Stern et al v. Columbia Gas Transmission, LLC et al
Filing
119
MEMORANDUM OPINION AND ORDER GRANTING IN PART AND DENYING IN PART DEFENDANTS' MOTIONS TO DISMISS re: 82 84 : Counts II, III, and IV are DISMISSED, and Counts V, VI, and VII remain. Signed by Senior Judge Frederick P. Stamp, Jr. on 12/5/2016. (copy to counsel via CM/ECF) (nmm)
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF WEST VIRGINIA
GARY STERN and SUSAN STERN,
Plaintiffs,
v.
Civil Action No. 5:15CV98
(STAMP)
COLUMBIA GAS TRANSMISSION, LLC,
CHESAPEAKE APPALACHIA, LLC,
COLUMBIA ENERGY VENTURE, LLC and
SWN PRODUCTION COMPANY, LLC,
Defendants.
MEMORANDUM OPINION AND ORDER
GRANTING IN PART AND DENYING IN PART
DEFENDANTS’ MOTIONS TO DISMISS
This civil action arises out of two oil and gas leases.
The
plaintiffs allege that the defendants have pooled and unitized
their properties without contractual authority and are unlawfully
producing gas from their properties.
The defendants filed motions
to dismiss under Federal Rule of Civil Procedure 12(b)(6). For the
following reasons, the defendants’ motions are granted in part and
denied in part.
I.
Facts
Columbia Gas Transmission, LLC and Columbia Energy Venture,
LLC (collectively “Columbia”) hold oil and gas leases in the
plaintiffs’ two tracts (“the subject leases”). Columbia sublet the
subject
leases
to
Chesapeake
Appalachia,
LLC
(“Chesapeake”).
Chesapeake has since assigned all of its rights and interests in
the subject leases to SWN Production Company, LLC (“SWN”).
The plaintiffs (“the Sterns”) allege that the subject leases
do not allow for pooling or unitizing their properties with
neighboring lands.
The Sterns allege that Chesapeake proposed
modifications to the subject leases that would allow for pooling,
but that they refused the modifications.
to
modify
the
subject
leases,
When the Sterns refused
Chesapeake’s
agent
allegedly
“threatened that Chesapeake would take [the Sterns’] gas with or
without their agreement to modify the [subject] leases as he
stormed out of [the Sterns’] home slamming the door behind him.”
ECF No. 76 at 6.
Chesapeake then filed a Declaration and Notice of Pooled Unit,
stating that portions of the Sterns’ properties were included in a
pooled unit known as the “Ray Baker Unit.”
Chesapeake drilled and
began operating a well known as the “Ray Baker #1H” on property,
other than the Sterns’, in the Ray Baker Unit.
The Sterns allege
that the Ray Baker #1H well is producing gas from the Sterns’
properties through drainage.
rights
and
interests
in
After Chesapeake assigned all of its
the
subject
leases
to
SWN,
SWN
has
continued producing gas from the Sterns’ properties through the Ray
Baker #1H well. The Sterns allege that after they filed this civil
action, SWN issued a First Amended Declaration and Notice of Pooled
Unit for the Ray Baker Unit, “reconfigur[ing] the boundaries of the
Ray Baker Unit . . . to exclude the portion of [the Sterns’] . . .
2
tracts
which
Chesapeake.”
had
previously
been
included
in
the
Unit
by
ECF No. 76 at 8.
The Sterns’ claims against Columbia have since been settled
and dismissed.
However, the Sterns continue to allege claims
against both Chesapeake and SWN for breach of contract, breach of
the implied covenant against drainage, fraudulent extraction of
gas, trespass, conversion, bad faith pooling, and breach of the
implied covenant of good faith and fair dealing.
Chesapeake has
now filed a motion to dismiss under Rule 12(b)(6).
SWN filed a
separate
and
motion
to
dismiss
under
Rule
12(b)(6)
joined
Chesapeake’s memorandum in support of its motion to dismiss.
II.
Applicable Law
To survive a motion to dismiss under Rule 12(b)(6), “a
complaint must contain sufficient factual matter, accepted as true,
to ‘state a claim to relief that is plausible on its face.’”
Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).
This plausibility
standard requires a plaintiff to articulate facts that, when
accepted as true, demonstrate that the plaintiff is plausibly
entitled to relief.
