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Lick Branch Unit, LLC v. Reed

United States District Court, E.D. Tennessee, Knoxville

November 3, 2016

LICK BRANCH UNIT, LLC, AND FOREXCO, INC., Plaintiffs,
v.
JIM REED, CHARLES BRUCE REED, AND JAMES LUEKING, Defendants. JAMES LUEKING, CHARLES BRUCE REED, AND JIM REED Individually, and as Attorney in Fact for Jean Reed, Freda Reed Davis, James Russell Reed, Deborah Reed Brandon, and Michael Allen Reed, Counterclaim-Plaintiffs,
v.
LICK BRANCH UNIT, LLC, FOREXCO, INC, FOREXCO ENERGY, LLC, MICHAEL GAMBLIN, CAMBRIDGE RESOURCES, INC, PDC RESOURCES, INC, LICK BRANCH UNIT JOINT VENTURE, CITIPOWER, LLC, CITIENERGY, LLC, and DANIEL R. FORSBERG, Counterclaim-Defendants and Third-Party Defendants.

          Magistrate Judge, Christopher Steger

          MEMORANDUM

          CURTIS L. COLLIER, UNITED STATES DISTRICT JUDGE

         Before the Court are cross motions for partial summary judgment. Defendants/Counterclaim-Plaintiffs Jim Reed et al. (“Defendants”) moved for partial summary judgment pursuant to Federal Rule of Civil Procedure 56(a) seeking a determination that Plaintiffs/Counterclaim-Defendants Lick Branch Unit, LLC et al. (“Plaintiffs”) do not own a working interest in the oil, gas, and minerals beneath Defendants' property. (Doc. 97.) Plaintiffs also moved for partial summary judgment seeking dismissal of the Counter-Complaint and Third-Party Complaint on the ground that Plaintiffs' ownership of a working interest in the oil, gas, and minerals beneath Defendants' property renders Defendants' claims untenable. (Doc. 101.) Both Plaintiffs and Defendants filed responses (Docs. 104 & 106, respectively) and replies (Docs. 107 & 108, respectively).

         For the reasons explained below, the Court finds Defendants own the working interest in the oil, gas, and minerals beneath their property. The Court will therefore GRANT Defendants' motion for partial summary judgment (Doc. 97) and DENY Plaintiffs' motion for partial summary judgment (Doc. 101).

         I. BACKGROUND

         Defendants and their predecessors in interest leased the working interest in their land to Plaintiffs and Plaintiffs' predecessors in interest in the 1960s. Defendants argue that under Tennessee law the working interest in their land reverted back to them due to a six-month stop in production occurring in 1994 and 1995.

         A. The Underlying Leases

         Defendants own land above a geological formation containing oil, gas, and other minerals. (Doc. 97.) In 1965 and 1967, Defendants and their predecessors in interest leased the mineral rights to their property to Plaintiffs' predecessors in interest in two separate leases (the “Underlying Leases”). (Id.) These leases granted Plaintiffs' predecessors in interest a “working interest” in Defendants' property. (Id.) The owner of a working interest under an oil and gas lease has the exclusive right to develop and produce oil and gas from the property, but must pay all costs of doing so, and normally must also pay royalties to the lessor. (Id. (citing Howard R. Williams & Charles J. Meyers, Manual of Oil and Gas Terms, (13th ed. 2006); Black's Law Dictionary, (10th ed. 2014)).) This was true of the Underlying Leases in this case.

         In Tennessee, all oil and gas leases, including those at issue here, are governed by Tennessee Code Annotated § 66-7-103. See Tengasco, Inc. v. Eastern Am. Energy Corp., No. 03A01-9703-CV-81, 1997 WL 476797, at *5 (Tenn. Ct. App. Aug. 1, 1997) (“In effect, the provisions of [] § 66-7-103 are written into every oil and gas lease.”). According to § 66-7-103(a)(1):

Any lease or oil or natural gas rights or any other conveyance of any kind separating such rights from the freehold estate of land shall expire at the end of ten (10) years from the date executed unless, at the end of such ten (10) years, natural gas or oil is being produced from such land for commercial purposes. If, at any time after the ten-year period, commercial production of oil or natural gas is terminated for a period of six (6) months, all such rights shall revert to the owner of the estate out of which the leasehold estate was carved. No assignment or agreement to waive the provisions of this subsection (a) shall be valid or enforceable.

(emphasis added.)

         B. The Unit Agreement

         Several different landowners control the land above the oil and gas reservoir at issue here. (Doc. 97.) In order to more efficiently explore and exploit the oil and gas beneath their land, Defendants, Defendants' predecessors in interest, and Plaintiffs' predecessors in interest executed a unit agreement in 1976 (the “Unit Agreement”). (Id.) The Unit Agreement created the “Lick Branch Unit, ” an agreement between the various landowners and the owners of the working interests to facilitate efficient and productive extraction of the oil and gas from the single reservoir beneath the various landowners' properties. (Id.) Unitization of this kind was expressly permitted by Tennessee law and the Underlying Leases, and this particular unitization agreement was approved by the Tennessee Oil and Gas Board in 1977. (Id.)

         The language of the Unit Agreement did not extinguish the Underlying Leases, create any new property rights, or vary the terms of the Underlying Leases with regard to Defendants' rights as relevant to § 66-7-103(a)(1). (See Doc. 1-1.) Three passages from the Unit Agreement are particularly instructive:

3.3 AMENDMENT OF LEASES AND OTHER AGREEMENTS
The provisions of the various leases, agreements, division and transfer orders, or other instruments covering the respective tracts or the production therefrom are amended to the extent necessary to make them conform to the provisions of this agreement, but otherwise shall remain in effect.
3.5 TITLES UNAFFECTED BY UNITIZATION
Nothing herein shall be construed to result in the transfer of title to the oil and gas rights by any party hereto to any other party or to [the] Unit Operator. The intention is to provide for the cooperative development and operation of the tracts ...

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