Eclipse Res. Ohio, LLC v. Madzia
| Decision Date | 02 March 2016 |
| Docket Number | Case No. 2:15-cv-177 |
| Parties | ECLIPSE RESOURCES - OHIO, LLC, et al., Plaintiffs, v. SCOTT A. MADZIA, Defendant. |
| Court | U.S. District Court — Southern District of Ohio |
OPINION AND ORDER
This matter is before the Court for consideration of the following filings: (1) Eclipse Resources I, LP and Eclipse Resources - Ohio, LLC's (collectively, "Eclipse") motion to dismiss amended counterclaims (ECF No. 26), Scott A. Madzia's response in opposition (ECF No. 32), and Eclipse's reply memorandum (ECF No. 33); (2) Madzia's motion for partial summary judgment (ECF No. 37), Eclipse's response in opposition (ECF No. 41), and Madzia's reply memorandum (ECF Nos. 51); (3) Eclipse's motion for leave to file sur-reply or motion for oral argument (ECF No. 52) and Madzia's response in opposition (ECF No. 54); (4) Eclipse's motion for partial summary judgment (ECF No. 58), Madzia's response in opposition (ECF No. 59), and Eclipse's reply memorandum (ECF No. 65).
For the reasons that follow, the Court GRANTS Eclipse's motion to dismiss, DENIES Madzia's motion for partial summary judgment, DENIES AS MOOT Eclipse's motion for leave to file a sur-reply, and DENIES AS MOOT Eclipse's motion for partial summary judgment.
Plaintiff Eclipse is in the business of acquiring and developing oil and gas. Eclipse is the successor-in-interest to the Oxford Oil Company ("Oxford"), which is a signatory to the written agreements at issue in this case. For ease of reference, and because it is undisputed that Eclipse assumed all of Oxford's rights in the agreements at issue, the Court refers to Oxford as Eclipse in this Opinion and Order.
Defendant and counterclaimant Madzia is the individual owner of three parcels of real property in Harrison County, Ohio (the "Madzia Property"). The Madzia Property consists of approximately 128 acres of land.
On April 10, 2006, Madzia and Eclipse entered into an Oil and Gas Lease covering the Madzia Property (the "Lease"). The Lease's granting clause states:
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(ECF No. 69-1, at PAGEID # 769.) The Lease therefore grants Eclipse the oil and gas "in and under" the Madzia Property, "together with the exclusive rights to drill for . . . oil and gas and their constituents." (Id.) The Lease also grants Eclipse the right to transport oil and gas "from the subject lands and other lands" "from, across, and through" the Madzia Property. (Id.) Finally, the Lease grants Eclipse the right to "possess, use and occupy so much of said premiseas is necessary and convenient to conduct its oil and gas and related activities, including . . . the right to install . . . structures required to produce, store and transport oil and gases and their constituents." (Id.)
In consideration for these rights, Eclipse agreed to pay Madzia "the sum of One Dollar, the receipt of which is hereby acknowledged," as well as a royalty on the oil and gas proceeds, free gas if certain conditions are met, and payment for damages to crops and fences caused by operations under the Lease. (Id.) The term of the Lease is "five (5) years and so much longer as oil, gas or their constituents are produced or are capable of being produced in paying quantities (in the sole opinion of Lessee) . . . ." (Id.)
On March 15, 2007, Eclipse began drilling a conventional well on the Madzia Property (the "Shallow Well"). The Shallow Well was placed into production on August of 2, 2007. Madzia has been receiving royalties from Eclipse since that date. It is undisputed that the Shallow Well remains in production such that the Lease remains in effect.
Madzia and Eclipse amended the Lease in June of 2013 (the "Amendment"). The Amendment states that "Lessor and Lessee for their mutual benefit, desire to amend and modify the Oil and Gas Lease, as provided for herein, in order to facilitate the formation of drilling units upon the Leased Premises and other lands." (ECF No. 69-2, at PAGEID # 773.) The Amendment replaces the Lease's pooling provision with a new provision that grants Eclipse the right to pool portions of the Madzia Property with other lands in order to create pooling units that exceed individual property boundaries. See id. at PAGEID # 774.
At some point in late 2013, Eclipse began construction of a well pad site on the Madzia Property. Eclipse paid Madzia approximately $60,000 to compensate for the surface damage tothe Madzia Property due to the well pad's construction. The area to be drilled was a 630-acre drilling unit that includes substantial portions of the Madzia Property, in addition to other property (the "Madzia Unit"). Eclipse began drilling operations on the Madzia Unit on March 1, 2014.
