Columbia Gas Transmission Corp. v. Larry H. Wright, Inc.

• Decision Date: 22 March 1977
• Docket Number: Civ. No. C-2-76-806.
• Citation: 443 F. Supp. 14
• Parties: COLUMBIA GAS TRANSMISSION CORPORATION, Plaintiff, v. LARRY H. WRIGHT, INC., Larry H. Wright, Richard Cameron and James Cameron d/b/a Cameron Brothers, a partnership, John H. McConnell, William N. McLaughlin, Donald H. Malenick, B. J. Armstrong, Robert Klein, Fritz Schmidt, Charles R. Dodson, John D. Montgomery, and Callander and Kimbrell, Inc., Defendants.
• Court: U.S. District Court — Southern District of Ohio

443 F. Supp. 14

COLUMBIA GAS TRANSMISSION CORPORATION, Plaintiff, v. LARRY H. WRIGHT, INC., Larry H. Wright, Richard Cameron and James Cameron d/b/a Cameron Brothers, a partnership, John H. McConnell, William N. McLaughlin, Donald H. Malenick, B. J. Armstrong, Robert Klein, Fritz Schmidt, Charles R. Dodson, John D. Montgomery, and Callander and Kimbrell, Inc., Defendants.

Civ. No. C-2-76-806.

United States District Court, S. D. Ohio, E. D.

March 22, 1977.

COPYRIGHT MATERIAL OMITTED

John V. Barger, III, Columbus, Ohio, for plaintiff.

John C. Elam, Michael G. Long, R. Douglas Callander, Columbus, Ohio, for defendants.

MEMORANDUM AND ORDER

DUNCAN, District Judge.

Plaintiff Columbia Gas Transmission Corporation alleges by its complaint that the defendants have breached various contracts which concern the production and sale of natural gas. Plaintiff seeks specific performance and damages as relief for the alleged breaches. The contracts involved are two advance payment contracts, dated February 5 and May 21, 1973 (and later amended), and 19 gas purchase agreements. One of the gas purchase agreements was executed in April, 1972; the other 18 were executed in 1973 and 1974. Under 28 U.S.C. § 1332(c), the plaintiff corporation is a citizen of the States of Delaware and West Virginia. The defendants are citizens of the State of Ohio. The amount in controversy exceeds $10,000.00 exclusive of interest and costs. This Court has jurisdiction of the subject matter of this action pursuant to 28 U.S.C. § 1332(a)(1). The law of Ohio governs the substantive rights of the parties.

The Court has received evidence from the parties concerning plaintiff's application for preliminary injunctive relief. The Court sets forth hereinbelow its findings of fact and conclusions of law, in accordance with Rule 52(a), Fed.R.Civ.P.

Plaintiff is a party to each of the advance payment contracts and gas purchase agreements. Defendant Larry H. Wright, Inc., is a party to the advance payment contracts. Larry H. Wright, Inc. and the remaining defendants are parties (or corporate officers of parties) to the gas purchase agreements, assignees of parties to these agreements, or owners of part interests in some of the 32 natural gas wells to which the purchase agreements pertain.

Under the amended advance payment contracts, which were drafted by plaintiff, Columbia Gas Transmission Corporation agreed to loan Larry H. Wright, Inc. an amount of money to be calculated by reference to the proven gas reserves at 20 locations in three townships in Muskingum County, Ohio. Larry H. Wright, Inc. was to use the loan proceeds to drill wells. In return for these loans or advance payments, Larry H. Wright, Inc. agreed (1) to commit all of the gas reserves it then owned or thereafter acquired in the three townships to plaintiff by executing gas purchase agreements, (2) to construct gas lines from the wells to plaintiff's gathering line, and (3) to repay all the loans or advance payments within twenty-four months. The advance payment contracts further provided that for 24 months plaintiff would withhold 50% of the total working interest revenues due Larry H. Wright, Inc. for gas produced and sold to plaintiff, and would apply the withheld amounts as repaid principal on the loans. The balance of the loans not repaid at the end of the 24-month period would become due and payable on demand by plaintiff, with the unpaid balance at the time of such demand bearing interest at the rate of 6% per annum compounded monthly for the 24-month period of the contracts.

The gas purchase agreements were also drafted by plaintiff. Most, but not all, of these 19 agreements were executed after the two advance payment contracts and most, but not all, concerned wells covered by the advance payment contracts. Each of the 19 agreements included the following language:

. . . Seller hereby agrees to sell to Buyer Columbia Gas Transmission Corporation all the natural gas that may be purchased or produced and saved by Seller from oil and/or gas wells located on leaseholds now held and operated or which may hereafter be operated by Seller in geographical description and Buyer agrees to purchase and take all of said gas, except gas used for operating purposes and gas utilized by Lessors for domestic purposes.

. . . . .

Seller agrees not to dispose of any of the gas produced from said Leaseholds to any other company or persons during the existence of this Agreement, but this covenant shall not interfere in any way with Seller's use of gas for operating purposes on said premises.

