SGC Land, LLC v. Louisiana Midstream Gas Services

Citations: 939 F. Supp. 2d 612; 2013 U.S. Dist. LEXIS 46968; 2013 WL 1282458Docket: Civil Action No. 10-1778

Court: District Court, W.D. Louisiana; March 28, 2013; Federal District Court

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A Motion for Summary Judgment was filed by Defendants Louisiana Midstream Gas Services, L.L.C., Chesapeake Operating, Inc., and Chesapeake Louisiana, L.P. (collectively referred to as Chesapeake). Plaintiffs SGC Land, L.L.C. and Smithburg, Inc. submitted a Cross-Motion for Partial Summary Judgment regarding the alleged improper location and operation of a pipeline on their property and opposed Chesapeake’s Motion for Summary Judgment on other matters. The Court partially granted Chesapeake's Motion and denied the Plaintiffs' Motion.

Background details include a March 7, 2008, Oil, Gas and Mineral Lease between Smithburg (predecessor to SGC) and Suncoast Land Services, covering approximately 567 acres in DeSoto Parish, Louisiana. The Lease contained provisions requiring the lessee to pay $2,000 per acre for surface damages and included restrictions on land usage, stating the leased acreage could not be used for roads, pipelines, etc., unless the well was drilled on that land. Suncoast later assigned its rights under the lease to Chesapeake Louisiana, L.P.

Chesapeake drilled the Smithburg 7H No. 1 well on the leased property in February 2009. Subsequently, Smithburg and Chesapeake executed a Surface Damage Release and Grant of Surface Easement, discharging liability for damages in a specified area and granting an easement for pipeline construction related to the Smithburg Well. Chesapeake later assigned its rights to construct and maintain a pipeline to Louisiana Midstream Gas Services, Inc. However, Midstream entered into a separate contract with Smithburg for additional rights beyond those granted under the original lease.

The "Easement and Right of Way Agreement" permits the installation and operation of a pipeline on designated property, allowing the transport of third-party gas. Evidence from email exchanges indicates that this easement was specifically intended to enable Midstream to flow third-party gas through the pipeline. Midstream constructed the pipeline, which also transmitted gas from the Smithburg Well and the Allen Well, the latter situated outside the leased properties associated with Smithburg. Midstream acknowledged that a segment of the pipeline was built slightly beyond the agreed Right of Way, measuring less than 30 feet, with some parts extending 4.4 feet beyond the designated area. 

Chesapeake has utilized infrastructure such as a frac pond, road, and well site on the Smithburg property to service the adjacent Allen Well, leading to Plaintiffs' claims against Chesapeake for allowing the use of facilities for wells not on the property, as well as for allegedly locating the pipeline outside the agreed Right of Way, constituting trespass. Chesapeake has moved for summary judgment to dismiss these claims, while the Plaintiffs have filed a motion for partial summary judgment regarding the pipeline's improper placement and operation.

Summary judgment is justified when no material facts are in dispute, and the moving party is entitled to judgment as a matter of law. A genuine issue of material fact arises when reasonable evidence could allow a jury to rule for the nonmoving party. The nonmovant must present specific facts showing a genuine trial issue, beyond mere allegations or minimal evidence.

Summary judgment is warranted when critical evidence regarding an essential fact is insufficient to support a judgment for the nonmovant. Factual disputes should be resolved in favor of the nonmovant only if there is an actual controversy with contradictory evidence from both parties. If the nonmovant cannot present enough evidence for a jury to potentially rule in their favor, there is no genuine issue for trial. The nonmovant bearing the burden of proof must provide evidence sufficient to survive a directed verdict motion; failing to do so results in granting the summary judgment motion.

The Lease contract governs the parties' legal rights and obligations, with interpretation aimed at revealing their common intent. Technical terms should be interpreted according to their technical meanings, while ambiguous terms must be construed in a manner that aligns with the contract's purpose. Provisions lacking explicit coverage imply adherence to legal and equitable standards relevant to similar contracts. Clear language in a contract should be interpreted strictly based on the document itself, and interpretations should not nullify any provisions.

Regarding trespass, it is undisputed that the pipeline on the Smithburg property was built outside the designated right of way in the Easement and Right of Way Agreement. However, determining whether Midstream or Chesapeake trespassed and if Chesapeake owes disgorgement of profits due to this breach requires a prior assessment of Chesapeake's good or bad faith. The complexity of contracts between the parties, including potential overlapping rights, necessitates careful analysis beyond the Easement for ruling on damages related to the pipeline's misplacement.

The SDR and Lease documents are significant for assessing whether Chesapeake had honest doubts about its rights and acted in good faith regarding the pipeline's location and use. The SDR grants an easement for a pipeline servicing the Smithburg Well but does not specify its exact location, allowing Chesapeake to place it where it services the well. However, the SDR does not authorize the transportation of third-party gas through this pipeline. 

