EQT Production Copmany v. Antero Resources Corporation ( 2020 )

IN THE SUPREME COURT OF APPEALS OF WEST VIRGINIA
September 2020 Term
_____________________ FILED
November 12, 2020
No. 19-0572 released at 3:00 p.m.
_____________________ EDYTHE NASH GAISER, CLERK
SUPREME COURT OF APPEALS
OF WEST VIRGINIA
EQT PRODUCTION COMPANY,
Defendant Below, Petitioner
v.
ANTERO RESOURCES CORPORATION,
Plaintiff Below, Respondent
___________________________________________________________
Appeal from the Circuit Court of Tyler County
The Honorable Jeffrey Cramer, Judge
Action No. 17-C-3
AFFIRMED
_________________________________________________________
Submitted: October 13, 2020
Filed: November 12, 2020
David K. Hendrickson, Esq. Corey L. Palumbo, Esq.
Hendrickson & Long, PLLC Joshua A. Cottle, Esq.
Charleston West Virginia Bowles Rice LLP
Counsel for Petitioner Counsel for Respondent
JUSTICE WORKMAN delivered the Opinion of the Court.
SYLLABUS BY THE COURT
1. “A circuit court’s entry of a declaratory judgment is reviewed de novo.” Syl.
Pt. 3, Cox v. Amick, 195 W. Va. 608, 466 S.E.2d 459 (1995).
2. Where multiple leases, such as an oil and gas base lease and a top lease, exist
on the same property, the provisions of the West Virginia Recording Act, West Virginia
Code §§ 40-1-8 to -9 (2019), govern which lease has priority.
i
WORKMAN, Justice:
Petitioner EQT Production Company (also referred to as “EQT”) appeals the
order entered by the Circuit Court of Tyler County on January 3, 2019, and the amended
order entered on May 23, 2019, both granting respondent Antero Resources Corporation
(also referred to as “Antero”) partial summary judgment on its claim for declaratory
judgment. The sole issue raised on appeal is whether the circuit court erred by granting
summary judgment in favor of Antero on its declaratory judgment claim, concluding that
the Antero Top Lease takes priority over the EQT Base Lease, as amended, covering the
same property. Upon review of the parties’ briefs and arguments, the appendix record,
and the applicable law, we find no error committed by the circuit court’s decision and we
therefore affirm.
I. Facts and Procedural Background
For purposes of this appeal, the facts are undisputed. The defendants below,
Larry W. Lemasters and Linda J. Lemasters (“the Lemasters”), own 100% of the oil and
gas within and underlying a certain tract of land containing 15.25 acres, located in
Ellsworth District, Tyler County, West Virginia, designated for tax assessment purposes as
Tax Map 23, Parcel 20 (“the Subject Property”). 1 On December 13, 2011, the Lemasters
executed and entered into an oil and gas lease with PetroEdge Energy, LLC, which covered
1
The property is also described in the deed of record located in the Office of the
Clerk of the County Commission of Tyler County.
1
the Subject Property (hereinafter the “EQT Base Lease” or “Base Lease”). EQT was
assigned the Base Lease through certain mesne, or intermediate, conveyances.
A Memorandum of the Base Lease (“Base Lease Memorandum”) was
recorded on January 12, 2012. 2 It provided that the primary term of the lease commenced
on December 13, 2011, and terminated five years thereafter, on December 13, 2016, unless
oil and gas was produced or capable of being produced on the Subject Property during the
primary term of the lease, or EQT was otherwise operating on the Subject Property in
search of oil and gas during the primary term. It is undisputed that EQT did not commence
operations to produce oil and gas during the primary term. Significantly, the terms of the
Base Lease did not grant EQT an express right of first refusal, right of renewal, or automatic
option to extend its primary term, and therefore the Base Lease Memorandum did not
operate to provide notice of any such right. See W. Va. Code § 40-1-8 (discussed infra in
greater detail).
In 2016, prior to the expiration of the primary term of the Base Lease, the
Lemasters executed and entered into a written oil and gas lease with Antero (hereinafter
2
See W. Va. Code § 40-1-8 (2019) (providing for the recording of a memorandum
of a lease instead of the actual lease).
