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Clifton Valentine v. Sugar Rock, Inc. , 745 F.3d 729 ( 2014 )


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  •                                PUBLISHED
    UNITED STATES COURT OF APPEALS
    FOR THE FOURTH CIRCUIT
    No. 12-2273
    CLIFTON G. VALENTINE,
    Plaintiff – Appellant,
    v.
    SUGAR ROCK, INC.; GERALD D. HALL; TERESA D. HALL,
    Defendants – Appellees.
    Appeal from the United States District Court for the Northern
    District of West Virginia, at Clarksburg.    Irene M. Keeley,
    District Judge. (1:10-cv-00193-IMK)
    Argued:   December 10, 2013                 Decided:   March 12, 2014
    Before KING, GREGORY, and FLOYD, Circuit Judges.
    Published Order of Certification to the Supreme Court of Appeals
    of West Virginia. Judge King prepared the Order, in which Judge
    Gregory and Judge Floyd joined.
    ARGUED: James Scott Huggins, THEISEN BROCK, LPA, Marietta, Ohio,
    for Appellant.   W. Henry Lawrence, IV, STEPTOE & JOHNSON PLLC,
    Bridgeport, West Virginia, for Appellees.       ON BRIEF: Daniel
    Patrick Corcoran, THEISEN BROCK, LPA, Marietta, Ohio, for
    Appellant.    Amy Marie Smith, William J. O'Brien, STEPTOE &
    JOHNSON PLLC, Bridgeport, West Virginia, for Appellees.
    ORDER OF CERTIFICATION TO THE
    SUPREME COURT OF APPEALS OF WEST VIRGINIA
    KING, Circuit Judge:
    Availing ourselves of the privilege afforded by the State
    of West Virginia through the Uniform Certification of Questions
    of Law Act, West Virginia Code sections 51-1A-1 through 51-1A-
    13, we hereby request that the Supreme Court of Appeals of West
    Virginia   exercise     its    discretion    to      answer    the   following
    certified question of law:
    Whether the proponent of his own working interest in a
    mineral lease may prove his entitlement thereto and
    enforce his rights thereunder by demonstrating his
    inclusion within a mining partnership or partnership
    in mining, without resort to proof that the lease
    interest has been conveyed to him by deed or will or
    otherwise in strict conformance with the Statute of
    Frauds.
    We perceive that the answer to the foregoing question of West
    Virginia   law   may   be    determinative   of     the    cause   now   pending
    before   us.     Moreover,    it   appears   that    the    decisions    of   the
    Supreme Court of Appeals of West Virginia provide no controlling
    precedent dispositive of the question.              To fully illustrate the
    nature of the controversy out of which the question arises, we
    next recite the relevant facts.
    2
    I.
    A.
    Clifton      G.      Valentine     filed          this        diversity    action      on
    November 8, 2010, in the Northern District of West Virginia,
    alleging that       he    is   the    owner       of   certain       fractional      working
    interests in four Ritchie County mining partnerships:                            Cuthright
    Oil & Gas Co. (stated working interest of 3/32), Iams Gas Co.
    (2/32), Iams Oil Co. (5/32), and Keith Gas Co. (1/32).                                 Three
    wells produce oil and gas on Cuthright’s leasehold, with single
    wells in production for each of the other three partnerships on
    their respective, discrete leaseholds.
    Named as defendants in Valentine’s lawsuit are Sugar Rock,
    Inc.,    which   is      the   operator      of    the    wells,        and    two    of   its
    officers,      Gerald     D.   Hall    and       Teresa       D.    Hall   (collectively,
    “Sugar    Rock”).         Valentine     demands          an    accounting       and    seeks
    compensatory and punitive damages, together with reimbursement
    of his attorney fees and litigation costs.                          On January 13, 2011,
    Sugar Rock answered the complaint and filed a counterclaim “in
    excess    of   $14,191.00,”       representing           the       cumulative    operating
    expenses attributable to Valentine’s asserted working interests
    in the six wells.         See J.A. 27. 1
    1
    Citations herein to “J.A. ___” refer to the contents of
    the Joint Appendix filed by the parties to the appeal underlying
    this Order of Certification.
