Eclipse Resources-Ohio, LLC v. Madzia

• Decision Date: 20 January 2017
• Docket Number: Case No. 2:15-cv-00177
• Parties: ECLIPSE RESOURCES-OHIO, LLC, et al., Plaintiffs/Counter-Defendants, v. SCOTT A. MADZIA, Defendant/Counter-Claimant.
• Court: U.S. District Court — Southern District of Ohio

ECLIPSE RESOURCES-OHIO, LLC, et al., Plaintiffs/Counter-Defendants, v. SCOTT A. MADZIA, Defendant/Counter-Claimant.

Case No. 2:15-cv-00177

UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF OHIO EASTERN DIVISION

January 20, 2017

JUDGE ALGENON L. MARBLEY

Magistrate Judge Kemp

OPINION AND ORDER

This matter is before the Court on the following motions: (1) the Third Motion for Summary Judgment (Docs. 139 & 140) of Plaintiffs/Counter-Defendants Eclipse Resources-Ohio, LLC and Eclipse Resources I, LP (collectively, "Eclipse"); (2) Defendant/Counter-Claimant Scott Madzia's ("Madzia") Motion for Partial Summary Judgment (Doc. 141); and (3) Defendant XTO Energy, Inc.'s ("XTO") Motion for Summary Judgment and/or Joinder in Motion of the Eclipse Entities' Motion for Summary Judgment. (Doc. 143.) For the following reasons, the Court GRANTS Eclipse's and XTO's Motions, and DENIES Madzia's Motion.

I. BACKGROUND

A. Factual Background.

1. Madzia and Eclipse Execute an Oil and Gas Lease, an Amendment to the Lease and

a Subsurface Easement.

This is a contract dispute concerning the rights and responsibilities of parties to an oil and gas lease. Madzia owns approximately 128 acres of real property in Stock Township, Harrison County, Ohio. (See Ex. A to Madzia's Mot. Part. Summ. J., Affidavit of Scott Madzia ("Madzia Aff.") ¶ 2; Answer, Doc. 8, ¶ 10.) On April 10, 2006, Madzia entered into an oil and gas lease (the "Lease") with The Oxford Oil Company ("Oxford"). (Madzia Aff. ¶ 3; Ex. A to Eclipse's Third Mot. Summ. J., Deposition of Scott Madzia ("Madzia Dep.") at 35:30-23, Ex. 3.) About three years later, on June 26, 2013, Madzia and Oxford executed an Amendment and Ratification of Oil and Gas Lease (the "Amendment"), which granted Oxford the right to pool Madzia's property with neighboring properties to create oil drilling units. (See Ex. B. to Second Am. Countercl.; Madzia Dep. at 39:5-7.) The Amendment obligates the lessee to "at all times comply with all applicable federal, state and local laws and regulations relative to its operations conducted on [Madzia's property.]" (Second Am. Countercl., Ex. B at 4.) Eclipse assumed Oxford's rights and obligations under the Lease and Amendment in June 2013. (See Madzia Aff. ¶ 3; Ex. B to Eclipse's Third Mot. Summ. J., 30(b)(6) Deposition of Christopher K. Hulburt, Esq. ("Hulbert Dep.") at 20:21-21:11.)

In December 2013, Eclipse constructed a well pad site on Madzia's property (the "Madzia Pad") and began drilling the Madzia Unit 2H, 4H, 8H and 10H wells (the "Madzia Wells") in or around March 2014. (Second Am. Countercl. ¶ 14.) In April 2014, Madzia and Eclipse entered into a subsurface easement agreement (the "Subsurface Easement") to provide Eclipse with subsurface horizontal drilling rights. (See id. ¶ 16, Ex. C.) When negotiating the Subsurface Easement, Madzia communicated to Eclipse via e-mail that the Subsurface Easement granted Eclipse rights only applicable to "the wells currently permitted and being drilled from this pad," which at that point, were the Madzia Wells. (Madzia Aff. ¶¶ 12, 14; see also Second Am. Countercl. ¶ 17, n.3.) Eclipse agreed to this condition, and the final, executed Subsurface Easement provided Eclipse the right to "drill a wellbore or wellbores across, through, and under the subsurface" of Madzia's property "in conjunction with drilling operations on the [Madzia Wells] . . . and for no other purpose or purposes whatsoever." (Second Am. Countercl., Ex. C.)Like the Amendment, the Subsurface Easement also requires Eclipse at its sole cost and expense to comply "at all times with all applicable federal, state and local laws, rules, regulations and safety standards in connection with [Eclipse's] activities hereunder." (Id.)

2. The John Mills and John Mills West Units.

In early 2014, Eclipse became the operator of four drilling units located north of Madzia's property. (Ex. D to Eclipse's Third Mot. Summ. J., Affidavit of Christopher K. Hulburt ("Hulburt Aff.") ¶ 4.) Eclipse consolidated these four units into the John Mills Unit and the John Mills West Unit. (Id. ¶ 5.) Eclipse determined that it would need another subsurface easement from Madzia to drill the John Mills West ("JMW") Wells from Madzia's property, and sought a second easement from Madzia in May 2014. (See Second Am. Countercl. ¶¶ 23, 25.) Madzia refused to execute a second subsurface easement without compensation. (Id. ¶¶ 26, 31.)

