Court Opinion

ID: 3175590
Source: CourtListenerOpinion
Date Created: 2016-02-08 20:04:14.287356+00
Date Added: 2024-06-11T14:49:46.229715
License: Public Domain

PUBLISHED

                   UNITED STATES COURT OF APPEALS
                       FOR THE FOURTH CIRCUIT

                              No. 15-1166

K & D HOLDINGS, LLC,

                 Plaintiff – Appellee,

           v.

EQUITRANS, L.P.; EQT PRODUCTION COMPANY,

                 Defendants – Appellants,

           and

EQT CORP. a/k/a Equitrans, Inc.,

                 Defendant.

Appeal from the United States District Court for the Northern
District of West Virginia, at Wheeling.  John Preston Bailey,
District Judge. (5:13-cv-00152-JPB)

Argued:   December 9, 2015                  Decided:   December 28, 2015

                     Amended:    February 8, 2016

Before NIEMEYER, DUNCAN, and AGEE, Circuit Judges.

Reversed and remanded with instructions by published opinion.
Judge Duncan wrote the opinion, in which Judge Niemeyer and
Judge Agee joined.

ARGUED:   Nicolle  Renee   Snyder  Bagnell,   REED   SMITH  LLP,
Pittsburgh, Pennsylvania, for Appellants.   Stephen A. Wickland,
Clarksburg, West Virginia, for Appellee.   ON BRIEF: Kevin C.
Abbott, Lucas Liben, REED SMITH LLP, Pittsburgh, Pennsylvania;
Michael W. Smith, R. Braxton Hill, IV, CHRISTIAN & BARTON LLP,
Richmond, Virginia, for Appellants.
DUNCAN, Circuit Judge:

      This appeal concerns an oil and gas lease (the “Lease”)

between      Defendants-Appellants          Equitrans,           L.P.,     and     EQT

Production Co. (collectively, “EQT”), 1 as lessees, and Plaintiff-

Appellee K & D Holdings, L.L.C. (“K & D”), as lessor.                              The

district court concluded that the Lease was divisible into two

separate segments--one for production and exploration, and one

for gas storage and protection of gas storage--and found that

the     production   and    exploration        segment      of    the     Lease    had

terminated after the Lease’s initial five-year term.                       On appeal,

Appellants    contend    that   the    Lease     is   not   divisible       and   that

because    they   are    actively     engaged    in   one    of    the     activities

covered by the Lease--protection of stored gas--the entire Lease

remains in effect.

      For the reasons stated below, we conclude that the district

court     erred   and,    accordingly,      we    reverse        and     remand   with

instructions to enter judgment for EQT.

      1K & D originally filed the complaint against EQT Corp.,
also known as Equitrans, Inc. The district court later granted
the   parties’   Joint   Motion   for   Substitution   of    Parties,
dismissing EQT Corp. d/b/a Equitrans Inc. as a party to this
civil   action   and   substituting   Equitrans,   L.P.,    and   EQT
Production Co. as defendants. Because all prior proceedings in
the civil action were binding on Equitrans, L.P., and EQT
Production Co. as if they had been properly joined and served as
defendants from the initial filing, “EQT” will be used to refer
to   the   Defendants-Appellants   both   before   and    after   the
substitution.

                                        3
                                         I.

                                         A.

     On December 2, 1989, Henry H. Wallace and Sylvia L. Wallace

executed an oil and gas lease with Equitrans, Inc., covering

180 acres    of      land     in   Tyler       County,      West     Virginia     (the

“Premises”). 2      K & D is the successor-in-interest to the lessors,

the Wallaces, and Equitrans, L.P., is the successor-in-interest

to the lessee, Equitrans, Inc.                  Equitrans, L.P., subleased to

EQT Production Co. the rights to produce and sell gas from the

“premises and subsurface formations that are not used for the

storage of gas or protection of stored gas.”                      J.A. 254. 3    Thus,

the Lease now governs the relationship between K & D and EQT.

