Fout et al v. EQT Production Company

Filing 153

MEMORANDUM OPINION AND ORDER DENYING 66 PLAINTIFFS MOTION FOR PARTIAL SUMMARY JUDGMENT AND GRANTING IN PART AND DENYING IN PART 69 DEFENDANTS MOTION FOR SUMMARY JUDGMENT. Signed by Senior Judge Frederick P. Stamp, Jr on 4/2/2018. (copy counsel of record via CM/ECF)(jmm)

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF WEST VIRGINIA
JOHN FOUT, NANCY FOUT,
J&N MANAGEMENT, LLC and
J&N MANAGEMENT ENTERPRISES, LLC,
Plaintiffs,
v.

Civil Action No. 1:15CV68
(STAMP)

EQT PRODUCTION COMPANY,
a Pennsylvania corporation,
Defendant.
MEMORANDUM OPINION AND ORDER
DENYING PLAINTIFFS’ MOTION FOR PARTIAL SUMMARY JUDGMENT
AND GRANTING IN PART AND DENYING IN PART
DEFENDANT’S MOTION FOR SUMMARY JUDGMENT
I.

Background

This civil action concerns the royalty payments that the
plaintiffs1 believe the defendant, EQT Production Company, failed
to pay them.

The plaintiffs own an undivided interest in oil and

natural gas in

Wetzel County, West Virginia.

The defendant and

the plaintiffs entered into a lease agreement, under which the
defendant would pay a flat-rate royalty payment in exchange for

1

The original plaintiffs to this civil action were John Fout
and Nancy Fout (“the Fouts”). On January 11, 2018, EQT filed a
motion for an order directing the Fouts to add J&N Management, LLC
and J&N Management Enterprises, LLC, the real parties in interest,
as plaintiffs in this civil action.
ECF No. 95.
The motion
represented that the Fouts had transferred all of their ownership
interests in the lease premises to J&N Management, LLC and J&N
Management Enterprises, LLC. At a pretrial conference and motion
hearing on January 29, 2018, the parties agreed that J&N
Management, LLC and J&N Management Enterprises, LLC, should be
added as additional plaintiffs in this civil action. Accordingly,
on February 9, 2018, this Court entered an order granting EQT’s
motion and adding the additional parties as plaintiffs.

both development and production rights.

In their complaint, the

plaintiffs contend that the defendant has underpaid the plaintiffs
and

incorrectly

payments.

applied

certain

deductions

to

their

royalty

In addition to those actions, the plaintiffs also

believe that the defendant failed to provide a “full and truthful
accounting of the production from Plaintiffs’ minerals and the
manner in which [the] royalty [payment] was calculated.”
No. 1.

ECF

The plaintiffs assert six counts in their complaint, which

are as follows: (I) failure to properly account, (II) breach of
contract,

(III)

breach

of

fiduciary

duties,

(IV)

fraud,

(V)

negligent misrepresentation, and (VI) punitive damages.
Previously, the defendant filed a partial motion to dismiss
Counts III and IV (the claims for breach of fiduciary duties and
fraud, respectively), which this Court granted in part and denied
in part.

As a result of that ruling, Count III was dismissed and

Count IV still remained.

The plaintiffs also filed an earlier

motion for partial summary judgment, requesting judgment in their
favor as to Count II.

Because the certified questions in Leggett

would

of

be

dispositive

Count

II,

the

Court

prejudice the motion for partial summary judgment.

denied

without

Therefore, at

that stage, Counts I, II, IV, V, and VI remained.
The Supreme Court of Appeals of West Virginia then answered
the Leggett certified question that was dispositive of Count II in
this case.

Leggett v. EQT Prod. Co., 800 S.E.2d 850 (W. Va.),

cert. denied, 138 S. Ct. 472 (2017).

