Bluegrass Materials Co. v. Freeman
| Decision Date | 23 November 2022 |
| Docket Number | 22-5091 |
| Parties | BLUEGRASS MATERIALS COMPANY, LLC, Plaintiff - Appellant, v. Frank W. FREEMAN; James M. Freeman; Laura A. Schoonover, fka Laura A. Freeman; Black Gold Oil Co., dba C&L Exploration Co. ; C&L Farms, a Partnership, Defendants - Appellees. |
| Court | U.S. Court of Appeals — Sixth Circuit |
ARGUED: K. Brad Oakley, JACKSON KELLY PLLC, Lexington, Kentucky, for Appellant. Kenneth A. Meredith, II, Bowling Green, Kentucky, for Appellees. ON BRIEF: K. Brad Oakley, Mary Elisabeth Naumann, JACKSON KELLY PLLC, Lexington, Kentucky, for Appellant. Kenneth A. Meredith, II, Bowling Green, Kentucky, for Appellees.
Before: COLE, CLAY, and MATHIS, Circuit Judges.
Bluegrass Materials Company, LLC ("Bluegrass") owns property that is subject to an oil and gas lease. Believing that lessees, James M. Freeman, Frank W. Freeman, and Laura A. Schoonover (collectively, the "Freemans"), were producing an insufficient quantity of oil to justify maintaining the lease, Bluegrass purported to terminate the lease and initiated this action seeking a declaration that the lease had terminated by its own terms, as well as asserting a number of other related claims. The district court found that Bluegrass's termination of the lease was improper and granted summary judgment to the Freemans and Black Gold Oil Co. d/b/a C&L Farms and C&L Farms (collectively, "Black Gold").1 Bluegrass appeals the district court's order granting summary judgment to the Freemans and Black Gold, denying Bluegrass's motion for summary judgment, and denying Bluegrass's motion to exclude the opinions of the Freemans’ proposed expert witness, Ms. Karen J. Greenwell ("Ms. Greenwell"), as moot. Because there is a factual dispute regarding whether the lease terminated by its own terms, we REVERSE the district court's order granting the Freemans’ and Black Gold's motion for summary judgment, AFFIRM the denial of Bluegrass's motion for summary judgment, VACATE the denial of Bluegrass's motion to exclude the opinions of Ms. Greenwell as moot, and REMAND to the district court for further consideration.
This action arises from an oil and gas lease on property owned by Bluegrass and located in Bowling Green, Kentucky (the "Subject Property"). Many of the relevant facts are undisputed. Pursuant to a November 20, 1985 agreement (the "Manning Lease" or "Lease"), Hettie F. Manning, as lessor, granted to Black Gold, as lessee, rights to oil and gas on an approximately 100-acre tract of land on the Subject Property that is adjacent to a quarry. The term of the Manning Lease is divided into two parts: there is a long-expired one-year term, followed by a secondary term that conditions the maintenance of the leasehold interest on the production of oil or gas by the lessee.2 The Manning Lease specifies the term as follows:
It is agreed that this lease shall remain in force for a term of ONE (1) year from this date, and as long thereafter as oil or gas, or either of them, is produced from said lease by the lessee.
(R. 83-5, PageID 1106).
The Kentucky Division of Oil and Gas (the "Division") granted Black Gold two permits to drill wells for oil on the Subject Property. The Division granted a permit for a third well, but Black Gold plugged that well in June 1988 because it was a dry hole. It is undisputed that the first two wells have produced at least some oil.
In 1990, Black Gold assigned its leasehold interest in the Manning Lease to the Freemans, making the Freemans the operators under the Lease. Black Gold retained an overriding royalty interest of approximately seven percent. The issues on appeal involve the Freemans’ activities as operators under the Manning Lease.
In 2010, Bluegrass purchased the quarry from Hydro Conduit Corporation. Bluegrass also purchased a 218-acre tract adjacent to the quarry, which included the Subject Property. Bluegrass owned the Subject Property subject to the Manning Lease and, as such, succeeded to the original lessor's interest, including the right to receive royalties equal to one-eighth of the oil or gas produced. According to Bluegrass, there are approximately three million tons of recoverable limestone reserves on the Subject Property today, worth between $4 and $20 per ton (ranging from $12 million to $60 million total).
In late 2016 or early 2017, Bluegrass applied for a conditional use permits to extend its quarry mining operations onto the Subject Property. The Freemans objected on procedural grounds, but the permits were approved. The Freemans then applied, on November 30, 2018, to drill two additional wells on the Subject Property. The Division issued permits for these wells on December 14, 2018—the same day Bluegrass filed its complaint. Additionally, James Freeman testified that the Freemans intended to reopen the third plugged well.
