K & D Holdings, LLC v. Equitrans, L.P.

Filing

AMENDED OPINION filed amending and superseding opinion dated 12/28/2015. Originating case number: 5:13-cv-00152-JPB Copies to all parties.. [15-1166]

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PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT

No. 15-1166

K & D HOLDINGS, LLC,
Plaintiff – Appellee,
v.
EQUITRANS, L.P.; EQT PRODUCTION COMPANY,
Defendants – Appellants,
and
EQT CORP. a/k/a Equitrans, Inc.,
Defendant.

Appeal from the United States District Court for the Northern
District of West Virginia, at Wheeling.
John Preston Bailey,
District Judge. (5:13-cv-00152-JPB)

Argued:

December 9, 2015
Amended:

Decided:

December 28, 2015

February 8, 2016

Before NIEMEYER, DUNCAN, and AGEE, Circuit Judges.

Reversed and remanded with instructions by published opinion.
Judge Duncan wrote the opinion, in which Judge Niemeyer and
Judge Agee joined.

ARGUED:
Nicolle
Renee
Snyder
Bagnell,
REED
SMITH
LLP,
Pittsburgh, Pennsylvania, for Appellants.
Stephen A. Wickland,

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Clarksburg, West Virginia, for Appellee.
ON BRIEF: Kevin C.
Abbott, Lucas Liben, REED SMITH LLP, Pittsburgh, Pennsylvania;
Michael W. Smith, R. Braxton Hill, IV, CHRISTIAN & BARTON LLP,
Richmond, Virginia, for Appellants.

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DUNCAN, Circuit Judge:
This appeal concerns an oil and gas lease (the “Lease”)
between

Defendants-Appellants

Equitrans,

L.P.,

and

EQT

Production Co. (collectively, “EQT”), 1 as lessees, and PlaintiffAppellee K & D Holdings, L.L.C. (“K & D”), as lessor.

The

district court concluded that the Lease was divisible into two
separate segments--one for production and exploration, and one
for gas storage and protection of gas storage--and found that
the

production

and

exploration

segment

of

the

Lease

terminated after the Lease’s initial five-year term.
Appellants
because

contend

they

are

that

the

actively

Lease
engaged

is
in

not
one

On appeal,

divisible
of

had

the

and

that

activities

covered by the Lease--protection of stored gas--the entire Lease
remains in effect.
For the reasons stated below, we conclude that the district
court

erred

and,

accordingly,

we

reverse

and

remand

with

instructions to enter judgment for EQT.
1

K & D originally filed the complaint against EQT Corp.,
also known as Equitrans, Inc. The district court later granted
the
parties’
Joint
Motion
for
Substitution
of
Parties,
dismissing EQT Corp. d/b/a Equitrans Inc. as a party to this
civil
action
and
substituting
Equitrans,
L.P.,
and
EQT
Production Co. as defendants. Because all prior proceedings in
the civil action were binding on Equitrans, L.P., and EQT
Production Co. as if they had been properly joined and served as
defendants from the initial filing, “EQT” will be used to refer
to
the
Defendants-Appellants
both
before
and
after
the
substitution.

3

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I.

A.
On December 2, 1989, Henry H. Wallace and Sylvia L. Wallace
executed an oil and gas lease with Equitrans, Inc., covering
180 acres

of

“Premises”). 2

land

in

Tyler

County,

West

Virginia

(the

K & D is the successor-in-interest to the lessors,

the Wallaces, and Equitrans, L.P., is the successor-in-interest
to the lessee, Equitrans, Inc.

Equitrans, L.P., subleased to

EQT Production Co. the rights to produce and sell gas from the
“premises and subsurface formations that are not used for the
J.A. 254. 3

storage of gas or protection of stored gas.”

