Ronald Stewart v. Chesapeake Exploration. L.L.C. , 542 F. App'x 468 ( 2013 )

NOT RECOMMENDED FOR FULL-TEXT PUBLICATION
File Name: 13a0928n.06
Nos. 12-4457; 12-4466; 12-4517; 13-3021
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
RONALD E. STEWART, 12-4457
CATHERINE L. STEWART, FILED
Oct 30, 2013
CHARLES CAIN, et al., 13-3021 DEBORAH S. HUNT, Clerk
Plaintiffs - Appellants,
v.
CHESAPEAKE EXPLORATION, L.L.C.,
On Appeal from the United States
Defendant - Appellee, District Court for the Northern
_____________________________________ District of Ohio
CHESAPEAKE EXPLORATION, L.L.C.,
CHK UTICA, L.L.C.,
Plaintiffs - Appellees,
v.
CATLETT QUALITY PLUMBING & 12-4466
HEATING, INC., et al.,
ERIC L. HARTONG, et al., 12-4517
Defendants - Appellants,
Before: MOORE, KETHLEDGE, and STRANCH, Circuit Judges.
KETHLEDGE, Circuit Judge. This case concerns the interpretation of oil and gas leases
between numerous landowners in Ohio, on the one hand, and Chesapeake Exploration, L.L.C., on
the other. Each lease grants Chesapeake, the lessee, the right to match any third-party offer to lease
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Stewart, et al. v. Chesapeake Exploration
the land for purposes of oil and gas exploration. The landowners argue that, if Chesapeake declines
to match such a third-party offer, the landowners can terminate Chesapeake’s lease in order to enter
a new lease with the third-party—effective immediately. The district court rejected that argument.
We affirm.
I.
The landowners each own property in eastern Ohio. Between 2008 and 2010, they each
leased their oil and gas rights to Anschutz Exploration, which later assigned its interests to
Chesapeake. The relevant lease terms are the same for all the landowners here.
Each lease grants Chesapeake the exclusive right to search for, produce, and sell oil and gas
found beneath the property. The lease is effective for a “primary term” of three to five years. The
lease remains effective after the primary term as long as Chesapeake conducts operations, has a well
capable of production, or makes prescribed payments. The landowners receive rent—paid up front
for the primary term—until a well is in place. Then they receive royalties.
At issue here is Paragraph 14 of the lease, which grants Chesapeake the right to match a
third-party offer to lease the land. The landowners have received such third-party offers and
Chesapeake has refused to match them.
Chesapeake and the landowners filed separate lawsuits in the district court. Chesapeake
sought a declaration that the landowners could not terminate the existing lease if Chesapeake refused
to match a third-party offer. The landowners sought declarations that they could terminate the lease
if they accepted a third-party offer following Chesapeake’s refusal. The district court adopted
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Stewart, et al. v. Chesapeake Exploration
Chesapeake’s interpretation of the leases. The court therefore entered judgment in favor of
Chesapeake in its action, and against the landowners in theirs. The landowners appealed.
II.
We review de novo the district court’s interpretation of a lease. See Royal Ins. Co. of Am.
v. Orient Overseas Container Line Ltd., 525 F.3d 409, 421 (6th Cir. 2008). The parties agree that
Ohio law applies here and that the lease’s text, if not ambiguous, controls our interpretation of it.
See Martin Marietta Magnesia Specialties, L.L.C. v. Pub. Util. Comm’n, 954 N.E.2d 104, 110 (Ohio
2011).
Paragraph 14 states:
14. PREFERENTIAL RIGHT TO RENEW. If, at any time during the primary
term hereof, or within one (1) year from the expiration, cancellation or termination
of this Lease, Lessor receives an acceptable, bona fide third-party offer to lease the
Leasehold, in whole or part, Lessor shall promptly provide the Lessee, in writing, of
all the verifiable particulars of such third-party offer. Lessee shall have thirty (30)
days from the receipt thereof to advise Lessor, in writing, of its agreement to match
said third-party offer as to all terms and consideration; immediately thereafter,
Lessor and Lessee shall take all cooperative steps necessary to effectuate the
consummation of said transaction and the survival of said transaction through any
statutorily mandated right of cancellation thereof. Any lease or option to lease the
Leasehold, in whole or part, granted by Lessor in contravention of the purposes of
this paragraph shall be deemed null and void.
The parties agree that Paragraph 14’s first sentence (“If, at any time. . .”) requires the
landowners to notify Chesapeake of a third-party offer that arises during the primary term, and in
the case of some of the leases, an offer that arises within a year of the lease’s end. From there, the
parties diverge.
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The landowners read Paragraph 14 of the lease to impose upon Chesapeake a duty—rather
than a “preferential right,” which is what the Paragraph’s title says—to match any third-party offer
that a landowner receives during the term of Chesapeake’s lease. Specifically, the landowners note
that Paragraph 14 provides that Chesapeake “shall have thirty (30) days from the receipt thereof to
advise Lessor, in writing, of its agreement to match said third-party offer”; and the landowners
contend that the word “shall” obligates Chesapeake to match any offer that comes in. The
landowners further assert that any failure by Chesapeake to match a third-party offer amounts to a
breach of the lease, allowing the landowner immediately to terminate it.
