Opposition Brief — Humble Oil & Refining Co. v. Price

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TABLE OF CONTENTS

Page

STATEMENT OF THE CASE

1, “Tee Pe 2 1

a RR a er on 3

IN REPLY TO HUMBLE’S ALLEGATIONS OF

WHY A WRIT SHOULD BE GRANTED... 5

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hs eS ¢ eee 11

APPENDIX A a a a a A-1

I. United States District Court Judgment on

Motion for Summary Judgment A-1

II. United States District Court’s Findings on

Motion for Summary Judgment A-3

III. Reasons for Summary Judgment —_...._>>>E A-8

Pl, GR _ RMRRDRRRINEenenerteneie =r oot Aten eau oreonebom Be Se B-1

I. Opinion of the United States Court

REESE . B-l

II. On Petition for Rehearing and Petition for

Penne tO BNE oe ec B-33

III. Judgment of the United States Court

0 I ccctaiccsksscaciictadenstass easeannaapetce B-38

APPENDIX C __ cheiathieenaieatijactiaaesssciichiniaaaetadl C-1

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53

INDEX OF AUTHORITIES

Cases:

Billeaud Planters, Inc. v. Union Oil of California

245 F. 2d 14 (C.A. 5th 1957)

Page

Breaux v. Pan American Petroleum Corporation,

163 So. 2d 406 (La. App. 1964), writ denied

246 La. 581, 165 So. 2d 481

7, 8

Erie — Company v. Tompkins, 304 U.S. 64

(19%

Gulf Refining Co. of Louisiana v. Glassell, 186 La.

190, 171 So. 846 (1936)

King v. Order of United Commercial Travelers of

America, 333 U.S. 878

Milling v. Collector of Revenue, 220 La. 773,

57 So. 2d 679 (1952)

Rials v. Davis, 212 La. 161, 31 So. 2d 726

(1947)

Swope v. Holmes, 169 La. 17 (1929)

Williams v. Humble Oil & Refining Co., 234 F.

Supp. 985 (D.C. La. 1964)

Statutes:

La. R.S. Title 30, Section 2, et sequitur

(Act 157 of 1940)

Articles 2710, 2721 and 2722 of La. Civil Code

of 1870

Article 2680 Louisiana Code of 1825

Article 1728 Code Napoleon (Civil Code)

of 1804

IN THE

Supreme Court of the United States

OCTOBER TERM, 1970

No. / 43¢

HUMBLE OIL & REFINING COMPANY,

Petitioner

versus

I. R. PRICE, ET AL,

Respondents

OPPOSITION TO

PETITION FOR WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR

THE FIFTH CIRCUIT IN THE

CAPTIONED CASE

Humble Oil & Refining Company, Defendant, seeks a

writ of certiorari to review the judgment of the United

States Court of Appeals for the Fifth Circuit dated Sep-

tember 30, 1970, Docket No. 26968 of said Court.’

This is Respondent’s brief in opposition to the grant-

ing of the writ.

I.

STATEMENT OF THE CASE

1. The Proceedings.

This action was instituted as a class action against

Humble Oil & Refining Company, in the United States

1 Appendix “B”’.

2

District Court for the Eastern District of Louisiana based

on diversity of citizenship and the amount in controversy.”

The Plaintiffs are land owners, royalty owners and min-

eral owners under an oil, gas and mineral lease to Defend-

ant, Humble. Plaintiffs sought to recover for minerals

drained by Defendant from under their land by oil wells

located on contiguous and adjacent property of which

Defendant was also the lessee. The litigation has been

protracted. Both Plaintiffs and Defendant moved for sum-

mary judgment. Plaintiffs’ motion for summary judg-

ment for an accounting was dismissed, and in denying in

part Defendant’s motion for summary judgment (an inter-

locutory decision), the trial judge thought it proper to let

the parties perfect appeals to the Court of Appeals so that

the law of the case could be determined prior to a pro-

tracted trial.? The purpose of the appeal has been accom-

plished, and the rules of law that are to be applied to the

facts of the case when it is tried have been determined by

the courts below. We respectfully submit that in deciding

the legal questions involved herein, neither the District

Court nor the Court of Appeals went further than neces-

sary, as Defendant contends.

Only these points of law have been determined:

1. The failure to use leased property as a prudent

administrator is a breach of the lease. Whether in fact

Defendant failed to do so is yet to be tried and on that

trial Plaintiffs must yet show that there has been sub-

stantial drainage of the leased property which Defendant

could have economically prevented. In no way has this fact-

ual question been predetermined as Defendant complains.

1964) Williams v. Humble Oil & Refining Co., 234 F. Supp. 985 (D.C. La.

3 Appendix “A”; Reported 290 F. Supp. 408 (D.C. E.D. La. 1968).

3

2. A lessor is not legally bound to notify lessee where

the lessee is draining the lessor’s property from oil and gas

wells located on adjacent leaseholds also owned by the

lessee. Whether in fact such drainage was being accom-

plished has yet to be determined on trial, and Plaintiffs

must not only prove drainage, but that it was substantial.

The object of the appeal was to set these guide lines

for the trial. Defendant wanted guide lines set or it would

not have sought an interlocutory appeal. Defendant has no

ground for petitioning for certiorari unless the guide lines

were not consistent with the application of the Erie prin-

ciple, and clearly they are. A perusal of the opinion of the

District Court (Appendix “A’’) and the sustaining opinions

of the Fifth Circuit (Appendix “B”) will show that the

two organs of the court, being scholars of Louisiana law,

relied substantially on the Louisiana Civil Code and Lou-

isiana jurisprudence and were confirmed in their opinions

by writings of other civil law scholars.

2. The Facts

The lease at issue was granted in 1933. The only

means by which one landowner (or his lessee) then could

prevent drainage of the oil or gas from the common reser-

voir by a well on another’s land was to drill a well near

the border of his property to the same reservoir at the

same depth. Extravagant well drilling and wasteful pro-

duction of natural resources led to conservation acts to

limit the number of wells and to permit all whose land

formed part of the reservoir to share in production from

it no matter where the well was drilled. In Louisiana, the

act which brought this about was Act 157 of 1940, now

La. R.S. Title 30, Sec. 2, et sequitur.

For many years, Defendant has had the lease on Plain-

4

tiffs’ land, as well as on the contiguous and adjacent lands,

and has drilled a number of wells on both on a 20 acre

surface pattern. This meant nothing in the way of pro-

tection, since the well on the adjoining land might have

been completed at a different depth, and so in a different

reservoir from that on the lessor’s land and accordingly,

Plaintiffs’ land would be drained. Defendant has alluded

to Plaintiffs’ answer to one of its interrogatories to the

effect Plaintiffs required no additional wells. Defendant

seeks comfort from this by urging that this meant it had

complied with a 20 acre surface spacing program and the

offset clause of the lease. However, nothing could be fur-

ther from the fact. What Plaintiffs allege is that the pur-

ported offset wells based on 20 acre surface spacing were

in fact not completed as offsets, but may have been com-

pleted or abandoned, as the case may be, in producing or

non-producing sands at different sub-surface levels and

thus, not in fact protecting Plaintiffs’ lands from drainage

by the Defendant’s wells on adjacent property.

In the early part of 1962, certain of the Plaintiffs

became unhappy with the royalties they were receiving

from Defendant as a result of declining production and

sought professional advice with regard thereto. Accord-

ingly, as a result of preliminary investigation, on March

29, 1963, I. R. Price, one of the Plaintiffs, demanded can-

cellation of the lease and damages.* In response to this

letter, Defendant admitted drainage of Plaintiffs’ lands,

but denied it was substantial.®

This was not Plaintiffs’ first attempt to protect the

lease. These attempts commenced as early as 1954.° In

4 Appendix “C’’.

5 Letter by Defendant’s counsel—Appendix “D”’’.

6 As a part of the record in the District Court there is a file of

correspondence commencing in November, 1954 wherein Plaintiffs

sought to ascertain from Defendants the exact status of production.

5

1959, Defendant had advised Plaintiffs that a study was

being made.” This study, which was produced in 1961,

disclosed that not less than $1,000,000.00 in royalties had

been taken from the Plaintiffs’ property. It was not until

1963, when Defendant began to form production units

under the Conservation Act of 1940 (enacted 23 years ear-

lier), that reasonably accurate information was available

to Plaintiffs to show the extent that Defendants had

drained their property by wells on other lands under lease

to Defendants.

Hence this suit. Plaintiffs have the right to damages

if they can show substantial drainage which could have

been prevented economically by Defendants. Plaintizfs

have not sought damages for the period preceding the Act

of 1940, though such damages are probably due, because

after 1940 Defendant could have protected Plaintiff, its

lessor, as a prudent administrator of Plaintiff’s land not

only by further completions in wells already drilled but by

the simple act of pooling, (which it did in 1963) and there-

by revealed to Plaintiffs that Defendant had not used the

leased land as a prudent administrator for the benefit

of both parties.

II

IN REPLY TO HUMBLE’S ALLEGATIONS

OF WHY A WRIT SHOULD BE GRANTED:

The preliminary statement of the Defendant, Humble,

mis-states the case. The reason for granting oil leases is

to enable lessees to drill wells to produce oil and gas for

the mutual benefit of lessor and lessee. Rials v. Davis,

212 La. 161, 31 So. 2d 726 (1947). Oil and gas are found

in subterranean reservoirs which frequently extend be-

7 Appendix “E”’.

8 Please see Page 8 of Humble’s brief.

6

yond surface ownership lines. Plaintiffs allege that De-

fendants extracted oil and gas from these reservoirs, partly

underlying Plaintiff’s land leased to Defendant, through

wells drilled on adjoining lands of others also leased to

Defendant, and Plaintiffs claim they should be paid ac-

cording to their lease for the oil and gas so extracted from

under their property and that such payment would amount

to more than Three Million Dollars.

The Court would give Plaintiffs’ an opportunity to

prove their damages while permitting Defendant to prove

whatever offsetting items it can. The Plaintiffs seek only

the royalty which Defendant should have paid them.

Fairness of conduct and the Louisiana Civil Code bind

the lessee “i. To enjoy the thing leased as a good admin-

istrator, according to the use for which it was intended

by the lease (and) “2. To pay the rent at the terms agreed

on” R.C.C. 2710 (See also R.C.C. 2721, 2722),° and the

Court affords the Plaintiffs the opportunity to prove that

the Defendant breached this obligation to the substantial

damage of the Plaintiffs. Again we say the complaint of

the Defendant, though not so stated, is that the Court did

not permit it to hide behind a clause in the lease requir-

ing notice from the lessor to lessee in certain cases, which

the Court held does not apply to this situation, which was

clearly within the knowledge of the Defendant.

Defendant in its Section III complains that the Court

is bound to apply Louisiana law, Erie Railroad Company

v. Tompkins, 304 U.S. 64 (1938) which no one disputes,

and in Section II and again in Section III argues that the

Court did not do so.

® Appendix “F”’.

nt ere

7

Defendant relies chiefly upon comments in Breaux v.

Pan American Petroleum Corporation, 163 S. (2d) 406

(La. App. 1964) writ denied 246 La. 581, 165 S. 2d 481,

and upon Billeaud Planters, Inc. v. Union Oil of California,

245 F. 2d 14 (C.A. 5th 1957).

Judge Rubin of the United States District Court as

well as the Fifth Circuit through Judge Wisdom, both

trained in the Louisiana law, rejected the defense based

on Billeaud. See Appendix “A”, P. 21-23, and Appendix

“5B, boas

Even if there were not the clear differences between

Bilieaud and the present case, the Court is not bound to

follow Billeaud, and the rule announced in Erie has no

application, for Billeaud is not a decision by the Louisiana

Supreme Court.

In effect the Court of Appeals stated (See Appendix

“a , eames

— “We have found no Louisiana decision denying a

cause of action for damages for breach of an im-

plied covenant on the ground that the lessor failed

to comply with a notice provision in the lease.”

Later on (See Appendix “B’”, P. 31) the Court also

said:

“The Louisiana Courts have not as yet had an op-

portunity to classify the breach of the lessee’s im-

plied obligation to prevent drainage.”

Judge Wisdom has traced the Louisiana law from

Swope v. Holmes, 169 La. 17 (1929) when the Louisiana

Supreme Court cancelled a “lease because the lessee had

drilled wells on adjacent property that were draining the

leased premises” (Appendix “B”, P. 10) through all of the

8

jurisprudence to Breaux v. Pan American Petroleum Cor-

poration, supra, where the Court squarely said:

“We know of no reason why a landowner would not

be entitled to recover from his mineral lessee the

damages which the lessor has sustained as the result

of a breach of the implied obligation on the part of

the lessee to exercise reasonable diligence in en-

deavoring to prevent substantial drainage of the

leased premises. We think the lessor under those

circumstances would have a cause of action for

damages for breach of a mineral lease contract just

as he would for breach of any other contract.”

If Defendant had held only the Plaintiffs’ lease and

some other oil company had held the leases on adjoining

properties, the economic interests of Defendant would have

encouraged it to prevent drainage either through proper

offset wells or more easily through proper sharing (uniti-

zation) of the reservoir. And if Defendant had no greater

obligation by reason of holding the other leases too, surely

its obligation was no less and, as the Court of Appeal said

“. . . the fact that the lessee (Humble) himself is causing

the damage has an important bearing on the proof of the

lessees knowledge of the drainage and on the steps the

lessee is capable of taking to prevent or diminish drainage”.

If Breaux and the Louisiana Code articles and cases

cited by the Court did not furnish the basis for the Court’s

decision, surely there is no Louisiana case denying the

principle that damages can be claimed and no case holding

that a lessor must give notice to a lessee of a fact that

lessee must know more fully than lessor could be expected

to know. In such a situation the Court of Appeals could

have followed the direction of the United States Supreme

Court in King v. Order of United Commercial Travelers of

America, 333 U.S. 878, and make its own determination

9

of what the Supreme Court of Louisiana would rule in a

similar case. However, the Fifth Circuit properly relied

upon the principles enunciated in the cited cases to hold

that if the Plaintiffs can show substantial damages by

drainage of their property which drainage could have been

prevented economically and reasonably, they are entitled to

recover damages from their lessee who did not act as a good

administrator of their property and hence actively breached

the obligation imposed by the landlord-tenant relationship.

Defendant suggests that the Court has created new

obligations after the event. This, too, is not correct. De-

fendant’s operating personnel had been advised by De-

fendant’s house counsel long before this lawsuit was filed

that Defendant had an obligation to maintain “lease

equity” and that in order to do so, it had to drill or rework

offset wells or unitize’® and it is clear that Defendant’s

obligations to use the leased property as a prudent admin-

istrator have been in Louisiana’s law as Article 2710 of

the Civil Code since 1870, and as Article 2680 in the Code

of 1825, and as Article 1728 in the Code Napoleon (Civil

Code) of 1804 from which it came. That the Code Articles

governing predial leases applies to mineral leases was es-

tablished by Gulf Refining Co. of Louisiana v. Glassell,

186 La. 190, 171 So. 846 (1936). See also the clear resumé

of this in Milling v. Collector of Revenue, 220 La. 773, 57

So. 2d 679 (1952), where at page 681, the court said:

“From the inception of litigation with respect to

mineral contracts and their interpretation, the ar-

ticles of the Civil Code specifically covering the

contract of lease (under Title IX, “Of Lease,”

Chapter 2, “Of Letting Out Things’), together with

other articles applicable to the ordinary lease un-

der “Conventional Obligations,” “Privileges” and

10 See letters reproduced in Appendix “G”’.

—— a

|

:

10

“Prescription,” have been consistently applied to

mineral contracts possessing the characteristics of

lease. For example, a lease affecting the whole

property where the lessor was the owner of but an

undivided interest was held valid under Article

2682, Spence v. Lucas, 138 La. 763, 70 So. 796; the

lessor’s lien and privilege to secure rentals was rec-

ognized under Articles 3218 and 3219, Logan v.

State Gravel Co., 158 La. 105, 103 So. 526; cancel-

lation of gas lease for nonpayment of rent when due

was ordered under Articles 2046, 2047, 2710, 2712

and 2729, Louisiana Oil Ref. Corp. v. Cozart, 163

La. 90, 111 So. 610; the prescription of three years

against a claim for arrearage of rent in the form

of additional royalties was applied under Article

3538, Board of Com’rs of Caddo Levee Dist. v. Pure

Oil Co., 167 La. 801, 120 So. 373; characteristics of

a sublease as distinguished from an assignment

were determined by application of Article 2725,

Roberson v. Pioneer Gas Co., 173 La. 313, 137 So.

46, 82 A.L.R. 1264; remedy of a lessee in the case

of disturbance of his possession was concluded un-

der the provisions of Articles 2703 and 2704, Gulf

Refining Co. of La. v. Glassell, 186 La. 190, 171 So.

846; the duration and conditions of such leases were

held to come within the rule announced in Articie

2684, Coyle v. North American Oil Consolidated,

'. On Rehearing, 201 La. 99, 112, 9 So. 2d 473; and

the lessor was required to fulfill the obligations

enumerated in Article 2692. Texas Co. v. State

Mineral Board, 216 La. 742, 44 So. 2d 841.”

That a lease is for the mutual benefit of lessor and lessee

was estabilshed in Rials v. Davis, supra. That all land-

owners whose lands embrace a reservoir of oil and gas

should share in it was established by Louisiana Act 157

of 1940. !

eee

11

ITI.

