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IN THE SUPREME COURT OF APPEALS OF WEST VIRGINIA January 2001 Term

FILED
July 6, 2001
RORY L. PERRY II, CLERK SUPREME COURT OF APPEALS OF WEST VIRGINIA

_________________ No. 28209 _________________

RELEASED
July 6, 2001
RORY L. PERRY II, CLERK SUPREME COURT OF APPEALS OF WEST VIRGINIA

JAMES T. WELLMAN AND GRACE WELLMAN, Plaintiffs Below, Appellees v. ENERGY RESOURCES, INC., A WEST VIRGINIA CORPORATION, Defendant Below, Appellant ________________________________________________________________ Appeal from the Circuit Court of Logan County Honorable Roger L. Perry, Judge Civil Action No. 98-C-429 AFFIRMED, IN PART, REVERSED, IN PART, AND REMANDED ________________________________________________________________ Submitted: January 10, 2001 Filed: July 6, 2001

Charles B. Dollison, Esq. Gary O. Kinder, Esq. Bowles Rice McDavid Graff & Love, PLLC Charleston, West Virginia Attorney for Appellees

O. Reginald Osenton, Esq. Dwayne J. Adkins, Esq. Osenton & Adkins, LLP Logan, West Virginia Attorney for Appellant

CHIEF JUSTICE McGRAW delivered the Opinion of the Court.

SYLLABUS BY THE COURT

1.

"A circuit court's entry of summary judgment is reviewed de novo." Syllabus

Point 1, Painter v. Peavy, 192 W. Va. 189, 451 S.E.2d 755 (1994).

2.

"If there is no genuine issue as to any material fact summary judgment should be

granted but such judgment must be denied if there is a genuine issue as to a material fact." Syllabus Point 4, Aetna Casualty & Surety Company v. Federal Insurance Company of New York, 148 W. Va. 160, 133 S.E.2d 770 (1963).

3.

"Judicial ascertainment" clauses in oil and gas leases in West Virginia are void under

the public policy of this State and do not preclude a court in which a controversy over an oil and gas lease is tried from rendering a final judgment and finally resolving that controversy.

4.

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.

5.

If an oil and gas lease provides that the lessor shall bear some part of the costs

incurred between the wellhead and the point of sale, the lessee shall be entitled to credit for those costs to the extent that they were actually incurred and they were reasonable. Before being entitled to such credit,
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however, the lessee must prove, by evidence of the type normally developed in legal proceedings requiring an accounting, that he, the lessee, actually incurred such costs and that they were reasonable.

6.

In light of the public policy favoring the conservation and maximum recovery of oil

and gas, when an oil or gas well remains capable of producing oil or gas at the termination of a lease covering such well, a lessee desiring to remove the well equipment must afford the lessor, or an agent chosen by the lessor, a reasonable opportunity to qualify under the bonding statute of this State, W. Va. Code 22-6-26, to continue the operation of the well. In the event the lessor elects to so qualify, a court, upon application of either party, may determine and order payment for the value of the lessee's well equipment, reduced by the cost of removing such equipment from the leasehold and by the cost of plugging the well assumed by the lessor.

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McGraw, Chief Justice:

This is an appeal by Energy Resources, Inc. from an order of the Circuit Court of Logan County granting James T. Wellman and Grace Wellman summary judgment in an action arising out of two oil and gas leases. In granting summary judgment, the circuit court found that the evidence adduced demonstrated that Energy Resources, Inc. had breached the leases and found that the leases had been terminated. The court also awarded the Wellmans substantial damages. On appeal, Energy Resources, Inc., claims that the circuit court erred in granting summary judgment, in declaring the termination of the leases, and in awarding the Wellmans damages.

I. FACTS The appellees in this proceeding, James T. Wellman and Grace Wellman, owned the oil and gas underlying two tracts of real estate containing 200 acres and 23.5 acres located in Logan County, West Virginia. They had acquired their interests from James T. Wellman's father, Benny Wellman. Prior to the transfer of the interests in the oil and gas to James T. and Grace Wellman, Benny Wellman had entered into two oil and gas leases covering the two tracts with Energy Resources, Inc., the appellant in the present proceeding. For all purposes relating to the present proceeding the leases were identical.

The leases contained certain provisions which are critical to issues in the present case. First, they provided that they would run for a term of ten years and for so long thereafter as drilling or

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working operations for oil or gas were conducted, or for so long as oil or gas were produced from the leased premises. Specifically, the leases provided that Energy Resources, Inc. was: TO HAVE AND TO HOLD said premises for the purposes aforesaid during the term of ten (10) years from the date hereof (called "primary term"), and as long thereafter as drilling or reworking operations for oil or gas are conducted thereon as hereinafter provided, or oil or gas produced therefrom, or this lease is extended by any subsequent provision hereof.

Each lease also provided that Energy Resources, Inc. would commence operations for the drilling of one well on or before January 1, 1993, or during the primary term of the lease. Specifically, the leases stated: Lessee agrees to commence operations for the drilling of one (1) well on said premises on or before January 1, 1993 or thereafter during the primary term hereof to pay to Lessor, in advance, a rental of the rate of One Dollar ($1.00) per acre for each twelve (12) month period until one (1) well is commenced or this lease is surrendered.

The leases required Energy Resources, Inc., to pay a royalty on any oil or gas produced. The royalty provision stated: Lessee agrees to deliver to Lessor, in tanks, tank cars, or pipe line, a royalty of one-eighth (1/8) of all oil produced and saved from the premises, and to pay to Lessor for gas produced from any oil well and used by Lessee for the manufacture of gasoline or any other product as royalty one-eighth (1/8) of the market value of such gas at the mouth of the well; is [if] such gas is sold by the Lessee, then as royalty one-eighth (1/8) of the proceeds from the sale of gas as such at the mouth of the well where gas, condensate, distillate or other gaseous substance is found.

