Burkhart v. Miley

[Cite as Burkhart v. Miley, 2017-Ohio-9006.]
STATE OF OHIO, MONROE COUNTY
IN THE COURT OF APPEALS
SEVENTH DISTRICT
CYRIL AND ROSEMARY BURKHART, )
)
PLAINTIFFS-APPELLEES, )
) CASE NOS. 15 MO 0012
V. ) 15 MO 0013
) 15 MO 0014
JEFF MILEY DBA MILEY GAS CO., ET )
AL., ) OPINION
)
DEFENDANTS-APPELLANTS. )
CHARACTER OF PROCEEDINGS: Civil Appeal from Court of Common
Pleas of Monroe County, Ohio
Case No. 2013-293
JUDGMENT: Reversed
Judgment in favor of appellants.
JUDGES:
Hon. Gene Donofrio
Hon. Mary DeGenaro
Hon. Carol Ann Robb
Dated: December 8, 2017
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APPEARANCES:
For Plaintiffs-Appellees Attorney Ethan Vessels
Cyril and Rosemary Burkhart 309 Second Street
Marietta, Ohio 45750
For Defendants-Appellants Attorney William Taylor
Jeff Miley dba Miley Gas Co. Attorney Scott Eickelberger
Attorney David Tarbert
Attorney Ryan Linn
50 North Fourth Street
P.O. Box 1030
Zanesville, Ohio 43702-1030
For Defendant-Appellant Attorney Lyle Brown
Antero Resources Attorney Melanie Morgan-Norris
Attorney J. West
41 South High Street
Columbus, Ohio 43215
For Amicus Curiae Attorney Gregory Russel
Ohio Oil and Gas Association Attorney Peter Lusenhop
52 East Gay Street
Columbus, Ohio 43216-1008
Attorney Aaron Williams
200 Public Square, Suite 1400
Cleveland, Ohio 44114
[Cite as Burkhart v. Miley, 2017-Ohio-9006.]
DONOFRIO, J.
{¶1} Defendant-appellant, Antero Resources Corporation, along with
defendant-appellant, Jeff Miley d.b.a. Miley Gas Company, appeal from a Monroe
County Common Pleas Court judgment, resulting from a bench trial, finding that a
certain oil and gas lease terminated due to the failure of the well at issue to produce
in paying quantities.
{¶2} Plaintiff-appellee, Rosemary Burkhart, individually and as the
representative of the estate of Cyril Burkhart, is the owner of the mineral rights to a
66-acre parcel of property located in Seneca Township in Monroe County (the
Property).
{¶3} By deed recorded February 2, 1945, Aloysius and Celia Burkhart, as
lessors, executed an oil and gas lease with Burns Drilling Company, as lessee (the
Lease). Aloysius and Celia were Cyril Burkhart’s parents. Aloysius’s and Celia’s
mineral interest passed to Cyril. When Cyril passed away, his mineral interest
passed to Rosemary.
{¶4} The Lease provides that it is for a term of five years and “so much
longer thereafter as oil, gas or their constituents are in paying quantities thereon.”
{¶5} The Lease covers the entire property. A single well sits on the property
(the Well). The Well was drilled in 1945. In 1992, the Burkharts transferred
ownership of the Property’s surface rights to Leo and Judith Loraditch. The
Burkharts reserved the mineral rights to the Property.
{¶6} On October 11, 2011, the Burkharts recorded a Preservation Notice of
Ownership in Oil and Gas Rights for the purpose of preserving their reserved mineral
interest.
{¶7} In 2011, defendant-appellant, Jeff Miley d.b.a. Miley Gas Company
(Miley), purchased the Well from RMB Production Corporation. The Lease was also
assigned to Miley. The assignment of the Lease from RMB to Miley was recorded
April 12, 2011. In 2012, Miley assigned the deep rights of the Lease to defendant-
appellant, Antero Resources Corporation (Antero).
