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Supreme Court of Louisiana
FOR IMMEDIATE NEWS RELEASE NEWS RELEASE #027

FROM: CLERK OF SUPREME COURT OF LOUISIANA

The Opinion handed down on the 9th day of April, 2010, is as follows:

2009-C -1170 C/W 2009-C -1180 C/W 2009-C -1194

CIMAREX ENERGY CO., ET AL. v. KATHERINE D. MAUBOULES, ET AL. (Parish of Vermilion)

Kimball, C.J., participated in oral argument participate in the deliberation of this opinion.

but

did

not

For these reasons we find that the court of appeal erred in affirming the trial court's award of statutory damages to Orange River. We hereby reverse the decision of the court of appeal. REVERSED. KNOLL, J., dissents and assigns reasons.

04/09/2010 SUPREME COURT OF LOUISIANA No. 09-C-1170 CONSOLIDATED WITH 09-C-1180 & 09-C-1194 CIMAREX ENERGY CO., ET AL. VERSUS KATHERINE D. MAUBOULES, ET AL. ON WRIT OF CERTIORARI TO THE COURT OF APPEAL THIRD CIRCUIT, PARISH OF VERMILION JOHNSON, Justice* This case arises out of a dispute involving royalty payments due under a mineral lease held by applicants, Cimarex Energy Co., Ceniarth, Ltd., Palace Exploration Co., and RZ, Inc. (hereinafter "Cimarex"). Alleging that there were competing claims to the royalty payments, Cimarex invoked a concursus proceeding and deposited the funds into the registry of the court. We granted this writ application primarily to review the lower courts' rulings that Cimarex had no reasonable basis to invoke a concursus proceeding in this case, and thereby unreasonably withheld royalty payments due to respondents, Orange River Royalties, L.L.P., Mission Royalty Quest, LLC, Fort Worth Operating Company, L.L.C., Richard Martter, and Coyote Ventures, Ltd. (hereinafter "Orange River"). Applying the law to the facts of this case, we find that the court of appeal erred in affirming the trial court's ruling in favor of Orange River on its reconventional demand, awarding statutory damages under La. R.S. 31:212.21 et seq. Specifically, we find that the court of appeal erred when it concluded that Cimarex had no
*

Kimball, C.J., participated in oral argument but did not participate in the deliberation of this 1

opinion.

reasonable basis to invoke the concursus proceeding. For the following reasons, we therefore reverse the decision of the court of appeal. FACTS AND PROCEDURAL HISTORY The royalties at issue arise from a mineral lease between defendants, Katherine D. Mauboules, et al. ("Mauboules Family") and Cimarex. Various members of the Mauboules family own a tract of land in Vermillion Parish, Louisiana. In October of 1997, the Mauboules sold certain royalty interests in their land to Ereunao Oil & Gas, Inc. ("Ereunao") via five royalty deeds, all dated October 16, 1997.1 Ereunao subsequently assigned portions of its mineral interest to numerous entities. The deeds executed between the Mauboules and Ereunao provided for a three-year prescriptive period for non-use. However, the deeds also included a prescription interruption clause which allowed off-premise production to maintain the entire royalty. The clause expressly provided: It is expressly understood and agreed that an interruption of prescription resulting from unit production shall extend to the entirety of the aforedescribed tract or tracts of land regardless of the location of the well or of whether all or only part of the aforedescribed tract or tracts of land in included in a unit or units. On November 14, 2001, the Mauboules' attorney, Kenneth Privat, sent a letter to Ereunao noting that the deeds had a three-year prescriptive period and thus had prescribed on October 16, 2000. Privat asked for a recordable instrument evidencing the extinction of the deeds. On November 20, 2001, Charles M. Fife, Jr., President of Ereunao, responded to Privat's letter, noting that although the deeds had a three-year prescriptive period, the deeds also included the prescription interruption

The Mauboules retained the executive rights, thus retaining the right to grant oil and gas leases over the property. 2

