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Journey Acquisition-II, L.P. v. EQT Production Co.

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

August 18, 2014

JOURNEY ACQUISITION-II, L.P., Plaintiff,
v.
EQT PRODUCTION COMPANY, Defendants

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For Journey Acquisition-II, L.P., Plaintiff, Counter Defendant: Christian D. Tucker, Elizabeth S. Kerr, Jack E. Price , Jr., Walker C. Friedman, LEAD ATTORNEYS, PRO HAC VICE, Friedman Suder & Cooke, PC, Fort Worth, TX; Wayne F. Collier, LEAD ATTORNEY, Kinkead & Stilz, PLLC, Lexington, KY.

For EQT Production Company, Defendant, Counter Claimant: Lindsay M. Bouffard, LEAD ATTORNEY, PRO HAC VICE, John Kevin West, Steptoe & Johnson PLLC - Columbus, Columbus, OH; Nora Clevenger Price, LEAD ATTORNEY, Steptoe & Johnson, PLLC - Lexington, Lexington, KY.

For Journey Acquisition-II, L.P., Counter Defendant: Christian D. Tucker, Jack E. Price , Jr., Walker C. Friedman, LEAD ATTORNEYS, Friedman Suder & Cooke, PC, Fort Worth, TX; Elizabeth S. Kerr, LEAD ATTORNEY, PRO HAC VICE, Friedman Suder & Cooke, PC, Fort Worth, TX; Wayne F. Collier, LEAD ATTORNEY, Kinkead & Stilz, PLLC, Lexington, KY.

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MEMORANDUM OPINION & ORDER

Gregory F. Van Tatenhove, United States District Judge.

This case concerns the interpretation of a number of contractual agreements entered into by Journey Acquisition-II, LP (Journey) and EQT Production Company (EQT). The agreements involve conveyances of interests in oil, natural gas, mineral rights, and related assets connected to several large tracts of land in southeastern Kentucky. They also involve drilling rights and the ownership or lease of the acreage on which certain oil wells are located. In 2001, EQT agreed to sell, lease, and otherwise transfer certain of these lands and rights to Journey. The primary dispute presently before the Court concerns which lands and rights were actually conveyed. The parties have filed several motions and cross-motions for summary judgment and for partial summary judgment, all of which have been fully briefed. At Journey's request, the Court held oral arguments on the motions for partial summary judgment on July 7, 2014, during which the Court denied a related motion to strike [R. 102] but took the other motions under advisement. For the reasons that

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follow, the Court denies EQT's motion for summary judgment; grants in part and denies in part Journey Acquisition's first motion for partial summary judgment; and grants Journey Acquisition's second, third, and fourth motions for partial summary judgment.

I

A

Journey Acquisition is a Texas limited partnership involved in oil and gas exploration and production in Kentucky. [R. 67 at 2.] EQT is a Pennsylvania corporation that is also extensively involved in the production and development of oil and gas. [ Id.] The real property that is the subject of their dispute is located mainly in Letcher, Perry, and Leslie Counties, and covers thousands of noncontiguous acres. The parties also dispute various wells, equipment, and mineral rights associated with those properties.

Essentially, there are three types of property interests at issue. First, EQT owned in fee simple about 100 tracts of land across eastern Kentucky (Fee Properties), and had the authority to either drill on those lands itself or lease the drilling rights to another party. [R. 86-1 at 2; R. 87-1 at 3.] Second, EQT leased several hundred oil and gas interests located primarily on properties in Eastern Kentucky, meaning that EQT had the right to explore for and produce oil and gas beneath lands actually owned by third parties (Third-Party Leases). [R. 86-1 at 2; R. 87-1 at 2.] For these properties, EQT could, and did, assign its rights as a lessee to another party. Third, EQT also owned several hundred existing wells along with the associated equipment, pipeline operations, and various other agreements that typically accompany oil and gas production. [R. 67 at 3-4; R. 87-1 at 3.] For most of the properties at issue, EQT was either the fee owner or lessee, but for some of the properties, EQT operated with Kentucky River Coal Company (KRCC) as joint venturers. [R. 86-1 at 3.]

In 2001, EQT decided to " divest" itself of a large number of its oil-producing properties in order to focus on gas production. [R. 86-1 at 3.] To assist in this transfer, EQT hired an adviser, Randall & Dewey, Inc., who then prepared a " 2001 Kentucky Property Divestment Data Room Summary" (2001 KPD DRS) describing the interests and properties that EQT planned to sell or otherwise transfer. [ Id. at 3-4.] EQT also prepared a number of maps to illustrate the boundaries of the properties it was offering. These were included in the 2001 KPD DRS. [ Id.] The 2001 KPD DRS was shown to potential purchasers who, if interested, could see more detailed information after signing a confidentiality agreement and then bid on the property. [ Id. at 7.] Journey's president, Brian Baer, and a petroleum engineer who worked for Journey at the time named Greg Shockley (who now works for EQT), evaluated EQT's offering, along with other consultants retained by Journey. [ Id. at 7-8.] Journey then submitted a bid and ultimately became the successful purchaser. [ Id. at 8.]

