Summitcrest, Inc. v. Eric Petroleum Corp.

• Decision Date: 04 March 2016
• Docket Number: No. 12 CO 0055.,12 CO 0055.
• Citation: 60 N.E.3d 807
• Parties: SUMMITCREST, INC., Plaintiff–Appellee Cross–Appellant v. ERIC PETROLEUM CORP., et al., Defendants–Appellants Cross–Appellees.
• Court: D.C. Court of Appeals

60 N.E.3d 807

SUMMITCREST, INC., Plaintiff–Appellee Cross–Appellant

v.ERIC PETROLEUM CORP., et al., Defendants–Appellants Cross–Appellees.

No. 12 CO 0055.

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

March 4, 2016.

Bruce Khula, Steven Friedman, Cleveland, OH, for Plaintiff–Appellee/Cross–Appellant.

Thomas Hill, Austintown, OH, for Defendant–Appellant/Cross–Appellee Eric Petroleum Corporation.

Thomas Fusonie, Columbus, OH, for Defendants–Appellants Chesapeake Exploration, LLC and Ohio Buckeye Energy, LLC.

GENE DONOFRIO, P.J., MARY DEGENARO, J., CHERYL L. WAITE, J.

OPINION

DeGENARO, J.

{¶ 1} Defendant–Appellant, Eric Petroleum Corporation (EPC) appeals the judgments of the Columbiana County Court of Common Pleas granting partial summary judgment in favor of Appellee Summitcrest, Inc., which 1) determined that the oil and gas lease between the parties had terminated with regard to lands outside of the 1–35 well unit, pursuant to a Pugh Clause in the Lease; 2) determined that the 1–35 well unit size was 640 acres; and 3) equitably tolled the lease as to the 640 acre 1–35 unit, but not the remaining outside lands, the remaining 2,094.496 acres.

{¶ 2} EPC asserts that the trial court misinterpreted and misapplied the Lease's Pugh Clause and erroneously determined the Lease had terminated with regard to the outside lands. EPC further argues that the trial court should have equitably tolled the lease as to the entire lease acreage. Summitcrest has filed a separate cross-appeal in this matter, challenging the trial court's determination that the unit size of the 1–35 well is 640 acres, instead of 40 acres.

{¶ 3} EPC's assignments of error are meritorious. The Pugh Clause did not apply because the Lease was still in its primary term as extended, and the trial court should have equitably tolled the Lease for the entire acreage, not just the 1–35 unit.

{¶ 4} With regard to the cross-appeal, Summitcrest's assignment of error is meritless because EPC properly increased the size of the 1–35 unit from 40 acres to 640 acres pursuant to the terms of the Lease agreement and Ohio law and should be entitled to the benefit of its bargain. Accordingly, the judgment of the trial court is reversed and modified so as to toll the primary term as to the entire 2,734 acres, and the case remanded for further proceedings.

Facts and Procedural History

{¶ 5} Summitcrest is the owner of approximately 2,734 acres of land in Columbiana County, Ohio. On April 24, 2004, Summitcrest as lessor entered into an oil and gas lease of the property with Mason Dixon Energy, Inc. as lessee. A memorandum of the lease agreement was duly recorded with the office of the Columbiana County Recorder.

{¶ 6} The Lease's habendum clause at paragraph 1 provides that it shall remain in force for a primary term of five years and “as long thereafter as oil or gas, or either of them, is produced from said land by the Lessee, its successors and assigns.” The habendum clause further provides that the primary term can be extended one time for five more years upon paying Summitcrest an agreed-upon sum before the original expiration date of the primary term.

{¶ 7} Paragraph 6 of the Lease is a Pooling Clause which provides:

