A recent, apparently unprecedented, decision from the Louisiana Court of Appeal, Second Circuit, has tremendous implications for energy financing in Louisiana. In Gloria’s Ranch, L.L.C. v. Tauren Exploration, Inc., No. 51,077, 2017 WL 2391927 (La. App. 2 Cir. 6/02/17), the court of appeals affirmed a ruling that an oil-and-gas lender was solidarily (jointly and severally) liable with a borrower for an award of more than $23 million, plus attorney fees, related to the borrower’s breach of mineral-lease obligations.
The lease, granted by Gloria’s Ranch, covered 1,390.25 acres and contained a primary term of three years, continuing “as long . . . as oil, gas, sulphur or other minerals . . . are produced from said land hereunder or from land pooled therewith.” The lessee, Tauren Exploration, assigned a 49 percent working interest to Cubic Energy. As security for a revolving credit facility, Cubic Energy mortgaged its interest in various mineral leases to Wells Fargo, including the Gloria’s Ranch lease, and collaterally assigned related profits to the mortgagee.
After the primary term, Gloria’s Ranch believed that its lease had expired for lack of production and demanded to Tauren Exploration, Cubic Energy, and Wells Fargo a recordable act releasing the lease. Necessary actions were not taken to release the lease, and Gloria’s Ranch filed suit alleging lost-leasing opportunities and seeking significant damages and attorney fees.
Gloria’s Ranch prevailed at trial. Damages included $22,806,000 for lost-leasing opportunities plus over $1,000,000 in attorney fees. The trial court found the mortgagee Wells Fargo solidarily liable with Cubic Energy because: (1) the mortgage contained an assignment of the mineral lease; (2) the mortgage prevented a release of the lease without the mortgagee’s consent; (3) the mortgagee held an overriding royalty and net profits interest in the lease; and (4) the mortgagee received financial information from the lessee and regularly audited its records.
The appellate court rejected the trial court’s holding that the mortgage contained an assignment of the mineral lease, noting that the mortgage did not transfer any working interest in the lease. Nevertheless, the court agreed that Wells Fargo was solidarily liable with Cubic Energy for the judgment. The court’s reasoning centered on Wells Fargo’s right to control Cubic Energy’s oil-and-gas operations on the leased property, which included the following:
- The credit agreement directed that Cubic Energy use the loan proceeds to develop the oil-and-gas properties, including drilling three wells on the Gloria’s Ranch property.
- Wells Fargo retained the right to approve the location and depth of the wells.
- Wells Fargo required Cubic Energy to perform specific workovers and completions on other properties subject to the mortgage.
- Wells Fargo required Cubic Energy to provide periodic financial statements about the lessee’s financial condition as well as various mineral-reserve, sales, and production reports.
- The mortgage granted Wells Fargo the right to access the Gloria Ranch property “at all times.”
- The mortgage prohibited Cubic Energy from entering into new operating agreements or amending existing operating agreements without the mortgagee’s consent.
- Cubic Energy was required to obtain Wells Fargo’s consent to release any of the leases subject to the mortgage, including the Gloria’s Ranch lease.
The court concluded that Wells Fargo shared “coextensive liability with Cubic Energy to provide a recordable act evidencing the release of its interest in the lease.” The court, however, cautioned that its decision is “highly fact-intensive and should not be construed as governing other cases that may follow unless the same facts exist.”
The dissenting opinion on the denial of rehearing was forceful:
Solidary liability between a lender and its borrower/owner for its actions will have a calamitous effect in Louisiana on banking and the relationship between creditors and debtors. . . . [T]he opinion will have a most chilling effect on the financing of oil and gas operations, which in turn will have an adverse economic effect on government and business in our state.
Gloria’s Ranch, as echoed by the dissent, should concern oil-and-gas lenders in Louisiana, especially since many of the loan provisions in the case are common in the industry. Loan agreements, for example, frequently restrict a borrower’s ability to transfer or release interests in collateral without the consent of the lender and/or require periodic disclosure of records regarding sales, production, and related financial information. More generally, Gloria’s Ranch creates substantial uncertainty not only for existing credit agreements with these provisions but also for how a lender can modify its loan facilities to avoid future solidary liability with its borrower in relation to a third-party.
Tyler L. Weidlich is with Beatty & Wozniak, P.C. in Denver, Colorado.