morning may please the court counsel my name of the evan weston i represent the appellant he cutey production company we would respectfully request that the court reverse the partial summary judgment and final judgment of the district court in the case for a new trial we would like to reserve three minutes for please please this case involves the interpretation in performance of eleven format agreements a format agreement is in essence the same as a lease so for that reason particularly with regard to the trial court summary judgment on natural gas liquids this decision whatever decision is made will have impact not just on the q t these are two substantial companies that were in negotiated a contract but it will have impact upon  landowners who have entered into leases with producers also because as i said a farm out agreement is essentially the same the lease is a lease what it does is it grants a right to produce in this case will gas and natural gas liquids in exchange for payment of a royalty there's no right to produce the oil the gas or the natural gas liquids without the format agreement or in the case of a landowner without the lease just like certainly someone who has a will and gas lease cannot produce coal or limestone because they have the lease just because without the right to produce the natural gas liquids through these farm out agreements magnum hunter would not have had the right to produce natural gas liquids as i said these rights are granted in exchange for are a royalty payment just the same as you would in a lease in this particular case the farm out agreements all provided that the would be paid based upon gross proceeds without deduction of any kind least not in any way  thing anything about the market price calculation but the road if you did it it did your honor it said that so for instance i know this case is this court is dealt in the appalachian land case with a lease which we had and market value of lease which was silent about whether or not you could take deductions and put the court said in that case and what the kentucky supreme court said in baker rex vs magnum hunter is if you a lease with a role to prove asian which is silent with regard to how you calculate royalty then you provide do apply this the fall rule which allows for the deduction of  certain transportation compression things like that processing cost in calculating the royalty but what for instance in the baker vs magnum hunter case the kentucky supreme court case the court very clearly pointed out that if you have a rose between the parties there was never any dispute with regard to natural gas royalties the deductions could not be taken magnum hunter is never made that claim that all during the audit or during this litigation that that it's very clear deductions cannot be taken where or i guess the dispute arose was with regard to natural gas liquids what happened there's just one well that produces the gas the oil in the natural gas liquids are not separate wells that produces each of these products and up until two thousand and eight all that was produced was the gas and it was sold this is wet gas which means it's it's high end heat content so that whenever it's whenever it was sold it was sold based upon as he's content and frankly before two thousand and eight  magnum hunter and then the royalty owner were getting paid for the natural gas liquids as part of the gas price but then in two thousand and seven the federal energy regulatory commission some new rules as far as the heat content that you could put into an interstate gas pipeline so for that reason then magnum hunter built this processing plant and begin deducting processing cost for the production for separating out that natural gas liquids from the gas so you can see we understand how you got to bit position because of the changed rules but i'm struggling a little bit i want to make sure i've got it right with this popper creek development and the appalachian l l c from our circuit on in two thousand and eleven they are the discussion was about gross and gross mint without deductions they are was determined to mean so how do we maining fully distinguish between gross income received as it was explained in poplar creek and proceeds received without deductions of any kind which is the language in your contract in other words don't you fit within the explanation of poplar creek or please i don't believe we do particularly with regard to that the gas royalty payments because it's very specific in the contract that was executed between these two parties that there were not to be any deductions of any kind in calculating the royalty well isn't that isn't  what popper creek addresses if gross means without deductions and you say proceeds received without deductions wouldn't mean that if pop were creeks that still means you get to deduct some portion wouldn't the same thing apply to you know your i don't buy not why would why would the way those words have been interpreted not res in a comparable answer in your case this court please i believe if you look at the language in these eleven farm out agreements there is a direct prohibition against adoption of any cost and the parties there was never any dispute with that regard for typically with regard to the natural gas royalties that they could not deduct compression and transportation in fact as part of the two thousand and thirteen audit process  they agreed to refund to e q t the deductions that were made on the gas royalties because the dispute there was not to get at the gas royalty there's never been any dispute that you cannot   that that that the farm out agreements did not apply to natural gas liquids they only had to gas and oil and as we've pointed out in our briefs we don't believe from a practical or a legal standpoint that makes any sense because without the right without these farm out agreements there would be absolutely no right for magnum hunter to produced that for gas liquids o own just like with a lesser work that has a lease with magnum hunter or some other producer their only right to produce any product emanates from the from the the the granting document him understand and this is an area of expertise in which i do not have a lot of experience so i'm looking to both of you to educate me what i'm struggling with is that we look back it looks feet which talks about gross income received by the lyce and i understand that that's different from the exact language in yours but grossman scribe's it manes with that deduction and yours specifically says without deduction too it seems to me that those two things are linguistically comparable and yet we so try me again because i'm missing something why is that not the same situation issuers subjecting you to at the honor it says gross proceeds but it doesn't get into the specific prohibition against the deductions but what describes