MORGANTOWN — An oil and gas class-action lawsuit that will affect the way many West Virginia royalty owners are paid is nearing its conclusion in federal court.
The Kay case, as it’s called, challenges how producer EQT deducts various post-production charges and severance taxes from royalty checks. It’s set to go to trial Dec. 17. But a status conference on a motion to dismiss the case has been held and people familiar with the case said settlement talks are in process.
Attorneys for EQT were not at liberty to comment on the case and attorneys for the plaintiffs did not respond to requests for comment.
Valerie Antonette, local chapter president of the National Association of Royalty Owners (NARO), gave an update on the case at a recent NARO town hall. Asked if she had any insight into the progress of the talks, she said in an email, “As we are not a class member I am not privy to all of the settlement negotiations and I have no new info at this time.”
The case is in the U.S. District Court for the Northern District of West Virginia, before Judge John P. Bailey, Here are some case highlights and recent developments.
It was first filed in Jan 2013. The plaintiffs – the Kay Co. and individual royalty owners H. Dotson Cather and James E. Hamric III, on behalf of a class of royalty owners – amended the complaint in 2014. The defendants are EQT Corp. and five of its subsidiaries.
The plaintiffs signed leases that entitled them to 12.5 percent royalties. They allege that EQT and its midstream and downstream chain of subsidiaries wrongly take deduct post-production expenses and severance taxes form their checks, and do not report the sale of natural gas liquids.
They charge breach of contract and fiduciary duty, fraud, and that EQT used its subsidiaries to sell gas to itself at reduced value, thereby depriving them of their full due royalty.
In a series of November rulings, Bailey dealt EQT a series of setbacks.
He denied EQTs motion for judgment on it deducting of severance taxes. He said that state law is clear that EQT, as the entity severing the gas from the ground, is subject to the tax, not the royalty owners, unless the lease expressly provides for the deduction.
He also denied EQT’s motion for judgment on fraud and punitive damage claims. He said EQT had the duty to inform the lessors of sales, revenues and deductions and determine what deductions are permissible.
He wrote that evidence provided by the plaintiffs shows EQT “decided that it was taking whatever it wanted to take and was not going to provides its lessors with enough information tat they could tell what they were taking, and then, refused to provide sufficient information that anyone could ever determine what all they were taking. The conduct was intentional.”
Perhaps most significant is a ruling connected to recent action by the Legislature and the state Supreme Court. Royalty owners familiar with the case said this could affect an EQT court challenge to a pro-royalty owner bill, SB 360, passed during the last session.
SB 360 was a response to the state Supreme Court’s about-face in a case called Leggett. In answering a question form a federal court, the Supreme Court in 2016 determined in “Leggett 1” that EQT could not deduct post-production expenses from royalties on leases converted from flat rate to 12.5 percent. Then in 2017, with a new justice on bard, in changed its answer in “Leggett 2” and said that’s OK.
The court also urged the legislature to clarify the law on that matter, and SB 360 resulted, prohibiting those deductions.
In Kay, EQT wanted to rely on Leggett 2 for the trial but Bailey said that SB 360 served as an amendment to existing law and was therefore retroactive, effectively nullifying Leggett 2. SB 360 “confirms that the law all along was that post-production costs could not be deducted” from the leases in question.
NARO and other royalty owners speculate that this could have a bearing on EQT’s lawsuit against the state Department of Environmental Protection that challenges SB 360 in order to allow deductions. EQT was not at liberty to comment on this speculation.
Bailey did grant EQT one boon in one ruling. He denied a motion by the plaintiffs to require EQT to pay royalties on unsold gas – meaning gas lost somewhere in the pipeline between extraction and sale: “Lessees have no general duty to pay for lost volumes.” However, if plaintiffs believe the producer is negligently losing gas, they are free to sue for damages on that matter.
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