Federal Court rules on WV royalty statute

GOWV News

(by Jennifer Hicks)

The United States District Court for the Northern District of West Virginia recently held that a 2018 amendment to W. Va. Code § 22-6-8 (the “Flat Rate Statute”) “clearly does not apply retroactively.” Although the Supreme Court of Appeals of West Virginia has not yet addressed this issue, this federal court decision is indicative of how the highest court in West Virginia may answer the question raised by plaintiffs in royalty litigation across West Virginia: Does the 2018 amendment apply retroactively to alter the way royalties are paid for wells drilled on a flat rate lease before May 31, 2018?

In Corder v. Antero Resources Corporation, Civil Action No. 1:18-cv-30 (N.D. W.Va. May 12, 2021), the Court analyzed several issues related to the payment of oil and gas royalties pursuant to various royalty provisions. One of the leases at issue was what is commonly referred to as a “flat rate” lease, under which the lessee was required to pay “$100 per year for each and every gas well obtained on the premises[.]”

Flat rate leases are governed in West Virginia by W. Va. Code § 22-6-8, which was originally enacted in 1982 and first amended in 1994, to require that no permit for a flat rate well would be issued unless the lessee swore by affidavit that it would pay the lessor no less than one-eighth of the total amount paid to or received by or allowed to the lessee at the wellhead for the oil and gas so extracted, produced or marketed. In 2017, in Leggett v EQT Prod. Co., 800 S.E.2d 850, 862 (W.Va. 2017), the Supreme Court of Appeals of West Virginia interpreted this language as allowing a pro-rata deduction or allocation of all reasonable post-production expenses actually incurred by the lessee, and held that a lessee may utilize the “net-back” or “work-back” method to calculate royalties owed to a lessor pursuant to a lease governed by W. Va. Code § 22-6-8(d).

In 2018, following the Leggett decision, the West Virginia Legislature amended W. Va. Code § 22-6-8 to require that in order to obtain certain permits, a flat-rate lessee must provide an affidavit swearing that it will pay the lessor “not less than one eighth of the gross proceeds, free from any deductions for post-production expenses, received at the first point of sale to an unaffiliated third-party purchaser in an arm’s length transaction for the oil or gas so extracted, produced or marketed before deducting the amount to be paid to or set aside for the owner of the oil or gas in place, on all such oil or gas to be extracted, produced or marketed from the well.”

In Corder, the plaintiffs argued that the 2018 amendment to the Flat Rate Statute should apply retroactively to prohibit the lessee from taking deductions of post-production expenses from the plaintiffs’ royalties. The Court ultimately disagreed with the plaintiffs, explaining that “[t]he presumption is that a statute is intended to operate prospectively, and not retrospectively, unless it appears, by clear, strong and imperative words or by necessary implication, that the Legislature intended to give the statute retroactive force and effect.” Corder at 33 (quoting Syl. Pt. 2, Martinez v. Asplundh Tree Expert Co., 803 S.E.2d 582 (W. Va. 2017)). The Court further explained that there is a long-standing principle under West Virginia law that “[n]o statute, however positive, is to be construed as designed to interfere with existing contracts, rights of action, or suits, and especially vested rights, unless the intention that it shall so operate is expressly declared.” Id. (quoting Syl. Pt. 3, Rogers v. Lynch, 29 S.E. 507 (W. Va. 1897)). The Court found that the 2018 amendment to the Flat Rate Statute does not state in “clear, strong[,] and imperative words” that it applies retroactively, nor does it specify any intent by the legislature to clarify the existing law on flat rate leases or to overrule the holding of the Supreme Court of Appeals in Leggett. Rather, the 2018 amendment prohibits the issuance of any new permit unless the lessee first agrees to pay royalties pursuant to the language of the 2018 amendment. The Court held that, “Based on this, the 2018 amendment clearly does not apply retroactively.”

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