Sale of Natural Gas at a Loss Does Not Support the Claim for Waste by Land Owner

Sale of Natural Gas at a Loss Does Not Support the Claim for Waste by Land Owner

 

A recent decision by the six circuit Court of Appeals has rejected the notion that the sale of natural gas at a loss, resulting in the landowners receiving no proceeds, did not constitute “waste.”  Cornett v. Magnum Hunter Production, Inc., No. 14-5390 (6th Cit. Nov. 25, 2014).

 

The plaintiffs own certain real property for which they had granted a lease to extract and sell natural gas. Under the lease, those owners were to receive 12.5% of the net sale proceeds (after the deduction of certain identified expenses).  With the near collapse of prices for natural gas, the sales price, after the deduction of the expenses, resulted in no net payment to the land owners.  They filed suit against the gas producer, alleging, inter alia, that continuing to extract gas from the property and sell it without any return to the land owners constituted "waste" of that asset. 

 

The trial court disagreed with this assessment and dismissed the complaint. On appeal, the sixth Circuit Court of Appeals would affirm the trial court's decision.

 

The 6^th Circuit’s decision is quite short, and simply rejects the notion that producing at no net gain to the owners was waste.  The Court did not that the right of the producer to “shut in” the well was for the protection of the producer, not the land owner, and that the producer had simply the right (and not the obligation), to shut in the well. 

 

The Court of Appeals as well rejected the plaintiff’s invitation for either the 6^th Circuit or the trial court on remand to discern a claim for some other cause.  This invitation was rejected on the basis that “the complaint is required to state a plausible claim for relief on its face in order to survive a motion to dismiss.”

 

Presumably the land owners could have, in the lease, required minimum royalties irrespective of sales prices or required that depletions cease when prices would not support royalties at a certain level.  Having failed to do so, they will  not be permitted to complain on the basis of waste.