Cather v. EQT Production Company

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF WEST VIRGINIA

CLARKSBURG

WILLIAM L. CATHER,

BRENDA L. CATHER,

CHARLES H. CATHER,

LINDA F. CATHER,

EVERET P. BICE, JR.

ELIZABETH BICE,

ROBERT JUNIOR HEMPHILL,

Trustee of Trust A Created Under

the Hemphill Family Trust Dated

October 17, 1995, as Amended,

Plaintiffs,

v. Civil Action No. 1:17-CV-208

(Judge Kleeh)

EQT PRODUCTION COMPANY,

EQT GATHERING, LLC,

EQT ENERGY, LLC,

EQT MIDSTREAM SERVICES, LLC,

EQT CORPORATION, and

EQUITRANS, L.P.,

Defendants.

MEMORANDUM OPINION AND ORDER GRANTING PLAINTIFFS’ MOTION FOR

SUMMARY JUDGMENT AS TO DEDUCTIONS [ECF NO. 74]

Pending before the Court is Plaintiffs’ Motion for Summary

Judgment as to Deductions [ECF No. 74]. The motion has been

fully briefed, the Court has entertained argument from counsel,

and the matter is now ripe for decision. For the reasons

discussed, the Court grants Plaintiffs’ motion.

MEMORANDUM OPINION AND ORDER GRANTING PLAINTIFFS’ MOTION FOR

SUMMARY JUDGMENT AS TO DEDUCTIONS [ECF NO. 74]

I. Factual Background

A. The Lease

On February 20, 1963, D.L. Cather and Lila S. Cather, W.L.

Cather and Maxine Cather, and Mary Hemphill and Robert J.

Hemphill signed a lease agreement (“Cather Lease”) with

Equitable Gas Company. ECF No. 1 at ¶ 6. That lease related to

oil and gas rights attached to nearly 504 acres in Taylor

County, West Virginia. Id. Plaintiffs are the current owners

of that tract and lessors under that lease agreement. Id.

¶¶ 16, 19. Equitable Gas Company’s interest in the Cather Lease

currently resides with Defendant EQT Production Company. Id.

¶ 17.

With respect to royalty payments, the Cather Lease

provides:

Lessee shall pay to the Lessor for each and

every well drilled upon such land, which

produces Natural Gas and/or Casinghead Gas

in a quantity sufficient for the Lessee to

convey to market, a money royalty computed

at the rate of one-eight (1/8) of the

wholesale market value which is based on the

average current price paid by the Lessee to

independent operators in the general

area . . . payment to be on or before the

25th day of the month following that in

which the gas has been delivered into the

marketing pipeline . . . .

MEMORANDUM OPINION AND ORDER GRANTING PLAINTIFFS’ MOTION FOR

SUMMARY JUDGMENT AS TO DEDUCTIONS [ECF NO. 74]

ECF No. 74-1 at 1. The lease is silent on whether the Lessee

may deduct from the royalty payments for the costs of severance,

costs of production, or costs of any kind, including severance

taxes. The Cather Lease does permit the Lessee, at its option,

to prepay any taxes “on or against the land or gas and/or oil in

place under the . . . lands” and recoup those payments against

any royalties due under the agreement. Id.

B. EQT Application of Lease Language

EQT prefers the word “allocation” as opposed to

“deduction.” In its discovery responses, EQT Production

explained its basis for taking deductions as follows:

EQT Production pays royalties based on the

specific language set forth in royalty

owners’ leases and does not take

“Deductions” from Plaintiffs’ royalties.

The amount of “[d]educti[ons]” is the amount

allocated to Plaintiffs for their share of

the gathering and compression charges used

to arrive at a sales price under the Gas

Purchase Agreements entered into by and

between EQT Energy and EQT Production after

adding in the value of depreciation, return

on investment, and taxes. Lessors are

responsible for their proportionate share of

severance taxes. Notwithstanding the

preceding objections, which are expressly

reserved, EQT Production directs Plaintiffs

to the Owner Revenue Inquiry attached hereto

as EQT Production00003-00011 which reflects

otherwise responsive information to this

request.

