Lutz v. Chesapeake Appalachia, L.L.C. (Slip Opinion)
2016 Ohio 7549
| Ohio | 2016Background
- Landowners (Lutz et al.) sued lessee Chesapeake alleging underpaid gas royalties under leases signed in 1970–71; dispute centers on deduction of postproduction costs.
- Leases contain varying royalty clauses: royalties to be paid based on “market value at the well,” “field market price,” or delivery “free of cost” into the pipeline.
- Production costs (to wellhead) are undisputedly lessee’s obligation; contested are postproduction costs (gathering, processing, compression, transportation) incurred after wellhead.
- Lessors: royalties should be calculated without deducting postproduction costs because there is no market at the well and lessee has implied duty to market after severance.
- Lessee: leases that specify value “at the well” permit deduction of postproduction costs to arrive at well value; plain lease language controls.
- Ohio Supreme Court declined to answer the certified question, holding that rights depend on the specific lease language and that extrinsic evidence is needed to resolve ambiguities; cause dismissed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Ohio follows the "marketable-product" rule (prohibits deducting postproduction costs except in certain circumstances) or the "at-the-well" rule (permits deduction of postproduction costs when royalties are based on value at the well) | Leases calling for value "at the well" or "field market price" should be read to give lessors share of value at market without deductions; lessee must market and bear postproduction costs | Lease language specifying "market value at the well" means postproduction costs are deductible from sale proceeds to arrive at the well value before computing royalties | Decertified: court refused to announce a single rule; held that dispute must be resolved by applying ordinary contract interpretation to the specific lease language (rights controlled by contract terms) |
Key Cases Cited
- Harris v. Ohio Oil Co., 57 Ohio St. 118 (recognizing oil and gas leases as contracts whose rights are determined by written terms)
- Chesapeake Exploration, L.L.C. v. Buell, 144 Ohio St.3d 490 (2015) (parties’ rights and remedies determined by lease language)
- Skivolocki v. E. Ohio Gas Co., 38 Ohio St.2d 244 (1974) (contracts interpreted to effect parties’ intent as evidenced by language)
- Graham v. Drydock Coal Co., 76 Ohio St.3d 311 (1996) (extrinsic evidence admissible when contract ambiguous or has special meaning)
- State ex rel. Claugus Family Farm, L.P. v. Seventh Dist. Court of Appeals, 145 Ohio St.3d 180 (2016) (implied covenants arise only when lease is silent on the subject)
- Piney Woods Country Life School v. Shell Oil Co., 726 F.2d 225 (5th Cir. 1984) (discussing "market value at the well" and role of processing/transportation costs)
- Poplar Creek Dev. Co. v. Chesapeake Appalachia, L.L.C., 636 F.3d 235 (6th Cir. 2011) (interpreting "at the well" to permit deduction of processing and transportation costs)