Thus, in a purported effort to work around the limitations of the Subsurface Easement, Eclipse pooled 0.517 acres of Madzia's property into the JMW Unit and began drilling operations on the JMW Wells from the Madzia Pad in June 2014, despite Madzia's objections. (Id. ¶¶ 32-33; Madzia Aff. ¶¶ 18-19.) Madzia contends that, although Eclipse had originally intended to frack the Madzia Wells first, Eclipse decided to begin fracking the JMW Wells (in which Madzia has a de minimis economic interest) before the Madzia Wells (in which Madzia has a substantial economic interest) to retaliate against Madzia for asserting his rights under the Subsurface Easement.¹ (Second Am. Countercl. ¶¶ 33-34.) According to Madzia, Eclipse has yet to frack the Madzia Wells. (Id. ¶ 34.)

3. Eclipse Recycles Madzia's Affidavit To Obtain Permits for the JMW Wells.

Under Ohio Revised Code Section 1509.05, Eclipse was required to obtain a valid permit issued by the Chief of the Division of Oil and Gas Resources Management of the Ohio Department of Natural Resources ("ODNR") in order to drill the JMW Wells. Ohio Rev. Code Ann. § 1509.05. On May 15, 2014, Eclipse submitted permit applications for several of the JMW Wells (Units 1H and 3H) to ODNR and requested expedited review of those applications. (Hulbert Aff. ¶ 6.) Eclipse intended to drill these wells from the Madzia Pad. (Id. ¶ 9.)

Section 1509.08² of the Ohio Revised Code sets forth the procedure for obtaining a permit from ODNR to drill an oil and gas well in a coal bearing township:³

Upon receipt of an application for a permit required by section 1509.05 of the Revised Code, or upon receipt of an application for a permit to plug and abandon under section 1509.13 of the Revised Code, the chief of the division of oil and gas resources management shall determine whether the well is or is to be located in a coal bearing township.

Whether or not the well is or is to be located in a coal bearing township, the chief, by order, may refuse to issue a permit required by section 1509.05 of the Revised Code to any applicant who at the time of applying for the permit is in material or substantial violation of this chapter or rules adopted or orders issued under it. The chief shall refuse to issue a permit to any applicant who at the time of applying for the permit has been found liable by a final nonappealable order of a court of competent jurisdiction for damage to streets, roads, highways, bridges, culverts, or drainways pursuant to section 4513.34 or 5577.12 of the Revised Code until the applicant provides the chief with evidence of compliance with the order. No applicant shall attempt to circumvent this provision by applying for a permit under a different name or business organization name, by transferring responsibility to another person or entity, by abandoning the well or lease, or by any other similar act.

If the well is not or is not to be located in a coal bearing township, or if it is to be located in a coal bearing township, but the landowner submits an affidavitattesting to ownership of the property in fee simple, including the coal, and has no objection to the well, the chief shall issue the permit.

Ohio Rev. Code Ann. § 1509.08. Essentially, the procedure set forth in the statute permits an affected coal owner to object to another entity's application to drill a proposed well. If the owner objects, "and if, in the opinion of the chief the objection is well founded, the chief shall disapprove the application and immediately return it to [ODNR] together with the reasons for disapproval and a suggestion for a new location for the well." Id. The applying entity can bypass this process if the coal owner submits an affidavit stating that he or she is the owner of the property (including the coal) and has no objection to the proposed well. Id.

In July 2013, Eclipse obtained an affidavit from Madzia (the "Coal Affidavit") stating that he owned the coal rights on his property and that he had no objections to Eclipse's drilling of the Madzia Wells. (Madzia Aff. ¶ 23; Ex. C to Eclipse's Third Mot. Summ. J., Deposition of Steve Opritza ("Opritza Dep.") at Ex. 17.) Eclipse submitted the Coal Affidavit in connection with its permit application for the Madzia Wells. (Id.) The Coal Affidavit contained no reference to the JMW Wells. (See Madzia Aff. ¶ 23.) But Eclipse also submitted the Coal Affidavit with its permit applications for the JMW Wells.⁴ (Id. ¶¶ 20-24; see also Second Am. Countercl. ¶ 36.) Eclipse submitted the Coal Affidavit without Madzia's knowledge or consent. (Madzia Aff. ¶¶ 20-24.) ODNR issued Eclipse drilling permits for the JMW Wells on June 2, 2014, and Eclipse began drilling the JMW Wells shortly thereafter.⁵ (See Hulburt Aff. ¶¶ 11-12.)

Eclipse's use of the Coal Affidavit to obtain permits for the JMW Wells is the central issue in this action. The parties do not dispute that Eclipse did indeed submit the recycled Coal Affidavit for the JMW Wells permit applications; what is at issue is only whether that submission was unlawful and therefore a breach of the Lease, Amendment and Subsurface Easement.

According to Eclipse, it submitted the Coal Affidavit with its permit application for the JMW Wells in reliance on the guidance of Patty Nicklaus, the ODNR employee responsible for reviewing all permit applications. (See Doc. 140 at 19-20.) In response to an inquiry from Eclipse about the permitting process, Nicklaus informed Eclipse via e-mail that "once you have received coal approval for at least one well on your pad, it follows that...