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EQT Production Co. v. Big Sandy Co., L.P.

Court of Appeals of Kentucky

November 8, 2019



          BRIEFS FOR APPELLANTS/ CROSS-APPELLEES: John Kevin West Columbus, Ohio Candace B. Smith Lexington, Kentucky

          BRIEFS FOR APPELLEE/CROSS-APPELLANT: Grahmn N. Morgan, Adrianne C. Strong, Kristeena L. Johnson, Lexington, Kentucky



          LAMBERT, JUDGE:

         These appeals and cross-appeals arise from several rulings of the Fayette Circuit Court related to contract rights set forth in two deeds executed nearly a century ago addressing coal, oil, and gas interests on property located in Pike County, Kentucky. EQT Production Company and EQT Gathering, LLC (collectively, "EQT") seek review of the Fayette Circuit Court's declaratory judgment requiring it to pay to relocate pipelines under certain circumstances and from the partial summary judgment barring unjust enrichment claims for payments made prior to a certain date. In its cross-appeal, Big Sandy Company, L.P. (Big Sandy), seeks review of the circuit court's interpretation of the phrase "coal workings, extended or projected," the decision to not hear evidence of the parties' prior dealings through the use of surface use agreements, the ruling as to when the statute of limitations began to run on its breach of contract claims, and the decision not to reform the deed as to the payment EQT owed to Big Sandy for coal left in place. Finding no error or abuse of discretion, we affirm.

         Pursuant to the terms of two deeds, Big Sandy owns approximately 56, 000 acres of coal property in Pike County, Kentucky. In December 1926, Big Sandy's predecessor in interest, Big Sandy Company, conveyed oil and gas interests on identified tracts by deed to R.J. Graf. It retained the coal and all other mineral estates on the Graf Property as well as ownership of the surface of certain portions. The deed provided that Big Sandy retained the dominant estate and intended to mine and remove coal and other minerals within that property. In a second deed executed in 1928 with identical pertinent language, Big Sandy conveyed the oil and gas interests on tracts of land to Kentucky West Virginia Gas Company. Big Sandy currently holds the interest in the coal and surface rights, and EQT is the current interest holder of the oil and gas rights set forth in the deeds. EQT Gathering performs the pipeline activities. Pursuant to the terms of the deeds, EQT must pay Big Sandy a royalty of 1/8 of the oil produced from the property as well as for coal that is left in place around a well. EQT was also required to interfere as little as reasonably possible with Big Sandy's right to remove coal and other minerals, and to obtain approval for "[t]he location of any oil or gas well through coal workings, extended or projected[.]" Big Sandy leases the mining of its coal and minerals to third parties in exchange for a royalty.

         On October 29, 2009, Big Sandy filed a complaint against EQT seeking to enforce rights it retained in the subject property as the dominant estate owner.[1] EQT held a subservient interest in the oil and natural gas rights, and Big Sandy alleged that EQT had failed to comply with the terms and intent of the deeds under which they operated. Big Sandy sought to enforce its rights under the deeds, a declaration as to their respective rights and obligations, and an accounting of royalties owed on EQT's oil production. In the complaint, Big Sandy alleged that EQT had breached the terms of the two deeds by drilling wells that passed through extended or projected coal workings without first obtaining its approval (Count I), failing to interfere as little as reasonably possible with Big Sandy's removal of coal (Count II), and refusing to provide an accounting of its oil production so that the proper royalties due could be determined (Count IV). Big Sandy sought a declaration from the court that EQT must obtain approval from it before locating wells on the properties that pass through coal workings, extended or projected; that EQT must relocate its pipelines - at its own expense - that interfere with coal mining or removal; and that EQT must obtain an easement or surface use agreement from Big Sandy before constructing any pipelines or using access roads over, through, or across the properties (Count III).

         EQT filed an answer disputing Big Sandy's allegations as well as a counterclaim and its own petition for a declaratory judgment. EQT sought a declaration that it had not breached any obligations with regard to the deeds; that the parties were not obligated to enter into agreements related to surface use or the location of its oil and gas wells; and that Big Sandy was obligated to pay the cost to relocate pipelines when they were being moved at Big Sandy's request.

