Virginia Lawyers Weekly VA Lawyers Weekly
In an issue of first impression, the court joined other circuits in holding that when alleging fraud by omission or concealment, given that critical facts related to such allegations are uniquely within the defendant’s knowledge and control, plaintiffs may partly rely on information and belief without running afoul of Rule 9(b). However, they must state the factual allegations that make their belief plausible.
Background
Certain leases permit Antero Resources Corporation to extract and sell natural gas owned by the lessors in exchange for royalty payments. Antero appeals from the district court’s summary judgment order, which held that Antero breached the terms of the leases by deducting certain “post-production costs” from the royalties it paid lessors and awarded damages. Lessors cross-appeal the district court’s earlier dismissal of their fraud and punitive damages claims against Antero.
Breach of contract
In Estate of Tawney v. Columbia Natural Resources, LLC, 633 S.E.2d 22 (W. Va. 2006), the court held that a lessee may deduct post-production costs from royalties only if the lease meets certain heightened specificity requirements. The claims in this case boil down to two questions: (1) whether each lease is subject to Tawney and (2) if so, whether the lease’s royalty provisions satisfy the Tawney requirements and permit Antero to deduct post-production costs.
The court finds that all the leases are subject to Tawney. The leases that are silent on the allocation of post-production costs fail to satisfy the Tawney requirements and therefore do not permit Antero to deduct post-production costs from lessors’ royalties. In addition, two leases modified by a 2015 settlement between Antero and a subgroup of lessors expressly prohibit Antero from deducting any post-production costs from settling lessors’ royalties.
However certain modified leases that include a market enhancement clause do authorize Antero to make deductions after the specific product Antero sells becomes marketable. That portion of the district court’s judgment is vacated. On remand, the finder of fact will need to determine which products Antero sold during the relevant time frame, when those products became marketable and whether Antero incurred the PRC2 and TRN3 costs before or after that point.
Fraud and punitive damages claims
In their second amended complaint, lessors alleged that the named defendants made affirmative misrepresentations regarding the gas collected from the wells and the deductions Antero took from royalties, and that the defendants “failed to report to [lessors] that they were extracting and selling liquids from [lessors’] natural gas.” On appeal, lessors challenge only the dismissal of the latter claim, which they characterize as a claim of fraud by omission or concealment.
Lessors ask this court to adopt a relaxed Rule 9(b) standard for allegations of fraud by omission or concealment, given that critical facts related to such allegations are uniquely within the defendant’s knowledge and control. The Fourth Circuit has not yet addressed this issue, but several other circuits do relax the Rule 9(b) standard when certain facts are peculiarly within the defendant’s knowledge.
This court agrees with that approach. In cases involving alleged fraud by omission or concealment, it is well-nigh impossible for plaintiffs to plead all the necessary facts with particularity, given that those facts will often be in the sole possession of the defendant. As such, when alleging fraud by omission or concealment, plaintiffs may partly rely on information and belief without running afoul of Rule 9(b).
However, they must state the factual allegations that make their belief plausible. The court stresses that this relaxed standard “does not eliminate the particularity requirement.” Here, even under a relaxed Rule 9(b) standard, lessors’ fraud allegations are not adequate. Because the complaint fails to state that claim with particularity, the district court’s order dismissing it is affirmed.
And because lessors did not sufficiently plead a fraud claim, the district court correctly dismissed their punitive damages claim. “Generally, absent an independent, intentional tort committed by the defendant, punitive damages are not available in an action for breach of contract.” While there are some limited exceptions to this rule, none applies here.
Affirmed in part, vacated in part and remanded.
Concurring in part and dissenting in part
Thacker, J., concurring in part and dissenting in part:
I would affirm the judgments and reasoning of the district court across the board.
Corder v. Antero Resources Corporation, Case Nos. 21-1715, 21-1716, Jan. 5, 2023. 4th Cir. (Gregory), from NDWVA at Clarksburg (Keeley). Elbert Lin for Appellant/Cross-Appellee. Marvin Wayne Masters for Appellee/Cross-Appellant. VLW 023-2-006. 39 pp.