1

clause relative to off-site production.2 Fife further stated in his letter: "Frankly, I did not realize the above clause was in these royalty deeds until recently. A member of my staff who prepares our royalty deeds advised me that he had inserted the clause as our information about the Key Production drilling program for this prospect was somewhat uncertain respecting its time frame for completion. Usually our royalty deeds have a three year term and do not include the above clause." In 2002, Key Production Company, predecessor to Cimarex, became interested in drilling on the Mauboules property, and contacted Privat to discuss and negotiate a lease. On May 29, 2002, an agent for Key Production sent a letter to Privat, extending an initial offer. Negotiations were difficult and continued over a two-year period, primarily due to Privat's assertions that the prescription interruption clause had been wrongfully inserted into the royalty deeds, possibly as a result of fraud, and that the royalty interests of Ereunao and the interests of its successors had therefore prescribed, and the royalty rights had reverted back to the Mauboules family. On December 26, 2002, Cimarex continued the negotiations for the lease by making a revised offer to the Mauboules through Privat. In addition to stating the lease terms and price per acre, the offer included additional consideration: if the Mauboules pursued a cause of action against Ereunao, Cimarex would agree to pay up to $7,500 of legal expenses associated with that action incurred during the next twelve month period; and if that cause of action was pursued, but failed, Cimarex would agree to pay a cash bonus of $75,000 to the Mauboules upon 150% payout of the well. The lease between Cimarex and the Mauboules Family was eventually executed

The Mauboules assert that the prescription interruption clause was not negotiated, and was inserted into the deeds without their knowledge or consent. 3

2

on February 10, 2003.3 The lease contained the following miscellaneous provisions, summarized below: In the event that the well is successful to the extent that the well reaches 150.00% payout, then the Mauboules shall be entitled to a one-time payment of $75,000.00, provided that the following has occurred: 1. At the time of payout, the Mauboules' royalty interest, which was conveyed unto Ereunao, remains outstanding; That the well reaches 150.00% payout;4

2.

The Lease Purchase Report between the Mauboules and Cimarex, dated April 10, 2003, included the following note: In the event that our well is successful, Lessor's attorney, Kenny Privat, will file suit against a royalty purchaser known as Ereunao Oil & Gas, Inc., et al. Kenny Privat contends that representatives of this company altered Royalty Deeds after being approved by him; and further, misled the Royalty Owners as to what portion of the tract that they were actually selling. The purpose of this suit will be to reduce the extent of the royalty deeds to cover only that portion of the leased premises situated within the confines of the Bourque unit, in lieu of the entirety of the tract. A $7,500.00 cash payment was deemed appropriate in order to offset future legal expenses incurred by the Suit. Further, this Agreement was evidenced by that certain unrecorded Letter Agreement dated December 26, 2002 by and between Cimarex and Kenny Privat; a copy of which is included herein. This royalty interest will then be placed in suspense until final determination rendered by the Court.

A Memorandum of Oil, Gas and Mineral Lease was filed in public records on May 6, 2003, recording the lease between the Mauboules and Cimarex. The Mauboules Lease itself was not filed of record in Vermilion Parish. See La. R.S. 9:2721.1 (repealed by Acts 2005, No. 169) and La. R.S. 44:104. 150% payout was defined as having occurred when the value of production, after payment of the lease burdens, is equal to 150% of the cost of drilling, completing, equipping and operating the test well. 4
4

3

Cimarex drilled a successful well and began production in January of 2004.5 On March 26, 2004, Privat sent a letter to Cimarex stating that the Mauboules were asserting that the royalty interests deeded to Ereunao had prescribed based on the three-year prescriptive period, and asking Cimarex to place the disputed royalties in suspense until a determination on this issue could be obtained from the courts. Cimarex forwarded the letter to its attorney, James Williams, who then contacted Privat. During a phone call with Privat, Williams learned that Privat was asserting that the off-tract production clause was ineffective because it had been inserted into the royalty deeds either fraudulently or under circumstances tantamount to fraud. Privat stated that he would have the clause declared invalid on the basis of fraud and that the royalty interests at issue had therefore reverted to the members of the Mauboules family. After receiving Privat's letter, and his phone conversation with Privat, Williams advised Cimarex that the Mauboules were asserting an adverse claim to that of Ereunao and its assigns, and he advised Cimarex to suspend royalty payments attributable to the disputed royalty interests pending resolution of the adverse claim. On April 23, 2004, Williams sent a letter to Privat memorializing their conversation, and confirming that the Mauboules were contending that the provision in the royalty deeds relative to off-tract production was inserted into the deeds "in

