The question in Kim R. Smith Logging Inc. v. Indigo Minerals LLC was whether a disgruntled Louisiana royalty owner sent its demand for unpaid royalties to the right party. It turns out that it did.
Mineral interest owner Cherry executed an oil and gas lease. Plaintiff Smith Logging purchased the property and Cherry retained his mineral interests. Operator Indigo/SWN* drilled four Haynesville wells.
The original lessee assigned the lease to Hopkins. Effective as of August 1, 2019, Hopkins assigned the lease to Valor. By a December 12, 2019, agreement, also effective as of August 1, 2019, Valor transferred its interests to Indigo/SWN and reserved an override
On November 1, 2019, Smith Logging made a 30-day demand to Indigo/SWN for payment of unpaid royalties under the lease. Counsel for Indigo/SWN confirmed that the royalty was owed. Indigo/SWN made three payments. The assignment to Indigo/SWN has not been recorded at the time of Smith Logging’s demand.
Smith Logging sued Indigo/SWN, Valor, and Hopkins for cancellation of the lease, damages in the amount of unpaid royalties, damages in the amount of double the unpaid royalties, and attorney fees, alleging on information and belief that Indigo/SWN was the lessee.
Indigo/SWN asserted a dilatory exception of prematurity and a peremptory exception of no cause of action. They argued plaintiff’s claims were premature because it failed to make written demand on Valor, Hopkins, or their predecessors. Alternatively, it failed to state a valid cause of action because Hopkins was lessee of record at the time demand was made. The trial court sustained the exceptions.
The question in a prematurity exception is whether the cause of action had yet to come into existence because some prerequisite condition had not been fulfilled. Indigo/SWN’s objection was that notice was improper. Here is the statutory scheme for a suit for unpaid royalties:
- Written notice of failure to pay royalties is a prerequisite to the judicial demand for damages or dissolution (R. S. 31:137).
- After written notice, the lessee is given 30 days to respond (R. S. 31:138).
- The royalty owner has remedies if the failure to pay was because of fraud or was wilful and without reasonable grounds (R. S. 139).
- If the lessee pays within 30 days, dissolution is not available. If the lessee fails to pay or inform the lessor of a reasonable cause why he didn’t pay, the court may award damages of double the amount of royalties due and attorney fees (R. S. 31:140).
Indigo/SWN became sublessee of the lease on August 1, 2019, and was sublessee when the demand for royalties was made. Because Smith Logging did not send the demand to Hopkins and Valor, notice of cancellation was not effective against them.
A sublessee becomes responsible directly to the original lessor for performance of the lessee’s obligations. Thus, as of August 1, 2019, as sublessee Indigo/SWN was responsible directly to Smith Logging for performance of its lease obligations.
Notice and demand to Indigo/SWN was sufficient. The trial court erred in sustaining the exception of prematurity.
No cause of action?
A no cause of action exception is tried on the face of the pleadings. All well-pleaded allegations of fact are accepted as true and correct and doubts are resolved in favor of sufficiency of the petition. The petition alleged facts sufficient to state a cause of action against Indigo/SWN. The district court erred in sustaining this exception.
* At some point Indigo was acquired by SWN Production (Louisiana) LLC; hence “Indigo/SWN”.