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Cabot Oil & Gas Corp. v. Beaver Coal Co., Ltd.

Supreme Court of West Virginia

November 9, 2017

BEAVER COAL COMPANY, LIMITED, Plaintiff Below, Respondent, and BEAVER COAL COMPANY, LIMITED, Plaintiff Below, Petitioner,

         Raleigh County No. 18-C-210-H


         Through these consolidated appeals, Cabot Oil & Gas Corporation and Cranberry Pipeline Corporation, as well as Beaver Coal Corporation, seek a reversal, either in whole or in part, of the circuit court's August 25, 2016, order through which it adopted an intervening law exception to the doctrine of res judicata, applied that exception to a prior final and binding arbitration ruling, and referred the parties to arbitration on all claims alleged in Beaver's complaint with instructions to the arbitrators on the law to be applied and the circuit court's rulings to be followed. The parties are represented by counsel: Timothy M. Miller and Callie E. Waers for Cabot Oil & Gas Corporation and Cranberry Pipeline Corporation, and J. Thomas Lane, J. Mark Adkins, and Andrew C. Robey for Beaver Coal Corporation.

         Upon review of the parties' arguments, the appendix record, the parties' briefs and the applicable law, we affirm, in part, and reverse, in part, the referral to arbitration; reverse the application of an intervening law exception to res judicata; and reverse the directions to the arbitrators concerning the law they are to apply and the rulings they are to follow. For the reasons set forth herein, we find this case satisfies the requirements of Rule 21(c) and (d) of the West Virginia Rules of Appellate Procedure and is properly disposed of through this memorandum decision.

         I. Factual and Procedural Background

         In 1929, Beaver Coal Corporation ("Beaver") and Godfrey L. Cabot, Inc. ("Godfrey Cabot") entered into a lease agreement ("1929 Lease") giving Godfrey Cabot the right to mine, explore, extract, and remove oil and gas from approximately twelve thousand acres of Beaver's land located in Raleigh County, West Virginia. In a 1956 amendment to the 1929 Lease, [1] Beaver granted Godfrey Cabot the right to use an additional 2, 516 acres of Beaver's land for the operation of a gas storage field ("storage field"). Godfrey Cabot assigned its rights under the 1929 Lease to Cabot Corporation in 1960. In a separate agreement entered into in 1977, Beaver granted to Cabot Corporation a license to install, operate, and maintain a gas pipeline across a certain portion of Beaver's property ("1977 Agreement").

         Cabot Corporation underwent an internal reorganization in 1982 and 1983, through which it assigned rights to various wholly-owned subsidiaries: Cabot Oil & Gas Corporation ("Cabot") was assigned the rights under the 1929 Lease and Cranberry Pipeline Corporation ("Cranberry") assumed all pipeline operations on Beaver's property, including the leased pipeline and related facilities under the 1929 Lease, and the licensed pipeline under the 1977 Agreement.[2] In 1991, Beaver and Cabot executed a Ratification of the 1929 Lease. Cabot states that it has continuously operated and produced gas under the lease since that time.

         Critical to the instant dispute is a provision in the 1929 Lease that reflects the parties' agreement to resolve all disputes arising under the lease through binding arbitration, as follows:

Should any question arise between the parties hereto as to the performance by the Lessee of any of the Articles of this lease, or of any covenant contained in any of said Articles, every such question shall be determined by arbitration in the manner provided for in this Article; and the Lessee hereby covenants with the Lessor to comply with and carry out promptly the decision or award of any and every arbitration so appointed ..... The decisions and awards of such arbitrators, or any two of them, shall be final and conclusive and binding upon the parties hereto, with no right of appeal[.][3]

(Footnote added). There is a limited arbitration provision in the 1977 Agreement that solely applies to differences of opinion concerning the current market stumpage price of trees cut by Cabot; however, no other arbitration is provided for, nor does that agreement incorporate by reference the 1929 Lease.

