Publication Date: 6/13/2008
On May 22, 2008, the Supreme Court of Appeals of West Virginia voted to refuse the appeal of a $404 million verdict rendered by a Roane County jury against NiSource Inc., Columbia Energy Group, and Chesapeake Appalachia LLC. Both plaintiffs and defendants had requested full appellate review of the verdict, which was the third largest in the United States in 2007, and included a punitive damages award of $270 million.
The case against the natural gas companies, called Estate of Tawney, et al. v. Columbia Natural Resources, L.L.C., et al., was brought as a class action by individuals and companies who owned royalty interests in West Virginia gas wells operated by Columbia Natural Resources. Columbia Natural Resources, or CNR, was owned by a subsidiary of NiSource and Columbia Energy Group until 2003, when it was sold to Triana Energy Holdings. In late 2005, Triana Energy Holdings sold CNR to Chesapeake Energy Holdings, which changed its name to Chesapeake Appalachia LLC, and continues to operate the exploration and production company.
The plaintiffs in the Tawney case alleged underpayment of royalties on several grounds, including improper deduction of post-production expenses; failure to pay royalty on gas lost through “shrinkage” or “line loss;” mismeasurement of amounts upon which royalty should be paid; payment of royalty based on actual proceeds received under long-term forward sales agreements; and failure to pay a 1/8th royalty on wells subject to flat rate leases.
The issue involving post-production expenses was resolved in an earlier appeal in which the West Virginia Supreme Court held that leases that called for royalties to be determined “at the wellhead” were “ambiguous” with respect to deduction of post production expenses and therefore would be construed liberally in favor of the lessors and strictly against the lessee to prohibit deduction of any portion of such expenses from royalty payments absent express language permitting such deductions. Estate of Tawney v. Columbia Natural Resources, L.L.C., 219 W. Va. 266, 633 S.E.2d 22 (2006). The case was remanded for determination of damages resulting from deduction of post production expenses.
Also prior to trial, the circuit court entered summary judgment with respect to the flat rate lease issue. Specifically, the court retroactively invalidated the 651 flat rate leases challenged by the plaintiffs, converted them to 1/8th royalty leases, and ordered payment of the difference between the flat rate royalty and the 1/8th royalty for a period of time going back ten years (representing the statute of limitations applicable to a contract claim). In so doing, the court relied on legislative findings set forth in the well permitting statute, W. Va. Code § 22-6-8, despite the fact that the Legislature specifically declined in that statute to retroactively invalidate existing flat rate leases as it believed such a remedy would violate the Commerce Clause.
In their Petition for Appeal, the defendants raised more than ninety separate points of error by the trial court, including violations of the defendants’ right to due process; the award of punitive damages in a case arising from alleged breach of contract; the award of punitive damages on the basis of the trial court’s newly-created tort of “fraudulent breach of contract;” the award of punitive damages in the absence of any award of compensatory tort damages; the award of punitive damages based upon constructive, rather than actual, fraud; the award of punitive damages based upon lawful forward sales agreements which were publicly disclosed; the trial court’s refusal to permit defendants to introduce the leases at issue into evidence until after all the witnesses had testified, which prevented cross-examination of plaintiffs or plaintiffs’ experts with respect to the leases; and the trial court’s ruling that the only acceptable price upon which to base royalty calculation was the Appalachian TCO index price at the time of production, even for proceeds leases and leases with sole discretion clauses. The defendants also challenged the court’s certification of a class involving disparate parties with disparate leases and disparate claims and its application of particular statutes of limitations, as well as many other substantive and evidentiary rulings.
In refusing to accept the parties’ joint request for full appellate review, the Supreme Court departed from its own precedent holding that, upon petition, it will review all awards of punitive damages. Moreover, the United States Supreme Court held in Honda Motor Co., Ltd. v. Oberg that federal due process dictates meaningful state court appellate review of all punitive damages awards. The West Virginia Supreme Court’s Order provides no reason for its decision, but tersely states: “Upon consideration whereof, the Court is of opinion to and doth hereby refuse said petition for appeal.”
Chief Justice Elliott Maynard, Justice Joseph Albright and Justice Larry Starcher participated in the May 22nd vote to refuse the appeal, along with Cabell County Circuit Judge Dan P. O’Hanlon and Raleigh County Circuit Judge H.L. Kirkpatrick, who were appointed three days earlier, on Monday, May 19, 2008, to sit in place of Justices Robin Davis and Brent Benjamin. Justice Davis recused herself because her husband, Scott Segal, is one of the plaintiffs’ lawyers in the underlying case. Justice Benjamin recused himself because he was a partner in one of the defense firms involved in the case prior to being elected to the Court in 2004.
The same day it refused to hear the Tawney appeal, the Supreme Court also refused to hear the appeal of the $219 million verdict in Wheeling-Pitt v. Central West Virginia Energy Company. That verdict, returned by a Brooke County jury, included a $100 million punitive damages award in a case in which Central West Virginia Energy, a Massey Energy subsidiary, was accused of violating the terms of a coal supply agreement. The Wheeling Pitt verdict was the seventh highest in the nation in 2007, according to a list published by the National Law Journal.