CONCLUSION

These principles of Louisiana law were applied by the

Court of Appeals in its original decision and in its second

opinion denying Defendant’s petition for rehearing and

accordingly, the application for a writ of certiorari should

be denied.

Respectfully submitted,

VICTOR A. SACHSE

701 Fidelity National Bank Building

Baton Rouge, Louisiana 70801

a S. STEEG a

0 Saratoga

Now Orleans, Loukions 70112

ATTORNEYS FOR RESPO

I. R. PRICE, ET ALS.

MOISE S. STEEG, JR. ~ \

CERTIFICATE.

I hereby certify that copies of this Opposition to Peti-

tion for Writ of Certiorari have this day been forwarded

to all counsel of record in these proceedings via United

States Mail, postage prepaid, properly a

New Orleans, Louisiana, this . A ( day o LG

MOISE S. STEEG, JR. 2

A-1

APPENDIX “A”

JUDGMENT ON MOTION FOR SUMMARY

JUDGMENT.

Filed Aug. 28, 1968.

UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF LOUISIANA

NEW ORLEANS DIVISION

Civil Action No. 14,312, Division “C”.

FLOYD WILLIAMS, ET AL.,

Plaintiffs,

versus

HUMBLE OIL & REFINING COMPANY,

Defendant.

This cause came on to be heard on motion of defend-

ant for a summary judgment pursuant to Rule 56 of the

Federal Rules of Civil Procedure, and the Court having

considered the matter and having heard oral argument;

having found that there is no genuine issue of material

facts as to plaintiffs’ first cause of action, and having

concluded that defendant is entitled to judgment as a

matter of law as to such cause of action; and having fur-

ther found that defendant is not entitled to judgment as

a matter of law as to plaintiffs’ remaining causes of ac-

tion; having found that there is no just reason for delay

in entering this judgment, and that an immediate appeal

from this judgment may materially u.dvance the ultimate

termination of the litigation,

It is Ordered, Adjudged and Decreed:

A-2

(1) That summary judgment be granted in favor of

defendant dismissing plaintiffs’ first cause of action;

(2) That summary judgment be denied on the issues

of notice as a pre-requisite to the action, of compliance with

the express offset provision of the lease, and of compliance

with the implied obligation to offset;

(3) That this judgment involves controlling ques-

tions of law, both as to the issue on which the motion is

granted and the issues as to which the motion is denied as

to each of which there is a substantial ground for differ-

ence of opinion, and that an immediate appeal from this

judgment, both as to that portion of the motion granted

and those portions of the motion denied, may materially

advance the ultimate termination of this litigation.

ALVIN B. RUBIN,

United States District Judge.

August 28th, 1968.

A-3

FINDINGS ON MOTION FOR SUMMARY

JUDGMENT.

Filed Aug. 28, 1968.

UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF LOUISIANA

NEW ORLEANS DIVISION

Civil Action No. 14,312, Division “C”.

FLOYD WILLIAMS, ET AL.,

Plaintiffs,

versus

HUMBLE OIL & REFINING COMPANY,

Defendant.

Rubin, District Judge:

For reasons set forth in the attached memorandum

opinion, the motion for summary judgment is Granted in

part and Denied in part. However, in accordance with

the provisions of Rule 56(d) of the Federal Rules of Civil -

Procedure, the Court has examined the pleadings and the

evidence before it and has interrogated counsel to ascer-

tain what material facts exist without substantial contro-

versy and what material facts are actually and in good

faith controverted. The following facts appear to be with-

out material controversy, and upon trial of this action, they

will be deemed established :

1. Humble Oil & Refining Company (“Humble’’) is

the present lessee under the mineral lease originally

granted to I. R. rrice, as lessee, a copy of which is an-

nexed to the plaintiffs’ complaint (“The Lease”).

2. In 1933, the Federal Land Bank of New Orleans

A-4

granted The Lease to I. R. Price, one of the plaintiffs in

this suit. Price was a lease broker and was acting as

agent for Humble. The property affected by The Lease

is referred to as The Williams Property.

3. The Lease was on a printed form and contained

provisions then in common use.

4. The Federal Land Bank was a large landowner,

and employed experienced persons to look after its min-

eral interests. In addition, it had available the advice of

a lawyer regularly employed by it.

5. Humble paid Price 2 years rentals in advance and,

by the use of this prepayment, Price succeeded in getting

the Land Bank to sell The Williams Property to the Wil-

liams family, from whom it had acquired the property.

6. The Land Bank reserved a quarter interest in the

minerals.

7. Price assigned The Lease to Humble.

8. The Williams family granted Price and another

Plaintiff, Edwin F. Gayle, a mineral interest in The Wil-

liams Property for their services.

9. Humble drilled a well on The Williams Property

in 1937. This was the discovery well in the North Crowley

field, and it is known as Williams No. 1.

10. Humble drilled additional wells on The Williams

Property in a surface spacing pattern containing approxi-

mately 20 acres per well.

11. Production of oil and gas from The Williams

A-5

Property or from premises pooled with them is still con-

tinuing.

12. The plaintiffs and others who share in the royal-

ties payable under The Lease have received payments from

the date of first production to March 1, 1964, of more

than $1,274,000.

13. As of March 1, 1964, Humble had drilled 20 wells

on The Williams Property at a cost of more than $2,750,000.

14. The plaintiffs’ claims in this suit relate only to

sands located above the Frio (“The Shallow Sands’’).

15. In 1963, Humble applied to the State Conserva-

tion Department for units affecting The Shallow Sands

and unitization orders were issued pooling The Williams

Property with other lands as to certain reservoirs in The

Shallow Sands effective April 1, 1964.

16. As of March 1, 1964, Humble had performed at

least 46 workover operations on wells on The Williams

Property producing from The Shallow Sands; these cost

more than $1,000,000.

17. There are two unit wells or units in which por-

tions of The Williams Property are pooled situated on ad-

joining premises within 150 feet of the leased premises.

There is no other well on adjoining premises situated

within 150 feet of the leased premises.

18. The plaintiffs do not contend thai Humble should

have drilled an additional well or wells on The Williams

Property in order to prevent drainage of oil and gas from

beneath the surface of these premises by wells drilled by

Humble on adjacent properties. However, the plaintiffs

contend that, if Humble had completed an existing well

A-6

or wells on The Williams Property to another sand or sands

in addition to the one from which that well was already

completed, in order to prevent drainage of oil and gas from

beneath the surface of The Williams Property by wells

drilled by Humble on adjacent properties, Humble could

have expected to receive a reasonable profit above the ad-

ditional cost of effecting the additional completion.

The following conclusions of law have been reached by

the Court and shall be applied in the conduct of the trial:

1. In order for the plaintiffs to recover damages from

the defendant because ot a breach of the defendant’s im-

plied obligation as lessee to exercise reasonable diligence

to prevent drainage of minerals from beneath the surface

of the leased premises, the plaintiffs must establish by a

preponderance of the evidence that oil or gas could have

been produced from the same reservoirs as those from

which production was actually obtained through wells

drilled on other property, that this could have been accom-

plished by additional or offset completions effected from

wells already drilled on the leased premises, and that it

would have been economically feasible for the lessee to ef-

fect such additional completions.

2. The burden of proof is on the plaintiffs to estab-

lish the damages sustained by them by showing by a pre-

ponderance of the evidence the quantity of oil and gas that

would have been produced from the offset completions and

the value of the minerals that plaintiffs would have re-

ceived from that production had the offset completions

been timely effected.

8. If the plaintiffs have a claim, it is only for dam-

ages, and the plaintiffs are not entitled to an accounting.

Therefore, summary judgment should be granted in favor

A-7

of the defendant on the plaintiffs’ first cause of action.

_ 4. This suit is not barred as a matter of law by the

plaintiffs’ failure to give notice of breach or notice of

to be decided by the jury.

5. A mineral lessee has a duty to the mineral lessor

te act as a prudent administrator of the leased premises,

If the lessee is draining oi] or gas from beneath the leased

premises by a well drilled by the lessee on other property,

its duty to act as a prudent administrator may include an

implied obligation to unitize the leased premises with those

from which production is being obtained, or to drill an

offset well, or to effect an offset completion of a well al-

ready drilled on the leased premises, if these acts are eco-

nomically feasible (under the principles set forth in para-

graph 1, above) or to do those other things, if any, that 2

prudent administrator would do under the circumstances,

What action 2 prudent administrator would take under

the circumstances is a fectual question to be decided by

the finder of fact in the light of the relevant evidence.

These conclusions of law are more fully set forth in

the attached opinion and are reached for the reasons and

under the authorities set forth therein.

There being no just reason for delay, summary judg-

ment is Granted in favor of the defendant on the plain-

tiffs’ first cause of action. The defendant’s motion for

summary judgment on the issue of notice as a prerequisite

to this action is Denied.

ALVIN B. RUBIN,

United States District J udge.

New Orleans, Louisiana.

August 27, 1968.

A-8

REASONS FOR SUMMARY JUDGMENT.

Filed Aug. 28, 1968.

UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF LOUISIANA

NEW ORLEANS DIVISION

Civil Action No. 14,312, Division “C”.

FLOYD WILLIAMS, ET AL.,

Plaintiffs,

vorsus

HUMBLE OIL & REFINING COMPANY,

Defendant.

Rubin, District Judge:

The plaintiffs seek an accounting and, in the alter-

native, damages, for breach of Humble’s implied obliga-

tion as a mineral lessee to exercise reasonable diligence to

prevent the drainage of oil and gas from beneath their

property. The principles to be applied in this diversity

suit are determined by the law of Louisiana. Williams’

prospects of recovery in federal Court, like Tompkins’, are

the same as those he would have in state Court. Erie R.

Co. v. Tompkins, 1938, 304 U.S. 64, 58 S.Ct. 817, 82 L.

Ed. 1188.

I. Accounting.

The plaintiffs’ first cause of action alleges that the

plaintiffs wrote a letter or March 29, 1963, demanding

payment of $1,226.00 (Exratum $1,226,000.00) for oil

drained from The Williams Property by wells drilled by

Humble on adjacent property, and that Humble replied

denying “substantial drainage.” The plaintiffs conclude

that this admits that some drainage occurred and that they

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A-9

thereby became entitled to an accounting. But even if the

plaintiffs’ premises are correct, their conclusion is a non

sequitur. Even if liability is established because Humble’s

letter is read as admitting “insubstantial drainage,” the

plaintiffs’ claim, under Louisiana law, is ore for damages.

They have no right to an accounting.

By judicial improvisation, relying largely upon the

analogy to principles of lease and servitude, Louisiana’s

Courts have evolved a body of rules applicable to an in-

dustry unknown when the Civil Code was adopted. The

shaping of the basic precepts began almost 50 years ago.

In 1922 Louisiana’s Supreme Court held that a landowner

does not own the oil and gas beneath his property. Frost-

Johnson Lumber Co. v. Salling’s Heirs, 1922, 150 La. 756,

91 So. 207. He has the exclusive right to search for min-

erals and to reduce them to his possession. But only upon

taking possession does he become vested with ownership.!

This rule has since been consistently applied. Although

it has been indicated that a wilful or negligent interfcr-

ence with the landowner’s right to attempt to reduce min-

erals to his possession might create a cause of action,” the

rule that minerals do not belong to the owner of the sur-

face until he reduces them to his possession has never been

qualified.* The supposed fugacious quality of oil and gas

has led the Louisiana Courts to conclude that the owner

of a tract of land cannot claim the oil or gas produced by

a neighbor as a result of drainage from his property.‘

1 Frost-Johnson Lumber Co. v. Salling’s Heirs, 1922, 150 La. 756,

91 So. 207; Liles v. Texas Co., 1928, 166 293, 117 So. 229; Wright

v. Imperial Oil & Gas Products Co., 1938, 177 La. 482, 148 So. 685.

pn * McCoy v. Arkansas Natural Gas Co., 1932, 175 La. 487, 143 So.

% Adams v. Grigsby, La.App., 1963, 152 So.2d 619; Whitehall Oil

Co. v. Heard, La.App., 1967, 197 So.2d 672.

* Higgins Oil & Fuel Co. v. Guaranty Oil Co. 1919, 145 La. 233,

82 So. 206; Louisiana Gas & Fuel Co. v. White Bros., 1925, 157 La’

728, 103 So. 23; Breaux v. Pan American Petroleum Corp., La.App.,

1964, 163 So.2d 406.

A-10

Enactment of the conservation law has not changed this

“rule of capture.’”®

The principles fixed by the Louisiana jurisprudence

were summed up by the Louisiana Court of Appeal for —

the Third Circuit in Breaux v. Pan American Petroleum

Corp., La. App. 1964, 163 So.2d 406, as follows:

“Tt is well settled in Louisiana that oil and gas in

place are fugitive minerals which are not subject

to absolute ownership as specific things apart from

the soil. The owner of land does not own the fugi-

tive oil or gas beneath it so as to have the right to

follow it after it has left his land, but he does have

the right to drill on his land and to become the

owner of such oil and gas as he may thereby draw

through the soil and bring into his possession.” 163

So.2d at 409.

Breaux squarely holds that the right of the landowner-

lessor against his lessee in the event of a breach of the

lessee’s implied obligation to exercise reasonable ailigence

to prevent drainage is a right to recover damages. A

creditor, as such, has no right to an accounting in Louisi-

ana. Where Louisiana Courts have recognized an action

for an accounting, they have done so under the provisions

of Louisiana Civil Code Article 21, which provides:

“Tn all civil matters, where there is no express law,

the judge is bound to proceed and decide according

to equity. To decide equitably, an appeal is to be

made to natural law and reason, or received usages,

where positive law is silent.”

The plaintiffs claim that Humble violated an implied

5The Louisiana cases that have dealt with the problem of drain-

age since the adoption of the existing conservation statute have con-

tinued to follow the ‘rule of capture.” See, e.g., Breaux v. Pan

American Petroleum Corp., La.App., 1964, 163 So.2d 406; Whitehall

Oil Co. v. Heard, La.App., 1967, 197 So.2d 672.

A-11

term of its contract with them. The Breaux case makes

it clear that they can recover only such damages as they

can prove. They are not entitled to an accounting.® There-

fore, the motion for a summary judgment as to the first

cause of action will be Granted.

II. Express Obligation to Drill Offset Wells.

Humble urges it does not owe the plaintiffs an implied

obligation to effect additional completions of existing wells

because The Lease contains an express provision relating

to offset wells, reading as follows:

“In the event a well or wells producing oil or gas

in paying quantities should be brought in on ad-

jacent land and within one hundred fifty (150)

feet of and draining the leased premises, Lessee

agrees to drill such offset wells as a reasonable

prudent operator would drill under the same or

similar circumstances.”

Humble contends that this supersedes any implied

obligation. Other than two unit wells, the units of which

include portions of The Williams Property; no well has

been brought in on adjacent land within 150 feet of the

leased premises. Hence, Humble urges that, since the

contract is the law between the parties,’ the inclusion of

this express obligation to drill offset wells under some cir-

stances precludes the application of a different or more

extensive obligation.®

The Lease clearly obliges Humble to drill offset wells

under some circumstances; it does not expressly negate

6 That plaintiffs themselves seek a jury trial is not controlling,

but a suit for an accounting is not one cognizable by a jury at com-

mon law under the principles recogni in the Seventh Amendment.

7 Art. 1901, LSA-C.C.- Billeaud Planters, Inc. v. Union Oil Co: of

California, 5 Cir., 1957, 245 F.2d 14.

. 8 Foster v. Atlantic Refining Co., 5 Cir., 1964, 329 F.2d 485

(Texas).

A-12

any obligation on the part of the Lessee to protect The

Williams Property from drainage under other circum-

stances. It does not deal with the question of the lessee’s

obligation to protect the leased premises from drainage by

wells on property that may not be adjacent, or with wheth-

er the lessee has an obligation to prevent drainage by

means other than drilling offset wells, for example, by

dual completion of existing wells or unitizatior proceed-

ings, or with any duty that may be imposed on the lessee

when the lessee itself is causing the drainage.®

Courts in other states have held that even though a

mineral lease contains an express provision dealing with

a subject, an obligation that would otherwise be legally

implied as part of the contract will be enforced to the ex-

tent that the express and the implied obligation are not

inconsistent.’°

In Louisiana, the mineral lease has been interpreted

in the light of the provisions of the Louisiana Civil Code

relating to predial leases.’ It is not to be read within its

four corners: it contains implied obligations on the part

of both lessee and lessor.'* The mineral lessee, like other

lessees, undertakes the obligation imposed by Louisiana

Civil Code Article 2710 “To enjoy the thing leased as a

9 Phillips Petroleum Co. v. Millette, 221 Miss. 1, 1954, 72 So.2d

176.

10 Hartman Ranch Co. v. Associated Oil Co., Calif., 1937, 73 P.2d

1163; Stanolind Oil & Gas Co. v. Christian, Texas, 1935, 83 S.W. 2d 408.

See also, Merrill, Implied Covenants in Oil and Gas Leases, (2d ed.

1940) $6 at 27; Note, 1967, Remedies for Breach of Implied Cove-

nants in Oil and Gas Leases in Montana, 28 Mont.L.Rev. 187.

11 “The rule is equally well established that in construing mineral

leases, ‘. . . the codal provisions applicable to ordinary leases must be

applied.’”” Melancon v. Texas Co., 1956, 230 La. 593-....... 89 So.2d

135, 142. Coyle v. North American Oil Consolidated, 1942, 201 La.

99, 9 So.2d 473; Tyson v. Surf Oil Co., 1940, 195 La. 248, 196 So. 336.