    3
    Valentine maintains that he purchased the working interests
    from Frank “F.A.” Deem, the original owner of the leaseholds, in
    the late 1950s.           For about forty years, Valentine received his
    proportionate share of the net proceeds generated by the well
    operations.       Those payments stopped in 1999, however, when Frank
    Deem’s son and successor in interest, William “W.A.” Deem, sold
    the majority interest in the partnerships to Sugar Rock.                                After
    Sugar    Rock    became     the     operator      and    managing     partner       of    the
    partnerships, the wells began to operate at a net annual loss,
    in amounts reflected on the tax documents (IRS Schedule K-1 to
    Form    1065)     that     each     partnership         has   continued      to    deliver
    annually    to    Valentine.         Sugar       Rock    billed     Valentine      for    his
    share of the deficiencies, but he refused to remit payment.                                In
    2001, Sugar Rock filed suit in state court against Valentine to
    recover    the     costs        incurred   to     that     point;     the     action      was
    dismissed in 2004 for failure to prosecute.
    The parties engaged in discovery in the district court,
    after which Sugar Rock moved for summary judgment on the ground
    that Valentine could produce no written instrument conveying him
    ownership of the working interests in dispute.                           In support of
    its     position,       Sugar     Rock   observed        at   the    outset       that,    in
    accordance       with    West     Virginia   law,       the   creation      of    the    four
    leaseholds transferred interests in real property.                          See J.A. 127
    (citing Syl. Pt. 1, McCullough Oil, Inc. v. Rezek, 
    346 S.E.2d
                       4
    788 (W. Va. 1986)); cf. Miller v. Schwartz, 
    354 N.W.2d 685
    , 689
    (N.D. 1984) (explaining that “[t]he interest acquired by the
    lessee under an ordinary oil and gas lease is known as a working
    interest     and     is     an    interest     in    real        property”      (citation     and
    internal quotation marks omitted)).
    Next,    Sugar     Rock      advanced      the     uncontroversial          corollary
    that any subsequent assignment by the lessee of a portion of its
    working interest in an oil and gas lease similarly conveys an
    interest     in     real     property.         See    J.A.        127   (citing      37   C.J.S.
    Statute      of     Frauds        § 77   (2011));          see     also    Exxon     Corp.     v.
    Breezevale         Ltd.,         
    82 S.W.3d 429
    ,     436        (Tex.     App.    2002)
    (instructing that, “[u]nder Texas law, a conveyance of a working
    interest in oil and gas is a real property interest”); Fry v.
    Farm Bureau Oil Co., 
    119 N.E.2d 749
    , 750 (Ill. 1954) (same,
    applying         Illinois    law).        Given       that        the     working    interests
    asserted by Valentine are real property interests, Sugar Rock
    maintained that their purported transfer could only be effected
    by   a    writing     contemplated         by       the    West     Virginia        Statute   of
    Frauds:
    No estate of inheritance or freehold, or for a term of
    more than five years, in lands, or any other interest
    or term therein of any duration under which the whole
    or any part of the corpus of the estate may be taken,
    destroyed, or consumed, except for domestic use, shall
    be created or conveyed unless by deed or will.
    5
    
    W. Va. Code § 36-1-1
    .          Thus, Sugar Rock reasoned, Valentine’s
    want of proper documentation evidencing ownership of the working
    interests in question doomed his claim.                    See J.A. 128 (citing
    Arbaugh v. Raines, 
    184 S.E.2d 620
    , 623 (W. Va. 1971), which held
    that    a   written     agreement      between    the      lessee      and     investors
    conveying shares in a gas well enterprise and providing for the
    distribution      of   proceeds     was    “neither        a    deed     nor    a    will”
    transferring to the investors any interest in the minerals in
    place).