2

That court held:

[R]oyalty payments pursuant to an oil or gas lease
governed by West Virginia Code § 22-6-8(e) (1994) may be
subject to pro-rata deduction or allocation of all
reasonable post-production expenses actually incurred by
the lessee. Therefore, an oil or gas lessee may utilize
the “net-back” or “work-back” method to calculate
royalties owed to a lessor pursuant to a lease governed
by West Virginia Code § 22-6-8(e). The reasonableness of
the post-production expenses is a question for the factfinder.
Leggett, 800 S.E.2d at 868.

Thus, the answer to the certified

question resolved Count II in favor of the defendant because the
defendant

was

permitted

to

deduct

reasonable

post-production

expenses under the lease governed by the flat rate statute.

The

Court held a status conference after the Supreme Court of Appeals
of West Virginia answered the Leggett certified question, and the
parties agreed that the sole remaining issue is the reasonableness
of the post-production expenses actually incurred by the lessee,
which is a question for the fact-finder.
The plaintiffs have now filed a partial motion for summary
judgment and the defendant has filed a motion for summary for
summary judgment.

Both motions are fully briefed at this time and

ripe for decision.
II.

Applicable Law

Under Federal Rule of Civil Procedure 56, this Court must
grant a party’s motion for summary judgment if “there is no genuine
dispute as to any material fact and the movant is entitled to
judgment as a matter of law.”

Fed. R. Civ. P. 56(a).

A fact is

“material” if it might affect the outcome of the case. Anderson v.
Liberty Lobby, 477 U.S. 242, 248 (1986).
3

A dispute of material

fact is “genuine” if the evidence “is such that a reasonable jury
could return a verdict for the non-moving party.” Id. If the
nonmoving party “fails to make a showing sufficient to establish
the existence of an element essential to that party’s case, and on
which that party will bear the burden of proof at trial,” summary
judgment must be granted against the plaintiff.
Catrett, 477 U.S. 317, 322 (1986).

Celotex Corp. v.

In reviewing the supported

underlying facts, all inferences must be viewed in the light most
favorable to the party opposing the motion.

See Matsushita Elec.

Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986).
The party seeking summary judgment bears the initial burden of
showing the absence of any genuine issues of material fact.
Celotex, 477 U.S. at 322-23.

See

“The burden then shifts to the

nonmoving party to come forward with facts sufficient to create a
triable issue of fact.”

Temkin v. Frederick County Comm’rs, 945

F.2d 716, 718 (4th Cir. 1991), cert. denied, 502 U.S. 1095 (1992).
However, “a party opposing a properly supported motion for summary
judgment may not rest upon the mere allegations or denials of his
pleading, but . . . must set forth specific facts showing that
there is a genuine issue for trial.”

Anderson v. Liberty Lobby,

Inc., 477 U.S. 242, 256 (1986).
III.

Discussion

Now before the Court are two pending motions for summary
judgment, both of which have been fully briefed.

Those motions

include: (1) the plaintiffs’ motion for partial summary judgment

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and (2) the defendant’s motion for summary judgment. Following its
review of the fully briefed motions, and the memoranda and exhibits
submitted by the parties, this Court finds that, for the reasons
set

forth

below,

the

plaintiffs’

motion

for

partial

summary

judgment must be denied and the defendant’s motion for summary
judgment must be granted in part and denied in part.

The motions

for summary judgment are discussed, in turn, below.
1.

Plaintiffs’ Motion for Partial Summary Judgment
The plaintiffs move this Court to enter an order finding that

the defendant has failed to pay a fair market value to the
plaintiffs

for

their

royalties

by

entering

into

illusory

or

collusive arrangements on their purchase contracts with affiliates,
wrongfully deducting post-production costs, and failing to pay for
natural gas liquids.

The plaintiffs contend that correction is

necessary through punitive damages.

Thus, the plaintiffs request

that this Court grant them partial summary judgment holding that
the defendant must pay a fair market value for their gas, may not
deduct unreasonable and unnecessary charges, must pay for natural
gas liquids (“NGLs”), and are liable for punitive damages as set
forth in Count VI of the complaint.
In view of the Leggett ruling, the plaintiffs contend that
they are entitled to the requested relief for four reasons. First,
the plaintiffs argue that, because the defendant is paying an
upstream price to the lessors, the defendant should take no
deductions from royalty owners.

