Court Opinion

ID: 8375337
Source: CourtListenerOpinion
Date Created: 2022-10-21 19:14:11.599942+00
Date Added: 2024-06-11T16:46:31.693906
License: Public Domain

FILED
                                                                     October 21, 2022
                         STATE OF WEST VIRGINIA                           released at 3:00 p.m.
                                                                      EDYTHE NASH GAISER, CLERK
                       SUPREME COURT OF APPEALS                       SUPREME COURT OF APPEALS
                                                                           OF WEST VIRGINIA

State of West Virginia ex rel.
TH Exploration II, LLC and Tug
Hill Operating, LLC,
Petitioners,

vs.) No. 21-1004 (Marshall County, 18-C-227 and 18-C-220)

Venable Royalty, LTD; V14, LP;
Venro, LTD; V2, LP; and The
Honorable Judge Jeffrey Cramer, Judge
of the Circuit Court of Marshall County,
West Virginia
Respondents.

                         MEMORANDUM DECISION

       Petitioners herein seek a writ of prohibition to halt the enforcement of a
November 10, 2021, decision of the Circuit Court of Marshall County. 1 The order
at issue granted summary judgment to Venable Royalty, Ltd., V14, LP, Venro, Ltd.
and V2 LP (hereinafter the “Venable Respondents”) 2 on the issue of royalty
calculations. 3
       This Court has carefully considered the parties’ briefs, oral arguments, and
the appendix record, and concludes that Petitioners have not met the standard for the

      Petitioners are represented by counsel Thomas C. Ryan, Travis L. Brannon,
      1

and Emily C. Weiss of K&L Gates LLP.

      The Venable Respondents are represented by James Holmes of Holmes
      2

PLLC and John F. McCuskey of Shuman, McCuskey & Slicer, PLLC.
      3
       In addition, we wish to acknowledge the amicus curiae brief submitted by
the Gas & Oil Association of West Virginia in support of Petitioners as well as the
amicus curiae brief submitted by the West Virginia Royalty Owners’ Association,
West Virginia Farm Bureau and Bounty Minerals LLC in support of the Venable
Respondents. We value these organizations’ contributions to this case and have
considered their briefs in conjunction with the parties’ arguments.
                                         1
issuance of a writ of prohibition in this case. Accordingly, we deny the requested
writ of prohibition. Because there is no substantial question of law, a memorandum
decision is appropriate pursuant to Rule 21 of the West Virginia Rules of Appellate
Procedure.

       This case involves a dispute regarding the calculation of royalties paid by
Petitioners to the Venable Respondents. Petitioners are the successors to lessors’
royalty rights and mineral interests in fifteen (15) leases (hereinafter “Leases”).
Petitioners acquired the Leases from Gastar Exploration USA, Inc. (hereinafter
“Gastar”) in 2016. 4 Prior to the acquisition, Gastar drilled and/or operated oil and
gas wells pursuant to the Leases and paid royalties to the Venable Respondents.
After Petitioners’ acquisition, Petitioners began paying royalties to the Venable
Respondents. 5

      With the exception of the royalty percentage 6, all fifteen leases contain the
following royalty provision:

      4
         Prior to Petitioners’ acquisition, Gastar conveyed 50% of its interest in the
leases to Atinum Marcellus I LLC (hereinafter “Atinum”), a nonoperating, partial
working interest owner. In 2021, Petitioners acquired Atinum’s 50% interest in the
fifteen leases so that Petitioners now own 100% of the leases. The Assignment and
Bill of Sale to Tug Hill Exploration II, LLC was dated April 7, 2016, but it was effective
January 1, 2016 and recorded on April 27, 2016.

