Normally I convert the formatted development into ASCII text before posting. This is because, in DIRT's early days, many of the email receivers did not deal well with formatted text. I'm curious whether things have changed in modern times. Converting is a step I don't want to do if I don't need to. So I didn't convert this one. Let me know if this comes through garbled in any way. Ed.

Daily Development for
Monday, March 1, 2004

by: Patrick A. Randolph, Jr.
Professor of Law, UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin Kansas City, Missouri

contractually agreed to "reasonably restore the premises as nearly as possible to their present condition," in a lease for an oil and gas terminal, jury may properly award $33 million in damages for cost of restoration even when property, as restored, will be worth $106,000 and even when landlord has no duty to use the damages proceeds actually to restore the property.

Corbello v. Iowa Production, 850 So.2d 686 (La. 2003)

Tenants (Shell Oil Company and others) leased 210 acres for 30 years for an oil and gas terminal. The property was within the area of 360 acres on which tenants had oil and gas extraction lease. The lease contained the language set forth in the caption, requiring restoration to original condition upon termination of the lease. When the lease ended, landlords claimed that tenants left the property heavily polluted with petroleum contaminants and in fact had created a situation in which there was a danger of seepage from their property into an aquifer that provided domestic water for the local community. The parties argued for a while about how much clean up was necessary. Then Landlords elected to sue.
They sued for breach of contract, rather than in tort (which would have been available in Louisiana), and for trespass based on the tenant's continued presence on the property during a holdover period.

A jury awarded $927,000 for trespass on the property following the end of the lease (failure to vacate), and $33 million for the cost of restoration, including $28 million for the cost of constructing a system to protect the aquifer. In addition, the jury awarded $16.7 million for injection of seawater beyond that permitted in the lease and the trial court awarded attorney's fees of around $740,000.

On appeal (after an intermediate ruling from a court of appeals), the Louisiana Supreme Court affirmed the basic damages ruling, remanded the determination for holdover trespass (under circumstances that would lead to a lower award, but still higher than defendants contended), remanded the groundwater award in a manner that likely would substantially reduce it, but then (agreeing with the court of appeals), increased the attorney's fees to $4 million. The court, however, did refuse to award exemplary damages, since the basic action was in contract.

A. The basic contract damages:

Perhaps the most spectacular part of the case is the decision upholding a
$33 million award in a case in which the restored value of the property
would be $107,000. Although the language of the lease stated that only
"reasonable restoration" was possible, the court elected to rely on the jury's judgment as to what was "reasonable."

The court agreed that prior tort decisions in Louisiana involving damages to property had limited recovery to loss in market value in market value, even when cost of restoration of the property was greater; but it concluded that that approach would not be used where the defendants had undertaken by
contract actually to restore the property to its original condition. The
court indicated that even in tort cases, there might be an exception where the property had special personal value to the plaintiff or where the plaintiff, in fact, was likely to make the repairs, and concluded that both exceptions applied here. But it specifically refused to base its opinion on the exceptions, viewing the rule as inapplicable in contract cases.

Thus, the award did not require the plaintiffs to use the money to restore. The court did, however, discuss the fact that it was likely that the plaintiffs, owners of the property in question for almost 100 years through several generations, likely would spend the money in that way. Further, the court noted that the $28 million for protection of the aquifer was in response to an imminent threat of contamination, although no contamination was now occurring and no government agency had ordered any clean up. Defendant Shell argued that it also would still be liable under Louisiana's environmental laws if indeed clean up was required, and the court responded that if this indeed occurred, and the plaintiffs had not done the clean up, Shell could recover back from the plaintiffs the cost of the clean up (assuming the money hadn't already been squandered on trips to the Maldive Islands).

B. The Saltwater Damages:

The interesting legal issue in this aspect of the case is the discussion of whether the defendant should be liable in restitution for the benefit it accrued to its business by deliberately disposing of saltwater on the property beyond that amount authorized under its lease. The trial court basically had so held, and a dissenter in the Supreme Court so argued. But the majority rejected that approach here, in part because the total amount of saltwater that was illegally injected amounted only to about 3 % of the total.

The editor has always been of the view that courts ought to look more at the issue of restitution damages, even in contracts cases, when faced with knowing and deliberate breaches of contract due apparently to cost-benefit analysis by the breaching party.

C. Trespass

For a portion of the time that tenants were holdover after the lease expired, they were not holding over "in bad faith" in the language of the Louisiana court. The editor thinks that this means that they were "tenants at sufferance" in common law language - the landlords hadn't elected to put tenant into a "trespasser" status by ordering that it leave. The court held that the damages awarded below appear to have been based upon "bad faith" holdover for the entire time, and remanded for a determination as to what proportion of the holdover in fact was not in "bad faith."

D. Attorney's Fees.

The tenant argued that appeals court should not increase the trial court's award of attorney's fees. Normally, this left to the trial court
discretion. But here the appeals courts concluded that the trial court
pointedly had not taken into account the fact that the attorneys had worked partially on a contingent fee basis, so that a greater part of the plaintiffs award would go to the attorneys if higher fees weren't awarded. The court recited the usual statement of factors to be taken into account in determining attorneys' fees, and that list does not include the presence of contingent fee contracts, but it seemed nevertheless to take that into account, among other things, in concluding that the trial court's award was "abusively low" and in awarding $4 million. This figure includes fees for the appeals.

Comment 1: The editor agrees that the plaintiffs' lawyers earned their fees here. The election to sue in contract rather than in tort was a brilliant stroke, and obviously they did a great job with the jury. The editor is somewhat surprised to see a Louisiana court, normally a bastion of Civil Law "reasonableness" defer so much to the jury in the interpretation of this concept in the contract.
Other courts might have viewed the issue as a question of law, or at least the jury's conclusion as over the top as a matter of law. Perhaps this reflects the fact that more and more high dollar plaintiffs lawyers are obtaining a voice in the appointment of judges even if they don't sit on the courts themselves (since they'd prefer to sit on their money.) The editor understands that plaintiffs' lawyers in his state contribute staggering amounts to politicians, and in fact there have been efforts to overturn the "merit based" judicial selection system here. Perhaps the same phenomenon is occurring elsewhere.

Comment 2: The editor, in fact, agrees with the concept that parties with contractual obligations ought not to be able to balance them away simply by paying the tort measure of damages. Contracts should not be reduced to questions of efficiency. At least in real estate, we can rely in most cases upon markets to establish efficiency, and markets work best when contracts are enforced as written and intended.

Nevertheless, the editor is uncomfortable with such huge imbalance between damages and impact, particularly when there is no showing that the monies actually will be used to carry out the stated contractual purpose. The editor admits that he sees less charm in bayou life than do the plaintiffs in this case. But, when faced with a stack of bills totalling $50 million, but editor speculates that at least some of the plaintiffs may have second thoughts about making property that has been an oil terminal for over thirty years back into a nice worthless swamp and walking away broke.

Maybe just one or two trips to Vegas . .. Waddaya say???!!! You might still walk away broke, but there are fewer mosquitoes. Don't care for Vegas? How about a nice NASCAR team sponsorship for a year or two? Makes even more noise than a Cajun band.

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