MEMORANDUM OPINION AND ORDER GRANTING PLAINTIFFS’ MOTION FOR

SUMMARY JUDGMENT AS TO DEDUCTIONS [ECF NO. 74]

ECF No. 74-4 at ¶¶ 10–11; see also ECF No. 84 at 3-4. EQT has

been consistent in this and other litigation as to how silence

in leases permits it to “allocate” expenses and taxes to

lessors. Jimmi Sue Smith, EQT Corporation’s Chief Accounting

Officer, stated in her affidavit submitted in The Kay Company,

LLC, et al. v. EQT Production Co., et al., 1:13-cv-151, and

attached to Plaintiffs’ Motion here that EQT Production pays

severance tax to the State of West Virginia including “its own

share and the lessor’s share . . . .” ECF No. 74-5 at ¶ 2. Ms.

Smith went on to state that “[i]f severance tax deductions were

not prohibited by the lessor’s lease, each lessor’s

proportionate share . . . of severance taxes actually paid to

the West Virginia State Tax Department was taken into account in

calculating royalty.” Id. ¶ 4.

Notwithstanding the preference to refer to its business

practice as one of allocation, John Bergonzi, then EQT

Corporation’s Vice President of Finance and Controller, stated

in his Kay Company affidavit, “On leases where royalty was to be

paid ‘at the well’ and allowed the deduction of downstream

costs,1 EQT Production deducted the royalty owners’ share of

1 As noted, the Cather Lease contains no provision “allow[ing] the

deduction of downstream costs.”

MEMORANDUM OPINION AND ORDER GRANTING PLAINTIFFS’ MOTION FOR

SUMMARY JUDGMENT AS TO DEDUCTIONS [ECF NO. 74]

downstream costs from the sales price received, as shown on its

royalty remittance statements.”2 ECF No. 74-6 at ¶ 12. Mr.

Bergonzi’s deposition testimony confirmed the practice of

deducting for expenses from royalty payments to lessors. In

determining “market value at the wellhead,” he noted that “EQT

determines market value at the wellhead . . . by finding the

first liquid trading point or sales point and then deducting the

costs to get that gas from that liquid trading point or from the

wellhead to that liquid trading point.” ECF No. 74-7 at 2.

Plaintiffs also submitted portions of Kay Company

transcript from the deposition of Michael Barbour, then

Supervisor of Division Order for EQT Corporation. Mr. Barbour

testified about the processing of leases, paying particular

attention to deductions for post-production expenses and taxes.

He described as a “general business practice[] or polic[y]” the

“tak[ing]” of production taxes from a one-eighth royalty where

2 The Cather Lease makes no reference to “at the well,” “at the

wellhead,” or anything similar. Instead, royalty payments are

to be calculated “based on the average current price paid by the

Lessee to independent operators in the general area . . . .”

ECF No. 74-1 at 1. The distinction in lease language does not

appear to be of significance with respect to the application and

relevance of this past testimony as Defendant EQT Production,

according to its own Remittance Statements, has calculated the

net royalty payment issued to Plaintiffs similarly regardless of

different lease provisions.

MEMORANDUM OPINION AND ORDER GRANTING PLAINTIFFS’ MOTION FOR

SUMMARY JUDGMENT AS TO DEDUCTIONS [ECF NO. 74]

the lease is silent on the allocation of severance taxes. ECF

No. 74-8 at 6. Mr. Barbour also testified that EQT would take

post-production expenses if the royalty clause of a particular

lease stated that one-eighth of the wholesale market value would

be paid to the royalty owner with no specific mention of

deductions. Id. at 7.

C. Performance Under the Cather Lease

EQT commenced production pursuant to its rights under the

Cather Lease in or around March 2012, constructing six (6) wells

tapping into the Marcellus Shale formation. ECF No. 1 at ¶ 20.

Since then, EQT Production has reported to each Plaintiff each

month information related to the production performance of each

well via a Remittance Statement. See ECF No. 74-3. Those

Statements provide certain information including production

date, production type, interest type, net price, decimal

interest, sales and owner volume, sales and owner revenue,

taxes, gross and owner deductions, and well net and owner net

revenue. Id. Based on the Statements issued from April 2012

through and including January 2019 (which reports February 2012

to November 2018 data), the “owner deducts” and “owner taxes”

deductions totaled $751,109.65. Id.; see also ECF No. 75 at 5.

