IN THE CIRCUIT COURT OF ROANE COUNTY, WEST VIRGINIA

1

1?

- 
?2 a? 
ESTATE OF GARRISON G. TAWNEY, by -.. .
LELAANN GOFF, Executrix, LELAANN 23:; :4 7'2-
GOFF and VERNON B. GOFF, husband and 34;: 
wife, JANICE E. COOPER and CLIFFORD R. g; 2:23. -. 
COOPER, husband and wife, LARRY G. g, 2 4+
PARKER, JOHN w. PARKER, RICHARD L. g: 5..
ASHLEY, JONES, by her 0: 
Attomey-in-Fact, ORTON A. JONES, r?

Plaintiffs,

CIVIL ACTION NO. O3-C-10E
(Judge Thomas C. Evans, 
COLUMBIA NATURAL RESOURCES,
LLC., f/k/a COLUMBIA NATURAL
RESOURCES, INC., a Texas corporation;
NISOURCE INC., a Delaware corporation;

and COLUMBIA ENERGY GROUP, a
Delaware corporation,

V.

Defendants.

0 
(Re: Cross Motions for Summary Judgment Relating to Flat-Rate Leases)

Pending for decision are the following motions made pursuant to Rule 56,


1. Defendant Columbia Natural Resources, Motion for Partial Summary
Judgment Regarding Flat-Rate Leases; and,

2. Plaintiffs? Cross Motion For Summary Judgment Regard Flat Rate Leases.

These motions have been fully briefed by the Defendant Columbia Natural
Resources, LLC and the Plaintiffs. Upon consideration of which, and the

record before this court, the court makes its following Findings of Fact, Conclusions of
Law and Order.

Statement of the Case

On February 3, 2003, nine West Virginia mineral owners who entered into oil
and gas leases with CNR or who are otherwise bene?ciaries of such leases (?Plaintiffs?)

?led suit against CNR in the Circuit Court of Roane County, West Virginia.

By Order entered on February 26, 2004, amended by Order entered on May
25, 2004, the Circuit Court granted the Plaintiffs? ?Motion for Class Certi?cation,"
certifying a Plaintiff Class which includes all lessors or bene?ciaries of West Virginia oil
and gas leases paid royalties by CNR after July 31, 1990. This broad certi?cation on its
face would include individuals who hold ?at-rate leases with CNR. Following class
certi?cation, extensive discovery and additional review of the numerous leases that are
the subject of this action was conducted by CNR and Plaintiffs.

CNR maintains that the ?at-rate leases are not within the scope of the Plaintiffs?
claims. In addition, CNR claims that those flat rate leases that may be subject to the
provisions of ?22-6-8 of the West Virginia Code allow deduction of post?production

expenses as a matter of law.

Pursuant to these claims, CNR makes its Motion for Partial Summary Judgment
asking this Court to (1) dismiss any claims or clarify that the Order granting class
certi?cation does not apply to wells on ?at-rate leases that were permitted and drilled
before the adoption of the Flat-Rate Royalty Statute, and, (2) hold that with respect to
wells permitted or modi?ed after the effective date of the statute, that the clear and
unambiguous language of Code 22-6-8 requires only that gas operators pay
royalties based on the proceeds from the sale of gas at the wellhead, proceeds less

post-production expenses incurred from the wellhead to the point of sale.

By cross motion, Plaintiffs maintain that they are entitled to summary judgment

regarding all of the ?at-rate royalty leases. Their primary argument is that the ?at-rate

49]

"Ie-r

royalty leases are unenforceable and void as contrary to public policy. The remedy
sought is not clear. In their ?Plaintiffs? Brief in Opposition to Defendants? Motion for
Summary Judgment Regarding Flat Rate Leases,? at page 6, the Plaintiffs move for
summary judgment that the court declare void as against public policy all such ?at-rate
leases, effective June 13, 1982, the effective date of the Flat-Rate Royalty Statute.
Similarly, in ?Plaintiffs? Supplemental Brief in Support of Plaintiffs? Cross Motion for
Summary Judgment Regarding Flat Rate Leases? at page 12, Plaintiffs maintain that
they be awarded unjust pro?ts relating to these leases and wells since the effective date
of the statute in 1982, stating that at best, CNR should be considered a ?non-willful
trespasser.? However, in their ?Plaintiffs? Reply to Defendant Response to
Plaintiffs? Supplemental Brief in Support of Plain?ffs? Cross Motion for Summary
Judgment Regarding Flat Rate Leases? at p. 17, Plaintiffs appear to be moving the

court to order that that ?at-rate leases be converted to royalty? leases.

Finally, with respect to wells and leases concededly within the purview of W. Va.
Code 22-6-8 - - that is, ?at-rate leases converted by operation of law to leases requiring
that royalty to be paid based on volume of gas produced - - Plaintiffs allege that CNR
has failed to pay the proper royalty as ?xed by the statute. CNR maintains that statute

allows deduction from royalty for all of the post-production expenses and moves for

'partial summary judgment as to that issue. Thus, a question of law is presented by

motion regarding whether post-production expenses may be deducted from the
?statutory? royalty.

Statement of Undisputed Fact

1. These cross motions for summary judgment present questions of law for the

court to decide. The facts do not appear to be dispute.

2. The Second Amended Complaint, para. 7-9, alleges generally that Plaintiffs
are owners of oil and gas rights in West Virginia, and that the Plaintiffs ?leased oil and

gas rights to Plaintiffs allege that they are entitled to royalty on gas produced
from the wells on the said leases, and that CNR has intentionally failed and refused to
pay royalties due to Plaintiffs. In Court 1 of the Second Amended Complaint, Plaintiffs
seek to recover all rents and royalties clue them by CNR, but which remain unpaid. In
Count Plaintiffs allege that violated West Virginia Code 22-6-8 by not paying
plaintiffs royalty required of CNR pursuant to said statute.?

3. CNR states that there are approximately 651 leases that provide that royalties
are to be paid to landowners on a ?at?rate basis.1 The royalty clauses may differ
somewhat, but all provide that the royalty is to be ?based solely on the existence of a
producing well, and thus is not inherently related to the volume of the oil and gas
produced or marketed . . . W. Va. Code The Plaintiffs who are lessors
under such ??at-rate leases? are paid a fixed annual (or otherwise periodic) sum

regardless of the volume of gas actually produced, saved and marketed from the lease.

4. So that it is clear, all 651 CNR leasehold estates are leases of oil and gas
producing properties in the State of West Virginia wherein CNR is the lessee, or the

successor/assignee of the lessee, and, thus, the Operator of the lease.

5. The law of this State is that courts will presume that the Legislature has
made the fullest investigation before declaring a ?fact.? Accordingly, a legislative
declaration of fact relating to a matter within the Legislature?s police power, if not
arbitrary, is final and binding on the judiciary. E. 9., Lemon 0. Ramsey, etc., 108
W. Va. 24, 150 SE. 725 (1929); Wooda? v. Durst, 71 W. Va. 350, 77 S. E. 264, 80

S. E. 367 (1912). Verba v. Ghaphery, 552 406 2001)(holding that
appellate courts ordinarily will not reexamine independently the factual basis for the legislative
justification for a statute; instead, the inquiry is whether the legislature reasonably could conceive to be
true the facts on which the challenged statute was based.)

 

I See CN R?s IN SUPPORT OF DEFENDANT COLUMBIA NATURAL
RESOURCES, MOTION FOR PARTIAL SUMMARYJUDGMENT REGARDING FLAT-RATE
Page Two.

11

Therefore, based on W. Va. Code 22-6-8, the following legislative facts - - found
and declared by the West Virginia Legislature in the year 1982- - and not challenged

herein, are binding on this court:

A. ?That a signi?cant portion of the oil and gas underlying this state is
subject to development pursuant to leases or other continuing contractual
agreements wherein the owners of such oil and gas are paid upon a royalty
or rental basis known in the industry as the annual flat well royalty basis, in
which the royalty is based solely on the existence of a producing well, and
thus is not inherently related to the volume of the oil and gas produced or
marketed;?

B. ?That continued exploitation of the natural resources of this state in
exchange for such wholly inadequate compensation is unfair, oppressive,
works an unjust hardship on the owners of the oil and gas in place, and
unreasonably deprives the economy of the state of West Virginia of the just
bene?t of the natural wealth of this state;?

C. ?That a great portion, if not all, of such leases or other continuing
contracts based upon or calling for an annual ?at well royalty, have been in
existence for a great many years and were entered into at a time when the
techniques by which oil and gas are currently extracted, produced or
marketed, were not known or contemplated by the parties, nor was it
contemplated by the parties that oil and gas would be recovered or
extracted or produced or marketed from the depths and horizons currently
being developed by the well operators.?

W. Va. Code (2) and (3).

Conclusions of Law and Opinion

Summary judgment is a device ??designed to effect a prompt disposition of
controversies on their merits without resort to a trial,? if, in essence, there is no
real dispute as to salient facts or if only a question of law is involved.? Painter 0.
Peony, 192 189, 192 n.5, 451 755, 758 n. 5 (1994) (quoting Oakes v.
Monongahela Power Co., 158 18, 207 191 (1974)). See also Hanks
v. Beckley Newspapers Com, 153 W. Va. 834, 172 816 (1970). As such, a

motion for summary judgment should be granted when it is clear that there is no
genuine issue of material fact to be tried and that inquiry concerning the facts is not
desirable to clarify the application of the law. Syl. pt. 3, Aetna Casualty and Surety
Co. v. Federal Insurance Co. of N.Y., 148 W. Va. 160, 133 770 (1963).
See also, Syl. pt. 2, Painter 0. Peavy, 192 W. Va. 189, 451 at 750 (1994).
The court is of the opinion that the issues raised by the motion and cross motion are at
this point pure questions of law and, therefore, well-suited to disposition by summary

judgment.

