JJK Mineral Company, LLC v. Noble Energy, Inc.

Filing 61

MEMORANDUM OPINION AND ORDER CONFIRMING PRONOUNCED ORDER OF THE COURT GRANTING IN PART AND DENYING IN PART DEFENDANT NOBLE ENERGY, INC.'S 31 MOTION FOR PARTIAL DISMISSAL, GRANTING DEFENDANT CNX GAS COMPANY, LLC'S 37 MOTION FOR PARTIAL DISMISSAL AND DENYING DEFENDANT COLUMBIA VENTURES, LLC'S 42 MOTION FOR PARTIAL DISMISSAL ORDER. Signed by Senior Judge Frederick P. Stamp, Jr. on 6/20/17. (copy to counsel via CM/ECF) (lmm)

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF WEST VIRGINIA
JJK MINERAL COMPANY, LLC,
a Pennsylvania limited
liability company,
Plaintiff,
v.

Civil Action No. 5:16CV112
(STAMP)

NOBLE ENERGY, INC.,
a Delaware corporation,
CNX GAS COMPANY, LLC,
a Virginia limited liability company,
COLUMBIA ENERGY VENTURES, LLC,
f/k/a NiSource Energy Ventures, LLC,
a Delaware limited liability company,
and COLUMBIA GAS TRANSMISSION, LLC,
a Delaware limited liability company,
Defendants.
MEMORANDUM OPINION AND ORDER
CONFIRMING PRONOUNCED ORDER OF THE COURT
GRANTING IN PART AND DENYING IN PART
DEFENDANT NOBLE ENERGY, INC.’S
MOTION FOR PARTIAL DISMISSAL,
GRANTING DEFENDANT CNX GAS COMPANY, LLC’S
MOTION FOR PARTIAL DISMISSAL AND
DENYING DEFENDANT COLUMBIA VENTURES, LLC’S
MOTION FOR PARTIAL DISMISSAL
This is a breach of contract and declaratory judgment suit
arising out of an oil and gas lease known as the “Crow Lease.”

The

defendants have filed separate motions for partial dismissal of
Counts II and III under Federal Rule of Civil Procedure 12(b)(6).
For the following reasons, the defendants’ motions are granted as
to Count II and denied as to Count III.

I.

Background

The Crow Lease covers the oil and gas rights to land in
Marshall

County,

West

Virginia.

The

plaintiff,

JJK

Mineral

Company, LLC (“JJK”), is the lessor, defendants Columbia Energy
Ventures, LLC, and Columbia Gas Transmission, LLC (collectively
“Columbia”) are the lessees, and defendants Noble Energy, Inc.
(“Noble”), and CNX Gas Company LLC (“CNX”) are sublessees.

The

Crow Lease did not originally include a pooling or unitization
clause.
In 2013, Noble approached JJK to amend the Crow Lease to
include pooling rights.
the

Amendment

and

That April, JJK executed two documents,

Ratification

of

Oil

and

Gas

Lease

(“the

Amendment”) and the Supplemental Agreement and Ratification of Oil
and Gas Lease (“the Supplement”). The Amendment modified the lease
to include pooling rights and increased JJK’s royalty interest to
15%.

The defendants did not sign the Amendment.

The Supplement

was a contract between JJK, CNX, and Noble providing that CNX and
Noble would pay JJK $1,500 per net acre as a non-refundable signing
bonus when JJK executed the Amendment. It also provided that Noble
and CNX would suspend royalty payments until JJK cleared its title
to the Crow Lease in a West Virginia civil action that was pending
at the time.
favor.

That civil action has now been resolved in JJK’s

Neither Noble nor CNX executed the Supplement.

That Fall,

Noble notified JJK that CNX and Columbia did not agree with the

2

terms of the Amendment and Supplement and that they refused to
execute them.
Nevertheless, Noble and CNX then pooled the Crow Lease into
two units, the Sand Hill 8 Unit and the Webster 22 North Unit.
They drilled wells on these units and began producing natural gas.
The

defendants

have

not

paid

any

royalties

to

JJK

for

that

production, even after JJK cleared its title. Further, JJK alleges
that Noble and CNX have intentionally withheld royalty payments in
an attempt to force JJK into executing versions of the Amendment
and the Supplement that are more favorable to the lessees.

JJK

alleges that Noble admitted at its Rule 30(b)(6) deposition that it
had no right to withhold royalties after title was cleared, and JJK
alleges that CNX is bound by this admission as a joint venturer
with Noble.
JJK originally filed this civil action against only Noble for
misappropriation and conversion, unjust enrichment, and for an
accounting. JJK then amended its complaint to add CNX and Columbia
as defendants.

JJK now alleges claims for willful breach of the

Crow Lease (Count I) and breach of good faith and fair dealing
under the Crow Lease (Count II) against Noble and CNX, and a
request for a declaration that the Amendment and the Supplement are
invalid, that the defendants do not have pooling rights, that the
defendants owe royalties to JJK, and that the Crow Lease has been
rescinded by willful breach (Count III).

3

JJK also requests an

accounting of all unpaid royalties (Count IV).