many well i think that is without deduction and i and if the court plays if if if you look at that the authority not just and the circuit and in kentucky but across the nation whenever you have the dispute arises is if it's silent if there's no specific reference to no deductions can be taken even in a state like west virginia which follows the market building rule where there's a presumption that you can't take the doctrines if a lease says you can take the deduction or it says there are not to be any deductions on either of those situations the controlling language of the lease is what it is is applied for instance if it says to duction prohibited they are prohibited by means of contract not by the application of the market bill of the rules so if the court please we believe that that the default rule only applies or a leas silent with regard to whether deductions can be taken or not and in a situation where a contract says that they're prohibited that the contract of the party supplies so for that reason we would ask that the it please the court and chance not hear from magnum hunter the employee in this case this case is an unfortunate example of when a legal discussion gets completely divorced from the facts of what actually happened in the case and i'm not just talking about the argument or the brief here but the corporate representative at trial for e q two was it's litigation manager the corporate representative at the deposition table we wanted to know about damages was a lawyer who was hard to try to explain those and in fact he couldn't algarve the court to go back and look at what happened in this case the actual factual record of this case because the j and what happened is just so important and it doesn't affect as mr west was silent while this would affect everyone in the world that has a lace this case is about these parties and what they did and that's the way that this case should be  set of cases that defined from i think le feet to to poplar creek and including baker so tell us educate us and what the court has recognized pauper curry baker all those cases that they were both involved in argued baker case to the kentucky supreme court and what the kentucky supreme court said was lall clearly is that you can take out from that gross the court stock up on take out from that grows the post production expenses and sometimes that's called a net back a work back theory on page twenty nine there is no royalty calculation and that was true for this case for in g l's for the liquids involved and the reason for that again going back to the chronology is from the time that these agreements were entered into back in one nine six no energy else no gas liquids no liquids were being produced it was simply gas the same thing was true even after the last you know there are eleven agreements as the court knows in the complaint the first  exhibits during the year two thousand and four the last agreement is signed there's still no in jails being produced anywhere it was not on their minds it's not in the dock it's not in the format agreements is not discussed because it wasn't happening it wasn't being produced even in the period from two thousand and four the last the last format agreement exhibit number one of them so how does that play out the stand your argument we didn't think about it like addressing that play out with the law and the way that plays out with a lawyer honors exactly what the court is focused on of the pope or couric and baker in these other cases if it's not on your mind if you haven't calculated if you haven't provided in the format agreements and they processing plant we can get your gas lowered so the next considered puri production costs all of this construction i'm just trying to make sure i understand the distinction between post production and the drilling in the creation and your own on that point what mr west was trying to argue and again this is where i think the little words legal arguments completely been apart from the facts it's trying to say well there's just one well th produces all this stuff the ngos are somehow part of the gas back at the well that's not that's not accurate what happens is the end she also new product that it's post production expenses are different than the post production expenses on gas if you're only talking about gas we weren't taking those we agreed with that that's why i'm saying agree with part of what he says but the n g l s was a new product they required new infrastructure or new building we were able to take post production was post production transportation costs the creation of the mechanics the cheated to divide this out of the existing gas that is that pre production costs that's that's post production as to the ngos your honor and again we did not take everything your position your everything is way way did not take on the right transportation all those are examples of in the various cases sometimes it's with timber gone or here's a good example in this courtroom you can talk it all the same law says for natural resource whether it's coal or timber if you have to take it off property and do something with it they're going to take temper off their property does not mean that they're going to build a furniture factory to build everything that's on this courtroom on the whole at your own level it may be a democrat maybe this is exactly like the timber which it came but that's not what the participant read a poem back when if it had been tempered that's what the parties were grandmamma's were take the temporal fs and your temper to market not build a furniture factory not build benches and podiums that in jail is a completely different product and another way of looking at they have again i think the if we have taken if someone orders ten units of butane for example which is an element of gas and we just deliver them all kinds of natural gas and just say there it's in there somewhere that's not going to satisfy a contract it's a different product and it's a product that was not covered by the format agreements as far as hell the calculation of royalty would be the default position of course under kentucky law clearly is the court recognizes is you can take those that's what we did this what we told you to we were going to do we walked on through a before argument that was year as of relationship they would meet regularly with this for problem come up what wall and walk there were through the plan to process the gas here's how we're going to do it and in fact did exactly that the processing plant was a back and was fine with that it could to enjoy the benefits of this gas still being able to go to market because it went through a processing plant where the gas comes out without any post production expenses and a new product a new product the liquids come out go to a different market and from that we detect post production expenses we show