{¶8} On July 26, 2013, Burkhart filed a complaint against Miley. The
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complaint alleged that the primary term of the Lease expired on December 6, 1949,
and there has not been sufficient production to continue the Lease. Therefore,
Burkhart sought a declaration that the Lease expired under its own terms. She later
amended the complaint to add Antero as a defendant.
{¶9} The case proceeded to a bench trial on October 1, 2014. The trial court
found that Miley had operated the Well in good faith and that it was profitable. The
court found that Miley had declared a profit from its operation of the Well on tax
returns in 2011, 2012, and 2013.
{¶10} The trial court found there was confusion regarding the name and API
number of the Well stemming from a sign hanging on the wellhead identifying the
Well as the “Burkhart, No.: 1Permit; Unknown.” and the Form 7 (Request for Change
of Owner), which identified the Well as the “Burkhart No. 2 API 20368.” The court
went on to find that the evidence demonstrated the Well located on the Property is
actually the Well designated as API No. 20368. It found that the argument that Miley
had been using the production from a well located off of the Property (No. 20334) to
hold the Lease was not supported by the evidence. The court found that the Ohio
Department of Natural Resources (ODNR) records placed Well No. 20334 in a
location that did not match the legal description of the Property. Moreover, the court
found that the drilling of Well No. 20334 was completed prior to the execution of the
Lease and the ODNR described this well as a non-producing historic well. On the
other hand, the court found that Well No. 20368 is located in the southwest quarter of
section 4, in which a portion of the Property is also located. And ODNR records
reflected that Well No. 20368 was drilled approximately one month after the
execution of the Lease.
{¶11} Thus, the court found that the production from Well No. 20368 located
on the Property was continuous and profitable. Therefore the court found that the
Lease remained in full force because the Well was producing in paying quantities.
The court entered judgment in favor of Miley and Antero.
{¶12} Following the judgment in favor Miley and Antero, Burkhart filed a
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motion for new trial or to amend the court’s findings of fact and conclusions of law.
Burkhart alleged that Jeff Miley made knowing misrepresentations to the court during
the trial. In the motion, Burkhart did not take issue with the court’s finding that the
Well was located on the Property. But Burkhart argued that the court’s finding that
Miley made a profit from 2011-2013 was incorrect. She noted that Jeff Miley and his
wife Meleesa both testified that they declared a profit in those years. But Burkhart
stated that Miley actually declared a loss in 2012 and 2013. She stated that she
obtained this information by way of a motion to compel in another case where Miley
produced his tax records. She further asserted that Miley’s tax records reported
money spent for contract labor, repairs, and maintenance, contrary to his testimony
that he did his own repairs.
{¶13} The trial court found that Burkhart presented good cause to reopen its
previous judgment and take additional testimony on the issue of Miley’s tax returns.
{¶14} The court held a hearing where it took additional testimony and
evidence on the sole issue of whether Miley had been profitably producing oil or gas
from the Well under the Lease.
{¶15} The court found that at the initial trial, Jeff Miley had testified for the
relevant tax years of 2010-2013, Miley was profitable and did not declare a loss. But
the court found Miley’s tax records showed otherwise. It noted that Miley declared a
loss in 2012 and 2013. Additionally, it found that the tax returns demonstrated that
much of Miley’s gross revenue did not come from the sale of oil and gas but from
contract work that Jeff Miley performed for other oil and gas operators. The court
went on to find that Miley did not report any production for 2011-2103 until late 2013,
when Antero suggested that Miley submit its production to the ODNR. Based on this
disclosure, the court inferred that the 2011 and 2012 production numbers were
merely estimates. The court noted it was undisputed by Jeff Miley that it would be
virtually impossible for any third party to look at documentary evidence and
independently verify that the Well is profitable. The court also noted, however, that
Miley’s tax preparer testified that the Schedule C forms for 2012 and 2013, did not
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show the expenses associated with the production of oil and gas exceeded the
revenues from the sale of oil and gas.
{¶16} The trial court found that Miley has a major financial incentive to claim
that the Well is profitable. It further found significant that Miley did not report any
production for the years 2011 and 2012, until directed by Antero do to so in late
2013. Finally, the court found that a lessee who claims his lease is profitable yet
whose tax return shows a loss casts “real doubt” on the actual profitability. Based on
these findings, the trial court found the Lease was cancelled for lack of production.
