Court in West Virginia Rejects Claims Coal Lessee Breached Implied Covenants

Keith B. Hall, LSU Law Center

Freeport Gas Coal Trust (Freeport) is the current lessor under a 1965 coal lease (Lease) covering more than 3,000 acres in Doddridge and Harrison Counties, West Virginia. Freeport Gas Coal Trust v. Harrison County Coal Resources, Inc., 2023 WL 2580021 (N.D. W.Va.). In 2021, Freeport sued the current lessee under the Lease, Harrison County Coal Resources, Inc. (Harrison), in state court. Freeport asserted three claims—namely, claims for: (1) a declaration that Harrison had breached an implied duty to diligently mine, and that Harrison should be ordered to begin mining the leased premises within six months; (2) reformation of the lease to provide for a larger royalty; and (3) a declaration that Harrison had abandoned the lease. Harrison timely removed the case to the United States District Court for the Northern District of West Virginia, based on diversity.

Freeport moved to remand the case to state court, and Harrison filed a Rule 12(b)(6) motion to dismiss for failure to state a claim, but the court denied both motions. Freeport Gas Coal Trust v. Harrison County Resources, Inc., 2023 WL 2577189 (N.D. W. Va.). Harrison also filed a motion for summary judgment on each of Freeport’s three claims. Freeport filed a cross motion for summary judgment on its implied covenant and abandonment claims.

Factual Background

The 1965 Lease grants the lessee the right to mine and sell “all of the Pittsburgh or nine foot vein or seam of coal” on the leased premises. The lease renews automatically for twenty-year periods, until all the economically minable coal has been removed, provided that the lessee is complying with the lease. The lease requires the lessee to provide the lessor with a mining plan before beginning mining, and to use “suitable methods of modern mining,” but Section 6 of the Lease provides that “commencement of mining operations hereunder and the dispatch, diligence and expediency in which such mining operations may thereafter be carried out shall be at the pleasure of the Lessee.” The Lease provided for a royalty of eleven cents per ton, with a minimum annual royalty of $4,000, whether or not any coal is produced. The Lease also requires the lessee to pay property taxes.

Harrison has operated the Harrison County Coal Mine, which is about twelve miles from the leased premises, for about sixty years. The company plans to continue operating the mine for the next forty or fifty years. Harrison uses longwall mining and is mining in the direction of the leased premises. Since the 1960s, Harrison’s longwall mining operations have advanced about seven miles closer to the leased premises. Harrison has not mined coal from the leased premises, but anticipates reaching the leased premises and mining it in the next twenty or thirty years. Harrison asserts that that it would not be economical to open a new mine entrance on the leased premises and that the only economical way to mine the leased premises is to reach it by longwall mining. Harrison presented evidence it has paid the property taxes required by the lease and that it has paid (or at least tendered) the annual $ 4,0000 minimum royalty.

Implied covenant claim

Freeport contends that, because neither Harrison nor its predecessor-in-interest has conducted any mining under the 1965 Lease, Harrison has breached an implied duty to diligently mine. The court noted that, under West Virginia law, “[t]there is an implied covenant by the lessee to begin mining with a reasonable time.” Freeport Gas Coal, 2023 WL 2580021 at *3 (quoting Horse Creek Coal Land Co. v. Trees, 84 S.E. 376, 378 (W. Va. 1915).  

But this implied covenant will not apply if it is inconsistent with an express clause in the coal lease. Id. (citing Frederick Bus. Props. Co. v. Peoples Drugs Stores, Inc., 445 S.E.2d 176, 182 (W. Va. 1994). The court concluded that the provision in Section 6 of the Lease stating that “commencement” and “diligence” of mining operations is “at the pleasure of the Lessee” gives the lessee complete discretion regarding both the start and pace of mining. The court reasoned that this complete discretion is inconsistent with an implied duty to start mining within a reasonable time. Therefore, Section 6 of the Lease displaces an implied covenant to begin mining within a reasonable time. Freeport argued that that Section 6 is ambiguous and that it conflicts with other clauses in the Lease, but the court disagreed.

Freeport also argued that the covenant of good faith and fair dealing requires Harrison to diligently mine the leased premises. The court agreed that West Virginia law generally imposes a duty of good faith and fair dealing on the parties to a contract, but the court explained that this cannot be used to create duties that are inconsistent with the provisions of a contract. The court rejected Freeport’s good faith and fair dealing argument, concluding that Freeport was asking the court to impose obligations inconsistent with Section 6’s provision that the start and pace of mining would be at Harrison’s complete discretion.

As an additional basis for its decision, the court concluded that the Lease’s minimum royalty provision precludes the existence of an implied covenant to diligently mine. The court cited prior West Virginia jurisprudence that the duty to diligently mine applies “only when there is no provision requiring payment of minimum royalties or rentals.”  Id. at *6 (quoting Mike Ross, Inc. v. Dante Coal Co., 230 F. Supp. 2d 716, 721 (N.D. W. Va. 2002)). When a lease contains a minimum royalty or rental provision, the provision “serve[s] as a substitute for due diligence” requirements. Because the 1965 Lease contains a minimum royalty provision, there is no duty to diligently mine. Therefore, the court granted summary judgment to Harrison, rejecting Freeport’s implied covenant claim.

Lease abandonment claim

A coal lease can be abandoned, but “[a]bandonment requires both physical abandonment and an intent to abandon.” Id. The court concluded that, for three reasons, Freeport’s abandonment claim failed. First, the court cited the West Virginia Supreme Court for the proposition that the concept of abandonment is based on the implied covenant to conduct mining within a reasonable time. In this case, Section 6 of the Lease did away with that implied covenant. Second, Harrison has continued to pay the annual minimum royalties required by the Lease. This is inconsistent with any intent to abandon. Third, Harrison has continued to pay property taxes on the mineable coal reserves beneath the leased premises. This is also inconsistent with an intent to abandon the Lease. Accordingly, the court granted summary judgment to Harrison, rejecting Freeport’s abandonment claim.

Reformation of the royalty rate

Finally, the court rejected Freeport’s claim for reformation of the royalty rate. The court suggested that a showing of mutual mistake would be necessary to justify Freeport’s claim for reformation. The court stated that “both of the contracting parties were sophisticated entities with experience in the coal industry” and Freeport “put forth no evidence to suggest that the contracting parties were unaware that the price of coal might increase over time.”  Id. at 8. The court acknowledged that some West Virginia authority would allow reformation of a lease if circumstances have changed so dramatically that a party’s insistence on enforcing the terms of the lease is “equivalent to the perpetration of a fraud upon the lessors,” but the court did not think that was the case here. Therefore, the court granted summary judgment to Harrison, rejecting Freeport’s reformation claim.

Keith B. Hall

Keith B. Hall

Keith B. Hall is Director of the Energy Law Center; Director of the Mineral Law Institute; Professor of Law and Nesser Family Chair in Energy Law, Campanile Charities Professor of Energy Law, and John P. Laborde Endowed Professorship in Energy Law 3 and 4

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