     The    Lease    grants    EQT   the       right   to   use    the   Premises     to

explore    for   and   produce     oil   and     gas,    to   store      gas,   and   to

protect stored gas. 4         The term of the Lease is established in

Article IV (the “Durational Provision”), which reads as follows:

     2 The Wallaces also entered into two other oil and gas
leases with Equitrans, Inc.: a lease for 40 acres dated
March 26, 1992, and one for 12 acres dated September 16, 1994.
On December 22, 2014, during the course of this litigation,
Equitrans, L.P., released and surrendered these leases.   Only
the 1989 lease remains.

     3 Citations to the “J.A.” refer to the Joint Appendix filed
by the parties in this appeal.

     4 Under Article I of the Lease, the Lessor
(Continued)

                                           4
         To have and to hold the said land and privileges
    for the said purposes for and during a period of
    5 years from December 2, 1989, and as long after
    commencement of operations as said land, or any
    portion thereof or any other land pooled or unitized
    therewith as hereinafter provided, is operated for the
    exploration or production of gas or oil, or as gas or
    oil is found in paying quantities thereon or stored
    thereunder, or as long as said land is used for the
    storage of gas or the protection of gas storage on
    lands in the general vicinity of said land. It is
    understood that a well need not be drilled on the
    leased   premises  to   permit  the  storage   of  gas
    thereunder and the Lessee shall be the sole judge of
    when and if said land is being used for the storage of
    gas or the protection of gas storage on lands in the
    general vicinity of said land.

J.A. 261.

     Since    entering   into   the    Lease,   EQT   has    not   engaged   in

exploration, production, or gas storage on the Premises.                      It

has, however, engaged in protection of gas storage.                Equitrans,

L.P., owns and operates a nearby natural gas storage facility

known   as   the   Shirley   Storage   Field,   which   is   authorized      and

    hereby leases and lets unto the Lessee, for its
    exclusive possession and use for the purpose of
    exploring and operating for and producing and saving
    oil and gas by all methods now known or hereafter
    known or hereafter discovered, and of injecting gas,
    air, water or other fluids into any subsurface strata
    for the purpose of recovering and producing oil and
    gas, and of pooling or unitizing the same with other
    lands for such purposed [sic], as hereinafter more
    fully set out and for storing gas in the substrata
    thereof, and protecting stored gas . . . .

J.A. 260.

                                       5
regulated by the Federal Energy Regulatory Commission (“FERC”). 5

FERC established a 2,000-foot buffer zone around Shirley Storage

Field for the protection of the gas storage facilities.                   It is

undisputed that part of this protective buffer zone falls on the

Premises,    and   that   therefore    EQT   is   using   a    portion   of   the

Premises for protection of storage of natural gas.

     Because EQT has not used the Premises to engage in gas or

oil production, K & D now seeks to enter into a more lucrative

oil and gas lease agreement with Antero, Inc., but has been

unable to do so because of the EQT Lease.

                                       B.

     On September 20, 2013, K & D filed a complaint against EQT

in the circuit court of Tyler County, West Virginia.                     K & D

primarily claimed that, because EQT has not produced and sold or

used gas or oil on the Premises for a period of greater than

twenty-four    months,     K   &   D   was   entitled     to     a   rebuttable

presumption under West Virginia law that EQT has abandoned the

Lease.    See W. Va. Code § 36-4-9a. 6

     5 FERC has regulatory authority pursuant to the Natural Gas
Act of 1938, 15 U.S.C. §§ 717 et seq.

     6   This provision reads, in relevant part, as follows:

     There is a rebuttable legal presumption that the
     failure of a person, firm, corporation, partnership or
     association to produce and sell or produce and use for
(Continued)

                                       6
       EQT removed the case to the United States District Court

for the Northern District of West Virginia, where the parties

subsequently filed cross motions for summary judgment.                     K & D

claimed that, because EQT “has expended no money to explore,

test, or drill for over twenty years,” J.A. 81, the Lease was

therefore “cancelled by operation of law.”                J.A. 84.     K & D

further argued that it should be permitted to lease the unused

portion of the Premises to another corporation for oil and gas

production and stated that any drilling permitted on the leased

area would not affect the protective zone for storage in use by

EQT.