      5
        Petitioners succeeded to the rights of Gastar in several gas-marketing
contracts and also entered into other third-party contracts. Although not exhaustive,
contracts mentioned in the circuit court’s order are: (1) 2010 Gas Purchase
Agreement in which Gastar and Atinum engaged SEI and agreed to sell and
relinquish title to their equity gas and the Venable Respondents’ royalty gas at
Delivery Points; (2) 2010 Gas Gathering Agreement; (3) 2010 Condensate Gathering
Agreement; (4) 2014 Gathering, Processing, Dehydrating and Treating Agreement
(hereinafter “2014 Gathering Agreement”); (5) 2016 NAESB Contract; (6) 2018
Liquids Contract; and (7) 2020 Confirmation.
      6
        Some of the Leases provide for a 17 percent royalty, while others provide
for a one-eighth (1/8th) royalty.
                                            2
Royalty Provision

               Royalty Payments: The royalties reserved by
Lessor, and which shall be paid by Lessee, are: (a) an oil
(including but not limited to distillate and condensate)
[respective royalty rate] of that produced and saved from
the lease premises, the same to be delivered at the wells or
to the credit of Lessor in the pipeline to which the wells
may be connected, provided; however, Lessee, at its
option, may from time to time purchase the royalty oil,
paying not less than the price prevailing in the pricing area
for oil of like grade and gravity at the time of delivery; (b)
on gas, including casinghead gas and all other gaseous or
vaporous substances, produced from the Land and sold or
used off the lease premises or in the manufacture of
gasoline or in the extraction of sulphur or any other
product, the market value at the wells of [respective
royalty rate] of the gas sold or used, with the market value
at the wells in no event to exceed the net proceeds received
by Lessee calculated or allocated back to the wells from
which produced, making allowance and deduction for a
fair and reasonable charge for gathering, compressing, and
making the gas merchantable, provided, that on gas sold at
the wells, the royalty shall be [respective royalty rate]of
the net proceeds received by Lessee from the sale, all
allowance and deductions, and provided further that, if any
sale of gas is regulated as to price by any governmental
agency having the jurisdiction, the market value or net
proceeds shall in no event exceed the amount received by
the Lessee, not subject to refund, calculated, or allocated
back to the wells from which produced, making allowance
and deduction for a fair and reasonable charge for
gathering, compressing, and making the gas merchantable,
and which amount may be further adjusted up or down
prospectively or retrospectively when the price of rate
authorized by the governmental agency is finally
determined; (c) on sulphur extracted and marketed, One
Dollar ($1.00) per long ton. Lessor agrees to pay any and
all taxes levied or assessed on Lessor’s interest in the
production of oil, gas and sulphur from the lease premises

                              3
             and Lessee is authorized to pay the taxes and assessments
             on behalf of Lessor and to deduct the amount so paid from
             any monies payable to Lessor. In the event any extraneous
             substance (being any substance that is obtained from
             sources other than the lease premises or lands pooled or
             unitized with the lease premises) is injected into
             subsurface strata in connection with secondary, tertiary, or
             other enhanced recovery operations, any like substance
             thereafter produced, or contained in oil or gas produced
             from the strata shall be deemed to be part of the extraneous
             substance injected until the total volume equals the total
             volume of the extraneous substance injected, and no
             royalty shall be payable on any extraneous substance.
             Lessee shall not be obligated to make payment to any
             individual payee or agent hereunder until such payment
             equal the sum of Twenty Five and no/100 Dollars
             ($25.00), but in any case, payment shall be made at least
             once each calendar year.

      Petitioners began paying royalties to Respondents in 2016, with Petitioners
deducting certain post-production costs from the royalties. On or about September
28, 2018, the Venable Respondents filed a complaint against Petitioners alleging that
such deductions resulted in Petitioners breaching the Leases. 7 The Venable
Respondents sought monetary damages and declaratory judgment.

       According to Petitioners, there is no dispute as to the manner in which the
royalties at issue were calculated. The only dispute is whether the royalty calculation
complies with West Virginia law. To understand this dispute, we must examine the
Leases and related contractual documents and the manner in which Petitioners sell
gas and related products. Since acquiring the Leases at issue, Petitioners operate and
produce a “wet gas,” which means that there are carbon liquids contained in the
unprocessed gas stream. The gas and condensate produced under the Leases flows
through the Williams Ohio Valley Midstream LLC (hereinafter, “Williams OVM”)

      7
        The complaint was amended several times with the most recent amendment
being the Fifth Amended Complaint, which was filed on or about January 30, 2020.
The Fifth Amended Complaint includes additional parties that are not involved in
this appeal.

