Mun. Auth. of Westmoreland Cnty. v. CNX Gas Co.

• Decision Date: 29 March 2019
• Docket Number: CIVIL ACTION NO. 2:16-CV-422
• Citation: 380 F.Supp.3d 464
• Parties: MUNICIPAL AUTHORITY OF WESTMORELAND COUNTY, on behalf of itself and all others similarly situated, Plaintiff v. CNX GAS COMPANY, L.L.C. and Noble Energy, Inc., Defendants
• Court: U.S. District Court — Western District of Pennsylvania

380 F.Supp.3d 464

MUNICIPAL AUTHORITY OF WESTMORELAND COUNTY, on behalf of itself and all others similarly situated, Plaintiff

v.CNX GAS COMPANY, L.L.C. and Noble Energy, Inc., Defendants

CIVIL ACTION NO. 2:16-CV-422

United States District Court, W.D. Pennsylvania.

Signed March 29, 2019

David A. McGowan, Susan A. Meredith, Caroselli, Beachler, McTiernan & Coleman, Pittsburgh, PA, Robert C. Sanders, Law Office of Robert C. Sanders, Upper Marlboro, MD, for Plaintiff.

Lucas Liben, Thomas J. Galligan, Nicolle R. Snyder Bagnell, Reed Smith LLP, Pittsburgh, PA, for Defendant CNX GAS Company, L.L.C.

John K. Gisleson, Matthew H. Sepp, Morgan, Lewis & Bockius LLP, Pittsburgh, PA, for Defendant Noble Energy, Inc.

MEMORANDUM

Christopher C. Conner, Chief Judge

Plaintiff Municipal Authority of Westmoreland County ("MAWC") owns approximately 2,255 acres of land in Western Pennsylvania that it has leased for oil and gas production. The current lessees are defendants CNX Gas Company, L.L.C. ("CNX") and Noble Energy, Inc. ("Noble"). MAWC contends that CNX and Noble (collectively, "lessees") have breached the terms of their contract with MAWC and tortiously converted portions of MAWC's royalty payments. MAWC filed the instant putative class action on behalf of itself and other similarly situated leaseholders. Lessees move for summary judgment on all claims against them. (Docs. 119, 128). MAWC moves for partial summary judgment. (Doc. 124). We will deny MAWC's motion for partial summary judgment and we will grant in part and deny in part lessees' motions.

I. Factual Background and Procedural History ¹

A. The Lease and Assignments

In January 2002, MAWC entered into an oil and gas lease (the "Lease") with Dominion Exploration & Production, Inc. ("Dominion") for gas production on approximately 2,255 acres MAWC owns in western Pennsylvania. (Doc. 131 ¶ 1). Dominion drilled and operated shallow, conventional wells on the leased property from 2002 until 2010. (Id. ¶¶ 2-3; Doc. 121 ¶ 17). Dominion merged with CONSOL Gas Company ("CONSOL Gas") in April 2010 and assigned the Lease to CONSOL Gas as part of the purchase and sale agreement. (Doc. 131 ¶ 3; Doc. 126 ¶ 5).

In January 2011, CONSOL Gas merged with CNX, leaving CNX as the surviving business entity and sole lessee. (Doc. 131 ¶ 4; Doc. 126 ¶ 8). CNX expanded gas operations under the Lease by drilling two unconventional, horizontal wells on the leased property in the Marcellus Shale Formation.² (Doc. 131 ¶ 7, Doc. 143 ¶ 7; Doc. 121 ¶ 17). CNX produced gas on the Lease property as the sole lessee from January 2011 to the end of September 2011. (Doc. 126 ¶ 11).

On September 30, 2011, CNX entered into a joint operating agreement with Noble, whereby CNX assigned, inter alia , a 50 percent working interest in the Lease. (Id. ¶ 12). Pursuant to the joint operating agreement, CNX and Noble were equally responsible for marketing, sales, and payment of royalties under the Lease. (Id. ¶ 13). Noble, however, did not begin to market or sell gas or pay royalties under the Lease until November 2012; rather, from October 2011 to November 2012, CNX alone continued to market, sell, and pay all royalties to MAWC for the gas produced. (Doc. 148 at 3 ¶ 13; Doc. 151 ¶ 13; Doc. 125 at 6 n.1). The joint operating agreement between CNX and Noble was terminated in late 2016, leaving CNX as the sole lessee beginning in January 2017. (Doc. 126 ¶ 14).

B. Assessment of Post-Production Costs

Costs associated with bringing natural gas to market after it has been removed from the ground (i.e. , from "wellhead" to point of sale) are referred to in industry vernacular as "post-production costs." See Kilmer v. Elexco Land Servs., Inc., 605 Pa. 413, 990 A.2d 1147, 1149 & n.2 (2010) ; (Doc. 125 at 11; Doc. 147 at 5). These costs frequently include gathering, compression, processing, dehydration, treatment, and transportation of gas. (Doc. 50 ¶ 9; Doc. 54 ¶ 9); see also Kilmer, 990 A.2d at 1149-50 & n.3. The parties agree that the Lease, as written, ordinarily would permit lessees to deduct post-production costs from royalties owed to MAWC. (Doc. 121 ¶ 4; Doc. 141 ¶ 4; Doc. 148 at 12 ¶ 1; Doc. 152 ¶ 1; Doc. 125 at 13; Doc. 142 at 7).

