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Cornett v. Magnum Hunter Production, Inc.

United States District Court, E.D. Kentucky, Southern Division, London

March 31, 2014

DENNIS CORNETT, et al., Plaintiffs,
v.
MAGNUM HUNTER PRODUCTION, INC. Defendant.

MEMORANDUM OPINION & ORDER

GREGORY F. VAN TATENHOVE, District Judge.

The Cornetts, Middletons, and Begleys, on behalf of themselves and a proposed class of similarly situated individuals, claim that, in producing and selling the natural gas taken from their land at a price that renders no royalties, Magnum Hunter Production Inc., has committed waste under KRS 381.350.[1] As such, the Plaintiffs seek cancellation of the lease and treble damages. Magnum Hunter moves the Court to dismiss this claim on the grounds that the statute does not apply to oil and gas lessees, and even if it does, the company has done nothing to trigger it and the leases themselves bar the claims. Because the Court finds that the oil and gas leases provided special written permission for Magnum Hunter to produce natural gas and sell it for the market price at the well, Magnum Hunter's motion shall be GRANTED and the Plaintiffs' claims under the Kentucky waste statute shall be DISMISSED.

I

The named Plaintiffs in this action are all land owners who entered into a series of oil and gas leases with Magnum Hunter Production, Inc., between 2003 and 2007 in Harlan and Letcher counties. In exchange for a sum of money and the various covenants and agreements contained in the lease, each Plaintiff leased the relevant land to Magnum Hunter for, among other things, "the purpose of mining exploring by geophysical and other methods, and operating for and producing therefrom oil, gas, [and] casing-head gas..." [R. 1-1 at 14, 24, 32]. Those additional covenants and agreements included a provision describing royalties for gas that Magnum Hunter would pay the Plaintiffs in further consideration for the lease. In terms of the Cornett and Middleton leases, Magnum Hunter agreed "to pay Lessor one-eighth of the market price at the well for gas sold or for the gas so used from each well off the premises..." [R. 1-1 at 14, 24]. In the Begley lease, Magnum Hunter agreed "to pay Lessor one-eighth of the net proceeds realized by the Lessee from the sale of natural gas...which net proceeds shall be defined to be the actual proceeds received less the Lessor's proportionate part of all post-production costs incurred by Lessee downstream of the wellhead to and including the point of sale, including but not limited to, cost incurred in the gathering, compression (including fuel burn), treating, processing, transporting, and marking of such gas..." [R. 1-1 at 33]. Each lease was to run for a set period of time, "and as long thereafter as oil, natural gas, coalbed methane gas, occluded gas, and other naturally occurring gases...are produced from the said lease premises..." [R. 1-1 at 32; similar provisions at R. 1-1 at 14, 24].

From all indications, this arrangement proved mutually beneficial for the primary term of the lease, as well as several years into the secondary term. However, beginning in 2012, the Plaintiffs no longer received royalty payments, but instead were provided with "Revenue Summary Statements, " and "Accounts Receivable Summary Statements, " reflecting they owed Magnum Hunter certain sums of money for their proportionate part of the difference between the amount for which such gas was sold and the deduction taken for transportation costs. [R. 1-1 at 5]. According to Magnum Hunter, the reason that no royalties were paid is because, "the price of natural gas has declined, such that the post-production costs described may have exceeded the price of gas Magnum Hunter has received in some instances, " which means that "after the Plaintiffs' one-eighth share of post-production costs is assessed, no proceeds remain on which royalties can be paid." [R. 3-1 at 4]. Magnum Hunter notes that during this period in question, it has not been receiving any profits either.