       EQT,   on   the   other   hand,   argued   that   West   Virginia   Code

§ 36-4-9a by its terms does not apply to leases for gas storage

purposes.      Instead, the “plain and unambiguous terms” of the

Durational Provision, which contain no requirement that gas or

oil be produced in order to hold the Lease, were determinative

of the abandonment issue.         J.A. 91.

       its own purpose for a period of greater than twenty-
       four months, . . . oil and/or gas produced from such
       leased premises constitutes an intention to abandon
       any oil and/or gas well and oil and/or gas well
       equipment    situate    [sic]    on    said    leased
       premises . . . .

W. Va. Code § 36-4-9a.

                                         7
        On September 30, 2014, the district court denied the cross

motions       for   summary    judgment.         The   district   court   rejected

K & D’s argument that West Virginia Code § 36-4-9a operated to

terminate the Lease, observing that this provision “specifically

states that the rebuttable presumption does not apply to leases

for gas storage purposes.”               J.A. 158.     Thus, the provision had

“no bearing” on the outcome of the case.                Id.

        The district court also rejected EQT’s interpretation of

the Durational Provision.            Acting sua sponte, the district court

found    as    a    matter    of   law   that    the   Lease    was   divisible   or

severable, rather than entire.                  J.A. 156.      The district court

reasoned:

     [The lease agreement] has two purposes for the lease
     of the land, the exploration for and the production of
     oil and gas versus the use of the property for the
     storage of gas and the protection of stored gas.      A
     separate consideration is stated for each.     The fact
     that the leases indicate that the lessee is not
     obligated to drill any wells is further evidence that
     the terms of each are not interrelated, as is the fact
     that the lessee has taken no steps whatsoever to
     develop the oil and gas underlying the property.

J.A. 157–58.         The district court then considered the segment of

the Lease relating to production of oil and gas and concluded

that given that the initial five-year lease term had elapsed

without EQT attempting to explore for or produce oil or gas,

this segment had expired.            Because EQT is using a portion of the

Premises for protection of gas storage, however, the district

                                           8
court concluded that the segment of the Lease relating to gas

storage and the protection of gas storage remains in effect.

       The district court determined that “the resolution of these

issues leaves general issues of material fact,” such as whether

the entire Premises was necessary for gas storage and whether

drilling from an area of the Premises “not necessary for gas

storage       protection            would     interfere         with     gas     protection.”

J.A. 158–59.

       EQT    subsequently           moved     for    reconsideration,          arguing          both

that the district court’s finding of severability was erroneous

and that the district court acted improperly by raising this

issue    sua      sponte       without       giving      the     parties       notice       or    an

opportunity to respond prior to issuing its order denying the

cross motions for summary judgment.                        The district court denied

this motion.

        In    anticipation           of     the   district       court     making       a    final

ruling, the parties jointly filed stipulations before the court

that     resolved            all     remaining         factual         issues     “with           the

understanding           and        agreement      that     by     entering       into        these

stipulations           the    parties       are   not    waiving       any     objections          or

rights       to   appeal      any     rulings     by     the    Court,     including         those

contained         in    the    Order        Denying      Cross    Motions       for     Summary

Judgment.”        J.A. 253.

                                                  9
       The district court issued its final order on January 21,

2015.     The court reiterated its conclusion from its previous

order that the lease at issue was divisible and that the segment

of the lease for the purpose of exploration for and production

of oil and gas had expired.               Given this, and taking into account

the     stipulations     made      by     the    parties,       the    district     court

concluded     that      “the     plaintiff        may        drill    exploration      and

production wells on areas which are not within the gas storage

protection       area   and    which     extend     horizontally         under   the   gas

storage protection to the Marcellus Shale area.”                       J.A. 287.

       EQT timely appealed.

