Bounty Minerals, LLC v. EQT Production Company
Filing
50
MEMORANDUM OPINION AND ORDER GRANTING IN PART AND DENYING IN PART DEFENDANTS MOTIONS TO DISMISS DKT. NO. 25 : The Court GRANTS EQTs motions to dismiss Bountys claims for declaratory judgment, ejectment, slander of title, andbreach of the implied co venant of further exploration and DISMISSES Counts One, Two, Three, Four, and Five of the amended complaint; DENIES EQTs motions to dismiss Bountys claim for breach of the implied covenant of development in Count Six of the amended complaint; and DENIES as MOOT Bountys motion to strike (Dkt. No. 17 ). Signed by Senior Judge Irene M. Keeley on 6/7/18. (jss)
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF WEST VIRGINIA
BOUNTY MINERALS, LLC,
Plaintiff,
v.
CIVIL ACTION NO. 1:17cv219
c/w 1:17cv220
(Judge Keeley)
EQT PRODUCTION COMPANY,
Defendant.
MEMORANDUM OPINION AND ORDER GRANTING IN PART AND DENYING
IN PART DEFENDANT’S MOTIONS TO DISMISS [DKT. NO. 25]1
During a joint scheduling conference in these consolidated
cases on March 12, 2018, the Court GRANTED in part and DENIED in
part the defendant’s motions to dismiss. This Memorandum Opinion
and Order explains the Court’s reasoning in support of that
decision.
I. BACKGROUND
The facts are taken from the amended complaints and, as they
must
be,
are
construed
in
the
light
most
favorable
to
the
plaintiff. See De'Lonta v. Johnson, 708 F.3d 520, 524 (4th Cir.
2013). On November 6, 2017, the plaintiff, Bounty Minerals, LLC
("Bounty"), filed two related cases in the Circuit Court of
Monongalia
County,
West
Virginia,
against
the
defendant,
EQT
Production Company ("EQT") (Dkt. No. 1-3). EQT is the record lessee
1
Unless otherwise noted, citations to docket entries in this
Memorandum Opinion and Order refer to the lead case, Civil No.
1:17cv219.
BOUNTY MINERALS V. EQT PRODUCTION
1:17CV219
MEMORANDUM OPINION AND ORDER GRANTING IN PART AND DENYING
IN PART DEFENDANT’S MOTIONS TO DISMISS [DKT. NO. 25]
of two tracts in which Bounty owns a mineral interest, but Bounty
alleges that the relevant leases have terminated for lack of
production. (Dkt. No. 15 at 2-5). The complaints make claims for
relief based on the alleged lease terminations, including 1)
declaratory judgments that the relevant leases and their amendments
have terminated, 2) ejectment, 3) slander of title, 4) breach of
the implied covenant of further exploration, and 5) breach of the
implied covenant of development.
EQT removed the cases to this Court on December 18, 2017,
based on the Court’s diversity jurisdiction (Dkt. No. 1). On
December 26, 2017, EQT moved to dismiss the complaints (Dkt. No.
5). When Bounty filed amended complaints on January 12, 2018 (Dkt.
No. 15), the Court denied EQT’s motions to dismiss as moot (Dkt.
No. 16). Then, on January 16, 2018, EQT moved to dismiss Bounty’s
amended complaints (Dkt. No. 17). At a joint scheduling conference
on March 12, 2018, the Court consolidated the cases and granted in
part and denied in part EQT’s motions (Dkt. No. 34).
II. STANDARD OF REVIEW
Fed. R. Civ. P. 12(b)(6) allows a defendant to move for
dismissal on the grounds that a complaint does not “state a claim
upon which relief can be granted.” When reviewing a complaint, the
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MEMORANDUM OPINION AND ORDER GRANTING IN PART AND DENYING
IN PART DEFENDANT’S MOTIONS TO DISMISS [DKT. NO. 25]
Court “must accept as true all of the factual allegations contained
in the complaint.” Anderson v. Sara Lee Corp., 508 F.3d 181, 188
(4th Cir. 2007) (quoting Erickson v. Pardus, 551 U.S. 89, 94
(2007)). “While a complaint . . . does not need detailed factual
allegations, a plaintiff’s obligation to provide the ‘grounds’ of
his
‘entitle[ment]
to
relief’
requires
more
than
labels
and
conclusions, and a formulaic recitation of the elements of a cause
of action will not do.” Bell Atl. Corp. v. Twombly, 550 U.S. 544,
555 (2007) (internal citation omitted).
