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Quarterly 147 PENNSYLVANIA'S NEW MEDICAL

MARIJUANA LAW: THE LEGAL

ROADMAP FOR A GROWING

INDUSTRY

161 FROM EXPUNGEMENT TO SEALING

OF CRIMINAL RECORDS IN

PENNSYLVANIA

171 THE TEN RULES OF CONSTRUCTION

FOR CASES INVOLVING TITLE

DISPUTES UNDER PENNSYLVANIA

OIL AND GAS LAW

183 PENNSYLVANIA'S APPELLATE

COURTS STRIKE OUT ON THEIR

OWN COLLATERAL ORDER PATH-

PART ONE

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Your Other Partner

October 2016 • VOLUME LXXXVII, No. 4

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CONTENTS

PENNSYLVANIA'S NEW MEDICAL MARIJUANA LAW:

THE LEGAL ROADMAP FOR A GROWING INDUSTRY 147

Thomas G. Wilkinson, Jr.

FROM EXPUNGEMENT TO SEALING OF CRIMINAL

RECORDS IN PENNSYLVANIA 161

Sharon M. Dietrich

THE TEN RULES OF CONSTRUCTION FOR CASES INVOLVING

TITLE DISPUTES UNDER PENNSYLVANIA OIL AND GAS LAW 171

Joel R. Burcat

PENNSYLVANIA'S APPELLATE COURTS STRIKE OUT ON

THEIR OWN COLLATERAL ORDER PATH—PART ONE 183

Bruce P. Merenstein

The Pennsylvania Bar Association Quarterly (ISSN 0196-2051) is published four times

a year in January, April, July and October by the Pennsylvania Bar Association, 100

South St., P.O. Box 186, Harrisburg, PA 17108-0186. Subscription rates: $30 per year for

non-members. Periodicals postage rates paid at Harrisburg, PA and at additional

mailing offices.

POSTMASTER: Send address changes to The Pennsylvania Bar Association Quarterly,

P.O. Box 186, Harrisburg, PA 17108-0186.

ii

The Ten Rules Of Construction For Cases Involving Title

Disputes Under Pennsylvania Oil And Gas Law

By JOEL R. BURCAT,* Dauphin County ^ 4 Member of the Pennsylvania Bar g

TABLE OF CONTENTS

1. A MINERAL/OIL AND GAS LEASE IS A 7. A PARTY SEEKING TO TERMINATE A CONTRACT GOVERNED BY CONTRACT LEASE BEARS A HEAVEY BURDEN LAW PRINCIPLES 172 OF PROOF 179

2. A MINERAL LEASE IS NOT A LEASE 8. PENNSYLVANIA OIL AND GAS LAW IS GOVERNED BY LANDLORD/TENANT VERY OLD—AND VERY NEW. TO LAW 173 MAINTAIN STABILITY AND THE

3. WHEN INTERPRETING A LEASE, A STATUS QUO, THE PREFERENCE OF COURT WILL NOT APPLY "IMPLIED" THE COURTS IS TO PRESERVE PROVISIONS, EXCEPT IN RARE OLD LAW 180 CIRCUMSTANCES 174 9. THE PENNSYLVANIA COURTS ARE

4. THE COURTS DISFAVOR PAROL LOOKING FOR THE PRAGMATIC EVIDENCE (EXCEPT WHEN IT SOLUTION 181 SUITS THEM) 175 10. THE SUPREME COURT WILL EMBRACE

5. PENNSYLVANIA COURTS WILL DECIDE A LEGAL PRINCIPLE THAT IS A CASES SO THAT THE INTERPRETATION MINORITY POSITION, IF IT IS WILL PRESERVE AS MANY LEASES CONSISTENT WITH PENNSYLVANIA AS POSSIBLE 177 LAW 182

