Bilbaran Farm, Inc. v. Bakerwell, Inc.

[Cite as Bilbaran Farm, Inc. v. Bakerwell, Inc., 2013-Ohio-2487.]
COURT OF APPEALS
KNOX COUNTY, OHIO
FIFTH APPELLATE DISTRICT
BILBARAN FARM, INC. : JUDGES:
:
: Hon. John W. Wise, P.J.
Plaintiff-Appellant : Hon. Patricia A. Delaney, J.
: Hon. Craig R. Baldwin, J.
-vs- :
: Case No. 12-CA-21
:
BAKERWELL, INC., ET AL. :
:
:
Defendants-Appellees : OPINION
CHARACTER OF PROCEEDING: Appeal from the Knox County Court of
Common Pleas, Case No. 12-QT-08-
0408
JUDGMENT: AFFIRMED
DATE OF JUDGMENT ENTRY: June 12, 2013
APPEARANCES:
For Plaintiff-Appellant: For Defendants-Appellees:
WILLIAM PAUL BRINGMAN STEVEN J. SHROCK
13 E. College Street CLINTON G. BAILEY
Fredericktown, OH 43019-1192 P.O. Box 469
Mount Vernon, OH 43050
Knox County, Case No.12-CA-21 2
Delaney, J.
{¶1} Plaintiff-Appellant Bilbaran Farm, Inc. appeals the October 25, 2012
judgment entry of the Knox County Court of Common Pleas dismissing Bilbaran Farm,
Inc.’s complaint.
FACTS AND PROCEDURAL HISTORY
{¶2} Plaintiff-Appellant Bilbaran Farm, Inc. entered into an oil and gas lease
with Professional Petroleum Services, Inc. on May 12, 2003. The lease agreement
granted Professional Petroleum Services “all of the oil and gas and the constituents of
either, in and under the lands hereinafter described together with the exclusive right to
drill and operate for, produce, and market oil and gas and their constituents, the right to
lay pipeline to transport oil and gas and their constituents from the lands leased
hereunder and other lands, the right to build and install such tanks, equipment and
structures ancillary thereto to carry on operations for oil and gas, together with the right
to enter thereon at all times and to occupy, possess and use so much of said premises
as is necessary and convenient for all purposes described herein * * *.”
{¶3} The lease agreement covered 275.67 acres owned by Bilbaran Farm
located in Brown Township, Knox County, Ohio. The lease did not specify the amount
of wells to be located on the property. The lease agreement contained a provision that
if the operation for a well was not commenced on the premises within 12 months from
the date of the lease, the lease would terminate as to both parties unless Professional
Petroleum Services paid to Bilbaran Farm a certain sum of money. The payment would
operate as a rental and deferral of commencement of operations.
Knox County, Case No.12-CA-21 3
{¶4} The lease agreement also provided: “This lease and all its terms,
conditions and stipulations shall extend to and be binding on all heirs, successors and
assigns of Lessor or Lessee. This lease contains all of the agreements and
understandings of the Lessor and the Lessee respecting the subject matter hereof and
no implied covenants or obligations, or verbal representations or promises, have been
made or relied upon by Lessor or Lessee supplementing or modifying this lease or as
an inducement thereto.”
{¶5} On December 4, 2007, Professional Petroleum Services assigned its
interest in the Bilbaran Farm oil and gas lease to Defendant-Appellee Bakerwell, Inc.
Bakerwell, Inc. then assigned a percentage of its interest in the Bilbaran Farm oil and
gas lease to Defendant-Appellee Crescent Oil & Gas, LLC.
{¶6} On August 9, 2012, Bilbaran Farm filed a complaint in the Knox County
Court of Common Pleas against Bakerwell, Inc. and Crescent Oil & Gas, LLC. The
complaint was entitled, “Complaint to Quiet Title, Declaratory Judgment and Partial
Cancellation of Oil and Gas Lease.” Attached to the complaint were four exhibits,
including the oil and gas lease agreement, assignments, and deed to the Bilbaran Farm
property. Bilbaran Farm alleged in its complaint:
4. The grantee of said lease developed said real estate to the extent of
drilling and completing three oil and gas wells into the Clinton formation
under the surface of said described real estate before the assignments
above referred to.
5. Said wells are located in the Township of Brown in the County of Knox
and in the State of Ohio.
