2. When mineral rights have been leased to an oil and gas producer, and
a person subsequently learns that he or she was a co-tenant to the land at the time that its
mineral rights were leased, but that co-tenant cannot be classified as a “nonconsenting co-
tenant” as contemplated by Syllabus Point 4 of Thaxton v. Beard, 157 W.Va. 381, 201 S.E.2d
298 (1973), such co-tenant is entitled to recover from the lessee only that portion of the
royalty to which he or she would have been entitled had he or she been a signatory to the
lease.
Ketchum, Justice: (See footnote 1)
In this case, we address a certified question from the Circuit Court of Braxton
County.
After reviewing the briefs, the record designated for appellate consideration,
legal authorities, and the oral arguments of counsel, we find that the certified question must
be reformulated so that this Court may narrowly address the law which is involved in the
circuit court's question. As more fully explained below, we find that where there are two co-
tenants (A and B), and both co-tenants mistakenly believe that tenant A is the sole owner of
the property; and an oil and gas producer seeks to lease the mineral rights of the property
from tenant A, because the oil and gas producer is also under the mistaken belief that tenant
A is the sole owner of the property; and tenant B negotiates with the oil and gas producer on
tenant A's behalf and actively participates in the making of the lease agreement, and tenant
B discovers after the lease agreement is executed that he owns one-half of the property and
subsequently sues the oil and gas producer seeking the value of the gas taken less the cost
of production, tenant B is only entitled to the portion of the royalty to which he would have
been entitled had both tenants A and B executed the lease.
I.
Defendant Waco Oil & Gas Company, Inc., (“Waco”) entered into a lease with
Karen Drake on January 25, 2002, in which Waco leased the oil and gas rights under 100
acres of the property. At this time, both Rickey Drake and Karen Drake continued to be
unaware of their joint ownership interest in the property and believed Karen to be the sole
owner. Rickey Drake negotiated with Waco, on behalf of his sister Karen, as the parties
were formulating this lease agreement. (See footnote 2) After the execution of the lease, Waco had an
examination of title conducted by a Clarksburg attorney who certified, on April 24, 2002, that
Karen Drake was the sole owner of the minerals under the leased property.
Waco began drilling a well on the property on October 28, 2002. This well, identified as the “Drake No. 1,” was completed on November 11, 2002. The well produced its first natural gas on December 4, 2002.
After the well was placed into production, Waco assigned 50 acres of the lease and the well to Lynn Energy. Another oil and gas producer, Excel Energy, was interested in subleasing the remaining 50 acres of mineral rights from Waco. Excel Energy then performed its own title examination and discovered that Rickey Drake and Karen Drake each owned a one-half interest in the mineral rights of the property. After this fact was discovered, Lynn Energy approached Rickey Drake and offered him a specified payment to release his interest in the well. Rickey Drake refused this offer and Lynn Energy subsequently transferred its lease back to Waco.
Karen Drake had been receiving royalty payments equal to one-eighth of the value of the gas produced from the well from Waco until it was discovered that Rickey Drake owned one-half of the mineral rights. After Lynn Energy transferred the lease back to Waco, Waco split the one-eighth royalty between the Drakes. Thereafter, Karen Drake and Rickey Drake were each issued royalty payments in the amount of one-sixteenth of the value of the gas produced. Rickey Drake has not negotiated any of these royalty checks because he has refused to accept Waco's interpretation of the lease.
On February 6, 2007, Rickey Drake filed a complaint alleging innocent trespass and demanding an accounting from Waco. On September 26, 2007, Rickey Drake filed an amended complaint, removing the innocent trespass claim and instead alleging that he has been wrongfully denied the full value of the oil and gas Waco removed from the property without his authority.
On January 30, 2008, the Circuit Court of Braxton County certified the following question to this Court:
Where an oil and gas producer entered a lease for oil and
gas production with one of two co-tenants, unaware of the
ownership interest of the non-leasing co-tenant, produces gas
pursuant to the lease and is then called upon by the non-leasing
co-tenant to account, in determining the amount to which the
non-leasing co-tenant is entitled is the correct measure the value
of gas produced less reasonable costs of production or is the
correct measure that portion of the royalty to which the non-
leasing tenant would have been entitled had each tenant
executed the lease?
The circuit court's answer to this question was that the correct measure of
reparation is the portion of the royalties to which Rickey Drake would have been entitled had
he joined his sister in executing the lease with Waco.
II.
Where there are two co-tenants (A and B), and both co-tenants
mistakenly believe that tenant A is the sole owner of the property; and an oil
and gas producer seeks to lease the mineral rights of the property from tenant
A because the oil and gas producer is also under the mistaken belief that tenant
A is the sole owner of the property; and tenant B negotiates with the oil and
gas producer on tenant A's behalf and actively participates in the making of
the lease agreement, and tenant B discovers after the lease agreement is
executed that he owns one-half of the property and subsequently sues the oil
and gas producer, is the correct measure the value of gas produced less
reasonable costs of production or is the correct measure that portion of the
royalty to which the non-leasing tenant (tenant B) would have been entitled
had each tenant (A and B) executed the lease?