                                           II.

       EQT raises two arguments on appeal: (1) that the district

court erred as a matter of law in holding that the Lease was

divisible     into      separate        segments,    one       for    exploration      and

production, and one for storage and protection of storage; and

(2) that the district court erred in finding that the “segment”

of the Lease for exploration and production had terminated after

its initial five-year lease term.                 In essence, this appeal asks

us to resolve whether the Lease required EQT to explore for or

produce oil or gas beyond the initial five-year period in order

to    maintain    its   production        rights,       or    whether,    instead,     EQT

                                            10
preserved all of its rights under the Lease by exercising just

one of them, protection of gas storage.

     We consider each of EQT’s arguments in turn, reviewing the

district    court’s   findings    of    fact   for   clear   error   and   its

conclusions of law de novo.        Perez v. Mountaire Farms, Inc., 650
F.3d 350, 363 (4th Cir. 2011).          As this court’s jurisdiction is

based on diversity of citizenship, we apply West Virginia law to

the facts of this case.          See Moore Bros. Co. v. Brown & Root,

Inc., 207 F.3d 717, 722 (4th Cir. 2000).

                                       A.

        EQT argues that the district court erred in finding sua

sponte that the Lease was divisible.           We agree.

     EQT argues that the Durational Provision, stating that the

lessee would have and hold the land and its privileges “as long

after commencement of operations as said land . . . is operated

for the exploration or production of gas or oil, or as gas or

oil is found in paying quantities . . . , or as long as said

land is used for the storage of gas or the protection of gas

storage,”    J.A. 261 (emphasis added), is clear: “the unambiguous

language of the Lease means that EQT had to do only one of the

alternative acts in order to keep the entire Lease in effect,

including EQT’s right to produce oil and gas.”               Appellants’ Br.

at 9.    K & D argues that to adopt this interpretation would be

contrary to West Virginia public policy and would conflict with

                                       11
the intent of the parties “to enter into a contract that would

be beneficial to both parties.”             Appellee’s Br. at 9.

                                           B.

       In   general,      West   Virginia       contract      law       principles      apply

equally to the interpretation of leases.                      See Energy Dev. Corp.

v. Moss, 591 S.E.2d 135, 143 (W. Va. 2003).                     Under West Virginia

law, “the primary criterion” for determining if a contract is

severable “is the intention of the parties as reflected from a

fair    construction       of    the    terms    of    the    contract        itself,    the

subject matter of the contract and the circumstances which gave

rise to the question.”                 Quinn v. Beverages of W. Va., Inc.,

224 S.E.2d 894, 900 (W. Va. 1976).                    A severable contract is one

that is “susceptible of division and apportionment,” while a

contract      that   is    not    severable      has    material         provisions      and

consideration        that       “are    common        each    to        the     other    and

interdependent.”          Dixie Appliance Co. v. Bourne, 77 S.E.2d 879,

881 (W. Va. 1953).           Further, “[t]here is a presumption against

finding a contract divisible unless divisibility is expressly

stated in the contract itself, or the intent of the parties to

treat       the   contract        as     divisible       is        otherwise       clearly

manifested.”         15     Williston      on    Contracts          §    45:4    (4th    ed.

2000)(footnotes omitted).

        In this case, a fair construction of the terms of the Lease

compels the conclusion that the Lease was intended to be entire,

                                           12
not    divisible.          To   hold    otherwise         would     be    to   ignore    the

disjunctive use of the word “or” in the Durational Provision.

The Lease expressly sets out a list of activities and makes

plain that engaging in any one of them constitutes an exercise

of rights such that the entirety of the Lease would remain in

effect.      As the West Virginia Supreme Court of Appeals has held,

“the word ‘or’ . . . in the absence of a contrary intent of the

parties   appearing        from     other    parts       of   the   lease,     [shall]   be

given its ordinary meaning and not considered as meaning ‘and.’”