6. COURTS WILL INTERPRET PENNSYLVANIA LAW TO PRESERVE ANCIENT PRECEDENT 178

ABSTRACT

Oil and gas drilling famously began in 1859 with "Colonel" Edwin Drake's

well in Titusville, Pennsylvania. Fracturing of oil wells (a.k.a. "fracking") also

began in Pennsylvania—in 1865—with the invention by Colonel E.A.L. Roberts

of the Roberts Torpedo, a small incendiary device that was lowered into the bore

hole and used to fracture the column of rock to free up the oil and natural gas

present in the rock} Hydraulic fracturing using water and other fluids under

*Mr. Burcat is a Partner with Saul Ewirig LLP, Harrisburg, Pa. He is Co-Editor of THE LAW of OIL AND

GAS IN PENNSYLVANIA (PBt 2014 and 2d ed. 2016), and is Chairman of the Firm's Oil and Gas Practice

Group. For more information, go to www.GasAndOilLawyers.com. The author thanks his colleagues at

Saul Ewing LLP for helping with some of the case summaries contained in this article: Andrew T. Bockis,

Richard A. Guerra, Jr., Matthew M. Haar, Ayanna Lee-Davis, and Mary Elizabeth Schluckebier.The au

thor also is grateful to Lisa C. McManus, Esq., Vice-President, Legal & General Counsel of Pennsylvania

General Energy, LLC for her critique and suggestions.

1. J. M. Eaton, PETROLEUM: A HISTORY OF THE OIL REGION OF VENANGO COUNTY, PENNSYLVANIA, at 133 (J .P.

Skelly & Co., 1866) ("This explosion [from a torpedo] is supposed to distend the opening, enlarging the

veins, and preparing for the flow of the oil to the region of the pump."); see, e.g., John F. Carll, OIL WELL

RECORDS AND LEVELS, at 55 (Bd. of Comm'rs for the Second Pa. Geological Survey, 1877) (record of torpe

doing of Lynn Well, No. 2, Nov. 1867).

PENNSYLVANIA BAR ASSOCIATION QUARTERLY | October 2016 171

http://www.GasAndOilLawyers.com

172 PENNSYLVANIA BAR ASSOCIATION QUARTERLY | October 2016

pressure to accomplish the same result began in the late 1940s.2 In 2004, in

Washington County, Pennsylvania, Range Resources drilled the first well to re

cover marketable amounts of natural gas from the MarceUus Shale formation.3

These advances enabled Pennsylvania to be at the forefront of an energy revolu

tion that continues to this day.

Pennsylvania's courts began examining the mining of minerals in the

Eigh teenth Century. Long before drilling and fracturing of oil and gas wells, the

courts ruled on proleptic cases dealing with title disputes relating to minerals.11

After 1859, however, the floodgates of litigation opened, and the courts of Penn

sylvania began reviewing many cases dealing with, in particular, title to minerals,

oil and natural gas.5 In addition, the courts also began

reviewing cases involving the impact of drilling on

neighbors and the environment.6

Now, in the early Twenty-First Century, rules of

construction can be divined from the case law that can

help predict the direction of Pennsylvania's courts re

garding a new case or factual scenario. It is not

enough to know the majority rules from other juris

dictions, as Pennsylvania relies on its own unique

rules. Instead, an evaluation of the facts of the case

against the following rules of construction will chart

a likely path for the eventual ruling by the courts.

1. A MINERAL/OIL AND GAS LEASE IS A CONTRACT

GOVERNED BY CONTRACT LAW PRINCIPLES

Some litigants have argued that mineral and oil and gas7 leases8 are different

than other contracts. The Pennsylvania Supreme Court however, has ruled that

mineral and oil and gas leases will be governed by basic contract law principles.

2. "Hydrofracturing... [wasl developed by the drilling industry in the late 1940's." United States Steel

Corporation v. Hoge, 468 A.2d 1380,1381 n.l (Pa. 1983).

3. Ross H. Pifer, Historical Background of Pennsylvania Oil and Gas Law, (cited as"Pifer"herein) chapter in

Joel R. Burcat & Stephen W. Saunders, THE LAW OF OIL AND GAS IN PENNSYLVANIA (PBI 2014) (cited as

"BURCAT & SAUNDERS" herein), at 9.