Rickey Drake assigns error to the circuit court's conclusion that the correct measure of reparation is the amount of royalty due pursuant to the lease. Mr. Drake argues that he is entitled to receive from Waco the value of the gas produced less the reasonable cost of production. Waco's position is that Rickey Drake is entitled to that portion of the royalty he would have received had the parties not been ignorant of his ownership interest at the time the lease agreement was formed.
In support of his argument that he is entitled to the value of the gas less the
reasonable cost of production, Mr. Drake cites Syllabus Point 4 of Thaxton v. Beard, 157
W.Va. 381, 201 S.E.2d 298 (1973), which states:
Where a tenant in common, claiming in good faith to be
the sole owner of the oil and gas interest, leases the property to
a third person, the nonconsenting cotenant may recognize the
lease and receive his fractional interest in the royalty or reject
the lease and receive his fractional part of the oil or gas
produced, less his proportionate part of the cost of discovery and
production.
Under the facts of this case, however, Rickey Drake can not be characterized
as a “nonconsenting cotenant.” Mr. Drake negotiated the lease with Waco on behalf of his
sister. He clearly had notice of the lease and was an active participant in the making of its
terms. At the time this lease was executed, both Rickey Drake and Waco were ignorant of
his ownership interest in the property. Both parties acted on the good faith _ but ultimately
mistaken _ belief that Karen Drake was the sole owner of the property. At the time the lease
was executed, Rickey Drake was not a “nonconsenting cotenant” because he actively
negotiated the lease agreement for the benefit of his co-tenant/sister, Karen Drake. (See footnote 4)
Waco argues that the proper measure of damages can be found in Syllabus
Point 2 of Cecil v. Clark, 49 W.Va. 459, 39 S.E.2d 202 (1901), which held:
If a tenant in common takes possession of the premises
to the exclusion of his co-tenant and lease the same to third
parties for the purpose of the mining and removal of the coal
therefrom, at a specified price per ton as royalty for the coal so
removed, the co-tenant so excluded may require an accounting
to him for his just proportion of such royalty, as the proper
measure of damage for such waste.
This holding is not directly on-point with the present case, however, because
there is no evidence that Karen Drake excluded Rickey Drake from the property. At the time
the lease was executed, Karen Drake believed that she was the sole owner of the property and
so, consistent with this belief, she did not exclude Rickey Drake from the property.
The question in this case is ultimately one of equity. Both parties agreed at
oral argument that the accounting for the oil and gas taken is a matter which involves
equitable principles. Both Waco and Rickey Drake were ignorant of his ownership interests
and both parties bear the blame. Waco should have known Rickey Drake was the co-owner
of the property and would have if a proper and accurate title search had been performed.
Rickey Drake, as one who was involved in the buying and selling of real estate, should have
known his ownership interest in the property. With both parties bearing a portion of the fault
here, we are reminded of the equitable principle announced by this Court in McNeely v. South
Penn Oil Co., 58 W.Va. 438, 52 S.E. 480 (1905): “a court of equity . . . often departs from
dry legal rules in the interest of substantial, even-handed justice.” 58 W.Va. at 443, 52 S.E.
at 482, quoting Williamson v. Jones, 43 W.Va. 562, 590-91, 27 S.E. 411, 422 (1897).
With this principle in mind, this Court believes it would be inequitable for
Rickey Drake to receive a larger portion of the profits from Waco than he would have
received had both parties not been ignorant of his ownership interest at the time the lease
agreement was executed. Syllabus Point 2, in part, of McNeely, supra, provides guidance
on the form an equitable outcome could take:
If one co-tenant execute an oil lease, purporting to cover
the whole of the common property, under which the lessee
produces oil, delivering to the lessor part thereof as royalty, it is
proper to require the lessor and lessee jointly to make reparation
to the injured co-tenant[.]
This Court cannot order the lessor (Karen Drake) and the lessee (Waco) to
make joint reparation to Rickey Drake, because the lessor (Karen Drake) has not been sued,
by either party, in this case.
The Court, guided by equitable principles, holds that when mineral rights have
been leased to an oil and gas producer, and a person subsequently learns that he or she was
a co-tenant to the land at the time that its mineral rights were leased, but that co-tenant cannot
be classified as a “nonconsenting co-tenant” as contemplated by Syllabus Point 4 of Thaxton
v. Beard, 157 W.Va. 381, 201 S.E.2d 298 (1973), such co-tenant is entitled to recover from
the lessee only that portion of the royalty to which he or she would have been entitled had
he or she been a signatory to the lease.
Where there are two co-tenants (A and B), and both co-tenants mistakenly
believe that tenant A is the sole owner of the property; and an oil and gas producer seeks to
lease the mineral rights of the property from tenant A, because the oil and gas producer is
also under the mistaken belief that tenant A is the sole owner of the property; and tenant B
negotiates with the oil and gas producer on tenant A's behalf and actively participates in the
making of the lease agreement, and tenant B discovers after the lease agreement is executed
that he owns one-half of the property and subsequently sues the oil and gas producer seeking
the value of the gas taken less the cost of production, tenant B is only entitled to the portion
of the royalty to which he would have been entitled had both tenants A and B executed the
lease.