In Northeast Natural Energy LLC v. Pachira Energy LLC, 2020 WL 3406592 (W. Va. 2020), a busi-ness venture between two independent companies went awry when one of the companies, Northeast Natural Energy LLC, began using assets purchased for the venture in a separate endeavor. After a trial court entered a preliminary injunction against Northeast, the West Virginia high court affirmed, holding that the joint business was likely a de facto partnership even though there was no evidence the parties specifically intended such a relationship. The court also found Northeast probably breached its fiduciary duties to the ostensible “partnership” and barred Northeast from any further use of partnership assets for its own profit.
In 2011, Northeast and Pachira Energy LLC executed a joint agreement which created an “area of mutual interest” in the town of Blacksville, West Virginia (the “AMI”) for natural gas production. They set guidelines for exploiting oil and gas leases, and created a joint operating agreement to run wells on the leased properties. Eventually, the companies entered into an oral contract to build a water system to enable the drilling and fracking of wells located in the AMI using a creek located there. Generally, the parties split profits and costs relating to their efforts 75%-25% with Northeast enjoying the 75% interest and Pachira the remaining 25%.
In 2018, Northeast began a side venture known as the Monongahela River Trunk Line, constructing and operating a water line from the Monongahela River to the AMI. Pachira had no interest in this project and paid no expenses to run it, although it footed 25% of the bill to build an extension adjoining the new line to the AMI water system. Northeast then announced that it would be charging Pachira its 25% “share” of the price of water transported from the Monongahela line to the boundary of the AMI. By September 2018, Northeast began testing whether it could use water from the Monongahela line to develop wells inside the AMI, instead of using the AMI creek water as the parties had originally agreed. Pachira also discovered that Northeast planned to use the AMI system to transport water from the Monongahela River to southern Pennsylvania in order to supply wells there. Again, in contrast to Northeast, Pachira had no ownership interest in these out-of-state wells.
Pachira filed suit against Northeast claiming that Northeast was exploiting the AMI water system for its own benefit and to the detriment of Pachira. This included, among other things, Northeast’s use of the system to transport water to its own wells in Pennsylvania and to third parties for sale, with no profit or other benefit inuring to Pachira. Pachira sought a preliminary injunction to immediately cease Northeast’s use of the AMI water system to support external drilling operations and to stop the selling of water to third parties for use outside of the AMI.
The circuit court granted Pachira’s injunction and the appeals court affirmed. On appeal, Northeast argued that the parties owned the AMI water system as tenants in common and that it was therefore free to use and enjoy its share of the property as it saw fit. The appeals court disagreed, holding that the parties were probably partners in a partnership, albeit an unintended one. West Virginia law states that a partnership is created by the “association of two or more persons to carry on as coowners a business for profit.” W. Va. Code § 47B-1-1(7). By this definition, “parties operating a busi-ness together for profit may inadvertently create a partnership despite their expressed subjective in-tention not to do so.” Valentine v. Sugar Rock, Inc., 234 W. Va. 526, 540 (2014) (quotation marks omitted). Here, although there was no written agreement governing the parties’ relationship, their conduct in establishing the AMI water system as a business for profit likely formed partnership and rendered them partners in it.
The appeals court further determined that the water system in the AMI could be considered property belonging to this partnership. Under West Virginia law, any property purchased with partnership as-sets is presumed to belong to the partnership even if not acquired in the name of the partnership or one of the partners. W. Va. Code § 47B-2-4(c). It was clear that both Pachira and Northeast had in-vested substantial amounts of money, time and labor to build and operate the AMI water system. Although the system was not titled in the name of a particular partnership, it had been set up with the combined assets of the parties to further their AMI business. As such, the water system could be deemed partnership property purchased with partnership assets.
Last, the court found that Northeast had likely used partnership property for its own personal profit, thereby breaching its fiduciary duty to the ostensible partnership and partner Pachira. Northeast’s continued unauthorized use of the AMI water system presented a real threat of ongoing wrong to Pachira, and entitled Pachira to a preliminary injunction barring such use.
To those contemplating a joint business endeavor with another company, this case serves as a warning as to how easy it can be to fall into an inadvertent partnership, even for sophisticated parties. If that occurs, parties will find themselves with significant fiduciary duties to one another that could lead to liability in the event of a dispute.