Opinion
Nos. 14 MO 0019 14 MO 0020.
06-28-2016
BURKHART FAMILY TRUST, Plaintiff–Appellee, v. ANTERO RESOURCES CORP., et al., Defendants–Appellants.
Ethan Vessels, Fields, Dehmlow & Vessels, LLC, Marietta, OH, for plaintiff-appellee Burkhart Family Trust. John Kevin West, Lyle B. Brown, Melanie Morgan Norris, Steptoe & Johnson PLLC, Columbus, OH, for defendant-appellant Antero Resources Corp. Richard A. Yoss, Ryan M. Regel, Yoss Law Office, Woodsfield, OH, for defendant-appellant Tri–County Resources.
Ethan Vessels, Fields, Dehmlow & Vessels, LLC, Marietta, OH, for plaintiff-appellee Burkhart Family Trust.
John Kevin West, Lyle B. Brown, Melanie Morgan Norris, Steptoe & Johnson PLLC, Columbus, OH, for defendant-appellant Antero Resources Corp.
Richard A. Yoss, Ryan M. Regel, Yoss Law Office, Woodsfield, OH, for defendant-appellant Tri–County Resources.
CHERYL L. WAITE, J., GENE DONOFRIO, J., and MARY DeGENARO, J.
OPINION
WAITE, J.
{¶ 1} Appellants Tri–County Resources ("Tri–County") and Antero Resources Corp. ("Antero") appeal a November 3, 2014 Monroe County Common Pleas Court judgment which determined that wells located on Appellee Burkhart Family Trust's property are not producing oil and gas in paying quantities. As a result, the trial court deemed the oil and gas lease forfeited. Appellants collectively argue that: (1) the trial court improperly placed the burden of proof on the wrong party at trial, (2) the trial court's decision is against the manifest weight of the evidence, and (3) the trial court erroneously denied their Civ.R. 41(B)(2) motion.
{¶ 2} As the trial court erroneously placed the burden of proof on Appellants based on all of the evidence of record, Antero's fourth assignment of error and Tri–County's second assignment have merit. The remaining assignments of error are moot. Accordingly, the judgment of the trial court is reversed.
Factual and Procedural History
{¶ 3} Cyril T. and Rosemary S. Burkhart own 179 acres of property in Seneca Township, Monroe County. In February of 1980, the Burkharts entered into an oil and gas lease with Chief Petroleum. The lease involved 177 acres of the Burkharts' property. Chief Petroleum drilled two wells on the property, both of which produced oil and gas. In accordance with the lease, Chief Petroleum paid royalties to the Burkharts. Sometime thereafter, Chief Petroleum assigned the lease to Mutual who continued to pay royalties to the Burkharts. In February of 1987, Mutual assigned the lease to Tri–County. In addition to obtaining mineral rights, Tri–County acquired ownership of both wells. Tri–County is a sole proprietorship owned by Richard Sulsberger.
{¶ 4} Tri–County continued paying royalties to the Burkharts for production of oil and gas. Tri–County receives payment from the gas company, Gather Co., and then calculates the Burkharts' royalties and sends them a check. In addition to the royalty check, Tri–County sends handwritten production summaries. As for the oil royalties, the oil company, Ergon, pays the Burkharts directly and Tri–County is not involved in the process. In addition to royalties, the Burkharts receive free gas in accordance with the lease.
{¶ 5} Mr. Burkhart assisted Tri–County in operating the well. He would often pump the well and adjust the gauges to ensure that sufficient gas was produced in an effort to maximize his royalties. Mr. Burkhart continued to help operate the well until he became ill. Afterward, his son, Cyril A. Burkhart, assisted in operating the well.
{¶ 6} In May of 2001, Mr. and Mrs. Burkhart transferred their property, including the mineral rights, to their son, Cyril A. Burkhart. In November of 2001, Cyril A. Burkhart transferred this property to the Burkhart Family Trust. After the transfer, the Burkharts continued to live on the property and failed to inform Tri–County that the property had transferred. Accordingly, Tri–County continued to send the royalty checks to Mr. and Mrs. Burkhart, who cashed or deposited all checks.
