Energy Law

Fifth Circuit Affirms decision to hold assignor solidary liable on Joint Operating Agreement: Chieftain Int'l (U.S.), Inc., Hunt Chieftain Dev., L.P.. Hunt Oil Co. v. Southeast Offshore, Inc.

by Elisabeth Lorio

The United States Court of Appeals for the Fifth Circuit recently affirmed the United States District Court for the Eastern District of Louisiana’s decision to grant partial summary judgment in favor of the operator co-owner in a dispute over liability after a fellow co-owner’s assignment of lease interests governed by joint operating agreements (JOAs). Southeast acquired ownership of fractional working interests in two oil and gas leases in the Gulf of Mexico governed by two separate, yet nearly identical JOAs. After acquiring the interests in the leases, Southeast became a party to and assumed the rights and obligations under the JOAs. Hunt, a co-owner and operator of the leases, advanced 100% of the costs of operations and later billed the other co-owners for their virile portion. After a number of years, Southeast ceased paying Hunt for its share of the expenses. Subsequently, Southeast entered into a written assignment with South Pass Properties, South Pass assuming all of Southeast’s rights and obligations under the leases and JOAs.  South Pass, however, never paid the outstanding balance owed to Hunt.

Hunt filed suit against both Southeast and South Pass alleging that Southeast’s assignment did not release Southeast from its obligations under the JOAs. The district court agreed, finding Southeast solidary liable, as the language of the JOAs did not unambiguously effect a release of Southeast. The Fifth Circuit affirmed the decision of the district court, holding that an assignee and an assignor remain solidarily liable to the assignor’s obligations to a third party unless third party releases the assignor. The appellate court found that the record was devoid of any effective release of Southeast by Hunt. In its decision, the Court rejected Southeast’s argument that the language of the JOA served as a release of Southeast from its liability after it assigned its interests to South Pass. Since the JOAs did not contain a clear and unambiguous release of Southeast by Hunt, Southeast was found solidarily liable for the obligations under the leases and JOAs.

Full post as published by The Energy Law Blog on December 22, 2008 (boomark / email).