Cather et al v. EQT Production Company et al

Filing 107

MEMORANDUM OPINION AND ORDER GRANTING PLAINTIFFS' MOTION FOR SUMMARY JUDGMENT AS TO DEDUCTIONS [ECF NO. 74 ]. Plaintiffs' motion with respect to prejudgment interest is GRANTED. Plaintiffs are hereby ordered to submit additional briefing a nd their prejudgment interest calculation within 21 days of entry of this order. Defendants shall have 14 days after Plaintiffs' submission to respond with any objections or alternative calculations. Signed by District Judge Thomas S. Kleeh on 8/13/2019. (wrr)

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF WEST VIRGINIA
CLARKSBURG

WILLIAM L. CATHER,
BRENDA L. CATHER,
CHARLES H. CATHER,
LINDA F. CATHER,
EVERET P. BICE, JR.
ELIZABETH BICE,
ROBERT JUNIOR HEMPHILL,
Trustee of Trust A Created Under
the Hemphill Family Trust Dated
October 17, 1995, as Amended,
Plaintiffs,

v.

Civil Action No. 1:17-CV-208
(Judge Kleeh)

EQT PRODUCTION COMPANY,
EQT GATHERING, LLC,
EQT ENERGY, LLC,
EQT MIDSTREAM SERVICES, LLC,
EQT CORPORATION, and
EQUITRANS, L.P.,
Defendants.
MEMORANDUM OPINION AND ORDER GRANTING PLAINTIFFS’ MOTION FOR
SUMMARY JUDGMENT AS TO DEDUCTIONS [ECF NO. 74]
Pending before the Court is Plaintiffs’ Motion for Summary
Judgment as to Deductions [ECF No. 74].

The motion has been

fully briefed, the Court has entertained argument from counsel,
and

the

matter

is

now

ripe

for

decision.

discussed, the Court grants Plaintiffs’ motion.

For

the

reasons

CATHER V. EQT

1:17-CV-208

MEMORANDUM OPINION AND ORDER GRANTING PLAINTIFFS’ MOTION FOR
SUMMARY JUDGMENT AS TO DEDUCTIONS [ECF NO. 74]
I.

Factual Background

A. The Lease
On February 20, 1963, D.L. Cather and Lila S. Cather, W.L.
Cather

and

Hemphill

Maxine

signed

Cather,
a

lease

Equitable Gas Company.
oil

and

gas

rights

that

tract

¶¶ 16, 19.

and

Mary

agreement

Hemphill

attached
Id.

lessors

to

and

(“Cather

ECF No. 1 at ¶ 6.

County, West Virginia.
of

and

nearly

Robert

Lease”)

J.

with

That lease related to
504

acres

in

Taylor

Plaintiffs are the current owners
under

that

lease

agreement.

Id.

Equitable Gas Company’s interest in the Cather Lease

currently resides with Defendant EQT Production Company.

Id.

¶ 17.
With

respect

to

royalty

payments,

the

Cather

provides:
Lessee shall pay to the Lessor for each and
every well drilled upon such land, which
produces Natural Gas and/or Casinghead Gas
in a quantity sufficient for the Lessee to
convey to market, a money royalty computed
at the rate of one-eight (1/8) of the
wholesale market value which is based on the
average current price paid by the Lessee to
independent
operators
in
the
general
area . . . payment to be on or before the
25th day of the month following that in
which the gas has been delivered into the
marketing pipeline . . . .

2

Lease

CATHER V. EQT

1:17-CV-208

MEMORANDUM OPINION AND ORDER GRANTING PLAINTIFFS’ MOTION FOR
SUMMARY JUDGMENT AS TO DEDUCTIONS [ECF NO. 74]
ECF No. 74-1 at 1.

The lease is silent on whether the Lessee

may deduct from the royalty payments for the costs of severance,
costs of production, or costs of any kind, including severance
taxes.

The Cather Lease does permit the Lessee, at its option,

to prepay any taxes “on or against the land or gas and/or oil in
place under the . . . lands” and recoup those payments against
any royalties due under the agreement.

Id.

B. EQT Application of Lease Language
EQT

prefers

“deduction.”

In

the

word

“allocation”

its

discovery

responses,

as
EQT

opposed

Production

explained its basis for taking deductions as follows:
EQT Production pays royalties based on the
specific language set forth in royalty
owners’
leases
and
does
not
take
“Deductions”
from
Plaintiffs’
royalties.
The amount of “[d]educti[ons]” is the amount
allocated to Plaintiffs for their share of
the gathering and compression charges used
to arrive at a sales price under the Gas
Purchase Agreements entered into by and
between EQT Energy and EQT Production after
adding in the value of depreciation, return
on investment, and taxes.
Lessors are
responsible for their proportionate share of
severance
taxes.
Notwithstanding
the
preceding objections, which are expressly
reserved, EQT Production directs Plaintiffs
to the Owner Revenue Inquiry attached hereto
as EQT Production00003-00011 which reflects
otherwise responsive information to this
request.

