Corey Kerns v. Chesapeake Exploration

• Court: Court of Appeals for the Sixth Circuit
• Decided: February 4, 2019
• Docket: 18-3636
• Status: Unpublished

Opinion

NOT RECOMMENDED FOR FULL-TEXT PUBLICATION File Name: 19a0058n.06

Case No. 18-3636

UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT FILED COREY KERNS, et al., ) Feb 04, 2019 ) DEBORAH S. HUNT, Clerk Plaintiffs-Appellants, ) ) ON APPEAL FROM THE UNITED v. ) STATES DISTRICT COURT FOR ) THE NORTHERN DISTRICT OF CHESAPEAKE EXPLORATION, L.L.C. ) OHIO and RICHARD J. SIMMERS, ) ) Defendants-Appellees. ) ) _____________________________________/

Before: MERRITT, GUY, and MOORE, Circuit Judges.

RALPH B. GUY, JR., Circuit Judge. The plaintiffs are landowners who collectively

own 127 acres of contiguous land in Ohio that is rich in below-ground oil and natural gas. The

defendants are a drilling company (Chesapeake Exploration, L.L.C.) and the state official (Richard

Simmers) who oversees the Ohio agency that regulates drilling. Chesapeake received permission

from the state to drill below the landowners’ tracts, and then the landowners sued in federal district

court based on federal-question jurisdiction. Their sole cause of action is 42 U.S.C. § 1983. They

allege that the drilling constitutes a “taking” under the Fourteenth Amendment. The district court

granted the defendants’ motions to dismiss and this appeal followed. We affirm. Case No. 18-3636 Corey Kerns, et. al. v. Chesapeake Exploration, L.L.C., et al.

I. BACKGROUND

Allowing unfettered drilling of the same reservoir has consequences. In the case of oil, for

instance, with each new drill site the reservoir loses more pressure, thus leaving much of the oil

unobtainable. Conflicting hydraulic fracturing operations can likewise result in unnecessary

drilling with less overall output. But under the common-law rule of capture, a landowner always

has an incentive to quickly drill his own well, regardless of the waste, because if he fails to capture

the resources, his neighbor will drill his own well and licitly take it all for himself. To address this

problem, Ohio requires “pooling” or “unitization” prior to drilling. This means that if separate-

yet-adjoining tracts of land have a common natural resource below them, the tracts are combined

into a single “unit” and drilling operations must be coordinated and spaced within the unit. Tract

owners then share in the benefits commensurate with their acreage. Owners can agree to

voluntarily pool their properties, but in the absence of agreement, the State of Ohio can also compel

pooling. Ohio law provides a detailed process for pooling.

A. Ohio’s Pooling Process

By law, Ohio has recognized that the “regulation of oil and gas activities is a matter of

general statewide interest that requires uniform statewide regulation[.]” Ohio Rev. Code

§ 1509.02. In particular, the state has expressed its preference for avoiding the waste of oil and

gas by requiring owners and lessees who drill for oil or gas to “use every reasonable precaution in

accordance with the most approved methods of operation to stop and prevent waste of oil or gas,

or both.” Id. § 1509.20. To further these interests, Ohio established the Division of Oil and Gas

Resources Management (“the Division”), which “has sole and exclusive authority to regulate the

permitting, location, and spacing of oil and gas wells and production operations within the state,”

excepting activities regulated by federal law. Id. § 1509.02.

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Among other restrictions, Ohio law limits how closely wells may be spaced, which can be

detrimental to owners of smaller tracts. See id. §§ 1509.24–25. For that reason, “owners of

adjoining tracts may agree to pool the tracts to form a drilling unit that conforms to the minimum

acreage and distance requirements[.]” Id. § 1509.26. Tract owners who wish to drill but are unable

to get all their neighbors to agree have other recourse: if they collectively own 65% of the land

overlying the underground reservoir, they may apply to the Division “for a mandatory pooling

order.” Id. §§ 1509.27, 1509.28(A). In such a case, the chief of the Division must:

notify all mineral rights owners of tracts within the area proposed to be pooled by an order and included within the drilling unit of the filing of the application and of their right to a hearing. After the hearing or after the expiration of thirty days from the date notice of application was mailed to such owners, the chief, if satisfied that the application is proper in form and that mandatory pooling is necessary to protect correlative rights and to provide effective development, use, and conservation of oil and gas, shall issue a drilling permit and a mandatory pooling order complying with the requirements for drilling a well as provided in section 1509.24 or 1509.25 of the Revised Code, whichever is applicable.

