Paulus v. Beck Energy Corp.

• Decision Date: 16 June 2017
• Docket Number: NO. 16 MO 0008,16 MO 0008
• Citation: 94 N.E.3d 73,2017 Ohio 5716
• Parties: John R. PAULUS, et al., Plaintiffs–Appellees, v. BECK ENERGY CORPORATION, et al., Defendants–Appellants.
• Court: Ohio Court of Appeals

94 N.E.3d 73

2017 Ohio 5716

John R. PAULUS, et al., Plaintiffs–Appellees,

v.BECK ENERGY CORPORATION, et al., Defendants–Appellants.

NO. 16 MO 0008

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

Dated: June 16, 2017

Atty. Ethan Vessels, Fields, Dehmlow & Vessels, LLC, 309 Second Street, Marietta, Ohio 45750, for Plaintiffs–Appellees.

Atty. Scott M. Zurakowski, Atty. Joseph J. Pasquarella, Krugliak, Wilkins, Griffiths & Dougherty Co., L.P.A., 4775 Munson Street, N.W., P.O. Box 36963, Canton, Ohio 44735–6963, for Defendants–Appellants.

JUDGES: Hon. Carol Ann Robb, Hon. Gene Donofrio, Hon. Mary DeGenaro

OPINION

ROBB, P.J.

{¶ 1} Defendants–Appellants Beck Energy Corporation et al. appeals the decision of the Monroe County Common Pleas Court entered in favor of Plaintiffs–Appellees John T. Paulus et al. Appellant first contends the lease was held by production and was still in its ten-year primary term, a period during which production in paying quantities was not required. Appellant claims a lessor whose lease is in its primary term cannot assert a lack of paying quantities, framing the issue as a lack of "standing" and claiming it is a jurisdictional issue which can be raised at any time during the proceedings. Conversely, the issue is not one of subject matter jurisdiction. Furthermore, the primary term was amended to five years by a letter agreement and the parties proceeded through trial as if the only issue was whether the lease was producing in paying quantities. Appellant's reply brief asserts the letter agreement was barred by the parol evidence rule. However, Appellant essentially introduced the agreement into evidence and invited the trial court to proceed under the belief the primary term of the lease was five years due to an amendment.

{¶ 2} Next, Appellant argues the evidence established the well was producing in paying quantities. The parties presented various arguments, including whether the amount paid to replace a pump in 2013 should be considered an operating expense or an excludable "reworking" expense, whether royalties are operating expenses, whether the lessee's judgment on paying quantities was given proper weight, whether the court improperly considered the lessee's motive to continue producing even at low amounts merely to preserve the lease rights for speculation, and whether low market prices should be taken into consideration. We conclude the trial court's decision finding a lack of paying quantities is supported by the weight of the evidence.

{¶ 3} Lastly, Appellant contends the trial court improperly ordered it to disgorge a bonus it received from XTO Energy Inc. when Appellant assigned its deep rights in 2011, a time prior to termination of the lease. Appellant argues the elements of Appellee's second claim were not established and unjust enrichment is not available where the parties' relationship was governed by a contract, such as where the lease permitted the lessee to assign its rights. We conclude the disgorgement of the bonus was improper.

{¶ 4} For the following reasons, the trial court's judgment finding the lease terminated is affirmed, but the judgment ordering disgorgement of the bonus is reversed.

STATEMENT OF THE CASE

{¶ 5} Appellee entered an oil and gas lease, dated January 5, 2005, for 160 acres in Monroe County. The habendum clause, at ¶ 2 of the lease, contained a pre-printed primary term of 10 years, during which Appellant was to commence drilling or pay delay rentals. The secondary term was "so much longer thereafter as oil and gas or their constituents are produced or are capable of being produced on the premises in paying quantities, in the judgment of the Lessee * * *." James Beck notarized the signatures of the landowners (John and Teresa Paulus) on January 5, 2005. Their relatives, who shared an interest in the oil and gas royalty, then signed on various dates, and the lease was recorded on February 28, 2005.

{¶ 6} John and Teresa Paulus also signed an agreement providing the lease would be canceled if a well was not drilled within five years from the date of the lease. The agreement was drafted by Appellant and printed on a letterhead from its Ravenna office dated January 4, 2005. Raymond Beck's name was signed, and under the signature were the circled initials DB. (Paulus Depo. Ex. 2). Pipeline agreements were also executed. Initial drilling in 2005 resulted in a "lost hole," which prevented further drilling at that spot. (Tr. 86). Upon moving the rig, the Paulus 1–A Well was drilled. It took some time to connect the well to a pipeline. (Paulus Depo. 38). The well went into production in 2007. (Tr. 87–88).