2
the “Antero Top Lease” or “Top Lease”). 3 This lease was dated June 24, 2016, but made
effective December 14, 2016, immediately upon the expiration of the primary term of the
EQT Base Lease. 4 The Antero Top Lease covered the Subject Property for a primary term
of five years from the effective date. In consideration for the Lemasters’ execution of the
Top Lease, Antero paid them in two separate installments. The initial installment was for
5% of the total consideration for the Top Lease, or the amount of $2,478.13, which sum
was paid at the time of signing and which the parties agreed was sufficient consideration
to form a binding contract. The second installment was for the remaining 95% of the total
The Court recognized the following definition of a “top lease” in Chesapeake
3
Appalachia, LLC v. Hickman, 236 W. Va. 421, 781 S.E.2d 198 (2015):
Properly defined, a top lease is “a lease granted by a
landowner, during the existence of a recorded mineral lease,
which is to become effective if and when the existing lease
expires or is terminated.” J. Zak Ritchie, “A Fresh Look at an
Old Tort: Litigating Slander of Title in Mineral Disputes,” 115
W.Va. L. Rev. 1097, 1118 (2013). See also, Patrick H. Martin
and Bruce M. Kramer, 8 Williams & Meyers Oil and Gas Law
1083 (2014) (A top lease is “[a] lease granted by a landowner
during the existence of a recorded mineral lease which is to
become effective if and when the existing lease expires or is
terminated.”).
236 W. Va. at 438, 781 S.E.2d at 215.
4
It is undisputed that the Antero Top Lease did not preclude EQT from commencing
operations under the Base Lease during the primary term, which ended on December 13,
2016.
3
consideration, or the amount of $47,048.38, which was subsequently mailed to the
Lemasters within fifteen business days of the effective date of the Top Lease. 5
A Memorandum of the Antero Top Lease (“Top Lease Memorandum”) was
recorded August 30, 2016. The Top Lease Memorandum provided, in pertinent part:
Lessor [the Lemasters] covenants and agrees that, as of the date
Lessor executes this Lease, Lessor has not agreed to extend,
amend, modify, or renew the Existing Lease [the Base Lease],
or to take any action which would result in such extension,
amendment, modification, or renewal of the Existing Lease,
and Lessor further covenants and agrees that Lessor shall not
enter into any such agreement or take any such action at any
time after the date Lessor executes this Lease.
(Emphasis added). The Top Lease also provided:
Lessor and Lessee [Antero] acknowledge that the lands
described in this [Top] Lease are presently subject to Oil and
Gas Lease dated December 13, 2011 and set to expire on
December 13, 2016 . . . (the “Existing Lease”). This [Top]
Lease is granted on Lessor’s reversionary interest in the leased
premises and is hereby vested in interest, but, as subject to the
Existing Lease, the interest covered by this [Top] Lease shall
vest in possession upon the termination of the Existing Lease.
Notwithstanding the express terms of the Antero Top Lease and the recorded
Top Lease Memorandum, the Lemasters and EQT entered into an Amendment and
Ratification of Oil and Gas Lease (the “Base Lease Amendment”), dated September 24,
5
It is undisputed that Antero timely tendered both payments to the Lemasters;
however, according to Antero, the Lemasters’ counsel returned the $47,048.38 payment to
Antero by letter dated January 31, 2017.
4
2016, and recorded December 12, 2016. In the Base Lease Amendment, the Lemasters
and EQT agreed, inter alia, to extend the primary term of the Base Lease for an additional
five years.
An EQT employee, Russell Greathouse, testified during a deposition that
multiple EQT employees, including John Damato, George Heflin and Becky Heflin, were
aware of the Antero Top Lease prior to EQT’s execution of the Base Lease Amendment.
Mr. Heflin testified that Mr. Greathouse and Steven Prelip, also an EQT employee, had a
copy of the Memorandum of Antero Top Lease. Mr. Heflin acknowledged that he knew
and understood that in the Antero Top Lease, the Lemasters had covenanted with Antero
not to voluntarily extend or amend the EQT Base Lease.
On March 16, 2017, Antero filed an amended complaint against EQT and the
Lemasters in circuit court, asserting claims for breach of contract, intentional interference
with contractual relationship, declaratory judgment, and slander of title. Relevant to the
instant appeal, is Antero’s declaratory judgment count in which Antero asked the circuit
court to declare that: 1) the Base Lease Amendment was ineffective and invalid as to
Antero; 2) the Antero Top Lease was the only valid lease affecting the Subject Property,
and 3) the Base Lease Amendment was invalid or, in the alternative, subordinate to the
Antero Top Lease.