    In   response,    Valentine        disavowed     the      “direct       ownership
    interest in real estate” that might have been transferred via a
    conforming    writing     indicating       the   conveyance         of    the       subject
    working interests.        J.A. 307.        Valentine contended instead that
    he possessed “an ownership interest in a partnership” arising
    under operation of law, and thus an indirect ownership interest
    in the four oil and gas leases.                
    Id.
          The specific portion of
    each    working    interest    to      which     he   is       entitled      need     not,
    according    to   Valentine,      be   established       in     strict       conformance
    with the Statute of Frauds, but can be proved by parol evidence
    and by the parties’ course of conduct.
    A “mining partnership” of the sort Valentine posits, may be
    formed “where tenants in common of mines or oil leases . . .
    actually engage in working the same, and share, according to the
    interest of each, the profit and loss.”                    Childers v. Neely, 34
    
    6 S.E. 828
    , 829 (W. Va. 1899) (citation and internal quotation
    marks omitted).            In such instances, “the partnership relation
    subsists . . . though there is no express agreement . . . to be
    partners      or   to    share    profits      and    loss.”     
    Id.
       (citation         and
    internal      quotation      marks      omitted).         From     Childers    and       the
    learned    legal        literature,     the    district    court     distilled       three
    essential elements of a mining partnership:                      (1) co-ownership of
    lands    or   leases      constituting        a   property     interest;      (2)   joint
    operation thereof; and (3) sharing of profits and losses.                                See
    J.A. 777; see also Drake v. O’Brien, 
    130 S.E. 276
    , 280 (W. Va.
    1925) (confirming that “[a] mining partnership exists between
    the tenants in common of a mine who work it together and divide
    the profits in proportion to their several interests”).
    The district court, by its Memorandum Opinion and Order
    (the    “Opinion”),        determined     that       Valentine’s     assertion      of    an
    interest in the Sugar Rock mining partnerships failed at the
    threshold,     in   that     he   had    not      satisfied    the   first    essential
    element.      See Valentine v. Sugar Rock, Inc., No. 1:10-cv-00193,
    
    2012 WL 4320850
     (N.D. W. Va. Sept. 18, 2012).                           In Childers,
    there was no dispute that the prospective partners each owned a
    properly documented share of the subject property prior to joint
    development of the minerals in place.                      By contrast, Valentine
    was unable to produce a writing in conformance with the Statute
    of   Frauds.        The     district      court       concluded,     therefore,      that
    7
    Valentine could not properly evidence receipt of the disputed
    working        interests,        which       in     turn        precluded           him     from
    demonstrating the requisite ownership interest in any of the
    subject leases.          See Opinion 13, 20-21.                 The court consequently
    granted Sugar Rock’s motion and entered summary judgment on its
    behalf.        Valentine timely appealed by notice filed on October
    12,    2012.      We    possess        jurisdiction           over    Valentine’s         appeal
    pursuant to 
    12 U.S.C. § 1291
    .
    B.
    1.
    During    the     pendency      of    this       appeal,       on    April    8,    2013,
    Valentine filed a contested motion to supplement the record with
    pleadings and additional materials filed in a putative class
    action    in    state    court     against        the    defendants         herein    by    nine
    other purported owners of working interests in the four mining
    partnerships.          See Washburn v. Sugar Rock, Inc., No. 11-C-61
    (Cir.    Ct.    Ritchie        Cnty.).       Valentine’s             motion   was     deferred
    pending oral argument.