5

An upstream price factors in

downstream costs.

The plaintiffs contend that, if Leggett is

followed, the defendant must pay the lessors royalty based upon the
enhanced value of the product when it leaves the defendant and
their affiliates and finds itself on the market.
Second, the plaintiffs argue that, if the defendant pays the
lessors royalty on an enhanced downstream price, the defendants can
deduct only reasonable and necessary post-production costs actually
incurred.

Specifically, the plaintiffs contend that only post-

production costs paid on the open market, not to an affiliate, and
that actually enhance the value of the gas, should be deducted from
their royalty. The plaintiffs state that the defendant “has turned
deductions

from

royalty

owners

not

as

a

pro-rata

share

of

post-production expenses, but as a way to realize even greater
profits all the while defrauding royalty owners of their rightful
payments.”

ECF No. 67 at 14.

Third, the plaintiffs argue that NGLs are compensable to them
as

lessors,

which

compensation

is

wrongfully

denied

by

the

defendant. Specifically, the plaintiffs contend that the defendant
evades the law by evading the required reporting on NGLs to the
State of West Virginia.

The plaintiffs contend that the defendant

accomplishes the evasion of the reporting requirement by selling
NGLs to its affiliates.

Thus, the plaintiffs conclude that as

lessors they are once again damaged by the defendant’s “illusory
and collusive contracts with affiliates.”

6

ECF No. 67 at 15.

Fourth, the plaintiffs argue that the defendant has acted
willfully and maliciously in failing to pay the plaintiffs the fair
market value of their product, and that this conduct can be stopped
only with severe punitive damages.

The plaintiffs contend that

punitive damages four times the amount of actual damages is fair,
reasonable, and affordable by the defendant, and that forfeiting
all profits from the sale of NGLs would deter further illegal
conduct.
The

defendant

filed

a

response

in

opposition

plaintiffs’ motion for partial summary judgment.

to

the

In response the

defendant argues that the motion should be denied because (1) the
sole remaining issue to be decided in this case is whether the
post-production expenses actually incurred and allocated to the
plaintiffs are reasonable; (2) the material evidence establishes
that

the

post-production

expenses

actually

incurred

by

the

defendant and proportionately allocated to the plaintiffs are
reasonable; and (3) the plaintiffs waived any claim that they may
have had regarding NGLs and/or punitive damages at the June 20,
2017 hearing in which they represented to the Court that the sole
remaining

issue

in

this

case

is

whether

the

post-production

expenses actually incurred and allocated to the plaintiffs are
reasonable.
The plaintiffs filed a reply to the defendant’s response in
opposition.

In

reply,

the

plaintiffs

argue

that

(1)

the

plaintiffs’ royalty should be based on the full sales price of

7

natural gas to a non-affiliate, not on a base index rate with
deductions; (2) the burden is on the defendant to show that its
costs are actually incurred and reasonable, and that the defendant
has not produced evidence to show that the costs it charges royalty
owners

are

actually

incurred

or,

if

actually

incurred,

are

reasonable to pass onto the royalty owners; (3) the defendant
cannot deduct the proceeds it receives for NGLs from the lessors;
and (4) punitive damages may solve the problems with the defendant.
This Court finds that the evidence presented is sufficient to
create

a

triable

issue

of

fact

at

trial

concerning

the

reasonableness of the post-production expenses actually incurred by
the lessee.
status

The parties expressly agreed at the June 20, 2017

conference

that

the

sole

remaining

issue

is

the

reasonableness of the post-production expenses actually incurred by
the lessee, which is a question for the fact-finder.
remaining
expenses

issue
were

is

two-part:

reasonable

and

This sole

(1)

whether

the

post-production

(2)

whether

the

post-production

expenses were actually incurred.
This

Court

finds

that

the

“actually

incurred”

element

encompasses the plaintiffs’ argument that the defendant failed to
pay them a fair market value for their royalties by entering into
illusory or collusive arrangements on the defendant’s
contracts

with

affiliates.

