Court Opinion

ID: 6349741
Source: CourtListenerOpinion
Date Created: 2022-06-14 19:14:59.863583+00
Date Added: 2024-06-11T09:14:51.275287
License: Public Domain

IN THE SUPREME COURT OF APPEALS OF WEST VIRGINIA
                                                                    FILED
                                January 2022 Term
                                _______________               June 14, 2022
                                                                 released at 3:00 p.m.
                                                             EDYTHE NASH GAISER, CLERK
                                  No. 21-0729                SUPREME COURT OF APPEALS
                                _______________                   OF WEST VIRGINIA

     SWN PRODUCTION COMPANY, LLC, and EQUINOR USA ONSHORE
            PROPERTIES INC., Defendants Below, Petitioners,

                                        v.

CHARLES KELLAM, PHYLLIS KELLAM, and all other persons and entities similarly
                situated, Plaintiffs Below, Respondents.

     ____________________________________________________________

              Certified Question from the United States District Court
                      for the Northern District of West Virginia
          The Honorable John Preston Bailey, United States District Judge
                             Civil Action No. 5:20-cv-85

                  CERTIFIED QUESTIONS ANSWERED
     ____________________________________________________________

                             Submitted: May 17, 2022
                               Filed: June 14, 2022

    Marc S. Tabolsky, Esq.                      James G. Bordas III, Esq.
    SCHIFFER HICKS JOHNSON PLLC                 Richard A. Monahan, Esq.
    Houston, Texas                              BORDAS & BORDAS, PLLC
    Elbert Lin, Esq.                            Wheeling, West Virginia
    HUNTON ANDREWS KURTH LLP                    Counsel for Respondents
    Richmond, Virginia
    Timothy M. Miller, Esq.                     Scott A. Windom, Esq.
    Jennifer J. Hicks, Esq.                     WINDOM LAW OFFICES, PLLC
    Katrina N. Bowers, Esq.                     Harrisville, West Virginia
    BABST, CALLAND, CLEMENTS, & ZOMNIR,         Anthony J. Majestro, Esq.
    P.C.                                        POWELL & MAJESTRO, PLLC
    Charleston, West Virginia                   Charleston, West Virginia
    Counsel for Petitioners
                                                 Counsel for Amici Curiae West Virginia
                                                 Land and Mineral Owners Association and
                                                 West Virginia Association for Justice

                                                 W. Henry Lawrence, Esq.
                                                 Amy M. Smith, Esq.
                                                 STEPTOE & JOHNSON PLLC
                                                 Bridgeport, West Virginia
                                                 Counsel for Amici Curiae American
                                                 Petroleum Institute, Gas and Oil
                                                 Association of WV, Inc., and West
                                                 Virginia Chamber of Commerce

                                                 Howard M. Persinger, III, Esq.
                                                 Persinger & Persinger, L.C.
                                                 Charleston, West Virginia
                                                 Counsel for Amici Curiae West Virginia
                                                 Royalty Owners’ Association, West
                                                 Virginia Farm Bureau, Bounty Minerals
                                                 LLC and Siltstone Resources, LLC

                                                 Michael W. Carey, Esq.
                                                 David R. Pogue, Esq.
                                                 Carey, Douglas, Kessler & Ruby, PLLC
                                                 Charleston, West Virginia
                                                 Marvin W. Masters, Esq.
                                                 April D. Ferrebee, Esq.
                                                 The Masters Law Firm LC
                                                 Charleston, West Virginia
                                                 Counsel for Amicus Curiae National
                                                 Association    of     Royalty   Owners,
                                                 Appalachia

JUSTICE WOOTON delivered the Opinion of the Court.

JUSTICE ARMSTEAD, deeming himself disqualified, did not participate in this decision.
JUDGE HOWARD sitting by temporary assignment.

JUSTICE BUNN, deeming herself disqualified, did not participate in this decision.
JUDGE ALSOP sitting by temporary assignment.

CHIEF JUSTICE HUTCHISON concurs and reserves the right to file a separate opinion.
JUSTICE WALKER dissents and reserves the right to file a separate opinion.
                              SYLLABUS BY THE COURT

              1.     “When a certified question is not framed so that this Court is able to

fully address the law which is involved in the question, then this Court retains the power

to reformulate questions certified to it under . . . the Uniform Certification of Questions of

Law Act found in W. Va. Code, 51-1A-1, et seq. . . .” Syl. Pt. 3, in part, Kincaid v. Mangum,

189 W. Va. 404, 432 S.E.2d 74 (1993).

              2.     “‘A de novo standard is applied by this Court in addressing the legal

issues presented by a certified question from a federal district or appellate court.’ Syllabus

Point 1, Light v. Allstate Ins. Co., 203 W.Va. 27, 506 S.E.2d 64 (1998).” Syl. Pt. 1,

Martinez v. Asplundh Tree Expert Co., 239 W. Va. 612, 803 S.E.2d 582 (2017).

              3.     “If an oil and gas lease provides for a royalty based on proceeds

received by the lessee, unless the lease provides otherwise, the lessee must bear all costs

incurred in exploring for, producing, marketing, and transporting the product to the point

of sale.” Syl. Pt. 4, Wellman v. Energy Resources, Inc., 210 W. Va. 200, 557 S.E.2d 254

(2001).

              4.     “If an oil and gas lease provides that the lessor shall bear some part of

the costs incurred between the wellhead and the point of sale, the lessee shall be entitled to

credit for those costs to the extent that they were actually incurred and they were

                                              i
reasonable. Before being entitled to such credit, however, the lessee must prove, by

evidence of the type normally developed in legal proceedings requiring an accounting, that

he, the lessee, actually incurred such costs and that they were reasonable.” Syl. Pt. 5,

Wellman v. Energy Resources, Inc., 210 W. Va. 200, 557 S.E.2d 254 (2001).

