PAMELA A. BARKER, District Judge.
Currently pending are the following motions: (1) the Motion of Defendants Chesapeake Exploration, LLC. and Chesapeake Operating, LLC for Summary Judgment (Doc. No. 81); and (2) Plaintiff Bounty Minerals, LLC.'s Motion to Strike Defendants' Notice of Supplemental Authority (Doc. No. 94.) For the following reasons, Plaintiff's Motion to Strike (Doc. No. 94) is DENIED, and Defendants' Motion for Summary Judgment (Doc. No. 81) is GRANTED.
The procedural history of this matter has been recounted in prior decisions of this Court (see e.g., Doc. Nos. 22, 70) and will not be repeated in full herein. Rather, the Court will only set forth that procedural background necessary to provide context for the pending Motions.
On July 11, 2017, Plaintiff Bounty Minerals, LLC (hereinafter "Plaintiff" or "Bounty Minerals") filed a Complaint against Defendants
Shortly after removal, Defendants moved to compel arbitration with respect to one of the subject leases, and to stay this action relative to the remaining leases pending the outcome of arbitration. (Doc. No. 7.) Bounty Minerals responded by moving to amend the Complaint to remove from the litigation the lease that served as the basis for Defendants' request for arbitration. (Doc. No. 16.) On December 1, 2017, this Court (through then-assigned District Judge Sara Lioi) granted Bounty Minerals' motion to amend, permitting it to file an Amended Complaint that omitted the lease with the arbitration clause. (Doc. No. 22.) The Court also denied Defendants' motion to stay. (Id.)
Bounty Minerals filed its Amended Complaint on December 6, 2017 and the Court thereafter conducted a CMC on January 8, 2018, at which it set various case management deadlines. (Doc. Nos. 25, 30.) Shortly thereafter, Defendants filed a Motion for Partial Dismissal, in which it sought an Order (a) dismissing all claims against Chesapeake Operating, (b) dismissing Count II (Breach of Contract) and Count III (Declaratory Judgment) of Plaintiff's Amended Complaint in their entirety; and (c) dismissing all claims against Chesapeake Energy Marketing. (Doc. No. 31.) In lieu of a response, Bounty Minerals filed a Motion for Leave to file a Second Amended Complaint. (Doc. No. 32.) On February 14, 2018, the Court granted Bounty Minerals' Motion to Amend, finding that the proposed amended complaint cured the alleged deficiencies set forth in Defendants' Partial Motion to Dismiss. (Doc. No. 35.)
Bounty Minerals filed its Second Amended Complaint that same day. (Doc. No. 36.) Therein, it asserted the following alternative claims: (1) breach of contract against all Defendants based on Defendants' alleged breach of the royalties provisions of the subject oil and gas leases (Count I); (2) breach of contract claims against Defendant Chesapeake Exploration, LLC based on Defendant's alleged breach of the express covenant of good faith and reasonable prudent operator (Count II); and (3) breach of contract against all Defendants based on Defendants' alleged breach of the affiliate sales provisions of the subject leases (Count III). (Id.)
The docket reflects the parties subsequently engaged in discovery. (Doc. Nos. 41, 42.) On August 10, 2018, Bounty Minerals filed another Motion for Leave to Amend Complaint, in which it sought to add several new defendants.
The Court lifted the stay on January 10, 2019, after mediation failed to produce a resolution. On February 26, 2019, the Court issued an Opinion & Order denying Bounty Minerals' Motion for Leave to Amend and for Remand, finding that "the balance of equities compels the conclusion that Bounty Minerals should not be permitted to further amend its complaint to defeat jurisdiction." (Doc. No. 70 at p. 9.)
On April 12, 2019, Defendants Chesapeake Exploration, LLC and Chesapeake Operating, LLC (hereinafter referred to collectively as the "Chesapeake Defendants") filed a Motion for Summary Judgment as to each of Plaintiff's claims. (Doc. No. 81.) Bounty Minerals filed a Brief in Opposition on May 3, 2019 (Doc. No. 83), to which the Chesapeake Defendants replied on May 17, 2019 (Doc. No. 84.)
On June 26, 2019, the case was transferred to the undersigned pursuant to General Order 2019-13. On October 30, 2019, the Chesapeake Defendants filed a "Notice of Supplemental Authority" in support of their Motion for Summary Judgment. (Doc. No. 93.) Bounty Minerals moved to strike the Chesapeake Defendants' Notice on November 1, 2019. (Doc. Nos. 94, 95.) On November 15, 2019, the Chesapeake Defendants filed a Brief in Opposition. (Doc. No. 96.)
On December 13, 2019, the Court conducted oral argument on the Chesapeake Defendants' Motion for Summary Judgment.