Thus,

the Lease now governs the relationship between K & D and EQT.
The
explore

Lease
for

grants

and

EQT

produce

protect stored gas. 4

the

oil

right

and

to

gas,

use

to

the

store

Premises
gas,

and

to
to

The term of the Lease is established in

Article IV (the “Durational Provision”), which reads as follows:

2

The Wallaces also entered into two other oil and gas
leases with Equitrans, Inc.: a lease for 40 acres dated
March 26, 1992, and one for 12 acres dated September 16, 1994.
On December 22, 2014, during the course of this litigation,
Equitrans, L.P., released and surrendered these leases.
Only
the 1989 lease remains.
3

Citations to the “J.A.” refer to the Joint Appendix filed
by the parties in this appeal.
4

Under Article I of the Lease, the Lessor
(Continued)
4

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To have and to hold the said land and privileges
for the said purposes for and during a period of
5 years from December 2, 1989, and as long after
commencement of operations as said land, or any
portion thereof or any other land pooled or unitized
therewith as hereinafter provided, is operated for the
exploration or production of gas or oil, or as gas or
oil is found in paying quantities thereon or stored
thereunder, or as long as said land is used for the
storage of gas or the protection of gas storage on
lands in the general vicinity of said land. It is
understood that a well need not be drilled on the
leased
premises
to
permit
the
storage
of
gas
thereunder and the Lessee shall be the sole judge of
when and if said land is being used for the storage of
gas or the protection of gas storage on lands in the
general vicinity of said land.
J.A. 261.
Since

entering

into

the

Lease,

EQT

has

not

engaged

exploration, production, or gas storage on the Premises.
has, however, engaged in protection of gas storage.

in
It

Equitrans,

L.P., owns and operates a nearby natural gas storage facility
known

as

the

Shirley

Storage

Field,

which

is

authorized

hereby leases and lets unto the Lessee, for its
exclusive possession and use for the purpose of
exploring and operating for and producing and saving
oil and gas by all methods now known or hereafter
known or hereafter discovered, and of injecting gas,
air, water or other fluids into any subsurface strata
for the purpose of recovering and producing oil and
gas, and of pooling or unitizing the same with other
lands for such purposed [sic], as hereinafter more
fully set out and for storing gas in the substrata
thereof, and protecting stored gas . . . .
J.A. 260.

5

and

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regulated by the Federal Energy Regulatory Commission (“FERC”). 5
FERC established a 2,000-foot buffer zone around Shirley Storage
Field for the protection of the gas storage facilities.

It is

undisputed that part of this protective buffer zone falls on the
Premises,

and

that

therefore

EQT

is

using

a

portion

of

the

Premises for protection of storage of natural gas.
Because EQT has not used the Premises to engage in gas or
oil production, K & D now seeks to enter into a more lucrative
oil and gas lease agreement with Antero, Inc., but has been
unable to do so because of the EQT Lease.
B.
On September 20, 2013, K & D filed a complaint against EQT
in the circuit court of Tyler County, West Virginia.

K & D

primarily claimed that, because EQT has not produced and sold or
used gas or oil on the Premises for a period of greater than
twenty-four

months,

K

&

D

was

entitled

to

a

rebuttable

presumption under West Virginia law that EQT has abandoned the
Lease.

See W. Va. Code § 36-4-9a. 6

5

FERC has regulatory authority pursuant to the Natural Gas
Act of 1938, 15 U.S.C. §§ 717 et seq.
6

This provision reads, in relevant part, as follows:

There is a rebuttable legal presumption that the
failure of a person, firm, corporation, partnership or
association to produce and sell or produce and use for
(Continued)
6

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EQT removed the case to the United States District Court
for the Northern District of West Virginia, where the parties
subsequently filed cross motions for summary judgment.

K & D

claimed that, because EQT “has expended no money to explore,
test, or drill for over twenty years,” J.A. 81, the Lease was
therefore “cancelled by operation of law.”

J.A. 84.

