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Frederick v. Southern Star Central Gas Pipeline, Inc.

United States District Court, Tenth Circuit

May 9, 2013

DREW W. FREDERICK, et al. Plaintiffs,
v.
SOUTHERN STAR CENTRAL GAS PIPELINE, INC., Defendant.

MEMORANDUM AND ORDER

JULIE A. ROBINSON, District Judge.

Plaintiffs in this case are seeking equitable reformation and declaratory judgment with respect to the annual payment required to exercise annual options in the natural gas storage leases under which Plaintiffs are lessors and Defendant Southern Star is lessee. This matter is before the Court on Defendant's Motion for Summary Judgment (Doc. 110). The motion is fully briefed and the Court is prepared to rule. As described more fully below, the Court grants Defendant's motion for summary judgment.

I. Motion to File Surreply

Plaintiffs seek leave to file a surreply to the motion for summary judgment, arguing that Southern Star's reply brief raised two new arguments: 1) that the factual basis for reformation does not show a present hardship; and 2) that Plaintiffs' reformation theory violates public policy. Southern Star did allege in its memorandum in support of summary judgment a lack of hardship factors in the present case. Southern Star argues that its public policy argument in its reply brief "was asserted in response to plaintiff's re-characterized and expanded claim that reformation could be based even upon industry changes."[1] Because Southern Star relies on the new public policy argument in its reply brief, the Court will grant Plaintiffs' motion to file their surreply. "[I]f the court relies on new materials or new arguments in a reply brief, it may not forbid the nonmovant from responding to these new materials."[2] Therefore, for purposes of the instant motion for summary judgment, the Court will consider Plaintiffs' Sur-Reply that is attached to its motion.

II. Uncontroverted Facts

The following facts are either uncontroverted, stipulated to, or viewed in the light most favorable to Plaintiffs.[3]

The parties and the Alden Field

Defendant Southern Star ("Southern Star") owns and operates a natural gas storage field located in Rice County, Kansas ("the Alden Field"), as authorized by Certificates of Public Convenience and Necessity issued by the Federal Energy Regulatory Commission ("FERC"). The Alden Field encompasses all of Sections 15, 21, and 22, and portions of Sections 9, 10, 16, 27, and 28 in Township 21 South, Range 9 West, Rice County, Kansas. There are currently thirty-three gas storage leases for this acreage in the Alden Field. Southern Star is the current "Lessee" and operator of the gas storage leases located within the certificated boundaries of the Alden Field. Plaintiffs are owners of mineral and/or surface rights in some of the acreage within the Alden Field and are "Lessors" of the seventeen Alden Field gas storage leases that are the subject of this case (the "gas storage leases"). Over the term of the gas storage leases, Southern Star and its predecessors have always used the subject properties for gas storage, and their use of the subject properties has not changed over time.

Pertinent terms of the gas storage leases

All of the gas storage leases provide for the lease by Southern Star of the land described therein "lying above the top of the Viola lime, " or comparable subsurface geological formations, exclusively for the purpose of natural gas storage and associated activities. All but one of Plaintiffs' natural gas storage leases gave Southern Star the right to store natural gas during a primary term of fifty years. The one exception was a ten year primary term, which expired in 1983.

Each of the seventeen leases contained language that gave a "repeated annual option to extend and continue this lease for and during each repeated annual period, after the expiration of said primary term, upon the same terms and provisions applicable for and during said primary term, including each repeated annual option." The amount provided in the leases to be paid during the primary term and for the exercise of subsequent annual options was $1 per acre per year. The yearly rental in each lease is referred to as an "annual payment." The paragraph of each lease that provides for an annual payment to exercise the yearly option contains the following language:

It is agreed that the consideration recited in paragraph 1 hereof, together with the herein provided annual payment, shall operate, cover and be held to be full consideration and compensation to Lessor for all privileges, rights and each option granted lessees under this lease, except only as otherwise expressly provided in this lease.

None of the Plaintiffs' leases contain any provision for upward adjustments for inflation or on any other basis. Under the subject leases, the only basis for exercising the annual option is by making a $1 per acre per year "annual payment" and "being engaged in any one of the purposes of the lease upon said land or upon land in the vicinity thereof."

All of the gas storage leases provide that Southern Star will, at the landowner's request, deliver free and/or reduced-price natural gas to the principal dwelling on the leased property ("Domestic Gas"), under conditions specified in the leases-either the existence of an observation well on the premises or upon circumstances that might exist "until a well exists on the premises." For purposes of this Memorandum and Order, "Domestic Gas" is defined as free and/or reduced-price natural gas to the principal dwellings on the properties subject to Plaintiffs' gas storage leases. All of the gas storage leases at issue in this case contain provisions obligating Southern Star to deliver some quantity of Domestic Gas, provided that terms and conditions specified in the gas storage leases are met. Some of the leases provide for 250, 000 Mcf[4] of Domestic Gas free annually and additional gas above that volume for only $.50 per Mcf; others require the lessor to pay $.50 per Mcf for all Domestic Gas received.

