W. W. McDonald Land Co. et al v. EQT Production Company et al

Filing 214

MEMORANDUM OPINION AND ORDER granting in part and denying in part Plaintiff's 131 MOTION for Partial Summary Judgment; granting in part and denying in part Defendant's 133 MOTION for Summary Judgment; granting in part and denying in part Defendant's 143 MOTION for Summary Judgment; granting in part and denying in part Defendant's 169 MOTION for Summary Judgment. Signed by Judge Joseph R. Goodwin on 11/21/2013. (cc: attys; any unrepresented party; www.wvsd.uscourts.gov) (tmr)

IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF WEST VIRGINIA
CHARLESTON DIVISION

W. W. MCDONALD LAND CO., et al.,
Plaintiffs,
v.

CIVIL ACTION NO. 2:11-cv-00418

EQT PRODUCTION COMPANY, et al.,
Defendants.

MEMORANDUM OPINION & ORDER

Pending before the court are the Plaintiffs’ Motion for Partial Summary Judgment [Docket
131], and multiple motions for summary judgment filed by the defendants [Dockets 133, 143, and
169]. For the reasons stated below, the following is ORDERED: With respect to Count II (breach
of contract), the Plaintiffs’ Motion for Partial Summary Judgment [Docket 131] is GRANTED in
part and DENIED in part in accordance with this opinion; the Defendants’ Joint Motion for
Summary Judgment [Docket 169] is GRANTED in part and DENIED in part in accordance
with this opinion; and the Motion for Summary Judgment of Defendants EQT Corporation, EQT
Energy, LLC, EQT Gathering, Inc. EQT Gathering Equity, LLC, EQT Investment Holdings, LLC,
and EQT Gathering, LLC [Docket 133] is DENIED. With respect to Count III (breach of fiduciary
duty) the defendants’ motions [Docket 133 and 143] are GRANTED. With respect to Count I
(failure to account), Count IV (fraud), Count V (negligent misrepresentation), Count VI (civil
conspiracy/joint venture), Count VII (aiding and abetting a tort), and Count VIII (punitive
damages), the defendants’ motions [Dockets 133, 143, and 169] are DENIED.

I. Background
This case arises out of a dispute over royalty payments related to fourteen oil and gas well
leases. The plaintiffs are owners of land subject to those leases. The plaintiffs contend that Estate
of Tawney v. Columbia Natural Resources, L.L.C., 633 S.E.2d 22 (W. Va. 2006), prohibits the
defendants from deducting “post-production” costs from royalty payments. These costs include
monetary expenses incurred by the defendants to transport and market the gas after production.
Additionally, the plaintiffs contend that their royalties should be calculated based on the gas
volume produced at the wellhead, not the smaller volume that is sold at an interstate pipeline
connection. 1
The undisputed facts are as follows. EQT Production purchased the leases in February
2000. Between February 2000 and January 1, 2005, EQT Production produced gas from the leased
wells and transported it to an interstate pipeline connection where it was marketed to third parties.
During this period, EQT Production paid the costs of transporting and marketing the gas. EQT
Production passed some of these monetary costs on to the plaintiffs by charging them a flat rate per
unit of gas. The parties dispute the particular rate that was charged. EQT Production also
subtracted from the plaintiffs’ royalty what the plaintiffs call “volumetric deductions.” Essentially,
EQT Production paid a royalty based on the volume of gas sold at the interstate pipeline
connection, rather than the volume of gas produced at the wellhead.
On January 1, 2005, EQT Production reorganized into separate entities, including EQT
Gathering, Inc., EQT Gathering Equity, LLC, and EQT Gathering, LLC (collectively “EQT
Gathering”), EQT Energy, LLC (“EQT Energy”), and EQT Corporation. EQT Production is a
subsidiary of EQT Corporation. EQT Production is the only entity that is a party to the leases at
1

As a result of numerous factors, the volumes of gas recorded at the wellhead necessarily differ from those recorded
downstream at the interstate pipeline connection.

2

issue. EQT Production sells the gas at the wellhead 2 to EQT Energy. EQT Energy contracts with
EQT Gathering to collect the gas and move it to the interstate pipeline connection, where EQT
Energy sells the gas to third parties. EQT Production argues that since the 2005 reorganization, it
has not deducted post-production monetary costs from royalties paid to lessors. Instead, it pays
royalties based on the price it receives from EQT Energy. That price is a wellhead price where gas
is valued “at the wellhead at an index price less gathering charges and retainage . . . .” (Mem. in
Supp. of Defs.’ Joint Mot. for Summ. J. [Docket 170], at 5).
The plaintiffs bring several counts collectively against the defendants: (I) failure to
properly account for royalties, (II) breach of contract, (III) breach of fiduciary duties, (IV) fraud,
(V) negligent “misrepresentation/concealment,” (VI) “civil conspiracy/joint venture,” (VII) aiding
and abetting a tort, and (VIII) “punitive damages.” (Am. Compl. [Docket 34], at 10-15). The
plaintiffs move for summary judgment [Docket 131] on their breach of contract claim only. The
defendants move for summary judgment in three separate motions. EQT Production moves for
summary judgment on Counts III-VII [Docket 143]. The remaining defendants, EQT Corporation,
EQT Energy, EQT Gathering, LLC, EQT Gathering, Inc., EQT Gathering Equity, LLC, and EQT
Investment Holdings, move for summary judgment on all counts [Docket 133]. Finally, the
defendants jointly move for summary judgment on all counts [Docket 169].
II. Legal Standard
To obtain summary judgment, the moving party must show that there is no genuine issue as
to any material fact and that the moving party is entitled to judgment as a matter of law. Fed. R.
Civ. P. 56(a). In considering a motion for summary judgment, the court will not “weigh the
evidence and determine the truth of the matter.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242,
2

As I discuss, infra, this sale between affiliated companies is not a bona fide wellhead sale.

3

249 (1986). Instead, the court will draw any permissible inference from the underlying facts in the
light most favorable to the nonmoving party. Matsushita Elec. Indus. Co. v. Zenith Radio Corp.,
475 U.S. 574, 587-88 (1986).
Although the court will view all underlying facts and inferences in the light most favorable
to the nonmoving party, the nonmoving party nonetheless must offer some “concrete evidence
from which a reasonable juror could return a verdict in his [or her] favor.” Anderson, 477 U.S. at
256. Summary judgment is appropriate when the nonmoving party has the burden of proof on an
essential element of his or her case and does not make, after adequate time for discovery, a
showing sufficient to establish that element. Celotex Corp. v. Catrett, 477 U.S. 317, 322-23
(1986). The nonmoving party must satisfy this burden of proof by offering more than a mere
“scintilla of evidence” in support of his or her position. Anderson, 477 U.S. at 252. Likewise,
conclusory allegations or unsupported speculation, without more, are insufficient to preclude the
granting of a summary judgment motion. See Felty v. Graves Humphreys Co., 818 F.2d 1126,
1128 (4th Cir. 1987); Ross v. Comm’ns Satellite Corp., 759 F.2d 355, 365 (4th Cir. 1985),
abrogated on other grounds, Price Waterhouse v. Hopkins, 490 U.S. 228 (1989).
III.

Discussion
A.

Breach of Contract

Both the plaintiffs and defendants move for summary judgment on Count II, the breach of
contract claim. The plaintiffs argue that the language of the individual leases, interpreted pursuant
to Estate of Tawney v. Columbia Natural Resources, LLC, 633 S.E.2d 22 (W. Va. 2006), prohibits
EQT Production from taking any post-production monetary deductions or “volume deductions”
from royalty payments.
To understand the plaintiffs’ argument—and to resolve this case—it is necessary to survey
4

