2010Public Service

Part 4: The coal industry fights back

'They're ripping us off'
Daniel Gilbert
December 9, 2009

Mike and Ferrell Whited look over paperwork concerning gas wells on their property near Swords Creek, Va. (David Crigger/Bristol Herald Courier)

On an early November day, Michael Whited, mounted on an all-terrain vehicle, checked the meter at a highly productive well named AY-112. Coalbed methane was flowing out of the ground and into a pipeline at the rate of 176,000 cubic feet a day – enough gas to satisfy the heating and cooking needs of the average American home for almost two years.

“I just check it to see how much they’re ripping us off,” Whited said.

Since 2001, 14 wells on the Whited land have produced 4.4 billion cubic feet of coalbed methane. That volume would generate about $30 million in gross proceeds for the gas operator, based on historical monthly averages of natural gas prices for two major interstate pipelines in the region.

As the owners of the surface land and the gases beneath it, the Whiteds are entitled to a one-eighth sliver of the proceeds from coalbed methane drained from their property. But because they do not own the coal, the Virginia Gas and Oil Board ordered that their royalties be placed into an escrow fund until the ownership of coalbed methane could be decided.

In the spring of 2004, the Supreme Court of Virginia issued a decision that spread like wildfire among mineral owners in Southwest Virginia, upholding a lower court ruling that a surface owner who sold only the coal from his property retained rights to all of the coalbed methane. The ruling in Harrison-Wyatt v. Ratliff buoyed landowners like the Whiteds, who had stood by empty-handed as gas companies drained their coalbed methane.

Earl Whited, the family patriarch who started out as a school bus driver, knew he had a claim to at least several hundred thousand dollars in escrow. In 2005, he retained Peter Glubiak, the attorney who had won for the Buchanan County surface owner in the Harrison-Wyatt case.

Glubiak had spent four years litigating the ownership of coalbed methane, and armed with the high court’s ruling, he figured getting the Whiteds’ royalties out of escrow would be smooth sailing.

But it didn’t turn out that way.

A trial of each tract

The large amount of royalties at stake had made it possible for Earl Whited to hire Glubiak, who worked on a contingency basis and charged a percentage of whatever his client recovered from escrow. But it also stirred a vigorous defense from another party – the company that owned the coal beneath the Whited land, who asserted a right to the coalbed methane royalties in spite of the Harrison-Wyatt ruling.

From the outset, Buckhorn Coal Co. made it clear it would not respect the Supreme Court’s ruling that a surface owner who sells only the coal retains rights to the coalbed methane.

“We think it’s a bad decision,” Charles Hart, managing partner of Tazewell, Va.-based Buckhorn, said in a phone interview. “You have to defend your interests. You can’t just roll over and say, ‘Here it is.’ ”

The defense went like this, as argued by Buckhorn’s lead counsel, Eric Whitesell: Coalbed methane ownership “can be reached only after a trial of the title of each tract” of land.

With that, Buckhorn heaved the burden of proving ownership squarely onto the Whiteds.

The plaintiffs, Buckhorn claimed, failed to identify the exact location of the boundaries where they claimed mineral interests. They failed to include a survey. They failed to name other parties who might have mineral interests in the same drilling units. They got the names wrong on the pleadings.

Complicating the plaintiffs’ case was that Earl Whited died early on in the litigation, in October 2006, and left his estate – and his active lawsuit – to his six children. Discord broke out among the heirs, and the two who had been designated executors ceded their authority to a professional administrator, Ralph Snead.

In a June 2007 letter briefing Snead on the case, Glubiak wrote, “We have been battling Buckhorn Coal over what proved to be extremely complex title issues, as well as boundary and ownership issues.”

A year later, with Buckhorn promising an appeal to the state Supreme Court if it lost, Snead presented the Whited heirs with three options: Pay $12,000 out of pocket for a survey and title opinion; negotiate with Buckhorn to split royalties; or none of the above, and Glubiak would withdraw from the case.

The heirs balked at the fee for additional title work, but could not agree on how to proceed. Snead, as administrator of the estate, unilaterally decided to authorize Glubiak to negotiate a split agreement.

Coal goes on the offensive

Buckhorn Coal has never won 100 percent of coalbed methane royalties, and Charles Hart never expected to in the Whited case.

“When there’s a conflict, we will split the royalties 50-50,” he said. “We like to do that, because once it gets into that escrow account, if nobody pushes the issue, you’ll never get any money.