Syl.   Pt.     1,   Little      Coal    Land      Co.    v.     Owens-Ill.     Glass    Co.,

63 S.E.2d 528, 529 (W. Va. 1951).

       K & D    argues       that      the   fact        that     the     Lease    contains

provisions      for     separate       monetary         consideration       for    distinct

activities renders it severable under Regent Waist Co. v. O.J.

Morrison Department Store Co., 106 S.E. 712 (W. Va. 1921).                               In

Regent    Waist     Co.,    a   case    involving        a    contract     for    different

types of garments, the Supreme Court of Appeals of West Virginia

held that “[w]here a retail merchant orders from a manufacturer

of shirtwaists a number of such waists of different kinds and

qualities,      a     definite      price      being     fixed      for    each   of    such

different kinds and qualities, such contract is separable in the

absence of any circumstance indicating the contrary.”                             Id. Syl.

Pt. 2, at 712.

                                             13
        It    is    true     that    the    Lease    requires      the   lessee   to   pay

different          rents   or    royalties        depending   on   the    activities    in

which        the    lessee      engages.          However,    these      activities    are

interrelated and quite different in kind from the transactions

at issue in Regent Waist Co., so the same logic does not apply

when interpreting the Lease at issue here.                            Rather than this

Lease       being     “made     up   of    several     distinct     items,”    there    is

instead an “intimate connection” between the different rights

bargained for.             Id. at 714.        Therefore, “it can safely be said

that the contract is entire.”                 Id.

        Finally,       K&D      argues     that    under   West    Virginia    law,    the

“general rule” is that oil and gas leases will “be liberally

construed in favor of the lessor.”                    Appellee’s Br. at 22 (citing

Martin v. Consolidated Coal & Oil Corp., 133 S.E. 626 (W. Va.

1926)).        This is so, but only when there is ambiguity as to the

meaning of the lease terms.                 “Where the intent of the parties is

clear, [the Supreme Court of Appeals of West Virginia] will not

use the vehicle of interpretation to relieve one party of a bad

bargain.”          Pechenik v. Baltimore & O.R. Co., 205 S.E.2d 813, 815

(W. Va. 1974). 7

        7
       We find K & D’s arguments based on vague notions of
fairness and West Virginia public policy similarly unavailing in
interpreting a lease the text of which is unambiguous.

                                              14
       Because        we       agree     with       EQT     that        the       language      of     the

Durational Provision is clear and that the Lease does not evince

any    intent       of     the    parties          to    enter     into       a     divisible        lease

agreement, we conclude that the district court erred in holding

to the contrary.

                                                    C.

       The     district         court’s       determination             that      EQT’s    production

and exploration rights had terminated as a result of non-use

during       the     initial         five-year          lease     term        was      based    on     the

erroneous          premise       that        the        Lease     was    divisible.              Having

concluded       that       the    Lease      is     not     divisible,            we   next    consider

whether       EQT    has       continuing         rights        under    the      Lease       under    the

requirements of the Durational Provision found in Article IV.

       Under        the       Durational      Provision,           a    lessee         will    maintain

continuing rights under the Lease beyond the initial five-year

term so long as (1) the lessee explores for or produces gas or

oil; (2) “gas or oil is found in paying quantities thereon or

stored thereunder”; or (3) the “land is used for the storage of

gas or the protection of gas storage on lands in the general

vicinity of said land.” J.A. 261.                               The parties have stipulated

that     “a    portion          of     the    180        Acre     Lease        falls      within       the

protective zone of the Shirley Storage Field.”                                     J.A. 254.         Thus,

EQT    is     using       a    portion       of    the     land        for    protection        of     gas

storage, one of the rights conferred by the Lease.                                              Because

                                                    15
there is no disagreement that EQT is indeed engaging in one of

the activities enumerated in the Durational Provision of the

Lease, we find that EQT continues to hold all rights under the

original Lease.

                             III.

     For the foregoing reasons, the judgment of the district

court is

                        REVERSED AND REMANDED WITH INSTRUCTIONS
                                     TO ENTER JUDGMENT FOR EQT.

                              16