3

to

CATHER V. EQT

1:17-CV-208

MEMORANDUM OPINION AND ORDER GRANTING PLAINTIFFS’ MOTION FOR
SUMMARY JUDGMENT AS TO DEDUCTIONS [ECF NO. 74]
ECF No. 74-4 at ¶¶ 10–11; see also ECF No. 84 at 3-4.

EQT has

been consistent in this and other litigation as to how silence
in

leases

lessors.

permits

it

to

“allocate”

expenses

and

taxes

to

Jimmi Sue Smith, EQT Corporation’s Chief Accounting

Officer, stated in her affidavit submitted in The Kay Company,
LLC, et al. v. EQT Production Co., et al., 1:13-cv-151, and
attached to Plaintiffs’ Motion here that EQT Production pays
severance tax to the State of West Virginia including “its own
share and the lessor’s share . . . .”

ECF No. 74-5 at ¶ 2.

Ms.

Smith went on to state that “[i]f severance tax deductions were
not

prohibited

by

the

lessor’s

lease,

each

lessor’s

proportionate share . . . of severance taxes actually paid to
the West Virginia State Tax Department was taken into account in
calculating royalty.”
Notwithstanding
practice

as

one

Id. ¶ 4.
the

of

preference

allocation,

to

refer

John

to

its

Bergonzi,

business
then

EQT

Corporation’s Vice President of Finance and Controller, stated
in his Kay Company affidavit, “On leases where royalty was to be
paid

‘at

the

well’

and

allowed

costs, 1 EQT Production deducted

1

the

deduction

of

downstream

the royalty owners’ share of

As noted, the Cather Lease contains no provision “allow[ing] the
deduction of downstream costs.”

4

CATHER V. EQT

1:17-CV-208

MEMORANDUM OPINION AND ORDER GRANTING PLAINTIFFS’ MOTION FOR
SUMMARY JUDGMENT AS TO DEDUCTIONS [ECF NO. 74]
downstream costs from the sales price received, as shown on its
royalty remittance statements.” 2

ECF No. 74-6 at ¶ 12.

Bergonzi’s

confirmed

deposition

testimony

the

practice

deducting for expenses from royalty payments to lessors.

Mr.
of
In

determining “market value at the wellhead,” he noted that “EQT
determines market value at the wellhead . . . by finding the
first liquid trading point or sales point and then deducting the
costs to get that gas from that liquid trading point or from the
wellhead to that liquid trading point.”
Plaintiffs
transcript

from

also
the

ECF No. 74-7 at 2.

submitted

portions

deposition

of

of

Michael

Kay

Barbour,

Supervisor of Division Order for EQT Corporation.
testified

about

the

processing

of

leases,

Company

paying

then

Mr. Barbour
particular

attention to deductions for post-production expenses and taxes.
He described as a “general business practice[] or polic[y]” the
“tak[ing]” of production taxes from a one-eighth royalty where

2

The Cather Lease makes no reference to “at the well,” “at the
wellhead,” or anything similar.
Instead, royalty payments are
to be calculated “based on the average current price paid by the
Lessee to independent operators in the general area . . . .”
ECF No. 74-1 at 1.
The distinction in lease language does not
appear to be of significance with respect to the application and
relevance of this past testimony as Defendant EQT Production,
according to its own Remittance Statements, has calculated the
net royalty payment issued to Plaintiffs similarly regardless of
different lease provisions.

5

CATHER V. EQT

1:17-CV-208

MEMORANDUM OPINION AND ORDER GRANTING PLAINTIFFS’ MOTION FOR
SUMMARY JUDGMENT AS TO DEDUCTIONS [ECF NO. 74]
the lease is silent on the allocation of severance taxes.
No. 74-8 at 6.

ECF

Mr. Barbour also testified that EQT would take

post-production expenses if the royalty clause of a particular
lease stated that one-eighth of the wholesale market value would
be

paid

to

deductions.

the

royalty

owner

with

no

specific

mention

of

Id. at 7.

C. Performance Under the Cather Lease
EQT commenced production pursuant to its rights under the
Cather Lease in or around March 2012, constructing six (6) wells
tapping into the Marcellus Shale formation.

ECF No. 1 at ¶ 20.

