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Appalachian Land Co v. Equitable Production Co.

United States District Court, E.D. Kentucky, Southern Division, Pikeville

June 22, 2018

APPALACHIAN LAND CO., Plaintiff,
v.
EQUITABLE PRODUCTION CO., Defendant.

          ORDER AND OPINION

         This matter is before the Court on several motions. Defendant Equitable Production Company ("EQT") has filed a Motion to Dismiss (DE 89). Plaintiff Appalachian Land Company ("ALC") has filed a Motion for Partial Summary Judgment and Award of Attorney's Fees and Expenses (DE 90), and a Motion to Certify Class (DE 116).

         For the following reasons, EQT's Motion to Dismiss (DE 89) is DENIED; ALC's Motion for Partial Summary Judgment and Award of Attorney's Fees is GRANTED IN PART and DENIED IN PART; and ALC's Motion to Certify Class is GRANTED IN PART.

         I. INTRODUCTION

         Defendant EQT is a lessee, either by succession or as an original party, under numerous Oil and Gas leases between EQT and various other persons and entities in Kentucky, including ALC. The leases require payment of royalties by EQT based upon the market price of gas at the well, but many do not contain any express language indicating which party is responsible for paying Kentucky's severance tax. (DE 1; 89-1). Where a lease was silent, it was EQT's policy to withhold at least part of the severance tax from royalty payments. (DE 116-3 at 12-13).

         Plaintiff ALC filed a class action complaint with this Court on July 8, 2008. (DE 1). The complaint alleged that EQT's deduction of the severance tax constituted a breach of ALC's lease contract, and those with similar language. After EQT filed its Answer, the parties moved for a stay pending an appeal in a substantially similar case: Poplar Creek Development Co., u. Chesapeake Appalachia, LLC, Civ. No. 08-190 (E.D. Ky. 2008) (“Poplar Creek"). In that case, the Sixth Circuit held that Kentucky law allowed lessees, here EQT, to deduct gathering, compression and processing costs from payment of royalties. Poplar Creek Deu. Co. u. Chesapeake Appalachia, LLC, 636 F.3d 235, 244 (6th Cir. 2011).

         While Poplar did not speak specifically to severance taxes, this Court found its logic applicable, and granted judgment on the pleadings for EQT as to deduction of the tax. (DE 60). ALC moved to alter the judgment, which this Court denied, and then appealed to the United States Court of Appeals for the Sixth Circuit. (DE 61; 64; 65). Finding no Kentucky law directly on point, the Sixth Circuit certified a question regarding deduction of severance taxes to the Kentucky Supreme Court. (DE 66 at 3). After reformulating the dispositive issue, the Kentucky Supreme Court held that "the producer severing natural gas from the earth [here, EQT] is solely responsible for the payment of the severance tax," absent a specific contractual provision apportioning the tax. Id. at 3-4. On October 27, 2015, the Sixth Circuit reversed this Court's judgment on the pleadings, and remanded for further proceedings consistent with the state Court's holding. Id.

         In July 2016, and admittedly in response to the Kentucky Supreme Court decision, EQT ceased deducting the severance taxes from royalties paid under market value leases without express severance tax language. (DE 89-1; DE 89-3 at 3). On March 7, 2017, EQT reimbursed royalty owners for deductions taken from 1995 through 2016, by sending approximately 2, 431 reimbursement checks. (DE 119-2). EQT alleges that it paid $1, 398, 167.71 in reimbursements, and also placed $62, 710.44 in a suspense account for reimbursing recipients that have not yet been accurately identified. Id. ALC admits to receiving a reimbursement check, but has not cashed that check. (DE 91 at 3).

         EQT has since filed a motion to dismiss ALC's claim for breach of contract, arguing that its reimbursement of the deducted severance tax has mooted the claim. (DE 89-1). ALC has filed a motion for partial summary judgment, seeking judgment on EQT's liability for breach of the lease and for attorney's fees. (DE 90-1). ALC also requests that the Court certify the class of "[a] 11 persons and entities who have entered into oil and gas leases with [EQT]...which obligate the lessee to pay royalties on gas produced from wells, which leases do not expressly authorize the deduction of severance taxes after it is severed from the wellhead." (DE 116). The motions have been sufficiently briefed, and the Court considers the arguments below.

