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FOR IMMEDIATE NEWS RELEASE NEWS RELEASE # 3 FROM: CLERK OF SUPREME COURT OF LOUISIANA The Opinions handed down on the 19th day of January, 2005 , are as follows:

BY CALOGERO, C.J. :

2004-C -0968

TERREBONNE PARISH SCHOOL BOARD v. CASTEX ENERGY, INC. SAMSON HYDROCARBONS COMPANY, BOIS D'ARC CORPORATION, FINA OIL & CHEMICAL COMPANY, SAMSON RESOURCES COMPANY (Parish of Terrebonne) We reverse the First Circuit's judgment and its holding that the law and/or the executed contracts in this case impose an implied duty upon Samson and Bois D'Arc to restore the surface of the leased land to its pre-lease condition by backfilling the canals, and we vacate the court of appeal's order compelling specific performance of this ostensible duty. We also find that the language of the contractual assignment to Bois D'Arc did not establish an express duty to restore the surface. Our resolution of these issues obviates the need to consider the defendants' five alternative arguments alluded to earlier, including the argument that the court erred in finding that Samson's attempted assignment to Castex was ineffective. REVERSED AND RENDERED. Judge Thomas C. Wicker, Jr., retired, sitting ad hoc for Associate Justice Chet D. Traylor, recused. KIMBALL, J., dissents for reasons assigned by Weimer, J. KNOLL, J., dissents and assigns reasons. WEIMER, J., dissents and assigns reasons.

01/19/05 SUPREME COURT OF LOUISIANA No. 04-C-0968 TERREBONNE PARISH SCHOOL BOARD VERSUS CASTEX ENERGY, INC., SAMSON HYDROCARBONS COMPANY, BOIS D'ARC CORPORATION, FINA OIL & CHEMICAL COMPANY, SAMSON RESOURCES COMPANY ON WRIT OF CERTIORARI TO THE COURT OF APPEAL FIRST CIRCUIT, PARISH OF TERREBONNE CALOGERO, Chief Justice* This case requires us to consider whether article 122 of the Mineral Code, La. Rev. Stat. 31:122, which obligates a mineral lessee to act as a reasonably prudent operator, compels the lessee to restore the surface of the leased land to its pre-lease condition, where the lease terms do not so require and there is no evidence that the lessee excessively or unreasonably exercised its rights under the lease. Resolution of this issue has proven to be difficult, as the Terrebonne Parish School Board ("the School Board") has posited the existence of a monumental problem facing the state, the problem of coastal restoration, and, more specifically, the need to avoid the dire consequences of non-restoration. On the other hand, however, this case presents the equally important concerns of adherence to the law and respect for the rights of contracting parties. Although the temptation may be to thrust a great part of the solution to the problem of coastal restoration upon the oil and gas companies and other private parties, rather than the state and federal governments currently faced with underwriting the expense of restoration, we decline to do so out of respect for the

Judge Thomas C. Wicker, Jr., retired, sitting ad hoc for Associate Justice Chet D. Traylor, recused. 1

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terms of the mineral lease to which these parties agreed. Thus, we reverse the courts below and find that, where the mineral lease expressly grants the lessee the right to alter the surface in the manner it did, and is silent regarding restoration, article 122 only imposes a duty to restore the surface to its original condition where there is evidence of unreasonable or excessive use. Facts: In 1963, after competitive bidding, the School Board granted an exclusive oil and mineral lease (hereafter, "the lease") to Shell Oil Company ("Shell"). The lease covered a section of coastal marshland located in Section 16, Township 19 South, Range 16 East.1 The lease terms expressly granted Shell broad rights to explore[] by any method for formations or structures and prospect[] and drill[] for oil [and] gas . . . stor[e] minerals and fluids, lay[] pipe lines, dredg[e] canals, build[] roads, bridges, docks, tanks, power stations, telephone and electric transmission lines, and other structures and facilities . . . necessary or convenient for the purpose of conducting the aforesaid operations . . . . (Emphasis added). As "full and adequate consideration for every right granted" under the lease, Shell paid $340,480 at the outset of the lease term. In addition, Shell agreed to provide the School Board royalties of 1/6 of all oil and gas produced, or "sums equal to the value thereof." The lease further obligated Shell, if it failed to commence drilling or mining operations, to make annual rental payments of $170,240. Significantly, the lease does not contain any provision relative to restoration, much less one requiring Shell, as lessee, to restore the surface to its pre-lease

Specifically, prior to the commencement of oil and gas operations, the area in question was freshwater flotant marsh. A flotant marsh is one in which a thick mat of vegetation floats on one to two feet of water that covers the land. 2