Bounty Minerals is in the business of purchasing oil and gas rights, including lease royalty interests, in the shale gas areas of Ohio, Pennsylvania, and West Virginia. (Doc. No. 36 at ¶ 6.) At issue in the present dispute are six (6) oil and gas leases that Bounty Minerals acquired between 2013 and 2015. (Id. at ¶¶ 8-17.) These Leases are identified in the Second Amended Complaint as follows: (1) the December 16, 2010 and January 7, 2011 leases between Alan L. Miller and Ohio Buckeye Energy, LLC (hereinafter "the Miller Leases") (Doc. No. 36-2); (2) the October 8, 2011 lease between Christopher and Sandi Ryland and Chesapeake Exploration (hereinafter "the Ryland Lease") (Doc. No. 36-4); (3) the March 9, 2011 lease between Dean Cobbs and Chesapeake Exploration (hereinafter "the Cobbs Lease") (Doc. No. 36-6); (4) the May 3, 2013 lease between Mark and Elizabeth Ingham and Chesapeake Exploration (hereinafter "the Ingham Lease") (Doc. No. 36-8); and (5) the October 8, 2011 lease between Michael and Dana Ritchie and Chesapeake Exploration (hereinafter "the Ritchie Lease") (Doc. No. 36-10).
The above Leases contain royalty provisions with respect to both oil and gas. The gas royalty provisions as set forth in the subject Leases are nearly identical, and provide as follows:
Ryland Lease at ¶ 9 (Doc. No. 36-4) (emphasis added).
The oil royalty provisions differ among the various Leases. The Ryland, Ritchie, and Ingham Leases provide that the Lessee agrees as follows:
See Doc. Nos. 36-4, 36-8, 36-10 (emphasis added). The Miller and Cobbs Leases provide that the Lessee agrees:
See Doc. Nos. 36-2 at PageID#s 1684, 1704; 36-6.
Also of relevance herein, each of the six leases at issue impose an obligation on the Lessee to act "as a reasonable prudent operator exercising good faith in all of its activities with the Lessor." See Doc. Nos. 36-2 at PageID# 1683, 1703; 36-4 at PageID# 1731; 36-6 at PageID# 1757; 36-8 at PageID# 1787; 36-10 at PageID# 1817.
Chesapeake Exploration, Chesapeake Operating, and Chesapeake Energy Marketing are affiliates of one another and are all subsidiaries of Chesapeake Energy. See Deposition of Joshua Bowles (hereinafter "Bowles Depo.") at Tr. 21-22 (Doc. No. 76-1). Defendant Chesapeake Exploration was the Lessee under the Leases at issue herein, as well as the operator and producer of the wells covered by the Leases. (Bowles Depo. at Tr. 30-33). Chesapeake Exploration installed centralized production pads at which the oil and gas are produced from several wells in a unit and delivered to a separator. See Expert Report of K. Terry dated February 9, 2019 (hereinafter "Terry Expert Report") at ¶ 24 (Doc. No. 81-5.) The oil is separated and put in a tank, and the separated gas is measured and metered into the first receiving pipeline. (Id.)
Chesapeake Exploration sold the oil to Chesapeake Energy Marketing ("CEM") at the oil storage tanks located near the wellheads on the lease or unit premises. (Id. at ¶ 25.) With respect to gas produced at the wells at issue, Chesapeake Exploration sold the gas to CEM at the production pad based on the volumes of gas metered. (Id. at ¶ 26.) CEM then transported the oil, gas, and natural gas liquids from the wellhead and entered into contracts with third-party midstream companies
Pursuant to an Agency Agreement with Chesapeake Exploration, Defendant Chesapeake Operating ("CO") received payment from CEM and calculated and paid Bounty Minerals royalties on behalf of Chesapeake Exploration. (Terry Expert Report at ¶ 27.) Along with the royalty payments, Chesapeake Operating provided Revenue Statements to Bounty Minerals, copies of which are attached to the Second Amended Complaint. (Doc. No. 36-12.) These Statements contain columns for, among other things, the month of production, what substances were produced, the volumes of substances produced, the price received for the sale of substances produced, applicable taxes, deductions and the royalty owner's interest in the substances that were produced and sold. (Doc. No. 36 at ¶ 30.)
According to Bounty Minerals, the Revenue Statements it received from Chesapeake Operating represented that there were no deductions of post-production costs from the royalty paid to Bounty Minerals associated with the Leases at issue, "as the columns on the Revenue Statement associated with such costs and deductions showed `.00.'" (Id. at ¶ 32.) Bounty Minerals claims that, over time, it noticed that the sales values of the oil, gas, and natural gas liquids in the Revenue Statements associated with the Leases at issue were "substantially less" than the sales values of hydrocarbons on royalty stubs associated with other of Bounty's oil and gas leases in the same vicinity in the same timeframe. (Id. at ¶ 33.)
Thus, on May 15, 2015, Lesley Thompson of Bounty Minerals sent an email to Chesapeake Energy's landowner relations department for clarification. (Doc. No. 36-13.) Therein, Mr. Thompson noted that, for the Ohio wells, "the gross deductions are zero and the net deductions are zero," and asked "does that mean that there are no deductions for drilling and operating these wells?" (Id.) On May 19, 2015, Chesapeake Energy's Revenue Team responded as follows:
(Id.) Chesapeake Energy also provided Bounty Minerals with a number of spreadsheets that identified post-production costs associated with a variety of wells that paid a production royalty to Bounty Minerals pursuant to the Leases. (Doc. No. 36-14.)
