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Davis Oil Co. v. TS, Inc.

Citation: 28 ELR 21379
No. 97-30408, 145 F.3d 305/47 ERC 1039/(5th Cir., 06/26/1998)

The court holds that under Louisiana law, the successor to a former oil company is directly liable for the cleanup costs of an abandoned oil lease site. When the original lessee conveyed to the company an oil and gas lease, the company consented to the inclusion of a covenant to clean up the leased area at the lease's expiration.

The court first holds that there is no conflict of laws and that it can proceed to decide the case under Louisiana law even though the choice-of-law clause in the purchase agreement between the parent companies of both the oil company and its successor provides that Ontario law applies. The original lessee is only a third-party beneficiary to the assumption agreements between the oil company and the successor, and Ontario's common-law rule of privity of contract provides that a contract cannot confer rights or impose obligations on anyone except the parties to it. However, the rule is relaxed in appropriate circumstances, including that of third-party beneficiaries. Moreover, even assuming that Ontario law does require strict privity of contract, the parent companies did not intend for that choice-of-law clause to apply to the transfer of the oil company's assets and liabilities to the successor.

Next, the court holds that the successor is directly liable to the original lessee for the company's cleanup obligation. The relevant portions of the various contracts — the sale agreement, which refers to the memorandum of understanding (MOU), which in turn refers to the option agreement — clearly contemplate the successor's assumption of the company's obligation to clean up the site. Further, the successor's argument that the assumption was merely an incidental assumption does not logically square with the structure of the deal between the parties.

The court then holds that the liability exclusions in the sale agreement do not apply. The MOU expressly assumes the obligation that the company incurred under the purchase agreement. The MOU does not require that the liabilities assumed be tied to an identifiable asset at closing. This requirement would have the effect of excluding a great deal of general oil and gas obligations — ones that the sprit of the transfer agreements would seem to encompass. Moreover, inserting the option agreement's definition of oil and gas assets and liabilities into the MOU's reference to assets and liabilities demonstrates that an assumed liability can outlive an asset. The liability need only be one incurred with assets that at some point in time were habitually designated as part of the company's oil and gas division. The company's obligations incurred as a result of its assumption of the covenant plainly meet this standard. Therefore, the district court's decision that the successor did not assume the lessee's cleanup obligation under the covenant is reversed, and the court renders judgment for the lessee.

A dissenting judge would hold that the contracts do not clearly contemplate the successor's assumption of the company's cleanup obligation to the lessee.

Counsel for Plaintiff
Etienne C. Lapeyre
Lapeyre, Terrell & Randazzo
400 Poydras St., Ste. 1980, New Orleans LA 70130
(504) 524-5152

Counsel for Defendant
Blake G. Arata
Gordon, Arata, McCollam & Duplantis
201 St. Charles Ave., Ste. 4000, New Orleans LA 70170
(504) 582-1111

Before Jones and Shaw,* JJ.