[Cite as Gateway Royalty, L.L.C. v. Chesapeake Exploration, 2020-Ohio-1311.]




             IN THE COURT OF APPEALS OF OHIO
                            SEVENTH APPELLATE DISTRICT
                                 CARROLL COUNTY

                                GATEWAY ROYALTY, L.L.C.,

                                         Plaintiff-Appellant,

                                                     v.

                        CHESAPEAKE EXPLORATION, ET AL.,

                                     Defendants-Appellees.


                       OPINION AND JUDGMENT ENTRY
                                        Case No. 19 CA 0933


                                    Civil Appeal from the
                        Court of Common Pleas of Carroll County, Ohio
                                  Case No. 2017CVH28970

                                         BEFORE:
                 Gene Donofrio, Cheryl L. Waite, David A. D’Apolito, Judges.


                                              JUDGMENT:
                                                Affirmed.



 Atty. Robert Sanders, 12051 Old Marlboro Pike, Upper Marlboro, Maryland 20772 and
 Atty. James Lowe, Lowe, Eklund & Wakefield Co. LPA, 1660 West Second Street,
 610 Skylight Office Tower, Cleveland, Ohio 44113, for Plaintiff-Appellant and
                                                                                      –2–


 Atty. Peter Lusenhop, Atty. Timothy McGranor, Atty. Andrew Guran, Atty. Thomas
 Fusonie, Atty. Mitchell Tobias, Atty. Ilya Batikov, Vorys, Sater, Seymour and Pease
 LLP., 52 East Gay Street, P.O. Box 1008, Columbus, Ohio 43216, and

 Atty. William Connolly, Drinker Biddle & Reath, LLP., One Logan Square, Suite 2000,
 Philadelphia, Pennsylvania 19103, and

 Atty. Daniel Donovan, Kirkland & Ellis, LLP., 655 Fifteenth Street, N.W., Washington,
 DC 20005, for Defendants-Appellees.

                                      April 3, 2020


 Donofrio, J.

       {¶1}   Plaintiff-appellant, Gateway Royalty, LLC (Gateway), appeals from a Carroll
County Common Pleas Court judgment granting summary judgment in favor of
defendants-appellees, Chesapeake Exploration, LLC (CELLC), Chesapeake Utica, LLC
(CHK Utica), Jamestown Resources, LLC (Jamestown), Pelican Energy, LLC (Pelican),
and EnerVest Operating, LLC (EnerVest), on Gateway’s claim for breach of contract
alleging underpayment of oil and gas royalties.
       {¶2}   Gateway is a Texas company that owns a royalty interest in six leases at
issue in this case. All six leases require that the royalties on gas, including natural gas
liquids (NGLs), are to be calculated on the price paid for the products marketed and used
off the premises.
       {¶3}   In five of the leases (the Eric Petroleum Leases), the original lessee was
Eric Petroleum, Inc. The current lessees of the Eric Petroleum Lease are CELLC, CHK
Utica, Jamestown, and Pelican. The Eric Petroleum Leases provide that the lessee shall
pay,

       as royalty for the gas marketed and used off the premises and produced
       from each well drilled thereon, the sum of one-eighth (1/8) of such gas so
       marketed and used at the price paid to Lessee * * * less any charges for
       transportation, compression and/or dehydration to deliver the gas for sale.

(Eric Petroleum Leases).




