Williamson v. Elf Aquitaine, Inc. , 138 F.3d 546 ( 1998 )

REVISED - April 24, 1998
UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
____________________
No. 96-60837
____________________
RALPH E. WILLIAMSON,
and his wife DAPHINE WILLIAMSON,
LESLIE WILLIAMSON,
JUDY WILLIAMSON DUNAWAY,
BONNIE WILLIAMSON MORRIS,
JAMES WILLIAMSON,
RALPH E. THOMAS,
SAMMY L. SMITH,
S. E. SMITH,
ROBERT SIDNEY DOBBS, JR.,
FLORA R. DOBBS,
BOBBY G. SMITH,
MARION P. SMITH,
and GRACE M. SMITH,
all residents of Lowndes County, Mississippi,
Plaintiffs-Appellees,
versus
ELF AQUITAINE, INC., a Delaware Corporation,
Defendants-Appellants.
Appeal from the United States District Court
for the Northern District of Mississippi
(No. 1:93-CV-255-S-D)
_________________________________________________________________
April 1, 1998
Before POLITZ, Chief Judge, GARWOOD and BARKSDALE, Circuit Judges.
RHESA HAWKINS BARKSDALE, Circuit Judge:
For this diversity action, the interlocutory appeal at hand
concerns whether, under Mississippi law, lessors/royalty owners are
entitled to royalties from the proceeds of the “nonrecoupable”
settlement of a “take-or-pay” contract between a lessee/producer
and a gas purchaser. On cross-motions for summary judgment, the
district court held for the lessors/royalty owners. We REVERSE and
RENDER.
I.
Appellees are lessors/royalty owners under six oil, gas, and
mineral leases for the Caledonia Field in Lowndes County,
Mississippi. Appellant, Elf Aquitaine, Inc., the lessee, drilled
and sold gas from two Caledonia Field wells. Elf entered into two
separate purchase and sales contracts with the Tennessee Gas
Pipeline Company (TGP). Under these contracts, Elf was required to
sell, and TGP was required to buy, 90 percent of Elf’s delivery
capacity. Among other things, these contracts contained “take-or-
pay” provisions, which required TGP to take or, if failing to take,
to in any event pay for a large minimum volume of gas that Elf made
available for delivery, and to take (recoup) the undelivered, but
paid for, gas in succeeding years.
The term “take-or-pay” is somewhat misleading; the purchaser
always must make payment for a minimum amount of available gas, but
may exercise an option to take (recoup) the gas at a later date.
These provisions are mutually beneficial: the producer is assured
a steady income; the pipeline company, a steady supply.
Due to various market forces in the early 1980s, the natural
gas market experienced an increase in supply but a decrease in
demand. Consequently, pipeline companies were in a financially
unfavorable position of being locked into long-term, take-or-pay
contracts with producers, requiring pipeline companies to purchase
at high prices large volumes of gas, which they were unable to
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resell on the flooded market. See Koch Hydrocarbon Co. v. MDU
Resources Group, Inc., 988 F.2d 1529 (8th Cir. 1993); John S. Lowe,
Defining the Royalty Obligation, 49 SMU L. REV. 223 (1996); Bruce
M. Kramer, Liability to Royalty Owners For Proceeds from Take-or-
Pay and Settlement Payments, 15 E. MIN. L. FOUND. § 14.01 (1994).
In 1983, due to these adverse market conditions, TGP followed
a growing trend among similarly situated pipeline companies and
unilaterally began refusing to take, much less to pay for, the full
minimum available gas amount, in clear breach of its contracts with
Elf, among others. As a result, Elf and TGP entered into a
settlement agreement in 1985 (the 1985 settlement), kept
confidential from the lessors, which resolved certain breach of
contract claims that Elf had against TGP.
However, due to continuing market difficulties, TGP continued
in breach of contract. (For example, in December 1985, TGP advised
Elf that its gas sales at one point had been reduced to the lowest
level since 1944.) TGP refused to meet its take-or-pay
obligations, but also refused to release the gas Elf was
contractually committed to sell to TGP. By 1987, TGP owed Elf over
$27 million in take-or-pay obligations under various contracts,
including the two involved in this case.
