IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
No. 98-30724
AMOCO PRODUCTION COMPANY
Plaintiff - Appellee-Cross-Appellant
versus
TEXAS MERIDIAN RESOURCES EXPLORATION INC;
ET AL
Defendants
MERIDIAN RESOURCE & EXPLORATION, CO,
formerly known as Texas Meridian Resources
Exploration Inc.
Defendant - Appellant-Cross-Appellee
Appeals from the United States District Court
for the Western District of Louisiana
July 12, 1999
Before POLITZ, HIGGINBOTHAM and DAVIS, Circuit Judges.
HIGGINBOTHAM, Circuit Judge:
Amoco brought this suit to terminate a mineral lease and joint
exploration agreement with Meridian. Amoco alleged that Meridian
drilled a well on a restricted portion of the lease without Amoco’s
required consent. The district court determined that Amoco had an
unlimited right to prohibit operations in the restricted area. As
a remedy, the district court dissolved the lease and terminated
Meridian’s interests in the disputed well and in previously drilled
producing wells that were unrelated to the parties’ present
dispute.
On appeal, Meridian challenges the district court’s
interpretation of Amoco’s right to restrict operations and the
remedy the district court imposed. In the alternative, Meridian
argues that the district court erred by refusing to allow Meridian
to recoup all of its costs incurred in connection with other
operations prior to the cancellation of the lease or to retain its
interest in the other producing wells. Meridian also claims that
the district court erred by granting Amoco attorney’s fees and pre-
judgment interest on the damages award. Amoco challenges the
district court’s denial of non-pecuniary damages and seeks
attorney’s fees for the cost of this appeal.
We AFFIRM the district court on all issues, except the award
to Amoco of legal interest on its damages award, which is REVERSED.
Amoco’s request for attorney’s fees on appeal is DENIED.
I
On July 1, 1993, Amoco and Meridian entered a Joint
Exploration Agreement covering 5,120 acres of land owned by Amoco
in Calcasieu Parish, Louisiana. The JEA allowed Meridian to obtain
one-half working interest in a mineral lease covering Amoco’s
property in exchange for furnishing a seismic survey of the
property. Meridian performed the survey, which cost $1,526,409,
2
and provided the data to Amoco, the other one-half working interest
owner. Under the JEA, Amoco and Meridian could drill wells and
develop the property by first proposing a drilling site to the
other party. The propositioned party had to elect whether to
participate or non-consent to the drilling proposal; a non-consent
election potentially subjected that party to penalty under the JEA.
The extent of the penalty depended upon whether the proposed well
was an exploratory well or a development well.
As part of the JEA, the parties agreed to maintain part of the
land as a restricted area for ecological reasons. The JEA nowhere
explicitly discloses that the restricted area included a mini-
wildlife refuge that was negotiated by Amoco with the United States
Fish and Wildlife Service, but extrinsic evidence demonstrates that
Meridian was aware of the mini-refuge lease. The southern boundary
of the mini-refuge was later shifted north by Amoco to accommodate
a proposed landfill; Amoco never provided Meridian with a copy of
the mini-refuge lease or told Meridian that the southern boundary
of the mini-refuge had changed.
After the lease was granted, Amoco and Meridian jointly
drilled one productive well, Amoco Ben Todd No. 2. Amoco Ben Todd
No. 2 was drilled in the restricted area; however, because the
mini-refuge boundary had been moved, it was not drilled in the
mini-refuge. Meridian proposed building Meridian Ben Todd No. 1,
a deeper well, about 2,050 feet east of the Amoco Ben Todd No. 2.
The proposed surface location for Meridian Ben Todd No. 1 was
3
within both the restricted area and the mini-refuge. This well was
300 feet from the revised southern boundary of the mini-refuge and
within 500 feet of the eastern boundary. It is undisputed that
Meridian knew the proposed well was within the restricted area.
Amoco considered the proposal and decided not to consent to
the surface operation in the restricted area. Pat Taylor, Amoco’s
land negotiator, told Frank Steele, Meridian’s land negotiator, of
Amoco’s decision over the phone and wrote a letter to the same
effect, explaining that the proposed well “violates the JEA with
regard to locating wells in these environmentally sensitive
areas . . . and, in addition, the proposed well is unnecessary.”
