Davis Oil Company v. TS Inc

REVISED, July 16, 1998

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT
_______________

No. 97-30408
_______________

DAVIS OIL COMPANY,

Plaintiff-Appellant,

VERSUS

TS, INC.,

Defendant-Appellee.

_________________________

Appeal from the United States District Court
for the Eastern District of Louisiana
_________________________
June 26, 1998

Before JONES and SMITH, Circuit Judges, and SHAW,* District Judge.

JERRY E. SMITH, Circuit Judge:

Davis Oil Company (“Davis Oil”) brought this Louisiana

diversity suit seeking recovery of cleanup costs for an abandoned

oil lease. Finding error, we reverse and render judgment for the

plaintiff.

*
District Judge of the Western District of Louisiana, sitting by
designation.
I.

The State of Louisiana granted Davis Oil an oil and gas lease

for a certain portion of state land in 1976. State Lease 7027

contains a covenant by Davis Oil to clean and cap the area at the

expiration of the lease term. By its terms, the lease would

terminate automatically three months after production from the

wells on the tract ceased.

In 1981, Davis Oil assigned 92.5% of the lease to HPC, Inc.

(“HPC”), a subsidiary of Hiram-Walker-Gooderham-Worts, Ltd.

(“HW-GW”). Davis Oil assigned the other 7.5% to ENI Oil & Gas

Drilling Program 1976-A (“ENI”). The state mineral board approved

the change in operator from Davis Oil to HPC.1

Davis Oil and HPC entered into a Purchase Agreement regarding

State Lease 7027. This contract contains a clause in which HPC

consents to be responsible for Davis Oil's obligations under the

lease.2 It is this clause that forms the basis for Davis Oil's

1
State acknowledgment of operator change did not relieve Davis Oil of its
cleanup obligations under the lease.
2
The clause specifically reads:

Section 2.14 Assumption of Certain Obligations. Subject to the
other provisions hereof, Buyer [HPC] agrees to assume and will pay,
perform and discharge all obligations of Seller [Davis Oil] relating
to the Properties to the extent such obligations (a) are
attributable to the Properties, and (b) attributable to any time or
period of time after the Effective Time, and (c) arise out of
legally binding obligations to which the Properties are shown to be
subject in the documents pursuant to which conveyances are made to
Buyer hereunder, and (d) which are not the subjects of Title Defects
(continued...)

2
suit against the successor to HPC's oil and gas assetsSSTS, Inc.

HPC subsequently assigned its portion of the lease to its

subsidiary, Home Petroleum Company. The change in operator was

again approved by the state mineral board. In 1982, Home Petroleum

Company and ENI assigned their respective interests to Davis Fuel,

Inc. (an entity not affiliated with Davis Oil). Again, the state

mineral board approved the change in operator. Davis Fuel, Inc.,

subsequently assigned its interest in the lease to Spartan

Minerals, Inc. (“Spartan”), and the state mineral board approved

the operator change. Spartan thereafter apportioned out its

ownership of the lease while retaining its operator rights. In

June 1985, production from the wells on the tract ceased, thereby

triggering an expiration of the lease in September 1985.

Spartan failed to cap the wells or clean up the site when the

lease expired. In 1992, the State of Louisiana summoned all listed

operators3 to a hearing to determine which should pay for cleanup.

(...continued)
or breaches of any representation or warranty of Seller hereunder.
Notwithstanding the foregoing, Buyer shall take title to the
Properties subject only to such matters that relate specifically to
the Properties and such matters shall not include any contractual
arrangements personal to the Seller or any documents evidencing or
securing any indebtedness of the Seller or of any predecessor in
title to the Seller . . . .

Davis Oil Co. v. TS, Inc., 962 F. Supp. 872, 885-86 (E.D. La. 1997) (quoting the
Purchase Agreement).

3
These included Davis Oil, HPC, Davis Fuel, Inc., and Spartan.

3
Only Davis Oil appeared.4 Thereafter, the state assessed Davis Oil

with the entire cleanup cost. Davis Oil now seeks to enforce its

Purchase Agreement with HPC by means of this suit against the

successor to HPC's oil and gas assets, TS, Inc.5

In 1988, TS, Inc., assumed HPC's assets and certain of its

obligations as a result of a larger arrangement between both

companies' parents (thereby becoming, for our purposes,

“TS/Home”SSsee note 7 below). HPC was a subsidiary of HW-GW,

which, in turn, was a subsidiary of Hiram Walker Resources (“HR”),

a Canadian liquor company.

TS, Inc., is a subsidiary of Gulf Canada Corporation (“Gulf

Canada”), which bought HR and made it one of its subsidiaries. As

part of its restructuring following the acquisition of HR, Gulf

Canada wished to divest HR of HW-GW. Gulf Canada, therefore, sold

HW-GW to Allied-Lyons, PLC (“Allied-Lyons”), which, however, was

interested only in the liquor businessesSSand not the oil and gas

businessesSSof HW-GW and its subsidiary, HPC, and HPC's subsidiary,

Home Petroleum Company.

4
HPC was dissolved after its asset sale to TS, Inc. Davis Fuel, Inc., and
Spartan are otherwise defunct or insolvent.
5
To recover, Davis Oil must show that TS, Inc., assumed HPC's Purchase
Agreement obligations pursuant to the assumption agreements between TS, Inc., and
HPC. The relevant agreements concerning the assumption are the Option Agreement,
the Memorandum of Understanding, and the Sale Agreement. These are discussed
more fully below. See infra parts III-VI.

4
Consequently, as part of its deal to sell HW-GW, Gulf Canada

gave Allied-Lyons an irrevocable put option in the form of the

Option Agreement. Within a certain amount of time after Allied-

Lyons acquired HW-GW, it could sell the oil and gas businesses of

HPC and of HPC's subsidiaries back to Gulf Canada or to Gulf

Canada's designated subsidiary.

Before the time to exercise the option had expired, Allied-

Lyons and Gulf Canada entered into a “Memorandum of Understanding”

that served to notify Gulf Canada that Allied-Lyons was exercising

its option. The Memorandum of Understanding designates TS, Inc.,

as the Gulf Canada subsidiary to assume HPC's oil and gas

businesses.

