Corder v. Antero Res. Corp.

• Decision Date: 05 January 2023
• Docket Number: 21-1715, No. 21-1716
• Parties: Gerald W. CORDER; Marlyn C. Sigmon; Garnet C. Cottrill; Randall M. Corder; Janet C. Packard; Lorena Krafft; Cheryl Morris ; Tracy Bridge; Angela Nicholson; Kevin McCall; Brian McCall, Plaintiffs - Appellees, v. ANTERO RESOURCES CORPORATION, a Delaware corporation, Defendant – Appellant. Gas and Oil Association of WV, Inc., Amicus Supporting Appellant, West Virginia Royalty Owners' Association; West Virginia Farm Bureau, Amicus Supporting Appellee. Gerald W. Corder; Marlyn C. Sigmon; Garnet C. Cottrill; Randall M. Corder; Janet C. Packard; Lorena Krafft; Cheryl Morris ; Tracy Bridge; Angela Nicholson; Kevin McCall; Brian McCall, Plaintiffs - Appellants, v. Antero Resources Corporation, a Delaware corporation, Defendant – Appellee.
• Court: U.S. Court of Appeals — Fourth Circuit

57 F.4th 384

Gerald W. CORDER; Marlyn C. Sigmon; Garnet C. Cottrill; Randall M. Corder; Janet C. Packard; Lorena Krafft; Cheryl Morris ; Tracy Bridge; Angela Nicholson; Kevin McCall; Brian McCall, Plaintiffs - Appellees,

v.ANTERO RESOURCES CORPORATION, a Delaware corporation, Defendant – Appellant.

Gas and Oil Association of WV, Inc., Amicus Supporting Appellant,

West Virginia Royalty Owners' Association; West Virginia Farm Bureau, Amicus Supporting Appellee.

Gerald W. Corder; Marlyn C. Sigmon; Garnet C. Cottrill; Randall M. Corder; Janet C. Packard; Lorena Krafft; Cheryl Morris ; Tracy Bridge; Angela Nicholson; Kevin McCall; Brian McCall, Plaintiffs - Appellants,

v.Antero Resources Corporation, a Delaware corporation, Defendant – Appellee.

No. 21-1715

No. 21-1716

United States Court of Appeals, Fourth Circuit.

Argued: September 15, 2022

Decided: January 5, 2023

ARGUED: Elbert Lin, HUNTON ANDREWS KURTH, LLP, Richmond, Virginia, for Appellant/Cross-Appellee. Marvin Wayne Masters, THE MASTERS LAW FIRM LC, Charleston, West Virginia, for Appellee/Cross-Appellant. ON BRIEF: Erica N. Peterson, HUNTON ANDREWS KURTH, LLP, Washington, D.C.; W. Henry Lawrence, IV, Amy M. Smith, Shaina D. Massie, STEPTOE & JOHNSON PLLC, Bridgeport, West Virginia, for Appellant/Cross-Appellee. April D. Ferrebee, THE MASTERS LAW FIRM LC, Charleston, West Virginia, for Appellees/Cross-Appellants. William M. Herlihy, Don C.A. Parker, SPILMAN THOMAS & BATTLE, PLLC, Charleston, West Virginia, for Amicus Gas and Oil Association of WV, Inc. Howard M. Persinger, III, PERSINGER & PERSINGER, L.C., Charleston, West Virginia, for Amici West Virginia Royalty Owners' Association and West Virginia Farm Bureau.

Before GREGORY, Chief Judge, NIEMEYER, and THACKER, Circuit Judges.

Affirmed in part, vacated in part, and remanded by published opinion. Chief Judge Gregory wrote the opinion, in which Judge Niemeyer joined. Judge Thacker wrote a separate opinion, concurring in part and dissenting in part.

GREGORY, Chief Judge:

These consolidated cases involve a dispute between Antero Resources Corporation ("Antero") and a group of landowners ("Lessors") over the payment of natural gas royalties under several oil and gas leases. The leases permit Antero to extract and sell natural gas owned by the Lessors in exchange for royalty payments. Antero appeals from the district court's summary judgment order, which held that Antero breached the terms of the leases by deducting certain "post-production costs" from the royalties it paid Lessors and awarded damages. Lessors cross-appeal the district court's earlier dismissal of their fraud and punitive damages claims against Antero.

We affirm the district court's summary judgment order in part and vacate in part. We conclude that some of the leases prohibit Antero from deducting any post-production costs from Lessors' royalties, but other leases—namely, those that contain a "Market Enhancement Clause"—do authorize deductions in certain circumstances. Separately, we affirm the dismissal of the fraud and punitive damages claims because Lessors did not plead them with sufficient particularity.

I.

A.

Lessors own mineral interests on several tracts of land in Harrison County and Doddridge County, West Virginia. Antero acquired the rights, under several different leases, to operate wells on those tracts to produce and sell natural gas. This appeal concerns lease agreements for seven different tracts.¹ All eleven Lessors have a continuing interest in most of the seven tracts at issue.