A court is “not bound to accept as true a legal conclusion
couched as a factual allegation.” Papasan v. Allain, 478 U.S. 265,
286 (1986). “[A] complaint must contain ‘enough facts to state a
claim to relief that is plausible on its face.’” Anderson, 508 F.3d
at 188 n.7 (quoting Twombly, 550 U.S. at 547). “A claim has facial
plausibility when the plaintiff pleads factual content that allows
the court to draw the reasonable inference that the defendant is
liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S.
662, 678 (2009). A motion to dismiss “does not resolve contests
surrounding the facts, the merits of a claim, or the applicability
of defenses.” Republican Party of N.C. v. Martin, 980 F.2d 943, 952
(4th Cir. 1992).
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MEMORANDUM OPINION AND ORDER GRANTING IN PART AND DENYING
IN PART DEFENDANT’S MOTIONS TO DISMISS [DKT. NO. 25]
In deciding the motion, the court need not confine its inquiry
to the complaint; it may also consider “documents incorporated into
the complaint by reference, and matters of which a court may take
judicial notice.” Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551
U.S. 308, 322 (2007). “A copy of a written instrument that is an
exhibit to a pleading is a part of the pleading for all purposes.”
Fed. R. Civ. P. 10(c). The court may also consider documents
attached to the motion to dismiss, so long as they are integral to
the complaint and authentic.” Philips v. Pitt Cty. Mem’l Hosp., 572
F.3d 176, 180 (4th Cir. 2009).
III. DISCUSSION
A.
Termination for Lack of Production
In Counts One through Three of the amended complaint, Bounty
seeks a declaratory judgment that the relevant leases and their
amendments have terminated for lack of production and are no longer
enforceable, as well as an order ejecting EQT from the tracts at
issue. (Dkt. No. 15 at 5-6). In its motion to dismiss, EQT argues
that, under West Virginia law, “production is irrelevant when
determining whether a lease with a flat-rate provision or a shut-in
royalty provision is abandoned or terminated" (Dkt. No. 26 at 5).
Given that Bounty has not offered a compelling reason to depart
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MEMORANDUM OPINION AND ORDER GRANTING IN PART AND DENYING
IN PART DEFENDANT’S MOTIONS TO DISMISS [DKT. NO. 25]
from existing precedent in West Virginia and the Fourth Circuit,
the Court agrees with EQT that Bounty’s claims for declaratory
relief and ejectment fail as a matter of law.
1.
Applicable Law
The controlling West Virginia precedent on this matter is
Bruen v. Columbia Gas Transmission Corp., 426 S.E.2d 522 (W. Va.
1992). The habendum clause in that case provided that the lease
would be "for the term of ten years (and so long thereafter as oil
or gas is produced from the land leased and royalty and rentals
paid by lessee therfore)." Id.
at 523 (emphasis supplied in
original). The lease provided for an enumerated royalty for oil, as
well as an "annual rent of $200 for each gas well ‘from the time
and while the gas is marketed." Id. Critically, the lease also
contained the following "flat-rate" provision:
Lessee agrees to pay Lessor Twelve Hundred Dollars
($1200.00) per year net rental until the royalties and
rentals reserved in this lease exceed that amount unless
lease be surrendered before said time as above provided.
Id. at 524.
Although the lessee, Columbia Gas, faithfully tendered the
$1200 annual "net rental,” the lessors alleged that the lease had
terminated due to an "alleged failure to produce oil and gas in
paying quantities." Id. at 523. The Supreme Court of Appeals
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MEMORANDUM OPINION AND ORDER GRANTING IN PART AND DENYING
IN PART DEFENDANT’S MOTIONS TO DISMISS [DKT. NO. 25]
rejected the lessors' argument, concluding that the "quantity of
production is irrelevant" in the case of a flat-rate lease. Id. at
524-25 (citing Goodwin v. Wright, 255 S.E.2d 924 (W. Va. 1979);
Ketchum
v.