Meridian insists that it offered to discuss a mutually agreeable
location for its proposed well but that Amoco refused to respond to
these efforts. Amoco claims that Meridian’s request to meet with
its fee land supervisor was “obviously intended to create a pretext
for this breach.”
Meridian informed Amoco that it intended to drill the well
without Amoco’s consent and requested Amoco to elect whether to
participate or non-consent. Taylor wrote a second letter to
Meridian reiterating Amoco’s opposition to the proposed well and
suggesting that if Meridian’s objective in drilling was to go
deeper than the existing Amoco Ben Todd No. 2, then that well could
be deepened upon depletion. Amoco claims that it thereafter
suggested a conference with Meridian to resolve the dispute, but
Meridian resisted. According to a memorandum by Steele, “Amoco has
4
yet to furnish us [Meridian] with any compelling reasons not to
drill the well . . . . Amoco evidently believes that they have the
unilateral right to prohibit our drilling operations on the fee
lands in Section 7 for whatever reason.” Amoco then filed a
declaratory judgment action on June 28, 1996. Meridian did not
seek an expedited ruling from the district court. Instead,
Meridian commenced its surface preparations.1
When Amoco learned that Meridian had begun surface operations,
it amended its suit to claim that Meridian had breached the
parties’ contract and sought consequential damages as well as
cancellation of the lease. Meridian continued its activities
despite Amoco’s continued objections and lawsuit. Meridian
believed that the JEA did not afford Amoco the unlimited right to
prohibit access for surface operations. The well was completed in
September 1996 and was producing by October 1996.
On August 15, 1997, the district court partially granted
Amoco’s summary judgment motion against Meridian for breaching the
terms of the JEA. After examining the express terms of JEA, the
district court held that the restricted areas were subject to
Amoco’s unconditional right to deny Meridian access to them.
Meridian filed a motion for reconsideration, and the district court
vacated its prior ruling. The district court reexamined the JEA in
1
Meridian commissioned an environmental consultant to evaluate
the proposed site. He opined that the proposed well presented no
adverse effects to the area.
5
great detail and again concluded that the contract unambiguously
gave Amoco the right to completely deny Meridian access to the
restricted area. The district court also ruled that Amoco was
entitled to cancel the lease pursuant to Paragraph 17 of the lease,
as incorporated into the JEA.
Damages were later determined by a bench trial. The district
court found Amoco’s total damages to be $10,561,800.41
($2,206,342.47 in net income received by Meridian on Amoco Ben Todd
No. 2 plus $8,355,457.94 in net income received by Meridian on
Meridian Ben Todd No. 1). Meridian’s total offset was determined
to be $2,817,905.57 ($750,000 in separable improvements on Meridian
Ben Todd No. 1 plus $2,067,905.57 for labor costs). The
difference, $7,662,293.16, was to be paid with legal interest on
the sum from the date of judicial demand, June 27, 1995.
Meridian filed a timely notice of appeal, and Amoco cross-
appealed. This court has jurisdiction pursuant to 28 U.S.C. §
1291.
II
The standard of review for summary judgment is well-
established. See FED. R. CIV. PROC. 56(C). Under Louisiana law, the
interpretation of an unambiguous contract is an issue of law for
the court. See Texas E. Transmission Corp. v. Amerada Hess Corp.,
145 F.3d 737, 741 (5th Cir. 1998). “When the words of the contract
are clear and explicit and lead to no absurd consequences, no
6
further interpretation may be made in search of the parties'
intent." La. Civ. Code Ann. art. 2046 (West 1995). “A contract
provision is not ambiguous where only one of two competing
interpretations is reasonable or merely because one party can
create a dispute in hindsight.” Texas E. Transmission Corp., 145
F.3d at 741 (citing Lloyds of London v. Transcontinental Gas Pipe
Line Corp., 101 F.3d 425, 429 (5th Cir. 1996)). In the context of
contract interpretation, only when there is a choice of reasonable
interpretations of the contract is there a material fact issue
concerning the parties’ intent that would preclude summary
judgment.