Id. § 1509.27. The resultant pooling order describes the boundaries of the unit and the location of

the drilling site and also allocates “on a surface acreage basis a pro rata portion of the production

to each tract pooled by the order.” Id. A party adversely affected by the chief’s decision may

appeal to the Oil and Gas Commission and then to the court of common pleas. Id. §§ 1509.36–37.

B. The Land in Harrison County

Chesapeake wanted to drill in Harrison County using hydraulic fracturing. It set its sights

on a 592-acre plot now known as the Our Land Co South Unit (“the Unit”). By 2014, Chesapeake

effectively owned most of the land comprising the Unit, but it was unable to reach an agreement

with American Energy-Utica, L.L.C., the lessee of 120 acres split across eight tracts. The owners

of those tracts had leased their mineral rights to American Energy-Utica in 1981, but the leases

were not comprehensive enough to allow the lessee to voluntarily enter a pooling agreement

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without the consent of the owners. And the owners were not interested in entering into the pooling

agreement proposed by Chesapeake. So, Chesapeake took the involuntary route. In November

2014, it filed an application for a mandatory pooling order, accurately attesting that it was the

owner of more than 65% of the land overlying the pool to be drilled.

The landowners opposed the application. During the application process, they submitted

filings and attended at least one hearing. They also filed suit in federal district court. 1

Nevertheless, the chief of the Division issued a mandatory pooling order on July 13, 2015. Under

the terms of the order, American Energy-Utica was deemed a “non-participating working interest

owner.”

The landowners appealed to the Oil & Gas Commission and argued, as they do here, that

the pooling order amounted to an unconstitutional taking of their property. The Commission

pointed out that it lacked jurisdiction to decide constitutional questions and therefore dismissed

the appeal. Under Ohio law, the landowners could have further appealed to the court of common

pleas of Franklin County, but they chose not to. See Ohio Rev. Code § 1509.37. Instead, they

sought a writ of mandamus from the Ohio Supreme Court, which denied the writ in January 2018.

State ex rel. Kerns v. Simmers, 101 N.E.3d 430 (Ohio 2018).

The landowners refiled their federal suit—the instant suit—soon after. In lieu of an answer,

Chesapeake and Simmers separately moved to dismiss the complaint. The district court granted

the motions, thus leading to this appeal.

1 The district court ultimately dismissed the suit for lack of standing. The court found that the clam was not yet ripe for review because the state administrative proceedings were ongoing. The instant suit, which is functionally the same, was refiled later. -4- Case No. 18-3636 Corey Kerns, et. al. v. Chesapeake Exploration, L.L.C., et al.

II. DISCUSSION

A. Jurisdiction

Both defendants moved to dismiss the case for lack of jurisdiction pursuant to Federal Rule

of Civil Procedure 12(b)(1). Simmers argued that he was immune from suit under the Eleventh

Amendment, and Chesapeake raised two separate arguments: (1) the landowners lacked standing

because they had already leased their oil and mineral rights to another party; and (2) the

landowners’ claim was not ripe because they failed to first seek just compensation from

Chesapeake in state court. The district court rejected all these arguments. On appeal, Chesapeake

revives both of its arguments, while Simmers briefly raises only the argument concerning the

leased rights. In any case, “we must independently satisfy ourselves” that we have jurisdiction.

Med. Mut. of Ohio v. k. Amalia Enters. Inc., 548 F.3d 383, 388 (6th Cir. 2008).

The defendants’ jurisdictional arguments amount to factual attacks, so the landowners bore

the burden to prove that the district court had jurisdiction. See Rogers v. Stratton Indus., Inc., 798

F.2d 913, 915 (6th Cir. 1986). In reviewing the 12(b)(1) motions, the district court was permitted

to consider documents outside the pleadings, including the mineral leases. See Ohio Nat’l Life

Ins. Co. v. United States, 922 F.2d 320, 325 (6th Cir. 1990). We review the district court’s

jurisdictional determination de novo. Blakely v. United States, 276 F.3d 853, 863 (6th Cir. 2002).

