Bradford Energy Capital, LLC v. SWEPI LP

BRADFORD ENERGY CAPITAL, LLC,and BRADFORD DRILLING ASSOCIATES XXVII L.P., Plaintiffs, v. SWEPI LP AND ROCKDALE MARCELLUS LLC, Defendants.

Civil No. 17-1231

UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF PENNSYLVANIA

September 25, 2020

OPINION

Plaintiffs Bradford Energy Capital, LLC (Bradford Energy) and Bradford Drilling Associates XXVII L.P. (Bradford Drilling) (collectively "Bradford") bring suit against Defendants Rockdale Marcellus LLC (Rockdale) and SWEPI LP (SWEPI) for breach of contract. Bradford alleges that Rockdale and its predecessor SWEPI breached a Drilling and Operating Agreement by failing to place into production a natural gas well in Tioga County, Pennsylvania. Pending before the Court are Rockdale's and SWEPI's separate Motions for Summary Judgment. ECF Nos. 95 & 98. The matter is fully briefed, and oral argument was held on April 16, 2020. As more fully explained below, Rockdale's Motion will be granted, and SWEPI's Motion will be dismissed as moot.

I. BACKGROUND

Bradford Drilling is a New York limited partnership with its principal place of business in Buffalo, New York. Rockdale's Concise Stmt. Mat. Facts ¶ 1, ECF No. 96. Bradford Energy is the managing general partner of Bradford Drilling. Id. ¶ 2. By virtue of his ownership of D.C. Mullan and Company, Daniel Mullan is the owner of Bradford Energy. Id. ¶ 3; Bradford Resp. Concise Stmt. Mat. Facts ¶ 3, ECF No. 105. Bradford Energy is the current general managing partner of Bradford Drilling. ECF No. 105, ¶ 3.¹

Defendant SWEPI is a Delaware limited partnership with its principal place of business in Houston, Texas. ECF No. 96, ¶ 5. Defendant Rockdale is a Texas limited liability company with its principal place of business in Houston, Texas. Id. ¶ 6. East Resources, Inc. ("East Resources"), a nonparty to this action, is a Pennsylvania Corporation with its principal place of business in Warrendale, Pennsylvania. Id. ¶ 4. East Resources engaged in oil and gas exploration and production, has acted as an oil and gas operator, and owned 650,000 acres in the geological formation known as the Marcellus Shale Formation. Id.

Starting in 1994, Bradford began entering into agreements with East Resources in connection with oil and gas projects, which included drilling oil and gas wells and operation of a natural gas processing plant. Id. at ¶ 8. Since 1994, Bradford and its related entities have raised over $270,000,000 from investors. Id. at ¶ 11; ECF No. 105, ¶ 11. Since 1994, Bradford has also acquired working interests in more than 1,000 oil and natural gas wells, as well as interest in natural gas processing plants, natural gas pipelines, royalty interests, and mineral rights. Id.

Bradford Drilling was formed in 2009 as part of a joint venture with East Resources to drill oil and gas wells in Bradford, Lycoming, Sullivan, and Tioga counties in Pennsylvania. ECF No. 105, ¶ 12. Bradford Energy prepared a private placement memorandum seeking investors to invest in Bradford Drilling, and thereby obtain limited partnerships interests. ECF No. 96, ¶ 13; "Supplement No. 1 for the Bradford Drilling Associates XXVII, L.P. Confidential Private Placement Memorandum, June 29, 2009 ("Private Placement Memorandum"). Securities firms would bring their clients to invest in Bradford Energy's projects. ECF No. 105, ¶ 14. The Private Placement Memorandum was required to be disclosed to potential investors under Commodity and Securities Exchange "Regulation D," codified at 17 C.F.R. ¶¶ 230.500-508. ECF No. 105, ¶ 15. In its Private Placement Memorandum, Bradford Energy included a section titled, "General Risks of the Oil and Natural Gas Business," which included the following statement:

Speculative Nature of Investment. Oil and natural gas drilling and production is an inherently speculative activity. Drilling for natural gas and oil involves a substantial risk of investment loss. There is always the risk that drilling activity may result in dry holes or wells that do not produce oil or natural gas in sufficient quantities to return the investment made. There is also substantial risk that the price of oil and natural gas, being volatile, may decrease. There is the possibility of drilling unproductive wells and the further possibility of drilling wells, though productive, do not produce oil or natural gas in sufficient quantities to return capital invested or a profit thereon.

Private Placement Memorandum, at 9, ECF No. 96-3, at 8 (ECF No. 96, ¶ 15; ECF No. 105, ¶ 15). It also included a section titled, "Specific Risks of the Partnership," which explained certain risks, in part, as follows:

We Have Limited Experience in Drilling to the Marcellus Shale. The managing general partner has limited experience in completing wells in the Marcellus Shale. As of December 31, 2008, the managing general partner and affiliated investment partnerships have drilled 5 wells to the Marcellus Shale, 4 of which ha[ve] been completed and are producing, but have been producing foronly a short period of time. . . . Also, other operators in the Appalachian Basin have limited experience in drilling wells to the Marcellus Shale. Thus, we have much less information with respect to the ultimate recoverable reserves and the production decline rate in the Marcellus Shale than we have in connection with other more traditional oil and natural gas wells in the Appalachian Basin.

