Trans Energy, Inc. et al v. EQT Production Company
Filing
108
MEMORANDUM OPINION AND ORDER DENYING 104 DEFENDANT'S MOTION TO DISMISS FOR LACK OF SUBJECT MATTER JURISDICTION AND FAILURE TO JOIN AN INDISPENSABLE PARTY. This Court will enter a separate order scheduling a status and scheduling conference such that this Court may consider an appropriate scheduling order for this civil action. Signed by Senior Judge Frederick P. Stamp, Jr. on 6/7/2016. (copy to counsel via CM/ECF) (nmm)
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF WEST VIRGINIA
TRANS ENERGY, INC.,
a Nevada corporation,
PRIMA OIL COMPANY, INC.,
a Delaware corporation, and
REPUBLIC PARTNERS VI, LP,
a Texas limited partnership,
Plaintiffs,
v.
Civil Action No. 5:13CV93
(STAMP)
EQT PRODUCTION COMPANY,
a Pennsylvania corporation,
Defendant.
MEMORANDUM OPINION AND ORDER
DENYING DEFENDANT’S MOTION TO DISMISS FOR
LACK OF SUBJECT MATTER JURISDICTION AND
FAILURE TO JOIN AN INDISPENSABLE PARTY
After conducting limited discovery to determine whether a nondiverse party is indispensable to this civil action, the defendant
filed a motion to dismiss under Federal Rule of Civil Procedure
12(b)(1) and (7) for lack of subject matter jurisdiction and
failure to join an indispensable party. For the following reasons,
the defendant’s motion is denied.
I.
Procedural History
The parties claim competing interests to the gas rights of a
property known as the Robinson lease.
The dispute arises from the
plaintiffs’ purchase of two oil and gas leases known as the
Robinson and Blackshere leases from Cobham Gas Industries, Inc.
(“Cobham”).
ECF No. 1 at 3; Trans Energy, Inc. v. EQT Prod. Co.,
No. 1:11CV75, 2012 WL 5906649, *1 (N.D. W. Va. Nov. 26, 2012).
The
Robinson and Blackshere leases were initially conveyed to South
Penn Oil Company (“South Penn”) in 1892.
unrecorded
indentures
with
Carnegie
South Penn entered into
Natural
Gas
Company
(“Carnegie”) and Hope Natural Gas Company (“Hope”) purporting to
sever South Penn’s natural gas and oil rights in the leases giving
Carnegie the oil rights and Hope the gas rights.
EQT was the
successor in interest to Carnegie and Hope.
Pennzoil Products Company (“Pennzoil”), a successor entity of
South Penn, assigned its rights in the Robinson and Blackshere
leases to Cobham in 1996.
The assignment was properly recorded.
In 2004, Prima Oil Company (“Prima”), a wholly owned subsidiary of
Trans Energy, Inc. (“Trans Energy”), acquired Cobham’s interest in
the leases through a properly recorded instrument.
Trans Energy
and Prima then entered into an agreement with Republic Partners VI,
LP (“Republic Partners”) to explore and develop a set of oil and
gas leases, including the Blackshere and Robinson leases. In 2010,
Republic Energy Ventures, LLC (“REV”) replaced Republic Partners in
that agreement.
In 2011, Trans Energy, Prima, Republic Partners, and REV filed
suit against EQT, seeking declaratory judgment to resolve the
parties’
competing
interests
Blackshere Litigation”).
in
the
Blackshere
Lease
(“the
This Court granted summary judgment for
the plaintiffs, finding that Prima was a bona fide purchaser of the
2
Blackshere Lease rights, thus, extinguishing EQT’s interest in the
lease.
On appeal, EQT argued for the first time that REV was a
non-diverse
party
jurisdiction.
and
that
this
Court
lacked
subject
matter
The United States Court of Appeals for the Fourth
Circuit affirmed this Court’s grant of summary judgment for the
plaintiffs, but vacated the judgment with prejudice as to REV.
Trans Energy, Inc. v. EQT Prod. Co., 743 F.3d 895, 907 (2014).
The
Court concluded that REV was a non-diverse but dispensable party,
and dismissed REV to maintain subject matter jurisdiction.
Id. at
901-02.
While the appeal was pending, EQT filed a civil action in West
Virginia state court seeking declaratory judgment, asserting that
it holds title to the Robinson lease.
EQT named as defendants
Trans Energy, Prima, Republic Partners, and REV.
Trans Energy,
Prima, and Republic Partners, but not REV, then filed this civil
action seeking declaratory judgment, asserting that they hold title
to the Robinson lease.
EQT filed a motion to dismiss this civil
action, arguing that this Court should abstain from exercising
subject matter jurisdiction based on the parallel state court
action.
This Court denied EQT’s motion to dismiss and stayed this
action pending the Fourth Circuit’s decision in the Blackshere
Litigation.