4. See e.g., Arthur Chambers v. Daniel Furry and Christian Furry, 1 Yeates 167,1792 WL 480 (Pa. 1792) (dis

pute over title to "soil, the stones, wood, or grass"); John Penn v. Matthew Divellin and John Musser, 2Yeates

309,1798 WL 516 (Pa. 1798) (lease reserved to the Penn family"the right of digging for ore, and the right

of fuel or coal, for the necessary buildings and lead works."at 1).

5. See e.g., Kiev v, Peterson, 41 Pa. 357 (1861) (dispute over petroleum rights); Funk v. Haldeman, 53 ft. 229

(1866) (dispute over rights to oil, coal and other minerals); Union Petroleum Co. v. Bliven Petroleum Co., 72

Pa. 173 (Pa. 1872) (dispute over title to land containing oil).

6. See, e.g., Collins v. Chartiers Valley Gas Co., 21 A. 147 (Pa. 1891) (judgment against natural gas driller for

negligent destruction of plaintiffs water well); Hauck v.Tide Water Pipe-Line Co., 153 Pa. 366,375-76 (1893)

("The escape of oil of a pipeline company... and its percolation through plaintiff's land, and destruction

of his springs, constitute a nuisance, and the company is liable for consequential damages, regardless of

negligence in permitting the oil to escape."); Pfeifferv. Brown, 30 A. 844 (Pa. 1895) (action for trespass could

be maintained against oil well driller who pumped salt water onto plaintiff's farm).

7. Pennsylvania, unlike any other state, has held that the term "minerals" does not include oil and gas.

This is based on the Dunham Rule, from Dunham and Shorttv. Kirkpatrick, 101 Pa, 36 (1882). The Rule was

reaffirmed in 2013, by the Supreme Court in Butler v. Charles Powers Estate, 65 A-3d 885 (Pa. 2013). See also:

T.W. Phillips Gas and Oil Co. v. Jedlicka, 42 A.3d 261,268 (Pa. 2012); Seneca Res. Corp. v. S&T Bank, 122 A.3d

374, 380 (Pa. Super. 2015).

8. Leases for minerals (e.g. coal, metals, etc.) and oil and gas generally are similar and, in fact, are fee

simple determinable deeds. See Jacobs v. CNG Transmission Corp., 332 F.Supp.2d 759, 773 (W.D. Pa. 2004);

Jedlicka supra note 7, at 268; Seneca Res. Corp. v. S & T Bank, 122 A.3d at 380,

Application of the

Ten Rules of

Construction will

guide lawyers and

the courts as they

apply Pennsylvania's

common law of oil

and gas.

The Ten Rules Of Construction For Cases Involving Title Disputes Under PA Oil And Gas 173

The decisive recent case of T.W. Phillips Gas and Oil Co. v. Jedlicka9 sets out the

Pennsylvania rule. In Jedlicka, the defendants asserted that a lease with an explo

ration company had terminated because of the expiration of the habendum

clause.10 They argued that because the wells suffered a loss in 1959, the lease termi

nated. The case was reviewed by both the Superior and the Supreme Courts.

Almost in passing, the Supreme Court reaffirmed Pennsylvania law that an oil

and gas lease is a contract that is to be interpreted in accordance with contract law

principles:

Furthermore, a lease is in the nature of a contract and is controlled by principles of contract law. It must be construed in accordance with the terms of the agreement as manifestly expressed, and"[t]he accepted and piain meaning of the language used, rather than the silent intentions of the contracting parties, determines the construction to be given the agreement."11

