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April 2009 issue Fall Out from Fourth Circuit Decision on § 404 Permits The Fourth Circuit’s decision on § 404 permits (Ohio Valley Envtl. Coalition v. Aracoma Coal Co.) has prompted separate reactions from the U. S. Environmental Protection Agency (EPA) and two United States senators. First, EPA announced plans to more closely scrutinize surface mining permits processed by the U. S. Army Corps of Engineers (Corps) that have languished for years. In February, the Court lifted an injunction issued by a federal district court against the Corps that prevented the Corp’s issuance of § 404 permits prompting the Corps to begin issuing permits that had been long delayed as a result of the litigation (For summary of case, See EMLF News Update, 4th Circuit Finds § 404 Permits Properly Issued in Surface Mining Operation, Robert D. Pollitt, (Mar. 2009)). EPA's action now places the status of upwards of one hundred permit requests once again in limbo. In making the announcement, EPA referenced two letters sent to the Corps expressing concern that proposed mitigation efforts were inadequate to address the potential environmental impact of two proposed mining operations in Kentucky and West Virginia. Second, two United States senators -- Benjamin L. Cardin (D-Md) and Lamar Alexander (R-Tenn) -- have proposed a bill, the Appalachia Restoration Act, to amend the Clean Water Act to make the dumping of mining waste from mountaintop removal coal into streams and rivers illegal. If passed, mountaintop coal mining operations would come to a halt. In its news release, EPA expressed “serious concerns about the need to reduce the potential harmful impacts on water quality” indicating its potential support of the new bill. (See www.epa.gov/newsroom, EPA Acts to Reduce Harmful Impacts from Mining, March 24, 2009). WV Supreme Court Determines Rights of Consenting Cotenant to Oil & Gas Lease The Supreme Court of Appeals of West Virginia, addressing a certified question about oil and gas leasing, determined that a cotenant of an oil and gas estate who did not execute a lease, but cannot be classified as a “nonconsenting cotenant,” is entitled to recover from the lessee only that portion of the royalty that such cotenant would have been entitled to had such cotenant executed the lease. Siblings Karen Drake and Rickey Drake mistakenly believed that Karen was the sole owner of a 100-acre oil and gas tract. WACO Oil & Gas Company, Inc. (WACO) also mistakenly believed Karen to be the sole owner of the oil and gas and desired to lease the mineral rights. Rickey, on Karen’s behalf, negotiated the lease between Karen and WACO. After the lease was executed between Karen and WACO, Rickey learned that he owned a one-half interest in the oil and gas (as a cotenant with Karen). Rickey then sued WACO for the amounts that he was entitled to as a cotenant of the property. The certified question asked whether the correct amount of his entitlement was (a) the value of the gas produced less reasonable costs of production (Rickey’s argument), or (b) that portion of the royalty to which Rickey would have been entitled to had both Rickey and Karen executed the lease (WACO’s argument). The court found that Rickey was entitled to (b), that portion of the royalty to which Rickey would have been entitled to had both Rickey and Karen executed the lease (WACO’s argument). The court held that “when mineral rights have been leased to an oil and gas producer, and a person subsequently learns that he or she was a cotenant to the land at the time that its mineral rights were leased, but the cotenant cannot be classified as a ‘nonconsenting cotenant’ as contemplated by Syllabus Point 4 of Thaxton v. Beard, 201 S.E.2d 298 (W.Va. 1973), such cotenant is entitled to recover from the lessee only that portion of the royalty to which he or she would have been entitled had he or she been a signatory to the lease.” Under the facts of the case, Rickey could not be considered a “nonconsenting cotenant” because he actively participated in the negotiation of the lease on Karen’s behalf. Furthermore, all parties involved were ignorant of Rickey’s ownership interest and, thus, acted in good faith belief that Karen was the sole owner of the property. Finally, the court noted that had either of the parties conducted a title search, prior to execution of the lease, that party would have discovered that Rickey was a cotenant. Thus, principles of equity come into play when both parties are at fault. The court found that it would be inequitable under the circumstances to give Rickey a larger share of the profits from WACO than he would have received had both parties known of his status as a co-owner at the time the lease was signed. Note that under Syllabus Point 4 of Thaxton v. Beard, 201 S.E.2d 298 (W.Va. 1973), where the cotenant is nonconsenting, that nonconsenting cotenant may choose to either recognize the lease and receive his fractional interest in the royalty, or reject the lease and receive his fractional part of the oil and gas produced less his proportionate part of the cost of discovery and production. WV Division of Oil and Gas Has No Authority Over Coalbed Methane Ownership Issues By decision dated March 27, 2009, the Supreme Court of Appeals of West Virginia held that the Coalbed Methane Act (W. Va. Code §§ 22-21-1 to 