EQT Production Company v. Magnum Hunter Production, Inc.
Filing
77
MEMORANDUM OPINION & ORDER: (1) GRANTING Magnum Hunter Production Company's 23 MOTION for Partial Summary Judgment; (2) GRANTING Magnum's 62 MOTION for Summary Judgment as to the claim for unjust enrichment in Count VII, the req uests in Counts VI, VIII, IX & X for prejudgment interest declaratory relief & injunctive relief arising from the unjust enrichment claim & the request for an accounting in Count VII as it pertains to all substantive counts; DENYING as to Counts I th rough V & the corresponding requests for prejudgment interest, declaratory relief & injunctive relief set forth in Counts VI, VIII, IX & X; (3) GRANTING EQT Production Company's 63 MOTION for Summary Judgment as to the claim for breach of cont ract from 2015 to present set forth in Count I as well as the corresponding request for prejudgment interest in Count VI & DENYING as to the claim for unauthorized deductions on NGL royalties in Count V & the corresponding request for prejudgment interest in Count VI. Signed by Judge Joseph M. Hood on 7/19/17.(KJR)cc: COR
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF KENTUCKY
CENTRAL DIVISION at LEXINGTON
EQT PRODUCTION COMPANY,
)
)
)
)
)
)
)
)
)
)
Plaintiff,
v.
MAGNUM HUNTER PRODUCTION
COMPANY,
Defendant.
Action No. 5:16-cv-150-JMH
MEMORANDUM OPINION
AND ORDER
****
I. INTRODUCTION
This matter is before the Court upon Defendant Magnum Hunter
Production Company’s Motion for Partial Summary Judgment [DE 23]
and Motion for Summary Judgment [DE 62], as well as Plaintiff EQT
Production Company’s Motion for Partial Summary Judgment [DE 63].
All Motions have been fully briefed a
nd are ripe for the Court’s review.
67, 68, 71, 72].
that
Magnum
[DE 27, 28, 48, 52, 62, 63,
For the reasons stated herein, IT IS ORDERED
Hunter’s
Motion
for
Partial
Summary
Judgment
is
GRANTED, while the Motion for Summary Judgment is GRANTED IN PART
AND DENIED IN PART.
EQT’s Motion for Partial Summary Judgment is
GRANTED IN PART AND DENIED IN PART.
II.
FACTUAL AND PROCEDURAL BACKGROUND
1
EQT and Magnum Hunter are in the business of producing and
selling oil and natural gas.
[DE 1, p. 1-2, ¶ 1-6].
Between 1996
and 2002, the predecessors in interest of both companies entered
into
eleven
Farmout
Agreements
(“FOAs”)
which
allocated
exploration and drilling rights on lands situated in Eastern
Kentucky.1
[Id. at p. 2-5, ¶ 9].
Specifically, 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.2
[DE 1-1, 1-2, 1-
3, 1-4, 1-5, 1-6, 1-7, 1-8, 1-9, 1-10, 1-11].
In exchange, EQT
would receive a royalty, amounting to a percentage of “8/8 of the
gross proceeds received from the sale of oil and/or gas produced
from wells drilled hereunder without deductions of any kind.”3
[DE
1-1, p. 6, ¶ 4A].
1
Having established that EQT’s and Magnum Hunter’s predecessors in
interest entered into the FOAs and that EQT and Magnum Hunter
subsequently assumed responsibility for the obligations set forth in the
FOAs, the Court will hereinafter refer to the contracting parties as EQT
and Magnum Hunter for ease of reference.
2
A farmout agreement is “[a] very common form of agreement between
operators, whereby a lease owner not desirous of drilling at the time
agrees to assign the lease, or some portion of it (in common or in
severalty) to another operator who is desirous of drilling the tract.”
Williams & Meyers, Oil and Gas Law, Manual of Terms.
“The primary
characteristic of the farmout is the obligation of the assignee to drill
one or more wells on the assigned acreage as a prerequisite to completion
of the transfer to him.” Id.
All of the FOAs obligated Magnum Hunter to drill test wells within a
given time period, while complying with a host of geological
requirements, in order to complete the transfer of rights. [See DE 11, p. 4-6, ¶ 3A-F].
3
The percentage used to calculate the royalties varies between the FOAs.
For instance, the 4/12/96 FOA reserves a royalty interest equal to 12.50%
of 8/8 of the gross proceeds, while the 12/1/98 FOA reserves a royalty
interest equal to 1/16 of 8/8 of the gross proceeds. [DE 1-1, p. 6, ¶
2
Notwithstanding the general prohibition on deductions, eight
of the FOAs specifically authorized Magnum Hunter to deduct EQT’s
“proportionate share of applicable severance tax” from the royalty
payments.4
[DE 1-1, p. 17; 1-2, p. 8-9, ¶ 4B; 1-3, p. 9, ¶ 4B; 1-
4, p. 12, ¶ 4D; 1-5, p. 12, ¶ 4D; 1-6, p. 9, ¶ 4B; 1-7, p. 40; 18, p. 8, ¶ 4D].
Two of the FOAs provided for escalation of
overriding royalties “[u]pon the payout of the first two (2) wells
drilled and completed as a well capable of production in paying
quantities.”5
[DE 1-1, p. 6-7, ¶ 4A; 1-7, p. 7-8, ¶ 4A].
All of
the FOAs required Magnum Hunter to pay EQT a shut-in fee for each
well capable of production that it closed for an extended period
of time.6
[DE 1-1, p. 8-9, ¶ 7A; 1-2, p. 11, ¶ 7B; 1-3, p. 12, ¶
4A; 1-4, p. 9, ¶ 4A]. The phrasing of the royalty provisions also varies
somewhat. For example, the 4/12/96 FOA language is rearranged in the
1/14/98 FOA to state that EQT was entitled to a percentage of the proceeds
received “by [Magnum Hunter] from the sale of oil and/or gas, without
deductions of any kind, produced from wells drilled hereunder.” [DE 12, p. 8, ¶ 4A]. However, the substance of the royalty provisions is
consistent throughout the FOAs.
4
A severance tax is “[a] tax on the removal of minerals from the ground,
usually levied as so many cents per barrel of oil or per Mcf [a thousand
cubic feet] of gas.”
Williams & Meyers, Oil and Gas Law, Manual of
Terms. It may also be “levied as a percentage of the gross value of the
minerals removed.” Id.
Two of the FOAs made no mention of severance tax deductions, but
attached and incorporated by reference an Agreement and Assignment of
Operating Rights, discussed infra, which authorized severance tax
deductions. [DE 1-1, p. 17; 1-7, p. 40].
5
An escalation clause is “[a] clause in a gas purchase contract providing
for progressive increases in the price to be paid on gas during the term
of the contract.” Williams & Meyers, Oil and Gas Law, Manual of Terms.
6
A shut-in royalty is “[a] payment made when a gas well, capable of
producing in paying quantities, is shut-in for lack of a market for the
gas.” Williams & Meyers, Oil and Gas Law, Manual of Terms.
