Alford v. Collins-McGregor Operating Co.

• Decision Date: 03 January 2018
• Docket Number: No. 2016–1281,2016–1281
• Citation: 2018 Ohio 8,152 Ohio St.3d 303,95 N.E.3d 382
• Parties: ALFORD et al., Appellants, v. COLLINS–MCGREGOR OPERATING COMPANY et al., Appellees.
• Court: Ohio Supreme Court

152 Ohio St.3d 303

95 N.E.3d 382

2018 Ohio 8

ALFORD et al., Appellants,

v.COLLINS–MCGREGOR OPERATING COMPANY et al., Appellees.

No. 2016–1281

Supreme Court of Ohio.

Submitted September 26, 2017

Decided January 3, 2018

Scullin & Cunning, L.L.C., and Sean R. Scullin, Youngstown, for appellants.

Geiger, Teeple, Robinson & McElwee, P.L.L.C., and Bruce Smith, Alliance, for appellees.

Porter, Wright, Morris & Arthur, L.L.P., Christopher J. Baronzzi, L. Bradfield Hughes, and Ryan T. Steele, Columbus, urging affirmance for amicus curiae American Petroleum Institute.

Vorys, Sater, Seymour & Pease, L.L.P., Timothy B. McGranor, and Gregory D. Russell, Columbus, urging affirmance for amici curiae Ohio Oil and Gas Association and Southeastern Ohio Oil and Gas Association.

O'Connor, C.J.

I. Introduction

{¶ 1} Appellants, Linda Griffith Alford, George Alford Jr., Bershelle Alford Giambattista, Joseph Alford, Judith Hanlon Farnsworth, Donna R. Hanlon, and James C. Eutzler (collectively, the "landowners"), sued appellees, Collins–McGregor Operating Company and Winston Oil Company (collectively, "Collins–McGregor"), seeking the partial termination of an oil and gas lease. The trial court granted Collins–McGregor's motion to dismiss for failure to state a claim and the Fourth District Court of Appeals affirmed.

{¶ 2} This appeal requires us to consider whether the landowners' claim for breach of the implied covenant to explore further is cognizable in Ohio and if so, the availability of partial horizontal forfeiture as a remedy for such a breach. We conclude that Ohio does not recognize an implied covenant to explore further separate and apart from the implied covenant of reasonable development. We therefore need not reach the issue of remedy.

II. Relevant Background

{¶ 3} The landowners hold interests in approximately 74 acres of land in Washington County, not far from the Ohio River. The land is subject to an oil and gas lease entered into on September 16, 1980, between the owners of the property at that time and Collins–McGregor.¹ "[T]he sole and only purpose" of the lease is to permit "mining and operating for oil and gas and laying pipe lines, and building tanks, powers, stations, and structures thereon, to produce, save and take care of said products." In return for permission to mine the land, Collins–McGregor committed to make royalty payments based on the amount of gas produced from the land and to deliver a portion of the oil produced from the land to the lessors.

{¶ 4} The lease provides that it "shall remain in force for a term of One (1) years from [the effective] date, and as long thereafter as oil or gas, or either of them, is produced from said land by the lessee." It is silent as to certain aspects of drilling and production. For example, the lease does not require production from any specific number of wells or from any particular depth. The lease also does not disclaim the application of any implied covenants.

{¶ 5} A well was drilled in 1981 and has produced oil and gas in paying quantities since then from a formation called the Gordon Sand. To date there has not been any production from the land at any depths below the Gordon Sand. The landowners contend, however, that exploration and production of oil and gas have been occurring near their property from below the Gordon Sand—specifically, from the Marcellus and Utica formations—but Collins–McGregor has failed to explore whether production can be obtained from those deep formations because it does not have the equipment or financial resources required to do so.

{¶ 6} On November 20, 2015, the landowners filed an amended complaint against Collins–McGregor alleging that it has improperly failed to explore or drill for oil at depths below the Gordon Sand. They sought a judgment that the portion of the lease covering depths below the Gordon Sand has terminated because it has either expired or been abandoned and that Collins–McGregor has breached numerous implied covenants. They also sought a judgment quieting title in the landowners' favor as to the depths below the Gordon Sand. The landowners have not sought to terminate Collins–McGregor's rights under the lease with respect to the well that has produced oil from 1981 to the present.

{¶ 7} Among the implied covenants that the landowners claim Collins–McGregor has breached are the implied covenant of reasonable development and the implied covenant to explore further. Ultimately, the remedy sought by the landowners is partial forfeiture of Collins–McGregor's rights under the lease such that all rights to explore for, develop, and exploit resources from depths below the Gordon Sand revert to the landowners. Collins–McGregor describes this as horizontal forfeiture (i.e., forfeiture of the right to drill to a particular horizontal layer or formation beneath the surface).

