Wake Forest Law Review

Oil Pumps

By Daniel Stratton

Today, the Fourth Circuit issued a published opinion in the civil case K & D Holdings, LLC v. Equitrans, L.P. In K & D Holdings, the court held that an oil and gas lease granted to defendants, Equitrans and EQT, by plaintiff, K & D Holdings, was not divisible into separate components. In reaching that conclusion, the court reversed and remanded the case to the district court with instructions to enter judgment in favor of Equitrans and EQT.

The Terms of the Original Lease

In December 1989, Henry Wallace and Sylvia Wallace signed a lease granting Equitrans the oil and gas rights to an area of land covering 180 acres in Tyler County, West Virginia. Currently, K & D is the successor in interest to the Wallaces. Additionally, Equitrans L.P., the successor-in-interest to Equitrans Corp., subleased the rights to produce and store gas on the land to EQT Corp. Essentially, the terms of the lease now govern a relationship between K & D and EQT.

The terms of the lease grant EQT the right to use the land to explore and produce oil and gas, store gas, and protect stored gas. The lease’s initial term ran for five years and would continue on for as long as a portion of the land was used for “exploration or production of gas or oil, or as gas or oil is found in paying quantities thereon or stored thereunder, or as long as said land is used for the storage of gas or the protection of gas storage on lands in the general vicinity.” After taking control of the land, EQT never engaged in exploration, production, or gas storage, but has engaged in gas storage protection.  Equitrans owns the nearby Shirley Storage Field, a natural gas storage facility. The Federal Energy Regulatory Commission established a buffer zone of 2000 feet around the storage area for protection of the storage facility. The leased land falls within that buffer zone.

Due to EQT and Equitrans not using the leased land for gas or oil production, K & D sought to end the arrangement and enter into a more lucrative contract with another company. On September 20, 2013, K & D filed a lawsuit in state court against EQT, arguing that it was entitled to a rebuttable presumption under West Virginia state law that EQT had abandoned the land after not producing or selling gas or oil from the property for more than twenty-four months. EQT removed to the United States District Court for the Northern District of West Virginia. EQT and K & D filed cross motions for summary judgment.

On September 30, 2014, the court denied both cross motions. Acting sua sponte, the district court found as a matter of law that the lease was divisible. The court argued that because the lease had two primary purposes, (1) exploration and production and (2) storage and protection, the lease could be divided into two separate leases. The lease for exploration and production of oil and gas had expired in the district court’s view, because the initial five-year term had elapsed without EQT exploring for or producing oil or gas. The court held however, that the second lease, for storage and protection, was still in force because EQT had used the land for that purpose.

On January 21, 2015, the district court issued its final order, stating that K & D was entitled to drill exploration and production wells in areas that were not within the buffer zone of the Shirley Storage Field. EQT appealed.

West Virginia is for Lessors

Because this case was heard under diversity jurisdiction, West Virginia state law applies. Under West Virginia law, contract law principles apply equally to the interpretation of leases. The primary criterion for determining if a contract is severable is whether such an intention was reflected by the parties in the terms of the contract itself, the subject matter of the contract, and the circumstances giving rise the question.  A contract is not severable when it has material provisions and considerations that are interdependent and common to each other. Additionally, under West Virginia state law, there is a presumption against divisibility unless the contract explicitly states that it is divisible or the parties intent of divisibility is clearly manifested. As a general matter, West Virginia law regarding oil and gas leases are liberally construed in favor of the lessor, but only when there is ambiguity as to the lease terms.

A Lease Divisible Cannot Stand

On appeal, EQT made two arguments. First, it argued that the district court erred as a matter of law in holding the lease divisible. Second, EQT contended that the district court was wrong in determining that the exploration portion of the lease had terminated after its initial five-year term. Reviewing the district court’s findings of fact for clear error and its conclusions of law de novo, the Fourth Circuit agreed with both of EQT’s arguments.

Starting with its first argument, EQT pointed to the language of the lease itself. The lease’s use of the word “or” between each act required of EQT in order to continue the lease indicated that the acts were alternatives, and that only one would be required to keep the entire lease in effect. Applying West Virginia’s test for determining if a contract is severable, the Fourth Circuit concluded that the lease was intended to be entire and not divisible.  The Fourth Circuit applied the plain, ordinary meaning of the word “or,” holding that in this case it was a disjunctive and could not be considered to have the same meaning as the word “and.”

K & D argued that because EQT paid different rents depending on what activities it was engaging in, the lease was divisible. The court found this argument to not be persuasive, noting that the activities EQT could engage in under the lease were interrelated. Additionally, because the Fourth Circuit found no ambiguity in the lease, it did not need to liberally interpret in favor of the lessor.

Having decided that the lease was not divisible, the court then turned to the question of whether EQT had continuing rights under the lease. The terms of the lease dealing with renewal stated that the lease would continue beyond the initial five-year term if “(1) the lessee explores for or produces gas or oil; (2) ‘gas or oil is found in paying quantities thereon or stored thereunder’; or (3) the ‘land is used for the storage of gas or the protection of gas storage on lands in the general vicinity.” Again noting the use of the disjunctive “or,” the court found that because it was undisputed that part of the land was being used for protection, EQT continued to hold all rights under the original lease.

The Fourth Circuit Hold the Lease is Not Divisible and Valid; Reverses and Remands 

Having determined that the lease was not divisible and that EQT still held all rights under the original lease, the Fourth Circuit reversed and remanded the lower court’s decision, instructing that court to enter judgement in favor of EQT and Equitrans.