TS, Inc., and HPC thereafter, entered into a Sale Agreement.6

When it assumed HPC's oil and gas businesses, TS, Inc., changed its

name to Home Petroleum Company. A few years later, it returned to

the name TS, Inc.7

The parties submitted to the district court a stipulated

record with their trial briefs. The district court granted

judgment for the defendant and issued an opinion containing

6
To facilitate the sale, HPC merged with its subsidiary, Home Petroleum
Company, contemporaneously with this transaction; HPC was the surviving entity.
7
For ease of explanation, we will refer to the company that assumed the
assets of HPC as “TS/Home” rather than TS, Inc., or Home Petroleum Company.

5
findings of fact and conclusions of law. See Davis Oil Co. v. TS,

Inc., 962 F. Supp. 872 (E.D. La. 1997).

II.

“[C]onstruction of a written instrument is normally a question

of law and findings and conclusions of the trial court are not

binding on the appellate court.” Rutgers, State Univ. v. Martin

Woodlands Gas Co., 974 F.2d 659, 661 (5th Cir. 1992) (citation

omitted). We review the district court's factual findings for

clear error. See id.

“Whether there is a 'plain meaning' to a contract or whether

an ambiguity exists is a legal question also subject to de novo

interpretation.” See Lloyds of London v. Transcontinental Gas Pipe

Line Corp., 101 F.3d 425, 429 (5th Cir. 1996) (citation omitted).

“Under Louisiana law, a contract is ambiguous when it is uncertain

as to the parties' intentions and susceptible to more than one

reasonable meaning under the circumstances and after applying

established rules of construction.” Id. (citation omitted). Once

the district court considers parol evidence, we review its factual

findings based thereon for clear error. See American Druggists

Ins. Co. v. Henry Contracting, Inc., 505 So. 2d 734, 737 (La. App.

3d Cir.), writ denied, 511 So. 2d 1156 (La. 1987).

III.

6
Davis Oil seeks to enforce HPC's lease cleanup obligations

against HPC's successor, TS/Home. To do so, Davis Oil must show

that the relevant assumption agreements between HPC and TS/Home

made TS/Home liable to Davis Oil for the State Lease 7027

obligations for which HPC was responsible under the Purchase

Agreement.

As a threshold matter, TS/Home argues that even if it is

responsible for HPC's Purchase Agreement obligations, the choice of

law clause in the Option Agreement8 between the parent companies of

HPC and TS/Home prevents Davis Oil from suing TS/Home directly,

rather than suing HPC and then making HPC seek recovery from

TS/Home. TS/Home represents that Ontario law, the law adopted in

the Option Agreement, requires strict privity for suits to enforce

contracts. Intended third-party beneficiaries are unable to sue to

enforce a contract if they are not parties to the original

agreement.

Davis Oil was not a party to the assumption agreements between

HPC and TS/Home and is thus only a third-party beneficiary of HPC's

delegation9 of its State Lease 7027 obligations to TS/Home.

8
The Option Agreement is the agreement in which Gulf Canada granted
Allied-Lyons the option to sell HPC's oil and gas assets and obligations to Gulf
Canada.
9
An explanation of our terminology might be helpful: “At the outset, it
is vital to distinguish the assignment of rights from the delegation of
performance of duties. An obligee's transfer of a contract right is known as an
assignment of the right. . . . An obligor's empowering of another to perform the
obligor's duty is known as a delegation of the performance of that duty.”
FARNSWORTH ON CONTRACTS § 11.1, at 778 (2d ed. 1990) (emphasis in original).

7
Arguing that a party's contractual choice of law binds an intended

beneficiary as well as the parties, see Barzda v. Quality Courts

Motel, Inc., 386 F.2d 417, 418 (5th Cir. 1967) (per curiam)

(construing Florida law), TS/Home maintains that we should dismiss

this action.

Our research reveals that TS/Home's representations about

Ontario's privity requirement may not be entirely representative of

the modern view that the Ontario courts are taking of the issue.

Although Ontario courts continue to adhere strictly to the common

law privity of contract requirement, we have found that some have

recently begun to carve more exceptions to that ruleSSincluding one

for third-party beneficiaries of contract.

The General Division of the Ontario Court recently cited a

case of the Supreme Court of Canada for the following proposition:

The common law rule of privity of contract provides that
a contract cannot confer rights or impose obligations on
anyone except the parties to it. However, the rule is
relaxed in appropriate circumstances, including that of
third-party beneficiaries. London Drugs Ltd. v. Kuehne
& Nagel Int'l Ltd. [1992] 3 SCR 299 [Can. Supr. Ct.].

Evanov v. Burlington Broad. Inc., 1997 Ont. C.J. LEXIS 964 (Ont.

Gen. Div.). If the emerging Ontario law indeed would permit

plaintiff's suit in this instance, then the choice of law issue

becomes moot. Ontario law and Louisiana law would not be in

conflict and thus we could proceed to employ the forum's law. See

8
infra note 14.

Even assuming that Ontario law does require strict privity of

contract for this third-party beneficiary, Gulf Canada and Allied-

Lyons did not intend, by their stipulation of Ontario law in the

Option Agreement, for that choice of law to apply to the transfer

of HPC's assets and liabilities. TS/Home argues that Ontario law

controls the Sale Agreement because, in its view, the Option

Agreement adopts Ontario law as the governing law for the

interpretation of all of the transfer agreements. In our view,

however, the parties meant their choice of law solely to govern the

manner in which the option was exercised and construed.10

The Option Agreement is a contract that bound Gulf Canada, a

Canadian corporation, headquartered in Toronto, Ontario, to buy the

oil and gas businesses of HPC. That agreement required HPC to

notify Gulf Canada by a written instrument delivered to Gulf Canada

in Toronto.

Logically, Gulf CanadaSSthe party granting the optionSSwanted

to make sure that it knew how that option would be exercised by the

option holder. Because of the great differences in laws among

jurisdictions concerning the construction of option contracts, the

10
Note that unlike other provisions in the Option Agreement, the choice
of law provision appears only in that agreement and is not repeated in the later
Memorandum of Understanding or in the Sale AgreementSSthe two documents actually
setting forth the details of the asset and obligation transfer.

9
parties likely intended to increase certainty by choosing the local

law of the option makerSSGulf Canada.

The nexus with Ontario apparent in the Option Agreement does

not also appear to exist in the Sale Agreement. In the latter

agreement, HPC, a Delaware Corporation headquartered in Denver,

Colorado, sold its oil and gas obligations to TS, Inc., a Georgia

Corporation. The assets and obligations transferred were located

in both the United States and Canada. There is no apparent

justification to find that the parties wanted Ontario law to govern

this transfer aspect of their agreement.

