Estate of Tawney v. Columbia Nat. Res.

• Decision Date: 15 June 2006
• Docket Number: No. 32966.,32966.
• Citation: 633 S.E.2d 22
• Court: West Virginia Supreme Court
• Parties: Estate of Garrison G. TAWNEY, by Lela Ann Goff, Executrix, Lela Ann Goff and Vernon B. Goff, Husband and Wife, Janice E. Cooper and Clifford R. Cooper, Husband and Wife, Larry G. Parker, John W. Parker, Richard L. Ashley, Myrtle Jones, by her Attorney-In-Fact, Orton A. Jones, Plaintiffs, v. COLUMBIA NATURAL RESOURCES, L.L.C., FKA Columbia Natural Resources, Inc., a Texas Corporation; Nisource, Inc., a Delaware Corporation; and Columbia Energy Group, a Delaware Corporation, Defendants.

633 S.E.2d 22

Estate of Garrison G. TAWNEY, by Lela Ann Goff, Executrix, Lela Ann Goff and Vernon B. Goff, Husband and Wife, Janice E. Cooper and Clifford R. Cooper, Husband and Wife, Larry G. Parker, John W. Parker, Richard L. Ashley, Myrtle Jones, by her Attorney-In-Fact, Orton A. Jones, Plaintiffs, v. COLUMBIA NATURAL RESOURCES, L.L.C., FKA Columbia Natural Resources, Inc., a Texas Corporation; Nisource, Inc., a Delaware Corporation; and Columbia Energy Group, a Delaware Corporation, Defendants.

No. 32966.

Supreme Court of Appeals of West Virginia.

Submitted: May 23, 2006.

Decided: June 15, 2006.

Syllabus by the Court

1. "If an oil and gas lease provides for a royalty based on proceeds received by the lessee, unless the lease provides otherwise, the lessee must bear all costs incurred in exploring for, producing, marketing, and transporting the product to the point of sale." Syllabus Point 4, Wellman v. Energy Resources, Inc., 210 W.Va. 200, 557 S.E.2d 254 (2001).

2. "If an oil and gas lease provides that the lessor shall bear some part of the costs incurred between the wellhead and the point of sale, the lessee shall be entitled to credit for those costs to the extent that they were actually incurred and they were reasonable. Before being entitled to such credit, however, the lessee must prove, by evidence of the type normally developed in legal proceedings requiring an accounting, that he, the lessee, actually incurred such costs and that they were reasonable." Syllabus Point 5, Wellman v. Energy Resources, Inc., 210 W.Va. 200, 557 S.E.2d 254 (2001).

3. "A valid written instrument which expresses the intent of the parties in plain and unambiguous language is not subject to judicial construction or interpretation but will be applied and enforced according to such intent." Syllabus Point 1, Cotiga Development Co. v. United Fuel Gas Co., 147 W.Va. 484, 128 S.E.2d 626 (1962).

4. The term "ambiguity" is defined as language reasonably susceptible of two different meanings or language of such doubtful meaning that reasonable minds might be uncertain or disagree as to its meaning.

5. "The question as to whether a contract is ambiguous is a question of law to be determined by the court." Syllabus Point 1, in part, Berkeley County Pub. Serv. Dist. v. Vitro Corp. of Am., 152 W.Va. 252, 162 S.E.2d 189 (1968).

6. "[W]hen new points of law are announced . . . those points will be articulated through syllabus points as required by our state constitution." Syllabus Point 2, in part, Walker v. Doe, 210 W.Va. 490, 558 S.E.2d 290 (2001).

7. "The general rule as to oil and gas leases is that such contracts will generally be liberally construed in favor of the lessor, and strictly as against the lessee." Syllabus Point 1, Martin v. Consolidated Coal & Oil Corp., 101 W.Va. 721, 133 S.E. 626 (1926).

8. "Uncertainties in an intricate and involved contract should be resolved against the party who prepared it." Syllabus Point 1, Charlton v. Chevrolet Motor Co., 115 W.Va. 25, 174 S.E. 570 (1934).

9. "`It is the province of the court, and not of the jury, to interpret a written contract.' Franklin v. Lilly Lumber Co., 66 W.Va. 164, 66 S.E. 225 [1909]." Syllabus Point 1, Stephens v. Bartlett, 118 W.Va. 421, 191 S.E. 550 (1937).

10. Language in an oil and gas lease that is intended to allocate between the lessor and lessee the costs of marketing the product and transporting it to the point of sale must expressly provide that the lessor shall bear some part of the costs incurred between the wellhead and the point of sale, identify with particularity the specific deductions the lessee intends to take from the lessor's royalty (usually 1/8), and indicate the method of calculating the amount to be deducted from the royalty for such post-production costs.

11. Language in an oil and gas lease that provides that the lessor's 1/8 royalty (as in this case) is to be calculated "at the well," "at the wellhead," or similar language, or that the royalty is "an amount equal to 1/8 of the price, net all costs beyond the wellhead," or "less all taxes, assessments, and adjustments" is ambiguous and, accordingly, is not effective to permit the lessee to deduct from the lessor's 1/8 royalty any portion of the costs incurred between the wellhead and the point of sale.