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       {¶4}   In the sixth lease (the Great Lakes Lease), the original lessee was Great
Lakes Energy Partners, LLC. Currently, the sole lessee of the Great Lakes Lease is
EnerVest. The Great Lakes Lease provides the identical provision quoted above in the
Eric Petroleum Leases except that the last line reads, “less any charges for transportation,
dehydration and compression paid by Lessee to deliver the gas for sale.” (Great Lakes
Lease).
       {¶5}   CELLC produces the gas and sells its share and CHK Utica’s share of the
gas to Chesapeake Energy Marketing, LLC (CEMLLC) at or near the wellhead.
Jamestown and Pelican also entered into marketing agreements with CELLC to market
and sell their oil, gas, and NGLs. CEMLLC then processes the raw product into gas and
NGLs and markets these products to third-party buyers downstream. CEMLLC incurs
post-production costs to move the gas downstream for further sale.
       {¶6}   Instead of paying royalties on the third-party price, appellees pay royalties
on the price paid by the third-party buyers minus the post-production costs incurred by
CEMLLC between the well and the sale to the third parties.
       {¶7}   On December 28, 2017, Gateway filed a complaint against appellees
alleging the underpayment of oil and gas royalties under counts of breach of contract,
conversion, and violations of Ohio’s Corrupt Practices Act. Gateway alleged that CELLC,
on behalf of all appellees, miscalculated the royalties it paid. It asserted the only price
actually paid for the gas and NGLs is the price paid by third-party buyers. Therefore,
Gateway claimed the royalties must be calculated on the third-party price. On appellees’
motion, the trial court dismissed the conversion and Ohio Corrupt Practices counts.
       {¶8}   CELLC, CHK Utica, Jamestown, and Pelican (the Chesapeake Defendants)
filed a joint motion for summary judgment on the remaining breach of contract claim.
EnerVest filed its own motion for summary judgment on that remaining claim. The trial
court granted both motions for summary judgment but for different reasons.
       {¶9}   As to the Chesapeake Defendants, the trial court found that while Gateway
sought to receive royalty payment based on the downstream sales price paid to CEMLLC,
this is not what is specified in the Eric Petroleum Leases. Instead, the royalty payment is
based on the price paid to CELLC at the wellhead. The court pointed out that per the Eric
Petroleum Leases, the contract price is to be reduced by the buyer’s actual cost of any



Case No. 19 CA 0933
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fees incurred in marketing such as taxes and fees for gravity adjustment, transportation,
or treating. The court also noted that the reasonably prudent operator’s price does not
have to be the highest possible price but rather it must be reasonable under the
circumstances. It found the Chesapeake Defendants met that burden. Thus, the trial
court found that no genuine issues of material fact existed and granted summary
judgment in favor of the Chesapeake Defendants.
      {¶10} As to EnerVest, the trial court pointed out that the royalty statement
provided by Gateway showed no deductions from royalties other than for taxes.
Therefore, it found there were no damages from improper deductions. The court pointed
out that Gateway relied on the Buck Well Documents, the Henceroth Discovery, and
conversations between Bruce Buck and unidentified oil haulers. The court found that the
Buck Well Documents related to a different lease. The Henceroth Discovery involved a
matter in which EnerVest was not a party and, therefore, could not be used against
EnerVest. And the conversations between Bruce Buck and the oil haulers did not concern
the Great Lakes Lease.      Thus, the trial court found that Gateway relied only on
unsupported inferences and presented no evidence to create a genuine issue of material
fact. Therefore, the court granted summary judgment in EnerVest’s favor.
      {¶11} Gateway filed a timely notice of appeal from both judgments on July 29,
2019. It now asserts that summary judgment in favor of appellees was improper.
      {¶12} An appellate court reviews a summary judgment ruling de novo. Comer v.
Risko, 106 Ohio St.3d 185, 2005-Ohio-4559, 833 N.E.2d 712, ¶ 8. Thus, we shall apply
the same test as the trial court in determining whether summary judgment was proper.
      {¶13} A court may grant summary judgment only when (1) no genuine issue of
material fact exists; (2) the moving party is entitled to judgment as a matter of law; and
(3) the evidence can only produce a finding that is contrary to the non-moving party.
Mercer v. Halmbacher, 9th Dist. Summit No. 27799, 2015-Ohio-4167, ¶ 8; Civ.R. 56(C).
The initial burden is on the party moving for summary judgment to demonstrate the
absence of a genuine issue of material fact as to the essential elements of the case with
evidence of the type listed in Civ.R. 56(C). Dresher v. Burt, 75 Ohio St.3d 280, 292, 662
N.E.2d 264 (1996). A “material fact” depends on the substantive law of the claim being
litigated. Hoyt, Inc. v. Gordon & Assoc., Inc., 104 Ohio App.3d 598, 603, 662 N.E.2d 1088