Pooling. Lessee hereby is given the right at its option, at any time within the primary term hereof or at any time during which this lease may be extended by any provision hereof, and from time to time within such period, to pool, reform, enlarge, and/or reduce such unit or pool, and repool all or any part or parts of leased premises or rights therewith with any other land in the vicinity thereof, or with any leasehold, operating, or other rights or interests in such other land so as to create units of such size and surface acreage as Lessee may desire but containing not more than eighty (80) acres for an oil well and not more than six hundred forty (640) acres for a gas well plus in each case a ten percent (10%) acreage tolerance. If at any time larger units are specified under any then applicable law, rule, regulation, or order of any governmental authority for the drilling, completion or operation of a well, or for obtaining maximum allowable, [sic] any such unit may be established or enlarged to conform to the size authorized. Each unit or reformation thereof may be created by governmental authority or by recording in the appropriate county office a Declaration containing a description of the pooled acreage. Any well which is commenced, or is drilled, or is producing on any part of any land theretofore or thereafter so pooled shall, except for the payments of royalties, be considered a well commenced, drilled, and producing on leased premises under this lease. There shall be allocated to the portion of leased premises included in any such pooling or repooling such proportion of the actual production from all lands so pooled or repooled as such portion of leased premises, computed on an acreage basis, bears to the entire acreage of the lands so pooled or repooled. The production so allocated shall be considered for the purpose of payment or delivery of royalty to be the entire production from the portion of leased premises included in such pooling or repooling in the same manner as though produced from such portion of leased premises under the terms of this lease. A unit established hereunder shall be valid and effective for all purposes of this lease even though there may be land, oil, and gas rights, royalty, and/or leasehold interests in land within the unite [sic] which are not pooled or unitized, or even though there may be a failure of the leasehold title (in whole or in part), to any tract or interest therein included in a pooled unit.

{¶ 8} A typewritten Addendum is attached to and incorporated into the Lease. At paragraph 19 it states: “The provisions of this Addendum are expressly made a part of the oil and gas lease and if there is a conflict between the provisions set out in this Addendum and any of the provisions in the oil and gas lease, the provisions contained in this Addendum shall apply and take precedence over any clause contained in this oil and gas lease, notwithstanding anything to the contrary.”

{¶ 9} Paragraph 24 of the Addendum is a Pugh Clause and provides¹ :

Continuous Development. At the expiration of the primary term and any extension thereof and at all times thereafter when oil and gas ceases to be produced in paying quantities (hereafter called “Termination Date”), this Lease shall terminate as to any portion of the Leased Premises located outside of the surface boundaries of any unit (hereinafter referred to as “outside lands”) on which is located a well producing from a zone or zones included in such unit or on which is located a shut-in gas well completed in a zone or zones included in such unit. In the foregoing sentence and in [Paragraph 6] the term “unit” shall refer to the larger of (i) any unit declared under [Paragraph 6] of this Lease and/or (ii) any spacing or pro-ration unit prescribed or permitted by the applicable governmental regulatory authority. If on the Termination Date Lessee is then engaged in the drilling of a well on the Leased Premises or if Lessee has within less than 90 days prior to the Termination Date completed/abandoned a well on the Leased Premises, this Lease shall not terminate as to said outside lands so long as Lessee continues to diligently drill wells on the Leased Premises with no lapse of more than one (1) year between the completion/abandonment of a well and the commencement of drilling operations for an additional well. Subject to the provisions of [Paragraph 5] if at any time Lessee allows a period in excess of one (1) year to elapse between the completion/abandonment of a well and the commencement of actual drilling operations on an additional well, this Lease shall terminate as to the outside lands. The terms “completion/ abandonment” and “completed/abandoned” shall mean the date the rig used for drilling and/or working over the well had been released. Lessee shall promptly execute and file of record a Release of all such outside lands as to which this Lease has terminated, as provided in this Lease.

{¶ 10} Paragraph 5 of the Lease is an Operations Clause which provides:

If prior to discovery and production of oil or gas, on the leased premises or on acreage pooled therewith, Lessee should drill a dry hole or holes thereon or, if after discovery and production of oil or gas, the production thereof should cease from any cause, this lease shall not terminate if Lessee commences operations for drilling, deepening, plugging back, or reworking within ninety (90) days thereafter or if it be within the primary term, commences or resumes the payment or tender of delay rentals or commences operations for drilling, deepening, plugging back, or reworking on or before the delay rental paying date next ensuing after the expiration of ninety (90) days from date if (sic) completion of a dry hole or cessation of production. If at any time subsequent to ninety (90) days prior to the beginning of the last year of the primary term and prior to the discovery and production of oil or gas on the leased premises or on acreage pooled therewith, Lessee should drill a dry hole thereon, no delay rental payment or operations are necessary in order to keep this lease in force during the remainder of the primary term. If at the expiration of the primary term, oil or gas is not being produced on the leased premises or on acreage pooled therewith, but Lessee is engaged in drilling, deepening, plugging back or reworking operations thereon or shall have completed a dry hole thereon within ninety (90) days prior to the end of the primary term, this lease shall remain in force so long as operations on said well, or for the drilling, deepening, plugging back, or reworking of any additional well, are prosecuted with no cessation of more than ninety (90) consecutive days and, if they result in the production of oil

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