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 Kelsey Kolb

This past Friday, in United States v. McCrea, the Fourth Circuit affirmed the Western District of Virginia’s amended order of forfeiture, which included the defendant’s residence. In doing so, the Fourth Circuit found that the Government can seize a defendant’s residence to satisfy a money judgment against him, as a “substitute asset” under 21 U.S.C. § 853(p), when he makes unavailable the primary forfeiture source: the proceeds of his offense.

In general, substitute assets are reachable when the defendant cannot otherwise pay the forfeiture money judgment. If the defendant’s conviction involved a conspiracy and the proceeds from that conspiracy are unavailable, § 853(p) mandates forfeiture of any other property that the defendant owns to satisfy the money judgment.

McCrea’s drug conspiracy and money laundering violations resulted in a $76,062.63 money judgment against him, for which it was undisputed that he did not have the money to pay. The Government then looked to any other property that McCrea owned to satisfy the money judgment. Thus, the Fourth Circuit affirmed the district court’s grant of the Government’s motion to substitute McCrea’s residence for forfeiture under § 853(p).

By Alina Buccella

Today, the Fourth Circuit certified a question to the West Virginia Supreme Court of Appeals in a case involving a dispute over mining rights. The question certified is, “[w]hether the proponent of his own working interest in a mineral lease may prove his entitlement thereto and enforce his rights thereunder by demonstrating his inclusion within a mining partnership or partnership in mining, without resort to proof that the lease interest has been conveyed to him by deed or will or otherwise in strict conformance with the Statute of Frauds.”

Under West Virginia law, each partner in a mining partnership must have an interest in the land mined or an interest in the lease covering the land mined. However, the law is not clear as to whether this interest needs to be granted by deed or will exclusively, or even if it needs to be in writing at all. The outcome of this case will depend on what the West Virginia Supreme Court answers, because the plaintiff does not have evidence of actual conveyance by will or deed of his real property interest. In this case, the plaintiff relied only on parole evidence to show that he maintains a working interest in four mines operated by the defendant as a result of his proportional participation in the mining partnership. To see more details about the facts of the lawsuit, you can read the full order of certification here.

By Matthew Meyers

Clear Sky Car Wash LLC v. City of Chesapeake, Virginia

As part of its plan to widen a main thoroughfare (US Route 17), the City of Chesapeake initiated a “quick take” proceeding to take a piece of property owned by Clear Sky Car Wash, LLC.  Under § 33.1-120 of the Virginia Code, a city can take property by filing a certificate of take and depositing “the fair value of the land” with the court.  The City deposited $2.15 million for Clear Sky’s property when it initiated the quick take proceeding.  Clear Sky, believing the appraisal, negotiation, and procedure of the taking to be faulty, sued the City.  It alleged, inter alia, that the City had violated Clear Sky’s rights under the Uniform Relocation Assistance and Real Property Acquisition Policies Act (URA), 42 U.S.C. § 4651. § 4651 details a number of policies that “heads of Federal agencies shall . . . be guided by” in acquiring land for public use.

The district court dismissed Clear Sky’s claims under the URA.  It concluded that the URA did not create a private right of action for landowners.  Clear Sky appealed the district court’s decision, but the Fourth Circuit agreed with the district court’s reasoning and affirmed.

The Fourth Circuit panel articulated the general rule for deciding whether a statute creates a private right of action: the question is “whether Congress intended to create a federal right.”  Statutory construction is the principle means used to determine that intent.  Congress must declare “unambiguously” that it intends to create a private right of action with the statute.

Although § 4651 only expressly applies to “heads of Federal agencies,” since the City of Chesapeake used federal funds to expand US Route 17, the Fourth Circuit panel found that, pursuant to § 4655, it was subject to § 4651.  As the panel notes, even assuming this, § 4651 does not create a private right of action.  The language of the provision is directed at agency heads, not landowners.  Furthermore, 42 U.S.C. § 4602(a) states, “The provisions of section 4651 of this title create no rights or liabilities and shall not affect the validity of any property acquisitions by purchase or condemnation.”  Therefore, if anything, Congress declared unambiguously that no private right of action exists under § 4651.

Clear Sky argued on appeal that § 4602(a) only applies to § 4651.  In its view, this omission manifests Congress’s intent to permit a private right of action against state agencies.  The panel disputed this interpretation:

This argument, however, overlooks the respective roles of §§ 4651 and 4655 and their relationship to each other. Section 4655 does not independently create any policies. Rather, it serves only to extend the § 4651 policies to state agencies when those agencies use federal funds to acquire real property. It is § 4651 that provides the source for the mandated substantive policies, and those policies are expressly qualified by § 4602(a), which rejects their use as a basis for a right of action.

Clear Sky’s other arguments, under § 1983 and the APA, were also rejected.