K & D Holdings, LLC v. Equitrans, L.P. , 812 F.3d 333 ( 2015 )

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 15-1166
K & D HOLDINGS, LLC,
Plaintiff – Appellee,
v.
EQUITRANS, L.P.; EQT PRODUCTION COMPANY,
Defendants – Appellants,
and
EQT CORP. a/k/a Equitrans, Inc.,
Defendant.
Appeal from the United States District Court for the Northern
District of West Virginia, at Wheeling. John Preston Bailey,
District Judge. (5:13-cv-00152-JPB)
Argued: December 9, 2015 Decided: December 28, 2015
Before NIEMEYER, DUNCAN, and AGEE, Circuit Judges.
Reversed and remanded with instructions by unpublished per
curiam opinion.
ARGUED: Nicolle Renee Snyder Bagnell, REED SMITH LLP,
Pittsburgh, Pennsylvania, for Appellants. Stephen A. Wickland,
Clarksburg, West Virginia, for Appellee. ON BRIEF: Kevin C.
Abbott, Lucas Liben, REED SMITH LLP, Pittsburgh, Pennsylvania;
Michael W. Smith, R. Braxton Hill, IV, CHRISTIAN & BARTON LLP,
Richmond, Virginia, for Appellants.
Unpublished opinions are not binding precedent in this circuit.
PER CURIAM:
This appeal concerns an oil and gas lease (the “Lease”)
between Defendants-Appellants Equitrans, L.P., and EQT
Production Co. (collectively, “EQT”), 1 as lessees, and Plaintiff-
Appellee K & D Holdings, L.L.C. (“K & D”), as lessor. The
district court concluded that the Lease was divisible into two
separate segments--one for production and exploration, and one
for gas storage and protection of gas storage--and found that
the production and exploration segment of the Lease had
terminated after the Lease’s initial five-year term. On appeal,
Appellants contend that the Lease is not divisible and that
because they are actively engaged in one of the activities
covered by the Lease--protection of stored gas--the entire Lease
remains in effect.
For the reasons stated below, we conclude that the district
court erred and, accordingly, we reverse and remand with
instructions to enter judgment for EQT.
1K & D originally filed the complaint against EQT Corp.,
also known as Equitrans, Inc. The district court later granted
the parties’ Joint Motion for Substitution of Parties,
dismissing EQT Corp. d/b/a Equitrans Inc. as a party to this
civil action and substituting Equitrans, L.P., and EQT
Production Co. as defendants. Because all prior proceedings in
the civil action were binding on Equitrans, L.P., and EQT
Production Co. as if they had been properly joined and served as
defendants from the initial filing, “EQT” will be used to refer
to the Defendants-Appellants both before and after the
substitution.
3
I.
A.
On December 2, 1989, Henry H. Wallace and Sylvia L. Wallace
executed an oil and gas lease with Equitrans, Inc., covering
180 acres of land in Tyler County, West Virginia (the
“Premises”). 2 K & D is the successor-in-interest to the lessors,
the Wallaces, and Equitrans, L.P., is the successor-in-interest
to the lessee, Equitrans, Inc. Equitrans, L.P., subleased to
EQT Production Co. the rights to produce and sell gas from the
“premises and subsurface formations that are not used for the
storage of gas or protection of stored gas.” J.A. 254. 3 Thus,
the Lease now governs the relationship between K & D and EQT.
The Lease grants EQT the right to use the Premises to
explore for and produce oil and gas, to store gas, and to
protect stored gas. 4 The term of the Lease is established in
Article IV (the “Durational Provision”), which reads as follows:
2 The Wallaces also entered into two other oil and gas
leases with Equitrans, Inc.: a lease for 40 acres dated
March 26, 1992, and one for 12 acres dated September 16, 1994.
On December 22, 2014, during the course of this litigation,
Equitrans, L.P., released and surrendered these leases. Only
the 1989 lease remains.
3 Citations to the “J.A.” refer to the Joint Appendix filed
by the parties in this appeal.
4 Under Article I of the Lease, the Lessor
(Continued)
4
To have and to hold the said land and privileges
for the said purposes for and during a period of
5 years from December 2, 1989, and as long after
commencement of operations as said land, or any
portion thereof or any other land pooled or unitized
therewith as hereinafter provided, is operated for the
exploration or production of gas or oil, or as gas or
oil is found in paying quantities thereon or stored
thereunder, or as long as said land is used for the
storage of gas or the protection of gas storage on
lands in the general vicinity of said land. It is
understood that a well need not be drilled on the
leased premises to permit the storage of gas
thereunder and the Lessee shall be the sole judge of
when and if said land is being used for the storage of
gas or the protection of gas storage on lands in the
general vicinity of said land.
