W.W. Mcdonald Land Co. v. Eqt Prod. Co.

• Citation: 983 F.Supp.2d 790
• Decision Date: 11 April 2014
• Docket Number: Civil Action No. 2:11–cv–00418.
• Court: U.S. District Court — Southern District of West Virginia
• Parties: W.W. McDONALD LAND CO., et al., Plaintiffs, v. EQT PRODUCTION COMPANY, et al., Defendants.

983 F.Supp.2d 790

W.W. McDONALD LAND CO., et al., Plaintiffs,

v.EQT PRODUCTION COMPANY, et al., Defendants.

Civil Action No. 2:11–cv–00418.

United States District Court, S.D. West Virginia.

Signed Nov. 21, 2013.

Opinion Clarifying Jan. 21, 2014.

Opinion Denying Reconsideration April 11, 2014.

Britt A. Freund, Greg S. Foster, J. Mark Adkins, Bowles Rice McDavid Graff & Love, J. Thomas Lane, Bowles Rice, Charleston, WV, for Plaintiffs.

David K. Hendrickson, Hendrickson & Long, Christopher S. Arnold, Allen Guthrie McHugh & Thomas, Charleston, WV, for Defendants.

MEMORANDUM OPINION & ORDER

JOSEPH R. GOODWIN, District Judge.

Pending before the court are the Plaintiffs' Motion for Partial Summary Judgment [Docket 131], and multiple motions for summary judgment filed by the defendants [Dockets 133, 143, and 169]. For the reasons stated below, the following is ORDERED: With respect to Count II (breach of contract), the Plaintiffs' Motion for Partial Summary Judgment [Docket 131] is GRANTED in part and DENIED in part in accordance with this opinion; the Defendants' Joint Motion for Summary Judgment [Docket 169] is GRANTED in part and DENIED in part in accordance with this opinion; and the Motion for Summary Judgment of Defendants EQT Corporation, EQT Energy, LLC, EQT Gathering, Inc., EQT Gathering Equity, LLC, EQT Investment Holdings, LLC, and EQT Gathering, LLC [Docket 133] is DENIED. With respect to Count III (breach of fiduciary duty) the defendants' motions [Docket 133 and 143] are GRANTED. With respect to Count I (failure to account), Count IV (fraud), Count V (negligent misrepresentation), Count VI (civil conspiracy/joint venture), Count VII (aiding and abetting a tort), and Count VIII (punitive damages), the defendants' motions [Dockets 133, 143, and 169] are DENIED.

I. Background

This case arises out of a dispute over royalty payments related to fourteen oil and gas well leases. The plaintiffs are owners of land subject to those leases. The plaintiffs contend that Estate of Tawney v. Columbia Natural Resources, LLC, 219 W.Va. 266, 633 S.E.2d 22 (2006), prohibits the defendants from deducting “post-production” costs from royalty payments. These costs include monetary expenses incurred by the defendants to transport and market the gas after production. Additionally, the plaintiffs contend that their royalties should be calculated based on the gas volume produced at the wellhead, not the smaller volume that is sold at an interstate pipeline connection.¹

The undisputed facts are as follows. EQT Production purchased the leases in February 2000. Between February 2000 and January 1, 2005, EQT Production produced gas from the leased wells and transported it to an interstate pipeline connection where it was marketed to third parties. During this period, EQT Production paid the costs of transporting and marketing the gas. EQT Production passed some of these monetary costs on to the plaintiffs by charging them a flat rate per unit of gas. The parties dispute the particular rate that was charged. EQT Production also subtracted from the plaintiffs' royalty what the plaintiffs call “volumetric deductions.” Essentially, EQT Production paid a royalty based on the volume of gas sold at the interstate pipeline connection, rather than the volume of gas produced at the wellhead.

On January 1, 2005, EQT Production reorganized into separate entities, including EQT Gathering, Inc., EQT Gathering Equity, LLC, and EQT Gathering, LLC (collectively “EQT Gathering”), EQT Energy, LLC (“EQT Energy”), and EQT Corporation. EQT Production is a subsidiary of EQT Corporation. EQT Production is the only entity that is a party to the leases at issue. EQT Production sells the gas at the wellhead ² to EQT Energy. EQT Energy contracts with EQT Gathering to collect the gas and move it to the interstate pipeline connection, where EQT Energy sells the gas to third parties. EQT Production argues that since the 2005 reorganization, it has not deducted post-production monetary costs from royalties paid to lessors. Instead, it pays royalties based on the price it receives from EQT Energy. That price is a wellheadprice where gas is valued “at the wellhead at an index price less gathering charges and retainage....” (Mem. in Supp. of Defs.' Joint Mot. for Summ. J. [Docket 170], at 5).

