Alford v. Collins-McGregor Operating Co. , 2016 Ohio 5082 ( 2016 )

[Cite as Alford v. Collins-McGregor Operating Co., 2016-Ohio-5082.]
IN THE COURT OF APPEALS OF OHIO
FOURTH APPELLATE DISTRICT
WASHINGTON COUNTY
LINDA GRIFFITH ALFORD, : Case No. 16CA9
ET AL.,
Plaintiffs-Appellants, :
v. : DECISION AND
JUDGMENT ENTRY
COLLINS-MCGREGOR :
OPERATING CO., ET AL.,
RELEASED: 7/15/2016
Defendants-Appellees. :
APPEARANCES:
Sean R. Scullin, Scullin & Cunning, LLC, Boardman, Ohio, for appellants.
Bruce Smith, Geiger Teeple Robinson & McElwee, PLLC, Alliance, Ohio, for appellees.
Harsha, J.
{¶1} Several owners sought a judgment declaring an oil and gas lease for their
property no longer effective below the Gordon Sand formation because the lessee had
not developed the resource past that depth. In effect, the landowners requested the
partial forfeiture of the oil and gas lease below that horizontal depth. The trial court
granted the motion of the lessee and well operators to dismiss the landowners’
complaint for failure to state a claim upon which relief can be granted.
{¶2} In their three assignments of error the landowners argue that the trial court
ignored precedent recognizing partial forfeiture of oil and gas leases for breach of
implied covenants, including the implied covenant to reasonably develop the property.
But none of the cases they cite have recognized horizontal forfeiture, i.e., forfeiture of
those formations below a certain depth. And those state courts that have expressly
addressed the issue, including this one, have rejected it by holding that under language
Washington App. No. 16CA9 2
similar to that of this lease, production of oil or gas from shallow wells held all depths of
the property and did not breach the duty to reasonably develop the property. Although
advances in drilling techniques may warrant changes to the reasonably prudent
operator standard, we decline to reject our recently issued precedent on this issue. We
overrule the landowners’ assignments of error and affirm the judgment of the trial court.
I. FACTS
{¶3} Linda Griffith Alford, George Alford Jr., Bershelle Alford Giambattista,
Joseph Alford, Judith Hanlon Farnsworth, Donna R. Hanlon, and James C. Futzler
(“landowners”), filed an amended complaint against Collins-McGregor Operating
Company (“Collins-McGregor”), Winston Oil Company (“Winston Oil”), and Darrell R.
Cline in the Washington County Court of Common Pleas. The landowners alleged they
own an interest, in varying proportions, in two parcels of real property in Washington
County consisting of a total of approximately 74 acres. The property is subject to an oil
and gas lease executed in September 1980 by the then-landowners and Collins-
McGregor. The landowners leased the property to Collins-McGregor “for the sole and
only purpose of mining and operating for oil and gas * * *.”
{¶4} The lease provided that it “shall remain in force for a term of One (1) years
from date, and as long thereafter as oil or gas, or either of them, is produced from said
land by the lessee.” The lease did not disclaim implied covenants and it did not require
a certain amount of wells or separate, restrict, or reserve shallow and deep rights.
{¶5} In September 1981, Collins-McGregor completed a well, which has
produced oil and/or gas in paying quantities from the property through 2014. According
Washington App. No. 16CA9 3
to the landowners, however, the well does not produce oil or gas from depths below the
Gordon Sand formation.
{¶6} Collins-McGregor and Winston Oil are the current owners and operators
under the lease, subject to the landowners’ royalty interest and to Cline’s overriding
royalty interest. The landowners claimed that although exploration and production of oil
and gas from depths below the Gordon Sand formation is occurring near their property,
Collins-McGregor and Winston Oil lack the equipment or capital necessary to explore or
produce from depths below the Gordon Sand formation, e.g., the Marcellus and Utica
formations.
{¶7} The landowners requested a judgment: (1) finding that there had been no
oil or gas production from depths below the Gordon Sand formation; (2) finding that
there had been no operations for production from depths below the Gordon Sand; (3)
that the lease had expired for depths below the Gordon Sand; (4) that Collins-McGregor
and Winston Oil breached some or all of the implied covenants in the lease as to depths
below the Gordon Sand; and (5) quieting title in the landowners’ favor for depths below
the Gordon Sand.
