Patrick D. Leggett v. EQT Production Co.

Opinion

No. 16-0136 - Patrick D. Leggett, et al. v. EQT

Production Company FILED May 30, 2017 released at 3:00 p.m. RORY L. PERRY, II CLERK SUPREME COURT OF APPEALS Davis, Justice, dissenting: OF WEST VIRGINIA

In this proceeding, the Court was asked to decide whether W. Va. Code § 22-6-8(e)

authorized the Respondents to deduct from the royalty payments of the Petitioners part of the

post-production costs associated with drilling oil and gas. When this issue was first

presented, a majority of this Court determined that the statute did not authorize such

deductions from the royalty payments. I voted with the majority in that decision. After the

majority opinion was filed, Respondents filed a motion for rehearing. I voted against a

rehearing, but a majority of the Court voted to rehear the case.1 After the rehearing, a new

majority opinion was issued which concluded that, under W. Va. Code § 22-6-8(e), the

Respondents could, in fact, deduct post-production costs associated with drilling oil and gas.

For the reasons set out below, I dissent from this new majority opinion.

A. Two Preliminary Issues

As a preliminary matter, there are two issues I wish to quickly dispose of before

1 One member of the Court who was on the original majority opinion, Justice Benjamin, was no longer with the Court when the rehearing was decided.

addressing the merits of my dissent. First, contrary to the unsubstantiated assertion of the

majority opinion, there is and was no legal basis for granting a rehearing in this case.

Rule 25 of the West Virginia Rules of Appellate Procedure states that a petition for rehearing “shall state with particularity the points of law or fact which in the opinion of the petitioner the Court has overlooked or misapprehended[.]” (emphasis added). This Court has recognized that “well settled principles of appellate procedure indicate that ‘a rehearing on an appeal can be granted only for purposes of correcting errors that the court has made . . . .’” Perrine v. E.I. du Pont de Nemours and Co., 225 W. Va. 482, 598, 694 S.E.2d 815, 931 (2010) (quoting In re Leslie H., 369 Ill. App. 3d 854, 308 Ill. Dec. 445, 861 N.E.2d 1010, 1015 (2006)).

West Virginia Reg’l Jail & Corr. Facility Auth. v. A.B., 234 W. Va. 492, 519, 766 S.E.2d

751, 778 (2014). Moreover, “[r]epetition of argument previously presented to the Court in

the case in not a proper basis for a petition for rehearing.” W. Va. R. App. Proc. 25(b).

I have combed through the majority opinion several times and have failed to find any

legal or factual error in the original majority opinion that this new majority opinion relied

upon to justify granting the rehearing. All that the new majority opinion has done is to

provide self-serving reasons as to why it would resolve the issue presented differently. In

the final analysis, all that the new majority opinion has done is to conclude that the operative

language in the dispositive statute was not ambiguous whereas the original majority opinion

reached the opposite view of the statute. This difference of opinion is not a basis for

rehearing. Ultimately, this is simply an impermissible request by the Respondents asking the

Court to change its mind.

Second, the new majority opinion went to great lengths to misconstrue the manner in

which the original majority opinion discussed the decisions in Wellman v. Energy Resources,

Inc., 210 W. Va. 200, 557 S.E.2d 254 (2001), and Tawney v. Columbia Natural Resources,

L.L.C., 219 W. Va. 266, 633 S.E.2d 22 (2006). Contrary to the assertions of the new majority

opinion, the original majority opinion had to discuss those cases because they were part of

the certified question. After discussing those decisions, the original majority opinion held

the following:

All the preceding inevitably leads us back to the first certified question, which asks simply whether our 2006 decision in Tawney has “any effect” on the proper construction of the statutory term “at the wellhead,” enacted in 1982 as part of West Virginia Code § 22-6-8, in connection with the minimum royalty payments due owners of oil and gas in place subject to flat-rate leases. Through our discussion, we have demonstrated that Tawney and our earlier precedents, particularly Wellman, indeed inform the analysis of the issue, but the question as formulated, we believe, imprecisely addresses the particular dispute between the parties.