Consequently, Elf and TGP entered into a second settlement
agreement in 1987 (the 1987 settlement), again kept confidential
from the lessors, under which TGP made a lump-sum payment of
approximately $6.6 million to Elf in consideration for Elf waiving
its claims under the take-or-pay contracts. No royalties were paid
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to Appellees from this settlement amount. (The 1987 settlement
included the following language: “WHEREAS Elf has been requested by
[TGP] to reduce prospectively the price, volumes and take-or-pay
obligations of gas purchased under the Contracts....” Although the
settlement amount was entered in Elf’s books as a settlement of
take-or-pay obligations, Appellees contend that this settlement was
not solely to excuse take-or-pay obligations but to excuse all
disputes arising out of the marketing of gas under the leases.)
In conjunction with the 1987 settlement, TGP and Elf also
amended the contracts to allow Elf to sell gas from the wells on
the open market. Such sales increased immediately, with Elf paying
Appellees full royalties from them.
In mid-1993, after becoming aware of the 1985 and 1987
settlements, Appellees filed this action in Mississippi chancery
court to recover as royalties a portion of the settlement proceeds.
Elf removed the action to federal district court.
With respect to the 1987 settlement, the district court
granted summary judgment to Appellees, denied Elf’s similar cross-
motion, and reserved ruling on damages. Williamson v. Elf
Aquitaine, Inc., 925 F. Supp. 1163, 1173-74 (N.D. Miss. 1996).
(The court held that the claim based on the 1985 settlement was
barred by limitations; Appellees do not cross-appeal. Id. at
1174.)
The district court certified the following issue for
interlocutory appeal: “whether, pursuant to Mississippi law,
lessors of a mineral interest in gas are entitled to royalties
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stemming from the nonrecoupable cash settlement of a take-or-pay
contract dispute between a pipeline and a producer”. Williamson v.
Elf Aquitaine, Inc., No. 1:93CV255-S-D, 1996 WL 671660 (N.D. Miss.
July 25, 1996) (unpublished). Our court initially denied but, upon
re-certification granted, Elf’s petition for interlocutory appeal.
Williamson v. Elf Aquitaine, Inc., No. 96-00268 (5th Cir. Dec. 5,
1996) (unpublished).
II.
A.
Appellees/lessors seek certification to the Mississippi
Supreme Court.
In determining whether to exercise our
discretion in favor of certification, we
consider many factors. The most important are
the closeness of the question and the
existence of sufficient sources of state law —
statutes, judicial decisions, attorney
general’s opinions — to allow a principled
rather than conjectural conclusion. But also
to be considered is the degree to which
considerations of comity are relevant in light
of the particular issue and case to be
decided. And we must also take into account
practical limitations of the certification
process: significant delay and possible
inability to frame the issue so as to produce
a helpful response on the part of the state
court.
State of Fla. ex rel. Shevin v. Exxon Corp., 526 F.2d 266, 274-75
(5th Cir. 1976).
Appellees contend that certification is proper because the
issue at hand has not been addressed by the Mississippi Supreme
Court and judicial economy would be served. But, as discussed
infra, Mississippi case law, which looks to Texas decisions in oil
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and gas cases, is sufficiently clear to allow this court to decide
the issue presented. Needless to say, “[c]ertification is not a
panacea for resolution of those complex or difficult state law
questions which have not been answered by the highest court of the
state”. Transcontinental Gas Pipeline Corp. v. Transportation Ins.
Co., 958 F.2d 622, 623 (5th Cir. 1992).
In short, this appeal does not fall within the class of
“exceptional” cases requiring certification. See, e.g., Lavespere
v. Niagara Mach. & Tool Works, Inc., 920 F.2d 259, 262 (5th Cir.
1990). Accordingly, certification is DENIED.
B.