{¶ 7} In December 2011, Appellant entered an agreement with Exxon Mobil Corporation c/o XTO Energy, Inc. assigning the deep rights in the lease in return for a 6.25% overriding royalty on future Utica Shale production and a signing bonus of $616,000. According to ¶ 8.1 of the agreement, the bonus was to be repaid if Appellant failed to maintain the acreage held by production for five years from the date of the assignment. (Beck Corp. Rep. Depo. 85–86, Ex. 20). The Beck lease at ¶ 13 granted Appellant the right to assign and transfer the lease in whole or in part without providing notice to Appellee.

{¶ 8} In September 2013, Appellant replaced the downhole pump at a cost of $10,503.31. (Tr. 90). The same month, Appellee executed a lease in favor of Gulfport Energy Corporation with a signing bonus of more than one million dollars plus 20% of the royalties. (Paulus Depo. 49–56; Ex. 7). Mr. Paulus testified Gulfport rejected the lease due to the Beck lease. (Paulus Depo. 56); (Tr. 61–61).

{¶ 9} On June 27, 2014, Appellee filed a complaint against Appellant. XTO was thereafter added as a defendant. The May 15, 2015 second amended complaint contained two counts. Count one sought a declaratory judgment terminating the lease due to lack of sufficient production. The complaint stated the ten-year primary term was amended to five years by an attached letter agreement. Count two was entitled "unjust enrichment equitable disgorgement" and claimed Appellant's conduct deprived Appellee of the benefits of a new lease and Appellant should be disgorged of the bonus XTO paid to Appellant.

{¶ 10} Appellant's answer stated the primary term of the lease was ten years and the letter agreement was of no effect "because, among other things, all lessors to the good and valid Beck Energy Oil and Gas Lease did not agree to and/or sign the letter agreement as a result, the Lease is still in its primary term." This statement was reiterated as one of thirty affirmative defenses; another defense said the "claims were barred in whole or in part by the parol evidence rule." Appellant filed a counterclaim for breach of contract and slander of title. Appellant also filed a motion to dismiss the "unjust enrichment equitable disgorgement" claim but did not submit a motion regarding the issue of the primary term.

{¶ 11} A bench trial was held on February 23, 2016. The parties stipulated there was oil and gas production from the well and royalties were paid as required. (Tr. 13). They agreed the court could consider Appellant's response to a request for admissions made after depositions. (Tr. 12). They also agreed the trial evidence would include the depositions of Mr. Paulus, Beck's corporate representatives (including Mr. Beck), and a Beck employee, along with the deposition exhibits. Mr. Paulus and Mr. Beck presented additional testimony at trial. Mr. Paulus testified he was entitled to gas from the well for domestic purposes. He said the well ran out of gas one day in January 2015 and Appellant's employee told him the well was dead. (Tr. 44, 76). Mr. Beck opined the well was profitable. (Tr. 70). He also noted how oil and gas prices drastically dropped three years prior to trial. (Tr. 81–82). The testimony is discussed further infra.

{¶ 12} On May 5, 2016, the trial court entered judgment in favor of Appellee on the requested declaratory relief of lease termination. The court found: Appellant spent significant sums of money in 2007 to drill and equip the well; the well yielded income beyond its operating expenses for the first few years; there were regular recurring expenses; the well ceased being profitable in 2012; the volume of gas decreased each year; despite the money spent to repair the well pump in 2013, actual production continued to decline in 2014 and 2015; Mr. Beck acknowledged a financial incentive to defend the profitability of the well due to the future production of Utica Shale; and the well recently ran out of gas. The court concluded it was undisputed the costs of operating the well exceeded the revenues generated from the well in 2012, 2013, and 2014, pointing to Appellant's detailed records and the tax forms submitted in those years. Law was cited on the lessee's good faith judgment, and the depressed market was found to be irrelevant due to the steady decline in actual production.

{¶ 13} The trial court's May 5, 2016 judgment entry declared the lease terminated for lack of profitable production and dismissed Appellant's counterclaim. On May 25, 2016, the court ruled in favor of Appellee on the remaining count, ordering the bonus paid by XTO to Appellant to be disgorged. Appellant filed a timely notice of appeal on June 2, 2016.

STANDARD OF REVIEW

{¶ 14} In a declaratory judgment case, a trial court's decision on justiciability is reviewed under the abuse of discretion standard of review. Arnott v. Arnott , 132 Ohio St.3d 401, 2012-Ohio-3208, 972 N.E.2d 586, ¶ 1. Justiciability is a threshold question dealing with whether the case is appropriate for declaratory relief, including whether there is an actual controversy between the parties. Id. at ¶ 5, 10 (not every case is appropriate for a declaratory action), clarifying Mid–American Fire & Cas. Co. v. Heasley , 113 Ohio St.3d 133, 2007-Ohio-1248, 863 N.E.2d 142, ¶ 12 (where a trial court determines a controversy is so...