Plaintiffs' Claims

Plaintiffs make no claim that there was fraud, coercion or duress in the negotiation, acquisition, or execution of the gas storage leases. Plaintiffs make no claim that the negotiation, acquisition, or execution of the gas storage leases was based on a mutual mistake of fact between the parties.

Plaintiffs seek reformation of the gas storage leases "in a manner which requires Southern Star to tender payments to exercise its annual option in an amount determined to be fair and reasonable at current market value rates for underground natural gas storage." Plaintiffs assert further that the "current market value for gas storage leases is multiple times the one dollar an acre being currently paid by Southern Star." Plaintiffs also seek a declaratory judgment holding that the storage leases should be reformed "to require Southern Star to tender payments to exercise the annual option in an amount determined to be fair and reasonable at current market value rates for underground natural gas storage."

Plaintiffs seek relief because of numerous changes in the natural gas business that "were neither anticipated nor reasonably foreseeable"... and because "[t]he Storage Leases as written drive too hard of a bargain to be enforced and are unconscionable and inequitable." Among the changes alleged to have been neither anticipated nor reasonably foreseeable were:[5]

a. "dramatic and marked changes in the natural gas business, including but not limited to deregulation and unbundling of services as mandated by FERC Order 436 in 1985 and Order 636 in 1992, the growth and development of marketing subsidiaries, the direct sale of natural gas from producers to consumers, and other dramatic changes in the natural gas and natural gas storage business";

b. "dramatic and unexpected changes in the energy industry generally, the value of energy and the value of natural gas"; and

c. "dramatic increases in the price of natural gas and the value of amounts paid for rentals of natural gas storage."

With respect to the Domestic Gas provisions in the gas storage leases that give Plaintiffs the right to free and/or reduced-price natural gas to their principal dwellings on the leased properties, Plaintiffs contend: "The free house gas clause is an independent clause and a separate contractual obligation of the lessee and lessee cannot avoid its express duty under the contract to provide free house gas."

Plaintiffs' experts' opinions [6]

One of Plaintiffs' experts is S. Wesley Haun, who describes himself as "an independent natural gas consultant with experience in the natural gas industry since 1977."[7] Haun was retained to "examine the regulatory changes in the prices, structure, and services provided utilizing storage assets" in the period from 1959 to the present, and "to determine if such changes would have been expected or foreseeable in 1959."[8] Haun concludes that the natural gas industry "has been completely restructured in substantial ways by federal regulatory changes" that occurred subsequent to 1959 when many of the gas storage leases at issue were executed.[9] He describes those federal regulatory changes in detail, which he identifies as the Natural Gas Policy Act of 1978 ("NGPA"), FERC Order 380, FERC Order 436 (in 1985), FERC Order 500 (in 1987), and FERC Order 636 (in 1992).[10] Haun states: "The movement from the NGPA of 1978 to the FERC Orders 380, 436-500, and 636 completed the restructuring of the natural gas industry on both commodity pricing and on bundled services and facilities."[11] Haun concludes further that "no entity or person in 1959 could have foreseen the eventual restructuring and deregulation of the natural gas industry."[12]

Plaintiffs have also retained William A. Henry, a consultant "for midstream operations, management, storage, regulatory and permit services."[13] Henry agrees with Haun that "substantial changes have occurred in the nature of the natural gas storage business since 1959 which were not foreseeable at that time, either to the landowner or the storage operator."[14] Consistent with Haun, Henry notes that FERC deregulated pipelines "with several Orders ending with FERC Order 636" in 1992.[15] Henry also opines that a per acre gas storage rental payment of $1 per acre is not a "fair current rental value, " and that the "current fair rental value is best ascertained by a rental payment in an amount provided in the Manual of Gas Storage utilized by the United States Bureau of Land Management."[16]

Free and reduced-price natural gas

The average annual residential natural gas rate in Kansas in 1967 (the first year for which the Energy Information Administration ("EIA") posted rates) was $1.04 per Mcf, and would have been even lower than that in 1959. The average annual residential natural gas rate in Kansas rose to as high as $13.89 per Mcf in 2008 and the EIA's most current (June 2012) rate is approximately $14.23 per Mcf.

Plaintiffs Howard Partington and Shirley Fair admit they own property that received Domestic Gas from Southern Star and its predecessors from approximately 1959 until 1999. Almost all of the gas received was delivered free of charge (the free gas maximum volume was ...


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