{¶ 7} In June of 2012, Tri–County assigned deep rights to G–R for all formations below 4,000 feet subsurface down to 500 feet below the base of Utica shale; Tri–County retained the shallow rights and ownership of the wells. Shortly thereafter, G–R assigned these deep rights to Antero.
{¶ 8} In June of 2013, the Burkhart Family Trust filed a complaint against Tri–County and Antero seeking a declaratory judgment that the lease had been forfeited due to a lack of production in paying quantities. The complaint was based on Tri–County's failure to report production to the Ohio Department of Natural Resources ("ODNR"). Shortly thereafter, both parties filed respective motions for summary judgment and both were denied by the trial court. Bench trial began on September 10, 2014. The trial court found in favor of the Burkhart Family Trust and this timely appeal followed.
{¶ 9} Antero and Tri–County have each filed their own brief in this matter. Although there are some differences, their assignments of error are essentially the same, thus are addressed together. Because one issue in each appears dispositive of this matter, it will be addressed out of order. Antero's Fourth Assignment of Error
THE TRIAL COURT ERRED AS A MATTER OF LAW WHEN IT PLACED THE BURDEN OF PROOF ON DEFENDANTS AT TRIAL.
Tri–County's Second Assignment of Error
THE TRIAL COURT IMPROPERLY SHIFTED THE BURDEN OF PROOF ONTO THE DEFENDANTS–APPELLANTS.
{¶ 10} In these assignments, Tri–County and Antero collectively argue that the trial court improperly placed the burden of proof on them at trial. As the Burkhart family brought the declaratory judgment action, Tri–County and Antero argue that the family trust bears the burden of proving a lack of production in paying quantities. Despite the fact that Appellee Trust had the burden to prove their claims, Appellants argue that the trial court found that Tri–County had failed to produce evidence to demonstrate that the wells are producing in paying quantities and that Tri–County's owner Richard Sulsberger's opinion concerning the wells' profitability is unsupported by the evidence.
{¶ 11} The Burkhart family on behalf of the Trust does not directly address this argument. However, it can be inferred from their general arguments that they believe that the failure of Tri–County and Antero to produce evidence of expenses prevented the Burkharts from going forward with their case at trial. Hence, it appears they seek to shift the burden of proof to Appellants.
{¶ 12} While this appeal involves an oil and gas lease, its resolution turns on the Rules of Civil Procedure rather than substantive oil and gas law. Specifically, resolution of this case hinges on who held the burden of proof. Although the trial court never specifically stated on which party to impose the burden of proof in this matter, it is clear from the record that the trial court did shift the burden of going forward with proof to Appellants. For instance, the trial court found that Mr. Sulsberger had presented "no credible evidence to support his blanket assertion" that the wells remain profitable. (11/3/14 J.E., p. 7.) Additionally, the trial court found that Mr. Sulsberger:
[D]oes not keep any particular business ledger nor does he have any electronic bookkeeping software. He does not keep a list of the income versus expenses for his company. He said he keeps various notes and papers concerning his business operations in a box. Nonetheless, Mr. Sulsberger consistently and plainly testifies that these two (2) wells are "profitable."
(11/3/14 J.E., p. 5.) These findings are among the many that show the trial court believed Appellants bore the burden of proving that the wells are profitable. However, this position is inconsistent with Ohio law.
{¶ 13} As stated by the Fourth District, "[t]he burden of proof question is not controlled by substantive oil and gas law, but rather procedure." Positron Energy Resources, Inc., 4th Dist. No. 07CA59, 2009-Ohio-1208, 2009 WL 690583, ¶ 18. The party who asserts a claim carries the burden of proof. Id. at ¶ 19. See also Weisant v. Follett, 17 Ohio App. 371 (7th Dist.1922) (the plaintiff held the burden of proving that the well was not producing in paying quantities); Moore v. Adams, 5th Dist. No. 2007AP090066, 2008-Ohio-5953, 2008 WL 4907590 (the plaintiff held the burden of proving nonproduction).