I. Are the Royalty Provisionsof the 651 Flat-Rate Leases Void and
Unenforceable as a Matter of Law Based on the Public Policy of this State?

At the time flat-rate leases were utilized in the oil and gas industry, most drilling
operations were for oil. See Donley, The Law of Coal, Oil and Gas in West Virginia and
Virginia, 436 (1951). Gas wells were left uncontrolled to discharge into the air, because
pro?table uses for natural gas were only then being discovered. Id. As explained by the
West Virginia Supreme Court of Appeals in discussing the oil and gas industry as
expressed by Professor Donley: is therefore not surprising that the standard legal
form for a mineral lease at that time provided for a small lump-sum payment when
natural gas was extracted. It is equally unsurprising to learn: modern leases it is
frequently provided that gas shall be on a royalty basis, which of course, is usually more
pro?table to the lessor.? See McGinnis v. Cayton, 173 102, 312 765
(1984) (citing Donley, supra at 219).

Professor Eugene Kuntz explains:

In the early days of operations under the oil and gas lease, the
primary objective of exploration and drilling operations was the discovery
of oil, and it was justi?ably regarded as a major misfortune if gas alone
were found. Although gas had a value it was dif?th to market.



495

The circumstances surrounding the use and the value of gas
apparently had an effect upon the development of the part of the royalty
clause which deals with gas. . . . If the lessee marketed the gas and
thereby held the lease, the lessor undoubtedly thought that the lessee
should be required to pay for the privilege, and accordingly, provision
was made for the lessee to make a ?xed periodic payment to the lessor
while the lease was so held. Unmarketed gas from a gas well and gas
from and gas from an oil well were regarded as being virtually valueless
and subject to use without charge by the lessee for operations on the
premises. It was apparently the general attitude that if such gas were to I
be used off of the premises or sold, then such gas had a demonstrated
value and the lessee should be required to make a ?xed periodic
payment to the lessor while the gas was so used or sold. At this stage of
the development of the royalty clause, provision was made for ?xed
periodic payment for producing gas from a gas well and for selling or
using any gas off of the premises.

As the natural gas industry developed and natural gas pipelines
were extended over the country creating and expanding the market for
gas, the value of gas increased. It also became apparent that the ultimate
value of gas and the value of the right to extract and sell gas could not be
foreseen or determined at any given time of leasing. Accordingly instead
of merely increasing the amount of the ?xed periodic payment to be
made as the gas royalty, the parties to oil and gas leases changed their
practices and began to provide for a royalty on gas which is measured
either by volume or by the value of the gas produced. There was a
transition period in some areas during which provision was made for a
?xed periodic rental after discovery of gas and before marketing and for a

royalty based on production after marketing had begun. The result
would be similar to the result now sought to be reached by use of a shut- I
in gas clause.

3 Kuntz, A Treatise on the Law of Oil and Gas, 40.1 at pp. 311-312 (footnotes
omitted).
Professor Kuntz further stated:

Although the ?xed gas royalty provision is no longer in general use
and although such provision has not been generally used for many years,
the presence of such provision in old oil and gas leases continues to
present a problem. It is not uncommon for a very old oil and gas lease to
be held by many years by production of oil followed by a recent
discovery of gas. When such event occurs, the lessor and lessee are
frequently surprised to ?nd that the royalty clause provides for a small

?xed annual rate per well. Rather than take advantage of the windfall,
many lessees have voluntarily modi?ed their leases to provide for a one-
eighth royalty. Many other lessees have not been so inclined. In the later
instance, the lessors then search the oil and gas lease for some other
provision under which they may assert a right to a gas royalty based on
production. Such search may be expected to lead to a provision for a
royalty on ?other minerals.?

Kuntz, Id, 40.2 at pp. 315-316.

In response to the inequity presented by ?at-rate royalty clause leases, the West
Virginia legislature adopted in 1982 what is today W. Va. Code Chapter 22, Article 6,
Section 8. See 1982 Acts of Legislature, ch. 105. In 1994, a reorganization of Chapter
22 of the West Virginia Code changed the placement of that statute to W. Va. Code 
22-6-8 while preserving its contents without signi?cant revision. These statutes are

collectively referred to here as the ?Flat-Rate Royalty Statute.?

The legislative ?ndings regarding this section of the Code are mostly set forth in
this court findings of fact, supra. The legislative ?ndings of W. Va. Code 22-6-8 con?rm
what Professors Donley and Kuntz write:

?[s]uch leases . . . have been in existence for a great many years
and were entered into at a time when the techniques by which oil and
gas are currently extracted, produced or marketed, were not known or
contemplated by the parties, nor was it contemplated by the parties
that oil and gas would be recovered or extracted or produced or
marketed from the depths and horizons currently being deveIOped by
the well operators.?

W. Va. Code 22-68(0) (3)
One additional finding of fact is pertinent and is as follows:

(4) That while being fully cognizant that the provisions of section
10, article I of the United States Constitution and of section 4, article of
the Constitution of West Virginia, proscribe the enactment of any law
impairing the obligation of a contract, the Legislature further finds that it
is a valid exercise of the police powers of this state and in the interest of
the state of West Virginia and in furtherance of the welfare of its citizens,
to discourage as far as constitutionally possible the production and

marketing of oil and gas located in this state under the type of leases or
other continuing contacts described above.

W. Va. Code 

The public policy of the State is then declared in subsection of W. Va. Code
22?6-8, as follows:

In the light of the foregoing ?ndings, the Legislature hereby
declares that it is the policy of this state, to the extent possible, to prevent
the extraction, production or marketing of oil or gas under a lease or
leases or other continuing contract or contracts providing a ?at well
royalty or any similar provisions for compensation to the owner of the oil
and gas in place, which is not inherently related to the volume of oil or
gas produced or marketed, and toward these ends, the Legislature further
declares that it is the obligation of this state to prohibit the issuance of any
permit required by it for the development of oil or gas where the right to
develop, extract, produce or market the same is based upon such leases
or other continuing contractual agreements.

W. Va. Code 22-6-8(b)

This statute was enacted - - and the public policy of state declared - - well

before the period of production activity at issue in this litigation.

The statute prohibits the subsequent issuance of any permit for the drilling of a
new oil or gas well, or for the re-drilling, deepening, fracturing, stimulating, pressuring,
converting, combining or physically changing to allow the migration of ?uid from one
formation to another, of an existing oil or gas production well, where the royalty
provision is a ?at-rate royalty. Id., subsection Nevertheless, this statute authorizes
the issuance of such a permit where the Operator ?les an affidavit which certi?es that
the royalty owner shall be paid not less than 1/8th of the total amount paid to or
received by or allowed to the operator ?at the wellhead 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.? W. Va. Code By the ?ling of such af?davit, the

royalty clause of the lease is converted by operation of law to a royalty based on

volume of oil or gas produced.

The statute, in subsection provides that he owner of the oil or gas in place
shall have a cause of action to enforce the owner?s rights established by this section."
W. Va. Code 

The question thus posed for this court is the enforceability of the ?at-rate royalty
provisions of the 651 leases described by CNR as ?Flat-Rate Leases? that fall outside
the operation of the remedial provisions of W. Va. Code 22-6-8. In other words, for
purposes of this order only, the court assumes that these 651 leases have royalty
provisions providing a flat well royalty or a similar provision for compensation to the
owner of the oil and gas in place, which is not inherently related to the volume of oil or
gas produced or marketed. Further, that the activity on these leases, since 1982, has
not been such so as to require the conversion of such leases by operation of statutory

law to a royalty based on the volume of oil or gas produced.2

CNR insists that that the ?at-rate royalty clauses must be enforced, essentially
because of the public policy in favor of the enforcement of contracts. However,
freedom to contract is not unfettered. See Wellington Power Corporation v. CNA
Surety Corp., 217 33, 614 680 (2005); see also Coyton v.
McGinnis, 173 at 109, 312 at 772 
of contract" does not vindicate tolerance of blatant inequities or unconscionable

acts. Our society values fundamental fairness, equality, honesty, cooperation and ethics).

 

2 Plaintiffs allege that at least one of the flat-rate royalty leases in this case unlawfully remains so.
In other words, they allege that activity has occurred on one or more leases since 1982 that requires
?conversion" to a proceeds-based royalty under W. Va. Code 22?6-8; yet, CNR continues to be pay a
?at?rate royalty.

10

Courts have judicial power to declare contracts void as contravening public
policy. Id. The West Virginia Supreme Court has recognized that ?no action can be
predicated upon a contract of any kind or in any form which is expressly forbidden by
law or otherwise void.? State ex rel. Boone Nat. Bank a. Means, 126 643,
647, 29 621, 623 (1944)(overruled on other grounds).