12 Pipes v. Payne, 1924, 156 La. 791, 101 So. 144; Reagan v.

Murphy, 1958, 235 La. 529, 105 So.2d 210; Breaux v. Pan American

Petroleum Corp., La.App., 1964, 163 So.2d 406, cert. denied, 246 La.

581, 165 So.2d 481.

A-13

good administrator, according to the use for which it was

intended by the lease.’

These words are no hollow invocation. They imply

basic obligations of the lessee arising, as the caption to

the Code article tells us, “from the nature of the contract”

of lease. The original French text used in the Codes of

1808 and 1825 is even more graphic: the lessee is bound to

enjoy the thing leased as “bon pere de famille... .”

The Louisiana Courts have found that certain obli-

gations are implied from the mineral lease. They have

not, however, clearly indicated the conceptual basis for

imposing those obligations but have apparently reached

this conclusion, at least in part, because of the influence

of decisions in common law states. Civilian doctrine would

draw all of these implied obligations from the basic duty

to enjoy the thing leased as a good administrator."®

Viewed in this light, the lessee’s duty to act as a good

administrator is not a separate and distinct obligation

imposed in addition to the implied obligations announced

by the Louisiana Courts: it is the basic obligation of the

lessee and all of the implied obligations already drawn are

merely elaborations or reflections of it.

Planiol, a French commentator to whom Louisiana

Courts have frequently turned for interpretation of the

Civil Code articles derived from French sources, says the

lessee is required to use the thing leased in the same man-

ner as a prudent owner would use his own property. In

describing the obligation he says:

13 Simmons v. Pure Oil Co., 1961, 241 La. 592, 129 So.2d 786.

14 See, e.g., Coyle v. North American Oil Consolidated, 1942, 201

La. 99, 9 So.2d'473, finding an implied obligation to drill offset wells.

See Walker, “Implied Drilling Obligations in Oil and Gas

in Louisiana,” 1 Loyola L.Rev. 1 (1941).

A-14

“For example, if it is a horse which is leased, the

lessee should avoid tiring him, to take it on too long

a journey or make it pull too heavy loads; he should

care for and nourish it suitably. If it is cultivated

land, he should keep it in good condition; if it is a

vineyard, give it the care that vines demand, etc.

See Art. 1766. The lessee should not, therefore,

while using the thing according to its destination,

make an abusive use of it, such as would compromise

its good condition or even its existence.”

The fundamental purpose of the mineral lease—“the

use for which it was intended by the lease’”— is the pro-

duction of minerals.’* Once production commences, the

lessor is paid rent’? for the leased premises only by the

royalty reserved in the lease. It is therefore the duty of

the lessee, necessarily implied in the lease, to develop the

leased premises properly and to prevent drainage of oil

and gas from beneath it, not at all hazards and all costs,

but “as a good administrator,”"* just as it is the obliga-

tion of a lessee enjoying a store under a percentage rental

to operate the store with regard to the lessor’s interests

as well as its own.”

16 McDonald v. Grande Corp., La.App., 1962, 148 So.2d 441.

17 Louisiana Courts have often characterized the lessor’s royalty

as rent. See, e.g., Roberson v. Pioneer Gas Co., 1931, 1738 La. 313,

137 So. 46; Robinson v. Horton, 1941, 197 La. 919, 2 So.2d 647; Davis

v. Laster, 1962, 242 La. 735, 138 So.2d 558.

18 In connection with the _—_ granted the lessee by a pooling

clause, the Louisiana Court of Appeal for the Third Circuit said, in

McDonald v. Grande Corp., La.App., 1962, 148 So.2d 441, 449, “As

indicated by the cited cases, the jurisprudence in Louisiana and in

other states interprets the powers granted the lessee by a voluntary

pooling clause as subject to such restrictions as will prevent arbitrary

and unfair dealings and as will therefore enforce a ‘standard of good

faith’ on the part of the mineral lessee.”

19 Selber Bros. v. Newstadt’s Shoe Stores, 1943, 203 La. 316, 14

So.2d 10. See also The Work of the Louisiana ogo Courts for

the 1962-63 Term, Mineral Rights, 24 La.L.Rev. 215, 218 (1964); The

Work of the Louisiana —— Courts for the 1961-62 Term, Mineral

Rights 23 La.L.Rev. 323, 336 n. 40, 338 (1963) in which reference is

made to “increasing utilization of what might be termed a fiduciary

principle in oil and gas law.”

A-15

These basic concepts guide Louisiana Courts in read-

ing the entire lease, as well as in determining what addi-

tional obligations are implied in it. No Louisiana cases

appear to have considered whether an express clause that

imposes certain specific obligations relative to offset wells

supersedes any other obligation to protect the leased prem-

ises from drainage on the part of the lessee. In Wilkins

v. Nelson, 1926, 161 La. 437, 108 So. 875, the Court sus-

tained an exception of no cause of action to a petition to

cancel a lease for failure to protect the premises from

drainage on the basis that no violation of an express cove-

nant similar to the one involved here was shown, but the

Court did not discuss whether there was an implied obli-

gation that went further than the express clause. How-

ever, it did hint at recognition of an additional implied

obligation for it said that the petition did not allege “that

defendant has acquired the lands adjacent to his lease, and

within [the limits fixed by the lease that would require

the lessee to drill] in an effort to defeat his obligation to

develop the property for oil, in the event an oil well should

be drilled within that distance from the property leased.”

108 So. at 876. Nor does Hart v. Standard Oil Co., 1920,

146 La. 885, 84 So. 169, militate against the existence of

an implied obligation where the lease contains an express

obligation to drill offsets within a prescribed distance

(there, “as is customary in the Caddo field”) , for the

Court observed in Hart, “The testimony of men of experi-

ence in the business shows that the well could not have

drained plaintiff’s land, and therefore did not call for an

ofiset well,” and added, “There is ample proof, too, that

the custom in the Caddo oil field did not demand that a

well of that capacity and at that distance should have

been offset.”2°

20 84 So. at 170.

A-16

The jurisprudence of other states points up the re-

luctance with which Courts will hold that the express

covenant to drill certain offset wells negates the implied

covenant to protect the leased premises from drainage.

In some cases, Courts have held that the express obliga-

tion applies only until the first well is drilled on the leased

premises or until the end of the primary term and have

applied the implied covenant thereafter.” In Millette v.

Phillips Petroleum Co., 1950, 209 Miss. 687, 48 So.2d 344,

although the Court said that the express offset provision

precluded equitable relief so far as an implied duty to drill

offset wells was concerned, the Court held that the lessee’s

“equitable duty, existing as well under implication, to con-

serve the mineral resources of lessors or to refrain from

depletory acts survives unimpaired.” 48 So.2d at 347.

The effect of an express offset covenant on the implied

duty to protect from drainage is fully considered by Pro-

fessor Charles J. Meyers of the Stanford University Law

School in “The Effect of Express Provisions in an Oil and

Gas Lease on Implied Obligations,” Fourteenth Annual

Mineral Law Institute 90, 107 (1967). He states:

“T think the Courts that are troubled by the ex-

press offset covenant are justified in their concern.

While the logic of the express clause is inescapable,

many landowners have something less than perfect

command of logic. If you know nothing at all about

implied covenants, even a careful reading of a lease

form containing an express offset clause would

21 Chapman v. Sohio Petroleum Co., on uae 1956, 297 S.W.

2d 885; Coats v. Brown, by Spead gs 1957, 301 W.2d 932; Mag-

nolia Petroleum Co. v. Page, Tex.Civ.App., 1940, 141 S.W.2d 691. But

see Hutchins v. Humble Oil & Refining Co., Tex.Civ.App., 1942, 161

S.W.2d 571, the express offset provision was held to be the sole obli-

Peon of the lessee concerning the protection of the leased premises

rom drainage. This case has been severely criticized by commenta-

tors. See, e.g., Merrill, Implied Covenants in Oil and Gas Leases, 5 8,

n. 11; —_—— The Effect of Express Provisions in an Oil and Gas

lease on Implied Obligations, Fourteenth Annual Mineral Law In-

stitute 90 (1967).

A-17

suggest that the lessee is assuming an affirmative,

extra undertaking; when in fact he is shucking off

responsibility that he would otherwise have. I am

therefore inclined to think that Courts ought not to

treat the express covenant as negating the implied

covenant.

“When the offset distance is fixed at a figure short-

er than that permitted by the spacing rules I am

even more certain that the express clause should

not be given pre-emptive effect. * * * Thus if the

lease states that no protective wells will be drilled

to offset draining wells beyond 650 feet or that no

protection wells will ever be drilled on said lease- ~

hold, the Courts should enforce the provision to the

fullest. But Courts should not enforce clauses hav-

ing the effect of the foregoing but suggesting to the

innocent just the opossite. The Courts should be

unmasking the wolf, not helping him keep his

sheep’s clothing neatly in place.” Id. at p. 110.

Guided by the usual principles that determine a les-

sor’s duty, the Louisiana Courts, I think, would not hold

that inclusion of the limited express requirement of drill-

ing offset wells contained in The Lease negates any other

obligation by the lessee to protect the leased premises from

drainage. Humble suggests that, while this express cove-

nant “might be thought to be severe,” it was customary

when the lease was prepared, the lease price was fair,

and it was only 30 years later that a breach was alleged.

This arguments fails to take adequately into account the

fundamental nature of the contract of the lease: taken at

face value it would negate almost every implied obligation.

It does not devitalize the lease to say that the funda-

mental duties imposed on the parties to a lease by the very

nature of their contract must be interpreted in the light

of changes in technology and industry practices. What

A-18

was diligent development in 1933, when wells were cus-

tomarily drilled to a relatively shallow depth is obviously

not diligent development in 1967 when many wells are

successfully drilled at depths in excess of 15,000 feet. It

does not alter the contract to hold, as I think the Courts

of Louisiana would, that the lessee’s implied obligations

are to be interpreted in the light of the technological meth-

ods that are now economically feasible, not in the light of

industrial practices 35 years ago.

III. The Nature and Extent of the Lessee’s Implied

Obligation.

It must be assumed, then, that the lessee does have an

implied obligation to protect The Williams Property from

drainage and that this obligation is not limited to drilling

offsets to wells within 150 feet of the leased premises.

But Humble urges that, if there is such a duty, the min-

eral lessee’s implied duty to its lessor with respect to avoid-

ing drainage is no different whether the drainage is

caused by a third party or by the lessee itself. In either

event the duty, it argues, is merely to drill offset wells

under the same circumstances that would require any

prudent operator of the leased premises to drill such wells.

On the other hand, the plaintiffs argue that the lessee’s

implied duty to protect the lessor’s premises from drain-

age includes an obligation to reimburse the lessor for

drainage occasioned by the lessee even when the lessee

could not have profitably brought in production on the

leased premises.”

A number of Courts in other states have considered

this problem, but there is no agreement on its solution.

Professor George W. Hardy, III, Professor of Mineral

ida 22 Phillips Petroleum Co. v. Millette, 221 Miss. 1, 1954, 72 So.2d

A-19

Law at the Louisiana State University Law School, has

written :?8

“Some cases have apparently considered of little

or no significance the fact that the lessee of the

complaining lessor is causing the drainage.* Others

have categorically denied that there is any signifi-

cance attaching to this fact.” Still others have sug-

gested the. existence of a higher duty on the part of

the lessee causing drainage by wells on adjoining

land.”* In seeming recognition of the higher duty,

_ 28 Hardy, Drainage of Oil & Gas from Adjoining Tracts—A Fur-

ther Development, 1966, 6 Natural Resources Journal 45, 52-53.

24 Professor Hardy’s footnote reads:

F.2d 444 (10th Cir. 1945); Cooper v. Ohio Oil Co., 108 F.2d

535 (10th Cir. 1939); Arkansas i

+» 297 Fed. 422 (8th Cir. 1924); Clear Creek Oil & Gas Co.

7 (1928); Powers vy. Bridge-

pert Oil Co., 238 Ill. 397, 87 N.E. 381 (1909); Myers v. Shell

Deep Rock Oil Corp. v. weg | 199 Okla. 480, 186 P.2d 828

etroleum Co., 297 S.W.2d 885

(Tex.Civ.App. 1956); Sinclair Oil & Gas Co. v. Bryan, 291

S.W. 692 (Rex. Civ. App: 1927). These and other cases are

cited an Williams & Meyers §§ 831-32.2, pp.

212-23.”

25 Professor Hardy’s footnote reads:

“Monsanto Chem. Co. v. Andrae, 245 Miss. 11, 147 So.2d

116 (1962); Hutchins v. Humble Oil & Ref. Co., 161 S.W.2d

CGiv.App. 1942). In Monsanto Chem. Co. v. Sykes,

245 Miss. 207, 147 So.2d 290 (1962), on suggestion of error

247 Miss. 227, 149 So.2d 20 (1963), relief was denied even

though the defendant lessee was causing the drainage. How-

ever, it appeared that some $483,000 had been expended to

drill and rework the protection we which could not be put in

iscussed in

denying that there is any ee to be attached to the

fact that the lessee caused the

Monsanto cases, supra, impose limitations on the prior deci-

sion of Phillips Petroleum Co. v, Millette, 221 Miss. 1, 72 So.

2d 176 (1954), in which the Mississippi Court had adopted the

“Olsen v. Sinclair Oil & Gas Co., 212 Heys 832 (D.Wyo.

1963); Geary v. Adams Oil & Gas Co., 31 F.Supp. 880 (E.D.

Ill. 1940); Blair v. Clear Creek Oil & Gas Co., 148 Ark. 301,

A-20

these latter cases have either relaxed the require-

ment of proof that an offset well be profitable,” or

negated the effect of an express offset clause free-

ing the lessee from any duty to drill an offset well,”

or declared that acceptance of delay rentals with

knowledge of the drainage does not waive the les-

sor’s right to seek relief.”**

But the commentators are no more able to reach con-

sensus than the Courts. Professor Merrill*® and Williams

and Myers" criticize the notion that a lessee who itself

causes drainage has any greater obligation than if the

drainage were caused by a third person. Professor Seed

suggests that a separate and distinct implied obligation to

230 S.W. 286 (1921); Annot., 19 A.L.R. 430 (1922); Hart-

man Ranch Co. v. Associated Oil Co., 10 Cal.2d 232, 73 P.2d

1163 (1937); R.R. Bush Oil Co. v. Beverly-Lincoln Land Co.,

69 Cal.App.2d 246, 158 P.2d 754 (1945); Hughes v. Bussey-

ville Oil & Gas Co., 180 Ky. 545, 203 S.W. 515 (1918) (dic-

tum); Central Kentucky Natural Gas Co. v. Williams, 249

Ky. 242, 60 S.W.2d 580 (1933) (dictum); Phillips Petroleum

Co. v. Millette, supra not 21; Millette v. Phillips Petroleum

Co., 209 Miss. 687, 48 So.2d 344 (1950); Dillard v. United

Fuel Gas Co., 114 W.Va. 684, 173 S.E. 573 (1934); Trimble

v. Hope Natural Gas Co., 113 W.Va. 839, 169 S.W. 529

(1933) ; Adkins v. Huntington Dev. & Gas Co., 113 W.Va. 490,

168 S.E. 366 (1932). These and other cases are collected and

discussed in 5 Williams & Meyers, §§ 824-24.2, pp. 125-48.”

27 Professor Hardy’s footnote reads:

“Geary v. Adams O°] & Gas Co., supra note 22; R. R. Bush

Oil Co. v. Beverly-Lincoln Land Co., supra note 22; Phillips

Petroleum Co. v. Millette, 221 Miss. 1, 72 So.2d 176 (1954);

Adkins v. Huntington Dev. & Gas Co., supra note 22. These

cases are collected and discussed in 5 Williams & Meyers 127.”

28 Professor Hardy’s footnote reads:

“R. R. Bush Oil Co. v. Beverly-Lincoln Land Co., 69 Cal.

App.2d 246, 158 P.2d 754 (1945); Millette v. Phillips Petro-

leum Co., 209 Miss. 687, 48 So.2d 344 (1950). See discussion

in 5 Williams & Meyers 128.”

2° Professor Hardy’s footnote reads:

“Blair v. Clear Creek Oil & Gas Co., 148 Ark. 301, 230 S.W.

286 (1921); Trimble v. Hope Natural Gas Co., 133 W.Va.

839, 169 S.E. 529 (1933). Other cases have refused to apply

other express lease clauses in situations where the drainage

complained of is caused by the defendant lessee. For a full

discussion of these cases, see 5 Williams & Meyers 128, 29.”

30 Merrill, Implied Covenants in Oil and Gas Leases § 111 at 260

(2d ed. 1940).

315 Williams & Meyers Oil & Gas Law § 824.2, at 144-47 (1964).

A-21

refrain from depletory acts should be imposed on the les-

see.” Professor Hardy sees a “strong need for some sanc-

tion to inhibit a lessee from abusing his position of advan-

tage and succumbing to the temptation to indulge his in-

terest at the expense of one of his lessors.’’*

In Louisiana the question is no longer an open one.