When Bounty Minerals compared the data in the spreadsheets to the Revenue Statements associated with the Leases at issue, it claims to have found "substantial differences" between the two documents. (Doc. No. 36 at ¶ 37.) Bounty Minerals and Chesapeake Exploration then exchanged a series of letters regarding these alleged discrepancies. (Id. at ¶ 41.) Of note, on July 16, 2019, Ben Harris from Chesapeake Exploration sent Mr. Thompson a letter that provided, in relevant, part as follows:
(Doc. No. 36-15.)
As further explained by the Chesapeake Defendants during discovery, Bounty Minerals' royalty payments are based on the wellhead value of the gas, as calculated via the "netback method." (Doc. No. 81-4 at p. 9.) To determine the wellhead value using this method, CEM calculated a weighted average sales price by adding all revenues from downstream sales transactions and dividing by the total volume sold. (Bowles Depo. at Tr. 145-146, 206-207.) CEM then subtracted the post-production costs it incurred from the weighted-average sales price it obtained from third-party purchasers to calculate the wellhead value of the gas. (Id.)
It is Defendants' position that calculation of the wellhead value via the "netback method" is in compliance with the express terms of the royalty provisions in the subject Leases. Bounty Minerals disagrees, arguing that Defendants' position is based on the incorrect presumption that the Leases compel that the royalty payment be calculated "at the wellhead." To the contrary, Bounty Minerals asserts that the Leases' reference to the "wellhead" as the point of royalty calculations is not applicable to affiliate sales, such as those between Chesapeake Exploration and CEM. Rather, Bounty Minerals maintains that the "affiliate sales" clause of the Leases dictates that royalty payments be "comparable to that which could be obtained in an arms length transaction (given the quantity and quality of the gas available for sale from the leased premises and for a similar contract term) and without any deductions or expenses." (Doc. No. 83 at p. 13.) Under this method, Bounty Minerals argues that royalty calculations should be based on downstream (rather than wellhead) sales values. (Id. at pp. 15-16.)
Summary judgment is proper "if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a). "A dispute is `genuine' only if based on evidence upon which a reasonable jury could return a verdict in favor of the non-moving party." Henderson v. Walled Lake Consol. Sch., 469 F.3d 479, 487 (6th Cir. 2006). "Thus, `the mere existence of a scintilla of evidence in support of the plaintiff's position will be insufficient; there must be evidence on which the jury could reasonably find for the plaintiff.'" Cox v. Kentucky Dep't of Transp., 53 F.3d 146, 150 (6th Cir. 1995) (quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 252 (1986)). A fact is "material" only "if its resolution might affect the outcome of the suit under the governing substantive law." Henderson, 469 F.3d at 487.
At the summary judgment stage, "[a] court should view the facts and draw all reasonable inferences in favor of the non-moving party." Pittman v. Experian Info. Solutions, Inc., 901 F.3d 619, 628 (6th Cir. 2018). In addition, "the moving party bears the initial burden of showing that there is no genuine dispute of material fact." Ask Chems., LP v. Comput. Packages, Inc., 593 Fed. Appx 506, 508 (6th Cir. 2014). The moving party may satisfy this initial burden by "identifying those parts of the record which demonstrate the absence of any genuine issue of material fact." Lindsey v. Whirlpool Corp., 295 Fed. Appx 758, 764 (6th Cir. 2008). "[I]f the moving party seeks summary judgment on an issue for which it does not bear the burden of proof at trial," the moving party may also "meet its initial burden by showing that `there is an absence of evidence to support the nonmoving party's case.'" Id. (quoting Celotex Corp. v. Catrett, 477 U.S. 317, 325 (1986)). Once the moving party satisfies its burden, "the burden shifts to the non-moving party who must then point to evidence that demonstrates that there is a genuine dispute of material fact for trial." Ask Chems., 593 Fed. Appx at 508-09. "[T]he nonmoving party may not simply rely on its pleading, but must `produce evidence that results in a conflict of material fact to be solved by a jury.'" MISC Berhad v. Advanced Polymer Coatings, Inc., 101 F.Supp.3d 731, 736 (N.D. Ohio 2015) (quoting Cox, 53 F.3d at 150).
Prior to reaching the merits of the parties' arguments, the Court will address Bounty Minerals' Motion to Strike Defendants' Notice of Supplemental Authority. (Doc. No. 94.) For the following reasons, this Motion is denied.
As discussed supra, Defendants filed their Motion for Summary Judgment on April 12, 2019; Bounty Minerals filed a Brief in Opposition on May 3, 2019; and Defendants filed a Reply Brief on May 17, 2019. (Doc. Nos. 81, 83, 84.) Several months later, on October 30, 2019, Defendants filed a "Notice of Supplemental Authority," in which it brought several recent decisions to the Court's attention and summarized the facts and holdings of those decisions. (Doc. No. 93.) Bounty Minerals moved to strike Defendants' Notice, arguing that it was inappropriate and "nothing more than an improper attempt by Defendants to have `another bite at the apple' through further legal argument in a case where briefing ended on May 17, 2019." (Doc. No. 95-2 at p. 1.)