There are many examples in the jurisprudence of this state where the Supreme
Court of Appeals has invalidated a contract, or a term thereof, because the contract was

in violation of the public policy of this state.3

 

3 See e.g. Helmick v. Potomac Edison Company, 185 W. Va. 269, 406 700
(1991) (contracts of adhesion by which monopolies require indemnification for incidents in which the
monopoly is at fault are void as against public policy); Ealy a. Shetler Ice Cream Co., 150 SE. 539,
150 SE. 539 (1929) (contract to pay a witness for testifying, coupled with the condition that the right of
compensation depends upon the result of the suit in which his testimony is used, is contrary to public
policy, and void, for the reason that it leads to perjury and the perversion of justice); Committee on
Legal Ethics of the West Virginia State Bar 0. Sheatsley, 192 W. Va. 272, 452 75 (1994)
(J. Cleckley, concurring) (recognizing holding in Ealy v. Shatter Ice Cream Co., supra); State ex rel.
West Virginia Truck Stop, Inc. v. Belcher, 156 W. Va. 183, 192 SE. 229 (1972) (contract resulting
in unreasonable restraint of trade is void at common law as contrary to public policy); Summers
County Citizens League, Inc. a. Tassos, 179 W. Va. 261, 367 209 (1988) (recognizing that
it public of?cer's interest in a contract is such that would tend to in?uence him in making the contract,
the contract is void because it violates public policy); State ex rel. Public Service Commission v.
Southern West Virginia Oil Gas Corporation, 141 W. Va. 551, 91 737 (1956) (J.
Lovins, dissenting) (contract between gas company disposing of its gas leases and wells to a second
company and vesting second company with power of management violated public policy); Pancake
Realty Co. a. Harber, 137 W. Va. 605, 73 438 (1952) (contractual covenant between
employer and employee restraining employee from engaging in similar business for period of one year
was against public policy and void); Capehart a. Church, 136 W. Va. 929, 69 127 (1952)
(contract between attomey and client for contingent fees, which provides that the client cannot make a
compromise, is void as against public policy); Butler 0. Young, 121 W. Va. 176, 2 250 (1939)
(same); Shipley v. Browning, 114 W. Va. 409, 172 SE. 149 (1933) (note and assignment of rent to
pay the same were void as against public policy); LeMasters a. Board of Education, 105 W. Va. 81,
141 SE. 515 (1928) (settlement agreement compromising claim of plaintiff against board of education
in consideration of the plaintiff's withdrawal of her suit was contrary to public policy); Shonk Land Co.
v. Joachim, 96 W. Va. 708, 123 SE. 444 (1924) (contract void because it violated statute prohibiting a
board of education from making contracts for building schoolhouses when contract required
expenditure of money in excess of funds legally at the Board?s disposal); Daugherty o. Parsons, 95
W. Va. 211, 120 SE. 519 (1923) (recognizing that contracts to sti?e or suppress evidence are illegal and
void as against public policy); Fallon o. Lay?eld, 94 W. Va. 428, 119 SE. 172 (1923) (agreement
between creditor and insolvent debtor found void as against public policy because it affected other
debtors? rights); State ex rel. Henson 0. Gore, 151 W. Va. 97, 150 575 (1966) (written lease
agreement made in behalf of the state held invalid?because it violates a statute); Poling a. Board of
Education, 56 W. Va. 251, 49 SE. 148 (1904) (contract for sale of land to board of education made

11

 

Concerning the concept of public policy, the Supreme Court of Appeals has
explained:

?Public policy? is that principal of law which holds that ?no person can
lawfully do that which has a tendency to be injurious to the public or
against public good even though no actual injury may have resulted
therefrom in a particular case to the public.? It is a question of law which
the court must decide in light of the particular circumstances of each case.

The sources determinative of public policy are, among others, our federal
and state constitutions, our public statutes, our judicial decisions, the
applicable principals of the common law, the acknowledged prevailing
concepts of the federal and state governments relating to and affecting
the safety health, morals and general welfare of the people for whom
government?with us?is factually established.
Cordle v. General Hugh Mercer Corp., 174 321, 325 111 (1984),
quoting Allen 0. Commercial Casualty Ins. Co., 37 A.2d 37 (1944)(ernphasis

added).

The West Virginia Legislature?s declaration of public policy in this case is free
from doubt. Its statutory declaration leaves no question for oil and gas lessees in West
Virginia. This continued ?exploitation? of natural resources leases in exchange for
?wholly inadequate compensation? is ?unfair,? ?Oppressive? and works an ?undue
hardship? on the oil and gas lessors, and ?unreasonably deprives? West Virginia?s
economy of the just bene?t of the natural wealth of the state. The legislature expressly
declared that it is the policy of this state to the extent possible ?to prevent the extraction,
production or marketing of oil or gas under a lease or leases or other continuing

contract or contracts providing a flat well royalty or any similar provisions for

 

by a member of the board is void and not enforceable because it violates a West Virginia statute);
Wellington Power Corporation v. CNA Surety Corp., 217 33, 614 680 (2005)
(holds contract to be valid notwithstanding apparent conflict with public policy articulated in W. Va.
Code 38-2-39 in view of unambiguous clause in contract and the public policy of freedom of the
parties to contract as they choose, a public policy of greater importance than the policy expressed in W.
Va. Code 38-2-39). 

12

5m

compensation to the owner of oil and gas in place, which is not inherently related to the
volume of the oil or gas produced or marketed . . . W. Va. Code 22-6-8 (1982).

CNR asserts several arguments against the claim that the ?at-rate royalty clauses
in the subject leases are void and unenforceable based on the public policy of this state.

Those arguments will be addressed seriatim.

1. CNR ?rst asserts that the pleadings ?led by the Plaintiffs do not contain any
claim that the ?at-rate leases are void and unenforceable, thus Plaintiffs have failed to
give CNR adequate notice of the claim. Rule 8 of the West Virginia Rules of Civil
Procedure requires that ?a pleading which sets forth a claim for relief? shall contain ?a
short and plain statement of the claim showing that the pleader is entitled to relief.?
Rule 8 (2005). The pleadings ?led by the Plaintiffs have consistently alleged
that CNR has failed to pay Plaintiffs rents and royalties due Plaintiffs. Should the court
grant the cross motion for summary judgment and ?nd the ?at-rate royalty clause void,
then Plaintiffs will have shown exactly what they alleged - - that CNR has failed to pay
Plaintiffs royalty for gas production that is due the Plaintiffs. Plaintiffs also allege that
they have not been paid royalty to which they are entitled based on W. Va. Code 22-6-
8, which is the basis for Plaintiffs argument for their cross motion that the ?at-rate
royalty clause is void and unenforceable as being in contravention of the public policy
evidenced by W. Va. Code 22-6-8. So, the broad outline of the ultimate nature of the
claim - - underpayment of royalty - - has been suf?ciently alleged in the opinion of the

this court.

Of greater concern to the court would be the situation where, perhaps, CNR had
been misled by discovery responses excluding the public policy argument as a basis for
the claim of underpayment of royalties. However, CNR does not maintain that this is
the case. The court is also not shown how CNR is prejudiced by defending the claim
that ?at?rate royalty clauses are void and unenforceable based on the public policy of

this state. There is no claim that discovery would have been conducted in a different

13

manner or that CNR is prevented by surprise in fully presenting its defense to the
argument.? For these reasons, the court believes that the cross motion cannot be

denied on this basis.

2. CNR also argues that the West Virginia Supreme Court of Appeals has, since
the adoption of the original Flat-Rate Royalty Statute, acknowledged and sanctioned
that royalties may still be paid to royalty owners on a ?at-rate basis, despite the
adoption of the Flat-Rate Royalty Statute. Cited is Syl. pt. 1, Bruen 0. Columbia Gas
Transmission Corp., 188 W. Va. 730, 426 522 (1992), where the court held
that a ?at-rate lease entered into in 1907 should not be terminated for failure to
produce oil or gas in paying quantities, because ?at?rate royalties are paid without
regard to ?the quantity of production.? Therefore, according to this argument, there
can be no dispute that where wells drilled pursuant to ?at-rate leases existed at the time
of the adoption of the ?at-rate royalty statute, oil and gas royalties may be paid on a
?at-rate basis. The court has carefully considered this case and the arguments
presented therein. No challenge was presented to the continued viability of the lease
and ?at-rate royalty clause on the basis that it was void and unenforceable, because it
was in con?ict with the expressed public policy of this state. Since the issue was not
presented to, nor resolved by the court in the Bruen case, the case cannot stand as

precedent for position on the cross motion for summary judgment.

3. CNR next asserts that the language of W. Va. Code 22-6-8 limits the statute?s

applicability so as to exclude therefrom existing ?at-rate leases, unless activity on those

 

4 After the cross motion for summary judgment was ?led by the Plaintiffs, CNR ?led two separate,
comprehensive memoranda of law relating to this sole issue. The court?s research also shows that
equitable defenses - - estoppel, waiver, laches - - are not applicable to claims that a contract is
unenforceable as being in violation of public policy. See eg. Harding v. Heritage Health Products
Co., 98 P.3d 945 (Colo. App. 2004). It also appears to be the rule throughout the United States that it
is not necessary to plead contract unenforceability based on public policy or illegality, since the court
may consider it at any time. Eg. Lind v. Spannuth, 137 360 (Ill. 1956); Wells v. Comtock,
297 P.2d 961 (Cal. 1956). See generally Westlaw Key No. 95K13 8(6) for many cases in support of
these propositions. 

14

50

leases occurring thereafterwards was required to be permitted. It asserts that since
these 651 leases have wells thereon that were permitted prior to the 1982 statute, to
declare the ?at-rate royalty clauses void and unenforceable because of W. Va. Code 22-
6-8 is to give the statute retroactive effect, which CNR asserts is completely without
merit and in direct contravention of the clear and unambiguous language expressed in
the statute.