On May 1, 2003, Cimarex, Ceniarth, Ltd. and Palace Exploration Company entered into a Joint Operating Agreement. Cimarex assigned certain undivided working interests in properties, which include the Mauboules Lease, to Ceniarth, Ltd. and Palace. Specifically as to Palace, Cimarex assigned it a 25% working interest in properties which included the Mauboules Lease. Palace assigned to Zeneco, Inc. of Oklahoma (formerly known as RZ, Inc. of Oklahoma) an undivided 1% overriding royalty interest in properties which included the Mauboules Lease. This assignment also provided for an additional undivided 5% working interest after payout. Cimarex, Ceniarth, Palace and RZ are the present owners and of all the undivided working interest in the Mauboules Lease, subject to the joint operating agreement. Pursuant to the joint operating agreement, the Mauboules No. 1 Well was drilled and completed in or around January 2004, and the Mauboules No. 2 Well was drilled and completed in September 2004, and the Mauboules No. 3 Well was drilled and completed in January 2005. Cimarex is the operator of Mauboules Nos. 1&2. Ceniarth, Palace and RZ are the non-operators of Mauboules Nos. 1&2. 5

5

what amounts to fraud on the part of the vendee," and that the Mauboules claimed that the term of the mineral royalty interest expired and they were entitled to 100% of the mineral royalty interest. Williams further stated that, viewing the matter strictly on the basis of the public records, Cimarex would be entitled to rely on the provisions in the royalty deeds. However, he noted that the assertion that the provision was "slipped in" unbeknownst to the Mauboules raised doubt as to the efficacy of the disputed provision to question whether the royalty interests survived. Thus, Williams stated that he advised Cimarex to suspend payment of proceeds until the dispute between the Mauboules and Ereunao and its vendees could be resolved. Beginning in April of 2004, the Orange River Group ("Orange River"), a group of individuals and businesses who purchase mineral royalty interests for the purpose of investment and re-sale in the producing mineral royalties market,6 purchased shares of outstanding mineral royalties in the Mauboules' land from assignees of Ereunao.7 On June 9, 2004, Cimarex advised Orange River of the Mauboules' adverse claim to the royalty interests, and further advised that Cimarex would be suspending the royalty payments. In August of 2004, Williams advised Cimarex that it would be necessary to file a concursus proceeding, and he received the authorization to do so. However, according to Williams, Orange River's attorney, Kerry Kilburn, asked him to delay the filing. On November 16, 2004, Kilburn made written demand for payment on behalf of Orange River to Cimarex pursuant to La. R.S. 31:212.21.8 In his letter, Kilburn
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The Orange River Group consists of: Orange River Royalties, L.L.P.; Mission Royalty Income 2002-A, L.P.; MRHC, L.L.C.; Charles P. Torrey, Jr.; Royalty Quest, L.L.C.; Richard Martter; Fort Worth Operating Company, L.L.C.; and Coyote Ventures, Ltd. Orange River made three different purchases of royalty interests from Ereunao's assignees, Lawrence and Lorena Brock: April 2004, August 2004, and February 2005.
8 7

La. R.S. 31:212.21 provides:

If the owner of a mineral production payment or a royalty owner other than a mineral lessor 6

noted that Orange River was a "good faith purchase[r] relying on the public record for the validity of [its] title and there can be no reasonable claim against [Orange River] by the Mauboules Family members." Cimarex received this notice on November 18, 2004. Williams, on behalf of Cimarex, responded to the demand for payment on December 2, 2004. Williams provided a written explanation of why the revenues attributable to the mineral royalty interest claimed by Orange River would be held in suspense and would be deposited into the registry of the court in conjunction with a concursus proceeding. Williams explained that because Orange River's interests were derived from Ereunao, which had acquired prescriptable mineral royalty interests from the Mauboules, and the Mauboules asserted that those interests acquired by Ereunao had indeed terminated by prescription, the public records doctrine would likely not vest an interest to Orange River which their vendors had no legal right to convey. After receipt of Orange River's demand, Williams advised Cimarex to deposit the disputed royalty proceeds into the registry of the Court and to file a concursus. On December 20, 2004, Cimarex filed the concursus proceeding which forms the underlying basis of this writ application. Orange River was named as a defendant in the concursus, along with the Mauboules, Ereunao, and Ereunao's assigns.9 The Mauboules answered the concursus, admitted to the existence of a controversy concerning entitlement to the disputed funds, and sought to be recognized as the owners of the mineral royalty interests. The Mauboules did not specifically assert fraud in their answers. Orange River reconvened, seeking unpaid oil and gas royalties and penalties pursuant to La. R.S. 31:212.21, et seq.

seeks relief for the failure of a mineral lessee to make timely or proper payment of royalties or the production payment, he must give his obligor written notice of such failure as a prerequisite to a judicial demand for damages. The original Petition in Concursus was filed on December 20, 2004. A Restated Petition in Concursus was filed on February 3, 2005 and a Corrected Restated Petition in Concursus was filed on March 1, 2005. 7
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Orange River subsequently filed a Motion for Summary Judgment, asking the Court to recognize their ownership of the mineral royalty interest at issue, and to award them all unpaid royalties allocable to such interest. In its opposition to the summary judgment, the Mauboules asserted that "the royalty deeds contain error that concerns the Mauboules principal cause of said contracts, and the error may have been induced by fraud." The Mauboules further stated that they had not yet had the opportunity to conduct discovery or depose Ereunao, and thus they could not yet prove that the error was induced by fraud. On August 22, 2005, the Court granted summary judgment in favor of Orange River, recognizing Orange River as the owners of a certain undivided mineral royalty interest in the land at issue, and ordered the Clerk of Court to release the funds representing owed royalties.10 Following a bench trial on Orange River's reconventional demand, the trial court found that Cimarex's reliance on the oral assertion of fraud by Privat was an unreasonable basis to suspend royalty payments, and thus Orange River was entitled to statutory penalties. The trial court entered judgment awarding statutory penalties pursuant to La. R.S. 31:212.23(C),11 calculated as the amount of royalties due, plus

On the same day, the trial court granted Cimarex's Motion to Dismiss Main Demand. In that motion, Cimarex asserted that while it relied on the allegation of fraud by the Mauboules in invoking the concursus proceeding, the Mauboules' answers to the petitions for concursus did not allege fraud, as was originally verbally represented to Cimarex. Thus, in the absence of a positive plea of fraud, Cimarex asserted that there was not a sufficient dispute on the face of the public records to justify maintenance of the concursus proceeding. Cimarex sought dismissal of the action without prejudice, to be refiled if fraud was subsequently alleged by the Mauboules.
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La. R.S. 31:212.23 provides:

A. If the obligor pays the royalties or production payments due plus the legal interest applicable from the date payment was due, the owner shall have no further claim with respect to those payments. B. If the obligor fails to pay within the thirty days from notice but states a reasonable cause for nonpayment, then damages shall be limited to legal interest on the amounts due from the date due. C. If the obligor fails to pay and fails to state a reasonable cause for failure to pay in 8