The amount of the shut-in fee and the time required to trigger the
shut-in provision varied between the FOAs. For example, the 1/14/98 FOA
3
7B; 1-4, p. 15, ¶ 7B; 1-5, p. 15, ¶ 7B; 1-6, p. 10-11, ¶ 7B; 1-7,
p. 9, ¶ 7A; 1-8, p. 9-10, ¶ 7B; 1-9, p. 9, ¶ 7C; 1-10, p. 7, ¶ 9C;
1-11, p. 7, ¶ 9C].
With the exception of the 7/21/04 FOA which only featured a
modified MOA [DE 1-10, p. 15-38], all of the FOAs attached and
incorporated by reference an Agreement and Assignment of Operating
Rights (“AAOR”), memorializing Magnum Hunter’s right to operate
wells on the lands in question and specifying that royalties must
be paid to EQT on or before the 28th day of the month.7
[DE 1-1,
1-2, p. 21-23; 1-3, p. 24-26; 1-4, p. 29-31; 1-5, p. 29-31; 1-6,
p. 22-24; 1-7, p. 17-18; 1-8, p. 23-25; 1-9, p. 69-71; 1-11, p.
14-16].
Of those ten FOAs, six incorporated by reference a Model
Form Operating Agreement (“MOA”), which the parties modified to
include specifics about Magnum Hunter’s operations.8
[DE 1-2, p.
24-46; 1-3, p. 27-49; 1-4, p. 36-58; 1-5, p. 36-58; 1-8, p. 3253; 1-9, p. 23-46].
provided that, once a well had been shut-in for 45 days, “[Magnum Hunter]
shall pay unto [EQT], a Shut-in Royalty of Six Hundred Dollars ($600.00)
per well per year, prorated on a monthly basis.” [DE 1-2, p. 11, ¶ 7B].
By contrast, the 10/3/97 FOA imposed a shut-in royalty of only $500 per
well per year, prorated on a monthly basis once the well had been shut
in for 45 days or longer. [DE 1-7, p. 9, ¶ 7A].
7
Much like the FOAs, the language of the AAORs varies slightly. While
most of them simply set the above-mentioned payment deadline, a few of
the AAORs provide that royalties must be paid “on or before the 28the
day of the month, no later than 90 days following the month in which
production is sold.” [DE 1-4, p. 29; 1-9, p. 69; 1-11, p. 14-15].
8
The parties amended some of the FOAs in writing. [See DE 1-15]. The
amendments did not alter the provisions pertinent to this Court’s
analysis.
4
Ten of the FOAs had clauses indicating that, “[i]n the event
that there exists any conflict between the terms and conditions of
this Agreement and the provisions of any Exhibit attached hereto,
the terms and conditions of this Agreement shall control.”
[DE 1-
2, p. 15, ¶ 15H; 1-3, p. 17, ¶ 15G; 1-4, p. 20, ¶ 15G; 1-5, p. 20,
¶ 15G; 1-6, p. 15, ¶ 15G; 1-7, p. 17; 1-8, p. 13, ¶ 15H; 1-9, p.
12, ¶ 16F; 1-10, p. 11, ¶ 20J; 1-11, p. 11, ¶ 20J].
FOA did not contain a conflict clause.
The 4/12/96
Nine of the FOAs also
included the following provision:
A failure by any party hereto to exercise any right or
rights or to take any authorized action shall in no way
serve to permanently amend or modify this Agreement, nor
shall a departure from the terms and conditions of the
Agreement establish a course of conduct of amending this
Agreement. This Agreement cannot be modified except in
writing. Activities of parties cannot be construed to
modify the terms.
[DE 1-2, p. 15, ¶ 15I; 1-3, p. 17, ¶ 15H; 1-4, p. 20, ¶ 15G; 1-5,
p. 20, ¶ 15G; 1-6, p. 15, ¶ 15H; 1-8, p. 13, ¶ 15G; 1-9, p. 12, ¶
16G; 1-10, p. 10, ¶ 20F; 1-11, p. 10, ¶ 20F].
In December 2008, Magnum Hunter built a processing plant and
began transporting gas from FOA wells to that facility, where it
was converted into NGLs.
[DE 52-3 at 3-5].
This endeavor was
part of Magnum Hunter’s effort to comply with new requirements
imposed by the Federal Energy Regulatory Commission (“FERC”).9 [DE
9
Under the new FERC requirements, Magnum Hunter had to lower the BTU
content of gas produced from FOA wells or shut them in. [DE 52-3 at 35
23-4, 27-2 at 15-16].
Magnum Hunter deducted transportation and
processing costs from the NGL sales price, then used the difference
as the basis for calculating EQT’s royalty on NGLs.
maintains
that
Magnum
Hunter’s
executives
made
[Id.].
this
EQT
decision
internally, while Magnum Hunter insists that it consulted with EQT
before taking post-production deductions.10
[Id.].
After receiving payments for six years, EQT realized that it
was losing revenue and exercised its contractual right to audit
Magnum Hunter’s production records related to the FOAs.
p.
5,
¶
10-12;
1-9;
1-14].
The
Audit
Report,
[Id. at
prepared
by
Mercadante and Company, PC, reported that Magnum Hunter had failed
to pay the full amount of shut-in fees, royalties, and escalation
fees due under the terms of the FOAs. [DE 1-14]. It also indicated
that Magnum Hunter had made unauthorized deductions in calculating
the royalties owed to EQT.
[Id.].
In sum, the Report identified
net exceptions totaling $2,367,307 for the audit period of 2011 to
2013.
“Net
exceptions
in
the
amount
of
$3,620,661
identified” for the audit period of 2011 to 2013.
[Id.].
…
were
EQT was
5]. BTUs, or British thermal units, denote “[t]he amount of heat needed
to raise the temperature of one pound of water one degree Fahrenheit.”
Williams & Meyers, Oil and Gas Law, Manual of Terms.
10
Although the term “production” is a “horse of many colors,” the term
often refers to the act of bringing oil or gas to the wellhead and
severing it from the earth.
See Diamond Shamrock Exploration Co. v.
Hodel, 853 F.2d 1159, 1165 (5th Cir. 1988); see also Williams & Meyers,
Oil and Gas Law, Manual of Terms. Thus, the Court will refer to the
transportation and processing costs subtracted from EQT’s royalties as
post-production deductions.
6
entitled to $2,367,307 of that total.
[Id.].
The remainder was
allocated to KRCC Oil & Gas, LLC, EQT’s co-Farmor in the 12/11/02
FOA.
[Id.].
On December 15, 2015, Magnum Hunter filed a Chapter 11
bankruptcy petition in the United States Bankruptcy Court for the
District of Delaware.
[DE 1, p. 5, ¶ 15].
During this proceeding,
“EQT asserted a claim in the amount of $5,896,907.00 for the
unremitted
shut-in
fees,
royalties,
overriding
royalties;
underpayment for the sale of natural gas liquids; improper postproduction deductions from royalties; and other amounts related to
the [FOAs].”
[Id. at p. 6, ¶ 19; DE 1-12].
In addition to the
$2,367,307 allegedly owed to EQT for 2011 to 2013, EQT sought
additional sums for 2002 to 2010 and 2013 to 2015 “based on
production records from Magnum Hunter.”
[DE 1-14].
The parties
ultimately agreed that Magnum Hunter would pay EQT $1,833,780 for
amounts owed for natural gas between January 2011 and October 2013.
[Id. at p. 6-7, ¶ 23-24].