              5.     “Language in an oil and gas lease that is intended to allocate between

the lessor and lessee the costs of marketing the product and transporting it to the point of

sale must expressly provide that the lessor shall bear some part of the costs incurred

between the wellhead and the point of sale, identify with particularity the specific

deductions the lessee intends to take from the lessor’s royalty (usually 1/8), and indicate

the method of calculating the amount to be deducted from the royalty for such post-

production costs.” Syl. Pt. 10, Estate of Tawney v. Columbia Natural Resources, LLC.,

219 W. Va. 266, 633 S.E.2d 22 (2006).

              6.     “An appellate court should not overrule a previous decision recently

rendered without evidence of changing conditions or serious judicial error in interpretation

sufficient to compel deviation from the basic policy of the doctrine of stare decisis, which

is to promote certainty, stability, and uniformity in the law.” Syl. Pt. 2, Dailey v. Bechtel

Corp., 157 W. Va. 1023, 207 S.E.2d 169 (1974).

                                             ii
WOOTON, Justice:

              The United States District Court for the Northern District of West Virginia

has certified four questions to this Court, which seek to clarify whether, in payment of

royalties under an oil and gas lease, the lessor may be required to bear a portion of the post-

production costs incurred in rendering the oil and gas marketable. First, the district court

poses this overarching question:

              Is Estate of Tawney v. Columbia Natural Resources, LLC., 219
              W. Va. 266, 633 S.E.2d 22 (2006), still good law in West
              Virginia?

We answer this question in the affirmative.

              The District Court then asks us to expound upon our holding in Tawney by

posing the following three questions:

              What is meant by the “method of calculating” the amount of
              post-production costs to be deducted?

              Is a simple listing of the types of costs which may be deducted
              sufficient to satisfy Tawney?

              If post-production costs are to be deducted, are they limited to
              direct costs or may indirect costs be deducted as well?

We find that these are questions of contract interpretation which may only be answered by

the Court and a factfinder, as appropriate, upon consideration of the lease in question and

other relevant evidence, through application of the holdings in Tawney, its predecessor,

Wellman v. Energy Resources, Inc., 210 W. Va. 200, 557 S.E.2d 254 (2001), and applicable

                                              1
contract law. In this regard, we recognize our authority to reformulate questions certified

to this Court:

                        When a certified question is not framed so that this
                 Court is able to fully address the law which is involved in the
                 question, then this Court retains the power to reformulate
                 questions certified to it under . . . the Uniform Certification of
                 Questions of Law Act found in W. Va. Code, 51-1A-1, et seq.
                 . . .”

Syl. Pt. 3, in part, Kincaid v. Mangum, 189 W. Va. 404, 432 S.E.2d 74 (1993); see also W.

Va. Code § 51-1A-4 (2018) (“The Supreme Court of Appeals of West Virginia may

reformulate a question certified to it.”). We exercise our authority to reformulate and more

succinctly phrase these three questions into a single question as follows:

                 What level of specificity does Tawney require of an oil and gas
                 lease to permit the deduction of post-production costs from a
                 lessor’s royalty payments, and if such deductions are
                 permitted, what types of costs may be included?

The answer to this question necessarily involves the exploration of contractual language,

the possible need for interpretation of said language, and the development of facts to assist

either the court or the factfinder, as appropriate. Therefore, we decline to answer the

reformulated question.

                   I. FACTUAL AND PROCEDURAL BACKGROUND

                 In August 2007, Respondents Charles and Phyllis Kellam (hereinafter “the

Kellams” or “Respondents”) entered into an oil and gas lease agreement (the “Kellam

Lease”) with Great Lakes Energy Partners, LLC (“Great Lakes”). Sometime thereafter,

Great Lakes assigned the lease to Chesapeake Appalachia, LLC (“Chesapeake”) from

                                                 2
whom Petitioners SWN Production Company, LLC (“SWN”) and Equinor USA Onshore

Properties Inc. (“Equinor”) acquired working interests in the lease. SWN now operates oil

and gas wells, and production units within which the Kellams’ leased lands are included.

Since SWN and Equinor acquired working interests in the Kellam Lease, the parties have

all engaged in oil and gas production efforts under the terms of that lease, which provides,

in pertinent part:

              4.    In consideration of the premises the Lessee covenants
              and agrees:

              (A) To deliver to the credit of the Lessor in tanks or
              pipelines, as royalty, free of cost, one-eighth (1/8) of all oil
              produced and saved from the premises, or at Lessee’s option to
              pay Lessor the market price for such one-eighth (1/8) royalty
              oil at the published rate for oil of like grade and gravity
              prevailing on the dates such oil is sold into tanks or pipelines.
              Payment of royalty for oil marketed during any calendar month
              to be on or about the 60th day after receipt of such funds by the
              Lessee.

              (B) To pay to the Lessor, as royalty for the oil, gas, and/or
              coalbed methane gas marketed and used off the premises and
              produced from each well drilled thereon, the sum of one-eighth
              (1/8) of the price paid to Lessee per thousand cubic feet of such
              oil, gas, and/or coalbed methane gas so marketed and used,
              measured in accordance with Boyle’s Law for the
              measurement of gas at varying pressures, on the basis of 10
              ounces above 14.73 pounds atmospheric pressure, at a standard
              base temperature of 60 degrees Fahrenheit, without allowance
              for temperature and barometric variations less any charges for
              transportation, dehydration and compression paid by Lessee
              to deliver the oil, gas, and/or coalbed methane gas for sale.
              Payment for royalty for oil, gas, and/or coalbed methane gas
              marketed during any calendar month to be on or about the 60th
              day after receipt of such funds by the Lessee.