J.A. 261.
Since entering into the Lease, EQT has not engaged in
exploration, production, or gas storage on the Premises. It
has, however, engaged in protection of gas storage. Equitrans,
L.P., owns and operates a nearby natural gas storage facility
known as the Shirley Storage Field, which is authorized and
hereby leases and lets unto the Lessee, for its
exclusive possession and use for the purpose of
exploring and operating for and producing and saving
oil and gas by all methods now known or hereafter
known or hereafter discovered, and of injecting gas,
air, water or other fluids into any subsurface strata
for the purpose of recovering and producing oil and
gas, and of pooling or unitizing the same with other
lands for such purposed [sic], as hereinafter more
fully set out and for storing gas in the substrata
thereof, and protecting stored gas . . . .
J.A. 260.
5
regulated by the Federal Energy Regulatory Commission (“FERC”). 5
FERC established a 2,000-foot buffer zone around Shirley Storage
Field for the protection of the gas storage facilities. It is
undisputed that part of this protective buffer zone falls on the
Premises, and that therefore EQT is using a portion of the
Premises for protection of storage of natural gas.
Because EQT has not used the Premises to engage in gas or
oil production, K & D now seeks to enter into a more lucrative
oil and gas lease agreement with Antero, Inc., but has been
unable to do so because of the EQT Lease.
B.
On September 20, 2013, K & D filed a complaint against EQT
in the circuit court of Tyler County, West Virginia. K & D
primarily claimed that, because EQT has not produced and sold or
used gas or oil on the Premises for a period of greater than
twenty-four months, K & D was entitled to a rebuttable
presumption under West Virginia law that EQT has abandoned the
Lease. See W. Va. Code § 36-4-9a. 6
5 FERC has regulatory authority pursuant to the Natural Gas
Act of 1938, 15 U.S.C. §§ 717 et seq.
6 This provision reads, in relevant part, as follows:
There is a rebuttable legal presumption that the
failure of a person, firm, corporation, partnership or
association to produce and sell or produce and use for
(Continued)
6
EQT removed the case to the United States District Court
for the Northern District of West Virginia, where the parties
subsequently filed cross motions for summary judgment. K & D
claimed that, because EQT “has expended no money to explore,
test, or drill for over twenty years,” J.A. 81, the Lease was
therefore “cancelled by operation of law.” J.A. 84. K & D
further argued that it should be permitted to lease the unused
portion of the Premises to another corporation for oil and gas
production and stated that any drilling permitted on the leased
area would not affect the protective zone for storage in use by
EQT.
EQT, on the other hand, argued that West Virginia Code
§ 36-4-9a by its terms does not apply to leases for gas storage
purposes. Instead, the “plain and unambiguous terms” of the
Durational Provision, which contain no requirement that gas or
oil be produced in order to hold the Lease, were determinative
of the abandonment issue. J.A. 91.
its own purpose for a period of greater than twenty-
four months, . . . oil and/or gas produced from such
leased premises constitutes an intention to abandon
any oil and/or gas well and oil and/or gas well
equipment situate [sic] on said leased
premises . . . .
W. Va. Code § 36-4-9a.
7
On September 30, 2014, the district court denied the cross
motions for summary judgment. The district court rejected
K & D’s argument that West Virginia Code § 36-4-9a operated to
terminate the Lease, observing that this provision “specifically
states that the rebuttable presumption does not apply to leases
for gas storage purposes.” J.A. 158. Thus, the provision had
“no bearing” on the outcome of the case. Id.
The district court also rejected EQT’s interpretation of
the Durational Provision. Acting sua sponte, the district court
found as a matter of law that the Lease was divisible or
severable, rather than entire. J.A. 156. The district court
reasoned:
[The lease agreement] has two purposes for the lease
of the land, the exploration for and the production of
oil and gas versus the use of the property for the
storage of gas and the protection of stored gas. A
separate consideration is stated for each. The fact
that the leases indicate that the lessee is not
obligated to drill any wells is further evidence that
the terms of each are not interrelated, as is the fact
that the lessee has taken no steps whatsoever to
develop the oil and gas underlying the property.