Since then, EQT Production has reported to each Plaintiff each
month information related to the production performance of each
well via a Remittance Statement.
Statements
date,

provide

production

interest,

sales

certain
type,

and

information

interest

owner

See ECF No. 74-3.

volume,

type,
sales

including
net
and

Those

production

price,

decimal

owner

revenue,

taxes, gross and owner deductions, and well net and owner net
revenue.

Id.

Based on the Statements issued from April 2012

through and including January 2019 (which reports February 2012
to November 2018 data), the “owner deducts” and “owner taxes”
deductions totaled $751,109.65.

Id.; see also ECF No. 75 at 5.

6

CATHER V. EQT

1:17-CV-208

MEMORANDUM OPINION AND ORDER GRANTING PLAINTIFFS’ MOTION FOR
SUMMARY JUDGMENT AS TO DEDUCTIONS [ECF NO. 74]
II.

Procedural History

On December 7, 2017, Plaintiffs Charles H. Cather, Brenda
L. Cather, William L. Cather, Elizabeth Bice, Everet P. Bice,
Jr., Linda F. Cather, and Robert Junior Hemphill filed their
Complaint

against

Gathering,

LLC,

Company,

and

EQT

Corporation,

Midstream

Equitrans,

“Defendants”).
claims:

EQT

ECF No. 1.

EQT

Services,
L.P.

Energy,
LLC,

LLC,

EQT

EQT

Production

(sometimes

hereinafter

That Complaint contained a number of

Alter Ego, Fraud, Civil Conspiracy to Commit Fraud,

Breach of Contract, Conversion, Unconscionability and Breach of
Duty of Fair Dealing, Violation of the West Virginia Consumer
Credit

and

Protection

Act

Section

Virginia

Consumer

Credit

Interest

Due

Plaintiffs

Payments

and

Answer

on

to

Punitive

February

and

Violation

Protection
on

Damages.

1,

2,

Improperly
Id.

2018.

Act

ECF

of

Section
Withheld

Defendants

No.

the

14.

6,

and

Royalty

filed

That

West

their

same

day,

Defendants filed their Motion for Partial Dismissal. ECF No. 15.
After briefing and entertaining argument, Judge Keeley grantedin-part and denied-in-part that motion, dismissing the claims
for Fraud (Count V), Civil Conspiracy to Commit Fraud (Count
VI), Conversion (Count VIII), Unconscionability and Breach of
Duty of Fair Dealing (Count IX), Violations of the West Virginia
Consumer

Credit

and

Protection
7

Act

(Counts

X

and

XI),

and

CATHER V. EQT

1:17-CV-208

MEMORANDUM OPINION AND ORDER GRANTING PLAINTIFFS’ MOTION FOR
SUMMARY JUDGMENT AS TO DEDUCTIONS [ECF NO. 74]
Punitive Damages (Count XIII). 3

ECF No. 27.

That ruling left

Counts IV and VII asserting Alter Ego and Breach of Contract
theories of recovery.
Plaintiffs filed their Rule 60 Motion for Relief from Final
Order or, Alternatively, Motion for Leave to Amend Complaint on
November 15, 2018.

ECF No. 57.

United

States

2018.

Plaintiffs’ Rule 60 and/or Rule 15 motion was denied on

May 17, 2019.

District

Judge

This matter was transferred to

ECF No. 95.

Thomas

S.

Kleeh

on

December

Plaintiffs filed their Motion for

Summary Judgment on February 15, 2019.

ECF No. 74.

have

after

fully

briefed

that

1,

motion

and,

a

July

The parties
15,

2019,

hearing, the matter is ready for decision.
III. Analysis
A. West Virginia Law
A review of the long-standing law on the issues raised by
Plaintiffs’ pending motion may be of benefit.

The Supreme Court

of Appeals of West Virginia has had occasion to examine this
area several times in recent years.

Yet, the concepts seem to

remain elusive.

3

Judge Keeley also dismissed Plaintiffs’ request for attorney’s
fees.
The Court’s summary order can be found at ECF No. 27
while the transcript setting forth the Court’s analysis is
docketed at ECF No. 63.

8

CATHER V. EQT

1:17-CV-208

MEMORANDUM OPINION AND ORDER GRANTING PLAINTIFFS’ MOTION FOR
SUMMARY JUDGMENT AS TO DEDUCTIONS [ECF NO. 74]
Since 2001, over 18 years ago now, the Supreme Court of
Appeals has clearly articulated that leases silent on the issue
of “post-production” expenses do not permit — nor does the law
permit — reductions
expenses.

of

royalty

payments

for

post-production

“If an oil and gas lease provides for a royalty based

on proceeds received by the lessee, unless the lease provides
otherwise, the lessee must bear all costs incurred in exploring
for, producing, marketing, and transporting the product to the
point of sale.”