Defendants in both cases will now seek vindication of their federal constitutional rights through petition for writ of certiorari to the United States Supreme Court.
The case against the natural gas companies, called Estate of Tawney, et al. v. Columbia Natural Resources, L.L.C., et al., was brought as a class action by individuals and companies who owned royalty interests in West Virginia gas wells operated by Columbia Natural Resources. Columbia Natural Resources, or CNR, was owned by a subsidiary of NiSource and Columbia Energy Group until 2003, when it was sold to Triana Energy Holdings. In late 2005, Triana Energy Holdings sold CNR to Chesapeake Energy Holdings, which changed its name to Chesapeake Appalachia LLC, and continues to operate the exploration and production company.
The plaintiffs in the Tawney case alleged underpayment of royalties on several grounds, including improper deduction of post-production expenses; failure to pay royalty on gas lost through “shrinkage” or “line loss;” mismeasurement of amounts upon which royalty should be paid; payment of royalty based on actual proceeds received under long-term forward sales agreements; and failure to pay a 1/8th royalty on wells subject to flat rate leases.
The issue involving post-production expenses was resolved in an earlier appeal in which the West Virginia Supreme Court held that leases that called for royalties to be determined “at the wellhead” were “ambiguous” with respect to deduction of post production expenses and therefore would be construed liberally in favor of the lessors and strictly against the lessee to prohibit deduction of any portion of such expenses from royalty payments absent express language permitting such deductions. Estate of Tawney v. Columbia Natural Resources, L.L.C., 219 W. Va. 266, 633 S.E.2d 22 (2006). The case was remanded for determination of damages resulting from deduction of post production expenses.
Also prior to trial, the circuit court entered summary judgment with respect to the flat rate lease issue. Specifically, the court retroactively invalidated the 651 flat rate leases challenged by the plaintiffs, converted them to 1/8th royalty leases, and ordered payment of the difference between the flat rate royalty and the 1/8th royalty for a period of time going back ten years (representing the statute of limitations applicable to a contract claim). In so doing, the court relied on legislative findings set forth in the well permitting statute, W. Va. Code § 22-6-8, despite the fact that the Legislature specifically declined in that statute to retroactively invalidate existing flat rate leases as it believed such a remedy would violate the Commerce Clause.
In their Petition for Appeal, the defendants raised more than ninety separate points of error by the trial court, including violations of the defendants’ right to due process; the award of punitive damages in a case arising from alleged breach of contract; the award of punitive damages on the basis of the trial court’s newly-created tort of “fraudulent breach of contract;” the award of punitive damages in the absence of any award of compensatory tort damages; the award of punitive damages based upon constructive, rather than actual, fraud; the award of punitive damages based upon lawful forward sales agreements which were publicly disclosed; the trial court’s refusal to permit defendants to introduce the leases at issue into evidence until after all the witnesses had testified, which prevented cross-examination of plaintiffs or plaintiffs’ experts with respect to the leases; and the trial court’s ruling that the only acceptable price upon which to base royalty calculation was the Appalachian TCO index price at the time of production, even for proceeds leases and leases with sole discretion clauses. The defendants also challenged the court’s certification of a class involving disparate parties with disparate leases and disparate claims and its application of particular statutes of limitations, as well as many other substantive and evidentiary rulings.
In refusing to accept the parties’ joint request for full appellate review, the Supreme Court departed from its own precedent holding that, upon petition, it will review all awards of punitive damages. Moreover, the United States Supreme Court held in Honda Motor Co., Ltd. v. Oberg that federal due process dictates meaningful state court appellate review of all punitive damages awards. The West Virginia Supreme Court’s Order provides no reason for its decision, but tersely states: “Upon consideration whereof, the Court is of opinion to and doth hereby refuse said petition for appeal.”
Chief Justice Elliott Maynard, Justice Joseph Albright and Justice Larry Starcher participated in the May 22nd vote to refuse the appeal, along with Cabell County Circuit Judge Dan P. O’Hanlon and Raleigh County Circuit Judge H.L. Kirkpatrick, who were appointed three days earlier, on Monday, May 19, 2008, to sit in place of Justices Robin Davis and Brent Benjamin. Justice Davis recused herself because her husband, Scott Segal, is one of the plaintiffs’ lawyers in the underlying case. Justice Benjamin recused himself because he was a partner in one of the defense firms involved in the case prior to being elected to the Court in 2004.
The same day it refused to hear the Tawney appeal, the Supreme Court also refused to hear the appeal of the $219 million verdict in Wheeling-Pitt v. Central West Virginia Energy Company. That verdict, returned by a Brooke County jury, included a $100 million punitive damages award in a case in which Central West Virginia Energy, a Massey Energy subsidiary, was accused of violating the terms of a coal supply agreement. The Wheeling Pitt verdict was the seventh highest in the nation in 2007, according to a list published by the National Law Journal.
Defendants in both cases will now seek vindication of their federal constitutional rights through petition for writ of certiorari to the United States Supreme Court.
