EQT Production Company v. Magnum Hunter Production, Inc.

Filing 107

MEMORANDUM OPINION & ORDER: IT IS ORDERED as follows: 1. EQTs objection to Magnum Hunters defense that EQTs claims from the 2002-2010 period are time-barred [DE 97 , p. 7-8] is OVERRULED. In addition, FOA's requiring parties to bring claims wit hin 24 months are EXCLUDED for 2002-2010 time period. Magnum Hunter will be permitted to make a laches defense as to the other FOAs for this time period; 2. EQT's request for data on FOAs during 2002-2010 period is GRANTED IN PART AND DENIED IN PART. For the FOAs not excluded by this order, Magnum Hunter must supply information to EQT; 3. EQTs objection to Magnum Hunters defense of overpayment [DE 97 , p. 7] is OVERRULED. Magnum Hunter may argue it is entitled to credit for overpayment during the Mercadante Audit period; 4. EQT shall be PROHIBITED from seeking any damages amount not listed in its Complaint. Signed by Judge Joseph M. Hood on 8/31/2017.(KM)cc: COR

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF KENTUCKY
CENTRAL DIVISION at LEXINGTON
EQT PRODUCTION COMPANY,
Plaintiff,
v.
MAGNUM HUNTER PRODUCTION
COMPANY,
Defendant.

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Action No. 5:16-cv-150-JMH

MEMORANDUM OPINION
AND ORDER

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I. INTRODUCTION
Plaintiff

EQT

and

Defendant

Magnum

Hunter

long

worked

together in the oil and gas business before things soured. As the
market for oil and gas dried up, so too did the prosperous
relationship between the parties. The predecessors in interest of
EQT and Magnum Hunter had entered into 11 Farmout Agreements
(“FOAS”) over several years, and those agreements governed the
duties and obligations of each party. The meaning and extent of
those FOAs has been the focus of this litigation for more than a
year. Now, with trial fast approaching, this Court must decide
several evidentiary issues raised in trial briefs, objections and
responses, and during the final pretrial conference. [DE 91, 95,
97, 99, 100, 106].

1 

For the reasons stated herein, IT IS ORDERED that EQT’s
objections to Magnum Hunter’s defenses relating to time-barred
claims for the 2002-2010 period and overpayment for the 2011-2013
period are OVERRULED. EQT’s request for data on FOAs during the
2002-2010 period is GRANTED IN PART AND DENIED IN PART. Finally,
EQT shall be PROHIBITED from seeking damages not listed in its
Complaint.
II.

FACTUAL AND PROCEDURAL BACKGROUND

The predecessors in interest of Plaintiff EQT and Defendant
Magnum Hunter entered into 11 FOAs between 1996 and 2002 [DE 1, p.
2-5 ¶ 9]. The FOAs allowed Magnum Hunter to drill wells on lands
owned or leased by EQT and sell oil and/or gas produced from those
wells. [DE 1-1; 1-2; 1-3; 1-4; 1-5; 1-6; 1-7; 1-8; 1-9; 1-10; 111]. In exchange, Magnum Hunter agreed to pay EQT a royalty. [DE
1-1, p. 6 ¶ 4A].
After working together for several years, the parties came to
disagreements regarding certain deductions, royalties, and other
payments made under the FOAs. [DE 1]. EQT filed this lawsuit May
19, 2016 claiming Magnum Hunter breached the FOAs by, among other
things, failing to render payment for wells in production, failing
to render shut-in royalty payments, failing to escalate royalty or
overriding

royalty

percentages,

deductions. [Id.].

2 

and

making

improper

royalty

During the final pretrial conference, both parties agreed
that EQT’s claims must be split into three distinct categories:
(1) claims arising between 2002 and 2010; (2) claims under the
Mercadante Audit period of 2011-2013; and (3) claims after the
Mercadante Audit period. [DE 100; 106]. This Memorandum Opinion
and Order deals only with issues arising out of the first two
categories.
First, the 2002-2010 claims. Throughout this litigation,
Magnum Hunter has argued that the FOAs contain language timebarring EQT from bringing these claims. [DE 11, p. 14; 67, p. 9;
86, p. 6, 9-10; 100, p. 2, 7-8]. Of the 11 FOAs, seven attach an
exhibit titled “Accounting Procedure Joint Operations.” [DE 1-2,
p. 50; 1-3, p. 54; 1-4, p. 63; 1-5, p. 62;

1-8, p.