The court agrees with CNR - - the legislative remedy afforded by W. Va. Code
22-6-8 simply does not apply to the 651 ?at-rate royalty leases at issue. Plainly, the
statutory remedy operates prospectively. Just as plainly, however, based on the
language of the statutes, the Legislature did not enact a legislative remedy for ?at-rate
royalty leases where permitted activity did not occur after the effective date of the
statute, because the Legislature was of the opinion that to do so would constitute a
violation of the constitutional protections providing against the impairment of
contracts.t5

The 651 leases at issue have not been ?converted" and, therefore, the legislative
remedy is not applicable. However, to argue that Plaintiffs thus have no claim based

on public policy is a non sequitur. Plaintiffs do not argue that it is the remedy provided

 

5 W. Va. Code provides: That while being fully cognizant that the provisions of
section 10, article I of the United States Constitution and of section 4, article 111 of the Constitution
of West Virginia, prescribe the enactment of any law impairing the obligation of a contract, the
Legislature further ?nds that it is a valid exercise of the police powers of this state and in the
interest of the state of West Virginia and in furtherance of the welfare of its citizens, to discourage
as far as constitutionally possible the production and marketing of oil and gas located in this state
under the type of leases or other continuing contracts described above.? (emphasis added)

6 See also W.Va.Code 22-6-8(b) provides: ?In the light of the foregoing ?ndings, the Legislature
hereby declares that it is the policy of this state, to the extent possible, to prevent the extraction,
production or marketing of oil or gas under a lease or leases or other continuing contract or
contracts providing a ?at well royalty or any similar provisions for compensation to the owner of the
oil and gas in place, which is not inherently related to the volume of oil or gas produced or marketed,
and toward these ends, the Legislature ?trther declares that it is the obligation of this state to prohibit
the issuance of any permit required by it for the development of oil or gas where the right to develop,
extract, produce or market the same is based upon such leases or other continuing contractual
agreements.? (emphasis added)

15

by the Legislature in W. Va. Code 22-6-8 that renders the ?at-rate royalty clauses of the
651 leases void and unenforceable under the law. On the contrary, the argument is
that public policy - - as expressed in this statute - - renders the flat-rate royalty clause
unenforceable in relation to gas produced subsequent to the effective date of the statute
in 1982.

In this regard, the court notes that the legislative ?ndings of fact - - to the effect
that the continued exploitation of this State?s natural resources presented by these
leases is unfair, oppressive and works an unjust hardship on the owners of the oil and
gas in place, and the statement of public policy set forth in W. Va. Code 22-6-8, facially
applies to all flat-rate royalty leases, not just those leases where activity occurs after the
effective date of the statute that is required to be permitted.

To reiterate, what is presented here is not the application of the My afforded
by the Flat-Rate Royalty Statute. It is whether this court will enforce 9mg;
Elm to pay what has been found to be wholly inadequate compensation for CNR's
Operations that represent the continued exploitation of this State?s natural resources,
where such contact right has been found by the Legislature of this State - - some 24
years ago and substantially before the period of gas production involved in this class
action case - to be unfair, oppressive and unjust to Plaintiffs, as royalty owners, and to
the people of this State.

4. CNR next argues that the Contract Clause of the United States Constitution
and the Contract Clause of the West Virginia Constitution preclude this court from
declaring that the ?at-rate royalty clauses at issue in this case are void and

unenforceable as being in violation of public policy.

This argument is suggested no doubt by the some of the terms of W. Va. Code
22-6?8, as follows:

1-5

{Sill

 That while being fully cognizant that the provisions of
section 10, article I of the United States Constitution and of
section 4, article [ll of the Constitution of West Virginia,
proscribe the enactment of any law impairing the obligation of a
contract, the Legislature further ?nds that it is a valid exercise of the
police powers of this state and in the interest of the state of West Virginia
and in furtherance of the welfare of its citizens, to discourage as far as
constitutionally possible the production and marketing of oil and gas
located in this state under the type of leases or other continuing contracts
described above.

In the light of the foregoing ?ndings, the Legislature hereby declares
that it is the policy of this state, to the extent possible, to prevent the
extraction, production or marketing of oil or gas under a lease or leases
or other continuing contract or contracts providing a ?at well royalty or
any similar provisions for compensation to the owner of the oil and gas in
place, which is not inherently related to the volume of oil or gas produced
or marketed, and toward these ends, the Legislature further declares that
it is the obligation of this state to prohibit the issuance of any permit
required by it for the development of oil or gas where the right to
develop, extract, produce or market the same is based upon such leases
or other continuing contractual agreements.

W. Va. Code, 22-66(0) and (emphasis added).

Article I, 10 of the United States Constitution states that State shall ..
pass any Law impairing the Obligation of Contracts.?

Similarly, Article 4 of the Constitution of West Virginia directs that bill
of attainder, ex post facto law, or law impairing the obligation of a contract, shall
be passed.? (1872) (emphasis added).

CNR asserts, in effect, that the Legislature has determined that the remedy
sought by the Plaintiffs, based on the public policy declared in W. Va. Code 22-6?8,
would be an unconstitutional violation of rights under the Contact Clause and,
therefore, never intended for the statute to be construed to apply to these 651 ?at-rate
leases. Since the Legislature concluded that such application would be

unconstitutional, then this court may not declare the subject ?at-rate leases void for

IT

being in contravention of public policy. However, it has been the law since 1803 that it
is for the judicial branch of government to determine -- and to be the ?nal arbiter of --
whether a law is in violation of the constitution. See Marbary 0. Madison, 1 Cranch
137, 2 60 (1803) (establishing doctrine of judicial supremacy). The opinion of
the legislative branch of government (if that is what it is) regarding the constitutionality
'of the relief sought by Plaintiffs, is simply not binding on this court.

In further support of its defense based on the Contract Clause, CNR cites
Energy Resources Group, Inc. v. The Kansas Power and Light Co., 459 US.
400, 103 697, 74 569 (1983), and Shell 0. Metropolitan Life Ins. Co.,
181 16, 380 183 (1989).

At the outset, the court notes that it is the law that federal and state constitutional
protections regarding impairment of the obligation of contracts by state action are
directed only against impairment by legislation and not by judgments of courts.
Barrows 0. Jackson, 346 0.5.249, 73 1031, 97 LE. 1586 (1953); McCoy a.
Union Elevated R. Co., 247 US. 354, 38 504, 62 1156 (1918). See
also, Geist 0. Robinson, 1 A.2d 153 (Pa. 1938); 84 390 (NC. 1954); King
0. Phoenix Ins. Co. of Brooklyn N.Y., 92 S.W. 892 (Mo. 1906); Nowicki v.
Ullsuik, 69 F.3d 1320 (1995); King 0. Sqfeco Ins. Co., 583 1051 (Oh.
1990). Thus, the contention of CNR that the relief sought by Plaintiffs is barred by the
Contract Clause has no merit.

The court also disagrees with the contention that the public policy provisions of
W. Va. Code 22-6-8 have no application to the 651 ?at-rate leases at issue. The
legislative remedy of the statute - - prohibiting the issuance of permits for new drilling or
re-working of existing wells on ?at-rate leases - - is simply the action taken by the
Legislature to accomplish and implement the public policy declared in W. Va. Code 22-
6-8(a) and As previously stated, there is nothing contained in such earlier
declarations which indicates that such public policy was not intended to apply to all

18



5'08

preexisting ?at-rate royalty leases. Rather, upon describing the evils inherent in all such
flat-rate leases and acknowledging the existence of the Contract Clauses of the United
States and West Virginia Constitutions, the Legislature expressed its intention that its
public policy be applied to all such leases to the fullest extent constitutionally permitted.
Accordingly, consistent with the Separation of Powers Doctrine, the Legislature has
recognized its power to declare the public policy of the State and the power of the
courts to determine the constitutional boundaries of such public policy.

While this court does not believe that the protections afforded by the Contact
Clause of the State and Federal Constitutions are applicable here, nonetheless, even if
applicable, declaring the royalty clause of the ?at-rate leases void and unenforceable,

would not be a violation of the protections afforded by the Contract clause.

The constitutional protection afforded preexisting contractual obligations by the
Contact Clause is not absolute. A signi?cant and legitimate public policy may override
the protection afforded by the Contract Clauses provided that the adjustment of the
rights and responsibilities of the contracting parties is based upon reasonable conditions
and is of a character apprOpriate to the public purpose justifying the legislation?s
adoption. See Syl. Pt. 3, Shell 0. Metropolitan Life Ins. Co., 181 16, 380
183 (1989) (?Although the language of the Contract Clause is facially absolute,
its prohibition must be accommodated to the inherent police power of the State to
safeguard the vital interests of its people"). As noted by defendant, the West Virginia
Supreme Court of Appeals has held:

In determining whether a Contract Clause violation has occurred,
a three-step test is utilized. The initial inquiry is whether the statute has
substantially impaired the contractual rights of the parties. If a substantial
impairment is shown, the second step of the test is to determine whether
there is a signi?cant and legitimate public purpose behind the legislation.
Finally, if a legitimate public purpose is demonstrated, the court must
determine whether the adjustment of the rights and responsibilities of
contacting parties is based upon reasonable conditions and is of a
character appropriate 'to the public purpose justifying the legisla?on?s
adoption.

l9

Syl. Pt. 4, Shell 0. Metropolitan Life Ins. Co., supra; see also Energy Reserves
Group, Inc. a. Kansas Power and Light Co., 459 0.8. 400, 410-12 (1983)
(applying the same analysis to protection afforded by federal Contract Clause; also
noting that ?[a]lthough the language of the Contract Clause is facially absolute, its
prohibition must be accommodated to the inherent police power of the State ?to

safeguard the vital interests of its people.? (citation omitted?.

A. Invalidating the Flat-Rate Royalty Clause Does Not Substantially Impair
Contract Rights.

Defendant's contention that interpreting the public policy of West Virginia set
forth in W. Va. Code 22?6-8 as invalidating all ?at?rate oil and gas leases would
constitute not only a substantial impairment but a severe impairment is simply without
merit when one considers the equities of the situation as well as the reasonably
presumed intention of the parties at the time such antiquated ?at-rate leases were
entered. The importance of honoring contracts is to further the goal of protecting the
reasonable expectations of the parties. It is neither reasonable nor logical to conclude
that lessees who drafted and entered into these antiquated ?at-rate leases intended,
reasonably or otherwise, to receive the windfall pro?ts they and their successors have
obtained as a result of a drastic, unforeseen and unintended changes in the techniques
of extraction, production and marketing of gas and the depths and horizons from which

gas is currently being extracted and marketed.