relevant West Virginia gas law to the present. Early cases demonstrate that the duties of lessees go
beyond merely paying the costs of production. Lessees must bear some portion of post-production
expenses as well. The two most recent cases I survey, Wellman v. Energy Resources, Inc., 557
S.E.2d 254 (W. Va. 2001), and Tawney, clarify this duty and demonstrate that lessees impliedly
covenant to bear all post-production costs incurred in delivering the gas to market.
In Kanawha Valley Bank v. United Fuel Gas Co., the Supreme Court of Appeals held that
the lessee may not deduct production taxes from a royalty. See 1 S.E.2d 875, 876 (W. Va. 1939).
At dispute were royalty provisions very similar to those in this case. The lease obligated United
Fuel Gas Co. (“United Fuel”) to pay a royalty “at the rate of one-eighth of the wholesale market
value thereof at the well.” Id. However, United Fuel deducted from the plaintiff’s royalty a
one-eighth portion of state production taxes. Id. The plaintiff sued to recover the amounts
withheld. Id. Looking to the language of the lease, the court found for the plaintiff. Id. The court
stated that the lessee had “bound itself to pay the lessor a full one-eighth of the market price of gas
at the well—not such price less one-eighth of the production tax.” Id.
In 1962, the Supreme Court of Appeals held that a proceeds lease required United Fuel to
pay a royalty based on the price it received from customers, free of post-production costs. See
Cotiga Development Co. v. United Fuel Gas Co., 128 S.E.2d 626, 630, 631-35 (W. Va. 1962). The
royalty provision in Cotiga required United Fuel “to pay for one-eighth . . . of the gas produced . .
. at the rate received by the Lessee for such gas . . . .” Id. at 630. United Fuel, a public utility that
delivered gas directly to consumers, paid royalties based on the wellhead market price of the gas.
Id. at 633. United Fuel argued the wellhead price, not the ultimate price received, must have been
the intention of the parties because the original lessee, Woods Oil and Gas Company, was not a
public utility. Id. The plaintiffs, however, asserted that the lease required that royalties be
5

calculated from the price received by United Fuel for the gas at the final point of sale. Id. at 632.
The court agreed with the plaintiffs and found that the lease provisions unambiguously required
United Fuel to pay a royalty based on the price it received at the end point of sale. Id. at 633. As the
plaintiffs in the instant case point out, the price at the end of point sale was significantly higher
than the wellhead price. This price difference was attributable to the post-production costs
incurred by United Fuel delivering the gas from the wellhead to customers as a public utility. See
id. at 634. Nonetheless, United Fuel was not permitted to factor those costs into royalty payments.
In 1992, the United States Court of Appeals for the Fourth Circuit required a lessee to pay
royalties based on the market price of gas, even though it received a lower, fixed contract price as
payment for the gas. The royalty clause required the lessee to pay one-eighth of the “current
wholesale market value at the well for all gas produced.” Imperial Colliery Co. v. OXY USA Inc.,
912 F.2d 696, 699 (4th Cir. 1990). The lessee, OXY USA, Inc. (“Oxy”), collected gas from
fourteen of Imperial Colliery Co.’s (“Imperial”) wells, comingled it with gas from other wells, and
transported it in a twelve-mile pipeline to the buyer, Equitable Gas Co. (“Equitable”). Id. at 699.
Oxy sold the gas to Equitable at a fixed contract price of 32.74 cents per one thousand cubic feet.
(Mem. of Law in Supp. of Pls.’ Mot. for Partial Summ. J. [Docket 132], at 11). 3 Oxy paid royalties
on the proceeds it received from Equitable under this contract price, less costs for transportation,
compression, and handling. (Id.). During the relevant period, the market value for the gas rose
dramatically, even though Oxy continued to receive a fixed contract price for the gas and pay a
royalty on this fixed contract price. (Id.).
Imperial sued to force Oxy to pay royalties based on the higher market price of the gas, not
the fixed contract price received from Equitable. Applying West Virginia law, the district court
3

Plaintiffs’ counsel was also counsel in the Imperial Colliery case. Therefore, I cite to the plaintiffs’ brief for facts not
present in the Imperial Colliery opinion.

6

and the Fourth Circuit agreed with Imperial that Oxy should pay royalties based on the market
price of the gas, which was calculated “by ascertaining the price that a willing buyer would pay a
willing seller in a free market . . . .” Imperial Colliery, 912 F.2d at 701. There is no indication from
the court’s opinion in Imperial Colliery that deductions were allowed for post-production costs.
Kanawha Valley Bank, Cotiga, and Imperial Colliery make plain that lessees operate under
an implied duty to pay some post-production costs. However, these cases do not clarify the
boundaries of this duty. The next two cases, Wellman and Tawney, specify that lessees impliedly
covenant to bear all post-production costs incurred in bringing the gas to market.
In Wellman, royalties under the leases were one-eighth “of the market value of such gas at
the mouth of the well,” or if the gas was sold by the lessee, one-eighth “of the proceeds from the
sale of gas as such at the mouth of the well.” 557 S.E.2d at 25. Lessee Energy Resources, Inc. sold
the gas at $2.22 per one thousand cubic feet. Id. Rather than pay a one-eighth royalty based on that
price, however, Energy Resources deducted post-production expenses to arrive at a sale price of
$0.87, on which it then paid a royalty to the lessor plaintiffs. Id. The post-production expenses
Energy Resources deducted included the cost of transporting the gas from the wellhead to a point
of sale and the cost of treating the gas to bring it to marketable condition. See id. at 264.
The court first recognized that “a distinguishing characteristic of such a [gas or oil] royalty
interest is that it is not chargeable with any of the costs of discovery or production.” Id. at 263-64
(citing Davis v. Hardman, 133 S.E.2d 77 (W. Va. 1963)). The court continued:
In spite of this, there has been an attempt on the part of oil and gas producers in
recent years to charge the landowner with a pro rata share of various expenses
connected with the operation of an oil and gas lease . . . . To escape the rule that the
lessee must pay the costs of discovery and production, these expenses have been
referred to as “post-production expenses.”

7

Id. at 264. After reviewing relevant decisions in other states, the court stated that “West Virginia
holds that a lessee impliedly covenants that he will market oil or gas produced. . . . It, therefore,
reasonably should follow that the lessee should bear the costs associated with marketing products
produced under a lease.” Id. at 265. The court then held that “if an oil and gas lease provides for a
royalty based on proceeds received by the lessee, unless the lease provides otherwise, the lessee
must bear all costs incurred in exploring for, producing, marketing, and transporting the product to
the point of sale.” Id. Further, if a lease did in fact provide for the deduction of post-production
costs, the lessee could deduct those costs “to the extent that they were actually incurred and they
were reasonable.” Id. Because Energy Resources did not proffer evidence showing that its
deductions were actually incurred or reasonable, the court did not allow post-production costs to
be deducted from royalties. See id. at 265.
Wellman accordingly stands for the proposition that unless a lease “provides otherwise,”
lessees may not deduct post-production costs before calculating royalties. The court in Tawney
took up the next question: how can a lease “provide otherwise”? That is, what lease language is
necessary before a lessee may deduct post-production costs from royalties? In Tawney, a class of
owners of oil and gas wells brought an action against Columbia Natural Resources (“CNR”)
seeking damages for insufficient royalty payments. See 633 S.E.2d at 25. For more than a decade,
CNR had deducted post-production expenses from the plaintiffs’ royalties. Id. These
post-production costs included “both monetary and volume deductions.” Id. Monetary deductions
included costs for transporting and processing the gas. Id. “Volume deductions” included the
“losses of volume of gas due to leaks in the gathering system or other volume loss . . . .” Id. The
court in Tawney addressed only the following certified question:
In light of the fact that West Virginia recognizes that a lessee to an oil and gas lease
8

must bear all costs incurred in marketing and transporting the product to the point
of sale unless the oil and gas lease provides otherwise, is lease language that
provides that the lessor’s 1/8 royalty is to be calculated “at the well,” “at the
wellhead” or similar language, or that the royalty is “an amount equal to 1/8 of the
price, net of all costs beyond the wellhead,” or “less all taxes, assessments, and
adjustments” sufficient to indicate that the lessee may deduct post-production
expenses from the lessor’s 1/8 royalty, presuming that such expenses are
reasonable and actually incurred.
Id. at 24-25.
The court held that the “at the wellhead”-type language was ambiguous because it did not
indicate “how or by what method the royalty is to be calculated or the gas is to be valued.” Id. at 28.
Further, the phrase “less all taxes, assessments, and adjustments,” was ambiguous without
additional language clarifying “what the parties intended.” Id. at 29. The court construed the
wellhead-type language against CNR and provided the framework under which lessees can deduct
post-production costs from royalties. Id. at 29-30. The court held that “language in an oil and gas
lease that is intended to allocate between the lessor and lessee the costs of marketing the product
and transporting it to the point of sale must” meet certain specificity standards. Id. at 30. First, the
language must “expressly provide that the lessor shall bear some part of the costs incurred between
the wellhead and the point of sale[.]” Id. Second, the language must “identify with particularity the
specific deductions the lessee intends to take from the lessor’s royalty[.]” Id. Finally, the language
must “indicate the method of calculating the amount to be deducted from the royalty for such
post-production costs.” Id.
1.

