SWN Production Company, LLC and Equinor USA Onshore Properties, Inc. v. Charles Kellam, Phyllis Kellam, and all other persons and entities similarly situated ( 2022 )

FILED
June 14, 2022
released at 3:00 p.m.
EDYTHE NASH GAISER, CLERK
Walker, J., dissenting, SUPREME COURT OF APPEALS
OF WEST VIRGINIA
The district court certified four questions to this Court, but we only need to
answer the first: whether Tawney is “still good law”? The answer is yes in the sense that
we have not yet overruled it, but no in the sense this Court wrongly decided it and its
predecessor Wellman. Five years ago when this Court decided Leggett, we highlighted the
flawed reasoning in Wellman and Tawney when we were “compelled to further illustrate
the faulty legs upon which [they] and [their] iteration of the marketable product rule
purports to stand.”1 Tawney was the next step in the illogical path blazed in Wellman, and
we should take this opportunity to overrule them both.
Before “deregulation,” oil and gas sales occurred at the wellhead. 2 After
deregulation, lessees started enhancing the “sour” gas removed from lessors’ property,
transporting it to an off-site location, and selling the “sweetened” gas for more than the
market value of the raw minerals. 3 We first addressed the effects of deregulation in
1
Leggett v. EQT Prod. Co., 239 W. Va. 264, 276, 800 S.E.2d 850, 862 (2017).
2
Id. at 271, 800 S.E.2d at 857.
3
Id. at 271-72, 800 S.E.2d at 858-59.
1
Wellman v. Energy Res., Inc.,4 which we later observed formed “the foundation of the
current state of West Virginia’s law on deduction of post-production costs.” 5 And as the
law stands under Wellman, lessees bear all post-production transportation and
enhancement expenses and pay royalty owners based on the proceeds of the enhanced
product. 6 So, because of Wellman, lessees compensate royalty owners for value beyond
the raw minerals that they own, unless they contract otherwise. 7 The Wellman Court
supported the default rule based on the implied covenant to market, but the decision appears
“to arise more from an unwillingness to accept the realities of deregulation in the natural
gas market than from implied covenant law.”8
Tellingly, the Wellman Court did not acknowledge the new industry
landscape wrought by deregulation. Instead, it focused on what it viewed as
4
210 W. Va. 200, 557 S.E.2d 254 (2001).
5
Leggett, 239 W. Va. at 272, 800 S.E.2d at 858 (citing Wellman, 210 W. Va. 200,
557 S.E.2d 254).
6
See Leggett, 239 W. Va. at 276-77, 800 S.E.2d at 862-63 (citation omitted).
7
Id.
8
Id. at 277, 800 S.E.2d at 863 (quoting John W. Broomes, Waste Not, Want Not:
The Marketable Product Rule Violates Public Policy Against Waste of Natural Gas
Resources, 63 U. Kan. L. Rev. 149, 170–71 (2014)).
2
an attempt on the part of oil and gas producers in recent years
to charge the landowner with a pro rata share of various
expenses connected with the operation of an oil and gas lease
such as the expense of transporting oil and gas to a point of
sale, and the expense of treating or altering the oil and gas so
as to put it in a marketable condition.[9]
The Court blamed the trend on lessees’ efforts “[t]o escape the rule that the lessee must
pay the costs of discovery and production . . . [,]” 10 in other words, to escape the implied
covenant to market. Before Wellman, the implied covenant to market required that “the
lessee exercise reasonable diligence to market the products, defined as ‘whatever, in the
circumstances, would be reasonably expected of all operators of ordinary prudence, having
regard to the interests of both lessor and lessee.’” 11 Although the Wellman Court chose not
to acknowledge deregulation, one cannot ignore the obvious goal of the decision: to grant
the benefits of deregulation to lessors while shifting the burden to lessees. And Wellman
did that by removing the notion that lessees could regard their own interest and, instead,
expanded the implied covenant to market to require lessees to bear all expenses of
enhancing already discovered and produced minerals and compensate lessors based on the
9
Wellman, 210 W. Va. at 210, 557 S.E.2d at 264.
10
Id.11
Leggett, 239 W. Va. at 272-73 n.12, 800 S.E.2d at 858-59 n.12 (quoting Rogers
v. Westerman Farm Co., 29 P.3d 887, 903 (Colo. 2001)).
3
value added post-production. The approach “[is] nothing more than a re-writing of the
parties’ contract to take money from the lessee and give it to the lessor.”12
Wellman based its interpretation of the implied covenant to market on a
section from a 1951 treatise that says
From the very beginning of the oil and gas industry it
has been the practice to compensate the landowner by selling
the oil by running it to a common carrier and paying to [the
landowner] one-eighth of the sale price received. This practice
has, in recent years, been extended to situations where gas is
found . . . .[13]
But Wellman overlooked another section of the treatise that acknowledges that the implied
covenant to market does not extend to minerals sold off-site and that lessees should pay
royalties
equal to one-eighth (1/8) of the proceeds received by the
[l]essee from the sale of gas if measured and sold at the well,
but if not sold at the well but after transmission or commingling
with gas from other properties, then equal to one-eighth (1/8)
of the average prevailing price currently paid at the well in the
same field by public utility companies . . . .[14]
12
Leggett, 239 W. Va. at 277, 800 S.E.2d at 863 (quoting David E. Pierce, Royalty
Jurisprudence: A Tale of Two States 374 (2010)).
13
Wellman, 209 W. Va. at 210, 557 S.E.2d at 263 (quoting Robert Donley, The Law
of Coal, Oil and Gas in West Virginia and Virginia § 104 (1951)).
14
Donley, supra at § 159 (emphasis added).