After the Fourth Circuit affirmed this Court’s decision in the
Blackshere Litigation, EQT filed a motion to dismiss this civil
3
action for failure to join REV as an indispensable party.
This
Court denied EQT’s motion without prejudice and ordered limited
discovery on the issue of whether REV is an indispensable party.
The parties have now completed discovery, and EQT has filed a
renewed motion to dismiss for lack of subject matter jurisdiction
and for failure to join REV as an indispensable party.
II.
Facts
In 2007, the plaintiffs entered into an agreement entitled
“Farm-Out and Area of Joint Development Agreement” (“AJDA”). Under
the AJDA, Republic Partners would assist in the exploration and
development of certain oil and gas leases held by Trans Energy and
Prima (“the Subject Leases”), which included the Robinson and
Blackshere leases.
ECF No. 106-3.
This arrangement was divided
into two phases: exploration and development.
Id. at 2-4.
After
completing work in each phase, Trans Energy and Prima would convey
interests in the Subject Leases to Republic Partners.
Id. at 3.
Specifically, § 5(c) of the AJDA provided that upon the
“completion of an exploration well by [Republic Partners],” Trans
Energy would convey to Republic Partners a 50% working interest in
the well and at least a 40% net revenue interest in the well.
Id.
Section 6(a) provided that Republic Partners could then enter the
“Development Phase,” at which point Trans Energy would convey to
Republic Partners a 50% working interest and a 40% net revenue
interest in the remainder of Trans Energy’s interests in the
4
Subject Leases.
Id.
In January 2009, after Republic Partners
completed the exploration phase, Trans Energy conveyed to Republic
Partners a 50% working interest and a 40% net revenue interest in
all of the Subject Leases, including the Robinson and Blackshere
leases.
ECF No. 104-4 at 1.
In 2010, Republic Partners and REV entered into a series of
agreements providing that REV would replace Republic Partners in
its operations under the AJDA.
The first of these agreements was
a “Contribution Agreement” on July 15, 2010, summarizing Republic
Partners and REV’s intent to transfer certain of Republic Partners’
assets
and
rights
and
obligations
under
the
AJDA
to
REV
in
consideration of membership in REV, a limited liability company.
ECF No. 104-5 at 4.
Section 1.1 provided that at closing, but
effective April 1, 2010, Republic Partners would transfer the
following to REV: (1) Republic Partners’ interests in all Subject
Leases excluding certain “Retained Assets” and certain “Option
Assets;” (2) Republic Partners’ rights and interests under the
AJDA; and (3) Republic Partners’ right to acquire overriding
royalty interests in certain of the Subject Leases identified in
Exhibit A-3 to the Contribution Agreement, which included the
Robinson and Blackshere leases.
Id. at 4-6; ECF No. 106-8 at 23.
Section 3.4 of the Contribution Agreement expressly identified the
Robinson and Blackshere leases as “Option Assets” and provided that
the leases were not subject to transfer under § 1.1 in recognition
5
of EQT’s competing claim to title of those leases.
at 12-13; ECF No. 106-8 at 40.
ECF No. 104-5
Under § 3.4, Republic Partners
granted an irrevocable option to REV to purchase Republic Partners’
rights in the Robinson and Blackshere leases within one year of
each lease’s title being cleared.
ECF No. 104-5 at 12; ECF No.
106-8 at 40. At that time, Republic Partners’ only interest in the
Robinson and Blackshere leases were the 50% working interests and
40% net revenue interests in each conveyed by Trans Energy in 2009.
ECF No. 104-4 at 1.
On July 16, 2010, Republic Partners assigned all of its rights
and
delegated
all
of
its
obligations
under
the
AJDA
to
REV
“together with [Republic Partners’] interest in the acreage and
other assets associated with [Republic Partners’] rights pursuant
to such AJDA” (“the Assignment of the AJDA”).
ECF No. 104-6.
This
document does not cross-reference the Contribution Agreement.
On
the same day and in recognition of the Assignment of the AJDA, the
plaintiffs agreed to a fourth amendment to the AJDA, in which Trans
Energy consented to Republic Partners’ assignment and delegation to
REV.
ECF No. 104-7 at 1.
Additionally, on the same day, Trans
Energy conveyed to REV a 50% overriding royalty interest in certain
of the Subject Leases, including the Robinson and Blackshere
leases.
ECF No. 106-12 at 1, 11.
On July 30, 2010, but effective April 1, 2010, Republic
Partners and REV signed a closing agreement for the Contribution
6
Agreement and the Assignment of the AJDA (“the Closing Agreement”).
ECF No. 106-15 at 1.
The Closing Agreement was expressly made
subject to the terms of the Contribution Agreement and provided
that “[i]f there is a conflict between the terms of [the Closing]
Agreement and the terms of the Contribution Agreement, the terms of
the Contribution Agreement shall control.”
Id. at 5.