The Court declines to strike Defendants' Notice. Defendants do not engage in further legal argument in their Notice but, rather, simply notify the Court of recent relevant authority and summarize the findings and holdings of those cases. Moreover, even if Defendants' Notice could be construed as including legal argument, Bounty Minerals sets forth legal argument in its Motion to Strike as to why it believes the newly cited cases are not relevant to the instant dispute.
Courts within this Circuit have noted that motions to strike are disfavored because they are a "drastic remedy." Braun v. Ultimate Jetcharters, Inc., 2014 WL 12584328 at * 1 (N.D. Ohio Feb. 25, 2014) (quoting Resolution Trust Corp. v. Vanderweele, 833 F.Supp. 1383, 1387 (N.D. Ind. 1993)). See also Brown & Williamson Tobacco Corp. v. United States, 201 F.2d 819, 822 (6th Cir. 1953) (finding that "the action of striking a pleading should be sparingly used by the courts. . . It is a drastic remedy to be resorted to only when required for the purposes of justice."). See also Frisby v. Keith D. Weiner & Associates Co., LPA, 669 F.Supp.2d 863, 865 (N.D. Ohio 2009); Bouchard v. American Home Products Corp., 2002 WL 32597993 at * 1 (N.D. Ohio July 8, 2002). Here, the Court finds that this litigation would be better served through resolution of the issues on the merits rather than through a motion to strike. Accordingly, Bounty Minerals' Motion to Strike (Doc. No. 94) is denied.
Defendants move for summary judgment in their favor with respect to each of the three counts raised in the Second Amended Complaint. The Court will address each Count in turn, below.
In Count I, Bounty Minerals asserts a claim for breach of contract of the Lease royalty provisions. Specifically, Bounty Minerals alleges that "Chesapeake Exploration has engaged in activities which result in an incorrect valuation point for the royalty and Chesapeake Operating has failed to tender full and complete royalty payments to Bounty, which are required under the Leases."
Defendants argue that they are entitled to summary judgment in their favor with respect to this claim because they have "complied with the unambiguous terms of the Leases" with respect to the payment of gas and oil royalties. (Doc. No. 81-2 at pp. 8-15.) As set forth supra, the gas royalty provision language relevant to this Count provides that Defendants agree to pay a certain percentage of royalties to Bounty Minerals as follows:
See, e.g., Ryland Lease at ¶ 9 (Doc. No. 36-4)
Defendants maintain that the above language "unambiguously provides that Chesapeake Exploration must calculate Bounty Minerals' royalties based on the value of the gas `
Bounty Minerals argues that Defendants' Motion must be denied "because it is premised on an incorrect contention that the Leases compel the royalty paid to Bounty to be calculated at the `wellhead.'" (Doc. No. 83 at p. 4.) To the contrary, Bounty Minerals maintains that the Leases' "reference to the `wellhead' as the point of royalty calculation is not applicable to affiliate sales." (Id.) Parsing out and examining in detail each of the clauses in the royalty provisions at issue, Bounty Minerals maintains that the clause containing the reference to the wellhead is "bracketed by commas which delineate the extent of its reach and applicability—to unaffiliated bona fide third party sales." (Id. at p. 8-9.) As Chesapeake Exploration only sells hydrocarbons from the wells to its affiliate, CEM, Bounty Minerals maintains that the reference to the wellhead "is not germane to this matter." (Id. at p. 9.)
Rather, Bounty Minerals focuses on the third clause of the gas royalty provisions and argues that it "describes a different mechanism for calculating `how' to pay a royalty based on a different type of sale—by the lessee to an affiliate." (Id.) This clause provides that: ". . ., or if the sale is to an affiliate of Lessee, the price upon which royalties are based shall be comparable to that which could be obtained in an arms — length transaction (given the quantity and quality of the gas available for sale from the leased premises and for a similar contract term) and without any deductions or expenses." Focusing on the comma that precedes this clause, and the use of the word "or," Bounty Minerals asserts that this clause is clearly separate from the "unaffiliated sales" clause where the "computed at the wellhead" language is found. (Id. at p. 11.) Bounty Minerals maintains that the Defendants' reading of the Leases "inserts language into the royalty provision where it does not exist" and argues that "the Defendants cannot bootstrap a method of calculation from one clause onto another when the contract does not specify it." (Id. at p. 13.)
Bounty Minerals then goes on to argue that what it terms "the affiliate sales clause" of the Leases requires that royalties be "comparable to that which could be obtained in an arms-length transaction. . . and without any deductions or expenses." (Id.) It asserts that, under this language, royalties should be calculated based on downstream values, explaining as follows:
(Id. at p. 14) (emphasis added) (internal citations to the record omitted).
In response, Defendants argue that Bounty Minerals' construction of the Lease language is without merit because "there is no language in the Leases whatsoever providing that royalties are to be based on a valuation point `downstream of the wellhead.'" (Doc. No. 84 at p. 2.) Rather, Defendants insist that, reading the royalty provision as a whole, the plain language of this provision clearly provides that the only valuation point is "at the wellhead," regardless of whether the sale is made to an unaffiliated or affiliated entity. (Id.) Defendants further assert that Bounty Minerals' interpretation would yield absurd results because it would cause Bounty Minerals to receive different royalty payments for the exact same gas depending on who buys it. (Id.) Specifically, Defendants argue as follows:
(Id.)
