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Decided: February 25, 2014

The Fourth Circuit affirmed the district court’s decision to quiet title in favor of plaintiffs, Trans Energy, Inc. to the gas rights located on a 3800-acre plot of land in northern West Virginia. However, in order to retain subject matter jurisdiction, the court vacated the district court’s decision as it pertains to plaintiff Republic Energy Ventures.

At the center of this dispute lies an oil and gas lease first conveyed in 1892 by John Blackshere (“Blackshere Lease”). In 1892, Blackshere entered into an oil and gas lease with South Penn Oil Company (“South Penn”) that would later become Pennzoil Products Company (“Pennzoil”) that was recorded with the county clerk. In 1901 and 1902, South Penn entered into two indenture agreements to sever its oil and gas rights from the Blackshere Lease and allocate them to Carnegie Natural Gas Company and Hope Natural Gas Company (“Hope”). These indentures were never recorded. In 1965, Hope conveyed all of its interests in any property in the county to a predecessor in interest to EQT Production Company (“EPC”). This transfer was recorded, but did not mention the Blackshere Lease specifically. EPC asserts gas rights in the Blackshere Lease through this recorded conveyance.

In 1996, Pennzoil assigned its rights in the Blackshere Lease to Cobham Gas Industries, Inc. (“Cobham”) through an assignment and bill of sale that was filed and recorded with the County Clerk. In 2004, Cobham conveyed its interest to the plaintiff, Trans Energy, Inc. (“Trans Energy”) through a recorded transfer. Trans Energy assigned half of its interest to plaintiff Republic Partners VI, LP (“Republic Partners”). Republic Energy Ventures (“REV”) claimed an interest in the royalties that Republic Partners obtained form the lease.

In 2011, the West Virginia Department of Environmental Protection granted Trans Energy a permit to drill a new gas well on the Blackshere Lease property. Before drilling the new well, the plaintiffs discovered EPC’s alleged interest in the Blackshere Lease and filed an action to quiet title on the basis that Trans Energy was a bona fide purchaser for value with no actual or constructive knowledge of a competing interest in the property when it acquired the property in 2004. EPC responded and asserting a competing claim to quiet title. Both parties then filed cross-claims for summary judgment. The district court awarded summary judgment to the plaintiffs. EPC appealed.

On appeal, EPC first argued that the district court lacked subject matter jurisdiction in the case. The plaintiffs relied on diversity of citizenship to file the case in federal court. The defendant, EPC is a Pennsylvania company. Plaintiffs conceded that a partner of REV was a citizen of Pennsylvania and proposed that the court dismiss REV as a party under Federal Rule of Civil Procedure 21. EPC did not consent to the dismissal, however, insisting that REV was an indispensable party under Rule 19 who could not be dismissed. The court agreed with the plaintiffs and dismissed REV in order to retain subject matter jurisdiction. The Fourth Circuit found that REV’s interest in the case was limited only to its royalty interest, and would be adequately protected by the remaining plaintiffs. Furthermore, EPC was unable to show “a single tangible way in which it will be harmed by REV’s absence.”

Next, EPC asserted three arguments based on the merits of the case. First, EPC argued that the 1996 transfer from Pennzoil to Cobham was limited to oil rights in the Blackshere Lease, and did not include the gas rights. EPC’s argument principally relied on an exhibit attached to the Assignment that indicated that the “rights” associated with the Blackshere Lease were “oil.” Based on this exhibit, EPC contended that the term “rights” referenced the actual ownership rights of the lease rather than the wells being transferred. Thus, because “oil” was the only right associated with the Blackshere Lease wells, the conveyance was limited to oil rights. The Fourth Circuit disagreed, finding that the exhibit merely indicated the existing wells on the property and not the ownership rights. Additionally, in several locations other than exhibit EPC relied upon, the record indicated that the transfer included both oil and gas rights. The court found that the exhibit should not be read in isolation of the rest of the recorded document.

Second, EPC argued that the district court lacked a factual basis to find that Trans Energy received title through the 2004 assignment because the plaintiffs accidentally failed to place the 2004 Assignment into the record. The Fourth Circuit dismissed this argument, finding extensive testimony from witnesses and experts that established the existence of the 2004 assignment.

Third, EPC argued that Trans Energy had notice of its competing claim at the time of the 2004 Assignment, and therefore, did not qualify as a bona fide purchaser. The Fourth Circuit disagreed. The court found that without recorded documents containing information about a Hope’s interest in the Blackshere Lease, a reasonably prudent purchaser would not be placed on notice of EPC’s competing claim. Additionally, mere rumors in the oil and gas industry that EPC held an interest in the property was insufficient to constitute constructive notice of a competing interest. Furthermore, the court found that Trans Energy was not placed on inquiry notice by EPC’s operation of two gas wells on the Blackshere Lease property. Trans Energy spent several days visiting well sites and found not sign of EPC’s wells. The property consists of 3800 acres of undeveloped and heavily forested land. Thus, the court held that Trans Energy conducted adequate due diligence in its search of the site. Therefore, the Fourth Circuit affirmed the district court’s judgment that quieted title in favor of the plaintiffs, but vacated the judgment as it applied to REV in order to retain subject matter jurisdiction.

Full Opinion

– Wesley B. Lambert