The analysis shifts to the Lease, particularly paragraphs 23 and 26, which limit Chesapeake's rights. Paragraph 23 restricts use of the leased 567.08 acres for various activities unless the well is drilled on that land, while paragraph 26 prohibits any land use related to leased operations unless the actual well site is on the 567.08 acres. Despite Chesapeake's broad interpretation that once the Smithburg Well is drilled, it can use the property for any related activities, the Court finds this interpretation overly expansive and suggests that both paragraphs impose limitations relevant to this case.

Paragraph 26 serves as a comprehensive restriction, preventing land use for operations unless tied to the well on the specified property. Although paragraph 23 appears to allow servicing of wells on pooled lands post-drilling, paragraph 26 constrains this right to wells specified in the Lease. Since the Allen Well is not on the relevant properties, its operations do not fall within "leased operations." Consequently, while the pipeline's location aligns with the SDR and Lease, transporting third-party gas does not. Chesapeake’s interpretation of the conditions reflects a reasonable confusion about the Lease’s language, indicating honest doubt regarding the lease terms. Overall, the violation of the gas transport operation is not as severe as claimed by the Plaintiffs, and Midstream's permissions regarding pipeline construction are more expansive than suggested.

Midstream's transportation of third-party gas through a pipeline that was constructed four feet outside the designated right of way did not result in harm to the Plaintiffs, constituting a breach of contract rather than a trespass. Under Louisiana law, civil trespass requires unlawful invasion of another's property, which did not occur as Chesapeake had authorization to construct the pipeline on the property. Although the Easement and Right of Way Agreement specified a location for the pipeline, the Court found that the minor deviation did not amount to trespass. Plaintiffs’ request for disgorgement of profits was denied, as they did not demonstrate bad faith possession by Midstream/Chesapeake, which is required under Louisiana law for such a remedy. The Court highlighted the absence of evidence indicating that Chesapeake gained financial advantages from the slight deviation, classifying the situation as an inadvertent surveying mistake rather than bad faith. Therefore, no reasonable juror could conclude that Chesapeake acted in bad faith, precluding an award for disgorgement of profits.

The Court applies the doctrine of encroachment under Louisiana Civil Code Article 670, concluding that when a landowner builds a structure in good faith that encroaches on adjacent property, and the adjacent owner fails to complain in a timely manner, the structure may remain. Chesapeake, as a landowner under the Lease and easement, built a pipeline without prior complaint from the Plaintiffs while the construction was substantially completed. Consequently, Chesapeake is entitled to a predial servitude over the area surrounding the pipeline, provided they compensate for the servitude's value.

Furthermore, even if Chesapeake's construction did not meet all technical criteria of Article 670, there is no evidence of bad faith, nor has the Plaintiff demonstrated any damage due to the minor deviation of the pipeline from the designated right of way. Thus, the Court declines to impose severe remedies like destruction of the pipeline or profit disgorgement, denying the Plaintiffs’ Motion for Partial Summary Judgment regarding the pipeline's location and operation.

Regarding abandonment, the Plaintiffs seek to release the Easement and Right of Way Agreement due to alleged non-use of the pipeline from February to mid-July 2010. The Agreement states that non-use for two consecutive months constitutes abandonment, but Chesapeake argues that the parties modified this term to eighteen months, supported by evidence from the record. Louisiana law prioritizes the added provisions over conflicting standard terms in contracts, emphasizing the need to ascertain the parties' intent in interpretations.

Midstream's contract modification inadvertently maintained the term "two," but the court ruled that provision number "18" prevails, establishing an 18-month non-use period for the pipeline. Courts should avoid interpretations leading to absurd outcomes, and a two-month non-use period would contradict industry standards and allow premature termination of rights before the lease’s 90-day restoration period. The plaintiffs failed to demonstrate an 18-month non-use, thus they are not entitled to terminate the Easement and Right of Way Agreement.

Regarding the use of the frac pond, road, and well site on the plaintiffs' property, these actions align with paragraph 26 of the agreement, which does not grant unlimited rights. There was reasonable doubt about the interpretation of paragraphs 23 and 26. Under Louisiana law, the right to dissolve a lease is subject to judicial discretion, particularly when a breach is minor, unintentional, or based on a good faith mistake. The court found that while Chesapeake was technically in default for servicing the Allen Well using the Smithburg property, it resulted from an honest misunderstanding of rights under the lease, which was poorly worded. No evidence of significant damage to the plaintiffs' property was presented, and prior constructions were justified for servicing the Smithburg Well, making the plaintiffs' claims of harm unsubstantiated. Thus, lease dissolution is not warranted.

