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Lewis v. Enerquest Oil & Gas, LLC

United States Court of Appeals, Eighth Circuit

July 1, 2015

Bryant Lewis; Helois Lewis; Barry Carter; Tor, Inc.; Lewark, LLC; Tony Allen; James Modisette; Linda Ware Bailey; Kenneth Ware; Mary Frances Ware Phillips; Norma Sullivan; Trina Lowery; William Lowery; Harry Kolb Revocable Trust, Plaintiffs - Appellants,
v.
Enerquest Oil and Gas, LLC; BP American Production Company, Defendants - Appellees Polly Foote; Patricia Swanson, Plaintiffs, Jerome Camp; Pamela C. Warren; Cassie Farrar; Laban Ware; Dorothy Ware, Plaintiffs - Appellants,

Submitted December 8, 2014.

Appeal from United States District Court for the Western District of Arkansas - El Dorado.

For Bryant Lewis, Helois Lewis, Barry Carter, Tor, Inc., Lewark, LLC, Tony Allen, James Modisette, Linda Ware Bailey, Kenneth Ware, Mary Frances Ware Phillips, Norma Sullivan, Trina Lowery, William Lowery, Harry Kolb Revocable Trust, Jerome Camp, Pamela C. Warren, Cassie Farrar, Laban Ware, Dorothy Ware, Plaintiffs - Appellants: David F. Butler, Jr., KINARD & CRANE, Magnolia, AR.

For Enerquest Oil and Gas, LLC, BP American Production Company, Defendants - Appellees: C. Michael Daily, Thomas A. Daily, DAILY & WOODS, Fort Smith, AR.

Before WOLLMAN, COLLOTON, and BENTON, Circuit Judges.

OPINION

COLLOTON, Circuit Judge.

Bryant Lewis and several other appellants own mineral interests that are subject to oil and gas leases in which EnerQuest Oil and Gas, LLC and BP American Production Company have an interest. The group sued the companies in the district court in an effort partially to cancel the leases on the ground that EnerQuest and BP America violated implied covenants to develop the mineral interests. The district court[1] granted summary judgment in favor of EnerQuest and BP America, ruling that the lessors failed to give the companies adequate notice of the alleged breach of the covenants, as required by seven of the leases and the common law of Arkansas. We affirm.

I.

Because we are reviewing a grant of summary judgment, we recite the facts in the light most favorable to the appellants. The appellants allege that they own mineral interests in the Chalybeat Springs (Smackover) Unit and are lessors of twenty-one oil and gas leases based on those interests. The lessors further allege that EnerQuest is the current lessee for a portion of nineteen of those leases, and that BP America is the lessee for the other two.

The Chalybeat Unit, which comprises land owned by several different parties, was formed in 1975 by an order of the Arkansas Oil and Gas Commission. Oil and gas formations that lie beneath the surface of land that has been combined into a unit like Chalybeat may be exploited by a single operator as if the formations are jointly owned. This arrangement optimizes the rate, and minimizes the cost, of production for all landowners. See Finley v. Marathon Oil Co., 75 F.3d 1225, 1229 (7th Cir. 1996).

The property interests in the Chalybeat Unit, including the twenty-one leases at issue here, are subject to a Unit Agreement that establishes how the oil and gas extracted from certain formations in the Unit will be divided. The agreement also provides for a unit operator. The operator has the exclusive right to develop the oil and gas resources described in the Unit Agreement. A new operator may be elected, and the incumbent operator replaced, by a seventy-five percent vote of the owners of certain rights to the oil and gas produced in the Unit.

In the late 1990s, PetroQuest became the operator of the Chalybeat Unit. Tony Allen, whose family owns mineral interests subject to some of the leases, faxed a letter to PetroQuest in August 2006 stating that he wanted more drilling in the Chalybeat Unit. Allen also placed telephone calls to PetroQuest in 2007, 2008, and 2009, requesting that the company increase drilling in the Chalybeat Unit and informing PetroQuest that he would sue to dissolve the unit or " release" the leases if the company did not perform.

In July 2010, four of the lessors applied to the Commission for an order dissolving the Chalybeat Unit on the ground that PetroQuest was not conducting unit-wide operations. The Commission held hearings in September and October 2010, and eventually denied the application.

The lessors then filed suit against EnerQuest and BP America in Arkansas state court. EnerQuest and BP America removed the action to federal court based on diversity of citizenship. The lessors filed a second amended complaint seeking partial cancellation of their twenty-one oil and gas leases on the ground that EnerQuest and BP America breached implied covenants in the leases to develop the oil and gas minerals. The district court granted the companies' motion for summary judgment, ...


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