Noble filed a

motion to dismiss Counts II and III (ECF No. 31), CNX filed a
motion to dismiss Count II (ECF No. 37), and Columbia filed a
motion to dismiss Count III (ECF No. 42).
On May 26, 207, the parties appeared before this Court for
oral argument on the motions to dismiss.

At oral argument, this

Court granted Noble and CNX’s motions to dismiss as to Count II and
denied Noble and Columbia’s motions to dismiss as to Count III.
This memorandum opinion serves to confirm this Court’s pronounced
order.
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)).

“The plausibility standard is

not a probability requirement, but asks for more than a sheer
possibility that a defendant has acted unlawfully.”

Hall v.

DirectTV, 846 F.3d 757, 765 (4th Cir. 2017). “[C]ourts must accept
as true all of the factual allegations contained in the complaint

4

and draw all reasonable inferences in favor of the plaintiff.” Id.
“[A] complaint is to be construed liberally so as to do substantial
justice.”

Id. (internal quotation marks omitted).
III.

A.

Discussion

Count II - Breach of Duty of Good Faith and Fair Dealing
Noble and CNX each seek dismissal of Count II in separate

motions.

They

argue

that

West

Virginia

does

not

recognize

independent claims for breaches of implied covenants.

After

initially challenging this assertion in response to Noble’s motion
to dismiss, JJK concedes in its response to CNX’s motion to dismiss
that Count II must be dismissed.
Indeed, West Virginia does not recognize a stand-alone claim
for breach of the implied covenant of good faith and fair dealing.
Gaddy Eng’g Co. v. Bowles Rice McDavid Graff & Love, LLP, 746
S.E.2d 568, 578 (W. Va. 2013).

Rather, such claims “sound[] in

contract,” id., and may be construed as breach of contract claims
if they “cover matters not identical to those specified in [other
breach of contract claims].”

Highmark W. Va., Inc. v. Jamie, 655

S.E.2d 509, 514 (W. Va. 2007).
In Count II, JJK alleges that Noble and CNX breached their
implied

duties

of

good

faith

and

withholding royalties without cause.

fair

dealing

by

willfully

That is the same conduct JJK

alleges in Count I in its breach of contract claim.

Thus, Count II

is a duplicative breach of contract claim that must be dismissed.

5

The defendants also argue that JJK’s request for punitive
damages and attorneys’ fees in Count II must be dismissed, and JJK
asks this Court to read those requests into Count I.

As this Court

stated at oral argument, Count II is dismissed in its entirety,
including JJK’s request for punitive damages and attorneys’ fees.
If JJK wishes to seek such damages under Count I, it may file a
motion for leave to amend its complaint.
B.

Count III - Declaratory Judgment
Count III requests a declaration that the Amendment and the

Supplement are invalid, that the defendants do not have pooling
rights, that the defendants owe royalties to JJK, and that the Crow
Lease has been rescinded by material breach.

Noble and Columbia

each seek dismissal of Count III for failure to state a claim.
JJK states two distinct claims.

First, JJK claims that the

Amendment and the Supplement are not enforceable because they are
not fully formed contracts. JJK therefore seeks a declaration that
the Amendment and Supplement have no force and that the defendants,
therefore, have no pooling rights.
“The elements of a contract are an offer and an acceptance
supported by consideration.”

Dan Ryan Builders, Inc. v. Nelson,

737 S.E.2d 550, 556 (W. Va. 2012).

The offer and acceptance “may

be by word, act[,] or conduct that evince the intention of the
parties to contract.”
(W. Va. 2013).

New v. GameStop, Inc., 753 S.E.2d 62, 70-71

Further, the parties’ conduct must demonstrate

6

their “mutual assent,” meaning the parties must “hav[e] the same
understanding of the terms of the agreement reached.”

Id. at 71.

JJK alleges sufficient facts to support a finding that a
contract was not formed when JJK executed the Amendment and the
Supplement.

JJK alleges that Noble expressed the defendants’

intent to not be bound by the terms of the agreements because they
“balked at some of the language [and] . . . would not sign the
documents until the language was changed.”

ECF No. 28 at 5.

Thus,

taking as true JJK’s allegations, the parties did not mutually
assent to the terms of the Amendment or the Supplement and no
contract was formed.
The defendants argue that JJK cannot seek to repudiate the
Amendment or Supplement because JJK retained a signing bonus paid
as part of the Supplement and, thus, ratified the contracts.
However,

repudiation

and

ratification

apply

only

to

voidable

contracts, which would otherwise be valid and enforceable.

See

Restatement (Second) of Contracts § 7 cmt. e (1981) (noting that a
contract is voidable where “the transaction is valid and has its
usual

legal

exercised”).
voidable.

consequences

until

the

power

of

avoidance

is

JJK does not claim the Amendment and Supplement are

Rather, JJK claims that they were never contracts to

begin with. While JJK’s receipt and retention of the signing bonus
may later be relevant to factual determinations regarding contract
formation, taking JJK’s complaint as true, no contract was formed.

7

Second, JJK claims that the Crow Lease has been rescinded due
to the defendants’ material breach.