(Emphasis added).

                                             3
              Paragraph 10 of the Kellam Lease addresses unitization and provides that, if

the leased premises are consolidated with other lands to form a development unit, “the

Lessor agrees to accept, in lieu of the one-eighth (1/8) oil, gas, and/or coalbed methane gas

royalty hereinbefore provided, that proportion of such one-eighth (1/8) royalty which the

acreage consolidated bears to the total number of acres compromising said development

unit.” Finally, Paragraph 11 of the Kellam Lease provides that, “[i]n case the Lessor owns

a less interest in the above described premises than the entire and undivided fee simple

therein, then the royalties and rentals herein provided for shall be paid to the Lessor only

in the proportion which such interest bears to the whole and undivided fee.”

              According to the Kellams, SWN and Equinor “each have deducted

postproduction costs from royalty checks due and payable to [the Kellams] and other

similarly situated persons and/or entities.” As such, on April 28, 2020, the Kellams

instituted the underlying civil action—a putative class action—in the United States District

Court for the Northern District of West Virginia, arguing that those deductions were in

contravention of this Court’s holdings in Tawney and Wellman because the terms of the

lease lack the specificity required under Tawney to permit the deduction of post-production

costs. While acknowledging that the royalty language provides for the deduction of certain

charges for “transportation, dehydration, and compression,” they argue the lease fails to

include a “method of calculating the amount to be deducted from the royalty share for such

post-production costs” as required by Tawney. See Tawney, 219 W. Va. at 268, 633 S.E.2d

at 24, syl. pt. 10 (“Language in an oil and gas lease that is intended to allocate between the

                                              4
lessor and lessee the costs of marketing the product and transporting it to the point of sale

must expressly provide that the lessor shall bear some part of the costs incurred between

the wellhead and the point of sale, identify with particularity the specific deductions the

lessee intends to take from the lessor’s royalty (usually 1/8), and indicate the method of

calculating the amount to be deducted from the royalty for such post-production costs.”).

              After a short delay in the proceedings caused by a stay issued pending the

resolution of Chesapeake’s voluntary Chapter 11 petition in the United States Bankruptcy

Court for the Southern District of Texas, SWN and Equinor filed answers to the Kellams’

complaint in July 2021. Contemporaneously, SWN and Equinor moved for judgment on

the pleadings, seeking dismissal of all of the Kellams’ claims with prejudice. In so doing,

SWN and Equinor argued that the Kellam Lease satisfied the requirements set forth in

Tawney. Once briefing was complete, on September 13, 2021, the district court, sua

sponte, certified the four questions set forth more fully above. We accepted the certified

questions and placed this matter on the docket for argument under Rule 20 of the West

Virginia Rules of Appellate Procedure. 1

       1
        This Court would like to acknowledge the participation in this case of the following
amici curiae: the West Virginia Land and Mineral Owners Association, the West Virginia
Association for Justice, the American Petroleum Institute, the Gas and Oil Association of
WV, Inc., the West Virginia Chamber of Commerce, the National Association of Royalty
Owners, Appalachia, the West Virginia Royalty Owners’ Association, the West Virginia
Farm Bureau, Bounty Minerals LLC and Siltstone Resources, LLC. We have considered
the arguments presented by the amici curiae in deciding this case.

                                             5
                             II. STANDARD OF REVIEW

              This Court has long held that “‘[a] de novo standard is applied by this Court

in addressing the legal issues presented by a certified question from a federal district or

appellate court.’ Syllabus Point 1, Light v. Allstate Ins. Co., 203 W.Va. 27, 506 S.E.2d 64

(1998).” Syl. Pt. 1, Martinez v. Asplundh Tree Expert Co., 239 W. Va. 612, 803 S.E.2d

582 (2017). Our resolution of the certified questions at issue will be guided by this

standard.

                                   III. DISCUSSION

A.     Is Tawney still good law in West Virginia?

              The first certified question simply asks whether Tawney is still “good law”

in West Virginia. See 219 W. Va. 266, 633 S.E.2d 22. The district court indicated its

belief that Tawney remained good law, despite SWN and Equinor’s contention that its

potential overruling was suggested in Leggett v. EQT Production Co., 239 W. Va. 264, 800

S.E.2d 850 (2017). In order to address this question, it is necessary to summarize the legal

developments that led to it in the first place. Over twenty years ago, this Court issued its

opinion in Wellman, wherein we essentially held that: (1) lessees may not deduct post-

production costs unless the lease agreement explicitly permits such deductions; and (2)

where there is such a provision, only reasonable and actually incurred expenses may be

deducted. We held:

                    If an oil and gas lease provides for a royalty based on
              proceeds received by the lessee, unless the lease provides
              otherwise, the lessee must bear all costs incurred in exploring

                                             6
              for, producing, marketing, and transporting the product to the
              point of sale.

                     If an oil and gas lease provides that the lessor shall bear
              some part of the costs incurred between the wellhead and the
              point of sale, the lessee shall be entitled to credit for those costs
              to the extent that they were actually incurred and they were
              reasonable. Before being entitled to such credit, however, the
              lessee must prove, by evidence of the type normally developed
              in legal proceedings requiring an accounting, that he, the
              lessee, actually incurred such costs and that they were
              reasonable.