In doing so, however, we must recognize the district court’s “considerable discretion in devising

procedures for resolving questions going to subject matter jurisdiction” and its obligation to

conduct its review “in a manner that is fair to the non-moving party.” Ohio Nat’l Life Ins. Co., 922

F.2d at 327 (quoting Rogers, 798 F.2d at 918). And we must accept the district court’s findings

of fact unless they are clearly erroneous. Id. at 326.

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At Chesapeake’s behest, the district court reviewed the mineral leases and reasoned that

“[r]egardless of whether or not Plaintiffs own the mineral rights,” their allegations of injury

extended “beyond the oil and gas itself” because they also alleged that defendants deprived them

of the exclusive possession of their land and damaged the subsurface. Kerns v. Chesapeake Expl.,

LLC, No. 5:18-cv-389, 2018 WL 2952662, at *3 (N.D. Ohio June 13, 2018). The district court

noted that defendants had “done nothing to challenge Plaintiffs’ standing on this basis” and

therefore found that plaintiffs had standing. Id.

We agree with the district court that the allegations in the complaint are broad enough to

assert an injury for standing purposes. First, Ohio courts have recognized that an oil and gas lease

can convey a fee simple determinable, thus leaving the lessor with a possibility of reverter. See,

e.g., Chesapeake Expl., L.L.C. v. Buell, 45 N.E.3d 185, 195–97 (2015). This is a property interest

that is conceivably impinged even after the drilling and hydraulic fracturing is complete. See

Coastal Oil & Gas Corp. v. Garza Energy Tr., 268 S.W.3d 1, 10 (Tex. 2008) (recognizing that a

landowner who leased his mineral rights had standing to sue the drilling company for trespass

based upon his possibility of reverter). Second, the landowners allege that Chesapeake’s drilling

will “permanently alter the subsurface” and even after Chesapeake’s operations are complete,

“millions of gallons of water, sand and chemicals” will remain beneath the land. Whether these

outcomes have exceeded or will likely exceed the permission granted in the leases is a question of

fact. For all of these reasons, we will not disturb the district court’s finding that, despite the

landowners’ leases, the landowners pleaded an injury that satisfies standing.

On the matter of ripeness, we also agree with the district court. Chesapeake contended that

the landowners could have included it as a party in seeking a writ of mandamus. According to

Chesapeake, the landowners’ failure to do so means they failed to seek compensation through state

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procedures, as required by Williamson County Regional Planning Commission v. Hamilton Bank

of Johnson City, 473 U.S. 172 (1985). As the district court found, and as we further explain below,

Chesapeake is a private party taking private action. Thus, mandamus could not lie against

Chesapeake. See State ex rel. Longacre v. Penton Publ’g Co., 673 N.E.2d 1297, 1298 (Ohio 1997).

The claim against Chesapeake is ripe.

The claim against Simmers is also ripe. To initiate a taking, Ohio law requires the

government to bring appropriation proceedings against a property owner pursuant to Ohio Rev.

Code §§ 163.01–163.62. See Coles v. Granville, 448 F.3d 853, 861 (6th Cir. 2006). The

landowners filed a mandamus action against Simmers in the Ohio Supreme Court to compel the

government to enter such proceedings. See Kerns, 101 N.E.3d 430. We have held that this

procedure is an appropriate avenue “for plaintiffs to pursue compensation for an involuntary taking

. . . no matter whether that taking is a regulatory or a physical one[.]” Coles, 448 F.3d at 865.

Therefore, although § 1509.37 sets out the proper procedure for reviewing Simmers’s order, the

mandamus action is the relevant state procedure for obtaining compensation. See Williamson Cty.,

473 U.S. at 194 n.13 (explaining that “[e]xhaustion of review procedures is not required[,]” but

that “a property owner [must] utilize procedures for obtaining compensation before bringing a

§ 1983 action.”). The landowners utilized that procedure, and the Ohio Supreme Court denied the

writ. See Kerns, 101 N.E.3d at 435.

B. State Action

The district court dismissed the claim against Chesapeake because it found that Chesapeake

is not a state actor, thus rendering § 1983 inapplicable. The landowners appeal that determination.