We therefore reformulate the question, in accordance with the discretion afforded us by West Virginia Code § 51-1A-4, as follows:

Whenever the lessee-owner of a working interest in an oil or gas well must comply with West Virginia Code § 22-6-8(e) by tendering to the lessor-owner of the oil or gas in place a royalty not less than one-eighth of the total amount paid to or received by or allowed to the lessee, does the statute require in addition that the lessee not deduct from that amount any expenses that have been incurred in gathering, transporting, or treating the oil or gas after it has been initially extracted, any sums attributable to a loss or beneficial use of volume beyond that initially measured, or any other costs that may be

characterized as post-production?

We answer that question in the affirmative.

Leggett v. EQT Prod. Co., No. 16-0136, 2016 WL 6835732, at *8 (W. Va. Nov. 17, 2016).

The new majority opinion wrongly stated that the original majority opinion used contract

principles applicable in Wellman and Tawney in order to decide the intent behind the

statutory meaning of “at the wellhead.” However, as noted above, the original majority

opinion reformulated the certified question so as to take out the Wellman and Tawney

analysis as a basis for answering the question. The reformulated question clearly was

grounded on the meaning of the statute. This point is made clear in the original majority

opinion when it held the following:

The absence of clear, unambiguous language [in the statute] gives rise to the uncertainty that there may be more than one way by which the holder of a working interest in an oil or gas well can comply with West Virginia Code § 22-6-8(e)’s command that the landowner’s royalty be calculated “at the wellhead.” It thus becomes necessary that we resort to traditional rules of statutory construction to accurately discern the intent of the Legislature. See syl. pt. 1, Farley v. Buckalew, 186 W. Va. 693, 414 S.E.2d 454 (1992) (“A statute that is ambiguous must be construed before it can be applied.”); State v. Gen. Daniel Morgan Post No. 548, Veterans of Foreign Wars, 144 W. Va. 137, 144, 107 S.E.2d 353, 358 (1959) (“[I]n the interpretation of a statute, the legislative intention is the controlling factor; and the intention of the legislature is ascertained from the provisions of the statute by the application of sound and well established canons of construction.”).

Leggett, 2016 WL 6835732, at *6. To be clear, in order to justify its erroneous decision in

this case, the new majority opinion wrongly asserted that the original majority opinion used

contract principles to analyze the statute. I have shown that the original majority opinion

expressly stated that it was relying upon statutory principles to examine the statute, not the

law governing contracts.

B. The Operative Language in W. Va. Code § 22-6-8(e) Is Ambiguous

The new majority opinion found that the applicable language in W. Va. Code

§ 22-6-8(e) is not ambiguous. It further erroneously concludes that the statute clearly

authorizes the Respondents to deduct post-production costs from the Petitioners’ royalty

payments. The majority opinion is simply wrong. The relevant language of the statute

provides as follows:

the owner of the working interest in the well . . . shall tender to the owner of the oil or gas in place not less than one eighth of the total amount paid to or received by or allowed to the owner of the working interest at the wellhead for the oil or gas so extracted, produced or marketed before deducting the amount to be paid to or set aside for the owner of the oil or gas in place, on all such oil or gas to be extracted, produced or marketed from the well.

W. Va. Code § 22-6-8(e) (emphasis added). According to the new majority opinion, there

is no ambiguity in the language of this provision. The new majority opinion determined that

this provision clearly shows that “[r]oyalty payments pursuant to an oil and gas lease

governed by the [statute] may be subject to pro-rata deduction or allocation of all reasonable

post-production expenses actually incurred by the lessee.” I cannot understand how this

reasoning by the new majority opinion is supported by the statute. The statute does not

contain any provisions that address the issue of “pro-rata deduction or allocation of all

reasonable post-production expenses.”