K & D

further argued that it should be permitted to lease the unused
portion of the Premises to another corporation for oil and gas
production and stated that any drilling permitted on the leased
area would not affect the protective zone for storage in use by
EQT.
EQT,

on

the

other

hand,

argued

that

West

Virginia

Code

§ 36-4-9a by its terms does not apply to leases for gas storage
purposes.

Instead, the “plain and unambiguous terms” of the

Durational Provision, which contain no requirement that gas or
oil be produced in order to hold the Lease, were determinative
of the abandonment issue.

J.A. 91.

its own purpose for a period of greater than twentyfour months, . . . oil and/or gas produced from such
leased premises constitutes an intention to abandon
any oil and/or gas well and oil and/or gas well
equipment
situate
[sic]
on
said
leased
premises . . . .
W. Va. Code § 36-4-9a.

7

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On September 30, 2014, the district court denied the cross
motions

for

summary

judgment.

The

district

court

rejected

K & D’s argument that West Virginia Code § 36-4-9a operated to
terminate the Lease, observing that this provision “specifically
states that the rebuttable presumption does not apply to leases
for gas storage purposes.”

J.A. 158.

“no bearing” on the outcome of the case.

Thus, the provision had
Id.

The district court also rejected EQT’s interpretation of
the Durational Provision.
found

as

a

matter

of

Acting sua sponte, the district court

law

that

severable, rather than entire.

the

Lease

J.A. 156.

was

divisible

or

The district court

reasoned:
[The lease agreement] has two purposes for the lease
of the land, the exploration for and the production of
oil and gas versus the use of the property for the
storage of gas and the protection of stored gas.
A
separate consideration is stated for each.
The fact
that the leases indicate that the lessee is not
obligated to drill any wells is further evidence that
the terms of each are not interrelated, as is the fact
that the lessee has taken no steps whatsoever to
develop the oil and gas underlying the property.
J.A. 157–58.

The district court then considered the segment of

the Lease relating to production of oil and gas and concluded
that given that the initial five-year lease term had elapsed
without EQT attempting to explore for or produce oil or gas,
this segment had expired.

Because EQT is using a portion of the

Premises for protection of gas storage, however, the district

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court concluded that the segment of the Lease relating to gas
storage and the protection of gas storage remains in effect.
The district court determined that “the resolution of these
issues leaves general issues of material fact,” such as whether
the entire Premises was necessary for gas storage and whether
drilling from an area of the Premises “not necessary for gas
storage

protection

would

interfere

with

gas

protection.”

J.A. 158–59.
EQT

subsequently

moved

for

reconsideration,

arguing

both

that the district court’s finding of severability was erroneous
and that the district court acted improperly by raising this
issue

sua

sponte

without

giving

the

parties

notice

or

an

opportunity to respond prior to issuing its order denying the
cross motions for summary judgment.

The district court denied

this motion.
In

anticipation

of

the

district

court

making

a

final

ruling, the parties jointly filed stipulations before the court
that

resolved

understanding
stipulations
rights

to

contained
Judgment.”

all
and

the

appeal
in

the

remaining
agreement

parties
any

are

rulings

Order

factual

that
not
by

Denying

J.A. 253.

9

by

issues
entering

waiving
the

any

Court,

Cross

“with
into

these

objections

including

Motions

the

for

or

those

Summary

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The district court issued its final order on January 21,
2015.

The court reiterated its conclusion from its previous

order that the lease at issue was divisible and that the segment
of the lease for the purpose of exploration for and production
of oil and gas had expired.

Given this, and taking into account

the

the

stipulations

concluded

that

made
“the

by

parties,

plaintiff

may

the

drill

district

court

exploration

and

production wells on areas which are not within the gas storage
protection

area

and

which

extend

horizontally

storage protection to the Marcellus Shale area.”

under

the

gas

J.A. 287.

EQT timely appealed.