Knox County, Case No.12-CA-21 4
***
7. There has been no further development of the real estate subject to the
lease although Plaintiff has made contact with the Defendants concerning
the same and has received no response thereto.
8. Defendants have breached their duty under said lease to develop the
rest of the undeveloped portion of the lease and have thwarted the
purpose of the lease and Plaintiff has been injured as a direct result of
said breach.
9. Defendants should not be able to prevent further development of the
leased premises, if they have not and are not going to further develop said
leased premises as it would be inequitable and unfair to Plaintiff for
Defendant to be able to do so.
10. The purpose of Plaintiff in granting said lease to the assignor thereof
to Defendants was to have the leased premises fully developed for
extraction of all oil and/or gas from said premises.
11. If Defendants are not going to further develop the leased premises, it
should be cancelled as to the undeveloped portion thereof, if Defendants
do not voluntarily surrender the lease to Plaintiff as it pertains to the
undeveloped portion of the premises so leased.
WHEREFORE, Plaintiff demands that the undeveloped portion of the
within oil and gas lease be declared void and forfeited with Plaintiff’s title
to said real estate being quieted as to any of said undeveloped portion
thereof with respect to any interest of defendants therein * * *.
Knox County, Case No.12-CA-21 5
{¶7} In lieu of filing an answer to the complaint, Bakerwell and Crescent Oil &
Gas filed a Motion to Dismiss pursuant to Civ.R. 12(B)(6). The companies argued that
Bilbaran Farm’s complaint failed to state a claim upon which relief could be granted
because the terms of the lease agreement, upon which Bilbaran Farm’s complaint was
based, did not contain any express or implied duty to further develop the land. Bilbaran
Farm responded, arguing that Bakerwell and Crescent Oil & Gas have left undeveloped
215.67 acres and have not extracted all the oil and gas from the property, as was
granted by the oil and gas lease.
{¶8} On October 25, 2012, the trial court granted the motion to dismiss by
Bakerwell and Crescent Oil & Gas. It is from this decision Bilbaran Farm now appeals.
ASSIGNMENT OF ERROR
{¶9} Bilbaran Farm, Inc. raises one Assignment of Error:
{¶10} “THE TRIAL COURT ERRED IN ITS JUDGMENT OF OCTOBER 25,
2012 BY DISMISSING THE COMPLAINT IN THE TRIAL COURT FOR RELIEF TO
QUIET TITLE, DECLARATORY JUDGMENT AND PARTIAL CANCELLATION OF OIL
AND GAS LEASE. (DOCKET #1)”
ANALYSIS
{¶11} Bilbaran Farm argues the trial court erred in granting the motion to dismiss
pursuant to Civ.R. 12(B)(6). We disagree.
Standard of Review
{¶12} A Civ.R. 12(B)(6) dismissal for failure to state a claim upon which relief
can be granted is reviewed de novo since it involves a pure legal issue. Perrysburg
Twp. v. Rossford, 103 Ohio St.3d 79, 2004-Ohio-4362, 814 N.E.2d 44, ¶ 5, citing
Knox County, Case No.12-CA-21 6
Cincinnati v. Beretta U.S.A. Corp., 95 Ohio St.3d 416, 2002-Ohio-2480, 768 N.E.2d
1136, ¶ 4-5.
{¶13} In order to affirm the trial court's dismissal for failure to state a claim, it
must appear beyond doubt that appellant can prove no set of facts warranting the relief
requested. State ex rel. Findlay Publishing Co. v. Schroeder, 76 Ohio St.3d 580, 581,
669 N.E.2d 835 (1996), citing State ex rel. Seikbert v. Wilkinson, 69 Ohio St.3d 489,
490, 633 N.E.2d 1128 (1994). In conducting this review, the court must presume all the
factual allegations in the complaint are true and make all reasonable inferences in favor
of the nonmovant. Id.{¶14} Where documents are attached or incorporated into the complaint, the
face of the complaint to be evaluated includes those documents. See Civ.R. 10(C).
“Material incorporated in a complaint may be considered part of the complaint for
purposes of determining a Civ.R. 12(B)(6) motion to dismiss.” State ex rel. Crabtree v.
Franklin Cty. Bd. of Health, 77 Ohio St.3d 247, 249, fn. 1, 673 N.E.2d 1281 (1997). “If
the plaintiff decides to attach documents to his complaint, which he claims establish his
case, such documents can be used to his detriment to dismiss the case if they along
with the complaint itself establish a failure to state a claim.” Adlaka v. Giannini, 7th Dist.