MEMORANDUM OPINION AND ORDER GRANTING PLAINTIFFS’ MOTION FOR

SUMMARY JUDGMENT AS TO DEDUCTIONS [ECF NO. 74]

II. Procedural History

On December 7, 2017, Plaintiffs Charles H. Cather, Brenda

L. Cather, William L. Cather, Elizabeth Bice, Everet P. Bice,

Jr., Linda F. Cather, and Robert Junior Hemphill filed their

Complaint against EQT Corporation, EQT Energy, LLC, EQT

Gathering, LLC, EQT Midstream Services, LLC, EQT Production

Company, and Equitrans, L.P. (sometimes hereinafter

“Defendants”). ECF No. 1. That Complaint contained a number of

claims: Alter Ego, Fraud, Civil Conspiracy to Commit Fraud,

Breach of Contract, Conversion, Unconscionability and Breach of

Duty of Fair Dealing, Violation of the West Virginia Consumer

Credit and Protection Act Section 2, Violation of the West

Virginia Consumer Credit and Protection Act Section 6, and

Interest Due to Plaintiffs on Improperly Withheld Royalty

Payments and Punitive Damages. Id. Defendants filed their

Answer on February 1, 2018. ECF No. 14. That same day,

Defendants filed their Motion for Partial Dismissal. ECF No. 15.

After briefing and entertaining argument, Judge Keeley granted-

in-part and denied-in-part that motion, dismissing the claims

for Fraud (Count V), Civil Conspiracy to Commit Fraud (Count

VI), Conversion (Count VIII), Unconscionability and Breach of

Duty of Fair Dealing (Count IX), Violations of the West Virginia

Consumer Credit and Protection Act (Counts X and XI), and

MEMORANDUM OPINION AND ORDER GRANTING PLAINTIFFS’ MOTION FOR

SUMMARY JUDGMENT AS TO DEDUCTIONS [ECF NO. 74]

Punitive Damages (Count XIII).3 ECF No. 27. That ruling left

Counts IV and VII asserting Alter Ego and Breach of Contract

theories of recovery.

Plaintiffs filed their Rule 60 Motion for Relief from Final

Order or, Alternatively, Motion for Leave to Amend Complaint on

November 15, 2018. ECF No. 57. This matter was transferred to

United States District Judge Thomas S. Kleeh on December 1,

2018. Plaintiffs’ Rule 60 and/or Rule 15 motion was denied on

May 17, 2019. ECF No. 95. Plaintiffs filed their Motion for

Summary Judgment on February 15, 2019. ECF No. 74. The parties

have fully briefed that motion and, after a July 15, 2019,

hearing, the matter is ready for decision.

III. Analysis

A. West Virginia Law

A review of the long-standing law on the issues raised by

Plaintiffs’ pending motion may be of benefit. The Supreme Court

of Appeals of West Virginia has had occasion to examine this

area several times in recent years. Yet, the concepts seem to

remain elusive.

3 Judge Keeley also dismissed Plaintiffs’ request for attorney’s

fees. The Court’s summary order can be found at ECF No. 27

while the transcript setting forth the Court’s analysis is

docketed at ECF No. 63.

MEMORANDUM OPINION AND ORDER GRANTING PLAINTIFFS’ MOTION FOR

SUMMARY JUDGMENT AS TO DEDUCTIONS [ECF NO. 74]

Since 2001, over 18 years ago now, the Supreme Court of

Appeals has clearly articulated that leases silent on the issue

of “post-production” expenses do not permit — nor does the law

permit — reductions of royalty payments for post-production

expenses. “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 Res., Inc., 557

S.E.2d 254 (W. Va. 2001) (emphasis added).

In rejecting the lessee’s claim that it was entitled to

deduct certain expenses before calculating the lessor’s royalty,

the Supreme Court of Appeals noted that the “landowner’s

royalty,” the traditional one-eighth share of the sale price

received, was “not chargeable with any of the costs of discovery

and production.” Id. at 263-64. The court further rejected the

re-naming of such deductions as “post-production expenses” based

on the lessee’s duty to market the oil or gas produced. Id. at

264.