This rule has now been reaffirmed numerous times by the Pennsylvania courts.12

One federal district court has put a slight gloss on this principle to clarify that it ap

plies to oil and gas leases: "Pennsylvania oil and gas leases are governed by general

principles of contract interpretation."13

2. A MINERAL LEASE IS NOT A LEASE GOVERNED BY

LANDLORD/TENANT LAW

Some parties have noted that the term often utilized to convey oil and gas is an

"oil and gas lease." Thus, they have argued that perhaps the conveyance is not a fee

simple determinable deed governed by oil and gas law, but a lease governed by

landlord/tenant law. These parties have sought some of the protections afforded to

tenants under the Landlord and Tenant Act of 195114 and have claimed that the cor

responding statute of frauds requires a lease to be signed by both the lessor and the

lessee to be valid. The courts have taken the view, however, that (despite its name) a

mineral or oil and gas lease is not governed by landlord and tenant law; rather, it is

a fee simple determinable title to property.15

In Derrickheim Co. v. Brown,16 a case dealing with title to oil and gas land, the court

stated clearly:"[0]il and gas leases are not controlled by normal landlord and tenant

law."17

Nolt v. TS Calkins & Assoc.18 more recently reaffirmed that an oil and gas lease is

not governed by landlord and tenant law. The court held the conveyance was subject

9. Supra note 7.

10. "Typically, as herein, the habendum clause in an oil and gas lease provides that a lease will remain

in effect for as long as oil or gas is produced 'in paying quantities.' Traditionally, use of the term 'in

paying quantities' in a habendum clause of an oil or gas lease was regarded as for the benefit of

the lessee, as a lessee would not want to be obligated to pay rent for premises which have ceased

to be productive, or for which the operating expenses exceed the income."

Jedlicka, supra note 7, at 268 (citations omitted).

11. Id. at 267 (citations omitted).

12. Seneca Res. Corp. v. S &T Bank, 122 A.3d at 379; Humberston v. Chevron U.S.A., Inc., 75 A.3d 504, 509

(Pa. Super. 2013); Caldwell v. Kriebel Resources Co., LLC, 72 A.3d 611, 614 (Pa. Super. 2013).

13. Smith v. Steckman Ridge, LP, 38 F.Supp.3d 644, 651 (W.D. Pa. 2014) (citations omitted) (emphasis

added).

14. 68 P.S. §250.101 et seq. (2004).

15. Hite v. Falcon Partners, 13 A.3d 942 (Pa. Super. 2011); See Russell Schetroma, Understanding,

Interpreting and Shaping the Evolving Pennsylvania Oil and Gas Lease, chapter in BURCAT & SAUNDERS, at 88.

16. Derrickheim Company v. Brown v. Webber, 451 A.2d 477 (Pa. Super. 1982).

17. Id. at 479.

18. Nolt v. TS Calkins & Associations, LP, 96 A.3d 1042 (Pa. Super. 2014).


to the general statute of frauds, not the statute of frauds in the Landlord and Tenant

Act:

In making this argument, the Nolts turn a blind eye to case law rejecting the notion that oil and gas leases are governed by landlord/tenant legal principles ... Although the interpretation of oil and gas leases has proved to be"troublesome" for the courts of this Commonwealth ... the law has developed to provide that an oil and gas lease, despite the use of the term "lease," actually involves the conveyance of property rights.. .19

3. WHEN INTERPRETING A LEASE, A COURT WILL NOT APPLY

"IMPLIED" PROVISIONS, EXCEPT IN RARE CIRCUMSTANCES

It is now well-established that an oil and gas lease is a unique form of contract,

one that is guided by oil and gas law.20 That being the case, the meaning of the con

tract will be derived solely from the language in the lease and not through the use

of implied terms unless the lease itself calls for such interpretation or is ambiguous.

An oil and gas lease will be thoroughly read by the court to determine if it can

divine the intent of the parties and only as a last resort will it rely on implied con

ditions from outside of the four corners of the lease.

Caldwell v. Kriebel Resources Co.,21 illustrates this principle. In Caldivell, the plain

tiffs sought to terminate their oil and gas lease with Kriebel Resources for failure of

Kriebel to engage in drilling of the Marcellus Shale formation. In the alternative, the

plaintiffs sought to reform the parties' lease to apply to shallow gas only.22 The

plaintiffs did not dispute that Kriebel was producing gas from the shallow forma

tion on their property. They claimed, however, that as Kriebel had not conducted

any drilling activities or paid delay rentals for gas in the Marcellus Shale formation,

Kriebel breached an "implied duty to develop."23 The plaintiffs also argued that

Kriebel breached an implied duty to develop "in paying quantities" and that the

court should apply a good faith standard to that duty. The trial court dismissed the

complaint.