    In the meantime, by its memorandum Order of July 19, 2013
    (the    “Washburn       Order”),       the   state       circuit       court    denied      the
    defendants’       motions       for    judgment         on    the     pleadings      and     for
    summary    judgment,       and    it     granted        the    plaintiffs’       motion      for
    partial summary judgment.               In so ruling, the court declared that
    the    plaintiffs       were    partners      in    the       mining       partnerships      and
    8
    owned the claimed working interests, notwithstanding that such
    assertions could not be corroborated by deed or will.                    Valentine
    submitted    the   Washburn     Order        in   accordance     with    the   rule
    permitting   us    to    be   notified       of   “pertinent     and    significant
    authorities [that] come to a party’s attention” while the appeal
    is yet pending.         See Fed. R. App. P. 28(j).               Inasmuch as the
    state court materials previously offered for our consideration
    will likely be useful in understanding the Washburn Order, we
    are   satisfied    to   grant   Valentine’s        motion   to    supplement    the
    record. 2
    In considering the motions before it, the circuit court
    acknowledged that Childers requires each partner in a mining
    2
    The district court’s summary judgment order in favor of
    Sugar Rock, entered in September 2012, concomitantly denied
    Valentine’s motion to voluntarily dismiss his complaint without
    prejudice, see Fed. R. Civ. P. 41(a)(2), so that he could join
    the putative class action in Ritchie County. Valentine contends
    on appeal that the court should have granted his dismissal
    motion or, failing that, stayed further action — including
    consideration of Sugar Rock’s motion for summary judgment — to
    await developments in the state court proceedings.     We reject
    Valentine’s assertions of error in this regard, and, with
    respect to the dismissal issue, adopt the analysis set forth by
    the district court in its unpublished Opinion. Our disposition
    of the above-described aspect of Valentine’s appeal removes any
    alternative basis to disturb the judgment below and leaves for
    resolution solely the question that we certify today, thereby
    ensuring that we do not ask the Supreme Court of Appeals of West
    Virginia for an advisory opinion.    See State ex rel. Advance
    Stores Co., Inc. v. Recht, 
    740 S.E.2d 59
    , 64 (W. Va. 2013)
    (reinforcing Court’s determination that it “will not answer a
    certified question if, in doing so, [it] would have to render a
    non-controlling, advisory answer”).
    9
    partnership        to    possess         an    ownership        interest        in   the    land   or
    lease being exploited, but also observed the opinion’s silence
    as    to    whether      such       an    interest       may     arise      and      be    evidenced
    through some writing other than a deed or will, or, indeed,
    through no writing at all.                      See Washburn Order 5 (recognizing
    that Childers “does not say that the mines, leases, or lands of
    a mining partnership must be titled in the name of each of the
    individual         mining       partners”).               The     circuit         court     instead
    regarded the Supreme Court’s post-Childers opinion in Lantz v.
    Tumlin,      
    81 S.E. 820
       (W.       Va.    1914),     as    more      helpful      to    its
    analysis.
    In    Lantz,      one    of       two   participants          in    an     alleged     mining
    partnership brought a bill in equity to dissolve the entity and
    settle accounts.               The defendant demurred on the grounds that
    there was no written partnership agreement and that only the
    plaintiff’s name appeared on the property deed.                                       The Supreme
    Court       of    Appeals      affirmed,            in   pertinent        part,      the    circuit
    court’s entry of judgment in favor of the plaintiff, concluding
    that the evidence left “no room for doubt” that the purported
    partnership had in fact existed.                          Lantz, 81 S.E. at 820.                   The
    evidence to which the Court referred consisted of interactions
    and correspondence between the parties, buttressed by the use of
    the    partnership        name       on       financial       records       and      on    contracts
    undertaken.             See    id.       at    820-21.          The       Court      rejected      the
    10
    defendant’s        invocation     of    the    Statute         of    Frauds      in   defense,
    instructing that “where persons engage in a joint enterprise for
    profit,       by    associating    themselves            together          as   partners      or
    otherwise, a relationship of trust and confidence is thereby
    established, and that as between them in the conduct of the
    joint    or    partnership      business       the       statute      of    frauds     has   no
    application.”        Id. at 821 (citations omitted).