It simply was never the reasonable expectation or intention of lessees to obtain
such windfall pro?ts. It therefore cannot be a substantial impairment of their rights for
this court to modify or adjust the contract to re?ect the realities of the modern world
and to achieve what the parties desired and intended all along?a reasonable price and
consideration for the production and marketing of any natural gas. See Energy
Resources Group, supra, 459 US. at 411 (?state regulation that restricts a party to

gains it reasonably expected from the contract does not necessarily constitute a

El]

50



La

substantial impairment"); Shell, supra, 380 at 188 (same, quoting Enemy
Resources Group).

Moreover, determining the extent of the impairment, [courts] are to
consider whether the industry . . . (at issue) . . . has been regulated in the past."
Energy Resources Group, supra, 459 US. at 411. Accord Syl. Pt. 5, Shell,
supra. ??In areas where there is regulation and the possibility of future regulation
exists, state action affecting private contracts is less likely to be found violative of the
contracts clause.? Shell, 380 at 189 (citations omitted). Of course, the oil and

gas industry is one which has been and continues to be heavily regulated.

To suggest that preventing lessees and their successors from obtaining
unexpected and unintended windfall pro?ts is a substantial impairment of their rights, is
to elevate form over substance and inequity over justice - - results which the law should

never countenance.

Because applying the public policy of West Virginia does not result in a
substantial impairment of lessees? rights, the inquiry ends there and the Contract
Clauses of the United States and West Virginia Constitutions are not violated.
However, even if one assumes that a substantial impairment does occur, the Contract
Clauses are still not violated because a signi?cant and legitimate public purpose exists
behind the legislation and the adjustment of the rights and responsibilities of the
contracting parties is based upon reasonable conditions and is of a character

appropriate to the public purpose justifying the legislation?s adoption.

B. A Signi?cant and Legitimate Public Purpose Exists Behind the Legislation

The legislative findings of fact and the declarations of public policy by the West
Virginia Legislature relating to Flat-Rate Leases plainly sets forth a significant and
legitimate public purpose behind the existence of the legislation. The Legislature has

21

expressly recognized that a majority of ?at-rate leases in the oil and gas industry, if not
all of them, were created a great number of years ago when neither the current
technologies for the extraction, production and marketing of oil and natural gas nor the
degree of their production and marketing was known or contemplated by the parties.
The Legislature has found not only that the continued exploitation of the natural
resources of this state in exchange for such wholly inadequate compensation is unfair,
oppressive, and works an unjust hardship on the owners of the oil and gas in place, but
that it unreasonably deprives the economy of the state of West Virginia of the just
bene?t of the natural wealth of this state. W.Va.Code (3). See
Energy Resources Group, 459 0.8. at 412 (citing United States Trust Co. v. New
Je_rse?, 431 U.S. 1, 31, n. 30 legitimate state interest is the elimination of

unforeseen windfall pro?ts?).

The court is of the opinion that no violation of the Contract Clause is presented
should the court declare that the ?at-rate royalty provisions in the 651 leases at issue

are void and unenforceable.

5. In ?Defendant Columbia Natural Resources, ReSponse To Plainti?s?
Supplemental Brief in Support of Plaintiffs? Cross Motion For Summary Judgment
Regarding Flat Rate Leases,? CNR asserts that even if invalidation 'of the ?at-rate
royalty clauses is constitutionally permissible, nonetheless, this court's power and
authority to do so is limited and must not be exercised in this case. CNR relies on the
case of Wellington Power Corp. v. CNA Surety Corp, 217 W. Va. 33, 614 
680 (2005), wherein the Supreme Court of Appeals considered whether ?pay-if-paid?
contract provisions of a public worlm sub-contract violated public policy, so as to render
the contract provision void. The Court noted that the ?pay-if-paid? provision in the
contracts in question were clear and unambiguous provisions; therefore, ?[p]laintiffs
bear a heavy burden in urging the non-enforcement of their contracts in light of the fact
that these are valid, unambiguous agreements.? Id. Despite the arguments by the
Plaintiffs that courts in California, Connecticut, Florida, Illinois, New York, Virginia and

22

several federal courts had held ?pay-if-pai provisions void as against public policy,
the West Virginia Supreme Court of Appeals denied the Plaintiff's requests that it render
the contacts in question void. The Wellington court offered the following explanation
as to why recognized public policy set forth in W. Va. Code 38-2-39 - - to secure
payment to the materialmen and laborers in the building of structures to be used by the
public - - would not defeat the substantial public policy of the liberty to contract:

this State's public policy favors freedom of contract which is the
precept that a contract shall be enforced except when it violates a
principle of even greater importance to the general public. In the case of
State 0. Memorial Gardens Development Corp., 143 182, 101
425 (1957), we quoted the following language with which we still
strongly agree:

[Y]ou are not to extend arbitrarily those rules which say that a given
contract is void as being against public policy, because if there is one
thing which more than another public policy requires it is that men of full
age and competent understanding shall have the utmost liberty of
contracting, and that their contracts, when entered into freely and
voluntarily, shall be held sacred, and shall be enforced by courts of
justice. Therefore, you have this paramount public policy to consider,--
that you are not to interfere with this freedom of contract.
143 at 191, 101 at 430, quoting Baltimore 8: Ohio
Southwestern Railway Co. v. Voigt, 176 US. 498, 20 385, 387, 44
560 (1900).

think

When asked to void a contract based on a public policy, this Court is
mindful of our rule that "[t]he judicial power to declare a contract void as
contravening sound public policy 'is a very delicate and unde?ned
power,l and should be exercised only in cases free from doubt. Richmond
0. Railroad Co., 26 Iowa, 191." Syllabus Point 1, Barnes u. Koontz, 112
48, 163 S.E. 719 (1932).

In the instant case, we are confronted with two competing public policies.
The ?rst, which derives from W.Va.Code 38239, is "[t]he public policy
of this state to secure payment to the materialmen and laborers in the
building of structures to be used by the public." State, for Use of El.
Dupont de Nemours Co. v. Coda, 103 676, 685, 138 S.E. 324,
328 (1927). The second, of course, is the freedom to contract as one
chooses. After carefully weighing these policies, we conclude that the

23

public policy of freedom of contract is more compelling and outweighs
the public policy found in W.Va.Code 38-2-39.

Wellington, 217 W. Va. 33, 38-39, 614 680, 685 -686 (2005).

CNR asserts that the facts of the instant case are not distinguishable from
those of Wellington. This court disagrees. The sub-contract in Wellington
related to the construction of the West Virginia University Life Sciences Building
in Morgantown. Although the opinion doesn?t state the date of this commercial
contract, it is fair to assume that it is of recent origin and that the time between
contract formation and alleged breach was relatively short, all of which is
completely unlike the antiquated, 100 year old flat-rate royalty leases at issue
here. The entire premise for the legislative declaration and ?nding that ?at-rate
leases are oppressive, unjust and work a hardship on the owners of oil and gas
in this state simply does not apply to the circumstances of the contracting parties
in Wellington. There is no suggestion from the facts of Wellington that a
drastic, unforeseen and unintended change of circumstances had occurred since
the formation of the sub-contract that created a windfall to one or the other or
frustrated the reasonable expectations of the other. What occurred to the
Plaintiffs in Wellington - - they were not paid because the general contractor
was not paid - - was precisely within the contemplation of the contracting
parties, and a risk that they specifically allocated, at the time of the contract
formation. This court believes that the distinguishing facts of that case is the
basis for the court?s conclusion that the public policy of freedom to contract was
more compelling than the public policy found in the public works statute. In
other words, the facts of the instant case are so different that Wellington,

supra, cannot be considered dispositive.
Relating to the exercise of discretion by the court to declare, or to refrain from

declaring, the ?at-rate royalty provisions void and unenforceable on public policy

grounds, the court has also carefully considered the Restatement (Second) of

24

Contracts, Chapter 8. Unenforceability On Grounds Of Public Poligg, Section 178

(REST Contr 2d 178) which provides:
178. When A Term Is Unenforceable On Grounds Of Public Policy

(1) A promise or other term of an agreement is unenforceable on
grounds of public policy if legislation provides that it is unenforceable
or the interest in its enforcement is clearly outweighed in the
circumstances by a public policy against the enforcement of such
terms.

(2) In weighing the interest in the enforcement of a term, account is
taken of

the parties' justi?ed expectations,

any forfeiture that would result if enforcement were denied, and

any special public interest in the enforcement of the particular
term.

(3) In weighing a public policy against enforcement of a term,
account is taken of

the strength of that policy as manifested by legislation or judicial
decisions,

the likelihood that a refusal to enforce the term will further that
policy.

the seriousness of any misconduct involved and the extent to
which it was deliberate, and

the directness of the connection between that misconduct and
the term.

Comment provides in pertinent part:

. . a decision as to enforceability is reached only after a careful
balancing, in the light of all the circumstances, of the interest in the
enforcement of the particular promise against the policy against the
enforcement of such terms. The most common factors in the balancing
process are set out in Subsections (2) and (3). Enforcement will be
denied only if the factors that argue against enforcement clearly
outweigh the law's traditional interest in protecting the expectations of
the parties, its abhorrence of any unjust enrichment, and any public
interest in the enforcement of the particular term.?