In the
Closing Agreement, Republic Partners conveyed its interests in
certain of the Subject Leases identified in Exhibits A-1 and A-2 to
the Closing Agreement, neither of which included the Robinson or
Blackshere leases.
Id. at 2.
Republic Partners also conveyed its
right under the AJDA to acquire overriding royalty interests in
certain of the Subject Leases listed in Exhibits A-1 and A-3 to the
Closing Agreement, which included the Robinson and Blackshere
leases.
Id. at 2, 32.
Republic Partners expressly retained its
interests in the leases listed as “Retained Assets” and “Option
Assets” in the Contribution Agreement.
Id. at 3.
After the
Blackshere Litigation was resolved in the plaintiffs’ favor, REV
exercised its option under the Contribution Agreement to acquire
Republic Partners’ interests in the Blackshere Lease.
See ECF No.
106-13.
III.
Applicable Law
Federal Rule of Civil Procedure 19 establishes a two-step
inquiry to determine whether an action may continue without the
joinder of additional parties.
Nat’l Union Fire Ins. Co. v. Rite
7
Aid. of S.C., Inc., 210 F.3d 246, 249 (4th Cir. 2000).
The Court
must first determine whether the absent party is “necessary” to the
action.
Fed. R. Civ. P. 19(a).
A party is “necessary” if in the
party’s absence, the court cannot accord complete relief among
existing parties,” or if the party claims an interest relating to
the action and disposing of the action in the party’s absence would
“impair or impede the person’s ability to protect the interest” or
“leave an existing party subject to substantial risk of incurring
double, multiple, or otherwise inconsistent obligations because of
the interest.”
Fed. R. Civ. P. 19(a)(1).
necessary party if feasible.
The court must join the
Fed. R. Civ. P. 19(a).
“[W]hen joinder of [the] part[y] is not feasible because of,
among other things, nondiversity, a court must decide whether the
action should proceed among the parties before it, or should be
dismissed because the absent party is indispensable.”
Trans
Energy, Inc. v. EQT Prod. Co., 743 F.3d 895, 901 (4th Cir. 2014)
(internal quotation marks omitted).
To determine whether a party
is indispensable, courts must consider: (1) “to what extent a
judgment rendered in the person’s absence might be prejudicial to
the person or those already parties;” (2) “the extent to which, by
protective provisions in the judgment, by the shaping of relief, or
other measures, the prejudice can be lessened or avoided;” (3)
“whether a judgment rendered in the person’s absence will be
adequate;” and (4) “whether the plaintiff will have an adequate
8
remedy if the action is dismissed for nonjoinder.” Id. “Dismissal
of a case is a drastic remedy, . . . which should be employed only
sparingly.”
Teamsters Local Union No. 171 v. Keal Driveaway Co.,
173 F.3d 915, 918 (4th Cir. 1999).
The party moving for dismissal
under Federal Rule of Civil Procedure 12(b)(7) bears the burden of
showing that an absent party is indispensable.
5C Charles Alan
Wright, Arthur Miller & Edward H. Cooper, Federal Practice and
Procedure § 1359 (3d. ed. 1998).
IV.
Discussion
It is undisputed that complete diversity exists between the
plaintiffs and EQT. The parties also agree that REV is a necessary
party under Rule 19(a), and that REV and EQT are both citizens of
Pennsylvania such that joinder of REV is not feasible because
diversity jurisdiction would be destroyed.
Thus, the sole issue
here is whether REV is indispensable to this civil action.
EQT
argues that REV is an indispensable party because (1) REV actually
holds all of Republic Partners’ interest in the Robinson lease, (2)
REV was engaged in a partnership with the plaintiffs to develop oil
and gas leases including the Robinson lease, and (3) REV and
Republic Partners are alter egos.
The plaintiffs argue that the
Fourth Circuit’s holding in the Blackshere Litigation regarding
REV’s dispensability has an issue preclusive effect here.
To
proceed, this Court must first unravel the transactions described
9
above and determine what interest REV actually holds in the
Robinson lease.
A.
REV’s Interest in the Robinson Lease
EQT argues that Republic Partners transferred to REV its
working and net revenue interests in the Robinson lease, giving REV
those interests along with an overriding royalty interest in the
Robinson lease.
Specifically, EQT argues that Republic Partners
assigned those interests to REV through the Contribution Agreement
and through the Assignment of the AJDA.
The plaintiffs argue that
REV has only an overriding royalty interest in the Robinson lease
and a contingent option to acquire Republic Partners’ interests in
the lease.
This Court agrees.
At the time of the Contribution Agreement and the Assignment
of the AJDA, Republic Partners held a 50% working interest and a
40% net revenue interest in the Robinson lease, which Trans Energy
conveyed to Republic Partners in 2009.
ECF No. 104-4 at 1.
In the
Contribution Agreement and the Closing Agreement, Republic Partners
expressly did not transfer its interest in the Robinson and
Blackshere leases to REV.
40; ECF No. 106-15 at 3.