On October 4, 2001, Journey and EQT entered into a Purchase and Sale Agreement (PSA) that was made effective as of July 1, 2001. The purchase price was $64,090,000. [R. 67 at 3; R. 87-2 at 2.] In the PSA, EQT agreed to sell Journey its title to and interests in numerous properties, wells, pipelines, and other assets located in five Kentucky counties. [R. 87-1 at 8; R. 87-2 at 7.] The PSA also contained an agreement to apply Kentucky law to any dispute [R. 87-2 at 41], and included a merger clause stating that this PSA superseded all prior agreements, understandings, and discussions. [ Id. at 40.]

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Part of the interests described in the PSA included EQT's leasehold rights under the Third-Party Leases and a variety of mineral rights to the Fee Properties Journey purchased. [ Id. at 7.] The PSA further provided for a due diligence period of nearly two months and possible price adjustments if necessary. [ Id. at 19-25.] Attached to the PSA were also several exhibits listing or describing in more detail the property that EQT was transferring. For instance, Exhibit A to the PSA lists and describes the various leasehold tracts that Journey acquired from EQT. [ See R. 87-2 at 56-72.] Exhibit D to the PSA lists the wells that were being conveyed. [R. 87-4 at 17-29.] Exhibit J to the PSA lists and describes the various fee properties involved in the transfer. [ See R. 87-6 at 34-37.] The PSA also contained a " Further Assurances" clause stating that Journey was to receive any oil and gas interest owned by EQT within certain blue-outlined boundaries on a series of maps attached as Exhibit N. [R. 87-2 at 39.] The parties now dispute the exact meaning of this clause and whether EQT conveyed any property to Journey that was not within the blue boundaries of the Exhibit N maps.

At closing on November 30, 2001, the parties completed the second phase of their deal, in which they executed two other documents called " the Master Assignment," and a lease of EQT's fee properties, called " the Oil and Gas Lease" (or " 2001 Lease" ). [R. 86-1 at 10-11.] In the Master Assignment, EQT formally assigned to Journey a list of properties that EQT leased from third parties, as well as several hundred wells with their associated rights and equipment. [R. 87-12.] The descriptions of the lease properties were attached to the Master Assignment as Exhibit A, and the list of wells being transferred was attached as Exhibit B. [ Id. at 5, 23.] For these properties, EQT assigned Journey the rights, title, and interests " down to the stratigraphic equivalent of the base of the Devonian Shale formation." [ Id. at 1.] In the 2001 Lease, EQT leased to Journey a number of properties that EQT owned in fee, leasing them for a primary term of five years. [R. 87-8 at 1-2.] Attached to the 2001 Lease as Exhibit A was a tract-by-tract description of these leased properties. [R. 87-8 at 14-17.] Also attached was Exhibit A-1 containing a set of maps that listed and described the tracts subject to the lease and were " virtually identical" to the maps in Exhibit N to the PSA. [ Id. at 18-29.] Some of the assignments and leases were only partially assigned or leased to Journey, and where that was the case, an explanatory endnote was placed in the property description on the appropriate exhibit. The largest third-party lease involved in the transaction was the Fordson Lease, which contained over 6,333 noncontiguous acres in Perry, Leslie, and Letcher Counties. [R. 86-1 at 12.]

During the due diligence period between October 4 and November 30 of 2001, EQT's land-administration director Cindy Perdue oversaw the task of " scrubbing" the exhibits for accuracy " trying to get them right before closing." [R. 87-1 at 19; R. 81 at 34-37, 65-66.] Journey retained a company called Title Pro and its president Jay Karickhoff to confirm EQT's title to the land on which the top-producing wells were located, but because that well value was the basis for confirming the value to Journey's secured lender, Karickhoff was not concerned with evaluating the title to any part of land not associated with the existing high-producing well sites. [R. 87-1 at 19; R. 73 at 5, 12-13, 37-38.] Neither Mr. Karickhoff nor Ms. Perdue could recall assuming or being told that the land being conveyed was limited solely by the blue outlines on the attached maps. [ See R. 73 at 33-41; R. 81 at 72-73.] EQT now claims to own many of the properties that

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Journey claims were conveyed in the 2001 transaction. In particular, EQT claims that the Exhibit N maps limit the conveyances to only the property located within the blue boundaries, while Journey claims that it received whatever the actual language in the documents described.

