Conny Farms, Ltd. v. Ball Resources, Inc. , 2011 Ohio 5472 ( 2011 )

[Cite as Conny Farms, Ltd. v. Ball Resources, Inc., 2011-Ohio-5472.]
STATE OF OHIO, COLUMBIANA COUNTY
IN THE COURT OF APPEALS
SEVENTH DISTRICT
CONNY FARMS, LTD., )
) CASE NO. 09 CO 36
PLAINTIFF-APPELLANT, )
)
- VS - ) OPINION
)
BALL RESOURCES, INC, et al., )
)
DEFENDANTS-APPELLEES. )
CHARACTER OF PROCEEDINGS: Civil Appeal from Common Pleas
Court, Case No. 08CV833.
JUDGMENT: Reversed and Remanded.
APPEARANCES:
For Plaintiff-Appellant: Attorney Scott Zurakowski
Attorney Stephan Wright
4775 Munson St. NW
P.O. Box 36963
Canton, OH 44735-6963
Attorney Erik L. Walter
60 South Park Place
Painesville, OH 44077
For Defendants-Appellees: Attorney John Rambacker
825 South Main Street
North Canton, OH 44720
JUDGES:
Hon. Mary DeGenaro
Hon. Gene Donofrio
Hon. Joseph J. Vukovich
Dated: September 27, 2011
[Cite as Conny Farms, Ltd. v. Ball Resources, Inc., 2011-Ohio-5472.]
DeGenaro, J.
{¶1} Plaintiff-Appellant, Conny Farms Ltd., appeals the judgment of the
Columbiana County Court of Common Pleas granting summary judgment in favor of
Defendants-Appellees1 in a suit concerning the validity of two oil and gas leases on
Conny Farms' property. The trial court granted summary judgment against Conny Farms
due to a judicial ascertainment clause contained in both leases. Conny Farms argues this
was erroneous because: (1) judicial ascertainment clauses are against public policy in
Ohio; (2) the judicial ascertainment clause should not be enforced because the leases
expired under their own terms pursuant to habendum clauses; and (3) genuine issues of
material fact preclude summary judgment.
{¶2} Judicial ascertainment clauses are unenforceable in Ohio as against public
policy, thus, the trial court erred by granting summary judgment in favor of Appellees and
denying Conny Farms' summary judgment on this basis. But because the trial court
concluded that the judicial ascertainment clause was enforceable, it did not rule on the
merits of Conny Farms' remaining claims, and we must give the trial court the opportunity
to do so. Accordingly, the judgment of the trial court is reversed, and the case remanded.
Facts and Procedural History
{¶3} Conny Farms is the record title owner of land in Columbiana County. Since
1950, there have been two oil and gas leases on that land, which were originally held by
2
East Ohio Gas Company (nka Dominion East Ohio), but are now held by Appellees. For
convenience, the parties refer to the leases as the Gibson lease and the Thompson
lease. The two leases are identical except for the dollar amounts, several dates, and the
names of the original lessors.
{¶4} There was never a well drilled on the property, it was used for gas storage
purposes only. Michael and Jennifer Conny purchased the property on October 7, 2005.
Prior to purchasing the property, the Connys were provided with a title commitment which
revealed the existence of the leases. The Connys transferred the property to Conny
Farms Ltd. on September 6, 2006. Michael and Jennifer Conny are the sole members of
1
Chowder Gas Storage Facility, LLC; Ball Resources, Inc., Bass Energy, Inc.; William E. Blair; Richard W.
Petticrew; Jeffrey B. Petticrew; C. Richard Petticrew; and 5 Star, LLC.
2
Chowder holds a 60% working interest in the leases, the other Appellees own the remaining aggregate.
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Conny Farms Ltd. Both the Connys and Conny Farms admit they had knowledge of the
leases prior to taking ownership to the property.
{¶5} In a July 2, 2008 letter to lessees Ball Resources Inc. and William E. Blair,
counsel for Conny Farms/The Connys stated the leases terminated because no
payments had been made since the Connys took ownership of the property in 2005, and
demanded cancellation of the leases.
