Originally published by Caleb J. Madere.
The Louisiana Supreme Court recently issued a decision in a downhole damages case, reversing the Third Circuit’s misguided application of the manifest error standard of review. Hayes Fund for the First United Methodist Church of Welsh, LLC v. Kerr-McGee Rocky Mt., LLC, No. 2014-C-2592, 2015 La. LEXIS 2530 (La. 2015). The dispute arose out of the drilling and operation of two wells drilled in 1999. Hayes Fund for the First United Methodist Church of Welsh, LLC v. Kerr-McGee Rocky Mt., LLC, 149 So. 3d 280, 283 (La. App. 3 Cir. 10/01/14). The first, the “Rice Acres well”, produced until 2004 when production ceased due allegedly to water migration into the production zones. Id. The second, the “Hayes Lumber well”, produced the lower zone in the Nodosaria formation until 2007 when the operators ran into sanding problems. Id. The well was recompleted in the upper zone of the Nodosaria formation and produced until 2008 when the well allegedly experienced extraneous water migration, ceasing production. Id. Plaintiff brought suit against Kerr-McGee alleging that Kerr-McGee’s imprudent operations caused the two wells to prematurely stop producing leaving valuable minerals in the ground.
As the Supreme Court summarized, this case can be boiled down to the following question: was the water found in the formations extraneous or was the water from the formations? The trial was conducted over a ten month period with twenty-five days of testimony by numerous experts. Id. The case itself necessitated extremely nuanced and technical testimony regarding the geology and geophysics of the formations. The defendant called four lay witnesses and five expert witnesses in trying to refute the plaintiff’s claim that Kerr-McGee imprudently operated the two wells. The plaintiff relied on a single expert witness in an attempt to show that the water produced from the two wells was extraneous water caused by the imprudent operations of Kerr-McGee. The district court, after tediously listening to and considering all of the expert testimony, found the defendant’s experts to be more credible and found that the plaintiff failed to meet its burden of proof. The plaintiff appealed, and the Third Circuit reversed the district court finding that the district court committed manifest error. The Louisiana Supreme Court reversed the Third Circuit and reinstated the district court ruling.
There are two particularly significant things to take away from the Supreme Court’s ruling. First, the Supreme Court, notably frustrated with the Third Circuit’s application of the manifest error standard of review, made clear that the district court should be given great deference in a case that hinges on the so-called battle of the experts. Hayes Fund, 2015 La. LEXIS 2530 at *107. Second, the Supreme Court held that its reversal of the Third Circuit effectively vacated the appellate court’s ruling on the collateral attack issue and the interpretation of the damages provision in the lease. Id. at fn. 1. Although the Court abstained from discussing these issues, it made clear that the Third Circuit’s analysis and ruling on these issues were effectively vacated.
I. Tortured Treatment of the Manifest Error Standard of Review
Third Circuit correctly explained that the district court’s judgment could only be overturned if the district court committed manifest error. That is, to reverse the district court, the court of appeal had to “(1) find that a reasonable factual basis does not exist for the finding, and (2) further determine that the record establishes that the fact finder is clearly wrong or manifestly erroneous.” Hayes Fund, 149 So. 3d at 284 (quoting Detraz v. Lee, 950 So. 2d 557 (La. 2007)). However, instead of reviewing the record to determine if the district court was reasonable in its findings, the Third Circuit pointed to expert testimony from the record that contradicted the district court’s findings and cited to this testimony as evidence of manifest error. In an effort to demonstrate the correct application of the manifest error standard, the Supreme Court cautioned that “the appellate court does not function as a choice-making court.” Hayes Fund, 2015 La. LEXIS 2530 at *2. The Court went on to emphasize that “[r]arely should a District Court’s choice of expert(s) be found clearly wrong because it is so difficult to find a reasonable basis does not exist for the expert’s opinion relied upon by the District Court.” Hayes Fund, 2015 La. LEXIS 2530 at *107. The Court drove the point home, quoting a previous Supreme Court opinion:
A reviewing court only has the “cold” record for its consideration while the trier of fact has the “warm blood” of all the litigants before it. This is why the trier of fact’s findings are accorded the great deference inherently embodied in the manifest error doctrine. So once again, we say it should be a rare day finding a manifest error breach when two opposing views are presented to the trier of fact. Id. at 16 (quoting Menard v. Laffayette Ins. Co., 31 So. 3d 996 (La. 2010)).