I will not belabor this point. It is clear to anyone reading the statute that you cannot

discern a legislative intent to allow a deduction for post-production expenses. The new

majority opinion has used legal sophistry to fool only itself.

The original majority opinion correctly found that the provision was ambiguous. In

doing so, the original majority opinion applied basic statutory construction principles to

discern the legislative intent of the statute. The original majority opinion looked to the whole

of the statute to see if it could determine a legislative intent to force oil and gas owners to pay

for post-production costs. The original majority opinion held that “[w]e need not guess at

the Legislature’s purpose in enacting § 22-6-8, for the wrongs intended to be redressed are

starkly revealed in the legislative findings and declarations indelibly engraved into the statute

itself.” The original majority opinion then cited to the following provision of the statute to

reach the conclusion that the Legislature did not intend to have oil and gas owners pay for

post-production costs:

The Legislature hereby finds and declares:

....

That continued exploitation of the natural resources of this state in exchange for such wholly inadequate compensation

is unfair, oppressive, works an unjust hardship on the owners of the oil and gas in place, and unreasonably deprives the economy of the state of West Virginia of the just benefit of the natural wealth of this state.

W. Va. Code § 22-6-8(a)(2). After reviewing this provision of the statute, as well as others,

the original majority opinion reached the rational conclusion that “[i]t would have been

perversely inconsistent with the overarching remedial intent of the flat-rate statute for a

Legislature so passionately dedicated to ensuring the future flow of adequate compensation

to oil and gas landowners to have purposefully provided a mechanism of royalty valuation

specifically designed to curtail that compensation.” Leggett, 2016 WL 6835732, at *6. In

other words, the legislative purpose of the statute unequivocally revealed an intent to provide

oil and gas owners with the maximum possible royalty payments. The statute was not

intended as a mechanism to reduce royalty payments or to fill the coffers of companies who

develop oil and gas interests. This is the intent only of the new majority opinion.

In order for the new majority opinion to have reached its unsupported conclusion, it

had to create the illusion that the statute was not ambiguous. This point is key because if the

new majority opinion had followed basic rules of statutory construction, it would have been

compelled to reach the same conclusion that the original majority opinion reached.

In my final thoughts on this matter, I must return to Wellman and Tawney. As I

previously noted, those two decisions were jettisoned by the new majority opinion because

they presented an impediment to the conclusion that the new majority strained to reach.

Those two opinions have been the law with respect to oil and gas contracts for over ten years.

Specifically, for over ten years those two opinions have stood for the proposition that oil and

gas leases that contain language requiring payment of royalty “at the wellhead,” without

more, do not permit the reduction of royalty payments for post-production costs. In spite of

the existence of this proposition in Wellman and Tawney for more than ten years, the

Legislature has never amended W. Va. Code § 22-6-8(e) so as to remove the “at the

wellhead” language from the statute for the purpose of distinguishing the reasoning of

Wellman and Tawney. In 2017, Delegate Walters introduced the following amendment to

W. Va. Code § 22-6-8(e) for the purpose of removing “at the wellhead” from the provision:

(e) To avoid the permit prohibition of subsection (d), the applicant may file with such application an affidavit which certifies that the affiant is authorized by the owner of the working interest in the well to state that it shall tender to the owner of the oil or gas in place not less than one eighth of the total amount paid to or received by or allowed to the owner of the working interest at the wellhead for the oil or gas so extracted, produced or marketed before deducting the amount to be paid to or set aside for the owner of the oil or gas in place, on all such oil or gas to be extracted, produced or marketed from the well. If such affidavit be filed with such application, then such application for permit shall be treated as if such lease or leases or other continuing contract or contracts comply with the provisions of this section.

(Strikethrough in original). This amendment died in committee. Clearly, this amendment

was intended to remove the implications of Wellman and Tawney from an analysis of the

statute. The Legislature chose not to remove that implication because the implication was

correct. However, the new majority opinion has done what the Legislature refused to do.

The new majority opinion has rewritten the statute to say what it was never intended to say.

In view of the foregoing, I dissent.