25

While it does not appear that the West Virginia Supreme Court of Appeals has
expressly adopted the Restatement's balancing and weighing test, it is apparent that this
is exactly the process undertaken by the majority of the court in reaching its decision in
Wellington, supra. The decision in Wellington simply gave overriding weight to the
interest of the parties and the public policy? in the enforcement of the ?pay when paid?
clause, because of the reasonable, justi?able expectations of the contracting parties to
that commercial contract. As previously indicated, this court believes that CNR has no
reasonable nor justi?able expectation in the enforcement of the ?at-rate royalty clauses
- - enforcement of these clauses results simply in a monetary windfall to CNR, a windfall
beyond the reasonable contemplation of the parties at the time of the execution of
these leases, a windfall found and declared by the Legislature of this state to be unjust,
oppressive and unfair. Refusal to enforce the ?at?rate royalty clauses of the 651 leases
at issue during the class certi?cation period will directly further the public policy set forth
in W. Va. Code 22-6-8(a) and by providing a mechanism for the owners of the oil

and gas to receive some measure of fair value for the natural resources extracted.

In determining the interest of the parties in the enforcement of the ?at-rate
royalty clause, the court has considered whether any forfeiture would result if
enforcement of the ?at-rate royalty clauses is denied. This is a very signi?cant
consideration, because this court does not believe that the flat?rate royalty leases can be
considered ?divisible? and ?severable? contracts. If the ?at-rate royalty clause is
invalidated by operation of law because of public policy, it is not severable from the rest
of the lease. The royalty is the only consideration ?owing to the owner of the oil and
gas under these leases. It is, therefore, the essence of the lease and if it is void, then
the lease must be held to be rescinded.8 Compare White 0. Cook, 51 W. Va. 201,

 

7 REST 2d Contr 178, Comment c. Strength of policy, provides that ?[t]he strength of the public policy
involved is a critical factor in the balancing process. Even when the policy is one manifested by legislation, it
may be too insubstantial to outweigh the interest in the enforcement of the term in question. . . 

3 In Quinn v. Beverages of West Virginia, 159 571, 224 894 (1976), the court
held in Syllabus Point 2 ?[w]hether contract is entire or severable is a determination to be made by court
according to intention of parties and such intention shall be ascertained from a consideration of subject

26

"716?

41 SE. 410 (1902) (void covenant of public official bond could be severed from lawful covenants,
therefore the bond was not vitiated). Therefore, the invalidation of the ?at-rate royalty

clauses of these leases, under traditional contract analysis, must result in the rescission

of the lease.

The Restatement of Contracts 2d, Section 178, Comment relating to
forfeiture provides:

e. Other factors. A court will be reluctant to frustrate a party's
legitimate expectations unless there is a corresponding bene?t to be
gained in deterring misconduct or avoiding an inappropriate use of the
judicial process. . . . The promisee's ignorance or inadvertence, even if
it does not bring him within the rule stated in Section 180 is one factor
in determining the weight to be attached to his expectations To
the extent, however, that he engaged in misconduct that was serious
or deliberate, his claim to protection of his expectations fails. The
interest in favor of enforcement becomes much stronger after the
promisee has relied substantially on those expectations as by
preparation or performance. The court will then take into account any
enrichment of the promisor and any forfeiture by the promisee if he
should lose his right to the agreed exchange after he has relied
substantially on those expectations.

A forfeiture that will accrue to CNR if the flat?rate royalty clauses are deemed to
be invalid is disgorgement of windfall pro?ts. CNR has no legitimate expectation in
retaining these windfall pro?ts under these leases by reason of the public policy of this
state in effect since 1982, and the court does not consider this a reason to refrain from

invalidating the ?at-rate royalty clauses.

However, to the extent that the 651 leases - not just the royalty clauses - - are
invalidated should the royalty clauses be declared unenforceable, then CNR forfeits: 1)

its contract rights to continue to produce oil or gas from existing wells during the

 

matter of contract, a reasonable construction of terms thereof and conduct of parties during their
negotiations, all of which should be viewed in light of surrounding circumstances." Surely, no lessor
would intend to enter into any lease where there was no provision for royalty or other compensation to
the lessor.

2T

secondary term of the leases; (2) its rights hereafter to explore, extract and market gas
or oil from the premises from new wells or reworked wells on the subject leases, where
the provisions of W. Va. Code 22-6-8 would convert the leases to ones with royalty
based on the volume of oil or gas produced. Such a result arguably is entirely justified
here - - CNR has continued to operate these leases with full knowledge and
appreciation of the fact that since 1982, it has been the public policy of this state to
discourage to the extent possible extraction of minerals pursuant to these leases, and
that these leases are oppressive, unfair and work an unjust hardship on owners of the
oil and gas and the people of this state. Having stated the argument, the court has
nevertheless concluded that the effects of a forfeiture can and should be mitigated, for

reasons assigned infra.

Having considered Wellington, supra, and Restatement 2d Contracts Section
178, this court believes that the public interest in its enforcement of the ?at-rate royalty
clauses set forth in the subject 651 leases is clearly outweighed in the circumstances by

the public policy against the enforcement of such terms. See W. Va. Code 


6. Regarding ?nal argument based on Wellington, supra, it is the
position of CNR that Plaintiffs have failed to produce evidence to support their claim
that the ?at-rate royalty provisions of the 651 lease should be declared invalid. For
instance, CNR argues that there is no evidence of the dates when the parties entered
into the flat-rate leases, nor do Plaintiffs offer the testimony of any individual Plaintiffs
indicating that they thought that there was no market for the gas at the time they
entered into ?at-rate leases. Because the Plaintiffs make such unsupported assertions,
according to CNR, the rule of Wellington, supra, must control. This court believes
that one need look no further than the legislative ?ndings of fact in W. Va. Code 22-6-
8(a) and for sufficient evidence of the Plain?ffs? claim, together with the undisputed
fact that CNR is the operator of 651 leases in West Virginia that are ?at-rate leases.

28

7. CNR argues that the ?Separation of Powers? doctrine prevents this court
from declaring unenforceable the royalty clauses of the subject 651 ?at-rate leases. This
is, perhaps, most persuasive argument. It is based upon the premise that courts
are not entitled to create law, but must merely interpret and apply the law in individual
cases. See State ex rel. W. Va. Citizens Action Group a. W. Va. Econ. Dev.
Grant Comm., 213 W. Va. 255, 262, 580 869, 876 (2003) (stating that
?[u]nder the constitutions, the legislature is empowered to make laws; it has that power
exclusively; the executive has the power to carry them by all executive acts into effect,
and the judiciary has the exclusive power to expound them as the law of the land

between suitors in the administration of justice?).

In State ex rel. Ri?'le 0. Hanson, 195 121, 126, 464 763,768
(1995), the court held that a statute, providing for change of venue where convenience
of parties would be served, was the exclusive authority for discretionary change of
venue, and any other change of venue from one county to another within West Virginia
that was not explicitly permitted by the statute was impermissible and forbidden. At Id.,
126,768, the court stated that:

[The] West Virginia Legislature is the paramount authority for
deciding and resolving policy issues pertaining to venue matters. Once
the Legislature indicates its preference by the enactment of a statute,
the Court?s role is limited. Our duty is to interpret the statute, not to
expand or enlarge upon it. State ex rel. F_ra_zier v. Meadows. 193
20, 23-24, 454 65, 68-69 (1994!. More signi?cantly,
any subsequent policy changes must come from the Legislature itself
and, in the absence of constitutional or statutory authority to the
contrary, this Court has no blanket power to recast the statute to meet
its fancy. State ex rel. McGraw 0. Scott Runvan Pontiac-Buick. Inc.

194 770, 461 516 (1995!.

 

29

The court is of the opinion that to declare that the subject ?at-rate royalty clauses
are void and unenforceable by being in contravention of public policy expressed in the
statute, is not expanding or enlarging upon the statute itself. It is the simple, everyday
function of the judicial branch of government to refuse in individual cases to enforce a
contract term in violation of the public policy of this state. The usual and ordinary
remedy here is rescission of the oil and gas lease in its entirety, because a ?at-rate
royalty lease is not a divisible contract. Rescission certainly is not a remedy
contemplated by the statute. It is therefore apparent that the only connection to W. Va.
Code 22?6-8 is the public poligg therein stated in plain and unambiguous terms.

Regulation of mineral leases has never been considered the exclusive domain of
the Legislature. In a closely analogous case, the Supreme Court of Appeals recognized
the power of the judiciary to declare the equitable remedy of rescission of a ?at-rate
royalty oil and gas lease, based on mutual mistake of fact. McGinnis v. Cayton, 173
102, 312 765 (1984).9 At 173 W. Va. 105, 312 769, the court
stated:

This principle provides that a contract is refonnable or voidable if
it can be shown that the parties mutually erred about a basic fact that
is material to their agreement. . . In the case at hand, the parties
agreed to provisions concerning both oil and natural gas and both
resources were present. Nevertheless, the limited awareness of the
economic value of natural gas at the time when the contract was
drafted raises at least the possibility that both parties were operating
under the assumption that the value of gas would remain de minimus.
Their agreement, then, could be seen as one primarily concerned with

oil production . . . A mutual mistake as to a material assumption

 

9 While this case was decided in 1984, it apparently commenced prior to the effective date of the Flat-Rate
Royalty Statute in 1982; the majority opinion does not mention this statute.

The ?legislative facts" found by the Legislature, as set forth in W. Va. Code 22-6-8, appear to support at

least primafacie, the equitable remedy of rescission based on mutual mistake. Plaintiffs have not pursued this
theory.

30


?an-b.

ks?)