Even if HPC and TS/Home intended Ontario law to govern the

transfer part of their dealSSin addition to how the option would be

exercisedSSthe parties do not appear to have meant that choice of

law to adopt a privity requirement. It would be peculiar if the

parties effected the purpose of the Option AgreementSSHW-GW's clean

break from the oil and gas businessesSSby requiring HPC (HW-GW's

subsidiary) to stand in as the defendant for any and all failures

of TS/Home to perform its obligations to HPC's oil and gas

obligees.11 This argument is especially weak given the fact that

HPC was dissolved soon after the asset sale.

If Ontario law does not govern this aspect of the transfer

11
HPC would then have to seek reimbursement from TS/Home under the
assumption agreements. It is still true that unless HPC obtained novations from
its obligees, it too could be held liable for any and all defaults by TS/Home.
Without allowing obligees, as third party beneficiaries, to sue TS/Home directly,
however, suing HPC would be the only avenue for such suits.

10
agreements, we might wonder which jurisdiction's law does apply.

We do not need to conduct a conflict of laws analysis, however,

because all of the possible jurisdictions whose laws might apply12

do not require the (assumed) strict privity of contract of

Ontario.13 There being no conflict of laws with the forum's laws,

we can proceed to apply Louisiana law.14

IV.

TS/Home argues that even under Louisiana law, an implicit

assumption of HPC's indemnification obligation is not sufficient

for the obligee to bring an action against the delegate under

LA. CIV. CODE art. 1821. TS/Home maintains that because we have held

that an indemnification agreement is a personal obligation under

12
These include Colorado, Delaware, Georgia, and Louisiana.

13
See, e.g., LA. CIV. CODE ANN. art. 1821; Montezuma Plumbing & Heating,
Inc. v. Housing Auth., 651 P.2d 426, 428 (Colo. Ct. App. 1982); Pierce v.
International Ins. Co., 671 A.2d 1361, 1364 (Del. 1996); Lincoln Land Co. v.
Palfery, 203 S.E.2d 597, 605 (Ga. Ct. App. 1973).

Although, in the final analysis, there may be yet another state that might
be found to have a more significant relationship with the transfer agreements
between HPC and TS/Home, mostSSif not allSSAmerican jurisdictions have long since
abandoned privity as an absolute bar to third-party beneficiaries suing on a
contract. See FARNSWORTH ON CONTRACTS § 11.11, at 831 (2d ed. 1990).
14
See LA CIV. CODE ANN. art. 3537 (West 1994). Under art. 3537, “an issue
of conventional obligations is governed by the law of the state whose policies
would be most seriously impaired if its laws were not applied to that issue.”
In this case, however, because all of the interested states' laws are fairly
similar, none would be “most seriously impaired” if not applied. Therefore, we
can apply the forum law without fear of conflict.

11
Louisiana law, see Joslyn Mfg. Co. v. Koppers Co., Inc., 40 F.3d

750, 756 (5th Cir. 1994), the assumption of the obligation here

must be made with a specific contractual provision. See id.

Louisiana law is settled that for there to be a
stipulation pour autrui there must be not only a third-
party advantage, but the benefit derived from the
contract by the third party may not merely be incidental
to the contract. Rather, the third-party benefit must
form the condition or the consideration of the contract
in order for it to be a stipulation pour autrui.
Moreover, a stipulation pour autrui will be found only
when the contract clearly contemplates the benefit to the
third person as its condition or consideration.15

TS/Home maintains that this “clearly contemplates” language means

that the assumption must be made by an explicit reference to the

assumed obligation in the written assumption agreement.

As the district court correctly concluded, and assuming that

this agreement fits within the confines of the Joslyn rule,

Louisiana law does not go so far as to require explicit reference

15
Chevron, U.S.A., Inc. v. Traillour Oil Co., 987 F.2d 1138, 1147 (5th
Cir. 1993) (quoting New Orleans Pub. Serv., Inc. v. United Gas Pipe Line Co.,
732 F.2d 452, 467 (5th Cir. 1984) (en banc) (internal quotations and citations
omitted) (“NOPSI”)).

In NOPSI, we stated the relevant rule for understanding the instant case:

Where the promisor's performance is to be made to, and is subject to
the control of, the promisee, the Louisiana courts have refused to
find a stipulation pour autrui despite the fact that the promisor
and promisee may have contemplated that the promisor's performance
would as a practical matter enable or facilitate the promisee's
performance of its obligations to a third party.

NOPSI, 732 F.2d at 468 (citations omitted) (emphasis added). In the present
case, the delegation was not “to be made to” and was not “subject to the control
of the promisee.” Quite the contrary. Unlike, for example, the letter of credit
contract at issue in Chevron, here, HPC, as promisee, exercised no control once
the agreement was signed; it could not have, because it ceased to exist.

12
to the individual, assumed obligation.16 Rather, state law requires

that it must be apparent from the face of the document assuming the

obligation that “the contract clearly contemplates the benefit to

the third person as its condition or consideration.” Chevron,

987 F.2d at 1147. That is, the party must be an intended third-

party beneficiary, rather than an incidental one. Consequently, we

must look to the language of the assumption agreements between

TS/Home and HPC to determine whether these parties “clearly

contemplated,” as the basis for their bargain, TS/Home's assumption

of HPC's cleanup obligations under the Purchase Agreement.

Before turning to the language of the contracts, however, we

respond to the serious charges leveled by the dissent. We conclude

below that, under our caselaw construing art. 1821, the relevant

portions of this labyrinth of contractsSSthe Sale Agreement, which

refers to the Memorandum of Understanding, which in turn refers to

the Option AgreementSS“clearly contemplate” TS/Home's assumption of

HPC's obligation to clean up the site.17 Thus, we find TS/Home

16
See Davis Oil, 962 F. Supp. at 882 (“[T]he reasoning of Chevron and
Joslyn simply cannot support the sweeping prohibition against general assumptions
that defendant advocates.”).

17
As the district court noted, there is also a subsidiary question whether
§ 2.14 of the Purchase Agreement between Davis Oil and HPC “clearly contemplated”
HPC's assumption of Davis Oil's obligation to the state for cleanup costs. For
the reasons stated by the district court, we agree that HPC did assume Davis
Oil's cleanup obligations under State Lease 7027 in the Purchase Agreement. See
(continued...)