         On May 11, 2010, EQT filed a motion to amend its answer and counterclaim to include a claim for unjust enrichment, alleging that when it changed its accounting system in 2001, it mistakenly began paying natural gas royalties to Big Sandy to which it was not entitled and did not discover this mistake until March 2, 2010. This was based upon information contained in a letter dated December 21, 2007, from Chauncey S. R. Curtz of Big Sandy to Lester Zitkus of EQT that was attached as Exhibit C to Big Sandy's complaint. The letter stated, in pertinent part, as follows:

Next, as I told you in my February, 2006 letter, the amount Equitable owes Big Sandy for coal left unmined in the vicinity of Equitable's wells has been accruing and increasing for some time. When we last met in Pikeville we told you the amount owed was becoming very significant, but we never heard anything more from you on the topic. Nor did we ever hear anything more on the issue we raised at that meeting about the payment of royalties by Equitable on gas we have been unable to confirm is owned by Big Sandy. As we told you, we are not sure why Equitable is paying Big Sandy royalty on gas produced from the wells listed on the attached Exhibit A.
Because we never heard anything more from Equitable on these two issues, I recently totaled the amount due Big Sandy for coal left in place in the vicinity of Equitable's wells, as well as the amount Equitable has paid Big Sandy for gas produced from the wells that we have been unable to confirm are on our property. Coincidentally, as of the date of this letter, both totals are very nearly $650, 000. As a result, we have elected to set-off the amounts due Big Sandy for coal left in place in the vicinity of Equitable's wells by the amount of royalty paid to Big Sandy for gas produced from those wells which we have been unable to confirm we own. As of December 1, 2007, we believe this set-off satisfies both of these accounts in full.

         EQT alleged that amount of mistaken payments totaled approximately $777, 000.00 and sought restitution of these amounts, plus interest. It later moved to amend its answer to include the information that a subsequent audit established it had underpaid oil royalties to Big Sandy in the amount of $20, 056.95 and that Big Sandy had refused to accept the check it tendered to pay it. In May 2010, the circuit court permitted EQT to amend its answer, and the parties entered into an agreed order permitting EQT to file an amended counterclaim and petition for declaratory judgment. Several months later, Big Sandy moved to amend its answer to the amended counterclaim to add an affirmative defense based upon the statute of limitations and laches for the unjust enrichment claim. The circuit court permitted it to do so pursuant to an agreed order.

         In June 2010, EQT moved the circuit court for a partial summary judgment, in which it sought dismissal of Count III of the complaint related to the declaratory judgment petition. Shortly thereafter, Big Sandy filed a motion for partial summary judgment on Count III and Count IV, in which it had sought an accounting of EQT's oil production. Both parties presented their arguments as to the interpretation of the language in the deeds. In an order entered September 29, 2010, the court denied both motions, finding that disputed issues of material fact existed. Later mediation efforts were unsuccessful, and a trial was scheduled for May 2017.

         In February 2017, EQT filed a motion for partial summary judgment on Counts I, II, and III of Big Sandy's complaint and on its own counterclaim for declaratory judgment. Big Sandy also filed a motion for partial summary judgment on EQT's unjust enrichment and declaratory judgment claims as well as on Counts I, II, III, and IV of its complaint. In an order entered April 11, 2017, the circuit court denied EQT's motion as well as the portion of Big Sandy's motion related to the claims in its complaint and EQT's petition for declaratory relief. It took the portion of Big Sandy's motion related to the counterclaim for unjust enrichment under submission.

         Prior to trial, the parties filed motions in limine, and EQT specifically sought to exclude "any evidence or testimony suggesting collateral agreements between the Parties about the use of and/or access to the surface define the Parties' rights and obligations under the Deeds." The parties entered into joint stipulations filed on May 2, 2017, and a bench trial commenced on May 8, 2017.