Of course, we review a summary judgment de novo. E.g., FDIC
v. Myers, 955 F.2d 348, 349 (5th Cir. 1992). In this regard, the
parties stipulated in district court that no material fact issues
exist. Therefore, at issue is whether, under Mississippi law, the
Appellees are entitled to royalties from the proceeds of the
nonrecoupable 1987 settlement of the take-or-pay contracts between
Elf and TGP. (As discussed infra, under a “nonrecoupable
settlement”, there is a termination of the pipeline company’s right
to take gas not taken prior to settlement.) Again, for this
summary judgment, as in all instances where we are presented with
an issue of law, see Thompson v. City of Starkville, 901 F.2d 456,
459 (5th Cir. 1990), we review de novo.
For this diversity action, and because the Mississippi Supreme
Court has not addressed this issue, we are required to make an
Erie-guess as to how the Mississippi courts would apply state
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substantive law. Erie R.R. Co. v. Tompkins, 304 U.S. 64 (1938);
e.g., Southwestern Engineering v. Cajun Elec. Power Co-op., Inc.
915 F.2d 972, 978 (5th Cir. 1990). In this regard, deference
cannot be given to the rulings by the district court, even though
it sits in the State whose law is being applied. Salve Regina
College v. Russell, 499 U.S. 225, 238 (1991) (“When de novo review
is compelled, no form of appellate deference is acceptable.”).
Prior to launching this de novo/non-deferential exploration,
we note, in fairness to the able district court, that some of the
key decisions it looked to as bases for its most comprehensive
opinion have subsequently been reversed. In sum, we are exploring
ground altered after the district court ruled.
1.
Under Mississippi law, as in general, implied covenants are
inapplicable when a contract contains express provisions on that
particular issue. Lloyd’s Estate v. Mullen Tractor & Equip. Co.,
4 So. 2d 282, 287 (Miss. 1941). Therefore, absent ambiguities,
Mississippi gives effect to the plain language of the lease, which
represents the agreed understanding between the parties. Superior
Oil Co. v. Beery, 63 So. 2d 115, 118 (Miss. 1953). Accordingly, we
look first to that plain language.
Concerning Elf’s royalty obligations to Appellees, five of the
leases state:
As royalty, lessee covenants and agrees:
... (b) To pay lessor on gas and casinghead
gas produced from said land (1) when sold by
lessee, one-eighth of the amount realized by
lessee, computed at the mouth of the well, or
(2) when used by lessee off said land or in
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the manufacture of gasoline or other products,
the market value, at the mouth of the well, of
one-eighth of such gas and casinghead gas....
(Emphasis added.) The sixth lease has substantially similar
language:
Royalties to be paid by lessee are: ...
(b) on gas, including casinghead gas or other
gaseous substance[s], produced from said land
and sold or used, the market value at the well
of one-eighth (1/8) of the gas so sold or
used, provided that on gas sold at the well
the royalty shall be one-eighth (1/8) of the
amount realized from such sales....
(Emphasis added.)
Applying Mississippi law, our court’s decision in Piney Woods
Country Life School v. Shell Oil Co., 726 F.2d 225 (5th Cir. 1984),
cert. denied, 471 U.S. 1005 (1985), concerned royalty provisions
virtually identical to those at hand. We held that “production”
for the purposes of a royalty-bearing oil and gas lease occurs when
the gas is brought to the surface and “severed from the land”. Id.
at 234; cf. Diamond Shamrock Exploration Co. v. Hodel, 853 F.2d
1159, 1165 (5th Cir. 1988). Elf contends that the plain language
of the leases requires payment of royalties only when gas has been
“produced” and “sold”. Appellees focus on the “amounts realized”,
contending that Elf “realized” two prices for the gas that,
subsequent to the 1987 settlement, it produced and sold: first,
the lump-sum, nonrecoupable settlement “price” for the gas it would
later produce; and second, the spot market prices from the sale of
the same gas when actually produced. (Based on statements by
counsel at oral argument here, as well as Appellees’ statement of
facts in the pretrial order, it appears that TGP purchased little,
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if any, of the gas that, post-1987 settlement, was produced and
sold.)
Mississippi courts give little guidance on a lessee’s royalty
obligations in the settlement of a take-or-pay dispute. However,
for oil and gas issues of first impression, the Mississippi Supreme
Court has long held that it will typically follow decisions of the
Texas courts, depending, of course, on “the soundness of the
reasoning by which they are supported”. Phillips Petroleum Co. v.