Operator Has Limited Experience Drilling Horizontal Wells in Tioga County, Pennsylvania. East Resources has drilled and completed only one horizontal well into the Marcellus Shale in Tioga County, Pennsylvania and therefore has limited experience and information regarding the Marcellus Shale in the area where the partnership's wells will be located.

. . .

Marcellus Wells Are Susceptible to Completion Problems. Wells drilled to the Marcellus Shale are susceptible to mechanical problems associated with the drilling and completion of the wells, such as casing collapse and lost equipment in the wellbore. In addition, the fracing of the Marcellus Shale will be more extensive and complicated than fracing wells that do not target shale formations. Completion problems may add unexpected costs to the wells or cause their total loss

. . .

Partnership Will Not Control Wells. Control of operation of the wells will vest with East Resources and not with the partnership. The partnership expects that it will surrender control of well operations to the operators even in cases where it owns a 50% or more working interest in any of the wells. It is expected that East, alone or in conjunction with their affiliates, will control all of the wells and, therefore, will have the power to make decisions which may not be in the partnership's best interests.

Private Partnership Memorandum, at 5, 7, ECF No. 96-3, at 4, 6 (ECF No. 96, ¶ 16; ECF No. 105, ¶ 16). Approximately 200 investors acquired limited partnerships in Bradford Drilling, contributing $20,000,000. ECF No. 96, ¶ 17; ECF No. 105, ¶ 17. Bradford Drilling's initial goal was to raise enough money to obtain a 25% ownership interest in eleven wells, but only raised enough to obtain a 20% interest in nine wells. ECF No. 96, ¶¶ 18-19; ECF No. 105, ¶¶ 18-19.

Eight of the nine wells that East Resources planned to drill were located in close proximity to one another in the northeast corner of Tioga County, in Jackson Township. ECF No. 96, ¶ 21. The ninth well, which is the subject of this litigation, was located in the southeast corner of Tioga County in Union Township. ECF No. 96, ¶ 22. The ninth well is designated asDrill Site Fitch 115 1H, referred to as the "Fitch Well." Ex. B to Cost Plus Drilling and Operating Agreement, Aug. 31. 2009, ECF No. 96-6, at 9. East Resources characterized the Fitch Well as an "exploration well" in its daily drilling report. ECF No. 96, ¶ 23. The cost to drill and complete the Fitch Well was approximately $5,000,000. ECF No. 105, ¶ 23. Pursuant to its 20% interest in the nine wells, Bradford Drilling invested approximately $1,000,000 into the drilling and completion of the Fitch Well. Id. Bradford Drilling retained Mike Hogan, a petroleum engineer with Hogan Energy Consulting, to review East Resource's plan for the drilling program. ECF No. 96, ¶ 24. Mr. Hogan did not express concerns about any of the wells East Resources planned to drill. Id. at ¶ 52. However, Mr. Hogan explained potential risks. and reminded Bradford to caution potential investors that natural gas drilling is highly speculative activity. ECF No. 96, ¶ 25; ECF No. 105, ¶ 25.

The Operating Agreement

Once the funds for investing were raised, Bradford Drilling and East Resources entered into a Cost Plus Drilling and Operating Agreement dated August 31, 2009 ("Operating Agreement"). ECF No. 96, ¶ 26. Bradford Drilling and East Resources had previously entered into twenty-six agreements prior to the August 31, 2009 Operating Agreement. ECF No. 105, ¶ 108; ECF No. 111, ¶ 108. East Resources was defined as the "Operator" and Bradford Drilling as the "Non-Operator." ECF No. 96, ¶ 29. The Fitch Well was identified as one of the wells in the drilling program intended to be drilled within the two-year "Primary Term" of the Operating Agreement. ECF No. 96, ¶ 27; ECF No. 105, ¶ 27. The Operating Agreement was not a standard form joint operating agreement used by the American Association of Petroleum Landmen; rather, it was the result of negotiations between Bradford Drilling and East Resources.ECF No. 96, ¶ 28; ECF No. 105, ¶¶ 28, 108; Rockdale's Resp. to Bradford's Add'l Mat. Facts, ECF No. 111, ¶ 108.

With respect to each well, Bradford Drilling agreed to pay East Resources its 20% pro rata share of the costs of the well plus an additional 15% of those costs. ECF No. 96, ¶ 30; Op. Agr. ¶ 4(a). Paragraph 5(a) of the Operating Agreement provides in part as follows:

In consideration of the payments to be made hereunder, and unless otherwise agreed to by the Parties, Operator undertakes to drill or cause to

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