Syl. Pt. 4, Wellman v. Energy Res., Inc., 557

S.E.2d 254 (W. Va. 2001) (emphasis added).
In rejecting the lessee’s claim that it was entitled to
deduct certain expenses before calculating the lessor’s royalty,
the

Supreme

Court

of

Appeals

noted

that

the

“landowner’s

royalty,” the traditional one-eighth share of the sale price
received, was “not chargeable with any of the costs of discovery
and production.”

Id. at 263-64.

The court further rejected the

re-naming of such deductions as “post-production expenses” based
on the lessee’s duty to market the oil or gas produced.

Id. at

264.
The Supreme Court of Appeals reiterated its holdings from
Wellman

in

Estate

of

Tawney

v.

Columbia

L.L.C., 633 S.E.2d 22 (W. Va. 2006).

Natural

Resources,

In fact, the court further

heightened the duties on lessees if they sought to recoup post9

CATHER V. EQT

1:17-CV-208

MEMORANDUM OPINION AND ORDER GRANTING PLAINTIFFS’ MOTION FOR
SUMMARY JUDGMENT AS TO DEDUCTIONS [ECF NO. 74]
production expenses from lessors.
or

production

costs

between

the

Any “allocation” of marketing
lessor

and

lessee

must

be

“express” in the lease and “identify with particularity” the
specific deductions to be taken from the one-eighth royalty.
Id. at Syl. Pt. 10.
This Court and the Southern District of West Virginia have
also had opportunity to apply the guidance of the Supreme Court
of Appeals.

Judge Goodwin undertook an extensive review of the

history of West Virginia jurisprudence on these issues in W.W.
McDonald Land Co., et al. v. EQT Production Co., et al., 983 F.
Supp. 2d 790 (S.D.W. Va. 2013). 4

After synthesizing Wellman and

Tawney, the Southern District concluded that “lessees have a
duty to bear all costs incurred until the gas reaches market,
not to a point of sale. . . . [L]essees have an implied duty to
bear all post-production costs incurred until the gas reaches
the market . . . .”

Id. at 802.

Judge Goodwin, in partially

granting summary judgment to the lessors, found, in the absence

4

Judge Goodwin undertook an exhaustive and scholarly review of
the relevant cases. In the interest of brevity, this Court will
not repeat his efforts but refers any interested reader to his
thorough discussion. See W.W. McDonald, 983 F. Supp. 2d at 796–
804.

10

CATHER V. EQT

1:17-CV-208

MEMORANDUM OPINION AND ORDER GRANTING PLAINTIFFS’ MOTION FOR
SUMMARY JUDGMENT AS TO DEDUCTIONS [ECF NO. 74]
of “lease language to the contrary, Tawney requires lessees to
Id. at 804. 5

pay royalties free of [post-production expenses].”
This

Court,

in

Richards

v.

EQT

Production

Co.,

No.

1:17CV50, 2018 WL 3321441 (N.D.W. Va. July 5, 2018), denied the
plaintiffs’

motion

for

partial

summary

judgment

because

EQT

Production was the lone defendant removing from the controversy
its

relationship

otherwise,

and

resolution.

with

because

Id. at *4.

any

other

entities,

of

factual

disputes

alter

ego

requiring

or
jury

Thereafter, during trial, Judge Keeley

granted the plaintiffs’ motion for directed verdict on the issue
of

severance

tax

deductions

from

one-eighth

royalty

payments

where the lease did not specifically allow such deductions.
No. 74-9 at 23–24.

ECF

The Court’s ruling was based on the plain

language of the statute and its application to a lease devoid of
language addressing severance taxes.

Id.

B. Cather Lease Deductions
Considering

all

of

these

cases,

the

rule

of

law

with

respect to deductions from royalty payments for either post-

5

He likewise rejected EQT’s efforts, as the Court saw them, to
“simply reorganiz[e] their businesses and mak[e] intra-company
wellhead sales” to circumvent Tawney’s requirements.
Id. at
804.

11

CATHER V. EQT

1:17-CV-208

MEMORANDUM OPINION AND ORDER GRANTING PLAINTIFFS’ MOTION FOR
SUMMARY JUDGMENT AS TO DEDUCTIONS [ECF NO. 74]
production expenses or severance taxes could not be more clear. 6
Such

deductions

are

permitting them.

impermissible

absent

express

There is no dispute that the Cather Lease

lacks the requisite language authorizing deductions.
single

Remittance

deductions
expenses.

for

language

Statement
BOTH

submitted

severance

See ECF No. 74-3.

to

taxes

the
and

Yet, every

Court

contains

post-production

There is no dispute the deductions

were made — despite the absence of Tawney-compliant provisions.
Absent from its briefing but argued at the July 15, 2019,
hearing,

Defendants

inapplicable

to

them irrelevant.

this

now

contend

case,

that

rendering

Wellman

and

Plaintiffs’

Tawney
reliance

are
on

Initially, Defendants argue that the implied

duty to market discussed in both Wellman and Tawney only applies
to

ambiguous

lease

language.