{¶ 8} Collins–McGregor moved to dismiss under Civ.R. 12(B)(6), arguing that Ohio law does not recognize the remedy of horizontal forfeiture. The trial court agreed and dismissed the case, holding that under the plain terms of the lease, the still-productive well drilled in 1981 was sufficient to hold the lease across all acres and at all depths. The Fourth District Court of Appeals affirmed, holding that Ohio law does not recognize partial horizontal forfeiture of oil and gas rights as an available form of relief.

{¶ 9} We accepted the landowners' discretionary appeal.

III. Analysis

{¶ 10} We review de novo a decision granting a motion to dismiss under Civ.R. 12(B)(6). Perrysburg Twp. v. Rossford , 103 Ohio St.3d 79, 2004-Ohio-4362, 814 N.E.2d 44, ¶ 5. In conducting this review, we accept as true all factual allegations in the complaint. Id. "[T]hose allegations and any reasonable inferences drawn from them must be construed in the nonmoving party's favor." Ohio Bur. of Workers' Comp. v. McKinley , 130 Ohio St.3d 156, 2011-Ohio-4432, 956 N.E.2d 814, ¶ 12. To grant the motion, "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." Id.

A. The Implied Covenant to Explore Further

{¶ 11} We begin by addressing the landowners' second proposition. They argue that the appellate court erred by affirming the dismissal of their amended complaint for failure to state a claim, because they alleged a breach of the implied covenant to explore further and a breach of that covenant may be remedied by horizontal forfeiture. Collins–McGregor raises two principal arguments in response. It argues that Ohio law does not recognize the implied covenant to explore further and even if it did, partial horizontal forfeiture is not an available remedy for a breach of an implied covenant in an oil and gas lease. We agree with Collins–McGregor that Ohio does not recognize an implied covenant to explore further.

{¶ 12} Oil and gas leases are contracts, and therefore, " ‘[t]he rights and remedies of the parties to an oil or gas lease must be determined by the terms of the written instrument.’ " Lutz v. Chesapeake Appalachia, L.L.C. , 148 Ohio St.3d 524, 2016-Ohio-7549, 71 N.E.3d 1010, ¶ 9, quoting Harris v. Ohio Oil Co. , 57 Ohio St. 118, 129, 48 N.E. 502 (1897). "It is a well-known and established principle of contract interpretation that ‘[c]ontracts are to be interpreted so as to carry out the intent of the parties, as that intent is evidenced by the contractual language.’ " Lutz at ¶ 9, quoting Skivolocki v. E. Ohio Gas Co. , 38 Ohio St.2d 244, 313 N.E.2d 374 (1974), paragraph one of the syllabus. Notwithstanding this principle, we have also long held that oil and gas leases are ordinarily subject to an implied covenant to reasonably develop the land. See Harris at paragraph one of the syllabus (recognizing "an implied covenant on part of the lessee that he will drill and operate such number of oil wells on the lands as would be ordinarily required for the production of oil contained in such lands, and afford ordinary protection to the lines").

{¶ 13} The parties can prevent application of the implied covenant of reasonable development by including in the lease "express provisions to the contrary." Beer v. Griffith , 61 Ohio St.2d 119, 399 N.E.2d 1227 (1980), paragraph two of the syllabus. For example, the parties can include a general disclaimer of implied covenants. E.g. , State ex rel. Claugus Family Farm, L.P. v. Seventh Dist. Court of Appeals , 145 Ohio St.3d 180, 2016-Ohio-178, 47 N.E.3d 836, ¶ 32–33 (holding that the parties' disclaimer prevented application of an implied covenant). The parties can also describe the development of the land sought by the parties in the terms of the lease itself. See Ionno v. Glen–Gery Corp. , 2 Ohio St.3d 131, 133, 443 N.E.2d 504 (1983) ("Thus, where a lease fails to contain any specific reference to the timeliness of development, the law will infer a duty to operate with reasonable diligence"); see also Kachelmacher v. Laird , 92 Ohio St. 324, 110 N.E. 933 (1915), paragraph one of the syllabus ("There can be no implied covenants in a contract in relation to any matter that is specifically covered by the written terms of the contract itself").

{¶ 14} Here, the lease does not contain a disclaimer of implied covenants, nor does it otherwise address whether any specific number of wells must be drilled or the depth to which any wells must be drilled. As a result, at least with respect to the matters at issue in this case, the lease is subject to the implied covenant of reasonable development.

{¶ 15} In this proposition, the landowners raise the implied covenant to explore further, a covenant we have not before considered. The landowners cite decisions of the Fifth Appellate District, which they claim have recognized the covenant. See Am. Energy Servs., Inc. v. Lekan , 75 Ohio App.3d 205, 215, 598 N.E.2d 1315 (5th Dist.1992) ; Moore v. Adams , 5th Dist. Tuscarawas No. 2007AP090066, 2008-Ohio-5953, 2008 WL 4907590, ¶ 35 ; Mauger v. Positron Energy Resources, Inc. ,...