Wellman, 210 W. Va. at 202, 557 S.E.2d at 256, syl. pts. 4 and 5. These holdings firmly

cemented West Virginia as a “marketable product rule” state, meaning that the lessee bears

all post-production costs incurred until the product is first rendered marketable, unless

otherwise indicated in the subject lease.

              Wellman arose from two oil and gas leases which contained standard one-

eighth royalty clauses. Of note, there was no provision under the terms of the lease for the

deduction of post-production costs. The lessee, Energy Resources, Inc., extracted gas from

a pre-existing well under one of the leases and sold that gas to Mountaineer Gas Company

for $2.22 per thousand cubic feet. Energy Resources paid the Wellmans a royalty claiming

that it had actually received only $0.87 per thousand cubic feet of gas extracted, and so the

Wellmans received approximately $0.11 per thousand cubic feet of gas. Energy Resources

indicated to the Wellmans that it arrived at these figures by deducting “certain expenses”

from the $2.22 per thousand cubic feet of gas it had been paid by Mountaineer Gas

Company. The Wellmans thereafter instituted a civil action arguing, in pertinent part, that

                                               7
the deduction of those expenses was contrary to the terms of the lease. Ultimately, the

Wellmans moved for summary judgment on this point and the circuit court granted that

motion, finding that Energy Resources had failed to show that it was entitled to deduct any

expenses from the one-eighth royalty, and by taking those deductions, it had essentially

short-changed the Wellmans. Id. at 203-05, 557 S.E.2d at 257-59.

              On appeal, this Court was presented with a matter of first impression:

whether, in the absence of lease language permitting the deduction of post-production

costs, a lessee was entitled to deduct such costs prior to calculating a lessor’s royalty

payment. In concluding that the answer was no, this Court surveyed the laws of other states

to determine whether such deductions were permissible. At that time we recognized that

only two states had permitted these deductions in the absence of an explicit lease provision

to that effect (Louisiana and Texas), while several others did not allow the deductions in

absence of a lease provision to that effect. Ultimately, we agreed with the jurisdictions

who took the latter path, reasoning:

                      The rationale for holding that a lessee may not charge a
              lessor for “post-production” expenses appears to be most often
              predicated on the idea that the lessee not only has a right under
              an oil and gas lease to produce oil or gas, but he also has a duty,
              either express, or under an implied covenant, to market the oil
              or gas produced. The rationale proceeds to hold the duty to
              market embraces the responsibility to get the oil or gas in
              marketable condition and actually transport it to market.

Id. at 210, 557 S.E.2d at 264. Leaning on the analysis of the Colorado Supreme Court in

Garman v. Conoco, 886 P.2d 652 (Colo. 1994), we explained that under the implied

                                              8
covenant to market, the lessee “had a duty to market oil and gas produced, and since under

the law it was required to pay the costs to carry out its covenants, it had the duty to bear

the costs of preparing the oil and gas for market and to pay the cost of transporting them to

market.” 210 W. Va. at 210, 557 S.E.2d at 264. Essentially, it is the lessee’s burden to

bear post-production costs, unless the lease provides otherwise. Id. at 211, 557 S.E.2d at

265.

               We adopted the reasoning of the Colorado Supreme Court—as well as the

reasoning then employed in Kansas and Oklahoma—finding that

               [l]ike those states, West Virginia holds that a lessee impliedly
               covenants that he will market oil or gas produced. Like the
               courts of Colorado, Kansas, and Oklahoma, the Court also
               believes that historically the lessee has had to bear the cost of
               complying with his covenants under the lease. It, therefore,
               reasonably should follow that the lessee should bear the costs
               associated with marketing products produced under a lease.
               Such a conclusion is also consistent with the long-established
               expectation of lessors in this State, that they would receive one-
               eighth of the sale price received by the lessor.

Id. at 211, 557 S.E.2d at 265 (internal citations omitted). Thereafter, we set out the holdings

discussed supra, establishing a rule that unless a lease provides for the deduction of post-

production costs, the lessee must bear those costs by default. Id. at 202, 557 S.E.2d at 256,

syl. pts. 4 and 5.

               Five years later, we were once again asked to wade into the waters of post-

production costs in Tawney. Tawney presented this Court with two certified questions from

                                               9
the Circuit Court of Roane County, West Virginia, asking whether certain specific lease

language stating that royalties were to be calculated “at the wellhead” was sufficient to

permit the deduction of post-production costs. See 219 W. Va. at 268-69, 633 S.E.2d at

24-25. The arguments presented by Columbia Natural Resources (“CNR”)—the lessee in

that case—essentially posited that gas was not sold at the wellhead, but to a supplier

downstream, so it was only logical that the lessee be permitted to deduct post-production

costs incurred in making the gas marketable at a point of sale. Id. at 270, 633 S.E.2d at 26.

We rejected this contention on the basis that the “at the wellhead” language was flatly

ambiguous insofar as it was imprecise. As we stated,

              [w]hile the language arguably indicates that the royalty is to be
              calculated at the well or the gas is to be valued at the well, the
              language does not indicate how or by what method the royalty
              is to be calculated or the gas is to be valued. For example,
              notably absent are any specific provisions pertaining to the
              marketing, transportation, or processing of the gas. In addition,
              in light of our traditional rule that lessors are to receive a
              royalty for the sale price of gas, the general language at issue
              simply is inadequate to indicate an intent by the parties to agree
              to a contrary rule—that the lessors are not to receive 1/8 of the
              sale price but rather 1/8 of the sale price less a proportionate
              share of deductions for transporting and processing the gas.

