Lutz Et Al. v. Chesapeake Appalachia, L.L.C.
148 Ohio St. 3d 524
| Ohio | 2016Background
- Federal district court certified a question to the Ohio Supreme Court about whether Ohio follows the “at-the-well” rule (allowing deduction of postproduction costs) or a version of the “marketable-product” rule (limiting such deductions).
- Dispute arises from 1970–1971 oil and gas leases where royalties were defined as "market value at the well," "field market price," or delivery "free of cost" to a pipeline; postproduction costs were not explicitly allocated in all leases.
- Lessors (Lutz and others) argue "market value at the well" precludes deduction of postproduction costs because there is no market at the well and the lessee has an implied duty to market the gas.
- Lessee (Chesapeake) contends the lease language controls and permits deduction of postproduction costs to arrive at the "value at the well."
- Ohio law treats oil and gas leases as contracts interpreted by their written terms; extrinsic evidence is admissible only if contract language is ambiguous.
- Court declined to answer the certified question, holding that rights depend on the specific lease language and that the federal court must interpret the leases accordingly; two justices dissented, each preferring an answer (one for marketable-product, one for at-the-well defined as gross proceeds minus postproduction costs).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Ohio follows the "at-the-well" rule or a "marketable-product" rule for deducting postproduction costs | Lessor: "market value at the well"/"field market price" forbids deducting postproduction costs; lessee must market and bear costs | Lessee: lease wording controls; "value at the well" means sale proceeds less postproduction costs to reach well value | Court declined to decide; rights depend on specific lease language and contract interpretation rules |
| Whether extrinsic evidence may resolve lease meaning given market changes since 1990s | Lessor: extrinsic evidence (market context) shows no market at well, supports marketable-product approach | Lessee: plain language controls; postproduction costs deductible to compute at-well value | Court: extrinsic evidence only if contract ambiguous; absent ambiguity federal court should decide leases’ meaning |
| Whether an implied covenant to market prevents deducting postproduction costs | Lessor: implied covenant to market arises because there is no market at the well | Lessee: no implied covenant overrides explicit lease language | Court: did not resolve implied-covenant question; noted Ohio law allows implied covenants only when lease is silent and contract governs |
| Proper forum to resolve royalty computation under specific leases | Lessor: asks state law rule declaration to guide computation | Lessee: asks enforcement of lease text under state law | Court: decertified the categorical question; dismissed cause and left lease interpretation to federal court |
Key Cases Cited
- Harris v. Ohio Oil Co., 57 Ohio St. 118 (1897) (oil and gas leases are contracts governed by their written terms)
- Skivolocki v. E. Ohio Gas Co., 38 Ohio St.2d 244 (1974) (contracts interpreted to carry out parties’ intent as evidenced by language)
- Graham v. Drydock Coal Co., 76 Ohio St.3d 311 (1996) (extrinsic evidence admissible when contract ambiguous or language has special meaning)
- Chesapeake Exploration, L.L.C. v. Buell, 144 Ohio St.3d 490 (2015) (parties’ rights under oil and gas leases determined by lease language)
- Piney Woods Country Life School v. Shell Oil Co., 726 F.2d 225 (5th Cir. 1984) (discussion of "market value at the well" vs. postproduction deductions)
- Poplar Creek Dev. Co. v. Chesapeake Appalachia, L.L.C., 636 F.3d 235 (6th Cir. 2011) (interpreting "at the well" as referring to unprocessed gas and permitting deduction of processing and transportation costs)