Marvin W. Masters, Esq., The Masters Law Firm, L.C., Michael W. Carey, Esq., George M. Scott, Esq., Robert E. Douglas, Esq., Carey, Scott & Douglas, P.L.L.C., Scott S. Segal, Esq., The Segal Law Firm, J. Thomas Lane, Esq., J. Mark Adkins, Esq., Bowles, Rice, McDavid, Graff & Love, Charleston, for Plaintiffs.

Timothy M. Miller, Esq., Joseph S. Beeson, Esq., Jessica A. Blake, Esq., Robinson & McElwee, P.L.L.C., Charleston, for Columbia Natural Resources, L.L.C.

Herschel H. Rose, III, Esq., Steven R. Broadwater, Esq., Rose Law Office, for Amicus Curiae Independent Oil and Gas Association of West Virginia, Inc.

Richard L. Gottlieb, Esq., Lewis, Glasser, Casey & Rollins, P.L.L.C., for Amicus Curiae West Virginia Oil and Natural Gas Association.

MAYNARD, Justice.

In this case, we address two certified questions from the Circuit Court of Roane County which we reformulate¹ into the following single question:

In light of the fact that West Virginia recognizes that a lessee to an oil and gas lease must bear all costs incurred in marketing and transporting the product to the point of sale unless the oil and gas lease provides otherwise, is lease language that provides that the lessor's 1/8 royalty is to be calculated "at the well," "at the wellhead" or similar language, or that the royalty is "an amount equal to 1/8 of the price, net of all costs beyond the wellhead," or "less all taxes, assessments, and adjustments" sufficient to indicate that the lessee may deduct post-production expenses from the lessor's 1/8 royalty, presuming that such expenses are reasonable and actually incurred.²

For the reasons that follow, we do not believe that the lease language set forth in the certified question permits CNR to deduct post-production expenses from the lessors' royalty payments.³

I. FACTS

Plaintiffs below are the owners of oil and gas ("lessors") which have been leased to Defendant Columbia Natural Resources or a predecessor in interest ("CNR"). At least since 1993, CNR has taken deductions from Plaintiffs' 1/8 royalty for "post-production" costs. These costs include CNR's delivery of gas from the well to the Columbia Gas Transmission ("TCO") point of delivery, CNR's processing of the gas to make it satisfactory for delivery into TCO's transportation line, and losses of volume of gas due to leaks in the gathering system or other volume loss from the well to the TCO line.

The post-production deductions taken by CNR include both monetary and volume deductions. CNR took deductions from royalty owners in equal amounts regardless of the distance from the well to TCO's transportation line. Even though CNR sent royalty checks to the lessors with an accounting of the purported amount of gas produced from the well, the purported price for which the gas was sold, and the purported amount of the royalty, CNR did not disclose on the accounting statements that deductions were taken.

Lessors have brought a class action suit against CNR for damages due to the allegedly insufficient royalty payments. There are approximately 8,000 Plaintiffs with 2,258 leases of varying forms and types. According to CNR, at least 1,382 leases at issue have language indicating that the royalty payment is to be calculated "at the well," "at the wellhead," "net all costs beyond the wellhead," or "less all taxes, assessments, and adjustments." CNR moved for summary judgment on the basis that the above lease language is clear and unambiguous and allows the lessee to deduct the royalty owners' proportionate share of post-production expenses, provided such expenses are actual and reasonable.

By order of October 14, 2005, the circuit court denied CNR's motion for summary judgment and certified two questions to this Court which we have reformulated as indicated above.

II. STANDARD OF REVIEW

This Court reviews a circuit court's answer to a certified question de novo. See Syllabus Point 1, Gallapoo v. Wal-Mart Stores, Inc., 197 W.Va. 172, 475 S.E.2d 172 (1996) (holding that "appellate standard of review of questions of law answered and certified by a circuit court is de novo").

III. DISCUSSION

It is the position of CNR that the "at the wellhead"-type language at issue in this case is clear and unambiguous and provides that the lessee may deduct the post-production costs of gas from the lessors' 1/8 royalty payments. Specifically, CNR explains that "at the wellhead" language indicates that the gas is to be valued for the purpose of calculating the lessors' royalty at the wellhead. However, the gas is not sold at the wellhead. In fact, the gas is not sold until the lessee adds value to it by preparing it for market, processing it, and transporting it to the point of sale. Thus, CNR concludes that the only logical way to calculate royalties at the wellhead is to permit lessees to deduct the lessors' proportionate share of post-production expenses, i.e., transportation and processing costs, from the total price received by the lessee.

The lessors, in contrast, assert that the "at the wellhead"-type language at issue is either silent or ambiguous on the subject of the allocation of post-production costs between the lessor and the lessee, and thus the language should be construed against the lessee. Further, because the lease language does not expressly address the allocation of post-production costs, the lessors posit that, pursuant to the lessee's implied covenant to market the gas recognized in Syllabus Point 4 of Wellman v. Energy Resources, Inc., 210 W.Va. 200, 557 S.E.2d 254 (2001), the lessee must bear all costs incurred in marketing and transporting the gas to the point of sale. Thus, the lessors conclude that CNR...