Henry v. Chesapeake Appalachia, L.L.C.

• Citation: 739 F.3d 909
• Decision Date: 14 January 2014
• Docket Number: No. 12–4090.,12–4090.
• Parties: James O. HENRY, Peggy S. Henry, Mark A. Henry, Mary Avis Henry, and Charles C. Henry, Plaintiffs–Appellees, v. CHESAPEAKE APPALACHIA, L.L.C., Defendant–Appellant.
• Court: United States Courts of Appeals. United States Court of Appeals (6th Circuit)

739 F.3d 909

James O. HENRY, Peggy S. Henry, Mark A. Henry, Mary Avis Henry, and Charles C. Henry, Plaintiffs–Appellees,

v.CHESAPEAKE APPALACHIA, L.L.C., Defendant–Appellant.

No. 12–4090.

United States Court of Appeals,Sixth Circuit.

Argued: April 24, 2013.

Decided and Filed: Jan. 14, 2014.

ARGUED:Daniel T. Donovan, Kirkland & Ellis LLP, Washington, D.C., for Appellant. Kevin M. Pearl, Frankovitch, Anetakis, Colantonio & Simon, Weirton, West Virginia, for Appellees. ON BRIEF:Daniel T. Donovan, Gregory L. Skidmore, Kirkland & Ellis LLP, Washington, D.C., Stephen W. Funk, Michael R. Traven, Roetzel & Andress, Akron, Ohio, for Appellant. Kevin M. Pearl, Michael G. Simon, Frankovitch, Anetakis, Colantonio & Simon, Weirton, West Virginia, for Appellees.

Before: GIBBONS and WHITE, Circuit Judges; COHN, District Judge. ^*

OPINION

HELENE N. WHITE, Circuit Judge.

Defendant–Appellant Chesapeake Appalachia, L.L.C. (Chesapeake), appeals the district court's grant of judgment on the pleadings to Plaintiffs James O. Henry, Peggy S. Henry, Mark A. Henry, Mary Avis Henry, and Charles C. Henry (Plaintiffs), in this declaratory action seeking a judgment that Chesapeake's oil and gas lease had expired. We REVERSE and REMAND for the entry of judgment in favor of Chesapeake.

I.

A. Factual Background

On October 17, 2006, Plaintiffs entered into an oil and gas lease with Fortuna Energy, Inc. (Fortuna), covering approximately 447 acres in Ross Township, Jefferson County, Ohio. Fortuna assigned the lease to Chesapeake on October 18, 2010. The lease grants Chesapeake exclusive rights to “all oil and gas and their constituents” in exchange for a rental rate of $5.00 per mineral acre per year and a royalty of 1 /8th of the current market value of “all oil, gas and the constituents” produced from the property. The lease provides for a five-year term, from October 17, 2006 to October 17, 2011, to be extended upon the occurrence of any of the following:

(i) a well capable of producing oil and/or gas is located on the Leasehold, or on lands pooled, unitized or combined with all or a portion of the Leasehold;

(ii) Lessor is receiving Royalty payments or Shut–In Royalty payments pursuant to the terms of this Lease;

(iii) Operations, as hereinafter defined, are being conducted on the Leasehold, or on lands pooled, unitized or combined with all or a portion of the Leasehold, with no cessation of greater than one hundred eighty (180) consecutive days, provided that such Operations result in a well capable of producing oil and/or gas; or

(iv) the Leasehold is used, or intended to be used, for the underground storage of gas, or for the protection of stored gas[.]

The parties agree that the dispositive issue is whether “Operations” were conducted on Plaintiffs' property or “on lands pooled, unitized or combined with all or a portion” of Plaintiffs' land before October 17, 2011, so as to extend the lease term.

B. “Operations,” Pooling, and Unitization

“Operations,” as defined in the lease, include any of the following activities that occur on Plaintiffs' property or lands pooled, unitized, or combined with all or a portion of Plaintiffs' property:

(i) using bona fide good faith efforts to diligently prepare the surface of the physical well site area prior to the commencement of actual drilling activities including, but not limited to, the commencement of clearing operations on or adjacent to the well site area such as the removal of trees, the construction of access roads or the delivery of heavy equipment;

(ii) drilling, testing, completing, reworking, recompleting, deepening, sidetracking, stimulating, fracing, plugging back or repairing a well or equipment;

(iii) any acts in search for or in an endeavor to obtain, maintain or increase the production of oil and/or gas including, without limitation, injecting substances into a well;

(iv) the production of oil and/or gas;

(v) the recovery of any injected substance; or

(vi) any act or acts similar or incidental to any of the foregoing.