II.
EQT raises two arguments on appeal: (1) that the district
court erred as a matter of law in holding that the Lease was
divisible

into

separate

segments,

one

for

exploration

and

production, and one for storage and protection of storage; and
(2) that the district court erred in finding that the “segment”
of the Lease for exploration and production had terminated after
its initial five-year lease term.

In essence, this appeal asks

us to resolve whether the Lease required EQT to explore for or
produce oil or gas beyond the initial five-year period in order
to

maintain

its

production

rights,

10

or

whether,

instead,

EQT

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preserved all of its rights under the Lease by exercising just
one of them, protection of gas storage.
We consider each of EQT’s arguments in turn, reviewing the
district

court’s

findings

of

conclusions of law de novo.

fact

for

clear

error

and

its

Perez v. Mountaire Farms, Inc., 650

F.3d 350, 363 (4th Cir. 2011).

As this court’s jurisdiction is

based on diversity of citizenship, we apply West Virginia law to
the facts of this case.

See Moore Bros. Co. v. Brown & Root,

Inc., 207 F.3d 717, 722 (4th Cir. 2000).
A.
EQT argues that the district court erred in finding sua
sponte that the Lease was divisible.

We agree.

EQT argues that the Durational Provision, stating that the
lessee would have and hold the land and its privileges “as long
after commencement of operations as said land . . . is operated
for the exploration or production of gas or oil, or as gas or
oil is found in paying quantities . . . , or as long as said
land is used for the storage of gas or the protection of gas
storage,”

J.A. 261 (emphasis added), is clear: “the unambiguous

language of the Lease means that EQT had to do only one of the
alternative acts in order to keep the entire Lease in effect,
including EQT’s right to produce oil and gas.”
at 9.

Appellants’ Br.

K & D argues that to adopt this interpretation would be

contrary to West Virginia public policy and would conflict with
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the intent of the parties “to enter into a contract that would
be beneficial to both parties.”

Appellee’s Br. at 9.
B.

In

general,

West

Virginia

contract

equally to the interpretation of leases.

law

principles

apply

See Energy Dev. Corp.

v. Moss, 591 S.E.2d 135, 143 (W. Va. 2003).

Under West Virginia

law, “the primary criterion” for determining if a contract is
severable “is the intention of the parties as reflected from a
fair

construction

of

the

terms

of

the

contract

itself,

the

subject matter of the contract and the circumstances which gave
rise to the question.”

Quinn v. Beverages of W. Va., Inc.,

224 S.E.2d 894, 900 (W. Va. 1976).

A severable contract is one

that is “susceptible of division and apportionment,” while a
contract

that

consideration

is

not

that

interdependent.”

severable

“are

common

has

material

each

to

provisions
the

other

and
and

Dixie Appliance Co. v. Bourne, 77 S.E.2d 879,

881 (W. Va. 1953).

Further, “[t]here is a presumption against

finding a contract divisible unless divisibility is expressly
stated in the contract itself, or the intent of the parties to
treat

the

manifested.”

contract
15

as

Williston

divisible
on

is

Contracts

otherwise
§

45:4

clearly
(4th

ed.

2000)(footnotes omitted).
In this case, a fair construction of the terms of the Lease
compels the conclusion that the Lease was intended to be entire,
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not

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divisible.

To

hold

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otherwise

would

be

to

ignore

the

disjunctive use of the word “or” in the Durational Provision.
The Lease expressly sets out a list of activities and makes
plain that engaging in any one of them constitutes an exercise
of rights such that the entirety of the Lease would remain in
effect.

As the West Virginia Supreme Court of Appeals has held,

“the word ‘or’ . . . in the absence of a contrary intent of the
parties

appearing

from

other

parts

of

the

lease,

[shall]

be

given its ordinary meaning and not considered as meaning ‘and.’”
Syl.

Pt.

1,

Little

Coal

Land

Co.

v.

Owens-Ill.

