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Beaverkettle Farms, Ltd. v. Chesapeake Appalachia, LLC

United States District Court, Sixth Circuit

August 30, 2013



BENITA Y. PEARSON, District Judge.

This controversy is before the Court as a result of a dispute over the enforceability of an oil and gas lease ("the Lease"). Plaintiff Beaverkettle Farms, Ltd. ("Beaverkettle"), seeks a declaratory judgment that the Lease is no longer valid and that Defendant Chesapeake Appalachia, LLC ("Chesapeake"), has no right to conduct hydraulic fracturing, [1] or "fracking, " on its land. Chesapeake seeks a declaration that the Lease continues to be in force, and, in addition, that Chesapeake has no current obligation to pay "delay rental" fees to Beaverkettle.

Presently, the parties call upon the Court to resolve cross-motions for summary judgment. ECF Nos. 28 and 33. They have filed supporting memoranda of law, ECF Nos. 29 and 33, opposition briefs, ECF No. 34 and 35, and reply briefs, ECF Nos. 39 and 40. Having reviewed and considered the parties' arguments, as well as the record and the governing legal principles, the Court denies each party's motion for the reasons articulated below.

I. Factual and Procedural History

A. Factual Background

Beaverkettle owns 4, 108 acres of land ("the Property") spanning Columbiana County in Ohio and Beaver County in Pennsylvania. ECF No. 7 at 4. On May 5, 2004, Beaverkettle and O&G Investment Holdings, LLC ("O&G"), entered into the Lease in question. ECF No. 7 at 3. The Lease granted O&G the right to explore and drill for oil and gas on the Property in exchange for certain consideration, including royalty payments for any minerals found and extracted. ECF No. 29-1. The Lease was to last for a term of seven years "and so much longer thereafter" as oil and gas were found on the Property, or as O&G "operated" the Property in the search for oil and gas. ECF No. 29-1 at 1. The Lease also provided that it will become "null and void" unless O&G began drilling a well on the Property within twelve months of the date of the Lease, or unless O&G paid "delay rentals" of $10 per acre for every acre not contained within an "approved drilling plat." ECF No. 29-1 at 1. Although O&G did not drill on the Property during the period in which it held the Lease, it kept the Lease alive by timely submitting delay rentals to Beaverkettle. ECF No. 29 at 27.

Within the first seven years of the agreement ("the primary term"), O&G assigned its exploration and drilling rights to Chesapeake on June 8, 2010. ECF No. 7 at 3. Chesapeake, like O&G, did not drill on the Property. See ECF No. 29 at 22. Although Chesapeake paid delay rentals to Beaverkettle for the remainder of the primary term, it failed to timely pay delay rentals after the primary term expired on May 5, 2011. ECF No. 29 at 27.

In the months leading up to May 5, 2011, Chesapeake and Beaverkettle engaged in discussions regarding Chesapeake's proposal to consolidate a portion of the Property with an adjoining parcel of land owned by James Tharp in order to form an "oil and gas development unit" ("the Tharp Unit"). ECF No. 7 at 8. Chesapeake informed Beaverkettle that it desired to drill a horizontal Utica Shale well on Tharp's land with a portion of the "horizontal lateral" running underneath the Property. ECF No. 29-11. Notably, in accordance with the terms of the Lease, a well drilled on a properly consolidated unit shall "be deemed to be located upon the leased premises within the meaning and for the provisions and covenants of [the] Lease." ECF No. 29-1 at 3. The Lease required Chesapeake to "effect such consolidation" by executing a declaration of consolidation and recording the document in the office of the local county recorder. ECF No. 29-1 at 3. Prior to May 5, 2011, Chesapeake recorded the declaration and began drilling the well ("the Tharp 3H well") on Tharp's land within the consolidated Tharp Unit. ECF Nos. 1-1 at 51-53; 29-11; 29-27; 29 at 22. Significant to this litigation, Chesapeake never obtained Beaverkettle's approval for the Tharp Unit, even though the Lease conferred upon Beaverkettle the right to "approve drill units" so long as the approval is not "unreasonably" withheld or delayed. ECF No. 29-1 at 5.