The superior court recognized that an implied duty to develop exists, but only

when the landowner's compensation is limited to royalty payments. The lessee does

not have to drill wells if it continues to pay the landowner for the opportunity to de

velop oil and gas.24 In this case, the court determined that it would not recognize an

implied duty to develop all economically exploitable strata for two reasons. First, the

plaintiffs'lease contained a provision that prohibited any implied covenant. Second,

the lease fully expressed both parties' obligations. The lease provided that Kriebel

would pay delay rental payments if no gas was produced. The court determined that

it was not authorized to impose an implied duty on Kriebel in light of the contract's

language.

Citing to Hutchinson v. Sunbeam Coal Corporation,25 the court noted with approval

that:

19. Id. at 1046-47 (citations omitted).

20. Jedlicka, supra note 7, at 267.

21. Caldwell v. Kriebel Resources Co., LLC, 72 A.3d 611.

22. Id. at 613.

23. Id. at 614.

24. There are, of course, a number of ways that lessors can continue a lease without actually drilling

the lease or extracting gas, e.g. delay rental payments, shut-in rentals, fixed rental payments, etc. See,

Robert J. Burnett, Oil and Gas Lease Negotiations from the Lessor's Perspective, chapter in BURCAT & SAUNDERS,

at 133-34.

25. Hutchinson v. Sunbeam Coal Corporation, 519 A.2d 385 (Pa. 1986).


The law will not imply a different contract than that which the parties have expressly adopted.To imply covenants on matters specifically addressed in the contract itself would violate this doctrine.26

Regarding the Caldwells' claim of breach of an implied duty to develop in paying

quantities, the court rejected the plaintiffs' argument that the term ought to be im

plied in all leases and noted that the parties in Jedlicka placed the term "paying

quantities" in their lease, which made the issue an interpretation of an express con

tract term and not an implied duty.27 Unlike the lease in Jedlicka, however, the lease

in Caldwell did not contain the phrase "in paying quantities/'The court therefore de

termined that it should not expand Jedlicka to include a good faith standard for all

aspects of the gas industry that affect natural gas production.28

4. THE COURTS DISFAVOR PAROL EVIDENCE

(EXCEPT WHEN IT SUITS THEM)

In the leading and most recent case, Yocca v. Pittsburgh Steelers Sports, Inc., the

Supreme Court stated the modern version of the parol evidence rule:

Where the parties, without any fraud or mistake, have deliberately put their engagements in writing, the law declares the writing to be not only the best, but the only, evidence of their agreement. All preliminary negotiations, conversations and verbal agreements are merged in and superseded by the subsequent written contract... and unless fraud, accident or mistake be averred, the writing constitutes the agreement between the parties, and its terms and agreements cannot be added to nor subtracted from by parol evidence.29

Exceptions to the parol evidence rule include: where a party avers that a term was

omitted from the contract because of fraud, accident, or mistake;30 and to explain or

clarify or resolve an ambiguity in the document.31 One limitation to this exception

is that:

while parol evidence may be introduced based on a party's claim that there was a fraud in the execution of the contract, i.e., that a term was fraudulently omitted from the contract, parol evidence may not be admitted based on a claim that there was fraud in the inducement of the contract, i.e., that an opposing party made false representations that induced the complaining party to agree to the contract.32

The case that most clearly articulates the Pennsylvania parol evidence rule as

applied in the oil and gas lease context is Humberston v. Chevron U.S.A., Inc.33 In

Humberston, plaintiffs-lessors brought a quiet title and trespass action against a

lessee and contractor hired to build a freshwater impoundment on the lessors' land.

