Opinion
No. 90-2168
Submitted December 3, 1991 —
Decided March 18, 1992.
APPEAL from the Court of Appeals for Stark County, No. CA-8097.
In 1949, Arthur D. and Dora S. Eberly, husband and wife, entered into an oil and gas lease with the East Ohio Gas Company with respect to approximately one hundred acres of their property situated in Section 9, Bethlehem Township of Stark County. The lease was subsequently recorded with the Stark County Recorder on August 15, 1949. Plaintiffs, Burtner-Morgan-Stephens Co. and Morgan-Pennington, Inc., are the successors-in-interest to East Ohio Gas Company with regard to the lease.
Mr. Eberly died in 1962, and his interest in the lease was consequently transferred to his wife. Mrs. Eberly died in 1973, and the property subject to the lease was thereafter divided and sold in numerous parcels to defendants and their predecessors in interest in 1975.
In June 1987, an oil and gas well known as the "Eberly Unit No. 2" was drilled on that portion of the original tract that is now owned by defendants-appellees, Donald A. and Ann Shetler. The 33.256 acre parcel of the Shetlers is part of a larger drilling unit containing 59.072 acres of land owned by defendants-appellants. The well was drilled pursuant to a permit issued by the Ohio Department of Natural Resources, Division of Oil and Gas. In relevant part, the application for the permit indicated that the property owners possessing a royalty interest in the well included those persons (appellants herein) owning interests in the drilling unit. The well in issue has been producing oil and gas with concomitant royalty proceeds since 1987.
Named as defendants inter alios, in this action were the following appellants: Billy F. Wilson, Alice P. Wilson, Deborah M. Kornish, Thomas E. Savage, Sharon A. Savage, Robert L. Baltzly, Suzanne E. Baltzly, Victor A. Smith, J. Kenny Warth, Kathy L. Warth and Raymond A. Miller. The parties stipulated that the property owned by Billy and Alice Wilson is now owned by appellant Todd D. Studer.
In October 1987, plaintiffs brought this action in the court of common pleas seeking a declaratory judgment to determine who should receive royalties derived from the Eberly Unit No. 2 well from the following categories of property owners:
(a) The owners of the property upon whose parcel the producing well is located;
(b) the owners of the property comprising the 59.072 acre drilling unit; or
(c) the owners of all properties originally covered by the 1949 oil and gas lease.
The instant action was brought in large part because of certain language in the 1949 lease concerning royalties:
"If the leased premises at any time should be owned in separate parcels this lease nevertheless shall be treated as an entirety, except that royalties or well rentals as to any producing well shall be payable to the owner or owners upon whose respective parcel the producing well is located, and there shall be no obligation upon the Lessee to offset wells on separate tracts into which the leased premises may be divided by sale, devise, or otherwise, and the drilling of a well or the existence of a producing well upon any parcel shall have the same effect by way of excusing payment of delay or acreage rentals and otherwise, as though the premises had not been divided." (Emphasis added.)
The cause was submitted to the trial court upon stipulation of facts, pleadings and briefs by the parties. After due consideration, the trial court held that royalties from the well were to be paid on a pro rata basis to the owners of the parcels comprising the 59.072 acre drilling unit.
Upon appeal, the court of appeals reversed and entered final judgment on behalf of defendants-appellees, the Shetlers. The appellate court stated that the lease agreement clearly provides that royalties "* * * shall be payable to the owner or owners upon whose respective parcel the producing well is located." The court of appeals further noted that the parties stipulated to the fact that the well in issue is situated upon property owned by the Shetlers. Therefore, the appellate court held that "* * * the trial court's reliance on R.C. 1509.24, 1509.26 and 1509.27 * * * [is] a retroactive application of statute * * * strictly proscribed by Art. II, Sec. 28 of the Ohio Constitution which holds, `the General Assembly shall have no power to pass retroactive laws, or laws impairing the obligation of contracts * * *.'"
The cause is now before this court pursuant to the allowance of a motion to certify the record.
Day, Ketterer, Raley, Wright Rybolt, Michael S. Gruber and Sara E. Lioi, for appellants.
Snively Kimmins and James D. Snively, for appellees.
The issue presented in this appeal is whether the royalties to the subject well should be paid in accordance with the terms of the 1949 oil and gas lease, or in accordance with the Revised Code sections and rules and regulations promulgated by the Ohio Department of Natural Resources, Division of Oil and Gas. For the reasons that follow, we agree with the court of appeals below that the 1949 lease governs the distribution of royalties under the particular facts of this case.
Research indicates that much legislation has been enacted during and since the 1960s in regulating the drilling of oil and gas wells. R.C. 1509.24 authorizes the Chief of the Division of Oil and Gas to establish rules and regulations with respect to the minimum acreage necessary to comprise a drilling unit. Ohio Adm. Code 1509:9-1-04(C)(4)(a) provides that wells of the depth of the subject well must be situated upon a minimum of forty acres to establish a drilling unit.
R.C. 1509.26 allows for voluntary pooling agreements to form drilling units which conform to the minimum acreage and distance requirements. R.C. 1509.27 allows for mandatory pooling orders from the Chief of the Division of Oil and Gas where an owner is unable to secure a volutary pooling agreement. Division (D) of R.C. 1509.27 provides that a mandatory pooling order shall "[a]llocate on a surface acreage basis a pro rata portion of the production to the owner of each tract * * *."
In the cause sub judice, the trial court retroactively applied the above statutes, rules and regulations in order to defeat the clear and unambiguous language of the 1949 oil and gas lease with regard to the payment of royalties generated by a producing well. In our view, such retroactive application clearly violated Section 28, Article II of the Ohio Constitution by impairing an obligation of contract. See Kiser v. Coleman (1986), 28 Ohio St.3d 259, 28 OBR 337, 503 N.E.2d 753.
The lease involved in this action was recorded shortly after it was entered into and, therefore, all parties to this action had at least constructive notice of how royalties were to be distributed for a producing well on the property in issue. While the state's police powers permit the General Assembly to enact legislation governing pooling arrangements, spacing, unitization and other oil and gas drilling regulations, a provision such as that found in R.C. 1509.27(D) governing distribution of royalties cannot, under the specific facts of this case, be used to retroactively impair the obligation of the contract set forth in the 1949 lease. See Goodale v. Fennell (1875), 27 Ohio St. 426. To hold otherwise would emasculate both the letter and spirit of the Ohio Constitution.
Therefore, we hold that pursuant to Section 28, Article II of the Ohio Constitution, R.C. 1509.27(D) may not be retroactively applied to determine distribution of royalties that are provided for in an oil and gas lease that was entered into and recorded prior to the enactment of the statutory provision.
Accordingly, the judgment of the court of appeals is hereby affirmed.
Judgment affirmed.
MOYER, C.J., HOLMES, DOUGLAS, WRIGHT, H. BROWN and RESNICK, JJ., concur.