United States District Court, N.D. West Virginia, Clarksburg
CLARKSBURG WILLIAM L. CATHER, BRENDA L. CATHER, CHARLES H. CATHER, LINDA F. CATHER, EVERET P. BICE, JR. ELIZABETH BICE, ROBERT JUNIOR HEMPHILL, Trustee of Trust A Created Under the Hemphill Family Trust Dated October 17, 1995, as Amended, Plaintiffs,
EQT PRODUCTION COMPANY, EQT GATHERING, LLC, EQT ENERGY, LLC, EQT MIDSTREAM SERVICES, LLC, EQT CORPORATION, and EQUITRANS, L.P., Defendants.
MEMORANDUM OPINION AND ORDER GRANTING PLAINTIFFS'
MOTION FOR SUMMARY JUDGMENT AS TO DEDUCTIONS [ECF NO.
S. KLEEH UNITED STATES DISTRICT JUDGE.
before the Court is Plaintiffs' Motion for Summary
Judgment as to Deductions [ECF No. 74]. The motion has been
fully briefed, the Court has entertained argument from
counsel, and the matter is now ripe for decision. For the
reasons discussed, the Court grants Plaintiffs' motion.
February 20, 1963, D.L. Cather and Lila S. Cather, W.L.
Cather and Maxine Cather, and Mary Hemphill and Robert J.
Hemphill signed a lease agreement (“Cather
Lease”) with Equitable Gas Company. ECF No. 1 at ¶
6. That lease related to oil and gas rights attached to
nearly 504 acres in Taylor County, West Virginia.
Id. Plaintiffs are the current owners of that tract
and lessors under that lease agreement. Id.
¶¶ 16, 19. Equitable Gas Company's interest in
the Cather Lease currently resides with Defendant EQT
Production Company. Id. ¶ 17.
respect to royalty payments, the Cather Lease provides:
Lessee shall pay to the Lessor for each and every well
drilled upon such land, which produces Natural Gas and/or
Casinghead Gas in a quantity sufficient for the Lessee to
convey to market, a money royalty computed at the rate of
one-eight (1/8) of the wholesale market value which is based
on the average current price paid by the Lessee to
independent operators in the general area . . . payment to be
on or before the 25th day of the month following that in
which the gas has been delivered into the marketing pipeline
. . . .
ECF No. 74-1 at 1. The lease is silent on whether the Lessee
may deduct from the royalty payments for the costs of
severance, costs of production, or costs of any kind,
including severance taxes. The Cather Lease does permit the
Lessee, at its option, to prepay any taxes “on or
against the land or gas and/or oil in place under the . . .
lands” and recoup those payments against any royalties
due under the agreement. Id.
EQT Application of Lease Language
prefers the word “allocation” as opposed to
“deduction.” In its discovery responses, EQT
Production explained its basis for taking deductions as
EQT Production pays royalties based on the specific language
set forth in royalty owners' leases and does not take
“Deductions” from Plaintiffs' royalties. The
amount of “[d]educti[ons]” is the amount
allocated to Plaintiffs for their share of the gathering and
compression charges used to arrive at a sales price under the
Gas Purchase Agreements entered into by and between EQT
Energy and EQT Production after adding in the value of
depreciation, return on investment, and taxes. Lessors are
responsible for their proportionate share of severance taxes.
Notwithstanding the preceding objections, which are expressly
reserved, EQT Production directs Plaintiffs to the Owner
Revenue Inquiry attached hereto as EQT Production00003-00011
which reflects otherwise responsive information to this
ECF No. 74-4 at ¶¶ 10-11; see also ECF No.
84 at 3-4. EQT has been consistent in this and other
litigation as to how silence in leases permits it to
“allocate” expenses and taxes to lessors. Jimmi
Sue Smith, EQT Corporation's Chief Accounting Officer,
stated in her affidavit submitted in The Kay Company,
LLC, et al. v. EQT Production Co., et al., 1:13-cv-151,
and attached to Plaintiffs' Motion here that EQT
Production pays severance tax to the State of West Virginia
including “its own share and the lessor's
share . . . .” ECF No. 74-5 at ¶ 2. Ms. Smith went
on to state that “[i]f severance tax deductions were
not prohibited by the lessor's lease, each lessor's
proportionate share . . . of severance taxes actually paid to
the West Virginia State Tax Department was taken into account
in calculating royalty.” Id. ¶ 4.
the preference to refer to its business practice as one of
allocation, John Bergonzi, then EQT Corporation's Vice
President of Finance and Controller, stated in his Kay
Company affidavit, “On leases where royalty was to
be paid ‘at the well' and allowed the deduction of
downstream costs,  EQT Production deducted the royalty
owners' share of downstream costs from the sales price
received, as shown on its royalty remittance
statements.” ECF No. 74-6 at ¶ 12. Mr.
