Lewis et al v. Enerquest Oil and Gas, LLC et al

Filing 40

MEMORANDUM OPINION. Signed by Honorable Susan O. Hickey on January 13, 2014. (cnn)

IN THE UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF ARKANSAS
EL DORADO DIVISION

BRYANT LEWIS; HELOISE LEWIS;
BARRY CARTER, TOR, INC.;
LEWARK, LLC; TONY ALLEN;
MARY J. ALLEN; JAMES MODISETTE;
LINDA WARE BAILEY; KENNETH WARE;
DOROTHY WARE; MARY FRANCES
WARE PHILLPS; NORMA SULLIVAN;
TRINA LOWERY; WILLIAMS LOWERY;
HARRY KOLB REVOCABLE TRUST; POLLY
FOOTE; PATRICIA SWANSON; JEROME
CAMP; PAMELA C. WARREN;
CASSIE FARRAR; and LABAN WARE

v.

PLAINTIFFS

CASE NO. 12-CV-1067

ENERQUEST OIL AND GAS, LLC
and BP AMERICA PRODUCTION COMPANY

DEFENDANTS

MEMORANDUM OPINION
Before the Court is a Motion for Summary Judgment filed on behalf of Defendants
EnerQuest Oil and Gas, LLC (“EnerQuest”) and BP America Production Company (“BP
America”). (ECF No. 23). Plaintiffs have responded. (ECF No. 31 & 38). Defendants have
replied. (ECF No. 35 & 39). The Court finds the matter ripe for consideration.
BACKGROUND
This case arises out of several oil and gas leases of the Chalybeat Springs Unit (“the
unit”). Plaintiffs are lessors of the unit. Defendant BP America is the current lessee. The
original operator of the unit was Amco Production. In 1996, PetroQuest became the operator.
Defendant EnerQuest became operator in late 2010 and continues to operate the unit to this date.

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In 2010, lessors became dissatisfied with PetroQuest’s lack of development of the unit.
In response, several lessors, which included four of the Plaintiffs in the instant suit as well as
lessors who are not parties to this suit, filed a petition before the Arkansas Oil and Gas
Commission (“AOGC”) seeking to have the unit dissolved. The AOGC held two hearings on
the matter in September and October of 2010.
In the September hearing, the parties discussed PetroQuest’s lack of development of the
unit. Tony Allen (“Allen”), a party in the AOGC proceeding and a plaintiff in this suit, reported
that he made several demands on PetroQuest to develop the unit. PetroQuest admitted that there
had been little development of the unit in the past but stated that it anticipated future
development. Defendant EnerQuest was not present at the September hearing because it was
not the operator of the unit at that time. At the close of the September hearing, instead of ruling
on the application, the AOGC decided to postpone adjudication until October so that it could
receive additional evidence.
Between the hearing dates in September and October, PetroQuest and Defendant
EnerQuest negotiated a transaction in which Defendant EnerQuest would replace PetroQuest as
operator of the unit. While Defendant EnerQuest’s operational control did not begin until
November 1, Defendant EnerQuest attended the October hearing. At the hearing, Defendant
EnerQuest stated that, because it had not received the relevant files from PetroQuest, Defendant
EnerQuest could not report how it planned to operate the unit. At the conclusion of the October
hearing, the AOGC declined to dissolve the unit because no provision in the unit agreement
required minimum production and, at that time, wells were producing.
November 2010, Defendant EnerQuest began operating the unit.

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Subsequently, in

Since becoming operator, Defendant EnerQuest and the unit working interest owners
have invested $2,724,211.01 in capital expenditures.