    Persuaded by Lantz, the Circuit Court of Ritchie County in
    Washburn       denied    Sugar     Rock’s          motion      for       judgment     on     the
    pleadings.         The circuit court perceived that the result in Lantz
    was     consistent       with     West     Virginia         authorities           permitting
    partnership real estate to be treated as personalty for purposes
    of    implementing       equitable       remedies         such      as     dissolution       and
    settlement.         See Washburn Order 8 (citing, inter alia, Brown v.
    Gray, 
    70 S.E. 276
    , 277 (W. Va. 1911)).                           Further, according to
    the   court,       the   plaintiffs      were       entitled        to     partial    summary
    judgment      regarding    their       claims       to   the     working        interests     in
    dispute.       The court ruled that — in the absence of any evidence
    to the contrary — ownership had been sufficiently demonstrated
    by the plaintiffs’ affidavits, appended with documents of record
    establishing each partnership, detailing the various interests
    therein, and subsequently assigning those interests.                              See 
    id. at 10-12
    .     The affidavits additionally incorporated the Schedule K-
    11
    1s that Sugar Rock had, from 1999 through 2011, delivered each
    year to the plaintiffs.             See 
    id. at 12
    .
    2.
    The   district        court      in    the     case     at    bar    was     likewise
    presented     with     the        opportunity       to    consider       the   import    and
    applicability         of     Lantz.          The    court    concluded         that    Lantz
    supported     the     proposition        made       apparent    in       Childers     that    a
    mining partnership may arise through words and by conduct.                               See
    Opinion 21 (recognizing that “there is, manifestly, no dispute
    that    a    written        partnership       agreement        is    not    required     for
    individuals to form a common law mining partnership” (citation
    omitted)).       According to the court, however, Lantz cannot be
    interpreted      as    permitting,           in    derogation       of   the   Statute       of
    Frauds, the conveyance of the property interest necessary to
    form a mining partnership:                   “What is required, however, is an
    interest in property, an interest which [Valentine] does not
    purport to have.”           
    Id.
    True enough, Valentine abandoned all pretense that he had
    been directly conveyed by deed or will any property interest in
    the    leases;   he        maintained    that       his   working        interest     instead
    derived indirectly from his proportional participation in the
    partnership, which owns the leases.                       Though the district court
    indicated that the absence of a preexisting property interest
    documented by deed or will forecloses, ab initio, the creation
    12
    of a “mining partnership,” it did not consider the possibility
    that its chicken-or-the-egg conundrum might be avoided if West
    Virginia      law   were      construed      to     recognize       a    “partnership        in
    mining,” that is, the formation of an ordinary partnership that
    happens     to    have   as    its       primary    purpose     the      exploitation        of
    minerals.        Such an approach could help to explain the result in
    Lantz, where a partnership was deemed to exist notwithstanding
    that one of the partner’s names was nowhere to be found on the
    subject lease.
    We     discern,        however,        another         rationale        potentially
    supporting the Lantz decision.                   In that dispute, the real estate
    owner   of    record     sued       to    hold     his   partner        —   whose    alleged
    interest in the same real estate was undocumented — liable for
    the indebtedness of the partnership.                     In order to prevail, then,
    the plaintiff was constrained to stipulate to the defendant’s
    property      interest.        A     stipulation,        as   the       Supreme     Court    of
    Appeals has explained, “is a judicial admission.                            As such, it is
    binding in every sense, preventing the party who makes it from
    introducing evidence to dispute it, and relieving the opponent
    from    the      necessity     of    producing        evidence      to      establish       the
    admitted fact.”          Lawyer Disciplinary Bd. v. Morgan, 
    717 S.E.2d 898
    , 906 (W. Va. 2011) (citation and internal quotation marks
    omitted).
    13
    Given the plaintiff’s admission in Lantz, consistent with
    the entirety of the supporting evidence, it can hardly be said
    that       relieving     the   defendant        therein   of        his     partnership
    obligations for want of a conforming writing would have served
    the purpose of the Statute of Frauds, which is “to prevent the
    fraudulent enforcement of unmade contracts, not the legitimate
    enforcement of contracts that were in fact made.”                            Hoover v.
