Chambers v. Chesapeake Appalachia, L.L.C.

• Decision Date: 14 January 2019
• Docket Number: NO. 3:18-CV-00437,3:18-CV-00437
• Parties: William A. CHAMBERS, et al., Plaintiffs, v. CHESAPEAKE APPALACHIA, L.L.C. and Equinor USA Onshore Properties, Inc., Defendants.
• Court: U.S. District Court — Middle District of Pennsylvania

359 F.Supp.3d 268

William A. CHAMBERS, et al., Plaintiffs,

v.CHESAPEAKE APPALACHIA, L.L.C. and Equinor USA Onshore Properties, Inc., Defendants.

NO. 3:18-CV-00437

United States District Court, M.D. Pennsylvania.

Signed January 14, 2019

Aaron D. Hovan, John J. Hovan, Attorney at Law, Tunkhannock, PA, Arleigh P. Helfer, Ira Neil Richards, Schnader Harrison Segal & Lewis LLP, Philadelphia, PA, for Plaintiffs.

Daniel T. Brier, John B. Dempsey, Nicholas F. Kravitz, Myers Brier & Kelly, LLP, John G. Dean, Elliott Greenleaf & Dean, Scranton, PA, Daniel T. Donovan, Kirkland & Ellis LLP, Ryan Shores, Shearman & Sterling LLP, Washington, DC, Kathryn E. Deal, Seamus C. Duffy, Akin Gump Strauss Hauer & Feld LLP, Philadelphia, PA, for Defendants.

MEMORANDUM

A. Richard Caputo, United States District Judge

When an oil and gas company suspects valuable fossil fuels rest below swaths of land, it leases mineral rights from the people who own that land on the surface. These leases typically allow the company to build wells to capture oil and gas, in exchange for a portion of the profit (a "royalty") payable to the landowners. The Plaintiffs in this case—the landowners—allege that the Defendant oil and gas companies skirted the terms in their leases governing royalties and well-building. (See Doc. 30). The Defendant companies, Chesapeake Appalachia and Equinor USA Onshore Properties, responded with Motions to Dismiss (Docs. 34 and 35 respectively), which are presently before me. Defendants contend that they have complied with the unambiguous terms of the leases. But because crucial portions of the leases are unclear, and because Plaintiffs have adequately pled their claims, Defendants' Motions to Dismiss will be denied.

I. Background

Plaintiffs are all landowners in Tunkhannock and neighboring Mehoopany, Pennsylvania. (Doc. 30 at ¶¶ 12-21). In October of 2007, Plaintiffs entered into oil and gas leases with Magnum Land Services, a "landman" that leases mineral rights from landowners on behalf of oil and gas companies. (See id. ¶ 22). Magnum accordingly assigned its interests in the leases to Defendants, Chesapeake and Equinor, making them the lessees. (See id. ¶¶ 22-27).

There are two clauses of the leases which form the basis of Plaintiffs' complaint: the "unitization" clauses and the royalty clauses. As a brief aside, a unitization clause permits a lessee to group a lessor's land with neighboring lessors' lands into a single oil and gas production unit. See, e.g. , Stewart v. SWEPI, LP , 918 F.Supp.2d 333, 337-38 (M.D. Pa. 2013). The purpose of unitization is to more efficiently capture underground oil and gas resources, which, by their nature, are not neatly divided between landowners on the surface. See Ohio Oil Co. v. Indiana , 177 U.S. 190, 209-10, 20 S.Ct. 576, 44 L.Ed. 729 (1900). Even in the absence of an agreement between a landowner and a prospector, states can mandate unitization for "securing a just distribution" of resources and "preventing waste." Id. at 210, 20 S.Ct. 576.

Back to this case. The unitization clauses at issue provide:

Lessor hereby grants to the Lessee the right at any time to consolidate the leased premises or any part thereof or strata therein with other lands to form a oil, gas, and/or coalbed methane gas development unit of not more than 640 acres, or such larger unit as may be required by state law or regulation for the purpose of drilling a well thereon and Lessee shall be required to maintain a well density of at least 1 well per 160 acres contained in such unit. (Doc. 30-1, Exhibits A-1 through A-3, § 8 (hereinafter "Leases") ).

Some of Plaintiffs' lands have been consolidated into the "Wootten North Unit," a production unit of about 300 acres. (Doc. 30 at ¶¶ 3, 38). But the Wootten North Unit only has one well. (Id. ¶ 38). Plaintiffs allege this violates the unitization clauses because, under their understanding, the well density of any unit must be "at least 1 well per 160 acres." (Id. ¶¶ 36, 39). Furthermore, because the current well-to-acre ratio violates the unitization clauses, Plaintiffs allege that Defendants have correspondingly breached the clauses governing the leases' length (the "habendum" clauses). (Id. ¶¶ 42-48).

The dispute over the royalty clauses is more complex. The royalty clauses require that the lessee

pay to the Lessor as royalty for the oil, gas, and/or coalbed methane gas marketed and used off the premises and produced from each well drilled thereon, the sum of one-eighth (1/8) of the price paid to Lessee per thousand cubic feet of such oil, gas, and/or coalbed methane gas so marketed and used. Payment of royalty for oil, gas, and/or coalbed methane gas marketed during any calendar month to be on or about the 60th day after receipt of such funds by the Lessee. (Leases § 4(B) ).