Id. at 272, 633 S.E.2d at 28. In that case, we reiterated that our default rule is that lessees

bear the brunt of post-production costs absent lease language shifting that cost—or a

portion thereof—to the lessor. Id. Accordingly, the question of whether such language

exists in the lease is a matter of contract interpretation.

                                               10
              We observed that parties to oil and gas leases are well within their rights to

contract for the sharing of post-production costs if they so choose, but the intent to do so

must be clear from the lease terms. To that end, we held that

                     [l]anguage in an oil and gas lease that is intended to
              allocate between the lessor and lessee the costs of marketing
              the product and transporting it to the point of sale must
              expressly provide that the lessor shall bear some part of the
              costs incurred between the wellhead and the point of sale,
              identify with particularity the specific deductions the lessee
              intends to take from the lessor’s royalty (usually 1/8), and
              indicate the method of calculating the amount to be deducted
              from the royalty for such post-production costs.

Id. at 268, 633 S.E.2d at 24, syl. pt. 10. This holding sets forth three basic requirements

for determining whether a lease enforceably permits the sharing of post-production costs:

(1) language explicitly stating the lessor will bear some portion of those costs; (2)

identification of the deductions the lessee intends to make; and (3) the method of

calculating the amount to be deducted.

              For another eleven years, thousands of oil and gas leases in this State—

including the Kellams’ own lease—were crafted with this standard in mind. However, in

2017, the Court was called upon to again address the deduction of post-production

expenses, albeit in a different context, in Leggett v. EQT Production Co., 239 W. Va. 264,

800 S.E.2d 850 (2017).

              Leggett was a set of certified questions from the United States District Court

for the Northern District of West Virginia, asking whether our decision in Tawney applied

                                            11
to bar the deduction of post-production costs with regard to leases governed by West

Virginia Code § 22-6-8(e) (1994). 2 See 239 W. Va. at 267, 800 S.E.2d at 853. Without

delving too far into the specifics of Leggett, it is sufficient to state that we held that the

unambiguous language used by the Legislature in § 22-6-8(e) permitted royalty payments

made pursuant to leases governed by that statute to be subject to pro-rata deduction or

allocation of all reasonable post-production expenses actually incurred by the lessee. Id.

In short order following the issuance of Leggett, in 2018 the Legislature amended § 22-6-

8(e), effectively overruling that decision and specifically altering the language of that Code

provision to state that royalty payments under that section were to be “free from any

deductions for post-production expenses.” W. Va. Code § 22-6-8(e) (2021).

              It is Leggett which forms the basis of the SWN and Equinor’s instant

challenges to the current validity of Tawney and precipitated the district court’s first

certified question. This is so because this Court in Leggett undertook an examination of

the legal underpinnings of Wellman and Tawney, while correctly noting that neither case,

       2
         West Virginia Code § 22-6-8 was crafted for the explicit purpose of converting so-
called flat rate oil and gas leases into leases which pay a royalty based on the volume of oil
and gas produced or marketed. “Flat rate” leases are leases wherein the lessors are paid an
annual fee based solely on the existence of a producing well on the property. See id.; see
also Leggett, 239 W. Va. at 267, 800 S.E.2d at 853. The Legislature, perceiving that these
leases provided inadequate compensation to lessors, crafted a mechanism to convert these
leases into volume-based royalty leases. Essentially, under this statute, any lessee seeking
a permit to drill, redrill, deepen, fracture, stimulate, pressurize, convert, combine, or
physically change a well under a flat rate lease is required to file an affidavit certifying that
the lessee will pay to the lessor a minimum one-eight royalty of the gross proceeds from
the sale of oil and as produced from those wells. W. Va. Code § 22-6-8(d)-(e).

                                               12
nor the implied covenant to market upon which they are founded, were applicable to its

analysis of West Virginia Code § 22-6-8(e). See Leggett, 239 W. Va. at 275-76, 800 S.E.2d

at 861-62 (“Accordingly, the implied covenant to market relied upon by the Wellman and

Tawney Courts has no application as pertains to leases affected by West Virginia Code §

22-6-8.”); see also id. at 276, 800 S.E.2d at 862 (“We therefore conclude that neither

Wellman nor Tawney are applicable to an analysis of the ‘at the wellhead’ language

contained in West Virginia Code § 22-6-8(e).”).

              The Leggett Court’s conclusion in this regard was correct because leases

under section 22-6-8 are entirely creatures of statute, unlike the freely negotiated

contractual provisions addressed in Tawney and Wellman. As we stated in Leggett,

“[u]tilizing . . . common law principles to interpret a statute . . . is not legally sound.” 239

W. Va. at 274, 800 S.E.2d at 860 (citing Kilmer v. Elexco Land Servs, Inc., 990 A.2d 1147,

1155 (Pa. 2010) (recognizing that states adopting the marketable product rule “have done

so as a matter of common law in interpreting ambiguities in leases, not through statutory

interpretation of a preexisting statute.”)). In rejecting the invitation to apply Wellman and

Tawney to section 22-6-8, we explained that the rules of statutory construction and contract

interpretation are vastly different. 239 W. Va. at 275, 800 S.E.2d at 861 (“The legal

standards applicable to issues of statutory interpretation have evolved separately from those

involving matters of contract interpretation. Thus, despite the fact that . . . statutory and

contractual language are essentially identical, it is theoretically possible that the application

of each set of legal standards would yield divergent results. . . .”) (citing Major Oldsmobile,

                                               13
Inc. v. Gen. Motors Corp., No. 93-Civ-2189 (SWK), 1995 WL 326475, at *4 (S.D.N.Y.

May 31, 1995), aff’d, 101 F.3d 684 (2d Cir. 1996)).

