Lutz v. Chesapeake Appalachia, L.L.C. (Slip Opinion)
2016 Ohio 7549
| Ohio | 2016Background
- Putative class action by Ohio landowners (Lutz et al.) alleging Chesapeake Appalachia underpaid gas royalties under 1970–1971 oil and gas leases.
- Leases specify royalties as either the “market value at the well,” the “field market price,” or delivery of one-eighth part to the pipeline — dispute centers on whether postproduction costs may be deducted before calculating royalties.
- Postproduction costs at issue include gathering, processing/compression, and transportation incurred after gas reaches the wellhead.
- Lessors argue “market value at the well”/“field market price” preclude deduction of postproduction costs because there is no market at the well and lessee must market the product.
- Lessee argues lease language controls: if royalties are based on value at the well, postproduction costs are deductible to arrive at the well price.
- Ohio Supreme Court declined to answer the certified federal question, holding oil and gas leases are contracts and rights depend on the specific lease language; dismissed the certified question for lack of necessity to decide a uniform rule.
Issues
| Issue | Plaintiff's Argument (Lutz) | Defendant's Argument (Chesapeake) | Held |
|---|---|---|---|
| Whether postproduction costs may be deducted when lease royalties are based on “market value at the well” or “field market price” | Lease language requires royalties based on value at the well/field price; lessors say no deduction for postproduction costs because lessee must market the gas | Lease language controls; where royalty is tied to value at the well, lessee may deduct postproduction costs to determine well value | Court declined to decide; held lease language governs and dismissed the certified question (rights/remedies depend on each lease’s terms) |
Key Cases Cited
- Chesapeake Exploration, L.L.C. v. Buell, 144 Ohio St.3d 490 (2015) (confirms oil and gas leases are contracts; rights determined by written instrument)
- 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)
- Harris v. Ohio Oil Co., 57 Ohio St. 118 (1897) (establishes that lease rights and remedies are determined by lease terms)
- Poplar Creek Dev. Co. v. Chesapeake Appalachia, L.L.C., 636 F.3d 235 (6th Cir.) (discusses “at the well” language as referring to unprocessed gas and allows deduction of processing/transport costs)
- Piney Woods Country Life School v. Shell Oil Co., 726 F.2d 225 (5th Cir.) (explains “market value at the well” as value before processing and transportation)