J.A. 157–58. The district court then considered the segment of
the Lease relating to production of oil and gas and concluded
that given that the initial five-year lease term had elapsed
without EQT attempting to explore for or produce oil or gas,
this segment had expired. Because EQT is using a portion of the
Premises for protection of gas storage, however, the district
8
court concluded that the segment of the Lease relating to gas
storage and the protection of gas storage remains in effect.
The district court determined that “the resolution of these
issues leaves general issues of material fact,” such as whether
the entire Premises was necessary for gas storage and whether
drilling from an area of the Premises “not necessary for gas
storage protection would interfere with gas protection.”
J.A. 158–59.
EQT subsequently moved for reconsideration, arguing both
that the district court’s finding of severability was erroneous
and that the district court acted improperly by raising this
issue sua sponte without giving the parties notice or an
opportunity to respond prior to issuing its order denying the
cross motions for summary judgment. The district court denied
this motion.
In anticipation of the district court making a final
ruling, the parties jointly filed stipulations before the court
that resolved all remaining factual issues “with the
understanding and agreement that by entering into these
stipulations the parties are not waiving any objections or
rights to appeal any rulings by the Court, including those
contained in the Order Denying Cross Motions for Summary
Judgment.” J.A. 253.
9
The district court issued its final order on January 21,
2015. The court reiterated its conclusion from its previous
order that the lease at issue was divisible and that the segment
of the lease for the purpose of exploration for and production
of oil and gas had expired. Given this, and taking into account
the stipulations made by the parties, the district court
concluded that “the plaintiff may drill exploration and
production wells on areas which are not within the gas storage
protection area and which extend horizontally under the gas
storage protection to the Marcellus Shale area.” J.A. 287.
EQT timely appealed.
II.
EQT raises two arguments on appeal: (1) that the district
court erred as a matter of law in holding that the Lease was
divisible into separate segments, one for exploration and
production, and one for storage and protection of storage; and
(2) that the district court erred in finding that the “segment”
of the Lease for exploration and production had terminated after
its initial five-year lease term. In essence, this appeal asks
us to resolve whether the Lease required EQT to explore for or
produce oil or gas beyond the initial five-year period in order
to maintain its production rights, or whether, instead, EQT
10
preserved all of its rights under the Lease by exercising just
one of them, protection of gas storage.
We consider each of EQT’s arguments in turn, reviewing the
district court’s findings of fact for clear error and its
conclusions of law de novo. Perez v. Mountaire Farms, Inc., 650
F.3d 350, 363 (4th Cir. 2011). As this court’s jurisdiction is
based on diversity of citizenship, we apply West Virginia law to
the facts of this case. See Moore Bros. Co. v. Brown & Root,
Inc., 207 F.3d 717, 722 (4th Cir. 2000).
A.
EQT argues that the district court erred in finding sua
sponte that the Lease was divisible. We agree.
EQT argues that the Durational Provision, stating that the
lessee would have and hold the land and its privileges “as long
after commencement of operations as said land . . . is operated
for the exploration or production of gas or oil, or as gas or
oil is found in paying quantities . . . , or as long as said
land is used for the storage of gas or the protection of gas
storage,” J.A. 261 (emphasis added), is clear: “the unambiguous
language of the Lease means that EQT had to do only one of the
alternative acts in order to keep the entire Lease in effect,
including EQT’s right to produce oil and gas.” Appellants’ Br.
at 9. K & D argues that to adopt this interpretation would be
contrary to West Virginia public policy and would conflict with
11
the intent of the parties “to enter into a contract that would
be beneficial to both parties.” Appellee’s Br. at 9.
B.
In general, West Virginia contract law principles apply
equally to the interpretation of leases. See Energy Dev. Corp.
v. Moss, 591 S.E.2d 135, 143 (W. Va. 2003). Under West Virginia
law, “the primary criterion” for determining if a contract is
severable “is the intention of the parties as reflected from a
fair construction of the terms of the contract itself, the
subject matter of the contract and the circumstances which gave
rise to the question.” Quinn v. Beverages of W. Va., Inc.,
224 S.E.2d 894, 900 (W. Va. 1976). A severable contract is one
that is “susceptible of division and apportionment,” while a
contract that is not severable has material provisions and
consideration that “are common each to the other and
interdependent.” Dixie Appliance Co. v. Bourne, 77 S.E.2d 879,
881 (W. Va. 1953). Further, “[t]here is a presumption against
finding a contract divisible unless divisibility is expressly
stated in the contract itself, or the intent of the parties to
treat the contract as divisible is otherwise clearly
manifested.” 15 Williston on Contracts § 45:4 (4th ed.