The Duty to Market Under Tawney and Wellman

After Tawney, it was unclear whether lessees are required to bear post-production costs
until the “point of sale,” wherever that may be, or until the market. This is an important distinction.
The market, as the parties stipulated at oral argument, is the first place downstream of the well

9

where the gas can be sold to any willing buyer and title passed to that buyer. (See Tr. 11/4/2013,
[Docket 211], 6:24-7:2, 31:1-9); cf. Imperial Colliery Co. v. Oxy USA Inc., 912 F.2d 696, 701 (4th
Cir. 1990) (“market value is computed by ascertaining the price that a willing buyer would pay a
willing seller in a free market . . . .”). But a point of sale may be at the wellhead (upstream from the
market) or at a burner tip (downstream from the market). Therefore, determining the point until
which lessees must bear post-production costs is crucial.
The only support for the argument that the duty extends to the point of sale derives from
syllabus point language in Tawney and Wellman. See Syl. Pt. 10, Tawney, 633 S.E.2d 22
(“Language in an oil and gas lease that is intended to allocate between the lessor and lessee the
costs of marketing the product and transporting it to the point of sale must expressly provide that
the lessor shall bear some part of the costs incurred between the wellhead and the point of
sale . . . .” (emphasis added)); Syl. Pt. 4, Wellman, 557 S.E.2d 254 (“If an oil and gas lease
provides for a royalty based on proceeds received by the lessee, unless the lease provides
otherwise, the lessee must bear all costs incurred in exploring for, producing, marketing, and
transporting the product to the point of sale.” (emphasis added)).
Conversely, when Tawney and Wellman are read in their entirety, it becomes clear that
lessees must bear the costs of bringing gas to the market, not to a point of sale. First, the facts in
Tawney support the existence of a duty to bear the costs of bringing gas to market, rather than to
the point of sale. Tawney addressed only a specific set of costs—the costs of delivering gas to the
Columbia Gas Transmission (“TCO”) line. Tawney, 633 S.E.2d at 25. At the TCO line, gas is
commoditized and bought and sold by third parties. The TCO line is therefore a market. Thus,
Tawney’s holdings are related to the duty to get the gas to market, not to a point of sale.
Because there were 2,258 separate leases at issue in Tawney, it is almost certain that points
10

of sale varied between the leases. In fact, the court stated that the leases were “of varying forms
and types.” Id. It would have been impossible for the court to address CNR’s duties with respect to
different points of sale for each lease unless the court addressed costs generally. But the Tawney
court did not address costs generally. Rather, it addressed only the costs of delivering gas to one
particular point in the stream of commerce—the TCO line. The only way to reconcile Tawney’s
facts—only the costs of bringing the gas to market were at issue—with the “point of sale”
language in Tawney’s syllabus points is to assume that Tawney applies to the costs incurred in
bringing the gas to market, not to a point of sale.
Second, both Tawney and Wellman are premised on the implied duty to market gas
produced:
The rationale for holding that a lessee may not charge a lessor for
“post-production” expenses appears to be most often predicated on the idea that the
lessee not only has a right under an oil and gas lease to produce oil or gas, but he
also has a duty, either express, or under an implied covenant, to market the oil or
gas produced. The rationale proceeds to hold the duty to market embraces the
responsibility to get the oil or gas in marketable condition and actually transport it
to market.
Tawney, 633 S.E.2d at 27 (emphasis added) (quoting Wellman, 557 S.E.2d at 264). The court in
Wellman explained that West Virginia law “holds that a lessee impliedly covenants that he will
market oil or gas produced.” 557 S.E.2d at 265. The court continued that “historically the lessee
has had to bear the cost of complying with his covenants under the lease. It, therefore, reasonably
should follow that the lessee should bear the costs associated with marketing products produced
under a lease.” Id. The court explained in both the Tawney and Wellman that its decisions were
predicated on the “duty, either express, or under an implied covenant, to market the oil or gas
produced.” Tawney, 633 S.E.2d at 27 (quoting Wellman, 557 S.E.2d at 264). Tawney and Wellman
both cite Professor Robert T. Donley’s seminal treatise, which also discusses an implied duty to
11

market gas produced:
From the very beginning of the oil and gas industry it has been the practice to
compensate the landowner by selling the oil and by running it to a common carrier
and paying to him one-eighth of the sale price received. This practice has, in recent
years, been extended to situations where gas if found . . . . In the absence of an
express covenant to market either oil or gas, the court implies one in order to
effectuate the basic purpose of the lease . . . .
Robert T. Donley, Law of Coal, Oil and Gas in West Virginia and Virginia § 104 (1951) (emphasis
added).
By basing the Wellman and Tawney decisions on the implied covenant to market, the
Supreme Court of Appeals indicated that it was adopting a version of the “marketable product”
rule. See 3 Eugene Kuntz, Law of Oil and Gas § 40.5 (Lexis 2013) (The Wellman decision “rel[ied]
on the implied covenant to market [and] adopted a marketable product rule . . . .”); Owen L.
Anderson, Rogers, Wellman, and the New Implied Marketplace Covenant, 2003-1 Rocky Mtn.
Min. L. Inst. 13A (2003) (“Wellman take[s] the view that royalty is owed on the value added by
transportation incurred to move gas to a first market unless the lease expressly provides
otherwise.”); cf Appalachian Land Co. v. EQT Production Co., CIV. A. 7:08-139-KKC, 2012 WL
523749 (E.D. Ky. Feb. 16, 2012) (deciding whether Kentucky follows the marketable product rule
or the “at-the-well” rule, and citing Tawney to show that West Virginia does not follow the
“at-the-well” rule). Under the marketable product rule, lessees impliedly covenant to bear the costs
of getting gas into marketable condition and transporting it to market. See 5 Howard R. Williams
and Charles J. Meyers, Oil and Gas Law § 853, p. 396.3 (2012) (“[T]he implied covenant to
market as a prudent operator includes an implied duty to prepare the natural gas for a market and
even to transport the gas to a commercial market.”); Owen L. Anderson, Royalty Valuation:
Should Royalty Obligations Be Determined Intrinsically, Theoretically, or Realistically? (Part 2),

12

37 Nat. Resources J. 611, 634 (1997) (implying that the marketable product rule requires lessees to
bring gas to marketable condition and marketable location). Other cases applying versions of the
marketable product rule hold the same. See, e.g., Rogers v. Westerman Farm Co., 29 P.3d 887, 906
(Colo. 2001) (“Absent express lease provisions addressing allocation of costs, the lessee’s duty to
market requires that the lessee bear the expenses incurred in obtaining a marketable product. Thus,
the expense of getting the product to a marketable condition and location are borne by the
lessee.”); TXO Prod. Corp. v. State ex rel. Comm’rs of Land Office, 903 P.2d 259, 262-63 (Okla.
1994) (holding that post-production costs of compression, dehydration, and gathering were not
deductible from royalties because these costs were necessary to deliver the gas into a pipeline).
Tawney and Wellman’s reliance on the implied duty to market gas, as well Tawney’s focus
on the costs of bringing gas to market, convinces me that lessees have a duty to bear all costs
incurred until the gas reaches market, not to a point of sale. I therefore FIND that lessees have an
implied duty to bear all post-production costs incurred until the gas reaches the market, which is
the first place downstream of the well where the gas can be sold to any willing buyer and title
passed to that buyer. 4
2.

Royalties for Unsold Gas

The parties differ whether Tawney’s heightened specificity requirements obligate lessees
to pay royalties on unsold gas. According to the plaintiffs, “the Tawney prohibition against
deductions for ‘post-production’ expenses specifically included both monetary expenses and
volumetric losses.” (Mem. of Law in Supp. of Pls.’ Mot. for Partial Summ. J. [Docket 132], at 15).
The plaintiffs would have lessees pay royalties on volumes of gas produced, not the smaller
volume that is actually sold at the interstate pipeline connection. Essentially, the plaintiffs believe
4

The duty to market is not implicated where, pursuant to the terms of a lease, gas is legitimately sold in an arm’s
length transaction at the wellhead. But that was not the case in Wellman and Tawney, and it is not the case here.