Case No. 19 CA 0933
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(8th Dist.1995), citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-248, 106 S.Ct.
2505, 91 L.Ed.2d 202 (1986).
       {¶14} If the moving party meets its burden, the burden shifts to the non-moving
party to set forth specific facts to show that there is a genuine issue of material fact. Id.;
Civ.R. 56(E). “Trial courts should award summary judgment with caution, being careful
to resolve doubts and construe evidence in favor of the nonmoving party.”              Welco
Industries, Inc. v. Applied Cos., 67 Ohio St.3d 344, 346, 617 N.E.2d 1129 (1993).
       {¶15} Gateway raises two assignments of error that it addresses together.
Gateway’s first assignment of error states:

              THE     TRIAL    COURT      ERRED       IN   ENTERING       SUMMARY
       JUDGMENT IN FAVOR OF APPELLEES BECAUSE THERE ARE
       GENUINE ISSUES OF MATERIAL FACT AS TO WHETHER THE GAS
       AND NATURAL GAS LIQUIDS WERE “MARKETED” AT THE WELL OR
       ONLY IN SALES TO THIRD-PARTY BUYERS DOWNSTREAM OF THE
       WELL.

       {¶16} Gateway’s second assignment of error states:

              THE     TRIAL    COURT      ERRED       IN   ENTERING       SUMMARY
       JUDGMENT IN FAVOR OF APPELLEES BECAUSE THERE ARE
       GENUINE ISSUES OF MATERIAL FACT AS TO WHETHER THE “PRICE
       PAID” TO APPELLEES FOR THE GAS AND NATURAL GAS LIQUIDS
       WAS A WELLHEAD PRICE OR THE PRICE PAID BY THIRD-PARTY
       BUYERS DOWNSTREAM OF THE WELL.

       {¶17} The leases provide that the royalties on gas and NGLs shall be 1/8 of the
price “paid” to the lessee for all gas and NGLs “marketed and used off the premises.”
Gateway argues that, by definition, the marketing must occur off of the leased premises.
It asserts that two documents produced by CELLC establish that the only gas marketed
is the gas marketed to the third-party buyers.
       {¶18} First, Gateway points to a document called the “Transaction Confirmation.”
(Opposition to Summary Judgment Ex. 2). The Transaction Confirmation provides that


Case No. 19 CA 0933
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CELLC will sell to CEMLLC the gas and NGLs and the “marketing obligations for royalty
owners.” Thus, Gateway argues, CELLC cannot perform marketing for royalty owners
because CELLC sold that right to CEMLLC.
       {¶19} Second, Gateway points to the Development Agreement between CELLC
and CHK Utica. (Opposition to Summary Judgment Ex. 1). The Development Agreement
provides: “Chesapeake Exploration will arrange for Affiliated or non-Affiliated Persons to
provide, on a Reasonably Prudent Operator Standard, all marketing and Other Services
helpful or necessary for the sale, at market prices, of Utica’s Hydrocarbon production.”
(Emphasis added). Gateway argues that CELLC clearly does not perform any marketing
because per the Development Agreement, it is required to arrange for other entities (in
this case CEMLLC) to perform “all” marketing.
       {¶20} Next, Gateway points out that the leases provide that the royalties shall be
1/8 of the price “paid to Lessee.” Because it asserts the only price paid to lessee is the
price paid by the third-party buyers, Gateway argues this is the amount from which
royalties must be calculated.
       {¶21} Gateway continues by arguing that the trial court incorrectly ruled that
CELLC marketed and sold the gas and NGL’s to CEMLLC. Therefore, it contends, the
trial court erroneously ruled that CELLC took no cost deductions from the royalties.
Gateway argues instead that the only actual sale and payment was the sale to the third-
party buyers. Consequently, it asserts the third-party price is the price that must be used
for royalty purposes, without any deductions.
       {¶22} Gateway goes on to argue that no costs can be deducted from the price
paid by the third-party buyers for two reasons. First, the costs were not incurred by
appellees but by CEMLLC. And second, the costs were incurred after CELLC transferred
title to CEMLLC at the well. Thus, all of the post-production costs were incurred by
CEMLLC downstream of the well. Therefore, Gateway concludes, none of the post-
productions costs can be deductible from the amounts paid by the third-party buyers when
calculating royalties.
       {¶23} The court's role in reviewing a contract is to determine the parties’ intent
and give effect to it. Hamilton Ins. Serv., Inc. v. Nationwide Ins. Cos., 86 Ohio St. 3d 270,
273, 714 N.E.2d 898 (1999). “A contract is defined by the words written within the four