Millette, 72 So. 2d 176, 182 (Miss. 1954).
Texas courts have dealt extensively with the question of when
royalties are to be paid in the context of take-or-pay provisions.
In a seminal case, Killam Oil Co. v. Bruni, 806 S.W.2d 264 (Tex.
App.--San Antonio 1991, writ denied) (Bruni I), the Texas Court of
Appeals held that lessors are not entitled to royalties on proceeds
from the settlement of a take-or-pay contract. That decision keyed
on the fact that the lease, which is virtually identical to one of
the leases at issue here, entitled the lessor to royalty payments
for gas “produced”, whereas take-or-pay settlement proceeds involve
payments for gas not produced.
However, especially for “nonrecoupable settlements”, the
holding in Bruni I was arguably called into question in Hurd
Enterprises, Ltd. v. Bruni, 828 S.W.2d 101, 106-07 n.8 (Tex. App.--
San Antonio 1992, writ denied) (Bruni II), which stated, in dicta,
that “there are cogent arguments concerning the royalty owner’s
interest in take-or-pay settlement funds, especially when, as here,
the settlement terminates the purchaser’s recoupment rights.”
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(Emphasis added.) Again, a “nonrecoupable settlement”, as in the
case at hand, occurs when the settlement terminates the pipeline
company’s “make-up” rights (i.e., the right to later take gas not
taken during the prior period covered by the settlement). See
Bruni II, 828 S.W.2d at 106 n.8.
This question was resolved in TransAmerican Natural Gas Corp.
v. Finkelstein, 933 S.W.2d 591 (Tex. App.--San Antonio 1996, writ
denied) (en banc) (Finkelstein II); the court found no distinction
between recoupable and nonrecoupable settlements, holding that “the
royalty owner, who does not shoulder the risks of exploration,
production, and development, should not share in the take-or-pay
payment”. Id. at 599 (citing Diamond Shamrock, 853 F.2d at 1167)
(quotation and ellipsis omitted). The court stated: “we reaffirm
our decision in Bruni I and clarify that a royalty owner, absent
specific lease language, is not entitled to take-or-pay settlement
proceeds, whether or not gas is sold to third parties on the spot
market”. Finkelstein II, 933 S.W.2d at 600.
Moreover, Finkelstein II held that the “cogent arguments”
listed in the dicta in Bruni II had “been resolved by Lenape’s
explanation that take-or-pay payments [do not] represent ... the
mere ‘pre-payment’ of gas suggested by [the Finkelstein I panel
opinion withdrawn by Finkelstein II]”. 933 S.W.2d at 599 (citing
Lenape Resources Corp. v. Tennessee Gas Pipeline Co., 925 S.W.2d
565, 571-72 (Tex. 1996)). Turning around the “Elf will receive two
payments” argument presented here by Appellees, the court noted
that, if royalties were required to be paid on the compromise of a
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dedication claim, the royalty owner would receive “two royalties on
the same gas, a right to which he was not entitled under the terms
of his lease”. Id.Similarly, Independent Petroleum Association of America v.
Babbit, 92 F.3d 1248 (D.C. Cir. 1996), states:
[T]here is no meaningful distinction between a
settlement payment and a recoupable take-or-
pay payment in that no gas is actually
produced in either case. ... The link between
the funds on which royalties are claimed and
the actual production of gas is missing.
....
[W]hen the payments (of either variety)
are nonrecoupable, the funds are never linked
to any severed gas. Therefore, no royalties
accrue on those payments.
Id. at 1259-60 (footnote omitted).
Other recent Texas cases have followed Finkelstein II and
further clarify the state of the law in Texas on the issue of
royalty obligations vel non in conjunction with nonrecoupable
settlements.
Alameda Corp. v. TransAmerican Natural Gas Corp., 950 S.W.2d
93, 97 (Tex. App.--Houston [14th Dist.] 1997, writ denied), held
that repudiation damages are not royalty-bearing when, as in the
case at hand, royalty obligations are tied to production. In so
holding, the court stated that “a royalty owner’s right to payment
under these circumstances is no longer an open question in Texas”.
