Kaess v. BB Land, LLC

1

FRANCIS KAESS, Plaintiff, v. BB LAND, LLC, Defendant.

CIVIL No. 1:22-CV-51 (KLEEH)

United States District Court, N.D. West Virginia

August 25, 2023

MEMORANDUM OPINION AND ORDER GRANTING MOTION TO CERTIFY QUESTION TO THE SUPREME COURT OF APPEALS OF WEST VIRGINIA

THOMAS S. KLEEH, CHIEF JUDGE, NORTHERN DISTRICT OF WEST VIRGINIA

Pending is the motion of the defendant, BB Land, LLC (“Defendant”), to certify a legal question to the Supreme Court of Appeals of West Virginia (“WVSCA”) [ECF No. 64]. For the reasons that follow, the Court GRANTS the Defendant's motion and intends to certify the following questions:

Question 1: Is there an implied duty to market for leases containing an in-kind royalty provision?

Question 2: Do the requirements for the deductions of post-production expenses from Wellman v. Energy Resources, Inc., 557 S.E.2d 254 (W.Va. 2001) and Estate of Tawney v. Columbia Natural Resources, 633 S.E.2d 22 (W.Va. 2006), apply to leases containing an in-kind royalty provision?

I. Background

A. Factual Background

The Plaintiff owns certain mineral interests for approximately 103.5 acres in Pleasants County, West Virginia (the “Subject Property”) [ECF Nos. 1 at ¶ 18; 30-2 at 2]. His interest is subject to an oil and gas lease dated January 6, 1979 (“the Base Lease”), to which the Defendant is the successor-in-interest [ECF No. 30-1]. The Base Lease grants the Defendant the right to drill and explore for and extract oil and gas “to the depth of 5000 feet or to the Oriskany Sand,” also referred to as the Marcellus Shale formation. Id. at 1. The Base Lease contains a provision for the payment of royalties which states:

In consideration of the premises the said Lessee covenants and agrees as follows:

1. To deliver to the credit of Lessors free of cost in the pipe lines to which he may connect his wells, the equal one-eighth (1/8) part of all oil produced and sold from the leased premises.

2. To deliver to the credit of Lessors free of cost in the pipe line to which he may connect his wells, the equal one-eighth (1/8) part of all gas produced and marketed from the leased premises, and the Lessors shall have the right to free gas from any such well or wells for hearing and lighting any building on or off the property, making their own connections therefor at their own risk and expense.

Id. at 2.

On May 19, 2016, the parties modified the Base Lease by entering into a Pooling Modification Agreement which added “certain voluntary pooling and unitization terms and conditions” [ECF No. 30-3 at 1]. Specially, the Pooling Modification Agreement added the following provision to the Base Lease:

POOLING AND UNITIZATION: Lesee, at its option is hereby given the right to pool or combine the acreage covered by this Lease or any portion thereof with other land, lease or leases in the immediate vicinity thereof, when in the Lessee's judgment it is necessary to advisable to do so in order to property develop and operate said premises in compliance with any lawful spacing rules which may be prescribed for the field in which this lease is situated by an duly authorized authority, or when to do so would, in the judgment of the Lessee, promote the conservation of the oil and gas in and under and that may be produced from said premises Lessee shall execute in writing an instrument identifying and describing the pooled acreage. The entire acreage so pooled in a tract or unit shall be treated, for all purposes except the payment of royalties on production from the pooled unit, as if it were included in this lease. If production is found on the pooled acreage, it shall be treated as if production is had from this lease, whether the well or wells be located on the premises covered by this lease or not. In lieu of royalties elsewhere herein specified, Lessor shall receive on production from a unit so pooled only such portion of the royalty stipulated herein as the amount of his/her acreage placed in the unit or his/her royalty interest therein on an acreage basis bears to the total acreage so pooled in the particular unit involved.

Id.

Around March 2018, the Defendant began reporting production of oil and gas from the Subject Property which is included in the P2S unit. The Subject Property contributes 64.093 acres of the unit's 624.5024 total acres. The Plaintiff did not take his share of production in-kind. The Defendant sold the Plaintiff's share on the market. It paid him a royalty calculated from the percentage of land he contributed to the P2S unit's acreage and deducted certain post-production costs.

