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Real Property – Assignee is Oil & Gas Lease BFP

Trans Energy Inc. v. EQT Production Co. (Lawyers Weekly No. 14-01-0204, 26 pp.) (Gregory, J.) No. 12-2553, Feb. 25, 2014; USDC at Clarksburg, W.Va. (Stamp, J.) 4th Cir.

Holding: Tracing the transfer of rights conveyed under an oil and gas lease in 1892, the 4th Circuit says there was no severance of the two interests and the lease conveyed gas rights as well as oil rights; the 4th Circuit affirms a district court judgment that a 2004 assignee was a bona fide purchaser who has superior title to a permittee attempting to drill a new gas well on the property.

In 1892, John Blackshere and South Penn Oil Company, the predecessor to Pennzoil Products Company, entered into an oil and gas lease that covered the Blackshere property (Blackshere Lease). The transfer was recorded with the Wetzel County Clerk. In 1901 and 1902, South Penn entered into two indenture agreements with Carnegie Natural Gas Company and Hope Natural Gas Company (Hope). The indentures purported to sever South Penn’s gas rights from its oil rights and allocate the gas rights to Carnegie and Hope. These indentures were never recorded.

In 1965, Hope conveyed all of its interests to any property in Wetzel County to Consolidated Gas Supply. The recorded transfer did not reference the Blackshere Lease. Consolidated Gas is a predecessor in title to EPC. The parties agree that EPC’s alleged interest in Blackshere’s gas rights derives from any right in the property that Hope transferred to Consolidated Gas by way of this 1965 conveyance.

In 1996, Pennzoil assigned its rights in the Blackshere Lease to Cobham Gas Industries through an assignment and bill of sale, with the assignment recorded with the Wetzel County clerk. In 2004, Cobham conveyed its interest by assignment to plaintiff Prima Oil Company. Prima is a wholly owned subsidiary of plaintiff Trans Energy Inc. Trans Energy then assigned half of its portion of the leasehold interest to plaintiff Republic Partners VI LP. Republic Energy Ventures’ (REV) interest in the matter derives from an overriding royalty interest in whatever production Republic Partners obtains from the lease.

In 2011, plaintiff Trans Energy was granted a permit by the West Virginia Department of Environmental Protection to drill a new gas well on the property. When Prima discovered EPC’s alleged interest in the Blackshere Lease resulting from the unrecorded Hope indenture, plaintiffs filed this quiet title action and sought a declaration that Prima was a bona fide purchaser for value when it acquired Cobham’s interest in 2004. EPC answered and counterclaimed, contending it held superior title.

On appeal, EPC argues that the 1996 transfer from Pennzoil to Cobham conveyed only the oil rights to the Blackshere Lease and not the gas rights. We adopt the district court’s conclusion that the memorandum unambiguously establishes that Pennzoil transferred both oil and gas rights to the oil and gas leases at issue. Nothing in the granting language or the list of leases indicates the oil and gas rights were severed at any point.

EPC also contends the district court lacked a factual basis on which to find that Prima received title to the lease by virtue of the 2004 Confirmatory Assignment. EPC’s own expert mentioned the 2004 Assignment in testifying that plaintiffs held an unbroken chain of title going back to the original 1892 lease. Plaintiffs’ expert testified to the same effect, and plaintiffs offered into evidence a written description of Prima’s complete chain of title that specifically referenced the 2004 assignment. Cleary, the evidence provided an adequate basis for the district court’s conclusion that Cobham conveyed to Prima its interest in the lease via the 2004 Assignment.

Finally, EPC argues that Prima had notice of its competing claim at the time of the 2004 assignment and was therefore not a BFP. Here, although the memorandum mentioned the Assignment, it did not reference other documents containing information about competing interests. The memorandum merely mentions the Assignment in passing, noting that it was the actual transfer document. Without more, there was nothing to raise Prima’s suspicions about a possible competing claim and give it cause to consult beyond the record. We agree with the district court that the references in the memorandum would not have placed a reasonably prudent purchaser on notice of EPC’s competing claim. Even assuming the language created a duty to consult the actual Assignment, nothing within the Assignment indicated the existence of a competing ownership claim.

We affirm the district court decision that Prima was a BFP in 2004 and therefore holds superior title to the Blackshere Lease by virtue of its unbroken, recorded chain of title.

We affirm the grant of summary judgment in favor of plaintiffs Prima, Trans Energy and Republic Partners, but vacate the judgment with respect to REV, whom we dismiss with prejudice.

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