Valentine v. Sugar Rock, Inc.

• Decision Date: 14 November 2014
• Docket Number: No. 14–0246.,14–0246.
• Citation: 234 W.Va. 526,766 S.E.2d 785
• Court: West Virginia Supreme Court
• Parties: Clifton G. VALENTINE, Plaintiff Below, Petitioner, v. SUGAR ROCK, INC., Gerald D. Hall, and Teresa D. Hall, Defendants Below, Respondents.

234 W.Va. 526

766 S.E.2d 785

Clifton G. VALENTINE, Plaintiff Below, Petitioner

v.SUGAR ROCK, INC., Gerald D. Hall, and Teresa D. Hall, Defendants Below, Respondents.

No. 14–0246.

Supreme Court of Appeals of West Virginia.

Submitted Sept. 3, 2014.

Decided Nov. 14, 2014.

James S. Huggins, Esq., Daniel P. Corcoran, Esq., Theisen Brock LPA, Marietta, OH, for Petitioner.

W. Henry Lawrence, Esq., William J. O'Brien, Esq., Amy Marie Smith, Esq., Steptoe & Johnson, PLLC, Bridgeport, WV, for Respondents.

Opinion

Justice KETCHUM :

The United States Court of Appeals for the Fourth Circuit has certified a complex question which intertwines issues about partnership interests in oil and gas wells, the Statute of Frauds, the common law “mining partnership,” and the West Virginia Revised Uniform Partnership Act ( W.Va.Code § 47B–1–1 et seq. ). At its heart, the question asks us to differentiate between a partner in an ordinary, general partnership that has as its principal business mining or operating oil and gas wells, and a partner in a common law “mining partnership.” While the two phrases sound the same, they are radically different forms of partnerships.

The case below involves oil and gas wells owned and operated by four partnerships. The partnerships also own real property: mineral interests in the form of leases to extract oil and gas from real estate. The plaintiff contends that he is a partner of each of these partnerships. The partners themselves do not own any part of the mineral interests. Nevertheless, another partner contends that the plaintiff should be excluded from the partnerships because he cannot produce a written instrument that meets with the Statute of Frauds showing he is a partner in the real-estate-owning partnerships.

The certified question from the federal court essentially has two parts. First, if a person contends he/she owns an interest in a common-law “mining partnership,” then does the Statute of Frauds require the person to prove he/she is a partner of the mining partnership through a deed, will, or other written conveyance? We answer this part of the question “ yes.” A person can only be a partner in a mining partnership if he/she is a co-owner of the mineral interest with the other partners. Hence, proving a partnership interest in the mining partnership requires first proving the person has a deed, will, or other written instrument showing partial ownership of the mineral interest in the land.

The second part of the question is this: if a partnership is a general partnership (as defined in and governed by the West Virginia Revised Uniform Partnership Act ), and the partnership owns leases to extract oil and gas from real property, then does the Statute of Frauds require a person to produce a written instrument to prove he/she is a partner in the general partnership? We answer this part of the question “no.” Under the Revised Uniform Partnership Act, W.Va.Code § 47B–2–3 [1995], general partnership property belongs solely to the partnership and not to the partners. A person does not need a deed, will or other written instrument to establish a partnership stake in the general partnership, even if the general partnership owns an interest in real property.

I.FACTUAL AND PROCEDURAL BACKGROUND

Plaintiff-below Clifton G. Valentine alleges that, since the 1950s, he has owned a partnership interest in partnerships that operate six oil and gas wells in Ritchie County, West Virginia. The wells are on four separate tracts of land, and are owned and operated by four separate partnerships: Cutright Oil & Gas Co.;¹ Iams Gas Co.; Iams Oil Co.; and Keith Gas Co.² Each of the four partnerships operates under a written lease with the landowner that allows for the extraction of oil and gas from each tract of land. Valentine maintains he became a partner in each partnership when he bought interests in the partnerships from Frank “F.A.” Deem, who created the four partnership entities in the late 1950s. Since that time, the partnerships continued to operate the oil and gas wells.

For about forty years, Valentine received payments from the four partnerships reflecting his share of the net profits generated by the well operations. Those payments stopped in 1999, however, when Frank Deem's son and successor in interest, William “W.A.” Deem, sold the majority interest in the partnerships to the defendant below, Sugar Rock, Inc.