The Ohio Supreme Court has held that oil and gas leases are contracts and "`the rights and remedies of the parties to an oil or gas lease must be determined by the terms of the written instrument.'" Lutz v. Chesapeake Appalachia, LLC, 71 N.E.3d 1010, 1012 (Ohio 2016) (quoting Harris v. Ohio Oil Co., 48 N.E. 502, 506 (Ohio 1897)). "Under Ohio law, the interpretation of written contract terms, including the determination of whether those terms are ambiguous, is a matter of law for initial determination by the court." Savedoff v. Access Grp., Inc., 524 F.3d 754, 763 (6th Cir.2008) (citations omitted). See also Alexander v. Buckeye Pipe Line Co., 374 N.E.2d 146, 148 (Ohio 1978); Lutz v. Chesapeake Appalachia, LLC, 2017 WL 4810703 at * 6 (N.D. Ohio Oct. 25, 2017).
"It is a well-known and established principle of contract interpretation that `[c]ontracts are to be interpreted so as to carry out the intent of the parties, as that intent is evidenced by the contractual language.'" Lutz, 71 N.E.2d at 1012 (quoting Skivolocki v. E. Ohio Gas Co., 313 N.E.2d 374 (Ohio 1974)). See also United States Fid. & Guar. Co. v. St. Elizabeth Med. Ctr., 716 N.E.2d 1201, 1208 (Ohio Ct. App. 2nd Dist. 1998). To that end, courts should:
Eastham v. Chesapeake Appalachia, LLC, 754 F.3d 356, 361 (6th Cir. 2014) (quoting Sunoco, Inc. (R&M) v. Toledo Edison Co., 953 N.E.2d 285, 292 (Ohio 2011)). Courts may examine extrinsic evidence to ascertain the parties' intent only if the contract is ambiguous. Id. See also Shifrin v. Forest City Enters., 597 N.E.2d 499, 501 (Ohio 1992).
"Ambiguity exists only when a provision at issue is susceptible of more than one reasonable interpretation." Lager v. Miller-Gonzalez, 896 N.E.2d 666, 669 (Ohio 2008); see also Lutz, 2017 WL 4810703 at * 7; 11 Williston on Contracts § 30:5 (4th ed.). "[W]hen circumstances surrounding an agreement invest the language of the contract with a special meaning, extrinsic evidence can be considered in an effort to give effect to the parties' intention." Martin Marietta Magnesia Specialties, LLC v. Pub. Util. Comm'n, 954 N.E.2d 104, 111 (Ohio 2011). However, as the Ohio Supreme Court has cautioned, "[o]nly when a definitive meaning proves elusive should rules for construing ambiguous language be employed. Otherwise, allegations of ambiguity become self-fulfilling." State v. Porterfield, 829 N.E.2d 690, 692-93 (Ohio 2005). See also Eastham, 754 F.3d at 361.
Here, the key issue is whether the phrase "computed at the wellhead" applies both to sales to (1) "unaffiliated bona fide purchasers," and (2) affiliated entities such as CEM. As set forth above, Bounty Minerals argues that it does not. For the following reasons, the Court disagrees with Bounty Minerals' interpretation of the royalty provision. Bounty Minerals divides the royalty provision into three separate clauses and asks the Court to construe the third clause (i.e., the clause regarding sales to affiliates) independently from the second clause (i.e., the clause regarding sales to unaffiliated, bona fide purchasers). Indeed, as counsel for Bounty Minerals repeatedly explained during oral argument, it is Bounty Minerals' position that this Court should entirely ignore the second clause of the gas royalty provision when applying the third clause, rendering the "at the wellhead" language irrelevant. It is well-established, however, that a contract should be construed to give effect to all of its provisions. Eastham, 754 F.3d at 363 ("A contract must be construed in its entirety and in a manner that does not leave any phrase meaningless or surplusage"). The Court is unwilling to construe the gas royalty provision so as to render the entirety of the second clause of that provision superfluous. See also Filicky v. American Energy-Utica, LLC, 645 Fed. Appx. 393, 398 (6th Cir. 2016) ("We generally seek to `avoid interpreting contracts to contain superfluous words.'") (quoting TMW Enters, Inc. v. Fed. Ins. Co., 619 F.3d 574, 578 (6th Cir. 2010)).
Moreover, construing the provision to ignore the second clause (as urged by Bounty) is problematic because it creates uncertainty regarding the valuation of royalties based on affiliate sales. Under Bounty Minerals' construction, the royalty provision's reference to "at the wellhead" in the second clause applies only to sales to unaffiliated purchasers and not to sales to affiliates and, therefore, the netback method does not apply to affiliate sales. By reading the contract in this fashion, Bounty Minerals creates a gap in the royalty provision with regard to the location and methodology by which affiliate sales are to be computed. Specifically, if the "at the wellhead language" is severed from the affiliate sales clause as argued by Bounty Minerals, there is no language in the royalty provision denoting where or how the royalties from affiliate sales shall be computed. Bounty Minerals argues that royalties should be based on the downstream sales values with no deductions for post-production costs. However, Bounty Minerals points to no language in the royalty provision that would support this interpretation. Bounty Minerals' construction of the royalty provision creates a hole in the contract, which it then fills (without any citation to supporting language in the contract) with the construction that would provide it with the highest royalties.