2000)(footnotes omitted).
In this case, a fair construction of the terms of the Lease
compels the conclusion that the Lease was intended to be entire,
12
not divisible. To hold otherwise would be to ignore the
disjunctive use of the word “or” in the Durational Provision.
The Lease expressly sets out a list of activities and makes
plain that engaging in any one of them constitutes an exercise
of rights such that the entirety of the Lease would remain in
effect. As the West Virginia Supreme Court of Appeals has held,
“the word ‘or’ . . . in the absence of a contrary intent of the
parties appearing from other parts of the lease, [shall] be
given its ordinary meaning and not considered as meaning ‘and.’”
Little Coal Land Co. v. Owens-Illinois Glass Co. et al.,
63 S.E.2d 528 (Syl. by the Court, part 1).
K & D argues that the fact that the Lease contains
provisions for separate monetary consideration for distinct
activities renders it severable under Regent Waist Co. v. O.J.
Morrison Department Store Co., 106 S.E. 712 (W. Va. 1921). In
Regent Waist Co., a case involving a contract for different
types of garments, the Supreme Court of Appeals of West Virginia
held that “[w]here a retail merchant orders from a manufacturer
of shirtwaists a number of such waists of different kinds and
qualities, a definite price being fixed for each of such
different kinds and qualities, such contract is separable in the
absence of any circumstance indicating the contrary.” Id.
at 712 (Syl. by the Court).
13
It is true that the Lease requires the lessee to pay
different rents or royalties depending on the activities in
which the lessee engages. However, these activities are
interrelated and quite different in kind from the transactions
at issue in Regent Waist Co., so the same logic does not apply
when interpreting the Lease at issue here. Rather than this
Lease being “made up of several distinct items,” there is
instead an “intimate connection” between the different rights
bargained for. Id. at 714. Therefore, “it can safely be said
that the contract is entire.” Id.Finally, K&D argues that under West Virginia law, the
“general rule” is that oil and gas leases will “be liberally
construed in favor of the lessor.” Appellee’s Br. at 22 (citing
Martin v. Consolidated Coal & Oil Corp., 133 S.E. 626 (W. Va.
1926)). This is so, but only when there is ambiguity as to the
meaning of the lease terms. “Where the intent of the parties is
clear, [the Supreme Court of Appeals of West Virginia] will not
use the vehicle of interpretation to relieve one party of a bad
bargain.” Pechenik v. Baltimore & O.R. Co., 205 S.E.2d 813, 815
(W. Va. 1974). 7
7 We find K & D’s arguments based on vague notions of
fairness and West Virginia public policy similarly unavailing in
interpreting a lease the text of which is unambiguous.
14
Because we agree with EQT that the language of the
Durational Provision is clear and that the Lease does not evince
any intent of the parties to enter into a divisible lease
agreement, we conclude that the district court erred in holding
to the contrary.
C.
The district court’s determination that EQT’s production
and exploration rights had terminated as a result of non-use
during the initial five-year lease term was based on the
erroneous premise that the Lease was divisible. Having
concluded that the Lease is not divisible, we next consider
whether EQT has continuing rights under the Lease under the
requirements of the Durational Provision found in Article IV.
Under the Durational Provision, a lessee will maintain
continuing rights under the Lease beyond the initial five-year
term so long as (1) the lessee explores for or produces gas or
oil; (2) “gas or oil is found in paying quantities thereon or
stored thereunder”; or (3) the “land is used for the storage of
gas or the protection of gas storage on lands in the general
vicinity of said land.” J.A. 261. The parties have stipulated
that “a portion of the 180 Acre Lease falls within the
protective zone of the Shirley Storage Field.” J.A. 254. Thus,
EQT is using a portion of the land for protection of gas
storage, one of the rights conferred by the Lease. Because
15
there is no disagreement that EQT is indeed engaging in one of
the activities enumerated in the Durational Provision of the
Lease, we find that EQT continues to hold all rights under the
original Lease.
III.
For the foregoing reasons, the judgment of the district
court is
REVERSED AND REMANDED WITH INSTRUCTIONS
TO ENTER JUDGMENT FOR EQT.
16