{¶6} Counsel for Ball Resources and Blair responded in a July 16, 2008 letter
that he was aware of the transfer of the property to the Connys since his office handled
the closing, noted the Connys were provided with the leases were represented by
independent third-party counsel in connection with that transaction, and stated with
regard to the notice provision in the leases: "It is my understanding that Mr. Conny never
notified Dominion as to the transfer of ownership in this property and did not notify my
clients prior to the notification contained in your July 2, 2008 correspondence. Based
upon your July 2, 2008 correspondence, we will now transfer the storage rental to Mr.
Conny in accordance with the terms of the subject leases."
{¶7} And in a July 23, 2008 follow-up letter, counsel for Ball Resources and Blair
provided documentation of the storage rental payments made by their predecessor in
interest, Dominion, to the Connys’ predecessor-in-interest, Klaus Forester, from April
2001 through May 2005. This letter went on to state:
{¶8} "Storage rental payments thereafter were suspended by Dominion East
Ohio since your client [Conny Farms] did not notify them of the real estate transfer.
Based upon the notification contained in your July 2, 2008 correspondence regarding this
transfer, these suspended funds will be transferred to Mr. Conny in the immediate future.
Based upon this payment history and the express terms of the subject oil and gas leases,
we believe that our leases remain valid and will proceed accordingly."
{¶9} Less than one month later, Conny Farms filed a multi-count complaint which
hinged on the allegation that Appellees breached the leases by failing to make any royalty
or rental payments; and/or that the leases expired under their own terms because no
production or storage of gas had occurred upon or under the property by Appellees or by
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their predecessor-in-title, Dominion. Appellees answered, and both sides filed cross-
motions for summary judgment. On October 16, 2009, the trial court issued a judgment
entry denying Conny Farms' motion and granting Appellees' motion, based upon the
judicial ascertainment clause:
{¶10} "The Court declines to set aside the [judicial ascertainment clause] cited
above. There is an abundance of authority, as cited by counsel for Defendant, that
leases are contracts and that the parties' obligations should be defined by that contract.
The Court finds that on the basis of the types of evidence that the Court may consider
pursuant to Rule 56 that there is no genuine issue of material fact; that the subject leases
are valid; and that Plaintiff's claims against the Defendants are without merit."
{¶11} Conny Farms filed a timely notice of appeal, after which Chowder Gas filed
a motion for sanctions and attorney fees with the trial court for having to defend the
motion for summary judgment. Pursuant to a limited remand from this court, the trial
court denied Chowder Gas' motion for attorney fees and sanctions, reasoning: first, that it
did not reach the underlying issues raised by Conny Farms when it entered summary
judgment; second, that there is no controlling law regarding the validity of judicial
ascertainment clauses; and finally, that there had been ongoing negotiations prior to filing
suit.
Enforceability of Judicial Ascertainment Clauses
{¶12} Conny Farms asserts as its sole assignment of error:
{¶13} “The trial court erred in granting summary judgment in favor of the
Defendants/Appellees and against Plaintiff/Appellant, Conny Farms, Ltd.”
{¶14} A motion for summary judgment is properly granted if the court, upon
viewing the evidence in a light most favorable to the party against whom the motion is
made, determines that: (1) there are no genuine issues as to any material facts; (2) the
movant is entitled to a judgment as a matter of law; and (3) the evidence is such that
reasonable minds can come to but one conclusion and that conclusion is adverse to the
opposing party. Civ.R. 56(C); Byrd v. Smith, 110 Ohio St. 3d 24, 2006-Ohio-3455, 850
N.E.2d 47, at ¶10. The party moving for summary judgment "bears the initial
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responsibility of informing the trial court of the basis for the motion, and identifying those
portions of the record which demonstrate the absence of a genuine issue of fact on a
material element of the nonmoving party's claim." Dresher v. Burt (1996), 75 Ohio St. 3d
280, 296, 662 N.E.2d 264. The nonmoving party has the reciprocal burden of specificity
and cannot rest on the mere allegations or denials in the pleadings. Id. at 293.
{¶15} An appellate court reviews a trial court's summary judgment decision de
novo, applying the same standard used by the trial court. Ohio Govt. Risk Mgt. Plan v.
