Jan/Feb 2018 Legal Update by Brittan J. Bush / Liskow & Lewis

by: Martha Mills at 2/8/2018 5:19:16 AM | Viewed 638 times.


By Brittan J. Bush

Liskow & Lewis

Severance Tax Disputes with State of Louisiana

Recently, the Louisiana Department of Revenue audited dozens of oil and gas operators in regard to the severance taxes paid to the State and demanded the payment of additional severance taxes. In Avanti Exploration, L.L.C. v. La. Dept. of Revenue, BTA Docket No. 9608D, the Louisiana Board of Tax Appeals heard a test case regarding the additional severance tax assessments made by the Department.

 In the case, the Department argued that operators were required to pay severance taxes on market center or index prices rather than the actual value received by the operator. By doing so, the Department sought to capture what it deemed to be an “in kind” benefit that the operator received for the transport of crude oil by the purchaser although the price received by the operator did not include amounts to account for such a benefit. The operator objected to this retroactive assessment, and the Board of Tax Appeals rejected the Department’s argument on the following grounds:

The Board found that severance tax is levied “at the time and place of severance”. Thus, when severance is the field, a market center price is irrelevant to the actual gross receipts received by the operator.

 The Board found no legal basis that the term “gross receipts” should require taxes to be assessed on amounts larger than what the operator actually received.

 The Board found the operator did not take any transportation deduction in the computation of its severance tax.

 Shortly after the Board’s decision was made public, the Louisiana Attorney General sent a letter to the Department of Revenue returning the Department’s contracts with outside counsel representing the Department in 25 related cases, effectively rejecting the Department’s theory for the retroactive severance tax assessments.

Louisiana Supreme Court Grants Writs in Gloria’s Ranch, L.L.C. v. Tauren Exploration, Inc.

 On June 2, 2017, the Louisiana Second Circuit issued its ruling in Gloria’s Ranch v. Tauren Exploration, Inc., 232 So. 3d 1202 (La. App. 2 Cir. 6/2/17) and awarded a mineral lessor with approximately $23,000,000.00 in damages, lease cancellation, and attorney’s fees after finding that the lessee failed to: (1) release the mineral leases at issue due to a failure to produce in paying quantities and (2) failed to properly pay royalties and respond to the mineral lessor’s royalty demand under Mineral Code article 140. 

The damages and lease cancellation awards in Gloria’s Ranch alone make it a unique Louisiana oil and gas matter. However, the most controversial aspect of the Second Circuit’s opinion was its affirmation of the trial court’s ruling that a mortgage lender with a security interest in a mineral lease, was solidarily liable with its borrowers (the mineral lessees) for damages. After the Second Circuit denied rehearing, various defendants, including the mortgage lender sought writs in the Louisiana Supreme Court. On December 15, 2017, the Court granted writs and will hear oral argument and issue an opinion in Gloria’s Ranch in the coming months. Given the potential impact that this case may have on the ability of parties to obtain financing for oil and gas activities, operators and parties providing finance should keep a watchful eye over the progress of this case in the Louisiana Supreme Court.

Louisiana Third Circuit Finds that Assignment of Rights Containing References to Latent Defects in Property May Defeat Subsequent Purchaser Doctrine in Catahoula Lake Investments, LLC v. Hunt Oil Company

In Catahoula Lake Investments, LLC v. Hunt Oil Company, 17-649 (La. App. 3 Cir. 1/10/18), the Third Circuit analyzed provisions in a sale of property to determine whether or not an assignment clause in the agreement specifically assigned the buyer with the right to sue for pre-acquisition property damage. Initially, the trial court found that the transaction did not assign such rights and the Plaintiff/buyer had no right of action to pursue claims for pre-acquisition property damage. The assignment clause in the case stated the following:


Vendor is selling the Property “AS IS, WHERE IS” without any warranties whatsoever as to fitness or condition, whether expressed or implied, and Vendee expressly waives the warranty of fitness and the guarantee against hidden or latent vices (defects in the Property sold which render it useless or render its use so inconvenient or imperfect the Vendee would not have purchased it had he known of the vice or defect) provided by law in Louisiana, more specifically, that warranty imposed by Louisiana Civil Code 2520 et seq[.] with respect to Vendor’s warranty against latent or hidden defects of the Property sold, or any other applicable law, not even for a return of the purchase price. Vendee forfeits the right to avoid the sale or reduce the purchase price on account of some hidden or latent vice or defect in the Property sold. Vendor expressly subrogates Vendee to all rights, claims and causes of action Vendor may have arising from or relating to any hidden or latent defects in the Property. This provision has been called to the attention of the Vendee and fully explained to the Vendee, and the Vendee acknowledges that he has read and understands this waiver of all express or implied warranties and accepts the Property without any express or implied warranties.


The trial court reasoned that the provision was too broad and its “lack of specificity [d]id not indicate to third parties that the personal right to sue for environmental damages caused by oil and gas operations [was] transferred . . .” The Third Circuit, however, disagreed and found that the transfer did in fact assign personal rights to sue for pre-acquisition property damage as a result of the assignment clause’s references to claims relating to any “hidden or latent defects in the Property”:

Vendor expressly subrogates Vendee to all rights, claims and causes of action Vendor may have arising from or relating to any hidden or latent defects in the Property.

The Third Circuit went on to compare this provision with the assignment provisions in other matters where courts applied the subsequent purchaser doctrine and found that the instant case was distinguishable. In addition, the Third Circuit rejected the trial court’s reasoning and examples to find that the provision resulted in absurd consequences by noting that the trials court’s rationale focused on open and obvious defects as opposed to the “hidden and latent” defects that formed the basis of the Plaintiff’s suit. Based on these reasons, the Third Circuit reversed and remanded the decision to the trial court.

While Catahoula Lake Investments does not appear to attack or modify the viability of the subsequent purchaser doctrine in legacy matters, it does provide greater insight as to what types of assignment clauses may transfer personal rights to sue for pre-acquisition property damage. Therefore, given the Third Circuit’s endorsement of the language noted above in transfers of property, legacy defendants should pay close attention to any transfers explicitly providing for assignments involving claims for hidden or latent defects when defending legacy matters.

Brittan J. Bush is an Associate in Liskow & Lewis’ Lafayette office where his practice focuses on royalty litigation, disputes between working interest owners and oil and gas operators, and legacy litigation. Brittan obtained his Bachelor’s degree in Political Science from the University of Georgia in 2009 and his Juris Doctorate from the Paul M. Hebert Law Center, Louisiana State University in 2012 where he served as Articles Editor of the Louisiana Law Review and was inducted into the Order of Coif. Any views expressed herein are those of the author and do not necessarily reflect the views of Liskow & Lewis and/or its clients. Copies of any decisions discussed herein are available from the author upon request.































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