B

Journey filed suit in this Court on June 13, 2012, and EQT filed a counterclaim the next month. During the course of discovery, Journey amended its complaint in June 2013, in July 2013, and yet again in January 2014. The instant motions relate to the claims asserted in the Third Amended Complaint [R. 67], which include the following: 1) claims for declaratory judgment confirming the 2001 Agreement and quieting title in Journey as owner of EQT's leasehold interest in the disputed Third-Party Lease properties and their associated rights and interests, and also as the owner of the disputed fee properties with their associated rights and interests; 2) claims for trespass and an accounting of all income attributable to the disputed wells, or, in the alternative, that EQT trespassed willfully and in bad faith and must pay Journey the sale price received by EQT for the wells claimed by Journey; 3) alternative claims for conversion or unjust enrichment concerning disputed wells, and for any resulting damages; 4) breach of contract claims, arguing that EQT has breached the 2001 Agreement; and 5) claims for attorney's fees and interest as well as both pre- and post-judgment interest.

In EQT's Answer to the Third Amended Complaint, EQT responded with several counterclaims, including 1) a request for declaratory judgment to quiet title in EQT concerning all the disputed property; 2) a request for reformation of the 2001 Agreement to the extent that it could be construed to convey any part of any property outside of the blue boundaries on the Exhibit N maps; and 3) claims for conversion or trespass against Journey concerning the disputed wells. [R. 68 at 5-10.]

Presently before the Court are the parties' motions for summary judgment and for partial summary judgment. EQT requests that the Court enter judgment in EQT's favor on all of the claims in Journey's Third Amended Complaint, and to also enter judgment in EQT's favor on EQT's counterclaims for declaratory judgment. [R. 86 at 1.] On the same day that EQT filed its summary judgment motion, Journey also filed four partial motions for summary judgment. [R. 87, 88, 89, 90.] In its first motion, Journey moves the Court to find in its favor on the breach of contract claims, and in particular to find that EQT breached the Further Assurances clause of the PSA by failing to convey all of its rights, title and interest in and to the Further Assurances wells and leases that were located within the blue boundaries, or to quiet title to those interests in Journey and pay Journey the net-revenue amounts received plus interest. [R. 87 at 3.] Journey's second motion requests partial summary judgment in its favor concerning its request for declaratory judgment confirming that the 2001 transaction conveyed to Journey the Third-Party Leases and Fee Properties as identified in Exhibits A and J to the PSA, including any portions outside the blue boundaries on the Exhibit N maps. [R. 88 at 1-2.] Construing the PSA in this manner would necessarily result in denying EQT's counterclaim requesting the Court to construe the agreement to mean only the lands within the blue boundaries were transferred. Journey's third motion requests summary judgment in its favor concerning EQT's affirmative defense of mutual mistake, and on EQT's related counterclaim for reformation of the contractual

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documents. [R. 89 at 1-2.] Finally, Journey moves for summary judgment in its favor on EQT's counterclaim for declaratory judgment concerning Journey's drilling obligations under the 2001 Lease. [R. 90 at 1.] Specifically, EQT's counterclaim alleges that the 2001 Lease required Journey to drill a producing well on certain leased tracts of land within five years in order to retain the lease for those tracts at the conclusion of the primary term. [R. 68 at 8.] Journey denies that drilling was required and seeks a declaration to that effect. [R. 90 at 2.]

II

A

Because the parties are diverse and the amount in controversy is well over $75,000, this action is in federal court on the basis of diversity jurisdiction, 28 U.S.C. § 1332. [R. 38.] Because Kentucky is the forum state, its substantive law will be used. Rawe v. Liberty Mut. Fire Ins. Co., 462 F.3d 521, 526 (6th Cir. 2006) (citations omitted). However, federal procedural law will govern as applicable, including in establishing the appropriate summary judgment standard. Weaver v. Caldwell Tanks, Inc., 190 F.App'x 404, 408 (6th Cir. 2006).

Summary judgment is appropriate when " the pleadings, discovery and disclosure materials on file, and any affidavits show that there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c)(2); Celotex Corp. v. Catrett, 477 U.S. 317, 323-25, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). " A genuine dispute exists on a material fact, and thus summary judgment is improper, if the evidence shows 'that a reasonable jury could return a verdict for the nonmoving party.'" Olinger v. Corp. of the President of the Church, 521 F.Supp.2d 577, 582 (E.D. Ky. 2007) (quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986)). Stated otherwise, " [t]he mere existence of a scintilla of evidence in support of the plaintiff's position will be insufficient; there must be evidence on which the jury could reasonably find for the plaintiff." Anderson, 477 U.S. at 252.