13
directly liable to Davis Oil for HPC's cleanup obligation.

The dissent stridently disagrees, as it finds this case

“indistinguishable” from Chevron. Thus, the best place to start,

it would seem, is with Chevron itself.

In that case, Traillour had an obligation to Chevron and

secured a “side agreement” with the Rocky Mountain investors by

which the investors promised Traillour a letter of credit for it to

fulfill its obligation to Chevron. In order to seek satisfaction

of the obligation from Traillour, Chevron attempted to bypass

Traillour by suing the Rocky Mountain investors directly. We

rejected Chevron's attempt to do so, stating:

We think that the district court, by finding an
unambiguous intent to confer a benefit on Chevron,
misread the purpose of the side agreement between Rocky
Mountain and Traillour. From the face of the agreement,
there is no clear manifestation of an intent by Rocky
Mountain to confer a benefit on Chevron. Instead, the
side agreement indicates that the letter of credit Rocky
Mountain agreed to obtain was to be “made available for
the benefit of Traillour at the closing of the purchase
of the Bayou of Couba Field.” It is undisputed that
Traillour, at the time it entered the side agreement with
Rocky Mountain, had agreed to keep in force a letter of
credit in favor of Chevron; however, it is also
undisputed that Chevron, in the letter accepting
Traillour's offer to purchase the Bayou Couba lease,
expressly conditioned the sale on Traillour and Marsh's
“acquisition of a $2,000,000.00 performance bond or
irrevocable letter of credit." Therefore, Rocky
Mountain's agreement to obtain the initial letter of
credit helped Traillour fulfill a condition precedent to
Chevron's obligation to assign the Bayou Couba lease.
Finally, the recital in the side agreement, on which the

(...continued)
Davis Oil, 962 F. Supp. at 885-87.

14
district court placed heavy reliance in finding an intent
to benefit Chevron, simply does not reveal a clear intent
to benefit Chevron. The recital, like the provisions of
the side agreement itself, reveals Rocky Mountain's
intent to help Traillour close the deal with Chevron.
Any benefit derived by Chevron from this side agreement
was, in our view, merely incidental.

Chevron, 987 F.2d at 1147-48 (some emphasis added).

Chevron involved a contract in which the promisor provided a

continuing and directed benefit to the promisee, while not

providing such a benefit to the third-party beneficiary. We quite

rationally used the above-mentioned factors to determine that the

promisor and promisee expected that the contractual obligations

would remain between the two. See id. (noting that the contract

did not intend to confer continuing benefits on the third-party

beneficiary).

The instant contract, by contrast, is noticeably different

from the one in Chevron. The instant parties inserted no

comparable language that this contract is “for the benefit of HPC.”

Although HPC undoubtedly benefited from the assumption agreement,

its benefit was non-exclusive and finite.

But there is a more important distinction. Here, the benefit

to HPC's oil and gas creditors is continuous and contemplated:

TS/Home, through its assumptions, undertook to step into HPC's

shoes in running its oil and gas business. Indeed, TS/Home changed

its name to HPC and undertook to be HPC itself. Far from being

“indistinguishable” from Chevron then, this case appears to be

15
terra nova.

The argument advanced by TS/Home and the dissent for the

extension of the stipulation pour autrui argument beyond that

outlined in Chevron is logically flawed; it proves too much under

the facts of this case. Their argument is as follows: Even if the

defendant did assume this obligation, it was merely an incidental

assumption, as it was not assumed through explicit contractual

language. Therefore, Davis Oil must recover from HPC and not from

TS/Home directly.

Although superficially attractive, this argument does not

logically square with the structure of the deal between TS/Home and

HPC. The reasoning of TS/Home and the dissent also applies to all

of the day-to-day obligations assumed through the general, rather

than explicit, contractual language. Therefore, under this

reasoning, TS/Home (even though it is running HPC's oil and gas

businesses) apparently cannot be sued by most, if any, creditors of

HPC's assumed oil and gas businesses. A consequence of this is

that Allied-Lyons must have agreed that it, or one of its

subsidiaries, would be a necessary stand-in to HPC's obligees when

TS/Home failed to meet its assumed obligations.

That is peculiar, though, in light of the only reason for the

deal in the first place: Allied-Lyons intendedSSthrough its having

and use of an irrevocable put optionSSto rid itself entirely of all

of HPC's oil and gas business. The put option, after all, was

16
meant to sell back to Gulf Canada (through TS/Home) the obligations

it already owned before the larger deal between the two parents

took place. Indeed, far from an unanticipated obligation for the

defendant, this obligation was once owned by the defendant's

parent, Gulf Canada, then sold to Allied-Lyons with an irrevocable

put option to sell it back to Gulf Canada. Accordingly, it makes

more sense, under the structure of the deal, to conclude that

TS/Home intended to make itself directly liable to obligees on

HPC's obligations it re-assumed.

Although we can readily understand why TS/Home chooses to make

this untenable argument, the dissent's adoption of it is less easy

to comprehend. The dissent's apparent failure to understand the

larger components of the deal between Allied-Lyons and Gulf Canada

reflects an evident concern about the development of the law of

third-party beneficiaries.

The dissent apparently worries about (1) the equity to

defendants in environmental cleanups and (2) the possibility that

our ruling will open the flood gates to new liability actions in

this area. Although we find these concerns commendable, we cannot

accept the dissent's desire to use its desired policy results “[to]

work[] backward from [its] desired 'equitable' result to the legal

principle that achieves [its] goal.”18 Dissent at 1. In sum,

18
As for the dissent's “parade of horribles” (e.g., tax collectors,
“roustabouts” and the like), its fears might have been allayed had it looked
beyond the language of the Sale Agreement to the limiting language in the
(continued...)

17
because TS/Home agreed to assume this obligation to Davis Oil, it

must be accountable for it now.