The issue was directly considered in Breaux v. Pan Ameri-

can Petroleum Corp., La. App., 1964, 163 So.2d 496. The

Court concluded that the lessor has “no greater rights and

no different cause of action against defendants-lessees

simply because the defendants are also the lessees of the

adjoining tract of land on which the alleged draining well

is located.” 163 So.2d at 417. The Court thoroughly con-

sidered the prior Louisiana jurisprudence in reaching this

reasoned conclusion. Nor is the Breaux decision based on

technicalities of pleading as plaintiffs suggest. The Lou-

isiana Supreme Court not only denied a writ of certiorari

to the lessor, but said of the Court of Appeal’s judgment

“We find no error of law in the judgment complained of.’’*

It is therefore clear that the opinion in Breaux does not

represent merely a quaint application of Louisiana pro-

cedural rules. Judge’s Tate’s dissent from the denial of

rehearing urged this view and argued that the case should

have been remanded to permit the lessor to amend the

pleadings. But the Court had already said that the evi-

32 Seed, The Implied Covenant in Oil & Gas Leases to Refrain

irom Depletory Acts, 3 U.C.L.A. L.Rev. 508 (1956).

33 Hardy, Drainage of Oil and Gas From Adjoining Tracts—A Fur-

ther Development, 1966, 6 Natural Resources Journal 45, 57.

34 Breaux v. Pan American Petroleum Corp., 1964. 246 La. 581,

165 So.2d 481. os

The plaintiffs’ application to the Louisiana Supreme Court

for a writ of certiorari expressly urged, “The Court erred in

failing to remand the case ye gp plaintiffs to supply the

allegations as to the money ue of the oil and gas ined

(the amount of which was set out in the poten) 3 and/or to

supply the allegation that defendants cou

a forced pooling unit, and did not do so (the petition states

that nothing was done to protect plaintiffs) .”

A-22

dence in the record supported the conclusions reached by

the trial judge and by it and that the evidence, together

with the pleadings, was simply not enough to show that

the lessors were entitled to recover on the merits. There

was therefore no reason to remand for amendment to the

pleadings.

The Breaux case makes the conclusion irresistible, as

a matter of Louisiana law, that the plaintiffs cannot re-

cover here for breach of the implied obligation to protect

the leased premises from drainage unless they can show:

(1) that substantial damage has occurred, (2) that the

lessee could have prevented the drainage without sustain-

ing an economic loss and (3) the amount of royalties that

the landowner would have received had the lessee taken

appropriate preventive measures.

IV. Notice Requirements.

Humble next contends that the plaintiffs’ suit is

barred for failure to give notice of default in accordance

with the terms of The Lease because Paragraph 8 of The

Lease provides in part:

“And in the event Lessor considers that operations

are not being conducted in compliance with this

contract, Lessee shall be notified in writing of the

facts relied upon as constituting a breach hereof

and Lessee shall have sixty (60) days after receipt

of such notice to comply with the obligations im-

posed by virtue of this instrument.”

Humble contends that the decisions in Billeaud Plant-

ers, Inc. v. Union Oil Co. of California, 5 Cir., 1957, 245

F.2d 14, 18, and Bollinger v. Republic Petroleum Corp.,

La. App., 1967, 194 So.2d 139, cert. denied, 196 So.2d 277,

barring any suit until such a notice is given control here.

A-23

But the lease in Billeaud provided expressly with respect

to “all [lessee’s] obligations hereunder BOTH EXPRESS

AND IMPLIED,” and the words emphasized were stressed

in the Court’s opinion to indicate the importance the Fifth

Circuit placed on them. In addition the lease involved

there expressly stated that notice was a “condition prece-

dent to ANY ACTION BY LESSOR FOR ANY CAUSE

WHATEVER.” (Emphasis supplied.) Similarly the no-

tice clause in the lease involved in Bollinger applied “in

the event Lessor considers that Lessee has failed to com-

ply with one or more of its obligations hereunder, either

expressed or implied,” with respect to all “claims Lessee

has BREACHED THIS LEASE.”

Here, however, the notice clause does not refer to im-

plied obligations; it merely deals on its face with claims

that “operations are not being conducted in compliance

with this contract;” and it gives sixty days after receipt

of notice “to comply with the obligations imposed by vir-

tue of this instrument.”

These differences in language may signify a profound

difference in intention. But a jury might find that the

parties intended the words in the present lease to mean

precisely the same thing they meant by ‘he different words

used in the leases involved in Bollinger and Billeaud.

Courts sitting as triers of fact resolve such questions

themselves.** Here the jury must determine it. Should the

35 Producers Oil & Gas Co., Inc. v. Continental Securities Corp.,

1937, 188 La. 564, 177 So. 668; Sittig 7. Dalton, 1940, 195 La. 765,

197 So. 423; Taylor v. Kimbell, 1951, 219 La. 731, 54 So.2d 1; Logan

v. Blaxton, La.App., 1954, 71 So.2d 675.

36 The Court in Billeaud said such a breach was passive. It ap-

pears that this observation was obiter dictum because having held the

notice clause applicable to both express and implied obligations (which

would include active as well as passive breaches) it was unnecessary

to reach the issue. See Professor Hardy’s Note on Billeaud in 1958,

18 La.L.Rev. 354, 357. In addition we note that its attention was

A-24

jury find as a fact that it was the intention of the parties

that notice is a requisite to this particular kind of suit,

and should it be established that no notice was given, then

presumably the verdict would be for the defendants. If,

however, the jury finds that the clause does not apply here,

then it would be necessary to determine whether notice was

nonetheless a requisite under Article 1931 and 1933 of the

Louisiana Civil Code because the breach was passive. It

is not necessary to determine at this moment whether the

classification of a specific breach as active or passive is

a question of law or a question of fact. However, it appears

that the proper way to handle the issue ultimately will be

for the Court to define the terms “active” and “passive”

for the jury and then require the jury to determine wheth-

er, under the facts proved, the breach (if there was one)

was of one kind or the other.”

The lessors have suggested that, even if notice would |

otherwise have been required as a matter of law, Humble

should be precluded from asserting that defense here be-

cause it was Humble’s duty to provide them with the in-

formation on the basis of which they could have acted

either to give notice or to’ seek unitization of the leased

premises.

Humble argues that it is the duty of the lessor to

maintain some contact with the premises and know what

focused on the failure to drill an offset well, not on the affirmative

act of drainage. In any event the Court did not deal with the function

of judge and jury in such cases because the case had been tried by the

District Court without a jury. Bollinger likewise was a nonjury case.

37 Article 1912 of the La. Civil Code tells us, “it is a prerequisite

to the recovery of damages and of profits and fruits” that a party

who is charged with a breach of contract be put in default. A con-

tract may be violated “either actively by doing something inconsistent

with the obligation it has propeaee or passively by not doing what was

covenanted to be done.” LSA-C.C. Art. 1931. “When the breach has

been passive only, damages are due from the time that the debtor has

been put in default.” LSA-C.C. 1933.

A-25

is occurring. It urges that the lease may, and that this

lease does, require the lessor “to exercise a prudent super-

vision of the performance by the lessee so that, if in the

lessor’s opinion operations are not conducted by the lessee

in accordance with the lease, the lessor may make formal

written complaint and require immediate corrective ac-

tion.” It suggests that records available to the plaintiffs

at the Louisiana Conservation Commission would have dis-

closed all that plaintiffs needed to know in order to give

notice of breach had they wished to do so.

The plaintiffs contend that it was not their duty to

examine the Conservation Commission records but that,

in any event, Humble filed erroneous information with

the Commission and that they could not have acted effec-

tively on the basis of information available to them.

These contentions likewise involve questions of fact.

Before they can be reached, the notice issue must be de-

termined. If the jury finds that it was the plaintiffs’ duty

to give notice of a breach either because the lease required

it, or because the lease did not deal with the subject and

the breach was passive,** then the next issue will be wheth-

er, under the facts proved, Humble is precluded from en-

forcing the duty that would otherwise exist.

There is yet another question invoked in this aspect

of the case. Louisiana Courts have long held that notice

of default is not required where it would have been vain

to give such notice. Where the obligee denies the existence

of a contract, or where it admits the contract but denies

38 Td.

39 Beck v. Fleitas, 1885, 37 La.Ann. 492; Souther Sawmill Co.

v. Ducote, 1908, 120 La. 1052, 46 So. 20; Johnson v. Levy, 1908, 122

La. 118, 47 So. 422; Schramm v. Toye Bros. Yellow Cab Co., La. App.,

1936, 169 So. 116.

A-26

the existence of an obligation under it,*° it is not necessary

for the plaintiff to prove that he put the defendant in

default. “The reason for that is that it would be incon-

sistent for one to deny the obligation of a contract, or to

deny that he had violated the obligation, and at the same

time urge that a proper demand might have brought forth

a performance of the obligation on his part.” Louisiana

Farms Co. v. Yazoo & M.V.R. Co., 1934, 179 La. 539, 154

So. 445, 446.

On the other hand, a Louisiana Court said in Bollinger

v. Republic Petroleum Corp., La. App., 1967, 194 So.2d

139, cert. denied, 196 So.2d 277, that the giving of notice

and observance of the waiting period would not necessarily

be a “vain and useless thing” and that the Court would

not speculate on what the response of the defendant would

have been had the notice and delay requirements been

complied with.

This issue also does not appear appropriate for deci-

sion on motion for summary judgment. The plaintiffs

may prove that it would have been fruitless for them to

give notice. The defendants may satisfy the jury that such

a conclusion is either speculative or wrong. In either event,

the decision can be reached only wher all of the facts are

before the trier of fact.

Humble’s motion for summary judgment for failure

to give notice or to put in default is therefore Denied.

V. Duty to Unitize.

In defense against the motion for summary judgment,

the plaintiffs urge that Humble owed them a duty to unit-

40 Louisiana Farms Co. v. Yazoo & M.V.R. Co., 1934, 179 La. 539,

_ = 445; Wadkins v. Wilson Oil Corp., 1942, 199 La. 656, 6 So.

A-27

ize the leased premises. Since the motion for summary

judgment in this regard has been denied there is no neces-

sity of ruling on this question in order to dispose of that

motion. However, to enable the parties to determine the

issues that will be submitted to the jury, I have reached

the conclusion of law set forth as Number 5 above under

the procedure permitted by Rule 56(d). This requires dis-

cussion of the question of whether there is a duty of a

lessee who holds adjacent properties under lease to seek

unitization in order to protect one property from drain-

age by another.

In discussing this problem, the opinion in Breaux

stated, “It is conceivable . . . that the lessor would be en-

titled to recover damages by alleging and proving that the

lessee could have created a pooling unit, thus enabling the

landowner to participate in the production from the drain-

ing well, but that he failed to do so. But, even on that

ground the lessor must establish the value of the minerals

which he would have received if such a unit had been

timely formed.’

The Lease does not contain a pooling clause. The lan-

guage used by the Court in Breaux might however extend

to a duty to secure unitization, and at least one commen-

tator, Professor George W. Hardy, III, reads the opinion

as strongly intimating this.*? Another commentator has

said:

“The author of the authoritative treatise in this

field, Professor Maurice Merrill, has advocated the

position that the advent of the conservation laws

has brought about the birth of a new implied duty,

the duty to ‘take such steps as are necessary to

41163 So.2d at 415.

42 Hardy, Drainage of Oil and Gas From Adjoining Tracts—A Fur-

ther Development, 6 iaaeal Resources Journal 45 (1966).

A-28

qualify him under the regulations, to secure the

largest possible allowable,’ and that the lessee who

has stopped short of the complete exhaustion of all

remedies toward this end and who has not per-

formed all necessary administrative acts to secure

prudent development has not discharged his duties

to the lessor. Arguments supporting the fifth im-

plied covenants are that the exclusiveness of the

lessee’s operating rights, and its access to most of

the pertinent data relating to the leased minerals,

render him the only person qualified to represent

the interests of the owner in matters pertaining to

production of minerals from the land. Although

considerable controversy surrounds this new obli-

gation of the lessee, it has been judicially accepted

in a few states.”’ (Footnotes omitted.) **

The implied obligation of the lessee to protect the

leased premises from drainage is coupled with its obliga-

tion to use them as a prudent administrator; hence there

may be an obligation on the part of the lessee who is pro-

ducing from adjacent property to take some action once

it learns, as it alone best knows that it is draining oil or

gas from premises that it has a duty to protect. The lessee

might conceivably discharge its duty to act as a prudent

administrator in various ways. It might drill an offset

well or effect an additional completion of an existing well.

If it thinks either that this is inadvisable under the cir-

cumstances or that it cannot be done profitably, it might

have a duty to seek unitization. If it does not, then the

facts may indicate that a prudent administrator would

make full disclosure to the lessor (directly or by filing sf-

ficient information with the Commissioner of Conserva-

tion) in order to enable the lessor to take such action on

this information as the lessor may deem appropriate, if

43 George, The Impact of Conservation Laws and Decisions —

= Mutual Obligations of the Minevai Lease, 1964, 24 La.L.Rev.

76.

A-29

any, perhaps by seeking unitization,“* or by giving notice

of the breach of the lease if the lessor considers that such

a breach has occurred. The nature and extent of the les-

see’s duties depend entirely on the facts and figures, and

on what a prudent administrator in the same position

would do.

Consequently, the jury should be charged that the

mineral lessee who is leasing adjacent tracts and is pro-

ducing oil or gas from a well on one tract that drains the

other has a duty to act as a prudent administrator in order

to protect the owner of the tract being drained by taking

such steps as a prudent administrator would take under

the circumstances then prevailing. If the lessee has not

acted as a prudent administrator, but has persisted in the

drainage, then as set forth in the Breaux case: “TT }he

measure of damages which the lessor sustains because of

a preach by the lessee of this implied obligation is the

value of the minerals or royalties which the lessor would

have received had the lessee complied with his obligation

under the lease.’’

This opinion will serve as an order on the motion for

summary judgment.

ALVIN B. RUBIN,

United States District Judge.

New Orleans, Louisiana,

August 27th, 1968.

44 LSA-R.S. 30:6F.

45 Breaux v. Pan American Petroleum Corp., La.App., 1964, 168

So.2d 406, 415.

B-1

APPENDIX “B”

IN THE

UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

No. 26968

FLOYD WILLIAMS, FREDERICK C. WILLIAMS,

ET AL,

Plaintiffs-Cross Appellees,

I. R. PRICE, EDWARD H. TAUSSIG and

EDWIN F. GAYLE,

Plaintiffs-A ppellants-

Cress Appellees,

versus

HUMBLE OIL & REFINING COMPANY,

Defendant-Appellee-

Cross-Appellant.

Appeals from the United States District Court for the

Eastern District of Louisiana

(September 30, 1970)

Before WISDOM and DYER, Circuit Judges, and

KRENTZMAN, District Judge.

WISDOM, Circuit Judge: This is a class action filed

by plaintiff landowners' against Humble Oil & Refining

1As the title of this case indicates, two Williamses and three

Freelands were also plaintiffs and ap ellants. The Williamses and

the Freelands have had the action voluntarily dismissed as to their

interests. The remaining plaintiffs in this c action are Messrs.

Price, Taussig and Gayle, who are mineral or royalty owners. The

class was composed of some 76 mineral and royalty owners. See Wil-

liams v. Humble Oil & Ref. Co., E.D. La. 1964, 234 F. Supp. 985.

B-2

Company, their mineral lessee, seeking an accounting for

the alleged drainage of oil und gas from beneath their

leased premises caused by Humble’s operations on adjoin-

ing premises. In the alternative, the plaintiffs seek dam-

ages for the alleged breach of Humble’s implied obliga-

tion to exercise reasonable diligence to protect their prop-

erty from drainage. Federal jurisdiction is based upon

diversity of citizenship under 28 U.S.C. § 1832. The prin-

ciples therefore to be applied in this case are determined

by the law of Louisiana. Erie R. Co. v. Tompkins, 1938,

304 U.S. 64, 58 S. Ct. 817, 82 L. Ed. 1188.

After protracted preliminaries, Humble moved for

summary judgment. The district court concluded tl.at the

plaintiffs were not entitled to an accounting and therefore

granted Humble’s motion for summary judgment on that

issue. The court denied Humble’s motion for judgment on

the issues relating to the cause of action for damages.’

Williams v. Humble Oil & Ref. Co., E.D, La. 1968, 290 F.

Supp. 408. The plaintiffs appealed of right. Humble ap-

pealed under 28 U.S.C. § 1292(b) from that part of the

district court’s order denying its motion for summary

judgment. We affirm.

In 1933 the Federal Land Bank of New Orleans

granted an oil, gas, and mineral lease to I. R. Price, one

of the plaintiffs, covering the Williams property in Acadia

Parish, Louisiana. The lease was on a printed form and

contained provisions then in common use. Price, a lease

broker, acted as an agent for Humble; indeed, he soon

assigned the lease to Humble. With the use of Humble’s

prepayment of two years rentals, Price persuaded the Land

2 These issues are: (1) Notice as a prerequisite to the action; (2)

the effect of the express offset provision of the lease; (3) recogni-

tion of the lessee’s implied obligation to protect the lessor against

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B-3

Bank to sell the leased premises back to the Williams

family, from whom it had been acquired. The Land Bank

reserved a quarter interest in the minerals. The Williams

family granted Price and another plaintiff, Edwin F.

Gayle, mineral interests in the leased property in return

for their services.

In 1937 Humble brought in its discovery well in the

North Crowley field now known as Williams No. 1. As

of March 1, 1964, Humble had drilled twenty wells on the

leased premises at a cost of more than $2,750,000. These

wells were drilled in a surface spacing pattern contain-

ing approximately twenty acres per well. Production

of oil and gas from the leased premises is stil] continuing,

and the plaintiffs and others who share in royalties pay-

able under the 1933 lease have received payments from the

date of first production to March 1, 1964, of more than

$1,274,000. The gross value of the oil and gas recovered

from the Williams property in those years exceeded

$10,192,000.

