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Cather v. EQT Production Co.

United States District Court, N.D. West Virginia, Clarksburg

August 13, 2019

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,
v.
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. 74]

          THOMAS S. KLEEH UNITED STATES DISTRICT JUDGE.

         Pending 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.

         I. Factual Background

         A. The Lease

         On 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.

         With 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.

         B. EQT Application of Lease Language

         EQT prefers the word “allocation” as opposed to “deduction.” In its discovery responses, EQT Production explained its basis for taking deductions as follows:

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 request.

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.

         Notwithstanding 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, [1] EQT Production deducted the royalty owners' share of downstream costs from the sales price received, as shown on its royalty remittance statements.”[2] 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.

         Plaintiffs 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.

         C. Performance Under the Cather Lease

         EQT 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.

         II. Procedural History

         On 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).[3] ECF No. 27. That ruling left Counts IV and VII asserting Alter Ego and Breach of Contract theories of recovery.

         Plaintiffs 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.

         III. Analysis

         A. ...


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