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The Seventh District Court of Appeals Upholds Statutory Unitization Order-Lessee's Use of Statutory Unitization Provision Does Not Breach...

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

The Seventh District Court of Appeals Upholds Statutory Unitization Order – Lessee’s Use of Statutory Unitization Provision Does Not Breach Stricken Lease Pooling Provision

On June 19, 2019, the Seventh District Court of Appeals issues a decision in Paczewski v. Antero Resources Corp., 2019-Ohio-2641. In Paczewski, an oil and gas lease, entered into in 1975 and covering over 700 acres of property in Monroe County, Ohio, originally stated that the lessee was permitted to consolidate the leased lands with other lands to form development units not to exceed a total of 640 acres. However, the original parties had stricken that clause, meaning they crossed out the text of the provision. Ultimately, it appears that 16 shallow wells were drilled on the 700-plus acres, including a shallow well on the plaintiffs’ property.

Antero Resources Corp. eventually acquired the deep rights for the lease. Antero attempted to negotiate an amendment to the lease, permitting Antero to pool or unitize the leased acreage with other acreage to form one or more units. Those efforts failed and as a result, Antero filed an application with the Ohio Department of Natural Resources for a statutory unitization order under R.C. 1509.28. ODNR eventually approved the application and issued the unitization order including the leased acreage. Plaintiffs appealed that decision to the Ohio Oil & Gas Commission and while that appeal was pending, they filed a lawsuit against Antero and the lessee owning the shallow rights. Two of plaintiffs’ claims were addressed by the Seventh District Court of Appeals’ opinion – breach of lease based on the statutory unitization, meaning a breach of contract claim, and a claim that the unitization order violates the Ohio Constitution’s takings clause.

The trial court dismissed all claims within the plaintiffs’ complaint. After that decision, the Fifth District Court of Appeals issued a decision in Am. Energy-Utica, LLC v. Fuller, 2018-Ohio-3250, holding that a lessee’s use of statutory unitization to unitize an oil and gas lease which stated “UNITIZATION BY WRITTEN AGREEMENT ONLY!” constituted a breach of contract. Relying upon the Fuller decision, the plaintiffs asked the trial court to vacate its dismissal of the plaintiffs’ complaint. The trial court denied the request and the plaintiffs thereafter appealed to the Seventh District Court of Appeals.

Ultimately, the Seventh District Court of Appeals upheld the trial court’s decision, thereby upholding the dismissal of the plaintiffs’ complaint, in its entirety. As to the breach of contract issue, the Seventh District held that the lease at issue was silent as to whether Antero could unitize or pool the plaintiffs’ lands because the original unitization/pooling provision was stricken. The Seventh District adopted a rule, which it said had been adopted by the Tenth and Eleventh Appellate Courts, which provides that a deleted or stricken lease clause renders the lease silent as to the subject matter of the stricken clause. Thus, when dealing with pooling, a stricken prohibition would mean the lease does not permit nor prohibit pooling. The Seventh District relied on this rule to uphold the trial court’s dismissal of the plaintiffs’ breach of contract claim – “Having considered the arguments of all parties, we find that the deletion of the voluntary unitization clause in the Lease renders it silent on the issue of unitization in any form. Because the Lease is silent with respect to either type of unitization, we conclude that the Order does not constitute a breach of the Lease, and that Appellants’ first and second assignment of error have no merit.” The Seventh District further relied on the fact that the plaintiffs’ lease provision had been stricken to distinguish the case from Fuller.

The Seventh District also upheld the trial court’s dismissal of the plaintiffs’ takings claim. The Seventh District relied on the fact that Ohio provides less protections to subsurface mineral rights and that the Ohio Supreme Court had previously held that the pooling procedures constitute a proper exercise of the state’s police power. Furthermore, the appellate court held that the per the unitization statute, no unitization order may be construed to have caused the title of the minerals to be transferred. As a result, the court reasoned that Antero’s unitization order left the plaintiffs’ mineral interest intact and that the order was a mere regulation of mineral interests, not a taking without just compensation.

Based on the Paczewski decision, landowners must be cognizant that in order to fall under the Fuller decision, they must not only strike unitization/pooling provisions, but must also explicitly state that said practice is either prohibited or must be done so only with the landowners’ express permission. It appears that careful planning prior to executing an oil and gas lease will provide the only recourse to landowners, as the takings claims have now been rejected by the Fifth District (Fuller) and the Seventh District (Paczewski).

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.

 
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