29 (2002 & Supp. 2008)) does not empower the West Virginia Division of Oil and Gas with the authority to resolve issues of conflicting ownership claims to coalbed methane. The decision stems from an appeal by CBC Holdings, LLC (CBC) from a November 16, 2007, order of the Circuit Court of Wetzel County, West Virginia. On January 22, 2007, CBC filed a declaratory judgment action in the Circuit Court of Wetzel County challenging Dynatec Corporation, USA’s (Dynatec) right to extract coalbed methane from the Pittsburgh seam of coal. CBC sought to establish that Dynatec’s lease agreement for the subject property did not include the mineral rights to the coalbed methane. CBC argued that when the surface rights of the various tracts of land were partitioned the mineral rights were not specifically addressed and, therefore, remained with the prior owners of the surface rights. Dynatec moved to dismiss on the grounds that CBC failed to exhaust its administrative remedies because CBC’s claim fell within the administrative procedures set forth in West Virginia’s Coalbed Methane Act. The trial court agreed, but rather than granting a dismissal, the case was sent to the Division of Oil and Gas to rule on “the drilling permits and coalbed methane formation ownership.” By its November 16, 2007 order, a ruling on Dynatec’s motion to dismiss was stayed by the Circuit Court during the pendency of the Division’s consideration. On review, the Supreme Court of Appeals held that the Division of Oil and Gas does not have the authority to resolve issues of conflicting ownership claims to coalbed methane and remanded the case for further proceedings. Out of State Coal Plants Deemed Public Nuisance in North Carolina; TVA Ordered to Install $1 Billion in Controls The United States District Court for the Western District of North Carolina issued an injunction requiring the Tennessee Valley Authority (TVA) to promptly install costly pollution control equipment at four coal-fired power plants in Alabama and Tennessee, whose emissions the Court deemed a public nuisance to citizens in North Carolina. Emissions from other plants in those states and in Kentucky were found to be too remote to constitute a nuisance. The Federal Clean Air Act requires the U. S. Environmental Protection Agency (EPA) to establish National Ambient Air Quality Standards (NAAQS) for various pollutants. These NAAQS represent EPA’s determination of how clean the air should be across the United States in order to protect public health and welfare. North Carolina lawmakers have expressed a desire that the air in North Carolina be cleaner than the federal standards. To that end, the North Carolina legislature established stringent standards seeking emission reductions from in-state pollution sources and declaring the legislature’s intent to use all available means and resources, including litigation, to obtain emission reductions from other states as well. To further these intentions, North Carolina brought suit against TVA in 2006. North Carolina relied on a theory of public nuisance to seek emission reductions from TVA’s coal-fired power plants in Tennessee, Alabama and Kentucky, claiming that those emissions enter North Carolina and adversely impact the citizens and the environment of that state. The court held that whether the individual coal-fired power plants constituted a nuisance had to be evaluated according to the law of nuisance of the state in which the plants were located. Thus, plants in Alabama were reviewed using Alabama’s definition of nuisance, those in Tennessee followed Tennessee’s definition, and so on. Following this approach, the federal court concluded that emissions from those plants within one hundred miles of the North Carolina border, when evaluated under the appropriate state law, constitute public nuisance. Specifically, even though the plants in question were being operated in compliance with applicable laws of the states in which they were located, the federal court found that TVA’s failure to install readily available pollution control technology was not reasonable conduct under the circumstances. The federal court ordered TVA to install scrubbers and selective catalytic reduction (SCR) technology to reduce emissions of SO2 and NOx at those plants within one hundred miles of North Carolina, at an estimated cost of approximately $1 billion. Emissions from plants located more than one hundred miles from the North Carolina border were found not to have a significant impact on North Carolina and thus North Carolina’s request for injunctive relief with respect to those plants was denied. Pennsylvania - Oil and Gas Lessees Define “Paying Quantities” for Pressure Leases Oil and gas lessee in a 1928 “pressure” lease, and an assignee of wells drilled thereunder (Phillips), sought declaratory judgment against oil and gas owner (Jedlicka) as to the respective rights and duties of the parties. Jedlicka sought forfeiture of the lease, arguing that Phillips had not produced oil and gas “in paying quantities” and failed to hold the lease by production. Jedlicka cited minimal historic production and a single net loss of $40 on production in 1959 as the factual basis for her argument. The Court of Common Pleas of Indiana County decreed that the lessee held the lease by production and the lease remained valid. On appeal, Jedlicka argued that the trial