Section 1983 creates a private cause of action for deprivations of constitutional rights. A

claim is actionable only if the defendant acted “under color of any statute, ordinance, regulation,

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custom, or usage, of any State or Territory or the District of Columbia[.]” 42 U.S.C. § 1983. A

private party qualifies as a state actor if two conditions are met: “(1) the deprivation complained

of was caused by the exercise of some right or privilege created by the State and (2) the offending

party acted together with or has obtained significant aid from state officials, or because his conduct

is otherwise chargeable to the State.” Tahfs v. Proctor, 316 F.3d 584, 590–91 (6th Cir. 2003)

(quoting Lugar v. Edmondson Oil Co., 457 U.S. 922, 937 (1982)) (quotation marks omitted).

“Generally, a private party’s mere use of the State’s dispute resolution machinery, without the

overt, significant assistance of state officials, cannot be considered state action.” Id. (quotation

marks and citations omitted, alterations adopted).

This circuit has recognized several tests to determine whether a defendant is a state actor.

See Carl v. Muskegon Cty., 763 F.3d 592, 595 (6th Cir. 2014) (recognizing three tests: the public-

function test, the state-compulsion test, and the nexus test); see also Marie v. Am. Red Cross, 771

F.3d 344, 362 (6th Cir. 2014) (recognizing the additional “entwinement test.”). At the district

court, the landowners did little to explain why Chesapeake should be considered a state actor,

much less which test to apply. Now on appeal, they principally liken Chesapeake’s actions to

those of the defendant in Lugar. Although the landowners’ appellate brief makes a fleeting

reference to the public-function and nexus tests, it does nothing to explain their applicability to

this case. We therefore consider those arguments forfeited and focus our attention on the Lugar

case. Accord S.H.A.R.K. v. Metro Parks Serving Summit Cty., 499 F.3d 553, 564–65 (6th Cir.

2007) (determining that the plaintiff forfeited an argument that the public-function test applies).

Lugar involved the state of Virginia’s prejudgment attachment proceedings. The plaintiff

was a truckstop operator who fell behind on his payments to his supplier. State law allowed the

supplier to sequester the plaintiff’s property through an ex parte petition, prior to a hearing. Upon

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the supplier’s petition, the clerk of court issued a writ of attachment and the county sheriff executed

it. The plaintiff sued the supplier, but not the state, under § 1983, alleging the state law was

“procedurally defective under the Fourteenth Amendment.” 457 U.S. at 941. The Court agreed

that the supplier was a state actor because it jointly participated with state officials in the

prejudgment seizure. Id.

Lugar is inapplicable here. To begin, we have “expressly declined . . . to extend the

relatively low bar of Lugar’s so-called ‘joint action’ test outside the context of challenged

prejudgment attachment or garnishment proceedings.” Revis v. Meldrum, 489 F.3d 273, 289 (6th

Cir. 2007). Moreover, the alleged harms of inhabiting the landowners’ land and taking their oil

and gas were and are committed solely by Chesapeake; the state plays no role in carrying those

actions out. Chesapeake’s “mere use” of the state’s pooling order process “without the ‘overt,

significant assistance of state officials’” does not transform it into a state actor. Am. Mfrs. Mut.

Ins. Co. v. Sullivan, 526 U.S. 40, 54 (1999) (quoting Tulsa Prof’l Collection Servs., Inc. v. Pope,

485 U.S. 478, 486 (1988)). The district court properly dismissed the § 1983 claim against

Chesapeake.

We therefore turn our attention to the remaining defendant, Richard Simmers, whom all

parties agree is a state actor.

C. The Takings Claim

The Fifth Amendment states that private property shall not be “taken for public use, without

just compensation.” U.S. Const. amend. V. This limitation on takings applies to the states via the

Fourteenth Amendment. Chicago, B. & Q.R. Co. v. City of Chicago, 166 U.S. 226, 241 (1897).

The landowners contend that Ohio’s law governing pooling orders allows takings that are not for

public use and are done without just compensation. They aver that the pooling order and

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procedures concerning their properties were deficient in both respects. We begin, however, with

a preliminary question: was this a taking to begin with?

