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 prandolph@cctr.umkc.edu
LANDLORD/TENANT; TENANT'S DUTY TO REPAIR; DAMAGES: Where tenant
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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