REVISED - April 24, 1998

UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

____________________

No. 96-60837

____________________

RALPH E. WILLIAMSON,

and his wife DAPHINE WILLIAMSON,

LESLIE WILLIAMSON,

JUDY WILLIAMSON DUNAWAY,

BONNIE WILLIAMSON MORRIS,

JAMES WILLIAMSON,

RALPH E. THOMAS,

SAMMY L. SMITH,

S. E. SMITH,

ROBERT SIDNEY DOBBS, JR.,

FLORA R. DOBBS,

BOBBY G. SMITH,

MARION P. SMITH,

and GRACE M. SMITH,

all residents of Lowndes County, Mississippi,

Plaintiffs-Appellees,

versus

ELF AQUITAINE, INC., a Delaware Corporation,

Defendants-Appellants.

Appeal from the United States District Court

for the Northern District of Mississippi

(No. 1:93-CV-255-S-D)

_________________________________________________________________

April 1, 1998

Before POLITZ, Chief Judge, GARWOOD and BARKSDALE, Circuit Judges.

RHESA HAWKINS BARKSDALE, Circuit Judge:

For this diversity action, the interlocutory appeal at hand

concerns whether, under Mississippi law, lessors/royalty owners are

entitled to royalties from the proceeds of th e “nonrecoupable”

settlement of a “take-or-pay” contract between a lessee/producer

and a gas purchaser. On cross-motions for summary judgment, the2

district court held for the lessors/royalty owners. We R EVERSE and

RENDER

.

I.

Appellees are lessors/royalty owners under six oil, gas, and

mineral leases for the Caledonia Field in Lowndes County,

Mississippi. Appellant, Elf Aquitaine, Inc., the lessee, drilled

and sold gas from two Caledonia Field wells. Elf entered into two

separate purc hase and sales contracts with the Tennessee Gas

Pipeline Company (TGP). Under these contracts, Elf was required to

sell, and TGP was req uired to buy, 90 percent of Elf’s delivery

capacity. Among other things, these contracts contained “take-orpay” provisions, which required TGP to take or, if failing to take,

to in any event pay for a large minimum volume of gas that Elf made

available for delivery, and to take (recoup) the undelivered, but

paid for, gas in succeeding years.

The term “take-or-pay” is somewhat misleading; the purchaser

always must make payment for a minimum amount of available gas, but

may exercise an option to tak e (recoup) the gas at a later date.

These provisions are mutually beneficial: the producer is assured

a steady income; the pipeline company, a steady supply.

Due to various market forces in the early 1980s, the natural

gas market experienced an increase in supply but a decrease in

demand. Consequently, pipeline companies were in a financially

unfavorable position of being locked into long-term, take-or-pay

contracts with producers, requiring pipeline companies to purchase

at high prices large volumes of g as, which they were unable to3

resell on the flooded market. S ee Koch Hydrocarbon Co. v. MDU

Resources Group, Inc.

, 988 F.2d 1529 (8th Cir. 1993); John S. Lowe,

Defining the Royalty Obligation

, 49 SMU L. R EV

. 223 ( 1996); Bruce

M. Kramer, Liability to Royalty Owners For Proceeds from Take-orPay and Settlement Payments , 15 E. M IN

. L. F OUND . § 14.01 (1994).

In 1983, due to these adverse market conditions, TGP followed

a growing trend among similarly situ ated pipeline companies and

unilaterally began refusing to take, much less to pay for, the full

minimum available gas amount, in clear breach of its contracts with

Elf, among others. As a result, Elf and TGP entered into a

settlemen t agreement in 1985 (the 1985 settlement), kept

confidential from the lessors, w hich resolved certain breach of

contract claims that Elf had against TGP.

However, due to continuing market difficulties, TGP continued

in breach of contract. (For example, in December 1985, TGP advised

Elf that its gas sales at one point had been reduced to the lowest

level since 1944.) TGP refused to meet its take-or-pay

obligations, but also refused to release the gas Elf was

contractually committed to sell to TGP. By 1987, TGP owed Elf over

$27 million i n take-or-pay obligations under various contracts,

including the two involved in this case.