                                          4
facilities and plants. 8 The wet gas and condensate streams are conveyed by separate
gathering lines that lead to the inlet of the local processing facilities and plants
owned and operated by Williams OVM. There are two entry points to the Williams
OVM facilities that are relevant to this case: Corley and Burch Ridge.

       Relating to Corley and Burch Ridge, Petitioners had written contracts with a
single marketing company (first, SEI Energy, LLC (“SEI”) and subsequently,
Williams Energy Resources, LLC (hereinafter “WER”) that govern the transactions
between those parties. 9 Petitioners contend that pursuant to their contract with
WER, WER agreed to purchase unprocessed gas at Corley and Burch Ridge. WER
is Petitioner’s only purported recipient of gas at Corley and Burch Ridge.
Respondents dispute this contention and argue that Petitioners do not sell any gas at
Corley and Burch Ridge. Respondents contend that Petitioners actually sell
processed gas products further downstream at the TETCO market and at plant
tailgates in the Williams OVM system. 10

       According to Petitioners, after the purported sale at Corley or Burch Ridge,
WER incurred costs to process the wet gas into residue and natural gas liquids
(hereinafter “NGLs”). Petitioners further allege that WER sold the residue gas at an
interstate pipeline (presumably TETCO), and either sold the NGLs at the plant
tailgate or returned them in-kind to Petitioners. WER then “netted back” the costs
it incurred after the point of sale and paid Petitioners its proceeds from the sale of
the unprocessed gas stream’s products. WER provided an aggregate monthly
statement rather than allocating the price per product when purchasing the
unprocessed gas at Corley or Burch Ridge. Therefore, Petitioners used an internal
reconciliation process to allocate the lump sum amount received from WER to each
product produced from and traceable to the oil and gas molecules produced from
each well drilled on the Leases. Petitioners state that they calculate the Venable
Respondents’ royalties based on the gross proceeds that they receive from WER’s
sale of the products of the unprocessed gas stream.

    On or about May 8, 2020, the Venable Respondents filed a motion for
summary judgment seeking the following relief: (1) that Petitioners be ordered to

      8
          This excepts a small volume of field condensate falling out at well sites.
      9
          SEI and WER are sometimes referred to as “Marketer.”
      10
        TETCO stands for the Texas Eastern interstate pipeline system, which runs
along the northeastern part of the United States.

                                            5
alter their current royalty-accounting practices to ensure that post-production costs
incurred prior to the TETCO market for residue gas, the plant-tailgate market for
NGLs and plant-made condensate, and the field market for field condensate not be
assessed against Respondents’ royalties moving forward; (2) that Petitioners be
ordered to prepare an accounting showing the post-production costs that have
reduced Respondents’ respective royalties and provide prompt reimbursement for
the amounts that were improperly allocated against Respondents’ royalty payments;
and (3) that Petitioners be ordered to pay the Respondents pre-judgment interest on
such amounts. 11

       Petitioners filed a cross-motion for summary judgment. A hearing on the
outstanding motions for summary judgment was held on October 23, 2020, and by
order entered on November 10, 2021, the circuit court granted the Venable
Respondents’ motion for summary judgment and denied Petitioners’ motion.
Specifically, the circuit court’s Order required Petitioners to: (1) alter the manner in
which they pay royalties to Respondents so that it is consistent with the court’s
opinion; (2) alter their royalty accounting practices to prevent royalty payments to
Respondents from bearing post-production costs incurred or assessed prior to the (a)
TETCO M2-region market for residue gas, (b) the Williams Plant tailgate market for
NGLs and condensate coming through the plant system, and (c) the field market for
skim oil that does not go through the plant system; and (3) prepare an accounting as
contemplated in Wellman v. Energy Resources, Inc., 210 W. Va. 200, 557 S.E.2d
254 (2001), which shows, by category and amount, the post-production costs from
the Williams Plants (or predecessor Caiman Plants) that have reduced Respondents’
respective royalties.12 The circuit court further ordered that upon completion of the
above requirements, Respondents may file for determination of pre-judgment
interest.