Further,

EQT

believes

the

prohibition against deductions — the clear rule established in
Wellman and expounded upon in Tawney — is not applicable without
a

finding

of

ambiguity.

This

argument

rings

quite

hollow.

Wellman’s holding could not be more clear or plain: “If an oil
6

As Judge Keeley noted, and EQT repeats, the Supreme Court of
Appeals has offered no guidance on interpretation of the
“Severance and Business Privilege Tax Act of 1993” (“the Act”).
As discussed later, this Court concurs with Judge Keeley’s
analysis and conclusion that, under the plain language of the
statute, lessors cannot be “charged” a portion of severance
taxes which are assessed on the extractor.

12

CATHER V. EQT

1:17-CV-208

MEMORANDUM OPINION AND ORDER GRANTING PLAINTIFFS’ MOTION FOR
SUMMARY JUDGMENT AS TO DEDUCTIONS [ECF NO. 74]
and gas lease provides for a royalty based on proceeds received
by the lessee, unless the lease provides otherwise, the lessee
must

bear

all

costs

incurred

in

exploring

for,

producing,

marketing, and transporting the product to the point of sale.”
Syl. Pt. 4, Wellman, 557 S.E.2d 254. 7

Despite Defendants’ urging

to the contrary, the words “ambiguous” or “ambiguity” do not
even

make

an

appearance

in

that

opinion.

The

claim

that

concerns of lease ambiguity were the genesis of this rule of law
are, frankly, without any basis whatsoever.
Defendants’
prohibition

against

Tawney either.
Wellman

and

claim

that

deductions

ambiguity
to

must

apply

finds

exist
no

for

support

the
in

The Tawney court reiterated the holdings from

outlined

for

lessees

a

legally-sound

path

deducting post-production expenses from royalty payments.

for
The

lease must expressly provide for some allocation or sharing of
costs between the wellhead and point of sale.

7

Syl. Pt. 10,

Importantly, this point of law was initially declared in a
syllabus point. As the Supreme Court of Appeals has recognized,
the West Virginia Constitution requires as much.
Syl. Pt. 13,
State ex rel. Med. Assurance of W. Va., Inc. v. Recht, 583
S.E.2d 80 (W. Va. 2003) (“[N]ew points of law . . . will be
articulated through syllabus points as required by our state
constitution.”). This Court notes the use of a syllabus point —
seven years before production under the Cather Lease started —
only to highlight the indisputable language used in a separate,
constitutional pronouncement.

13

CATHER V. EQT

1:17-CV-208

MEMORANDUM OPINION AND ORDER GRANTING PLAINTIFFS’ MOTION FOR
SUMMARY JUDGMENT AS TO DEDUCTIONS [ECF NO. 74]
Tawney, 633 S.E.2d 22.

That express provision must identify

“with particularity the specific deductions” to be withheld and
the specific method of calculating the amount of post-production
expenses to be deducted from the lessor’s royalty.

Id.

This

clear point of law likewise does not hinge on any finding of
ambiguity in the underlying lease.

Nor does Tawney limit its

own application to any particular lease language.
years

before

production

under

the

Cather

Lease

In short,
began,

the

Supreme Court of Appeals provided a roadmap to Defendants and
other lessees on how to properly, legally deduct post-production
expenses from royalty payments in the state of West Virginia.
The failure to follow that map cannot be excused by an argument
without legal basis.
Defendants also urge this Court to take up the purported
invitation of the Supreme Court of Appeals in Leggett, et al. v.
EQT Production Co., et al., 800 S.E.2d 850 (W. Va. 2017), to
cast aside Wellman, Tawney, and the principles governing leases
like the Cather Lease for nearly two decades based on the dicta
questioning

those

decisions.

Id. at 863.

Leggett

court

“under-developed

expressly

or

inadequately

reasoned”

EQT’s invitation is misplaced.
left

“for

another

vitality and scope of Wellman and Tawney.”

day

Id.

the

The

continued

In other words,

Wellman and Tawney continue to have the same vitality and scope
14

CATHER V. EQT

1:17-CV-208

MEMORANDUM OPINION AND ORDER GRANTING PLAINTIFFS’ MOTION FOR
SUMMARY JUDGMENT AS TO DEDUCTIONS [ECF NO. 74]
they have had since being decided.
that

it

sits

in

diversity

in

this

This Court is also mindful
case.