A taking requires a property interest, and for that we look to state law. See Stop the Beach

Renourishment, Inc. v. Fla. Dep’t of Envtl. Prot., 560 U.S. 702, 707 (2010) (“Generally speaking,

state law defines property interests[.]”); Ruckelshaus v. Monsanto Co., 467 U.S. 986, 1001 (1984)

(noting that property interests stem from sources independent from the Constitution, such as state

law). Under Ohio law, “minerals underlying the surface, including oil and gas, are part of the

realty,” though a landowner may sever the mineral estate through a conveyance. Chesapeake

Expl., L.L.C. v. Buell, 45 N.E.3d 185, 189–90 (Ohio 2015). But Ohio also recognizes “correlative

rights,” which it defines as “the reasonable opportunity to every person entitled thereto to recover

and receive the oil and gas in and under the person’s tract or tracts, or the equivalent thereof,

without having to drill unnecessary wells or incur other unnecessary expense.” Ohio Rev. Code

§ 1509.01(I). Thus, under Ohio law each landowner has both a property interest in the subsurface

minerals of his lot and an attendant right to recover those minerals without needless waste—as

does his neighbor.

By 1950, the Supreme Court had consistently held “that a state may adopt reasonable

regulations to prevent economic and physical waste of natural gas.” Cities Serv. Gas Co. v.

Peerless Oil & Gas Co., 340 U.S. 179, 185 (1950) (further stating that the due process claim

against the state regulation was “virtually without substance.”). By that time, the Court had

“upheld numerous kinds of state legislation designed to curb waste of natural resources and to

protect the correlative rights of owners through ratable taking, or to protect the economy of the

state.” Id. (internal citations omitted); see also Hunter Co. v. McHugh, 320 U.S. 222, 227–28

(1943) (“We have held that a state has constitutional power to regulate production of oil and gas

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so as to prevent waste and to secure equitable apportionment among landholders of the migratory

gas and oil underlying their land, fairly distributing among them the costs of production and of the

apportionment.”) (collecting cases); cf. Ohio Oil Co. v. Indiana, 177 U.S. 190, 212 (1900) (“[W]e

cannot say that the statute [regulating natural deposits of oil and gas] amounts to a taking of private

property, when it is but a regulation by the State of Indiana of a subject which especially comes

within its lawful authority.”). Ohio’s scheme falls comfortably within these bounds. In fact, the

landowners here cannot point to a single case that holds a unitization or pooling scheme

unconstitutional.

Every state court to address this issue has held that pooling schemes like Ohio’s do not

effect a taking of a landowner’s minerals. The Supreme Court of Oklahoma, for instance, held:

[T]he lawful exercise of the state’s power to protect the correlative rights of owners in a common source of supply of oil and gas is not a proper subject for the invocation of the provisions of either the State or Federal Constitution which prohibit the taking of property without just compensation or without due process of law and forbid the impairment of contract obligations. As we view it, the property here involved has not been taken or confiscated: its use has merely been restricted and qualified.

Patterson v. Stanolind Oil & Gas Co., 77 P.2d 83, 89 (Okla. 1938). Other states have reached

similar conclusions. See, e.g., Gawenis v. Ark. Oil & Gas Comm’n, 464 S.W.3d 453, 457–58 (Ark.

2015) (holding that the state’s procedure did not “take” anything away from the landowner, but

rather, allowed him “to lease his interest in the drilling unit in exchange for compensation or to

participate in the drilling of the well and receive monetary benefits”); Sylvania Corp. v. Kilborne,

271 N.E.2d 524, 527 (N.Y. 1971) (similarly basing its holding on the police power).

We see no reason the same does not hold true in Ohio. The state’s supreme court has held

that the state’s pooling procedures constitute a proper exercise of its police power, just as courts

in other states have held. See Redman v. Ohio Dep’t of Indus. Relations, 662 N.E.2d 352, 361

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(Ohio 1996); Burtner-Morgan-Stephens Co. v. Wilson, 586 N.E.2d 1062, 1064–65 (Ohio 1992).

That power is exercised in the service of protecting property rights by requiring a just, orderly, and

efficient process for neighbors to extract common resources. Each landowner’s property interest

in the minerals remains intact; it is simply regulated. See Cities Serv. Gas Co. v. Peerless Oil &

Gas Co., 340 U.S. 179, 185–86 (1950). The landowners therefore have no takings claim as to the

minerals below the surface of their land.