         II. ANALYSIS

         A. Defendant EQT's Motion to Dismiss (DE 89)

         On June 5, 2017, EQT filed a motion to dismiss ALC's claim for breach of contract in its entirety. (DE 89). EQT argues that, since it previously reimbursed royalty owners for withheld severance taxes dating back to 1995, ALC's claim has become moot. (DE 89-1 at 4). Further, EQT points out that it ceased the deduction of the severance taxes for market value leases without express severance tax language in 2016, meaning the desired effect of the litigation has already been achieved. Id. at 4.

         ALC has responded, arguing that EQT's reimbursement check amounted to a settlement offer, which ALC rejected when it did not cash the check. (DE 91 at 3). ALC cites the recent United States Supreme Court case Campbell-Ewald v. Gomez, for the proposition that a rejected settlement offer has no effect on the plaintiffs interest in the lawsuit. (DE 91 at 3); see also Campbell-Ewald Co. v. Gomez, 136 S.Ct. 663, 672 (2016). Further, ALC asserts that it seeks relief beyond what was offered by EQT, namely deducted severance taxes dating back to July of 1993, prejudgment interest, and attorney's fees. (DE 91 at 5). Therefore, ALC concludes that, at best, EQT's reimbursement of severance taxes dating back to 1995 only offers a portion of ALC's requested relief, and there remains an active controversy. Id.

         EQT characterizes the ALC reimbursement check as performance under the lease agreement. (DE 96 at 1-2). EQT has pointed out that, unlike the Rule 68 settlement offer in Campbell-Ewald, its reimbursement check did not require agreement to any conditions, restrictions, or indicate that it was intended as settlement of any outstanding claim. Id. at 3. And-under the lease agreement between EQT and ALC-depositing the check in the mail fully satisfied its payment obligation, mooting ALC's claims. Id. at 4. EQT argues that any remaining claims to prejudgment interest and attorney's fees are not legally sufficient to create a controversy. Id. at 6-15.

         A case becomes moot "only when it is impossible for a court to grant any effectual relief whatever to the prevailing party." Campbell-Ewald Co. v. Gomez, 136 S.Ct. 663, 669, 193 L.Ed.2d 571 (2016) (internal citations omitted). "As long as the parties have a concrete interest, however small, in the outcome of the litigation, the case is not moot." Id. Here, ALC retains a stake in the outcome of the litigation-regardless of whether EQT's reimbursement check is treated as a settlement offer or performance-because it claims entitlement to damages beyond what EQT included in the reimbursement check.

         EQT admits that it has reimbursed royalty owners which could be identified, including ALC, for withheld severance taxes dating back to 1995. (DE 89-1 at 4). But ALC alleges that it is entitled to relief dating back to 1993. (DE 91 at 5). Even without consideration of attorney's fees and interest, it is clear that EQT has not tendered an offer that fully satisfies ALC's demand for relief, and thus the check has not mooted ALC's claims. See Mey v. N. Am. Bancard, LLC, 655 Fed.Appx. 332, 336 (6th Cir. 2016). And while EQT argues that it has no records by which to calculate reimbursements prior to 1995, the difficulty that ALC may face in proving the amount of reimbursement for those years does not itself moot the claims. See Hrivnak v. NCO Portfolio Management, Inc., 719 F.3d 564, 567-568 (6th Cir. 2013) ("As defendants would have it, claims with little to no chance of success should be dismissed as moot whenever they are mixed in with promising claims that a defendant offers to compensate in full. That is not how it works").