Francis v. Giacomelli, 588 F.3d 186, 193 (4th
Cir. 2009) (citing Iqbal, 556 U.S. at 678; Bell Atl. Corp. v.
Twombly, 550 U.S. 544, 570 (2007)).
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III.
A.
Discussion
Breach of Contract Claims - Count II
In Count II, the Sterns allege claims for the breach of
contract, breach of the implied covenant against drainage, and
fraudulent extraction of gas.
The defendants argue that these
claims must be dismissed because the subject leases include a right
to pool or unitize the Sterns’ properties.
The Sterns argue that
the subject leases do not include express pooling clauses and are
otherwise ambiguous regarding pooling rights.
Under West Virginia law, “[a]n oil and gas lease which is
clear in its provisions and free from ambiguity, either latent or
patent, should be considered on the basis of its express provisions
and is not subject to a practical construction by the parties.”
Flanagan v. Stalnaker, 607 S.E.2d 765, 770 (W. Va. 2004) (internal
quotation marks omitted).
Similarly, the parol evidence rule
applies to oil and gas leases that are completely integrated.
Warner v. Haught, Inc., 329 S.E.2d 88, 94 (W. Va. 1985).
“The mere
fact that parties do not agree to the construction of a contract
does not render it ambiguous.”
Flanagan, 607 S.E.2d at 769.
“A
latent ambiguity arises when the instrument upon its face appears
clear and unambiguous, but there is some collateral matter which
makes the meaning uncertain.”
Flanagan, 607 S.E.2d at 769 n.4.
Where a term is ambiguous, the court may look to the course of the
parties’ performance to determine the parties’ intent.
4
Harbert v.
Hope Natural Gas Co., 84 S.E. 770, 773 (W. Va. 1915).
Further,
“oil and gas leases . . . will generally be liberally construed in
favor
of
the
lessor,
and
strictly
as
against
the
lessee.”
Flanagan, 607 S.E.2d at 770 (internal quotation marks omitted).
“Generally, future pooling clauses are definite, designating
the maximum acreage that can be placed in a pooled unit and the
mode of pooling, containing anti-dilution provisions, specifying
the hydrocarbons subject to the pooling, limiting the period in
which
pooling
can
be
exercised
to
avoid
the
rule
against
perpetuities, and requiring the recording of the declaration of
pooling.”
2015).
1A Nancy Saint-Paul, Summers Oil and Gas § 6:27 (3d Ed.
Further, more general pooling clauses are valid where they
“merely authoriz[e] unitization where it is in the best interests
of the parties to do so and providing for the apportionment of
royalties in the proportion that the area of the land covered by
the lease bears to the entire unitized area.”
Id.
Thus, valid
future pooling provisions must provide an express right to pool or
unitize, withstand the rule against perpetuities, and provide for
apportionment of royalties between the pooled leases.
First, the express language of the subject leases permits
pooling or unitization.
The granting clause of each subject lease
provides the defendants with “all other rights and privileges
necessary, incident to, or convenient for the operation of the
[Sterns’ property], alone and conjointly with other lands for the
5
production
and
transportation
of
oil
and
injection, storage and withdrawal of gas.”
(emphasis
added).
This
language
gas,
and
for
the
ECF No. 82-1 at 2, 6
expressly
contemplates
the
operation of the subject leases with other lands as a unit.
Second, the grants survive the rule against perpetuities because
the leases terminate after ten years unless the defendants operate
the leases alone or conjointly with neighboring lands.1
82-1 at 2, 6.
ECF No.
Third, as discussed below, by operation of law the
Sterns would be entitled to a one-eighth royalty in the proportion
that the area of land covered by the subject leases bears to the
whole unit.
Thus, this Court finds that the subject leases
expressly grant the defendants the right to pool or unitize the
Sterns’ properties.
The
Sterns
argue
that
pooling
or
unitization
was
not
contemplated by the subject leases because the leases require the
lessee to drill on the properties themselves to extend the lease
1
Under West Virginia law,
[a]
nonvested property interest is invalid unless:
(1) When the interest is created, it is certain to vest
or terminate no later than twenty-one years after the
death of an individual then alive; or
(2) The interest either vests
ninety years after its creation.