Plaintiffs are not entitled to disgorgement of profits related to the Smithburg property used for servicing the Allen Well, as they failed to prove Chesapeake acted in bad faith. There is uncertainty regarding whether Chesapeake gained an economic benefit qualifying as a civil fruit under Louisiana law, specifically La. C.C. art. 551. The court notes that no revenues were generated from the Smithburg property; any benefits came from adjacent property. Mr. Smith's lack of legal knowledge does not substantiate the claim for damages, as the court previously dismissed claims for legal damages under Louisiana trespass law, allowing only for actual damages to the property. Mr. Smith has not provided evidence of such damages. Changes to the property were authorized under the lease, and continued usage did not harm the Plaintiffs. Chesapeake’s past breach of contract is deemed a "good faith mistake." The court concludes that Chesapeake did not trespass when constructing and operating the pipeline, as the slight deviation from the Easement and Right of Way Agreement was permitted. The court finds that the pipeline's placement is more a matter of encroachment or breach of contract rather than trespass, and there is no evidence of bad faith by Chesapeake in using the frac pond, road, and well site for servicing adjacent wells. Consequently, Plaintiffs are not entitled to disgorgement of profits or termination of the Lease or Easement and Right of Way Agreement.

Chesapeake is not liable for damages related to its previous use of the Smithburg property for the Allen Well servicing, except for the value of the predial servitude and any actual damages incurred by the Plaintiff due to pipeline construction outside the agreed right of way. Plaintiffs failed to provide evidence regarding the extent of these actual damages. Consequently, Chesapeake’s Motion for Summary Judgment is granted, and all claims against Louisiana Midstream Gas Services, L.L.C., Chesapeake Operating, Inc., and Chesapeake Louisiana, L.P. are dismissed, except for claims related to actual damages connected to the predial servitude. Additionally, Plaintiffs’ Motion for Partial Summary Judgment is denied.

Plaintiffs have filed a Motion for Reconsideration regarding the Court's March 28, 2013 Memorandum Ruling. They argue that the Court made errors in determining that the Defendants acted in good faith and claim that the ruling expanded Defendants' rights beyond what was established in the Easement and Right of Way Agreement. The Court noted that while the Federal Rules of Civil Procedure do not explicitly allow for motions for reconsideration, they are generally treated as motions to alter or amend under Rule 54(b), which grants the Court discretion to modify interlocutory orders for sufficient cause. 

The Court acknowledged that it had inadvertently granted Defendants broader rights than those originally agreed upon in the 2009 Easement and Right of Way Agreement. Therefore, the ruling will be amended to correct this error.

Midstream, the original holder of the Easement and Right of Way Agreement, is affirmed to have the same personal servitude over the land occupied by the pipeline as originally granted. Plaintiffs alleged that Defendants acted in bad faith regarding the pipeline's construction and operation, asserting that good faith ceased on November 8, 2010, when the lawsuit was filed. However, definitions of good faith under Louisiana law do not apply to encroachments as per relevant case law, and notice of any deviation post-completion or the lawsuit's filing does not negate Defendants' good faith. Plaintiffs failed to provide evidence of legal bad faith by Midstream/Chesapeake, who negotiated with Plaintiffs to transport third-party gas and constructed the pipeline accordingly. The minor deviation from the agreed route was not contested during surveying, and no evidence suggested that this deviation was intentional or financially motivated. The Court determined that the pipeline construction was authorized under the Lease, thus Defendants did not trespass. The legal question focused on whether transporting third-party gas was permissible despite the minor deviation. The Court declined to categorize the violation as breach of contract, encroachment, or trespass, ruling out disgorgement of profits due to the absence of legal bad faith or actual damages. The Court mandated fair compensation for any actual damages caused by the pipeline's location while granting the servitude based on encroachment principles.

The remedy sought by the Plaintiffs could also be justified under Louisiana Civil Code article 1986 if classified as a breach of contract, leading to the appropriate denial of the disgorgement of profits. The Court partially granted and partially denied the Plaintiffs’ Motion for Reconsideration. The previous Ruling and Order were amended to affirm that Midstream, the original holder of the Easement and Right of Way Agreement, retains the same servitude rights over the land now occupied by the pipeline, with the condition that Midstream and/or Defendants must provide fair compensation for this servitude in addition to any actual damages from the deviation. The Court declined to modify other aspects of the earlier ruling. Chesapeake Operating, Inc., Chesapeake Louisiana, L.P., and Louisiana Midstream Gas Services are collectively referred to as "Chesapeake," and their claims will be treated as a single entity for these motions. Notably, the Court indicated that the recent amendments to Rule 56 do not affect its legal analysis, maintaining that there is "no genuine dispute as to any material fact." The Court referenced the Louisiana Supreme Court case Clovelly Oil Co. LLC v. Midstates Petroleum Co. LLC, which aligns with the principles of contract interpretation. Additionally, the term "the Well" refers specifically to the Smithburg Well situated on Smithburg’s 4.11 acres, while Louisiana Civil Code article 551 defines fruits as products derived from another thing without loss of substance, specifying civil fruits as revenues such as rentals, interest, and certain corporate distributions. Relevant case law was cited to support these definitions.