III
Amoco contends that the JEA affords it the right to deny
Meridian access to conduct drilling operations in the restricted
areas. Moreover, Amoco maintains that Meridian failed to receive
Amoco’s required consent to drill in the restricted area.
Meridian, on the other hand, insists that the JEA only affords
Amoco the right to “reasonably restrict” access to the restricted
areas in order to accommodate ecological needs. In the
alternative, Meridian argues that if the JEA does provide Amoco the
right to deny it access to the restricted areas, Amoco’s exercise
of that right in this situation was an act of bad faith.
As the district court indicated, Article 2 and Article 10.1 of
the JEA are the relevant provisions for determining this dispute.
7
Article 2 of the JEA addresses the seismic permit conditions and
provides that the seismic activities in the environmentally
sensitive “restricted areas,” described in Article 10, would be
limited between July 1 and November 1 and limited or denied between
November 1 and July 1. Article 10, entitled “Restricted Areas and
Environmental Considerations,” provides the following:
The areas outlined in blue on Exhibit A are Restricted Areas,
in that any activities on these areas are restricted and any
access may be restricted or limited as determined by AMOCO’s
Fee Land Manager. In addition, AMOCO shall have the right
during the life of this JEA to require a cessation of any
seismic, drilling or other operations anywhere on AMOCO Fee
Lands which in AMOCO’s opinion is necessary to meet ecological
needs of wildlife . . . . Any such cessation . . . shall
serve to extend the 180-day CDP [Continuing Development
Program] of the Lease . . . .2 Notwithstanding the provisions
of the Lease, either party shall have the right to propose the
drilling of an Exploratory Well to test a Prospect Area which
is partially or wholly included within a Restricted Area, as
long as no surface operations are conducted within such
Restricted Area without the prior written consent of AMOCO.
The district court carefully analyzed the words and phrases of
Articles 2 and 10 and concluded that the only reasonable
interpretation of these provisions unambiguously furnishes Amoco
with the right to restrict access, even to the point of complete
denial, to the restricted areas. Thus, the district court held
that there is no genuine issue of material fact regarding any
2
This third sentence concerns Paragraph 2 of the Oil and Gas
Lease and deals with the availability of a continuous drilling
program for a secondary term under the JEA when a “forced
cessation” by Amoco based on ecological needs occurs; it does not
create such an extension when a cancellation based on a violation
of the JEA occurs during the primary term.
8
reasonable alternative interpretation of the JEA. We agree.
The district court also rejected Meridian’s argument that
Amoco acted in bad faith in exercising its right to restrict.
Louisiana law requires contracts to be performed in good faith.
See La. Civ. Code Ann. art. 1983 (West 1987). Meridian claims that
Amoco’s reasons for not consenting were a pretext to avoid penalty
payments and that Amoco’s failure to inform Meridian that its
proposed well could have been moved 300 feet to the south side of
the revised east-west boundary of the mini-refuge demonstrates bad
faith. Despite grumbles about the unannounced boundary changes in
the mini-refuge, it appears that the restricted area itself never
changed.
While there is evidence that the parties’ communication
efforts were far from exemplary, none of Meridian’s allegations
establishes any conduct by Amoco that was not permitted by its
contractual rights under the JEA. Therefore, we agree with the
district court’s conclusion that there is no genuine issue of
material fact concerning Amoco’s good faith. We affirm the
district court’s summary judgment ruling in favor of Amoco’s
unlimited right to deny Meridian drilling access in the restricted
areas.
IV
After determining the extent of Amoco’s right to restrict, the
district court dissolved the lease pursuant to Paragraph 17 of the
9
Oil and Gas Lease.3 Meridian argues that the district should not
have allowed the lease to be canceled because dissolution is a
disfavored, harsh remedy and because Amoco failed to provide the
requisite pre-suit notice. According to Meridian, notice was
lacking because Amoco “never particularized that Meridian’s
purported default could be cured by moving its surface location a
mere 300 feet . . . .” Amoco argues that cancellation was a remedy
for which Meridian assumed the risk when it signed the lease and
when it decided to drill the disputed well.