Bergonzi's deposition testimony confirmed the practice of
deducting for expenses from royalty payments to lessors. In
determining “market value at the wellhead, ” he
noted that “EQT determines market value at the wellhead
. . . by finding the first liquid trading point or sales
point and then deducting the costs to get that gas from that
liquid trading point or from the wellhead to that liquid
trading point.” ECF No. 74-7 at 2.
also submitted portions of Kay Company transcript
from the deposition of Michael Barbour, then Supervisor of
Division Order for EQT Corporation. Mr. Barbour testified
about the processing of leases, paying particular attention
to deductions for post-production expenses and taxes. He
described as a “general business practice or
polic[y]” the “tak[ing]” of production
taxes from a one-eighth royalty where the lease is silent on
the allocation of severance taxes. ECF No. 74-8 at 6. Mr.
Barbour also testified that EQT would take post-production
expenses if the royalty clause of a particular lease stated
that one-eighth of the wholesale market value would be paid
to the royalty owner with no specific mention of deductions.
Id. at 7.
Performance Under the Cather Lease
commenced production pursuant to its rights under the Cather
Lease in or around March 2012, constructing six (6) wells
tapping into the Marcellus Shale formation. ECF No. 1 at
¶ 20. Since then, EQT Production has reported to each
Plaintiff each month information related to the production
performance of each well via a Remittance Statement.
See ECF No. 74-3. Those Statements provide certain
information including production date, production type,
interest type, net price, decimal interest, sales and owner
volume, sales and owner revenue, taxes, gross and owner
deductions, and well net and owner net revenue. Id.
Based on the Statements issued from April 2012 through and
including January 2019 (which reports February 2012 to
November 2018 data), the “owner deducts” and
“owner taxes” deductions totaled $751, 109.65.
Id.; see also ECF No. 75 at 5.
December 7, 2017, Plaintiffs Charles H. Cather, Brenda L.
Cather, William L. Cather, Elizabeth Bice, Everet P. Bice,
Jr., Linda F. Cather, and Robert Junior Hemphill filed their
Complaint against EQT Corporation, EQT Energy, LLC, EQT
Gathering, LLC, EQT Midstream Services, LLC, EQT Production
Company, and Equitrans, L.P. (sometimes hereinafter
“Defendants”). ECF No. 1. That Complaint
contained a number of claims: Alter Ego, Fraud, Civil
Conspiracy to Commit Fraud, Breach of Contract, Conversion,
Unconscionability and Breach of Duty of Fair Dealing,
Violation of the West Virginia Consumer Credit and Protection
Act Section 2, Violation of the West Virginia Consumer Credit
and Protection Act Section 6, and Interest Due to Plaintiffs
on Improperly Withheld Royalty Payments and Punitive Damages.
Id. Defendants filed their Answer on February 1,
2018. ECF No. 14. That same day, Defendants filed their
Motion for Partial Dismissal. ECF No. 15. After briefing and
entertaining argument, Judge Keeley granted-in-part and
denied-in-part that motion, dismissing the claims for Fraud
(Count V), Civil Conspiracy to Commit Fraud (Count VI),
Conversion (Count VIII), Unconscionability and Breach of Duty
of Fair Dealing (Count IX), Violations of the West Virginia
Consumer Credit and Protection Act (Counts X and XI), and
Punitive Damages (Count XIII). ECF No. 27. That ruling left
Counts IV and VII asserting Alter Ego and Breach of Contract
theories of recovery.
filed their Rule 60 Motion for Relief from Final Order or,
Alternatively, Motion for Leave to Amend Complaint on
November 15, 2018. ECF No. 57. This matter was transferred to
United States District Judge Thomas S. Kleeh on December 1,
2018. Plaintiffs' Rule 60 and/or Rule 15 motion was
denied on May 17, 2019. ECF No. 95. Plaintiffs filed their
Motion for Summary Judgment on February 15, 2019. ECF No. 74.
The parties have fully briefed that motion and, after a July
15, 2019, hearing, the matter is ready for decision.