Therefore, the court vacated its previous judgment and entered judgment in favor of
Burkhart.
{¶17} Antero subsequently filed a motion for new trial and to reopen and
amend the judgment entry.
{¶18} Miley filed a timely notice of appeal on June 26, 2015 (15-MO-12).
Miley then filed a motion joining in Antero’s motion for new trial.
{¶19} Antero then filed a notice of appeal (15-MO-13). The trial court, without
leave, denied the motion for a new trial. Antero filed another notice of appeal from
that judgment (15-MO-14).
{¶20} This court then issued a limited remand so that the trial court could rule
on the motion for new trial. The trial court denied the motion. This court then
consolidated the appeals. This court also granted the Ohio Oil and Gas Association
and the Southeastern Ohio Oil and Gas Association leave to file an amicus curiae
brief in support of Antero and Miley.
{¶21} Antero raises five assignments of error. Miley raises three assignments
of error. We will address the assignments of error out of order for ease of discussion.
{¶22} Antero’s second assignment of error and Miley’s second assignment of
error control the outcome of this case.
{¶23} Antero’s second assignment of error states:
THE TRIAL COURT ERRED AS A MATTER OF LAW WHEN IT
DID NOT USE THE CORRECT LEGAL STANDARD AND BURDEN OF
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PROOF IN DETERMINING IF THERE WAS PRODUCTION IN
PAYING QUANTITIES.
{¶24} Miley’s second assignment of error states:
THE TRIAL COURT ERRED AS A MATTER OF LAW IN
APPLYING THE WRONG LEGAL STANDARD IN DETERMINING
WHETHER AN OIL AND GAS LEASE REMAINS IN EFFECT.
{¶25} Here Antero argues the trial court erred in focusing on the overall
profitability of the Lease’s total operation instead of on the profitability of the Well and
in shifting the burden of proof to appellants to prove production in paying quantities.
Antero points out that the law defers to the lessee’s determination as to the
profitability of a well. It asserts paying quantities refers to a “well” as opposed to a
“lease.” Antero goes on to argue that the cost of the lessee’s own labor in operating
and maintaining a well is not considered when determining paying quantities.
{¶26} Antero contends the trial court was correct in its First Decision when it
limited its focus to the profitability of the Well and concluded there was production in
paying quantities. It asserts the court erred in its Second Decision when it focused
instead on the overall profitability of Miley’s operations as opposed to the profitability
of the Well.
{¶27} Additionally, Antero argues the trial court impermissibly shifted the
burden from the Burkharts (to prove lack of paying quantities) to them (to prove
paying quantities).
{¶28} Miley adds that the Lease provides that it will continue so long as oil
and gas are produced in paying quantities, not so long as the lessee declares a profit
on its Schedule C with the IRS. It further points to testimony that these payments are
consistent with the royalties paid to the Burkharts. Finally, it points to Jeff Miley’s
testimony that the Well is profitable and his expenses for the Well are de minimis.
{¶29} After the primary term of an oil and gas lease expires, if the conditions
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of the secondary term are not being met, then the lease terminates by the express
terms of the contract and by operation of law and revests the leased estate in the
lessor. Swallie v. Rousenberg, 190 Ohio App.3d 473, 2010-Ohio-4573, 942 N.E.2d
1109 (7th Dist.), ¶ 63. It is common for the secondary term of the lease to be
conditioned upon oil or gas being produced in paying quantities. Dennison Bridge,
Inc. v. Resource Energy, L.L.C., 7th Dist. No. 14 HA 21, 2015-Ohio-4736, ¶ 21.
{¶30} The term “paying quantities,” when used in the habendum clause of an
oil and gas lease, generally means quantities of oil or gas sufficient to yield even a
small profit to the lessee over operating expenses, even though such things as
drilling costs or equipping costs are not recovered which may result in the
undertaking as a whole suffering a loss. Blausey v. Stein, 61 Ohio St.2d 264, 265-
266, 400 N.E.2d 408 (1980).
