Zehentbauer Family Land, LP v. TotalEnergies E&P U.S., Inc.

• Decision Date: 01 February 2022
• Docket Number: 20-3469
• Court: U.S. Court of Appeals — Sixth Circuit
• Parties: ZEHENTBAUER FAMILY LAND, LP; HANOVER FARMS, LP; EVELYN FRANCES YOUNG, Successor Trustee of Robert Milton Young Trust, Plaintiffs-Appellants, v. TOTALENERGIES E&P USA, INC., fka Total E&P USA, Inc.; PELICAN ENERGY, LLC; JAMESTOWN RESOURCES, LLC, Defendants-Appellees.

ZEHENTBAUER FAMILY LAND, LP; HANOVER FARMS, LP; EVELYN FRANCES YOUNG, Successor Trustee of Robert Milton Young Trust, Plaintiffs-Appellants,
v.
TOTALENERGIES E&P USA, INC., fka Total E&P USA, Inc.; PELICAN ENERGY, LLC; JAMESTOWN RESOURCES, LLC, Defendants-Appellees.

No. 20-3469

United States Court of Appeals, Sixth Circuit

February 1, 2022

NOT RECOMMENDED FOR PUBLICATION

ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF OHIO

Before: SUHRHEINRICH, STRANCH, and MURPHY, Circuit Judges.

SUHRHEINRICH, Circuit Judge.

Plaintiffs, a class of landowners in Ohio's Utica Shale Formation, claim that Defendants, oil-and-gas exploration companies, miscalculated their royalty payments by basing them on the "at the wellhead" price rather than on the downstream value of refined oil and gas products. The district court sided with Defendants and so must we.

I.

Plaintiffs entered into oil and gas lease agreements with a predecessor of Defendants between 2010 and 2012. See Zehentbauer Fam. Land, LP v. Chesapeake Expl., L.L.C., 935 F.3d 496, 499-501 (6th Cir. 2019). These agreements allow the defendant production companies to extract oil and gas from the landowners' properties; in exchange, the landowners receive royalty

1

payments "based upon the gross proceeds paid to Lessee for the gas marketed and used off the leased premises, including casinghead gas or other gaseous substance . . . computed at the wellhead from the sale of such gas substances so sold by Lessee." R. 1-1, PID 46 ¶ 5(b) (emphasis added). "Gross proceeds" are defined as "the total consideration paid for oil, gas, associated hydrocarbons, and marketable by-products produced from the leased premises." Id. And gross proceeds are derived from sales either to (1) an unaffiliated bona fide purchaser in an "arms-length transaction," or (2) an "affiliate of Lessee," for a comparable sales price "and without any deductions or expenses." Id.

Defendants Chesapeake Exploration, LLC and CHK Utica, LLC (collectively "Chesapeake") sell their oil and gas at the wellhead to midstream affiliate Chesapeake Energy Marketing, LLC ("CEMLLC").^[1] See R. 114-1, PID 3724. Defendant TotalEnergies E&P USA, Inc. ("Total")^[2] sells its oil and gas at the wellhead to midstream affiliate Total Gas & Power North America, Inc. ("TGPNA"). See R. 112-1, PID 3606. CEMLLC and TGPNA process the raw products and transport them for sale to unaffiliated downstream companies. Zehentbauer, 935 F.3d at 501. These midstream affiliates pay for the gas using the netback method, which "takes a weighted average of prices at which the midstream affiliates sell the oil and gas at various downstream locations and adjusts for the midstream company's costs of compression, dehydration, treating, gathering, processing, fractionation, and transportation to move the raw oil and gas from the wellhead to downstream resale locations." Id. The netback method accounts for these midstream, or post-production, costs. Id. The midstream affiliates pay this reduced amount to the

2

defendant producers, who use this netback price as the base for calculating Plaintiffs' royalty payments. Id.

Plaintiffs felt that their royalties should be based on a different set of gross proceeds-the gross proceeds received by affiliates of Defendants further downstream after the product is refined and moved to market. In 2015 they sued Defendant Lessees on behalf of themselves and 224 other lessors complaining that Defendants had breached their lease obligations by "failing to pay the full royalties due under the leases" to the class members. R. 1-1, PID 36 ¶ 85.

The district court granted summary judgment to Defendants, holding that the plain and unambiguous language of the contract required that the "royalties are to be valued based on the wellhead value of the oil, gas, and [natural gas liquids] and, therefore, the deduction of post-production costs are authorized." Zehentbauer Fam. Land LP v. Chesapeake Expl., LLC, 450 F.Supp.3d 790, 811 (N.D. Ohio 2020).

Plaintiffs appealed. Plaintiffs and the Chesapeake Defendants jointly moved to dismiss the case as to those defendants only, see ECF No. 43, which the Clerk of Court granted, ECF No. 46. The remaining defendants on appeal are Total, Jamestown Resources, LLC, and Pelican Energy, LLC.

II.

Summary judgment is proper where "there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(a). We review the district court's grant of summary judgment de novo. Laster v. City of Kalamazoo, 746 F.3d 714, 726 (6th Cir. 2014).

The parties agree that Ohio law applies. R. 92, PID 1021. In Ohio, an oil and gas lease is a contract governed by "the traditional rules of contract construction." Lutz v. Chesapeake

3

Appalachia, LLC, 71 N.E.3d 1010, 1011 (Ohio 2016); see Henceroth v. Chesapeake Expl., LLC, 814 Fed.Appx. 67, 69 (6th Cir. 2020). "If the lease language is unambiguous, then courts should interpret the lease 'so as to...