Consequ ently, Elf and TGP entered into a second settlement

agreement in 1987 (the 1987 settlement), again kept confidential

from the lessors, under which TGP made a lump-sum payment of

approximately $6.6 million to Elf in consideration for Elf waiving

its claims under the take-or-pay contracts. No royalties were paid4

to Appellees from this settlement amount. (The 1987 settlement

included the following language: “WHEREAS Elf has been requested by

[ TGP] to reduce prospectively the price, volumes and take-or-pay

obligations of gas purchased under the Contracts....” Although the

settlement amount was entered in Elf’s books as a settlement of

take-or-pay obligations, Appellees contend that this settlement was

not solely to excuse take-or-pay obligations but to excuse all

disputes arising out of the marketing of gas under the leases.)

In conjunction with the 1987 settlement, TGP and Elf also

amended the contracts to allow Elf to sell gas from the wells on

the open market. Such sales increased immediately, with Elf paying

Appellees full royalties from them.

In mid-1993, after becoming aware of the 1985 and 1987

settlements, Appellees filed this action in Mississippi chancery

court to recover as royalties a portion of the settlement proceeds.

Elf removed the action to federal district court.

With respect to the 1987 settleme nt , the district court

granted summary judgment to Appellees, denied Elf’s similar crossm otion, and reserved ruling on damages. W illiamson v. Elf

Aquitaine, Inc.

, 925 F. Supp. 1163, 1173-74 (N.D. Miss. 1996).

(The court held that the claim based on the 1985 s ettlement w as

barred by limitations; Appellees do not cross-app eal. I d. at

1174.)

The district court ce rtified the following issue for

interlocutory appeal: “whether, pursuant to Mississippi law,

lessors of a mineral interest in gas are entitled to royalties5

stemming from the nonrecoupable cash settlement of a take -or-pay

contract dispute between a pipeline and a producer”. W illiamson v.

Elf Aquitaine, Inc.

, No. 1:93CV255-S-D, 1996 WL 671660 (N.D. Miss.

July 25, 1996) (unpublished). Our court initially denied but, upon

re-certification granted, Elf’s petition for interlocutory appeal.

Williamson v. Elf Aquitaine, Inc. , No. 96-00268 (5th Cir. Dec. 5,

1996) (unpublished).

II.

A.

Appellees/lessors seek certification to the Mississippi

Supreme Court.

In determining whether to exercise our

discretion in favor of certification, we

consider many factors. The most important are

the closeness of the question and the

existence of sufficient sources of state law

—

statutes, judicial decisions, attorney

general’s opinions

— to allow a principled

rather than conjectural conclusion. But also

to be considere d is the degree to which

considerations of comity are relevant in light

of the particular issue and case to be

decided. And we must also take into account

practical limitations of the certification

process: significant delay and possible

inability to frame the issue so as to produce

a helpful response on the part of the state

court.

State of Fla. ex rel. Shevin v. Exxon Corp. , 526 F.2d 266, 274-75

(5th Cir. 1976).

Appellees contend that certification is proper be cause the

issue at hand has not been addressed by the Mississippi Supreme

Court and judicial economy would be served. But, as discussed

infra

, Mississippi case law, which looks to Texas decisions in oil6

and gas cases, is sufficiently clear to allow this court to decide

the issue presented. Needless to say, “[c]ertification is not a

panacea for resolution of those complex or difficult state law

questions which have not been answered by the highest court of the

state”. T

ranscontinental Gas Pipeline Corp. v. Transportation Ins.

Co. , 958 F.2d 622, 623 (5th Cir. 1992).

In short, this appeal does not fall within the class of

“exceptional” cases requiring certification. S ee

, e.g.

, Lavespere

v. Niagara Mach. & Tool W orks, Inc. , 920 F.2d 259, 262 (5th Cir.

1990). Accordingly, certification is DENIED

.

B.

Of course, we review a summary judgment de novo. E.g., FDIC

v. Myers , 955 F.2d 348, 349 (5th Cir. 1992). In this regard, the

parties stipulated in district court that no material fact issues

exist. Therefore, at issue is whether, under Mississippi law, the

Appellees are entitled to royalti es from the proceeds of the

nonrecoupable 1987 settlement of the take-or-pay contracts between

Elf and TGP. (As discussed i nfra

, under a “nonrecoup able

settlement”, there is a termination of the pipeline company’s right

to take gas n ot taken prior to settlement.) Again, for this

summary judgment, as in all instances where we are presented with

an issue of law, see Thompson v. City of Starkville

, 901 F.2d 456,

459 (5th Cir. 1990), we review de novo

.

