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Ohio lessors granted right to pursue claims for underpayment of royalties against Chesapeake

Krugliak, Wilkins, Griffiths & Dougherty Co., L.P.A.

The U.S. Court of Appeals for the Sixth Circuit held that allegations of improper royalty calculations were not barred by Ohio’s statute of limitations, and lessors may pursue claims for unpaid royalties that occurred within four years prior to filing suit, and potentially further back in time if lessors can prove they did not have sufficient information to trigger their duty to investigate.

On May 29, 2013, the Federal Sixth Circuit Court of Appeals held in Lutz v. Chesapeake Appalachia, L.L.C., Case Nos. 10–4538, 11–3034, that the plaintiffs were permitted to pursue their breach of contract claim pertaining to any underpayments of royalties that occurred within the four years prior to the filing of their complaint. The decision reversed the U.S. District Court decision which had dismissed the suit as time-barred by Ohio’s four-year statute of limitations in Ohio R.C. § 2305.041.

The issue in the appeal was whether a gas, oil, or mineral lease providing for monthly royalty payments is divisible for statute of limitations purposes under Ohio law. The alleged underpayment of royalties began in 1993 and 2000 when two distinct underpayment schemes purportedly began, prior to the leases being transferred to Chesapeake. The plaintiffs’ complaint was filed in 2009, and styled as a purported class-action lawsuit involving property in Trumbull and Mahoning Counties in Ohio (although, the district court held class certification in abeyance pending a decision on Chesapeake’s motion to dismiss). The District Court concluded that the continued underpayment of royalties was the effect of the past violations alleged in 1993 and 2000 (which do not toll the limitations period), and not a continuous violation (which can toll the statute of limitations). As a result, the District Court concluded that the statute of limitations ran before the complaint was filed, thereby barring lessors’ claims.

The U.S. Court of Appeals acknowledged that Ohio common law would appear to support the district court’s determination that the continuous violation doctrine would not apply to plaintiffs’ breach of contract claims. However, the Court did not rule on this issue, as the Court found that the leases at issue should be construed as divisible contracts, with each alleged underpayment giving rise to a separate cause of action. The Court acknowledged that whether a gas, oil, or mineral lease providing for monthly royalty payments is divisible was an issue of first impression in Ohio (not previously addressed by Ohio courts), but concluded that Ohio courts have endorsed contract divisibility in other contexts, and found support in oil and gas cases involving similarly structured royalty contracts in other jurisdictions.

As a result, the U.S. Court of Appeals held that lessors were permitted to pursue breach of contract claims pertaining to any underpayment of royalties that occurred within four years prior to the filing of their complaint. The Court further concluded that Ohio courts would not extend the discovery rule (which provides that a cause of action does not arise until the plaintiff knows, or by the exercise of reasonable diligence should know, that he or she has been injured by the conduct of the defendant) to plaintiff’s breach of contract action. The Court found application of the discovery rule to the Lessor's allegations of breach of contract would run afoul of the public policy basis for the Ohio legislature's enactment of Ohio R.C. § 2305.041, and therefore refused to extend it.

However, the U.S. Court of Appeals remanded to the District Court to determine whether equitable tolling may apply to toll the statute of limitations based on the allegations of fraud. The Court noted that information sufficient to alert a reasonable person to the possibility of wrongdoing gives rise to a party's duty to inquire into the matter with due diligence. If the Plaintiffs did not have the means of discovering the breach due to reports omitting true information and containing intentional misrepresentation, then equitable tolling may apply. However, if in fact plaintiffs did have sufficient information to trigger their duty to investigate, then equitable tolling may not be appropriate.

The U.S. Court of Appeals remanded the matter for further proceedings, and the case will proceed before the District Court.

NOTE: This general summary of the law should not be used to solve individual problems since slight changes in the fact situation may require a material variance in the applicable legal advice.

If you have any questions concerning this client alert, please contact Attorney Gregory W. Watts at 330-497-0700.

 
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