New Hope Cmty. Church v. Patriot Energy Partners, LLC

• Decision Date: 20 December 2013
• Docket Number: No. 12 CO 23.,12 CO 23.
• Citation: 6 N.E.3d 70
• Parties: NEW HOPE COMMUNITY CHURCH, et al., Plaintiffs–Appellees, v. PATRIOT ENERGY PARTNERS, LLC, et al., Defendants–Appellants.
• Court: Ohio Court of Appeals

6 N.E.3d 70

NEW HOPE COMMUNITY CHURCH, et al., Plaintiffs–Appellees,

v.PATRIOT ENERGY PARTNERS, LLC, et al., Defendants–Appellants.

No. 12 CO 23.

Court of Appeals of Ohio, Seventh District, Columbiana County.

Dec. 20, 2013.

Robert Guehl, Chad Burton, Brandon Cogswell, Beaverscreek, OH, for Plaintiffs–Appellees.

William Dowling, Christopher S. Humphrey, Buckingham, Doolittle & Burroughs, LLP, Akron, OH, Michael Matasich, Buckingham, Doolittle & Burroughs, LLP, Cleveland, OH, for Patriot Energy Partners and Andrew Blocksom.

John Keller, Mitchell Tobias, Vorys, Sater, Seymour and Pease, LLP, Columbus, OH, for Chesapeake Exploration, L.L.C.

Before: MARY DeGENARO, J., JOSEPH J. VUKOVICH, J., CHERYL L. WAITE, J.

DeGENARO, P.J.

{¶ 1} Defendants–Appellants, Patriot Energy Partners, LLC and Chesapeake Exploration, LLC, oil and gas lessees, appeal the May 15, 2012 judgment of the Columbiana County Court of Common Pleas denying their motion to stay the claims of Plaintiffs–Appellees, numerous property owners and lessors, pending arbitration, pursuant to an arbitration clause in the leases. On appeal, Patriot and Chesapeake contend that the trial court erroneously concluded that the arbitration provisions were unconscionable and therefore unenforceable.

{¶ 2} Upon review, Patriot and Chesapeake's arguments are meritorious. While the trial court correctly concluded that the arbitration provision is substantively unconscionable, the trial court erred by concluding that the arbitration clause is procedurally unconscionable. Although none of the Property Owners had any past training in oil and gas leases, many had executed oil and gas leases in the past; were given time to review these leases and ask questionsprior to signing, some proposing amendments to the leases. Some simply did not read the leases including the arbitration provision or did not understand the arbitration clause, but conceded they could have sought outside counsel before signing and chose not to do so. In order for an arbitration provision to be held unconscionable, both substantive and procedural unconscionability must be present. Because the Property Owners only demonstrated that the arbitration clause was substantively unconscionable, the arbitration clause is valid. Accordingly, the judgment of the trial court is reversed and the matter stayed pending arbitration.

Facts and Procedural History

{¶ 3} In 2008, several independent contractors, called landmen in the oil and gas industry, associated with Patriot, began securing oil and gas leases from landowners in Columbiana and Carroll Counties. These landmen included Patriot president Andrew Blocksom, Thomas Blocksom, Benjamin Dickey and Robert Dickey. Bass Energy, a company headed by geologist Dr. William Hlavin, was the primary company behind Patriot. Hlavin, via Bass Energy and Patriot, sought to secure as much leasehold acreage as possible within an area targeted due to its location along a specific geological fault-line. The business of securing the leases generally began with a telephone contact to prospective lessors by the landmen. Those who were interested were sent leases by mail to review. Sometimes the lessors would send the executed leases directly back to Patriot. In other cases, the landmen would personally visit the landowners to close the deals.

{¶ 4} All of the subject leases were granted in favor of Patriot in 2008, and were substantially the same, though some contained addenda negotiated by the Property Owners. The leases had primary terms of 5 years and specified a certain amount per acre, generally $10 in delay rentals; an annual amount the lessee is obligated to pay if no drilling is commenced on the property. The leases also provided for royalties on wells that were ultimately drilled and were productive.

{¶ 5} In 2010, Patriot assigned the deep rights under the subject leases to Chesapeake, for $1,100 per acre.

{¶ 6} On August 31, 2011, the Property Owners filed the present action against Patriot and Chesapeake, and pertinent to this appeal, sought rescission of the leases, a declaration that the leases were null and void, and the invalidation of the assignments to Chesapeake. During the course of the proceedings, the trial court granted Chesapeake's motion for equitable tolling of the primary terms of the leases. On October 7, 2011, Patriot and Chesapeake jointly moved to stay the proceedings pending arbitration. The Property Owners opposed the motion, arguing that the arbitration provision was unconscionable and therefore unenforceable.