court erred when it applied a subjective rather than objective standard to its determination of whether the lease had produced in paying quantities. Jedlicka argued that, as there is very limited authority in Pennsylvania as to what exactly constitutes “paying quantities,” save one Pennsylvania Supreme Court case decided in 1899, the state should adopt an objective standard, citing cases from numerous other jurisdictions that have done so, along with setting forth a tenuous interpretation of a Pennsylvania Court of Common Pleas case. The Superior Court opted not to follow the persuasive authority proffered by Jedlicka, both dismissing the non-Pennsylvania cases and disagreeing with the characterization of the Pennsylvania Court of Common Pleas case as creating an objective standard. Instead, as it was bound to follow the 1899 Pennsylvania Supreme Court case, the Superior Court did so, stating that the good faith judgment of Phillips as to its production is a central issue, and that it was Jedlicka’s burden to establish a lack of good faith. Both the Superior Court and the trial court agreed that Jedlicka failed to meet this burden. An ancillary issue on appeal was whether the trial court erred when it determined that the lease produced in paying quantities because there was insufficient competent evidence of expenses presented during the proceedings below. The Superior Court once again stated that the burden of establishing a termination or forfeiture of a lease is on the party asserting the termination or forfeiture. Thus, it was Jedlicka’s burden to establish that Phillips failed to establish its expenses and stood in breach of the lease. Upon reviewing the record below as to this issue, and in light of the applicable burden, the Superior Court once again concurred with the trial court’s decision. Texas Supreme Court reverses $18.6 million Jury Verdict Against Exxon In two companion cases, the Texas Supreme Court reversed a jury verdict against Exxon awarding $18.6 million in damages, which included $10 million in punitive damages. In Case No. 05-1076, the court found that the royalty owners’ claims of waste, negligence per se, negligent misrepresentation and tortious interference were barred by the tolling of the two-year statute of limitations period, which began when the royalty owners had actual knowledge of their claims. The court also reversed the court of appeals decision in favor of Exxon on the breach of lease claim because insufficient evidence existed where Exxon had completed at least one well capable of producing in paying quantities in each zone. However, the court affirmed the fraud claims against Exxon finding sufficient evidence that the royalty owners relied on Exxon’s inaccurate filings made with the Railroad Commission. In Case No. 05-0729, the Texas Supreme Court reversed the court of appeals judgment holding that Emerald Oil & Gas Company, L.C. lacked standing under § 85.321 of the Texas Natural Resources Code. The court stated that § 85.321 creates a private cause of action that does not extend to a subsequent lessee (here, Emerald). The court noted that in this case, the original lessee did not assign its claim for property damages to the subsequent lessee. Ohio - Plaintiff Has Burden of Proving Validity of Lease in Declaratory Action Positron Energy Resources, Inc. and Stonebridge Operating Co. (Plaintiffs) filed suit against Defendants after Plaintiffs’ employees were escorted off of Defendants’ property at gunpoint. The employees were trying to install a new meter and pipelines at wellheads on two wells located on separate leased properties owned by Defendants. After a bench trial, the Washington County Common Pleas Court granted Defendants’ motion for a directed verdict. Plaintiffs appealed the decision. At issue was whether the leases had lapsed and which party had the burden of proving the current status of the leases. The Court of Appeals agreed with Defendants that Plaintiffs had the burden of proving that the leases were valid in this case because Plaintiffs had asserted a claim for declaratory judgment that the leases were valid. The Court of Appeals, however, determined that the lower court had abused its discretion in issuing a directed verdict based on Plaintiffs’ failure to prove that the leases were valid while at the same time denying Plaintiffs’ motion to reopen case to prove the very fact upon which the directed verdict was based. This case was remanded for further proceedings consistent with the opinion. Just Compensation for Partial Taking Measured by the Diminution in Market Value In a case before the United States District Court for the Northern District of West Virginia, Hardy Storage Company (Plaintiff) brought an action against surface landowners to condemn and pay just compensation for subsurface storage tanks. The surface landowners presented a variety of procedural and substantive theories, but the ultimate issue proved to be that of just compensation. Noting that the surface landowners bear the burden of proving the fair market value of the property condemned, the court established that in cases of partial takings, just compensation is measured by the diminution in market value (i.e. the difference between the fair market value of the land before and after the condemnation). The court, however, found that the surface landowners did not present any