Decision will impact hundreds of Ohio oil and gas leases and millions of dollars in potential bonus payments and royalties
In a dispute between landowners and Beck Energy Corp. (“Beck”) over oil and gas leases to explore drilling for oil and natural gas in southern and eastern Ohio, the Supreme Court of Ohio heard oral arguments today in two previously consolidated cases, Hupp v. Beck Energy and Claugus Family Farm v. Seventh District Court of Appeals.
Beck and its lease assignee, XTO Energy Inc. (“XTO”), estimate that approximately 700 Ohio landowners will be impacted by the Court’s decision on multiple issues, including those involving millions of dollars in potential bonus payments and royalties. The issues, first raised in Hupp, center on whether the Monroe County trial court’s decision to void leases held by Beck was valid because the court agreed with the landowners that language in the Beck leases was crafted to allow Beck to sit on land indeterminately before it wished to drill. In other words, the trial court determined that the Beck leases were “no-term” leases. The trial court also allowed the landowners to seek class action status to void approximately 700 Beck leases with similar language. The Seventh District Court of Appeals reversed the Monroe County court and sent the case back to the lower court for further proceedings, and also ruled that the court took the correct steps to certify the case as a class action.
The Claugus Family Farm case was brought on behalf of absent class members who were not notified of the class action. The Seventh District tolled the primary terms all the leases on a date in 2012 when the class action was certified. The Claugus Family Farm objected to the tolling order in an original act in mandamus and prohibition. The Claugus Family Farm argued that its lease with Beck would have expired by now, which would have allowed it to enter into a new lease that would pay more than $470,000 in signing bonuses plus more royalties than the Beck lease offered.
Beck and XTO counter that the pending lawsuits and the approval of the class action greatly impacted their decision to hold off drilling since 2012 and therefore, they should have more time to drill if they choose.
Potential Impact on Ohio’s Oil and Gas Industry
The Ohio Oil and Gas Association and six other E&P companies in support of Beck and XTO filed amicus curiae briefs in the cases indicating that the lease form used by Beck is very similar to the lease forms that have been used in Ohio and other states for years. Should the Supreme Court of Ohio reverse the Seventh District decision, it would impact not only Beck and XTO, but likely other E&P companies in Ohio that have similar provisions in existing leases. In short, the impact in a reversal would be immense.
Synopsis of Oral Argument
The Supreme Court of Ohio will address the following issues:
- Are leases that Monroe County landowners and others signed with Beck Energy void because they are worded to allow Beck to perpetually control the mineral rights while not attempting to drill for oil or gas?
- Do the Beck leases properly contain a primary and secondary terms?
- Do an estimated 700 Ohio landowners with Beck leases who were made part of a class-action suit against Beck without notice have the right to end their leases and renegotiate new ones if they choose?
- Was an appeals court authorized to place an order tolling all 700 contested leases, and allowing the clock to start running again on them only after the litigation is resolved?
At oral argument today, the primary focus appeared to be on the issues presented in the Claugus Family Farm case as opposed to the issues underlying the Hupp case. Indeed, when counsel for Beck began to discuss the issues in Hupp related to the validity of Beck’s lease form, Justice O’Neill directed him to the due process considerations at issue in Claugus Family Farm. From that point forward, nearly the entirety of Beck’s oral argument time was spend on the Claugus Family Farm case. Near the end, Beck’s attorney was asked whether he agreed with the Seventh District Court of Appeals’ analysis on the lease issue – i.e., that the lease form was valid – to which he responded that he did. Perhaps this signals that the Supreme Court of Ohio foresees no legal error with the Seventh District’s decision upholding the validity of the leases.
As to the issues presented in Claugus Family Farm, the Court spent considerable time at oral argument discussing issues of due process, particularly whether Claugus Family Farm had an opportunity to be heard. Because the class had been certified pursuant to Civ. R. 23(B)(2), which generally does not require notice and does not permit parties to “opt out,” Beck and counsel for the Seventh District Court of Appeals argued that no notice was required and all due process requirements were met.
Finally, the Court and the parties addressed the issue of tolling. Counsel for XTO argued that tolling was required because, with the pendency of the Hupp lawsuit, neither Beck nor XTO were willing (nor should have been expected) to take the risk of engaging in drilling operations. Thus, both Beck and XTO essentially lost a significant portion of the primary term of the leases engaging in this litigation. Tolling was required (and was correctly granted), argued XTO, to maintain the status quo of the primary terms during the pendency of the lawsuit.
It is true that no one can predict the outcome of a case based upon oral argument. That said, it was interesting and enlightening to compare the time spent by the Court on the issue in Hupp versus the issues presented in Claugus Family Farm. In that regard, and based upon oral argument alone, the Court seemed to be struggling much more with Claugus Family Farm than Hupp. The Ohio oil and gas industry and oil and gas landowners/lessors alike will be anxiously awaiting the Court’s decisions in these two very important cases.
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