Tennant v. Range Res. Appalachia, LLC

561 F.Supp.3d 522

James S. TENNANT and Sarah J. Tennant, husband and wife, and John W. McIlvanie and Alice L. McIlvaine, husband and wife, Plaintiffs,

v.RANGE RESOURCES - APPALACHIA, LLC, Defendant.

Civil Action No. 18-1533

United States District Court, W.D. Pennsylvania.

Signed September 21, 2021

Brendan A. O'Donnell, Robert J. Burnett, Houston Harbaugh, P.C., Pittsburgh, PA, for Plaintiffs.

Alex Mahfood, Justin H. Werner, Reed Smith LLP, Pittsburgh, PA, Kevin C. Abbott, Law Office of Kevin C. Abbott, McMurray, PA, for Defendant.

MEMORANDUM OPINION

W. Scott Hardy, United States District Judge

I. INTRODUCTION

In this diversity action, Plaintiffs James S. Tennant and Sarah J. Tennant (the "Tennants") and John W. McIlvaine and Alice L. McIlvaine (the "McIlvaines") claim that Defendant Range Resources-Appalachia, LLC breached certain oil and gases leases between the parties by failing to demonstrate that post-production costs deducted from their royalty payments resulted in a net increase in the value of gas produced under those leases. Presently before the Court are Defendant's Motion for Summary Judgment and Plaintiffs’ Cross-Motion for Partial Summary Judgment and materials in support. (Docket Nos. 43-50). For the reasons that follow, Defendant's Motion will be granted, and Plaintiffs’ Cross-Motion will be denied.

II. PROCEDURAL HISTORY

Plaintiffs commenced this case in the Court of Common Pleas of Washington County, Pennsylvania by filing a Complaint on October 16, 2018. (Docket No. 1-2). Defendant removed the action to this Court on November 15, 2018, and then filed an Answer to the Complaint on December 6, 2018. (Docket Nos. 1, 6).

Following a post-discovery status conference held on January 31, 2020, the Honorable J. Nicholas Ranjan, who was the presiding judge at the time,¹ ordered the parties to cross-file motions for summary judgment pursuant to the schedule outlined in the amended case management order. (Docket Nos. 41, 42). Each party filed a timely Motion, Brief in Support and an Appendix, as well as their respective responses to same. (Docket Nos. 43-50). The matter is now ripe for disposition.

III. RELEVANT FACTS ²

The Tennants own oil and gas underlying a 99.15625 acre parcel of property in Washington County, Pennsylvania identified by Tax Parcel No. 120-007-00-00-0027-00 (the "Tennant Property"). (Docket No. 1-2, ¶ 8). The McIlvaines own oil and gas underlying the following two parcels of property in Washington County, Pennsylvania: a 22.6487 acre parcel identified by Tax Parcel No. 120-007-00-00-0026-04 (the "McIlvaine 22 Acre Property"); and a 29.98 acre parcel identified by Tax Parcel No. 120-011-00-00-0033-01 (the "McIlvaine 29 Acre Property"). (Id. , ¶¶ 13.a, 13.b).

On September 10, 2013, Plaintiffs entered into identical oil and gas leases with Defendant covering the Tennant Property, the McIlvaine 22 Acre Property and the McIlvaine 29 Acre Property (collectively, the "Leases"). (Docket Nos. 1-2, ¶¶ 9, 14, 15, Exs. A, B; 1-3, Ex. C).³ The Leases contain a royalty clause pursuant to which Defendant agreed to pay Plaintiffs "[f]or gas and other hydrocarbons produced with gas ... as royalty for the gas, saved and sold from the Leased Premises, eighteen percent (18%) of the net amount realized by [Range] for the sale and delivery of such gas." (Docket No. 1-2, Ex. A, ¶ 5(B)). The royalty clause authorizes the deduction of Plaintiffs’ pro-rata share of certain specified post-production costs. (See id. , ¶ 5(C)).

Each Lease contains an Addendum specifying that, in the event of any inconsistency between the terms and conditions in the Lease and those in the Addendum, "the provisions of the Addendum shall prevail and supersede the inconsistent provisions of the main body of this [L]ease." (Docket No. 1-2, Ex. A, Addendum). Relevant here, the Addendum contains the following royalty clause which addresses the applicability of post-production costs to royalty payments:

The royalties payable to Lessor hereunder shall never be charged with any part of the costs and expenses for exploration, drilling, development, production, storage, processing, compressing, marketing or transportation to the point of first sale of the production from the leased premises, except that Lessor's royalties shall bear its proportionate share of any severance, ad valorem, windfall profits or other excise taxes attributable to the production of oil and/or gas from the leased premises; provided, however, that any expense incurred by Lessee for the purpose of enhancing the value of the oil and/or gas or other products produced from the leased premises, or any property pooled therewith, to receive a better price and any deductions from price or volumes for processing, compressing, marketing or transportation by a purchaser of the production from the leased premises may be deducted from Lessors’ share of production so long as such deductions are based upon the Lessee's actual cost of such enhancements or charges. These deductions shall only be charged to the Lessor if they result in a net increase in the value of the oil and/or gas or other products produced from the leased premises, or any property pooled therewith. It is the intent to ensure that the Lessors receive a price that is not less than, or more than, the price received by Lessee including all enhancements received by Lessee less any charges and deductions made by a purchaser.