         On June 15, 2017, the circuit court entered its judgment and order, and ruled on Big Sandy's motion for partial summary judgment on EQT's counterclaim for unjust enrichment. The judgment, which the court declared to be final and appealable, provided as follows:

1. EQT is ordered to pay Big Sandy $10, 188.00 for coal left in place around wells that EQT drilled on the property at issue on or after October 29, 1994 under Counts I and II of Big Sandy's Complaint, with post-judgment interest accruing from the date of the entry of this Judgment until paid in full.
2. With respect to the Parties' competing claims for Declaratory Judgment (Count III of Big Sandy's Complaint and EQT's Petition for Declaratory Judgment), the Court orders and adjudges as follows:
a. The Court will take under submission the Parties' joint request for a ruling on the meaning of the phrase "coal workings, extended or projected."
b. In the event that any of EQT's pipelines interfere more than as little as may be reasonably possible with mining and removal of coal and other minerals, per the terms of the Deed, EQT must relocate the pipelines and pay for such relocation.
c. Under the Deeds, EQT is not obligated to enter surface use agreements with Big Sandy, prior to performing activities on the property covered by the Deeds.
d. The issuance of a well permit by the Kentucky Division of Oil and Gas is not determinative of whether EQT obtained approval from Big Sandy or its lessees regarding the location of the wells, whether EQT acted reasonably in its oil and gas operations, or whether EQT otherwise complied with the terms of the Deeds. Events that occurred during the permitting process may be relevant for other purposes.
e. The Court declines to rule that EQT is explicitly required to coordinate and cooperate with Big Sandy regarding the placement of its pipelines, roads, facilities, and other surface installations or improvements. However, if EQT takes any action that would otherwise be a breach of the obligations set forth in the Deeds or otherwise set out in this Judgment, it may be liable for the consequences of such conduct.
3. With respect to Count IV of Big Sandy's Complaint, the Court orders and adjudges that Big Sandy is entitled to an accounting. Judgment is entered in favor of Big Sandy in the amount of at least $39, 403.10, which is subject to increase based on the outcome of the accounting, with post-judgment interest accruing from the date of the entry of this Judgment until paid in full. EQT shall perform a query in its accounting system, by owner, for the period fifteen years prior to the filing of the Complaint, for all oil royalties on all oil wells owed to Big Sandy. The Court orders and adjudges that EQT is to produce the results of such query to Big Sandy with a written explanation as to how the royalties owed are being calculated. The Court further orders and adjudges that, to the extent EQT has royalty reports and oil tickets for oil royalties due to Big Sandy in its records, EQT must produce such oil tickets to Big Sandy so that Big Sandy may perform its own calculations. After EQT produces such information, if the Parties are unable to agree to the amount that EQT owes Big Sandy for unpaid oil royalties under Count IV of the Complaint, either Party may request a ruling from the Court on this issue.
4. EQT's Counterclaim for Unjust Enrichment has been bifurcated and will proceed separately. The Parties are to submit proposed, mutually convenient dates for the unjust enrichment claim to proceed.

         The court declined Big Sandy's request to reform the deeds, which required EQT to pay it 10¢ per ton for the 140 square foot block of coal left in place around a well. Big Sandy wanted the court to raise the 10¢ per ton amount to the present day value using the Consumer Price Index and use the 200-square-foot block left in place for the calculation as required by current regulations.

         In a separate order entered the same day, the court ruled on Big Sandy's motion for partial judgment on the unjust enrichment counterclaim. The court stated that such claims are subject to a five-year statute of limitations pursuant to Kentucky Revised Statutes (KRS) 413.120 and that EQT had argued that, because it did not discover the issue giving rise to this claim until March 2, 2010, the discovery rule and the doctrine of equitable tolling should toll the running of the statute of limitations in this case. The court found that:

[EQT], in the exercise of reasonable diligence, could have discovered the alleged overpayments at the time they were allegedly made and that [EQT] had at [its] disposal the information that would have allowed [it] to discover the alleged overpayments. [EQT's] corporate representative Nicole Atkison testified during her deposition that all of the information needed to discover the overpayment was at [EQT's] disposal and that the alleged overpayment could have been gleaned from the payment history.

         The court went on to find that the first overpayment was made in 2002, and that each overpayment constituted a separate claim for unjust enrichment. It then concluded that EQT's right to recover for alleged overpayments that occurred five years prior to the time EQT filed its counterclaim for unjust enrichment on May 11, 2010, was barred by the statute of limitations. The court therefore granted Big Sandy's motion for partial summary judgment related to overpayments made more than five ...

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