Antero operates several wells on the tracts covered by the leases. The wells extract the raw minerals, which then collect in a production unit, where they are separated into oil, gas, and water. Meters measure the volume and chemical composition of the gas from each well before it moves downstream. The gas then flows from gathering pipelines into one of two larger pipelines: (1) the ETC Bobcat Pipeline, which is an interstate pipeline that carries unprocessed gas to markets for sale, or (2) a pipeline that transfers unprocessed gas to the Sherwood Gas Processing Plant, which is owned and operated by a company called MarkWest Liberty Midstream & Resources. Gas transported to the Processing Plant is processed into natural gas liquids ("NGLs"). The NGLs, which are known as "Y-Grade" at this stage, may be sold at the Processing Plant or sent to MarkWest's fractionation plant in Pennsylvania. The fractionation plant converts the Y-Grade NGLs into more purified products such as ethane, propane, and butane for sale at multiple locations. Manufacturing Y-Grade NGLs at the Processing Plant also produces residue gas, which is mostly methane. The residue gas may be transported and sold "in-basin" or transported and sold in more distant "out-of-basin" markets.

In 2015, Antero and a subgroup of Lessors ("Settling Lessors") entered a Confidential Settlement Agreement and Release of All Claims ("Settlement Agreement"). The Settlement Agreement resolved a partition action Antero had brought against Settling Lessors in state court, and, pursuant to the Agreement, Settling Lessors agreed to modify the terms of all but one of the leases at issue in this case.² Thus, for six of the seven tracts, we must consider both the terms of the original lease (as to the Lessors who were not parties to the Settlement Agreement) and the modifications made in 2015 (as to the Settling Lessors). For the seventh tract (Lease 9), we need only consider the terms of the original lease.

Each lease requires Antero to pay Lessors royalties based on their proportionate share of the gas it extracts and sells. Generally speaking, royalties are measured as a fraction (typically one-eighth) of the gas's value or the proceeds from its sale. However, the specific methods the leases use to calculate royalties vary. Lessors' breach-of-contract claim centers on whether the terms of each lease permit Antero to deduct certain "post-production" costs from Lessors' royalties. These comprise the expenses Antero incurs to process natural gas into more refined products (such as NGLs) and transport those products for sale.

On this point, the leases fall into three general categories. The leases in the first category—the original versions of Leases 3, 4, 5, 6, 7, and 9—are silent on the allocation of post-production costs. These leases use one of a few different methods to calculate royalties. One simply requires Antero to pay royalties equal to one-eighth of "the price received by [Antero] from the sale" of gas. J.A. 830 (Lease 5). Antero characterizes the remaining leases in this category as having "market value" royalty clauses. They require Antero to pay a fraction of the "value" of gas, the "net amount realized by Lessee ... from the sale" of gas, or the "gross proceeds received from the sale of [natural gas] at the prevailing price for gas," all of which are calculated "at the well" or "at the wellhead." See J.A. 823 (Lease 3); J.A. 825 (Lease 4); J.A. 834 (Lease 6); J.A. 840 (Lease 7); J.A. 849 (Lease 9).³ These leases were originally executed in the late 1970s or early 1980s. At that time, it was a common practice for gas to be sold directly at the wellhead. Antero, which acquired an interest in most of the leases in 2012, does not claim that it sells any raw gas at the well.

The second category is a subset of leases that were modified by the 2015 Settlement Agreement. These leases potentially prohibit Antero from deducting any post-production costs from Settling Lessors' royalties. Specifically, Paragraph 14 of the Settlement Agreement states that royalties for Leases 3 and 4 "shall be deemed gross royalties and shall be calculated without any regard to any postproduction or market enhancement costs claimed or incurred by Antero." J.A. 1607. The parties dispute whether that language actually applies.

The leases in the third and final category contain a "Market Enhancement Clause." The Market Enhancement Clause states that Antero must bear the costs it incurs to "transform the product into marketable form," but that it may deduct costs from royalties if they "result in enhancing the value of the marketable oil, gas or other products to receive a better price." J.A. 1622 (emphasis added). In full, the Clause states:

It is agreed between the Lessor and Lessee that, notwithstanding any language herein to the contrary, all oil, gas or other proceeds accruing to the Lessor under this lease or by state law shall be without deduction, directly or indirectly, for the cost of producing, gathering, storing, separating, treating, dehydrating, compressing, processing, transporting, and marketing the oil, gas and other products produced hereunder to transform the product into marketable form; however, any such costs which result in enhancing the value of the marketable oil, gas or other products to receive a better price may be deducted from Lessor's share of production so long as they are based on Lessee's actual cost of such enhancements. However, in no event shall Lessor receive a price that is less than, or more than, the price received by Lessee.

Id. The remainder of the leases modified by the 2015 Settlement Agreement contain the Market Enhancement Clause. In addition, certain Lessors and Antero had modified Lease 2 in 2012 to include the Clause.

The parties dispute whether the leases, in their various forms, allow Antero to deduct two particular types of post-production costs from Lessors' royalties. The first, which Antero refers to as "PRC2," consists of expenses associated with processing, fractionating, and transporting NGLs. The second post-production cost, which Antero refers to as "TRN3," consists of the costs Antero incurs to transport residue gas beyond the first available "in-basin" market to a more distant "out-of-basin" market.⁴ J.A. 1046.

Antero uses a simple "work-back method" to factor these costs into the royalties it pays Lessors. This method starts with the revenue the company obtains from selling the gas...