{¶31} In determining whether a well is profitable, courts look to the discretion
of the lessee. Lang v. Weiss Drilling Co., 7th Dist. Nos. 15 MO 0005, 15 MO 0006,
2016-Ohio-8213, ¶ 34. Although the lessee has discretion to determine a well's
profitability, the determination of whether a well is profitable cannot be arbitrary. Id.Courts impose a standard of good faith on the lessee. Id.{¶32} This case is controlled by another decision of this court involving The
Burkhart Family Trust and Antero. Burkhart Family Trust v. Antero Resources Corp.,
7th Dist. Nos. 14 MO 0019, 14 MO 0020, 2016-Ohio-4817, appeal not allowed, 147
Ohio St.3d 1437, 2016-Ohio-7677, 63 N.E.3d 156.
{¶33} In that case, the Burkhart Family Trust (BFT) filed a complaint against
Antero and Tri-County seeking a declaratory judgment that a certain lease had been
forfeited for lack of production in paying quantities. The matter proceeded to a bench
trial and the trial court entered judgment in favor of BFT. Antero and Tri-County
appealed to this court. They argued that the trial court improperly placed the burden
of proof on them at trial to prove that the wells in question were producing in paying
quantities. Id. at ¶ 10. Instead, they asserted, because BFT brought the complaint
against them, the trial court should have placed the burden on BFT to prove that the
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wells were not producing in paying quantities. Id.
{¶34} This court started out by noting that although the case involved an oil
and gas lease, its resolution depended on the Rules of Civil Procedure, specifically
who held the burden of proof. Id. at ¶ 12. We found that although the trial court
never directly stated which party bore the burden of proof, it was clear from the
record that the court improperly shifted the burden to Antero and Tri-County. Id. For
example, we pointed to the trial court’s finding that Sulsberger, Tri-County’s owner,
had presented “no credible evidence to support his blanket assertion” that the wells
were profitable. Id. We further pointed to the trial court’s finding that Sulsberger did
not keep a business ledger, bookkeeping software, or list of the income versus
expenses for his company. Id.
{¶35} We went on to address Sulsberger’s testimony. We noted that
Sulsberger was BFT’s sole witness. Id. at ¶ 15. Sulsberger testified that the wells
were producing in paying quantities. Id. The trial court found Sulsberger’s testimony
to be not credible. Id. We found that while the trial court disbelieved Sulsberger, this
did not lead to the conclusion that Sulsberger’s testimony was evidence of the
opposite, that being that the wells were not producing in paying quantities. Id.
Instead, it left BFT with no credible witness. Id.
{¶36} We then addressed the trial court’s finding that the wells were not
producing in paying quantities. We noted that only some of the trial court’s findings
were relevant to whether the wells produced in paying quantities and those relevant
findings were not supported by the record. Id. at ¶ 21.
{¶37} First, we pointed to the trial court’s finding that Sulsberger had
miscalculated the royalties paid to BFT. Id. at ¶ 22. We found that any
miscalculation of royalties was irrelevant to the question of paying quantities. Id.
Thus, we found the trial court improperly considered this factor.
{¶38} Second, we pointed to the trial court’s finding that Sulsberger failed to
report production to the ODNR and the county auditor. Id. at ¶ 23. We stated that
the failure to file production reports with the ODNR did not add to the determination of
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whether a well is producing. Id., citing Mobberly v. Wade, 7th Dist. No. 13 MO 18,
2015-Ohio-5287, ¶ 16.
{¶39} Third, we noted that while Sulsberger testified as to his Schedule C tax
forms, they were not offered into evidence. Id. at ¶ 24. We noted that although
Sulsberger testified that his Schedule C showed a loss in certain years, he testified
that the form contained business expenses for all of his business projects, not just
the wells in question. Id. Therefore, while his Schedule C may have shown that his
projects as a whole were unprofitable, it did not provide information specific to the
wells at issue. Id. Thus, we found it had no evidentiary value to the issue of
production in paying quantities. Id.