“[F]ederal

courts

sitting in diversity rule upon state law as it exists and do not
surmise or suggest its expansion.” St. Paul Fire & Marine Ins.
Co. v. Jacobson, 48 F.3d 778, 783 (4th Cir. 1995). 8
Wellman and Tawney remain the law of the state of West
Virginia.

The principles of those cases apply here.

There is

no genuine issue of material fact that deductions made unlawful
by Wellman and Tawney were made from royalty payments provided
for under the terms of the Cather Lease.
therefore

appropriate

on

the

Summary judgment is

question

of

deductions.

Plaintiffs’ motion is GRANTED.
C. Severance Tax Deductions
Plaintiffs further seek summary judgment with respect to
severance tax deductions from royalty payments under the Cather
Lease based on the text of the Act as well as this Court’s
decision in Richards.

Defendants challenge that motion based on

8

This principle may be particularly applicable here.
The
composition of the Supreme Court of Appeals has changed multiple
times since the Leggett court questioned, without disturbing,
Wellman and Tawney.
This Court will not gaze into its crystal
ball to speculate as to whether a future court will take the
next step to abrogate the “under-developed or inadequately
reasoned” decisions. Thankfully, the principle of stare decisis
does not require such an effort.

15

CATHER V. EQT

1:17-CV-208

MEMORANDUM OPINION AND ORDER GRANTING PLAINTIFFS’ MOTION FOR
SUMMARY JUDGMENT AS TO DEDUCTIONS [ECF NO. 74]
the same arguments made during the Richards trial and outlined
in their post-trial motions in that case.

There is no dispute

that deductions were made for severance taxes.
stated

in

their

written

discovery

responses,

As Defendants
“[l]essors

are

responsible for their proportionate share of severance taxes.”
ECF No. 74-4 at ¶¶ 10-11; see also ECF No. 74-3.
Plaintiffs’ claim centers on the “Severance and Business
Privilege Tax Act of 1993,” W. Va. Code § 11-13A-1, et seq.
Act

provides,

“For

the

privilege

of

engaging

or

The

continuing

within this state in the business of severing natural gas or oil
for sale, profit or commercial use, there is hereby levied and
shall be collected from every person exercising such privilege
an annual privilege tax . . . .” W. Va. Code § 11-13A-3a(a).
This tax applies “to all persons severing gas or oil in this
state . . . .”
The

Id. § 11-13A-3a(c).

statutory

definitions

amplify

Plaintiffs’

position.

Under the statute, “severing” means “the physical removal of the
natural resources from the earth or waters of this state by any
means . . . .”

Id. § 11-13A-2(c)(11).

Taxpayer is defined as:

any individual, partnership, joint venture,
association, corporation, receiver, trustee,
guardian, executor, administrator, fiduciary
or representative of any kind engaged in the
business of severing or processing (or both
severing and processing) natural resources
in this state for sale or use. In instances
16

CATHER V. EQT

1:17-CV-208

MEMORANDUM OPINION AND ORDER GRANTING PLAINTIFFS’ MOTION FOR
SUMMARY JUDGMENT AS TO DEDUCTIONS [ECF NO. 74]
where contracts (either oral or written) are
entered into whereby persons, organizations
or businesses are engaged in the business of
severing or processing (or both severing and
processing) a natural resource but do not
obtain title to or do not have an economic
interest therein, the party who owns the
natural
resource
immediately
after
its
severance
or
has
an
economic
interest
therein is the taxpayer.
Id. § 11-13A-2(c)(13).
As

noted,

this

Court

has

previously

had

opportunity

to

address this issue — without the benefit of guidance from the
Supreme Court of Appeals.
verdict

in

favor

of

the

In Richards, Judge Keeley directed
lessors,

finding

the

severance

tax

statute unambiguous and only applicable to persons or entities
“in the business of severing or processing” the gas and not
lessors

unless

they

processing the gas.”

are

“in

the

business

of

severing

or

The Court found EQT Production Company’s

position “erroneous as a matter of law” in entering judgment on
behalf of the lessors.
This

Court

agrees

with

Judge

Keeley’s

analysis.

The

statute clearly limits its own applicability to those engaged in
the business of severing, in this instance, natural gas from
West Virginia lands.

The applicability of the tax is limited to

those exercising the privilege of extracting natural gas from
property.

As Plaintiffs point out, the definitions under the

17

CATHER V. EQT

1:17-CV-208

MEMORANDUM OPINION AND ORDER GRANTING PLAINTIFFS’ MOTION FOR
SUMMARY JUDGMENT AS TO DEDUCTIONS [ECF NO. 74]
Act emphasize the unambiguous language:
“engaged

in

the

business

of

severing

a “taxpayer” must be
or

processing

(or

both

severing and processing) natural resources in this state for
sale or use . . . .”

