## Facts

- Municipal Authority of Westmoreland County (MAWC) owned approximately 2,255 acres in western Pennsylvania and leased the property for oil and gas production under a written lease executed in 2002.
- The lease’s royalty provision expressly allowed the lessee to deduct certain postproduction costs from royalties payable to MAWC.
- For roughly eight years, the original operator (and/or early successors) paid MAWC royalties without taking postproduction-cost deductions, despite the lease language permitting them.
- After CNX Gas Company, L.L.C. (CNX) became the lessee, it initially continued paying royalties without deductions for several months, but began deducting postproduction costs around mid-2011.
- Even after CNX began deducting, MAWC’s royalty receipts exceeded MAWC’s internal projection for 2011; MAWC then adjusted later projections to account for the deductions.
- In 2012, CNX assigned a portion of its leasehold interest to Noble Energy, Inc. (Noble), which also deducted postproduction costs from MAWC’s royalty payments.
- MAWC filed suit in 2015 (as a putative class action) asserting that the long period of non-deduction meant the lease had been modified, that defendants had waived the right to deduct, or that equitable estoppel barred deductions; MAWC also asserted a conversion theory tied to the withheld royalty amounts.
- The parties filed cross-motions for summary judgment, with defendants seeking judgment on all claims and MAWC seeking partial summary judgment.

## Issues

1. Whether a long course of paying royalties without postproduction-cost deductions can modify an unambiguous lease term that permits such deductions.
2. Whether the prior non-deduction practice shows a waiver of the contractual right to deduct postproduction costs.
3. Whether equitable estoppel can prevent defendants from taking deductions authorized by the lease based on MAWC’s claimed reliance on prior payment practices.
4. Whether withholding amounts as postproduction-cost deductions under (or in dispute under) a lease can support a tort claim for conversion, as opposed to a contract claim.
5. Whether any breach-of-contract issues remained regarding whether defendants’ deductions, if permitted in principle, were taken only to the extent and in the manner the lease allowed.

## Decision

- The court denied MAWC’s motion for partial summary judgment.
- The court granted defendants’ motions for summary judgment in part and denied them in part.
- The court held that the lease unambiguously permitted deduction of specified postproduction costs and rejected MAWC’s theory that years of non-deduction altered that express contract right.
- The court concluded MAWC did not produce evidence of a legally effective modification based solely on course of performance where the royalty language was clear.
- The court rejected waiver because the record did not show a clear, intentional, and permanent relinquishment of the deduction right.
- The court rejected equitable estoppel because MAWC could not show justifiable reliance on an expectation of “no deductions” in the face of a lease provision authorizing deductions, particularly after CNX began deducting and MAWC adjusted its projections.
- The court entered summary judgment against MAWC’s conversion theory to the extent it merely repackaged a royalty-underpayment dispute governed by the lease, rather than alleging a distinct tort duty.
- The court allowed limited contract-related disputes to continue to the extent MAWC challenged whether deductions taken were consistent with the lease’s scope and calculation requirements, rather than arguing that deductions were barred altogether.

## Legal Principles

- Under Pennsylvania law, unambiguous lease language is enforced as written; courts do not rewrite clear royalty provisions based on later payment practices.
- Course-of-performance evidence cannot be used to change a clear contractual term; it primarily aids interpretation where a contract term is ambiguous.
- Contract modification requires proof of mutual assent to new terms (and a legally sufficient basis for the change); a unilateral choice to pay more than the contract requires does not, by itself, amend the contract.
- Waiver of a contractual right requires a clear, intentional, and unequivocal act showing the party meant to give up that right; nonuse of the right for a period is not enough without evidence of intent to surrender it permanently.
- Equitable estoppel requires inducement, justifiable reliance, and prejudice; reliance is generally not justifiable when it conflicts with an express, written contract term governing the parties’ relationship.
- Tort claims such as conversion generally fail when the alleged wrongdoing is the withholding or calculation of money owed under a contract and no independent tort duty is shown; disputes over royalty computations typically sound in contract.

## Conclusion

Municipal Authority of Westmoreland County v. CNX Gas Company, L.L.C. held that a lease clause expressly permitting postproduction-cost deductions controlled despite many years of royalty payments made without deductions, and MAWC could not use course of performance to show modification, waiver, or equitable estoppel barring deductions; the court also rejected conversion to the extent it duplicated the contract dispute, while leaving only limited contract issues for further proceedings concerning whether defendants’ deductions complied with the lease’s terms.


Municipal Authority of Westmoreland County v. CNX Gas Company, L.L.C., 380 F. Supp. 3d 464 (2019)