two times that amount, plus judicial interest beginning on the date royalties were due.12 The trial court denied any further compensatory damages, finding no support for a claim for damages outside the scope of La. R.S. 31:122.23(C). Additionally, the trial court, while finding Cimarex's conduct in failing to timely pay the royalties to be unreasonable, also found that Cimarex's conduct did not rise to a level which would trigger exemplary damages, even if authorized in law. The court of appeal affirmed the trial court's finding that Cimarex's actions were unreasonable. The court found that Cimarex had no legitimate basis for initiating the concursus, and that it was merely orchestrated as a condition to the Mauboules granting the lease to Cimarex. The court also suggested that, given the history of the Mauboules' claim, the agreement Cimarex made with the Mauboules to obtain the lease violated the "clean hands doctrine." The court further found that Cimarex did not show how the Mauboules' assertions could present a claim that would challenge, much less defeat, Orange River's royalty interest and the public records doctrine. The court reasoned that to file a valid concursus, Cimarex needed to show that the Mauboules had a competing claim against Orange River. But, the Orange River claim was fully supported by the public records and public records doctrine. Thus, while the Mauboules may have a claim against Ereunao for fraud, the Mauboules had no claim to the funds due Orange River. Finally, because the concursus was improperly invoked, the court held that Cimarex was not entitled to immunity for depositing the funds into the registry of the court, and the action of depositing the funds did not constitute payment of the royalties due under the mineral code.

response to the notice, the court may award as damages double the amount due, legal interest on that sum from the date due, and a reasonable attorney's fee regardless of the cause for the original failure to pay. A new trial was subsequently granted for the limited purpose of allocating liability, and the trial court entered an amended judgment, specifically setting forth the amount of statutory penalties, interest, and attorneys fees due to each member of the Orange River group. 9
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The court of appeal upheld the trial court's calculation of damages and interest. The court agreed that the proper calculation of damages under the statute was doubling the amount of royalties that were due, and adding this amount to the amount of unpaid royalties. The court also agreed that interest on the damages began to accrue on the date of judicial demand, not the date of judgment. Cimarex (along with Ceniarth, Palace and Zeneco) applied for supervisory writs in this Court, which were granted.13 DISCUSSION Our decision addresses whether Cimarex properly invoked the concursus proceeding. Specifically, we examine whether the Mauboules' assertions relative to the Ereunao deeds constituted a competing claim, and whether Cimarex, as a stakeholder, was required to determine the merits of the competing claim prior to invoking the concursus. Prior to its codification, concursus developed through jurisprudence as an equitable remedy.14 In 1922, the legislature officially enacted Act 123, providing for the concursus proceeding. This Act authorized one who held money, claimed by two or more persons, or upon which two or more persons claimed a lien or privilege, to deposit the money in the registry of the court, and to cite all claimants to litigate over the fund. La. Acts 1922, No. 123; American Surety Co. of New York v. Brim, 175 La. 959, 144 So. 727 (La. 1932). The Act further provided that the depositor was relieved of any liability to the persons cited, and provided the manner in which the deposit should be made and the manner for citing the persons who had an interest in the