ECF No. 104-5 at 12; ECF No. 106-8 at
Rather, Republic Partners expressly
conveyed an option to purchase its interests in the Robinson and
Blackshere leases within one year of title being cleared.
104-5 at 12.
ECF No.
Further, REV exercised its option to purchase
Republic Partners’ interests in the Blackshere lease after the
10
Blackshere
Republic
Litigation
Partners
and
ended,
REV
ECF
No.
understood
106-13,
that
indicating
Republic
that
Partners’
interests in the Robinson and Blackshere leases had not been
conveyed to REV through their various agreements.
Partners
never
conveyed
to
REV
its
working
Thus, Republic
and
net
revenue
interests in the Robinson lease.
This Court finds that the only interests REV holds in the
Robinson lease are the 50% overriding royalty interest Trans Energy
directly conveyed to it in 2010, and the option to acquire Republic
Partners’ 50% working interest and 40% net revenue interest in the
Robinson lease within one year of title clearance, contingent upon
title being cleared.
B.
Issue Preclusion
The plaintiffs argue that the Fourth Circuit’s conclusion in
the Blackshere Litigation that REV was not indispensable to that
litigation is binding in this civil action under the doctrine of
res judicata.
Specifically, the plaintiffs argue that because REV
held only an overriding royalty interest in both the Blackshere and
Robinson leases, the Fourth Circuit’s conclusion that REV was not
indispensable in the Blackshere Litigation has an issue preclusive
effect here.
Issue preclusion “bars successive litigation of an issue of
fact or law actually litigated and resolved in a valid court
determination essential to the prior judgment, even if the issue
11
recurs in the context of a different claim.”
Taylor v. Sturgell,
553 U.S. 880, 892 (2008) (internal quotation marks omitted).
For
issue preclusion to apply, the proponent must demonstrate that: (1)
“the issue or fact is identical to the one previously litigated;”
(2)
“the
issue
or
fact
was
actually
resolved
in
the
prior
proceeding;” (3) “the issue or fact was critical and necessary to
the judgment in the prior proceeding;” (4) “the judgment in the
prior proceeding is final and valid;” and (5) “the party to be
foreclosed by the prior resolution of the issue or fact had a full
and fair opportunity to litigate the issue or fact in the prior
proceeding.” In re Microsoft Corp. Antitrust Litig., 355 F.3d 322,
326 (4th Cir. 2004).
In the Blackshere Litigation, the Fourth Circuit determined
that REV was not an indispensable party based on its overriding
royalty interest in the Blackshere lease.
at 900-02.
necessary
Trans Energy, 743 F.3d
The Fourth Circuit’s determination was critical and
to
the
judgment
because
a
finding
that
REV
was
indispensable would have deprived the court of subject matter
jurisdiction.
Id. at 901.
EQT had a full and fair opportunity to
litigate the issue, as EQT actually argued on appeal that REV was
indispensable.
valid.
Id. at 900-01.
The judgment is now final and
However, the factual and legal issues in these matters are
not identical.
12
In the Blackshere Litigation, it was determined that Trans
Energy and Prima transferred to REV “an overriding royalty interest
in
whatever
production
Republic
Partners
obtains
from
the
[Blackshere] lease.” Trans Energy, 743 F.3d at 899; see also Trans
Energy, Inc., 2012 WL 5906649, *1, 4.
The question before the
Fourth Circuit in the Blackshere Litigation was whether REV was
indispensable to those proceedings to determine title to the
Blackshere lease.
Trans Energy, 743 F.3d at 900-02.
Here, the
question is whether REV is indispensable to these proceedings to
determine title to the Robinson lease.
Even if both leases follow
the same chain of title and involve the same agreements between the
plaintiffs and REV, the fact that these civil actions deal with
separate leases means that the factual and legal issues involved
are not identical.
Thus, issue preclusion does not apply to this
Court’s determination of whether REV is indispensable to this civil
action.
However, for the following reasons, this Court finds that
REV is not indispensable and need not be joined as a plaintiff.
C.
REV is Not Indispensable
Based on this Court’s finding that the only interests REV
holds in the Robinson lease are a 50% overriding royalty interest
and a contingent option to acquire Republic Partners’ interests in
the lease, this Court finds that REV is not an indispensable party
in this civil action. First, just as in the Blackshere Litigation,
entry of judgment in this civil action without REV’s presence will
13
not prejudice REV or the parties.
The plaintiffs will adequately
represent REV’s interest in this dispute, as the plaintiffs will
presumably vigorously argue that they have title to the Robinson
lease.
EQT will not be prejudiced by having to defend its claimed
title to the Robinson lease in REV’s absence.
At worst, if EQT
prevails in this civil action, it may need to file a separate civil
action against REV to apply the judgment to REV under principles of
res judicata, but this would hardly be prejudicial.