{¶8} Collins-McGregor and Winston Oil filed a Civ.R. 12(B)(6) motion to
dismiss the landowners’ complaint for failure to state a claim upon which relief can be
granted. They argued that Ohio does not recognize a claim for horizontal forfeiture of
an oil and gas lease. After the landowners filed a response in opposition, the trial court
granted the motion and dismissed the complaint. The court held that “[t]he undisputed
production from the well that exists on the seventy-four (74) acre parcel holds all acres
and depths.” This appeal followed.
Washington App. No. 16CA9 4
II. ASSIGNMENTS OF ERROR
{¶9} The landowners assign the following errors for our review:
1. THE TRIAL COURT ERRED IN FINDING THAT PRODUCTION FROM
A WELL ALWAYS HOLDS ALL ACRES AND DEPTHS OF AN OIL
AND GAS LEASE.
2. THE TRIAL COURT ERRED BY FINDING THAT THE OIL AND A
GAS LEASE AT ISSUE IS NOT SUBJECT TO PARTIAL
TERMINATION.
3. THE TRIAL COURT ERRED IN DISMISSING APPELLANTS’
AMENDED COMPLAINT PURSUANT TO CIV.R. 12(B)(6).
III. STANDARD OF REVIEW
AND GENERAL PRINCIPLES
{¶10} “A motion to dismiss for failure to state a claim upon which relief can be
granted tests the sufficiency of the complaint.” Volbers-Klarich v. Middletown Mgt., Inc.,
125 Ohio St.3d 494, 2010-Ohio-2057, 929 N.E.2d 434, ¶ 11. “In order for a trial court to
dismiss a complaint under Civ.R. 12(B)(6) for failure to state a claim upon which relief
can be granted, it must appear beyond doubt that the plaintiff can prove no set of facts
in support of the claim that would entitle the plaintiff to the relief sought.” Ohio Bur. of
Workers' Comp. v. McKinley, 130 Ohio St.3d 156, 2011-Ohio-4432, 956 N.E.2d 814, ¶
12; Lloyd v. Robinson, 4th Dist. Ross No. 14CA3462, 2015-Ohio-1331, ¶ 11. “ ‘Whether
a complaint sufficiently sets forth a claim presents a question of law we review de novo.’
” Brown v. Schmidt, 4th Dist. Ross No. 15CA3523, 2016-Ohio-2864, ¶ 10, quoting
Strahler v. Vessels, 4th Dist. Washington No. 11CA24, 2012-Ohio-4170, ¶ 9.
{¶11} This case involves the interpretation of a written contract, which usually is
a matter of law also requiring de novo review. Arnott v. Arnott, 132 Ohio St.3d 401,
2012-Ohio-3208, 972 N.E.2d 586, ¶ 14, quoting Saunders v. Mortensen, 101 Ohio St.3d
Washington App. No. 16CA9 5
86, 2004-Ohio-24, 801 N.E.2d 452, ¶ (“ ‘[t]he construction of a written contract is a
matter of law that we review de novo’ ”). Our role is to ascertain and give effect to the
intent of the parties, which is presumed to lie in the contract language. Arnott at ¶ 14.
“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.” Alexander v. Buckeye Pipe Line
Co., 53 Ohio St.2d 241, 374 N.E.2d 146 (1978), paragraph two of the syllabus,
superseded by statute on other grounds; Harding v. Viking Internatl. Resources Co.,
Inc., 2013-Ohio-5236, 1 N.E.3d 872, ¶ 12 (4th Dist.).
{¶12} In our context, “[t]he rights and remedies of the parties to an oil or gas
lease must be determined by the terms of the written instrument” and “[s]uch 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.” Harris v. Ohio Oil Co., 57 Ohio St. 118,
129, 48 N.E. 502 (1897); Harding at ¶ 11; Bohlen v. Anadarko E & P Onshore, LLC, 4th
Dist. Washington App. No. 14CA13, 2014-Ohio-5819.
IV. LAW AND ANALYSIS
{¶13} The landowners’ assignments of error collectively challenge the dismissal
of their amended complaint. They claim that the trial court erred in holding that
production from a well holds all acres and depths of an oil and gas lease. They also
argue the court erred in not finding that the lease was subject to partial forfeiture for the
deep rights beyond the Gordon Sand formation based on the lessees’ breach of the
lease’s implied covenants by failing to explore and produce oil or gas from depths below
that formation.