Cimarex Energy v. Mauboules, 2009-1170 (La. 9/25/09), 18 So.3d 97; Cimarex Energy v. Mauboules, 2009-1180 (La. 9/25/09), 18 So.3d 97; Cimarex Energy v. Mauboules, 2009-1194 (La. 9/25/09), 18 So.3d 97. For a historical look at concursus, see Sarpy, Concursus: Interpleader in Louisiana, Tul.L.Rev. 531 (1961). 10
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money. La. Acts 1922, No. 123. The Act was passed in order to avoid a multiplicity of suits and actions, and contemplated a proceeding leading to one judgment, which finally adjudicated all the issues between all the parties. Amerada Petroleum Corp. v. State Mineral Board, 203 La. 473, 485, 14 So. 2d 61, 65 (La. 1943); Hennington v. Petroleum Heat & Power Co. of Louisiana, 194 La. 188, 196-197, 193 So. 583, 586 (La. 1940). The Act was incorporated into La. R.S. 13:4811 et seq. La. R.S. 13:4811 was amended and reenacted by La. Acts 1954, No. 523 to provide: Whenever any person, firm, partnership, corporation, or association of persons is in possession of any money, which is claimed by two or more persons, or upon which two or more persons are claiming a lien and privilege, then such person, firm, partnership, corporation or association of persons holding the money, may deposit it in the registry of the district court having jurisdiction of the domicile of one or more of the claimants thereto, and shall thereafter be relieved of all liability for the payment of the money on complying with the requirements set out in R.S. 13:4811 through 13:4817; provided, however, that if said money is due, or claimed to be due, on account of any sale, lease or other transaction affecting or pertaining to immovable property or any character of interest therein, such deposit shall be made in the Registry of the district court having jurisdiction of the Parish wherein said immovable property is situation, or , if said property be situated in more than one Parish, then in the Registry of any district court having jurisdiction over any Parish wherein a part of said immovable property is situated. This statute was a codification of the common-law interpleader, and imposed numerous restrictions on the use of concursus, primarily restricting its use to a stakeholder who would deposit funds into the registry of the court. Sarpy, supra at 534; Damson Oil Corp. v. Sarver, 346 So. 2d 1304, 1306 (La. App. 3 Cir. 1977). In 1960, the legislature adopted the Louisiana Code of Civil Procedure. In this process, it repealed La. R.S. 13:4811 et seq. and enacted Title X, relative to concursus proceedings, broadening the application of the concursus proceeding. The law governing concursus is set forth in La. C.C.P. arts. 4651 through 4662. The introduction to Title X provides that these articles: (1) codify those jurisprudential
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rules on concursus procedure which have been found to be useful and workable; (2) broaden the base of the procedural remedy by borrowing some of the broad and flexible principles of federal interpleader; (3) provide workable substitutes for two of the prior rules which experience has proven to be unworkable; and (4) provide, so far as practicable, a single set of rules to govern concursus procedure regardless of the use to which it may be put. The Code of Civil Procedure defines a concursus proceeding as "one in which two or more persons having competing or conflicting claims to money, property, or mortgages or privileges on property are impleaded and required to assert their respective claims contradictorily against all other parties to the proceeding." La. C.C.P. art. 4651. The Code of Civil Procedure further provides a rule relative to claimants that can be impleaded: Persons having competing or conflicting claims may be impleaded in a concursus proceeding even though the person against whom the claims are asserted denies liability in whole or in part to any or all of the claimants, and whether or not their claims, or the titles on which the claims depend, have a common origin, or are identical or independent of each other. No claimant may be impleaded in a concursus proceeding whose claim has been prosecuted to judgment. No person claiming damages for wrongful death or for physical injuries may be impleaded in a concursus proceeding, except by a casualty insurer which admits liability for the full amount of the insurance coverage, and has deposited this sum into the registry of the court. La. C.C.P. art. 4652. In enacting this article, the legislature removed the

jurisprudential limitations placed on concursus when La. Act 123 of 1922 introduced the concept of interpleader. Further, the language of the first paragraph is based on Federal Rule of Civil Procedure 22(1), which combines interpleader with the bill in the nature of interpleader and removes the former limitations and restrictions on the

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use of the remedy.15 Comment, La. C.C.P. art. 4652; Sewerage & Water Board of New Orleans v. Sanders, 239 So. 2d 414 (La. App. 4 Cir. 1970). The primary purpose of the concursus proceeding is to protect a stakeholder "from multiple liability from conflicting claims and from vexation attending involvement in multiple litigation in which stakeholder may have no direct interest." Landry & Passman Realty, Inc. v. Beadle, Swartwood, Wall & Associates, Inc., 303 So.2d 761, 763 (La. App. 1 Cir. 1974); see also Rehabilitation Concepts Plus, Inc. v. Wills, 42,400 (La. App. 2 Cir. 10/10/07), 968 So. 2d 262, 264; Marquez v. Progressive Ins. Co., 2006-1024 (La. App. 3 Cir. 12/6/06), 944 So. 2d 876, 878-879. This Court has noted that concursus can be used not only to prevent multiple liability, but also to prevent multiple litigation, and therefore can be used by a person against whom multiple claims are asserted, even though liability on some or even all of the claims is denied. Louisiana Intrastate Gas Corp. v. Muller, 290 So. 2d 888, 895 (La. 1974); see also Comment, La. C.C.P. art. 4562. Furthermore, the language of Code of Civil Procedure article 4652 also provides that use of the concursus proceeding is allowed even if the stakeholder denies liability owed to one or all of the claimants. Like the concursus proceeding, federal interpleader was designed to protect the stakeholder. 7 Charles A. Wright et al., Federal Practice and Procedure,

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