Nerco Oil & Gas Inc v. Otto Candies Inc, et

United States Court of Appeals,

Fifth Circuit.

No. 95-30008.

NERCO OIL & GAS, INC., et al., Plaintiffs,

Agip Petroleum Co., Inc. and Lleco Holdings, Inc., Plaintiffs-
Appellants, Cross-Appellees,

v.

OTTO CANDIES, INC., et al., Defendants,

Otto Candies, Inc., Defendant-Appellee, Cross-Appellant.

Feb. 14, 1996.

Appeals from the United States District Court for the Eastern
District of Louisiana.

Before REAVLEY, HIGGINBOTHAM and BARKSDALE, Circuit Judges.

REAVLEY, Circuit Judge:

On November 7, 1992 an allision occurred between the M/V Hatty

Candies, owned by Otto Candies, Inc., and an offshore oil and gas

platform owned by Nerco Oil & Gas, Inc. and Agip Petroleum Co.

Nerco's assets were later purchased by LLECO Holdings, Inc. As a

result of the accident, three of the wells on the platform were

shut-in for between 31 and 50 days. The parties settled all claims

of actual damages to the platform, and tried to the district court

the measure of damages for the resulting shut-in of the three

wells. The district court awarded damages based upon Candies'

expert's estimation of loss, and specifically rejected the platform

owner's "lost profits" calculation of damages. LLECO Holdings,

Inc. v. Otto Candies, Inc., 867 F.Supp. 444, 450-451 (E.D.La.1994).

The district court's award also included royalty payments

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potentially owed by the platform owners to the U.S. Mineral

Management Service. Id. at 451. Both parties appeal.

We are initially asked to resolve the question of whether

"lost profits" is the proper measure of damages when an offshore

well is shut-in as the result of an allision. Our review of the

district court's legal conclusions is de novo. Dow Chemical Co. v.

M/V Roberta Tabor, 815 F.2d 1037, 1042 (5th Cir.1987). We review

the factual findings under the clearly erroneous standard. Id.

I.

We begin with the legal measure of damages and our decision

in Continental Oil Co. v. SS Electra, 431 F.2d 391 (5th Cir.1970),

cert. denied, 401 U.S. 937, 91 S.Ct. 925, 27 L.Ed.2d 216 (1971).

In a similar allision, the S.S. Electra collided with an offshore

oil platform owned by Continental in the Gulf of Mexico. No oil

was lost in the accident. However, the damage to the platform was

severe and production was halted. The parties stipulated that the

net income which would have been realized during the shut-in was

$60,000. The district court in Electra awarded Continental

interest on the $60,000 for the 130 day shut-in period as damages.

We rejected this measure of damages because it did not properly

award Continental for its return on investment. We stated:

The [platform owners] have lost the use of their capital
investment in lease, platform and producing wells for 130 days
during which that investment was tied up without return. The
fact that the same amount of profit can be made at a later
time with the same investment of capital by removing from the
ground a like quantity of oil at the same site does not alter
the fact that the [platform owners] are out of pocket a return
on 130 days of use of their investment. Presumably the oil
companies ultimately will produce from the reservoir all the
oil that is economic to produce, but, as the District Court

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 pointed out, it will require 130 days longer to do so. The
[platform owners] must stay on the site 130 days longer, with
investment in place, than necessary but for the ship's
negligence.

This is no theoretical, shadowy concept of loss. It is
squarely within the basic damage doctrine for marine collision
of restitutio in integrum, as applied in many comparable
situations.

Electra, 431 F.2d at 392. The doctrine of restitutio in integrum,

strictly construed, would limit damages to the difference in the

value of the vessel before and after the collision. Delta Marine

Drilling Co. v. M/V Baroid Ranger, 454 F.2d 128, 129 (5th

Cir.1972). Under this theory of recovery, the owners of an injured

vessel are often entitled to recover for the loss of the vessel's

use, while laid up for repairs. The Potomac, 105 U.S. 630, 26

L.Ed. 1194 (1882); Electra, 431 F.2d at 392. The recovery of loss

of earnings has often depended upon the circumstances of the

accident. Where the accident victim can show no loss of income,

the courts have not awarded damages. Brooklyn Eastern Terminal v.

United States, 287 U.S. 170, 53 S.Ct. 103, 77 L.Ed. 240 (1932)

(plaintiff's two tugs did the same work as the three had done

before one was damaged); Bolivar County Gravel Co. v. Thomas

Marine Co., 585 F.2d 1306, 1309 (5th Cir.1978) (gravel company was

in same position as before the accident to its dredge and had lost

no sales because stockpile of gravel was replenished after repairs

to dredge). Where loss of earnings was shown the plaintiff has

been permitted to recover. Delta Marine, 454 F.2d at 130 (oil

platform's contract with oil company required payment of $4,300 per

day while drilling and $3,500 per day for time in tow or in

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repair). In this case Nerco/LLECO and Agip were not able to

produce oil from other wells to make up for the loss of their three

wells. Nevertheless, the platform owners lost no oil or gas

because of the accident. The true damage to the platform owners as

acknowledged in Electra is that they will be required to remain at

the site longer than expected to recover the oil and gas.

