Fifth Circuit Affirms Surety Cannot Recover From Former Offshore Lessees For Forfeited Bonds Used To Pay For Decommissioning

The Fifth Circuit's recent decision in Lexon Insurance Co., Inc. v. Chevron U.S.A. Inc., No. 24-20347 (5th Cir. Aug. 19, 2025) (slip op.), addresses who should pay offshore decommissioning costs when a current leaseholder fails to meet its legal obligations. Federal law requires that wells, pipelines, and platforms on the Outer Continental Shelf be safely abandoned once operations cease. That obligation runs not only to the current leaseholder and operator, but to all who have ever held such interests.

In this case, Linder Oil was the most recent operator for an offshore lease. But after going bankrupt and defaulting, its surety, Lexon Insurance Company, paid more than $11 million on performance bonds to the government. The government, in turn, transferred that money to former leaseholders, who completed decommissioning. Although the total costs exceeded the amount of the bonds, Lexon nonetheless sought reimbursement from several former leaseholders. By forfeiting the bonds, Lexon argued it paid a debt to the government on behalf of the former leaseholders who were jointly responsible for decommissioning costs. As a result of its payment, Lexon claimed it was entitled to step into the government's shoes and recover its money through "subrogation." Lexon consequently filed suit against the former leaseholders in federal court, alleging its subrogation theory along with theories of contribution and unjust enrichment. But the district judge rejected each of these claims on summary judgment and dismissed Lexon's lawsuit with prejudice. In response, Lexon sought appellate review.

A unanimous three-judge panel of the Fifth Circuit sided with the trial court. Writing for the majority, Judge Irma Ramirez first addressed Lexon's federal-law claims. In seeking subrogation, Lexon relied in large part on 31 U.S.C. § 9309. According to Lexon, this statute allows "a surety" who pays "the government under a bond" to "obtain reimbursement from any party whom the government" could have "lawfully" forced to pay. Op. at 6. The panel disagreed with that interpretation. "[C]ontrary to Lexon's argument," the Court ruled, § 9309 is far more limited in scope: "[B]y its plain text and title," the statute simply allows a surety who satisfies a government debt "the same priority as the United States to the insolvent principal's assets and estate." Id. at 6–7. On this basis, the surety may bring "a civil action under the bond" against the principal, but not against third-parties uninvolved with the bond agreement. Id. at 7 (quoting 31 U.S.C. § 9309). Because the defendants here were "not parties to the bonds," the court concluded that § 9309's plain text foreclosed Lexon's statutory subrogation argument. Id.

The Court next considered whether Lexon could invoke "equitable subrogation" through "established federal common law." Id. at 7–8. But this theory fared no better. As the statute governing offshore disputes, the Outer Continental Shelf Lands Act mandates that federal law apply. Yet "[w]hen there is a gap to fill in federal law," state law, not judge-made federal rules, supplies the rule of decision. Id. at 5, 8. As the Fifth Circuit has recognized, "federal courts should not create interstitial federal common law when the Congress has directed that a whole body of state law shall apply." Id. at 8 (quoting Matte v. Zapata Offshore Co., 784 F.2d 628, 631 (5th Cir. 1986)). In this case "no federal statute govern[ed] the precise" subrogation issue, so the panel rejected Lexon's federal common law theory and turned instead to the law of Louisiana.

Ultimately, however, Lexon's subrogation argument found no support in the Civil Code. Although Louisiana recognizes "legal subrogation," the "right is strictly construed." Id. at 9 (quoting Martin v. La. Farm Bureau Cas. Ins. Co., 638 So.2d 1067, 1068 (La. 1994)). To qualify, the paying obligor must have "recourse" against others who were also bound for the same obligation. Id. (quoting La. Civ. Code art. 1829(3)). Here, the panel concluded that Lexon had shown no such "recourse" against defendants. Id. at 9–10. Between the parties, the relevant regulations and contracts placed the risk squarely on Linder Oil, who expressly agreed to indemnify the others.

For the same reason, Lexon's state-law contribution claim failed. As the court explained, contribution presumes a "shared, equal burden" among "co-sureties." Id. at 10–11 (citing La. Civ. Code art. 3055). In this case, however, Lexon was not a co-surety with defendants; it was Linder Oil's surety alone. And even if the defendants could be styled as "co-sureties," they had secured indemnity from Linder. Id. at 11. Such a reality, the Court ruled, "rebutted" any "presumption" of a shared "principal obligation." Id.

Finally, the panel considered Lexon's unjust enrichment claim. But, like the others, this argument was also meritless. A successful unjust enrichment theory requires that the "enrichment" be without legal "justification." Id. at 11–12 (quoting Edwards v. Conforto, 636 So.2d 901, 907 (La. 1993), on reh'g (May 23, 1994)). Here, the majority recognized that any benefit defendants received was justified by the "indemnity agreements with Linder Oil." Id. at 12. Because "equity" had no role in rewriting those valid "bargained-for" transactions, the panel affirmed dismissal of Lexon's unjust enrichment claim. Id. 11–12.

In the end, Lexon issued bonds to "secure Linder Oil's decommissioning obligations." Id. at 12. In fulfilling its responsibility as surety, Lexon paid when Linder defaulted. Neither federal nor Louisiana law allowed Lexon to shift that burden to former leaseholders.

This decision reinforces the valuable role performance bonds in favor of the government play in backstopping offshore decommissioning obligations. While the government retains discretion to decide whether to call for the forfeiture of bonds when a lessee or operator defaults on its obligations (unless the bonds are dual-obligee bonds in favor of both the government and a predecessor), when it does so, predecessors who step up to perform decommissioning can accept bond proceeds to help defray the associated costs. This certainty supports reliance by sellers, at least in part, on government bonds in connection with assumption of decommissioning liabilities by purchasers in purchase and sale agreements and related indemnity provisions.

Note: Liskow & Lewis represented defendants Chevron U.S.A Inc. and BP America Production Company. Jana Grauberger and Michael Rubenstein represented the companies at the trial court. Liskow's appellate team, Kelly Becker and Kathryn Gonski, handled the appeal. Ms. Becker argued for the companies at the United States Fifth Circuit Court of Appeals.

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