13

that Tawney obligates lessees to pay royalties on gas that is never sold. I disagree.
First, Tawney’s heightened specificity requirements clearly apply to “the costs of
marketing the product and transporting it to the point of sale.” Syl. Pt. 10, Tawney, 633 S.E.2d 22.
Syllabus Point 10 is written in terms of monetary costs only, as the plaintiffs conceded at oral
argument. (See Tr. 11/4/2013, [Docket 211], 8:17-18). Therefore, volume losses are not part of the
court’s holding.
Second, and most significantly, requiring lessees to pay royalties on unsold gas is illogical
and inequitable. Volume losses are not “deductions” of costs in the same sense as marketing or
transportation costs. A deduction is the “act or process of subtracting or taking away.” Black’s Law
Dictionary 475 (9th ed. 2009); see also Webster’s Third New International Dictionary 589 (2002)
(“an act of taking away”). Therefore, in order to have a deduction, there must be a starting value
from which you take the deduction. Under Wellman and Tawney, the lessee has a general duty to
market the gas produced, under which the lessee must bear all costs incurred in converting the
product to a marketable condition and bringing it to a market. See Syl. Pt. 4, Wellman, 557 S.E.2d
254; Syl. Pt. 1, Tawney, 633 S.E.2d 22. The lessee does not receive payment for lost and
unaccounted for gas that is not delivered to the market. Rather, the lessee receives payment only
for gas that is actually sold. Therefore, when the lessee pays a royalty on those proceeds, there is
nothing to deduct; the lessee was never paid for undelivered volumes of gas. Volume losses are not
costs that are deducted from a royalty, unlike the monetary deductions that concerned the Wellman
and Tawney courts.
Under the plaintiffs’ interpretation of Tawney, lessees would be required to pay a royalty
based on the value of gas at one point in the stream of commerce—the market—but on a volume of
gas at an earlier point in the stream of commerce—the wellhead. To illustrate this point, assume a
14

wellhead produced 1,000 cubic feet of gas, where it is worth $1.00 per cubic foot. The lessee then
gathers the gas, markets it, and delivers it to an interstate pipeline where it is now worth $3.00 per
cubic foot. When the gas arrives at the pipeline, however, only 900 cubic feet of gas remain.
Various volume losses contributed to the reduction of the gas volume by 100 cubic feet. Although
only 900 cubic feet of gas reach the interstate pipeline and are sold, the plaintiffs would have
lessees pay a one-eighth royalty at the market price on the entire 1,000 cubic feet that left the
wellhead. The plaintiffs want to have their cake and eat it too. They seek a royalty based on the unit
value of gas at market, to which they are generally entitled under Tawney, but they want this
royalty to be paid based on the volume at the wellhead, where gas is considerably less valuable.
Meanwhile, the lessee received no payment for the lost, unsold gas. Had the court in Tawney
intended such a perverse result, it would have said so.
Finally, other courts considering this question agree that royalties need not be paid on
unsold gas. See, e.g., Amoco Prod. Co. v. Andrus, 527 F. Supp. 790, 794 (E.D. La. 1981) (where
Department of Interior administered leases on the Outer Continental Shelf, holding that the
Department could not require payment of royalties for oil and gas flared, vented, used, or
unavoidably lost); Marathon Oil Co. v. Andrus, 452 F. Supp. 548, 553 (D. Wyo. 1978)
(invalidating as arbitrary and capricious ruling by Secretary of Interior to require payment of
royalties on unavoidably lost or used gas on onshore leases); Dynegy Midstream Sers., Ltd. P’ship
v. Apache Corp., 294 S.W.3d 164, 168-69 (Tex. 2009) (under “unambiguous” gas sale contract,
gas processor had no obligation to pay gas producer for gas lost between the wellhead and the
processor’s plant).
Therefore, lessees have no general duty to pay for lost volumes. The plaintiffs may,
understandably, be concerned about lessees losing large volumes of gas and therefore paying out
15

smaller royalties. However, lessees have a duty to act as ordinarily prudent operators. Jennings v.
S. Carbon Co., 80 S.E. 368, 370 (W. Va. 1913); Grass v. Big Creek Dev. Co., 84 S.E. 750, 754 (W.
Va. 1915) (The duty is “that degree of diligence reasonably and ordinarily exercised by prudent
operators engaged in the same line of business under the same or similar circumstances and
conditions, keeping in view the covenants of the lease and the mutual benefit and advantage of the
parties to the contract[.]”). Therefore, if the plaintiffs believe that the lessees are negligently losing
gas between the wellhead and the market, the plaintiffs may sue to recover damages for unpaid
royalties on that gas. Cf. id.
In sum, the state of the law in West Virginia regarding royalty payments on gas leases is as
follows. West Virginia recognizes an implied duty on the part of producers to market the gas
produced. See Tawney, 633 S.E.2d at 27 (Lessees have a duty “to market the oil or gas produced.”
(citing Wellman, 557 S.E.2d 254, 264)). This obligation to market gas “embraces the responsibility
to get the oil or gas in marketable condition and actually transport it to market.” Id. The market is
the first place downstream of the well where the gas can be sold to any willing buyer and title
passed to that buyer. Unless a lease provides otherwise, lessees must deliver the gas to the market,
in a marketable condition, free of all costs of production. The costs of production include any
“post-production” costs incurred to market the gas. In order to deduct any post-production costs
from royalties, leases must adhere to the specificity requirements set out in Tawney. Finally,
Tawney’s heightened specificity requirements do not obligate lessees to pay royalties on lost
volumes.
3.

Tawney Applies Retroactively

The defendants argue that Tawney’s heightened specificity requirements should not apply
to their leases because they were executed decades before Tawney was decided. This retroactivity
16

argument is without merit. “As a general rule, judicial decisions are retroactive in the sense that
they apply both to the parties in the case before the court and to all other parties in pending cases.”
Caperton v. A.T. Massey Coal Co., 690 S.E.2d 322, 350 (W. Va. 2009). There are exceptions to
this general rule, but they do not apply here. If the Supreme Court of Appeals intended Tawney to
apply prospectively only, it could have said so. Instead, Tawney’s holding applied to the parties in
that case—a class of approximately 8,000 plaintiffs holding 2,258 leases—and to leases executed
and conduct occurring more than a decade before the decision was announced. See Tawney, 633
S.E.2d at 25.
4.

The Defendants Cannot Avoid Tawney by Using a “Work-back”
Method

Finally, the defendants argue that Tawney is inapplicable because EQT Production sells
gas at the wellhead and, since 2005, has taken no monetary deductions from royalties. However,
EQT Production sells the gas at the wellhead to EQT Energy, a sister company. The defendants
cannot calculate royalties based on a sale between subsidiaries at the wellhead when the
defendants later sell the gas in an open market at a higher price. Otherwise, gas producers could
always reduce royalties by spinning off portions of their business and making nominal sales at the
wellhead. I predict with confidence that, if confronted with this issue, the Supreme Court of
Appeals would hold the same. See Howell v. Texaco, Inc., 112 P.3d 1154 (Okla. 2004) (“an
intra-company contract is not an arm’s length transaction, [and] it is not a legal basis on which [a
producer] can calculate royalty payments”); Beer v. XTO Energy, Inc., CIV-07-798-L, 2010 WL
476715 (W.D. Okla. Feb. 5, 2010) (gas sale at wellhead between two controlled, affiliated
companies not appropriate for royalty calculation).

17

Further, in order to determine a wellhead price at which EQT Production sells gas to EQT
Energy, defendants essentially admit they continue to deduct post-production expenses. To
determine the wellhead price, the defendants use a “work-back method” which “involves
subtracting postproduction costs that enhance the value of the gas from the interstate connection
price.” (Mem. in Supp. of Defs.’ Joint Mot. for Summ. J. [Docket 170], at 25). Absent lease
language to the contrary, Tawney requires lessees to pay royalties free of these costs. The
defendants cannot avoid Tawney by simply reorganizing their businesses and making
intra-company wellhead sales. Accordingly, I FIND that Tawney’s specificity requirements apply
to royalty payments made under the defendants’ work-back method after 2005.
5.

Individual Lease Analysis

With the general legal framework set out above, I now turn to the fourteen leases at issue in
the parties’ motions to determine whether they permit the defendants to deduct monetary costs or
require the defendants to pay for lost volumes. For efficiency, I will group leases with similar
royalty provisions together. My analysis is two-fold. First, I will determine if the leases permit
deductions for monetary costs. Next I will determine whether the leases permit deductions for
volume losses incurred between the wellhead and the market.
a.

Leases (a), (b), (c), (d), (e), (f), and (i) 5

Leases (a), (b), (c), (d), (e), (f), and (i) contain the following royalty provisions:
-

Leases (a) through (e):

To Pay Lessors, should a well be found producing gas only as full consideration for
such gas well and its products, a royalty payable . . . beginning with the date the gas
is first marketed therefrom and continuing so long as gas is produced and marketed
or used off the premises equal to 1/8th of the wholesale market value thereof at the
well as represented by the prevailing purchase price currently paid at the well by
purchasers of gas at wholesale in the field in which the well is located.
5

I refer to the leases as they appear on the Amended Complaint [Docket 34], at 6.

