Amoco Production Co. v. Texas Meridian Resources Exploration Inc.

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.

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.

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.

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.

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.

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.

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.

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.

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.