Although EQT withdrew the remainder of
its claims from the bankruptcy petition, it reserved the right to
pursue them in a separate proceeding.
[Id.].
Accordingly, on May 19, 2016, EQT filed the instant action
against Magnum Hunter, asserting the following claims: (1) breach
of contract for failure to render payment for wells in production;
(2) breach of contract for failure to render shut-in royalty
7
payments; (3) breach of contract for failure to escalate royalty
or overriding royalty percentages after the specified time period;
(4)
breach
of
contract
for
failure
to
escalate
royalty
or
overriding royalty percentages after proceeds from production
exceeded costs; (5) breach of contract for improper royalty and
overriding royalty deductions; (6) prejudgment interest on the EQT
cash
payment;
(7)
unjust
enrichment;
(8)
declaratory relief; and (10) injunctive relief.
accounting;
(9)
[DE 1].
Before discovery closed, Magnum Hunter moved for partial
summary judgment on the claim for unauthorized deductions relating
to NGL royalties.
In its Motion, Magnum Hunter argues that the
FOAs did not address the production of NGLs at all and that, thus,
they did not prohibit Magnum Hunter from taking post-production
deductions
in
calculating
EQT’s
royalty
payments.
In
the
alternative, Magnum Hunter asserts that it was not required to pay
royalties to EQT because it was acting as a processor, rather than
a lessee, with regard to NGLs.
Once discovery closed, the parties contacted United States
Magistrate Judge Robert E. Wier, seeking assistance in resolving
a discovery dispute.
[DE 41].
Magnum Hunter complained that it
had repeatedly asked EQT to provide evidence relating to its
damages
calculations
materials.
[DE 43].
but
received
the
Mercadante
audit
When Magnum Hunter deposed John Bergonzi,
8
only
EQT’s corporate representative, he could not explain how EQT had
calculated certain categories of damages that were not covered by
the audit, except to say that it had “brought forward” production
figures from its Enertia database.
this data to Magnum Hunter.
[Id.].
EQT had not provided
[Id.].
Judge Wier provisionally “exclude[d] as a preclusive sanction
under Rule 37(c) and (d), from further proceedings in this case
any evidence on which EQT relied to make damages calculations that
EQT did not produce to Magnum Hunter.”
[DE 43].
EQT filed a
Motion for Reconsideration, which Judge Wier denied in a written
Memorandum Opinion and Order on May 25, 2017.
61].
[DE 49, 54, 55,
EQT then submitted Objections to Judge Wier’s ruling, which
this Court overruled in a separate Memorandum Opinion and Order.
Shortly thereafter, Magnum Hunter moved for summary judgment
on all remaining claims, arguing that EQT could not prove its
damages
in
light
of
Judge
Wier’s
ruling.
[DE
62].
EQT
simultaneously moved for partial summary judgment on Count I
(Breach of Contract for Failure to Render Payment for Wells in
Production), “as it relates to royalty due and owing from October,
2015-present.”
[DE 63-1 at 3].
EQT also sought summary judgment
on Count V (Breach of Contract for Improper Royalty and Overriding
Royalty Deductions) and Count VI (Prejudgment Interest), “as it
relates to damages for Counts I and V.”
9
[Id.].
According to EQT, “[t]he undisputed evidence demonstrates
that [Magnum Hunter] has breached the contracts by failing to make
full and complete payments for royalty.”
[Id.].
In support of
this assertion, EQT notes that it has not received a payment from
Magnum Hunter in two years.
[Id.].
As for Count V, EQT reiterates
arguments made in responding to Magnum Hunter’s Motion for Partial
Summary Judgment.
[Id.].
Specifically, EQT insists that the FOAs
address the production of NGLs and explicitly prohibit Magnum
Hunter from taking any royalty deductions, apart from severance
taxes.
[Id.].
Finally, EQT argues that prejudgment interest
should be awarded because it has not had the use of these sums for
several years now.
[Id.].
The Court will address each of these
Motions, and the numerous arguments raised therein, in turn.
III. ANALYSIS
A. Applicable Law
Federal courts sitting in diversity apply federal procedural
law.
Hanna v. Plumer, 380 U.S. 460, 465 (1965).
The substantive
law of the forum state governs the claims asserted.
Erie R. Co.
v. Tompkins, 304 U.S. 64 (1938); Moore, Owen, Thomas & Co. v.
Coffey, 992 F.2d 1439 (6th Cir. 1993).
Accordingly, the Court
will evaluate the Motions in accordance with the Federal Rules of
Civil Procedure while applying substantive Kentucky law to the
underlying claims.
10
B.
Standard of Review
Summary judgment is appropriate when 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).
If there is
a dispute over facts that might affect the outcome of the case
under governing law, then entry of summary judgment is precluded.
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986).
The
moving party has the ultimate burden of persuading the court that
there are no disputed material facts and that he is entitled to
judgment as a matter of law.
Id.
Once a party files a properly supported motion for summary
judgment by either affirmatively negating an essential element of
the
non-moving
party’s
claim
or
establishing
an
affirmative
defense, “the adverse party ‘must set forth specific facts showing
that there is a genuine issue for trial.’”
Fed. R. Civ. P. 56(e)).
Id. at 250 (quoting
“The mere existence of a scintilla of
evidence in support of the [non-moving party’s] position will be
insufficient; there must be evidence on which the jury could
reasonably find for the [non-moving party].”
C.
Magnum Hunter’s Partial Motion for Summary Judgment
1.
Interpretation of the FOAs
11
Id. at 252.
“A contract between parties dealing in oil and gas is subject
to the same rules of construction as any ordinary contract.”
Oliver v. Louisville Gas & Elec. Co., 732 S.W.2d 509, 511 (Ky. Ct.
App. 1987).
examination
Interpretation of a contract “must begin with an
of
the
plain
language
of
the
instrument.”
Ky.
Shakespeare Festival, Inc. v. Dunaway, 490 S.W.3d 691, 694 (Ky.
2016).
“‘[I]n the absence of ambiguity a written instrument will
be enforced strictly according to its terms,’ and a court will
interpret the contract’s terms by assigning language its ordinary
meaning and without resort to extrinsic evidence.” Frear v. P.T.A.
Indus., Inc., 103 S.W.3d 99, 106 (Ky. 2003) (quoting O’Bryan v.
Massey-Ferguson, Inc., 413 S.W.2d 891, 893 (Ky. 1966)).
“A
contract
it
is
ambiguous
if
a
reasonable
person
would
find
susceptible to different or inconsistent interpretations.”
Coal Corp. v. Knight, 325 S.W.3d 290, 298 (Ky. 2010).
Hazard
In such
instances, “the court’s primary objective is to effectuate the
intentions of the parties.”
Dunaway, 490 S.W.3d at 695 (citing
Cantrell Supply, Inc. v. Liberty Mut. Ins. Co., 94 S.W.3d 381, 384
(Ky. Ct. App. 2002)).
The FOAs state that EQT is entitled to royalties based on a
percentage of “8/8 of the gross proceeds received by [Magnum
Hunter] from the sale of oil and/or gas, without deductions of any
kind, produced from wells drilled hereunder.”
12
[See DE 1-1, p. 6,
¶ 4A].