No. 05 MA 105, 2006-Ohio-4611, ¶ 34 citing Aleman v. Ohio Adult Parole Auth., 4th
Dist. No. 94CA17, 1995 WL 257833 (Apr. 24, 1995).
Oil and Gas Lease Agreement and the Duty to Further Develop
{¶15} With respect to oil and gas leases, the Supreme Court of Ohio in Harris v.
Ohio Oil Co., 57 Ohio St. 118, 129, 48 N.E. 502 (1897) stated: “The rights and remedies
of the parties to an oil or gas lease must be determined by the terms of the written
Knox County, Case No.12-CA-21 7
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.” Moore v. Adams, 5th Dist. No. 2007AP090066, 2008-Ohio-5953, ¶ 21.
{¶16} The Supreme Court of Ohio has “long adhered to the general principal
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) citing Beer v. Griffith, 61 Ohio St.2d 119, 399 N.E.2d 1227(1980). The Court clarified:
Certainly the only material inducement which influences a lessor to grant a
lessee the power to exercise extensive rights upon his land is his
expectation of receiving *** royalties based upon the amount of minerals
derived from the land. *** Given the nature of these [royalties], there is
manifestly an implied covenant on the part of the lessees that they will
work the land with ordinary diligence, not simply for their own advantage
and profit, but also so that the lessors may secure the actual consideration
for the lease, i.e., the production of minerals and the payment of a royalty
on the minerals mined.
Bushman v. MFC Drilling Inc., 9th Dist. No. 2403-M, 1995 WL 434409 (July 19, 1995)
citing Ionno at 133-134.
{¶17} The claims Bilbaran Farm raises in its complaint is that while three wells
are operating on the property, a portion of the property remains undeveloped, defeating
the purpose of the lease. A similar factual scenario was raised in the case of Bushman
Knox County, Case No.12-CA-21 8
v. MFC Drilling Inc., 9th Dist. No. 2403-M, 1995 WL 434409 (July 19, 1995), appeal not
accepted, 74 Ohio St.3d 1484, 657 N.E.2d 1377 (1995). In Bushman v. MFC Drilling
Inc., Bushman and MFC Drilling, Inc. executed an oil and gas lease that gave MFC
Drilling exclusive right to explore, drill, produce and market gas and oil found beneath
the surface of a 27 acre tract of Bushman’s land. Id. at *1. MFC Drilling placed one
well into operation; however, 17 acres of Bushman’s property remained undeveloped
and Bushman collected no royalties on the undeveloped property. Bushman filed a
complaint in the Medina Court of Common Pleas seeking damages for MFC Drilling’s
breach of an implied covenant under the lease to develop Bushman’s property and for
termination of the lease. Id.
{¶18} The trial court granted summary judgment in favor of MFC Drilling based
on the terms of the oil and gas lease. Id. Bushman appealed and the Ninth District
Court of Appeals affirmed. As basis for the affirmance, the court of appeals considered
the implied covenant to reasonably develop the land and the express terms of the
Bushman oil and gas lease. The court stated:
While gas and oil leases contain an implied covenant requiring the
lessee to reasonably develop the leased property, Ohio courts have
consistently enforced express provisions in such leases that disclaim the
implied covenant. Taylor v. MFC Drilling, Inc. (Feb. 27, 1995), Hocking
App. No. 94CA14, unreported; Smith v. N.E. Natural Gas (Sept. 30, 1986),
Tuscarawas App. No. 86AP030016, unreported; Holonko v. Collins (June
29, 1988), Mahoning App. No. 87CA120, unreported. As stated by the
Ohio Supreme Court in Harris, “[t]he implied covenant arises only when
Knox County, Case No.12-CA-21 9
the lease is silent on the subject.” Id. at 128. The gas and oil lease
executed by Bushman and MFC contains the following language:
“It is mutually agreed that this instrument contains and expresses
all of the agreements and understandings of the parties in regard to the
subject matter thereof, and no implied covenant, agreement or obligation
shall be read into this agreement or imposed upon the parties or either of
them.”