W. Va. Code § 11-13A-2(c)(13).

There is

no dispute that Plaintiffs are not in such a business, while
Defendants, at least Defendant EQT Production, are — which is
the reason for the Cather Lease.

Defendants, under the terms of

that lease, retain the exclusive rights and ability to sever the
natural gas at issue.
Defendants’
“taxpayer”

contention

under

the

Act

that
is

Plaintiffs

unavailing.

qualify

as

Defendant

a
EQT

Production immediately sells the extracted gas to Defendant EQT
Energy — not Plaintiffs or any unrelated party for that matter.
While

the

interest,
precludes

“taxpayer”
the

Act’s

Plaintiffs

definition

does

definition
from

of

the

contemplate
that

an

concept

taxpayer

economic
expressly

classification.

“Economic interest” does not include “a person who only receives
an arm’s length royalty . . . .”

W. Va. Code § 11-13A-2(c)(4).

This Court likewise concurs with Judge Keeley’s conclusion
that

deductions

from

royalty

payments

not

only

must

reasonable and actually incurred but also must be “legal.”

be
The

Act limits its application to taxpayers — as defined under the
statute.

Even if the parties could contract to the contrary,
18

CATHER V. EQT

1:17-CV-208

MEMORANDUM OPINION AND ORDER GRANTING PLAINTIFFS’ MOTION FOR
SUMMARY JUDGMENT AS TO DEDUCTIONS [ECF NO. 74]
which

they

cannot,

the

Cather

Lease

contains

no

language

permitting deductions for severance taxes imposed on the lessee.
Simply put, the deductions made for severance taxes not only run
afoul

of

Wellman

unambiguous

statute

and

Tawney

but

governing

also

such

flout

the

taxes.

clear,

Therefore,

Plaintiffs’ motion with respect to severance tax deductions is
GRANTED on this basis as well.
D. Deduction Damages
Although, as noted herein as well as in their briefing,
Defendants contest the notion that the deductions taken from
Plaintiffs’

royalty

payments

under

the

Cather

Lease

are

impermissible or unlawful, there is no dispute as to the amount
of deductions withheld or the fact the deductions were taken.
The

Remittance

Statements

[ECF

No.

74-3]

state

as

much,

and

counsel conceded the obvious point during the July 15, 2019,
hearing.

Because this Court has found that these deductions run

contrary to well-established West Virginia law and Plaintiffs
are

entitled

to

judgment

as

a

matter

of

law

on

the

issue,

Plaintiffs are likewise entitled to judgment in the amount of
those deductions. 9

9

Defendants argue that the true issue in this matter is whether
Plaintiffs received “market value” under the Cather Lease. They

19

CATHER V. EQT

1:17-CV-208

MEMORANDUM OPINION AND ORDER GRANTING PLAINTIFFS’ MOTION FOR
SUMMARY JUDGMENT AS TO DEDUCTIONS [ECF NO. 74]
Defendants’ Remittance Statements from April 2012 through
and including January 2019 provide basic information about the
gross and net royalty calculations and payments.

Defendant EQT

Production prepared and issued the Remittance Statements and,
therefore,

do

not

contest

their

accuracy.

The

Remittance

Statements produced to the Court at summary judgment stage are
attached to Plaintiffs’ motion as Exhibit 3.

ECF No. 74-3.

There is no dispute that the “Owner Deducts and Owner Taxes”
category is

a

list

of

the

deductions

at

issue,

withholdings for expenses and severance taxes.

representing

The collective

total of deductions taken at the time of Plaintiffs’ motion is
$751,109.65.

ECF No. 75 at 5; ECF No. 74-3.

For the reasons articulated herein, because the Court finds
the deductions improper and because there is no genuine issue of
material

fact

are correct
However, as
deductions
calculating
considering
value” must
deductions.

with

respect

to

the

amount

of

such

deductions

in that the lease requires such a royalty payment.
discussed at length, West Virginia law prohibits the
Defendants took from the royalty payments in
what Defendants believe to be “market value.” Thus,
Defendants’ own Remittance Statements, “market
be at least the net royalties paid plus the improper

Plaintiffs also contend that the “Net Price” listed in the
Remittance Statements [ECF No. 74-3] and used to calculate the
royalty due under the lease was lower than the market price.
That issue was not made subject of this motion, and the Court
leaves that matter for another day.

