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Richards v. EQT Production Co.

United States District Court, N.D. West Virginia

July 5, 2018

ARNOLD K. RICHARDS and MARY L. RICHARDS, Plaintiffs,
v.
EQT PRODUCTION COMPANY, Defendant.

          MEMORANDUM OPINION AND ORDER DENYING PLAINTIFFS' MOTION FOR PARTIAL SUMMARY JUDGMENT [DKT. NO. 31]

          IRENE M. KEELEY UNITED STATES DISTRICT JUDGE

         This case involves claims for breach of contract and fraud related to royalty payments for natural gas interests. The plaintiffs, Arnold and Mary Richards (the “Richards”), are owners of mineral interests in Ritchie County, West Virginia. The Richards allege that the defendant, EQT Production Company (“EQT Production”), has failed to provide accurate accountings of the gas removed from certain wells, including the amounts received and costs deducted from royalties. The complaint also alleges that EQT Production has breached the express terms of the relevant leases and committed fraud by improperly calculating royalties and making improper deductions. EQT Production denies these allegations, contending that its royalty payments to the Richards are in compliance with the lease terms.

         Pending before the Court is the Richards' motion for partial summary judgment on their breach of contract claim. For the reasons that follow, the Court DENIES the motion (Dkt. No. 31).

         I. BACKGROUND

         A. Factual Background

         Many of the facts in this case are not in dispute. Nonetheless, as this is a dispositive motion filed by the plaintiffs, the Richards, the Court reviews the evidence in the light most favorable to EQT, the non-moving party. See Providence Square Assocs., L.L.C. v. G.D.F., Inc., 211 F.3d 846, 850 (4th Cir. 2000).

         Each of the Richards' claims relate to the payment of royalties relating to three oil and gas leases (collectively, the “Leases”) (Dkt. Nos. 41-2, 41-3, 41-4). EQT Production, the sole lessee to the Leases, has the right to develop and purchase gas from the Lease premises. Id. at 1. The Leases include the following royalty provision:

In Consideration of the Premises the said party of the second part, covenants and agrees: 1st-to deliver to the credit of the Lessors, their heirs or assigns, free of cost, in the pipe line to which the Lessee may connect the wells ... the equal one-eighth (1/8) part of all oil produced and saved from the leased premises; and second, to pay ... one-eighth (1/8) of the market price of the gas from each and every gas well drilled on said premises, the product from which is marketed and sold off the premises, said gas to be measured by a meter.

Id. at 2 (emphasis added) (the “Royalty Provision”); see also Dkt. Nos. 51-1; 51-2; 51-3. Although the Leases were amended in 2014 to allow for pooling and unitization for horizontal drilling, the Royalty Provisions have not been modified. Also relevant is a provision, as follows:

“...if ‘casing head gas' (being gas produced from oil wells) or any part thereof should be marketed and sold by said Lessee, said Lessors shall receive one-eighth of the market price of the gas and other by-products so marketed and sold.”

Id. (the “By-Product Provision”).

         In 2016, EQT drilled six horizontal wells on “Pullman 96," a well pad located on a tract adjacent to the Lease premises. It is undisputed that these wells produce natural gas from the leasehold estates. It is also undisputed that EQT sells the natural gas produced from the wells to an affiliate, EQT Energy, LLC (“EQT Energy”), pursuant to a Base Contract for Sale and Purchase of Natural Gas (“Gas Sales Contract”) (Dkt. No. 40-1 at 5). Natural gas produced from the pooled acreage passes through meters located at or near the pad and wellheads where, pursuant to the Gas Sales Contract, EQT Energy takes custody of the gas. EQT Energy then delivers and sells the gas to third-party purchasers on the open market.

         Notably, the Gas Sales Contract establishes a pricing formula whereby EQT Energy pays EQT Production an amount equal to “the first of the month index price applicable to the interstate pipeline/gas gathering system into which the gas is delivered, less gathering related charges, retainage, and any other agreed to charges.” Id. To arrive at the price for the point where the gas is sold to EQT Energy (i.e., at the wellhead), EQT Production utilizes a “work-back method, ” whereby certain post-production expenses of gathering and compressing the gas to a downstream market are deducted from the downstream index price of the gas sold. The Richards' royalty payments are then calculated based on the price where the gas is sold to EQT Energy - the wellhead.

         B. Procedural Background

         The Richards filed their complaint on February 27, 2017, in the Circuit Court of Ritchie County, West Virginia (Dkt. No. 1-1). EQT removed the case to this Court on April 3, 2017, based on diversity of citizenship (Dkt. No. 1). The complaint asserts four causes of action, including (1) failure to properly account for royalties, (2) breach of contract, (3) breach of fiduciary duties and negligence, and (4) fraud and constructive fraud (Dkt. No. 1-1 at 14-17).

         On April 7, 2017, the Richards moved to remand the case (Dkt. No. 3), and on April 10, 2017, EQT filed its answer, together with a partial motion to dismiss Count Three of the complaint for failure to state a claim (Dkt. No. 4-6). During a scheduling conference on June 22, 2017, the Court denied the Richards' motion to remand, and the parties stipulated to the voluntary dismissal of the plaintiffs' claims for breach of fiduciary duties and negligence. Following discovery, the Richards moved for partial summary judgment on their breach of contract claim (Dkt. No. 31). The motion is now fully briefed and ripe for disposition.

         II. STANDARD OF REVIEW

         Summary judgment is appropriate only “if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, 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(c). When ruling on a motion for summary judgment, the Court reviews all the evidence “in the light most favorable” to the nonmoving party. Providence Square Assocs., L.L.C. v. G.D.F., Inc., 211 F.3d 846, 850 (4th Cir. 2000). The Court must avoid weighing the evidence or determining its truth and limit its inquiry solely to a determination of whether genuine issues of triable fact exist. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249 (1986).

         The moving party bears the initial burden of informing the Court of the basis for the motion and of establishing the nonexistence of genuine issues of fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). Once the moving party has made the necessary showing, the non-moving party “must set forth specific facts showing that there is a genuine issue for trial.” Anderson, 477 U.S. at 256 (internal quotation marks and citation omitted). The “mere existence of a scintilla of evidence” favoring the non-moving party will not prevent the entry of summary judgment; the evidence must be such that a rational trier of fact could reasonably find for the nonmoving party. Id. at 248-52.

         III. APPLICABLE LAW

         “A federal court exercising diversity jurisdiction is obliged to apply the substantive law of the state in which it sits.” Volvo Const. Equip. N. Am. v. CLM Equip. Co., Inc., 386 F.3d 581, 599-600 (4th Cir. 2004) (citing Erie R.R. Co. v. Tompkins, 304 U.S. 64, 79 (1938)). In West Virginia, “[a] claim for breach of contract requires proof of the formation of a contract, a breach of the terms of that contract, and resulting damages.” Sneberger v. Morrison, 776 S.E.2d 156, 171 ( W.Va. 2015) (citing Syl. Pt. 1, State ex rel. Thornhill Grp., Inc. v. King, 759 S.E.2d 795 ( W.Va. 2014)).

         In order to prevail on their motion for summary judgment, the Richards must establish the following four elements: “[T]he existence of a valid, enforceable contract; that [they] ha[ve] performed under the contract; that [EQT] has breached or violated its duties or obligations under the contract; and that [the Richards] ha[ve] been injured as a result.” See Exec. Risk Indem., Inc. v. Charleston Area Med. Ctr., Inc., 681 ...


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