All the leases included additional language which was crossed out by the original contracting parties. (Doc. 30 at ¶¶ 53-54). The crossed-out language provided that the one-eighth (1/8) royalty would be "less or net any post-production costs paid by the Lessee to prepare for and/or deliver the oil, gas, and/or coalbed methane gas for sale[.]" (Leases § 4(B) ). Before the leases were executed, John Przepiora, Magnum's representative, explained to Plaintiffs "that crossing out the language ... would guarantee that any lessee would be prohibited from deducting post-production costs from their royalty payments." (Doc. 30 at ¶¶ 56-57). Despite this, Chesapeake "has routinely levied such deductions against Plaintiffs' royalty payments." (Id. ¶ 58).

Equinor was craftier in reducing its royalty burden, according to Plaintiffs. "Instead of paying royalties based on the actual ‘price paid to Lessee’ for ‘gas marketed and used off the premises,’ as the Leases require, Equinor has paid, and continues to pay, royalties based on artificially low, artificially set book prices for transfers between Equinor and its marketing arm, [ENG]." (Id. ¶ 61 (quoting the leases) ). Equinor avoids paying Plaintiffs the royalties they are allegedly entitled to via a three-step process: (1) Equinor sells the gas captured from Plaintiffs' properties to its fellow subsidiary, ENG, at an artificially low price, one-eighth (1/8) of which Plaintiffs receive as royalties; (2) ENG in turn "markets and sells the gas to end users at significantly higher prices;" and then (3) Equinor ASA (Equinor and ENG's parent company) pockets the difference. (Id. ¶¶ 64-68). Plaintiffs allege they are instead entitled to one-eighth (1/8) of "the ultimate sales price received for the gas downstream," not the "artificial price that Equinor applies to transfers of gas to [ENG] at the wellhead [i.e. , when the gas leaves the ground but before it is processed for sale.]" (Id. ¶ 67). Additionally, Plaintiffs allege Equinor has "improperly and unilaterally manipulated the depressed ‘reference price’ " it charges ENG to further lower Plaintiffs' royalties. (Id. ¶¶ 86-88, 139). These practices, Plaintiffs claim, violate both the express terms of the leases and the implied covenant of good faith and fair dealing. (Id. ¶¶ 130-46).

Besides damages, Plaintiffs seek specific performance of the unitization clauses, or in the alternative, a judgment terminating the leases. (Id. ¶ 146). Chesapeake moves to dismiss only Counts I through III of the complaint, which allege violations of the leases' unitization and habendum clauses, leaving the dispute over their royalty calculations for another day. (See Docs. 34, 39). Equinor, on the other hand, moves to dismiss all claims brought against it. (See Docs. 35, 38). The Motions to Dismiss have been fully briefed and are now ripe for review.

II. Legal Standard

Federal Rule of Civil Procedure 12(b)(6) provides for the dismissal of a complaint, in whole or in part, for failure to state a claim upon which relief can be granted. The defendant, as the movant, bears the burden of establishing that a plaintiff's complaint fails to state a claim. See Gould Elecs. v. United States , 220 F.3d 169, 178 (3d Cir. 2000). When considering a Rule 12(b)(6) motion, my role is limited to determining if a plaintiff is entitled to offer evidence in support of his claims. See Semerenko v. Cendant Corp. , 223 F.3d 165, 173 (3d Cir. 2000).

"A pleading that states a claim for relief must contain ... a short and plain statement of the claim showing that the pleader is entitled to relief." Fed. R. Civ. P. 8(a)(2). The statement required by Rule 8(a)(2) must "give the defendant fair notice of what the ... claim is and the grounds upon which it rests." Bell Atl. Corp. v. Twombly , 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) (quotation omitted). Detailed factual allegations are not required. Id. However, "a complaint must do more than allege the plaintiff's entitlement to relief." Fowler v. UPMC Shadyside , 578 F.3d 203, 210 (3d Cir. 2009). Instead, a complaint must "show" this entitlement by alleging sufficient facts to support its claims for relief. Id. ; see Ashcroft v. Iqbal , 556 U.S. 662, 679, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) ("While legal conclusions can provide the framework of a complaint, they must be supported by factual allegations.").

The inquiry at the motion to dismiss stage is "normally broken into three parts: (1) identifying the elements of the claim, (2) reviewing the complaint to strike conclusory allegations, and then (3) looking at the well-pleaded components of the complaint and evaluating whether all of the elements identified in part one of the inquiry are sufficiently alleged." Malleus v. George , 641 F.3d 560, 563 (3d Cir. 2011). Dismissal is appropriate only if, accepting as true all the facts alleged in the complaint, a plaintiff has not pleaded "enough facts to state a claim to relief that is plausible on its face," Twombly , 550 U.S. at 570, 127 S.Ct. 1955, meaning enough factual allegations " ‘to raise a reasonable expectation that discovery will reveal evidence of’ " each necessary element. Phillips v. Cty. of...