{¶ 14} The record demonstrates that the Trust's complaint sought forfeiture of the lease based on the Burkharts' contention that the wells failed to produce in paying quantities. As the Burkhart family brought the claim on behalf of the Trust, it is clear that they had the burden to prove that the wells are no longer profitable. The question becomes whether that burden was met, here.
{¶ 15} At trial, the Burkhart family presented only one witness, Mr. Sulsberger. The Burkhart family relies on certain aspects of Mr. Sulsberger's testimony to support their argument that the wells are not profitable. However, as Appellee points out, the trial court found Mr. Sulsberger lacked credibility. The court stated: "there exists a plethora of evidence before this Court that calls into question his testimony as well as his credibility." (11/3/14 J.E., p. 7.) The Burkharts argue that because the trial court found him to be an incredible witness we are to construe his testimony against Appellants. Contrary to the Burkhart family's argument, when a witness has been found to lack credibility, none of that witness' testimony is to be considered. In order to affirm the trial court's ruling, we must find that this record reveals that the Trust presented evidence the wells failed to produce in paying quantities. Mr. Sulsberger clearly testified that the wells continued to so produce. The trial court disbelieved him, but that does not lead to the conclusion that Mr. Sulsberger's testimony is evidence of the opposite, as Appellee suggests. Instead, it leaves Appellee with no credible witness and no evidentiary value to that testimony, at all.
{¶ 16} This record clearly shows that the wells produced oil and gas. The record is replete with evidence demonstrating production, including a year-to-year chart showing the total production in both dollars and MCF (Exh. 27), production statements and check stubs from Columbia Gas (1987–2001) and Gather Co. (2002–2013) (Exh. 45–71), and a check stub for oil royalties (Exh. 43). This evidence was acknowledged by the trial court: "but the way I'm looking at this, with all due respect, there's production, evidence of, there's profit." (9/10/14 Tr., p. 144.) The standard is not mere production, however, it is whether there was production in paying quantities. As the trial court explicitly found that the wells produced, we next turn our focus to evidence of "paying quantities."
{¶ 17} The term "paying quantities" is defined as production of "quantities of oil or gas sufficient to yield a profit, even small, to the lessee over operating expenses, even though the drilling costs, or equipping costs, are not recovered, and even though the undertaking as a whole may thus result in a loss." Blausey v. Stein, 61 Ohio St.2d 264, 265–266, 400 N.E.2d 408 (1980).
{¶ 18} Several Ohio courts, including this Court, have determined that the lessee has discretion to determine whether a well is profitable. See Bohlen v. Anadarko E & P Onshore L.L.C., 4th Dist., 2014-Ohio-5819, 26 N.E.3d 1176 ; Hupp v. Beck, 7th Dist., 2014-Ohio-4255, 20 N.E.3d 732 ; Smith v. North East Natural Gas Co., 5th Dist. No. 86AP030016, 1986 WL 11337 (Sept. 30, 1986) ; Blausey, supra. Although the lessee maintains such discretion, the determination of whether a well is profitable cannot be arbitrary. Hupp at ¶ 103. Courts do impose a good faith standard on the lessee.Id. Accordingly, "when bona fide, [a lessee's judgment] is entitled to great weight in determining whether the gas is in fact produced in paying quantities." Id., citing Weisant v. Follett, 17 Ohio App. 371 (7th Dist.1922).
{¶ 19} However, we must bear in mind that while the lessee's decision in this regard must be bona fide and made in good faith, a lessee nevertheless holds significant discretion:
The fact that it is questionable whether oil wells on land held under a lease operative only so long as oil or gas should be found in paying quantities will ever yield a reasonable profit on the investment, is not sufficient ground for vacating the lease; the lessee is the sole judge on this question, and so long as he can make a profit therefrom, he will be permitted to do so.
Smith, supra, at *2.
