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Wilhelm v. Jay-Bee Production Company

Wilhelm v. Jay-Bee Production Company

Case No. 
15-0768
Type of Proceeding: 
Appeal from the Circuit Court of Tyler County (Judge Cramer)
Issues: 

Did the trial court err when it failed to hold that an oil and gas lease should be forfeited even after finding that the lessee had willfully breached said agreement by not making royalty payments as set forth in the lease?

Background: 

The Petitioner owns a fractional interest in 37.9 acres located in Tyler County, WV.  The Petitioner signed an oil and gas lease with Jay-Bee Production which ultimately put into production two oil and gas wells and an oil and gas production unit which included the Petitioner’s land.  After production started, the oil and gas operator sent to the landowner a “division order” that it required the landowner to sign before it would issue royalty payments.  The landowner refused to sign the “division order” and the gas company refused to make payments without the signed document.  In February of 2013 the landowner provided notice to the operator that she believed that the operator was in violation of the lease royalty terms and that she would deem the lease forfeited.  The lease agreement required certain notice before a landowner could claim any default.  In response, the operator sent the landowner another copy of the disputed “division order.”

The landowner filed suit, seeking a finding that the lease was not valid and that she was entitled to 100% of the oil and gas proceeds attributable to her property rather than the royalty percentage payable under the lease.  The trial court determined that it was improper for the operator to withhold royalty payments in the absence of a signed “division order” as the lease agreement did not provide for such.  The trial court ordered the operator to pay the royalties, plus interest, which had accrued but had not yet been paid.  The trial court was also to consider an award of attorney fees to the Petitioner.  The trial court, however, declined to find that the lease had terminated or was forfeited.  The landowner appealed the portion of the decision finding that the lease had not terminated or been forfeited.  The operator states that it disagrees with the trial court’s rulings on many issues, but decided to accept the rulings and did not file any cross-appeals.

Positions of the Parties: 

Petitioner’s Position

The Petitioner states that the trial court found that the operator had breached the lease willfully and, therefore, pursuant to the terms of the lease agreement, found that the lease was terminated.  The Petitioner states that the lease directly required royalty payments to be made and that such payments were not made until the court ordered it to be done.  The Petitioner’s arguments are that the lease is clear in its requirement and that the operator failed to meet those requirements.  As such, the lease agreement should have been found void.

Respondent’s Position

The Respondent states that it disagrees with the trial court’s findings regarding any breach of the agreement, but chose not to appeal.  The Respondent states that the trial court was correct in not finding the lease forfeited as there is a long line of cases in West Virginia which seem to direct that forfeiture is limited to fairly extreme circumstances.  Here, the Petitioner could be, and was, compensated for the alleged damages through the payment of the royalties, plus interest.

Probable Impact: 

The Supreme Court has not really dealt with issue of lease forfeiture in the new reality of Marcellus and Utica Shale drilling.  Are the decades-old cases stating that forfeiture clauses should be strictly construed still controlling?  The case appears on the Court’s Rule 20 docket which might show that the Court will consider writing a new syllabus point.  This is certainly a case to continue to follow as it might give guidance on many oil and gas lease termination issues which are percolating in the trial courts and which have not yet reached the court system.

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