Chartiers
Oil
Co.,
5
S.E.2d
414
(W.
Va.
1939);
McCutcheon v. Enon Oil & Gas Co., 135 S.E. 238 (W. Va. 1926);
Bassell v. West Virginia Central Gas Co., 103 S.E. 116 (W. Va.
1920); McGraw Oil Co. V. Kennedy, 64 S.E. 1027 (W. Va. 1909)). The
court further reasoned that the express terms of the lease did not
require any particular amount of production, but instead required
"‘flat' payments of rental in the amount of $1200 per year,
regardless of production." Id. at 525 (emphasis in original). The
court held unequivocally:
If an oil and gas lease contains a clause to continue the
lease for a term "so long thereafter as oil and gas is
produced," but also provides for "flat-rate" rental
payments, then quantity of production is not relevant to
the expiration of the term of the lease if such
"flat-rate" rental payments have been made by the lessee.
Id. at 527.
Subsequent to the decision in Bruen, the Southern District of
West Virginia and the Fourth Circuit have interpreted its holding
quite broadly. For example, in Wellman v. Bobcat Oil & Gas, Inc.,
the lease at issue had a primary term of ten years and secondary
term for "as long thereafter as oil or gas, or either of them, is
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MEMORANDUM OPINION AND ORDER GRANTING IN PART AND DENYING
IN PART DEFENDANT’S MOTIONS TO DISMISS [DKT. NO. 25]
produced from said land." No. 3:10-0147, 2011 WL 6415487, at *2
(S.D.W.Va. Dec. 21, 2011). Much like the lease in Bruen, it further
provided for a 1/8 royalty on oil and a flat-rate payment of
"Seventy Five ($75.00) dollars each three months in advance for gas
from each and every gas well drilled on said premises . . . to be
paid each three months thereafter while the gas from said well is
marketed and produced." Id. Because production from the well was
intermittently
interrupted,
the
plaintiffs
argued
that
the
secondary term had expired, thereby terminating the lease under the
plain language of the habendum clause. The district court was asked
to decide "whether, as a matter of law, the secondary term of the
. . . lease can be terminated by nonproduction of gas." Id. at *3.
Although their lease included a flat-rate provision, the
plaintiffs attempted to distinguish Bruen, arguing that it involved
whether there was production in paying quantities, not "whether
there was any production." Id. at *4 (emphasis added). The Southern
District of West Virginia rejected the plaintiffs' argument:
Bruen is explicit that "quantity of production is
irrelevant." This proposition applies equally to
situations where production is zero and where production
is "non-paying." Additionally, Bruen ratifies several
older cases holding that the lessee of a flat-rate lease
simply has no interest in the production of the leased
well. . . . The case law is clear: a lessee who makes
required payments on a flat-rate mineral lease may avoid
this contractual termination clause of the lease
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MEMORANDUM OPINION AND ORDER GRANTING IN PART AND DENYING
IN PART DEFENDANT’S MOTIONS TO DISMISS [DKT. NO. 25]
agreement even without producing any minerals from the
leased mineral estate.
Id.
On appeal, the Fourth Circuit affirmed the district court's
application of Bruen. In doing so, it acknowledged that the
language of the habendum clause appeared to require production as
a condition of extending the secondary term. The court further
reasoned, however, that under Bruen, the addition of a flat-rate
rental provision modified the application of the habendum clause's
otherwise contrary mandate. Wellman v. Bobcat Oil & Gas, Inc., 524
F. App'x 26, 30-31 (4th Cir. 2013) (unpublished decision).
2.
Application
On its face, this case presents the same circumstances at
issue in Wellman. The habendum clauses in the relevant leases
include language appearing to limit the secondary term as follows:
1) "as long thereafter as oil or gas, or either of them, is
produced"; 2) "as long thereafter as operated by the Lessee in the
search for or production of [minerals]" or being used for gas
storage. But, the parcels are also subject to the following
flat-rate royalty provisions:
Parcel One: "[P]arty of the second part covenants and
agrees . . . to pay one hundred $100.00 Dollars each
three months for gas from each and every gas well drilled
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MEMORANDUM OPINION AND ORDER GRANTING IN PART AND DENYING
IN PART DEFENDANT’S MOTIONS TO DISMISS [DKT. NO. 25]
on said premises, the product of which is marketed and
used off the premises . . . ."