The court of common pleas evaluated the lease and determined that the lease per

26. Kriebel, 72 A. 3d at 615 (citations omitted).

27. Jedlicka, supra note 7, at 276-77.

28. Caldwell, 72 A.3d at 616.

29. Yocca v. Pittsburgh Steelers Sports, Inc., 854 A.2d 425,436 (Pa. 2004), (quoting Gianni v. Russell & Co., 126

A. 791,792 (Pa. 1924)). A discussion of the parol evidence rule may be found in Matthew A. Meyers, Where

Parties Have Manifested Their Intentions in a Pinal, Exclusive, and Fully Integrated Agreement, that Writing Will

be the Only Evidence of Their Agreement: Yocca v. The Pittsburgh Steelers Sports, Inc., 43 Duq. L. Rev. 497

(2005).

30. Yocca, 854 A.2d at 437.

31. Id.

32. Id. at 437 n.26 (citations omitted).

33. Humberston, 75 A.3d 504.


mitted the development sought by the lessees.34 The lessors argued that they ought

to be permitted to introduce parol evidence to interpret language in the lease.35The

trial court prohibited the introduction of parol evidence.

The superior court evaluated the lease and agreed with the trial court's conclu

sions and its reasoning.36 Relying on Yocca, the appeals court found that the intro

duction of parol evidence would be both improper and unnecessary. The court also

evaluated the integration clause in the lease. Noting that the clause stated that "the

entire agreement between the Lessor and Lessee is embodied herein [in the Lease]"

and that the integration clause specifically excluded any oral representations, the

court found that the integration clause supported the lessee's position.37

On the other hand, the federal courts, applying Pennsylvania law, have been

somewhat reluctant to apply Pennsylvania's parol evidence rule.38 What appears to

trouble the federal courts is the requirement that all pre-execution discussions be

tween the contracting parties are merged into the written agreement, including those

discussions that may involve fraud to induce the lessor to enter into the lease.

In Cabot Oil & Gas Corp. v. Jordan,39 the plaintiff, Cabot, brought an action against

the defendant seeking a declaratory judgment that the oil and gas lease between the

parties was valid and binding. Defendant claimed the lease was invalid primarily

because Cabot's representatives made false representations to defendant that in

duced her to enter into the lease. After consideration, the court declined to exercise

jurisdiction over Cabot's complaint for declaratory judgment.

The court noted that federal district courts have discretion to deny jurisdiction

when a matter comes before the court that must be decided under state law and

"when the state law involved is close or unsettled."40 The court declined jurisdiction

rather than "meddle" in Pennsylvania law, which it found to be unclear and unset

tled, holding that"any decision about corporate practices and/or landowner respon

sibility has potential broad impact on the matters of state law presented and the

state courts should make such vital determinations."41

The issue also arose in federal court in Kropa v. Cabot Oil & Gas Corporation, in

which a gas rights lessor brought an action against the lessee, alleging that he was

fraudulently induced to enter into an oil and gas lease and seeking a declaratory

judgment that the lease was invalid.42 The lessor claimed the lessee's representative

told him that the lessee would "never pay any more than $25.00 per acre so he better

take the $25.00 per acre. . ."43 After learning that others received more money, the

lessor sued seeking to void the contract. The lessee moved to dismiss.

The court examined the integration clause of the lease and three writings that

were all a part of the contract at the time it was signed. One did not contain an in

tegration clause. The court refused to dismiss that portion of the claim dealing with

34. Pennsylvania law provides that "the task of interpreting a contract is generally performed by a

court rather than by a jury." Id. at 510 (quoting Maguire v. Ohio Casualty Ins. Co., 602 A.2d 893,894 (Pa. Super.

1992)).

35. Id.

36. Id. at 512.

37. Id. See also, Wright v. Misty Mountain Farm, LLC, 125 A.3d 814,818-19 (Pa. Super. 2015) (intent of par

ties must be shown from the language of the deed excepting oil and gas rights, not parol evidence).