[:52



which underlies a contractual agreement is suf?cient grounds to ?nd
that agreement void. The Restatement (Second) of Contracts
Specifically provides in 152(1): ?[w]here a mistake of both parties at
the time a contract was made as to a basic assumption on which the
contract was made has the material effect on the agreed exchange of
performances, the contract is voidable by the adversely affected party

unless he bears the risk of the mistake . . . 

In two early cases relating to natural resources contracts and leases, the Supreme
Court of Appeals discussed supervening factors, such as change in value of natural
resources over extensive time periods, and their effect on contracts. In Bufalo Coal
Coke Co. v. Vance, 71 148, 76 SE. 177 1912), the Court had
refused to grant speci?c performance of a ?ve-year-old executory contract to lease
minerals, utilizing equitable principles to evaluate what was fair and just and concluding
that it would not permit the appellees to ?reap where they have not sown? to the
disadvantage and injury of the other party to the contract. Bu??alo Coal 8: Cake
Co., 76 SE. at 180.

In reaching its conclusion, the Court in Bu?'alo Coal Coke Co., supra,
noted:

True there is no evidence in the case showing what changes in
value have taken place since the date of the contract, but we may take
judicial notice that the value of all mineral and timber land in
this state had greatly enhanced in value within the ?ve years
intervening between the date of the contract and the date of the suit. We
think we may assume from the facts established in the cause that some
object of advantage to the plaintiff and disadvantage to the defendant
called the plaintiff to action after nearly ?ve years of unexplained delay.

Id., 76 SE. at 179 (emphasis added). S_eg McGinnis, 312 at 775-76.
Similarly, in Wellman v. Virginia Railway Co., 101 SE. 252, 253 1919), the
Court stated that ?[y]ears have brought changes of circumstances and of
parties. Timber then of little value has now become of great value, of which

we may take judicial notice.? (Emphasis added).

31

In summary, the judicial branch of government has intervened in mineral and
natural resource leases and contracts where supervening, unforeseen events have
occurred which make enforcement of a lease or contract beyond the reasonable

expectations of the contracting parties.

CNR also cites Collins 0. Homebuilders, Inc., 175 W. Va. 427, 333
792 (1985), where the court refused to add to a statute by creating a cause of
action in favor of an additional class, absent a constitutional mandate. Collins, 175
W. Va. at Syl. pt. 2, 333 at Syl. pt. 2. In Collins, the plaintiff brought a cause
of action against apartment owners, because his application was denied on grounds of
his criminal record. This suit was based on the existing public policy of the state, as
expressed statutorily that landlords may not refuse potential tenants based on ?race,
religion, color, national origin, ancestry, sex, blindness and handicap.? Id. at 428, 793.
However, the Supreme Court of Appeals refused to permit the plaintiff a cause of action
where none existed in the statute, stating that it would not go beyond the actions of the
Legislature. Thus, the court refused to expand upon and add to the public poligg of this
_sta_te by adding to the statutory criteria a classification based on the ?previous criminal

history? of the applicant.

At Id. 428, 793, the court stated as follows:

The legislative branch of government has the primary responsibility for
translating public policy into law. See, 3.9., Cooper 0. Gwinn, 171
245, 298 781, 785-86 (1981]. This is appropriate
because the members of the legislature are elected representatives of
?the public,? and thus have the unique ability to collectively discern
public Opinion and formulate statements thereof. The legislature in fact
has considered the criteria employed by landlords in selecting their

tenants, and found certain criteria impermissible: ?race, religion, color,

32

national origin, ancestry, sex, blindness and handicap.? Refusal to rent
for any of these reasons gives rise to a statutory cause of action in
favor of the rejected applicant. This list does not, however, include
criminal convictions, and the rule of construction expressed by the
Latin, inclusio unius est exclusio alterius (the certain designation of
one precludes the implication of another) leads us to the conclusion
that the legislature did not intend to include any additional categories.
Where, as here, the legislature has made what appears to be
a comprehensive statement regarding classi?cations offensive
to public policy, this Court will not add to that list in the

absence of constitutional mandate. (Emphasis added)

With the facts of the instant case, however, the Legislature has already spoken - -
in clear, unmistakable terms - - leases that contain ?at-rate royalty clauses, which
include the subject 651 leases, are ?unfair, oppressive, worlds) an unjust hardship on
the owners of the oil and gas in place, and unreasonably deprive(s) the economy of the
state of West Virginia of the just benefit of the natural wealth of this state.? W. Va.
Code To find that the flat-rate royalty clauses are void and unenforceable,
as Plaintiff asserts, simply does not require this court to add to or expand on what the

Legislature has found to be the public poligg of this state.

In Yoho v. Triangle PWC, Inc., 175 556, 336 204
(1985), a retaliatory discharge action brought against the employer and union by an
employee/workers' compensation recipient, the court held that a provision of a
collective bargaining agreement mandating termination of seniority after the employee's
absence from work for one year for work-related injury, for which she received worker's
compensation bene?ts, was not contrary to public policy, even though loss of seniority

also resulted in the loss of her job. In refusing to hold the ?loss of seniority? provision

33

of the collective bargaining agreement void as being against public policy, the court
stated the following:

Further, the Court cannot help but feel sympathy for a woman
who suffered a physically and emotionally painful injury which caused
her to be off work for the last twelve months, and ?nds that it is now
mandated by the terms of her collective bargaining agreement that her
employer dismiss her. Nevertheless, we feel it would be a mistake to
extend public policy to cover Ms. Yoho's case.

[The power to declare an action against public policy is a broad
power and one dif?cult to de?ne. ?No ?xed rule can be given to
determine what is public policy. (citations omitted). It is sometimes
de?ned as that principle of law under which freedom of contract or

private dealings are restricted by law for the good of the community-

the public good.? Higgins v. McFarland, 196 Va. 889, 894, 86 
168, 172 [1955). Nevertheless, despite the broad power vested in the

courts to determine public policy, we must exercise restraint when we
use it.

The right of a court to declare what is or is not in accord
with public policy does not extend to speci?c economic or
social problems which are controversial in nature and
capable of solution only as the result of a study of various
factors and conditions. It is only when a given policy is so
obviously for or against the public health, safety, morals or welfare that
there is a virtual unanimity of opinion in regard to it, that a court may
constitute itself the voice of the community so declaring. Mamlin v.
Genoe, 340 Pa. 320, 325, 17 A.2d 407, 409 (1941!. An issue which
is fairly debatable or controversial in nature is one for the legislature
and not for this Court. (Emphasis added)

34

In regard to the 651 ?at-rate royalty leases, since 1982, CNR has continued to
exploit the natural resources of this state for wholly inadequate compensation, to the
Oppression of Plaintiffs who are the owners of the oil and gas. Is this a ?speci?c
economic . . . problem? which is ?controversial in nature and capable of solution only
as the result of a study of various factors and conditions . . The court believes not.
The Legislature has spoken clearly and convincingly in terms that unambiguously apply

to all ?at-rate leases.

There is simply nothing that is ?fairly debatable? or ?controversial? regarding the
public policy of this State as expressed by the Legislature in relation to ?at-rate royalty

leases.10

Courts are created to do justice in individual cases. The Legislature of this state
?xes the public policy. The courts implement that policy. CNR has cited no case where
a court has ever enforced a contract term that has been found to be unjust, unfair,
oppressive, that works an unjust hardship on the other party, and that is exploitative.
CNR insists that the court enforce a contract term that provides it windfall pro?ts for
activity the Legislature has told us that public policy requires be ?discouraged as far as
constitutionally possible." (note 10). To enforce such a contract term under these
circumstances would require this court to perpetuate oppression and injustice, in

violation of the clear public policy of this state.

 

1? [Us the policy of this state, to the extent possible, to prevent the extraction, production or marketing of oil

or gas under a lease or leases or other continuing contract or contracts providing a ?at well royalty or any
similar provisions for compensation to the owner of the oil and gas in place, which is not inherently related to
the volume of oil or gas produced or marketed . . . . W. Va. Code Subsection provides in
pertinent part that it is a valid exercise of its police power, in order to ?irther the welfare of the citizens of this
state, . . to discourage as far as constitutionally possible the production and marketing of oil and gas located
in this state . . pursuant to ?at-rate leases.

35

Based on the foregoing, the court concludes as a matter of law that the royalty
provisions of the 651 ?at-rate royalty leases at issue are void and unenforceable, based
on the public policy of this state contained in W. Va. Code 22-6-8(a) and 

ll. What is the Remedy Based on the Court?s Declaration that the
Flat-Rate Royalty Clauses are Void and Unenforceable?

As stated, the ?at-rate leases are n_ot divisible or severable contracts. If the
royalty clause in these leases is unenforceable, there simply is no provision for the
payment of royalty, which is the only consideration ?owing to the owner of the oil and
gas in the secondary term of the lease. Ordinarily, therefore, rescission is the remedy
where a contract term in a lease of this nature is held to be void and unenforceable. In
SUPPLEMENTAL BRIEF IN SUPPORT OF CROSS
MOTION FOR SUMMARY JUDGMENT REGARDING FLAT RATE LEASES, Plaintiffs
move that these leases be invalidated, and that CNR be considered a non-willful
trespasser. However, in the subsequent REPLY TO DEFENDANT 
RESPONSE TO SUPPLEMENTAL BRIEF IN SUPPORT OF
CROSS MOTION FOR SUMMARY JUDGMENT REGARDING FLAT
RATE LEASES, Plaintiffs there move the court to convert the ?at-rate natural gas leases
to a royalty provision consistent with that found in W. Va. Code that is:

?not less than one eighth of the total amount paid to or received by or
allowed to the owner of the working interest at the wellhead 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."