This language indicates that Magnum Hunter only owes EQT
royalties from the sale of NGLs if they qualify as “oil and/or
gas,” as that term is used in the FOAs.
Although none of the FOAs explicitly define “oil and/or gas,”
some of them provide more guidance as to the meaning of this term
than others.
Accordingly, the Court will divide the FOAs into
three subsets: (1) FOAs that define “oil well” and “gas well” and
attach and incorporate an MOA defining “oil and gas”; (2) FOAs
that define “oil well” and “gas well” but do not attach and
incorporate an MOA defining “oil and gas”; and (3) FOAs that do
not define “oil well” and “gas well” and do not attach and
incorporate an MOA defining “oil and gas.”
The Court will then
analyze each subset in turn.
a.
FOAs that define “oil well” and “gas well” and
attach and incorporate an MOA defining “oil and
gas”
Nine of the FOAs include definitions for the terms “oil well”
and “gas well.”
9; 1-10].
[See DE 1-2, p. 2, ¶ 2M; 1-3; 1-4; 1-5; 1-8; 1-
“Gas Well” means “gas well as defined by Kentucky
Revised Statute Number 353.010,” which provides as follows:
“Gas well” means any well which:
(a) Produces natural gas not associated or blended with
crude petroleum oil any time during production; or
(b) Produces more than ten thousand (10,000) cubic feet
of natural gas to each barrel of crude petroleum oil
from the same producing horizon.
13
Ky. Rev. Stat. Ann. § 353.010(10); see also Ky. Rev. Stat. Ann. §
353.010(9) (defining “gas” as “natural gas”).
Similarly, “Oil
Well” means “any well which produces one (1) barrel or more of oil
to each ten thousand (10,000) cubic feet of natural gas.”
Ky.
Rev. Stat. Ann. § 353.010(14); See also Ky. Rev. Stat. Ann. §
353.010(13) (defining “oil” as “petroleum”).
While the terms “oil well” and “gas well” are not synonymous
with the phrase “oil and/or gas,” they are closely related.
After
all, KRS § 353.010 defines “oil well” and “gas well” in terms of
the substances produced therefrom.
The FOAs also clearly state
that royalties are only owed on substances produced from the
subject wells.
Thus, if the FOAs contemplate wells producing
natural gas or petroleum, it follows that the term “oil and/or
gas” also refers to natural gas or petroleum.
Seven of those FOAs attach and incorporate MOAs, which state
that “Oil and Gas” means “oil, gas, casinghead gas, gas condensate,
and/or
all
other
liquid
or
gaseous
hydrocarbons
and
other
marketable substances produced therewith, unless an intent to
limit the inclusiveness of this term is specifically stated.” [See
id. at p. 27, Art. I, ¶ K].
all
types
of
substances
Because the MOA definition embraces
produced
as
result
of
oil
and
gas
exploration, while the FOAs contemplate only the production of
14
natural gas and petroleum, the Court finds that there is a conflict
between the FOAs and their attached MOAs.
Accordingly, the Court
must determine which document takes precedence, and thus, which
definition controls the instant dispute.
EQT urges the Court to apply the broader MOA definition and
find that NGLs qualify as “oil and/or gas” within the meaning of
the FOAs.
However, EQT fails to explain why the MOA definition
should control.
After all, these FOAs unambiguously state that,
“[i]n the event that there exists any conflict between the terms
and conditions of this Agreement and the provisions of any Exhibit
attached hereto, the terms and conditions of this Agreement shall
control.”
[See id. at p. 15, ¶ 15H].
Thus, the Court must rely
on the FOA definitions in evaluating the royalty provisions at
issue.
That being the case, EQT argues that the FOA definitions
originate from KRS Chapter 353, entitled Mineral Conservation and
Development, which defines “gas” broadly enough to include NGLs.
In support of this proposition, EQT notes that the Kentucky Natural
Gas Acquisition Authority Act defines “gas” as “natural gas or any
substitute
for
natural
gas,
including
synthetic
natural
gas,
liquefied natural gas, coal gas, or other substance usable in lieu
of natural gas.”
Ky. Rev. Stat. Ann. § 353.402(3).
Similarly,
the Kentucky Gas Pipeline Authority Act defines “gas” as “natural
15
gas, coalbed or other methane gas, carbon dioxide gas, crude oil
or petroleum products, or any elements of natural gas or other
gas.”
Ky. Rev. Stat. Ann. § 353.750(6).
This argument fails because the FOAs do not reference KRS §
353.402(3) or KRS § 353.750(6) in defining “oil and/or gas.” While
EQT invites the Court to find that these broad definitions extend
to KRS § 353.010, simply because they are all housed within Chapter
353, the text of the statutes themselves contradict this logic.
KRS § 353.010, the very section cited in the FOAs, provides
definitions for the whole chapter, “unless the context requires
otherwise.”
By contrast, KRS § 353.402(3) and KRS § 353.750(6)
apply only to their respective subchapters.
If
anything,
this
distinction
makes
it
clear
that
the
definitions from KRS § 353.010 does not include the range of other
substances identified in KRS § 353.402(3) and KRS § 353.750(6), as
it demonstrates that the Kentucky General Assembly declined to
apply the broader definitions to KRS Chapter 353 as a whole.11
Because the FOAs unambiguously rely on KRS § 353.010 for their
definition of “oil well” and “gas well,” and because the relevant
11
EQT briefly suggests that NGLs are automatically included within the
definition of “gas” because they are composed of hydrocarbons, just like
natural gas. However, this observation has not stopped legislatures,
courts, or contracting parties from differentiating the two, as explained
above. If the Court were to accept EQT’s argument, it would render such
efforts to distinguish between substances a nullity.
16
subsections of KRS § 353.010 speak only of natural gas, the Court
finds that NGLs are not included within the phrase “oil and/or
gas,” as that term is used in the FOAs.12
b. FOAs that define “oil well” and “gas well” but do not
incorporate an MOA defining “oil and gas”
Two of the FOAs define “oil well” and “gas well” by reference
to KRS § 353.010, but do not incorporate MOAs with conflicting
definitions of “oil and gas.”
[DE 1-6; 1-11].
Absent such a
conflict, the FOA definition of “gas well” as a well “[p]roducing
natural gas” controls.
For reasons explained in the previous
section, the Court again concludes that the FOAs unambiguously
limit the term “gas” to natural gas, thereby excluding NGLs.
c.
FOAs that do not define “oil well” and “gas well”
and do not incorporate an MOA defining “oil and
gas”
Two of the FOAs fail to define “oil well” and “gas well” at
all, nor do they incorporate an MOA defining the terms “oil and
gas.”
[DE 1-1; 1-7].
Thus, the Court must construe the term “gas”
in accordance with its plain meaning.
According to Merriam-
Webster’s Dictionary of English Usage, “gas” is “a fluid (such as
air) that has neither independent shape nor volume but tends to
12
EQT offers deposition testimony in support of their argument that the
parties contemplated the inclusion of NGLs in the FOAs. It also notes
that Magnum Hunter paid some royalties on NGLs at the beginning of their
production, thereby suggesting that the company had a contractual
obligation to do so. However, the Court need not consider such extrinsic
evidence because the FOAs unambiguously adopt a limited definition of
“gas well,” which does not include NGLs.