The Court is not persuaded that the royalty provision at issue should be read in such a manner. Rather, the Court finds that the royalty provision should be read as a cohesive whole, giving effect and meaning to all of its terms. Reading the royalty provision in its entirety, it is plain that it creates only one valuation point for both unaffiliated and affiliated sales; i.e., "at the wellhead." While the presence of the comma highlights that there are two different possible types of sales (i.e., sales to unaffiliated vs. affiliated entities), the Court finds that the comma does not, standing alone, result in the creation of a separate (and undefined) location and/or methodology for calculating the value of the hydrocarbons with respect to affiliate sales. As discussed above, to read the royalty provision as urged by Bounty Minerals would create a gap and insert an entirely different valuation point and methodology for affiliated sales, a result which is simply not supported by the language of the royalty provision at issue. Indeed, Bounty Minerals has not pointed to any language in the Leases that could reasonably be construed as providing that royalties are to be based purely on downstream values.
Moreover, under Bounty Minerals' interpretation, Bounty would receive royalties based on a higher, downstream value (with no subtraction of post-production costs) when the gas is sold to an affiliate; and a lower, at-the-wellhead value when the gas is sold to an unaffiliated third party. However, the royalty provisions are plainly designed to ensure that that prices relative to affiliated sales are "comparable" to prices obtained in unaffiliated sales. Indeed, the royalty provisions state exactly that. As set forth above, the Leases expressly provide that, for affiliate sales, "the price upon which royalties are based shall be comparable to that which could be obtained in an arms-length transaction." The clear import of this language is that royalties based on unaffiliated and affiliated sales should be equivalent to one another. Under Bounty Minerals' reading of this provision, however, royalties based on unaffiliated sales and affiliated sales would not be equivalent. Bounty Minerals' construction of the royalty provisions, then, would lead to a result that is not consistent with the plain language of the Lease.
For similar reasons, the Court agrees with Defendants that Bounty Minerals' proposed construction would lead to an absurd result. Ohio courts have found that "parties bind themselves to the plain and ordinary language used in a contract unless those words lead to a manifest absurdity." Fultz & Thatcher v. Burrows Group Corp., 2006 WL 3833971 at * 2 (Ohio App. 12th Dist. Dec. 28, 2006) (citing Alexander v. Buckeye Pipe Line Co., 374 N.E.2d 146 (Ohio 1978)). Even assuming that Bounty Minerals' literal construction of the sentence at issue had some merit, it would lead to the incongruous result that sales to unaffiliated entities (i.e., arms-length transactions) would result in lower royalties than sales to affiliated entities. Bounty Minerals offers no logical explanation as to why the parties would contract for such a result, and the Court can think of none. Indeed, as discussed above, the purpose of the royalty provisions at issue is to create parity between royalties derived from unaffiliated and affiliated sales. Bounty Minerals' interpretation of the lease would undermine this purpose and is not supported by either the express language of the royalty provisions or common sense.
Accordingly, and for all the reasons set forth above, the Court rejects Bounty Minerals' interpretation of the lease and agrees with Defendants that the plain language of the relevant gas royalty provisions provides that Defendants must calculate Bounty Minerals' royalties based on the value of the gas "at the wellhead," with respect to both unaffiliated and affiliated sales. Notably, Bounty Minerals does not dispute that (1) Chesapeake Exploration's transfer of the hydrocarbons to CEM constitutes a "sale to an affiliate" under the Lease;
Defendants also move for summary judgment with respect to the oil royalty lease provisions. As noted supra, the oil royalty provisions differ among the various leases. During oral argument, the parties appeared to agree
Defendants argue, and the Court agrees, that the language "recovered from the leased premises" as used in the above provision sets the valuation point for sales to both unaffiliated and affiliated purchasers. The Court also agrees that the phrase "recovered from the leased premises" contemplates valuation at the well and, therefore, authorizes the deduction of post-production costs, for all of the reasons discussed above.
With regard to the Miller and Cobbs leases, the oil royalty provisions of those leases provide that the royalty shall be based "upon the gross proceeds paid to Lessee from the sale of oil recovered from the lease premises valued at the purchase price received for oil prevailing on the date such oil is run into transporter trucks or pipelines." (Doc. Nos. 36-2 at PageID#s 1684, 1704; 36-6.) The Court likewise finds that the phrase "recovered from the leased premises" denotes valuation at the well. Moreover, construing similar contract language, at least one court has found that the phrase "run into transporter trucks or pipelines" similarly indicates valuation at the well. See Burlington Resources Oil & Gas Co. LP v. Texas Crude Energy, LLC, 573 S.W.3d 198, 207-208 (Texas S.Ct. 2019). Accordingly, and in the absence of any meaningful argument to the contrary, the Court finds that Bounty Minerals has failed to demonstrate that Defendants breached the oil royalty provisions of the relevant leases.