On June 21, 2013, the Plaintiffs initiated this action in Harlan Circuit Court, on their own behalf and on behalf of a large number of others similarly situated. [R. 1-1 at 3]. The Plaintiffs do not dispute that the price of natural gas has fallen or that Magnum Hunter is not profiting from the sale of natural gas. Further, the Plaintiffs do not specifically claim that Magnum Hunter has breached the leases. Instead, the Plaintiffs argue that in continuing to remove natural gas from their land and sell it at a price that does not allow it to recover its costs and pay the Plaintiffs a royalty, Magnum Hunter has violated Kentucky's waste statute, KRS 381.350. As relief, the Plaintiffs seek cancellation of the lease and treble damages. The Plaintiffs also petition the Court for a declaration that they do not have to pay the costs for which Magnum Hunter has billed them. Magnum Hunter responds that the charges assessed to the Plaintiffs were computer generated and that the company has no intention of collecting them. In addition, Magnum Hunter argues that the Kentucky waste statute does not apply in this case. As a result, Magnum Hunter believes that the Plaintiffs have failed to state a claim for which relief could be granted, and their complaint should be dismissed under Federal Rule of Civil Procedure 12(b)(6). Having been fully briefed by the parties, this matter is now ready for the Court's review.

II

A

Federal Rule of Civil Procedure 12(b)(6) allows a defendant to seek dismissal of a complaint which fails to state a claim upon with relief can be granted. Fed.R.Civ.P. 12(b)(6). In reviewing a Rule 12(b)(6) motion, the Court "accept[s] all the Plaintiffs' factual allegations as true and construe[s] the complaint in the light most favorable to the Plaintiffs." Hill v. Blue Cross & Blue Shield of Mich., 409 F.3d 710, 716 (6th Cir. 2005). "The purpose of Rule 12(b)(6) is to allow a defendant to test whether, as a matter of law, the plaintiff is entitled to legal relief even if everything alleged in the complaint is true." Mayer v. Mylod, 988 F.2d 635, 638 (6th Cir.1993).

B

As a general matter, waste is "[p]ermanent harm to real property committed by a tenant (for life or for years) to the prejudice of the heir, the reversioner, or the remainderman." Black's Law Dictionary (9th ed. 2009); see also Calvert v. Rice, 12 Ky.L.Rptr. 252, 253, 1890 WL 1368 (Ky. Super. May 14, 1890) (defining waste as "an act done by a tenant without license or authority from his landlord, whereby a lasting damage is done to the freehold."). The doctrine of waste is most often applied to a situation in which a person with a present interest in property unreasonably interferes with the future enjoyment of the premises by someone with a future interest. 1 Summers Oil and Gas § 2:25 (3d ed.). For example, someone with a future interest might successfully maintain an action for waste against a life tenant who cuts down all of the trees from the property or affirmatively alters the structure of a building so as to reduce its value. See 3 Blackstone, Commentaries, p. 223 (describing waste as "spoil or destruction of the estate, either in houses, woods, or lands, by demolishing, not the temporary profits only, but the very substance of the thing."); Adams v. Adams, 371 S.W.2d 637, 639 (Ky. 1963); Abel v. Wuesten, 136 S.W. 867 (1911).

Kentucky has codified the waste doctrine in KRS 381.350, and the parties do not dispute that this statute is the appropriate law to be applied in this case. Specifically, the Kentucky waste statute provides as follows:

If any tenant for life or years commits waste during his estate or term, of anything belonging to the tenement so held, without special written permission to do so, he shall be subject to an action of waste, shall lose the thing wasted, and pay treble the amount at which the waste is assessed.

KRS § 381.350. Though Kentucky courts trace the origins to this statute to the Thirteenth Century English Statute of Gloucester, the parties have been unable to produce a single case wherein this statute has ever been applied to forfeit an oil and gas lease for failure of the lessee to generate sufficient royalties for the lessor. See Salyer's Guardian v. Keeton, 214 Ky. 643, 283 S.W. 1015, 1018 (1926). Magnum Hunter argues that the reason for this absence of law is that the statute could never apply in such a situation, and it asks the Court to interpret the statute accordingly. Specifically, Magnum Hunter claims that this statute is not applicable ...


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