By Dan Menken

Today, in the civil case of Covey v. Assessor of Ohio County, a published opinion, the Fourth Circuit reversed the district court’s dismissal of Christopher and Lela Covey’s suit against government officials for entering the curtilage of their house without a search warrant.

Question of Fourth Amendment Protection From Unreasonable Government Intrusion

The Court was asked to decide whether government officials violated the Coveys’ Fourth Amendment right to protection from unreasonable government intrusion when the government officials entered the curtilage of the Covey’s home in search of marijuana without a warrant.

Government Tax Assessor Relayed Information to Police Regarding Marijuana Plants

On October 21, 2009, a field deputy for the tax assessor of Ohio County, West Virginia, entered the Covey’s property to collect data to assess the value of the property for tax purposes. The tax assessor entered the Covey’s property despite seeing “No Trespassing” signs, which is against West Virginia law. When searching the property, the tax assessor found marijuana in the Covey’s walk-out basement patio. The tax assessor then contacted the police.

When the police arrived, they entered the curtilage of the Covey’s residence and proceeded to the area where the marijuana was located. As they were searching the property they encountered Mr. Covey. The officers detained Mr. Covey and continued their search. The officers then waited several hours to obtain a warrant to search the house. During that time, Mrs. Covey returned home and was warned that she would be arrested if she entered the house, after which she left the premises. Upon returning an hour later, Mrs. Covey was seized and interrogated. After the police received the search warrant, the Coveys were arrested and jailed overnight.

On March 30, 2010, Mr. Covey pleaded guilty in state court to manufacturing marijuana in exchange for the government’s promise that they would not initiate prosecution against Mrs. Covey. He was sentenced to home confinement for a period of not less than one year and not more than five years. On October 20, 2011, the Coveys brought this suit pro se. The claims, brought under 42 U.S.C. § 1983 and Bivens, alleged that several defendants violated the Coveys’ Fourth Amendment rights by conducting an unreasonable search. The district court dismissed the Coveys’ claim concluding that none of the defendants violated the Fourth Amendment. This appeal followed.

Fourth Amendment Protects Curtilage of Home

The Court reviewed the district court’s grant of a motion to dismiss de novo. To prevail on a motion to dismiss, a plaintiff must “state a claim to relief that is plausible on its face.” Ashcroft v. Iqbal. A claim is plausible if “the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id.

According to Oliver v. United States (1984), the Fourth Amendment protects homes and the “land immediately surrounding and associated” with homes, known as curtilage, from unreasonable government intrusions. Probable cause is the appropriate standard for searches of the curtilage and warrantless searches of curtilage is unreasonable.   The knock-and-talk exception to the Fourth Amendment’s warrant requirement allows an officer, without a warrant, to approach a home and knock on the door, just as any ordinary citizen could do. An officer may bypass the front door when circumstances reasonably indicate the officer might find the homeowner elsewhere on the property. The right to knock and talk does not entail a right to conduct a general investigation on a home’s curtilage.

The Complaint Presented Plausible Claims For Violations of the Fourth Amendment

Properly construed in the Coveys’ favor, the complaint alleges that the officers saw Mr. Covey only after they entered the curtilage. Thus, applying the Rule 12(b)(6) standard, the Court found that the Coveys plausibly alleged that the officers violated their Fourth Amendment rights by entering and searching the curtilage of their home without warrant. The district court erred by accepting the officers account of events, in which they stated that they saw Mr. Covey prior to entering the curtilage.

Turning to the tax assessor, the Court believed that his entering of the property, although illegal, was not a per se violation of the Fourth Amendment. In this case, the Court believed that the governmental interest in the search for tax purposes was minimal, while the Covey’s privacy interest is significant. Therefore, the Fourth Circuit held that the Coveys pleaded a plausible claim that the tax assessor conducted an unreasonable search of their home and curtilage.

Defendants’ Affirmative Defenses

According to Ashcroft v. al-Kidd (2011) qualified immunity “shields federal and state officials form money damages unless a plaintiff pleads facts showing (1) that the official violated a statutory or constitutional right, and (2) that the right was ‘clearly established’ at the time of the challenged conduct. As to the police officers, the Court stated that they should be aware that a warrantless search of the home, absent consent or exigency, is presumptively unconstitutional. Additionally, the Court noted that Fourth Circuit has, for over a decade, recognized that the curtilage of the home is entitled to Fourth Amendment protection. The Court felt that the tax assessor presented a closer case. Because there was no case law that spoke to a similar set of facts, and the tax assessor should have been aware that he was violating a Constitutional right by searching the property, the Court ruled that the tax assessor was not entitled to qualified immunity.

Finally, the defendants claimed that the Coveys’ § 1983 and Bivens claims are barred by Heck v. Humphrey (1994). There are two requirements for Heck to bar the Coveys’ claims. First, “a judgment in favor of the plaintiff [must] necessarily imply the invalidity of [a plaintiff’s] conviction or sentence.” Second, the claim must be brought by a claimant who is either (i) currently in custody or (ii) no longer in custody because the sentence has been served, but nevertheless could have practicably sought habeas relief while in custody. The court concluded that Mr. Covey’s claims did not necessarily imply the invalidity of his conviction and thus are not necessarily barred by Heck. The Court remanded the district court for further analysis under Heck.

Reversed and Remanded

Thus, the Fourth Circuit reversed the district court’s grant of dismissal and remanded the case for further proceedings.