On May 19, 2011, Beaverkettle informed Chesapeake that the Lease had terminated at the expiration of the primary term because Chesapeake had neither discovered oil and gas on the Property nor operated the Property in the search for oil and gas. ECF No. 1-1 at 40-41. Chesapeake responded on May 26, 2011, and communicated its belief that the Lease remained "in full force and effect" due to Chesapeake's actions in search for oil and gas within the Tharp Unit prior to the expiration of the primary term. ECF No. 1-1 and 42.

This litigation ensued to adjudicate Beaverkettle's and Chesapeake's rights and obligations with respect to the Lease.

B. Procedural History

Beaverkettle initiated the lawsuit by filing a complaint in the Columbiana County, Ohio, Court of Common Pleas. ECF No. 1-1. Beaverkettle sought a declaratory judgment that the Lease had terminated, on May 5, 2011, pursuant to its terms, and, even had the Lease been extended past that date, it was null and void as a result of Chesapeake's failure to timely pay delay rentals. ECF No. 1-1. Chesapeake then removed the case to this Court[2] and filed a counterclaim seeking a judicial declaration that the Lease had properly been extended past its primary term and that Chesapeake had no continuing obligation to pay delay rentals to Beaverkettle after that term ended. ECF No. 7 at 22.

Subsequently, the parties filed cross-motions for summary judgment. Each party asserts that there are no genuine issues of material fact with respect to its legal claims, and that it is entitled to judgment as a matter of law. ECF Nos. 28 and 33. Having received and reviewed each party's memorandum of law; ECF Nos. 29 and 33; and opposition and reply briefs; ECF Nos. 34, 35, 39, and 40; the Court is prepared to rule on these motions.

II. Legal Standard

Summary judgment is "an integral part of the Federal Rules as a whole, which are designed to secure the just, speedy, and inexpensive determination of every action rather than a disfavored procedural shortcut." F.D.I.C. v. Jeff Miller Stables, 573 F.3d 289, 294 (6th Cir. 2009) (quotations omitted). "Summary judgment is appropriate only 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.'" EJS Properties, LLC v. City of Toledo, 698 F.3d 845, 855 (6th Cir. 2012) ( quoting Fed.R.Civ.P. 56(a)). "A genuine issue of material fact exists when there is sufficient evidence for a trier of fact to find for the nonmoving party.'" U.S. ex rel. Wall v. Circle C Construction, LLC, 697 F.3d 345, 351 (6th Cir. 2012) ( quoting Ciminillo v. Streicher, 434 F.3d 461, 464 (6th Cir. 2006)). A court deciding a motion for summary judgment "must construe the evidence and draw all reasonable inferences in favor of the nonmoving party." Kuhn v. Washtenaw County, 709 F.3d 612, 620 (6th Cir. 2013). "Where the moving party carries its initial burden, the nonmoving party may not rest upon its mere allegations or denials of the adverse party's pleadings, but rather must set forth specific facts showing that there is a genuine issue for trial.'" Ellington v. City of East Cleveland , 689 F.3d 549, 552 (6th Cir. 2012) ( quoting Moldowan v. City of Warren, 578 F.3d 351, 374 (6th Cir. 2009)); see Tingle v. Arbors at Hilliard, 692 F.3d 523, 529 (6th Cir. 2012) ("a mere scintilla' of evidence in support of the nonmoving party's position is insufficient to defeat summary judgment").

Cross-motions for summary judgment are examined under the usual Rule 56 standards, and a district court "must evaluate each motion on its own merits and view all the facts and inferences in the light most favorable to the nonmoving party.'" Spectrum Health Continuing Care Group v. Anna Marie Bowling Irrecoverable Trust, 410 F.3d 304, 309 (6th Cir. 2005).

III. Discussion

Two issues guide the resolution of the motions before the Court. The first issue is whether Chesapeake had properly extended the Lease past its primary term by "operat[ing]" the Property in the search for oil and gas. The second issue is whether, if so extended, the Lease nonetheless became "null and void" as a consequence of Chesapeake's failure to timely pay delay rentals to Beaverkettle in the time following the expiration of the primary term ("the secondary term").[3]

The parties agree that the Court's interpretation of the Lease is governed by Ohio law. ECF Nos. 33-1 at 14; 40 at 11. After all, Beaverkettle is a citizen of Ohio; ECF No. 1 at 2; the Lease was executed in Ohio; ECF No. 33-2 at 3; monies due under the Lease are required to be delivered to an Ohio address; ECF No. 29-1 at 2; and the majority portion of the Property at issue is located in Ohio. ECF Nos. 1-1 at 4; 33-1 at 14. See Ohayon v. Safeco Ins. Co. of Illinois , 91 Ohio St.3d 474, 477, 747 N.E.2d 206 (2001) (where there is choice-of-law issue in contract dispute, Ohio follows law of forum having most significant relationship to transaction and parties).

