A lessee, operator, and contract driller were found to be a “single business enterprise” for the purpose of imposing statutory penalties and attorney fees for failure to pay royalties. The principle is that if one corporation is wholly under the control of another, the fact is it is a separate entity does not relieve the controlling entity from liability. The law considers the former corporation to be merely an alter ego of the latter.
Louisiana law imposes statutory penalties on a lessee who fails to pay royalties. Oracle 1031 Exchange, LLC was the actual lessee and Oracle Oil LLC and Delphi Oil, Inc. were the operator and the contract driller.
What is required for one entity to be “wholly under the control” of another? (1) Delphi and/or Oracle paid royalties from the well; (2) Delphi and/or Oracle received the checks for selling the oil produced from the well; (3) Delphi and/or Oracle paid the severance taxes; (4) all three entities are headed by the same person; and (5) Exchange appeared to be insolvent (by the fact that it appealed devolutively – without a bond or other means to suspend the effect of the judgment). From all of this, the court concluded that Oracle and Delphi were wholly under the control of Exchange and were Exchange’s alter ego.
One possible reason the court passed liability for underpayment on to Exchange could be that but for the court’s treatment of Oracle and Delphi as, in effect, lessees, the royalty owners would have had no recourse for recovery of their unpaid royalties.
All states do not recognize this theory of recovery. For example, efforts by plaintiffs in Texas to convince the Supreme Court to adopt this standard have been unsuccessful.