Case No. 19 CA 0933
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corners of the document.” Cleveland Mack Leasing, Ltd. v. Chef's Classics, Inc., 7th Dist.
Mahoning No. 05 MA 59, 2006-Ohio-888, ¶ 19. When contract language is clear and
unambiguous, and not subject to multiple interpretations, a court will not consider extrinsic
evidence to interpret the contract's terms. Love v. Beck Energy Corp., 7th Dist. Noble
No. 14 NO 415, 2015-Ohio-1283, ¶ 21, citing Shifrin v. Forest City Enterprises, Inc., 64
Ohio St.3d 635, 597 N.E.2d 499 (1992), syllabus.
         {¶24} Thus, if the Leases are clear and unambiguous, we may not consider the
extrinsic evidence Gateway urges us to consider.
         {¶25} The Eric Petroleum Leases provide that CELLC will pay royalties, “for the
gas marketed and used off the premises and produced from each well” in the amount of
one-eighth of “such gas so marketed and used at the price paid to Lessee * * * less any
charges for transportation, compression and/or dehydration to deliver the gas for sale.”
This language appears clear and unambiguous.
         {¶26} According to Merriam-Webster’s online dictionary, to “market” is “to expose
for sale in a market” or to “sell.” https://www.merriam-webster.com/dictionary/market.
Thus, when CELLC sold the gas and NGLs to CEMLLC, it “marketed” the product.
Because there is no ambiguity, we will not consider the extrinsic documents that Gateway
relies on.
         {¶27} The price CEMLLC pays to CELLC is calculated in the following way: (1)
CELLC produces and markets the gas and NGLs by bringing the hydrocarbons to the
surface; (2) CELLC sells its working interest share, along with CHK Utica’s, Jamestown’s,
and Pelican’s working interest shares, to CEMLLC at or near the wellhead; (3) CEMLLC
calculates the “netback” price by taking the proceeds it receives from third-party buyers
downstream and deducting the transportation, compression, gathering, and other post-
production costs it incurs; and (4) CEMLLC pays the Chesapeake defendants the
“netback” price for the gas and NGLs produced and sold at the wellhead. (Chesapeake
Defendants’ Motion for Summary Judgment Ex. A, Gipson Aff. ¶ 3; Ex. B, Bowles Aff. ¶
4, 7, 11). The Chesapeake defendants then pay Gateway royalties based on this netback
price.
         {¶28} In a similar case, the United States District Court, Northern District of Ohio,
Eastern Division, approved this method. The court granted summary judgment in favor



Case No. 19 CA 0933
                                                                                      –8–


of CELLC on a class action suit brought by royalty owners for breach of contract arising
from CELLC’s alleged underpayment of oil and gas royalties asserting CELLC paid the
royalties on the wrong price. Henceroth v. Chesapeake Expl., L.L.C., N.D.Ohio No.
4:15CV2591, 2019 WL 4750661 (Sept. 30, 2019). The leases at issue provided CELLC
would pay royalties “in an amount equal to one-eighth of the net proceeds realized by
Lessee from the sale of all gas and the constituents thereof produced and marketed from
the Leasehold.” Id. at * 1.
       {¶29} The court found:

       Defendant’s motion presents the issue of whether CELLC paid royalties
       consistent with the Class Leases. The Court concludes that it did.
       Defendant paid “one-eighth of the net proceeds realized.” The lease
       language is plain and unambiguous and the evidentiary record is clear:
       CELLC (the Lessee) paid Plaintiffs 1/8th of the proceeds it received from
       the sale of the oil and gas produced and marketed from the leaseholds. * *
       * CELLC sells the oil and gas at the wellhead to CEMLLC * * * receives a
       netback price from CEMLLC for those sales, and paid Plaintiffs 1/8th of
       those proceeds, without taking any deductions from the proceeds realized
       from CEMLLC. That is exactly what the parties negotiated for in section 5(B)
       of the Class Leases.
Id. at *7. Thus, the court concluded that the language “one-eighth of the net proceeds
realized by Lessee from the sale of all gas and the constituents thereof produced and
marketed from the Leasehold” was clear and unambiguous. And that the netback price
was the proper price from which to calculate the one-eighth royalty payment.

       {¶30} The same federal district court also confirmed an arbitrator’s award in favor
of CELLC, CK Utica, and CEMLLC on the almost identical lease issue. In Hale v.
Chesapeake Expl., L.L.C., N.D.Ohio No. 4:18CV2217, 2019 WL 1863670 (Apr. 25, 2019),
reconsideration denied, N.D.Ohio No. 4:18CV2217, 2019 WL 5420147, the royalty
owners pursued claims against CELLC, CK Utica, and CEMLLC asserting breach of
contract. Per the terms of their lease, the royalty owners were to receive royalties
calculated as a percentage of the proceeds attributable to the production from each well.


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Id. at * 1. The royalty owners alleged they should have received royalties on the revenue
figure of the sale from CEMLLC to downstream purchasers, rather than on the revenue
figure of the sale from CELLC to CEMLLC. Id. They further argued that CELLC does not
perform any marketing, instead CEMLLC does. Id. at * 2. They argued that CELLC’s
obligation to “market” the oil and gas does not occur until CEMLLC sells the product to
third-party buyers downstream. Id.
       {¶31} The arbitration panel unanimously decided against the royalty owners and
in favor of the Chesapeake parties. Id. The panel found the royalty owners provided no
evidence that CEMLLC paid a price to CELLC that was “less than that which would be
received from a sale to an unaffiliated third party in an arm’s length transaction
considering the volume available quality, location, and length of term of the proposed
sale.” Id. It further found CELLC transfers title and receives total consideration from
CEMLLC for the oil and gas produced from the leases, CELLC markets the oil and gas
produced from the leases, and CELLC and its affiliates make legally sufficient accounting
entries on their books and records to evidence transfer of title and consideration paid. Id.
       {¶32} The district court observed that the arbitration panel also found that CELLC
“marketed” the oil and gas when it sold the oil and gas to CEMLLC. Id. at * 4. The court
confirmed the panel’s award finding that the panel stayed well within its powers to
adjudicate the dispute and executed those powers appropriately. Id.
       {¶33} Given all of the above, the Leases are clear and unambiguous and the
Chesapeake defendants properly calculated the royalty payments based on the Leases’
terms. Accordingly, the trial court properly granted summary judgment in their favor.
       {¶34} EnerVest raises a different argument than the Chesapeake defendants.
EnerVest argues that Gateway has not identified any evidence to support its claim that
EnerVest breached the Great Lakes Lease. Nor has Gateway identified any damages.
EnerVest points out that in its complaint, Gateway made the same allegations against all
defendants regarding each of the Leases and calculations of royalties. In its interrogatory
answers, Gateway identified the evidence it stated support its allegations of breach: (1)
the “Buck Well Documents;” (2) the “Henceroth Discovery;” and (3) conversations
between non-party Bruce Buck and unidentified oil haulers. EnerVest argues none of this
evidence applies to it or the Great Lakes Lease.