Parcel Two: "[P]arty of the second part covenants and
agrees . . . to pay $87.50 Dollars each three months in
advance for the gas from each and every gas well drilled
on said premises, the product of which is marketed and
used off the premises, while the gas from said well is so
marketed and used."
Under West Virginia law as interpreted by the Fourth Circuit
in Wellman, "[b]ecause the Lease[s] provide[] for the payment of a
flat-rate rental to [Bounty], the quantity of production - whether
high, low, or zero - is utterly irrelevant for determining whether
the secondary term of the Lease[s] expired, again assuming the
payments are in fact made." 524 F. App'x at 31 (emphasis in
original). Indeed, in both of its amended complaints, Bounty
alleges - and thus admits - that EQT has continued to send it
purported flat-rate payments.
Bounty
nonetheless
distinguishable
because
contends
they
deal
that
with
the
"a
cases
well
in
suit
incapable
are
of
production," rather than a well that "was either producing or
indisputably capable of production but shut-in" (Dkt. No. 31 at 1416). Ultimately, this is a distinction without a difference, and
Bounty's arguments regarding the unfavorable nature of this outcome
are not persuasive.
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MEMORANDUM OPINION AND ORDER GRANTING IN PART AND DENYING
IN PART DEFENDANT’S MOTIONS TO DISMISS [DKT. NO. 25]
First, Bounty contends that such a holding would ignore the
plain language of the leases. More particularly, it argues that
language limiting the lessee's vested interest under the habendum
clauses
would
have
no
meaning
if
a
flat-rate
payment
could
nonetheless continue the lease. See Syl. Pt. 3, Dunbar Fraternal
Order of Police, Lodge No. 119 v. City of Dunbar, 624 S.E.2d 586
(W. Va. 2005) ("[S]pecific words or clauses of an agreement are not
to be treated as meaningless, or to be discarded, if any reasonable
meaning can be given them consistent with the whole contract.").
Notably, the same secondary-term limitations were present in Bruen
and Wellman, but did not affect the courts' decisions. See Bruen,
426 S.E.2d at 523, 527; Wellman,
No. 3:10-0147, 2011 WL 6415487,
at *5 (recognizing that the result compelled by Bruen appeared
inconsistent with the language of the habendum clause); Wellman, F.
App'x at 30-31 (reasoning that the provision of a flat-rate payment
modified application of the habendum clause).
Second, Bounty contends that, if the lease does not terminate
when there is no well capable of production during the secondary
term, then 1) EQT can continue the lease as long as it "is willing
to make minimal quarterly payments," and 2) "an operator would not
even need to drill a well before the end of the primary term to
continue the lease" (Dkt. No. 31 at 15-16). The former concern is
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IN PART DEFENDANT’S MOTIONS TO DISMISS [DKT. NO. 25]
eliminated by the implied covenant to develop the leasehold. Under
West
Virginia
law,
a
lessee
simply
cannot
hold
a
lease
in
perpetuity without undertaking reasonable efforts to profit from
the land. See St. Luke's United Methodist Church v. CNG Development
Co., 663 S.E.2d 639 (W. Va. 2008). The latter concern is refuted by
the language of the leases, each of which apply the flat-rate
rental only to gas wells that are drilled on the premises. In other
words, in order for the lessee to hold a well through payment of a
flat-rate rental, there must be an existing well to which the
payment applies.
Finally, Bounty contends that applying the holdings of Bruen
and Wellman to the facts of this case impermissibly fails to
construe the leases "as to promote development and prevent delay
and
unproductiveness,"
interpretations
of
the
and
that
habendum
the
clause
parties'
render
the
differing
contract
ambiguous (Dkt. No. 31 at 16-17). But West Virginia's edict to
"prevent delay and unproductiveness" when interpreting oil and gas
leases existed long before Bruen was decided. See Syl. Pt. 3,
Parish Fork Oil Co. v. Bridgewater Gas Co., 42 S.E. 655 (W. Va.