For this diversity action, and because the Mississippi Supreme

Court has not addressed this issue, we are required to ma ke an

Erie -guess as to how t he Mississippi courts would apply state7

substantive law. E rie R.R. Co. v. Tompkins

, 304 U.S. 64 (1938);

e.g., Southwestern Engineerin g v. Cajun Elec. Power Co-op., Inc.

915 F.2d 972, 978 (5th Cir. 1990). In this regard, deference

cannot be given to the rulings by the district court, even though

it sits in the State whose law is being a pplied. S alve Regina

College v. Russell

, 499 U.S. 225, 238 (1991) (“When de novo review

is compelled, no form of appellate deference is acceptable.”).

Prior to launching this de novo /non-deferential exploration,

we note, in fairness to the able district court, that some of the

key decisions it looked to as bases for its most comprehensive

opinion have subsequently been reversed. In sum, we are exploring

ground altered after the district court ruled.

1.

Under Mississippi law, as in general, implied covenants are

inapplicable when a contract contains express pro visions on that

particular issue. Lloyd’s Estate v. Mullen Tractor & Equip. Co.

,

4 So. 2d 282, 287 (Miss. 1941). Therefore, absent ambiguities,

Mississippi gives effect to the plain language of the lease, which

represents the agreed understanding between the parties. S uperior

Oil Co. v. Beery

, 63 So. 2d 115, 118 (Miss. 1953). Accordingly, we

look first to that plain language.

Concerning Elf’s royalty obligations to Appellees, five of the

leases state:

As royalty, lessee covenants and agrees:

... (b) To pay lessor on gas and casinghead

gas produced from said land (1) w hen sold by

lessee

, one-eighth of the amount realized by

lessee, computed at the mouth of the well, or

(2) when used by lessee off said land or in8 the manufacture of gasoline or other products,

the market value, at the mouth of the well, of

one-eighth of such gas and casinghead gas....

(Emphasis added.) The sixth lease has substantially similar

language:

Royalties to be pai d by lessee are: ...

(b) on gas, including casinghead gas or other

gaseous substance[s], produced from said land

and sold or used

, the market value at the well

of one-eighth (1/8) of the gas so sold or

used

, provided that on gas sold at the well

the r oyalty shall be one-eighth (1/8) of the

amount realized from such sales

....

(Emphasis added.)

Applying Mississippi law, our court’s decision in Piney Woods

Country Life School v. Shell Oil Co.

, 726 F.2d 225 (5th Cir. 1984),

cert. denied

, 471 U.S. 1005 (1985), concerned royalty p rovisions

virtually identical to those at hand. We held that “production”

for the purposes of a royalty-bearing oil and gas lease occurs when

the gas is brought to the surface and “severed from the land”. I d.

at 234; cf. Diamond Shamrock Exploration Co. v. Hodel

, 853 F.2d

1159, 1165 (5th Cir. 1988). Elf contends that the plain language

of the leases requires payment of royalties only when gas has been

“produced” and “sold”. Appellees focus on the “amounts realized”,

contending that Elf “realized” two prices for the gas that,

subsequent to the 1987 settlement, it produced and sold: first,

the lump-sum, nonrecoupable settlement “price” for the gas it would

later produce; and second, the spot market prices from the sale of

the same gas when actually produced. (Based on statements by

counsel at oral argument here, as well as Appellees’ statement of

facts in the pretrial order, it appears that TGP purchased little,9

if any, of the gas that, post-1987 settlement, was produced and

sold.)

Mississippi courts give little guidance on a lessee’s royalty

obligations in the settlement of a take-or-pay dispute. However,

for oil and gas issues of first impression, the Mississippi Supreme

Court has long held that it will typically follow decisions of the

Texas courts, depending, of cours e, on “the soundness of the

reasoning by which they are supported”. P hillips Petroleum Co. v.