W. Va. Code § 36-1A-1(a).
6
or
terminates within
term. However, § 2 of each subject lease provides for an extension
of the leases’ primary terms if the Sterns’ property
or any portion thereof is operated by the [defendants],
in search for or in production of oil or gas as long as
such land is utilized by [the defendants] alone or
conjointly with neighboring lands for either the storage
of gas by injection, storage and removal of gas through
well or wells operated on either the [Sterns’ property]
or other adjoining or neighboring lands comprising a part
of the same gas storage field, or for the protection of
any gas stored in such storage field.
ECF No. 82-1 at 2, 6 (emphasis added).
Thus, the terms of the
subject leases are extended if the Sterns’ properties are operated
“alone or conjointly with neighboring lands.”
This language
contemplates the pooling or unitization with neighboring lands and
extends the term of the Sterns’ lease for any work done within a
unit that includes the Sterns’ properties.
Further, the repeated
use of the phrase “alone or conjointly” in the granting clauses and
in § 2 reinforces the parties’ intent to grant pooling rights.
Next, the Sterns argue that the subject leases cannot be read
to provide for pooling because they do not provide for royalty
payments unless there is production on the properties themselves.
While
the
subject
leases
do
not
expressly
provide
for
the
apportionment of royalties amongst pooled leases, “[a] present
pooling clause in an oil and gas lease produces the same royalty
apportionment effect as a community lease.”
§ 56:1.
Saint-Paul, supra
Under West Virginia law, lessors in a community lease are
entitled to royalties for oil or gas produced “in the proportion
7
that the parcel of land held by each of them bears to the total
area of the tract.”
1917).
Lynch v. Davis, 92 S.E. 427, 429 (W. Va.
Thus, by operation of law, the Sterns would be entitled to
the royalty stated in the subject leases in proportion with the
acreage of their land included in the unit.
Finally, the Sterns argue that Chesapeake and SWN’s attempts
to modify the leases to include pooling or unitization clauses show
that the parties did not understand the leases to include such
rights originally.
The Sterns also argue that they obtained
discovery showing that Chesapeake obtained modifications for other
leases in the Ray Baker Unit that have substantially similar
language and provisions as the Sterns’ leases, allegedly showing
that Chesapeake did not believe the Sterns’ leases authorized
pooling or unitization.
subject
leases
to
be
However, because this Court finds the
unambiguous,
the
parties’
actions
in
performing the subject leases are irrelevant to their construction.
Because this Court finds that the subject leases provide the
defendants
with
the
right
to
pool
or
unitize
the
Sterns’
properties, the defendants did not breach the subject leases by
including the Sterns’ properties in the Ray Baker Unit and by
producing gas from those properties through the Ray Baker #1H well.
Accordingly, the Sterns’ claims for breach of contract, breach of
the implied covenant against drainage, and fraudulent extraction of
gas in Count II must be dismissed.
8
B.
Bad Faith Pooling & Breach of Duty of Good Faith and Fair
Dealing Claims - Counts V, VI, and VII
The Sterns allege claims for “bad faith pooling” and “breach
of the implied covenant of good faith and fair dealing” against
Chesapeake and SWN separately.
ECF No. 13, 15.
Specifically, the
Sterns allege that, in adding portions of their properties to the
Ray Baker Unit, Chesapeake did not “act in good faith as a
reasonabl[y] prudent operator and . . . take into account both its
interests
and
those
of
the
[Sterns].”
ECF
No.
76
at
13.
Similarly, the Sterns allege that SWN’s removal of their properties
from the Ray Baker Unit breached its duty to act in good faith as
a reasonable operator.
“breach
of
contract,
They also allege that the defendants’
breach
of
the
implied
covenant
against
drainage, fraudulent extraction of gas . . . , trespass, and bad
faith pooling ha[ve] been such as to constitute a breach of the
implied covenant of good faith and fair dealing.”
ECF No. 76 at
15. The defendants argue that the Sterns’ claims must be dismissed
because West Virginia law does not permit stand-alone breach of
implied covenant claims.
Under West Virginia law, breaches of implied covenants do not
“provide a cause of action apart from a breach of contract claim.”
Gaddy Eng’g Co. v. Bowles Rice McDavid Graff & Love, LLP, 746
S.E.2d 568, 578 (W. Va. 2013) (internal quotation marks omitted).
Rather, such claims “sound[] in breach of contract.” Id. (internal
9
quotation marks omitted).