The plaintiffs’ contentions in this case relate only to

the shallow sands, those located above the Frio. As of

March 1, 1964, Humble had performed at least 46 work-

over operations on the wells producing from the shallow

sands at a cost of more than $1,000,000. In addition, Hum-

ble applied to the State Conservation Department for units

affecting certain of the shallow reservoirs, and in 1963

unitization orders were issued pooling the Williams prop-

erty with other lands overlying the shallow reservoirs.

The plaintiffs contend that their property is being

drained by Humble’s operations on the adjacent premises.

The district court found that there are two unit wells, in

the production of which the plaintiffs share, situated on

B-4

adjoining property within 150 feet of the Williams tract.

There are no other wells on adjacent premises located with-

in 150 feet of the Williams property. Nevertheless, the

plaintiffs urge that Humble should have taken steps —

either by multiple completions or forced pooling — to pre-

vent their land from being drained and that those steps

would have been economically feasible for the company.

The questions for review are these: (1) Were the

plaintiffs entitled to an accounting? (2) What is the na-

ture and ex‘ent of the lessee’s implied obligation to protect

the leased premises from drainage? (3) Does an express

offset provision in the lease preclude the implication of a

further duty upon the lessee to protect against drainage?

(4) Does the plaintiffs’ failure to comply with a notice pro-

vision in the lease bar their cause of action for damages?

I.

ACCOUNTING

‘Nhe plaintiffs contend that because Humble failed to

exeicise reasonable diligence to prevent their property

from being drained, it must account to them for that frac-

tion of production on the adjacent property that is attribu-

table to the drainage.®

In granting Humble’s motion for summary judgment

on this cause of action, the district court held that under

Louisiana law the plaintiffs’ proper remedy is an action

to recover damages. “A creditor, as such, has no right to

an accounting in Louisiana”. 290 F.Supp. at 412-13. We

3 These plaintiffs argue that Humble by its tardy ~~ for

unitization declared that it is taking oil and from the plaintiff’s

land through wells it drilled on other land. Humble accounts for oil

and gas taken since unitization. The plaintiffs contend that it should

also be made to account for oil and gas so taken and so taken to its

oe before it made the fact known through unitization ap-

plications.

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B-5

agree with the result and affirm the judgment. We hold

that in the circumstances of this case, the plaintiffs have

no action for an accounting. We do not go so far as to

say that in Louisiana a mineral lessor is a mere creditor

or that mineral lessors never have a right to an accounting

from their lessee.

Humble’s arguments rest on the incontestable prin-

ciple that a Louisiana landowner neither owns the min-

erals beneath his land nor has any right to the oil and gas

produced on adjoining property. Humble’s position is that

an accounting is available only to one who has a property

interest in the subject matter of the suit.

It is quite true that Louisiana adheres to the non-

ownership theory of oil and gas; thus only upon drilling

and reducing the minerals to possession does the Louisiana

landowner become vested with ownership. Frost-Johnson

Lumber Co. v. Salling’s Heirs, 1922, 150 La. 756, 91 So.

207. It is also true that under the rule of capture a land-

owner may produce as much oil and gas as he can from a

well bottomed on his land and need not account to his

neighbor if he drains oil and gas from beneath his neigh-

bor’s land. Louisiana Gas & Fuel Co. v. White Bros., 1925,

157 La. 728, 103 So. 23; Higgins Oil & Fuel Co. v. Guar-

anty Oil Co., 1919, 145 La. 233, 82 So. 206. Nevertheless,

we consider that these principles are not determinative of

the issue. It is unsettled in Louisiana what right the plain-

tiff must possess in order to maintain an action for an ac-

counting. The landowner’s exclusive right to explore his

land and drill for oil or his right under a lease to one-

eighth of gross production in certain circumstances may

be sufficient interests to entitle him to an accounting.‘

In McCoy v. Arkansas Natural Gas Co., 1932, 175 La. 487, 143

So. 383, the Supreme Court of Louisiana stated that the owners have

B-6

It would be a mistake to think that a Louisiana land-

owner may never compel an accounting by his mineral

lessee. Indeed, we have been able to find several oil and

gas cases in which Louisiana courts have ordered an ac-

counting. E.g. Fontenot v. Sunray Mid-Continent Oil Co.

(La. App. 3d Cir. 1967) 197 So.2d 715; Mire v. Hawkins,

(La. App. 3 Cir. 19 ) 177 So.2d 795; Davies v. Texar-

kana Crude Oil Co., 1923, 154 La. 424, 97 So. 597; Harris

v. J. C. Trahan Drilling Contractor, Inc., La. App. 2d Cir.

1964, 168 So.2d 881; Pierce v. Atlantic Ref. Co., La. App.

3d Cir. 1962, 140 So.2d 19; Bailey v. Meadows, La. App.

2d Cir. 1961, 130 So.2d 501. Each case, however, follows

a well-defined pattern, typically an action by the lessor to

cancel his mineral lease on the ground of nonpayment of

royalties. If the court orders cancellation of the lease, it

may also direct the lessee to account to the plaintiff for

the royalties earned until cancellation. See Davies v. Tex-

arkana Crude Oil Co.; Fontenot v. Sunray Mid-Continent

Oil Co.; Pierce v. Atlantic Ref. Co.; Bailey v. Meadows.

Even if the court rejects the lessor’s demand for cancella-

tion because nonpayment was excusable, plaintiff is still

entitled to an accounting of royalties that have accrued

under the terms of the lease. See Mire v. Hawkins; Harris

v. J. C. Trahan Drilling Contractor, Inc. Thus at least in

oil and gas lease cancellation cases an accounting is an-

cillary to the action and exists for the equitable purpose

an exclusive right to drill and reduce minerals to possession and that

that right is as well entitled to the protection of the law as is the own-

ership of corporeal property.

In a number of ways the Conservation Law of Louisiana (Act 157

of 1940-R.S. 30:1, et seq.) has recognized the incidents of ownership

with respect to oil and gas before its production. “Owner” and “pro-

ducer” are defined in Section 3 as follows:

For example,

(8) “ ‘Owner’ means the person who has the right to drill

and produce from a pool and to appropriate the production

either for himself or for others.

“(9) ‘Producer’ means the owner of a well capable of pro-

ducing oil or gas or both.”

SYR TITAS OTS TIFT OT

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B-7

of adjusting in one proceeding all the differences between

the parties arising from the main cause of action.

For many years in Louisiana the existence of a cause

of action based on drainage was in doubt. Finally the

case of Breaux v. Pan American Petroleum Corp., La.

App. 3d Cir. 1964, 163 So.2d 406, established the right of

a landowner to recover damages from his lessee for breach

of the lessee’s implied obligation to exercise reasonable

diligence to prevent drainage. The plaintiffs are right, of

course, when they argue that Breaus merely held that an

action for damages lies; it did not hold that an action of

accounting will not lie. Nevertheless, we believe that an

action for damages based on drainage and an action fox

an accounting are fatally incompatible in a way that an

action for cancellation and an accounting are not.

The district court correctly enumerated the elements

of an action for damages that Breaux requires the land-

owner to prove. 290 F. Supp. at 411. In the ordinary drain-

age case the plaintiff must prove first that substantial

drainage has occurred and that offset wells drilled on his

premises could have produced oil and gas from the same

reservoirs as those from which production was actually

5 Authority for the equitable adjustment of the parties’ differ-

ences can be found in Article 21 of the Louisiana Civil Code: “In all

civil matters, where there is no express law, the judge is bound to

proceed and decide according to equity. To decide equitably, an ap-

peal is to be made to natural law and reason, or received usages,

where positive law is silent.” See Miller v. Kellerman, W.D. La. 1964,

228 F. Supp. 446, 464. In that case Judge Hunter also found support

for the accounting in Article 1965: “The equity intended by this

rule is founded in the christian principle not to do unto others that

which we would not wish others should do unto us; and on the moral

maxim of the law that no one ought to enrich himself at the expense

of another. When the law of the land, and that which the parties have

made for themselves by their contract, are silent, courts must apply

these principles to determine what ought to be incidents to a contract,

which are required by equity.” See also Art. 2037: “Manner of per-

formance of conditions. Every condition must be performed in the

manner , it is probable that the parties wished and intended that

it should be.

B-8

obtained through the draining wells. Second, he must

prove that it would have been economically feasible for

the lessee to drill such offset wells. Finally, he must prove

“with some degree of certainty” the quantity of oil and

gas that would have been produced from the offset wells

and the value of his share of that production. Breaux v.

Pan American Petroleum Corp., 163 So.2d at 415.

It is this last requirement that makes an accounting

incompatible with an action for damages under the rule

in Breaux. By means of an accounting the plaintiffs seek

to shift to Humble the burden of proof on the issue of dam-

ages imposed on them by Breaux. They would have the

court require Humble to calculate and present to them the

quantity of oil and gas drained from beneath their land.

This conflict, however, does not arise in the situation in

which a plaintiff seeks cancellation of a lease based upon

nonpayment of royalties. In that case the plaintiff’s right

to cancellation depends not on the amount of royalties but

rather on the lessee’s failure to pay any amount of royal-

ties without a valid justification. See Bollinge v. Texas

Co., 1957, 282 La. 637, 95 So. 2d 132, 1386. Thus once the

fact of unexcused nonpayment is proved and cancellation

awarded, it is appropriate, in order to afford full and com-

plete relief, to require the lessee to account for the accrued

royalties. Davies v. Texarkana Crude Oil Co., 1923, 154

La. 424, 97 So. 597, 598.

The Breaux case establishes that if the plaintiffs can

prove the elements of the cause of action, they are entitled

to damages from Humble for breach of its implied obli-

gation to exercise reasonable diligence to protect the prop-

erty from drainage. But they must prove “with some de-

gree of certainty” the quantum of harm suffered. Since

an order of accounting would require Humble to deter-

7

B-9

mine the amount of oil and gas drained, it is inconsistent

with the rigorous burden of pleading and proof that

Breaux places on aggrieved landowners. Thus we conclude

that in oil and gas cases the Louisiana courts would con-

fine an action of accounting to that situation in which the

lessee unjustifiably fails to pay his lessor royalties pro-

duced from wells drilled on the lessor’s land.

II.

THE NATURE AND EXTENT OF THE LESSEE’S

IMPLIED OBLIGATION TO PROTECT AGAINST

DRAINAGE

In the alternative, the plaintiffs sued for damages for

breach of Humble’s implied obligation as their mineral

lessee to exercise reasonable diligence to protect the plain-

tiffs’ property from drainage of oil and gas. The district

court, denying Humble’s motion for summary judgment in

relation to the cause of action for damages, reached the

following conclusion of law.

5. A mineral lessee has a duty to the mineral lessor

to act as a prudent administrator of the leased

premises. If the lessee is draining oil or gas from

beneath the leased premises by a well drilled by the

lessee on other property, its duty to act as a prudent

- administrator may include an implied obligation to

unitize the leased premises with those from which

production is being obtained, or to drill an offset

well, or to effect an offset completion of a well al-

ready drilled on the leased premises, if these acts

are economically feasible . . . or to do those other

_ things, if any, that a prudent administrator would

do under the circumstances. What action a pru-

dent administrator would take under the circum-

stances is a factual question to be decided by the

finder of fact in the light of the relevant evidence.

290 F. Supp. at 411-12.

B-10

On appeal neither side is satisfied with that conclu-

sion. The plaintiffs urge this Court to hold that as a

matter of law a mineral lessee, upon discovery of drainage

from beneath the leased premises, has an affirmative duty

to unitize the leased premises with those to which the oil

or gas is draining, or to inform the lessee of the drainage

so that he may seek unitization, or to drill an offset well,

or to effect an offset completion of a well already drilled

on the leased premises, if these acts are economically feas-

ible. Humble, on the other hand, argues first that the in-

clusiou in the lease of an express provision dealing with

drainage precludes the implication of any other obligation

to protect the leased property from drainage. Second,

Humble argues that as a matter of law in Louisiana the

extent of its obligation to protect against drainage is lim-

ited to drilling offset wells or completions and that it

would be both unfair and unwise to impose any new obli-

gation. We deal with Humble’s first contention in Section

III of this opinion.

The general rule in Louisiana is that the landowner

has no cause of action for damages against the owner of

the adjoining property or his lessee for drainage of oil

an: gas from beneath his land. Louisiana Gas & Fuel Co.

v. White Bros., 1925, 157 La. 728, 103 So. 23; Higgins Oil

& Fuel Co. v. Guaranty Oil Co., 1919, 145 La. 233, 82 So.

206. That rule is based on the concept that oil and gas —

fugacious substances — are not subject to ownership in

place. Frost-Johnson Lu:nber Co. v. Salling’s Heirs, 1922,

150 La. 756, 91 So. 207. Thus the Louisiana landowner

may drill wells on his property and capture as much oil

and gas as he can, even though he may draw some of his

production from his neighbor’s land.

A different situation obtains, however, when the party

B-11

whose production on adjacent premises is also the plain-

tiff’s lessee. In that case a cause of action for damages

lies based on the contractual relationship between lessor

and lessee and the lessee’s codal obligation to act as “a

good administrator”. In an oil and gas lease the land-

owner/lessor surrenders to the lessee his exclusive right

to drill for oil in return for a percentage share in the gross

proceeds of production. When the lessee acquires the lease,

he also assumes a number of obligations, one of which is

a duty to protect the leased premises from drainage. When

drainage does occur, the landowner’s judicial remedy is

then an action against the lessee for damages or cancella-

tion of the lease for breach of his implied obligation to pro-

tect against drainage.®

For many years the existence of this remedy against

the mineral lessee was in doubt in Louisiana.’ In 1929 in

Swope v. Holmes, 169 La. 17, 124 So. 131, the Louisiana

Supreme Court granted a landowner cancellation of his

lease because the lessee had drilled wells on adjacent prop-

erty that were draining the leased premises. Yet as late

as 1964 it was accurate to say that the Louisiana courts,

for one reason or another, had never awarded damages

for drainage.* Nevertheless, in several cases, although re-

lief was denied, the court assumed the existence of the

remedy. E.g., Billeaud Planters, Inc. v. Union Oil Co. of Cali-

fornia, W.D. La. 1956, 144 F. Supp. 564, 569, aff'd, 5 Cir.

1957, 245 F.2d 14; Roberts v. United Carbon Co., 5 Cir.

1935, 78 F.2d 39, 42; Coyle v. North American Oil Consol.,

6 See Arata, Louisiana Law of Drainage, in Eleventh Ann. Inst.

on Mineral Law 46, 47 (1964).

7 Hardy, Drainage of Oil and Gas From Adjoining Tracts —A

Further Development, 6 Nat. Res. J. 45 (1966).

8 —— supra, note 6, at 51. See also Billeaud Planters, Inc. v.

Union Oil Co. of California, W.D. La. 1956, 144 F. Supp. 564, 569,

affd, 5 Cir., 1957, 245 F.2d 14.

B-12

1942, 201 La. 99, 9 So.2d 473, 475-76; Louisiana Gas

Lands v. Burrow, 1941, 197 La. 275, 1 So.2d 518, 521-22.

The issue is no longer an open one in Louisiana. In

Breaux v. Pan American Petroleum Corp., La. App. 3d

Cir. 1964, 163 So.2d 406, writ denied, 246 La. 581, 165

So. 481, the court said that

we know of no reason why a landowner would not

be entitled to recover from his mineral lessee: the

damages which the lessor has sustained as the re-

sult of a breach of the implied obligation on the

part of the lessee to exercise reasonable diligence

in endeavoring to prevent substantial drainage of

the leased premises. We think the lessor under

those circumstances would have a cause of action

for damages for breach of a mineral lease contract

just as he would for breach of any other contract.

163 So.2d at 415.

If there is no longer any doubt about the existence

of the duty, there is still—as the present lawsuit illus-

trates — question as to the nature and extent of the les-

see’s obligation to protect against drainage. We hold that

on this issue the district court correctly stated the law of

Louisiana:

[T]he mineral lessee who is leasing adjacent tracts

and is producing oil or gas from a well on one tract

that drains the other has a duty to act as a pru-

dent administrator in order to protect the owner of

the tract being drained by taking such steps as a

prudent administrator would take under the cir-

cumstances then prevailing.

290 F. Supp. at 422.

Whether on a particular set of facts the lessee has

breached his duty is a question for the trier of fact. To

B-13

recover damages for breach of the implied obligation to

protect from drainage, the plaintiff in Louisiana must show

(1) that substantial drainage has occurred, (2) that

the lessee cc id have prevented the drainage with-

out sustaining an economic loss and (8) an amount

of royalties that the landowner would have received

had the lessee taken appropriate preventive meas-

ures,

Id. at 419.

In Breaux the Court declared:

We conclude, therefore, that plaintiffs in this

suit have no greater rights and no different cause

of action against defendants-lessees simply because

the defendants are also the lessees of the adjoining

tract of land on which the alleged draining well is

located.

But the fact that the lessee himself is causing the damage

has an important bearing on the proof of the lessee’s

knowledge of the drainage and on the steps the lessee is

capable of taking to prevent or diminish drainage.