Washington App. No. 16CA9 6
{¶14} As general propositions the landowners are correct that production from a
well does not necessarily hold all acres of the lease, and there are several implied
warranties associated with oil and gas leases, absent a valid disclaimer.
{¶15} “Since the 1800s, courts have recognized the existence of implied
covenants in oil and gas leases.” Yoder v. Artex Oil Co., 5th Dist. Guernsey No. 14 CA
4, 2014-Ohio-5130, ¶ 45, citing Hall, The Application of Oil & Gas Lease Implied
Covenants in Shale Plays: Old Meets New, 32 Energy & Min.L.Inst. (2011). “The most
commonly recognized implied covenants are the covenant to drill a test well, the
covenant to reasonably develop, the covenant of further exploration, the covenant to
protect against drainage, the covenant to diligently market, and the covenant to restore
the surface.” Id. The Supreme Court of Ohio “has long adhered to the principle that
absent express provisions to the contrary, a mineral lease includes an implied covenant
to reasonably develop the land.” Ionno v. Glen-Gery Corp., 2 Ohio St.3d 131, 132, 443
N.E.2d 504 (1983). Forfeiture of an oil and gas lease may be an appropriate remedy,
under limited circumstances, for a breach of an implied covenant. Hoop v. Kimble, 7th
Dist. Harrison No. 14 HA 9, 2015-Ohio-2110, ¶ 15.
{¶16} In Ohio, “[w]here certain causes of forfeiture are specified in an oil and gas
lease, others cannot be implied. Under such a lease, the remedy for a breach of an
implied covenant, without more, is damages, and not forfeiture of the lease, in whole or
in part.” Beer v. Griffith, 61 Ohio St.2d 119, 399 N.E.2d 1227 (1980), paragraph two of
the syllabus, approving and following Harris, 57 Ohio St. 118, 48 N.E. 502, at
paragraphs two and three of the syllabus. Nevertheless, “[w]here legal remedies are
inadequate, forfeiture or cancellation of an oil and gas lease, in whole or in part, is an
Washington App. No. 16CA9 7
appropriate remedy for a lessee’s violation of an implied covenant.” Beer at paragraph
four of the syllabus; see also Core v. Samurai Corp., 2015-Ohio-5437, __ N.E.3d __, ¶
14 (7th Dist.).
{¶17} Consequently, depending on the facts and circumstances, the remedy of
partial forfeiture of an oil and gas lease may be an appropriate remedy for the breach of
an implied covenant. For example, in Beer, the Supreme Court of Ohio affirmed the
partial forfeiture of an oil and gas lease for a lessee operating only one well on a 150-
acre leasehold because of a breach of the implied covenant to reasonably develop the
land. The court held that the lessee’s breach forfeited all but the 40-acre tract
associated with its producing well. In light of significant further efforts necessary to
develop the resources and the amount of unexploited acreage, the trial court reasoned
the lessee’s financial and operating difficulties would render a mere damage award
inadequate; thus “forfeiture of lessee’s interest is warranted in order to assure the
development of the land and the protection of lessor’s interests.” Id., 61 Ohio St.2d at
122, 399 N.E.2d 1227.
{¶18} Nevertheless, none of the cases cited by the landowners address the
availability of partial forfeiture as a remedy for horizontal, as opposed to vertical,
property. And the landowners’ action here expressly sought relief declaring that the
depths below the Gordon Sand formation were unencumbered by the oil and gas lease
because of the lessees’ breach of the implied covenants to reasonably explore and
develop that horizontal portion of the leasehold.
{¶19} In Marshall v. Beekay Co., 2015-Ohio-238, 27 N.E.3d 1 (4th Dist.), we
recently addressed this issue, albeit it the context of an assignment of the lessees’
Washington App. No. 16CA9 8
shallow rights. In Marshall the landowners sought the partial horizontal termination of
the deep rights of oil and gas leases based on the lessees’ failure to produce oil or gas
in areas below the Germantown Sand formation, notwithstanding the continued
production of 15 shallow wells. Based upon several cases, including Popa v. CNX Gas
Co., LLC, N.D. Ohio No. 4:14CV143, 2014 WL 3749415 (July 20, 2014), and Clark v.
