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Wahoowa, Inc. v. Consol of Kentucky, Inc.

United States District Court, S.D. West Virginia

May 8, 2019

WAHOOWA, INC., and SUVAC, INC., Plaintiffs,
v.
CONSOL OF KENTUCKY, INC. fka Consol of Kentucky, LLC, CNX RESOURCES CORPORATION fka Consol Energy, Inc., and SOUTHEASTERN LAND, LLC, Defendants.

          MEMORANDUM OPINION AND ORDER

          JOHN T. COPENHAVER, JR., SENIOR UNITED STATES DISTRICT JUDGE

         Pending is plaintiffs' motion for declaratory judgment, filed August 23, 2018. Also pending is the joint motion for summary judgment of the defendants, CONSOL of Kentucky, Inc.[1] (“COK”), CNX Resources Corp.[2] (“CONSOL Energy”), and Southeastern Land, LLC (“Southeastern”), filed January 15, 2019.

         I. Background

         On March 24, 2005, Huntington Realty, Inc. (“Huntington”), as Lessor, entered into a coal lease (“the Lease”) with Southern West Virginia Energy, LLC (“Southern WVE”), as the “Lessee.” Second Am. Compl., ECF No. 55, at ¶ 3; Lease Agreement, ECF No. 41-1, at 5. At the time the Lease was executed, Southern WVE was comprised of a fifty-one percent membership interest owned by Eagle Mining, LLC and a forty-nine percent interest owned by CONSOL of WV, LLC, a subsidiary of CONSOL Energy. Second Am. Compl., ECF No. 55 at ¶ 4. In 2008, CONSOL of WV, LLC acquired Eagle Mining, LLC's membership interest in Southern WVE, and effective December 26, 2008, Southern WVE was merged into COK, with COK as the surviving entity. Id. ¶ 6. COK, a Delaware limited liability company, is a wholly-owned subsidiary of CONSOL Energy, which appears to now be CNX Resources Corp., each of which is a Delaware corporation. Id. ¶ 7; see also Not. Removal, ECF No. 1, at ¶¶ 11, 12.

         As a result of the merger, the parties agree that COK is the “Lessee” in the Lease to Southern WVE. Pls.' Reply, ECF No. 50, at 3; Defs.' Mem. Supp. Mot. Summary J. (“Defs.' Mem.”), ECF No. 58, at 2.

         On February 25, 2015, HRC conveyed portions of the land under the Lease to plaintiffs Wahoowa, Inc. (“Wahoowa”) and SUVAC, Inc. (“SUVAC”), both West Virginia corporations. Second Am. Compl., ECF No. 55 at ¶ 2; Not. Removal, ECF No. 1, at ¶ 9-10. Wahoowa received the mineral interests and SUVAC the surface interests to twelve tracts of the property covered by the Lease. Second Am. Compl., ECF No. 55, at ¶ 2.

         On July 19, 2016, CONSOL Energy notified plaintiffs that COK intended to assign its entire interest in the Lease to Southeastern, a Kentucky limited liability company. Second Am. Compl., ECF No. 55, at ¶ 9; Not. Removal, ECF No. 1, at ¶ 13. Later, in August 2016, CONSOL Energy informed the plaintiffs that the transaction had closed on August 1, 2016 and that COK had guaranteed Southeastern's performance under the Lease. Second Am. Compl., ECF No. 55, at ¶ 11.

         Wahoowa and SUVAC initiated this civil action in the Circuit Court of Mingo County, West Virginia on September 15, 2017, pursuant to the Uniform Declaratory Judgment Act, W.Va. Code § 55-13-1 et seq. Specifically, the plaintiffs ask that the court “find and determine the assignment of the Lease from COK to Southeastern is improper, invalid and contrary to the terms and provisions of the Lease.” Second Am. Compl., ECF No. 55, at ¶ 17.

         Section 12 of the Lease states that

it is the essence of this Lease that Lessor enters into this Lease expressly relying upon the demonstrated skill, experience, character, substance, credit and ability of Lessee and its present management. . . . Lessor and Lessee hereto expressly recognize and acknowledge that the obligations of Lessee hereunder are “personal services” of Lessee, a Lessee whom Lessor considers to be uniquely competent and qualified to perform those services. . . . For these reasons, Lessor demands, and Lessee specifically agrees to, performance of all Lessee's obligations herein from Lessee alone and, subject to Section 18 of this Lease, from no other person or entity.

         Lease Agreement, ECF No. 41-1, at 14-15.

         Section 18a of the lease governs assignments and provides as follows:

a. Lessee shall not sell, assign or transfer this Lease without the prior written consent of Lessor. Without denigrating the value to Lessor of Lessee's “personal services” and Lessor's reliance on the skill and ability of Lessee (as is more particularly elaborated in Sections 12 and 36 of this Lease), Lessor and Lessee agree that Lessee may freely assign, without written consent, its rights under this Lease to a wholly-owned subsidiary or an affiliate of, which is also controlled by, Consol Energy, Inc. or a wholly-owned subsidiary or an affiliate of Lessee so long as Lessee has the same partners as of the date of this Lease. Lessor and Lessee have also agreed that Lessee may freely assign, without written consent, its rights under this Lease to a third party with reasonable experience in the mining, marketing, and processing of coal if the third party has a net worth of at least $35, 000, 000 or to a third party with reasonable experience in the mining, marketing, and processing of coal if Consol Energy, Inc. or Lessee, so long as Lessee has the same partners as of the date of this Lease, guarantees the performance of the terms and provisions of this Lease by such third-party assignee. A sale or other transfer of fifty percent (50%) or more of the stock or membership interest of Lessee to or the merger of Lessee into another entity where Lessee is not the surviving entity shall constitute assignment of the Lease for purposes of this Section 18(a). Provided, however, a purchase by Consol Energy, Inc., or its affiliates of all of the stock or membership interest in Lessee shall not constitute an assignment of the Lease for purposes of this Section 18(a).
* * *
The restrictions on assignment and subleasing contained in this provision should be construed such that if Consol Energy, Inc., a wholly-owned subsidiary of Consol Energy, Inc. or an affiliate controlled by Consol Energy, Inc. (collectively, “Consol Affiliate”) is not the lessee or a partner or member of an entity which is the lessee, then the new assignee must have a net worth of $35 million dollars or a Consol Affiliate or Lessee, so long as Lessee has the same partners as of the date of this Lease, guarantees the performance under this Lease.

Id. at 23-24.

         The court finds that the drafters' use of the word “partners” in Section 18a doubtless refers to CONSOL of WV, LLC and Eagle Mining, LLC, even though those two entities were members, and not partners in the conventional sense, of the originally named Lessee, Southern WVE. Indeed, “[a]n LLC with at least two members is classified as a partnership for federal income tax purposes.” IRS Pub. 3402, at 2 (Jan. 1, 2016). It is noted that, inasmuch as the court concludes that COK as ...


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