Patrick D. Leggett v. EQT Production Co.

FILED
No. 16-0136 – Leggett et al v. EQT Production Co.
May 26, 2017
Released at 3:00 p.m.
WORKMAN, J., concurring: RORY L. PERRY II, CLERK
SUPREME COURT OF APPEALS

I concur in the majority’s conclusion that the use of the phrase “at the

wellhead” in West Virginia Code § 22-6-8 must be construed in a manner which most

closely effectuates the Legislature’s intent at the time the statute was enacted, as required

by our canons of statutory construction. I therefore agree that, for purposes of the

statutory language, the term “at the wellhead” permits use of the “netback” method of

royalty calculation. I write separately, however, to emphasize that the majority’s

decision to allow cost deduction may not be abused to the detriment of lessors who are

chargeable with pro-rata costs and to urge the Legislature to enact specific protections to

assure fairness and reasonableness in the calculation of post-production costs. As the

majority’s new syllabus point states, only such costs as are reasonable and actually

incurred are properly deductible. Accordingly, to the extent that a lessor alleges that cost

deductions are artificially inflated or are otherwise not commercially reasonable, he or

she may clearly maintain an action against the lessee pending sufficient proof thereof.

The petitioners’ allegations below are, unfortunately, not without

precedent. See EQT Prod. Co. v. Adair, 764 F.3d 347, 365 (4th Cir. 2014) (alleging

coalbed methane sold “at too low a price, in part, by selling the gas to affiliates in non-

arms-length transactions” and defendant took “improper or excessive deductions”).

Courts nationwide, whether following the marketable product rule or “at the well” rule,

1
have had occasion to address similar allegations of self-dealing or outright fraud in the

deduction of costs and/or manipulation of sales price to the detriment of the lessor.

Anderson Living Trust v. Conocophillips Co., LLC, No. CV 12-0039 JB/KBM, 2016 WL

1158341, at *11 (D.N.M. Mar. 1, 2016) (alleging defendant utilized intercompany

transactions and/or contracts with affiliate companies to impose unreasonable expenses

and deductions and/or for services not actually incurred); Abraham v. BP Am. Prod. Co.,

685 F.3d 1196, 1201 (10th Cir. 2012) (alleging netback method included an unreasonable

processing cost and gas sold at discounted price to affiliate company); Ramming v. Nat.

Gas Pipeline Co. of Am., 390 F.3d 366, 373 (5th Cir. 2004) (alleging lessee sold gas in

“sham transaction” for purposes of affecting royalties). Nothing in the majority opinion

alters a lessor’s right to relief in the event such conduct is established, nor should lessees

perceive the majority to be malleable with respect to a lessor’s right to fair and equitable

treatment in the payment of royalties. 1

Understandably, however, the majority opinion may illicit criticism for

placing what may be characterized as an unfair burden on a landowner-lessor to adduce

sufficient evidence to, in good faith, file an action alleging royalty underpayment.

1
A court examining the issue of the fairness and reasonableness of post-
production costs should be wary of lessees’ affiliate entities realizing a profit from post-
production costs. As other courts have observed and as noted by the majority, “[c]ourts
should take care not to allow lessors to be deprived or defrauded of their royalties by their
lessees entering into illusory or collusive assignments or gas purchase contracts.” Tara
Petroleum Corp. v. Hughey, 630 P.2d 1269, 1275 (Okla. 1981).

2
Regrettably, that is the unavoidable consequence of the Court’s decision. To alleviate

such a burden other states have enacted legislation designed to compel the lessee to

affirmatively provide information and be accountable to those with whom such costs will

be shared. For example, Montana has enacted a statute which makes the following

requirements for royalty payments:

(1) An oil and gas producer paying royalties by check, draft,
or order shall include with every payment a form showing the
following matters relating to that payment:

(a) the name of the royalty owner to whom the
payment is made;

(b) the date of the check, draft, or order;

(d) the time period during which production occurred
for which payment is being made;

(e) any number used to identify the lease under which
production occurred;

(f) the type of product produced;

(g) barrels of oil and cubic feet of gas for which
payment is made;

(h) the amount and type of all taxes withheld;

(i) the net value of production;

(j) the royalty owner's net value; and

(k) contact information for obtaining additional
information regarding the payment and answers to
questions.

3
(2) In addition to the information required in subsection (1),
an oil and gas producer paying royalties to a royalty owner
shall, at the time of payment, specify by line item every
charge assessed against the royalty owner.

(3) Any person purposely and knowingly violating the
provisions of subsection (1) or (2) is guilty of a misdemeanor
and upon conviction shall be punished by a fine of not more
than $1,000.

Mont. Code Ann. § 82-10-104 (West). Colorado has similar requirements:

Notwithstanding any other applicable terms or arrangements,
every payment of proceeds derived from the sale of oil, gas,
or associated products shall be accompanied by information
that includes, at a minimum:

(a) A name, number, or combination of name and number that
identifies the lease, property, unit, or well or wells for which
payment is being made;

(b) The month and year during which the sale occurred for
which payment is being made;

(c) The total quantity of product sold attributable to such
payment, including the units of measurement for the sale of
such product;

(d) The price received per unit of measurement, which shall
be the price per barrel in the case of oil and the price per
thousand cubic feet (“MCF”) or per million British thermal
units (“MMBTU”) in the case of gas;

(e) The total amount of severance taxes and any other
production taxes or levies applied to the sale;

(f) The payee's interest in the sale, expressed as a decimal and
calculated to at least the sixth decimal place;

4
(g) The payee's share of the sale before any deductions or
adjustments made by the payer or identified with the
payment;

(h) The payee's share of the sale after any deductions or
adjustments made by the payer or identified with the
payment;

(i) An address and telephone number from which additional
information may be obtained and questions answered.

(2.5) Upon written request by the payee, submitted to the
payer by certified mail, the payer shall provide to the payee
within sixty days a written explanation of those deductions or
adjustments over which the payer has control and for which
the payer has information, whether or not identified with the
payment, and, if requested by the payee, such meter
calibration testing and production reporting records that are
required to be maintained by the payer in accordance with
section 34-60-106(1)(e). The requirement to provide a written
explanation of deductions or adjustments shall not preclude
the payer from answering the inquiry by referring the payee
to the royalty clause or payment provision in a lease or other
agreement.

(2.7) A payer who fails to provide information required or
requested in accordance with subsection (2.3) or (2.5) of this
section shall be subject to penalties as provided in section 34-
60-121.

Colo. Rev. Stat. Ann. § 34-60-118.5 (West). Such statutory requirements create an

avenue through which a lessor may obtain information upon which further inquiry may

be based and acknowledges the shared accountability and good faith required where post-

production costs are realized by both lessor and lessee.

What both the foregoing and the majority’s opinion underscores is the

necessity of the Legislature to address these policy-laden issues and declare, by statute,
5
the will of the State’s citizenry in this regard. This Court is constrained to our canons of

statutory construction and does not make policy. “This Court does not sit as a

superlegislature, commissioned to pass upon the political, social, economic or scientific

merits of statutes pertaining to proper subjects of legislation. It is the duty of the

Legislature to consider facts, establish policy, and embody that policy in legislation. It is

the duty of this Court to enforce legislation unless it runs afoul of the State or Federal

Constitutions.” Syl. Pt. 2, Huffman v. Goals Coal Co., 223 W. Va. 724, 725, 679 S.E.2d

323, 324 (2009). Where the Legislature’s inaction in the face of such significant changes

in the industry leaves this Court to intuit its intentions and/or retrofit outdated statutory

language to evolving factual scenarios, the will of the people is improperly disregarded.

Accordingly, I respectfully concur.