La. SC remands case over mineral lease proceeds

Jessica M. Karmasek Apr. 6, 2012, 12:15pm


BATON ROUGE, La. (Legal Newsline) - The Louisiana Supreme Court ruled last week that a case over proceeds from a property's mineral production must be remanded.

The Court majority, in its March 30 ruling, said two lower courts failed in finding in favor of defendants Donald Zadeck and Zadeck Energy Group Inc.

At issue is a mineral lease inherited by plaintiff James P. Wells Jr.

On Sept. 17, 1949, James P. Wells Sr. and Olean Speights Wells executed a cash deed in favor of Paul and Cleo Holmes, conveying 120 acres of property in DeSoto Parish, La.

In the sale of the property to the Holmeses, the Wellses established a mineral servitude by reserving an undivided one-half interest in the mineral rights on the property.

However, in the 1950s, James and Olean Wells divorced. Pursuant to their community property settlement, they divided the servitude with each party, retaining ownership of an undivided one-fourth mineral interest in the property.

On June 5, 1954, Olean Wells executed a mineral lease in favor of Z.T. Gallion, pursuant to which a well was drilled on the property. The lease was released on June 26, 1958 because the well resulted in a dry hole.

In 1961, the Holmes family executed a mineral lease with Parnell Inc., Zadeck's predecessor in interest, covering lessors' "entire undivided one-half interest in and to" the property. The property was then included in the Paluxy Sand Unit U, a unit in which the Shirey Well No. 1 achieved production in January 1965 and continued producing through 2007.

Olean Wells died in 2002, and her servitude was inherited by her son, James P. Wells Jr., and his sister, Martha C. Perser, who is not a party to the lawsuit.

On Dec. 19, 2008, Wells was contacted by Bill Dempsey, a landman representing Comstock Resources, concerning a lease of his mineral interest.

Soon after, Wells discovered the long history of production involving the servitude and filed a lawsuit against Zadeck, Oleum Operating Company LC, T.M. Hopkins Operating Inc. and T.M. Hopkins Inc. -- all of which allegedly conducted oil and gas exploration and production activities from his unleased unitized acreage -- for their failure to tender unto him and/or his mother their rightful share of proceeds from the production.

In response, Zadeck filed a peremptory exception of prescription, arguing that Wells' claim to recover payment is a claim in quasi contract that prescribed 10 years from Zadeck's cessation of involvement with the Shirey Well No. 1.

In particular, it contended its ownership interest ended on Sept. 3, 1994, when it sold all of its rights in the well to T.M. Hopkins Inc. It maintained that thereafter, it had no further involvement with the Shirey Well No. 1.

Zadeck also argued that Wells failed to file his suit until 15 years after it ceased service as operator of Shirey Well No. 1.

In response, Wells argued that the doctrine of contra non valentem -- commonly referred to as the "discovery rule" -- applies to suspend the running of prescription since he had no knowledge of the existence of the mineral interests or production until Dec. 19, 2008.

A trial court granted Zadeck's peremptory exception of prescription and dismissed Wells' claims against the company with prejudice.

It reasoned that Wells' mother failed to monitor her mineral interest and that Wells, himself, failed to prove that some reason external to his own will led to his or his mother's ignorance of the fact that they had a cause of action they could pursue.

An appeals court agreed that Wells failed to present any evidence that his mother exercised due diligence to protect her mineral interest.

The state's high court, in its 15-page ruling, found otherwise.

"Rather than looking to the record for evidence of facts within plaintiff's knowledge and then examining the reasonableness of plaintiff's inaction in light of those facts, considering plaintiff's education, intelligence and the nature of defendant's conduct, the Court of Appeal held that contra non valentem does not apply here solely because the 'record is devoid of evidence of any efforts on the part of Mrs. Wells to keep abreast of the mineral activity on the property,'" Justice Bernette J. Johnson wrote for the majority.

"Given the facts, the inquiry should have been: As plaintiff took no further action after signing and then releasing the lease covering her 1/4 mineral interest, was her inaction after 1958 reasonable in light of her education, intelligence and the nature of defendant's conduct?"

The reasonableness of Olean Wells' actions center on the knowledge she possessed, the Court said.

"An unleased mineral interest owner, who was minimally educated and not living in the same parish where the subject unit well was located, should not be required to continuously search the public records, make cold calls or investigate the possibility of a unit well not located on the property subject to the mineral servitude," Johnson wrote.

"The record in this case establishes that Mrs. Wells, like the plaintiff in Amoco, was not put on notice of a possible injury because she never received payment from production, although such was clearly required by statute.

"In this case involving unleased mineral interests included in a producing unit, there is a statutory burden on this defendant, who has an affirmative obligation to pay."

Taking into account both factors -- Olean Wells' education and intelligence, and Zadeck's conduct -- the Court said both lower courts' conclusions are not supported by the record.

"Moreover, we agree with the conclusion in Amoco that there is nothing in the jurisprudence requiring the owner of a mineral servitude to continuously check the property records to determine if new unitized wells are producing from the servitude owner's property," Johnson wrote, reversing the the appeals court's ruling.

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