         Beaver states that it determined in the late 1990's that Cabot was (1) deducting post-production costs from royalties and (2) not paying royalties on the native gas produced from wells in the storage field. The parties were unable to resolve these issues, which prompted Beaver to institute an arbitration in 2001. In the arbitration, Beaver sought to resolve whether Cabot had paid proper royalties; whether Cabot could deduct post-production costs from the royalties; and whether Cabot owed royalties on the wells located in the storage field.

         On July 27, 2004, the arbitration panel issued its award in which it considered then-existing law, including Wellman v. Energy Resources, Inc., 210 W.Va. 200, 557 S.E.2d 254 (2001). The panel determined that there was no "controlling West Virginia decision" and reached its decision on the deduction of post-production expenses from royalties by applying "the language of the lease[] as written." Although the panel concluded that it was the parties' intent to allow for reasonable deductions from royalty for post-production costs, it further found that the amount Cabot had deducted was not reasonable and ordered Cabot to pay as additional royalty to Beaver "an amount equal to the difference between the gathering charge Cabot actually used and the amount the arbitrators have concluded is a reasonable gathering charge[.]" Since the 2004 arbitration award, Cabot states that it has issued royalty checks to Beaver that were computed and paid in accordance with the arbitration panel's award, and that Beaver has accepted and cashed those royalty checks.

         Subsequent to the 2004 arbitration award, this Court issued Estate of Tawney v. Columbia Natural Resources, Inc., 219 W.Va. 266, 633 S.E.2d 22 (2006).[4] In Tawney, this Court held that lease language providing that the 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 all costs beyond the wellhead, '" is ineffective to allow for any post-production costs to be deducted from the royalty. Id. at 268, 633 S.E.2d at 24, syl. pt. 11, in part.

         On March 7, 2008, Beaver filed a complaint and petition for injunctive relief in the circuit court against Cabot and Cranberry(collectivelythe "Cabot defendants, " except where it is necessary to refer to these parties individually) seeking: (Count I) enforcement of the 2004 arbitration award for Cabot's alleged failure to satisfy its obligations thereunder;[5](Count II) damages for Cabot's alleged breaches of the 1929 Lease due to the underpayment of royalties, the wrongful deduction of post-production costs under Tawney, and Cabot's assignment of its rights under the 1929 Lease to Cranberry without seeking or obtaining Beaver's consent; (Count III) damages for Cabot's alleged breach of the 1977 Agreement by assigning its pipeline rights under that agreement to Cranberrywithout seeking and obtaining Beaver's consent; (Count IV) declaratory judgment for forfeiture of the 1929 Lease; (Count V) damages resulting from Cranberry's allegedly intentional intrusion and continuous trespass upon Beaver's land; (Count VI) ejectment of Cranberry from Beaver's land; and (Count VII) declaratory judgment for forfeiture of the 1977 Agreement. The Cabot defendants removed the action to federal court where they filed a motion to dismiss.

         In their motion to dismiss, the Cabot defendants asserted that Beaver's claims under the 1929 Lease were barred by the doctrine of res judicata given the prior arbitration award; that those claims were also barred by the statute of limitations pertaining to seeking a vacancy of an arbitration award; and that the trespass claims against Cranberry were barred by the applicable two-year statute of limitations. Beaver filed a response in opposition to the motion, after which the Cabot defendants filed a reply brief. In May 2008, Beaver filed a motion seeking a remand of the action to state court. By order entered February 18, 2009, the federal court remanded the action to the circuit court without ruling on the Cabot defendants' motion to dismiss.

         On November 16, 2009, the circuit court held a hearing on the motion to dismiss. During this hearing, the Cabot defendants argued that all issues pertaining to the 1929 Lease were subject to arbitration; that Beaver's current claims either were or should have been raised in the prior arbitration; that the time for an appeal of the arbitration panel's 2004 award had passed; and that all issues subject to arbitration should be dismissed. Thereafter, the parties submitted proposed findings of fact and conclusions of law to the circuit court.

         Through its order entered on July 13, 2010, the circuit court denied the motion to dismiss. The court found that Tawney constituted an intervening change in the law, which created an exception to the finality of the arbitration award and the doctrine of res judicata. The circuit court concluded that given the "intervening change of law in the Tawney decision . . . when viewing the facts in a light most favorable to Beaver, Beaver at this time states a claim upon which relief may be granted against Cabot for underpayment of royalties."