18

(Exhibit 1 [Docket 131-1], at 3-4; Exhibit 2 [Docket 131-2], at 3; Exhibit 3 [Docket 131-3], at 2-3;
Exhibit 4 [Docket 131-4], at 2-3; Exhibit 5 [Docket 131-5], at 3-4) (emphasis added).
-

Lease (f):

[S]hould a well be found producing gas only . . . a royalty [is] payable [to the
lessor]. . . so long as gas is produced and marketed . . . equal to one-eighth (1/8) of
the wholesale market value thereof at the well as represented by the prevailing
purchase price currently paid at the well by purchasers of gas at wholesale in the
field in which the well is located; but such payment to Lessor shall be not less than
One and seven-eighths (1-7/8) Cents for each [Mcf] of gas produced and sold in
any month.
(Exhibit 7 [Docket 131-7], at 3) (emphasis added).
-

Lease (i):

[The lessee will pay] for each gas well from the time and while the gas is marketed,
at the rate of One-eighth (1/8) of the wholesale market value thereof at the well,
which value for the purpose of this lease shall not be less than [15¢] per [Mcf],
payable each three months.
(Exhibit 6 [Docket 131-6], at 3) (emphasis added).
The royalty language in these leases is similar to the “at-the-wellhead”-type language
examined in Tawney. Also like Tawney, these leases do not “expressly provide that the lessor shall
bear some part” of the post-production costs, “identify . . . specific deductions the lessee intends to
take from the lessor’s royalty” or “indicate the method of calculating the amount to be deducted
from the royalty for . . . post-production costs.” Tawney, 633 S.E.2d at 24. Thus, I FIND the
language in leases (a), (b), (c), (d), (e), (f), and (i) is insufficient to allow the defendants to deduct
post-production monetary costs from the plaintiffs’ royalties.
It is a separate issue whether the defendants are entitled to take “volumetric deductions.”
As I previously explained, Tawney’s heightened specificity requirements do not obligate lessees to
pay royalties on lost volumes. Accordingly, I look only to the language in the leases. At first
19

glance, the leases appear to require royalty payments based on the volume extracted at the
wellhead, without reference to the volume that makes it to the market: royalties are one-eighth of
the “wholesale market value” “at the well.” However, the leases are written in the context of gas
being “produced” and “marketed.” This means that royalties should be paid only on the gas
actually delivered to market, even if this volume is smaller than the volume recorded at the
wellhead. Gas is produced when it is extracted from the wellhead, but it is not produced and
marketed until it is delivered and sold at a market. I therefore FIND that royalties for leases (a),
(b), (c), (d), (e), (f), and (i) are payable only on the gas actually sold and marketed.
b.

Leases (g) and (h)

Leases (g) and (h) are unique because their royalty provisions distinguish between gas sold
at the well and gas sold elsewhere.
-

Lease (g):

(1) If measured and sold at the well, [royalty shall be] an amount equal to
one-eighth (1/8th) of the price received by the Lessee from the sale of such gas.
(2) If not sold at the well, then at the time gas is first marketed from each well
completed on the leased premises, the royalty price for such well shall be
established as one-eighth (1/8th) of the wellhead price then being paid by Lessee to
producers in the general producing area of the leased premises for like gas from
the same geological formation.
(Exhibit 8 [Docket 131-8], at 1-2) (emphasis added).
-

Lease (h):

If measured and sold at the well, [royalty shall be] an amount equal to one-eighth
(1/8) of the price received by the Lessee for the sale of such gas. . . . [I]f not sold at
the well, . . . [royalty shall be] one-eighth (1/8) of the wellhead price being paid by
Lessee to producers in the general producing area of the leased premises for like
gas from the same geological formation.

20

(Exhibit 9 [Docket 131-9], at 3) (emphasis added). It appears that these leases intend for royalties
to be paid based on a wellhead price—as opposed to a downstream price—for the gas. These leases
could be read to require that if the gas is sold at the wellhead, then royalty is one-eighth of that
price. If not sold at the wellhead, then royalty is one-eighth of the price of comparable gas sold at
the wellhead. Even so, this language is not precise enough to meet the Tawney standards. The
leases do not “expressly provide that the lessor shall bear some part of the costs incurred between
the wellhead and the point of sale,” or “identify with particularity the specific deductions the lessee
intends to take . . . .” Tawney, 633 S.E.2d at 30. I therefore FIND the language in leases (g) and (h)
is insufficient to allow the defendants to deduct post-production monetary costs from the
plaintiffs’ royalties.
With respect to volume losses, leases (g) and (h) are written in the context of gas being
“marketed” and “sold.” Therefore, I FIND that leases (g) and (h) permit the lessees to pay a
royalty based on the volume of gas actually sold at the market.
c.

Leases (k), (l), and (m)

Leases (k), (l), and (m) each contemplate specific post-production cost deductions for
compression, desulphurization, and transportation of gas.
-

Lease (k):

Lessee shall pay to the Lessors the sum of [2¢] per [Mcf] of gas produced and
marketed from the leased premises, and, in addition thereto, one-eighth (1/8) of the
selling price in excess of [16¢] per [Mcf] received by the Lessee for any such gas
sold by it at a higher price than [16¢] per [Mcf]; provided, however, that if, in order
to market such gas more advantageously it shall be necessary or desirable, in the
judgment of the Lessee, to do any or all of the following, i.e., to compress or
desulphurize such gas or to construct a pipeline or pipelines off the leased premises,
then the Lessee may deduct from the price received by it for such gas in excess of
[16¢] per [Mcf] of the actual cost of such compression, of such desulphurization
and of such transportation; and, provided further that the Lessors shall always
receive, regardless of the selling price received by the Lessee, at least one-eighth
21

(1/8) of the wholesale market price or value at the well of said gas, that is to say, the
usual or prevailing wholesale market price paid for gas at the well at the time in the
general locality of the leased premises, or in the same or nearest gas field,
whichever is higher . . . .
(Exhibit 11 [Docket 131-11], at 7-8) (emphasis added).
-

Lease (l):

[Lessee shall pay] the sum of One and Seven-eighths Cents (1-7/8¢) for each [Mcf]
of gas produced and marketed from the leased premises, and in addition thereto,
one-eighth (1/8) of the selling price thereof in excess of Fifteen Cents (15¢) per
[Mcf] received by Lessee for the gas produced by it at and sold at a higher price
than Fifteen Cents (15¢) per [Mcf]. The selling price for gas on which royalty is
based is the price at the well. If the gas should be sold at some point other than at the
well, then any selling price in excess of Fifteen Cents (15¢) per [Mcf] received by
the Lessee shall be adjusted downward to reflect a reasonable charge for
compressing, desulphurization and/or transporting gas from the well to the point of
sale.
(Exhibit 12 [131-12], at 9) (emphasis added).
-

Lease (m):

Lessee shall pay for the gas produced, saved and marketed therefrom, from the time
and while the gas is marketed, as royalty, the sum of One and Seven-eighths Cents
(1-7/8¢) for each [Mcf] of gas produced and marketed from the consolidated leased
premises, and in addition thereto, one-eighth (1/8) of the selling price thereof in
excess of Fifteen Cents (15¢) per [Mcf] received by Lessee for the gas produced by
it at and sold at a higher price than Fifteen Cents (15¢) per [Mcf]. The selling price
for gas on which royalty is based is the price at the well. If the gas should be sold at
some point other than at the well, then any selling price in excess of Fifteen Cents
(15¢) per [Mcf] received by the Lessee shall be adjusted downward to reflect a
reasonable charge for compressing, desulphurization and/or transporting gas from
the well to the point of sale.
(Exhibit 13 [131-13], at 6) (emphasis added).
The defendants argue that these leases specifically contemplate deductions for
post-production costs, such as desulphurization, compression, and transportation. (See Mem. in
Supp. of Defs.’ Joint Mot. for Summ. J. [Docket 170], at 19-22). With respect to lease (k), the
plaintiffs refute this argument by pointing to the clause stating that lessees are to pay “at least
22