The parties’ agreement on the facts ends there, as they disagree on the Freemans’ oil production levels and sales. Bluegrass and the Freemans produced several pieces of evidence regarding the production and sale of oil under the Lease, including: an Oil Production Report from the University of Kentucky; a report from the Division; oil purchasing records; and an Oil Run Ticket Report from Barrett Oil Purchasing, Inc. (the "Barrett Report"). Frank Freeman testified that the Barrett Report is the best document to know how much oil has been produced and what royalties have been paid. According to Bluegrass, the University of Kentucky Oil Production Report shows that oil was not produced or sold at various points in the Lease—centrally here, the 11- to 12-month period between the end of September 2015 and the end of September 2016—which is confirmed by the Barrett Report and Frank Freeman's own deposition testimony. On the other hand, the Freemans contend that the same records show that oil was constantly produced and that sales were made each calendar year.
The parties also disagree about whether Bluegrass received royalty payments from the Freemans as required by the Lease.
According to Bluegrass, the Freemans made no royalty payments during the September 2015 to September 2016 period because no oil was sold. The Freemans assert that they produced oil and made oil sales each calendar year. Although the Freemans claim that 38 royalty checks were paid, totaling $14,877.00, between August 26, 2010, and the end of 2018, it appears that there were no royalty checks issued between October 20, 2015, and October 20, 2016. In late November 2019, after filing suit, Bluegrass refunded previous royalty payments it had accepted and began declining any new royalty payments because it believed the Lease had terminated following the Freemans’ alleged cessation of oil production from September 2015 to September 2016.
On December 14, 2018, Bluegrass filed its complaint asserting four causes of action: (1) termination of the Lease pursuant to the Lease's habendum clause, (2) trespass, (3) waste, and (4) breach of the implied covenant of good faith and fair dealing. On December 18, 2020, the Freemans filed a motion to dismiss for lack of subject matter jurisdiction, claiming that complete diversity did not exist and that the amount in controversy was insufficient. That same day, the parties filed cross motions for summary judgment. In Bluegrass's motion for summary judgment, it raised an additional, and alternative, request for summary judgment to terminate the Freemans’ right to establish additional wells on the Subject Property. Bluegrass also filed a motion to exclude the opinions of the Freemans’ proposed expert witness, Ms. Greenwell. On January 12, 2022, the district court entered a memorandum opinion and order: (1) denying Bluegrass's motion for summary judgment and its motion to exclude, (2) denying the Freemans’ motion to dismiss,3 and (3) granting the Freemans’ motion for summary judgment.
We review a district court's grant of summary judgment de novo . See Thacker v. Ethicon, Inc. , 47 F.4th 451, 458 (6th Cir. 2022). Summary judgment is proper "if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a).
On appeal, Bluegrass argues that the district court erred by: (1) granting the Freemans’ motion for summary judgment based on the law of forfeiture; (2) granting the Freemans’ motion for summary judgment on Bluegrass's claims for trespass, waste, and violation of the implied covenant of good faith and fair dealing; (3) denying as moot Bluegrass's motion to exclude the opinions of Ms. Greenwell; and (4) failing to consider Bluegrass's request for summary judgment on its claims for partial termination of the Lease. The crux of the alleged errors is that the district court misconstrued Bluegrass's Lease termination claim insofar as it construed Bluegrass's claim as based on forfeiture and analyzed it under Kentucky's forfeiture law. Bluegrass, in fact, alleged and argued that the Manning Lease terminated by its own terms. The district court's analysis of Bluegrass's Lease termination claim under forfeiture law impacted not only that claim, it affected Bluegrass's related claims. We conclude that there is a genuine issue of material fact about whether the Manning Lease terminated by its own terms. Accordingly, the district court erred in granting summary judgment to the Freemans and Black Gold.
Kentucky substantive law governs this action. Under Kentucky law, there are three distinct grounds under which an oil and gas lease may terminate: (1) abandonment; (2) forfeiture; or (3) termination of the lease by its own terms via a habendum clause (commonly referred to as ipso facto termination). See Wheeler & Lemaster Oil & Gas Co. v. Henley , 398 S.W.2d 475, 476 (Ky. 1965) ; Hiroc Programs, Inc. v. Robertson , 40 S.W.3d 373, 377 (Ky. Ct. App. 2000). Historically, there has been confusion about the differences between abandonment and...
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