The Supreme Court of Appeals reiterated its holdings from

Wellman in Estate of Tawney v. Columbia Natural Resources,

L.L.C., 633 S.E.2d 22 (W. Va. 2006). In fact, the court further

heightened the duties on lessees if they sought to recoup post-

MEMORANDUM OPINION AND ORDER GRANTING PLAINTIFFS’ MOTION FOR

SUMMARY JUDGMENT AS TO DEDUCTIONS [ECF NO. 74]

production expenses from lessors. Any “allocation” of marketing

or production costs between the lessor and lessee must be

“express” in the lease and “identify with particularity” the

specific deductions to be taken from the one-eighth royalty.

Id. at Syl. Pt. 10.

This Court and the Southern District of West Virginia have

also had opportunity to apply the guidance of the Supreme Court

of Appeals. Judge Goodwin undertook an extensive review of the

history of West Virginia jurisprudence on these issues in W.W.

McDonald Land Co., et al. v. EQT Production Co., et al., 983 F.

Supp. 2d 790 (S.D.W. Va. 2013).4 After synthesizing Wellman and

Tawney, the Southern District concluded that “lessees have a

duty to bear all costs incurred until the gas reaches market,

not to a point of sale. . . . [L]essees have an implied duty to

bear all post-production costs incurred until the gas reaches

the market . . . .” Id. at 802. Judge Goodwin, in partially

granting summary judgment to the lessors, found, in the absence

4 Judge Goodwin undertook an exhaustive and scholarly review of

the relevant cases. In the interest of brevity, this Court will

not repeat his efforts but refers any interested reader to his

thorough discussion. See W.W. McDonald, 983 F. Supp. 2d at 796–

804.

MEMORANDUM OPINION AND ORDER GRANTING PLAINTIFFS’ MOTION FOR

SUMMARY JUDGMENT AS TO DEDUCTIONS [ECF NO. 74]

of “lease language to the contrary, Tawney requires lessees to

pay royalties free of [post-production expenses].” Id. at 804.5

This Court, in Richards v. EQT Production Co., No.

1:17CV50, 2018 WL 3321441 (N.D.W. Va. July 5, 2018), denied the

plaintiffs’ motion for partial summary judgment because EQT

Production was the lone defendant removing from the controversy

its relationship with any other entities, alter ego or

otherwise, and because of factual disputes requiring jury

resolution. Id. at *4. Thereafter, during trial, Judge Keeley

granted the plaintiffs’ motion for directed verdict on the issue

of severance tax deductions from one-eighth royalty payments

where the lease did not specifically allow such deductions. ECF

No. 74-9 at 23–24. The Court’s ruling was based on the plain

language of the statute and its application to a lease devoid of

language addressing severance taxes. Id.

B. Cather Lease Deductions

Considering all of these cases, the rule of law with

respect to deductions from royalty payments for either post-

5 He likewise rejected EQT’s efforts, as the Court saw them, to

“simply reorganiz[e] their businesses and mak[e] intra-company

wellhead sales” to circumvent Tawney’s requirements. Id. at

804.

MEMORANDUM OPINION AND ORDER GRANTING PLAINTIFFS’ MOTION FOR

SUMMARY JUDGMENT AS TO DEDUCTIONS [ECF NO. 74]

production expenses or severance taxes could not be more clear.6

Such deductions are impermissible absent express language

permitting them. There is no dispute that the Cather Lease

lacks the requisite language authorizing deductions. Yet, every

single Remittance Statement submitted to the Court contains

deductions for BOTH severance taxes and post-production

expenses. See ECF No. 74-3. There is no dispute the deductions

were made — despite the absence of Tawney-compliant provisions.

Absent from its briefing but argued at the July 15, 2019,

hearing, Defendants now contend that Wellman and Tawney are

inapplicable to this case, rendering Plaintiffs’ reliance on

them irrelevant. Initially, Defendants argue that the implied

duty to market discussed in both Wellman and Tawney only applies

to ambiguous lease language. Further, EQT believes the

prohibition against deductions — the clear rule established in

Wellman and expounded upon in Tawney — is not applicable without

a finding of ambiguity. This argument rings quite hollow.

