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AWT Be Good LLC v. Chesapeake Louisiana L.P.

United States District Court, W.D. Louisiana, Shreveport Division

January 11, 2019

AWT BE GOOD LLC
v.
CHESAPEAKE LOUISIANA, L.P., ET AL.

          MAGISTRATE JUDGE HAYES

          MEMORANDUM RULING

          S. MAURICE HICKS, JR., CHIEF JUDGE, UNITED STATES DISTRICT COURT

         Before the Court are multiple pending motions filed by the parties pursuant to Federal Rule of Civil Procedure 56: (1) Plaintiff AWT Be Good LLC's (“AWT”) Motion for Partial Summary Judgment (Record Document 45); (2) Defendants Chesapeake Louisiana, L.P. (“CLLP”), Chesapeake Operating, L.L.C. (“COLLC”), and Chesapeake Energy Marketing, L.L.C.'s (“CEM”) (collectively “Chesapeake”) Motion for Summary Judgment (Record Document 47); and (3) Defendant PXP Louisiana L.L.C.'s (“PXP”) Motion for Summary Judgment (Record Document 49). Chesapeake and PXP oppose AWT's motion; AWT likewise opposes Chesapeake and PXP's respective motions. For the reasons set forth below, all motions are DENIED.

         I. BACKGROUND

         This oil and gas case concerns the parties' conflicting interpretations of certain provisions contained in a mineral lease. On March 25, 2008, AWT entered into an oil and gas lease (the “Lease”) with Meagher Oil and Gas Properties, Inc. covering property located in DeSoto and Red River Parishes, Louisiana. See Record Document 47-2 at 1.[1] The Lease was later assigned to Chesapeake on August 15, 2008. See id.; Record Document 45-1 at 1. Thereafter, Chesapeake subleased a 20% interest in the Lease to PXP (the “Sublease”). See Record Document 45-1 at 1.

         Two years later on August 18, 2010, AWT and Chesapeake entered into an amendment of the Lease (the “Lease Amendment”), the interpretation of which is the primary basis for the instant dispute, to provide as follows:

12. TRANSPORTATION CHARGES: With regard to mineral production, LESSEE bears all costs of production, transportation, gathering, compression, disposal of salt water and any other cost, expense or preparation necessary to produce, process and/or transport the mineral production, except with regard to gas, LESSEE shall pay all of said costs including any other costs and expenses that are incurred prior to delivery of the gas into a regulated intrastate pipeline or interstate gas pipeline at the tailgate of the furthest downstream of either (i) a gathering system; or (ii) a treating plant, for delivery to its final market destination (a “Transportation Pipeline”). It is the intention of the parties that with regard to gas, the only cost that the Lessor's royalty shall bear is its proportionate share of the long-haul transportation charges to the point of sale of the royalty gas once the gas is in a Transportation Pipeline. Royalty will be paid on any mineral production produced from any well, even minerals that are used to operate and/or service any equipment used in the production, compression, processing or transportation of said mineral production, except for shrinkage and fuel lost and unaccounted for incurred after delivery into the Transportation Pipeline.

         Record Document 45-2 at 6 (emphasis added). AWT alleges that Chesapeake, in direct violation of the Lease Amendment, has been and continues to improperly deduct from AWT's royalties what it alleges are “unused” “capacity charges, ” costs which AWT contends are not associated with the “actual” transportation of AWT's gas. See id. at 5- 6

         As explained by AWT, these capacity charges incurred by Chesapeake are “upfront reservation fee[s] a gas producer pays to a pipeline owner in order to secure future space in the pipeline for the delivery of its gas to distant markets.” See id. at 6-7 (quoting Commissioner of General Land Office of State v. SandRidge Energy, Inc., 454 S.W.3d 603, 621 (Tex. App.-El Paso 2014)). AWT further explains these charges as a type of “take-or-pay” obligation that producers, like Chesapeake, agree to pay to third-party transportation pipelines each month to transport a certain volume of gas, whether or not the producer actually ships the reserved volume. See id. According to AWT, Chesapeake incurs these costs (and subsequently charges them against AWT's royalties) not only when it ships a volume of AWT's gas that is below the reserved volume but also when no amount of AWT's gas is shipped in the pipeline. See id. Chesapeake responds that the capacity charges are actual transportation costs that are a customary practice in the oil and gas industry and are necessary to ship the gas to additional downstream markets in order to maximize revenue. See Record Document 47-1 at 7-8. Chesapeake also maintains that, contrary to AWT's assertion, capacity charges (or reservation fees) are not netted in computing AWT's royalty if none of AWT's gas is shipped in a pipeline that has a reservation fee. See id. at 11.