However, the Sterns’ claims allege
breaches of the subject leases for conduct unrelated to their claim
that the subject leases do not provide pooling or unitization
rights.
They allege that Chesapeake failed to act as a reasonably
operator in adding portions of the Sterns’ properties to the Ray
Baker
Unit,
properties
that
from
SWN
the
did
the
same
in
removing
unit,
and
that
both
breached their duties to act in good faith.
the
Stern’s
defendants’
actions
The breach of good
faith and fair dealing claim relies on at least one version of
facts that does not overlap with the dismissed claims in Count II,
in that the Sterns allege that each defendants’ act of bad faith
pooling constitutes a breach of the defendants’ duties to act in
good faith and fair dealing.
Thus, the Sterns’ claims may survive
despite the defendants having the right to pool or unitize the
Sterns’ properties.
While the Sterns’ claims are stated as
breaches of implied covenants, they should properly be construed as
breach of contract claims and need not be dismissed based on their
style in the complaint.
See Highmark W. Va., Inc. v. Jamie, 655
S.E.2d 509, 514 (W. Va. 2007) (“[W]hile inartfully drafted as a
claim upon an implied covenant, Count 3 is, in reality, a breach of
contract claim covering matters not identical to those specified in
Counts 1 and 2.”). Accordingly, the defendants’ motions to dismiss
are denied as to Counts V, VI, and VII.
10
C.
Trespass and Conversion Claims - Counts III and IV
The Sterns also allege claims for trespass and conversion of
their gas.
They allege that the defendants committed a physical
trespass by drilling the Ray Baker #1H well and hydraulically
fracturing the shale under the Ray Baker Unit, including the
Sterns’ properties, without contractual authority to do so.
They
also allege that the defendants have been producing gas from the
Sterns’ properties through that well without contractual authority
to do so.
The defendants argue that these claims are barred by the
“gist of the action” doctrine and that the Sterns otherwise fail to
state claims for trespass or conversion.
Under the gist of the action doctrine, a plaintiff cannot
maintain a tort claim in a breach of contract case where: (1)
“liability arises solely from the contractual relationship between
the parties”; (2) “the alleged duties breached were grounded in the
contract itself”; (3) “any liability stems from the contract”; and
(4) “the tort claim essentially duplicates the breach of contract
claim or . . . the success of the tort claim is dependent on the
success of the breach of contract claim.”
Gaddy Eng’g Co. v.
Bowles Rice McDavid Graff & Love, LLP, 746 S.E.2d 568, 577 (W. Va.
2013).
The Sterns’ trespass and conversion claims are dependent upon
a finding that the defendants have breached the subject leases and
lack contractual authority to unitize the Sterns’ properties and to
11
produce gas from their property through a well on a neighboring
tract.
The defendants’ alleged liability arises solely out of the
parties’ performance of the subject leases’ terms.
While the
defendants’ obligations to not trespass and convert the Sterns’ gas
arise out of common law, the subject leases grant the defendants
title to the Sterns’ gas and to conduct operations to produce that
gas.
Thus, the defendants are liable for trespass and conversion
only if they have also breached the terms of the subject leases.
All liability must stem from that breach, and the Sterns’ trespass
and conversion claims seek only to duplicate the same breaches of
the same contractual duties.
Thus, the Sterns’ trespass and
conversion claims are barred under the gist of the action doctrine.
Further, even if the Sterns’ claims are not barred, the Sterns fail
to state claims for trespass and conversion because the defendants
had contractual authority to unitize the subject leases and to
produce gas from the Sterns’ properties as part of the Ray Baker
Unit.
Accordingly, the defendants’ motions to dismiss are granted
as to Counts III and IV.
IV.
Conclusion
For the foregoing reasons, the defendants’ motions to dismiss
(ECF Nos. 82, 84) are GRANTED IN PART AND DENIED IN PART.
Counts
II, III, and IV are DISMISSED, and Counts V, VI, and VII remain.
IT IS SO ORDERED.
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The Clerk is DIRECTED to transmit a copy of this memorandum
opinion and order to counsel of record herein.
DATED:
December 5, 2016
/s/ Frederick P. Stamp, Jr.
FREDERICK P. STAMP, JR.
UNITED STATES DISTRICT JUDGE
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