In April of 2014, Madzia and Eclipse executed a third agreement called the "Subsurface Easement." The granting clause of the Subsurface Easement states:
NOW, THEREFORE, Grantor, for and in consideration of the sum of Ten Dollars ($10.00) and other valuable consideration in hand paid to Grantor, receipt of which is hereby acknowledged, does by these presents GRANT, BARGAIN, AND CONVEY unto Grantee a subsurface easement and right-of-way to enable Grantee to drill a wellbore or wellbores across, through and under the subsurface of the Subsurface Tract, as to all depths and formations, and to provide Grantee ingress to and egress from, and the right to penetrate, use and occupy, the entire subsurface of the Subsurface Tract for a wellbore or wellbores. This subsurface easement and right-of-way is strictly limited in application and can only be used in conjunction with drilling operations on the Madzia Unit #2H well, as permitted on February 19, 2014 and having API Well #34-067-2-128-80-00; Madzia Unit #4H well, as permitted on February 19, 2014 and having API Well #34-067-2-128-70-00; Madzia Unit #6H well, as permitted on February 19, 2014 and having API Well #34-067-2-128-50-00; Madzia Unit #8H well, as permitted on February 19, 2014 and having API Well #34-067-2-128-60-00; Madzia Unit #10H well, as permitted on February 19, 2014 and having API Well #34-067-2-128-40-00 and for no other purpose or purposes whatsoever.
(ECF No. 8-5, at PAGEID # 105.) The Subsurface Easement therefore grants Eclipse the right to "drill a wellbore or wellbores across, through, and under the subsurface of the [Madzia Property]" "in conjunction with drilling operations on the [Madzia Wells] . . . and for no other purpose or purposes whatsoever." (Id.) The Subsurface Easement further states: "This grant contains all of the agreements between the parties with respect to the subject matter hereof, and no prior representations or statements, verbal or written, have been made modifying, adding to or changing the terms of the agreement." (Id.) The Court refers to the wellbores drilled in conjunction with the Madzia Unit as the "Madzia Wells."
Immediately north of the Madzia Unit is another group of drilling units called the "John Mills Units." Eclipse presented evidence that, in November of 2013, third party Chesapeake Exploration, LLC ("Chesapeake") was planning to develop and operate four John Mills Units, which potentially included portions of the Madzia Property that were not included in the Madzia Unit. Eclipse intended at that time to assign Chesapeake an interest in Eclipse's leaseholds in those portions of the Madzia Property.
Eclipse's Vice President of Land testified in an affidavit that Eclipse planned to backdrill the Madzia Wells. This meant that Eclipse would drill wellbores outside of the Madzia Unit in order to capture the oil and gas inside the Madzia Unit. Because Eclipse planned to assign Chesapeake portions of its interests in the Madzia Property that were outside of the Madzia Unit but that could include the backdrilled wellbores, it sought and obtained the Subsurface Easement. Eclipse's position, therefore, is that the Subsurface Easement was intended to preserve Eclipse's right to maintain wellbores in the Madzia Property even if it were to assign its leasehold rights to those portions of the Madzia Property to Chesapeake. Stated differently, "a subsurface easement agreement [is] needed when portions of a property are located outside of a drilling unit, due to the possibility that future events [may] result in Eclipse no longer being the lessee of the oil and gas lease covering those parcels." (ECF No. 41-6, at PAGEID # 502.)
The following depiction of the property boundaries and drilling units illustrates this concept. According to Eclipse, the Subsurface Easement was necessary to preserve Eclipse's rights in the wellbores outside of the Madzia Unit (illustrated by the striped pattern) should it later give up its leasehold rights to those portions of the property:
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(ECF No. 41-4, at PAGEID # 498.)
Eclipse's Field Land Coordinator (Operations), Brett Marlow, testified that he met with Madzia and the other affected property owners to explain Eclipse's need for subsurface easements in April of 2014. Marlow stated: "At no time did I ever state or explain that the subsurface easement agreement was intended to give Eclipse the right to drill and/or that the subsurface easement agreement would otherwise amend Madzia's [or the other affect property owners'] oil and gas leases with Eclipse." (ECF No. 4106, at PAGEID # 503-04.)
In May of 2014, Eclipse sought a second subsurface easement for use in conjunction with the John Mills Units ("John Mills Subsurface Easement"). Eclipse does not explain the purpose of the proposed John Mills Subsurface Easement. Eclipse states only that it "had begun negotiations to enter into a different agreement by which Eclipse would become the operator of wells drilled within the John Mills Unit." (ECF No. 41, at PAGEID # 447.) At some point, although it is unclear to the Court exactly when, Eclipse became the...
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