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US high court asked to review WV justice’s role in gas royalties case

West Virginia Supreme Court Justice Beth Walker

The U.S. Supreme Court is being asked to review West Virginia Supreme Court Justice Beth Walker’s participation in a high-stakes natural gas royalty case that could have had significant financial implications for energy companies in which her husband owned stock.

Late last week, attorneys for Katherine Leggett and other plaintiffs in the case urged the federal court to hear an appeal of the case, in which the West Virginia court reversed its own ruling after Walker was elected and replaced Justice Brent Benjamin.

In the case, the state Supreme Court ultimately ruled — once Walker took office — that natural gas drillers can deduct post-production costs for things like gathering, transporting and treating natural gas after it is extracted from the royalties paid to certain types of mineral owners. The finding was a significant victory for the industry, with millions of dollars riding on the outcome for natural gas companies and mineral owners in the state’s Marcellus Shale gas region.

“Justice Walker’s spouse owned stocks of many natural gas and energy producing companies, including shares of at least one company whose subsidiary had significant natural gas operations in West Virginia and was a party to several pending cases presenting similar issues,” the petition filed Friday with the federal court said. “Justice Walker cast the decisive vote to grant rehearing, and, on rehearing, the court reversed itself and issued a decision favorable to natural gas companies, holding that deductions of post-production expenses were proper.”

The petition argues that courts “vary widely” in their approach to when a financial interest is “sufficiently substantial” to require a judge to recuse themselves, and that the case involving Walker provides the justices “an excellent opportunity to dispel the confusion.”

Still, any U.S. Supreme Court petition is a statistical long shot. The court hears only about 80 cases each year, out of the 7,000 to 8,000 appeals that are filed annually. About another 100 cases are decided by the court without a hearing, according to the court’s website.

In late May, on the Friday afternoon before the three-day Memorial Day weekend, the state Supreme Court ruled by a 4-1 vote that EQT Production Co. was allowed to deduct post-production costs. The case specifically concerned payments to mineral owners whose leases with gas drillers were covered under a 1982 West Virginia law meant to update old “flat-rate” leases that, in many instances, dated back to the turn of the 20th century. Legislators had passed that law to reform a system that left many mineral owners being paid only a flat rate, such as $300 a year, regardless of how much gas was being produced and how much profit drillers were making. In the Leggett case, plaintiffs argued that EQT has been wrongly deducting post-production expenses before paying owners their royalties on a tract that had been covered by a 1906 lease that was updated according to the 1982 law.

The court’s ruling was a reversal from a 3-2 November 2016 decision in which the court ruled that post-production cost deductions were not allowed on those leases. The state court also had ruled, more than a decade ago in a case called “Tawney v. Columbia Natural Resources,” that post-production deductions generally were not allowed.

Between the November 2016 and May 2017 rulings, Walker took office, having defeated Benjamin in a statewide election. Justice Margaret Workman also switched sides, ruling against the gas company in 2016 and joining the majority in EQT’s favor this year.

The U.S. Supreme Court petition, though, focuses on Walker’s involvement in the Jan. 25 vote to grant EQT’s request for a rehearing of the matter. The vote was 3-2. Walker joined the two justices who previously voted in EQT’s favor, Allen Loughry and Menis Ketchum, to grant the rehearing request. The two justices who previously had voted with Benjamin against the gas company, Workman and Robin Davis, voted not to rehear the case.

In their petition, the Leggett attorneys recount that they became aware, in April 2017, of a state Ethics Commission financial disclosure in which Walker reported that her husband, Mike Walker, owned stock in “many natural gas and energy companies, including Chevron Corporation, Columbia Pipeline Group, Conoco Phillips, Dominion Resouces, Duke Energy Corporation, General Electric Corporation, Portland General Electric, and ExxonMobile Corporation.” ExxonMobile subsidiary XTO Energy has significant operations in West Virginia.

After briefs were already filed in the rehearing, and about a week before the oral argument, the Leggett attorneys filed a motion asking that the argument be called off and the rehearing ended, citing Walker’s involvement, and arguing that her husband’s financial holdings created a conflict that violated the plaintiffs’ right to due process. Among other things, they noted that Mike Walker had loaned his wife’s Supreme Court campaign $525,000. Under court rules, canceling Walker’s vote on the rehearing motion would result in the rehearing motion being denied by an equally divided vote.

Walker issued an initial memo to the court clerk on April 26, saying she did not believe she or her husband had an economic interest in the case. On May 1, Walker issued a second memo, which said “out of an abundance of caution, my husband has divested himself of ownership of shares of stock of any company engaged in the business of producing coal, oil and gas, wind, or solar energy.”

The U.S. Supreme Court petition says that Walker’s initial “denial of an economic interest even in the face of ownership of stocks in companies that would be affected by her decisions suggests that she viewed her recusal obligations as limited to a scenario in which either she or her husband had a direct interest either in a party to the case or in the mineral rights or leases at issue.” The petition says her subsequent statement that her husband sold his energy stocks “after she voted to grant rehearing ... does not eliminate the due process violation.”

“Even assuming that she had no conflict of interest when the court decided the merits on rehearing, petitioners’ constitutional rights were nonetheless violated,” the petition states.

The petition says it has long been clear that judges must recuse themselves when they have a “direct, personal, substantial, pecuniary interest” in a case. But, the petition explains, “courts have divided over whether such an interest exists when a judge has an economic interest in a case’s outcome, but does not own an interest in any of the parties or the specific transaction at issue.”

“Several courts have correctly held that recusal is required whenever the circumstances create a ‘possible temptation’ for the judge to reach a particular outcome,” the petition says. “Other courts have taken a narrower view, holding that recusal is not required, as long as the judge has no economic interest in the parties or specific subject matter of the case, regardless of any other financial incentives.”

The petition says the U.S. Supreme Court has not “given any guidance on what sorts of pecuniary interests give rise to a constitutional disqualification requirement in more than three decades.”

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

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