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EQT Production Co. v. Magnum Hunter Production Co.

United States District Court, E.D. Kentucky, Central Division, Lexington

August 31, 2017

EQT PRODUCTION COMPANY, Plaintiff,
v.
MAGNUM HUNTER PRODUCTION COMPANY, Defendant.

          MEMORANDUM OPINION AND ORDER

          Joseph M. Hood, Senior U.S. District Judge

         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');">97, 99, 100, 106].

         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; 1-11]. 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, and making improper royalty deductions. [Id.].

         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 time-barring 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 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 ...


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