We disagree with the landowners’ reading of this language. Paragraph 14 does not say that
Chesapeake “shall match” any third-party offer; what it says, rather, is that Chesapeake “shall have
thirty (30) days” to advise a landowner of Chesapeake’s decision to accept such an offer. What the
cited language mandates, then, is that Chesapeake have 30 days to make its decision, not what the
decision is. This point is confirmed by the Paragraph’s title, which again purports to grant
Chesapeake a “right” rather than impose on it an obligation. The point is also confirmed by the
Paragraph’s temporal scope, which extends to “one (1) year from the expiration, cancellation or
termination of this Lease[.]” Thus, under the landowners’ reading of the provision, Chesapeake
would breach the lease if Chesapeake declined to match a third-party offer made 11 months after
the lease had already expired by its terms. That reading is strange at best; whereas it would not be
strange for a lessee to have a right to renew a lease—on the same terms offered by a third
party—within a year of the lease’s expiration.
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But the landowners argue that other language in Paragraph 14 supports their reading.
Specifically, Paragraph 14 states that, if Chesapeake advises a landowner of Chesapeake’s decision
“to match said third-party offer[,]” then “immediately thereafter, Lessor and Lessee shall take all
cooperative steps necessary to effectuate the consummation of said transaction[.]” The landowners
then read “said transaction” to refer back to the third-party offer, which in turn means that, if
Chesapeake declines to accept such an offer, Chesapeake must allow the landowner to
“consummate” that “transaction” with the third party. But there are at least two problems with this
argument. First, an offer is not a “transaction,” and thus “said transaction,” as used in Paragraph 14,
refers to Chesapeake’s agreement to match a third-party offer, not the offer itself. Second, the word
“consummate” does not mean to commence performance of a contract according to its terms.
Rather, to consummate a contract is to “complet[e] . . . a contract by mutual signature.” Webster’s
Third New International Dictionary 490 (2002) (emphasis added). Thus, if Chesapeake chooses to
exercise its right to match a third-party offer, Paragraph 14 requires Chesapeake promptly to sign
an agreement to that effect with the landowner. The Paragraph does not require such an agreement
actually to take effect before the end of Chesapeake’s existing lease—much less require Chesapeake
to terminate its lease.
The landowners’ interpretation of Paragraph 14 also conflicts with several other provisions
in the lease. For example, Paragraph 3 states that “[t]his Lease shall remain in force for a primary
term of three (3) years” (emphasis added); but under the landowners’ reading the lease would
terminate before then if Chesapeake declined to match a third-party offer during that term.
Similarly, Paragraph 4 states that Chesapeake “has the option to extend the primary term of this
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Lease for one additional term of three (3) years from the expiration of the primary term of this
Lease[,]” and that “[e]xercise of this option is at [Chesapeake]’s sole discretion[.]” Under the
landowners’ reading, however, Chesapeake would have no discretion and no option to extend the
lease if it failed to match a third-party offer during the lease’s primary term. Paragraph 12 likewise
states that “this lease shall remain in force and its lease terms shall continue so long as” Chesapeake
is actively engaged in drilling operations on the subject property; but under the landowners’ reading
a landowner could order Chesapeake to remove its equipment immediately if Chesapeake declined
to match a third party’s offer.
The landowners respond that Paragraph 14 specifically addresses the parties’ obligations
once a third-party makes an offer to lease the property, and that Paragraph 14 therefore trumps all
of these other provisions once such an offer is made. As explained above, however, the landowners’
interpretation of Paragraph 14 is implausible. That their interpretation contradicts the plain terms
of these other provisions only makes it more so.
Finally, the landowners argue that, under Chesapeake’s interpretation of the lease agreement,
the landowners could never eject Chesapeake from their property—even if Chesapeake made no
effort to extract oil or gas from it, which undisputedly is the object of the agreement—so long as
Chesapeake makes the minimal “delay” payments prescribed by Paragraph 5(A) of the lease. This
concern appears more theoretical than real, at least on this record, since there is no evidence that
Chesapeake has actually thwarted a lease agreement’s purpose in this manner. Moreover, Ohio law
recognizes an implied obligation to perform a contract in good faith. See Ed Schory & Sons, Inc.
v. Soc’y Nat’l Bank, 662 N.E.2d 1074, 1082 (Ohio 1996). Here, as Chesapeake itself emphasizes,
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the interests of both parties are served by Chesapeake’s exploration and drilling upon the property
as soon as practicable. We are therefore confident that, if Chesapeake declined in bad faith to
explore or drill on a landowner’s property, and instead sought merely to hold the property
indefinitely, Ohio law would provide the landowner a remedy.
In summary, we agree with the district court that, by its terms, Paragraph 14 does not grant
the landowners a right to terminate their leases, but instead grants Chesapeake a “preferential right
to renew” them. And because the district court correctly interpreted the lease as a matter of law, it
did not—as the landowners separately argue here—abuse its discretion when it stayed discovery
(with respect to parol evidence) pending its interpretation of the lease on summary judgment. See
Hahn v. Star Bank, 190 F.3d 708, 719 (6th Cir. 1999).
The district court’s judgments are affirmed.
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