Second, any
potential prejudice to the parties or REV could be avoided by
fashioning a protective provision in the judgment if any prejudice
becomes apparent.
Third, any judgment entered without REV’s
presence will be adequate to resolve the parties’ competing claims
to title.
Fourth, if this Court dismissed this civil action for
non-joinder, the plaintiffs would have an adequate remedy in the
parallel state litigation, but this factor does not weigh heavily
in favor of dismissal.1
Further, it is significant that the Fourth
Circuit concluded in the Blackshere Litigation that REV was not an
indispensable party based on its overriding royalty interest in the
Blackshere lease.
Trans Energy, 743 F.3d at 901-02.
This Court
finds that neither the parties nor REV will be prejudiced by REV’s
1
This Court notes that EQT filed
judgment action regarding title to the
Circuit Court for Wetzel County, West
plaintiffs’ filing the complaint in this
this Court is unaware of the status of the
14
a parallel declaratory
Robinson lease in the
Virginia prior to the
civil action. However,
state court proceedings.
absence and, thus, REV is not an indispensable party.
This civil
action will not be dismissed for non-joinder.
D.
EQT’s Partnership Theory
EQT
argues
that,
regardless
of
whether
REV
is
itself
indispensable, Trans Energy, Prima, Republic Partners, and REV were
engaged in a partnership to explore and develop the Subject Leases
under the AJDA.
EQT argues that this “partnership” is the real
party in interest regarding the plaintiffs’ claim to title of the
Robinson lease because the Subject Leases are partnership property.
Accordingly, EQT argues that the partnership is an indispensable
party to this civil action, but that joinder is not feasible
because the partnership is non-diverse based on REV’s citizenship.
“[A] federal court must disregard nominal or formal parties
and rest jurisdiction only upon the citizenship of real parties to
the controversy.”
Navarro Sav. Ass’n v. Lee, 446 U.S. 458, 461
(1980). Where partners file suit in their own names to enforce the
partnership’s rights, the partnership is the real party in interest
and must be joined if feasible.
See Cunningham v. BHP Petroleum
Great Britain PLC, 427 F.3d 1238, 1241-42, 1244 (10th Cir. 2005)
(approving district court’s determination that the real party in
interest was the plaintiffs’ partnership, that the partnership was
indispensable, and that joinder was not feasible because the
partnership was non-diverse). However, no partnership exists here.
15
First, the AJDA did not create a partnership.
Under West
Virginia law, “the association of two or more persons to carry on
as co-owners a business for profit forms a partnership, whether or
not the persons intend to form a partnership.”
W. Va. Code
§ 47B-2-2(a). To determine whether a partnership has been created,
courts must apply the following rules:
(1) Joint tenancy, tenancy in common, tenancy by the
entireties, joint property, common property, or part
ownership does not by itself establish a partnership,
even if the co-owners share profits made by the use of
the property.
(2) The sharing of gross returns does not by itself
establish a partnership, even if the persons sharing them
have a joint or common right or interest in the property
from which the returns are derived.
(3) A person who receives a share of the profits of a
business is presumed to be a partner in the business,
unless the profits were received in payment[] [of some
unrelated obligation to the person]. . . .
Id. § 47B-2-2(c).
Under the AJDA, the plaintiffs agreed that Republic Partners,
and subsequently REV, would provide services in the form of
exploration and development of the Subject Leases.
In exchange,
Trans Energy and Prima would convey to Republic Partners and REV
certain interests in the Subject Leases.
Trans Energy and Prima
conveyed to Republic Partners working interests and net revenue
interests in the Subject Leases and conveyed to REV overriding
royalty interests in certain of the Subject Leases. The plaintiffs
and REV’s interests in the Subject Leases constitute tenancies in
16
common as to each lease, and each lease which provides for a
payment of a portion of revenues generated from production on each
lease.
There is no provision for the sharing of profits or losses
in the AJDA.
Nor are there provisions creating a management or
business structure.
While EQT argues that the plaintiffs have
pooled their resources and expertise into developing the Subject
Leases under the AJDA, under West Virginia Code § 47B-2-2(c), that
arrangement is not sufficient to create a partnership because it
does not provide for the co-ownership of a business in which the
parties share management authority and profits and losses.
See
Armor v. Lantz, 535 S.E.2d 737, 743-45 (W. Va. 2000) (examining
precedent providing that revenue sharing without more does not
create a joint venture); Bowers v. Wurzburg, 528 S.E.2d 475, 484-85
(W. Va. 1999) (concluding that “the mere existence” of an agreement
between a landlord and tenant-store wherein the tenant-store would
pay the landlord two percent of its gross sales along with rent
does not “automatically create[] a joint venture”); Kerns v. Slider
Augering & Welding, Inc., 505 S.E.2d 611, 619 (W. Va. 1997)
(concluding that mining company conducting operations for another
firm and paying that firm “a per-ton price for the coal extracted”
did not constitute an agreement to share profits and losses to
create a joint venture).