Harrison, 115 Ohio St. 3d 241, 2007-Ohio-4948, 874 N.E.2d 1155, at ¶5. And it is well-
established that issues raised in summary judgment motions but not considered by the
trial court will not be ruled upon by the appellate court. Mills-Jennings, Inc. v. Dept. of
Liquor Control (1982), 70 Ohio St. 2d 95, 99, 435 N.E.2d 407; Ochsmann v. Great
American Ins. Co., 10th Dist. No. 02AP-1265, 2003-Ohio-4679, at ¶21.
{¶16} The trial court, via summary judgment in favor of the defendants, declined to
set aside the judicial ascertainment clause in both leases, which states:
{¶17} "It is agreed that this lease shall never be forfeited or cancelled for failure to
perform, in whole or in part, any of its covenants, conditions or stipulations, until it shall
have been first finally judicially determined that such failure exists, and after such final
determination, lessee is given a reasonable time therefrom to comply with any such
covenants, conditions or stipulations."
{¶18} The validity of judicial ascertainment clauses is an issue of first impression
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in Ohio. Despite Conny Farms’ citation to Tisdale v. Walla (Dec. 23, 1994), 11th Dist.
No. 94-A-0008, there are no Ohio cases that discuss whether judicial ascertainment
clauses are against public policy. Although Tisdale involved a judicial ascertainment
clause, the outcome of the case did not turn on its enforceability. Rather, the court in
Tisdale held that the lease had expired automatically due to the operation of a habendum
clause, thus obviating the lessor's need to seek a judicial determination of whether the
lessee had forfeited the lease; that the judicial ascertainment clause cannot affect the
3
Appellees incorrectly claim this argument was waived. Conny Farms raised it in its motion for summary
judgment and its brief in opposition to Appellees' motion for summary judgment, but relies on different cases
to support the argument on appeal.
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operation of the habendum clause. Id. at *4.
{¶19} Conny Farms relies on Wellman v. Energy Resources, Inc. (2001), 210
W.Va. 200, 557 S.E.2d 254, and the cases cited within it, which held judicial
ascertainment clauses are against public policy for three reasons. First, the court noted
that judicial ascertainment clauses require courts to try cases piecemeal, which is
generally disfavored, and second, that the clauses would require at least two trials and
two judgments and would improperly convert trial and appellate courts into "mere boards
of arbitration." Wellman at 205, 206, citing Frick-Reid Supply Corp. v. Meers
(Tex.Civ.App.1932), 52 S.W.2d 115, 118. Finally, the court expressed concern over the
unequal bargaining power: "[O]ften in the oil and gas lease situation, the landowner is a
relatively small operator with limited resources and the lessee often has substantially
greater resources. 'Judicial ascertainment' clauses in such situations might enable the
lessee to subject the lessor to needless and unfair pressure to obtain concessions."
Wellman at 206, citing Melancon v. Texas Company (1956), 230 La. 593, 624, 89 So. 2d
135.
{¶20} In sum, the Wellman court held:
{¶21} "West Virginia, like other jurisdictions, has recognized that economy of
judicial effort is a public policy concern. * * * West Virginia has also long adhered to the
ancient legal principle that Nemo debet bis vexari pro una et eadem causa, or that no one
should be twice vexed by one and the same cause, or, more freely translated, that one
should not have to undergo repeated litigation over the same matter. * * * Finally, the
Court believes that the purpose of the legal system is to provide final resolution of legal
controversies and not to provide a device to enable one party to grind another down
through repetitious litigation until the other submits.
{¶22} "In short, the Court believes there are compelling public policy reasons for
holding that "judicial ascertainment" clauses in oil and gas leases, which, in effect, open
the door for repeated litigation over the same issues, are not enforceable on this State.
On the other hand, the Court can see no reason for holding them enforceable.
{¶23} "In view of this, and in view of the fact that other jurisdictions have rejected
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such clauses, this Court holds that 'judicial ascertainment' clauses in oil and gas leases in
West Virginia are void under the public policy of this State and do not preclude a court in
which a controversy over an oil and gas lease is tried from rendering a final judgment and
finally resolving that controversy." (Internal citations omitted.) Wellman at 207-208.