Whether or not to dissolve a lease completely is subject to
judicial discretion. See Publicker Chem. Corp. v. Belcher Oil Co.,
792 F.2d 482 (5th Cir. 1986). The district court found that the
cancellation clause expressly provided for dissolution of the lease
as a remedy for a breach, and it concluded that Amoco had fulfilled
its duty of notice by explicitly and repeatedly informing Meridian
that it refused to give its required consent to drill the Meridian
Ben Todd No. 1. at the proposed site.
While it would have been more cooperative of Amoco to explain
to Meridian that a 300 foot shift to the south would have located
the proposed well outside of the mini-refuge, we must agree with
the district court that Amoco was not required to do so in order to
3
Paragraph 17 of the Oil and Gas Lease provides that:
If Lessee fails to comply with any of the other
provisions of this Lease, Lessor may terminate the Lease,
if within twenty (20) days after notice by Lessor, Lessee
has not complied with such provision.
10
fulfill its obligation of notice. In addition, Meridian could have
moved its proposed well site 500 feet to the east, outside the
restricted area, after Amoco denied consent to the proposed
drilling site in the restricted area. Considering the explicit
terms of the JEA and Meridian’s actions in light of Amoco’s
unambiguous non-consent, we find that the district court’s decision
to allow the lease to be canceled was not an abuse of discretion.
V
In the alternative, Meridian argues that the district court
should have granted only partial cancellation of the lease because
of Meridian’s performance of its other lease obligations and
because of the “savings clause” in Paragraph 17. First, Meridian’s
“savings clause” argument is meritless. The savings clause in
Paragraph 17 provides:
If Lessee fails to commence operations on a well hereunder or
conduct continuous operations as herein provided, or if Lessee
fails to secure the formation of units as herein provided, all
of the Lessee’s rights hereunder shall automatically
terminate, without notice, . . . Except as to those portions
Lessee may be permitted to retain under Paragraph 2 (which
refers to the continuous drilling program) hereof.
The “savings” part of the Paragraph 17 pertains to a lessee’s
failure to commence or continue drilling. The dispute here did not
arise from Meridian’s failure to commence or continue drilling, but
from another provision of the lease concerning the required consent
of Amoco for drilling in restricted areas. The next sentence in
Paragraph 17 explicitly provides that if a lessee “fails to timely
11
comply with any of the other provisions of this Lease,” termination
is an available remedy to the lessor. Therefore, the district
court correctly rejected this argument.
Next, Meridian argues that its partial performance of other
obligations should be credited. The expenditures for these acts
include the following:
1. Meridian requests $1,526,409 in reimbursement for
the seismic survey.
2. Meridian requests $911,040 in expenses incurred for
co-producing the Amoco Ben Todd No. 1.
3. Meridian requests $671,753 in expenses incurred for
co-producing the Meridian Gayle Well.
4. Meridian requests $673,552.45 in unrecovered costs
from its participation in Amoco Ben Todd. No. 2.
Meridian relies upon Article 2018 of the Louisiana Civil Code,
which provides that “upon dissolution a contract, the parties shall
be restored to the situation that existed before the contract was
made,” and Article 2019, which provides that “in contracts
providing for continuous or periodic performance, the effect of
dissolution shall not be extended to any performance already
rendered,” to support its argument that it should recover its pre-
breach costs.
The district court considered Meridian’s arguments about
reimbursement for pre-breach costs and rejected them. The district
court found that each of the above-described expenditures was
rendered in performance of Meridian’s obligations under the JEA
before the cancellation and was unrelated to the disputed breach of
12
the JEA. The district court reasoned that to reimburse Meridian
after the breach of the JEA would “extend the effect” of Amoco’s
“dissolution” to already rendered contractual obligations unrelated
to the present dispute.
The logic of this reasoning is more apparent in the reverse
situation. For instance, if at the time of the breach Meridian had
already recouped its costs from its other performance expenditures
or even recognized a profit from the other acts, a dissolution of
the lease based on a later act would not require the unraveling of
previous payments or performances. Therefore, we find no abuse of
discretion in the district court’s refusal to allow Meridian to
recoup costs it incurred in connection with operations completed
prior to the cancellation of the lease.