38. See, e.g., Cabot Oil & Gas Corporation v. Jordan, 698 F.Supp.2d 474 (M.D. Pa. 2010); Kropa v. Cabot Oil

& Gas Corporation, 609 F.Supp.2d 372 (M.D. Pa. 2009).

39. Cabot Oil & Gas Corporation, 698 F.Supp.2d 474.

40. Id. at 476, quoting State Auto Insurance Companies, v. Summy, 234 F.3d 131,135 (3d Cir. 2001).

41. Id. at 479.

42. Kropa v. Cabot Oil & Gas Corporation, 609 F.Supp.2d 372 (M.D. Pa. 2009).

43. Id. at 372.


the statement that the lessor would never be offered more than $25 since that part

of the claim was not covered by an integration clause;44 however, the court did dis

miss that part of the claim relating to fraudulent statements regarding the amount

of royalty since that was covered by an integration clause.45

In 2009 the Kropa court granted the defendant's motion to dismiss in part and de

nied it in part. The court then denied the defendant's motion for reconsideration,

finding that"the written agreement between the parties to be fully integrated is only

a part of the inquiry into whether the parol evidence rule should apply, and it was

not material to the issue of whether a contract actually existed between the par

ties."46 In arguing the motion to reconsider, the lessor alleged that no valid contract

existed because the lessee induced the lessor to sign the contract through fraud.The

lessor was not seeking an interpretation of the contract; rather, the lessor was seek

ing a ruling that no contract existed between the parties. The court held that evi

dence of fraud in the inducement suspends the parol evidence rule because fraud

prevents formation of a valid contract.47

5. PENNSYLVANIA COURTS WILL DECIDE CASES SO THAT THE

INTERPRETATION WILL PRESERVE AS MANY LEASES AS POSSIBLE

When evaluating a case, an important question to ask is: Will there be an impact

of this decision on a large number of leases? If the answer is yes, that suggests that

the court will seek to preserve as many leases as possible.

Kilmer v. Elexco Land Services, Inc.i8 is a good example of an outcome that pre

served the largest number of leases. Kilmer presented the Supreme Court with the

opportunity to review the term "royalty" and construe that term in the context of

Pennsylvania's Guaranteed Minimum Royalty Act ("GMRA").49 The GMRA governs

leases between landowners and gas companies seeking to drill natural gas wells in

Penn-sylvania and requires that leases guarantee the landowner-lessor "at least

one-eighth royalty of all oil, natural gas or gas of other designation removed or

recovered from the subject real property."50 The Court noted that the critical term

"royalty" is not defined by the GMRA.51

The Court noted that"numerous cases [were] pending in Pennsylvania trial courts

involving the same question" at the time the original complaint was filed before the

county court.52 It then went on to note that at the time the petition to exercise extra

ordinary jurisdiction was filed by the gas companies, "more than seventy suits were

currently on hold pending the appellate litigation in this case.. ,"53 At least one com

mentator claimed that "hundreds of landowners sought to invalidate their leases

under the theory that their leases do not comply with the GMRA."54

44. Id. at 378-79.

45. Id. at 379.

46. Kropa v. Cabot Oil Gas Corporation, 716 F.Supp.2d 375,379 (M.D. Pa., 2010).

47. Id. at 375 (quoting Mellon Bank Corporation v. First Union Real Estate Equity and Mortgage, Investments,

951 F.2d 1399,1408 (3d Cir. 1991)).

48. Kilmer v. Elexco Land Services, Inc., 990 A.2d 1147 (Pa. 2010).

49. 58 P.S. §33.3 (2015).

50. Id.

51. Kilmer, 990 A.2d at 1149.

52. Id. at 1151.

53. Id.

54. Benjamin F. Hantzal, Royalty on Sweet Gas or Sour Gas? The Supreme Court of Pennsylvania's

Interpretation of the Guaranteed Minimum Royalty Act to Permit Gas Companies to Deduct Post-Production Costs

from Royalty Payments Made to Landowners: Kilmer v. Elexco Land Services, Inc., 13 Duq. Bus. L.J. 273,285

(2011).