Wellman’s holding could not be more clear or plain: “If an oil

6 As Judge Keeley noted, and EQT repeats, the Supreme Court of

Appeals has offered no guidance on interpretation of the

“Severance and Business Privilege Tax Act of 1993” (“the Act”).

As discussed later, this Court concurs with Judge Keeley’s

analysis and conclusion that, under the plain language of the

statute, lessors cannot be “charged” a portion of severance

taxes which are assessed on the extractor.

MEMORANDUM OPINION AND ORDER GRANTING PLAINTIFFS’ MOTION FOR

SUMMARY JUDGMENT AS TO DEDUCTIONS [ECF NO. 74]

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, 557 S.E.2d 254.7 Despite Defendants’ urging

to the contrary, the words “ambiguous” or “ambiguity” do not

even make an appearance in that opinion. The claim that

concerns of lease ambiguity were the genesis of this rule of law

are, frankly, without any basis whatsoever.

Defendants’ claim that ambiguity must exist for the

prohibition against deductions to apply finds no support in

Tawney either. The Tawney court reiterated the holdings from

Wellman and outlined for lessees a legally-sound path for

deducting post-production expenses from royalty payments. The

lease must expressly provide for some allocation or sharing of

costs between the wellhead and point of sale. Syl. Pt. 10,

7 Importantly, this point of law was initially declared in a

syllabus point. As the Supreme Court of Appeals has recognized,

the West Virginia Constitution requires as much. Syl. Pt. 13,

State ex rel. Med. Assurance of W. Va., Inc. v. Recht, 583

S.E.2d 80 (W. Va. 2003) (“[N]ew points of law . . . will be

articulated through syllabus points as required by our state

constitution.”). This Court notes the use of a syllabus point —

seven years before production under the Cather Lease started —

only to highlight the indisputable language used in a separate,

constitutional pronouncement.

MEMORANDUM OPINION AND ORDER GRANTING PLAINTIFFS’ MOTION FOR

SUMMARY JUDGMENT AS TO DEDUCTIONS [ECF NO. 74]

Tawney, 633 S.E.2d 22. That express provision must identify

“with particularity the specific deductions” to be withheld and

the specific method of calculating the amount of post-production

expenses to be deducted from the lessor’s royalty. Id. This

clear point of law likewise does not hinge on any finding of

ambiguity in the underlying lease. Nor does Tawney limit its

own application to any particular lease language. In short,

years before production under the Cather Lease began, the

Supreme Court of Appeals provided a roadmap to Defendants and

other lessees on how to properly, legally deduct post-production

expenses from royalty payments in the state of West Virginia.

The failure to follow that map cannot be excused by an argument

without legal basis.

Defendants also urge this Court to take up the purported

invitation of the Supreme Court of Appeals in Leggett, et al. v.

EQT Production Co., et al., 800 S.E.2d 850 (W. Va. 2017), to

cast aside Wellman, Tawney, and the principles governing leases

like the Cather Lease for nearly two decades based on the dicta

questioning those “under-developed or inadequately reasoned”

decisions. Id. at 863. EQT’s invitation is misplaced. The

Leggett court expressly left “for another day the continued

vitality and scope of Wellman and Tawney.” Id. In other words,

Wellman and Tawney continue to have the same vitality and scope

MEMORANDUM OPINION AND ORDER GRANTING PLAINTIFFS’ MOTION FOR

SUMMARY JUDGMENT AS TO DEDUCTIONS [ECF NO. 74]

they have had since being decided. This Court is also mindful

that it sits in diversity in this case. “[F]ederal courts

sitting in diversity rule upon state law as it exists and do not

surmise or suggest its expansion.” St. Paul Fire & Marine Ins.

