WV Supreme Court rehears gas company’s argument in royalty payment case

Photo courtesy Thorney Lieberman via WV Supreme Court

Lawyers for EQT Corp., on Tuesday, urged a new lineup of state Supreme Court justices to find that the company is permitted to deduct a variety of post-production expenses when it sends checks to a group of mineral royalty owners covered by a law meant to update decades-old natural gas industry payment practices in West Virginia.

In doing so, EQT attorney David Hendrickson was asking the court to reverse its own decision from last September, in a case that is being closely watched by the state’s natural gas industry and has raised issues about a potential conflict of interest for the court’s newest member, Justice Beth Walker.

Last year’s ruling, written by Justice Brent Benjamin, found that West Virginia’s 1982 law to update old “flat-rate” leases requires that companies like EQT not deduct from royalties they pay to mineral owners any expenses for gathering, transporting or treating gas after it is initially extracted from the ground. The court had ruled a decade ago, in a case called “Tawney v. Columbia Natural Resources,” that deducting these sorts of post-production costs from royalty payments to gas owners was illegal unless doing so was specifically outlined in the lease.

The pending case, brought on behalf of Patrick Leggett and other mineral owners against EQT, is over whether that same legal requirement applies to drilling operations that work under the language in that 1982 state law.

Lawmakers passed that law to reform what they said was “wholly inadequate compensation” for mineral owners covered by leases that dated back, in many instances, to the turn of the 20th century. Those leases often paid a flat rate, such as $300 a year, regardless of how much gas was being produced and how much profit drillers were making. Basically, the law said that, to put a new well on a site covered by one of those flat-rate leases, the driller had to agree to pay royalties amounting to a one-eighth — 12.5 percent — royalty.

The Leggett case plaintiffs argue that EQT has been wrongly deducting post-production expenses before paying them their one-eighth royalty on a tract that had been covered by a 1906 lease that was updated according to the 1982 law.

Benjamin sided with the Leggett plaintiffs and was joined in his decision by Justices Robin Jean Davis and Margaret Workman. Justices Menis Ketchum and Allen Loughry dissented. But Walker unseated Benjamin in last year’s election, and then voted with Ketchum and Loughly to grant EQT’s request for a rehearing.

Hendrickson argued that the royalty owners had already gotten more than they deserved — he said the conversion to a one-eighth royalty from the flat-rate lease meant “millions” to them. And he said that interpreting the 1982 statute in this case was completely different from what justices did in Tawney, where they interpreted a lease, an exercise where courts are supposed to read any ambiguous language against the interests of its authors, who are typically the more sophisticated parties.

Workman said the court shouldn’t read the two situations so differently.

“What’s the difference?” Workman said. “If it’s ambiguous, it’s ambiguous.”

Marvin Masters, a lawyer for Leggett, said that, because the 1982 statute is ambiguous on the matter, the court should turn to its precedent in Tawney in trying to find an answer about post-production costs in this case.

“Tawney was the last case in West Virginia that addressed these issues,” Masters said.

The Leggett case was a major point of discussion during the legislative debate over potential passage of a forced-pooling natural gas bill this session. Various parties were looking for lawmakers to either codify Tawney and the earlier Leggett decision — or to overturn them, depending on which side those parties were on.

And Tuesday’s argument was surrounded somewhat by additional controversy because of Walker.

Lawyers for the royalty owners had sought to stop Tuesday’s rehearing of the case, arguing that Walker should not have taken part in the vote to grant that rehearing and that she should have disqualified herself from any consideration of the issue because her husband, Michael Walker, owned stock in a long list of natural gas and energy companies that could potentially be affected by the court’s eventual decision.

Michael Walker had loaned his wife’s campaign $525,000 during last year’s election race.

After information about that motion by the royalty owners was publicized, Walker released an updated decision not to disqualify herself, saying her husband had sold all of his energy stocks.

Reach Ken Ward Jr. at kward@wvgazettemail.com, 304-348-1702 or follow @kenwardjr on Twitter.

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