We now turn to the language of the assumption agreements at

issue. In the Sale Agreement, TS/Home assumes four types of HPC's

liabilities:

And for the same [$100.00 and other good and
valuable] consideration, Assignee [TS/Home] hereby
assumes, subject to the Option Agreement and Memorandum
of Understanding, the following obligations and
liabilities:

1. All obligations of Assignor to deliver oil, gas or
other minerals pursuant to any balancing agreement,
gas purchase agreement or other agreement to
compensate any party for any previous over-
production by Assignor or for any “take or pay” or
other advance payment;

2. All obligations and liabilities of Assignor at the
Effective Date that have arisen in the ordinary
course of its business;

3. All obligations to past or present employees of
Assignor in respect of accrued pay and salaries,
commissions, vacation and holiday pay, workman's
compensation levies, statutory and other
withholding deductions, other payroll deductions
including union dues and pension plan
contributions; and

4. All liabilities and obligations under equipment
(including, without limitation, data processing) or
real property leases or licenses or contracts
therein entered into by HPC in the ordinary course
of business.

(...continued)
Memorandum of Understanding and in the Option Agreement to which the Sale
Agreement refers and to the Purchase Agreement.

18
Sale Agreement (emphasis added), cited in Davis Oil, 962 F. Supp.

at 882. The district court correctly found that HPC's cleanup

obligations under the Purchase Agreement arose in the ordinary

course of business before the effective date, thus falling within

the scope of paragraph 2.19

The district court, however, found that TS/Home had not

assumed HPC's cleanup obligations, because the obligations fell

within one of the Sale Agreement's exceptions to the aforementioned

assumed obligations. The exclusionary language at issue reads as

follows:

Except to the extent expressly assumed or required
to be assumed pursuant to this Assignment, the Option
Agreement or the Memorandum of Understanding, the
liabilities assumed by Assignee hereunder shall not
include, and Assignee shall not assume or in any way be
liable or responsible for (a) any liability or obligation
of any kind incurred by or on behalf of Assignor after
the Effective Date (b) any liability or obligation which

19
For essentially the same reasons outlined by the district court, see
Davis Oil, 962 F. Supp. at 884-85, we agree that this obligation arose in the
ordinary course of business prior to the closing date of December 15, 1988.
State Lease 7027 provided for its own expiration three months after oil and gas
production from the leased tract ceased. Once the lease expired, the obligation
to cap the wells and clean the site “arose.” No demand was required for the
obligation to accrue.

Production ceased on the land covered by State Lease 7027 in June 1985.
As a result, the lease automatically expired in September 1985. At that time,
Davis Oil's contractual obligation under the lease agreement became due. Under
the Purchase Agreement transferring Davis Oil's interest in the lease to HPC, HPC
also became obliged to clean up the site at that time.

In the district court, Davis Oil also argued that paragraph 4 of the Sale
Agreement assumed this obligation because it was an obligation from a “real
property lease.” The district court rejected this contention, stating that “it
is evident from other provisions in the Sale Agreement that when the parties
referred to oil and gas leases they used the term 'oil and gas leases.'” Davis
Oil, 962 F. Supp. at 883. Davis Oil does not raise this argument on appeal and
we, as a consequence, do not address it.

19
may in the future be asserted against Assignee arising
out of, resulting from or in connection with, Assignor's
operation of its business and (c) any liability or
obligation of any kind to any shareholder of Assignor to
any corporation, entity or person related to or
affiliated with such a shareholder.

Sale Agreement (emphasis added), cited in Davis Oil, 962 F. Supp.

at 887. Specifically, the district court held that the cleanup

obligations did not meet exception (b) because, although they arose

prior to December 15, 1988, they were not asserted against TS/Home

until approximately four years after the closing date.20 See Davis

Oil, 962 F. Supp. at 888.

The exclusionary language in the Sale Agreement starts with

the phrase “Except to the extent expressly assumed or required to

be assumed pursuant to this Assignment, the Option Agreement or the

Memorandum of Understanding . . . .” Sale Agreement, cited in

Davis Oil, 962 F. Supp. at 887. Although we agree with the

district court's interpretation that the Option Agreement does not

require assumption, the court's interpretation of the Memorandum of

Understanding is flawed, and that document does indeed require

TS/Home's assumption of HPC's obligation to Davis Oil.

Accordingly, the exceptions of the Sale Agreement are not

applicable.

20
We need not consider the propriety of the district court's reading of
the exclusionary prongs in the Sale Agreement, because we find this obligation
expressly assumed by the Memorandum of Understanding. See infra part VI.

20
V.

Davis Oil argues that the Option Agreement plainly

contemplates TS/Home's acquisition of this liability. It points to

the following definition of “Oil and Gas Assets and Liabilities”

that the Option Agreement adopts:

[T]hose assets and liabilities of HW-GW and its
subsidiaries (excluding any Consolidated Indebtedness but
including, without limitation, assets and liabilities of
HPC Inc.) habitually designated as part of the oil and
gas division of such corporations, which assets and
liabilities as at August 31, 1985 were those set forth in
Schedule D annexed hereto.21

Davis Oil maintains that the emphasized language shows that Allied-

Lyons intended to rid itself of all oil and gas assets and

liabilities, notwithstanding what the specific provisions of the

Memorandum of Understanding and the Sale Agreement might state.

Because, however, the Option Agreement only outlines the

possible range of things Allied-Lyons could sell to Gulf Canada, we

must look to the Memorandum of Understanding and the Sale Agreement

to determine what the parties actually did transfer. By itself,

the Option Agreement determines only the frontier. The Memorandum

of Understanding and the Sale Agreement, by contrast, hammer out

the details of the eventual transfer.

21
Supplemental Share Purchase Agreement (emphasis added). The Option
Agreement adopts its definition of Oil and Gas Assets and Liabilities from the
“Restated Agreement,” which includes the Supplemental Share Purchase Agreement.
The aforementioned definition of Oil and Gas Assets in the Supplemental Share
Purchase Agreement also contains a reference to “Schedule D.” That appendix,
however, contains only aggregate monetary estimates of the values of the assets
and liabilities to be assumed.

21
VI.

Davis Oil contends that the Memorandum of Understanding shows

that the parties meant to have Gulf CanadaSSthrough TS/HomeSSassume

the entire scope of the assets and liabilities defined in the

Option Agreement. Specifically, Davis Oil points to the following

in the Memorandum of Understanding:

Without limiting the provisions of the [Option]
Agreement or the foregoing provisions hereof but subject
as hereinafter provided in this Section (m), the
following liabilities shall be part of the Oil and Gas
Assets and Liabilities:

(i) except as contemplated herein, all obligations
and liabilities of HPC and its subsidiaries at
Closing, whether or not contingent, that have
arisen in the ordinary course of the oil and
gas business of HPC or any of its subsidiaries
carried on with the Oil and Gas Assets and
Liabilities;

* * *

(iv) except as contemplated herein, all liabilities
and obligations accruing or falling due after
closing, whether or not contingent, in
relation to the oil and gas business
theretofore conducted by HPC or any of its
subsidiaries carried on with the Oil and Gas
Assets and Liabilities.

