Case Law Update: Franklin v. Regions Bank

This controversy stemmed from a mineral lease covering 1,805.35 acres in Louisiana which included provisions dictating that it would terminate at the end of its term as to rights below the deepest depth drilled, known as deep rights, as well as nonproducing acreage. The operator drilled on all but 168.95 acres at depths above the Haynesville Shale formation. Accordingly, the lease was set to expire as to the nonproducing 168.95 acres as well as the deep rights below the remaining acreage. In 2007, a Regions Bank landman negotiated an extension of the lease on behalf of the mineral owners, intending to extend the lease only as to the 168.95 acres. However, the extension was not expressly limited to this acreage and by signing it, the landman mistakenly extended the entire original lease as to all acreage and all depths.

In 2007, Petrohawk contacted Regions to execute a new lease covering the depths intended to be released under the original lease. By this time, a boom in Haynesville production had skyrocketed lease bonuses. Because the lease extension precluded Regions from executing the second lease with Petrohawk, the mineral owners missed out on a significant lease bonus payment and a higher royalty rate while the unproductive deep rights remained tied up in the earlier lease.

The farm owners sued Regions for breach of contract alleging Regions’ landman mishandled the lease extension. The district court found that Regions was not liable because the landman’s mistake was a “mistake in judgment,” which was covered by an exculpatory clause in the mineral management agreements between Regions and the mineral owners. The 5th Circuit rejected this argument, finding the land man did not make a mistake in judgment, but rather a pure and simple mistake by misreading and signing the extension. Thus, Regions was not shielded from liability, the landman’s mistake constituted breach of contract, and the mineral owners were entitled to financial damages.