Therefore, and for all the reasons set forth above, Defendants are entitled to summary judgment in their favor with respect to Count I of the Second Amended Complaint.
In Count II, Bounty Minerals alleges that Defendant Chesapeake Exploration violated the Leases' express covenants of good faith and reasonable prudent operator. Bounty asserts that "the sole purpose of Chesapeake Exploration's interaction with [CEM] is to avoid Chesapeake Exploration's obligation to carry the lessors' hypothetical share of post-production costs, which is dictated by the Leases' royalty clauses." (Doc. No. 36 at ¶ 79.) Bounty claims that "[i]n essence, Chesapeake Exploration decided to engage in a `gift' transaction to an affiliate solely in order to escape and/or avoid responsibility for paying Bounty's hypothetical share of post-production costs under the Leases." (Id. at ¶ 91.) Bounty alleges that "a reasonable prudent operator would not transfer title to and possession of a commodity to any other party without a valuation of the commodity at the location and time of the sale and without any firm commitment that it receive payment of a certain value after the alleged transaction concludes." (Id. at ¶ 93.)
Defendant Chesapeake Exploration argues it is entitled to judgment in its favor with respect to this claim because "there is no evidence in the record that [it] has not acted in an `ordinarily prudent' way or in bad faith in entering into contracts with CEMLLC, selling at the wellhead to CEMLLC, or paying royalties to Bounty Minerals based on the netback method." (Doc. No. 81-2 at p. 15.) It asserts that royalties are paid as required by the Leases and notes that the netback method (pursuant to which post-production costs are deducted) has been approved by numerous courts. (Id.) Chesapeake Exploration also cites evidence that its method of calculating royalties is typical in the industry, as is the practice of selling to an affiliate. (Id. at p. 16.)
In its Brief in Opposition, Bounty Minerals appears to abandon its claim that Chesapeake Exploration violated the covenant of good faith/reasonable prudent operator by engaging in a "sham" or "gift" transaction to its affiliate, CEM. (Doc. No. 83 at pp. 18-19.) Instead, Bounty advances a new theory, arguing that Chesapeake Exploration violated the covenant of good faith by sending revenue statements that falsely give the impression that there were no deductions and that the royalty is a "gross" royalty that is paid without deduction. (Id. at p. 19.) Bounty Minerals further asserts that Chesapeake Exploration's "royalty calculation is not in good faith" because it includes deductions and costs related to activities that occur after title to the gas has been transferred, citing Pollock v. Energy Corp. of America, 2015 WL 3795659 (W.D. Pa. June 18, 2015).
In response, Chesapeake Exploration first notes that Bounty Minerals' argument regarding the allegedly deceptive royalty statements is not presented as a basis for its good faith/reasonable prudent operator claim as set forth in Count II. (Doc. No. 84 at fn 4.) Chesapeake Exploration then argues that this new argument is without merit because (1) "the check stubs accurately reflect the undisputed fact that Chesapeake Exploration has not taken any deductions from Bounty Minerals' royalty payments;" and (2) Chesapeake Exploration has, in fact, paid royalties in accordance with the Leases and both federal and state case law. (Id. at p. 8.) Lastly, Chesapeake Exploration argues that Bounty Minerals' reliance on Pollock Energy is misplaced because, in that case, the operator retained title to the oil and gas until sale to third-party buyers by its affiliate, but certain costs to make that sale were incurred only by the affiliate. (Id. at p. 9.) In the instant case, however, Chesapeake Exploration does not retain title to the oil and gas and, further, any marketing fees incurred by CEM are not passed on to Bounty Minerals. (Id. at pp. 9-10.)
As set forth above, each of the Leases at issue impose an obligation on the Lessee to act "as a reasonable prudent operator exercising good faith in all of its activities with the Lessor." See Doc. Nos. 36-2 at PageID# 1683, 1703; 36-4 at PageID# 1731; 36-6 at PageID# 1757; 36-8 at PageID# 1787; 36-10 at PageID# 1817. The "reasonable prudent operator" standard was recently explained by one Ohio appellate court, as follows:
Yoder v. Artex Oil Co., 2014 WL 6467477 at * 12-13 (Ohio App. 5th Dist. Nov. 13, 2014).
For the following reasons, the Court finds that Chesapeake Exploration is entitled to judgment in its favor with respect to Count II. First, the Court rejects Bounty Minerals' argument that Chesapeake Exploration acted in bad faith when it submitted revenue statements that allegedly failed to disclose deductions for post-production costs. Chesapeake Exploration has not, in fact, taken any deductions from Bounty Minerals' royalty payments. As explained supra, it is undisputed that Chesapeake Exploration transferred title to CEM at or near the wellheads. It is further undisputed that CEM deducted post-production costs and then transferred proceeds to Chesapeake Exploration based on a netback price. Bounty Minerals has not demonstrated that Chesapeake Exploration took any deductions from the proceeds that it received from the sale to CEM. Moreover, the Revenue Statements expressly disclose that the gross value "may reflect the price received from an affiliated purchaser" and, further, that "[d]eductions made by the purchaser (affiliated or non-affiliated)" — i.e., CEM— "may or may not be shown." (Doc. No. 36-12.)