4
It is not clear whether the parties in Wellman put the latter rule to the Court. But what is
clear is that the latter rule is the logical adaptation of the implied covenant to market in
view of deregulation’s realties. The Wellman Court looked past the realties, extended the
implied covenant to market to obligate lessees to cover expenses incurred after discovery
and production, and built our jurisprudence on faulty legs.
This Court compounded the flawed reasoning in Tawney v. Columbia Nat.
Res., L.L.C.15 There, the Court held that a lease must provide a “method of calculating”
post-production expenses if a lessee wishes to contract away Wellman’s expanded implied
covenant to market. 16 But no court should require parties to contract away an implied
covenant, much less impose a heightened burden for doing so. Instead, implied covenants
are merely gap fillers courts can use “to implement the parties[’] intentions where not
otherwise stated[.]” 17 As Petitioners put it, “[t]he fundamental legal flaw underlying
Wellman and Tawney is that they invert the roles of express contractual terms and implied
covenants.” So, when express terms state that parties will calculate royalties based on
15
219 W. Va. 266, 633 S.E.2d 22 (2006).
16
See Syl. Pt. 10, Id. at 266, 633 S.E.2d at 22.
17
Leggett, 239 W. Va. at 275, 800 S.E.2d at 861.
5
minerals’ value at the wellhead, courts should not supersede the express terms with an
implied covenant, which are “only justified on grounds of legal necessity” and should not
be at issue where express terms cover the point. 18 And by adding unprecedented
impediments to lessees’ freedom of contract—like creating an ambiguous “method of
calculating” requirement—it seems this Court doubts this State’s mineral owners’ ability
to contract for themselves. The heightened requirements undermine the basic underpinning
of contract law that “[i]t is not the right or province of a court to alter, pervert or destroy
the clear meaning and intent of the parties as expressed in unambiguous language in their
written contract or to make a new or different contract for them.” 19 In other contexts, this
Court has lamented impediments to contractual freedom and deemed the public policy to
outweigh countervailing policy concerns:
[Persons] of full age and competent understanding shall have
the utmost liberty of contracting, and . . . their contracts, when
entered into freely and voluntarily, shall be held sacred, and
shall be enforced by courts of justice. Therefore, you have this
18
See Id. (quoting Allen v. Colonial Oil Co., 92 W. Va. 689, 115 S.E.2d 842, 844
(1923)).
19
Syl. Pt. 3, Cotiga Dev. Co. v. United Fuel & Gas Co., 147 W. Va. 484, 128 S.E.2d
626 (1962).
6
paramount public policy to consider,—that you are not lightly
to interfere with this freedom of contract.[20]
Next, the question is whether the principle of stare decisis limits our ability
to correct what I believe are the errors of the past. And this Court’s approach to precedent
supports correcting the flawed reasoning that started in Wellman and continued in Tawney.
As we have explained, stare decisis is flexible when this Court erroneously decided cases
or when an outmoded rule should not apply to changed circumstances:
Stare decisis is not a rule of law but is a matter of
judicial policy . . . . It is policy which promotes certainty,
stability and uniformity in the law. It should be deviated from
only when urgent reason requires deviation. However, stare
decisis is not an inflexible policy. In the rare case when it
clearly is apparent that an error has been made o[r] that the
application of an outmoded rule, due to changing conditions,
results in injustice, deviation from that policy is warranted.[21]
We follow the guidance of Supreme Court of the United States, which provided factors to
consider:
[1] the desirability that the law furnish a clear guide for
the conduct of individuals, to enable them to plan their affairs
with assurance against untoward surprise; [2] the importance
20
Wellington Power Corp. v. CNA Sur. Corp., 217 W. Va. 33, 38, 614 S.E.2d 680,
685 (2005) (quoting State v. Mem’l Gardens Dev. Corp., 143 W. Va. 182, 191, 101 S.E.2d
425, 430 (1957)).
21
Adkins v. Francis Hosp. of Charleston, 149 W. Va. 705, 718, 143 S.E.2d 154,
162 (1965) (internal citation omitted).
7
of furthering fair and expeditious adjudication by eliminating
the need to relitigate every relevant proposition in every case;
and [3] the necessity of maintaining public faith in the judiciary
as a source of impersonal and reasoned judgments.[22]
In this instance, that nature of the certified questions from the district court
highlights the ambiguous and unworkable standards that Wellman and Tawney created.
The doctrine established by the cases is so unsound that courts cannot determine whether
the cases remain binding precedent or, much less, apply novel concepts like the “method
of calculating” requirement. And, here again, this Court refuses to answer the certified
question about what the unprecedented term of art means. Instead, the majority further
convolutes the doctrine by punting the question as if answering it may accidentally allow
lessees to contract away Wellman’s baseless default rule.
With such unclear and unfounded standards, it is impossible for lessees and
lessors to confidently plan their affairs, which leads to unneeded litigation. For example,
the parties to this case agreed that the lessee would pay the lessor royalties based on the
sale price “less any charges for transportation, dehydration, and compression paid by the
[the lessee] to deliver the oil, gas, and/or coalbed methane gas marketed . . . .” In any other
Meadows v. Meadows, 196 W. Va. 56, 64, 468 S.E.2d 309, 317 (1996) (quoting
22
Moragne v. States Marine Lines, Inc., 398 U.S. 375, 403 (1970)).
8
context, there would be little room to dispute the unambiguous contract terms: the lessee
pays the lessor royalties based on the proceeds minus the listed expenses. But under
Wellman and Tawney’s novel standard, a dispute exists as to whether the express contract
terms crack Tawney’s undefined code to negate an implied covenant. We could remove
all confusion by wiping the slate clean of Wellman and Tawney and allowing parties to
govern their own affairs—as we do in other commercial relationships. We do not need to
protect parties from their own contracts.
For these reasons, I respectfully dissent.
9