{¶ 20} Despite this standard, the Burkhart family on behalf of the Trust seeks for us to impose a new standard which is more favorable to their position. The Trust proposes several factors they would have us apply to guide a court's determination of whether a lease is profitable; however, none of these factors originate from a statute or caselaw. Importantly, these factors directly conflict with the current standard. The Burkharts were required to provide evidence that production did not meet the paying quantities standard sufficient to overcome the lessee's great discretion on this issue.
{¶ 21} In determining that the well failed to produce in paying quantities, the trial court relied on findings made based on Mr. Sulsberger's testimony. The court based its determination in this regard on its findings that Mr. Sulsberger underpaid the Burkharts' royalties, failed to report production to ODNR or the county auditor, showed a loss for his "operations" on his tax returns, was a poor record keeper, and had a significant financial incentive to maintain the lease as he stood to profit from G–R's deep drilling. However, only some of these findings are relevant to the issue of whether the wells produced in paying quantities and those relevant findings are not supported by the record, here.
{¶ 22} Beginning with the calculation of royalties, the record does reflect that Mr. Sulsberger had been using an incorrect method of calculating royalties. The miscalculation caused the Burkhart's royalty payments to be underpaid by no more than ten dollars. While Mr. Sulsberger's calculations were admittedly incorrect, the Burkharts are not seeking back payment of any royalties lost due to miscalculation. Regardless, any miscalculation of the Burkharts' royalties is completely irrelevant on the question of whether the wells are producing in paying quantities. Even if relevant, the record shows production in greater quantities than the Burkharts believed. Thus, the trial court improperly considered the miscalculation of royalties as a factor when determining the paying quantities standard.
{¶ 23} In regard to Mr. Sulsberger's failure to report production to ODNR and the county auditor, this finding is not determinative of this issue. First, ODNR or county auditor reports would have merely shown production. As production had already been established through other evidence, the absence of these reports is not fatal to Appellants' case. Second, as we have previously held, the failure to file production reports with ODNR does not add to the determination of whether a well is producing. Mobberly v. Wade, 7th Dist., 2015-Ohio-5287, 44 N.E.3d 313, ¶ 16.
{¶ 24} As to Mr. Sulsberger's Schedule C tax forms, these documents were not offered or admitted into evidence. Any testimony regarding these forms was provided by Mr. Sulsberger. As the trial court found Mr. Sulsberger lacked credibility, none of his testimony should be considered. Even so, while Mr. Sulsberger agreed that his Schedule C showed a loss in certain years, he testified that the form contained business expenses not just for the Burkhart wells, but also for other business projects in which he was engaged, including his rental properties. As such, Schedule C reflects that his projects as a whole were unprofitable, but does not provide information specifically regarding the Burkhart wells. It is likely that if this form provided such evidence, it would have been introduced at the hearing. Again, it was not. Thus, even if Mr. Sulsberger's testimony about his tax form has some relevance, it has no evidentiary value related to the issue of production in paying quantities.
{¶ 25} The trial court also relied on its finding that Mr. Sulsberger is a poor record keeper. Relevant to the issue at hand, Mr. Sulsberger admittedly did not keep a record of his expenses. Aside from their reliance on Mr. Sulsberger's lack of records, the Burkhart family has presented no evidence to support their belief that the well is not producing in paying quantities. There was clearly production from the wells. Aside from their own admissions that royalties were regularly received, the only evidence on the record regarding whether this production was in paying quantities comes from Mr. Sulsberger's testimony. Again, his credibility has been questioned by the trial court. Setting aside his testimony, there is absolutely no evidence in this record as to the quantity of such production or the expenses involved in production and hence, there is no evidence to support the Burkhart family's claims. And even if we consider this testimony with a jaundiced eye, it presents nothing favorable to the Trust.
