SWN Prod. Co. v. Kellam

• Decision Date: 14 June 2022
• Docket Number: 21-0729
• Parties: SWN PRODUCTION COMPANY, LLC, and Equinor USA Onshore Properties Inc., Defendants Below, Petitioners, v. Charles KELLAM, Phyllis Kellam, and all other persons and entities similarly situated, Plaintiffs Below, Respondents.
• Court: West Virginia Supreme Court

875 S.E.2d 216

SWN PRODUCTION COMPANY, LLC, and Equinor USA Onshore Properties Inc., Defendants Below, Petitioners,

v.Charles KELLAM, Phyllis Kellam, and all other persons and entities similarly situated, Plaintiffs Below, Respondents.

No. 21-0729

Supreme Court of Appeals of West Virginia.

Submitted: May 17, 2022

Filed: June 14, 2022

Marc S. Tabolsky, Esq., Schiffer Hicks Johnson PLLC, Houston, Texas, Elbert Lin, Esq., Hunton Andrews Kurth LLP, Richmond, Virginia, Timothy M. Miller, Esq., Jennifer J. Hicks, Esq., Katrina N. Bowers, Esq., Babst, Calland, Clements, & Zomnir, P.C., Charleston, West Virginia, Counsel for Petitioners

James G. Bordas III, Esq., Richard A. Monahan, Esq., BORDAS & BORDAS, PLLC, Wheeling, West Virginia, Counsel for Respondents

Scott A. Windom, Esq., Windom Law Offices, PLLC, Harrisville, West Virginia, Anthony J. Majestro, Esq., Powell & Majestro, PLLC, Charleston, West Virginia, Counsel for Amici Curiae West Virginia Land and Mineral Owners Association and West Virginia Association for Justice

W. Henry Lawrence, Esq., Amy M. Smith, Esq., Steptoe & Johnson PLLC, Bridgeport, West Virginia, Counsel for Amici Curiae American Petroleum Institute, Gas and Oil Association of WV, Inc., and West Virginia Chamber of Commerce

Howard M. Persinger, III, Esq., Persinger & Persinger, L.C., Charleston, West Virginia, Counsel for Amici Curiae West Virginia Royalty Owners’ Association, West Virginia Farm Bureau, Bounty Minerals LLC and Siltstone Resources, LLC

Michael W. Carey, Esq., David R. Pogue, Esq., Carey, Douglas, Kessler & Ruby, PLLC, Charleston, West Virginia, Marvin W. Masters, Esq., April D. Ferrebee, Esq., The Masters Law Firm LC, Charleston, West Virginia, Counsel for Amicus Curiae National Association of Royalty Owners, Appalachia

Wooton, Justice:

The United States District Court for the Northern District of West Virginia has certified four questions to this Court, which seek to clarify whether, in payment of royalties under an oil and gas lease, the lessor may be required to bear a portion of the postproduction costs incurred in rendering the oil and gas marketable. First, the district court poses this overarching question:

Is Estate of Tawney v. Columbia Natural Resources, LLC. , 219 W. Va. 266, 633 S.E.2d 22 (2006), still good law in West Virginia?

We answer this question in the affirmative.

The District Court then asks us to expound upon our holding in Tawney by posing the following three questions:

What is meant by the "method of calculating" the amount of post-production costs to be deducted?

Is a simple listing of the types of costs which may be deducted sufficient to satisfy Tawney ?

If post-production costs are to be deducted, are they limited to direct costs or may indirect costs be deducted as well?

We find that these are questions of contract interpretation which may only be answered by the Court and a factfinder, as appropriate, upon consideration of the lease in question and other relevant evidence, through application of the holdings in Tawney, its predecessor, Wellman v. Energy Resources, Inc. , 210 W. Va. 200, 557 S.E.2d 254 (2001), and applicable contract law. In this regard, we recognize our authority to reformulate questions certified to this Court:

When a certified question is not framed so that this Court is able to fully address the law which is involved in the question, then this Court retains the power to reformulate questions certified to it under ... the Uniform Certification of Questions of Law Act found in W. Va. Code, 51-1A-1, et seq. ..."

Syl. Pt. 3, in part, Kincaid v. Mangum , 189 W. Va. 404, 432 S.E.2d 74 (1993) ; see also W. Va. Code § 51-1A-4 (2018) ("The Supreme Court of Appeals of West Virginia may reformulate a question certified to it."). We exercise our authority to reformulate and more succinctly phrase these three questions into a single question as follows:

What level of specificity does Tawney require of an oil and gas lease to permit the deduction of post-production costs from a lessor's royalty payments, and if such deductions are permitted, what types of costs may be included?