Second, the plaintiffs and REV are not engaged in an implied
mining partnership.
Under West Virginia law, a mining partnership
17
is formed “where tenants in common of . . . [mineral] leases . . .
actually engage in working the same, and share, according to the
interest of each, the profit and loss.” Childers v. Neely, 34 S.E.
828, 829 (W. Va. 1899) (emphasis added).
Thus, for a mining
partnership to form: (1) the parties must be “tenants in common or
joint tenants of a[] [mineral] lease,” Valentine v. Sugar Rock,
Inc., 766 S.E.2d 785, 796 (W. Va. 2014) (internal quotation marks
omitted); (2) the parties must have actually engaged in cooperative
work on the ground “for the purpose of extracting minerals” from
the mineral lease, id. at 797; and (3) the parties must “share,
according to the interest of each, the profit and loss.” Childers,
34 S.E. at 829; see also Kerns, 505 S.E.2d at 619 (concluding that
mining company conducting operations for another firm and paying
that
firm
“a
per-ton
price
for
the
coal
extracted”
did
not
constitute an agreement to share profits and losses to create a
joint venture). Because co-ownership of the subject mineral rights
is imperative, a mining partnership exists on a lease-by-lease
basis
according
to
the
particular
lease
being
worked.
See
Valentine, 766 S.E.2d at 793-95 (explaining that it is the shared
ownership and use of a particular mineral lease between persons
that creates a mining partnership).
The plaintiffs and REV are co-tenants in the Robinson lease,
but they do not share profits derived from production.
All of the
plaintiffs’ interests are in the revenue from production on the
18
lease, and do not provide for profit and loss sharing.
While
Republic Partners must bear the cost of its own operations in
exploring and developing the leases, that does not constitute
profit and loss sharing because only Republic Partners bears those
costs.
But even if this constitutes a share of losses, Republic
Partners does not share in profits, but only revenue.
Further,
even if a partnership exists as to the plaintiffs, REV would not be
a partner because REV’s overriding royalty interest is a passive
interest in the Robinson lease, as it is a right only to a share of
the revenue from production.
Third, even if a partnership exists and REV is a partner, the
hypothetical partnership would have no interest in the Robinson
lease.
Under the West Virginia Code §§ 47B-2-3 and 47B-2-4, the
Subject Leases would not be partnership property because they are
not held in the hypothetical partnership’s name or in the name of
one of the hypothetical partners in their capacity as a partner.
See W. Va. Code § 47B-2-4(a).
Nevertheless, EQT argues that Trans
Energy and Prima contributed the Subject Leases under the AJDA to
the hypothetical partnership. However, the Subject Leases were not
contributed to a common account and are not held in the name of a
separate
entity.
Rather,
the
plaintiffs
and
REV
each
hold
interests in the Subject Leases in their own names, and the AJDA
simply
provided
for
the
exchange
of
those
interests
consideration of work done to explore and develop the leases.
19
in
Assuming
that
the
hypothetical
partnership
is
a
mining
partnership, that partnership could not possibly hold title to the
Subject Leases as partnership property.
Under West Virginia law,
a mining partnership is a legal fiction and the partnership does
not exist as a separate entity.
Valentine, 766 S.E.2d at 793-95.
Further, an essential element to implying a mining partnership is
that the partners hold title in a mineral lease as co-tenants,
which precludes any separate entity from holding title to that
mineral lease.
Id. at 796.
Here, title to the Robinson lease is
in the name of Trans Energy and Prima, with working and net revenue
interests in Republic Partners’ name and an overriding royalty
interest in REV’s name.
Thus, any implied partnership would not
have an interest in the Robinson lease.
Further,
any
hypothetical
partnership
indispensable party to this civil action.
would
not
be
an
Any interest that a
hypothetical partnership, mining or general, would have in this
litigation would be fully vindicated by the plaintiffs who actually
hold interests in the Robinson lease.
Thus, any hypothetical
partnership would not be prejudiced by non-joinder. The plaintiffs
would not be prejudiced because they may fully litigate their
personal
claims
to
partnership’s presence.
title
regardless
of
the
hypothetical
EQT would not be prejudiced because res
judicata would bind any hypothetical partnership and its partners
to the judgment in this civil action, regardless of whether EQT
20
prevails.
Thus, any hypothetical partnership that may exist would
not be an indispensable party to this civil action.
E.
EQT’s Alter Ego Theory
Finally,
EQT
argues
that
this
Court
should
“pierce
the
corporate veil” between Republic Partners and REV such that REV’s
citizenship should be imputed to Republic Partners because REV and
Republic Partners are alter egos of each other.
Specifically, EQT
argues that REV and Republic Partners are alter egos because they
share the same office, they have the same manager, they have no
employees, neither observes corporate formalities, and REV is
capitalized with assets contributed by Republic Partners.