1902). Moreover, "[t]he mere fact that the parties do not agree to
the construction of a contract does not render it ambiguous." Syl.
Pt. 4, Mylan Labs. Inc. v. Am. Motorists Ins. Co., 700 S.E.2d 518
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MEMORANDUM OPINION AND ORDER GRANTING IN PART AND DENYING
IN PART DEFENDANT’S MOTIONS TO DISMISS [DKT. NO. 25]
(W. Va. 2010) (citing Syl. Pt. 1, Berkeley Co. Pub. Serv. v. Vitro
Corp., 162 S.E.2d 189 (W. Va. 1968)).
B.
Slander of Title
In Count Four, Bounty alleges that EQT’s conduct constitutes
slander of Bounty’s mineral title in the land (Dkt. No. 15 at 6-7).
EQT argues that Bounty has failed to adequately plead the necessary
elements of a claim for slander of title (Dkt. No. 26 at 11).
In West Virginia, the elements of slander of title are (1)
publication of (2) a false statement (3) derogatory to plaintiff's
title (4) with malice (5) causing special damages (6) as a result
of diminished value in the eyes of third parties. Syl. Pt. 3. TXO
Production Corp. v. Alliance Resources Corp., 419 S.E.2d 870, 879
(W. Va. 1992). "As a general rule, ‘wrongfully recording an
unfounded claim to the property of another' satisfies the first
three elements and is actionable ‘provided that the other elements
for slander of title, namely malice and special damages, are
present.'" Bissett v. Chesapeake Appalachia, LLC, No. 5:13CV20,
2013 WL 12213901, at *3 (N.D.W.Va. May 2, 2013) (quoting TXO
Production, 419 S.E.2d at 880).
Here, Bounty has alleged that, "by continuing to publish and
claim an interest under the [leases], which have clearly terminated
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MEMORANDUM OPINION AND ORDER GRANTING IN PART AND DENYING
IN PART DEFENDANT’S MOTIONS TO DISMISS [DKT. NO. 25]
as a matter of law," EQT has committed slander of Bounty's mineral
title in the land (Dkt. No. 15 at 6). For the reasons discussed
above, however, the leases at issue have not been terminated for
lack of production. Because the leases have not been terminated,
and because EQT holds the rights under those leases, there has been
no "publication of a false statement.” Because Bounty cannot
establish the first two elements, it has failed to state a claim
for slander of title.
C.
Implied Covenant of Further Exploration
In Count Five, Bounty alleges that, by “failing to explore
unconventional formations with reasonable diligence,” EQT has
breached the implied covenant of further exploration (Dkt. No. 15
at 7). In its motion to dismiss, EQT persuasively argues that West
Virginia does not recognize a claim for breach of the implied
covenant of further exploration (Dkt. No. 26 at 13-14).
The implied covenant of further exploration requires "a lessee
to ‘further explore' the leased premises to discover and ultimately
produce
from
unproven
or
possibly
deeper
strata.
Under
the
so-called further exploration covenant, a lessee would have an
implied duty (absent express language to the contrary) to explore
potentially productive but unproven strata on the leased premises."
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MEMORANDUM OPINION AND ORDER GRANTING IN PART AND DENYING
IN PART DEFENDANT’S MOTIONS TO DISMISS [DKT. NO. 25]
George A. Bibikos, A Review of the Implied Covenant of Development
in the Shale Gas Era, 115 W. Va. L. Rev. 949, 965 (2013) (noting
that the implied covenant of further exploration is "not widely
recognized as a separate covenant and not adopted in . . . West
Virginia").
Notably, Bounty has failed to identify any case in which a
West Virginia court has expressly recognized the implied covenant
of
further
exploration.
Instead,
it
cites
St.
Luke's
United
Methodist Church v. CNG Development Co., to argue that West
Virginia recognizes an implied covenant to further explore based on
the Supreme Court's passing mention of operators' "obligation to
explore, develop, and produce." 663 S.E.2d 639, 646 (W. Va. 2008).
As discussed further below, in St. Luke's, the Supreme Court of
Appeals affirmed the existence of an implied covenant to develop.