Co. v. Jacobson, 48 F.3d 778, 783 (4th Cir. 1995).8

Wellman and Tawney remain the law of the state of West

Virginia. The principles of those cases apply here. There is

no genuine issue of material fact that deductions made unlawful

by Wellman and Tawney were made from royalty payments provided

for under the terms of the Cather Lease. Summary judgment is

therefore appropriate on the question of deductions.

Plaintiffs’ motion is GRANTED.

C. Severance Tax Deductions

Plaintiffs further seek summary judgment with respect to

severance tax deductions from royalty payments under the Cather

Lease based on the text of the Act as well as this Court’s

decision in Richards. Defendants challenge that motion based on

8 This principle may be particularly applicable here. The

composition of the Supreme Court of Appeals has changed multiple

times since the Leggett court questioned, without disturbing,

Wellman and Tawney. This Court will not gaze into its crystal

ball to speculate as to whether a future court will take the

next step to abrogate the “under-developed or inadequately

reasoned” decisions. Thankfully, the principle of stare decisis

does not require such an effort.

MEMORANDUM OPINION AND ORDER GRANTING PLAINTIFFS’ MOTION FOR

SUMMARY JUDGMENT AS TO DEDUCTIONS [ECF NO. 74]

the same arguments made during the Richards trial and outlined

in their post-trial motions in that case. There is no dispute

that deductions were made for severance taxes. As Defendants

stated in their written discovery responses, “[l]essors are

responsible for their proportionate share of severance taxes.”

ECF No. 74-4 at ¶¶ 10-11; see also ECF No. 74-3.

Plaintiffs’ claim centers on the “Severance and Business

Privilege Tax Act of 1993,” W. Va. Code § 11-13A-1, et seq. The

Act provides, “For the privilege of engaging or continuing

within this state in the business of severing natural gas or oil

for sale, profit or commercial use, there is hereby levied and

shall be collected from every person exercising such privilege

an annual privilege tax . . . .” W. Va. Code § 11-13A-3a(a).

This tax applies “to all persons severing gas or oil in this

state . . . .” Id. § 11-13A-3a(c).

The statutory definitions amplify Plaintiffs’ position.

Under the statute, “severing” means “the physical removal of the

natural resources from the earth or waters of this state by any

means . . . .” Id. § 11-13A-2(c)(11). Taxpayer is defined as:

any individual, partnership, joint venture,

association, corporation, receiver, trustee,

guardian, executor, administrator, fiduciary

or representative of any kind engaged in the

business of severing or processing (or both

severing and processing) natural resources

in this state for sale or use. In instances

MEMORANDUM OPINION AND ORDER GRANTING PLAINTIFFS’ MOTION FOR

SUMMARY JUDGMENT AS TO DEDUCTIONS [ECF NO. 74]

where contracts (either oral or written) are

entered into whereby persons, organizations

or businesses are engaged in the business of

severing or processing (or both severing and

processing) a natural resource but do not

obtain title to or do not have an economic

interest therein, the party who owns the

natural resource immediately after its

severance or has an economic interest

therein is the taxpayer.

Id. § 11-13A-2(c)(13).

As noted, this Court has previously had opportunity to

address this issue — without the benefit of guidance from the

Supreme Court of Appeals. In Richards, Judge Keeley directed

verdict in favor of the lessors, finding the severance tax

statute unambiguous and only applicable to persons or entities

“in the business of severing or processing” the gas and not

lessors unless they are “in the business of severing or

processing the gas.” The Court found EQT Production Company’s

position “erroneous as a matter of law” in entering judgment on

behalf of the lessors.

This Court agrees with Judge Keeley’s analysis. The

statute clearly limits its own applicability to those engaged in

the business of severing, in this instance, natural gas from

West Virginia lands. The applicability of the tax is limited to

those exercising the privilege of extracting natural gas from

property. As Plaintiffs point out, the definitions under the

MEMORANDUM OPINION AND ORDER GRANTING PLAINTIFFS’ MOTION FOR

SUMMARY JUDGMENT AS TO DEDUCTIONS [ECF NO. 74]

Act emphasize the unambiguous language: a “taxpayer” must be

“engaged in the business of severing or processing (or both

severing and processing) natural resources in this state for

sale or use . . . .” W. Va. Code § 11-13A-2(c)(13). There is

no dispute that Plaintiffs are not in such a business, while

Defendants, at least Defendant EQT Production, are — which is

the reason for the Cather Lease. Defendants, under the terms of

that lease, retain the exclusive rights and ability to sever the

natural gas at issue.

