Oil and Gas Case Law Update: Recent Decisions Impacting Oil and Gas Practice

Faculty

Course Planner: Lisa C. McManus, Vice President, Legal & General Counsel, Pennsylvania General Energy Company, LLC

Panelists:•Joel Burcat, Partner, Saul Ewing•Robert J. Burnett, Director, Houston Harbaugh•Lisa C. McManus•Brian Pulito, Member, Steptoe Johnson•Michael Winek, Shareholder, Babst Calland

Agenda

• Sabella v. Appalachian Dev. Corp. • Citizens for Pennsylvania’s Future v. Ultra

Resources, Inc. • Sisson v. Stanley• Harrison v. Cabot Oil & Gas • Pennsylvania Environmental Defense

Foundation v. Commonwealth

Sabella v. Appalachian Dev. Corp., 103 A.3d 83, 2014 PA Super 237 (Pa. Super. Ct. 2014)

Brian Pulito, Steptoe Johnson

Holding: Failure to conduct full title search deprived operators of bona fide purchaser status; trial court had erred in finding that operators were good faith trespassers at any point in time because they were on statutory constructive notice of the true owner's interest based on owner’s recorded instrument.

PennFuture v. Ultra Resources, Inc., 2015 U.S. Dist. LEXIS 21357 (M.D. Pa. Feb. 23, 2015)

Michael Winek, Babst Calland

Eight compressor stations 8 small sources

OR 1 major source

“sources located on one or more contiguous or adjacent properties”

• Distance onlyOR

• Distance + functional interdependence

Court held: Plain meaning should normally control

However, interdependence may be considered “unique factual scenario” “unusual or outside of the normal oil and gas

configurations and arrangements contemplated by PADEP”

Sisson v. Stanley, 2015 PA Super 18 (Pa. Super. Ct. 2015)

Robert Burnett, Houston Harbaugh• In 1953, the OGM were severed from surface and

reserved by the grantor, Joseph Stanley• Many years later the surface owner, Donald Sisson, filed

a quiet title action in an effort to “acquire” the OGM rights

• Attempted to effectuate “alternative service” under Rule 430(a)

• Trial court granted motion for “alternative service” and surface owner published notice of the suit in local newspaper

• Default judgment entered on August 2, 2010

• In November 2010, the sole surviving heir of Joseph Stanley, filed a petition to open the default judgment

• Rule 430(a) provides that a motion for alternative service must be “accompanied by an affidavit stating the nature and extent of the investigation which has been made to determine the whereabouts of the defendant and the reasons why service cannot be made.”

• The trial court granted the petition and held the affidavit was insufficient under Rule 430(a) and Deer Park Lumber v. Major, 559 A.2d 941 (Pa. Super. 1989)

• Prior to trial, the surviving heir filed a motion for judgment on pleadings on the basis of the 1953 Deed

• Trial court granted motion and entered judgment in favor of the surviving heir

• On appeal, the Superior Court affirmed and held that:

i. The affidavit was insufficient under Rule 430(a); and

ii. 1953 Deed severed OGM rights and Butler v. Powers Estate was inapplicable

Harrison v. Cabot Oil & Gas, 2015 Pa. LEXIS 355 (Pa. 2015)

Lisa C. McManus, PGEHarrison v. Cabot Oil & Gas Corp., 887 F. Supp. 2d 588 (M.D. Pa. 2012):

•Challenged lease was valid, the primary term continued to run during the litigation, and thus the lease had expired. No equitable tolling applied.•Cited case law:

Derrickheim Co. v. Brown, 305 Pa. Super. 173, 451 A.2d 477 (1982) Lauchle v. Keeton Group LLC, 768 F. Supp. 2d 757 (M.D. Pa. 2011)

Cabot’s Grounds for Equitable Tolling

1) A lessor’s commencement of a lease-validity challenge constitutes an effective repudiation of the agreement;

2) The lawsuit and attending uncertainty renders it economically impractical for the lessee to proceed with the costly development of production infrastructure on the property; and,

3) It would be unfair to permit a meritless lease challenge to deprive the lessee of the benefit of its bargain.

Courts should therefore award an extension of the primary lease term, measured according to the length of time the unsuccessful lawsuit was pending.

Supreme Court’s Opinion

• Commencement of declaratory judgment action as to oil and gas lease’s validity is not a “repudiation of the lease” because repudiation requires an “absolute and unequivocal refusal to perform” the contract.

• Oil and gas lessees have superior bargaining power and can draft leases to include a tolling provision.

• Recognition of special tolling rule for oil and gas leases would chill lease challenges with merit.

• Ruling is limited to cases in which actual repudiation has not occurred

Motion for Reconsideration/Reargument

1. Extension is not dependent on a finding of repudiation and is available whenever a lessor prevents or obstructs a lessee’s operations.

2. Pennsylvania law already recognizes that a lessor may not prevent or obstruct a lessee’s operations on its lease, but the Opinion ignored this principle.

3. The unique character of an oil-and-gas lease compels the conclusion that a lessor’s suit attacking the validity of its lease amounts to a repudiation.

4. Extension is implied by the terms of oil-and-gas leases, even if not expressly stated, to protect the benefit of the parties’ bargain.

5. The Opinion essentially creates a no-lose situation for lessors who challenge the validity of their oil-and-gas leases during the primary term.

What’s a Lessee to Do?

1. Proceed with development plans and hope for either:a) a favorable ruling on the lease’s validity or b) interference from the lessor that establishes a complete

repudiation of the lease.2. Ensure inclusion of a tolling provision in each oil and gas lease that

provides for tolling.

Pennsylvania Environmental Defense Foundation v. Commonwealth, Docket No. 228 M.D.2012, 2015 Pa.

Commw. LEXIS 9 (Pa. Commw. Ct. Jan. 7, 2015)Joel R. Burcat, Saul Ewing

Environmental Rights Amendment (i) The people have a right to clean air, pure water, and to the preservation of the natural, scenic, historic, and esthetic values of the environment. (ii) Pennsylvania’s public natural resources are the common property of all the people, including generations yet to come. (iii) As trustee of these resources, the Commonwealth shall conserve and maintain them for the benefit of all the people.

Art. I, § 27 (1971) (Numbering added).

Payne v. Kassab, 312 A.2d 86(Pa. Cmwlth. 1973) (Payne I), aff’d, 361 A.2d 263(Pa. 1976) (Payne II).

The Payne Test: (1) Was there compliance with all applicable statues and regulations relevant to the protection of the Commonwealth’s public natural resources? (2) Does the record demonstrate a reasonable effort to reduce the environmental incursion to a minimum? (3) Does the environmental harm which will result from the challenged decision or action so clearly outweigh the benefits to be derived thereform that to proceed further would be an abuse of discretion? Payne I, 312 A.2d at 94.

Robinson Twp. v. Commonwealth, 83 A.3d 901 (Pa. 2013).

Pennsylvania Envt’l Defense Found. v. Commonwealth, 108 A.3d 140 (Pa. Cmwlth. 2015)

Questions?