The lease permitted Chesapeake to “pool” or “unitize” ¹ Plaintiffs' property:

Lessee is hereby granted the right, in its sole discretion, at any time and from time to time during and after the Primary Term, to pool, unitize or combine all or any portion of the Leasehold with any other land or lands, whether contiguous or not contiguous, at any time before or after the drilling of a well so as to create one (1) or more drilling or production units.... For all purposes under the provisions of this Lease, the Leasehold shall be deemed to be unitized upon submission of the drilling permit application pertaining to the relevant drilling or production unit to the governmental authority having jurisdiction.... Any Operations conducted on the drilling or production unit, whether conducted before, after or during the exercise of the rights and powers granted under this clause, or the presence of a well capable of production located on the drilling or production unit, shall have the same effect in continuing this Lease in full force and effect as if such Operations were conducted upon the Leasehold, or as if such well capable of production was located on the Leasehold.

On June 30, 2011, Chesapeake submitted its first drilling-permit application for a well located on the property of Otilia J. Asuncion. The Asuncion well bordered, but did not include, Plaintiffs' property. Chesapeake filed a revised drilling-permit application changing the location of the well on the Asuncion property on July 19, 2011. One week later, Chesapeake filed another drilling-permit application for an Asuncion well, this time listing “landowner royalty interest holders” as part of the application. Five properties were listed, but Plaintiffs' was not among them. Chesapeake submitted additional applications on September 13, and October 7, which also did not include Plaintiffs' property.

On October 14, 2011, Chesapeake filed a “Declaration and Notice of Pooled Unit” (DPU), declaring the creation of the “Asuncion Unit.” Exhibit A to the DPU listed twenty-one properties as included in the Asuncion Unit, including Plaintiffs' property. The DPU stated its effective date as October 6, 2011, and declared that “operations and/or production (or the equivalent as in the case of shut-in payments) anywhere within the Unit shall be deemed to be operations and/or production on each separate tract sufficient to extend and maintain each included lease in the Unit.” The DPU specified that production from the unit would be allocated among all of the leases in the unit proportional to the surface area of each lease. On November 9, 2011, Chesapeake submitted two more drilling-permit applications pertaining to the Asuncion Unit, and included Plaintiffs as royalty interest holders on both applications.

II.

Plaintiffs brought this action in the Court of Common Pleas, Jefferson County, Ohio, seeking a declaration that the lease expired on October 17, 2011, and Chesapeake removed the case to the United States District Court for the Southern District of Ohio based on diversity of citizenship. Chesapeake filed its answer, a counterclaim seeking declaratory judgment in its favor and compensatory damages for breach of contract, and a motion for judgment on the pleadings. Plaintiffs respondedwith their own motion for judgment on the pleadings, which the district court granted, concluding that Chesapeake's actions did not extend the lease beyond its primary term because the lease required that a drilling permit application pertaining to the leased property or a property already unitized with the leased property, be filed before the expiration of the lease. Chesapeake timely appealed.

III.

A. Standard of Review

“We review a district court's grant of judgment on the pleadings under Rule 12(c) using the same de novo standard of review applicable to orders of dismissal under Rule 12(b)(6).” Poplar Creek Dev. Co. v. Chesapeake Appalachia, L.L.C., 636 F.3d 235, 240 (6th Cir.2011). We accept all well-pleaded material allegations of the opposing party as true, and the motion may be granted only if “no material issue of fact exists and the party making the motion is entitled to judgment as a matter of law.” JPMorgan Chase Bank, N.A. v. Winget, 510 F.3d 577, 581–82 (6th Cir.2007) (internal quotation marks omitted). “Although our decision rests primarily upon the allegations of the complaint, matters of public record, orders, items appearing in the record of the case, and exhibits attached to the complaint also may be taken into account.” Barany–Snyder v. Weiner, 539 F.3d 327, 332 (6th Cir.2008) (internal quotation marks and brackets omitted). “A federal court sitting in diversity must apply the law of the highest state court if the court has ruled on the matter in dispute; otherwise, the court may rely on case law from lower state courts.” Poplar Creek, 636 F.3d at 240.

B. Analysis

Under Ohio law, “contract interpretation is a question of law for determination by the court.” Textileather Corp. v. GenCorp Inc., 697 F.3d 378, 382 (6th Cir.2012). This court must determine the intent of the parties, which is presumed to reside in the contract's language. Savedoff v. Access Group, Inc., 524 F.3d 754, 763 (6th Cir.2008). “We must apply the plain language of the contract unless that language is ambiguous.” Textileather, 697 F.3d at 382. “The meaning of a contract is to be gathered from a consideration of all its parts, and no provision is to be wholly disregarded as inconsistent with other provisions unless no other reasonable construction is possible.” Karabin v. State Auto. Mut. Ins. Co., 10 Ohio St.3d 163, 462 N.E.2d 403, 406 (1984) (internal quotation marks and citation omitted). Leases are subject to the same rules of interpretation as other written agreements. See Myers v. E. Ohio Gas Co., 51 Ohio St.2d 121, 364 N.E.2d 1369, 1372 (1977). “Ambiguity exists where ‘the language is capable of two reasonable, but conflicting interpretations.’...