The court in Electra rejected the district court's measure of

damages and chose the alternative measure of "lost profits"

proposed by Continental. In a footnote the Electra court limited

the holding by noting that because the only evidence before the

court was of lost profit, the court did not have to consider

whether a fair return on investment would be a better measure of

damages. 431 F.2d at 393 n. 3. Contrary to the platform owner's

position, our holding in Electra did not determine that "lost

profits" was the required measure. We only determined that it was

one measure of damages and that it was a better measure than

interest on lost profits.

Candies' expert, Hise, testified as to the value of the

platform owner's loss. He testified that only an interruption of

production occurred in this case. Hise estimated what the monthly

net revenue of the platform over the life of production would have

been had no accident occurred. He also estimated the monthly net

revenue of the platform during the life of production after the

shutdown due to the accident. Both estimations were discounted to

present value, and the difference constituted what Hise determined

was the loss to the platform owners as a result of the allision.

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The post-collision value necessarily factors in the additional time

necessary to recover all oil and gas from the reservoir, the loss

of cash flow during the shut-in period, and the monthly delay in

receiving revenue over the life of the well as a result of the

accident.

The platform owners argue that the magnitude of the

discrepancy between "lost profits" ($766,018.00) and the actual

award ($140,987.00) are not "in the same ballpark" which indicates

that Hise's calculations must be incorrect. This evidence could

just as easily demonstrate how excessive the "lost profits" measure

of damages is, when compared to the owners' real loss.

The platform owners also argue that Hise's opinion and his

calculations are not the "fair return on investment" contemplated

in Electra. The expert acknowledged that his methodology was

different, but Hise testified that his method came to the same

point as a fair return on investment. Nevertheless, it is

important at this juncture to note that the platform owners offered

no other method of calculation for the fair return on investment.

Rather, their position before the district court was that they were

entitled to their computation of lost profits.

We agree with the district court that Hise's methodology is a

better measure of the platform owner's loss than the platform

owners' sum of "lost profits."

II.

The platform owners also argue the district court was clearly

erroneous in adopting several of Hise's factual assumptions. They

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contend the price of gas forecasted by Hise has since been proven

not to be true; gas reserves were actually lost during the

shut-in; and finally, the diagram Hise used to explain his model

does not correspond with the evidence. The platform owner's

complaint concerning the decrease in the price of gas in the spot

market is based upon changes in the market after the district

court's judgment. There was no objection to Hise's price forecast

at trial, and we are not inclined to take "judicial notice" of the

speculative spot market price for gas and recalculate damages. The

district court was not clearly erroneous in accepting Hise's

estimation of future gas prices.

The platform owner's arguments concerning Hise's model and

the lost oil and gas are contingent upon a finding of actual loss

or leakage of reserves. Both arguments require an estimation on

the part of the platform owners to prove their oil or gas losses.

See Bolivar, 585 F.2d at 1308 n. 2 (burden of establishing that

profits were lost is upon the plaintiff); Skou v. United States,

478 F.2d 343, 345 (5th Cir.1973) (same). There was no proof that

the platform owners suffered a loss of oil or gas during the

shutdown. Their own expert testified that she was not hired to

determine whether reserves were lost. A week before trial during

her deposition she testified that there was no loss. Before trial,

the platform owners filed a motion in limine in which they

recognized that they were not seeking damages for lost oil or gas.

LLECO, 867 F.Supp. at 449 n. 8. At trial their expert indicated

that gas or oil reserves were lost, but she could not estimate that

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loss. We do not believe the trial court was clearly erroneous in

adopting Hise's assumptions.

III.

In Candies' cross-appeal, it asserts that the district court

was clearly erroneous in not deducting the United States Mineral

and Mining Service (M.M.S.) royalty in its computation of monthly

revenue during the shutdown. In his original net revenue estimate,

Hise deducted as an expense the M.M.S. royalty. The district

court, however, required Hise to recalculate those figures without

the expense deduction. The district court's reasoning for not

including this expense was based on the premise that after the suit

the platform owners may be forced to pay the M.M.S. royalty on the

award. The district court's decision was based upon speculative

testimony. Hise testified that he had heard of one case in which

the M.M.S. had sought royalty payments on a court recovery for

shut-in time. He was unaware of whether the M.M.S. actually

recovered.

The platform owner's oil and gas lease requires them to pay a

royalty of 162/3% in amount or value of "production saved, removed

or sold from the lease area." We have defined the word

"production," as "the actual physical severance of minerals from

the formation." Diamond Shamrock Exploration Co., v. Hodel, 853

F.2d 1159, 1168 (5th Cir.1988). Therefore, under this lease, the

M.M.S. would not be entitled to a royalty until "production." No

physical severance of oil or gas occurred during the "shut-in"

period. Because the testimony concerning the M.M.S.'s desire to

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seek royalty in the "shut-in" case is speculative, and because the

lease indicates the M.M.S. would not be entitled to such a royalty,

we believe the district court was clearly erroneous in including

the royalty payments in its award. The lease between the platform

owners and the M.M.S. does require a minimum royalty payment of

$3.00 per acre per year to maintain the lease. We presume that the

actual royalty payments paid during the year of the accident were

in excess of the minimum royalty due, but if not, Candies will be

responsible for a portion of that cost. Therefore, we remand the

case to the district court to modify the award to correct the

M.M.S. royalty reimbursement.

IV.

The district court's judgment is vacated and the case is

remanded for modification of the amount of recovery.

VACATED and REMANDED.

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