         On August 12, 2010, the Cabot defendants filed a motion for clarification or, alternatively, for relief from the circuit court's order denying their motion to dismiss. In this motion, they stated that if the circuit court did not relieve them from the "operation and effect" of the order denying their motion to dismiss, and "compel arbitration of [Beaver's] claims, " they intended to "seek relief from the Order by filing a petition for writ of prohibition with the Supreme Court of Appeals of West Virginia."[6] Although a hearing was held on the motion on November 12, 2010, the circuit court never ruled on the motion.

         The Cabot defendants filed an answer to the complaint on December 2, 2010, in which they asserted arbitration as an affirmative defense, stating that "[a]ll disputes between parties which form the subject matter of the Complaint must be submitted to arbitration pursuant to the Federal Arbitration Act, 9 U.S.C. §1, et seq., and the dispute resolution agreement bargained for and agreed upon by the parties." An agreed order was entered by the circuit court on December 11, 2013, setting forth a briefing schedule for the parties to address "certain outstanding legal issues . . . necessary . . . for this case to proceed in a timely fashion."[7] The parties addressed these five issues-the Cabot defendants through a motion for partial summary judgment and Beaver through a memorandum of law. An evidentiary hearing was held before the circuit court on February 21, 2014, during which testimony was given and oral arguments were presented in support of the parties' respective positions.

         On March 27, 2014, the circuit court entered an agreed order directing the parties to submit proposed orders on the Cabot defendants' motion for partial summary judgment. Although the parties submitted their respective proposed orders, a ruling was not forthcoming.[8] Instead, on August 25, 2016, the circuit court entered a final order through which it removed the action from its docket and directed the parties to arbitration on all claims, finding the referral was required by the arbitration provision in the 1929 Lease. In this final order, the circuit court recognized an intervening law exception to the doctrine of res judicata, which it found was applicable to Count II of Beaver's complaint. As the circuit court explained:

The real question is whether the issues before this Court, and subject to arbitration, are precluded by res judicata. This Court is required to make that decision because, as previously found, the contract does not delegate that decision to the arbitrators. This Court has previously found that the issues raised by the plaintiff herein are not precluded by the doctrine of res judicata because of the limited exception to that doctrine and identified as a "subsequent change in law." This case is not an appeal but is, in part, a direct demand for resolution of issues not previously addressed by the arbitrators.

         The circuit court then addressed the 2004 arbitration award and found the arbitrators had "used the Wellman case to support their conclusion that the defendant could in fact impose certain costs incurred in transporting and marketing the gas produced from the plaintiff's property." Having determined that Tawney represented "a significant shift in West Virginia Law [and] that the case must be brought before the arbitrators again[, ]" the circuit court ordered that all issues in Beaver's complaint, as well as the five legal issues identified in the court's December 10, 2013, order, be referred to arbitration, and it instructed the arbitrators, as follows:

[T]he arbitrators will be required to recognize the existence of the change in law identified in the Tawny [sic] case and to the extent the arbitrators are required to determine the relative positions of the parties in this case, if Tawny [sic] is relevant to the issues to be resolved by the arbitrators then Tawny [sic] will trump Wellman. The issues raised in Counts I, III, IV, V, VI and VII are new issues and are subject to arbitration without the necessity of an analysis of the res judicata claims.

         The circuit court concluded that "the arbitration herein ordered shall be conducted pursuant to the requirements of [] [the 1929 Lease] and the rulings in this order." These consolidated appeals followed.

         II. Standard of Review

         The circuit court's August 25, 2016, order removed this action from the court's docket and compelled the parties to arbitration. As this Court has previously held, we "will preclude enforcement of a circuit court's order compelling arbitration only after a de novo review of the circuit court's legal determinations leads to the inescapable conclusion that the circuit court clearly erred, as a matter of law, in directing that a matter be arbitrated[.]" Syl. Pt. 4, in part, McGraw v. Amer. ...

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