The district court also denied Meridian’s request to retain an
interest in any “separate” leases because it found Meridian’s
breach to have been committed in bad faith and concluded that
Paragraph 17 gave Amoco the right to terminate the entire lease.
Again, we find no abuse of discretion by the district court in
refusing to allow Meridian to retain any interest in the other
producing wells.
VI
Amoco, which opted to retain the benefit of Meridian Ben Todd
No. 1, challenges the district court’s decision to credit Meridian
the current value of materials and workmanship of that well.
13
Although Meridian was not entitled to any of its production costs
preceding the breach, the district court ruled that, under Article
497 of the Louisiana Civil Code, Meridian was entitled to offset
$2,067,905.57 incurred in connection with labor expenses for
Meridian Ben Todd No. 1, which the court determined was a separable
improvement. Article 497 provides:
When constructions, plantings, or works are made by a bad
faith possessor, the owner of the immovable may keep them or
he may demand their demolition and removal at the expense of
the possessor, and in addition, damages for the injury he may
have sustained. If he does not demand demolition and removal,
he is bound to pay at his option either the current value of
the materials and of the workmanship of the separable
improvements that he has kept or the enhanced value of the
immovable.
The district court determined that $2,067,905.57, the combined sum
of what Meridian paid in labor expenses connected to the
installation of raw and manufactured materials ($562,500) and labor
and equipment costs ($116,012.50), qualified as reimbursable
“workmanship.”
Amoco argues that Article 497 does not include the labor cost
of constructing separable improvements because such costs are not
included in the definition of workmanship. Amoco asserts that
“workmanship” refers to the quality of the materials used in
constructing the well. Amoco suggests that the cost of “quality”
has been reflected in the purchase price of the materials, which
was stipulated to be $750,000. Amoco also argues that a bad faith
possessor does not have a right to reimbursement. See La. Civ.
14
Code art. 488 (“Products derived from a thing as a result of
diminution of its substance belong to the owner . . . . [A]
possessor in good faith has the right to reimbursement of his
expenses. A possessor in bad faith does not have this right.”)
We find that the district court correctly applied Article 497
because the Meridian Ben Todd No. 1 is a separable improvement to
Amoco’s land. Furthermore, in Nabors Oil & Gas Co. v. Louisiana
Oil Refining Co., 91 So. 765, 774 (La. 1922), the Louisiana Supreme
Court held that even a bad faith oil producer was entitled to
recover labor costs incurred in installing a well and bringing it
into operational condition. It would be unreasonable to calculate
“workmanship” as merely the purchase cost of materials when
workmanship necessarily includes the skills and efforts of a
laborer to make the materials useful. Accordingly, we affirm the
district court’s decision to credit Meridian the current value of
materials and workmanship on Meridian Ben Todd No. 1.
VII
Meridian argues that the district court erred by granting
Amoco attorney’s fees. The district court based its decision upon
La. Min. Code art. 209, La. Rev. Stat. § 31:209, which authorizes
attorney’s fees when a lease is canceled. Article 209 provides
that “[t]he right to secure damages and attorney's fees under
15
Article 2074 is applicable also to a demand for dissolution of a
mineral lease for failure to comply with its obligations.”
Meridian claims Article 209 is inapplicable because the primary
relationship it shared with Amoco was that of a co-working interest
owner in a joint exploration agreement, not a lessee.
Article 11 of the JEA defines the parties’ relationship and
expressly negates the creation of any kind of partnership, joint
venture, or association. Accordingly, the district court did not
err by awarding attorney’s fees to Amoco.