{¶ 26} Mr. Sulsberger testified that his expenses are minimal and are far outweighed by his profit. He produced physical evidence showing that he has made approximately $125,000 to $130,000 (based on approximately $5,000 per year) since acquiring the Burkhart wells. He testified that his monthly bills are approximately $200 to $300 a month. Mr. Sulsberger further testified that his only reoccurring monthly cost is the electricity bill, which runs between $8 and $12 per month. The only other expenses that he has incurred have been minor maintenance costs. He testified that his most expensive maintenance cost was a one-time purchase of a pump for $600 or $700. The only other significant expense that he has incurred has been the replacement of two motors, which cost approximately $400 to $500. Other than these expenses, Mr. Sulsberger testified that maintenance costs were limited to periodically replacing belts ($10) and a one-time replacement of a capacitor ($20–25).
{¶ 27} Further, Mr. Sulsberger testified that he has no employees, thus has no payroll expenses. Instead of hiring employees, Mr. Sulsberger relied on the Burkharts and G–R employees to tend to the well. Mrs. Burkhart and Cyrus A. Burkhart supported these statements when they testified that Mr. Burkhart pumped the well at no charge and his son, Cyrus A. Burkhart, continued this practice. Mr. Sulsberger testified that a G–R employee who lived near the Burkhart property routinely checked on and maintained the well at no cost. Hence, even if the trial court disbelieved most of Mr. Sulsberger's testimony, at least some of his testimony was corroborated by Appellees. And even if the testimony was partially incredible, it cannot be inverted to actually provide proof of the opposite contention, an interpretation necessary to Appellee's position.
{¶ 28} Although not conclusive, the payments of royalties can be some evidence of production in paying quantities. See Price v. K.A. Brown Oil & Gas LLC, 7th Dist. No. 13 MO 13, 2014-Ohio-2298, 2014 WL 2466360 (the failure to pay royalties or payment of de minimus royalties is evidence of failure to produce in paying quantities); Bohlen v. Anadarko E & P Onshore LLC, 4th Dist., 2014-Ohio-5819, 26 N.E.3d 1176 (the fact that production has resulted in royalty payments is evidence of production in paying quantities). Tri–County produced check stubs from the payment of oil and gas royalties which is further evidence that the Burkhart wells are producing in paying quantities.
{¶ 29} Finally, the trial court's reliance on the finding that Tri–County stood to profit by holding onto the lease until G–R had an opportunity to complete deep drilling on the property was also irrelevant to the issue of paying quantities. It is unclear whether Tri–County has reserved an overriding royalty interest in the deep-drilling rights. Even so, whether or not Tri–County would profit from G–R's deep drilling activities has no bearing at all on the pertinent determination.
{¶ 30} While Mr. Sulsberger's lack of records is troubling and he clearly convinced the trial court that he was untruthful, the fact remains that the Burkhart family, on behalf of the Trust, had the burden of proving by means of evidence that the wells (that they admit produce) do not produce in paying quantities. In support of shifting the burden of proof to Appellants, Appellee argued at hearing that this would force them into proving the negative. It is apparent the Burkhart family had the ability to use discovery to uncover evidence necessary to prove their assertions. Instead of subpoenaing Tri–County's records or subpoenaing any other type of evidentiary records on the issue of whether paying quantities of either gas or oil were being produced, the Burkhart family insists that Appellants were required to prove the production from the wells was adequate in order to withstand their demands for termination of the lease. As the Trust has failed to meet its burden, the trial court's judgment is erroneous. Accordingly, Tri–County and Antero's argument has merit and is sustained. The judgment of the trial court on this issue is reversed.
Antero's First Assignment of Error
THE TRIAL COURT ERRED IN ENTERING A JUDGMENT IN FAVOR OF PLAINTIFF–APPELLEE.
{¶ 31} Antero's first assignment of error generally contests the trial court's decision, but provides no real legal argument. As such, there are no arguments to address, here.
Antero's Second, Third, and Fifth Assignments of Error
THE TRIAL COURT ERRED AS A MATTER OF LAW WHEN IT HELD THAT "DE MINIMIS " ROYALTIES WILL NOT HOLD AN OIL AND GAS LEASE BY PRODUCTION IN PAYING QUANTITIES.