Defendant EnerQuest has reworked

several existing wells and drilled an additional well to enhance the value of the unit. The unit
has reported production every month except for July 2013. Specifically, during Defendant
EnerQuest’s operation of the unit and through its reworking of the existing wells, the unit
generated $1,785,843.08 of net revenue, and the royalty owners accrued $215,324.14 in
royalties.
Despite this development, the parties agree that Defendant EnerQuest has not developed
the brown dense zone. Plaintiffs allege that this formation is productive. However, according
to Defendants’s expert, Ken Fristche (“Fritsche”), drilling in the brown dense zone is not
commercially reasonable. Fritsche reported that drilling into the brown dense zone requires
horizontal well-bores. Fritsche estimated those wells can cost over six million dollars per well,
exclusive of research costs. Fritsche reported that three horizontal wells have been drilled and
completed in the brown dense zone by other operators as of June 6, 2013. However, since their
completion, two of the wells have been abandoned and one is currently shut-in. Because of the
characteristics of the brown dense zone, the expected costs, and the poor performance of the
three wells, Fristche concluded that, in his opinion, the brown dense zone was not yet a
commercially viable zone for production of oil and gas.

Fritsche stated that Defendant

EnerQuest should wait for other companies with larger acreage positions at stake to prove the
economics of the brown dense play. Fritsche also noted Defendant EnerQuest’s efforts to test
other zones of the unit. Fritsche indicated that from 1998 through the time that Defendant
EnerQuest became operator, several wells were drilled to test additional zones, all of which
were unsuccessful.

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Dissatisfied with Defendant EnerQuest’s development of the unit, Plaintiffs filed suit in
this Court against Defendants. In this case, Plaintiffs request the Court to partially cancel the
leases as to all formations not currently producing. Plaintiffs assert that cancellation of the
leases is warranted because Defendants breached the implied covenant to develop the unit.
STANDARD OF REVIEW
The standard of review for summary judgment is well established. The Federal Rules of
Civil Procedure provide that when a party moves for summary judgment: “The court shall grant
summary judgment if the movant shows that there is no genuine dispute as to any material fact
and the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a); Krenik v.
County of LeSueur, 47 F.3d 953 (8th Cir.1995). The Supreme Court has issued the following
guidelines for trial courts to determine whether this standard has been satisfied:
The inquiry performed is the threshold inquiry of determining whether there
is a need for trial-whether, in other words, there are genuine factual issues
that properly can be resolved only by a finder of fact because they may
reasonably be resolved in favor of either party.
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250 (1986). See also Agristor Leasing v. Farrow,
826 F.2d 732 (8th Cir. 1987); Niagara of Wisconsin Paper Corp. v. Paper Indus. UnionManagement Pension Fund, 800 F.2d 742, 746 (8th Cir. 1986). A fact is material only when its
resolution affects the outcome of the case. Anderson, 477 U.S. at 248. A dispute is genuine if
the evidence is such that it could cause a reasonable jury to return a verdict for either party. Id.
at 252.
The Court must view the evidence and the inferences that may be reasonably drawn from
the evidence in the light most favorable to the nonmoving party. Enterprise Bank v. Magna
Bank, 92 F.3d 743, 747 (8th Cir. 1996). The moving party bears the burden of showing that
there is no genuine issue of material fact and that it is entitled to judgment as a matter of law. Id.
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The nonmoving party must then demonstrate the existence of specific facts in the record that
create a genuine issue for trial. Krenik, 47 F.3d at 957. A party opposing a properly supported
motion for summary judgment may not rest upon mere allegations or denials, but must set forth
specific facts showing that there is a genuine issue for trial. Anderson, 477 U.S. at 256.
DISCUSSION
Defendants argue that Plaintiffs cannot secure a cancellation of the leases because
Plaintiffs failed to give Defendants notice of a breach of the implied covenant. Plaintiffs do not
dispute that notice is required but argue that Defendants were notified in writing when Plaintiffs
filed an application before the AOGC. 1 Plaintiffs additionally argue that Allen’s demands to
PetroQuest gave Defendants notice of a breach.
The parties do not cite any case law discussing the notice requirements for cancellation of
an oil and gas lease for the breach of an implied covenant. The Court also had difficulties
finding such an Arkansas case. However, in Stephens Production Co. v. Johnson, the Arkansas
Supreme Court briefly discussed the notice requirement in a concurring opinion. The Arkansas
court stated that “the lessor [should] notify the lessee that if a well is not drilled within a certain
reasonable period of time, the lease will be cancelled.” 311 Ark. at 208, 842 S.W.2d at 853
(Wright, J., concurring). Additionally, the Arkansas court stated that the goal of the notice
requirement is to help prevent litigation, which should be an objective of the judicial system. Id.
at 209, 842 S.W.2d at 853. In extending beyond Arkansas law, the Eighth Circuit has stated that
“[a]n oil and gas lease is recognized and protected property interest [and a] cancellation of an oil
and gas lease affects a forfeiture of that interest.” Superior Oil Co. v. Devon Corp., 604 F.2d
1