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condition upon the cessation of its operations.2 The lease also contains a clause permitting the lessee to assign its rights, but providing that "no transfer, whether in whole or in part, . . . shall be valid unless such transfer or assignment be approved by the lessor." Following a series of assignments, Bois D'Arc Corporation ("Bois D'Arc") acquired an interest in the lease in April 1987. Bois D'Arc expressly accepted "any and all obligations accruing to the assigned lease on or after the effective date." In 1988 and 1989, through two assignments, Samson Hydrocarbons Company3 and Samson Resources Company (collectively, "Samson") acquired an interest in the lease from Bois D'Arc and Atlantic Richfield Oil Company ("ARCO"). The 1989 ARCO assignment to Samson contained the following language: As part of the consideration for this Assignment, Assignee assumes and agrees to comply with all obligations imposed by law or the terms of the leases to which the Leasehold interests are subject, including, specifically, the obligation to plug and abandon all existing producing or nonproducing wells located on the Leasehold interests, and to restore the condition of the surface of the leased premises, in compliance with applicable state and federal regulations. (Emphasis added). Samson retained its interest until 1996 when it agreed to sell the interest to Castex Energy, Inc. ("Castex"), as part of a package of several oil and gas properties. Under the terms of the lease, various assignees drilled five wells, one of which was converted into a saltwater disposal well. The assignees also dredged three canals

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The lease is based on a form promulgated in 1948 by the State of Louisiana Mineral

Board. Samson Hydrocarbons Company is the former Grace Petroleum Company ("Grace"). In 1993, Grace amended its corporate name to Samson Natural Gas Company. Samson Natural Gas Company subsequently became Samson Hydrocarbons Company. Thus, although Samson Hydrocarbons Company was Grace at the time it acquired an interest under the 1963 lease, for clarity's sake, this opinion will refer to Samson Hydrocarbons Company and Samson Resources Company collectively as "Samson." 3
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and a slip in conjunction with their drilling operations. At issue in this appeal are two of these canals and the slip ("the canals"), which are located east of Minors Canal.4 The dredging of these canals resulted in a loss of 27.74 acres. The lease terminated near the end of 1996 or the beginning of 1997, when production ceased. At the time of termination, Castex was the operator of record. Castex and the other lessees submitted uncontested evidence that they complied with all regulations of the Louisiana Commissioner of Conservation governing plugging and abandonment of oil and gas wells, closing of oil field pits, and cleaning the area around abandoned wells. The School Board filed this lawsuit in September 1999,5 asserting that the leased property consisted of coastal wetlands, and that, before the defendants' exploration activities commenced, the property had consistent vegetation and almost no surface ponds or streams. The School Board claimed that the canals the defendants dredged altered the hydrology of the marsh and adversely affected its ecology by removing marsh terrain, creating spoil banks, and generally impairing the natural ebb and flow of tidal waters. Even in the absence of an express lease provision, the defendants have a duty to restore the surface, as near as practicable, to its original condition, the School Board asserted, and their failure to do so has resulted in further widening of the canals and additional loss of coastal acreage to erosion.

Minors Canal was dredged in 1940, before any oil and gas activities on this property commenced. The assignees also dredged a fourth canal on the eastern side of the property, but the issues before this court do not relate to this canal. The original defendants were Tenneco Oil Company ("Tenneco"), Samson, Bois D'Arc, Fina Oil and Chemical Company ("Fina"), and Castex. The trial court granted Tenneco's motion for summary judgment and dismissed with prejudice the School Board's claims against Tenneco on November 20, 2000. On May 10, 2001, the trial court granted Fina's motion for summary judgment, dismissed without prejudice as premature the School Board's claims against Fina related to an August 1977 servitude, and dismissed with prejudice all remaining claims against Fina. 4
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Samson filed a third party demand against Castex in October 2000, claiming that Castex acquired Samson's full interest in the lease under their 1996 agreement. Under this contract, Samson asserted, Castex bound itself to indemnify, defend, and hold Samson harmless for any damages resulting from the School Board's claims. The Courts Below: Following trial on the merits in June 2001, the trial court entered judgment for the School Board. The court found that defendants Samson and Bois D'Arc were solidarily liable to the School Board under the lease for the restoration of the School Board's property "to a condition as near as practicable to its pre-lease condition." The court ordered the defendants to deposit $1.1 million plus judicial interest into the registry of the court to be used to restore the property, and appointed a Special Master "to oversee the design, permitting, execution and disbursement of funds for said marsh restoration plan." The Special Master was ordered to devise a plan for filling the canals that would (1) preserve and make use of the current spoil banks and include water control structures as necessary, (2) include the plugging of the canals with earthen and/or stone material if feasible, (3) result in filling the canals with a suitable fill material to result in the restoration of the displaced marsh to a condition as near as practicable to the property's pre-lease condition, and (4) be completed within two years of the date the defendants were to deposit funds in the court registry. The court further ordered that, should restoration cost less than $1.1 million, the excess funds were to be remitted to Samson and Bois D'Arc. Finally, the trial court dismissed the School Board's claims against Castex, and Samson's third party demand against Castex, with prejudice. Concerning the third party demand against Castex, the trial court found that Samson's attempted assignment of the lease interest to Castex was ineffective because the School Board had never approved the