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Each lease also contained a "right to cure" or "judicial ascertainment clause." Those clauses, which were identical, stated: This lease shall never be forfeited or terminated for failure of Lessee to perform in whole or in part any of its express or implied covenants, conditions or obligations until it shall have been first finally judicially determined that such failure exists, and Lessee shall have been given a reasonable time after such final determination within which to comply with any such covenants, conditions or obligations.

Prior to the time Energy Resources, Inc. entered into the leases for the two tracts, a natural gas well had been drilled on the 23.5 acre tract under a prior lease granted to a different lessee on April 29, 1954.1 However, by the time Energy Resources, Inc. entered into the leases involved in the present case, that old well had been out of production for many years and that the lease under which it had been drilled, as well as an accompanying lease on the other tract, had been abandoned by the prior lessee.

After Energy Resources, Inc. leased the two tracts, it did not commence the drilling of a well on either tract prior to January 1, 1993, or at any time during the primary terms, as required by its leases. Further, it did not pay the $1.00 per acre per year delay rental which it had obligated itself to pay in its leases. It does appear, however, that it entered the 23.5 acre tract and reworked the previouslyabandoned well drilled by the prior lessee and placed it back in operation in October 1993 after the expiration of the primary term of its leases with the Wellmans. The gas produced from this well was not

Energy Resources, Inc., argues that it is not clear which parcel the well was located on. However, a plat filed with the Oil and Gas Division of the West Virginia Department of Mines, which is included in the record, together with other evidence, shows that the well was on the 23.5 acre tract.
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used for the manufacture of gasoline or any other product. Instead, it was sold as natural gas to Mountaineer Gas Company. The well produced natural gas until it was turned off in November 1998. For the gas taken from this well, Energy Resources, Inc., paid the Wellmans one-eighth of $.87 for each thousand cubic feet of gas which it had sold. In arriving at the $.87 per thousand cubic feet base figure, it took the position that it had deducted certain expenses which it had paid from the $2.22 per thousand cubic feet of gas which it had actually received.

By letters dated July 8, 1998 and September 18, 1998, the Wellmans notified Energy Resources, Inc. that it was in default under the oil and gas leases for failing to drill new wells and for failing to pay proper royalties. The Wellmans gave Energy Resources, Inc. a period of 30 days to cure these defaults. Energy Resources, Inc. did not respond to the demands, and the Wellmans instituted the present action on December 8, 1998. In bringing the action, the Wellmans sought not only termination of the leases, but damages for the failure of Energy Resources, Inc., to pay proper royalties from the existing well.

After development of the case, the Wellmans moved for summary judgment, and by order dated January 3, 2000, the Circuit Court of Logan County granted their motion. It its order, the circuit court found that the leases had terminated by their own terms due to the failure of Energy Resources, Inc., to drill a well on each lease, due to its failure to pay delay rentals, and due to its failure to pay a proper oneeighth royalty on the production from the reworked well. The court also awarded the Wellmans substantial damages because of the failure of Energy Resources, Inc., to pay the Wellmans proper royalties on the gas extracted from the existing well. In awarding the damages, the court concluded that Energy Resources,
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Inc., did not show that it was entitled to deduct the expenses from the $2.22 per thousand cubic feet of gas which it had received and that it had, in effect, short-changed the Wellmans by improperly charging them with the expenses. The court also awarded the Wellmans prejudgment interest, post-judgment interest, and attorney fees and costs.

In the present proceeding, Energy Resources, Inc. claims that the circuit court erred in granting summary judgment and that the court erred in awarding damages without allowing a jury to determine the appropriate balance due. It also claims that the circuit court erred in refusing to allow it to deduct expenses before computing royalties payable, and that it erred in awarding the Wellmans their attorneys fees.

II. STANDARD OF REVIEW In Syllabus Point 1 of Painter v. Peavy, 192 W. Va. 189, 451 S.E.2d 755 (1994), this Court stated that: "A circuit court's entry of summary judgment is reviewed de novo."

Additionally, in Syllabus Point 4 of Aetna Casualty & Surety Company v. Federal Insurance Company of New York, 148 W. Va. 160, 133 S.E.2d 770 (1963), the Court stated that: "If there is no genuine issue as to any material fact summary judgment should be granted but such judgment must be denied if there is a genuine issue as to a material fact."

III.
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DISCUSSION Questions Relating to the Termination of the Lease The "Right to Cure" or "Judicial Ascertainment Clause" Problem Two of the assignments of error raised by Energy Resources, Inc., relate to the circuit court's determination that the leases which it had entered into with James T. and Grace Wellman terminated under the circumstances of the case. Energy Resources, Inc., points out that the leases contained what it calls "right to cure" clauses which provided that: This lease shall never be forfeited or terminated for failure of Lessee to perform in whole or in part any of its express or implied covenants, conditions or obligations until it shall have been first finally judicially determined that such failure exists, and Lessee shall have been given a reasonable time after such final determination within which to comply with any such covenants, conditions or obligations.

Energy Resources, Inc., claims that because of the "right to cure" clauses, the circuit court could not declare the leases terminated until the court had first finally judicially determined that it had failed to meet its obligations and until after it had been given an additional reasonable time, after such final judicial determination, to comply with its obligations. In effect, it argues that it must be given a second chance to meet its obligations before a court can judicially terminate its rights.

Although Energy Resources, Inc., refers the to the clauses as "right to cure" clauses, such clauses have been referred to by commentators on oil and gas law as "judicial ascertainment" clauses. See, e.g., 4 Howard R. Williams & Charles J. Meyers, Oil and Gas Law

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