The Court notes that there is a debate among courts whether notice may be waived. See, e.g., Superior Oil Co. v.
Devon Corp., 604 F.2d 1063, 1069 (8th Cir. 1979); Compare Byrd v. Bradham, 280 Ark. 11, 14-15, 655 S.W.2d
366, 368 (1983) with Stephens Production Co. v. Johnson, 311 Ark. 206, 208, 842 S.W.2d 851, 853 (1992) (Wright,
J., concurring). However, Plaintiffs do not argue waiver. Plaintiffs assert that they gave effective notice.

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1063 at 1069 (applying Nebraska law). The Eighth Circuit has also noted that “[a] lessee, even
though he may be in breach of the implied covenant, should be informed of that breach, and
should be given an opportunity to redeem himself by commencing further development within a
reasonable time,” and the notice requirement is “consistent with due process and with the law’s
abhorrence of forfeitures.” Id.
In the instant case, viewing the facts in the light most favorable to Plaintiffs, the AOGC
proceedings did not give Defendants notice of a breach and a reasonable time to comply. The
October hearing arguably gave Defendant EnerQuest notice of PetroQuest’s alleged breach.
However, the October hearing did not give notice to Defendant EnerQuest of its alleged breach.
At the hearing, Defendant EnerQuest reported that its operational control of the unit would begin
on November 1. Accordingly, at that time, Defendant EnerQuest could not have been in breach
of a covenant because it had not begun operation of the unit. In other words, Plaintiffs cannot
argue that they gave Defendant EnerQuest notice of a breach in October if no breach could have
actually occurred.
Further, the Court also notes that the AOGC proceedings involved different issues and
different parties than the current case. In their application to the AOGC, the lessors asked for
dissolution of the unit. (ECF No. 32-2). The lessors did not request cancellation of their leases. 2
Further, only four of the twenty-two Plaintiffs in the instant suit were named in the AOGC
proceedings. Therefore, the Court finds that the AOGC proceedings did not give notice to
Defendant EnerQuest.
Plaintiffs additionally argue that notice was given by Allen. However, again, at the time
Allen demanded development of the unit, PetroQuest was allegedly in breach of the covenant,

2

The Court notes that cancellation of the leases was discussed at the AOGC hearing. However, the commissioners
questioned their own jurisdictional authority to cancel a lease.

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not Defendant EnerQuest.

Defendant EnerQuest’s operational control of the unit had not

commenced. Thus, no breach had occurred, and no notice could have been given.
Accordingly, the Court concludes that Plaintiffs failed to give Defendants notice of
Defendant EnerQuest’s breach and a reasonable time to comply with the covenant. The notice
requirement imposed on Plaintiffs is consistent with due process given Defendants’s property
interest at stake. Because Plaintiffs did not give Defendants notice, the Court need not address
the merits of whether Defendants breached the implied covenant to develop the leasehold.
CONCLUSION
For the reasons stated above, the Court finds that Defendants’s Motion for Summary
Judgment (ECF No. 23) should be and hereby is GRANTED. Accordingly, Plaintiffs’s claims
are DISMISSED. Plaintiffs’s Motion for a Jury Trial (ECF No. 18) is now MOOT. An order of
even date consistent with this Opinion shall issue.
IT IS SO ORDERED, this 13th day of January, 2014.
/s/ Susan O. Hickey
Susan O. Hickey
United States District Judge

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