Essentially, JJK seeks a

declaration of equitable forfeiture of the Crow Lease.
defendants

argue

that

there

are

no

grounds

for

The

equitable

forfeiture.
Generally, courts will not order the forfeiture of an oil and
gas lease unless the lease terms clearly provide for forfeiture
upon some default, the lease has expired, or the lessee has
abandoned the lease. Warner v. Haught, Inc., 329 S.E.2d 88, 95 (W.
Va. 1985).

However, forfeiture is permitted where, “instead of

working a loss or injury contrary to equity, [forfeiture] promotes
justice and equity and protects the owner against the indifference,
laches, and injurious conduct of the lessee.”
at 96.

Warner, 329 S.E.2d

Thus, the West Virginia Supreme Court of Appeals has

permitted equitable forfeiture for the breach of a lease in
“case[s] of extraordinary hardship,” Allen v. Colonial Oil Co., 115
S.E. 842, 844 (W. Va. 1923), including a lessee’s “fraudulent
refusal of . . . development[]” or fraudulent efforts “to deprive
[the lessor] of compensatory returns from her lands,” but only if
damages would not provide a sufficient remedy.

Jennings, v. S.

Carbon Co., 80 S.E. 368, 370-71 (W. Va. 1913).
Further, “forfeiture . . . is disfavored based upon concerns
rooted in the high costs of exploration and development conjoined
with the vesting of land-use rights.”

8

St. Luke’s United Methodist

Church v. CNG Dev. Co., 663 S.E.2d 639, 646 (W. Va. 2008).

Thus,

partial rescission has been permitted as to portions of the lease
not being worked, as a less severe remedy for a lessee’s breach of
the implied covenant of development.

See

St. Luke’s United

Methodist Church v. CNG Dev. Co., 663 S.E.2d 639, 646-47 (W. Va.
2008).
JJK alleges the defendants are withholding royalties to extort
JJK into executing an amendment to the Crow Lease with terms that
would be more favorable to the lessees.
is

entitled

to

the

royalties.

In

The defendants admit JJK
fact,

Noble’s

corporate

representative admitted as much in his deposition conducted under
Federal Rule of Civil Procedure 30(b)(6).

Thus, the question is

whether the intentional withholding of royalties admittedly owed in
an attempt to extort a favorable amendment to the lease constitutes
the sort of fraudulent breach causing extreme hardship that would
warrant equitable forfeiture.
The West Virginia Supreme Court of Appeals has not directly
considered this issue.

The court has previously concluded that

fraudulent refusals to develop a lease, resulting in drainage, may
be a sufficient ground for equitable forfeiture. Jennings, 80 S.E.
368, 370.

The court has also concluded that a simple failure to

make timely rental payments is not sufficient to permit forfeiture.
Warner, 329 S.E.2d at 95-96; see also Wellman v. Bobcat Oil & Gas,
Inc., 524 F. App’x 26, 32-33 (4th Cir. 2013) (applying West

9

Virginia law).

However, the court also held that “an oil and gas

lessee’s repeated failure to pay rentals on time, thereby forcing
the lessor to repeatedly seek relief under [West Virginia Code
§ 36-4-9a], may permit a finding that the indifference, laches or
injurious

conduct

of

the

lessee

justifies

equitable forfeiture of the leasehold.”

a

declaration

of

Warner, 329 S.E.2d at 96.

Further, in an unpublished opinion, the court has noted that
forfeiture for nonpayment may be grounds for forfeiture if the
failure to pay was “willful[] or the delay in payment [was]
unreasonably long” and the breach “caused irreparable injury.”
Wilhelm v. Jay-Bee Prod. Co., No. 15-07568, 2016 WL 5941934, *3 (W.
Va. Oct. 13, 2016).

Regardless, the court has made clear that

equitable forfeiture may be appropriate where a lessee’s willful
breach creates such hardship to the lessor that damages alone are
not an adequate remedy.
Based on this precedent, this Court believes the West Virginia
Supreme Court of Appeals, if presented with the issue, would
conclude that the bad-faith refusal to pay royalties admittedly
owed in an effort to extort a favorable renegotiation of the
lease’s terms is the sort of fraudulent, injurious conduct that
would justify a declaration of equitable forfeiture or partial
recision.

Thus, at this early stage, this Court finds that

equitable forfeiture or partial recision may be an appropriate
remedy.

Further, this Court finds that JJK has sufficiently

10

alleged circumstances of extreme hardship for which damages alone
would not remedy the defendants’ breach. However, this Court makes
no conclusions regarding the ultimate appropriateness of forfeiture
or partial recision as a remedy or whether damages would be
sufficient to remedy any breach and those issues will be determined
if need be after these proceedings have matured.
IV.

Conclusion

For the above reasons, Noble’s motion for partial dismissal
(ECF No. 31) is GRANTED IN PART and DENIED IN PART, CNX’s motion
for partial dismissal (ECF No. 37) is GRANTED, and Columbia’s
motion for partial dismissal (ECF No. 42) is DENIED.
IT IS SO ORDERED.
The Clerk is DIRECTED to transmit a copy of this memorandum
opinion and order to counsel of record herein.
DATED:

June 20, 2017

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

11