The plaintiffs bring several counts collectively against the defendants: (I) failure to properly account for royalties, (II) breach of contract, (III) breach of fiduciary duties, (IV) fraud, (V) negligent “misrepresentation/concealment,” (VI) “civil conspiracy/joint venture,” (VII) aiding and abetting a tort, and (VIII) “punitive damages.” (Am. Compl. [Docket 34], at 10–15). The plaintiffs move for summary judgment [Docket 131] on their breach of contract claim only. The defendants move for summary judgment in three separate motions. EQT Production moves for summary judgment on Counts III–VII [Docket 143]. The remaining defendants, EQT Corporation, EQT Energy, EQT Gathering, LLC, EQT Gathering, Inc., EQT Gathering Equity, LLC, and EQT Investment Holdings, move for summary judgment on all counts [Docket 133]. Finally, the defendants jointly move for summary judgment on all counts [Docket 169].

II. Legal Standard

To obtain summary judgment, the moving party must show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(a). In considering a motion for summary judgment, the court will not “weigh the evidence and determine the truth of the matter.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). Instead, the court will draw any permissible inference from the underlying facts in the light most favorable to the nonmoving party. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587–88, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986).

Although the court will view all underlying facts and inferences in the light most favorable to the nonmoving party, the nonmoving party nonetheless must offer some “concrete evidence from which a reasonable juror could return a verdict in his [or her] favor.” Anderson, 477 U.S. at 256, 106 S.Ct. 2505. Summary judgment is appropriate when the nonmoving party has the burden of proof on an essential element of his or her case and does not make, after adequate time for discovery, a showing sufficient to establish that element. Celotex Corp. v. Catrett, 477 U.S. 317, 322–23, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). The nonmoving party must satisfy this burden of proof by offering more than a mere “scintilla of evidence” in support of his or her position. Anderson, 477 U.S. at 252, 106 S.Ct. 2505. Likewise, conclusory allegations or unsupported speculation, without more, are insufficient to preclude the granting of a summary judgment motion. See Felty v. Graves–Humphreys Co., 818 F.2d 1126, 1128 (4th Cir.1987); Ross v. Comm'ns Satellite Corp., 759 F.2d 355, 365 (4th Cir.1985), abrogated on other grounds, Price Waterhouse v. Hopkins, 490 U.S. 228, 109 S.Ct. 1775, 104 L.Ed.2d 268 (1989).

III. Discussion

A. Breach of Contract

Both the plaintiffs and defendants move for summary judgment on Count II, the breach of contract claim. The plaintiffs argue that the language of the individual leases, interpreted pursuant to Estate of Tawney v. Columbia Natural Resources, LLC, 219 W.Va. 266, 633 S.E.2d 22 (2006), prohibits EQT Production from taking any post-production monetary deductions or “volume deductions” from royalty payments.

To understand the plaintiffs' argument—and to resolve this case—it is necessary to survey relevant West Virginia gas law to the present. Early cases demonstrate that the duties of lessees go beyond merely paying the costs of production. Lessees must bear some portion of post-production expenses as well. The two most recent cases I survey, Wellman v. Energy Resources, Inc., 210 W.Va. 200, 557 S.E.2d 254 (2001), and Tawney, clarify this duty and demonstrate that lessees impliedly covenant to bear all post-production costs incurred in delivering the gas to market.

In Kanawha Valley Bank v. United Fuel Gas Co., the Supreme Court of Appeals held that the lessee may not deduct production taxes from a royalty. See121 W.Va. 96, 1 S.E.2d 875, 876 (1939). At dispute were royalty provisions very similar to those in this case. The lease obligated United Fuel Gas Co. (“United Fuel”) to pay a royalty “at the rate of one-eighth of the wholesale market value thereof at the well.” Id. However, United Fuel deducted from the plaintiff's royalty a one-eighth portion of state production taxes. Id. The plaintiff sued to recover the amounts withheld. Id. Looking to the language of the lease, the court found for the plaintiff. Id. The court stated that the lessee had “bound itself to pay the lessor a full one-eighth of the market price of gas at the well—not such price less one-eighth of the production tax.” Id.

In 1962, the Supreme Court of Appeals held that a proceeds lease required United Fuel to pay a royalty based on the price it received from customers, free of post-production costs. See Cotiga Development Co. v. United Fuel Gas Co., 147 W.Va. 484, 128 S.E.2d 626, 630, 631–35 (1962). The royalty provision in Cotiga required United Fuel “to pay for one-eighth ... of the gas produced ... at the rate received by the Lessee for such gas....” Id. at 630. United Fuel, a public utility that delivered gas directly to consumers, paid royalties based on the wellhead market price of the gas. Id. at 633. United Fuel argued the wellhead price, not the ultimate price received, must have been the intention of the parties because the original lessee, Woods Oil and Gas Company, was not a public utility. Id. The plaintiffs, however, asserted that the lease required that royalties be calculated from the price received by United Fuel for the gas at the final point of sale. Id. at 632. The court agreed with the plaintiffs and found that...