17
expand indefinitely.”
nor gaseous.”
By contrast, “liquids” are “neither solid
See Merriam-Webster’s Dictionary of English Usage.
Because NGLs are liquid in form, rather than gaseous, the Court
finds that the term “gas,” as it is used in these two FOAs,
unambiguously excludes NGLs.13
2.
Effect of Interpretation
Because the FOA definition of “gas well” does not contemplate
the production of NGL from subject wells, the royalty provisions
requiring Magnum Hunter to pay a percentage of the proceeds from
the sale of “oil and/or gas” do not apply to NGLs.
While Kentucky
law allows courts to utilize the “at the well” royalty calculation
when an oil and gas lease provides for royalties but does not
specify the method for their calculation, the Court is not aware
of any cases applying this rule to oil and gas leases that do not
even contemplate the production of a particular substance.
See
Poplar Creek Dev. Co. v. Chesapeake Appalachia, LLC, 636 F.3d 235,
242 (6th Cir. 2011) (making an Erie guess that Kentucky would adopt
the “at the well” rule as its default calculation method for oil
and gas royalties); Baker v. Magnum Hunter Prods., 473 S.W.3d 588,
596-97 (Ky. 2015) (approving of the Sixth Circuit’s analysis).
13
Again, the fact that NGLs and natural gas are both composed of
hydrocarbons does not necessarily lead to the conclusion that the terms
can be used interchangeably. For example, the term “water” generally
refers to the liquid form of H20, while “water vapor” describes H20 in a
gaseous state and “ice” refers to H20 in a solid state.
18
Thus, the Court must conclude that the FOAs do not require Magnum
Hunter to pay EQT any royalties in connection with the sale of
NGLs.
The
Court
acknowledges
the
possibility
that
the
parties
attempted to orally modify the FOAs or reach a separate agreement
as
to
the
production
and
processing
of
NGLs.
The
former
possibility provides no relief for EQT because the FOAs clearly
state that conversations and conduct are insufficient to modify
their terms.
As for the latter scenario, the record contains
deposition testimony from Donald Michael Wallen and William Barr,
both former employees of Magnum Hunter’s predecessor, Daugherty
Petroleum, indicating that the contracting parties discussed the
changes necessary to comply with the new FERC regulations and that
EQT did not object to the deductions at issue.
EQT does not deny meeting with Magnum Hunter during this time,
but insists that it did not know of the decision to deduct postproduction costs from its royalties and did not consent to such
deductions.
record
to
However, EQT cannot point to any evidence in the
support
this
assertion,
other
than
Wallen’s
brief
statement that Magnum Hunter made an “internal decision” to deduct
post-production costs from EQT’s royalties.
EQT does not offer
any testimony to demonstrate that it objected to the deductions or
that it ultimately negotiated a different set of terms with Magnum
19
Hunter.
In short, the evidence in the record does not give rise
to a genuine issue of material fact as to whether a separate oral
contract, express or implied, existed between the parties, and if
so, what the terms of that contract were.14
Thus, the Court must
grant Magnum Hunter’s Motion for Partial Summary Judgment on Count
V, to the extent that it states a claim for breach of contract
related to improper deductions from NGL royalty calculations.15
D.
Magnum Hunter’s Motion for Summary Judgment
1.
Counts I through V
“To prove a breach of contract, the complainant must establish
three things: 1) existence of contract; 2) breach of that contract;
and 3) damages flowing from the breach of contract.”
Metro
Louisville/Jefferson Cty. Govt. v. Abma, 326 S.W.3d 1, 8 (Ky. Ct.
App. 2009).
“[C]ontingent, uncertain and speculative damages
generally may not be recovered” under Kentucky law.
Curry v.
Bennett, 301 S.W.3d 502, 506 (Ky. Ct. App. 2009) (citing Spencer
14
Magnum Hunter also contends that EQT is estopped from complaining about
the calculation of the royalties because it accepted payment for six
years without complaint. [DE 28 at 3-4]. This argument is moot, in
light of the Court’s ruling on Magnum Hunter’s Motion for Partial Summary
Judgment. Likewise, EQT’s insistence that Magnum Hunter’s Partial Motion
for Summary Judgment is premature is now moot, as discovery has closed.
[DE 27 at 19].
15
In Count V, EQT alleges that Magnum Hunter took improper deductions
from the royalty calculations between 2002 and 2015. [DE 1, p. 12-13,
¶ 55-58]. Magnum Hunter did not produce NGLs until 2008. [DE 52-3 at
3-5]. Thus, the Court’s ruling only disposes of a portion of Count V,
leaving intact a claim for improper deductions from royalties on natural
gas. {DE 1, p. 20, ¶ 101].
20
v. Woods, 282 S.W.2d 851, 852 (Ky. 1955)).
However, “where it is
reasonably certain that damage has resulted, mere uncertainty as
to the amount does not preclude one’s right of recovery or prevent
a jury decision awarding damages.”
Id.
“[I]n instances where a
litigant establishes a cause of action but has not established an
entitlement
to
compensatory
damages,
nominal
damages
may
be
awarded.” Mo-Jack Distrib., LLC v. Tamarak Snacks, LLC, 476 S.W.3d
900, 908 (Ky. Ct. App. 2015) (citing Stoll Oil Ref. Co. v. Pierce,
343 S.W.2d 810, 811 (Ky. 1961)).
Magnum Hunter argues that it is entitled to summary judgment
on EQT’s remaining breach of contract claims because EQT cannot
prove damages without the excluded Enertia data.
Judge Wier’s
ruling certainly makes it difficult for EQT to substantiate the
amounts claimed in Count I for unpaid royalties and gaps in royalty
payments from May to November 2015 because EQT calculated those
amounts by “br[inging] forward” Magnum Hunter production records
that had been entered into EQT’s Enertia database.
10].
[DE 72-4 at 7,
EQT used the same method to calculate the amounts demanded
in Count V for unauthorized deductions from royalties between 2002
to 2010 and October 2013 to April 2015.16
[Id.].
Thus, Judge
16
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,
21
Wier’s ruling also hampers EQT’s ability to support the claim for
damages set forth in Count V.
However, Kentucky law indicates that a plaintiff’s failure to
establish his or her entitlement to compensatory damages is not
fatal to a claim if he or she can otherwise establish a cause of
action.
Curry, 301 S.W.3d at 506; Mo-Jack Distrib., LLC, 476
S.W.3d at 908.
Magnum Hunter insists that Curry and Mo-Jack are
distinguishable from the instant matter because they considered
the plight of plaintiffs who did not have sufficient information
to prove damages, whereas this case involves a plaintiff whose own
mistakes impacted its ability to prove damages.
Neither case
suggests that such a distinction should be made, and the Court is
not aware of any other case law supporting such a proposition.
Curry and Mo-Jack preserve a plaintiff’s ability to collect nominal
damages in the event that he or she can establish that a breach
125 F.3d 989, 995-6 (6th Cir. 1997) (“[I]ssues adverted to in a
perfunctory manner, unaccompanied by some effort at 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”).
22
occurred, but cannot prove damages. EQT’s mistakes may have placed
it in such a situation, but that does not mean that it is barred
from recovering nominal damages if appropriate.