              Moreover, the Leggett Court intimated that a key feature of freely negotiated

lease agreements was that the parties may limit the implied covenants—like the implied

covenant to market—which append to those leases. Leggett, 239 W. Va. at 275, 800 S.E.2d

at 861. However, “the implied covenant to market does not append itself to statutes; rather

it is a tool utilized to resolve contractual ambiguities.” Id. We observed that implied

covenants are generally recognized to be “gap fillers” to effectuate the parties’ intentions

in forming the contract when the contract is silent on a particular issue. Id. (citing Allen v.

Colonial Oil Co., 92 W. Va. 689, 115 S.E. 842, 844 (1923)). In applying these basic

concepts, the Leggett Court then explained why neither the implied covenant to market nor

the cases which are founded upon it were applicable to its interpretation of section 22-6-8:

              In this instance, at the times these leases were executed, the
              parties contemplated neither the marketing of the product and
              any implied covenants thereof, nor cost allocation because the
              leases were flat-rate leases. The lessor’s royalty issued
              irrespective of production, making post-production costs and
              the marketing efforts of the lessor irrelevant to both parties for
              purposes of the lease. Only by operation of West Virginia
              Code § 22-6-8(e), then, is cost allocation implicated in the
              parties’ dealings. Accordingly, without the commensurate
              ability to bargain about allocation of costs or limit any implied
              covenants which may affect cost-bearing, utilizing cases which
              are premised on these considerations is of limited utility at best
              and inequitable at worst. Dogmatic imposition, therefore, of
              West Virginia’s so-called marketable product rule—which was
              developed upon these considerations—to prohibit allocation of
              postproduction expenses as requested by the petitioners yields

                                              14
             little parity when the parties were not free to contract
             otherwise.

             Moreover, use of this Court’s cases involving freely negotiated
             contracts—which were decided years after the statute at issue
             was enacted—to foster a reading of the statute which affects
             the terms of a contract regarding matters which were not
             within the contemplation of the parties is potentially
             problematic on a constitutional level. This Court has stated
             that “those who enter into contracts do so with reference to the
             law as it exists at the date thereof; and any impairment by
             legislative action, or otherwise, of an obligation thus created,
             is plainly inhibited by both the State and Federal
             Constitutions.” McClintic v. Dunbar Land Co., 127 W.Va.
             454, 461, 33 S.E.2d 593, 596 (1945). While West Virginia
             Code § 22-6-8 itself is cognizant of the delicate balancing act
             it undertakes to avoid unconstitutionally impairing contractual
             rights by affecting only the issuance of permits, extending the
             statute beyond that procedural prerequisite into the terms of the
             negotiated lease between the parties is dangerous territory. In
             interpretation of a statute, it is not for this Court to attempt to
             “retrofit” this Court’s caselaw to give meaning to a statute
             enacted well before such precedent, particularly when such
             precedent employs a rationale wholly inapplicable to statutory
             construction and so substantially affects the contracting
             parties’ rights. We therefore conclude that neither Wellman
             nor Tawney are applicable to an analysis of the “at the
             wellhead” language contained in West Virginia Code § 22-6-
             8(e).

Id. (emphasis added and citation omitted). In essence, the Court openly acknowledged that

neither Wellman and Tawney nor the implied covenant to market had any place in its

interpretation of West Virginia Code § 22-6-8(e).

             In explicitly recognizing that the common law standards set forth in Wellman

and Tawney did not apply to the issue before it, the Leggett Court even reformulated the

certified question presented to remove any reference to Tawney, and instead asked simply:

                                             15
“Are royalty payments pursuant to an oil or gas lease governed by West Virginia Code §

22-6-8(e) (1994) subject to pro-rata deduction or allocation of post-production expenses

by the lessee?” Leggett, 239 W. Va. at 281, 800 S.E.2d at 867. Yet, despite these consistent

acknowledgments that Tawney was utterly inapplicable to the case at bar, the Leggett Court

engaged in a somewhat indulgent frolic into what it deemed the “faulty legs” upon which

Tawney—and its predecessor Wellman—stood. Id. at 276, 800 S.E.2d at 862. 3

       3
         The Leggett Court’s primary criticism of these cases was that “the use of the
implied covenant to market to reach the issue of [post-production] cost allocation is highly
questionable.” 239 W. Va. 275 n.15, 800 S.E.2d 861 n.15. In making this statement, the
majority in that case cited to cases from jurisdictions which have not extended their implied
covenants in this way, but glossed over the fact that at least four states other than West
Virginia have done precisely the opposite. The highest courts of Colorado, Kansas,
Oklahoma, and Arkansas have all recognized, just as we did in Wellman, that the implied
duty to market necessarily encompasses a duty to render the product marketable, which
includes bearing the cost of doing so absent a lease provision to the contrary. Despite this,
the Leggett Court parroted one author’s concern that the implied covenant to market has
exceeded its original intent and “should be confined to its original purpose: to require the
lessee to diligently seek a market for gas reserves that are shut in.” Id. (citing Owen L.
Anderson, Royalty Valuation: Should Royalty Obligations Be Determined Intrinsically,
Theoretically, or Realistically? Part 2, 37 Nat. Res. J. 611, 683 n. 89 (1997)). The problem
with this assertion is that it is not clear that the implied duty to market was ever truly limited
in such a way. See, e.g., Warfield Nat. Gas Co. v. Allen, 88 S.W.2d 989, 991 (Ky. 1935)
(recognizing that, where a lease was silent on this issue, a lessee bore the expense of
producing and marketing oil and gas as consideration for its entitlement to seven-eighths
of the proceeds from the sale thereof). Rather, the implied covenant to market is reasonably
construed to require a lessee to bear marketing costs, which is the very basis of the
marketable product rule we employ today.