The moving party has the initial burden of demonstrating the basis for its motion and identifying those parts of the record that establish the absence of a genuine issue of material fact. Chao v. Hall Holding Co., Inc., 285 F.3d 415, 424 (6th Cir. 2002). The movant may satisfy its burden by showing " that there is an absence of evidence to support the non-moving party's case." Celotex Corp., 477 U.S. at 325. Once the movant has satisfied this burden, the non-moving party must go beyond the pleadings and come forward with specific facts to demonstrate that a genuine issue exists. Hall Holding, 285 F.3d at 424 (citing Celotex Corp., 477 U.S. at 324). In applying the summary judgment standard, the Court must review the facts and draw all reasonable inferences in favor of the non-moving party. Logan v. Denny's, Inc., 259 F.3d 558, 566 (6th Cir. 2001) (citing Anderson, 477 U.S. at 255).

B

" It is well settled that the interpretation of contracts is an issue of law for the court to decide." Equitania Ins. Co. v. Slone & Garrett, P.S.C., 191 S.W.3d 552, 556 (Ky. 2006). To establish a claim for breach of contract, Kentucky common law requires the plaintiff to establish: " 1) existence of a contract; 2) breach of that contract; and 3) damages flowing from the breach of contract." Fifth Third Bank v. Lincoln Fin. Sec. Corp., 453 F.App'x 589, 601 (6th Cir. 2011) (quoting Metro Louisville/Jefferson Cnty. Gov't v. Abma,

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326 S.W.3d 1, 8 (Ky. Ct. App. 2009). " An elemental principle" of contract interpretation is that a contract must be construed " in accordance with the intention of the parties. The court must seek to ascertain how the parties intended their agreement to operate at the time they entered into it." L.K. Comstock & Co., Inc. v. Becon Const. Co., 932 F.Supp. 948, 964 (E.D. Ky. 1994) aff'd sub nom. L.K. Comstock & Co. v. Becon Constr. Co., 73 F.3d 362 (6th Cir. 1995).

Another rule of contract construction is that " . . . specific terms and exact terms are given greater weight than general language; . . . [and] separately negotiated or added terms are given greater weight than standardized terms or other terms not separately negotiated." Id. at 967 (quoting Restatement (Second) of Contracts 203(c), (d) (1979)). In doing so, the Court must read the various provisions of the contract as a whole, and should look to interpretations that " promote harmony" between any apparently conflicting provisions. Id. at 964 (citing Cook United, Inc. v. Waits, 512 S.W.2d 493, 495 (Ky. 1974)). Similarly, an interpretation of the contract that " gives a reasonable, lawful, and effective meaning to all the terms is preferred to an interpretation which leaves a part unreasonable, unlawful, or of no effect." Id. at 967 (quoting Restatement (Second) of Contracts 203(a) 1979)) (internal quotation marks omitted).

Where the parties execute a written instrument, an unambiguous written contract " will be enforced strictly according to its terms," and the court will interpret those 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, 105-06 (Ky. 2003) (internal quotations omitted). If there is no ambiguity, the court's analysis extends only to the four corners of the contract to determine the parties' intention. Hoheimer v. Hoheimer, 30 S.W.3d 176, 178 (Ky. 2000). If, however, the contract is " facially reasonably susceptible to more than one interpretation," the Court will give " great weight" to the parties' actions, subsequent conduct, or other declarations indicating their mutual intent and understanding. L.K. Comstock & Co., Inc., 932 F.Supp. at 965 (quoting A.L. Pickens Co. v. Youngstown Sheet & Tube Co., 650 F.2d 118, 120 (6th Cir. 1981)).

C

As a threshold matter, the Court must first address a jurisdictional issue raised by EQT. EQT contends that Journey's claims are barred by various statutes of limitation and by equitable doctrines. First, EQT asserts that Section 17 of the PSA sets a contractual limitation of one year in which to bring claims concerning the agreement. [R. 86-1 at 40.] Because the PSA states that the " Seller's representations and warranties shall survive the closing for a period of one (1) year only," and because Journey brought suit nearly eleven years after closing, EQT argues that all of Journey's claims are barred. [ Id.] However, the PSA specifically lists the " Representations of Seller" in a separate section from the rest of the contract [R. 87-2 at 3-6 (Section 4(a))], and further states in bold, capital letters that the list of representations in Section 4(a) is " EXCLUSIVE." [ Id. at 6-7.] The language and structure of the contract appear to indicate that only those listed, express warranties in Section 4(a) are limited to the one-year survival period. Because ...


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