Court Watch: Third Circuit continues to show signs of judicial activism with a troubling ruling on a

The Third Circuit Appellate Court continues to earn its reputation as one of Louisiana’s most activist judicial bodies. It seems determined to create new laws based on its own agenda (and those of the plaintiffs that come before them) rather than interpret existing law as established by the Louisiana Legislature. The Third Circuit recently added another case to its growing list of potentially precedent-setting decisions in Hayes Fund for the First United Methodist Church of Welsh, L.L.C. v. Kerr-McGee Rocky Mountain, L.L.C (2013) (Hayes Fund), where they attempt to expand strict and absolute liability for well operators in Louisiana.


In Hayes Fund, the landowner plaintiffs sued oil and gas operators after production ceased, and the wells on their property yielded less than expected. The plaintiffs asserted that the defendants operated the wells imprudently in violation of the Louisiana Mineral Code, causing the plaintiffs to sustain a substantial loss in royalty income. The Third Circuit agreed.


The court reasoned that boilerplate language found in most mineral leases known as the “all damages” clause imposed absolute liability for the obligation to develop. Adopting the courts interpretation of this clause imposes liability without fault on all of the obligations of the lessee as opposed to the well-established prudent operator standard set out in Article 122 of the Mineral Code.


Interestingly, the case did not start out this way. At trial, the district court rejected the plaintiffs’ novel legal theory finding the plaintiffs did not prove fault or negligence, and as such, could not recover lost royalties.


The defendants successfully argued before the district court that the “all damages” clause “d[id] not impose strict and/or absolute liability on the defendants for ‘all’ damages without reference to the remainder of the contract.” This was a reasonable finding given that other parts of the mineral lease specifically limit the defendants liability to damages “including, but not limited… the surface of the land, timber, crops, pastures, . . . water wells and improvements.”


The district court also found that, “there is an obligation owed to the plaintiffs by the defendants under the lease: not to cause damage to their property during the drilling operations of the collective defendants. However, the plaintiffs must still prove at trial that the operations of the defendants were imprudent and these imprudent operations were the cause of the damages suffered.”


The Third Circuit disagreed on both points. In overturning the district court, the appellate court held that the “all damages” clause of the lease imposes strict and absolute liability on defendant operators for all surface and subsurface reservoir damages. Incredibly, the appellate court also removed the landowner’s burden of proof to show that the defendants were actually imprudent in operating the well.


In order to arrive at this ruling, the Third Circuit took the unusual step of reevaluating the trial court’s factual findings. This case was extremely technical. The trial included 25 days of testimony taken over a 10-month period with six expert witnesses testifying on complex geologic issues, as well as multifaceted issues of drilling, completing, and trouble-shooting oil and gas operations. The Third Circuit may have been paying lip service to the manifest error standard of review they were supposed to follow because it seems they gave no deference to the trial court’s factual findings.


Appellate Judges Jimmie Peters, Billy Ezell, and Phyllis Keaty made up the three-judge panel that considered, and essentially retried, the case that ultimately netted the plaintiffs more than $13 million. Writing for the Third Circuit panel, Judge Keaty held that the terms and provisions that were added to the mineral lease actually “expounded upon rather than limited” the defendants’ liability. Furthermore, “since the words of the lease are clear and explicit and lead to no absurd consequences, no further interpretation may be made into the parties’ intent.”


The notion that this ruling would not lead to “absurd consequences” is truly remarkable. There are substantial risks inherent in all drilling operations, and the practical impact of this ruling is that it will encourage and perhaps even force operators to develop wells beyond their production capacity even when it is environmentally unsafe or economically unfeasible to do so. Those are absurd consequences indeed.


Perhaps even more troubling is the fact that the Hayes fund ruling has widespread implications. The language the court relied upon to impose strict and absolute liability is common boilerplate language, which can be found in many existing mineral leases. If this ruling is allowed to stand, it will undoubtedly be used by plaintiffs’ attorneys to create a new cottage industry of litigation where defendants can be found liable anytime a well produces less than expected.


Let’s hope that doesn’t happen. An appeal from the Hayes Fund defendants is expected and will be closely watched.


For more information about the Third Circuit decision, please visit http://www.la3circuit.org/.

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