57; 1-9, p.

48; 1-10, p. 40]. This language, adopted from the Council of
Petroleum Accountants Societies (“COPAS”), contains a range of
provisions relating to payment, audits, and other issues. [Id.].
Specifically, each includes an “Adjustments” section that
purports

to

limit

when

parties

can

bring

claims

under

the

agreement. Five of the FOAs contain an Adjustments section that
provides:
“Payment of any such bills shall not prejudice the right
of any Non-Operator to protest or question the
correctness thereof; provided, however, all bills and
statements rendered to Non-Operators by Operator during
any calendar year shall conclusively be presumed to be
true and correct after twenty-four (24) months following
the end of any such calendar year, unless within the
3 

said twenty-four (24) month period a Non-Operator takes
written exception thereto and makes claim on Operator
for adjustment.”
[DE 1-2, p. 50; 1-3, p. 54; 1-4, p. 63; 1-5, p.62; 1-8,
p. 57].
Another two FOAs use similar language but exclude “working
interest ownership adjustments” from the 24-month requirement. [DE
1-9, p. 49; 1-10, p. 40]. And four FOAs do not attach the COPAS
exhibit at all. [DE 1-1; 1-6; 1-7; 1-11].
Magnum Hunter argues that the COPAS provisions prevent EQT
from bringing the 2002-2010 claims because EQT did not take written
exceptions within 24 months, as the agreements require. [DE 86;
100]. Magnum Hunter does not dispute that EQT did preserve its
claims after 2010. [DE 100, p. 3].
In response, EQT argued during the final pretrial conference
that the COPAS language does not apply to the claims at issue in
this litigation. [DE 106]. EQT also points to this Court’s July
19, 2017 Memorandum Opinion and Order (“MOO”) in support of its
position that Magnum Hunter may not make its time-bar argument.
[DE 97, p. 8]. In a footnote, the Court wrote:
Magnum Hunter also asserts that EQT’s claim for damages
dating back to 2002 is “time-barred under the contracts
themselves (and certainly would also be barred by
laches.” [DE 67 at 9]. Magnum Hunter does not elaborate
on either of these arguments. Although the Court could
simply reject Magnum Hunter’s assertions for failure to
sufficiently develop them, it will make a few brief
observations.
See McPherson v. Kelsey, 125 F.3d 989,
995-6 (6th Cir. 1997) (“[I]ssues adverted to in a
perfunctory manner, unaccompanied by some effort at
4 

developed argumentation, are deemed waived” because
“[i]t is not sufficient for a party to mention a possible
argument in the most skeletal way, leaving the court to
… put flesh on its bones”).
Kentucky’s statute of limitations for breach of contract
claims is fifteen years. The Court is not aware of any
FOA provision shortening this period.
Because the
alleged breaches date back to 2002, and because EQT filed
suit in 2016, the Court sees no evidence that these
claims are time-barred by the applicable statute of
limitations.
As for Magnum Hunter’s laches argument, Magnum Hunter
has not shown prejudice resulting from an unreasonably
delay caused by EQT.
See Plaza Condo Ass’n, Inc. v.
Wellington Corp., 920 S.W.2d 51, 54 (Ky. 1996)
(explaining that laches is “an equitable doctrine” that
“serves to bar claims in circumstances where a party
engages in unreasonable delay to the prejudice of others
rendering it inequitable to allow that party to reverse
a previous course of action”).
[DE 77, P. 21-22, n. 16].
According to EQT, this footnote precludes Magnum Hunter from
arguing EQT’s claims are time-barred. [DE 97, p. 7-8]. Magnum
Hunter disagrees and asks the Court to prohibit EQT from pursuing
its

2002-2010

claims

altogether.

[DE

100,

p.

2-3].

