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U.S. Energy Development Corp. v. Mallory

United States District Court, Western District of Pennsylvania

September 17, 2014



McVerry, J.

Pending before the Court are the objections (ECF No. 53) to the Report and Recommendation (“R&R”) issued on August 13, 2014, by Magistrate Judge Susan Paradise Baxter, filed by L.E. Mallory, , LP; Henry A. Satterwhite Royalty Holdings, LLC; and Henry A. Satterwhite Royalty Holdings, LP (collectively, “Defendants”). U.S. Energy Development Corporation (“U.S. Energy” or “Plaintiff”) has filed a response in opposition to Defendants’ objections (ECF No. 54), which are ripe for disposition.


Factual and Procedural Background

The R&R thoroughly sets forth the factual background, much of which is undisputed, and its recitation of the facts is incorporated herein by reference. See R&R at 4-7, ECF No. 52. Briefly stated, the parties entered into a lease in 2006 (the “USE lease”), which granted Plaintiff the rights to develop the “shallow” oil and gas deposits on property in McKean County, Pennsylvania, which is owned by Defendants (referred to by the parties as the “Acreage”). The USE lease also granted Plaintiff a right of first refusal with respect to the “deep” oil and gas rights on the property:

The Lessee shall have the right of first refusal to lease the horizons below the base of the Bradford Third Sandstone upon the terms and conditions of any bona fide written offer made for them. Said right to be exercised by notifying the Lessor by registered mail within ten (10) days of its receiving written notice that such bona fide offer has been made.

In April 2007, Defendants provided Plaintiff written notice of an offer from Atlas America, LLC (“Atlas”) to lease the deep horizon rights. The next month, Plaintiff declined to exercise its right of first refusal, apparently because Plaintiff’s president, Douglas Walch, felt that he had reached a tentative agreement with Atlas to jointly develop the deep horizons.[1]

In July 2007, Defendants and Atlas entered into a one-year lease that granted Atlas the rights to develop the deep horizons, with the option to renew the lease for additional years. The 2007 Atlas lease was never renewed. However, Defendants subsequently entered into two new leases with Atlas with respect to the deep horizons rights of certain portions of the Acreage. The first lease, in August 2009, covered only a small portion of the Acreage, while the second lease, in February 2010, covered practically all of the Acreage. It is undisputed that Defendants did not notify Plaintiff before having entered into either of these leases, as required by the right of first refusal clause in the USE lease.

In July 2011, Plaintiff notified Defendants that it believed they were in breach of the USE lease because they had failed to offer Plaintiff the right to lease the deep horizon rights before having entered into the leases with Atlas in 2009 and 2010. In response, representatives of Defendants told Plaintiff to try to negotiate a deal with Atlas that it would allow the two entities to jointly exploit the rights, as it had attempted to do in 2007. Plaintiff did so. Atlas eventually responded that it would consider a “farm out” agreement, but at a significantly higher cost than that which had been in the leases between Defendants and Atlas, so the deal never came to fruition.

Plaintiff initiated this lawsuit by filing a Complaint on October 1, 2012, in which it alleged that Defendants breached the “agreement by entering into subsequent lease agreements with Atlas without offering U.S. Energy the Right of First Refusal required by the U.S. Energy Lease.”[2] Compl. ¶ 23, ECF No. 1. On December 16, 2013, Defendants moved for summary judgment, arguing that the alleged breach did not cause any damages to Plaintiff and, as a result, Plaintiff failed to establish a prima facie breach of contract claim. Alternatively, Defendants argued that “the Court should grant partial summary judgment dismissing all claims for consequential damages and lost profits, since those theories of damages are subject to heightened standards of foreseeability and certainty.” Def.’s Br. in Supp. of Mot. for Summ. J. at 3, ECF No. 38. On January 31, 2014, Plaintiff filed a cross-motion for partial summary judgment on the issue of liability, contending that Defendants breached the lease agreement by declining to extend the right of first refusal before it entered into the 2009 and 2010 Atlas leases, and the only issue remaining for trial is the amount of damages.

Magistrate Judge Baxter issued an R&R on August 13, 2014, in which she addressed both sides’ motions. First, Magistrate Judge Baxter recommended that Plaintiff’s motion for partial summary with regard to liability be granted. In reaching that conclusion, Magistrate Judge Baxter declined to look beyond the terms of the lease agreement to consider Defendants’ arguments in support of their claim that the right of first refusal was not breached because it was a essentially a “one-time” right that expired after Plaintiff declined to match Atlas’s 2007 offer. In Magistrate Judge Baxter’s view, “[t]he Right of First Refusal (bargained for by these parties) is not limited by any other terms; instead, it clearly states U.S. Energy will be notified of ‘any bona fide written offer.’” R&R at 11, ECF No. 52 (emphasis in original). Thus, Magistrate Judge Baxter concluded, when Defendants admittedly failed to notify Plaintiff of the 2009 and 2010 offers by Atlas and give Plaintiff the right to lease the deep rights on those same terms, they breached the USE lease, irrespective of their subjective belief about what the USE lease did or did not require of them. Id. at 12. Second, reasoning that it would be inappropriate to grant summary judgment solely on the basis of Plaintiff’s alleged inability to prove damages, she recommended that Defendants’ motion be denied in its entirety. Id. at 12-13. However, even if Plaintiff could not prove compensatory damages, Magistrate Judge Baxter explained, Plaintiff would be entitled to recover nominal damages and, thus, Plaintiff should be permitted to file an Amended Complaint requesting such damages. Id. at 13. Magistrate Judge Baxter did not, however, specifically address Defendants’ request for partial summary judgment as to Plaintiff’s claim for damages for lost profits. These objections followed.

II. Standard of Review

Whenever objections to a magistrate judge’s R&R are filed, the district court must conduct a de novo review of the contested portion of the report (assuming, of course, that the objections are timely and specific). Fed.R.Civ.P. 72(b)(3); 28 U.S.C. § 636(b); Goney v. Clark, 749 F.2d 5, 6-7 (3d Cir. 1984). In resolving the objections, the district court may: (1) accept, reject, or modify, in whole or in part, the findings and recommendations of the magistrate judge; (2) receive further evidence; or (3) recommit the matter to the magistrate judge. Fed.R.Civ.P. 72(b)(3); 28 U.S.C. ยง 636(b)(1). Likewise, the Local Rules for the Western District of Pennsylvania require ...

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