See id. at 648 (holding that the "equitable remedy of partial
rescission is an appropriate remedy to be considered if either a
breach of the implied covenant of further development or undue
hardship can be established and the trial court is convinced that
monetary damages alone are an insufficient remedy") (emphasis
added), but did not recognize, expressly or otherwise, distinct
implied covenant to further explore.
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MEMORANDUM OPINION AND ORDER GRANTING IN PART AND DENYING
IN PART DEFENDANT’S MOTIONS TO DISMISS [DKT. NO. 25]
This Court declines to conclude that, despite the Supreme
Court's silence on the issue, West Virginia would be likely to
recognize an implied covenant of further exploration. At bottom,
there is no need to maintain a separate cause of action based on an
implied covenant to further explore where, as here, an implied
covenant to develop exists. In fact, it is for that very reason
that
other
courts
considering
the
question
have
declined
to
recognize a separate covenant of further exploration. See, e.g.,
Alford v. Collins-McGregor Operating Co., 2018 WL 321611, at *3
(Ohio Jan. 3, 2018) (declining to recognize a covenant of further
exploration and noting that "[a]lthough the Landowners have an
interest
in
sufficiently
the
development
protected
by
the
of
the
implied
land,
that
covenant
interest
of
is
reasonable
development and does not require recognition of a new implied
covenant to explore further").
Moreover, as EQT has argued, the covenant to further explore
is not without controversy because, under the covenant, "there is
no need for the lessor to prove that further exploration would be
profitable" and is therefore speculative in nature. See, e.g.,
Mitchell v. Amerada Hess Corp., 638 P.2d 441, 449 (Okla. 1981)
(noting the "speculative burden the offered covenant would place on
lessees" and declining to recognize it).
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D.
Implied Covenant of Development
In its final claim for relief, Bounty alleges that, even
without considering unconventional formations, EQT has breached the
implied covenant of development by “severely fail[ing] to develop
the leasehold[s]” (Dkt. No. 15 at 8). EQT contends that the implied
covenant of development is not applicable to flat-rate leases (Dkt.
No. 26 at 14-17).
In St. Luke's United Methodist Church v. CNG Development Co.,
the Supreme Court of Appeals reaffirmed the longstanding existence
of an implied covenant to develop. 663 S.E.2d 639 (W. Va. 2008).
There, "the three oil and gas wells that were drilled on the leased
property [were] marginally productive." Id. at 641. Despite their
concession that there had been continuous production that held the
lease throughout its secondary term, the lessors argued that the
lessee had breached the implied covenant of development by not
drilling additional wells. Id. at 643.
The Supreme Court of Appeals found that the basis for implied
covenant was well reasoned:
[T]his covenant requires that "when the existence of
either of these valuable mineral substances [oil and gas]
in paying quantities becomes apparent from operations on
the premises leased or on adjoining lands, the lessee
shall drill such number of wells as in the exercise of
sound judgment he may deem reasonably necessary to secure
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IN PART DEFENDANT’S MOTIONS TO DISMISS [DKT. NO. 25]
either oil or gas or both, for the mutual advantage of
the owner of the land and of himself as operator under
the lease; also for the protection of the lands leased
from drainage through wells on adjoining or contiguous
lands."
Id. at 644 (quoting Jennings v. S. Carbon Co., 80 S.E. 368, 369 (W.
Va. 1913). A lessor may particularly enforce the covenant when he
can prove that "operators for oil and gas of ordinary prudence and
experience in the same neighborhood under similar conditions have
been proceeding successfully with the further development of their
lands or leases, and the further fact that additional wells would
likely inure to the mutual profit of both lessors and lessee." Id.
at 643 (quoting Adkins v. Huntington Development & Gas Co., 168
S.E. 366, 369 (W. Va. 1933)).
Thus, at bottom, the implied covenant of development obligates
the lessee to do what is reasonable to obtain a profit for itself
and the lessor. See id. at 645 (quoting Brewster v. Lanyon Zinc.
Co., 140 F. 801, 814 (8th Cir. 1905)). Underlying the covenant is
the desire to prevent lessees from holding a lease for purely
speculative purposes, while another party stands ready to develop
the leasehold. Id. at 645-46 (citing Parish Fork Oil Co. v.