one-eighth (1/8) of the wholesale market price or value at the well,” “regardless of the selling price
received by the Lessee . . . .” (Lease (k), Exhibit 11 [Docket 131-11], at 8).
A contract is ambiguous where it contains language “reasonably susceptible of two
different meanings or language of such doubtful meaning that reasonable minds might be
uncertain or disagree as to its meaning.” Payne v. Weston, 466 S.E.2d 161, 166 (W. Va. 1995)
(internal quotations omitted). I FIND that lease (k) is ambiguous on the issue of monetary
deductions because it contemplates specific deductions while simultaneously prohibiting the
lessee from assessing them. In this situation, I would normally admit parol evidence to resolve the
ambiguity. See Syl. Pt. 1, Lee Enters., Inc. v. Twentieth Century-Fox Film Corp., 303 S.E.2d 702
(W. Va. 1983). However, ambiguities in oil and gas leases are construed against the lessee. See
Tawney, 633 S.E.2d at 29-30; Syl. Pt. 1, Martin v. Consol. Coal & Oil Corp., 133 S.E. 626 (W. Va.
1926) (“The general rule as to oil and gas leases is that such contracts will generally be liberally
construed in favor of the lessor, and strictly as against the lessee.”). Therefore, I FIND that lease
(k) fails to meet Tawney’s specificity requirements for monetary deductions.
Leases (l) and (m) do not contain a contradictory provision similar to that in lease (k).
Nonetheless, the plaintiffs argue that leases (l) and (m) fail to meet Tawney’s specificity
requirements because they do not describe the method of calculating deductions. I disagree. Leases
(l) and (m) both specify that the lessor will bear some part of the costs of marketing the gas. The
leases identify the particular costs that will be deducted—the costs of compression,
desulphurization, and transportation. Further, leases (l) and (m) identify the method for calculating
deductions because the lessee can only deduct “reasonable” costs. “Reasonableness” is a common
legal standard that has been used by courts for more than a century. See, e.g., Robinson v. Lindsay,
598 P.2d 392, 393 (Wash. 1979) (“In the courts’ search for a uniform standard of behavior to use in
23

determining whether or not a person’s conduct has fallen below minimal acceptable standards, the
law has developed a fictitious person, the ‘reasonable man of ordinary prudence.’ That term was
first used in Vaughan v. Menlove, 132 Eng. Rep. 490 (1837).”). “The word[] ‘reasonable’ . . . [is a]
relative term[] with no fixed or rigid meaning; but [it is] not ambiguous. In ordinary use and
common acceptation, the word ‘reasonable’ means fair; just; ordinary or usual; not immoderate or
excessive; not capricious or arbitrary. It means what is just, fair and suitable under the
circumstances.” Sydnor Pump & Well Co. v. Taylor, 110 S.E.2d 525, 530 (Va. 1959) (internal
quotations omitted). In fact, the court in Tawney used “reasonableness” as a legal standard in this
context. See Syl. Pt. 2, Estate of Tawney v. Columbia Natural Resources, LLC, 633 S.E.2d 22 (W.
Va. 2006) (Lessees may deduct costs only “to the extent that they were actually incurred and they
were reasonable.”). I therefore FIND that leases (l) and (m) meet Tawney’s specificity
requirements for the deduction of costs for compression, desulphurization, and transportation to
the extent they were reasonable and actually incurred.
With respect to volume losses, each of the leases frames royalties in terms of a portion of
the price “received” by the lessee. Lease (k) states that royalties will be paid based on gas
“produced and marketed,” and “sold by [the lessee].” Lease (l) indicates that royalties will be paid
on gas “produced and marketed.” Lease (m) states that royalties will be paid on gas “produced,
saved and marketed.” Therefore, I FIND that leases (k), (l), and (m) permit the lessees to pay
royalties only on the actual amount of gas sold at market.
d.

Lease (n)

Lease (n) does not include any “wellhead” language. It states that royalties will be based
upon the proceeds received by the lessee:

24

[Lessee agrees] [t]o pay Lessor for gas of whatsoever nature or kind (with all of its
constituents) produced and sold or used off the Leased Premises, or used in the
manufacture of products therefrom, one-eighth (1/8) of the gross proceeds received
for the gas sold, used off of the leased premises or in the manufacture of products
therefrom, but in no event more than one-eighth (1/8) of the actual amount received
by the Lessee . . . .
(Exhibit 10 [Docket 131-10], at 1) (emphasis added). Lease (n) does not identify with particularity
specific post-production costs to be deducted from royalties. Thus, I FIND that lease (n) does not
meet Tawney’s specificity requirements to allow the defendants to deduct post-production
monetary costs.
With respect to volume losses, lease (n) specifically states that royalties will be paid based
on gas “produced and sold” and on “gross proceeds received for the gas sold.” Thus, I FIND lease
(n) permits the lessees to pay a royalty based on the volume of gas actually sold at the market.
e.

Lease (j)

The plaintiffs state that lease (j) has “terminated” and therefore do not move for summary
judgment on lease (j). (See Pls.’ Resp. to Defs.’ Joint Mot. for Summ. J. [Docket 176], at 16). The
plaintiffs do not oppose the defendants’ motion for summary judgment on lease (j). Accordingly,
with respect to lease (j), the defendants’ motion for summary judgment is GRANTED.
6.

Non-Lessee Defendants

EQT Corporation, EQT Energy, EQT Gathering, LLC, EQT Gathering, Inc., EQT
Gathering Equity, LLC, and EQT Investment Holdings (collectively, the “non-lessee defendants”)
move for summary judgment on the breach of contract claim [Docket 133]. They argue that
summary judgment is appropriate because they were not in privity of contract with the plaintiffs.
(See Mem. in Supp. of Mot. for Summ. J. of Non-Lessee Defendants [Docket 134], at 5-6). EQT
Production is the only defendant who is a party to the leases at issue. However, as I discuss below,

25

there is a genuine dispute of material fact whether the non-lessee defendants are vicariously liable
for the debts and obligations of EQT Production. Therefore, the non-lessee defendants’ motion for
summary judgment [Docket 133] on the breach of contract claim is DENIED.
7.

Conclusion

On Count II (breach of contract), the Plaintiffs’ Motion for Partial Summary Judgment
[Docket 131] is GRANTED in part with respect to monetary deductions in leases (a), (b), (c), (d),
(e), (f), (g), (h), (i), (k), and (n); and DENIED in part with respect to monetary deductions in
leases (l) and (m) and with respect to volume losses on leases (a), (b), (c), (d), (e), (f), (g), (h), (i),
(k), (l), (m), (n). On Count II (breach of contract), the Defendants’ Joint Motion for Summary
Judgment [Docket 169] is GRANTED in part with respect to lease (j) in its entirety, with respect
to monetary deductions in leases (l) and (m), and with respect to volume losses in leases (a), (b),
(c), (d), (e), (f), (g), (h), (i), (k), (l), (m), (n); and DENIED in part with respect to monetary
deductions in leases (a), (b), (c), (d), (e), (f), (g), (h), (i), (k), and (n).
B.

Limitations on Tort Claims

The defendants argue that the plaintiffs’ following claims are partially barred by the statute
of limitations: Count III (breach of fiduciary duty), Count IV (fraud), Count V (negligent
misrepresentation/concealment), Count VI (civil conspiracy/joint venture), and Count VII (aiding
and abetting a tort). Under West Virginia law, a court must apply a five-step analysis to determine
the validity of a statute-of-limitations defense. See Mack-Evans v. Hilltop Healthcare Ctr., Inc.,
700 S.E.2d 317, 322 (W. Va. 2010) (quoting Syl. Pt. 5, Dunn v. Rockwell, 689 S.E.2d 255 (W. Va.
2009)).
First, the court should identify the applicable statute of limitation for each cause of
action. Second, the court (or, if material questions of fact exist, the jury) should
identify when the requisite elements of the cause of action occurred. Third, the
26