        In this vein, the Leggett majority also contended that Wellman failed to recognize
interstate variations in the marketable product rule. To the contrary, Wellman analyzed the
rules surrounding the sharing of post-production costs employed by other states—including
Texas, Louisiana, Colorado, Kansas, and Oklahoma. In several of those states, much like
in West Virginia, it has long been recognized—even before deregulation of the gas industry
in the 1990s—that a lessee impliedly covenants to market the oil and gas it produces under
                                               16
              By its own admission, Leggett’s ensuing discussion of those cases and their

“faulty legs” was mere obiter dicta and of no authoritative value to this Court today. Just

as the United States Supreme Court has recognized, “we are not bound to follow our dicta

in a prior case in which the point now at issue was not fully debated.” Cent. Va. Cmty.

Coll. v. Katz, 546 U.S. 356, 363 (2006). Accordingly, we see little reason to justify

Leggett’s criticism of Wellman and Tawney with any further discussion other than to simply

reiterate that those cases are the result of a reasonable and justifiable interpretation of this

State’s common law as evidenced by the fact that several other states employed nearly

identical reasoning in concluding that, absent a contract provision to the contrary, the

implied covenant to market requires the lessee to bear all post-production costs. This is a

the lease. The basic rules employed by those states simply explained that “the implied duty
to market means a duty to get the product to the place of sale in marketable form.” Wood
v. TXO Prod. Corp., 854 P.2d 880, 882 (Okla. 1992); see also Davis v. Cramer, 808 P.2d
358, 362 (Colo. 1991) (explaining that the covenant to market requires a lessee to exercise
reasonable diligence to market production from the well.); Sternberger v. Marathon Oil
Co., 894 P.2d 788, 799 (Kan. 1995) (“The lessee has the duty to produce a marketable
product, and the lessee alone bears the expense in making the product marketable.”). Even
in states that do not employ the marketable product rule today, it was once recognized that
the lessee may be impliedly obligated to bear certain costs in marketing oil and gas. See,
e.g., Warfield, 88 S.W.2d at 991. West Virginia has long applied the same rule. See Robert
Tucker Donley, The Law of Coal, Oil and Gas in West Virginia and Virginia §§ 70 & 104
(1951) (stating that in West Virginia a lessee impliedly covenants he will market oil and
gas produced). The only question for us in Wellman was whether that rule necessarily
required a lessee to bear post-production costs until the gas was marketed. The logical
conclusion that it did, unless otherwise provided in the lease, was amply supported by the
common law of this State, as well as the guidance of other states employing virtually
identical rules.

                                              17
common law doctrine; we are not inclined to revisit the underpinnings of Wellman and

Tawney—despite the parties’ and Leggett’s invitation to do so—for several reasons.

              First and foremost, we do not need to address our interpretation of the implied

covenant of marketability in the case at bar because that covenant is not implicated. In this

case there is a contractual provision addressing the allocation of post-production costs such

that an implied covenant is not necessary to ascertain the parties’ intent in contracting.

Specifically, Paragraph 4(B) of the Kellams’ lease provides that the lessor shall be paid a

one-eighth royalty for the market price of the oil, gas, and coalbed methane gas “less any

charges for transportation, dehydration and compression paid by Lessee to deliver the oil,

gas, and/or coalbed methane gas for sale.” As such, the implied covenant of marketability

is clearly inapplicable because, insofar as the lease is not silent on the issue of post-

production cost allocation, there is no gap for that implied covenant to fill. The parties

have freely negotiated a contract in which they appear to have expressed an intent to share

the burden of post-production costs in the manner indicated therein. Therefore, the

question whether that provision satisfies the additional requirements set out in Tawney that

the lease identify with particularity the costs to be deducted and identify a method of

calculating those deductions, as explained infra, is not a question this Court can answer,

but is instead relegated to the finder of fact.

              Second, we are compelled by the doctrine of stare decisis to carefully

consider whether we are justified in overruling the precedent of this Court. As we

                                                  18
explained in syllabus point two of Dailey v. Bechtel Corp., 157 W. Va. 1023, 207 S.E.2d

169 (1974), “[a]n appellate court should not overrule a previous decision recently rendered

without evidence of changing conditions or serious judicial error in interpretation sufficient

to compel deviation from the basic policy of the doctrine of stare decisis, which is to

promote certainty, stability, and uniformity in the law.” In our review of the briefs and the

appendix record, no one—not even this Court in Leggett—has articulated any changing

conditions or serious judicial error in interpretation sufficient to overturn Wellman and

Tawney. See id. The parties present us with no evidence of substantial changes in the

deduction of post-production costs since those decisions were rendered sufficient to justify

overruling our longstanding precedent. As to the question of serious juridical error in

interpretation, as explained above, Wellman and Tawney are consistent with decades of oil

and gas jurisprudence in this State, as well as general principles of contract which undergird

the formation of oil and gas leases—including the use of implied covenants when a lease

is silent on an issue. While litigation has arisen under those opinions, that is not indicative

of instability or “chaos” but is the “unavoidable consequence” of any opinion of this Court.

Leggett, 239 W. Va. at 284, 800 S.E.2d at 870 (Workman, J., concurring). In actuality, it

is far more likely in our opinion that overruling Tawney and Wellman would result in

instability and uncertainty, particularly for the thousands of leases that have been executed

in the years since those opinions were published.