5
On March 28, 2017, EQT served its answer to the amended complaint and
counterclaim in which it asserted a declaratory judgment count asking the circuit court to
declare that the Base Lease, as amended, was the only lease in effect regarding the Subject
Property and that the Antero Top Lease was subject to the Base Lease and Base Lease
Amendment.
On November 5, 2018, Antero filed a motion for partial summary judgment
on its claims for intentional interference with a contract and declaratory judgment. On
November 26, 2018, EQT filed a response in opposition and a cross-motion for summary
judgment on its counterclaim for declaratory judgment. Thereafter, by order entered
January 3, 2019, the circuit court granted Antero partial summary judgment and denied
EQT’s cross-motion for summary judgment. The circuit court determined that under the
West Virginia Recording Act (“Recording Act”), West Virginia Code §§ 40-1-8 to -9
(2019), the Base Lease and Base Lease Amendment are subject to the Antero Top Lease,
and the Antero Top Lease is the valid and existing oil and gas lease covering the Subject
Property. On May 23, 2019, the circuit court amended its January 3, 2019, order, finding
that its award of summary judgment in favor of Antero on its declaratory judgment claim
was a final order subject to immediate appellate review under Rule 54(b) of the West
6
Virginia Rules of Civil Procedure. 6 This order, and the January 3, 2019, order form the
basis for the instant appeal.
II. Standard of Review
We begin by noting that “[a] circuit court’s entry of a declaratory judgment
is reviewed de novo.” Syl. Pt. 3, Cox v. Amick, 195 W. Va. 608, 466 S.E.2d 459 (1995).
Applying this standard of review, we examine the issue before us.
III. Discussion
The sole issue raised on appeal is whether the circuit court erred by granting
summary judgment in favor of Antero on its declaratory judgment claim, by concluding
that the Antero Top Lease takes priority over the EQT Base Lease, as amended, covering
the Subject Property. EQT argues that the circuit court’s order was in error because: 1)
EQT had the right to amend the Base Lease; 2) the conditions necessary for Antero’s Top
6
In its January 3, 2019, order, the circuit court also granted summary judgment to
Antero on its intentional interference of contract claim against EQT. The court determined
that in the Antero Top Lease, the Lemasters had agreed not to amend, to modify or to
otherwise extend the Base Lease, which covenant was also set forth in the Top Lease
Memorandum. The Court found that EQT had both constructive and actual knowledge of
the Lemasters’ agreement not to extend the Base Lease. Despite that actual knowledge and
notice, EQT intentionally entered into the Base Lease Amendment with the Lemasters and
injured Antero’s leasehold rights. In its May 23, 2019, order, the circuit court expressly
provided that only its determination of the declaratory judgment counts was subject to an
immediate appeal pursuant to Rule 54(b) of the West Virginia Rules of Civil Procedure.
Accordingly, the circuit court’s grant of summary judgment on the intentional interference
with a contract count is not before us in the instant appeal.
7
Lease to become effective did not occur and, therefore, the Top Lease is subordinate to the
Base Lease; 3) the recording of the Top Lease did not render the Base Lease, as amended,
subordinate, and 4) the “no-modification clause” included in the Top Lease is
unenforceable and void as against public policy. 7 We reject EQT’s arguments.
While EQT focuses on its “absolute right” to amend its Base Lease as the
controlling issue in this case, we find that the determinative issue is which lease – the Base
Lease, the Base Lease Amendment or the Top Lease – is superior or has priority. This
Court has recognized that leases are controlled by principles of contract law. As this Court
stated in Chesapeake Appalachia, 236 W. Va. 421, 781 S.E.2d 198 (2015), “[t]o be clear,
the leases at issue are to be construed like any other contract. An oil and gas lease (or other
mineral lease) [is] both a conveyance and a contract.” Id. at 434, 781 S.E.2d at 211; see
also Leggett v. EQT Prod. Co., No. 1: l3CV4, 2016 WL 297714, at *4 (N.D.W. Va. Jan.
22, 2016) (same); Iafolla v. Douglas Pocahontas Coal Corp., 162 W. Va. 489, 250 S.E.2d
128 (1978) (applying contract law to mineral lease). Under principles of contract, therefore,
EQT was free to amend its Base Lease, and the Lemasters had the right to enter into the
Top Lease with Antero.