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assignment. On appeal, the First Circuit affirmed the trial court's determination that Samson and Bois D'Arc owed a duty under Mineral Code article 122 to restore the surface of the leased land to its pre-lease condition by backfilling the canals. Terrebonne Parish School Board v. Castex Energy, Inc., 2001-2634 (La. App. 1 Cir. 3/19/04), ___ So. 2d ___. The court reasoned that article 122 imposes upon mineral lessees certain implied covenants stemming from the requirement of La. Civ. Code art. 2710 that a lessee act as a prudent administrator. The court relied on Caskey v. Kelly Oil Co., 981193 (La. 6/29/99), 737 So. 2d 1257, 1261, to find that Louisiana's pre-Mineral Code jurisprudence recognized, as one of the lessee's implied covenants, "the obligation to restore the surface as near as practical to its original condition on completion of operations." Significantly, the court observed that the lessee's performance of the obligation to restore the surface was governed "by the standard of the conduct expected of persons of ordinary prudence under similar circumstances and conditions with due regard for the parties' respective interests." In addition to La. Civ. Code art. 2710, the First Circuit relied upon articles 2719 and 2720, which relate to a lessee's obligation to return leased property in a particular condition upon the termination of the lease.6 Article 122, which had its

La. Civ. Code. arts. 2719 and 2720, which appear with other articles generally related to the obligations and rights of a lessee, provide, Art. 2719. Return of things leased under inventory If an inventory has been made of the premises in which the situation, at the time of the lease, has been stated, it shall be the duty of the lessee to deliver back everything in the same state in which it was when taken possession of by him, making, however, the necessary allowance for wear and tear and for avoidable accidents. Art. 2720. Return of things leased without inventory If no inventory has been made, the lessee is presumed to have received the thing in good order, and he must return it in the same 6

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genesis in these articles and in the pre-Mineral Code jurisprudence, thus imposed upon a mineral lessee an implied obligation to restore the surface to its pre-lease condition even in the absence of an express lease provision. The court held that Samson and Bois D'Arc, as the assignees holding rights under the lease, bore responsibility for the required restoration under La. Rev. Stat. 31:128.7 The court rejected the defendants' argument, based on Rohner v. Austral Oil Exploration Co., 104 So. 2d 253 (La. App. 1 Cir. 1958), that before imposing a duty to restore the surface, the court was required to find that the lessees were either negligent in their exercise of their rights under the lease, had used surface property outside of the scope of the lease, or had otherwise acted unreasonably. The court found that Rohner did not address the broad issue of whether the Mineral Code imposes an implied duty to restore the surface in the absence of an express duty under the lease. Rather, Rohner only considered the narrow issue of whether a lessee who has actually undertaken restoration of the surface but had failed to perform satisfactorily was liable to the lessor for tort damages. The First Circuit also found that the trial court's restoration methodology was reasonable, rejecting defendants' arguments that any implied duty to restore the surface was limited by what a reasonably prudent operator would do, and that industry custom was not to backfill dredged canals. The court found that the trial court had reasonably balanced the cost of restoration and the intrinsic value of the wetlands, and emphasized that the trial court's plan "did not accept in totality any of the proposals offered by the parties" and did not require perfect restoration. The fair market value of the land did not limit the defendants' duty to restore,
state, with the exceptions contained in the preceding article. La. Rev. Stat. 31:128 provides, "To the extent of the interest acquired, an assignee or sublessee acquires the rights and powers of the lessee and becomes responsible directly to the original lessor for performance of the lessee's obligations." 7
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the court held, relying on Corbello v. Iowa Production, 02-0826 (La. 2/25/03), 850 So. 2d 686, 694. The court reasoned that to tether the duty to restore to the market value of the land would encourage oil companies to operate with indifference to the consequences of their activities, safe in the knowledge that their exposure would be limited. Further, the court stressed, neither the terms of the original lease nor those of the assignments expressly limited the lessee's liability for restoration. The lessee and/or assignees could have insisted that the contract contain such an express limitation had they desired one, the court concluded. Finally, the court vacated the portion of the trial court's judgment appointing a Special Master and requiring the defendants to pay $1.1 million into the court registry, and amended the judgment to require the defendants to specifically perform their restoration obligation in accordance with the methodology the trial court fashioned, without regard to cost. The court also affirmed the portion of the judgment dismissing Samson's third party demand against Castex with prejudice. The court found that Samson's right to assign the lease was subject to an implied suspensive condition

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