Ohio's Seventh District Court of Appeals has reversed a key decision by a lower court and ruled in favor of a small oil and gas company in a class action case that affected hundreds of angry landowners and threatened the industry's ability to protect the terms of its leases.
The case, brought against Beck Energy Corp. by a group of six landowners from Monroe County, OH, had dragged on for years (see Shale Daily, July 18, 2013). The landowners filed a lawsuit in 2011 alleging Beck used a blanket oil and gas lease drafted in 1983 that tied up their mineral rights, where the company initially planned to drill into the Clinton Sandstone, but never did. The plaintiffs argued that Beck failed to meet the obligations of the $50/acre leases -- signed between 2001 and 2006 -- by not developing the land in a timely manner, causing them to lose out on the Utica Shale boom, which has attracted thousands of dollars or more per acre in recent years.
Courts across the state have heard from landowners dissatisfied with restrictive leases, but over the years, judges have typically upheld the contractual obligations included in them, ruling in favor of the industry. The Beck case was closely watched and more than a dozen industry-related groups had filed friend-of-the-court briefs on behalf of the company, fearing how land negotiations could be affected in the state. The appeals court decision made last week was key for the industry as it continues to develop the Utica Shale at a rapid pace, according to attorneys at Krugliak, Wilkins, Griffiths & Dougherty Co. who represented Beck.
In a statement released after the appeals court ruling, the firm said the decision "impacts virtually every oil and gas producer, both local and national, who owns lease rights and/or is drilling in the Utica Shale."
Just two months after the suit was filed, court documents showed that Beck Energy sold the deep mineral rights across 21,000 acres to ExxonMobil Corp. subsidiary XTO Energy Inc., which outraged the plaintiffs, who believed the acreage was sold for millions of dollars. As part of its deal with XTO, Beck agreed "to warrant and defend the title to the assets" against the claims of any party.
In 2012, a Monroe County Common Pleas Court judge issued a summary judgement in favor of the landowners, and said at the time that the leases were perpetual and "clearly, unequivocally and seriously offend public policy."
Shortly after the ruling, Beck appealed to the Seventh District, and in the meantime, the plaintiffs filed for class action status after discovering that up to 700 landowners had signed similar leases with Beck -- a motion that was granted by the lower court. XTO also tried to intervene as a third party in the case, but its motion was denied by the lower court. The appeals court also denied XTO's motion to intervene.
It also denied Beck's challenge to the case's class action status but cited a string of Ohio case law in reaching its decision that Beck's leases were not illegal.
"Regarding the summary judgement ruling, the trial court misinterpreted the pertinent lease provisions and Ohio case law and erred in concluding the lease is a no-term, perpetual lease," the appeals court decision said. "The trial court further erred in concluding the lease was subject to implied covenants and that Beck breached the implied covenant to reasonably develop."
The court said Beck's leases are not perpetual because they contain a primary term of 10 years within which to commence drilling. A secondary term also included in the lease provides for its indefinite duration after the 10-year period and "operates to extend the lessee's rights under the lease."
“This means that the plain language of oil and gas leases is valid. The primary terms are valid throughout, which doesn’t mean the leases go on in perpetuity, but they help provide for a contract that both parties are expected to abide by,” said Thomas Stewart, executive vice president of the Ohio Oil and Gas Association, about the case’s broader implications in the state.
“The original court ruling that somehow -- it’s a mystery to me how they arrived at the decision -- essentially said the Beck leases would go on forever, even if they didn’t drill a well,” Stewart added. “Those leases don’t say that, and you can’t just break a lease because the primary term says the [lessee] has a right to hold the lease and drill even if it takes several years.”
The appellate judges remanded the case back to the lower court for further proceedings. Mark Ropchock, of Slater & Zurz LLP, which represents the landowners in the case, told NGI’s Shale Daily that his firm is seriously considering an appeal to the Ohio Supreme Court.
“We’re weighing our options. The appellate court found that we do represent an entire class of people,” he said. “In all likelihood, we’re going to appeal to vigorously protect their rights because we feel like we have a duty to pursue this.”
At the very least, Ropchock said, it could take months for the state Supreme Court to even decide if it will hear the case. As for the Seventh District’s decision impacting other landowners that might want to challenge a restrictive lease in the future, Ropchock said he doesn’t believe, as the industry does, that the Beck Energy case will be of serious significance.
“I don’t think it affects things one way or another,” he said. “These leases rise and fall on their own language, and this decision doesn’t set any terrible precedent. I don’t think it’s good or bad for anybody.”