         Beginning on October 13, 2015, AWT first sent notice to Chesapeake of an alleged underpayment of royalties. See Record Document 47-2 at 4. Chesapeake responded to this notice by issuing a royalty check to AWT which, according to Chesapeake, included reimbursement to AWT for gathering and associated fuel costs that Chesapeake had mistakenly charged to AWT in computing its royalties. See id. The following year, Chesapeake received additional notices for failure to properly pay royalties from AWT's counsel, to which Chesapeake responded that AWT's royalties were being calculated and paid properly. See id. at 5.

         On September 7, 2016, AWT filed an Original Petition for Proper Payment of Royalties Plus Damages and Attorney's Fees (the “Petition”), which was subsequently removed to this Court, alleging various claims against Chesapeake regarding its computation and payment of AWT's royalties. See Record Document 1-2 at 1, 19-20. AWT seeks from this Court an order against Chesapeake declaring that the disputed Lease Amendment prohibits Chesapeake from charging AWT's royalties with certain transportation-related post-production costs. See Record Document 45-2 at 5. In response, Chesapeake also requests summary judgment in its favor, not only as to whether such transportation costs are properly deductible, but also as to the other claims AWT alleges in its Petition. See Record Document 47 at 1. Additionally, PXP requests summary judgment dismissing all of AWT's claims against it or, in the alternative, joins in Chesapeake's motion for the same relief. See Record Document 49-1 at 6.

         II. LAW AND ANALYSIS

         A. Summary Judgment Standard

         Summary judgment is proper pursuant to Rule 56 of the Federal Rules of Civil Procedure when “there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Quality Infusion Care, Inc. v. Health Care Serv. Corp., 628 F.3d 725, 728 (5th Cir. 2010).[2] A genuine dispute of material fact exists if the record, taken as a whole, could lead a rational trier of fact to find for the non-moving party. See Geoscan, Inc. of Texas v. Geotrace Techs., Inc., 226 F.3d 387, 390 (5th Cir. 2000). During this stage, courts must look to the substantive law underlying the lawsuit in order to identify which facts are “material.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 2510 (1986).

         Rule 56(c) mandates the entry of summary judgment, after adequate time for discovery and upon motion, against a party “who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof [at trial].” See Patrick v. Ridge, 394 F.3d 311, 315 (5th Cir. 2004) (quoting Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 2552 (1986)). If the movant demonstrates the absence of a genuine dispute of material fact, “the nonmovant must go beyond the pleadings and designate specific facts showing that there is a genuine [dispute] for trial.” Gen. Universal Sys., Inc. v. Lee, 379 F.3d 131, 141 (5th Cir. 2004). Where critical evidence is so weak or tenuous on an essential fact that it could not support a judgment in favor of the nonmovant, then summary judgment should be granted. See Boudreaux v. Swift Transp. Co., 402 F.3d 536, 540 (5th Cir. 2005).

         In reviewing a motion for summary judgment, the court is to view “the facts and inferences to be drawn therefrom in the light most favorable to the non-moving party.” Tubos de Acero de Mexico, S.A. v. Am. Int'l Inv. Corp., Inc., 292 F.3d 471, 478 (5th Cir. 2002); Harris v. Serpas, 745 F.3d 767, 771 (5th Cir. 2014). The court should not, however, in the absence of any proof, presume that the nonmoving party could or would prove the necessary facts. See Little v. Liquid Air Corp., 37 F.3d 1069, 1075 (5th Cir. 1994).

         As the present case is before the Court under diversity jurisdiction, the Court must apply the substantive law of the forum state pursuant to the Erie doctrine. Bradley v. Allstate Ins. Co., 620 F.3d 509, 517 n.2 (5th Cir. 2010) (citing Erie R. Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817 (1938)). Here, because the Lease covers immovable property situated in Louisiana, it is undisputed that Louisiana substantive law controls. See ...


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