In Ohio, the interpretation of written contracts, including lease agreements, is a question of law. Heritage Court, LLC v. Merritt , 187 Ohio App.3d 117, 122, 931 N.E.2d 194 (2010). Leases are subject to the traditional rules of contract interpretation. Mark-It Place Foods, Inc. v. New Plan Excel Realty Trust, 156 Ohio App.3d 65, 84, 804 N.E.2d 979 (2004). In construing the terms of any contract, "the principal objective is to determine the intention of the parties." Hamilton Ins. Services, Inc. v. Nationwide Ins. Cos., 86 Ohio St.3d 270, 273, 714 N.E.2d 898 (1999).

"The intent of the parties to a contract is presumed to reside in the language they chose to employ in the agreement." Kelly v. Medical Life Ins. Co., 31 Ohio St.3d 130, 130, 509 N.E.2d 411 (1987). "Common words appearing in a written instrument will be given their ordinary meaning unless manifest absurdity results, or unless some other meaning is clearly evidenced from the face or overall contents of the instrument." Foster Wheeler Enviresponse, Inc. v. Franklin County Convention Facilities Authority, 78 Ohio St.3d 353, 361, 678 N.E.2d 519 (1997). Furthermore, "[t]he meaning of a contract is to be gathered from a consideration of all its parts, and no provision is to be wholly disregarded as inconsistent with other provisions unless no other reasonable construction is possible." Karabin v. State Automobile Mutual Ins. Co., 10 Ohio St.3d 163, 167, 462 N.E.2d 403 (1984) (quotations omitted).

"Where the terms in a contract are not ambiguous, courts are constrained to apply the plain language of the contract." St. Marys v. Auglaize County Bd. of Commrs., 115 Ohio St.3d 387, 390, 875 N.E.2d 561 (2007). "Contractual language is ambiguous only when its meaning cannot be determined from the four corners of the agreement or where the language is susceptible of two or more reasonable interpretations." Covington v. Lucia, 151 Ohio App.3d 409, 414, 784 N.E.2d 186 (quotations omitted), appeal denied, 99 Ohio St.3d 1435, 789 N.E.2d 1117 (2003). "If an ambiguity exists in a contract, then it is proper for a court to consider extrinsic evidence, ' i.e., evidence outside the four corners of the contract, in determining the parties' intent." Id.

The above rules "contain a measure of flexibility in their application" but they are designed only to ascertain the parties' intent. Foster, 78 Ohio St.3d at 362. Courts are admonished that it is not their function "to rewrite the parties' contract in order to provide for a more equitable result. A contract does not become ambiguous by reason of the fact that in its operation it will work a hardship upon one of the parties thereto.'" Id. ( quoting Ohio Crane Co. v. Hicks, 110 Ohio St. 168, 172, 143 N.E. 388 (1924)).

Finally, with respect to oil and gas leases in particular, it is the long-held view in Ohio that:

The rights and remedies of the parties to an oil and gas lease must be determined by the terms of the written instrument, and the law applicable to one form of lease may not be, and generally is not, applicable to another and different form. Such leases are contracts, and the terms of the contract with the law applicable to such terms must govern the rights and remedies of the parties.

Swallie v. Rousenberg, 190 Ohio App.3d 473, 483, 942 N.E.2d 1109 (2010) ( quoting Harris v. Ohio Oil Co., 57 Ohio St. 118, 48 N.E. 502 (1897)), appeal denied, 127 Ohio St.3d 1535, 940 N.E.2d 987 (2011), reconsideration denied.

A. Issue One: Did Chesapeake Extend the Lease Past Its Primary Term?

Chesapeake argues that the evidence shows it properly extended the Lease past the primary term. Specifically, Chesapeake asserts that it (1) exercised its right under the Lease to form a consolidated oil and gas development unit, known as the Tharp Unit; and (2) commenced operations in the search for oil and gas on the Tharp Unit prior to May 5, 2011. ECF No. 29 at 29. In response, Beaverkettle contends that Chesapeake's activities could not have extended the Lease because ...

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