{¶24} Appellees cite cases from other state courts which have upheld judicial
ascertainment clauses, although often without much discussion. See Gillette v. Pepper
Tank Co. (Colo.App.1984), 694 P.2d 369, 374 (concluding judicial ascertainment clauses
are not void; declining to follow Frick-Reid); Melancon v. Texas Co. (1956), 230 La. 593,
89 So. 2d 135 (concluding judicial ascertainment clause could apply, but only to a bona
fide dispute as to which there is a real disagreement in good faith between the parties).
See, also id. at 630 (McCaleb, J., dissenting): "This [judicial ascertainment] clause is clear
and explicit; it is the law between the parties and should be given full force and effect by
this Court. * * * It simply signifies the clear intent of the parties to be that the lease is
earned when the lessee has secured production and that, thereafter, it shall not be lost or
forfeited without first having a judicial ascertainment of the breach and then giving lessee
an opportunity to perform its obligation. Public policy does not preclude the parties from
thus contracting and the majority does not place its decision on that basis." (Internal
citations omitted.)
{¶25} Appellees also point to Ohio Supreme Court case law holding that oil and
gas leases are like any other contract and that the language within them is controlling
between the parties. See Harris v. Ohio Oil Co. (1897), 57 Ohio St. 118, 129, 48 N.E.
502 ("The rights and remedies of the parties to an oil or 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." See, also, Swallie v. Rousenberg, 190 Ohio
App.3d 473, 2010-Ohio-4573, 942 N.E.2d 1109 at ¶61 (a Seventh District case quoting
Harris for this proposition.)
{¶26} In considering the arguments raised by the parties, we are mindful that "[i]n
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considering whether a provision in a contract is against 'public policy' [courts] must
remember that the freedom to contract is fundamental, and that we should not lightly
disregard a binding agreement, unless it clearly contravenes some established or
otherwise reasonable public interest." Hurst v. Enterprise Title Agency, Inc, 157 Ohio
App.3d 133, 2004-Ohio-2307, 809 N.E.2d 689, at ¶19. However, we are persuaded by
the analysis of our sister states as articulated in Wellman, in reaching the conclusion that
judicial ascertainment clauses are against public policy in Ohio and therefore
unenforceable. Ohio values judicial economy, which protects its citizens from repeated
litigation over the same matter. More importantly, the purpose of the legal system in Ohio
is to provide for the resolution of legal controversies, not to be used as a mechanism to
enable one party to grind down another. Accordingly Conny Farms’ argument is
meritorious.
Failure to Pay Rentals & Habendum Clause
{¶27} Conny Farms also argues that the trial court’s summary judgment was
erroneous because Appellees breached the leases by failing to pay rental fees, and that
the leases expired pursuant to the terms of the habendum clause. However, the trial
court did not resolve these issues, granting summary judgment solely on the basis of the
judicial ascertainment clause. While the trial court concluded that the leases were "valid,"
it did not decide whether they had been breached due to Appellees' failure to make rental
payments or whether the leases had expired under their own terms pursuant to the terms
of the habendum clauses. In fact, in its judgment entry denying sanctions and attorneys
fees the trial court stated: “this Court’s ruling on the Motion for Summary Judgment did
not reach the underlying issues which were put forth by various claims in the Plaintiff’s
Complaint.” Both parties raised these issues on summary judgment, but they were not
resolved by the trial court. Thus we cannot, and must remand the case so these issues
can be addressed by the trial court. Mills-Jennings at *99, Ochsmann at ¶21.
{¶28} In conclusion, the judicial ascertainment clauses are unenforceable as
against public policy in Ohio which favors judicial economy, and preserves a legal system
to promote the resolution of legal disputes rather than permit mechanisms to thwart that
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system. Moreover, issues that were raised but not ruled upon by the trial court cannot be
addressed by the court of appeals. Accordingly, the judgment of the trial court is
reversed, and the case is remanded for further proceedings consistent with this opinion.
Donofrio, J., concurs.
Vukovich, J., concurs.