Wolfcale, 5th Dist. Ashland No. CA-648, 1977 WL 201058 (June 2, 1977), we held there
was “no authority” to support a partial forfeiture of the deep, i.e., horizontal, rights of the
leasehold. Marshall at ¶ 21. We further held that the deep-rights lessees did not
breach the implied covenant to reasonably develop the property because “there was no
duty to further develop as long as gas and oil were being found in paying quantities” in
the shallow part of the leasehold. Id. at ¶ 23.
{¶20} Similarly, in Clark, the Fifth District Court of Appeals rejected landowners’
attempt to declare an oil and gas lease abandoned horizontally below the Berea Sands
formation. The court determined that Ohio law has not recognized this type of partial
forfeiture or abandonment:
What this appeal boils down to is an ingenius [sic] attempt to find a way to
get out from under an old oil and gas lease which in the light of changed
circumstances respecting the price of oil is now economically
disadvantageous' [sic] to the land owner. However ingenuously [sic] this
argument has been developed and how resourcefully it has been
researched and how strenuously it has been urged, it is totally without
support in Ohio law and this court declines to blaze the trail.
Id. at *3.
{¶21} Although the landowners attempt to half-heartedly assert that our decision
in Marshall “appears to be limited to its facts,” we find it to be directly applicable here.
Like the granting clause in the lease in Marshall, the granting clause in the oil and gas
Washington App. No. 16CA9 9
lease here “does not contain terms limiting the depth or formation, [so] the rights are
granted to all depths.” See K & D Farms, Ltd. v. Enervest Operating, L.L.C., 5th Dist.
Stark No. 2015CA00038, 2015-Ohio-4475, ¶ 29, citing Marshall. And as in that case,
the lessees’ continuous production of oil and gas in paying quantities in the shallow
area of the leasehold (the Gordon Sand formation) held the depths below that
formation.
{¶22} The landowners cite no Ohio case, and offer no persuasive out-of-state
authority, for modifying our current precedent to permit the requested partial horizontal
forfeiture of oil and gas leases. Our own limited legal research reveals that this is a
complex, evolving issue with no easy answer. See Burford, Legal Issues Involving
Private Rights in Appalachia, 12 E.Min.L.Found. Section 21.04 (1991) (“Even though
horizontal wells cost more than twice as much as a traditional well, one horizontal well
can ‘tap five times the amount of reserves’ of a conventional vertical well. The ability of
horizontal wells to increase production and reserves holds the potential to set a new
standard for the covenant of reasonable development”); Porter Wright Morris & Arthur,
LLP, Implied Covenants may require mineral lessees to develop deep rights (July 10,
2012), http://www,lexology.com (accessed June 16, 2016) (“until Ohio shale resources
are proven and horizontal drilling or other advanced technologies are widely accepted in
Ohio, the standard for what constitutes ‘reasonable development’ and ‘reasonable
diligence’ under a mineral lease will not change. Lessees still have time to protect
themselves by either exploring and developing deep rights on their own or by entering
into farm-out agreements or similar arrangements with other operators to share the
costs of these activities”). In the absence of persuasive authority to the contrary and
Washington App. No. 16CA9 10
because current precedent does not recognize the availability of partial horizontal
forfeiture of oil and gas rights in Ohio, we agree with the trial court that it appeared
beyond doubt that the landowners could prove no set of facts entitling them to their
requested relief. Consequently, we overrule the landowners’ assignments of error.
V. CONCLUSION
{¶23} The trial court correctly granted the lessees’ motion and dismissed the
landowners’ complaint seeking partial forfeiture of the oil and gas lease for the depths
below the Gordon Sand formation. Having overruled the landowners’ assignments of
error, we affirm the judgment of the trial court.
JUDGMENT AFFIRMED.
Washington App. No. 16CA9 11
JUDGMENT ENTRY
It is ordered that the JUDGMENT IS AFFIRMED and that Appellants shall pay
the costs.
The Court finds there were reasonable grounds for this appeal.
It is ordered that a special mandate issue out of this Court directing the
Washington County Court of Common Pleas to carry this judgment into execution.
Any stay previously granted by this Court is hereby terminated as of the date of
this entry.
A certified copy of this entry shall constitute the mandate pursuant to Rule 27 of
the Rules of Appellate Procedure.
Abele, J. & Hoover, J.: Concur in Judgment and Opinion.
For the Court
BY: ________________________________
William H. Harsha, Judge
NOTICE TO COUNSEL
Pursuant to Local Rule No. 14, this document constitutes a final judgment
entry and the time period for further appeal commences from the date of filing
with the clerk.