discovery rule should be applied to determine when the statute of limitation began
to run by determining when the plaintiff knew, or by the exercise of reasonable
diligence should have known, of the elements of a possible cause of action . . . .
Fourth, if the plaintiff is not entitled to the benefit of the discovery rule, then
determine whether the defendant fraudulently concealed facts that prevented the
plaintiff from discovering or pursuing the cause of action. Whenever a plaintiff is
able to show that the defendant fraudulently concealed facts which prevented the
plaintiff from discovering or pursuing the potential cause of action, the statute of
limitation is tolled. And fifth, the court or the jury should determine if the statute of
limitation period was arrested by some other tolling doctrine. Only the first step is
purely a question of law; the resolution of steps two through five will generally
involve questions of material fact that will need to be resolved by the trier of fact.
Dunn v. Rockwell, 689 S.E.2d 255, 265 (W. Va. 2009).
Applying the first step, it is clear that a two-year statute of limitations applies to tort claims
causing personal injury. That statute, West Virginia Code § 55-2-12(b), provides that “[e]very
personal action for which no limitation is otherwise prescribed shall be brought . . . within two
years next after the right to bring the same shall have accrued if it be for damages for personal
injuries . . . .” The plaintiffs do not dispute that this statute applies to their claims for breach of
fiduciary duty, fraud, negligent misrepresentation/concealment, and aiding and abetting a tort.
(See Pls.’ Resp. to Defs.’ Joint Mot. for Summ. J. [Docket 176], at 1-2).
However, the plaintiffs argue that the ten-year statute of limitations for breach of contract,
West Virginia Code § 55-2-6, applies to their civil conspiracy claim in Count VI. They point to
authority stating that “the statute of limitation for a civil conspiracy claim is determined by the
nature of the underlying conduct on which the claim of conspiracy is based . . . .” Dunn, 689 S.E.2d
at 269. According to the plaintiffs, the conduct underlying their civil conspiracy claim is the
improper payment of royalties, which is a breach of contract claim, and therefore the ten-year
statute of limitations should apply. (See Pls.’ Resp. to Defs.’ Joint Mot. for Summ. J. [Docket 176],
at 6-7). However, the plaintiffs ignore other statements made by the court in Dunn that limit civil

27

conspiracy to tort actions: “A civil conspiracy is . . . a legal doctrine under which liability for a tort
may be imposed on people who did not actually commit a tort themselves but who shared a
common plan for its commission with the actual perpetrator(s).” Dunn, 689 S.E.2d at 269
(emphasis added); see also Kessel v. Leavitt, 511 S.E.2d 720, 753 (W. Va. 1998) (“At its most
fundamental level, a civil conspiracy is a combination to commit a tort.”) (internal quotations
omitted). The plaintiffs have pointed to no contrary authority, and I have found none, where a West
Virginia court applied a ten-year statute of limitations to a civil conspiracy claim. Accordingly, I
FIND that the two-year statute of limitations for torts, West Virginia Code § 55-2-12(b), applies to
the plaintiffs’ civil conspiracy claim.
The plaintiffs also bring a claim for joint venture within Count VI. A joint venture “is an
association of two or more persons to carry out a single business enterprise for profit, for which
purpose they combine their property, money, effects, skill, and knowledge.” Syl. Pt. 5, Armor v.
Lantz, 535 S.E.2d 737 (W. Va. 2000). Like civil conspiracy, joint venture is not a stand-alone
claim, but a basis for vicarious liability. See id. at 742-43 (“[M]embers of a joint venture are . . .
jointly and severally liable for all obligations pertaining to the venture, and the actions of the joint
venture bind the individual co-venturers.”). Because joint venture liability can arise out of “all
obligations pertaining to the venture” and is not apparently limited to tort liability, I FIND that the
plaintiffs’ joint venture claim is not automatically barred by the two-year tort statute of limitations.
If the plaintiffs establish joint venture liability for claims other than torts, then their joint venture
claim is not barred by the statute of limitations in West Virginia Code § 55-2-12(b).
I therefore FIND that the two-year statute of limitations in West Virginia Code §
55-2-12(b) applies to the plaintiffs’ claims for breach of fiduciary duty, fraud, negligent
misrepresentation/concealment, civil conspiracy, and aiding and abetting a tort.
28

Under the second step of the Dunn framework, I determine—as long as there is no genuine
dispute of material fact—when the requisite elements of the causes of action occurred. It is
undisputed that the plaintiffs had cause to sue as early as 2002. (See Mem. in Supp. of Defs.’ Joint
Mot. for Summ. J. [Docket 170], at 9-10). However, the plaintiffs argue that the deductions, which
have been taken periodically until the present, are a “continuing tort.” Under the “continuing tort”
theory, “where a tort involves a continuing or repeated injury, the cause of action accrues at and
the statute of limitations begins to run from the date of the last injury or when the tortious overt
acts or omissions cease.” Graham v. Beverage, 566 S.E.2d 603, 614 (W. Va. 2002). However, this
theory does not apply “when money recovery is sought on an obligation payable in installments.”
G. T. Fogle & Co. v. King, 51 S.E.2d 776, 784 (W. Va. 1948). Then, “the statute of limitations
commences to run against each installment from the time it becomes due.” Id. The continuing tort
theory will not apply to toll the statute of limitations, even though the plaintiff brings tort actions,
where the injuries were multiple and periodic, not continuing. See, e.g., Copier Word Processing
Supply, Inc. v. WesBanco Bank, Inc., 640 S.E.2d 102, 109-110 (W. Va. 2006) (finding continuing
tort theory inapplicable where plaintiff sued for civil conversion related to hundreds of separate
instances of embezzlement by the defendant). The court in Copier Word found that “while the
multiple conversions were carried out repeatedly over time, each conversion was a discrete act, a
single transaction involving a specifically individual negotiable instrument. Thus, each
conversion, though similar, was a distinctly separate transaction.” Id. at 109. Similarly, each act of
tortiously reducing royalty payments, though similar, is a separate act and separate transaction.
Accordingly, I FIND that the continuing tort theory is inapplicable. The requisite elements of the
plaintiffs’ causes of action accrued at the time of each allegedly deficient royalty payment.
Third, I determine whether the discovery rule tolled the statute of limitations. Under the
29

discovery rule, the statute of limitations will run, “where the injury is not apparent, from the date
the plaintiff knows or reasonably should know of his claim.” Smith v. Raven Hocking Coal Corp.,
486 S.E.2d 789 (W. Va. 1997). “[W]hether a plaintiff ‘knows of’ or ‘discovered’ a cause of action
is an objective test. . . . This objective test focuses upon whether a reasonable prudent person
would have known, or by the exercise of reasonable diligence should have known, of the elements
of a possible cause of action.” Dunn, 689 S.E.2d at 265.
The plaintiffs knew as early as 2002 that deductions, at some amount, were being
subtracted from their royalties. On September 25, 2002, Glenn T. Yost, in a letter on behalf of the
plaintiffs, wrote to the defendants:
For the last several months, your company has taken unexplained deductions from
the gross revenue on each well on the various royalty reports from the period
October, 2001, through June, 2002. . . . All of the various Leases which comprise
the many wells on our property prohibit any kind of deductions from the gross
revenue received by the Lessee. Unless a valid explanation for these deductions is
received in writing from your company within 30 days or payment for the
deductions, we will consider these deductions unallowable and a default under each
of the various Leases.
(Exhibit W [Docket 169-23], at 1). The parties agree that Mr. Yost referred only to monetary
deductions, not volume losses, in this email. The plaintiffs contend that the discovery rule tolled
the statute of limitations until they became aware of the volume losses on June 30, 2009. (See Pls.’
Resp. to Defs.’ Joint Mot. for Summ. J. [Docket 176], at 4; Exhibit A [Docket 176-1], at 1).
With respect to monetary deductions, the undisputed facts establish that the plaintiffs were
aware of the allegedly improper monetary deductions as early as Mr. Yost’s September 25, 2002
email. Therefore, I FIND that the discovery rule does not toll the plaintiffs’ claims as they relate to
damages incurred from monetary deductions.
I need not decide whether the discovery rule tolled the plaintiffs’ claims as they relate to

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volume losses because the plaintiffs cannot state any tort claim in relation to volume losses. As I
explained above, the defendants are entitled to summary judgment on all of the leases with respect
to volume losses. Therefore, the plaintiffs have not incurred any damages in relation to volume
losses, and no tort will lie in relation to the volume losses.
Under the fourth step of my analysis, I determine whether the defendants “fraudulently
concealed facts which prevented the plaintiff[s] from discovering or pursuing the potential cause
of action . . . .” Dunn, 689 S.E.2d at 265. The plaintiffs argue that fraudulent concealment relates
only to volume losses. (See Pls.’ Resp. to Defs.’ Joint Mot. for Summ. J. [Docket 176], at 5). They
do not argue that the defendants fraudulently concealed the existence of monetary deductions.
Because the plaintiffs’ tort claims cannot relate to volume losses, I FIND that the statute of
limitations was not tolled by fraudulent concealment.
At the fifth step of my analysis, I determine if the statute of limitations is affected by some
other tolling doctrine. Here, the parties agree that a tolling agreement and previous class action
litigation tolled the statute of limitations for particular defendants.
1.