Memorandum of Understanding (emphasis added), cited in part in

Davis Oil, 962 F. Supp. at 888-89.

The district court found that the above-quoted passage from

the Memorandum of Understanding requires that the liabilities

22
assumed be tied to an asset forming part of the “Oil and Gas Assets

and Liabilities” at closing. Reading the words “business . . .

carried on with the Oil and Gas Assets and Liabilities” as

“business carried on with the assets forming part of the Oil and

Gas Assets and Liabilities,” Davis Oil, 962 F. Supp. at 889

(emphasis added), the court concluded that the obligation under

State Lease 7027 could not possibly have been assumed. HPC had

sold its interests in State Lease 7027 well before the closing

date; HPC's obligations to Davis Oil with regard to State Lease

7027 were not tied to an identifiable asset forming part of the Oil

and Gas Assets and Liabilities at closing. Thus, HPC's obligation

to Davis Oil under the Purchase Agreement fell outside the

obligations that TS/Home assumed in the Memorandum of

Understanding.22

The district court dismissed the idea that “the obligation in

question relates to business carried on with the liabilities

constituting the Oil and Gas Assets and Liabilities,” because the

argument was “circular and le[d] nowhere.” Davis Oil, 962 F. Supp.

at 889. “In essence, the argument would be that the obligation in

question falls within the subsection (i) or (iv) because it meets

the requirements of that subsection if the last phrase is ignored.”

22
Because we decline to adopt the district court's reading of a presently
existing asset requirement in § (m) of the Memorandum of Understanding, we need
not address Davis Oil's contention that because of a defective title transfer,
HPC still legally owned its interest in State Lease 7027 on December 15, 1988.
Accordingly, we express no view on the matter.

23
Id. The court's reasoning is troublesome for the reasons that we

outline below.

The district court's reading of a presently existing asset

requirement into § (m)(i) and (m)(iv) is strained in light of the

language of the Option AgreementSSan agreement to which § (m)

specifically refers.23 Even though the court had reason to be

suspicious of Davis Oil's reading of the phrase “business . . .

carried on with the Oil and Gas Assets and Liabilities,” its own

alternative similarly lacks force.

At bottom, the district court reads into the contract a

requirement that the liabilities assumed in this section be tied to

an identifiable asset assumed at closing. This requirement has the

effect of excluding a great deal of general oil and gas

obligationsSSones that the spirit of the transfer agreements would

seem to encompass.24

23
The district court never discussed the phrase “without limiting the
provisions of the [Option Agreement]” that appears before the specific exclusions
mentioned thereafter. As Davis Oil correctly notes, this phrase is important,
because it shows that the parties intended the Option Agreement's expansive
definition of Oil and Gas Assets and Liabilities to play a role in the Memorandum
of Understanding. Thus, when reading the more specific passages of § (m)(i) and
(m)(iv), we should keep in mind the language initially adopted by the Option
Agreement.
24
The district court's insertion of a “related asset” requirement seems
especially tenuous when, in another part of the same subsection of the Memorandum
of Understanding, the drafters used that phrase when they meant to include such
a requirement:

(continued...)

24
We note that it was HR that originally owned HPC and Home

Petroleum Company through HR's subsidiary, HW-GW. When HR was

acquired by Gulf Canada, the deal was to sell HW-GW but to retain

HW-GW's oil and gas holdings. Thus, there is good reason to

believe that TS/HomeSSthe designated subsidiary of Gulf CanadaSSdid

in fact intend to assume HPC's general oil and gas obliga-

tionsSSincluding those untied to a “related asset.” These

obligations were originally Gulf Canada'sSSby way of HRSSto begin

with. As a basis for the bargain of selling HW-GW, Gulf Canada

agreed to keep its oil and gas obligations.

The better view of the phrase “Oil and Gas Assets and

Liabilities” in § (m) is to read it in conjunction with the Option

Agreement. After all, this section of the Memorandum of

Understanding starts with the admonition: “Without limiting the

(...continued)
For greater certainty, the following liabilities of HPC shall
not constitute a portion of the Oil and Gas Assets and Liabilities
and shall not be assumed by Gulf:

(1) liabilities to any affiliate of HPC (other than to a
subsidiary of HPC where the related asset is also included as
part of the Oil and Gas Assets and Liabilities and other than
liabilities to affiliates arising in connection with bona fide
transactions entered into in the ordinary course of the oil
and gas business carried on by HPC or its subsidiaries with
the Oil and Gas Assets and Liabilities) . . . .

Memorandum of Understanding, § (m) (emphasis added). Note that the contract
drafters included the “related asset” requirement explicitly in one instance, and
then immediately afterwardSSin the same sentenceSSdid not; instead the drafters
used the same phrasing that they used in subsections (i) and (iv).

25
provisions of the [Option] Agreement . . . .” Accordingly, if we

insert the Option Agreement's definition of “Oil and Gas Assets and

Liabilities” for that phrase in § (m), we reach a more congruent

result.

Here is how the relevant subsections of § (m) would read if we

inserted the Option Agreement's definition of “Oil and Gas Assets

and Liabilities” for that phrase:

* * *

The use of the Option Agreement's “assets . . . habitually

designated as part of the oil and gas division of such

corporations” extricates us from the vicious circle of trying to

define the liabilities forming the “Oil and Gas Assets and

26
Liabilities” by self-referencing to the assets forming part of the

“Oil and Gas Assets and Liabilities.” Instead, if we use an

external definitionSSwhich seems to adopt a common understanding of

the partiesSSthings start to make more sense.

Under this reading, an assumed liability can outlive an asset.

The liability need only be one incurred with assets thatSSat some

point in timeSSwere “habitually designated as part of the oil and

gas division of” HPC or Home Petroleum Company. HPC's obligations

incurred as a result of its assumption of State Lease 7027 plainly

meet this standard.

VII.