Defendants’ contention that Plaintiffs qualify as a

“taxpayer” under the Act is unavailing. Defendant EQT

Production immediately sells the extracted gas to Defendant EQT

Energy — not Plaintiffs or any unrelated party for that matter.

While the “taxpayer” definition does contemplate an economic

interest, the Act’s definition of that concept expressly

precludes Plaintiffs from the taxpayer classification.

“Economic interest” does not include “a person who only receives

an arm’s length royalty . . . .” W. Va. Code § 11-13A-2(c)(4).

This Court likewise concurs with Judge Keeley’s conclusion

that deductions from royalty payments not only must be

reasonable and actually incurred but also must be “legal.” The

Act limits its application to taxpayers — as defined under the

statute. Even if the parties could contract to the contrary,

MEMORANDUM OPINION AND ORDER GRANTING PLAINTIFFS’ MOTION FOR

SUMMARY JUDGMENT AS TO DEDUCTIONS [ECF NO. 74]

which they cannot, the Cather Lease contains no language

permitting deductions for severance taxes imposed on the lessee.

Simply put, the deductions made for severance taxes not only run

afoul of Wellman and Tawney but also flout the clear,

unambiguous statute governing such taxes. Therefore,

Plaintiffs’ motion with respect to severance tax deductions is

GRANTED on this basis as well.

D. Deduction Damages

Although, as noted herein as well as in their briefing,

Defendants contest the notion that the deductions taken from

Plaintiffs’ royalty payments under the Cather Lease are

impermissible or unlawful, there is no dispute as to the amount

of deductions withheld or the fact the deductions were taken.

The Remittance Statements [ECF No. 74-3] state as much, and

counsel conceded the obvious point during the July 15, 2019,

hearing. Because this Court has found that these deductions run

contrary to well-established West Virginia law and Plaintiffs

are entitled to judgment as a matter of law on the issue,

Plaintiffs are likewise entitled to judgment in the amount of

those deductions.9

9 Defendants argue that the true issue in this matter is whether

Plaintiffs received “market value” under the Cather Lease. They

MEMORANDUM OPINION AND ORDER GRANTING PLAINTIFFS’ MOTION FOR

SUMMARY JUDGMENT AS TO DEDUCTIONS [ECF NO. 74]

Defendants’ Remittance Statements from April 2012 through

and including January 2019 provide basic information about the

gross and net royalty calculations and payments. Defendant EQT

Production prepared and issued the Remittance Statements and,

therefore, do not contest their accuracy. The Remittance

Statements produced to the Court at summary judgment stage are

attached to Plaintiffs’ motion as Exhibit 3. ECF No. 74-3.

There is no dispute that the “Owner Deducts and Owner Taxes”

category is a list of the deductions at issue, representing

withholdings for expenses and severance taxes. The collective

total of deductions taken at the time of Plaintiffs’ motion is

$751,109.65. ECF No. 75 at 5; ECF No. 74-3.

For the reasons articulated herein, because the Court finds

the deductions improper and because there is no genuine issue of

material fact with respect to the amount of such deductions

are correct in that the lease requires such a royalty payment.

However, as discussed at length, West Virginia law prohibits the

deductions Defendants took from the royalty payments in

calculating what Defendants believe to be “market value.” Thus,

considering Defendants’ own Remittance Statements, “market

value” must be at least the net royalties paid plus the improper

deductions.

Plaintiffs also contend that the “Net Price” listed in the

Remittance Statements [ECF No. 74-3] and used to calculate the

royalty due under the lease was lower than the market price.

That issue was not made subject of this motion, and the Court

leaves that matter for another day.