{¶40} Fourth, we noted that the trial court relied on its finding that Sulsberger
was a poor record keeper. Id. at ¶ 25. We found that aside from its reliance on
Sulsberger’s lack of records, BFT did not present any evidence to support its position
that the wells were not producing in paying quantities. Id.
{¶41} Fifth, we noted that Sulsberger regularly paid royalties to BFT. Id. at ¶
25, 28. And we stated that while not conclusive, the payment of royalties is some
evidence of production in paying quantities. Id. at ¶ 28.
{¶42} Finally, we noted that the trial court relied on the finding that
Sulsberger’s company stood to profit by holding on to the lease until deep drilling on
the property was completed. Id. at ¶ 29. We found this finding to be irrelevant to the
issue of paying quantities. Id.
{¶43} Based on all of the above, this court concluded:
While Mr. Sulsberger's lack of records is troubling and he clearly
convinced the trial court that he was untruthful, the fact remains that the
Burkhart family, on behalf of the Trust, had the burden of proving by
means of evidence that the wells (that they admit produce) do not
produce in paying quantities. In support of shifting the burden of proof
to Appellants, Appellee argued at hearing that this would force them
into proving the negative. It is apparent the Burkhart family had the
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ability to use discovery to uncover evidence necessary to prove their
assertions. Instead of subpoenaing Tri–County's records or
subpoenaing any other type of evidentiary records on the issue of
whether paying quantities of either gas or oil were being produced, the
Burkhart family insists that Appellants were required to prove the
production from the wells was adequate in order to withstand their
demands for termination of the lease. As the Trust has failed to meet its
burden, the trial court's judgment is erroneous.
Id. at ¶ 29.
{¶44} In this case too, the trial court incorrectly placed the burden on Miley
and Antero to prove that the Well was producing in paying quantities instead of
placing the burden on Burkhart to prove that the Well was not producing in paying
quantities. The trial court here, like the trial court in BFT, considered several factors
we deemed in BFT to be irrelevant to a determination of paying quantities.
{¶45} First, the trial court found that Miley’s tax returns revealed that Miley
declared a loss of $10,211 in 2012, and a loss of $76,126 in 2013. It also found that
the tax returns demonstrated that much of Miley’s gross revenues did not come from
the sale of oil and gas but from contract work that Jeff Miley performed for other oil
and gas operators.
{¶46} Notably absent from the trial court’s finding here is any mention of how
the Well at issue performed. Miley’s tax returns are not specific to the Well. They
encompass all of Miley’s operations including, as the trial court noted, work Jeff Miley
performed for other oil and gas operators. And while Miley as a company overall
may have declared losses in 2012 and 2013, there is no indication as to whether the
Well produced oil and gas in paying quantities in those years. Therefore, the court
erred in relying on this factor.
{¶47} Second, the trial court found that Miley did not report any production on
any of its wells, including the Well at issue, until late 2013. At that time, after a
suggestion by Antero, Miley submitted production reports to the ODNR. The trial
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court then, “clearly infer[ed] that the 2011 and 2012 production numbers are mere
estimates by Mr. Miley.” It also found it “significant” that Miley did not report any
production in 2011 or 2012.
{¶48} We stated in BFT that “the failure to file production reports with ODNR
does not add to the determination of whether a well is producing.” Id. at ¶ 23, citing
Mobberly, 2015-Ohio-5287, ¶ 16. Thus, the fact that Miley did not timely submit
production reports to the ODNR does not help to determine whether the Well
produced in paying quantities.
{¶49} Third, the trial court found it was undisputed by Jeff Miley that it would
be “virtually impossible” for a third party to look at documentary evidence presented
by Miley and verify that the Lease was profitable.
{¶50} This statement by the trial court is an example of how the trial court
placed the burden of proof on Miley to show production in paying quantities. We
found similar statements by the trial court in BFT, to show that the trial court
impermissibly shifted the burden of proof. Id. at ¶ 12 (where the trial court found
Sulsberger did not keep a business ledger, did not have any electronic bookkeeping
software, and did not keep a list of the income versus expenses). Thus, the trial
court improperly shifted the burden from Burkhart to Miley.