         EQT further argues that ALC cannot claim, and the Court should not consider, reimbursement for severance taxes prior to 1998, since 1998 is the year in which ALC first acquired an interest in the lease. But this argument is not persuasive, as it confuses the merits of a claim with the existence of a live controversy. ALC contends that its purchase of the lease agreement included purchase of the rights to royalty payments prior to 1998-EQT simply disagrees. EQT may not moot ALC's claim by only offering what it believes ALC is entitled to recover. See Hrivnak, 719 F.3d at 567-568 ("Reasonable though the defendants' offer may have been (and may still prove to be), the disparity between what they offered and what the plaintiff sought generally will preclude a finding of mootness").

         At the motion to dismiss stage, the Court will construe the complaint in the light most favorable to the plaintiff, accept its allegations as true, and draw all reasonable inferences in favor of the plaintiff. See Handy-Clay u. City of Memphis, Tenn., 695 F.3d 531, 538 (6th Cir. 2012). Here, ALC claims royalties have been withheld since at least July, 1993 (DE 91 at 5); that it has not deposited EQT's reimbursement check (DE 103-1 at 5); that the check is not for the complete amount owed under the lease agreement and thus does not cure EQT's breach (DE 103-1 at 5-7)); and EQT admits that its check, even if deposited, would not reimburse ALC for royalties prior to 1995 (DE 89-1 at 3-4). Not only does this preclude the Court from finding ALC's claims to be mooted as discussed above, but ALC has also stated a claim upon which relief can be granted. As such, EQT's Motion to Dismiss ALC's claim for breach of contract (DE 89) is denied.

         B. Plaintiff ALC's Motion For Partial Summary Judgment and For Partial Award of Attorney's Fees and Expenses (DE 90)

         Having determined that ALC's claims are not mooted, the Court addresses summary judgment. On June 23, 2017, ALC filed a motion for partial summary judgment, arguing that it is entitled to judgment as to liability on the breach of contract claim and should be awarded attorney's fees. (DE 90). EQT has opposed both parts of the motion. (DE 98).

         Summary judgment is proper "if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(a). The moving party bears the initial burden and must identify "those portions of the pleadings...which it believes demonstrate the absence of a genuine issue of material fact." Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986) (internal citation omitted).

         Once the movant meets the initial burden, the opposing party "must set forth specific facts showing that there is a genuine issue for trial." Fed.R.Civ.P. 56(e). In the Court's consideration of the motion, "the evidence should be viewed in the light most favorable to the non-moving party." Ahlers v. Schebil, 188 F.3d 365, 369 (6th Cir. 1999) (citing Anderson, 477 U.S. at 255).

         1. Breach of Contract

         Under Kentucky law, breach of contract requires showing (1) the existence of a contract; (2) breach of that contract; and (3) damages flowing from the breach. Metro Louisville/Jefferson County Government v. Abma, 326 S.W.3d 1, 8 (Ky. Ct. App. 2009). Here, the existence of a contract is admitted by both parties. See (DE 10 at 2, pp. 9). ALC argues that EQT breached the contract when it failed to pay the full amount of royalties owed, namely through deduction of the severance tax which the Kentucky Supreme Court has clarified as improper. See Appalachian Land Co. v. EQT Production Co., 468 S.W.3d 841, 848 (Ky. 2015); (DE 90-1 at 13). ALC has provided evidence that EQT withheld at least $11, 453.41 in royalty payments to ALC during the relevant time period. (DE 90-5 at 6-7).

         EQT attacks summary judgment in two ways. First, EQT argues that the Kentucky Supreme Court decision should not be applied retroactively against it, but rather should be applied only prospectively. (DE 98 at 2-6). Second, EQT raises several affirmative defenses, including payment and acceptance, accord and satisfaction, laches, and estoppel.

         a. Retroactivity of Kentucky Supreme Court Decision

         EQT is correct that the Kentucky Supreme Court recognizes its own ability to give a decision prospective or retroactive application. See Hagan v. Farris,807 S.W.2d 488, 490 (Ky. 1991). And under Kentucky law, "[i]t is...permissible to have a decision apply prospectively in order to avoid injustice or hardship." Id. But giving ...


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