“Fifty percent is better than nothing,” he said.

And Hart is adamant that the Supreme Court got it wrong in the Harrison-Wyatt case.

J. Scott Sexton, a Roanoke, Va., lawyer, represented the losing coal owner, Harrison-Wyatt, in that case. Asked recently whether he thought the Supreme Court’s ruling resolved the ownership of coalbed methane, Sexton reflected, carefully parsing his words.

“The Harrison-Wyatt decision established the law in Virginia that a coal owner claiming title under an unambiguous coal-only deed does not own the coalbed methane,” he said.

In plain language, when a surface and gas owner sells only coal, the coal does not include coalbed methane; the surface owner keeps that. But that decision has come under increasing assault – in and out of court – by coal owners in the years since the courts ruled on coalbed methane ownership.

Coal owners routinely propose royalty split agreements they tout as “the most economical and expedient way” to collect money from escrow, according to split agreements reviewed by the Bristol Herald Courier.

Some outright deny the Supreme Court’s ruling in Harrison-Wyatt.

In November 2008, one coal owner wrote to Jimmy Smith, of Coeburn, Va., and proposed to split royalties: “The Commonwealth of Virginia has not made a judicial determination of ownership of coalbed methane.”

The offer was signed by John Mooney, vice president and regional manager for NRP Operating LLC, a subsidiary of Houston-based Natural Resource Partners LP, which earned gross revenues of $292 million in 2008 – including $8 million in gas and oil royalties, according to its financial filings. Mooney did not respond to phone or e-mail messages seeking comment.

Glubiak, in representing various clients’ mineral interests, has encountered this assault firsthand.

“It’s my contention that the coal industry decided that if they put up a united front, then they can scare people off and into doing these godforsaken split agreements,” he said. “Most people say, ‘I can’t pay some lawyer $50,000 to fight my case with you.’ There are millions of dollars at stake, and [coal companies] used this as a bludgeon to beat up people and threaten what they’re going to do.”

As for the argument that the Harrison-Wyatt decision is limited to the deeds in one case, Glubiak said, “I will defend to my dying breath [against] this crap that’s going on now that it’s only a Buchanan County case. If the severance deed says ‘coal only,’ the surface owner wins; the surface owner owns the gas.”

The split

By 2008, Glubiak was pursuing for the Whiteds the very type of agreement he abhors – a 50-50 split – and four of the heirs retained another law firm to halt the negotiation. They spent $7,500 before eventually, in February 2009, endorsing the split.

The upshot is this: The Whited heirs will receive 50 percent of the royalties in escrow, minus 30 percent for the services of Glubiak and Snead. After that payout, the Whiteds and Buckhorn evenly will split the one-eighth royalty. As of October, Snead had collected more than $300,000 from escrow to distribute among Glubiak, the Whiteds and himself.

“We didn’t really have much choice, I don’t guess you’d say,” Cathy Ward, a Whited heir who favored the split agreement, said in an interview. “When you’re up against these big companies, you’re not going to win. You don’t have much of a chance. I knew the way Buckhorn was dragging it out in court, they was just going to keep fighting us.”

Ferrell Whited, a disabled coal miner and the oldest of the heirs, is still angry about the split.

“Glubiak sold us out. And the judge. They sold us out. And our administrator – they sold us out.”

Glubiak and Snead, for their part, contend they did their all for the Whiteds – a difficult, conflictive group of clients, they said, and that the unhappy result is a reflection of the extraordinarily complex requirements of collecting royalties from escrow. The Whiteds still will receive many thousands of dollars each in royalties, they pointed out.

“It is a lousy system,” Glubiak mused. “Could they have done a split at the beginning? I don’t know, maybe, maybe not.”

Turning to Buckhorn and the coal industry, Glubiak said, “You know what the most embarrassing part of this is? They beat me.”

After four years of absorbing the costs of the litigation, Glubiak said, “I just couldn’t do it anymore. I just gave up.”

This, he acknowledged, handed the industry “tremendous support emotionally and legally” in its fight for coalbed methane royalties.

The split agreement did not settle everything for the Whiteds. They still have interests in other coalbed methane wells, and the Virginia Gas and Oil Board is funneling those royalties into escrow. None of the heirs seemed willing to go through another lawsuit, or to split them with Buckhorn.

Said Ferrell Whited: “We’ll just sit back and let the escrow build and just will it to our grandkids