(Id. , Addendum, ¶ 12) (hereinafter, "Addendum ¶ 12").

Defendant placed the Tennant Property, the McIlvaine 22 Acre Property and the McIlvaine 29 Acre Property into certain drilling units. (Docket No. 1-2, ¶¶ 20-22). Based on production of those drilling units, Defendant made royalty payments to Plaintiffs. (Id. , ¶ 23). Defendant provided Plaintiffs with royalty statements accompanying the payments which showed the deduction of certain post-production costs for transportation, gathering, processing, firm capacity and purchased fuel. (Id. , ¶¶ 24-25; Docket No. 1-3, Exs. E, F). However, Plaintiffs claim that the royalty statements did not contain any "identification, demonstration or proof that any of the assessed ‘deductions’ resulted in a ‘net increase’ in the value" of the gas to substantiate the deductions. (Docket No. 1-2, ¶ 28).

Plaintiffs initiated this action against Defendant, asserting a single breach of contract claim. (See generally Docket No. 1-2). As alleged in the Complaint, Plaintiffs claim that Defendant "has breached its contractual obligations under the Leases by deducting post-production costs without demonstrating that said costs resulted in a ‘net increase in the value’ of the produced hydrocarbons."⁴ (Id. , ¶ 40) (emphasis added); see also id. , ¶ 41 (alleging that Defendant "has not demonstrated or established" that post-productions costs reflected in royalty payments to Plaintiffs resulted in a net increase in the value of the gas on which their royalties were calculated). Consequently, Plaintiffs allege that Defendant's deductions of post-production costs are improper and unauthorized by Addendum ¶ 12 and have damaged Plaintiffs. (Id. , ¶ 42).

Plaintiffs’ deposition testimony confirmed that their breach of contract claim is premised on Defendant's alleged duty to demonstrate to them that post-production costs deducted from their royalty payments resulted in a net increase in the value of the gas produced and that Defendant failed to show same.⁵ Mr. McIlvaine, who is a lawyer and negotiated the Leases on behalf of Plaintiffs,⁶ testified that "in order to take deductions, according to that No. 12 royalty clause in the addendum, [Range has] got to show us a better price and [Range has] got to show us that they enhanced the value of the oil and the gas. And [Range hasn't] done that...." (Docket No. 45-3 at 6:5-7:21, 9:14-21, 18:4-12). Mr. McIlvaine reiterated that "no one has ever showed [him] where [Range] got a better price and that [Range] enhanced the value of the oil and gas...." (Id. at 24:8-10); see also id. at 36:7-12 (confirming that Plaintiffs’ complaint and his testimony is that Range "has never proved" to Plaintiffs that it was complying with Addendum ¶ 12), 47:15-19, 49:15-18 (asserting Range must show compliance with Addendum ¶ 12).

Ms. Tennant likewise testified that it was "true" that Plaintiffs’ "primary complaint here is that Range has breached a duty to demonstrate to [them] that the deductions charged resulted in a net increase in the value of the gas." (Docket No. 45-2 at 32:17-22); see also id. at 30:15-18 (testifying "[Range] need[s] to show" that post-production costs resulted in a net increase in value of the gas). Additionally, Mr. Tennant testified that his "understanding" of the Leases was that if "Range can't provide [Plaintiffs] with evidence that [it] got the best price for [Plaintiffs’] gas and [Range] can't provide ... evidence that ... [it] enhanced the value of the gas ... [it's] breaching the [Leases]." (Docket No. 45-1 at 24:13-19); see also id. at 28:18-21 ("I'm saying, Range, prove to me that you're increasing – enhancing the value of that gas, prove to me that you're getting the best price ..."). In Mr. Tennant's estimation, "the burden is on Range" to show that post-production costs enhanced the value of the gas. (Id. at 27:4-5, 30:25-31:1, 32:4-5; 45:9-10).

Despite Mr. Tennant's testimony that the burden is on Range, Mr. McIlvaine acknowledged that "the person [who's] claiming" a breach of contract has the burden to prove that the contract has been breached. (Docket No. 45-3 at 51:3-9). Mr. McIlvaine conceded that "there [are] no words in [Addendum ¶ 12] that says Range must prove" that the post-production costs reflected in the royalty payments resulted in a net increase in the value of the gas produced under the Leases. (Id. at 26:20-24). Again, when asked whether there is anything "in the words of [the] Lease that requires Range to show [him a net increase] on any particular form or royalty statement or anywhere," Mr. McIlvaine responded, ...