J. Fleet Oil & Gas Corporation, L.L.C. v. Chesapeake Louisiana, L.P.

          HORNSBY MAGISTRATE JUDGE.

          MEMORANDUM RULING

          S. MAURICE HICKS, JR., CHIEF JUDGE.

         Before the Court is Defendants Chesapeake Louisiana, L.P.; Chesapeake Operating, L.L.C.; Chesapeake Energy Corporation; and Chesapeake Energy Marketing, L.L.C.'s (collectively, “Chesapeake”) “Motion for Partial Summary Judgment” (Record Document 34). Chesapeake seeks to dismiss certain claims asserted by J. Fleet Oil and Gas Production Company, L.L.C (“J. Fleet”) and Martin Producing, L.L.C. (“Martin”) (collectively “Plaintiffs”). For the reasons which follow, Chesapeake's “Motion for Partial Summary Judgment” is hereby GRANTED.

         FACTUAL AND PROCEDURAL BACKGROUND

         In or around the summer of 2004, J. Fleet and Martin marketed the Martin/J. Fleet Prospect to a number of oil and gas companies as an opportunity to acquire a large contiguous block of leased acreage in which the oil and gas company could acquire a 100% working interest position in the leased acreage and have full operational control of the exploration and development of the multiple potentially productive zones and formations within the Martin/J. Fleet Prospect. On August 23, 2004, Chesapeake entered into a Participation Agreement (the “Agreement”) with Martin. See Record Document 34-2 at 1. The Agreement established an area of mutual interest (“AMI”) comprised of lands in Caddo Parish, Louisiana. See id. As part of the Agreement, Martin agreed to assign the oil and gas leases within the AMI to Chesapeake, respectively reserving an overriding royalty interest^[1] (“ORRI”) on each lease assigned in a percentage amount equal to the difference between the lessor's royalty and 28%, thus providing Chesapeake with a net revenue working interest percentage in each lease within the AMI of not less than 72%. See id. Identified in Exhibit “B” to the Agreement, the assignment reads as follows:

Assignor hereby reserves an overriding royalty interest applicable to each lease, equal to the difference between the lease royalty and 28% of all oil, gas and casinghead gas produced, saved and marketed from the lands covered by said leases. It is the intent that Assignor (Plaintiffs) shall deliver not less than a 72% net revenue interest to Assignee (Chesapeake) on each of the leases.

See id. at 10. All parties recognized that Martin would transfer or assign one-half of the Martin/J. Fleet ORRI to J. Fleet and that Martin was acting for itself and on behalf of J. Fleet.

         The Agreement was first amended on November 17, 2004, to modify and expand the AMI. See id. at 13. On April 4, 2007, the Agreement was amended a second time to reduce the amount of ORRIs owned by J. Fleet in the AMI. See id. at 16. Pursuant to the Agreement, Chesapeake entered into seven contracts of assignment with J. Fleet, whereby Chesapeake assigned an ORRI in the AMI to J. Fleet. See Record Document 34-3. Each of the seven assignments to J. Fleet contained the following express provision:

Proceeds of production attributable to the overriding royalty interest assigned herein shall be due Assignee from date of first production attributable to the particular lease assigned herein.

Said overriding royalty interest shall be free of all development, production, and operating expense of any wells drilled on the subject lands or land pooled therewith. Said overriding royalty interest shall bear and pay its portion of gross production taxes, pipeline taxes, and all other taxes assessed against the gross production subject to said overriding royalty interest.

See id. Exhibits B-O.

         J. Fleet alleges that from the beginning of payment of J. Fleet's ORRI Chesapeake was improperly deducting various costs and expenses from J. Fleet's ORRI in violation of the specific contractual agreements among the parties. See Record Document 1 at 15. J. Fleet alleges the improper deductions include costs such as compression costs, fuel usage and gathering costs as well as other costs or expenses incident to the production and sale of the oil and gas including, but not limited to, costs and expense of exploration, drilling, development, operating, marketing and all other costs. See id. Chesapeake allegedly deducted these costs without always disclosing what deductions were being made. See id. J. Fleet alleges Chesapeake is in breach of their contractual obligation to pay J. Fleet its ORRI from Chesapeake's working interest without any such deductions. See id. J. Fleet asserts Chesapeake's violations have resulted in Chesapeake improperly claiming in excess of $1 million for itself at the expense of and damage to J. Fleet. See id. at 16.

         On or about December 17, 2013, J. Fleet sent a demand letter to Chesapeake demanding full and proper payment for all ORRI payments due and owing on all wells and units under the Agreement and the seven contracts of assignment. See Record Document 1-1 at 104. On February 28, 2014, Chesapeake responded to J. Fleet's demand letter admitting it was deducting post-production costs from J. Fleet's ORRI. See id. at 113. Chesapeake refused to cease deducting development, production, and operating expenses or costs from J. Fleet's ORRIs, resulting in J. Fleet filing the instant suit on October 2, 2015. See Record Document 1. J. Fleet seeks: (1) a declaratory judgment pursuant to 28 U.S.C. § 2201; (2) a judgment of accounting; (3) a prohibitory injunction; (4) damages for Chesapeake's intentional, bad-faith breach of contract; and (5) damages for Chesapeake's intentional breach of fiduciary duties owed to J. Fleet. See id. at 17-21. Martin filed a Motion to Intervene on May 2, 2016, and was added to the lawsuit on May 3, 2016. See Record Document 17. Chesapeake filed a Motion for Partial Summary Judgment on August 25, 2016, seeking to dismiss Plaintiffs' claim that Chesapeake improperly deducted post-production costs. See Record Document 34.

         LAW AND ANALYSIS

         I. LEGAL STANDARDS

         A. SUMMARY JUDGMENT

         Rule 56 of the F.R.C.P. governs summary judgment. This rule provides that the court “shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” F.R.C.P. 56(a). Also, “a party asserting that a fact cannot be or is genuinely disputed must support the motion by citing to particular parts of materials in the record, including ... affidavits ... or showing that the materials cited do not establish the absence or presence of a genuine dispute, or that an adverse party cannot produce admissible evidence to support the fact.” F.R.C.P. 56(c)(1)(A) and (B). “If a party fails to properly support an assertion of fact or fails to properly address another party's assertion of fact as required by Rule 56(c), the court may ... grant summary judgment.” F.R.C.P. 56(e)(3).

         In a summary judgment motion, “a party seeking summary judgment always bears the initial responsibility of informing the district court of the basis for its motion, and identifying those portions of the pleadings ... [and] affidavits, if any, which it believes demonstrate the absence of a genuine issue of material fact.” Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 2553 (1986) (internal quotations and citations omitted). If the movant meets this initial burden, then the non-movant has the burden of going beyond the pleadings and designating specific facts that prove that a genuine issue of material fact exists. See Celotex, 477 U.S. at 325, 106 S.Ct. at 2554; see Little v. Liquid Air Corp., 37 F.3d 1069, 1075 (5th Cir. 1994). A non-movant, however, cannot meet the burden of proving that a genuine issue of material fact exists by providing only “some metaphysical doubt as to the material facts, by conclusory allegations, by unsubstantiated assertions, or by only a scintilla of evidence.” Little, 37 F.3d at 1075.

         Additionally, in deciding a summary judgment motion, courts “resolve factual controversies in favor of the nonmoving party, but only when there is an actual controversy, that is when both parties have submitted evidence of contradictory facts.” Id. Courts “do not, however, in the absence of any proof, assume that the nonmoving party could or would prove the necessary facts.” Id.

         B. CONTRACT ...