that to e q to for six years again the chronology is important they accepted that we're fine with  se the object of the contract even though it's something that have to occur for the natural gas liquids are available to send off and do whatever needs to be done so so that that's why it's post production from the original subject of the contract is that right you are i don't think anything to do with the note with the natural gas liquids has the thing i mean clearly the transportation of the like with that that that's that's clearly understandable but when we talk about i guess the line of demarcation if you can look at it that way we're about that when they formulate the contract exactly wrong and that and how you can post here and you rather that's exactly right what the parties were thinking about when they entered into the contract or the gas and what's associated with the gas what they're thinking about when the fork water comes up is we've got a new product the post the natural gas liquids it does go to a different market the transportation is different where it's going whether it's down to new jails but then again that's the way the parties treated not think that that's so important because each of the parties understood them whether whether or not any more of an expert if we agree with your argument do it do you think me to be a remain  would be required under any circumstances for this reason the court will recognize who went to trial on on three issues and what were the pre all the claims we did not go for that so that's all paid the the all that claims the proof shall be fully paid those so the only thing that was left as as a came out of suspense and the accounting for that we did pay that judgment so the judgment was entered against us we immediately paid it if we prevail as we would with hope we would  would be simply a matter of returning that money to us way think the court should be a for the district court should be a formed on all of the decisions have made other than the mathematical calculation that i've put in for my credit and that's what we ended up paying but as far as the other issues wrong are certainly no remain and would be appropriate no reversal would be appropriate what the district court did a large part of what they were arguing in their brief the district court did under a highly deferential standard that we hope this court will recognize that there is no abuse of discretion in the decisions that the court below may as far as this in g l question and the calculation for that that was known to be a six hundred seven thousand dollar question but the energy els is going forward i do not believe that we require are in the kind of calculation for that a dollar value was put upon it but most important court in there even says well you know the auditors were free to go visit the home office and they did that that's just like hair all that's could be taken all that's were taken nothing ever comes up for all the time period the goes on so i think that's really important to say that i'm getting to my last minute so i feel like i need them to just sum up and say again that this is not the case the calls for some kind of sweeping pronouncement where there are the war gas always contains liquid we know that not right and we know that's not right for the reasons shown in the brief but more importantly we know it's not right for the way that the parties triggered it this is a case for recognizing how hard the district judge in the magistrate judge worked on this case help properly they stronger in that there are both tom barr but there also were excluded under the discretionary orders of the corps both on discovery and the entire health carefully they looked at the head and again i would hope that this court is as an afterthought a little argument is completely divorced from any facts which would ask the court to affirm the district court except our credit in the end the pre judgment interest in the other things we've raised our cos r please the court counsel just not all question first during my initial argument with regard to the two thousand and two to two thousand and ten deductions and the application of of how  baker hughes by this court we do believe that the district court abused its discretion certainly was there a mistake is for a should of some information been provided sooner yes it should oh that's my fault it's not my client's fa but the important thing about that is there was no surprise or prejudice to magnum hunter because these figures that were part of the inertia data that was excluded whenever magnum hunter was the party that calculated and paid royalties so contemporaneously with the production of the natural gas between two thousand and two and two thousand and ten they would send a check or a wire and a statement saying this is the payment that was made and hunter knew what was in it if it was a mirror image of these royalty statements that they had provided so there certainly was no surprise to them also there was no surprise because the amount that was claim for the deductions between two thousand two thousand and ten was specified in the proof a claim that was filed in the two thousand and fifteen bankruptcy so they clearly knew about that so that's one aspect secondly  addition to excluding the inertia dad and the sky for a rule under the discovery sanction the district court also excluded evidence that they produced it was not evidence that  y had we had consistently over the course of this litigation requested that they provide to us a summary of the deductions that they had taken in the payments they have made between two thousand and two and two thousand  ultimately the district court did order them to do that and they did within a few days they were able to generate for the period between two thousand and six and two thousand and ten all the deductions that were taken on for farm outs other than the ones that the court had ruled wrist time barred and that was like one point two million dollars so they've conceded i think my learned counsel conce in her argument that they knew that they couldn't deduct for gas post production expenses for gas and they provided the information from their records as far as what that was the one point two million dollars but yet  district court expanded its ruling with regard to the discovery sanctions and excluded that we believe that that should have been included the court ask about the contractual time bar i just want to mention that very briefly is that  if you look at the record their own witness their corporate representative testified that their contractual limitations only of pride to working interest payments not royalty interest payments like were at issue  this is just oh i'm sorry judge cave did you have a question well you know i just wanted to let the lawyers know that i've listened to everything that he said