      The present Petition for Writ of Prohibition to this Court followed.

      We begin our analysis of this request for extraordinary relief by noting “[t]his
Court is restrictive in the use of prohibition as a remedy.” State ex rel. W. Va. Fire
& Cas. Co. v. Karl, 199 W. Va. 678, 683, 487 S.E.2d 336, 341 (1997). When
      11
          The Venable Respondents’ motion sought summary judgment on “certain
liability issues, leaving for later determination the resolution of all liability issues,
as well as [their] entitlement to damages and attorney’s fees.”
      12
         Once Respondents and/or the Court are satisfied that Petitioners’
accountings are accurate, Petitioners must promptly reimburse Respondents for the
amounts that were improperly allocated against their royalty payments.
                                           6
presented with a petition requesting prohibitory relief, this Court has held that “[a]
writ of prohibition will not issue to prevent a simple abuse of discretion by a trial
court. It will only issue where the trial court has no jurisdiction or having such
jurisdiction exceeds its legitimate powers. W. Va. Code, 53-1-1.” Syl. Pt. 1, State
ex rel. PrimeCare Med. Of W. Va., Inc. v. Faircloth, 242 W. Va. 335, 835 S.E.2d
579 (2019) (quoting Syl. Pt. 2, State ex rel. Peacher v. Sencindiver, 160 W. Va. 314,
233 S.E.2d 425 (1977)).

       Petitioners do not allege that the circuit court acted without jurisdiction.
Instead, they argue that the circuit court exceeded its legitimate powers. Therefore,
we will look to the factors this Court has previously established to determine if a
writ of prohibition should issue:

             (1) whether the party seeking the writ has no other
             adequate means, such as direct appeal, to obtain the
             desired relief; (2) whether the petitioner will be damaged
             or prejudiced in a way that is not correctable on appeal; (3)
             whether the lower tribunal’s order is clearly erroneous as
             a matter of law; (4) whether the lower tribunal’s order is
             an oft repeated error or manifests persistent disregard for
             either procedural or substantive law; and (5) whether the
             lower tribunal’s order raises new and important problems
             or issues of law of first impression. These factors are
             general guidelines that serve as a useful starting point for
             determining whether a discretionary writ of prohibition
             should issue. Although all five factors need not be
             satisfied, it is clear that the third factor, the existence of
             clear error as a matter of law, should be given substantial
             weight.

Syl. Pt. 4, in part, State ex rel. Hoover v. Berger, 199 W. Va. 12, 483 S.E.2d 12
(1996). “In determining the third factor, the existence of clear error as a matter of
law, we will employ a de novo standard of review, as in matters in which purely
legal issues are at issue.” State ex re. Gessler v. Mazzone, 212 W. Va. 368, 372, 572
S.E.2d 891, 895 (2002).

       Petitioners contend that our failure to issue a writ of prohibition at this time
“has the potential to perpetuate the ‘chaos’ that currently exists in West Virginia
royalty jurisprudence and to cause confusion for all oil and gas producers in the
state.” We disagree.

                                           7
        Petitioners contend that all five of the Hoover factors weigh in their favor.
Importantly, the first factor of Hoover directs us to determine whether Petitioners
have another adequate remedy, such as direct appeal, to obtain the relief they desire.
See Syl. pt. 4, in part, Hoover, 199 W. Va. 12, 483 S.E.2d 12. We conclude that
Petitioners do, indeed, have such an adequate remedy by way of a direct appeal of
the circuit court’s final order when such order is issued. Petitioners contend that they
cannot directly appeal at this time because a trial or evidentiary hearing on damages
is still necessary to obtain a final order, and that requiring this case to proceed to
such a hearing would cause unreasonable expense and delay. Although Petitioners
later argue that they might have to retain expert witnesses to calculate damages, their
arguments with respect to the expenses are general and without adequate support.