VIII
Next, Meridian argues that the district court erred by
awarding Amoco legal interest on its damages award. The district
court held that Amoco’s damages were “tort damages for wrongful
conversion of mineral production” and were therefore eligible for
legal interest under La. Rev. Stat. Ann. § 13:4203. This statute
provides for interest from the date of judicial demand for damages
arising “ex delicto,” as opposed to “ex contractu.” Meridian
4
Article 207 provides the following:
If the former owner of the extinguished or expired
mineral right fails to furnish the required act within
thirty days of receipt of the demand or if the former
lessee of a mineral lease fails to record the required
act within ninety days of its extinguishment prior to the
expiration of its primary term, he is liable to the
person in whose favor the right or the lease has been
extinguished or expired for all damages resulting
therefrom and for a reasonable attorney's fee incurred in
bringing suit.
16
argues that this action was not a tort action, but a breach of
contract lawsuit, and therefore not eligible for legal interest
under § 13:4203. We review the award of prejudgment interest for
an abuse of discretion.
The question before us is whether the present judgment sounds
in damages ex delicto. In diversity cases, issues of prejudgment
interest are governed by state law. See Lib. Mut. Fire Ins. Co. v.
Canal Ins. Co., 1999 WL 332704, *10 (5th Cir. May 26, 1999). The
Louisiana Court of Appeals explained that "[t]he classical
distinction between 'damages ex contractu' and 'damages ex delicto'
is that the former flow from the breach of a special obligation
contractually assumed by the obligor, whereas the latter flow from
the violation of a general duty owed to all persons." Davis v.
LeBlanc, 149 So. 2d 252, 254 (La. App. 1963). Under Davis, legal
interest under § 13:4203 is not available in “favor of judgments
such as the present [an action in redhibition], which awarded
damages primarily on the basis of the violation of a contractual
duty . . . ,” but limited “the benefits of the special statute to
judgments sounding in damages ex delicto.”
Although we recognize that Meridian’s conduct may have
violated the general duty not to wrongfully convert minerals, we
find that the recovery sought was essentially based on the alleged
violation of a contractual duty. The district court awarded Amoco
damages because it determined that Meridian had breached the lease.
17
Therefore, we find that the present judgment does not sound in
damages ex delicto. Accordingly, Amoco is not entitled to legal
interest on its award.
IX
Amoco argues that the district court wrongly refused to grant
non-pecuniary damages.5 The district court denied Amoco’s request
for non-pecuniary damages because it found Amoco’s non-pecuniary
interest to be “so insusceptible to measurement as to be impossible
to quantify.” Amoco claims that the district court’s reason for
denial was an error of law.
Amoco asserts that “Louisiana law expressly provides for
recovery of such [non-pecuniary] damages when not susceptible to
measurement.” According to La. Civ. Code art. 1989, “[w]hen [non-
pecuniary] damages are insusceptible of precise measurement, much
discretion shall be left to the court for the reasonable assessment
of these damages.”
Amoco argues that the district court wrongfully declined to
5
La. Civ. Code art. 1988 provides:
Damages for nonpecuniary loss may be recovered when the
contract, because of its nature, is intended to gratify
a nonpecuniary interest and, because of the circumstances
surrounding the formation or the nonperformance of the
contract, the obligor knew, or should have known, that
his failure to perform would cause that kind of loss.
Regardless of the nature of the contract, these damages
may be recovered also when the obligor intended, through
his failure, to aggrieve the feelings of the obligee.
18
perform a “reasonable assessment of the damages” because it found
the non-pecuniary damages to be immeasurable. We disagree. The
district court quoted Article 1989 in its opinion, demonstrating an
awareness of its authority to assess damages even when damages were
insusceptible to precise measurement. The district court performed
a “reasonable assessment of the damages” and concluded no non-
pecuniary damages would be awarded. Given the amount of discretion
Article 1989 provides a district court, we find no abuse of it
here.
X
Amoco requests reasonable fees for this appeal, but cites no
additional authority other than La. Min. Code art. 209, La. Rev.
Stat. § 31:209, which authorizes attorney’s fees when a lease is
canceled. We note that both parties raised substantive issues on
appeal and find that both parties contributed to the dysfunctional
communications resulting in this dispute. We decline to award
Amoco attorney’s fees on appeal.
XI
The judgment of the district court is AFFIRMED on all issues,
except the award to Amoco of legal interest on its damages award,
which is REVERSED. Amoco’s request for attorney’s fees on appeal
is DENIED.
19