THE TRIAL COURT ERRED AS A MATTER OF LAW WHEN IT BASED ITS FINDING OF LACK OF PRODUCTION IN PAYING QUANTITIES UPON APPELLANT TRI–COUNTY'S FAILURE TO FILE ADMINISTRATIVE REPORTS OF OIL AND GAS PRODUCTION TO OHIO DEPARTMENT OF NATURAL RESOURCES AND MONROE COUNTY AUDITOR.
THE TRIAL COURT'S JUDGMENT AND DECISION ARE AGAINST THE MANIFEST WEIGHT OF THE EVIDENCE AND A VIOLATION OF SUBSTANTIAL JUSTICE.
Tri–County's First and Third Assignments of Error
THE DECISION OF THE TRIAL COURT IS AGAINST THE MANIFEST WEIGHT OF THE EVIDENCE.
THE TRIAL COURT ERRONEOUSLY IGNORED CONTROLLING CASE LAW DEALING WITH THE PROCESS OF DETERMINING PROFITABILITY WITH REGARD TO AN OIL AND GAS LEASE FORFEITURE CLAIM.
{¶ 32} Tri–County and Antero contend that the trial court erroneously deemed the lease forfeited based on a lack of production in paying quantities. Relying on Blausey, supra, Antero argues that a lessee remains solely responsible to determine whether a well is producing in paying quantities. Even if the matter is questionable, Antero argues that the determination remains solely at the discretion of the lessee, according to Smith, supra. Further, as the lessee bears the risk of nonproduction, the lessee is permitted to attempt recoupment of the initial investment as long as any financial benefit is gained from production. See Blausey, supra. Antero notes that it is counterintuitive for a lessee to maintain a well if it is not profitable. Antero urges that the evidence shows that Tri–County has profited approximately $135,000 over the years from the Burkhart family wells.
{¶ 33} The Burkhart family responds by arguing that even though they believe the trial court used a standard that is both too lenient on Tri–County and inconsistent with Blausey, the trial court reached the correct result. The Burkhart family disagrees with our decision in Hupp, supra, and urges that it muddied the law by incorrectly giving deference to a lessee. In arguing that the trial court correctly determined that the wells failed to produce in paying quantities, the Burkhart family relies on the following: Tri–County's failure to report production to ODNR and the county auditor, royalties were incorrectly calculated, and Tri–County's IRS Schedule C indicate a loss on "operations," and maintenance costs for the wells. As we have earlier discussed, none of this provides evidence as to whether paying quantities were produced. The Trust offered no evidence on the relevant issue. Because these issues have been addressed in our holding on Antero's fourth assignment of error and Tri–County's second assignment of error, these assignments are moot.
Antero's Sixth Assignment of Error
THE TRIAL COURT ERRED WHEN IT DENIED ANTERO'S REQUEST FOR A JUDGMENT IN ITS FAVOR AND DID NOT DISMISS PLAINTIFF–APPELLEE'S COMPLAINT PURSUANT TO CIVIL RULE 41(B)(2).
{¶ 34} Antero argues that the trial court abused its discretion when it failed to dismiss the complaint pursuant to Civ.R. 41(B)(2). Antero argues that the Burkhart family failed to establish by a preponderance of the evidence that the wells were not producing in paying quantities. Antero argues that the Burkhart family focused on the years 2007 through 2011 and the evidence presented at trial demonstrated that Tri–County realized a profit during this time.
{¶ 35} Again, the Burkhart family does not specifically respond to this argument. It appears that the Burkhart family on behalf of the Trust is relying on their manifest weight arguments, here. Based on our holding on Antero's fourth assignment of error and Tri–County's second assignment of error, this issue is moot.
Conclusion
{¶ 36} Appellants collectively argue that the trial court improperly placed the burden of proving production in paying quantities on them at trial. This record demonstrates that the trial court did erroneously place the burden on Appellants. The record further establishes that the Burkhart family on behalf of the Trust presented no relevant evidence to support their claim that the wells are not producing in paying quantities. As the Burkhart family failed to meet their burden of proof, the remaining issues are moot. Accordingly, the judgment of the trial court is reversed and judgment is granted in favor of Appellants.
DONOFRIO, P.J., and DeGENARO, J., concur.