Millette , 72 So. 2d 176, 182 (Miss. 1954).

Texas courts have dealt extensively with the question of when

royalties are to be paid in the context of take-or-pay provisions.

In a seminal case, K illam Oil Co. v. Bruni

, 806 S.W.2d 264 (Tex.

App.--San Antonio 1991, writ denied) ( Bruni I ), the Texas Court of

Appeals held that lessors are not entitled to royalties on proceeds

from the settlement of a take-or-pay contract. That decision keyed

on the fact that the lease, which is virtually identical to one of

the leases at issue here, entitled the lessor to royalty payments

for gas “produced”, whereas take-or-pay settlement proceeds involve

payments for gas not produced

.

However, especially for “nonrecoupable settlements”, the

holding in Bruni I was arguably called into question in Hurd

Enterprises, Ltd. v. Bruni

, 828 S.W.2d 101, 106-07 n.8 (Tex. App.--

San Antonio 1992, writ denied) ( Bruni II ), which stated, in dicta,

that “there are cogent arguments co ncerning the royalty owner’s

interest in take-or-pay settlement funds, especially when, as here,

the settlement terminates the purchaser’s recoupment rights .”10

(Emphasis added.) Again, a “nonrecoupable settlement”, as in the

case at hand, occurs when the settlement terminates the pipeline

company’s “make-up” rights ( i.e. , the right to later take gas not

taken during the prior period covered by the settlement). S ee

Bruni II , 828 S.W.2d at 106 n.8.

This question was resolved in TransAmerican Natural Gas Corp.

v. Finkelstein , 933 S.W.2d 591 (Tex. App.--San Antonio 1996, writ

denied) (en banc) ( Finkelstein II ); the court found no distinction

between recoupable and nonrecoupable settlements, holding that “the

royalty owner, who does not shoulder the risks of exploration,

production, and development, shou ld not share in the take-or-pay

payment”. Id. at 599 (citing Diamond Shamrock , 853 F.2d at 1167)

(quotation and ellipsis omitted). The court stated: “we reaffirm

our decision in Bruni I and clarify that a royalty owner, absent

specific lease language, is not entitled to take-or-pay settlement

proceeds, whether or not gas is sold to third parties on the spot

market”. Finkelstein II , 933 S.W.2d at 600.

Moreover, F inkelstein II held that the “cogent argume nts”

listed in the d icta in B runi II had “been resolved by Lenape ’s

explanation that take-or-pay payments [do not] represent ... the

mere ‘pre-payment’ of gas suggested by [the Finkel stein I p anel

opinion withdrawn by Finkelstein II ]”. 933 S.W.2d at 599 (citing

Lenape Resources Corp. v. Tennessee Gas Pipeline Co. , 925 S.W.2d

565, 571-72 (Tex. 1996)). Turning around the “Elf will receive two

payments” argument presented here by Appellees, the court noted

that, if royalties were required to be paid on the compromise of a11

dedication claim, the royalty owner would receive “two royalties on

the same gas, a right to which he was not entitled under the terms

of his lease”. Id.

Similarly, Independent Petroleum Association of America v.

Babbit , 92 F.3d 1248 (D.C. Cir. 1996), states:

[T]here is no meaningful distinction between a

settlement payment and a recoupable take-orpay payment in that no gas is actually

produced in either case.

... The link between

the f unds on which royalties are claimed and

the actual production of gas is missing.

....

[W]hen the payments (of either variety)

are nonrecoupable, the funds are never linked

to any severed gas. Therefore, no royalties

accrue on those payments.

Id. at 1259-60 (footnote omitted).

Other recent Texas cases have followed Finkelstein I I and

further clarify the state of the law in Texas on the issue of

royalty obligations vel non in conjunction with nonrecoupab l e

settlements.

Alameda Corp. v. TransAmerican Natural Gas Corp. , 950 S.W.2d

9 3, 97 (Tex. App.--Houston [14th Dist.] 1997, writ denied), held

that repudiation damages are not roya lty-bearing when, as in the

case at h and, royalty obligations are tied to production. In so

holding, the court stated that “a royalty owner’s right to payment

under these circumstances is no longer an open question in Texas”.