20

CATHER V. EQT

1:17-CV-208

MEMORANDUM OPINION AND ORDER GRANTING PLAINTIFFS’ MOTION FOR
SUMMARY JUDGMENT AS TO DEDUCTIONS [ECF NO. 74]
withheld to date, Plaintiffs are entitled to summary judgment as
to those deductions in the amount of $751,109.65. 10
E. Prejudgment Interest
Plaintiffs

also

contend

that

they

are

entitled

prejudgment interest on those improper deductions.

to

Defendants

argue that consideration of interest is premature. 11

With no

genuine issue of material fact existing on the issues presented
in Plaintiffs’ motion and Plaintiffs being entitled to judgment
as a matter of law, the Court does not believe consideration of
prejudgment

interest

on

the

amount

set

by

this

order

to

be

premature.

However, given the sometimes-murky waters of the law

governing prejudgment interest in breach of contract cases, some
discussion of the issue is warranted.

See Bd. of Educ. of

McDowell Cty. v. Zando, Martin & Milstead, Inc., 390 S.E.2d 796,

10

Plaintiffs’ motion only seeks judgment as to the propriety and
amount of deductions.
As discussed at the July 15, 2019,
hearing, Plaintiffs have remaining claims concerning the price
used to calculate royalty payments.
Those claims are not
subject of the pending motion and are not addressed herein.
11
Defendants also argue that Plaintiffs motion on this ground is
misplaced because (1) the true issue is whether Plaintiffs were
paid market value under the Cather Lease and (2) Plaintiffs have
failed to offer a comparison of amounts received to amounts that
should have been paid under the lease.
The Court has already
dispensed with this argument, and it does not warrant further
consideration on the issue of prejudgment interest.

21

CATHER V. EQT

1:17-CV-208

MEMORANDUM OPINION AND ORDER GRANTING PLAINTIFFS’ MOTION FOR
SUMMARY JUDGMENT AS TO DEDUCTIONS [ECF NO. 74]
809 (W. Va. 1990) (“Admittedly, there is some confusion in our
cases with regard to prejudgment interest in contract cases.”).
The West Virginia Code provides:
The jury, in any action founded on contract,
may allow interest on the principal due, or
any part thereof, and in all cases they
shall find the aggregate of principal and
interest due at the time of the trial, after
allowing all proper credits, payments and
sets-off; and judgment shall be entered for
such aggregate with interest from the date
of the verdict.
W. Va. Code § 56-6-27.

“In this jurisdiction one who withholds

money from the rightful owner on the date when it should be paid
is liable for interest.” Morton v. Godfrey L. Cabot, Inc., 63
S.E.2d 861, 864 (W. Va. 1949) (citation omitted).

“Interest

accrues on a debt from the time it is due, although liability
therefor was in dispute.”

Id. (citation omitted).

Simply put,

“[a] past due debt, certain in amount, bears interest from the
due date until paid.”
Defendants
Morton.

urge

Id. at Syl. Pt. 1.
a

distinction

between

this

Any distinction is one without meaning.

matter

and

Defendants are

correct that Morton involved stipulated facts, waiver of a jury
trial, and submission of the issue to the court in lieu of a
jury.

Here, while no party has waived a jury trial, this Court

has found such a proceeding unnecessary on the issues raised in
Plaintiffs’

motion

as

no

material
22

facts

are

in

dispute

and

CATHER V. EQT

1:17-CV-208

MEMORANDUM OPINION AND ORDER GRANTING PLAINTIFFS’ MOTION FOR
SUMMARY JUDGMENT AS TO DEDUCTIONS [ECF NO. 74]
Plaintiffs

are

entitled

to

judgment

as

a

matter

of

law.

Defendants offer no other reason why Morton and its application
of W. Va. Code § 56-6-27 should not prevail here.
Thus, pursuant to W. Va. Code § 56-6-27, this Court finds
that

Plaintiffs

are

amounts awarded.

entitled

to

specific

interest

on

the

Therefore, Plaintiffs’ motion with respect to

prejudgment interest is GRANTED.
the

prejudgment

interest

The parties did not address

calculation

or

potential

amount

of

interest which may be due on the deductions in their summary
judgment

briefing.

Plaintiffs

are

hereby

ordered

to

submit

additional briefing and their prejudgment interest calculation
within 21 days of entry of this order.

Defendants shall have 14

days after Plaintiffs’ submission to respond with any objections
or alternative calculations.
IV.

CONCLUSION

For the reasons stated above, Plaintiffs’ Motion [ECF No.
74] is GRANTED.
It is so ORDERED.
The Clerk is directed to transmit copies of this Order to
counsel of record.
DATED: August 13, 2019
___________________________
THOMAS S. KLEEH
UNITED STATES DISTRICT JUDGE
23