7
Because this argument concerns the intentional interference with a contract claim
which is not before us on appeal, we decline to address this argument. See supra note 6.
8
However, the issue of which lease has priority when multiple leases exist on
the same property is governed by the Recording Act, West Virginia Code §§ 40-1-8 to -9.
West Virginia Code § 40-1-8 provides for the recording of a memorandum of a lease
instead of the actual lease as follows:
Any contract in writing made in respect to real estate or
goods and chattels in consideration of marriage; or any contract
in writing made for the conveyance or sale of real estate, or an
interest or term therein of more than five years, or any other
interest or term therein, of any duration, under which the whole
or any part of the corpus of the estate may be taken, destroyed,
or consumed, except for domestic use, shall, from the time it is
duly admitted to record, be, as against creditors and purchasers,
as valid as if the contract were a deed conveying the estate or
interest embraced in the contract. In lieu of the recording of a
lease pursuant to this section, there may be recorded with like
effect a memorandum of such lease, executed by all persons
who are parties to the lease and acknowledged in the manner
to entitle a conveyance to be recorded. A memorandum of lease
thus entitled to be recorded shall contain at least the following
information with respect to the lease: The name of the lessor
and the name of the lessee and the addresses of such parties as
set forth in the lease; a reference to the lease, with its date of
execution; a description of the leased premises in the form
contained in the lease; the term of the lease, with the date of
commencement and the date of termination of such term, and
if there is a right of extension or renewal, the maximum period
for which, or date to which, the lease may be extended, or the
number of times or date to which it may be renewed and the
date or dates on which such rights of extension or renewal are
exercisable. Such memorandum shall constitute notice of only
the information contained therein.
(Emphasis added). The significance of the statutory requirement that a memorandum of
lease contain certain specific information set forth in the lease including, inter alia, the term
of the lease, the commencement and termination dates of the lease, and if there is a right
9
of extension or renewal including specific details for such extension or renewal, is that this
type of information provides notice and basic fairness to other potential good faith
purchasers or “bona fide purchasers.” Syl. Pt. 5, Kourt Sec. Partners, LLC v. Judy’s
Locksmiths, Inc., 239 W. Va. 757, 806 S.E.2d 188 (2017) (“A bona fide purchaser is one
who actually purchases in good faith.” Syl. Pt. 1, Kyger v. Depue, 6 W.Va. 288 (1873).”);
see Trans Energy, Inc. v. EQT Prod. Co., 743 F.3d 895, 904 (4th Cir. 2014) (providing that
a bona fide purchaser is “‘one who purchases for a valuable consideration, paid or parted
with, without notice of any suspicious circumstances to put him on inquiry.” Stickley v.
Thorn, 87 W.Va. 673, 106 S.E. 240, 242 (1921). This rule protects good faith purchasers
who conduct due diligence prior to purchasing an interest in real property. See Gullett v.
Burton, 176 W.Va. 447, [451-52], 345 S.E.2d 323, 327 (1986).”); see also Syllabus, in
part, United Fuel Gas Co. v. Morely Oil & Gas Co., 101 W. Va. 83, 131 S.E. 716 (1926)
(“To be protected [under the Recording Statute] . . . against a prior unrecorded deed, one
must be a complete purchaser, must have had no notice of the prior contract or deed, and
have paid all the purchase money for the land purchased by him.” (emphasis added).
Further, West Virginia Code § 40-1-9 provides:
Every such contract, every deed conveying any such
estate or term, and every deed of gift, or deed of trust or
memorandum of deed of trust pursuant to section two, article
one, chapter thirty-eight of this code, or mortgage, conveying
real estate shall be void, as to creditors, and subsequent
purchasers for valuable consideration without notice, until and
except from the time that it is duly admitted to record in the
10
county wherein the property embraced in such contract, deed,
deed of trust or memorandum of deed of trust or mortgage may
be.
Id. (emphasis added). Hence, where a real estate contract is unrecorded and purports to
convey real estate to a subsequent bona fide purchaser for valuable consideration without
notice, it is void. Id. Accordingly, we hold that where multiple leases, such as an oil and
gas base lease and a top lease, exist on the same property, the provisions of the West
Virginia Recording Act, West Virginia Code §§ 40-1-8 to -9 (2019), govern which lease
has priority.