After examining the Third Circuit’s reasoning, the Supreme Court found that the Third Circuit improperly applied the manifest error standard. Rather than reviewing the district court’s judgment to determine if there was a reasonable basis for the judgment, the Third Circuit focused on the evidence presented by plaintiff’s expert that conflicted with the findings of the district court. As the Supreme Court noted, this is not the correct application of the manifest error standard. Id. at *106. In cases that hinge on a battle of the experts there is going to inherently be testimony that conflicts with the court’s ruling. The appellate court, as the Supreme Court explained, is not tasked with finding the conflicting testimony and deciding for itself which testimony and evidence is most credible. Instead, the appellate court is to review the testimony and determine if the district court was reasonable in reaching its judgment in light of the testimony presented.
After finding that the Third Circuit incorrectly applied the manifest error standard, the Court conducted a full manifest error review as a guideline for the Third Circuit going forward and painstakingly discussed the testimony given at trial and noted the conflicting expert testimony. After reviewing the testimony, the Court correctly found that the district court was entirely reasonable in crediting the defendant’s experts over the plaintiff’s experts, and in light of such reasonableness, the district court’s judgment should not be disturbed.
Going forward, the Court’s analysis of the expert testimony itself is not all that useful. Downhole cases are inherently fact specific and no two cases will be the same. However, the Court’s application of the manifest error standard and the deference given to the district court’s fact finding suggests that absent unusual circumstances, the district court’s factual findings in these battle of experts will not be disrupted on appeal.
II. Collateral Attack Doctrine and Interpretation of Damage Provision in Lease
Aside from the finding that the district court committed manifest error with regard to its factual findings, the Third Circuit also reversed the district court on questions of law, namely whether the collateral attack doctrine applies and whether the damage provision in the lease creates strict liability.
The collateral attack doctrine is codified in Louisiana Revised Statutes § 30:12. The collateral attack doctrine prevents a party from attacking an order from the Commissioner of Conservation other than by the means prescribed in § 30:12. One of the elements a plaintiff must prove in a downhole case is damages. When trying to establish damages, the size of the reservoir becomes relevant because it will help the plaintiff establish how much oil and gas are now unrecoverable due to the defendant’s imprudent operations.
Here, the plaintiff creatively argued that the unit order established the reservoir boundaries. Further, the plaintiff contended that the defendant, by arguing that the unit order did not accurately reflect the geological boundaries of the reservoir, was collaterally attacking the unit order issued by the Commissioner of Conservation. Hayes Fund, 149 So. 3d at 293. Thus, the plaintiff argued that the unit order depicting rectangle units established the boundaries of the reservoir, and any attempt to refute those boundaries should be impermissible as a collateral attack on a Commissioner’s order. The Third Circuit agreed with the plaintiff and held that defendant’s argument that the reservoir was smaller than the unit plat depicted was a collateral attack on the unit order. Id. at 294. Thus, the Third Circuit allowed the plaintiff to establish the reservoir boundaries by reference to the unit order in proving damages.
Unfortunately, on appeal the Supreme Court did not discuss the applicability of the collateral attack doctrine. The Supreme Court made clear that its ruling “effectively vacates” the Third Circuit’s ruling on the collateral attack doctrine, but the Court declined to discuss the issue further. Hayes Fund, 2015 La. LEXIS 2530 at fn. 1. This provides very little insight as to how the Supreme Court would rule on the issue, and at least for now the issue is still unresolved.
The plaintiff also argued that the lease only required the plaintiff to prove causation and damages to recover. The plaintiff reasoned that the damage provision in the lease made the operator strictly liable for any and all damage to the property without having to prove that the operator acted imprudently. The damage provision in the lease read, “[t]he Lessee shall be responsible for all damages to timber and growing crops of Lessor caused by Lessee’s operations.” The plaintiff contends that the stricken through text means that the Lessee is responsible for all damages to the Lessor’s property, regardless of imprudence. In other words, as long as the plaintiff can show that the defendant caused damages to the plaintiff, then the plaintiff will have a cognizable claim. The Third Circuit agreed, stating that defendant “was absolutely liable when it knowingly agreed that ‘Lessee shall be responsible for all damages caused by Lessee’s operations’” and that “[t]his absolute liability was initially limited to damages to [plaintiff’s] timber and growing crops. Those limitations, however, were struck from the lease.” Hayes Fund, 149 So. 3d at 300.
Again, without discussing the issue, the Supreme Court only made clear that its ruling effectively vacated the Third Circuit’s ruling on the damages provision, but the Court’s ruling provides little insight into how the Court may come down on the issue in the future. Hayes Fund, 2015 La. LEXIS 2530 at fn. 1. What we do know is that the Third Circuit’s analysis will not be binding on future cases. Thus, the effect of such provisions in future cases is unresolved.
Note: A team of Liskow & Lewis attorneys prepared an amicus brief in this case. If there are any questions or concerns regarding this case, please contact Kelly Becker at kbbecker@liskow.com.
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