Breaux makes it clear that a cause of action for dam-

ages can be predicated as much upon the lessee’s failure

to seek unitization as upon the more commonplace failure

to drill offset wells or completions. In the ordinary drain-

age case the plaintiff must allege and prove that the les-

see could have produced oil and gas from the same reser-

voir by offset wells or completions drilled on the leased

premises and that it would have been economically feasi-

ble for the lessee to drill such wells. He must also allege

and prove the quantity of oil and gas that would have

been produced from such a well and the value of his share

of production. The plaintiff may also recover damages,

however, if he alleges and proves that the lessee could have

B-14

created a pooling unit under which plaintiff would have

participated in the production from the reservoir, but that

he failed to do so. Damages in that case would be limited

to the amount plaintiff would have received from such a

unit. 163 So.2d at 415-16. Moreover, drilling offset wells,

completions, and unitization do not exhaust the possible

ways in which the lessee might discharge its duty to pro-

tect against drainage. Indeed, if he deems it inadvisable

or unprofitable to drill offset wells or unitize the prem-

ises, the prudent administrator should perhaps disclose

the fact of drainage to the lessor so that he may apply to

the Louisiana Commissioner of Conservation for the es-

tablishment of a drilling unit.’ In appropriate circum-

stances failure to make a full disclosure may provide the

basis for a cause of action for damages.

In addition to the precedental effect of Breaux, sound

policy reasons support the decision not to limit the lessee’s

duty to protect against drainage by drilling offset wells.’°

Admittedly, the implied obligation to protect against drain-

age has long been thought of solely in the context of drill-

ing offset wells. The emphasis on that mode of protection

was understandable in the early years of the oil industry.

* Under La. Rev. Stat. § %0:6F the lessor himself may seek a hear-

ing to determine whether a unit should be formed. Because

administrative relief is thus available to both the lessor and lessee, it

could be argued that the lessee should not have to assume the burden

of applying for unitization. Professor Hardy, however, points out the

weakness of this argument:

one of the principal motivations of any lessor in executing a

lease contract is to shift the burdens of development and ad-

ministration to the lessee. Therefore, the mere fact that the

possibility of lying for unitization is open to the lessor

Thould not alter basic obligation of the lessee in this regard.

Hardy, note 7, at 48-49 n. 13.

‘Many of the arguments that follow have been articulated in

two tening articles on the Breaux decision by Professor Geo

w. , Ill, of the Louisiana State University ae Sa

Hardy, typ gg ag go tg ey 1963-64 Term

—Mineral Rights, 25 La. L. Rev. 1965); Drainage of Oil

i Fone Maney oh 2.

R

4

if

[ree

mn

B-15

The rule of capture effectively precluded resort to the

courts to prevent drainage; thus the drilling of a well to

offset each of the draining wells on adjacent property was

the only method avaiiable to lessees to fulfill their obliga-

tion. Conservation laws, however, have added at least one

other self-help remedy to the lessee’s repertoire, forced

pooling or unitization. It is reasonable to require that the

lessee, as a prudent administrator, utilize all the methods

available to him to prevent drainage."

To require the lessee in certain circumstances to seek

unitization will not place an unfair burden upon him. In-

deed, the concept of a duty to unitize is thoroughly com-

patible with the “prudent administrator” standard gov-

erning his conduct with respect to other implied covenants.

The lessee may always defend a suit based upon his fail-

ure to unitize by showing that a prudent operator would

not have formed a unit or that he had attempted without

success all reasonable means to establish a unit or that the

costs of unitization would not leave him a profit.

Moreover, from the point of view of the landowner,

recognition of a duty on the part of the lessee to unitize in

circumstances in which a prudent administrator would

do so can afford significant protection against drainage

of valuable reserves. Especially is this so in cases when

it would be unprofitable — or perhaps even impossible be-

cause of spacing regulations — for the lessee to drill addi-

tional wells. In those circumstances the lessee’s contribu-

tion to the cost of a unit well may be recoverable from his

share of unit production, and the lessor will be saved at

least part of his mineral reserves. When the lessee him-

11 Cf. George, The Impact of Conservation Laws and Decisions

7 “y the — Obligations of the Mineral Lease, 24 La. L. Rev. 571,

6 (1964

B-16

self is doing the draining on adjacent land, the argument

for unitization is even more compelling. The lessor in that

case can get adequate protection against drainage without

further cost to the lessee, whose drilling costs are already

incurred. Thus he need only divide the royalty interest

among the pooled landowners. It is true that any recovery

of damages by the lessor for the lessee’s failure to unitize,

coming on top of a full royalty payment to the adjacent

landowner, will decrease the lessee’s profit — or perhaps

turn a marginally profitable well into a losing enterprise.

But if the lessee had originally exercised the requisite

diligence to prevent drainage, the added “cost” would not

have bee® incurred. As Professor George W. Hardy, III,

points out, “if there is a penalty involved here for the les-

see, it does not seem unfair because it would have been

avoided Py due diligence.”

For these reasons then we hold that the district court’s

conclusion of law number 5 correctly states the law of

Louisian@-

Il.

EXPRESS OFFSET PROVISION

Even if it be conceded that conclusion of law number

5 correctly states the nature and extent of the Louisiana

lessee’s implied obligation to protect against drainage,

Humble argues that its implied duty has been superseded

by an express offset provision in the lease. The 1933 lease

contains the following sentence:

[Im the event a well or wells producing oil or gas in

paying quantities should be brought in on adjacent

land and within one hundred fifty (150) feet of

and draining the leased premises, Lessee agrees to

> Hardy, Drainage of Oil and Ges From Adjoining Tracts —

A Purther Development, note 7, at 58. a

B-17

drill such offset wells as a reasonably prudent oper-

ator would drill under the same or similar circvm-

stances.

Humble now urges that the inclusion in a lease of an ex-

press covenant to drill offset wells under specified circum-

stances preclude the implication of any different or greater

obligation with respect to drainage.

After reviewing the principal cases and secondary

sources, the district court concluded that the Louisiana

courts would not hold that inclusion in the lease of an

express requirement to drill offset wells under limited con-

ditions negates any other obligation imposed upon the 'les-

see to protect the leased premises from drainage. 290 F.

Supp. at 416. We agree.

At the outset it must be recognized that there are no

decisions of the Louisiana courts squarely in point. A re-

view of the decisions of other jurisdictions reveals an in-

creasing reluctance to allow displacement of the implied

protection covenant by express offset provisions, especially

when the lessee is also the operator whose drilling on ad-

jacent land is causing the drainage.”

The experience of the Texas courts is illustrative.

Hutchins v. Humble Oil & Ref. Co., Tex. Civ. App. — Gal-

veston, 1942, 161 S.W.2d 571, writ ref’d n.r.e., is probably

the authority most often cited for the proposition that an

express offset provision bars the implication of any other

duty to protect against drainage. The Texas courts them-

selves, however, have limited that principle so that the

express provision controls only during the primary term

WB ng Ry yt Sy aw § 826.3 at

Affecting Im: Ry hey Ry AP Mt. Mineral Lew

Inst. 133, 148-54 (1956).

B.i8

of the lease. See Coats v. Brown, Tex. Civ. App. — Texar-

kana, 1957, 301 S.W.2d 932, 936; Magnolia Petroleum Co.

v. Page, Tex. Civ. App. — San Antonio, 1940, 141 S.W.2d

691, 693, writ ref'd. After that the implied protection

covenant — applicable to draining wells no matter how

far from the boundary line they are located — becomes

effective. Moreover, in the recent case of Shell Oil Co. v.

Stansbury, Tex. 1966, 410 S.W.2d 187, the Texas Supreme

Court held that an express offset provision in a lease did

not limit the lessee’s obligation to protect against drain-

age when the lessee was also the operator whose drilling

on adjacent property was causing the drainage. The court

concluded that the lessor was entitled to recover damages

— notwithstanding the express offset. provision — if he

could prove that the lessee had caused substantial drain-

age and that a reasonably prudent operator would have

drilled a well on the lessor’s land to protect it from drain-

age. The court specifically overruled Hutchins v. Humble

Oil & Ref. Co., insofar as it conflicts with the principle

that “a lessee i is under a duty to protect his lessor against

depletion of the lessor’s minerals by the affirmative act of

the lessee upon adjacent land.” 410 S.W.2d at 188.

The same result has been reached in the other juris-

dictions. In R.R. Bush Oil Co. v. Beverly-Lincoln Land

Co., 1945, 69 Cal. App. 2d 246, 158 P.2d 754, a California

court refused to allow an express offset provision displace

the implied protection covenant when the lessee through

its operations on adjoining land was draining the lessor’s

property. The decision was an outgrowth of the court’s

view that “there is an implied obligation on the part of

an oil and gas lessee to refrain from taking any affirm-

ative course of action which will result in draining a sub-

stantial quantity of oil and gas from the lessor’s prop-

erty.” 158 P.2d at 758. Thus in the situation where the

B-19

lessee drained his lessor’s premises by production on ad-

joining lands, the express offset provisions of the lease

could have no application.

The Supreme Court of Mississippi approached the

problem in a similar way in Millette v. Phillips Petroleum

Co., 1950, 209 Miss. 687, 48 So.2d 344. The court first rec-

ognized that the express lease provision limiting the les-

see’s duty to drill offset wells precluded resort to any other

implied obligation with respect to offset wells. 48 So.2d

at 346. Nevertheless, the court held that “there is an im-

plied covenant in a lease of oil property that the lessee

will do nothing to impair the value of the lease, and must

use reasonable care to protect the lessor from damage or

loss by the affirmative act of such lessee.” Id. at 347. That

responsibility is entirely separate from the traditional duty

to drill offset wells — although it may require in some

cases the lessee to drill offset wells. Thus an express

lease provision absolving the lessee from any duty to drill

offset wells will not necessarily relieve him from liability

for substantial drainage caused by his own affirmative

act.* Id.

j 74 Summarizing Millette, one author has said: “. . . In sustaining

the recov of po Me by the lessor in the trial court, the majority

opinion held:

(1) the prudent operator rule has no place in a case

- involving pene coal by a common lessee;

(2) That bn, | to drill offset wells and the — dh —

nsa or drainage are entirely ——, an

aati clause affecting the offset well o ligation does

not _ affect the duty to compensate for drain-

age,

(3) That the prudent operator rule applies only to the obli-

gation to compensate for drainage.

reaching its conclusion the ority also launched a new im-

stat tan noted above, which it’ toned to exist under the cir-

cumstances. The covenant was variously stated as:

(1) ‘The obligation of the lessee not to deplete the resources

of the lessor,’ and,

(2) “The obligation to conserve the mineral resources of the

B-20

The question then is whether there is any principle in

Louisiana jurisprudence similar to the duty expressed in

the Stansbury, Bush, and Millette cases that might form

the basis for our decision. We believe there is. Article

2710 of the Louisiana Civil Code imposes on a lessee the

obligation “[t]o enjoy the thing leased as a good adminis-

trator, according to the use for which it was intended by

the lease.”"® As Judge Rubin pointed out:

These words are no hollow invocation. They

imply basic obligations of the lessee arising, as the

caption of the Code article tells us, “from the na-

ture of the contract” of lease. The original French

text used in the Code of 1808 is even more graphic:

The lessee is bound to enjoy the thing leased as “bon

pere de famille. ... It is therefore the duty of the

lessee, necessarily implied in the lease, to develop

the leased premises properly and to prevent drain-

age of oil and gas from beneath it, not at all haz-

ards and all costs, but “as a good administrator,”

just as it is the obligation of a lessee enjoying a

store under a percentage rental to operate the store

with regard to the lessor’s interests as well as its

own. °

Again, as the district court well stated,

the lessee’s duty to act as a good administrator is

not a separate and distinct obligation imposed in

lessor and to refrain from depletory acts.

€ * * cad *

By way of summary, it may be said that the jealous protection af-

forded by the courts to the implied covenants to protect against

i has materially reduced colle my of express clauses upon

this covenant. This protection is ially apparent when the drain-

age results from the activity of a common lessee. In that situation,

it appears likely that a rem will be afforded the ieved lessor

in = _ regardless of any express covenant.” Malone, Note

at .

15 Walker, Implied Drilling Obligations in Oil and Gas Leases in

Louisiana, 1 Loyola L. Rev. 1, 6-7 freee; Brown v . Producers Oil Co.,

1914, 134 La. 672, 64 So. 674, 677.

B-21

addition to the implied obligations announced by

the Louisiana courts: it is the basic obligation of

the lessee and all of the implied obligations already

drawn are merely elaborations of it.

290 F.. Supp. at 414.

Planiol, commenting on the analogous provision in

the French Code, Article 1766, says that as a good admin-

_ istrator the lessee

should maintain the thing as it should be done, and

take for its preservation the same precautions that

a prudent owner would take for his own. For ex-

ample, if it is a horse which is leased, the lessee

should avoid tiring him, to take it on too long a

journey, or make it pull too heavy loads; he should

care for and nourish it suitably. If it is cultivated

land, he should keep it in good condition; if it is a

vineyard, give it the care that vines demand, ete.

Art. 1766. The lessee should not, therefore, while

using the thing according to its destination, make

an abusive use of it, such as would compromise its

good condition or even its existence.'®

It-is settled in Louisiana that mineral leases are con-

strued as leases generally and that the codal provisions

applicable to ordinary leases must be applied to mineral

leases whenever they are pertinent. Melancon v. Texas

Co., 1956, 280 La. 593, 89 So.2d 135, 142; Coyle v. North

American Oil Consol., 1942, 201 La. 99, 9 So.2d 473, 478.

The duty of the Louisiana lessee to use the leased

premises as a good administrator must of course encom-

pass an obligation to protect the premises against any im-

16 Planiol, Traite de Droit Civil (11th Ed. 1939), T. II, No. 1692

Trans. La. Law Inst. 1959). Quoted in Rials v. Davis, 1947, 212 La.

{ei 31 So.2d 726, a landmark case on the obligations of a Louisiana

lessee.

Cd

B-22

pairment of value threatened by the affirmative act of

the lessee himself. An obligation as basic as this one to

the protection of the lessor can not be displaced by the in-

sertion in the lease of an express provision relating solely

to the establishment of offset wells.

Several factors lead us to this conclusion.

First, lease provisions in derogation of implied obli-

gations are to be strictly construed.'* Applying that prin-

ciple to the lease in question, we see that there is only a

small area in which the traditional obligations of the les-

see are displaced. The lease obligates Humble to drill off-

set wells whenever production in paying quantities is

brought in on adjacent land within 150 feet of plaintiffs’

premises, if a reasonably prudent operator would do so

under the same or similar circumstances. The district

judge correctly observed that the lease ‘does not expressly

negate any obligation on the part of the Lessee to protect

The Williams Property from drainage under other circum-

stances,” 290 F. Supp. at 413. Moreover, the lease con-

tains no mention of the possibility of drilling offset com-

pletions or seeking unitization or taking any other steps

when the lessee himself is causing the drainage. Strictly

construed, the lease merely guarantees that in certain cir-

cumstances Humble will drill offset wells. When those cir-

cumstances are not present, Humble is still obligated to

act as a good administrator with respect to the leased

premises. It would require a clear and unequivocal clause

in a lease to convince the court that the lessor intended to

sacrifice that basic obligation owed him by his lessee.'*

* M. Merrill, Covenants Implied in Oil and Gas Leases § 200 (2d

ed. 1940): Merrill, Lease Clauses Affecting Implied Covenants, in Sec-

ond Ann. Inst. on ‘Oil & Gas Law & Tax. 141, 142.43 (1951).

18 See Walker, Express Clauses in Oil and Gas Leases Aff

a Implied Obligations of the Lessee, 13 Miss. L. J. 292, 30

(

B-23

Second, when the lessee inserts an express offset pro-

vision into a lease, he is, of course, attempting to limit the

implied responsibility to protect against drainage that he

would otherwise have under the law of the jurisdiction.”

As a general proposition, when the average landowner

reads a lease form containing the usual offset provision, it

is reasonable for him to assume that the lessee is shoulder-

ing an added responsibility. Although there is no objection

to enforcing a clause stating clearly that the lessee is not

obligated to offset a well more than 150 feet f.om the

boundary line, “to accomplish this through indirection, by

appearing to confer a benefit while taking one away,

smacks of fraud or unfair dealing.”*° The element of un-

fairness is most striking in those leases in which the off-

set distance has been fixed at a figure equal to or even

shorter than that permitted by the Conservation Depart-

ment’s spacing rules; those clauses, if enforced, would —

because of the impossibility of there ever being a well with-

in that distance — effectively relieve the lessee of all obli-

gation to protect against drainage.*' Thus because of the

indirection of the usual offset provision and the conse-

quent possibility of misinterpreting its legal effect, such

clauses should be, at the very least, strictly construed.

Third, we are in agreement with the district court

that “the fundamental duties imposed on the parties to a

lease by the very nature of their contract must be inter-

preted in the light of changes in technology and industry

practices.” 290 F. Supp. at 416. The lease in question was

executed in 1933 on Bath’s Louisiana Form 12A. The pro-

vision obligating the lessee to drill offset wells if draining

19 Caldwell, Standard Provisions in Louisiana Mineral Lease

Forms — Variations Thereof, 11 La. B. J. 185 (1963); Walker, note

18, at 305.

205 H. Williams & C. Meyers, Note 13, §826.3 at 206.

21 Jd.

B-24

wells were brought in on adjacent property within 150 feet

was boilerplate; for how many years earlier this form and

its offset clause had been in use is unknown. In any event,

the offset distance of 150 feet may have represented an

honest effort in 1933 to estimate the distance at which

drainage usually occurs.** If so, that estimate reflected

the industry’s then existing knowledge of drainage. Im-

provements in technology, however, have made it abund-

antly clear that drainage can and regularly does occur at

distances far beyond 150 feet. Strict enforcement of lease

provisions that were reasonable in light of scientific knowl-

edge and industrial practices in 1933 might be wholly un-

fair in 1963 or more recent years.