In

the

alternative, Magnum Hunter plans to raise a laches defense, which
EQT also claims the Court prohibited in the above footnote. [DE
97, p. 7-8].
Second, the 2011-2013 Mercadante Audit Claims. The Mercadante
Audit report lists seven exceptions that Magnum Hunter purportedly
owed

EQT.

[DE

1-14].

The

total

of

all

seven

exceptions

is

$2,367,307. [Id.]. Magnum Hunter takes issue, however, with the

5 

amounts listed in Exception 5 and Exception 6. Specifically, Magnum
Hunter argues EQT failed to list Exception 5 in its Complaint and
has since offered no proof to support the amount. [DE 1; 100, p.
3]. Second, Magnum Hunter seeks to argue that part of Exception 6
—more than $600,000 — was calculated based on natural gas liquids
(“NGLs”), a topic that this Court ruled is not at issue in this
case. [DE 77].
Without Exception 5 and part of Exception 6, the total owed
under the Audit period would be reduced by hundreds of thousands
of dollars. This is important to Magnum Hunter because, among other
reasons, it already voluntarily paid $1,833,780 to EQT (the “Cash
Payment”) as part of a previous bankruptcy proceeding. [DE 1, p.
7 ¶ 23a;

1-13, p. 59-60]. According to Magnum Hunter, the Cash

Payment exceeds the amount it actually owed EQT for the Mercadante
period. Thus, Magnum Hunter argues it is entitled to a credit
amounting to the difference.
EQT objects. [DE 97, p. 7]. EQT first argues that the amount
listed in Exception 5 was included in the total amount sought in
the Complaint. [DE 106]. Second, EQT argues that Magnum Hunter
should be prohibited from seeking a credit since Magnum Hunter
“never

identified

those

amounts

nor

produced

any

documents

supporting such a claim.” [DE 97, p. 7]. Thus, EQT argues the Court
should prohibit any offset claim [Id.]. The Court will address
each of these objections and arguments in turn.
6 

III. ANALYSIS
2002-2010 Claims
“Where

the

parties

execute

a

written

instrument,

an

unambiguous written contract, ‘will be enforced strictly according
to its terms,’” Journey Acquisition-II, L.P. v. EQT Prod. Co., 39
F. Supp. 3d 877, 887 (E.D. Ky. 2014). “Kentucky courts have held
that parties may contract for a shorter limitations period for
bringing a lawsuit” and “such contractual reductions typically
apply where the contract specifically addresses lawsuits or legal
causes of action.” Id. at 888. “[I]t is not contrary to public
policy for parties to contract for a reasonably shorter period
than that fixed by statute.” Johnson v. Calvert Fire Ins. Co., 183
S.W.2d 941, 943 (Ky. Ct. App. 1944). “Parties are at liberty to
contract for a limitation period less than the period fixed by
statute.” Munday v. Mayfair Diagnostic Lab., 831 S.W.2d 912, 914
(Ky. 1992).
The COPAS exhibits in the FOAs demonstrate an intent to limit
when the parties can bring claims. Parties are free to do so under
Kentucky law. See id. EQT and Magnum Hunter in fact did so under
seven of the 11 FOAs, which require that the non-operator make a
claim for adjustment within 24 months. [DE 1-2, p. 50; 1-3, p. 54;
1-4, p. 63; 1-5, p. 62;

1-8, p.