{¶51} Fourth, the trial court found that Miley had a “major financial incentive”
to claim the Well is profitable and Miley “obviously stand[s] to profit immensely by
maintaining the current Lease.” The court found that the deep rights were assigned
to Antero whose production efforts could result in a “financial windfall” to Miley.
{¶52} In BFT, we specifically found that the trial court’s reliance on the finding
that the lessee stood to profit by holding onto the lease until deep drilling was
completed was irrelevant to the issue of paying quantities. Id. at ¶ 29. In fact, we
stated that whether the lessee would profit from deep drilling activities “has no
bearing at all on the pertinent determination.” Id. Thus, the trial court here erred in
relying on this factor.
{¶53} Fifth, the trial court found that a lessee who claims its lease is profitable
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yet the tax returns show a loss “casts real doubt on his actual profit.”
{¶54} This statement by the trial court is another example of shifting the
burden to prove paying quantities to Miley.
{¶55} Finally, there was no dispute here that Miley had been paying royalties
to Burkhart, yet the trial court did not mention this in its findings. And “[w]hile not
conclusive evidence, royalty payments can be evidence of production in paying
quantities.” RHDK Oil & Gas, L.L.C. v. Dye, 7th Dist. No. 14 HA 0019, 2016-Ohio-
4654, ¶ 30.
{¶56} The party who asserts a claim in an oil and gas case, just as in any
other civil case, carries the burden of proof. Burkhart Family Trust, 2016-Ohio-4817,
at ¶ 13. Thus, in this case, the burden was on Burkhart to prove that the Well was
not producing in paying quantities. The trial court’s findings, however, demonstrate
that it placed the burden on Miley and Antero to prove the Well was producing in
paying quantities. Moreover, in making its determination, the trial court relied on
several factors this court has found to be irrelevant to a paying quantities
determination. Therefore, the trial court erred in finding that the Well was not
producing in paying quantities and in entering judgment in favor of Burkhart.
{¶57} Accordingly, Antero’s second assignment of error has merit and is
sustained. Likewise, Miley’s second assignment of error has merit and is sustained.
{¶58} Antero’s first assignment of error states:
THE TRIAL COURT ERRED IN ENTERING A JUDGMENT IN
FAVOR OF PLAINTIFF-APPELLEE.
{¶59} Antero’s third assignment of error states:
THE TRIAL COURT’S JUDGMENT AND DECISION ISSUED
MAY 27, 2015 ARE AGAINST THE MANIFEST WEIGHT OF THE
EVIDENCE AND A VIOLATION OF SUBSTANTIAL JUSTICE.
{¶60} Antero’s fourth assignment of error states:
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THE TRIAL COURT ERRED IN GRANTING A NEW TRIAL TO
APPELLEE PURSUANT TO CIVIL RULE 59.
{¶61} Antero’s fifth assignment of error states:
THE TRIAL COURT ERRED IN VACATING ITS NOVEMBER 7,
2014 JUDGMENT IN ITS ENTIRETY.
{¶62} Miley’s first assignment of error states:
THE TRIAL COURT ERRED IN VACATING ITS PRIOR
JUDGMENT ENTRY AND ENTERING A JUDGMENT IN FAVOR OF
APPELLEE ON MAY 27, 2015.
{¶63} Miley’s third assignment of error states:
THE TRIAL COURT’S SECOND JUDGMENT ENTRY DATED
MAY 27, 2015 IS AGAINST THE MANIFEST WEIGHT OF THE
EVIDENCE AND A VIOLATION OF SUBSTANTIAL JUSTICE.
{¶64} Given our resolution of Antero’s second assignment of error and Miley’s
second assignment of error, the remaining assignments of error are moot.
{¶65} For the reasons stated above, the trial court’s judgment is hereby
reversed. Judgment is entered in favor of Antero and Miley.
DeGenaro, J., concurs.
Robb, P.J., concurs.