Glass

Co.,

63 S.E.2d 528, 529 (W. Va. 1951).
K & D
provisions

argues
for

that

the

separate

fact

monetary

that

the

Lease

consideration

for

contains
distinct

activities renders it severable under Regent Waist Co. v. O.J.
Morrison Department Store Co., 106 S.E. 712 (W. Va. 1921).
Regent

Waist

Co.,

a

case

involving

a

contract

for

In

different

types of garments, the Supreme Court of Appeals of West Virginia
held that “[w]here a retail merchant orders from a manufacturer
of shirtwaists a number of such waists of different kinds and
qualities,

a

definite

price

being

fixed

for

each

of

such

different kinds and qualities, such contract is separable in the
absence of any circumstance indicating the contrary.”
Pt. 2, at 712.

13

Id. Syl.

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It

is

different
which

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true

rents

the

that
or

lessee

the

Pg: 14 of 16

Lease

royalties

requires

depending

engages.

However,

on

the
the

these

lessee

to

activities
activities

pay
in
are

interrelated and quite different in kind from the transactions
at issue in Regent Waist Co., so the same logic does not apply
when interpreting the Lease at issue here.
Lease

being

“made

up

of

several

distinct

Rather than this
items,”

there

is

instead an “intimate connection” between the different rights
bargained for.

Id. at 714.

that the contract is entire.”
Finally,

K&D

argues

Therefore, “it can safely be said
Id.

that

under

West

Virginia

law,

the

“general rule” is that oil and gas leases will “be liberally
construed in favor of the lessor.”

Appellee’s Br. at 22 (citing

Martin v. Consolidated Coal & Oil Corp., 133 S.E. 626 (W. Va.
1926)).

This is so, but only when there is ambiguity as to the

meaning of the lease terms.

“Where the intent of the parties is

clear, [the Supreme Court of Appeals of West Virginia] will not
use the vehicle of interpretation to relieve one party of a bad
bargain.”

Pechenik v. Baltimore & O.R. Co., 205 S.E.2d 813, 815

(W. Va. 1974). 7

7

We find K & D’s arguments based on vague notions of
fairness and West Virginia public policy similarly unavailing in
interpreting a lease the text of which is unambiguous.

14

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Because

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we

agree

with

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EQT

that

the

language

of

the

Durational Provision is clear and that the Lease does not evince
any

intent

of

the

parties

to

enter

into

a

divisible

lease

agreement, we conclude that the district court erred in holding
to the contrary.
C.
The

district

court’s

determination

that

EQT’s

production

and exploration rights had terminated as a result of non-use
during

the

erroneous
concluded
whether

initial
premise

that

EQT

that

the

has

five-year

Lease

lease

the
is

continuing

Lease
not

rights

term
was

was

on

divisible.

divisible,
under

based

we

the

Having

next

Lease

the

consider
under

the

requirements of the Durational Provision found in Article IV.
Under

the

Durational

Provision,

a

lessee

will

maintain

continuing rights under the Lease beyond the initial five-year
term so long as (1) the lessee explores for or produces gas or
oil; (2) “gas or oil is found in paying quantities thereon or
stored thereunder”; or (3) the “land is used for the storage of
gas or the protection of gas storage on lands in the general
vicinity of said land.” J.A. 261.
that

“a

portion

of

the

180

The parties have stipulated

Acre

Lease

falls

protective zone of the Shirley Storage Field.”
EQT

is

using

a

portion

of

the

land

for

within

J.A. 254.

protection

storage, one of the rights conferred by the Lease.
15

the
Thus,

of

gas

Because

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there is no disagreement that EQT is indeed engaging in one of
the activities enumerated in the Durational Provision of the
Lease, we find that EQT continues to hold all rights under the
original Lease.

III.
For the foregoing reasons, the judgment of the district
court is
REVERSED AND REMANDED WITH INSTRUCTIONS
TO ENTER JUDGMENT FOR EQT.

16