B. Procedural History

Based on these facts, the Plaintiff initiated this lawsuit against BB Land, Jay-Bee Oil & Gas, Inc., and Jay-Bee Production Company (collectively, “Defendants”), asserting three causes of action: (1) Payment Misallocation; (2) Improper Deductions - Marcellus; and (3) Excessive Deductions - Utica [ECF No. 1 at 610]. On March 7, 2023, the Court granted in part and denied in part a motion to dismiss filed by the Defendants [ECF No. 26]. The Court found that Count Three and part of Count One (related to a February 15 Lease) were subject to an arbitration agreement, and the Court stayed those counts pending their arbitration. The Court also dismissed all non-arbitration claims against Jay-Bee Oil & Gas, Inc. and Jay-Bee Production Company.

As such, only BB Land remained as a defendant, and only Count Two and a portion of Count One remained for disposition. At the conclusion of discovery, the Defendant filed a motion for summary judgment [ECF No. 30]. On July 21, 2023, the Court granted in part and denied in part its motion [ECF No. 59].

As to Count One, the Plaintiff asserted that the Defendant improperly calculated his royalties based on the acreage he contributed to the P2S Unit rather than actual “production from the boundaries of the P2S6 Well itself” [ECF No. 1 at ¶¶ 30-43]. The Court granted the Defendant summary judgment on this issue, finding that the Pooling Modification Agreement unambiguously permitted it to calculate the Plaintiff's royalty based on the amount of acreage he contributed to the production unit [ECF No. 59 at 7-14].

As to Count Two, the Plaintiff alleged that the Defendant breached the lease by improperly deducting post-production costs from his share of production royalties. The Defendant contended it is permitted to deduct such costs from the Plaintiff's royalty because he did not take his share of production “in-kind” as contemplated by the Base Lease and so the Defendant was required to take his share of production to market along with its own share of production to avoid waste. The Court denied the Defendant's request for summary judgment on Count Two, finding that the holdings of Wellman and Tawney apply in this case regardless of whether the lease at issue is an in-kind or proceeds lease.

C. Motion to Certify

At the final pretrial conference, the Court granted the Defendant's request for leave to file a motion to certify a question of law to the WVSCA [ECF No. 61]. In its pending motion, [ECF No. 64], the Defendant asks the Court to certify one question:

Do the requirements for the deductions of postproduction expenses from Wellman v. Energy Resources, Inc., 557 S.E.2d 254 (W.Va. 2001) and Estate of Tawney v. Columbia Natural Resources, 633 S.E.2d 22 (W.Va. 2006), apply equally to leases containing an in-kind royalty provision where the lessor is entitled to a share of the production as opposed to the proceeds from a sale to a third party?

According to the Defendant, the WVSCA has not yet addressed whether the implied duty to market, and thus the Wellman and Tawney requirements, applies to in-kind leases and the WVSCA's answer to this question will dispose of the issues in this case. The Defendant acknowledges that the Fourth Circuit Court of Appeals predicted in Corder v. Antero Res. Corp., 57 F.4th 384, 396 (4th Cir. 2023), that the WVSCA would extend the Wellman and Tawney requirements beyond proceeds leases to market value leases. But it asserts that Corder does not govern this cause because it does not address in-kind leases which are distinct from other types of leases under West Virginia law. The Defendant suggests the WVSCA should answer its proposed question in the negative: “[b]ecause an in-kind lease contemplates physical delivery of the product to the royalty holder (for the holder to market as it wishes), the lessee has not assumed an implied duty to market the gas at its own expense” [ECF No. 64 at 3].

The Plaintiff opposes certification [ECF No. 68]. He does not dispute that the answer to the question posed by the Defendant is determinative of his breach of contract claim. Instead, he contends that the WVSCA “has previously and definitely determined” that Wellman and Tawney requirements apply to all oil and gas leases, including in-kind leases.

II. Relevant Law

West Virginia has enacted the Uniform Certification of Questions of Law Act, (“UCQLA”), W.Va. Code § 51-1A-1, et seq., which provides:

The Supreme Court of Appeals of West Virginia may answer a question of law certified to it by any court of the United States ... if the answer may be determinative of an issue in a pending case in the certifying court and if there is no controlling appellate decision, constitutional provision or statute of this state.

W.Va. Code § 51-1A-3. The Supreme Court of Appeals has recognized that the purpose of this statute is “to provide foreign courts with the benefit of [its] determination of West Virginia law” and “to resolve ambiguities or unanswered questions” in the same. Abrams v. W.Va. Racing Comm'n, 263 S.E.2d 103, 106 (W.Va. 1980) (internal quotations omitted); see also Morningstar v. Black and Decker Mtg. Co., 253 S.E.2d 666, 669 (W.Va. 1979). The...