The answer to this question necessarily involves the exploration of contractual language, the possible need for interpretation of said language, and the development of facts to assist either the court or the factfinder, as appropriate. Therefore, we decline to answer the reformulated question.

I. FACTUAL AND PROCEDURAL BACKGROUND

In August 2007, Respondents Charles and Phyllis Kellam (hereinafter "the Kellams" or "Respondents") entered into an oil and gas lease agreement (the "Kellam Lease") with Great Lakes Energy Partners, LLC ("Great Lakes"). Sometime thereafter, Great Lakes assigned the lease to Chesapeake Appalachia, LLC ("Chesapeake") from whom Petitioners SWN Production Company, LLC ("SWN") and Equinor USA Onshore Properties Inc. ("Equinor") acquired working interests in the lease. SWN now operates oil and gas wells, and production units within which the Kellams’ leased lands are included. Since SWN and Equinor acquired working interests in the Kellam Lease, the parties have all engaged in oil and gas production efforts under the terms of that lease, which provides, in pertinent part:

4. In consideration of the premises the Lessee covenants and agrees:

(A) To deliver to the credit of the Lessor in tanks or pipelines, as royalty, free of cost, one-eighth (1/8) of all oil produced and saved from the premises, or at Lessee's option to pay Lessor the market price for such one-eighth (1/8) royalty oil at the published rate for oil of like grade and gravity prevailing on the dates such oil is sold into tanks or pipelines. Payment of royalty for oil marketed during any calendar month to be on or about the 60th day after receipt of such funds by the Lessee.

(B) To pay to the Lessor, as royalty for the oil, gas, and/or coalbed methane gas marketed and used off the premises and produced from each well drilled thereon, the sum of one-eighth (1/8) of the price paid to Lessee per thousand cubic feet of such oil, gas, and/or coalbed methane gas so marketed and used, measured in accordance with Boyle's Law for the measurement of gas at varying pressures, on the basis of 10 ounces above 14.73 pounds atmospheric pressure, at a standard base temperature of 60 degrees Fahrenheit, without allowance for temperature and barometric variations less any charges for transportation, dehydration and compression paid by Lessee to deliver the oil, gas, and/or coalbed methane gas for sale. Payment for royalty for oil, gas, and/or coalbed methane gas marketed during any calendar month to be on or about the 60th day after receipt of such funds by the Lessee.

(Emphasis added).

Paragraph 10 of the Kellam Lease addresses unitization and provides that, if the leased premises are consolidated with other lands to form a development unit, "the Lessor agrees to accept, in lieu of the one-eighth (1/8) oil, gas, and/or coalbed methane gas royalty hereinbefore provided, that proportion of such one-eighth (1/8) royalty which the acreage consolidated bears to the total number of acres compromising said development unit." Finally, Paragraph 11 of the Kellam Lease provides that, "[i]n case the Lessor owns a less interest in the above described premises than the entire and undivided fee simple therein, then the royalties and rentals herein provided for shall be paid to the Lessor only in the proportion which such interest bears to the whole and undivided fee."

According to the Kellams, SWN and Equinor "each have deducted postproduction costs from royalty checks due and payable to [the Kellams] and other similarly situated persons and/or entities." As such, on April 28, 2020, the Kellams instituted the underlying civil action—a putative class action—in the United States District Court for the Northern District of West Virginia, arguing that those deductions were in contravention of this Court's holdings in Tawney and Wellman because the terms of the lease lack the specificity required under Tawney to permit the deduction of post-production costs. While acknowledging that the royalty language provides for the deduction of certain charges for "transportation, dehydration, and compression," they argue the lease fails to include a "method of calculating the amount to be deducted from the royalty share for such post-production costs" as required by Tawney . See Tawney , 219 W. Va. at 268, 633 S.E.2d at 24, syl. pt. 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.").

After a short delay in the proceedings caused by a stay issued pending the resolution of Chesapeake's voluntary Chapter 11 petition in the United States Bankruptcy Court for the Southern District of Texas, SWN and Equinor filed answers to the Kellams’ complaint in July 2021. Contemporaneously, SWN and Equinor moved for judgment on the pleadings, seeking dismissal of all of the Kellams’ claims with prejudice. In so doing, SWN and Equinor argued that the Kellam Lease satisfied the requirements set forth in Tawney . Once briefing was complete, on September 13, 2021, the district court, sua sponte, certified the four questions set forth more fully above. We accepted the certified questions and placed this matter on the docket for argument under Rule 20 of the West Virginia Rules of Appellate Procedure.¹

II. STANDARD OF REVIEW

This Court has long held that " ‘[a] de novo standard is applied by this Court in addressing the legal issues presented by a certified question from a federal district or appellate...