Most importantly, and as discussed at length above, the Court has found that Defendants paid royalties to Bounty consistent with the Lease royalty provisions when it calculated royalties based on the value of the gas and oil "at the wellhead." Defendants correctly note (and Bounty Minerals does not contest) that numerous courts have interpreted the language "at the well" as unambiguously allowing for the deduction of post-production costs. See e.g., Cunningham Property Management Trust v. Ascent Resources-Utica, LLC, 351 F.Supp.3d 1056, 1062 (S.D. Ohio 2018); Lutz, 2017 WL 4810703 at * 7-8.
This also defeats Bounty Minerals' argument that the royalty calculations were "not in good faith" because they were based on deductions and costs related to activities that occurred after transfer of title to the gas. Although the Pollock court may have so held under the circumstances of that particular case, the Ohio Supreme Court has again and again explained that "`the rights and remedies of the parties to an oil or gas lease must be determined by the terms of the written instrument.'" Lutz, 71 N.E.2d at 1012. See also Harris, 48 N.E. at 506. Here, the Court has carefully considered the parties' arguments and interpreted the Leases to find that Defendants paid royalties to Bounty Minerals consistent with the language of the relevant royalty provisions. As discussed above, under those provisions, Defendants properly computed royalties "at the wellhead" via use of the netback method, which allows for the deduction of post-production costs.
Accordingly, the Court finds that Bounty Minerals has failed to present any evidence that Chesapeake Exploration has not acted in good faith or as a reasonable prudent operator. Chesapeake Exploration is, therefore, entitled to summary judgment in its favor with respect to Count II of the Second Amended Complaint.
In Count III, Bounty Minerals alleges that Defendants breached the royalty provisions of the subject Leases because "the royalties that Bounty receives for production under the Leases is not comparable to values that could be obtained in an arms-length transaction and are not `without any deductions or expenses.'"
Defendants argue that they are entitled to judgment in their favor with respect to this claim because Bounty Minerals' royalty payment is directly tied to the arms-length sales price that is received downstream and is, therefore, "comparable" to the value that could be obtained in an arms-length transaction. (Doc. No. 81-2 at p. 17.) Specifically, Defendants argue:
(Id.) Defendants further assert that they are entitled to judgment because Bounty Minerals has failed to come forward with any evidence that the sales of oil and gas from the wells at issue were not comparable to prices that would have prevailed in arms-length transactions with unaffiliated entities in the same areas. (Id. at p. 18.) Defendants assert that Bounty Minerals' expert, Phyllis Bourque, failed to conduct a market value study on this very issue, and argues that the data that Ms. Bourque did compile relates to prices in Texas, which is not comparable to sales prices in the area of the wells at issue herein. (Id. at pp. 18-20.)
Bounty Minerals argues that Defendants' argument fails because "the Leases do not compel the `wellhead' as the point of royalty valuation." (Doc. No. 83 at p. 14.) Rather, Bounty's expert, Ms. Bourque, determined that the marketplace for "wet" gas is at the interstate pipeline, after it has been processed. (Id. at p. 15.) Ms. Bourque evaluated the prices paid for pipeline quality gas at certain locations and determined that "the gas prices paid to Bounty was [sic] lower than and not comparable to these prices." (Id.) In calculating damages relating to gas, Ms. Bourque "accepted the weighted average sales values of residue gas from CEMLLC to third party purchasers and simply eliminated the post-production costs and fees charged by CEMLLC and her Supplemental Report identifies over $300,000 in damages for residue gas and [natural gas liquids]." (Id.) Ms. Bourque's damages calculations with regard to oil royalties "were rooted in the West Texas Intermediate benchmark price." (Id. at p. 18.)
In response, Defendants argue that Bounty Minerals has failed to establish a genuine issue of material fact because "the comparable price that matters here is the price obtained in an arms-length transaction
The Court agrees with Defendants. Bounty Minerals' royalties were properly calculated at the wellhead via the netback method. As such, Bounty Minerals' royalty payments were directly derived from sales made by CEM in arms-length transactions with unaffiliated, third-party purchasers. As such, the Court finds there is no genuine issue of material fact that these sales prices that formed the basis of Bounty Minerals' royalty payments are not "comparable" to "values that could be obtained in an arms-length transaction." Moreover, the Court agrees with Defendants that the findings of Bounty Minerals' expert, Ms. Bourque, do not compel a different conclusion because Ms. Bourque's analysis was not based on calculations "at the wellhead" and use of the netback method, which this Court has found proper for all the reasons set forth above.
Accordingly, the Court finds that Defendants are entitled to summary judgment in their favor with respect to Count III of the Second Amended Complaint.
For all the reasons set forth above, Plaintiff's Motion to Strike (Doc. No. 94) is DENIED, and Defendants' Motion for Summary Judgment (Doc. No. 81) is GRANTED.