It is
unclear whether EQT is arguing that REV is the alter ego of
Republic Partners as its parent entity, or that this Court should
disregard the distinction between REV and Republic Partners as
sibling entities of a larger conglomerate.
Thus, this Court will
consider both theories, but must first unravel the relationship
between REV and Republic Partners.
Republic Partners and REV are part of a network of entities
operated by Republic Energy Operating, LLC (“REO”).
at 3-5.
ECF No. 104-2
REO holds no oil or gas assets but operates several
holding entities that do hold oil and gas assets.
holding entities include Republic Partners and REV.
Id.
Id.
These
Most or
all of the employees in this network are employed by REO and not by
the holding entities.
Id. at 6-7.
21
Republic Partners, REV, and
several other related entities share office space that is leased by
REO.
Id. at 8-10.
supplies there.
Republic
REO provides all workplace infrastructure and
Id. at 9-10.
Partners’
general
and
limited
partners
include
several natural persons, ECF No. 104-9 at 6-8, and one of its
managers is John Swanson, id. at 1, who is also the President of
REO. ECF No. 104-11. REV’s initial members were Republic Partners
and Energy Trust Partners (“ETP”).
ECF No. 104-2 at 14.
Republic
Partners contributed its interests in certain of the Subject Leases
as discussed above, id. at 15-16; ECF No. 104-5 at 4-6; ECF No.
106-8 at 23, and ETP contributed cash.
ECF No. 104-2 at 15-16.
Wells Fargo and Company, Inc. later became a member after making a
cash contribution.
ECF No. 104-11.
Id. at 16.
REO is the sole manager of REV.
It is unclear whether Republic Partners is the
controlling member of REV.
Based on these relationships, EQT’s
alter ego argument fails.
First, REV is not an alter ego of Republic Partners as its
subsidiary.
Showing that a subsidiary is the alter ego of its
parent company “is not easily proved and the burden of proof is on
a party soliciting a court to disregard a corporate structure.” S.
Elec. Supply Co. v. Raleigh Cnty. Nat’l Bank, 320 S.E.2d 515, 522
(W. Va. 1984).
applied
Some of the United States Courts of Appeals have
corporate
veil-piercing
to
impute
a
subsidiary’s
citizenship to its parent company to defeat diversity jurisdiction.
22
See, e.g., Nauru Phosphate Royalties, Inc. v. Drago Daic Interests,
Inc., 138 F.3d 160, 164 (5th Cir. 1998). When analyzing whether to
pierce the corporate veil, West Virginia requires courts to engage
in a case-by-case analysis, “with particular attention to factual
details.”
Specifically,
Raleigh
courts
Cnty.
should
Nat’l
Bank,
consider:
320
(1)
any
S.E.2d
at
523.
“inadequacy
of
capital structures;” (2) “whether personal and corporate funds have
been
commingled
without
regard
to
corporate
form
by
a
sole
shareholder;” (3) “whether two corporations have commingled their
funds so that their accounts are interchangeable;” (4) “whether
they have failed to follow corporate formalities, siphoning funds
from one corporation to another without regard to harm caused [to]
either entity, or failed to keep separate records;”
(5) whether
there is “total control and dominance of one corporation by another
or a shareholder;” (6) whether one company is “a dummy corporation
with no business activity or purpose;” (7) whether there is a
“violation of law or public policy;” (8) whether there is “a unity
of interest and ownership that causes one party or entity to be
indistinguishable from another;” and (9) whether there are “common
shareholders,
facilities.”
common
Id.
officers
and
employees,
and
common
Finally, evidence related to these factors must
be “analyzed in conjunction with evidence that a corporation
attempted to use its corporate structure to perpetrate a fraud or
23
do grave injustice on an innocent third party seeking to ‘pierce
the veil.’”
Id. (internal citations omitted).
This Court finds that REV is not an alter ego of Republic
Partners.
The
evidence
indicates
that
REV
is
adequately
capitalized, as it holds interests in several oil and gas leases
among other assets.
There is also no evidence that Republic
Partners and REV have commingled funds.
EQT argues that Republic
Partners’ contribution of its interests in certain of the Subject
Leases to REV constitutes commingling of funds, however, Republic
Partners actually transferred those assets to REV, and they do not
share ownership or use of those assets.
EQT argues that neither
entity followed corporate formalities because they failed to keep
minutes at non-annual meetings and the minutes for annual meetings
are sparse.
While this may not be an ideal practice, it is hardly
in disregard of corporate formalities to a degree that would
warrant veil-piercing, as the record indicates that no actions were
taken without express authorization by all partners and members.
See ECF No. 104-9.
Republic Partners has an ownership interest in
REV as a member, but there is no evidence that Republic Partners
totally controls or dominates REV’s affairs.
The evidence shows
that REV is not a dummy entity, but that it actually holds oil and
gas assets that are actively being explored and developed.
Court finds no violation of law or public policy here.