However,

whether

the

purchase

defendant’s

contracts with its affiliates reflect post-production expenses that

8

were “actually incurred” is a question for the fact-finder.

Thus,

this claim must be denied at the summary judgment stage.
As to the plaintiff’s claims regarding NGLs and punitive
damages, this Court finds that the plaintiffs made an express
waiver of those claims at the July 20, 2017 status conference. ECF
No. 43 at 1.

“[W]aiver is the ‘intentional relinquishment or

abandonment of a known right.’” Wood v. Milyard, 566 U.S. 463, 474
(2012) (quoting Kontrick v. Ryan, 540 U.S. 443, 558 n.13 (2004)).
“Thus,

a

party

alleged

to

have

waived

its

rights

must

contemporaneously have known of the circumstances giving rise to
[those rights].”

Am. Hardware Mut Ins. Co. v. BIM, Inc., 885 F.2d

132, 138 (4th Cir. 1989).

“Waiver ‘may be made by an express

statement or agreement, or it may be implied from the conduct of
the party who is alleged to have waived a right.’”

Williams v.

Tucker, 801 S.E.2d 273, 278 (W. Va. 2017) (quoting Parsons v.
Halliburton Energy Servs., Inc., 785 S.E.2d 844, 850 (W. Va.
2016)).
At the status conference, the parties expressly agreed that
the sole remaining issue in this civil action is the reasonableness
of the post-production expenses actually incurred by the lessee.
The Court held the status conference for the specific purpose of
determining what issues remained in this civil action, if any, in
light of the Leggett decision.

Counsel for each party expressly

stated that they had reviewed the Leggett decision and were in
agreement that the sole remaining issue was the reasonableness of

9

the post-production expenses actually incurred by the lessee, and
that the parties would require four months to complete discovery on
that sole remaining issue.

Thus, this Court finds the plaintiffs

entered into an express statement and agreement waiving other
issues.

The Court also finds that, at the time of the waiver, the

plaintiffs knew of the circumstances giving rise to the waived
issues. Thus, the Court concludes that the plaintiffs relinquished
their right to pursue their claims regarding NGLs and punitive
damages in this civil action.
Additionally, even if the plaintiffs had not waived their
punitive damages claim at the June 20, 2017 status conference,
punitive damages are not an available remedy in a contract action,
which this essentially is. See Warden v. Bank of Mingo, 341 S.E.2d
679,

684

(W.

Va.

1985)

(“[P]unitive

damages

are

generally

unavailable in pure contract actions.”); Berry v. Nationwide Mut.
Fire Ins. Co., 381 S.E.2d 367, 374 (W. Va. 1989) (“Generally,
absent an independent, intentional tort committed by the defendant,
punitive damages are not available in an action for breach of
contract.”).
Accordingly,

the

plaintiffs’

motion

for

partial

summary

judgment is denied in its entirety.
2.

Defendant’s Motion for Summary Judgment
The defendant moves this Court for the entry of summary

judgment in its favor with respect to the claims against it in this
civil action.

As a preliminary matter, the defendant states that

10

the sole issue to be decided in this case is whether the postproduction

expenses

actually

incurred

and

allocated

plaintiffs on a pro-rata basis are reasonable.

to

the

The defendant

contends that, “[w]hile this issue would generally be one for the
fact-finder, here, the undisputed facts firmly establish that the
post-production costs actually incurred to gather, compress, and
transport gas from the leased premises to the downstream market and
which are a component of the price received by EQT for the sale of
natural gas are reasonable.”

ECF No. 70 at 7.

The defendant also

contends that the plaintiffs “have failed to offer any facts, much
less any material fact, to refute the evidence presented by EQT
with respect to the reasonableness of the allocated costs,” and,
thus, that there is no material issue of fact to be resolved by a
jury.

ECF No. 70 at 11.
The

plaintiffs

defendant’s

motion

filed
for

a

response

summary

in

judgment.

opposition
In

to

the

response,

the

plaintiffs state that the defendant’s memorandum in support of its
motion for summary judgment contains many serious omissions and
misstatements of facts.