During the eight years that Dominion extracted gas and paid MAWC royalties under the Lease, Dominion did not deduct any post-production costs. (Doc. 126 ¶ 59; Doc. 127, Ex. 3 (Dominion royalty statements) ). The parties disagree about the type and amount of post-production costs that Dominion may have incurred. (Doc. 148 at 9-10 ¶ 59; Doc. 151 ¶ 59). However, the deposition testimony of Jason Mumford ("Mumford"), the Assistant Corporate Controller for CONSOL Energy, Inc. ("CONSOL Energy"), clearly indicates that post-production costs were incurred but not passed on to MAWC. (Doc. 126 ¶¶ 59-61; Doc. 127, Ex. 2, Mumford Dep. 72:9-73:18, 78:24-81:8, 85:2-17, 92:5-10, 132:11-23).³

The same is true for the period that CONSOL Gas was the sole lessee—approximately May 2010 through December 2010. It is undisputed that CONSOL Gas did not deduct any post-production costs from MAWC's royalties. (Doc. 126 ¶ 62; Doc. 148 at 10-11 ¶ 62; Doc. 127-1 Ex. 5 (CONSOL Gas royalty statements) ). Lessees disagree about whether CONSOL Gas incurred post-production costs every month and whether those costs were de minimis. (Doc. 148 at 10-11 ¶ 62; Doc. 151 ¶ 62). But the record is clear that CONSOL Gas incurred some post-production costs that were not charged to MAWC. (Doc. 127-2, Ex. 17 at 2-3 (CNX answer to Interrogatory No. 2(a) ); Mumford Dep. 33:7-51:17, 108:11-117:23).

The non-deduction of post-production costs continued for nine months into CNX's tenure as lessee. (Doc. 126 ¶¶ 63-65). Beginning with its November 2011 royalty statement for October 2011 gas production, CNX began to charge MAWC for its pro rata share of post-production costs. (Id. ¶ 66; Doc. 148 at 11 ¶ 66). When Noble began marketing and selling gas under the Lease and paying its proportionate share of royalties to MAWC, it too charged MAWC post-production costs. (Doc. 126 ¶ 67). MAWC asserts that from the time lessees began charging these costs until the end of 2015, lessees have deducted over $ 3.5 million from its royalties. (Doc. 126 ¶ 67; Doc. 50 ¶ 32; Doc. 1 ¶ 22).

C. Procedural History

MAWC commenced this action in state court in February 2016. CNX, with Noble's consent, removed the case to this court. In its amended complaint, MAWC asserts claims for breach of contract and conversion on its own behalf against CNX and Noble. MAWC also seeks class certification under Federal Rule of Civil Procedure 23 for similarly situated oil and gas leaseholders. Discovery has been bifurcated at the parties' agreement: the parties have completed discovery on the merits of MAWC's claims; class certification discovery is deferred until after resolution of dispositive motions on those claims. (See Doc. 52 at 4 ¶ 9(d); Doc. 171-1 at 16-17). CNX and Noble move for summary judgment on all claims against them. MAWC moves for summary judgment on its breach of contract claims (Counts I, II, IV, and V of the amended complaint), and as to damages against Noble on Counts IV and V. The cross-motions are fully briefed and ripe for disposition.

II. Legal Standard

Through summary adjudication, the court may dispose of those claims that do not present a "genuine dispute as to any material fact" and for which a jury trial would be an empty and unnecessary formality. FED. R. CIV. P. 56(a). The burden of proof tasks the non-moving party to come forth with "affirmative evidence, beyond the allegations of the pleadings," in support of its right to relief. Pappas v. City of Lebanon, 331 F.Supp.2d 311, 315 (M.D. Pa. 2004) ; see also Celotex Corp. v. Catrett, 477 U.S. 317, 322-23, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). This evidence must be adequate, as a matter of law, to sustain a judgment in favor of the non-moving party on the claims.

Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250-57, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986) ; Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587-89, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986). Only if this threshold is met may the cause of action proceed. See Pappas, 331 F.Supp.2d at 315.

Courts are permitted to resolve cross-motions for summary judgment concurrently. See Lawrence v. City of Philadelphia, 527 F.3d 299, 310 (3d Cir. 2008) ; see also Johnson v. Fed. Express Corp., 996 F.Supp.2d 302, 312 (M.D. Pa. 2014) ; 10A CHARLES ALAN WRIGHT ET AL. , FEDERAL PRACTICE AND PROCEDURE § 2720 (3d ed. 2015). When doing so, the court is bound to view the evidence in the light most favorable to the non-moving party with respect to each motion. FED. R. CIV. P. 56 ; Lawrence, 527 F.3d at 310 (quoting Rains v. Cascade Indus., Inc., 402 F.2d 241, 245 (3d Cir. 1968) ).

III. Discussion

The facts in this case are largely undisputed. Three predominantly legal questions remain: first , whether CNX and Noble breached the Lease when they assessed post-production costs on MAWC in general (Counts I and IV); second , assuming assessment of post-production costs was permissible, whether the actual costs lessees charged MAWC were appropriate and reasonable (Counts II and V); and third , whether lessees' reduction of royalty payments for post-production costs constituted conversion (Counts III and VI). We will address these issues seriatim , noting any relevant differences between the parallel claims against CNX and Noble when necessary.

A. Breach of Contract – Post-Production Costs Generally

MAWC contends that the general assessment of post-production costs by CNX and Noble was a breach of the Lease. MAWC acknowledges that the Lease as written unambiguously permits lessees to deduct post-production costs, but posits that this right was either modified or waived by years of non-deduction preceding CNX's first assessment in November 2011. MAWC alternatively asserts that lessees are equitably estopped from charging such costs. CNX and Noble counter that there was...