Bridgewater Gas Co., 42 S.E. 655, 660 (W. Va. 1902); Steelsmith v.
Gartlan, 29 S.E. 978 (W. Va. 1898)). In St. Luke's, given that the
lessee already had a vested interest and the parties appeared to
17
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agree that further development would be beneficial, the Supreme
Court
of
Appeals
remanded
the
case
to
give
the
lessee
"an
opportunity to further develop the property." Id. at 647.
Here, Bounty has squarely alleged that EQT has breached its
implied covenant to develop the leaseholds. According to Bounty,
"operators for oil and gas or ordinary prudence and experience in
the
same
general
vicinity,
or
neighborhood,
under
similar
conditions have been proceeding successfully with the further
development of their land or leases" (Dkt. No. 15 at 8). It further
alleges that "additional wells on the Land would likely inure to
the mutual profit of both Bounty and EQT." Id. Under the Supreme
Court of Appeals' articulation, Bounty has plainly stated a claim
that EQT breached the implied duty to develop.
Nonetheless,
pointing
to
the
Supreme
Court
of
Appeals'
unpublished memorandum decision in Smith v. Chestnut Ridge Storage,
LLC, EQT contends that the implied covenant to develop does not
apply to its flat-rate lease. In Smith, the parties not only agreed
that secondary term would extend "as long [after the primary term]
as the said land is operated by Lessee in the production of oil and
gas," but also "agreed that Lessee may drill or not drill on said
land as it may elect." No. 14-0136, 2014 WL 6607569, at *1 (W. Va.
2014) (emphasis added). The parties further agreed that, "in lieu
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of all delay rental, shut-in royalty or royalty due," the lessee
could tender "an annual rental" for "storage and storage protection
rights." Id. at *2. Given the parties' agreement, the Supreme Court
of Appeals concluded that the lessors had expressly waived the
implied covenant of development, and also that they had impliedly
waived it by agreeing "to payment in a form other than royalties."
Id. at *4.
The Court is not persuaded by EQT's argument that Smith
controls this case. First, the leases at issue in this case contain
no express waiver of the implied covenant, such as that the lessee
"may drill or not drill . . . as it may elect." Second, the
flat-rate payments contemplated by the leases simply are not
"payment in a form other than . . . royalties from production." Id.
at *4. Unlike Smith, where the alternate payments were for use of
the leasehold for gas storage, the flat-rate payments in this case
are listed with other "royalty" payments and are directly tied to
the production of gas; the payment is made on a per-well basis.
Moreover, applying the implied covenant to develop to a
flat-rate lease is not inconsistent with the holding in Bruen that,
"where a flat-rate lease is involved, quantity of production is
irrelevant to the continuation of the lease." The lease at issue in
St. Luke's included a flat-rate provision, and the Supreme Court of
Appeals nonetheless applied the covenant. Brief of Appellant, St.
19
BOUNTY MINERALS V. EQT PRODUCTION
1:17CV219
MEMORANDUM OPINION AND ORDER GRANTING IN PART AND DENYING
IN PART DEFENDANT’S MOTIONS TO DISMISS [DKT. NO. 25]
Luke's, No. 33527, 2008 WL 952951, at *2 (W. Va. 2008). This
holding is consistent with usual application of the covenant, which
requires further development to protect from drainage despite the
fact that minimal amounts of production would otherwise hold a
lease. See, e.g., Adkins, 168 S.E. at 369.
IV. CONCLUSION
For the reasons discussed, the Court:
•
GRANTS EQT’s motions to dismiss Bounty’s claims for
declaratory judgment, ejectment, slander of title, and
breach of the implied covenant of further exploration and
DISMISSES Counts One, Two, Three, Four, and Five of the
amended complaint;
•
DENIES EQT’s motions to dismiss Bounty’s claim for breach
of the implied covenant of development in Count Six of
the amended complaint; and
•
DENIES as MOOT Bounty’s motion to strike (Dkt. No. 17).
It is so ORDERED.
The Court directs the Clerk to transmit copies of this
Memorandum Opinion and Order to counsel of record.
DATED: June 7, 2018.
/s/ Irene M. Keeley
IRENE M. KEELEY
UNITED STATES DISTRICT JUDGE
20
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