Specifically, the plaintiffs contend that

(1) the “index” price the defendant pays its royalty owners is a
sham and should be disregarded entirely; and (2) if the defendant
pays the plaintiffs a royalty based on the interstate pipeline
rate, the defendant can deduct only reasonable and necessary postproduction costs that enhance the value of the product.

The

plaintiffs conclude that the defendant “has essentially turned the

11

compression, transmission and compression (midstream) of natural
gas into another profit stream by charging the royalty owners for
costs that are never actually incurred, not reasonable or are
recouped at the final sale.”

ECF No. 73 at 1.

The defendant filed a reply to the plaintiffs’ response in
opposition.

In reply, the defendant again argues that its motion

should be granted because the plaintiffs have failed to present
material facts sufficient to create a triable issue of fact.

The

defendant contends (1) that the plaintiffs’ arguments concerning
the “index price” were waived and provide no basis upon which to
deny the defendant’s motion; and (2) that the material evidence
establishes

that

the

post-production

costs

incurred

by

the

defendant and allocated to the plaintiffs are reasonable.
This Court again finds that a genuine issue of material fact
exists, and that the evidence presented is sufficient to create a
triable issue of fact at trial concerning the reasonableness of the
post-production expenses actually incurred by the defendant as
lessee.

Accordingly, the defendant’s motion for summary judgment

is denied as to the reasonableness of the post-production expenses
actually incurred by the lessee.
This Court further finds that the plaintiffs did not expressly
waive their claims regarding the index price the defendant pays its
royalty owners because they relate to whether the post-production
expenses were “actually incurred.”

The Court agrees with the

plaintiffs that, if the index price is based on “sham” transactions

12

with the defendant’s affiliates, then such claims go to whether the
post-production expenses were “actually incurred.”
This

Court

does

find,

however,

that

the

plaintiff

did

expressly waive the other claims remaining in the complaint. Those
claims include failure to properly account, breach of contract,
fraud, negligent misrepresentation, and punitive damages.

This

Court finds that none of those claims are encompassed by the sole
remaining

issue

of

the

reasonableness

expenses actually incurred by the lessee.

of

the

post-production

As is discussed above,

the plaintiffs expressly agreed that no other issues remained and
thus

waived

any

other

issues

at

the

June

20,

2017

status

conference.
Accordingly, the defendant’s motion for summary judgment is
granted as to the claims for failure to properly account, breach of
contract, fraud, negligent misrepresentation, and punitive damages.
The Court finds that each of those claims was waived at the June
20, 2017 status conference, and that none of those claims goes to
the

sole

remaining

post-production

issue

expenses

of

the

actually

reasonableness

incurred

by

the

of

the

lessee.

Additionally, as is discussed above, punitive damages are not an
available remedy in a contract action.
The defendant’s motion for summary judgment is denied as to
the

reasonableness

of

the

post-production

expenses

actually

incurred by the lessee because this Court finds that the evidence

13

presented is sufficient to create a triable issue of fact as to
this issue.
IV.

Conclusion

For the above reasons, the plaintiffs’ motion for partial
summary judgment (ECF No. 66) is DENIED and the defendant’s motion
for summary judgment (ECF No. 69) is GRANTED IN PART and DENIED IN
PART. The defendant’s motion for summary judgment is granted as to
the claims for failure to properly account, breach of contract,
fraud, negligent misrepresentation, and punitive damages.

The

defendant’s motion for summary judgment is denied as to the sole
remaining

issue

of

the

reasonableness

of

the

post-production

expenses actually incurred by the lessee, which is a question for
the fact-finder.
IT IS SO ORDERED.
The Clerk is DIRECTED to transmit a copy of this memorandum
opinion and order to counsel of record herein.
DATED:

April 2, 2018

/s/ Frederick P. Stamp, Jr.
FREDERICK P. STAMP, JR.
UNITED STATES DISTRICT JUDGE

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