Barclay Petroleum, Inc. v. Bailey

96 N.E.3d 811

2017 Ohio 7547

BARCLAY PETROLEUM, INC., Plaintiff–Appellee,

v.Matthew BAILEY, Trustee of the Bailey Family Trust Dated 1/12/2007, et al., Defendants–Appellants.

No. 16CA14

Court of Appeals of Ohio, Fourth District, Hocking County.

RELEASED August 18, 2017

Gregory D. Brunton and Daniel J. Hyzak, Gordon & Rees LLP, Columbus, Ohio, for defendants-appellants Matthew Bailey, Trustee of the Bailey Family Trust Dated 1/12/2007, and Lora Bailey, Trustee of the Bailey Family Trust Dated 1/12/2007.

Shawn J. Organ and Joshua M. Feasel, Organ Cole LLP, Columbus, Ohio, for plaintiff-appellee Barclay Petroleum, Inc.

DECISION AND JUDGMENT ENTRY

Hoover, J.

{¶ 1} The trial court granted summary judgment to plaintiff-appellee Barclay Petroleum, Inc. ("Barclay"), in a dispute concerning the validity of a 1985 oil and gas lease (the "lease"). In competing motions for summary judgment, Barclay argued that the lease remained valid and in effect, whereas the defendants-appellants, Matthew and Lora Bailey, Trustees of the Bailey Family Trust Dated 1/12/2007 (the "Baileys"), argued that the lease had been cancelled under its terms and by operation of law because of lack of production. Because we agree with the Baileys that the lease terminated under its own terms and by operation of law, we reverse the judgment of the trial court.

I. Facts

{¶ 2} In October 1984, Darrell and Janet Lucas granted an oil and gas lease to Marjac Energy Company. Marjac assigned its lease rights to Barclay in 1987.¹ The lease covered 70 acres in Marion Township, Hocking County, Ohio, including the 17.986 acres now owned by the Baileys. The Lucases granted Marjac and its successors or assignees the right to drill for, produce, and sell oil and gas under the property for a primary term of one year and a secondary term "as long thereafter as oil, gas, or casinghead gas is produced from the leased premises or operations are continued * * *". In return, the Lucases were to receive a 12.5% royalty on all oil and gas produced and sold from their land. The lease also provided that the Lucases were to receive free gas for their house on the leasehold property.

{¶ 3} In July 1985, the Lucas # 1 Well was drilled and completed on the leasehold property. It is undisputed that the Lucas #1 Well continuously produced oil and/or natural gas for commercial sale for a period of twenty years until 2005. However, according to records from the Ohio Department of Natural Resources, after 2005 the Lucas # 1 Well produced no oil or gas for commercial sale during at least six years: 2006, 2008, 2009, 2010, 2011, and 2012.

{¶ 4} In October 1988, the Lucas # 2 Well was drilled and completed on the leasehold property. The Lucas # 2 Well continuously produced oil and/or natural gas for commercial sale for 12 years until 2000. However, again according to records from the Ohio Department of Natural Resources, the well produced no oil or gas for commercial sale after 2000 during at least ten years: 2001, 2002, 2003, 2004, 2005, 2006, 2008, 2010, 2011, and 2012.

{¶ 5} In November 1988, the Lucas # 3 Well was drilled and completed on the leasehold property. The Lucas # 3 Well continuously produced oil and/or natural gas for commercial sale for 12 years until 2000. However, according to records from the Ohio Department of Natural Resources, the well produced no oil or gas for commercial sale after 2000 during at least ten years: 2001, 2002, 2003, 2004, 2005, 2006, 2008, 2010, 2011, and 2012.

{¶ 6} Despite the above-described limited commercial production during the mid and late 2000's, it is undisputed that Barclay continued to operate and maintain the well that produced the household gas during that time period. The Lucases never experienced any prolonged interruption of household gas service, and Barclay promptly remedied any temporary interruption of service. The Lucases were content with the free gas used to heat their house and did nothing to cancel the lease.

{¶ 7} The Lucas # 1, # 2, and # 3 Wells are the only wells on the leasehold property. In 2012, the Lucases split their 70 acres into four separate tracts and sold each tract to Wilcox Land Finance Company, LLC. Wilcox Land Finance Company, LLC then re-sold each tract to four families. Steven and Paula Kaiser bought a tract containing approximately 36 acres; Daniel and Rita Caldwell purchased a tract comprised of 12 acres; Melodye Davis purchased the 5–acre tract containing the Lucases' house; and the Baileys purchased the remaining 17.986 acres. The Lucas # 3 Well is the only well located on the Baileys' property.