This
There is no
evidence that Republic Partners and REV have a unity of interest
24
that makes them indistinguishable, as two of REV’s members are
entities that are unrelated to Republic Partners.
While Republic
Partners and REV share office space and Swanson as an officer, this
factor has very little weight and no other factor weighs in favor
of finding an alter ego relationship.
Thus, this Court finds that
REV is not an alter ego of Republic Partners.
Second, REV’s citizenship may not be imputed to REV as a
sibling entity under the veil-piercing doctrine.
Appeals
have
applied
veil-piercing
citizenship to its parent entity.
to
impute
Some Courts of
a
subsidiary’s
See Nauru Phosphate Royalties,
138 F.3d at 164 (concluding that a subsidiary’s citizenship may be
attributed to its parent company if it is the alter ego of the
parent
company
and
“the
subsidiary’s
wrongful
conduct
is
at
issue”); Taber Partners, I v. Merit Builders, Inc., 987 F.2d 57,
61-63 (1st Cir.), cert. denied, 510 U.S. 823 (1993) (concluding
that “the separate corporate identities of a parent and subsidiary
should be honored when determining either one’s principal place of
business” so long as “there is no evidence that the integrity of
the corporate form has been violated”); Danjaq, S.A. v. Pathe
Commc’ns Corp., 979 F.2d 772, 774-76 (9th Cir. 1992) (suggesting
that a subsidiary’s citizenship may be imputed to its parent
company where the subsidiary is the parent’s alter ego).
Other
Courts of Appeals have suggested that a parent entity’s citizenship
may be imputed to its subsidiary where the subsidiary is the alter
25
ego of the parent.
See Shell Rocky Mtn. Prod. v. Ultra Res., Inc.,
415 F.3d 1158, 1163 (10th Cir. 2005); Schwartz v. Elec. Data Sys.,
Inc., 913 F.2d 279, 283-84 (6th Cir. 1990).
The District of
Columbia Circuit has completely rejected the use of veil-piercing
See Pyramid
in determining the citizenship of a corporate party.
Sec. Ltd. v. IB Resolution, Inc., 924 F.2d 1114, 1120 (D.C. Cir.),
cert. denied, 502 U.S. 822 (1991) (concluding that 28 U.S.C. § 1332
does not support the application of veil-piercing to determinations
of corporate citizenship).
on
this
issue,
but
The Fourth Circuit has not weighed in
district
courts
within
the
circuit
have
recognized the application of veil-piercing to defeat diversity
jurisdiction.
See, e.g., Mancor Indus., Inc. v. Tri-Cities Power
Auth., No. 5:08CV278, 2008 WL 5068582, *5 (S.D. W. Va. Nov. 24,
2008) (recognizing that veil-piercing has been applied to defeat
diversity jurisdiction but not to expand jurisdiction).
But see
Maday v. Toll Bros. Inc., 72 F. Supp. 2d 599, 605-06 (E.D. Va.
1999) (noting that the application of veil-piercing to defeat
jurisdiction “has long [been] moribund”).
Regardless of the dissonance among the Courts of Appeals,
there
is
no
authority
for
applying
veil-piercing
to
sibling
entities to impute their citizenships to each other to defeat
diversity jurisdiction.
Similarly, there is no authority for
applying veil-piercing generally to sibling entities. The doctrine
exists to hold the person controlling the corporation liable for
26
the corporation’s wrongful acts where the “corporation is so
organized and controlled as to be a mere adjunct or instrumentality
of the [controlling shareholder].”
S. States Coop., Inc. v.
Dailey, 280 S.E.2d 821, 827 (W. Va. 1981); see also S. Elec. Supply
Co. v. Raleigh Cnty. Nat’l Bank, 320 S.E.2d 515, 522 (W. Va. 1984)
(concluding that a parent corporation may be held “liable for
behavior of another corporation within its total control”).
doctrine does not exist to treat sibling entities as one.
The
Thus,
veil-piercing cannot be applied to Republic Partners and REV as
sibling entities, and REV’s citizenship will not be imputed to
Republic Partners.
V.
Conclusion
For the foregoing reasons, this Court finds that Republic
Energy Ventures, LLC is not an indispensable party to this civil
action and need not be joined as a plaintiff.
Thus, this Court
maintains subject matter jurisdiction under 28 U.S.C. § 1332.
Accordingly, the defendant’s motion to dismiss for lack of subject
matter jurisdiction and failure to join an indispensable party (ECF
No. 104) is DENIED.
This Court will enter a separate order
scheduling a status and scheduling conference such that this Court
may consider an appropriate scheduling order for this civil action.
IT IS SO ORDERED.
The Clerk is DIRECTED to transmit a copy of this memorandum
opinion and order to counsel of record herein.
27
DATED:
June 7, 2016
/s/ Frederick P. Stamp, Jr.
FREDERICK P. STAMP, JR.
UNITED STATES DISTRICT JUDGE
28
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