Tolling against EQT Production

The plaintiffs were at one time members of a class action suit in this court styled Kay Co.,
et al. v. Equitable Production Company, Case No. 2:06-cv-00612. The plaintiffs eventually opted
out of the class settlement of Kay Co. Pursuant to this court’s orders in Kay Co. ([Docket 169-26],
at 18), a tolling agreement ([Docket 169-27]), and a letter terminating the tolling agreement
([Docket 169-31]), the statute of limitations for claims against EQT Production tolled from June
13, 2006, through the filing of this lawsuit. Accordingly, I FIND the statute of limitations bars the
plaintiffs’ tort claims against EQT Production to the extent that they seek damages prior to June
13, 2004, two years prior to the filing of the complaint in Kay Co.
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2.

Tolling against EQT Corporation

EQT Corporation was also a party to Kay Co., so the statute of limitations tolled from June
13, 2006, until May 29, 2010, the day after the Kay Co. tolling period ended. EQT Corporation was
not a party to a separate tolling agreement. The plaintiffs did not file their Complaint in this action
until June 16, 2011, 1 year and 18 days after the Kay Co. tolling period ended, leaving 347 days
prior to the filing of Kay Co. for the plaintiffs to file claims that were not time-barred by the
two-year statute of limitations. Accordingly, I FIND that the statute of limitations bars the
plaintiffs’ tort claims against EQT Corporation to the extent that they seek damages prior to July
1, 2005, 347 days prior to the filing of Kay Co.
3.

The Statute of Limitations Did Not Toll on Claims against EQT
Energy, EQT Gathering, Inc., EQT Gathering, LLC, EQT Gathering
Equity, and EQT Investment Holdings

The defendants EQT Energy, EQT Gathering, Inc., EQT Gathering, LLC, EQT Gathering
Equity, and EQT Investment Holdings were not parties to the Kay Co. suit or a separate tolling
agreement. Therefore, I FIND that the statute of limitations bars the plaintiffs’ tort claims against
defendants EQT Energy, EQT Gathering, Inc., EQT Gathering, LLC, EQT Gathering Equity, and
EQT Investment Holdings to the extent that they seek damages for the period prior to June 16,
2009, two years prior to the filing of the Complaint in this action.
Accordingly, the Defendants’ Joint Motion for Summary Judgment [Docket 169]
regarding the limitations defense is GRANTED. The plaintiffs’ tort claims are partially barred
according to the terms set out above.
C.

Breach of Fiduciary Duty

Defendant EQT Production argues that the plaintiffs’ claim for breach of fiduciary must be
dismissed because West Virginia law does not recognize fiduciary duties between a lessee of a gas
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well and a royalty owner. (See Mem. in Supp. of Mot. for Summ. J. of Def. EQT Prod. Co. with
Respect to Counts III-VII [Docket 144], at 7). The West Virginia Supreme Court of Appeals long
ago announced the duty owed between parties on an oil or gas lease does not rise to the level of a
fiduciary relationship:
Where the object of the operations contemplated by an oil and gas lease is to obtain
a benefit or profit for both lessor and lessee . . . both are bound by the standard of
what, in the circumstances, would be reasonably expected of operators of ordinary
prudence, having regard to the interests of both.”
Grass v. Big Creek Dev. Co., 84 S.E. 750, 753 (W. Va. 1915). Further, this court has held that,
although there may be extra-contractual duties owed by a gas well lessee to a lessor, the existence
of these duties “does not create or imply a fiduciary relationship between lessor and lessee of
mineral rights.” Wellman v. Bobcat Oil & Gas, Inc., No. 3:10–0147, 2010 WL 2720748 (S.D. W.
Va. July 8, 2010) (Chambers, J.). Although the plaintiffs acknowledge this authority, they argue
that it is limited to circumstances where the lessor and lessee share an overlapping pecuniary
interest in production and marketing of gas. I need not resolve this issue because the lessors and
lessees in this case clearly share an overlapping pecuniary interest in the marketing of their gas.
Accordingly, I FIND that there was no fiduciary relationship between the lessors and EQT
Production in this case.
The plaintiffs argue that summary judgment on this claim is inappropriate because there is
a genuine dispute of material fact. But where there is no cognizable claim, I need not decide if
there is a genuine factual dispute. The failure to state a claim “is usually challenged by a motion to
dismiss under Rule 12(b)(6), [but] it may also serve as a basis for summary judgment.” In re:
Enron Corp. Sec., Derivative & ERISA Litigation, 610 F. Supp. 2d 600, 607 (S.D. Tex. 2009)
(citing Whalen v. Carter, 954 F.2d 1087, 1098 (5th Cir. 1992)); Ritter v. Dalton, 129 F.3d 117 (4th

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Cir. 1997) (unpublished) (“[T]he district court properly granted summary judgment for . . . failure
to state a claim upon which relief could be granted.).
The remaining defendants, EQT Corporation, EQT Energy, EQT Gathering, LLC, EQT
Gathering, Inc., EQT Gathering Equity, LLC, and EQT Investment Holdings (collectively, the
“non-lessee defendants”), argue that they cannot owe a fiduciary relationship because they were
not parties to any lease with the plaintiffs. (See Mem. in Supp. of Mot. for Summ. J. of Non-Lessee
Defs. [Docket 134], at 6-7). The plaintiffs argue only that the non-lessee defendants are vicariously
liable for breach of fiduciary duty because they participated in a joint venture or civil conspiracy
with EQT Production. (See Pls.’ Resp. to Mot. for Summ. J. of Non-Lessee Defs. [Docket 173], at
5-9). However, if EQT Production, the only party to the leases, owed no fiduciary duty, then the
non-lessee defendants cannot be vicariously liable for a breach of that duty. Accordingly, I FIND
that the non-lessee defendants owe no fiduciary duty to the plaintiffs.
Therefore, defendant EQT Production’s motion for summary judgment [Docket 143] with
regard to Count III (breach of fiduciary relationship) is GRANTED. Additionally, the non-lessee
defendants’ motion for summary judgment [Docket 133] with respect to Count III (breach of
fiduciary duty) is GRANTED.
D.

Failure to Account, Fraud, Negligent Misrepresentation,
Conspiracy/Joint Venture, and Aiding and Abetting a Tort

Civil

I have considered the briefing, the evidence presented, and counsel’s oral arguments. I
FIND that a genuine issue of material fact exists as to the following claims against all of the
defendants: Count I (failure to account), Count IV (fraud), Count V (negligent misrepresentation),
Count VI (civil conspiracy/joint venture), and Count VII (aiding and abetting a tort). Accordingly,
defendants’ motions on these counts [Dockets 133, 143, and 169] are DENIED.

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E.

Punitive Damages

The defendants additionally move for summary judgment on the issue of punitive
damages. “Generally, punitive damages are unavailable in an action for breach of contract unless
the conduct of the defendant constitutes an independent, intentional tort.” Hayseeds, Inc. v. State
Farm Fire & Cas., 352 S.E.2d 73, 80 (W. Va. 1986). “Punitive damages are allowed only where
there has been malice, fraud, oppression, or gross negligence. . . . [P]unitive damages are generally
unavailable in pure contract actions.” Warden v. Bank of Mingo, 341 S.E.2d 679, 684 (1985). The
plaintiffs do not bring a pure contract claim. They bring claims for fraud and negligent
misrepresentation as well. Therefore, the defendants’ motions for summary judgment on the issue
of punitive damages are DENIED.
IV.

Conclusion
With respect to Count II (breach of contract), the Plaintiffs’ Motion for Partial Summary

Judgment [Docket 131] is GRANTED in part and DENIED in part in accordance with this
opinion; the Defendants’ Joint Motion for Summary Judgment [Docket 169] is GRANTED in
part and DENIED in part in accordance with this opinion; and the Motion for Summary
Judgment of Defendants EQT Corporation, EQT Energy, LLC, EQT Gathering, Inc. EQT
Gathering Equity, LLC, EQT Investment Holdings, LLC, and EQT Gathering, LLC [Docket 133]
is DENIED. With respect to Count III (breach of fiduciary duty) the defendants’ motions [Docket
133 and 143] are GRANTED. With respect to Count I (failure to account), Count IV (fraud),
Count V (negligent misrepresentation), Count VI (civil conspiracy), Count VII (aiding and
abetting a tort), and Count VIII (punitive damages) the defendants’ motions [Dockets 133, 143,
and 169] are DENIED.
The court DIRECTS the Clerk to send a copy of this Order to counsel of record and any
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unrepresented parties. The court further DIRECTS the Clerk to post a copy of this published opinion
on the court’s website, www.wvsd.uscourts.gov.

ENTER: November 21, 2013

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