WEST VIRGINIA RECORD

CHARLESTON – Property owners who leased oil and gas rights to Columbia Natural Resources received less in royalties than they deserved, the West Virginia Supreme Court of Appeals has ruled.

The Court decided June 15 that Columbia improperly deducted expenses from revenues before sending out royalty checks at the promised rate of one eighth.

The decision preserves a Roane County class action with about 8,000 plaintiffs. Circuit Judge Thomas Evans III had asked the Court for guidance on the case.

Columbia attorneys argued that the lease contracts allowed deductions, but the Supreme Court of Appeals found the language ambiguous.

The Court sided with the plaintiffs because the defendant wrote the leases.

According to a 1934 Court decision, "Uncertainties in an intricate and involved contract should be resolved against the party who prepared it."

The case caught the Court short handed. Chief Justice Robin Davis disqualified herself, presumably because the plaintiffs' legal team included husband Scott Segal.

Justice Brent Benjamin also disqualified himself.

To fill their seats, the Court added circuit judges Tod Kaufman of Kanawha County and Harry Kirkpatrick III of Raleigh County.

The three Justices and the two substitutes reached a unanimous decision.

Columbia had taken deductions for "post production" costs at least since 1993. Those costs included delivery of gas from wells to transmission points, processing to make gas suitable for delivery, and losses due to leaks.

Royalty checks accounted for production and price, but Columbia did not disclose on the accounting statements that it had taken deductions.

Several lessors sued in 2003, seeking to represent a class of plaintiffs.

Columbia moved for summary judgment. Evans denied the motion last October, but he sought support from above.

Evans certified two questions to the Supreme Court of Appeals.

He asked if a lessee may deduct money or volume from royalty payments for post production costs where the lease does not specifically provide for deductions.

He asked if contract language such as "amount realized at the well," "net revenue realized," or "one eighth of price" granted a right of deduction in the absence of a specific provision.

Before the Supreme Court of Appeals, Marvin Masters of Charleston led the plaintiffs' legal team. Timothy Miller of Charleston led the defense team.

The Independent Oil and Gas Association of West Virginia and the West Virginia Oil and Natural Gas Association supported Columbia's arguments as "amicus curiae" -– friends of the Court.

The Justices found that Evans quoted lease language that did not come up in arguments on summary judgment, so they reformulated his questions into a single question.

In light of the fact that a lessee must bear all costs in marketing and transport unless a lease provides otherwise, they asked, does language such as "at the well," or "less all taxes, assessments and adjustments" indicate that the lessee may deduct post production expenses?

They answered: No.

Justice Spike Maynard wrote for the Court that, "... the language does not indicate how or by what method the royalty is to be calculated or the gas is to be valued."

He wrote that Columbia executed some of the leases decades ago but did not start deducting post production expenses until about 1993.

"Under these circumstances," he wrote, "we are unable to conclude that the lease language at issue was originally intended by the parties, at the time of execution, to allocate post production costs between the lessor and the lessee."

In some contracts he spotted an apparent conflict in the phrase, "gross proceeds at the wellhead." He wrote that lessees do not receive proceeds at the wellhead.

He wrote, "Such an internal conflict results in an ambiguity."

If Columbia intended for lessors to bear a portion of processing and transportation costs, Maynard wrote, the company could have written specific language into leases explaining how it would calculate royalties and what deductions it would take.