In this case, there is evidence in the record to suggest that
Magnum Hunter breached the terms of the FOAs by failing to pay EQT
the correct amounts owed on schedule. For example, Magnum Hunter’s
corporate representative, Donald Michael Wallen, testified that
the company had made accounting mistakes and overcharged EQT for
certain costs.
[DE 63-4 at 18-21].
Even if EQT is unable to fully
support its claim for damages on the aforementioned aspects of
Counts I and V, it may well be entitled to nominal damages.
The Court also notes that EQT seeks recovery in Counts I and
V for sums owed from 2015 to present. Wallen testified that Magnum
Hunter suspended payments to EQT in 2015, in an effort to correct
the aforementioned accounting errors.
[DE 63-4 at 21].
Magnum
Hunter then entered bankruptcy, leaving the payments in suspense.
[Id.].
This evidence of breach suggests that EQT may be entitled
to nominal damages at a minimum, for the same reasons explained
above.
However, the record also contains a spreadsheet prepared
by Magnum Hunter, which includes revenue data from 2015 to present.
[DE 54-23; 63-12].
This evidence is not subject to Judge Wier’s
preclusive sanction and, thus, may be used to support the relevant
portions of Counts I and V.
Because there is a genuine issue of
23
material fact as to whether and to what extent EQT suffered damages
flowing from the alleged breaches set forth in Counts I and V,
summary judgment on these claims is not warranted.17
The Mercadante audit substantiated EQT’s demand in Counts II,
III and IV for omitted escalation and shut-in fees from 2011 to
2013, as well as its claim in Count V for improper deductions from
royalty payments between 2011 and 2013.
However, Magnum Hunter
insists that the Confirmation Order entered by the bankruptcy court
precludes EQT from seeking any additional sums from the 2011 to
2013
period.
Thus,
it
concludes
that
these
claims
must
be
dismissed because they cannot prove any additional entitlement to
damages.
By contrast, EQT maintains that it may seek to recover the
difference between the amount stated in its Proof of Claim and the
amount paid by Magnum Hunter during the bankruptcy proceedings.
Because the Proof of Claim included a demand for over $2 million
relating to the 2011 to 2013 period alone, and because Magnum
Hunter only paid EQT $1,833,780, EQT’s reading necessarily allows
it to seek relief for additional sums relating to the 2011 to 2013
period.
17
In fact, as the Court will explain infra, summary judgment is actually
warranted in EQT’s favor on a small portion of Count I.
24
“Interpreting court orders differs from that of statutes and
contracts only to the extent that instead of construing the intent
of the legislature or the intent of the parties, we must determine
the intent of the ordering court.”
Crouch v. Crouch, 201 S.W.3d
463, 465 (Ky. 2006); see also In re Settlement Facility Dow Corning
Trust, 628 F.3d 769, 772 (6th Cir. 2010) (using the same principles
to interpret the terms of a joint reorganization plan from a
bankruptcy proceeding).
This means that “[w]here the language of
the order is clear and ambiguous, we will construe the order
according
to
its
plain
terms.”
Crouch,
201
S.W.3d
at
465.
“However, where the order is ambiguous and open to interpretation,
we will endeavor to construe and effectuate the intent of the trial
court.”
Id. at 465-66.
The Confirmation Order states, in pertinent part:
Notwithstanding anything to the contrary in the Plan or
this Confirmation Order, EQT, the Debtors and the
Reorganized Debtors, and their successors and assigns
agree that (a) the EQT Farmout Agreements are preserved
in their entirety pursuant to Article IV.T of the Plan
and (b) the EQT Claim shall be treated and resolved as
follows: (i) on account of amounts owed for natural gas
under the EQT Farmout Agreements for the period of
January, 2011 through October, 2013 the Debtors shall
pay EQT $1,833,780 (the “EQT Cash Payment”) on or as
soon as reasonably practicable following the Effective
Date, but in no event later than 14 days following the
Effective Date, in full and final satisfaction of and
solely to the extent of the EQT Cash Payment portion of
the EQT claim; (ii) the remainder of the EQT Claim (the
total EQT Claim less the EQT Cash Payment (the “Remaining
EQT Claim”) and any and all additional claims,
interests, rights, causes of action, and/or defenses,
25
whether contractual, monetary, equitable, or otherwise,
held, alleged, and/or owned by EQT, including but not
limited to all Royalty and Working Interests against any
of the Debtors shall be and hereby are fully preserved
in their entirety against the Reorganized Debtors and
their successors and assigns, and shall be wholly
unaffected, except as provided herein, by these Chapter
11 Cases, the Plan, including any and all waivers and
releases contained in the Plan, and the discharge of
Claims or Interests obtained by or granted to the Debtors
in these Chapter 11 Cases; and (iii) subject to the
foregoing preservation provision, the Remaining EQT
Claim shall be and hereby is deemed withdrawn, expunged,
and null and void with respect to the Chapter 11 Cases
only (and not with respect to any preserved rights set
forth above) and EQT shall not be entitled to any
distribution in the Chapter 11 Cases.
[DE 1-13 at 60-61].
The language of this Order unambiguously preserves EQT’s
right to seek recovery for the remainder of the amount listed in
the Proof of Claim, which necessarily includes some of the amount
initially claimed in connection with the 2011 to 2013 period.
After all, the bankruptcy court defined the “Remaining EQT Claim”
as the total amount stated in the Proof of Claim minus the EQT
Cash Payment, then stated that the Remaining EQT Claim was “fully
preserved.”
[Id.].
While the Order states that Magnum Hunter
made the $1,833,780 payment “on account of amounts owed for natural
gas under the EQT Farmout Agreements for the period of January,
2011 through October, 2013,” there is no indication that this
amount covers other sums claimed for the 2011 to 2013 period, such
as shut-in fees and operating charges related to the production of
natural gas.
[Id.].
Accordingly, the Court rejects Magnum
26
Hunter’s argument that EQT cannot prove any further entitlement to
damages in Counts II, III, and IV.
Because the Order does not
preclude EQT from seeking recovery for the Remaining EQT Claim, it
is permitted to use the Mercadante audit report to prove damages,
just as Magnum Hunter is entitled to use its expert to rebut the
claim for damages.
[DE 72-1].
Finally, EQT seeks to recover unpaid shut-in and escalation
fees from 2013 to 2015 in Counts II, III, and IV.
Because the
Mercadante audit report only covered 2011 to 2013, EQT contacted
the
accounting
firm
and
asked
for
advice
calculations for the 2013 to 2015 period.
regarding
damages
[DE 71-4 at 19-21].
According to John Bergonzi, Mercadante suggested that EQT use the
2011 to 2013 audit figures as an estimate for the 2013 to 2015
period. [Id.]. Magnum Hunter argues that these numbers are simply
“placeholders,” making them insufficient to support claims for
damages.
However, these numbers were not randomly selected.
It
is logical that the amount of fees and royalties owed on the FOA
wells for the 2011 to 2013 period would be close to the amounts
owed on the same wells for the subsequent two-year period.
Magnum
Hunter is free to rebut this damages calculation with its own
expert, as explained above.
Accordingly, the Court finds that
there is a genuine issue of material fact as to whether and to
what extent EQT suffered damages flowing from the alleged breaches
27
set forth in Counts II, III.