admissible evidence regarding the diminution in market value. The surface landowners did not submit an expert opinion, and the court rejected their estimates since the numbers they presented either relied on an assumption of a total taking, were based on unreliable county assessment figures, or were based on inadmissible settlement offers to other parties. Therefore, the court relied on the expert opinion provided by Plaintiff, which based its estimate of fair market value on the value paid in the market for similar rights, which it determined to be $50 per acre. The court granted Plaintiff’s motion for summary judgment by ordering Plaintiff to pay the surface landowners $4,817 despite the fact that the surface landowners were seeking compensation in excess of $4,000,000. This case emphasizes that in a just compensation case, obtaining an expert opinion regarding market value is of utmost importance. It also demonstrates that the Natural Gas Act, which governs condemnation actions, does not require parties to negotiate in “good faith” relative to just compensation; the parties must only demonstrate that they have been unable to agree on the compensation to be paid. Lastly, this case notes that when the Federal Energy Regulatory Commission grants a certificate of public convenience and necessity, a district court cannot revisit this issue. Gas Producer Unable to Halt Coal Exploration While Challenge to License is Pending The United States District Court for the District of Columbia refused to enjoin the U. S. Department of the Interior’s Bureau of Land Management from allowing coal exploration by BTU Western Resources Inc. (BTU) to proceed while a challenge to the issuance of the coal exploration license is pending. Bill Barrett Corporation (BBC) produces natural gas from the coal seam under preexisting licenses. BBC is seeking judicial review of the BLM’s decision to issue a coal exploration license to BTU, on the grounds that the license lacks sufficient stipulations to protect BBC’s natural gas operations in the event BBC’s wells are contaminated by BTU’s exploratory core drilling. The court granted a temporary restraining order prohibiting coal exploration until at least January 17, 2009. (See EMLF News Update, BBC Granted Temporary Restraining Order to Halt Exploration, Kenneth L. Carroll (Feb. 2009)). Recently, the U. S. District Court for the District of Columbia considered BBC’s request for a preliminary injunction to halt coal exploration under the license pending resolution of the case. In its motion, BBC argued that core drilling by BTU would introduce oxygen into the coal seam, causing irreparable harm. Because natural gas production relies on negative pressure in the coal seam, BBC alleged that oxygen would migrate through the seam to the gas wells, shutting them down and making it impossible to purge the gas wells and coal seam of oxygen. On March 11, 2009, the court denied the injunction. Judge Richard J. Leon declined to find irreparable harm, and instead, deferred to the BLM’s technical expertise in its determination that the risk of oxygen contamination was not proven with any certainty. Judge Leon also noted that, when oxygen contamination had occurred, BBC had been able to return those wells to production in about nine days. The court’s decision limits the gas producer’s ability to protect its operations from coal exploration activities while a challenge to the federal license is pending. Wellbore Window Drilling Patent Case Settled; New Case Filed Whipstock Services, Inc. (Whipstock) recently settled a patent infringement case against Key Energy Services, Inc. for wellbore window drilling that involves drilling sideways through metal casing to prevent the borehole from caving in. That suit was dismissed with prejudice pursuant to an agreement between the parties. The terms of the agreement have not been released, and the order dismissing the case is void of any information relating to settlement amounts or enforceability of the patent. Whipstock is now pursuing patent infringement claims against Schlumberger Ltd. and Smith International, Inc. These new patent infringement suits against new parties suggest that the first patent infringement suit against Key Energy Services, Inc. was at least moderately successful. Any entity using the wellbore window drilling method, or a similar method, should be mindful of possible patent infringement claims from Whipstock. Patriot Reaches Agreement with Environmental Groups Patriot Coal Corporation (Patriot) reached an agreement with environmental groups settling a federal civil action brought by the groups against Patriot for alleged violations of the Clean Water Act (CWA.) The alleged violations occurred at two mines acquired by Patriot as a part of its purchase of Magnum. Patriot agreed to pay a $50,000 civil penalty and $325,000 in attorneys’ fees. Patriot also agreed to invest up to $350,000 in a pilot project to measure the effectiveness of reverse osmosis technology to treat selenium in coal mines. To date, no effective technology has been developed to address the selenium issue resulting in an ongoing legal conflict between regulators, industry and environmental groups. (For summary of case, see EMLF News Update, Ohio Valley Envtl Coalition v. Hobet Mining, LLC, J. Kevin Ellis (Feb. 2009)).
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