In the instant case, according to the original terms of the EQT Base Lease,
which were duly recorded in the Base Lease Memorandum, the Base Lease expired on
December 13, 2016, unless oil or gas was produced on the Subject Property during the
primary term of the lease or EQT was otherwise operating on the Subject Property. It is
undisputed that neither of these events occurred; therefore, it was impossible for Antero to
have had actual or constructive notice of any right of EQT to extend the Base Lease beyond
its primary term because other than the two events described above occurring, no such right
existed.
In summary, Antero entered into the Top Lease with the Lemasters on June
24, 2016, prior to the expiration of the term of the EQT Base Lease, and recorded the Top
Lease Memorandum August 30, 2016, in compliance with West Virginia Code § 40-1-8.
According to West Virginia Code § 40-1-9, Antero was a bona fide purchaser under the
11
terms of the Top Lease because it had no notice of the EQT Base Lease extending beyond
its original term of December 13, 2016. 8 All that Antero knew or could have known from
the recorded EQT Base Lease Memorandum was that the EQT Base Lease expired on
December 13, 2016. See Eagle Gas Co. v. Doran & Assocs., Inc., 182 W. Va. 194, 197,
387 S.E.2d 99, 102 (1989) (“In general a party without actual notice may rely upon record
titles in the office of the clerk of the county commission of the county in which the land is
located. W. Va. Code, 40-1-9 [1963].”). As a matter of fact, EQT did not even seek to
extend the primary term of its Base Lease with the Lemasters for another five-year period
until after the Antero Top Lease Memorandum was recorded. As the record reflects, the
Base Lease Amendment was dated September 24, 2016, and was not recorded until
December 12, 2016. Because Antero’s Top Lease Memorandum was recorded before
EQT’s Base Lease Amendment, Antero’s Top Lease has priority over EQT’s Base Lease
and Base Lease Amendment. See Heck v. Morgan, 88 W. Va. 102, 106 S.E. 413, 417 (1921)
(where subsequent lessee claimed he was a bona fide purchaser without notice of a lessee
8
EQT also argues that Antero had no “present property interest” conveyed by the
Top Lease, and therefore the Top Lease “was not in effect at the time” EQT amended its
Base Lease to extend its primary term.” According to EQT “[n]either the existence nor
recording of the Top Lease, or language within that Top Lease purporting to preclude
modification of the Base Lease (the ‘no modification clause’),” acted to preclude EQT from
preserving its interest in the property. This argument is without merit. Pursuant to its terms,
the Antero Top Lease was a binding contract upon its signing; it provided that “it hereby
vested in interest, but as subject to the Existing Lease[,]” as of the date the Top Lease was
executed. Further, the Lemasters and Antero agreed the initial installment paid by Antero
to the Lemasters was “sufficient consideration to form a binding contract between Lessor
and Lessee.”
12
under a prior lease, which was not recorded, the Court agreed with the argument that his
lease took priority over the prior lease, but disagreed with the facts, stating “[t]he defendant
. . . claims that he was a purchaser for value in good faith, and without notice of the
plaintiffs rights under the lease which had been theretofore executed to him by Morgan,
and that therefore his rights under the lease executed to him by Morgan in September, 1919,
are superior to the rights of the plaintiff, and this would be correct if the facts justified this
conclusion, for under our recording statutes the plaintiffs lease would be void as to a
purchaser for value in good faith without notice.”). 9
Based upon a straightforward application of the Recording Act, we conclude
that the circuit court did not err in declaring that the EQT Base Lease and Base Lease
Amendment are subject to the Antero Top Lease, and the Antero Top Lease is the valid
and existing oil and gas lease covering the Subject Property.
9
See Rorex v. Karcher, 224 P. 696, 697-98 (Okla. 1923) (holding that “[t]here was
no provision in the lease contract granting an extension or right of extension to the lessees,
and any extension procured by the lessees was subject to the rights of intervening third
persons. Prior to the time the extension was procured, the rights of the plaintiff intervened
by reason of his lease, and any extension granted after the execution of the lease to the
plaintiff was taken subject to the rights of the plaintiff under his lease.”); see also Willan
v. Farrar, 124 N.W.2d 699 (Neb. 1963) (finding that actions taken by a base lease lessee
subsequent to the execution of a top lease does not affect the rights of a top lessee.).
13
IV. Conclusion
For the foregoing reasons, we affirm the orders of the Circuit Court of Tyler
County.
Affirmed.
14