Summary judgment is therefore
inappropriate on these claims.
2.
Counts VI through X
Magnum Hunter also moves for summary judgment on Counts VI
through X, which state claims for prejudgment interest, unjust
enrichment, accounting, declaratory relief, and injunctive relief.
First, Magnum Hunter briefly contends that it is entitled to such
relief on EQT’s claim for unjust enrichment because it is premised
on the same facts underlying the breach of contract claims.
An unjust enrichment claim consists of three elements: “(1)
benefit conferred upon defendant at plaintiff’s expense; (2) a
resulting
appreciation
of
benefit
by
defendant;
and
(3)
inequitable retention of benefit without payment for its value.”
Jones v. Sparks, 297 S.W.3d 73, 78 (Ky. Ct. App. 2009); see also
Javier Steel Corp. v. Cent. Bridge Co., 353 S.W.3d 356, 359 (Ky.
Ct. App. 2011).
“The claim for unjust enrichment is a legal
fiction created to permit recovery where equity says there should
be recovery, although there is no recovery in contract.”
Holley
Performance Prods., Inc. v. Keystone Auto. Operations, Inc., Civ.
A. No. 1:09-cv-00053-TBR, 2009 WL 3613735, at *5 (W.D. Ky. Oct.
29, 2009) (citing Perkins v. Daugherty, 722 S.W.2d 907, 909 (Ky.
Ct. App. 1987)).
28
Although
Federal
Rule
of
Civil
Procedure
8(d)(3)
allows
parties to “state as many separate claims or defenses as it has,
regardless
of
consistency,”
federal
courts
within
the
Sixth
Circuit have dismissed unjust enrichment claims that were premised
on the same facts underlying a breach of contract claim, relying
on the Kentucky rule that “’[t]he doctrine of unjust enrichment
has no application in a situation where there is an explicit
contract which has been performed.’”
See, e.g., Poynter v. Ocwen
Loan Servicing, LLC, Civ. A. No. 3:13-cv-773-DJH-CHL, 2016 WL
5380926, at *6 (W.D. Ky. Sept. 23, 2016) (quoting Codell Constr.
Co. v. Kentucky, 566 S.W.2d 161, 165 (Ky. Ct. App. 1977)).
In this case, EQT has failed to plead separate claims.
Its
unjust enrichment claim is predicated solely on alleged breaches
of the FOAs, making it duplicative of EQT’s breach of contract
claims.
Thus, even if the Federal Rules of Civil Procedure permit
alternative pleading, dismissal would still be appropriate because
EQT has not successfully plead claims in the alternative.
simply repackaged Counts I through V in Count VII.
It has
Summary
judgment is therefore warranted on this claim.
Magnum Hunter then insists that summary judgment on Counts
VI, VIII, IX, and X is appropriate because they simply request
specific remedies for the breaches of contract set forth in Counts
I through V, as well as the unjust enrichment plead in Count VII.
29
While Magnum Hunter is correct in asserting that prejudgment
interest, accounting, declaratory relief, and injunctive relief
are “remed[ies] for the wrongdoings alleged above, not [] separate,
actionable
claim[s],”
their
argument
proceeds
on
incorrect
assumption that they are entitled to summary judgment on the
underlying claims.
Sparks v. Countrywide Home Loans, Civ. A. No.
5:15-cv-99-JMH, 2015 WL 6556542, at *15 (E.D. Ky. Oct. 1, 2015)
(explaining that).
In short, Magnum Hunter contends that it is
entitled to summary judgment on Counts VI, VIII, IX, and X because
they cannot survive without Counts I through V and VII. This logic
holds true, to the extent that these requested remedies pertain to
the unjust enrichment claim. However, to the extent that the Court
has denied summary judgment on Counts I through V, it follows that
summary judgment is inappropriate on Counts VI, VIII, IX, and X.
However,
Magnum
Hunter
makes
an
additional
argument
for
summary judgment on EQT’s claim for an accounting in Count VIII.
“An accounting is a detailed statement of the debits and credits
between parties arising out of a contract or a fiduciary relation.”
Holley Perf. Prods. V. Keystone Auto. Operations, Inc., No. 1:09CV-53-TBR,
2009
WL
3613735,
at
(internal quotations omitted).
*3
(W.D.
Ky.
Oct.
28,
2009)
“[A]s an equitable remedy, an
accounting requires insufficiency of legal remedies.”
James T.
Scatuorchio Racing Stable, LLC v. Walmac Stud Mgmt., LLC, Civ. A.
30
No. 5:11-cv-374-DCR, 2014 WL 2113096, at *17 (E.D. Ky. May 20,
2014) (citing Dairy Queen, Inc. v. Wood, 369 U.S. 469, 478 (1962)).
The plaintiff has the burden of proving that legal remedies are
inadequate because “the parties are of such a complicated nature
that only a court of equity can satisfactorily unravel them.”
Id.
(quoting Dairy Queen, 369 U.S. at 478).
EQT seeks an accounting of the following items: (1) all the
deductions
assessed
against
EQT’s
royalties;
(2)
the
actual
volumes of Oil and/or Gas produced under the Farmout Agreements;
(3) the actual prices at which MHP sold the Oil and/or Gas produced
under the Farmout Agreements; and (4) the actual market price when
MHP sold the Oil and/or Gas produced under the Farmout Agreements.”
[DE 63-1 at 20-21].
In support of this request for an accounting,
EQT simply states that, “[w]ithout a complete accounting of the
records
and
underlying
data
related
to
MHP’s
oil
and
gas
production, EQT is incapable of calculating the amount that MHP
owes pursuant to the Farmout Agreements.”
[Id.].
As Magnum Hunter is quick to point out, these conclusory
statements do not explain why legal remedies are insufficient and,
thus, fail to justify the “extraordinary remedy” of an accounting.
Bradshaw v. Thompson, 454 F.2d 75, 79 (6th Cir. 1972); see also
Dairy Queen, 369 U.S. at 473-74 (explaining that the burden “is
considerably increased and it will indeed be a rare case in which
31
it can be met”); City of Owensboro v. Ky. Util. Co., Civ. A. No.
4:04-CV-87-M, 2008 WL 4642435, at *1 (W.D. Ky. Oct. 15, 2008)
(“Based on this holding, courts and commentators have indicated
that, at least in the federal courts, one may now conclude that
the remedy of an accounting no longer exists in cases of complex
accounts.”)
(internal
quotations
and
alterations
omitted).
Accordingly, Magnum Hunter is entitled to summary judgment on Count
VIII.
E.
EQT’s Motion for Partial Summary Judgment
As discussed above, a plaintiff must establish three things
to prove a breach of contract: 1) the existence of contract; 2)
breach of that contract; and 3) damages flowing from the breach of
contract.”
Abma, 326 S.W.3d at 8.
EQT claims that it is entitled
to partial summary judgment on its claim for unpaid royalties from
2015 to present in Count I, as well as its claim for improper
deductions from NGL royalties in Count V, because it has proven
that Magnum Hunter breached the terms of the FOAs.
EQT also moves
the Court to grant partial summary judgment on its claim for
prejudgment interest in Count VI, as it relates to Counts I and V.