57; 1-9, p. 48; 1-10, p. 40]. Of

those seven FOAs, however, two contain exceptions to the 24-month

7 

requirement for claims relating to “working interest ownership
adjustments.” [DE 1-9, p. 49; 1-10, p. 40]. Another four do not
attach the COPAS provisions at all. [DE 1-1; 1-6; 1-7; 1-11].
Thus, five FOAs limit the time to bring claims without
exception. As such, EQT will be prohibited at trial from seeking
damages on those contracts for the years 2002-2010. [DE 1-2; 1-3;
1-4; 1-5; 1-8]. As for the two FOAs with exceptions for a working
interest ownership adjustment, EQT may argue at trial that such an
exception applies, and Magnum Hunter may rebut those arguments [DE
1-9; 1-10]. Finally, EQT remains free to seek damages on the four
FOAs that have no limit on time to bring claims. [DE 1-1; 1-6; 17; 1-11]. Pursuant to the Court’s ruling during the pretrial
conference, Magnum Hunter shall provide EQT the data it has
requested on the six FOAs still at issue from 2002-2010. [DE 1-1;
1-6; 1-7; 1-9; 1-10; 1-11].
This Court’s July 19 MOO does not save EQT’s position. There,
the Court made a “few brief observations” in a footnote about the
statute of limitations and laches; it did not rule that Magnum
Hunter could not rely on the plain language in the parties’
agreements. [DE 77, p. 21-22, n. 16]. The Court’s July 19 MOO also
does not prevent Magnum Hunter from making a laches defense during
trial.
Mercadante Audit Claims

8 

In its July 19 MOO, this Court ruled NGL payments did not
fall under the FOAs. [DE 77]. Yet, Magnum Hunter argued during the
pretrial conference that claims brought under the Mercadante Audit
period

contain

amounts

calculated

using

NGLs.

[DE

106].

Specifically, according to Magnum Hunter, the Audit report uses
NGLs as part of the $1,768,451 listed in Exception 6. Magnum Hunter
argues

it

does

not

owe

this

amount

since

the

FOAs

do

not

contemplate NGLs. [DE 77].
EQT has conceded in several documents that part of the
bankruptcy Proof of Claim (“POC”) and Mercadante Audit were based
on “underpayment for the sale of natural gas liquids.”

[DE 1, p.

6 ¶ 19]. Because Magnum Hunter does not owe EQT for NGLs, Magnum
Hunter is entitled to offset for any NGL payments it made to EQT
on these claims.
As for the $381,000 listed in Exception 5 of the Audit, EQT
never included this in its Complaint. [DE 1]. The total amount EQT
did claim in its Complaint -- $5,896,907 -– came directly from the
POC. [DE 1, p. 6 ¶ 19]. And the POC, which EQT attached to its
Complaint, specifically includes the Mercadante exceptions as a
basis for some of EQT’s claims. [DE 1-12]. But the $381,000 from
Exception 5 on the Mercadante Audit was nowhere on the POC and
nowhere in the Complaint. [DE 1; 1-12]. Instead, the POC and the
Complaint list a sum of $176,805 related to Exception 5. [DE 1, p.

9 

13 ¶ 59; 1-12]. Because EQT never asserted a claim for the $381,000
in Exception 5, it cannot now do so at trial.
Magnum Hunter wishes to argue that its Cash Payment satisfied
all of the Mercadante Audit claims. [DE 100, p. 3]. Indeed, without
the $381,000 listed in Exception 5 and the $607,000 from NGLs
included in Exception 6, Magnum Hunter may have already satisfied
EQT’s

claims

for

payment

during

this

period.

Despite

EQT’s

objections, Magnum Hunter may make this argument at trial. EQT may
not seek recovery of any amounts from NGLs, and it may not seek
recovery of $381,000 that was not listed in its Complaint.
IV. CONCLUSION
For the reasons stated herein,
IT IS ORDERED as follows:
(1)

EQT’s objection to Magnum Hunter’s defense that EQT’s
claims from the 2002-2010 period are time-barred [DE 97,
p.

7-8]

is

OVERRULED.

In

addition,

FOAs

requiring

parties to bring claims within 24 months are EXCLUDED
for the 2002-2010 time period. [DE 1-2; 1-3; 1-4; 1-5;
1-8]. Magnum Hunter will be permitted to make a laches
defense as to the other FOAs for this time period.
(2)

EQT’s request for data on FOAs during the 2002-2010
period is GRANTED IN PART AND DENIED IN PART. For the
10 

FOAs not excluded by this order, Magnum Hunter must
supply information to EQT.
(3)

EQT’s

objection

to

Magnum

Hunter’s

defense

of

overpayment [DE 97, p. 7] is OVERRULED. Magnum Hunter
may argue it is entitled to credit for overpayment during
the Mercadante Audit period.
(4)

EQT shall be PROHIBITED from seeking any damages amount
not listed in its Complaint.

This the 31st day of August, 2017.

11