Their claim of a taking through occupation of the subsurface land is another matter. Apart

from their alleged loss of valuable natural resources, the landowners claim that the subsurface

horizontal wells that jut through their property lines deprive them of the exclusive use and

possession of their land. Simmers’s pooling order authorized the horizontal drilling, so the

landowners contend that the order (and the statute empowering it) work a taking against them.

Again, we must begin by looking to the property allegedly taken.

Ohio qualifies a landowner’s subsurface property rights, as illustrated in Chance v. BP

Chemicals, Inc., 670 N.E.2d 985 (Ohio 1996). There, the plaintiffs brought a trespass action

against a company for disposing of waste in wells miles below the surface. The plaintiffs alleged

that the waste had seeped out of the wells and migrated across boundary lines into their own

subsurface property. Although the plaintiffs were not making use of any subsurface property, they

nevertheless claimed that they were injured by the mere presence of the waste. The Ohio Supreme

Court rejected the idea that landowners have “absolute ownership of everything below the surface

of their properties,” and held instead that their “subsurface rights in their properties include the

right to exclude invasions of the subsurface property that actually interfere with [their] reasonable

and foreseeable use of the subsurface.” 670 N.E.2d at 992.

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Under Chance, then, a takings claim could conceivably lie based upon subsurface

occupation.2 But alleging a party’s mere presence below the ground is not enough to make out a

takings claim. Ohio’s actual-interference requirement means that the landowners’ property

interests in the space beneath their land springs to life only if Chesapeake’s drilling “actually

interfere[s]” with their “reasonable and foreseeable use of the subsurface.” Id. at 992. In other

words, there must be “some type of physical damages or interference with use.” See id. at 993.

The complaint fails to adequately plead such damage and thus fails to plead the requisite

property interest. Although Rule 12(b)(6) does not demand “detailed factual allegations,” it does

require that a complaint contain more than “a formulaic recitation of the elements of a cause of

action[.]” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). On the matter of subsurface

occupation, the complaint gives only a recitation of the elements, generically pleading that the

drilling will “impose a continuing permanent invasion of Plaintiffs’ property, interfere with

Plaintiffs[’] reasonable and foreseeable use of said property and constitute a per se taking of said

property.” Without more, the complaint fails to plead a subsurface property interest and thus fails

to state a subsurface takings claim.

The complaint likewise fails to state a claim based on an above-ground taking. As the

district court pointed out, the complaint lacks allegations of “any current surface damage” and

contains only the allegation “that Chesapeake will enter beneath the land, inject water, sand, and

chemicals beneath the land, and remove oil, gas, and natural gas liquids from beneath the land

. . . .” Kerns, 2018 WL 2952662, at *12. Admittedly, the landowners became more specific on

2 We recognize the Chance court’s caveat that reasoning from drilling cases was not directly analogous to the matter before it in light of the “special body of law” governing drilling. Chance, 670 N.E.2d at 991. Nevertheless, we see no reason the underlying property principle articulated in Chance should not guide us here.

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appeal, alleging in their reply brief that Chesapeake’s method of drilling (hydraulic fracturing) is

“potentially hazardous” and can result in “the release of chemicals to the surface, ground water,

and water wells, and also the flowback of contaminated liquids from the well, and the treatment of

wastewater.” And they bolster their allegations as to these new harms with citations to the websites

of the U.S. Environmental Protection Agency and the Ohio Department of Natural Resources. But

we are reviewing the district court’s dismissal of the complaint itself, unaided by the new reply

brief’s added harms. Even so, an action that is “potentially hazardous” does not make it imminent.

Similarly, the webpages merely mention the potential risks that may attend hydraulic fracturing;

they do not suggest that hydraulic fracturing necessarily renders surface land unusable—much less

that a harm is actual or imminent on the landowners’ particular plots.

D. The Due Process Claim

Due-process claims, like takings claims, require a property interest. EJS Properties, LLC

v. City of Toledo, 698 F.3d 845, 855 (6th Cir. 2012). As we have explained, the complaint failed

to adequately plead a property interest. The due process claim therefore fails for the same reason

the takings claim fails.

III. CONCLUSION

The complaint fails to state a claim upon which relief may be granted. Accordingly, the

judgment of the district court is AFFIRMED.

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