Case No. 19 CA 0933
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       {¶35} EnerVest argues that the Buck Well Documents have no bearing on the
Great Lakes Lease because they relate to a different lease to which it is not a party. It
contends the Henceroth Discovery is likewise unrelated to the Great Lakes Lease.
Additionally, EnerVest argues, it contains hearsay. Finally, it points out that Bruce Buck
has no connection with the Great Lakes Lease. EnerVest argues Gateway has only
offered inferences against it. It asserts Gateway wishes the court to infer that the alleged
breach of the Eric Petroleum Leases results in a finding that EnerVest breached the Great
Lakes Lease.
       {¶36} Finally, EnerVest argues the evidence is uncontroverted that Gateway has
no evidence of damages resulting from the Great Lakes Lease. It points to Gateway’s
royalty statements for production from the wells in drilling units subject to the Great Lakes
Lease. (EnerVest Motion for Summary Judgment, Ex. A). It notes that under the heading
“DEDUCT,” all entries read “0.0,” indicating that no deductions were taken.
       {¶37} The trial court relied on these reasons in granting summary judgment to
EnerVest. In its appellate brief, Gateway did not address these arguments. In its reply
brief, however, Gateway argued that the record is clear that CELLC functions as the
“operator” under both the Eric Petroleum Leases and the Great Lakes Lease. As such,
CELLC has the responsibility for selling the gas and paying the royalties. Gateway argues
that EnerVest, as the gas producer, cannot arrange for its agent, CELLC, to calculate and
pay royalties and then avoid liability if the agent underpays the royalties.
       {¶38} CELLC is the operator of the Great Lakes Lease. (EnerVest Motion for
Summary Judgment Exs. A-1, A-2, A-3). EnerVest admitted in its motion for summary
judgment that it is not the operator of any of the wells drilled pursuant to the Great Lakes
Lease, does not calculate or pay royalties to Gateway, does not market any products from
the wells, and had not negotiated any contracts for the sale of production from the wells.
(EnerVest Motion for Summary Judgment p. 3, Ex. B).
       {¶39} Based on the analysis above, summary judgment was proper finding that
CELLC did not breach the Eric Petroleum Leases in calculating royalty payments to
Gateway. Therefore, whether EnerVest should be held to be responsible for the royalty
payment calculated by CELLC, as Gateway alleges, or whether CELLC should be the
responsible party on the Great Lakes Lease, as EnerVest alleges, is immaterial here.



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Because the trial court properly found that CELLC calculated and paid royalties in
accordance with the Leases, under either scenario summary judgment in favor of
EnerVest was proper.
       {¶40} Accordingly, Gateway’s first and second assignments of error are without
merit and are overruled.
       {¶41} For the reasons stated above, the trial court’s judgment is hereby affirmed.




Waite, P. J., concurs.

D’Apolito, J., concurs.




Case No. 19 CA 0933
[Cite as Gateway Royalty, L.L.C. v. Chesapeake Exploration, 2020-Ohio-1311.]




         For the reasons stated in the Opinion rendered herein, the assignments of error
 are overruled and it is the final judgment and order of this Court that the judgment of
 the Court of Common Pleas of Carroll County, Ohio, is affirmed. Costs to be taxed
 against the Appellant.
         A certified copy of this opinion and judgment entry shall constitute the mandate
 in this case pursuant to Rule 27 of the Rules of Appellate Procedure. It is ordered that
 a certified copy be sent by the clerk to the trial court to carry this judgment into
 execution.




                                       NOTICE TO COUNSEL

         This document constitutes a final judgment entry.