Because the Memorandum of Understanding expressly assumes the

obligation that HPC incurred under the Purchase Agreement, the

exclusions in the Sale Agreement do not apply. The district court

therefore erred in finding that TS/Home did not assume Davis Oil's

cleanup obligation under State Lease 7027. Accordingly, we REVERSE

and RENDER judgment for Davis Oil.

By EDITH H. JONES, Dissenting:

With due respect to the panel majority, I must dissent

from the improbable result in this case. The majority hold,

27
overruling the district court, that TS/Home, which acquired oil and

gas assets of HPC in a transnational corporate reorganization in

1988, also acquired environmental cleanup obligations pertaining to

a lease that HPC had sold to another party in 1982. In other

words, the corporate reorganization transaction somehow revived a

liability that had been shed by HPC for all practical purposes six

years earlier. The majority accomplishes this Phoenix-like

resurrection of liability by misconstruing Louisiana’s law

concerning a stipulation pour autrui, or in the common law, a third

party beneficiary contract.25 The majority cites the applicable law

but evidently does not understand what it means and misconstrues

the application of that law in a recent carefully considered

decision of our own court. See Chevron v. Traillour Oil Co., 987

F.2d 1138 (5th Cir. 1993).

Putting the facts in perspective, it appears that the

majority has worked backward from a desired “equitable” result to

the legal principle that achieves their goal. Davis, the plaintiff

here, acquired State Lease 7027 from Louisiana in 1975 and assigned

its interest in the lease to HPC in 1981.26 Eighteen months later,

HPC conveyed State Lease 7027 to another company. Several

25
See Louisiana Civil Code Art. 1821 (“An obligor and a third
person may agree to an assumption by the latter of an obligation of
the former. To be enforceable by the obligee against the third
person, the agreement must be in writing.”).
26
HPC and Home Petroleum are related entities, but the
intracorporate dealings are unnecessary to relate here.

28
intervening conveyances occurred until in 1985, production from the

lease ceased. The last operator apparently failed to plug and

abandon the wells as required by the terms of the lease.

In 1988, pursuant to a much larger transaction between

Canadian liquor companies, HPC transferred its oil and gas assets

to TS, Inc., which became TS/Home, the target defendant here. HPC

later dissolved.

The state caught up with the status of Lease 7027 in 1991

and began looking for parties to hold liable for the clean-up

costs. The state fastened its gaze on Davis Oil, which naturally

began to seek others in the chain of title who could contribute to

the clean-up costs. HPC no longer existed, and several other

transferees were apparently defunct, so Davis went after TS/Home.

Davis alleged (1) that HPC, Inc. originally had a contractual

obligation to indemnify Davis Oil for plugging and abandoning

operations on State Lease 7027 and (2) that TS/Home assumed HPC’s

obligation to Davis Oil in the assignment transaction that occurred

in 1988. Lacking any direct contractual relationship with TS or

any of the subsequent owners of Lease 7027, Davis has to prove

itself an obligee of the HPC-TS/Home transaction.27

Davis has persuaded the majority that when TS/Home

27
Davis makes no argument against TS/Home founded on § 128 of
the Louisiana Mineral Code. La. Rev. Stat. Ann. § 31:128 (West
1998); see also Chevron, 987 F.2d at 1158 (construing § 128). I
will not speculate on any such claim.

29
acquired hundreds of oil and gas properties in the United States

and Canada from HPC in the 1988 reorganization, it also voluntarily

assumed the obligation to clean up Lease 7027 in Louisiana on a

property that HPC had sold and divested itself of six years

earlier. That any rational business would voluntarily assume such

remote liabilities defies common sense. Not surprisingly, the

imposition of liability under these circumstances also defies

Louisiana’s law. Louisiana does not readily permit a third-party

stranger to a contract to enforce its provisions against one of the

contracting parties. As this court has put it in an en banc

opinion, a third-party beneficiary provision in Louisiana requires

the following: that “the benefit derived form the contract by the

third party may not be merely incidental to the contract;” that

“the third-party benefit must form ‘the condition or consideration’

of the contract in order to be a stipulation pour autrui;” and that

the provision will be found “only when the contract clearly

contemplates the benefit to the third person as its ‘condition or

consideration.’” New Orleans Pub. Serv., Inc. v. United Gas

Pipeline Co., 732 F.2d 452, 467-68 (5th Cir. 1984) (en banc).

Louisiana law requires either that there be an express declaration

of intent to benefit the third party “or an extremely strong

implication.” Id.

Nothing in the contractual provisions laboriously

construed by the majority “clearly contemplates” any benefit to

30
third parties as remote to the corporate reorganization of HPC and

TS/Home as the clean-up costs for wells that had stopped producing

three years after HPC sold them and three years before the

corporate reorganization occurred. This particular obligation

could not have been a known potential claim in the context of the

1988 transaction, because although the wells had stopped producing

in 1985, the state’s claim for environmental cleanup costs was

first asserted in 1991, three years after the transaction here at

issue. Indeed, because HPC had sold its interest in 1982, how

could it possibly have known that, after several intervening

transfers, the wells would cease production without proper plugging

and abandoning three years later?

In a strikingly similar case, this court exhaustively

considered Louisiana’s law of stipulation pour autrui and ruled

against the party in Davis’s position. See Chevron v. Traillour

Oil Co., 987 F.2d 1138 (5th Cir. 1993). Chevron makes it clear

that in Louisiana, a stipulation pour autrui “is never presumed.

Rather, the intent of the contracting parties to stipulate a

benefit in favor of a third party must be made manifestly clear.”

Id. at 1147 (internal citation omitted). In Chevron, the court

held that when Traillour, which purchased Chevron’s interest in an

oil field, re-assigned that interest to Rocky Mountain,

conditioning Rocky Mountain’s performance on providing a letter of

credit (which Chevron required) to secure the plugging and

31
abandoning of the wells, that was not a third-party beneficiary

provision in favor of Chevron. Rocky Mountain executed a contract

to benefit only Traillour, the court held, and this benefit could

not flow back to Chevron directly. The Chevron opinion also holds

that remote investors in the field, who purchased from Traillour

and assumed “all obligations” resulting from their ownership of the

conveyed interests, did not execute a stipulation pour autrui on

behalf of Chevron. Their contract with Traillour did not clearly

contemplate a benefit to Chevron as its condition or consideration.