        The cases Petitioners rely upon in support of this factor are distinguishable
from the present case. In State ex rel. Frazier v. Hrko, 203 W. Va. 652, 510 S.E.2d
486, (1998), the parties would have been compelled to go through an expensive,
complex trial. In the instant case, Petitioners state only that a trial or hearing on
damages would be necessary to obtain a final order. Further, in State ex rel. Frazier
v. Hrko, this Court concluded there was a “high likelihood of reversal on appeal,”
which we are unable to conclude at this stage in the instant case. Id at 658, 510
S.E.2d 486, 492. The Venable Respondents argue that Petitioners have another
means for obtaining their desired relief. According to the Venable Respondents,
discovery and pre-trial litigation should continue so that a meaningful appeal can
take place. 13 The order that Petitioners seek to prohibit does not terminate all
litigation between the parties on the merits of the case. Petitioners clearly have the
remedy of a direct appeal available to them after the circuit court enters a final order.

       The mere fact that Petitioners will be required to recalculate the royalties
previously paid in this matter does not render its ability to appeal the final order of
the circuit court in this matter an inadequate remedy as envisioned in Hoover.
Indeed, any damage incurred by Petitioner would be monetary in nature and, if
erroneous, could be remedied on direct appeal. This court has made abundantly clear
that a writ of prohibition is an extraordinary remedy that should not be used as a
substitute for a direct appeal:

      13
        The Venable Respondents contend that a determination needs to be made
as to whether the Residue Gas and NGL portion of the Leases (clause 5(b)) or the
Condensate portion (clause 5(a)) contains the greater amount in controversy.

                                           8
             As we have repeatedly stated, “[o]ur law plainly states that
             a writ of prohibition may not be used as a substitute for
             appeal.” State ex rel. Shelton v. Burnside, 212 W. Va. 514,
             518, 575 S.E.2d 124, 128 (2002); see also State ex rel.
             Maynard v. Bronson, 167 W. Va. 35, 41, 277 S.E.2d 718,
             722 (1981)(“[P]rohibition cannot be substituted for writ of
             error or appeal unless a writ of error or appeal would be an
             inadequate remedy.”)

State ex re. Howell v. Wilmoth, No. 19-0065 (W.Va. Supreme Court, November 5,
2019) (memorandum decision) at *3. Because we find that a direct appeal would be
an adequate remedy, the first factor of the Hoover test weighs against the issuance
of the requested writ.

        Although the presence of an adequate remedy absent an extraordinary writ is
dispositive in this case, we nonetheless find that the Petitioners have failed to
establish that the remaining factors set forth in Hoover weigh in favor of the
requested writ. The second Hoover factor directs us to consider whether Petitioners
will be damaged or prejudiced in a way that is not correctable on appeal. See Syl.
pt. 4, in part, Hoover, 199 W. Va. 12, 483 S.E.2d 12. Petitioners’ argument with
respect to this factor is focused on the expenses that they may incur in order to
calculate damages, not whether any such damage they would allegedly incur in
making such calculation can be corrected on appeal. Specifically, Petitioners
contend that without our intervention at this point, they will be saddled with the
burden of calculating damages via an accounting which they allege will likely
involve the additional expense of expert witnesses. However, what Petitioners are
actually required to prepare is an accounting showing “by category and amount, the
post-production costs from the Williams plants (or predecessor Caiman Plants) that
have reduced [the Venable Respondents’] respective royalties.” Importantly, the
second Hoover factor does not ask us to merely consider whether Petitioners will be
in some way burdened. Instead, it directs us to consider whether Petitioners will be
damaged or prejudiced in a way that is not correctable on appeal. In support of
their argument that this factor weighs in their favor, Petitioners argue that they will
be required to change the method by which they calculate royalties and will also be
forced to implement new business practices to comply with the calculation of
royalties. First, we note that it is not clear from the record whether the burdens
complained of would extend beyond the specific Leases at issue in this case.
Regardless, the expenses regarding such calculations that Petitioners rely upon are
speculative and are monetary in nature and, thus, could be corrected on appeal.