Article 2 of each purchase agreement established the productive life of the well or wells involved as the term during which the agreement would remain in effect. Article 11 set a fixed purchase price for each million cubic feet of gas delivered per month. The same article included a purchase price opener clause which required an adjustment of the contract price "in the event an increase in the purchase price paid for gas produced in the State of Ohio is made by Buyer within one year from the date of this Agreement."

This case concerns the following wells:

(1) Ewan (2) Gatewood (3) Ward 1 (4) Ward 2 (5) Zinn 1 (6) Zinn 2 (7) Norman (8) Vickers (9) B. Lapp 1 (10) Ferrell (11) Gosser (12) L. Lapp (13) Johnson (14) Shirer (15) Sarbaugh 1 (16) Sarbaugh 2 (17) Houston 1 (18) Houston 2 (19) Phillips (20) Long (21) Ballard-Wishart (22) Darr 1 (23) Darr 2 (24) Dickerson (25) Gillett 1 (26) Gillett 2 (27) B. Lapp 2 (28) B. Lapp 3 (29) B. Lapp 4 (30) Peterson (31) Senter 1 (32) Senter 2

For the sake of convenience, the Court will refer hereinbelow to the wells by parenthetical number rather than by name.

Using the "proven gas reserves" formula set out in the advance payment contracts, Columbia Gas Transmission Corporation loaned Larry H. Wright, Inc. $329,807.94 in 1973 and 1974. Of that amount, $230,169.64 was advanced under the May 21, 1973, contract; the balance was advanced under the February 5, 1973, contract. The May 21 contract, as finally amended, concerned wells (1) through (8). The February 5 contract, as finally amended, concerned wells (9) through (20). Neither advance payment contract concerned wells (21) through (32).

Individually or through a limited partnership, six of the defendants (Messrs. Armstrong, Klein, McConnell, McLaughlin, Malenick and Schmidt) invested $1,097,744.00 (of which $529,400.00 represented secured loans from a bank) in all of the 32 wells except wells (14) and (21).

On July 8, 1974, Mr. J. Ball, an employee of plaintiff Columbia Gas Transmission Corporation, removed the gas delivery chart from the Wright-B. Lapp deduct meter, which gauged the June 6, 1974, to July 8, 1974, production of a well or wells (the evidence is not clear which well or wells) involved in this litigation. Such meters show both an index reading and a chart reading; these should correlate if the meter is functioning properly. Mr. Ball wrote on the back of the Wright-B. Lapp deduct meter chart for that period, "Index reading correct, chart has been tampered with." On the September 7, 1974, chart of the Wright-Johnson deduct meter, concerning the previous month's production from well (13), Mr. Ball wrote, "Index reading correct, chart was tampered with." On the October 8, 1974, chart of the Wright-Houston deduct meter, concerning the previous month's production from wells (17) and (18), Mr. Ball wrote, "Reading correct, chart has been moved ahead (by?)." Although each of these charts was delivered to plaintiff's data processing channels and each formed the basis for contractual payments for gas delivered, Columbia Gas Transmission Corporation did not act in 1974 to determine if a delivery measuring problem existed. It did not lock its metering stations (as was commercially feasible) or make any other security efforts. It did not inform Larry H. Wright, Inc. or the other defendants that a potential problem existed until late 1975 and early 1976, when plaintiff informed defendant Larry Wright that some of the meter readings seemed to be erroneous. Wright and his employees checked meters, finding some leaks and some meters which were not operating.

By letter dated May 20, 1976, Mr. Charles E. Cozad, plaintiff's director of gas procurement, informed defendant Larry Wright that $122,697.71 was outstanding on the two 1973 advance payment contracts. He noted that these contracts provided that if the money advanced was not fully repaid within 24 months, "the balance not recovered shall become due and payable upon demand by Columbia." Plaintiff did not make a demand for the money; Mr. Cozad said only that "we would appreciate your prompt attention to this matter."

It was not until a June 7, 1976, meeting that Larry Wright was informed of plaintiff's belief that some meters had been tampered with. Mr. Wright denied any knowledge of or complicity in the alleged tampering. Mr. A. Belcastro, one of plaintiff's division managers, sent defendant Mr. Wright a letter dated June 10, 1976, which, he wrote, was "to confirm our June 7 discussion on tampering with the meters at the Wright Shirer, Lapp, Zinn and Ward measuring stations." He wrote, "The charts and indexes at these stations were turned by hand to increase the flow to approximately 10 to 20 times the normal monthly delivery." He promised that plaintiff would "review the charts for the past year to correct over-payments which were caused by moving the chart and index ahead." He wrote that according to plaintiff's information the tampering "started about April of 1975." He stated, "We have sealed the index on these four (4) measuring stations." He closed by calling the alleged tampering "a serious matter" and urging Wright to bring it to the attention of his employees.

On or about June 20, 1976, Larry H. Wright, Inc. received its last payment for gas delivered to plaintiff under the 19 gas purchase agreements. The payment covered gas...