Bushman argues that public policy prohibits a general disclaimer of
the implied covenant to develop the leased property. In support of this
position, Bushman points out that the gas and oil leases in Smith and
Holonko contained provisions granting the lessee discretion to determine
whether to commence drilling operations in addition to a general
disclaimer of implied covenants. Bushman goes on to argue that the
general disclaimer of implied covenants found in his lease agreement with
MFC is ineffective in removing the implied covenant to reasonably develop
in the absence of specific language addressing that covenant. We agree
with the Taylor court, which held that a general disclaimer of implied
covenants -- identical to the disclaimer contained in the lease agreement
under review -- effectively disclaimed the implied covenant to reasonably
develop the leased property. There is no authority, neither statutorily
mandated nor judicially created, removing disclaimer of implied covenants
in gas and oil leases from the operation of general contract law. Further,
upon review of Bushman's arguments, we are unable to conclude that
Knox County, Case No.12-CA-21 10
public policy requires anything more than a general waiver of implied
covenants.
Id. at *2.
{¶19} The Bushman decision is in accord with this Court’s decision in Smith v.
North East Natural Gas Co., 5th Dist. No. 86 AP 030016, 1986 WL 11337 (Sept. 30,
1986). The oil and gas lease in Smith contained a provision as to the enforceability of
implied covenants: “It is mutually agreed that this instrument contains and expresses all
of the agreements and understandings of the parties in regard to the subject matter
thereof, and no implied covenant, agreement or obligation shall be read into this
agreement or imposed upon the parties or either of them. (Emphasis added).” Id. at *1.
{¶20} We held:
Judge Rutherford of this court in the Coshocton County Court of
Appeals case, Lake v. Ohio Fuel Gas Co. (1965), 2 Ohio App.2d 227,
stated at 231:
... as stated by the Supreme Court of Ohio in the case of Harris v.
Ohio Oil Co., 57 Ohio St. 118 at page 129 of the opinion:
“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 in 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.”
Knox County, Case No.12-CA-21 11
We conclude that in the case at bar under the terms of the lease-
the written contract of the parties-the trial court properly found that Lessee
did not violate the express covenant to 1) pay royalties, or 2) to find oil or
gas or their constituents on the premises in paying quantities in the
judgment of the Lessee; nor did the Lessee violate any implied covenant
since the express written language of the contract provided that “no
implied covenant, agreement or obligation shall be read into this
agreement or imposed upon the parties or either of them.”
Smith, at *2.
{¶21} In the present case, the oil and gas lease attached to Bilbaran Farm’s
complaint contains the following provision: “This lease and all its terms, conditions and
stipulations shall extend to and be binding on all heirs, successors and assigns of
Lessor or Lessee. This lease contains all of the agreements and understandings of the
Lessor and the Lessee respecting the subject matter hereof and no implied covenants
or obligations, or verbal representations or promises, have been made or relied upon by
Lessor or Lessee supplementing or modifying this lease or as an inducement thereto.”
Based on the interpretation of Bushman and Smith, the language of this provision
disclaims the implied covenant to reasonably develop the property. Bilbaran Farm
argues the failure to further develop the property is unfair and inequitable. Similar to
Bushman’s public policy argument, this is waived by the express disclaimer against an
implied covenant to develop the property. As stated in Bushman, “[t]he mere fact that
the terms of an executed contract turn out to be unfavorable to one of the parties does
not override the fundamental concept in Ohio law that parties enjoy ‘freedom of contract’
Knox County, Case No.12-CA-21 12
and are bound to the contractual relationship that they create. See Royal Indemn. Co:
v. Baker Protective Services, Inc. (1986), 33 Ohio App.3d 184, 186.” Bushman v. MFC
Drilling, 1995 WL 434409, at *3.
{¶22} Upon our de novo review of the motion to dismiss, utilizing an analysis
most favorable to the Bilbaran Farm, we find the authority of Bushman and Smith
demonstrates Bilbaran Farm can present no facts warranting relief. The trial court did
not err in granting the motion to dismiss of Defendants-Appellees Bakerwell, Inc. and
Crescent Oil & Gas, LLC.
{¶23} The sole Assignment of Error of Plaintiff-Appellant Bilbaran Farm, Inc. is
overruled.
CONCLUSION
{¶17} The judgment of the Knox County Court of Common Pleas is affirmed.
By: Delaney, J.,
Wise, P.J., and
Baldwin, J., concur.
HON. PATRICIA A. DELANEY
HON. JOHN W. WISE
HON. CRAIG R. BALDWIN
PAD:kgb/PM5.27.13