According to EQT, it can prove that Magnum Hunter breached
the terms of the FOAs by failing to pay royalties on natural gas
from 2015 to present.
To support this proposition, EQT relies on
an affidavit from John Bergonzi, its own corporate representative.
32
[DE 63-7].
It also points to the testimony of Magnum Hunter’s
corporate representative, Donald Michael Wallen, who stated that
payments to EQT were placed in suspense so that Magnum Hunter could
correct the incorrect royalty calculations.
Hunter
subsequently
filed
for
remain suspended to this day.
bankruptcy,
[Id.].
[DE 63-4].
and
EQT’s
Magnum
payments
Finally, EQT supports its
claim with a spreadsheet, prepared by Magnum Hunter at EQT’s
request, which includes production records from 2015 to present.
[DE 63-12].
The
bulk
of
Magnum
Hunter’s
argument
admissibility of the Bergonzi affidavit.
focuses
on
the
However, even if the
Court disregarded that affidavit, the record would still include
unrefuted testimony that Magnum Hunter suspended payments to EQT,
resulting in a cessation of payments required by the FOAs.
Magnum
Hunter states that “[t]his issue is very much contested in any
event because EQT also owes Magnum Hunter for its share of costs
in Joint Interest Billings on wells in which EQT has a working
interest.”
[DE 67 at 12].
It then concludes that “[e]ven if
Magnum Hunter were not entitled to summary judgment, the parties
could not determine whether EQT owes Magnum Hunter more in setoff
than Magnum Hunter might owe in royalty until the NGL issue is
determined.”
[Id.].
33
Although Wallen briefly refers to an error with Joint Interest
Billing in his deposition, his testimony does not actually indicate
that EQT owes any sums to Magnum Hunter, let alone that those sums
exceed the amount sought by EQT in this action.
[DE 63-4].
Thus,
the only possible basis for offset would be Magnum Hunter’s payment
of NGL royalties to EQT, as Magnum Hunter was not contractually
required to pay EQT those sums.
Nevertheless, EQT has proven that
Magnum Hunter breached the FOAs in the manner described above and
that EQT suffered damages as a result.
Thus, partial summary
judgment is appropriate on Count I, as it pertains to sums owed
from 2015 to present.
The Court acknowledges that this sum may be
subject to offset based on the NGL royalties, but, without knowing
the amount of those royalties, it must reserve that determination
for a later date.
EQT also maintains that it is entitled to partial summary
judgment
on
Count
V,
as
it
relates
to
the
alleged
improper
deductions from NGL royalties. This effort fails because the Court
has already found that the FOAs did not contemplate the production
of NGLs or provide for the calculation of NGL royalties.
Thus,
Magnum Hunter did not breach the terms of the FOAs by deducting
post-production costs from royalties paid to EQT.
Partial summary
judgment is therefore inappropriate on this portion of Count V.
34
EQT next seeks partial summary judgment on Count VI, at least
as
the
demand
for
prejudgment
interest
aforementioned portions of Counts I and V.
pertains
to
the
“In a diversity case,
state law governs the district court’s decision whether to award
prejudgment interest.”
Conte v. Gen. Housewares Corp., 215 F.3d
628, 633 (6th Cir. 2000).
“The longstanding rule in [Kentucky] is
that prejudgment interest is awarded as a matter of right on a
liquidated demand, and is a matter within the discretion of the
trial
court
or
jury
on
unliquidated
demands.”
3D
Enter.
Contracting Corp. v. Louisville and Jefferson Cty. Metro. Sewer
Dist., 174 S.W.3d 440, 450 (Ky. 2005) (citing Nucor Corp. v. Gen.
Elec. Co., 812 S.W.2d 136, 141 (Ky. 1991)).
“Liquidated claims
are of such a nature that the amount is capable of ascertainment
by mere computation, can be established with reasonable certainty,
can be ascertained in accordance with fixed rules of evidence and
known standards of value, or can be determined by reference to
well-established
market
values.”
Id.
(internal
quotations
omitted); 3D Enter., 172 S.W.3d at 450 (directing courts to “look
at the nature of the underlying claim, not the final award”).
“Absent a contractually agreed upon rate, the appropriate
rate of interest is governed by statute.”
Reliable Mech., Inc. v.
Naylor Indus. Servs., Inc., 125 S.W.3d 856, 857 (Ky. Ct. App. 2003)
(citing Ky. Rev. Stat. Ann. § 360.010(1) (providing that “the legal
35
rate of interest is eight percent (8%) per annum”)).
“While pre-
judgment interest has traditionally been simple interest, case law
does not indicate that it is required to be so.”
Id. at 858.
Principles
of
of
equity
may
also
justify
an
award
prejudgment interest under certain circumstances.
compound
Id. (explaining
that compound interest “is an equitable means of recognizing the
economic
reality
that
[the
defendant]
has
enjoyed
a
long
opportunity to earn interest on the money that it wrongfully
withheld from [the plaintiff]”).
EQT’s claim for unpaid royalties from 2015 to present are
liquidated because they are capable of ascertainment by mere
computation, based on the percentages set forth in the FOA royalty
provisions and the gross proceeds from the sale of oil and/or gas
produced from FOA wells.
In fact, it seems that Magnum Hunter has
already done the necessary computations at EQT’s request.
Because
these damages are liquidated, EQT is entitled to prejudgment
interest as a matter of right under Kentucky law.
EQT does not
request that the Court apply a particular interest rate.
In the
absence of any FOA provisions deviating from the statutory rate,
the Court will award prejudgment interest at 8% per annum.
While
EQT asks the Court to compound that interest in recognition of the
fact that Magnum Hunter has had the opportunity to use the sums
that it withheld from EQT, the Court is not convinced that such
36
measures are necessary, especially since EQT may well have had the
use of funds belonging to Magnum Hunter in the years leading up to
this litigation.18
IV.
CONCLUSION
Accordingly, for the reasons stated herein,
IT IS ORDERED as follows:
(1)
Defendant Magnum Hunter Production Company’s Motion for
Partial Summary Judgment [DE 23] be, and is, hereby GRANTED;
(2)
Defendant Magnum Hunter’s Motion for Summary Judgment
[DE 62] be, and is, hereby GRANTED as to the claim for unjust
enrichment in Count VII, the requests in Counts VI, VIII, IX, and
X for prejudgment interest, declaratory relief, and injunctive
relief arising from the unjust enrichment claim, and the request
for an accounting in Count VII as it pertains to all substantive
counts and DENIED as to Counts I through V and the corresponding
requests
for
prejudgment
interest,
declaratory
relief,
and
injunctive relief set forth in Counts VI, VIII, IX, and X; and
(3)
Plaintiff EQT Production Company’s Motion for Partial
Summary Judgment [DE 63] be, and is, hereby GRANTED as to the claim
18
In its Motion for Partial Summary Judgment, EQT included a request for
oral argument. The Court concluded that such a hearing was unnecessary,
given the thorough briefing on these issues.
37
for breach of contract from 2015 to present set forth in Count I,
as well as the corresponding request for prejudgment interest in
Count VI, and DENIED as to the claim for unauthorized deductions
on NGL royalties in Count V and the corresponding request for
prejudgment interest in Count VI.
This the 19th day of July, 2017.
38
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