{¶ 7} Each of the subject leases contains the following identical arbitration clause, which is set forth in the same size print and format as every other lease clause:

NOTICES AND ARBITRATION * * * Any controversy arising out of or relating to this agreement shall be settled by arbitration. Either party may initiate any arbitration proceeding by notifying the other party in writing, but only after the aforementioned notice of breach has been served and the time period for cure provided for in this lease has expired. The procedure to be followed in the event of any arbitration shall be that prescribed in the Rules of the American Arbitration Association. Judgment upon the award rendered by the arbitrators may be entered in any Court having jurisdiction thereof.

{¶ 8} Three days of hearings were held on Patriot and Chesapeake's motion to stay pending arbitration in April 2012, prior to which the parties stipulated: (1) if paragraph 13 is enforceable the issues presented in the pleadings are arbitrable matters; (2) that all plaintiffs agreed to be bound by the trial court's decision and the decision would apply to each plaintiff individually, but that such agreement did not preclude appeal by either side. Thus, the hearings focused on the issue of whether the arbitration clauses were unconscionable.

{¶ 9} Twenty-three of the Property Owners testified about matters such as: the genesis of the leases, the contact they had with the landmen from Patriot, their prior business experience and their experience with oil and gas leases more generally. Several landmen and Hlavin also testified. The trial court took judicial notice of the American Arbitration Association (AAA) rules. Since not all of the Property Owners testified at the hearings, the parties stipulated that the Property Owners' educational backgrounds ranged from a minimum of a GED to a maximum of a master's degree with some work towards a doctorate. The parties also agreed that the remaining Property Owners who did not testify would have testified substantially the same as the others who had testified, with some minor personal variations.

{¶ 10} On May 15, 2012, the trial court issued a detailed decision denying Patriot and Chesapeake's motion to stay pending arbitration. The court concluded the “arbitration clause * * * [is] substantively and procedurally unconscionable and therefore not binding on the parties in this case.”

Enforceability of the Arbitration Clause

{¶ 11} In their sole assignment of error, Patriot and Chesapeake assert:

{¶ 12} “The trial court erred in denying the Motion to Stay Proceedings Pending Arbitration of Defendant–Appellants Chesapeake Exploration, L.L.C., Patriot Energy Partners LLC, and Andrew Blocksom because it incorrectly held that the arbitration provision was both substantively and procedurally unconscionable. ( See Opinion and Order Denying Motion to Stay, attached as Appendix A.)”

Arbitration and Standard of Review

{¶ 13} The Property Owners raise several issues that were not raised in the trial court, first that the arbitration clauses are against public policy in Ohio, and second that Patriot's alleged non-payment of delay rentals renders both the leases themselves, along with the arbitration clauses therein null and void. Generally, errors not raised in the trial court may not be raised for the first time on appeal. See, e.g., In re Retaining Vorys, Sater, Seymour & Pease, L.L.P., as Special Counsel, 192 Ohio App.3d 357, 2011-Ohio-640, 949 N.E.2d 84, ¶ 24. However, as this is an emerging area of Ohio law, we will exercise our discretion to address these issues. See Kuhn v. 21st Century Ins. Co., 5th Dist. No. 2011 CA 00232, 2012-Ohio-2598, 2012 WL 2115524, ¶ 19 (“Because waiver is a discretionary doctrine, an appellate court may decline to apply it in the interests of justice.”)

{¶ 14} Turning to the public policy argument, Ohio's Arbitration Act has been codified in Revised Code Chapter 2711, and arbitration is encouraged as a method of settling disputes. See Williams v. Aetna Fin. Co., 83 Ohio St.3d 464, 700 N.E.2d 859 (1998). “Arbitration agreements are ‘valid, irrevocable, and enforceable, except upon grounds that exist at law or in equity for the revocation of any contract.’ ” Taylor Bldg. Corp. of Am. v. Benfield, 117 Ohio St.3d 352, 2008-Ohio-938, 884 N.E.2d 12, ¶ 33 (quoting R.C. 2711.01(A)). “A presumption favoring arbitration arises when the claim in dispute falls within the scope of the arbitration provision. An arbitration clause in a contract is generally viewed as an expression that the parties agree to arbitrate disagreements within the scope of the arbitration clause, and, with limited exceptions, an arbitration clause is to be upheld just as any other provision in a contract should be respected.” Id. at 471, 700 N.E.2d 859.

{¶ 15} The Ohio Supreme Court has noted there is a “strong public policy favoring arbitration” in Ohio as developed through case law over many years. Schaefer v. Allstate Ins. Co., 63 Ohio St.3d 708, 711–712, 590 N.E.2d 1242 (1992), citing e.g., Brennan v. Brennan, 164 Ohio St. 29, 128 N.E.2d 89 (1955), paragraph one of the syllabus; Mahoning Cty. Bd. of Mental Retardation v. Mahoning Cty. TMR Edn. Assn. (1986), 22 Ohio St.3d 80, 488 N.E.2d 872 (1986); and Bd. of Edn. Of the Findlay City School Dist. v. Findlay Edn. Assn., 49 Ohio St.3d 129, 551 N.E.2d 186 (1990).

{¶ 16} The Property Owners cite no...