MEMORANDUM OPINION AND ORDER GRANTING PLAINTIFFS’ MOTION FOR

SUMMARY JUDGMENT AS TO DEDUCTIONS [ECF NO. 74]

withheld to date, Plaintiffs are entitled to summary judgment as

to those deductions in the amount of $751,109.65.10

E. Prejudgment Interest

Plaintiffs also contend that they are entitled to

prejudgment interest on those improper deductions. Defendants

argue that consideration of interest is premature.11 With no

genuine issue of material fact existing on the issues presented

in Plaintiffs’ motion and Plaintiffs being entitled to judgment

as a matter of law, the Court does not believe consideration of

prejudgment interest on the amount set by this order to be

premature. However, given the sometimes-murky waters of the law

governing prejudgment interest in breach of contract cases, some

discussion of the issue is warranted. See Bd. of Educ. of

McDowell Cty. v. Zando, Martin & Milstead, Inc., 390 S.E.2d 796,

10 Plaintiffs’ motion only seeks judgment as to the propriety and

amount of deductions. As discussed at the July 15, 2019,

hearing, Plaintiffs have remaining claims concerning the price

used to calculate royalty payments. Those claims are not

subject of the pending motion and are not addressed herein.

11 Defendants also argue that Plaintiffs motion on this ground is

misplaced because (1) the true issue is whether Plaintiffs were

paid market value under the Cather Lease and (2) Plaintiffs have

failed to offer a comparison of amounts received to amounts that

should have been paid under the lease. The Court has already

dispensed with this argument, and it does not warrant further

consideration on the issue of prejudgment interest.

MEMORANDUM OPINION AND ORDER GRANTING PLAINTIFFS’ MOTION FOR

SUMMARY JUDGMENT AS TO DEDUCTIONS [ECF NO. 74]

809 (W. Va. 1990) (“Admittedly, there is some confusion in our

cases with regard to prejudgment interest in contract cases.”).

The West Virginia Code provides:

The jury, in any action founded on contract,

may allow interest on the principal due, or

any part thereof, and in all cases they

shall find the aggregate of principal and

interest due at the time of the trial, after

allowing all proper credits, payments and

sets-off; and judgment shall be entered for

such aggregate with interest from the date

of the verdict.

W. Va. Code § 56-6-27. “In this jurisdiction one who withholds

money from the rightful owner on the date when it should be paid

is liable for interest.” Morton v. Godfrey L. Cabot, Inc., 63

S.E.2d 861, 864 (W. Va. 1949) (citation omitted). “Interest

accrues on a debt from the time it is due, although liability

therefor was in dispute.” Id. (citation omitted). Simply put,

“[a] past due debt, certain in amount, bears interest from the

due date until paid.” Id. at Syl. Pt. 1.

Defendants urge a distinction between this matter and

Morton. Any distinction is one without meaning. Defendants are

correct that Morton involved stipulated facts, waiver of a jury

trial, and submission of the issue to the court in lieu of a

jury. Here, while no party has waived a jury trial, this Court

has found such a proceeding unnecessary on the issues raised in

Plaintiffs’ motion as no material facts are in dispute and

MEMORANDUM OPINION AND ORDER GRANTING PLAINTIFFS’ MOTION FOR

SUMMARY JUDGMENT AS TO DEDUCTIONS [ECF NO. 74]

Plaintiffs are entitled to judgment as a matter of law.

Defendants offer no other reason why Morton and its application

of W. Va. Code § 56-6-27 should not prevail here.

Thus, pursuant to W. Va. Code § 56-6-27, this Court finds

that Plaintiffs are entitled to prejudgment interest on the

amounts awarded. Therefore, Plaintiffs’ motion with respect to

prejudgment interest is GRANTED. The parties did not address

the specific interest calculation or potential amount of

interest which may be due on the deductions in their summary

judgment briefing. Plaintiffs are hereby ordered to submit

additional briefing and their prejudgment interest calculation

within 21 days of entry of this order. Defendants shall have 14

days after Plaintiffs’ submission to respond with any objections

or alternative calculations.

IV. CONCLUSION

For the reasons stated above, Plaintiffs’ Motion [ECF No.

74] is GRANTED.

It is so ORDERED.

The Clerk is directed to transmit copies of this Order to

counsel of record.

DATED: August 13, 2019

___________________________

THOMAS S. KLEEH

UNITED STATES DISTRICT JUDGE