Francis Kaess v. BB Land, LLC (Justice Walker, dissenting, joined by Justice Bunn)

No. 23-522, Francis Kaess v. BB Land, LLC FILED June 6, 2025 Walker, Justice, dissenting, and joined by Justice Bunn: released at 3:00 p.m. C. CASEY FORBES, CLERK SUPREME COURT OF APPEALS OF WEST VIRGINIA In this certified question proceeding, the majority opinion applies an implied duty to market to an oil and gas lease that contains an in-kind royalty provision. It goes on to hold that the requirements for the deductions of post-production expenses from Wellman1 and Tawney2 apply to the lease. With respect for my colleagues in the majority, I dissent. As explained below, the majority’s analysis does not withstand scrutiny primarily because it muddles the distinction between different types of leases. As a result, the majority effectively rewrites the leases to take money from the producers to give it to the royalty owners. But it is not the province of this Court to rewrite an oil and gas lease to 1 See Syl. Pt. 4, Wellman v. Energy Res., Inc., 210 W. Va. 200, 557 S.E.2d 254 (2001) (“If an oil and gas lease provides for a royalty based on proceeds received by the lessee, unless the lease provides otherwise, the lessee must bear all costs incurred in exploring for, producing, marketing, and transporting the product to the point of sale.”). 2 See Syl. Pt. 10, Estate of Tawney v. Columbia Natural Res., 219 W. Va. 266, 633 S.E.2d 22 (2006) (“Language in an oil and gas lease that is intended to allocate between the lessor and lessee the costs of marketing the product and transporting it to the point of sale must expressly provide that the lessor shall bear some part of the costs incurred between the wellhead and the point of sale, identify with particularity the specific deductions the lessee intends to take from the lessor’s royalty (usually 1/8), and indicate the method of calculating the amount to be deducted from the royalty for such post- production costs.”). 1 reflect the Court’s view of a fair bargain. We certainly would not go to such extreme measures to rewrite contracts in any other context.3 I would have held that for leases that contain an in-kind royalty provision, there is no implied duty to market arising from the lease/contract and the requirements of Wellman and Tawney for the deductions of post-production expenses are inapplicable. As explained below, an implied duty to market is only triggered when a royalty owner does not or cannot take physical possession of its royalty share of the production; when that occurs, the producer must market and sell the royalty owner’s share of the production to avoid waste and loss, and the producer may properly charge the royalty owner his share of any post-production costs. One of the most contentious legal issues in the oil and gas industry is the dispute concerning the deductibility of post-production costs from royalty payments owed to lessors.4 At the risk of oversimplification, most royalty clauses generally fall into one 3 When examining a contract in an employment dispute, this Court stated that: “Our task is not to rewrite the terms of contract between the parties; instead, we are to enforce it as written.” Fraternal Ord. of Police, Lodge No. 69 v. City of Fairmont, 196 W. Va. 97, 101, 468 S.E.2d 712, 716 (1996). In the same way, we have held parties to a contract dispute involving an insurance policy to the plain language in the policy and noted that: “‘We will not rewrite the terms of the policy; instead, we enforce it as written.’” Auto Club Prop. Cas. Ins. Co. v. Moser, 246 W. Va. 493, 500, 874 S.E.2d 295, 302 (2022) (quoting Payne v. Weston, 195 W. Va. 502, 507, 466 S.E.2d 161, 166 (1995)). 4 See William T. Silvia, Slouching Toward Babel: Oklahoma’s First Marketable Product Problem, 49 Tulsa L. Rev. 583 (Winter, 2013) (outlining the “minefield of judicial interpretations among the major oil and gas-bearing states[,]” including West Virginia); 2 of two broad categories: “proceeds” royalty provisions, which provide for the mineral owner to receive a royalty consisting of a monetary share of the proceeds the producer receives from the sale of the oil and gas produced under the lease, and “in-kind” royalty provisions, which provide for the mineral owner to receive a royalty consisting of a portion of the physical oil and gas produced, tendered at the wellhead. This Court has stated that