Face Challenges Confidently

486 Marrs & Smith P’ship v. Sombrero Oil & Gas Co., L.L.C

Thursday, September 3rd, 2015

Richard F. Brown

The following is not a legal opinion.  You should consult your attorney if the case may be of significance to you.
Marrs and Smith Partnership v. Sombrero Oil and Gas Company, L.L.C.  held that a nonexecutive mineral owner must reimburse the lessee for bonus paid to the nonexecutive and to the executive in a suit by the nonexecutive to rescind the lease.  The parties aligned as nonexecutive mineral owner (“Nonexecutive”), Lessor and Lessee under an oil and gas lease.  The Nonexecutive ratified the lease, but then sued to rescind the lease.  The lease terminated by its terms when no well was drilled.  Lessee obtained a partial summary judgment against the Nonexecutive of liability for breach of lease and for restitution damages.  The restitution damages were for bonus paid to Lessor and to the Nonexecutive, but not repaid to Lessee, in the amount of approximately $69,000.   At trial, the jury declined to award Lessee’s claim of $5 million in lost profits, but did award approximately $570,000 to Lessee in attorney’s fees.   The trial court’s judgment included the restitution damages and the attorney’s fees, but not the claimed lost profits.  The Nonexecutive appealed, contesting the judgment on restitution damages and attorney’s fees.
The question presented to the court was whether “[Lessee] established, as a matter of law, that the [Nonexecutive’s] repudiation was a producing cause of [the Lessee’s] out-of-pocket expenses.”   The court held that “bonus payments were required to maintain the Lease [and] their reimbursement would naturally and necessarily flow from any breach of the Lease.”   Apparently the Nonexecutive contended the lease terminated by its terms, and therefore the Nonexecutive’s actions could not be a producing cause.  The court held that the summary judgment was based on the out-of-pocket expenses, not lost profits.   The court also dismissed as irrelevant the Nonexecutive’s claim that Lessee suffered no damages because a third party reimbursed Lessee for the bonus payments.  “[U]nlike other contractual damages, restitution focuses on forcing the defendant to disgorge benefits that it would be unjust to keep, rather than on compensating the plaintiff.”
The significance of the case is the holding that the lessor in a suit for rescission of a lease must reimburse the bonus paid or almost certainly be liable for restitution damages.  In this case, the bonus was paid in part to both the Lessor and to the Nonexecutive.  The opinion does not address that distinction, nor does it address whether the suit for rescission was as to the full mineral interest or some lesser interest owned by only the Nonexecutive.  Thus, the extent of a nonexecutive’s obligation to reimburse bonus paid under similar circumstances is not fully developed.