We hold that the offset provision does not displace

Humble’s implied obligations. Our holding does not change

the nature of the mineral lessee’s obligation. His obliga-

tion remains the same — to protect the leased premises

against impairment by drainage. What must charge in

light of scientific and technological advances are the steps

necessary to satisfy that obligation, To measure a lessee’s

performance of his duties by industry standards long since

discarded or upgraded would undermine the continuing

duty of the lessee to act as “a good administrator”, the

“bon pere de famille”. -

22 Bath’s Form 42 CPM-New South Louisiana Revised Six (6)-

Pooling, currently in favor with South Louisiana operators, sets the

offset distance at 330 feet. Caldwell, note 19, at 190-91. Then there

is the additional provision ‘it being provided however, that lessee shall

not be required to drill any offset wells unless the well on adjacent

land is within 330 feet of any line of the lands hereunder, nor such

shall cffset well be necessary when said lands are being reasonabl

protected by a well on the leased premises or land pooled therewi

(all or any part thereof).’”’ An interesting feature of this provision

is that at the present time there is no such thing as a well within 330

feet of any line of the leased premises because the Commissioner of

Conservation Statewide Order 29-E specifically prohibits drilling wells

within 330 feet of any property line. In a situation where the leased

premises are —— substantial net drainage, beyond question, from

a robber well loca more than 330 feet m the leased pre

it may be wondered whether the courts will hesitate to find that an

obligation to offset exists despite this provision of the printed form. /d.

B-25

IV.

REQUIREMENT OF NOTICE

Humble contends that the plaintiffs’ suit is barred as

a matter of law because of their failure to comply with

the notice provision of the 1933 lease. The last sentence in

paragraph 8 of the lease provides,

And in the event Lessor considers that operations

are not being conducted in compliance with this

contract, Lessee shall be notified in writing of the

facts relied upon as constituting a breach hereof

and Lessee shall have sixty (60) days after receipt

of such notice to comply with the obligations im-

posed by virtue of this instrument.

Rejecting Humble’s argument, the district court stated in

conclusion of law number 4 that “[t]his suit is not barred

as a matter of law by the plaintiffs’ failure to give notice

of breach or notice of default. Whether or not it is barred

is a question of fact to be decided by the jury.” 290 F.

Supp. at 411. :

: We would go one step further; we conclude that this

is a matter to be decided by the court. As a matter of law,

we hold that the plaintiffs’ cause of action for damages is

not barred by their failure to give notice in conformity

with paragraph 8 of the lease.

In the law of contracts (conventional obligations) a

proper distinction exists between the “interpretation” of

written instruments and their “construction”. “Inter-

pretation” refers to the process of determining the mean-

ing of the words used; that process is traditionally thought

23 See 8 A. Corbin, Contracts § 534 (1960) he S. Williston, Contracts

602 (Jaeger ed. 1961); ALI, —a Second), Contracts § 226,

5 Fe c. (Tent. Draft No. 5, Mar. 31, 1970

B-26

to be a function of the jury.”’ On the other hand, the proc-

ess of determining the legal effect of the words used —

once we know their meaning — is properly labelled “con-

struction” ;* it is peculiarly a function of the court.”** On

this point, we agree with Humble that there is nothing in

this case for the jury to decide. There is no doubt what

words were used — as well as what words were not used —

and what those words mean. What is left is for the court

to assess the legal effect of the words chosen in the light

of the nature of the contract.

Notice provisions were originally inserted in mineral

leases primarily to protect the lessee against a forfeiture

of the lease for breach of some express or implied obliga-

tion. Because forfeiture or cancellation is an extraordi-

nary remedy that terminates the lessee’s interest it is fair

to require that notice, demand, and an opportunity to cure

the breach be given the lessee.** Thus whenever the lessor

has sought cancellation, the Louisiana courts have required

strict compliance with the notice requirements of the lease.

See, e.g., Vance v. Hurley, 1949, 215 La. 805, 41 So.2d

724; Bollinger v. Republic Petroleum Corp., La. App. 1st

Cir. 1966, 194 So.2d 139, writ ref’d, 250 La. 463, 196 So.

2d 276 (1967) ; Fawvor v. U.S. Oil of Louisiana, Inc., La.

App. 3d Cir. 1964, 162 So.2d 602.

On the other hand, an action for damages threatens

no such harsh consequences as termination of the lessee’s

interest. There is less reason to insist upon notice and de-

24 Both Professors Corbin and Williston, however, discern a trend

toward the interpretation of written contracts by the court. 3 A. Cor-

bin, Contracts § 554, at 225 (1960); 4 S. Williston, Contracts § 616,

at 649 (Jaeger ed. 1961).

233 A. Corbin, Contracts § 534 (1960).

26 id. § 554.

27 See 4 H. Williams, Oil and Gas Laws § 682, at 334-35 (1969);

M. Merrill, note 17, § 192, at 421.

B-27

mand. Indeed, in the ordinary drainage action notice to

the lessee would be superfluous. The harm has already

been committed, and no action by the lessee to repair the

breach could adversely affect the lessor’s right to compen-

sation for past harm.** In many cases the fact of injury

is already known to the lessee, who has superior knowl-

edge of his own operations, long before it becomes known

to the lessor. The lessor’s inability to give notice of that

which he does not know should not in all fairness bar

him forever from recovery for damages already incurred.”

The oil industry was undoubtedly conscious of these con-

siderations when the standard form notice provision in

the instant lease was drafted. Therefore, we hold that

failure to comply with a notice provision drafted in this

language and in these circumstances was not then intended

to and does not now bar an action for damages.

We have found no Louisiana decision denying a cause

of action for damages for breach of an implied covenant

on the ground that the lessor failed to comply with a notice

provision in the lease. Both Bollinger v. Republic Petro-

lewm Corp., and Vance v. Hurley, relied on by Humble,

were actions for cancellation of the lease. Lease provisions

of this type are specifically intended to bar actions for

cancellation unless the prescribed notice is first given.

Since that is the obvious purpose of the clause, it makes

sense in that case to enforce its provisions. -In the instant

28 4 H. Williams, note 27, § 682, at 335.

29 M. Merrill, note 17, § 192, at 421.

30 Our conclusion that the notice provision in the 1933 lease was

not intended to bar an action for damages for breach of the implied

rotection covenant is further ened by placing the issue in

istorical perspective. Recall that in 1933 the mere existence of such

a damage action was doubtful. See McCoy v. State Line Oil & Gas Co.,

1932, 175 La. 231, 143 So. 58; Caddo Oil & Co. v. Producers

Oil Co., 1914, 134 La. 701, 64 So. 684. It is therefore highly unlikely

that the notice provision in the 1933 lease was intended to bar an ac-

tion that, to the best of anyone’s knowledge, probably did not even

exist in Louisiana.

B-28

case notice as a prerequisite to an action for damages

makes little sense and could not have been intended by the

draftsmen in 1933 when they chose the language of para-

graph 8.

We consider that Billeaud Planters, Inc. v. Union Oil

Co. of California, 5 Cir. 1957, 245 F.2d 14, is inapposite.

Billeaud was an action for damages for failure to prevent

drainage. In that case, however, the lease, drafted in 1944,

contains the explicit language, “all [the lessee’s] obiiga-

tions BOTH EXPRESS AND IMPLIED”. The notice pro-

vision has an additional sentence not contained in the

Humble lease: “The service of said notice and the lapse of

sixty (60) days without Lessee meeting or commencing

to meet the alleged breaches shall be a condition precedent

to any action by Lessor for any cause hereunder.” (Em-

phasis supplied.) 245 F.2d at 16. The Court took this

language as establishing the intent of the parties to re-

quire notice as a prerequisite to an action for damages.

Moreover, as Judge Rubin pointed out, the Billeaud court

focused on the failure to drill an offset well, not on the af-

firmative act of drainage.

The coaclusion reached in Billeaud is not compelled

by the language of the lease.*' For example, in Texas Oil

& Gas Corp. v. Vela, Tex. 1968, 429 S.W.2d 886, the Texas

Supreme Court held that a similar clause did not bar an

action for damages. Recognizing that the purpose of a

notice provision is to protect the lessee against a sudden

forfeiture, the court held that the parties “could not have

intended that the lessor would be forever barred from re-

covering damages sustained prior to the giving of notice.”

429 S.W.2d at 875. In any event, paragraph 8 of the in-

31 For criticisms of the decision of this Court in Billeaud, see M.

Merrill, note 12, § 200 (1964 Supp.) ; Note, 18 La. L. Rev. 854 (1958).

B-29

stant lease contains no such language. Judge Rubin held

that the “difference in language may signify a profound

difference in intention [between the Billeaud lease and the

Williams lease]”; whether it did in fact was to be resolved

by the jury. 290 F. Supp. at 419. We hold, as a matter of

law, that the difference in language requires a result dif-

ferent from that reached in the Billeaud case.

The district court correctly ruled that if paragraph 8

does not appl; to this case, it is still necessary to deter-

mine whether notice was nevertheless required under the

Louisiana Civil Code The Code distinguishes between

“active” and “passive” breaches of a contract. A contract

may be breached “either actively by doing something in-

consistent with the obligation it has proposed or passively

by not doing what was covenanted to be done.”®? A breach

that is passive only requires notice and demand before

damages are due,** while an active breach does not.™

Damages for an active breach are due from the moment

of the violation. The district court thought it unnecessary

at the time to determine whether the classification of a

specific breach as active or passive is a question of law or

a question of fact. The court did, however, express the opin-

ion that it woulc be proper to give the issue to the jury,

aided of course by appropriate definitions. 290 F. Supp.

at 420.

This conclusion we believe to be incorrect. Our read-

ing of the cases convinces us that the Louisiana courts

approach the active-passive classification problem as a

question for the court. See, e.g., Melancon v. Texas Co.,

1956, 230 La. 593, 89 So.2d 135; Noel Estate, Inc. v. Lou-

82 La. Civil Code art. 1931.

33 Jd. art. 1933.

34 Jd. art. 1932.

B-30

‘ dsiana Oil Ref. Corp., 1937, 188 La. 45, 175 So. 744; Broad-

head v. Pan American Petroleum Corp., La. App. 3d Cir.

1964, 166 So.2d 329; Bailey v. Meadows, La. App. 2d Cir.

1961, 180 So.2d 501. That rule, moreover, would seem to

be the better view. The classification of a specific breach

as active or passive requires a construction of the bare

words of the Code in the light of the gloss of past decisions.

Defining the terms “active” and “passive” for a jury in

accord with the simple language of Article 1931 of the

Louisiana Civil Code consistent with the complicated de-

cisions on the subject would tax the jury with drawing a

bright dividing line where none exists in the jurispru-

dence.* The chances of arbitrary decision making will be

substantially lessened if the court, guided by the Code, de-

cisions, and commentaries, should decide whether a specific

breach is to be characterized as active or passive.

Applying that principle to the instant case, we con-

clude that the specific violation alleged is an active breach

and therefore that the plaintiffs were not required to give

notice as a condition to their action for damages. Gen-

eraiiy the failure to perform an obligation in an oil and

gas lease is a passive breach, which requires notice and a

formal demand. See Savoy v. Tidewater Oil Co., W.D. La.

1963, 218 F. Supp. 607, aff'd 5 Cir. 1964, 326 F.2d 757;

Bonsall v. Humble Oil & Ref. Co., W.D. La. 1961, 201 F.

Supp. 516, 521, aff'd 5 Cir. 1962, 300 F.2d 150; Touchet

v. Humble Oil & Ref. Co., W.D. La. 1960, 191 F. Supp.

291, 294; Broadhead v. Pan American Petroleum Corp.,

La. App. 3d Cir. 1964, 166 So.2d 329, 332. In several cases

involving the nonpayment of royalties, however, the Lou-

isiana courts have held that an unreasonable and unjusti-

fiable delay in paying royalties constituted an active rather

35 Cf. Smith, The woo! Concept of Default, in Twelfth Ann.

Inst. on Mineral Law 3 (1965).

B-31

than passive breach. Bollinger v. Texas Co., 1957, 282 La.

637, 95 So.2d 132; Melancon v. Texas Co., 1956, 230 La.

598, 89 So.2d 135; Pierce v. Atlantic Ref. Co., La. App.

3d Cir. 1962, 140 So.2d 19; Bailey v. Meadows, La. App.

2d Cir. 1961, 180 So.2d 501. Thus, in some cases at least,

a willful failure to perform may amount to action incon-

sistent with the contract.

The Louisiana courts have not as yet had an oppor-

tunity to classify a breach of the lessee’s implied obliga-

tion to prevent drainage. In Breaux the question of notice.

did not arise. In his dissenting opinion, Judge Tate as-

sumed that such a breach was passive, as are failure to

act generally. Nevertheless, he acknowledged the possibil-

ity that the breach may have been active because the lessee

himself was doing the draining through wells drilled on

the adjacent premises. 163 So.2d at 421. Professor Hardy

has also made the suggestion that when drainage is caused

by the operations of the lessee on adjoining property, no-

tice is unnecessary.** In that situation the lessee has not

merely failed to perform his duty to protect against drain-

age; he has also knowingly and affirmatively acted in a

manner inconsistent with that obligation. The action of

the common lessee in this regard is analogous to the wilful

conduct that characterized the nonpayment of royalty

cases. Just as in Bollinger, Melancon, Pierce, and Bailey,

the lessee’s action here should be viewed as an active breach

of his lease obligations.

In Billeaud Planters, Inc. v. Union Oil Co. of Cali-

fornia, this Court characterized the lessee’s failure to pre-

vent the drainage that he was also causing as “only a pas-

36 , The Work of the Louisiana Appellate Courts for the

1968-1984 erm, note 10, st 365; Note, 18 L. Rev. 354, 359-60

(1958).

B-82

sive breach of contract.” 245 F.2d at 18. The statement

was purest dictum, however, inasmuch as the lessor’s cause

of action was held to be barred by his failure to comply

with an express notice provision in the lease. In addition,

the Court cited only a 1910 construction contract case*’

as authority for its conclusion.

We conclude that the Louisiana courts would find the

analogy of the Bollinger, Melancon, Pierce, and Bailey

cases persuasive and hold that the lessor’s action for dam-

ages is not in the circumstances of this case barred by his

failure to give notice to his lessee. Necessarily, we also

conclude that the Louisiana courts would characterize as

“active” the lessee’s failure to prevent the drainage that

he is in fact causing by his own operations on adjoining

property.*

AFFIRMED as to the result reached by the district

court and REMANDED for further proceedings consist-

ent with this opinion.

37 Godchaux v. Hyde, 1910, 126 La. 187, 52 So. 269.

3s“. . . On the other hand, it would appear that the lessee is

bound, as in any a to do an inconsistent with its

obligations to do. Where lessee has omitted to accomplish its posi-

tive obligations, while wilfully draining from a productive sand under-

_ the leased tract, he is in a rather poor position to contend that

e only fault on his part is passive omission to act. Thus, it is cer-

tainly not illogical to assert that the default of obligations to do,

coupled with the —- depletion of sands beneath the leased tract,

is an active breach of the lease contract. . . . However, where pro-

duction from the adjoining lands is fully within control of the lessee,

it would appear that drainage from the undeveloped tract is not mere-

ly an omission but action inconsistent with the ress and implied

obligations to develop the leased tract. It can y be denied that

in this instance the lessee was aware that it was depleting the reserves

underlying the leased tract. Protection from liability could have been

achieved by compliance with the obligations of the lease contract. It

seems inconsistent with civilian ideas of fault as a basis of recov

to state that the lessee was in need of notice of its transgression.”

Hardy, Note, 19 La. L. Rev. 354, 359-60.

B-33

IN THE

UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

No. 26968

FLOYD WILLIAMS, FREDERICK C. WILLIAMS,

ET AL,

Plaintiffs-Cross Appellees,

I. R. PRICE, EDWARD H. TAUSSIG and

EDWIN F. GAYLE,

Plaintiffs-A ppellants-

Cross Appellees,

versus

HUMBLE OIL & REFINING COMPANY,

Defendant-Appellee-

Cross-Appellant.

Appeals from the United States District Court for the

Eastern District of Louisiana

(December 8, 1970)

ON PETITION FOR REHEARING AND PETITION

FOR REHEARING EN BANC

Before WISDOM and DYER, Circuit Judges, and

KRENTZMAN, District Judge.

WISDOM, Circuit. Judge: The Court has considered

all of the issues raised in Humble’s Petition for Rehearing

and Suggestions of Rehearing en Banc and the brief of the

amici curiae in support of the petition for rehearing.

B-84

Humble and amici curiae argue strenuously that this

Court erred in holding that “the Louisiana courts would

characterize as ‘active’ the lessee’s failure to prevent the

drainage that he is in fact causing by his own operations

on adjoining property.” See Williams v. Humble Oil &

Refining Co., 5 Cir. 1970, 481 F.2d _..... We agree with

the petitioners that under Louisiana law the breach of an

implied obligation in an oil and gas lease is generally a

passive breach, which requires notice and a formal demand.

But we cannot agree that the alleged breach in the cir-

cumstances of this case was merely passive.

