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]
Appeal: 15-1166
Doc: 45
Filed: 02/08/2016
Pg: 1 of 16
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,
Appeal: 15-1166
Doc: 45
Filed: 02/08/2016
Pg: 2 of 16
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.
Appeal: 15-1166
Doc: 45
Filed: 02/08/2016
Pg: 3 of 16
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
Appeal: 15-1166
Doc: 45
Filed: 02/08/2016
Pg: 4 of 16
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
Appeal: 15-1166
Doc: 45
Filed: 02/08/2016
Pg: 5 of 16
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
Appeal: 15-1166
Doc: 45
Filed: 02/08/2016
Pg: 6 of 16
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
Appeal: 15-1166
Doc: 45
Filed: 02/08/2016
Pg: 7 of 16
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
Appeal: 15-1166
Doc: 45
Filed: 02/08/2016
Pg: 8 of 16
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
8
Appeal: 15-1166
Doc: 45
Filed: 02/08/2016
Pg: 9 of 16
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
Appeal: 15-1166
Doc: 45
Filed: 02/08/2016
Pg: 10 of 16
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
Appeal: 15-1166
Doc: 45
Filed: 02/08/2016
Pg: 11 of 16
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
11
Appeal: 15-1166
Doc: 45
Filed: 02/08/2016
Pg: 12 of 16
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,
12
Appeal: 15-1166
not
Doc: 45
Filed: 02/08/2016
divisible.
To
hold
Pg: 13 of 16
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.
Appeal: 15-1166
Doc: 45
It
is
different
which
Filed: 02/08/2016
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
Appeal: 15-1166
Doc: 45
Because
Filed: 02/08/2016
we
agree
with
Pg: 15 of 16
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
Appeal: 15-1166
Doc: 45
Filed: 02/08/2016
Pg: 16 of 16
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
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?