{¶ 8} Shortly after the Baileys took possession of their property in November 2012, a dispute arose between the Baileys and Barclay. The Baileys alleged that Barclay had abandoned and neglected to maintain and operate the Lucas Wells. Barclay, meanwhile, alleged that the Baileys interfered with their right to operate and maintain the Lucas # 3 Well. Despite the dispute, the wells produced enough oil to create more than $800 worth of landowner royalties in 2013. The Kaisers, Caldwells, and Ms. Davis all cashed royalty checks from the oil sales. Ms. Davis also uses gas from the Lucas Wells to heat her home. The Baileys did not cash any royalty checks from the oil sales.

{¶ 9} Eventually the dispute gave rise to the Barclay complaint filed in this lawsuit on February 12, 2014, which seeks damages and injunctive relief to ensure continued access to the Lucas # 3 Well located on the Baileys' property. On March 18, 2014, the Baileys filed an answer and counterclaims seeking a declaratory judgment quieting title in their favor, and alleging that the lease had expired under its terms due to the failure to produce oil, gas, or casinghead gas and Barclay's failure to otherwise continue operations. The Baileys' counterclaims also include a claim for forfeiture due to breach of various implied duties.

{¶ 10} On April 1, 2015, the Baileys filed a motion for summary judgment, again contending that the lease had expired on its terms by operation of law due to non-production of the wells. On April 17, 2015, Barclay filed a cross-motion for summary judgment claiming that the lease remained valid and in effect. Barclay alleged that the Baileys' interpretation of the lease was incorrect, and that the Lucases, the landowners at the time of the alleged non-production, had expressly approved of Barclay's performance under the lease. Specifically, Barclay alleged that the Lucases had expressly agreed that production of gas for their home on the leasehold property was sufficient to hold the lease—and that the doctrines of modification, waiver, and estoppel barred the Baileys from claiming the lease had terminated.

{¶ 11} On May 10, 2016, the trial court issued its decision and judgment entry on the competing motions for summary judgment. In its decision and judgment entry the trial court determined that the lease remained valid and in effect and awarded Barclay summary judgment. Specifically, the trial court determined that under the terms of the lease Barclay's production of gas for the Lucases domestic use was sufficient to hold the lease. Alternatively, the trial court found that the Lucases' longstanding course of performance had modified the lease. Of note, the trial court stated: "The undisputed facts are that Barclay provided free gas and the Lucases were satisfied with this performance." Thus, the trial court found that: "[T]he agreement was modified so that the provision of the free gas was sufficient performance to have the lease continue in effect." Finally, the trial court found—again in the alternative—that the Lucases had waived their right to challenge the validity of lease by not challenging its validity when non-production first occurred in the early to mid–2000's, and that the Baileys, as the Lucases successors-in-interest, were estopped by the doctrine of waiver from challenging the validity of the lease.

{¶ 12} The Baileys filed a timely notice of appeal from the trial court's May 10, 2016 decision and judgment entry.

II. Assignments of Error

{¶ 13} The Baileys raise four assignments of error for our review.

First Assignment of Error:

The trial court erred as a matter of law when it concluded that the subject oil and gas Lease did not automatically expire on its own terms and by operation of law in the early 2000s when the Lessee failed to continually satisfy the express production requirement contained in the Lease's unambiguous habendum clause which required commercial, non-domestic production of oil and/or natural gas in order for the Lease to remain valid and in effect beyond its primary term.

Second Assignment of Error:

The trial court erred as a matter of law when it concluded that the Lease had been modified by the parties' course of performance.

Third Assignment of Error:

The trial court erred as a matter of law when it failed to find that the Lease converted into a tenancy at will upon its automatic expiration by operation of law.

Fourth Assignment of Error:

The trial court erred as a matter of law when it concluded that the Baileys were estopped from having the Lease declared cancelled.

III. Law and Analysis

{¶ 14} Because the Baileys' assigned errors are interrelated, we address them jointly. Essentially, the Baileys argue that the trial court erred by granting Barclay's cross-motion for summary judgment and by denying their competing motion for summary judgment. The Baileys contend that the lease expired under its terms and by operation of law when the wells failed to produce oil or gas for commercial sale in the mid to late 2000's; that upon the automatic termination of the lease a tenancy relationship was formed between Barclay and the landowners; that because the lease had been automatically terminated it was incapable of being modified and that any alleged modification before the termination of the lease was not supported by new consideration or a different course of conduct; and that the doctrines of waiver and estoppel...