After Sugar Rock became managing partner of the four partnerships and simultaneously became the operator of the six wells, the wells allegedly began to operate at a net annual loss. Sugar Rock annually delivered partnership tax documents³ to Valentine reflecting these losses. Further, Sugar Rock billed Valentine for his share of the deficiencies, but he refused to remit payment. In 2001, Sugar Rock filed suit in state court against Valentine to recover the alleged deficiencies; the suit was dismissed in 2004 for failure to prosecute.

A. Proceedings before the U.S. District Court

On November 8, 2010, Valentine filed a diversity action against Sugar Rock⁴ in the United States District Court for the Northern District of West Virginia. Valentine asserted that Sugar Rock had not properly accounted for the proceeds and expenses of production for the six wells, and had breached its duty of good faith and fair dealing toward other partners in the four partnerships. Valentine claims Sugar Rock is “scheming to usurp partnership property” by depositing all the partnership income in Sugar Rock's account, and then invoicing the partnerships for unauthorized, unnecessary, and unreasonable expenses. Valentine demanded an accounting of the four partnerships, and sought compensatory and punitive damages together with reimbursement of his attorney fees and litigation costs. Sugar Rock answered the complaint and filed a counterclaim against Valentine seeking Valentine's share of the operating expenses attributable to his ownership interests in the four partnerships.

The parties engaged in discovery in the district court after which Sugar Rock moved for summary judgment. In its motion, Sugar Rock characterized the four partnerships as “mining partnerships,” which arise when the co-owners or co-lessees of an interest in land cooperate in extracting oil, gas, or other minerals from the land. See, e.g., Syllabus Point 1, Childers v. Neely, 47 W.Va. 70, 34 S.E. 828 (1899) (“Where tenants in common or joint tenants of an oil lease or mine unite and co-operate in working it, they constitute a mining partnership.”). Sugar Rock asserted it was entitled to summary judgment because Valentine could produce no written instrument creating his partnership interest in the four “mining partnerships” that own and operate the oil and gas wells.

In support of its motion for summary judgment, Sugar Rock argued that the creation of the four leaseholds conveyed interests in real property. See Syllabus Point 1, in part, McCullough Oil, Inc. v. Rezek, 176 W.Va. 638, 346 S.E.2d 788 (1986) (“An oil and gas lease (or other mineral lease) is both a conveyance and a contract.”). Further, Sugar Rock argued that any subsequent assignment of a partnership interest in the oil and gas leases similarly conveyed interests in real property. Working from the premise that the partnership interests in the four leases claimed by Valentine are interests in real property, Sugar Rock maintained that their purported transfer could only be effected by a writing contemplated by the West Virginia Statute of Frauds, W.Va.Code § 36–1–1 [1923]. Thus, Sugar Rock reasoned, Valentine's lack of a written deed or will evidencing his ownership of the partnership interests in question doomed his claim.

In response, Valentine asserted to the district court that Sugar Rock's arguments failed to distinguish between “a direct ownership interest in real estate and an ownership interest in a partnership.” West Virginia's common law and statutes permit a partnership agreement to be written, oral, or implied from the conduct and dealings of the partnership's members. See Syllabus Point 2, Duffield v. Reed, 84 W.Va. 284, 99 S.E. 481 (1919) (“A partnership, as to the parties thereto, springs from their intention, which need not be expressed in writing, but may be by oral agreement, or may be implied from their conduct and dealings with one another.”); W.Va.Code § 47B–1–1(8) [2003] (“ ‘Partnership agreement’ means the agreement, whether written, oral or implied, among the partners concerning the partnership, including amendments to the partnership agreement.”). Valentine contended that he did not purchase a direct ownership interest in real estate, but rather that he purchased an ownership interest in four partnerships, and it was the partnerships that owned the real estate interests. Valentine asserted there was substantial evidence to support a finding he was a partner in each of the four partnerships, and was therefore entitled to share in the profits generated by the leases owned by the partnerships.

In an order dated September 18, 2012, the district court granted summary judgment to Sugar Rock and dismissed Valentine's claims with prejudice.⁵ The district court discerned that, under West Virginia law, a “mining partnership” requires a member of the partnership to establish “co-ownership of lands or leases constituting a property interest.” The district court determined that Valentine's assertion of an interest in the four “mining partnerships” failed because he could not produce a deed or will in conformance with the Statute of Frauds showing his ownership interest in the partnerships or in the subject leases.

Valentine timely appealed the district court's order to the United States Court of Appeals for the Fourth Circuit.

B. Washburn v. Sugar Rock

During the pendency of his appeal, Valentine notified the Court of Appeals of the existence of a similar lawsuit in the Circuit Court of Ritchie County styled Washburn v. Sugar Rock.⁶ Nine other people, who purported to be owners of partnership...