Id. at 99 (citing Bruni II and Lenape).
And, Condra v. Quinoco Petroleum, Inc., 954 S.W.2d 68 (Tex.
App.--San Antonio 1997, n.w.h.), relied on Bruni II, Finkelstein
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II, and Alameda in holding that proceeds from a nonrecoupable take-
or-pay settlement are not royalty-bearing:
Similar to the repudiation damages
considered in [Finkelstein II], the
nonrecoupable payment in the instant case was
not paid for production. Therefore, we hold
that the appellants’ division orders do not
entitle them to royalties on the take-or-pay
settlement in this case.
Id. at 71.
The state of the law in Texas is clear: absent specific lease
language, royalty owners are not entitled to proceeds from take-or-
pay settlements, whether recoupable or nonrecoupable. Accord
Condra, 954 S.W.2d at 71; Alameda, 950 S.W.2d at 97-99; Finkelstein
II, 933 S.W.2d at 597-600. Obviously, Texas case law is not
binding on Mississippi courts; but, as noted, it is typically
followed by them in oil and gas issues of first impression.
Phillips Petroleum, 72 So. 2d at 182.
The reasoning evinced in these Texas opinions is sound and
consistent with the limited Mississippi law precedent. See, e.g.,
Piney Woods, 726 F.2d at 234 (holding that, under Mississippi law,
“a gas sale contract is executory and that the sale is executed
only upon production and delivery”) (citing MISS. CODE ANN. § 75-2-
105, et seq.); Palmer v. Crews, 35 So. 2d 430, 435 (Miss. 1948)
(stating that a royalty “consists of a share in the oil and gas
produced. It does not include a perpetual interest in the oil and
gas in the ground”.). Accordingly, that reasoning applies here.
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2.
Equitable considerations do not come into play. As discussed,
it is well-established in Mississippi that implied covenants are
inapplicable when, as here, an issue is expressly covered by the
language in a lease. Lloyd’s Estate, 4 So. 2d at 287 (“An express
covenant upon a given subject ... excludes the possibility of an
implied covenant of a different or contradictory nature.”).
Similarly, “[a]s we stated in Bruni I, the royalties to which a
lessor is entitled must be determined from the provisions of the
oil and gas lease”. Finkelstein II, 933 S.W.2d at 597. Therefore,
we follow Finkelstein II:
Like the lease in Bruni I, [the royalty
owner]’s lease is tied to production. By this
language, [the royalty owner] unambiguously
limited his right to royalty payments from gas
actually extracted from the land.
Additionally, without production, [the
lessor]’s duty to reasonably market was not
triggered.
933 S.W.2d at 598 (internal citation and footnote omitted).
Appellees do not claim to be third-party beneficiaries of the
take-or-pay contracts between Elf and TGP. See Mandell v. Hamman
Oil and Refining Co., 822 S.W.2d 153 (Tex. App.--Houston [1st
Dist.] 1991, writ denied); Gerard J.W. Bos & Co., Inc. v. Harkins
& Co., 883 F.2d 379, 382 (5th Cir. 1989) (applying Mississippi
law). And, Appellees do not contend that the 1987 settlement was
in bad faith or less than an arms-length transaction.
On the other hand, they do note that, in addition to a claimed
implied duty to market, the leases provide that “[l]essee covenants
and agrees to use reasonable diligence to produce, utilize, or
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market the minerals capable of being produced from said wells”.
But, as discussed above, and as stated in Finkelstein II, “[t]ake
or pay is not a benefit which flows from the marketing covenant of
a lease”. 933 S.W.2d at 600. Furthermore, Appellees do not claim
that, post-1987 settlement, Elf has not complied with its express
marketing obligation.
III.
In Piney Woods, this court held that, under Mississippi law,
the provisions in the lease controlled, even though, in that case,
the gas producer was economically disadvantaged. 726 F.2d at 237-
38. This time, it appears that it is the royalty owners who are
adversely affected by the enforcement of the lease. The summary
judgment is REVERSED, and judgment is RENDERED for Elf Acquitaine,
Inc.
REVERSED and RENDERED
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