GO-WV News
(By Katrina Bowers)
The West Virginia Supreme Court has accepted certified questions from the United States District Court for the Northern District of West Virginia concerning whether the seminal decision in Estate of Tawney v. Columbia Natural Resources, LLC, 219 W.Va. 266, 633 S.E.2d 22 (2006) (“Tawney”) regarding the deductibility of post-production expenses remains the law of West Virginia, and if so, the proper interpretation of Tawney.
In Charles Kellam, et al. v. SWN Production Company, LLC, et al., No. 5:20-CV-85, a case filed as a class action but not yet certified, the United States District Court for the Northern District of West Virginia, Judge John Preston Bailey, certified on his own motion whether Tawney remains the law of West Virginia, whether the lease in question allowed the deductions, and the proper application of Tawney. At the time of the District Court’s certification in Kellam, pending before the District Court was the defendants’ Motion for Judgment on the Pleadings which argued the Kellam’s lease complied with Tawney and the District Court was bound by the decision in Young v. Equinor USA Onshore Properties, Inc., 982 F.3d 201 (4th Cir. 2020). The Kellam’s lease states the lessee agrees to pay 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 . . . less any charges for transportation, dehydration and compression paid by Lessee to deliver the oil, gas, and/or coalbed methane gas for sale.”
The Kellam lease is very similar to the lease considered in Young, where the 4th Circuit Court of Appeals reversed Judge Bailey and held the lease clearly and unambiguously allowed the deduction of post-production expenses. In expressly rejecting Judge Bailey’s reasoning that the lease in Young did not contain sufficiently explicit language about the method of calculating deductions and therefore did not comply with Tawney, the 4th Circuit Court of Appeals noted that “Tawney doesn’t demand that an oil and gas lease set out an Einsteinian proof for calculating post-production costs. By its plain language, the case merely requires that an oil and gas lease that expressly allocates some post-production costs to the lessor identify which costs and how much of those costs will be deducted from the lessor’s royalties.” Young, 982 F.3d at 208.
In certifying the questions to the West Virginia Supreme Court of Appeals, Judge Bailey relied on his similar reasoning in Young, which the 4th Circuit Court of Appeals rejected.
On December 27, 2021, SWN Production Company, LLC and Equinor USA Onshore Properties Inc. (“producers”) filed their opening brief in Kellam. Additionally, on the same day, the American Petroleum Institute, Gas and Oil Association of WV, Inc., and the West Virginia Chamber of Commerce filed an amici curiae brief in support of the producers in Kellam. A response to the producers’ brief is due on or before February 11, 2022. The West Virginia Supreme Court of Appeals will allow full oral argument concerning the certified questions in Kellam during the January 2022 term of Court.
Click here, to view the article online in the February issue of GO-WV News.