Id. at 99 (citing Bruni II and Lenape ).

And, Condra v. Quinoco P etroleum, Inc. , 954 S.W.2d 68 (Tex.

App.--San Antonio 1997, n.w.h.), relied on B runi II

, Finkelst ein12

II

, and Alameda in holding that proceeds from a nonrecoupable takeor-pay settlement are not royalty-bearing:

Similar to the repudiation damages

considered in [ Finkelstein II ], the

nonrecoupable payment in the instant case was

not pai d for production. Therefore, we hold

that the appellants’ division orders do not

entitle them to royalties on the take-or-pay

settlement in this case.

Id. at 71.

The state of the law in Texas is clear: absent specific lease

language, royalty owners are not entitled to proceeds from take-orpay sett l ements, whether recoupable or nonrecoupable. A ccord

Condra

, 954 S.W.2d at 71; Alameda

, 950 S.W.2d at 97-99; Finkelstein

I I

, 933 S.W.2d at 597-600. Obviously, Texas case law is not

bin ding on Mississippi courts; but, as noted, it is typically

followed by them in oil and gas issues of first impression.

Phillips Petroleum , 72 So. 2d at 182.

The reasoning evinced in these Texas opinions is sound and

consistent with the limited Mississippi law precedent. S ee

, e.g.

,

Piney Woods

, 726 F.2d at 234 (holding that, under Mississippi law,

“a gas sale contract is executory and t hat the sale is executed

only upon production and delivery”) (citing M ISS

. C ODE A NN . § 75-2-

105, et seq. ); Palmer v. Crews

, 35 So. 2d 430, 435 (Miss. 1948)

(stating that a royalty “consists of a share in the oil and gas

produced. It does not include a perpetual interest in the oil and

gas in the ground”.). Accordingly, that reasoning applies here.13 2.

Equitable considerations do not come into play. As discussed,

i t is well-established in Mississippi that implied covenants are

inapplicable when, as here, an issue is expressly covered by the

language in a lease. L loyd’s Estate

, 4 So. 2d at 287 (“An express

covenant upon a given subject

... excludes the possibility of an

implied covenant of a different or contradictory natu re.”).

Similarly, “[a]s we stated in B runi I

, the royalties to which a

lessor is entitled must be determined from the provisions of the

oil and gas lease”. F inkelstein II

, 933 S.W.2d at 597. Therefore,

we follow Finkelstein II :

Like the lease in B runi I

, [the royalty

owner]’s lease is tied to production. By this

language, [the royalty owner] unambiguously

limited his right to royalty payments from gas

actually extracted from the land.

Additionally, without production, [the

lessor]’s duty to reasonably market was not

triggered.

933 S.W.2d at 598 (internal citation and footnote omitted).

Appellees do not claim to be third-party beneficiaries of the

take-or-pay contracts between Elf and TGP. See Mandell v. Hamman

Oil and Refining Co.

, 822 S.W.2d 153 (Tex. App.--Houston [1st

Dist.] 1991, writ denied); Gerard J.W. Bos & Co., Inc. v. Harkins

& Co.

, 883 F.2d 379, 382 (5th Cir. 1989) (applying Mississippi

law). And, Appellees do not contend that the 1987 settlement was

in bad faith or less than an arms-length transaction.

On the other hand, they do note that, in addition to a claimed

implied duty to market, the leases provide that “[l]essee covenants

and agrees to use reasonable diligence to produce, utilize, or14

mar ket the minerals capable of being produced from said wells”.

But, as discussed above, and as stated in Finkelstein II , “[t]ake

or pay is not a benefit which flows from the marketing covenant of

a lease”. 933 S.W.2d at 600. Furthermore, Appellees do not claim

that, post-1987 settlement, Elf has not complied with its express

marketing obligation.

III.

In Piney Woods , this court held that, under Mississippi law,

the provisions in the lease controlled, even though, in that case,

the gas producer was economically disadvantaged. 726 F.2d at 237-

38. This time, it appears that it is the royalty owners who are

adversely affected by the enforcement of the lease. The summary

judgment is REVERSED

, and judgment is RENDERED for Elf Acquitaine,

Inc.

REVERSED and RENDERED