See id. at 1159-60.28

This analysis appears to me dispositive of the present

situation, where any “intent to benefit” Davis was much more vague

and inspecific than the language Chevron dealt with. There was far

more equity in Chevron’s position than there is in this case,

because Chevron clearly contemplated and sought to avoid the

possibility that Traillour might not be able to bear the costs of

plugging and abandoning the wells. Here, by contrast, neither

TS/Home nor HPC had any conception at the time of the 1988

reorganization either that Lease 7027, which HPC no longer owned,

had ceased production without proper environmental controls or that

28
Neither this case nor Chevron deals expressly with the
liabilities of owners in the lease’s chain of title to the original
lessor for cleanup costs. Any such obligation would be a real
obligation, whereas the intermediate owners’ liability on indemnity
provisions is a personal obligation under Louisiana law. See
Chevron, 987 F.2d at 1149.

32
Davis Oil lurked in the shadows, waiting to pounce on TS/Home after

having been itself mugged by the Lease 7027 plug and abandonment

costs. It is illogical for this later panel to hold that there was

a clear intent to benefit Davis Oil in this case after our court

has concluded that no intent to benefit Chevron existed in the

prior case.

The majority fails to adequately distinguish Chevron, yet

as a prior precedent of this Court construing Louisiana law, it is

dispositive. See, e.g., Batts v. Tow-Motor Forklift Co., 978 F.2d

1386, 1393 (5th Cir. 1992). The majority also fails to deal with

the wealth of Louisiana caselaw, summarized in the accompanying

footnote, that narrowly construes the doctrine of stipulation pour

autrui.29

29
The following is a sample of cases in which either the
Louisiana courts or this court sitting in diversity has examined
Louisiana third party beneficiary law:

Liquid Drill, Inc. v. U.S. Turnkey, 48 F.3d 927 (5th Cir.
1995) (holding that a stipulation pour autrui did not exist even
though a drilling contract provided that the contracting party was
to be “solely responsible and assumes all liability for all
consequences of operations by both parties while on a day work
basis, including results and all other risks or liabilities
incurred in or incident to such operations”); Dartez v. Dixon, 502
So.2d 163 (La. 1987) (finding stipulation pour autrui where benefit
to third party “was not merely incidental to the agreement but was
a calculated and essential part of the negotiations” between the
parties); Broussard v. Northcott Exploration Co., 481 So.2d 125
(La. 1986) (holding that mineral lease did not create a stipulation
pour autrui despite the fact that the lessee assumed responsibility
for “all surface damages”); Hargroder v. Columbia Gulf Transmission
Co., 290 So.2d 874 (La. 1974) (finding stipulation pour autrui only
(continued...)

33
The majority’s rough-and-ready decision to diffuse

liability for clean-up costs may well have consequences far beyond

the incorrect result reached here. As the preceding discussion of

Chevron and Louisiana law demonstrate, contract law generally does

not lightly presuppose that strangers to a contract may enforce the

contract in court. The potential for confusion and inconsistency

ought to be obvious. Suppose, for instance that a local tax

assessor decided, years after HPC had sold its interest in Lease

29
(...continued)
after concluding that the servitude agreement “contain[ed] no
restriction as to beneficiaries”); Andrepont v. Acadia Drilling
Co., 231 So.2d 347 (La. 1969) (finding stipulation pour autrui
where the contracting parties modified their lease to expand
liability beyond damages to the lessor); Oswalt v. Irby Const. Co.,
424 So.2d 348, 354 (La. App. 1982) (holding that agreement of
grantee in right-of-way deed, where grantor reserved right to grow
crops in right-of-way, to pay grantor for any future damage to
crops on submittal of bill by grantor, was not stipulation pour
autrui in favor of grantor’s lessee); Logan v. Hollier, 424 So.2d
1279 (La. Ct. App. 1982) (holding that a stipulation pour autrui
did not exist despite insurance policy language which provided that
when “the amount of ultimate loss becomes certain, the company
will, upon request of the insured, make such payment to claimant on
behalf of the insured”); Crowley v. Hermitage Health & Life Ins.
Co., 391 So.2d 53 (La. App. 1980) (holding that health and accident
insurance policy in which employer is insured, providing for
benefits in the event of employee work-related injury to be paid to
employer or persons furnishing services to employee, is not
stipulation pour autrui in favor of employee injured on job); HMC
Mgmt. Corp. v. New Orleans Basketball Club, 375 So.2d 700 (La. Ct.
App. 1979) (holding that lease agreement did not clearly
contemplate any intention to benefit third party “as it was simply
an agreement between two entities for their mutual benefit”); Hertz
Equip. Rental Corp. v. Homer Knost Constr. Co., 273 So.2d 685 (La.
Ct. App. 1973) (holding that insurance contract did not create a
stipulation pour autrui because it did not “purport to name the
third party as an insured”).

34
7027, that HPC had underpaid local school taxes. Suppose, as

another example, that a roustabout who once worked for HPC on Lease

7027 sues a third-party who seeks contribution from HPC on the

theory that plaintiff’s real injury occurred during his employment

by HPC. Under the majority’s rule, either of these parties could

now sue TS/Home directly, even though no claim had been made before

HPC sold its interest in Lease 7027 or even before the 1988

reorganization.30 Suppose, as another complication, that HPC was

still in business, having sold only its “oil and gas” assets to

TS/Home but retained other properties. Could the plaintiffs still

sue TS/Home? Because the potential liabilities are obviously

endless, and because reasonable expectations of contracting parties

are thwarted when a stranger can sue to “enforce” their deal, no

case in Louisiana construes a general assumption of liabilities

clause in a contract as a stipulation pour autrui.31 I hope this

30
It goes without saying that such plaintiffs could sue HPC.
And if HPC had become defunct without properly accounting for
potential known claims, state law affords remedies, e.g., by means
of fraudulent conveyance law. This case has no such allegations,
and the only question is whether plaintiffs unknown to the
contracting parties will now have two potential defendants.
31
The maxim never say never is useful in law as in life. Thus,
I would not contend that no assumption of liabilities provision in
a complex corporate reorganization or acquisition will ever result
in a stipulation pour autrui, a provision in favor of a third
party. Boilerplate language like that included here, however, is
likely to characterize such provisions and falls far short of
showing that the benefit to a specific third party was contemplated
as part of the transaction’s condition or consideration. See New
Orleans Pub. Serv., 732 F.2d at 467-78.

35
is the last case ever to do so.