    Moran, 
    662 S.E.2d 711
    , 719 (W. Va. 2008) (citations and internal
    quotation marks omitted); see also Timberlake v. Heflin, 
    379 S.E.2d 149
    , 153 (W. Va. 1989) (instructing that “a pleading in a
    civil       case   may   satisfy     the     requirement       of     a     memorandum”
    evidencing a contract for the sale or lease of land).
    In the matter before us, however, we face perhaps a more
    typical situation, in that the plaintiff urges a declaration of
    his ownership interest in realty not evidenced by deed or will,
    such       declaration    being    vigorously      opposed     by     the     owner   of
    record.         The    particular    facts      underlying     the        case   at   bar
    persuade us that we may appropriately certify the question we
    now confront. 3
    3
    Even if the difference in procedural posture that
    potentially distinguishes this matter from Lantz is deemed to be
    of no legal significance, our resort to the certification
    process is nonetheless reasonable and appropriate.      In that
    instance, the district court’s Opinion and the Washburn Order
    entered by the Circuit Court of Ritchie County manifest
    irreconcilable outcomes though both courts have sought to apply
    (Continued)
    14
    II.
    In   light   of    the    foregoing,         we   identify      the   controlling
    question of West Virginia law to be this:                    Whether the proponent
    of his own working interest in a mineral lease may prove his
    entitlement     thereto        and    enforce        his    rights     thereunder   by
    demonstrating      his       inclusion      within      a   mining    partnership    or
    partnership in mining, without resort to proof that the lease
    interest has been conveyed to him by deed or will or otherwise
    in    strict   conformance           with    the     Statute     of     Frauds.      We
    acknowledge that the Supreme Court of Appeals of West Virginia
    may reformulate the question.               All of the parties in this matter
    are   represented       by    counsel,       whose      names   and    addresses    are
    provided hereunder.
    the same precepts of West Virginia law to the identical Ritchie
    County properties. As our distinguished colleague Judge Widener
    reminded us in Denny v. Seaboard Lacquer, Inc., 
    487 F.2d 485
    ,
    489 (4th Cir. 1973), the principles of federalism first
    identified by the Supreme Court of the United States in Erie
    Railroad Co. v. Tompkins, 
    304 U.S. 64
     (1938), impose upon us the
    duty   to  decide   diversity  actions   through   the  faithful
    application of state law, as we discern it to the best of our
    ability.   The parties before us on appeal, as well as the
    additional, non-diverse plaintiffs involved in the Ritchie
    County litigation, are each entitled to have the controlling
    question of West Virginia law properly decided. In view of the
    importance of the question and the significant likelihood that
    it will recur as oil and gas exploration and development
    continues on the upswing in West Virginia, we are of the opinion
    that the state’s Supreme Court of Appeals ought to be afforded
    the opportunity to resolve it.
    15
    For the Plaintiff-Appellant:          For the Defendants-Appellees:
    James Scott Hughes                    W. Henry Lawrence, IV
    Daniel Patrick Corcoran               William James O’Brien
    THEISEN BROCK, LPA                    STEPTOE & JOHNSON, PLLC
    424 2nd Street                        400 White Oaks Boulevard
    Marietta, OH 45750                    Bridgeport, WV 26330
    III.
    Accordingly, pursuant to the privilege made available under
    West Virginia law as described above, we hereby ORDER:     (1) that
    the question set forth herein be certified to the Supreme Court
    of Appeals of West Virginia for answer; (2) that the Clerk of
    this Court transmit to the Supreme Court of Appeals of West
    Virginia, under the official seal of this Court, a copy of this
    Order of Certification; and (3) that the Clerk of this Court
    forward in addition the original or copies of the record before
    this Court, in all or in part, as requested by the Supreme Court
    of Appeals of West Virginia, any and all such requests being
    effective upon notification by ordinary means from the Clerk of
    the Supreme Court of Appeals of West Virginia.
    QUESTION CERTIFIED
    16