We have found no case in which the Louisiana courts

have classified a lessee’s failure to prevent the drainage

that he is in fact causing by his own operations on adjoin-

ing property. In Breaux v. Pan American Petrolewm

Corp., La. App. 8 Cir. 1964, 163 So.2d 406, the question

of notice did not arise, inasmuch as the plaintiffs made a

formal demand before filing suit. Jd. at 408. Neverthe-

less, the petitioners now argue that Breaux holds that the

alleged breach in a factual situation of this kind is only

passive. Specifically, they point to the court’s statement

in Breaux “that plaintiffs in this suit have no greater

rights and no different cause of action against defendants-

lessees simply because the defendants are also the lessees

of the adjoining tract of land on which the alleged drain-

ing well is located.” Id. at 417. We do not dispute this

statement, but we cannot agree that the language is con-

trolling on the issue of notice.

In Breaux the plaintiffs argued that when the defend-

ant occupies the dual position of being lessee of the plain-

tiffs’ property and also lessee of the adjoining tract on

which the draining well is located, the plaintiff lessor is

then entitled to one-half the royalties due on production

B-35

from the draining well. In the words of Judge Hood, “The

question presented, therefore, is whether a different meas-

ure of damages should be used where plaintiff’s lessee is

also the operator of the draining well.” Jd. at 416. The

language to which petitioners refer is the court’s answer

to that question. By that language the court was simply

reaffirming its holding that even in a factual situation

of this kind, to recover damages the lessor must prove

(1) that substantial drainage has occurred, (2) that it

would have been economically feasible for the lessee to take

steps to prevent the drainage, and (3) the amount of roy-

alties that the lessor would have received had the lessee

taken the appropriate steps. In other words, the plain-

tiffs in this case have no greater rights or different cause

of action than do the plaintiffs in an ordinary drainage

action. But the court’s views on the requisite proof of

drainage and the proper measure of damages cannot be

treated as controlling on the question of notice, especially

when that question was not even presented to the court.

As pointed out in our original opinion, in Billeaud

Planters, Inc. v. Union O11 Co. of California, 5 Cir. 1957,

245 F.2d 14, the Court characterized the lessee’s failure to

_ prevent the drainage that he was also causing as “only a

passive breach of contract.” Id. at 18. We did not follow

Billeaud, however, as the characterization there seemed

both unnecessary to the result in the case and also based

on scant authority. The petitioners now argue that the

classification of the breach was essential to the decision

and cite additional authorities to support the finding of a

passive breach.

We still do not consider ourselves bound by that state-

ment in Billeaud. Since the Court’s decision in Billeaud

a line of cases has developed in which the Louisiana courts

B-36

have indicated that in some instances at least, a willful

failure to perform an obligation may amount to action in-

consistent with the contract, i.e., an active breach of the

contract. See Bollinger v. Texas Co., 1957, 232 La. 637,

95 So.2d 135; Melancon v. Texas Co., 1956, 230 La. 593,

89 So.2d 135; Fontenot v. Sunray Mid-Continent Oil Co.,

La. App. 3d Cir. 1967, 197 So.2d 715; Sellers v. Continen-

tal Oil Co., La. App. 3d Cir. 1964, 168 So.2d 435; Pierce

v. Atlantic Ref. Co., La. App. 3d Cir. 1962, 140 So.2d 19;

Bailey v. Meadows, La. App. 2d Cir. 1961, 130 So.2d 501;

cf. Jones v. Whittington, La. App. 2d Cir. 1965, 171 So.

2d 764. In addition to the analogy to this growing num-

ber of cases on the nonpayment of royalty, the Billeaud

Court lacked the advantage o: Professor Hardy’s cogent

analysis of civilian concepts of fault. In his words,

The act of draining two leases by means of one

well is not merely a passive failure to comply with

an obligation to protect the drained lease, it is

conduct clearly inconsistent with that obligation

if it occurs in the face of actual or constructive

knowledge of the drainage. Thus, the lessee’s ac-

tion should properly be viewed as an active breach

of his lease contract.

Hardy, The Work of the Louisiana Appellate Courts for

the 1963-64 Term — Mineral Rights, 25 La. L. Rev. 360,

865-66 (1965). See also Note, 18 La. L. Rev. 354 (1958).

For these reasons as well as those expressed in our

original opinion, we adhere to our conclusion that the Lou-

isiana courts would characterize as “active” the breach of

the lessee’s obligation to protect against drainage that the

plaintiffs allege occurred in this case. If the plaintiffs

can prove their allegations, they are entitied to damages

despite their failure to give notice before commencing this

lawsuit.

B-37

The Petition for Rehearing on behalf of Humble Oil

is DENIED and no member of this panel nor Judge in

regular active service on the Court having requested that

the Court be polled on rehearing en banc, (Rule 35 Federal

Rules of Appellate Procedure; Local Fifth Circuit Rule

12) the Petition for Rehearing En Banc is DENIED.

B-38

IN THE

UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

October Term, 1969

No. 26968

D. C. Docket No. CA 14312

FLOYD WILLIAMS, FREDERICK C. WILLIAMS,

ET AL,

Plaintiffs-Cross Appellees,

I. R. PRICE, EDWARD H. TAUSSIG and

EDWIN F. GAYLE,

Plaintiffs-A ppellants-

Cross Appellees,

versus

HUMBLE OIL & REFINING COMPANY,

Defendant-Appellee-

Cross-Appellant.

Appeal from the United States District Court for the

Eastern District of Louisiana

Before WISDOM and DYER, Circuit Judges, and

KRENTZMAN, District Judge.

JUDGMENT

This cause came on to be heard on the transcript of

the record from the United States District Court for the

Eastern District of Louisiana, and was argued by counsel;

ON CONSIDERATION WHEREOF, It is now here

ordered and adjudged by this Court that the judgment of

B-39

the said District Court in this cause be, and the same is

hereby, affirmed; and that this cause be, and the same is

hereby remanded to the said District Court for further pro-

ceedings consistent with the opinion of this Court;

It is further ordered that plaintiffs-cross appellees

and plaintiffs-appellants-cross appellees be condemned to

pay one-third the costs on appeal to be taxed by the Clerk

of this Court and that defendant-appellee-cross-appellant

be condemned to pay two-thirds of said costs.

September 30, 1970

Issued As Mandate: Dec. 16 1970

C-1

APPENDIX “C”

March 29, 1963

REGISTERED MAIL

RETURN RECEIPT REQUESTED

SPECIAL DELIVERY

Humble Oil & Refining Company

909 S. Jefferson Davis Parkway

New Orleans, Louisiana

Re: Floyd Williams Lease

997.19 Acre Lease

North Crowley Field

Acadia Parish, Louisiana

Gentlemen:

By instrument dated January 28, 1933, The Federal

Land Bank of New Orleans, as Lessor, granted an oil, gas

and mineral lease to I. R. Price, as Lessee, which lease is

recorded in Book Y-4, Page 233, of the conveyance records

of Acadia Parish, Louisiana, and covers the following de-

scribed lands in said Parish:

All of the S% of fractional Section 34, Township

8 South, Range 1 East, La. Meridian, containing

159.40 acres;

All of the S% of Section 33, Township 8 South,

Range 1 East, La. Meridian, containing 356.53

acres;

That certain tract described as beginning at the SE

corner of Section 32, Township 8 South, Range 1

East; thence North 2 degrees 40 minutes west a

distance of 1375 feet, thence south 89 degrees 30

minutes west a distance of 706 feet, thence south 2

degrees 40 minutes east a distance of 1371 feet,

thence north 89 degrees 45 minutes east a distance

of 706 feet to the point of beginning, and containing

22.22 acres, as per copy of plat of survey made by

M. Bernard, C. E., November 1921;

C-2

The E% of NE% and the S% of SW% of NE%

of Section 5, Township 9 South, Range 1 East, con-

taining 102.50 acres, SAVE AND EXCEPT all that

part of S% of SW%4 of NE\% which lies west of

the center of the channel of the Long Point Bayou,

and containing 7.50 acres, more or less;

The NW of the NW\,; the E% of the NWY%;

the W14 of the NE; and the NE% of the NE%4

of Section 4, Township 9 South, Range 1 East, and

containing 242.74 acres, more or less;

The W\% of NW% and the NW% of the SW% of

fractional Section 3, Township 9 South, Range 1

East, containing 121.30 acres.

All of the above tracts of land containing in the

aggregate 997.19 acres, more or less, situated in the

Parish of Acadia, State of Louisiana.

_ By various transfers, assignments and releases the

above described lease is now owned of record by your com-

pany, insofar as it covers and affects lands covered there-

by, less and except that portion which was released by in-

strument dated the 24th day of July, 1934, and recorded

in Book E-5, Page 197 of the conveyance Records of said

parish and described as follows:

That certain tract described as beginning at the SE

corner of Section 32, Twp 8, SR, 1E; thence north

2 degrees 40 minutes west a distance of 1375 feet;

thence south 89 degrees 30 minutes west a distance

of 706 feet, thence south 2 degrees 40 minutes east

a distance of 1871 feet, thence north 89 degrees 45

minutes east a distance of 706 feet to the point of

beginning and containing 22.22 acres, as per copy

of survey made by M. Bernard, C.E. November

1921;

The E\% of NE% and the S% of SW% of NE%

of Sec. 5, Twp 9 SR 1E, containing 102.50 acres,

save and except all that part of S% of SW% of

NE which lies west of the center of the channel

C-3

of the long Point Bayou, and containing 7.50 acres,

more or less;

The above two tracts containing in the aggregate

117.22 acres, more or less.

The lease was for a period of three (3) years and six

(6) months from the date thereof, and has therefore been

in its secondary term for a period of more than twenty-

five (25) years.

We consider that you have not diligently endeavored

to produce the minerals or protect our minerals from drain-

age of the above property. In addition, you have conducted

your operations on adjoining properties so as to cause such

drainage. This constitutes an active breach of your obli-

gations under this lease. As a result, this lease has now

terminated. 3

This letter is to demand that you execute a release

of such oil, gas and mineral lease and place same of record

in the Parish of Acadia within ten (10) days, pursuant to

the provisions of LRS 30:102.

This letter likewise demands payment as to our pro-

portionate interest of $1,226,000.00, as compensatory pay-

ment for the royalty oil drained from this leasehold prem-

ise by your undip Stakes, Reimers and Ohlenforst wells.

Unless we receive payment within ten (10) days, we will

institute the necessary legal proceedings to recoup this

damage.

Yours very truly,

Richard F. Price

Agent for

I. R. Price et al

RFP/gw

D-1

APPENDIX “D”

HUMBLE OIL & REFINING COMPANY

New Orleans 60, Louisiana

New Orleans Area Post Office Box 61012

Law Department

Peter Monrose April: 9, 1963

Area Attorney

Floyd Williams Lease

997.19 Acre Lease

North Crowley Field

Acadia Parish, Louisiana

Mr. Richard F. Price

326 Oil and Gas Building

New Orleans 12, Louisiana

Dear Mr. Price:

Reference is made te your letter of March 29, 1963 per-

taining to the captioned lease in which you requested a

release of the same, apparently on the theory that we had

not diligently endeavored to produce this lease or protect

it from drainage by other properties.

On receipt of your letter we reviewed carefully all of our

files relating to both past and present activities on this

lease. This review clearly indicated that we have at all

times operated the lease in the manner that a prudent

operator would under the same or similar circumstances.

We have at all times had a continuous program for this

lease which program included both the drilling of a large

number of wells and the reworking of certain of these

wells from formation to formation wherever such was

feasible and practicable. In fact, we are at the present

time conducting reworking operations on the iecase. In

addition, the evidence we have does not indicate that there

has been at any time any substantial drainage of minerals

or any substantial movement of minerals from beneath

the property covered by this lease by wells on other leases.

D-2

In view of the foregoing we must respectfully refuse to

grant the release requested in your letter, as well as the

payment demanded in the last paragraph of the same, and

we ask that you withdraw your letter of March 29, 1963

so that we may proceed with the additional operations

that are contemplated for this lease.

Yours very truly,

HUMBLE OIL & REFINING

COMPANY

By /s/ Peter Monrose

Peter Monrose

PM :mws

E-1

APPENDIX “E”

HUMBLE OIL & REFINING COMPANY

‘Exploration Department

P. 0. Box 626

New Orleans 7, La.

September 28, 1959

Eastern Division

Re: North Crowley Field

Acadia Parish, La.

Mr. Guy H. Johnston

2444 Times Boulevard

Houston 5, Texas

Dear Mr. Johnston:

In reply to your letter of September 22 and the two specific

items of information requested by you, please be advised

as follows:

1. We understand your position in regards to the

oil unit recently requested around the Williams

19 well in the F-5 sand and we wish to advise

you currently a study is being made of all reser-

voirs in the subject field and consideration will

be given to formation of units necessary to re-

solve equities in the future. We will advise you

of the results of this study at the earliest pos-

sible date.

2. It is our belief that at this time the drilling of

the Williams #19 weil did not provide sufficient

information to justify a hearing to revise Fault

Block C in the F-17 sand. I realize that we did

present an indication of some different geology

relative to this reservoir, but we do not feel

that the Commissioner would feel the evidence

of importance enough to justify any additional

revisions. At this time we have plans to drill

additional wells south of Reservoir C, and we

E-2

feel that these will have some direct bearing on

the geology to the north. It is our belief that

any further revision should be delayed until

these wells are drilled and the information ob-

tained from them fully evaluated.

Should you have additional questions regarding your inter-

est in this field, please contact me.

Very truly yours,

HUMBLE OIL & REFINING

COMPANY

/s/ Mont G. Calvert, Jr.

Mont G. Calbert, Jr.

MGC,Jr:an

ec: Mr. R. W. Ulricksen

Humble Oil & Refining Company

New Orleans, Louisiana

—

F-1

APPENDIX “F”

SECTION 3—OF THE OBLIGATIONS AND

RIGHTS OF THE LESSEE

Art. 2710. The lessee is bound:

1. To enjoy the thing leased as a good administrator,

according to the use for which it was intended by the

lease.

2. To pay the rent at the terms agreed on.

Art. 2721. The lessee is only liable for the injuries and

losses sustained through his own fault.

Art. 2722. He is, however, liable for the waste committed

by the persons of his family (household), or by those to

whom he may have made a sublease.

G-1

APPENDIX “G”

Proposal to Dually Complete

A. Ohlenforst Well No. 8

North Crowley Field

Acadia Parish, Louisiana

Mr. R. S. Sullins

Building

Attention: Mr. Jerry C. Brown

This is in answer to your letter of December 1, 1960, in

which you state that Humble desires to dually complete

the A. Ohlenforst Well No. 8 in the Marg. 3 and 3A Sands.

Said letter states that four leases are productive in these

sands, said leases being A. Ohlenforst, F. Williams, P. J.

Reiners and K. J. Thevis. If Humble places these sands

on production it must take the necessary steps to assure

that all leases underlain by productive portions thereof

participate equitably in the production from these sands.

The Law Department has advised that this may be accom-

plished by either forming units or drilling the necessary

offset well on each participating lease. Since according to

your letter the productive area of each of these sands en-

compasses approximately 130 surface acres, it would ap-

pear that 43 acre units would be in order.

It is suggested that 2 meeting between the Production De-

partment, Geological and Land Departments be held to

determine the proper unitization program to be adopted.

All papers attached to your letter of December Ist are

returned herewith.

J. P. Robbins, III

JPR,III :kh

Enclosures

ee: Mr. Mont Calvert

Building

G-2

HUMBLE OIL AND REFINING COMPANY

New Orleans, Louisiana

New Orleans, La.

April 15, 1957

Re: Workover — North Crowley Field

J. B. Stakes No. 1

Mr. C. L. Tate

Building .

This request proposes to plug off the present open

hole completion interval by the use of PTWC tools and to

recomplete in a higher stringer of the _________ sand, the

Mi-7A. The present interval is producing 100% salt water

by gas-iift.

While it is recognized that an oil completion can

probably be effected in the Mi-7A sand through perfora-

tions from 7184-7188 feet and in the Mi-Z sand through

perforations from 7134-7139 feet, it is recommended that

the well be shut-in in the form of a temporary abandon-

ment. The North Crowley Gas Unit 14, No. 1, a recently

completed 200’ west offset, has no commercial gas pro-

duction in the deep Frio sands, but has been completed as

a good oil well in the Marg-1 sand. The J. B. Stakes No. 1

well did not go deep enough to encounter the Marg-1 sand.

A small fault east of the J. B. Stakes No. 1 well probably

controls the assumulation. Since the Gas Unit 14, No. 1

well can be used to deplete the Marg-1 reservoir which

might contain as much as 550,000 barrels of oil, it is rec-

ommended that this well be produced to depletion of the

Marg-1 oil sand while the Stakes No. 1 well is shut-in so

that there can be no question of twin well production from

the viewpoint of the lessor. We do not want to initiate a

twin well drilling program.

The question of an offset well for the F. Williams lease

will undoubtedly arise within the near future. The F. Wil-

liams No. 7 well had 23 feet of net oil sand from 85/1-3604.

G-3

During workover operations in 1950, the M-1 sand tested

salt water through perforations from 8571-76’. At the

present time, an attempt is being made to recomplete the

Williams No. 7 well in the Mi-3A-2 sand. This attempt

has met with little success since, after __.the forma-

tion, the well is gas-lifting only 12 barrels of fluid per

day, 30% of which is salt water. In order to meet the off-

set obligation it is recommended that the F. Williams No.

7 well be tested at this time in the Marg-1 sand through

perforations from 8575-8578 or that a 40 acre oil unit be

formed around the Gas Unit 14, No. 1 well so that both

the Stakes and Williams leases will participate in the

Marg 1 sand production.