                                          9
Therefore, these concerns and speculations are not sufficient to meet the second
Hoover factor. Id.

       The third Hoover factor is met only if the circuit court’s order is clearly
erroneous as a matter of law. Id. Here, Petitioners contend that the circuit court
clearly erred by denying their motion for summary judgment and by granting the
Venable Respondents’ motion for summary judgment. Specifically, Petitioners
argue that the circuit court failed to apply existing West Virginia law by disregarding
the express language of the Leases or significantly expanding the application of
existing West Virginia law.

        Petitioners argue that the circuit court’s conclusions are clearly erroneous as
a matter of law. Arguably, some of the court’s specific findings may not be essential
to its ultimate conclusion, which appears to be primarily based on contractual terms.
Nonetheless, we are unable to conclude at this stage that the court’s order was clearly
erroneous as a matter of law. Despite Petitioners’ arguments to the contrary, we
conclude that the circuit court’s consideration of Petitioners’ third-party contracts is
relevant. The circuit court’s order thoroughly explains the relationships between the
parties as well as Petitioners’ third-party sales contracts and related marketing
activity in reaching its decision to grant the Venable Respondents’ motion for
summary judgment and to deny Petitioners’ motion. The circuit court concluded
that, at the time of its order, the four live contracts were: (1) the 2014 Gathering
Agreement; (2) the 2016 NAESB Contract; (3) the 2020 Confirmation; and (4) the
2018 Liquids Contract.

       The third-party contracts involved in this case are a significant source of
contention, with Petitioners arguing that the Venable Respondents’ emphasis on the
third-party contracts is a diversion from what Petitioners believe is the circuit court’s
true legal errors. Respondents contend, however, that in the instant case as well as
in all royalty-underpayment cases, the “lessee’s third-party sales contracts and
related marketing activity constitute the most important evidence.”

      After a thorough review of the Leases, the circuit court looked to third-party
contracts to determine points of sale for residue gas, NGLs and plant condensate.
With respect to “points of sale,” the circuit court concluded that Petitioners’ 2016
NAESB Contract and 2020 Confirmation establish a point of sale at TETCO for
Residue Gas. Further, the court found that 2014 Gathering Agreement and the 2018
Liquids Contract establish points of sale at plant tailgates for NGLs and plant
condensate.

                                           10
       The circuit court’s decision was based largely upon lease and contract
interpretation, and Petitioners have failed to demonstrate that the circuit court’s
interpretation of such leases and contracts along with Petitioners’ marketing activity,
constitutes clear error as a matter of law.

       Because the circuit court’s decision was based largely upon contract
interpretation, Petitioners are also unable to satisfy the fourth and fifth Hoover
factors. Under the fourth Hoover factor, Petitioners must show that the circuit
court’s order is “an oft repeated error or manifests persistent disregard for either
procedural or substantive law.” Id. Petitioners do not allege that the circuit court’s
order is an oft repeated error. Instead, they contend that the order shows a disregard
for the law of our state by redefining “market” in the application of the implied duty
to market. We are not persuaded by Petitioners’ argument in this regard as we have
concluded that the decision at issue was based largely upon specific contract
interpretation. Likewise, the final factor of the Hoover test asks us to examine
whether the circuit court’s order “raises new and important problems or issues of
law of first impression.” Id. Petitioners fail to satisfy this factor because the decision
at issue largely interprets the specific leases and third-party contracts and marketing
activity unique to this action rather than raising new and important problems or
issues of law.

        Petitioners have failed to establish that the circumstances present in this case
render them unable to address the errors they have raised on direct appeal, and they,
therefore, have failed to demonstrate that they have no other “adequate means” to
seek relief. Moreover, they have failed to demonstrate to this Court’s satisfaction
that the circuit court’s order was clearly wrong as a matter of law. We, therefore,
conclude that Petitioners have failed to establish that they are entitled to prohibitory
relief in this case. Accordingly, the requested writ is hereby denied.

                                                                            Writ denied.

ISSUED: October 21, 2022
                                           11
CONCURRED IN BY:

Chief Justice John A. Hutchison
Justice Elizabeth D. Walker
Justice Tim Armstead
Justice William R. Wooton
Judge Richard A. Facemire sitting by temporary assignment.

Justice C. Haley Bunn, deeming herself disqualified, did not participate.

                                         12