Such a remedy avoids the forfeiture of CNR's other important and valuable
contract rights under the ?at-rate royalty leases. By avoiding the ?plugging? of wells on

the lease, and removal of equipment and machinery, it also permits the full, ef?cient

36

@511



development of the Plaintiffs? mineral estate by the continued extraction, production,

and marketing of the lessors? gas.

Throughout this opinion, it has been noted that expectations regarding
these flat-rate royalty leases have not been reasonable, and that by continuing to
extract, produce and market gas from these leases, subsequent to 1982, its conduct
amounts to exploitation, according to the public policy expressed in the statute.
However, this pertains only to expectations in regard to the ?at-rate royalties
payable under these antiquated leases. There are other expectations, arising under
these leases, that are reasonable and justi?able, and these are mentioned, infra, page
29.

In fashioning a remedy, the court must also consider that these leases were
unquestionably valid and reasonable at the time of contract formation. The history of
the development and evolution of natural gas royalty clauses demonstrates that it was
the intention of the parties to such contracts to provide a reasonable consideration for
the value of the natural gas. The lessees clearly neither foresaw nor intended the
windfall pro?ts which they have received as a result of advancing technologies and
increased markets for the sale of natural gas. Both lessors and lessees believed that the

value of their gas was de minimus.

Plaintiffs argue that the court should adjust the rights and responsibilities of the
contracting parties by converting such ?at-rate leases to 1/8 royalty leases, and that this
will accomplish what the parties intended upon entering such contracts, achieving a

reasonable compensation for the value of the natural gas.

Plaintiffs also submit that in addition to and consistent with the public policy set
forth in W.Va.Code 22?6-8, other equitable and legal principles also support
converting flat-rate natural gas leases to 1/8 royalty leases. By way of example, in

3?

McGinnis v. Cayton, supra, Justice Harshbarger noted in his concurring opinion that
in the historical development of common law contracts concepts:
?there has been a positive movement away from strict and rigid
rules of law in order to accommodate long-term contracts that have
become manifestly unfair: evenness and equity should prevail
over form, and Justice demands whatever ?exibility is
necessary to ?ll in contractual gaps and adapt to
unexpected changes.? Id. at 772 (emphasis added).

Among the various doctrines discussed by Justice Harshbarger were supervening

events causing unjust enrichment and unconscionability.

While discussing supervening events causing unjust enrichment, Justice

Harshbarger explained:

It the increased utility of and the concomitant advances in
technology to capture and produce natural gas were unpredictable,
supervening events working to undermine the purpose of the contract (for
lessor and lessee to reap fair and equitable bene?ts from the extraction
and sale of valuable minerals on the leased tract), discharge from
performance is not the only possible remedy. The contract may be

reformed, duties may be enhanced, or restitution ordered for unjust
enrichment.

1d; at 775.

In discussing possible solutions to such dilemmas, Justice Harshbarger reasoned:

Situations arising from contracts like the McGinnises' recommend
solutions by inter-party renegotiation. When that does not work, courts
should make themselves available to provide just and equitable
resolutions with the primary goal being to maintain the integrity
of the long-term contractual relationship. . . . . This can be
better achieved by remedies such as equitable adjustment than
rescission or discharge from performance.

Equitable adjustment is an evolved form of ?reformation?.
It can be used to prevent or remedy unjust enrichment,

unconscionability or other inequities. It has received considerable
scholarly support. . . .

38



Long-term contract problems that arise because of fundamental
shifts in the balance or equities of the original relationships are best
resolved by the parties. Courts should do all they can to encourage
settlement and private resolution. Scriveners of new long-ten'n contracts
are aware of this need to provide for dispute resolution and equitable
adjustment by parties. . . .

However, in the event that a court must intervene, it
should only be limited by its perception of fairness.

I agree with the California court in MacFarlane v. Peters, 103
Cal.App.3d 627, 163 Cal.Rptr. 655, 657 (1980), that ?[w]hile sitting in
its equitable capacity, a court may avail itself of powers broad,
?exible and capable of being expanded to deal with novel cases
and condi?ons . . . While the facts in this case are without
reported precedent, such lack is no deterrent to equitable
relief." (Citations omitted.) Lack of precedent does not warrant
denial of justice. Our state courts have equitable power to
fashion just remedies.

McGinnis, 312 at 779-81 (citations and footnotes omitted; emphases added).

To order a remedy here as suggested by the Plaintiffs is reforming the contract to

re?ect a term not agreed on by the parties but imposed by the court. Reformation of
contracts is granted to ?reform? the contract so that it re?ects the true intention of the
parties. Here, there is no claim that the antiquated leases do not re?ect the hue

intention of the parties. Accordingly, reformation as a remedy appears inapplicable.

Justice Harshbarger speaks of ?equitable adjustment? as a remedy. The term

?equitable adjustment" does appear in the cases, but not necessarily as an equitable
remedy. In Travelers Indemnity Company 0. Radar, 152 699, 704, 166
157, 160 (1969), the court stated that subrogation is a ?creature of equity having
for its purpose the working out of an equitable adjustment between the parties by

39

securing the ultimate discharge of a debt by the person who in equity and good
conscience ought to pay it.? quoting 16 Couch, Cyclopedia of Insurance Law, 61: (18
2d Ed.1964). In Kyle 0. Kyle, 197 252, 475 344 (1997), the court
refers to eguitable adjustment in the context of effecting equitable distribution in a
divorce case. To the same effect is Cha?n v. Chq?n, 202 616, 505 679
(1998) (see footnote 18).

Plaintiffs have agreed to the adjustment of these ?at-rate leases to a royalty
based on proceeds received by the lessee at the well-head, effective for the entire
period of this class action claims. (See Page 37, supra). The court has a paucity of
authority to ?reform? the contract by ordering what the Plaintiffs have agreed on.

Therefore, it is the Order of the Court as follows:

Subject to the agreement and concurrence of CNR, and commencing with the
period encompassed by the claims asserted in this class action litigation, royalty for gas
produced from the 651?at-rate royalty leases shall be calculated as follows:

?not less than one eighth of the total amount paid to or received by or
allowed to the owner of the working interest at the wellhead 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."

This royalty calculation method, unless otherwise agreed by the parties, shall

continue for so long as such leases are subsisting and viable.

If CNR does not, within 20 days from date of entry of this order, agree and
concur with this method of royalty calculation by written instrument ?led with the clerk
of this court, then it is the order of this court that each of the 651 ?at-rate royalty leases
for oil and gas are rescinded, the royalty clauses therein provided being in

contravention of the public policy of this state and, therefore, void and unenforceable.

40

(II

r?r-?n

In such latter event, CNR shall be considered a non-willful trespasser with respect to gas

produced from such leasehold estates.

May CNR Deduct Post-Production Expenses Incurred From the
Well-Head to the Point of Sale Where the Royalty is Payable Pursuant to W.
Va. Code 22-6-8 

The language of the statute - - W. Va. Code 22-6-8(e) - - states that owners of
the oil and gas are entitled to royalties of not less than 1/8 of the proceeds, not market

value, ?at the wellhead.?

arguments on this issue were submitted on this question prior to the
decision of the West Virginia Supreme Court of Appeals in Estate of Tawney a.
Columbia Natural Resources, LLC, et al, -- W. Va. --, 2006 WL 1685249 (dec?d
June 15, 2006). That case concerned the issue of whether post-production expenses
were deductible from the royalty payable to the owner of the oil and gas, based on
certain royalty clauses set forth in various private lease agreements between lessors and
lessees. While a royalty clause based on the language of a statute is obviously different
than a royalty clause based on private agreement, similarities nonetheless exist, and the
court would therefore bene?t from oral argument of the parties on the issue. Therefore,
counsel for CNR is directed to schedule a hearing for that purpose at a time and place
convenient with counsel.

0 

Based on the foregoing, it is therefore ORDERED as follows:

1. Defendant Columbia Natural Resources, Motion for Partial Summary
Judgment Regarding Flat-Rate Leases is denied and overruled, except that the court
takes under advisement, pending further argument, the issue of whether post-
production expenses are deductible from statutory royalty based on W. Va. Code 22-6-


41

2. Plaintiffs? Cross Motion For Summary Judgment Regard Flat Rate Leases is
granted, except as otherwise provided, in?'a.

3. Subject to the agreement and concurrence of CNR, and commencing with
the period encompassed by the claims asserted in this class action litigation, royalty for

gas produced from the 651 ?at-rate royalty leases in issue shall be calculated as follows:

?not less than one eighth of the total amount paid to or received by or
allowed to the owner of the working interest at the wellhead 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."

This royalty calculation method, unless otherwise agreed by the parties, shall
continue for so long as such leases are subsisting and viable.

If CNR does not, within 20 days from date of entry of this order, agree and
concur with this method of royalty calculation by written instrument ?led with the clerk
of this court, then it is the order of this court that each of the 651 ?at-rate royalty leases
for oil and gas are rescinded, the royalty clauses therein provided being in
contravention of the public policy of this state and, therefore, void and unenforceable.
In such latter event, CNR shall be considered a non-willful trespasser with respect to gas
produced from such leasehold estates.

4. objection and exception to this order is saved and shall be considered
by this court ?saved? regardless and irrespective of whether CNR agrees and concurs
with the remedy provided in paragraph no. 3 of this Order.

5. The Clerk shall forward attested copies of this order to counsel of record.

All of which is ORDERED, accordingly. CERTIFIED THISTHE

ENTER: August 4, 2006 DEC 2 2 2015

CLERK new! I 
1V VIRGINIA

Thomas C. Evans, Ill, Circuit Judge
Fifth Judicial Circuit, State of West Virginia

 

Entered In 6.0.8. No. Page 990

4 .
2 ?Ml?day of g: a I 20-Q6