              In short, neither the parties, nor the Leggett Court in criticizing the legal

underpinnings of Wellman and Tawney, have articulated any reason sufficient to justify the

                                              19
overruling of those cases. Accordingly, we decline to do so, and necessarily conclude that

those cases remain in effect. As such, we answer the district court’s first certified question

in the affirmative: Tawney is still good law in West Virginia.

B.    What level of specificity does Tawney require of an oil and gas lease to permit the
deduction of post-production costs from a lessor’s royalty payments, and if such
deductions are permitted, what costs may be included?

               As indicated above, the district court has asked that we clarify what Tawney

requires when it states that a lease must “identify with particularity the specific deductions

the lessee intends to take from the lessor’s royalty (usually 1/8), and indicate the method

of calculating the amount to be deducted from the royalty for such post-production costs.”

Tawney, 219 W. Va. at 268, 633 S.E.2d at 24, syl. pt. 10. In reviewing the parties’ briefs

and the district court’s certification order, we believe these questions can only be answered

by looking to the individual lease at issue and other relevant evidence, thus rendering them,

in some instances, questions of contract interpretation which we cannot answer.

Specifically, the analysis as to whether a lease agreement is “particular” enough in listing

the costs to be deducted will necessarily be different with regard to each contract.

Therefore, this Court cannot create a hard and fast rule in that regard insofar as the question

is tied directly to the specific language of the lease and, if ambiguous, the parties’ intent in

contracting.

               Moreover, the same is true of determining whether the lease agreement

indicates a method of calculating the deductions to be made. That is a matter of contract

                                              20
interpretation, and will necessarily hinge upon the individual contract at issue. As such,

we believe whether the individual contract sufficiently identifies a method of calculating

the deductions is a matter left in the capable hands of the court and fact-finder, as

appropriate. This is because oil and gas lease agreements are simply contracts and are to

be construed as such. See Syl. Pt. 1, McCullough Oil, Inc. v. Rezek, 176 W. Va. 638, 346

S.E.2d 788 (1986) (“An oil and gas lease (or other mineral lease) is both a conveyance and

a contract. It is designed to accomplish the main purpose of the owner of the land and of

the lessee (or its assignee) as operator of the oil and gas interests: securing production of

oil or gas or both in paying quantities, quickly and for as long as production in paying

quantities is obtainable.”).

              We reiterate Tawney and Wellman’s succinct requirements that leases must

meet in order to allocate some share of the post-production costs to the lessor. Specifically,

the lease must: (1) include language indicating the lessor will bear some of those costs; (2)

identify with particularity the deductions to be made (with an understanding that such

deductions must be both reasonable and actually-incurred under Wellman); and (3) indicate

the method of calculating the amount to be deducted. We see no reason to elaborate on

these requirements further; whether a lease meets those requirements is a question of

contract interpretation guided by principles of contract law. See, e.g., Syl. Pt. 1, Lee

Enters., Inc. v. Twentieth Century-Fox Film Corp., 172 W. Va. 63, 303, S.E.2d 702 (1983)

(“While the general rule is that the construction of a writing is for the court; yet where the

meaning is uncertain and ambiguous, parol evidence is admissible to show the situation of

                                             21
the parties, the surrounding circumstances when the writing was made, and the practical

construction given to the contract by the parties themselves either contemporaneously or

subsequently. If the parol evidence be not in conflict, the court must construe the writing;

but, if it be conflicting on a material point necessary to interpretation of the writing, then

the question of its meaning should be left to the jury under proper hypothetical

instructions.”)(internal citation omitted); Syl. Pt. 4, Tawney, 219 W. Va. at 267-68, 633

S.E.2d at 23-24 (“The term ‘ambiguity’ is defined as language reasonably susceptible of

two different meanings or language of such doubtful meaning that reasonable minds might

be uncertain or disagree as to its meaning.”); see also Frat. Ord. of Police, Lodge No. 69

v. City of Fairmont, 196 W. Va. 97, 101 n.7, 468 S.E.2d 712, 716 n.7 (1996) (“Exploring

the intent of the contracting parties often, but not always, involves marshaling facts

extrinsic to the language of the contract document. When this need arises, these facts

together with reasonable inferences extractable therefrom are superimposed on the

ambiguous words to reveal the parties’ discerned intent.”); Syl. Pt. 1, Martin v. Consol.

Coal & Oil Corp., 101 W. Va. 721, 133 S.E. 626 (1926) (“The general rule as to oil and

gas leases is that such contracts will generally be liberally construed in favor of the lessor,

and strictly as against the lessee.”).

               For the foregoing reasons, we believe that the reformulated certified question

presents issues which may only be answered by the district court and a factfinder, as

appropriate, and not by this Court. Accordingly, we decline to answer the reformulated

certified question.

                                              22
                                  IV. CONCLUSION

              Based upon our analysis, we answer the certified questions as follows:

              Question One:        Is Estate of Tawney v. Columbia Natural Resources,

LLC., 219 W. Va. 266, 633 S.E.2d 22 (2006), still good law in West Virginia?

              Answer:              Yes.

              Question Two:        What level of specificity does Tawney require of an oil

and gas lease to permit the deduction of post-production costs from a lessor’s royalty

payments, and if such deductions are permitted, how are the deductions to be calculated?

              Answer:       We decline to answer the reformulated certified question

because it presents a question of contract interpretation which may only be answered by

referencing the individual lease and applicable principles of law.

                                                            Certified Questions Answered.

                                            23