The Court recognized that while "the plain language of the GMRA clearly pro

vides that the lessor must receive a one-eighth royalty, it is silent regarding the

definition of the term royalty and the method for calculating the royalty."55 The con

cern was that the so-called net-back method—favored by the drillers—resulted in a

royalty less than one-eighth of the value of the gas. The Court assumed that the

General Assembly intended that the royalty should be calculated both at the well

head and at the point of sale and ruled that "the lease at issue only provides for the

lessor to share in the post-production costs, and charges the lessee with all the pro

duction costs."56 Thus the Court adopted the net-back method of calculating the

royalty and found for the gas companies.

The Supreme Court's decisions in Butler v. Charles Powers Estate57 and Herder

Spring Hunting Club v. Keller58 (discussed below), are also good examples of the prin

ciple that the courts will try to preserve as many leases as possible.

6. COURTS WILL INTERPRET PENNSYLVANIA LAW TO PRESERVE

ANCIENT PRECEDENT

Pennsylvania's courts developed a large body of case law in response to the

drilling that began in 1859. It has often been wondered whether the courts would

adhere to this court-made law that in some instances was over a century and a half

old.59 The answer is yes: the Pennsylvania Supreme Court recognizes the precedent

laid down by its predecessors and is loath to overturn it.60

An example is the Dunham Rule from 1882. In Dunham and Shortt v. Kirkpatrick,61

the Supreme Court ruled that in a real property transaction, a sale or reservation of

"minerals" does not convey or reserve the oil or gas. The Court based this determi

nation on "the common understanding of mankind" that oil is riot a mineral.62 A

later decision expanded the rule to include natural gas.63

The Court in Butler v. Charles Powers Estate explained the rule, attempting to put it

into the context of the impact of the rule on modern leases:

Thus, the Dunham Rule, a well-established and relied upon rule of property, continues to bind all situations in which a deed reservation does not expressly include oil or natural gas within the reservation. Indeed, such a conclusion was demanded by the long-standing jurisprudence of this Commonwealth concerning property law: 'A rule of property long acquiesced in should not be overthrown except for compelling reasons of public policy or the imperative demands of justice/6''

55. Kilmer, 990 A.2d at 1157.

56. Id. at 1158.

57. Butler v. Charles Powers Estate, 65 A.3d 885 (Pa. 2013).

58. Herder Spring Hunting Club v. Keller, 143 A.3d 358, (Pa. 2016), aff'g Herder Spring Hunting Club v. Keller,

93 A.3d 465 (Pa. Super. 2014).

59. See Pifer at 14 ("Does Pennsylvania case law from the 1800s and early 1900s remain good law?");

Saunders at 69 ("The continued viability of long-standing rules of law is being questioned as a result of

the markedly different methodology currently employed to extract oil and natural gas from unconven

tional shale formations."); Lester L. Greevy, Jr. & John A. Shoemaker, Shale Gas Ownership—Tax-Sale Titles:

An Historical Perspective of the Pennsylvania Title Wash, 85 Pa. Bar Ass'n Q. 106, 114 0uly 2014) (cited as

Greevy & Shoemaker herein) ("Because of the enormous amounts of money itwolved, various groups are

now putting forward new ideas as to why established rules of property should be retroactively upset").

60. See Pifer at 14 ("Generally speaking, early Pennsylvania oil and gas case law remains good law.").

61. Dunham, 101 Pa, 36.

62. Id. at 44.

63. Silver v. Bush, 62 A. 832, 833 (Pa. 1906).

64. Butler, 65 A.3d at 891-92.


The scientific basis for the Dunham Rule arguably makes little or no sense. Nevertheless it has been the law of Pennsylvania, and disturbing this precedent

would disrupt virtually every mineral or oil and gas deed drafted since the 1880s.

Butler, which upheld the Dunham Rule, says that in Pennsylvania the legal presump

tion is that for private deed purposes oil and gas are not minerals (the gist of the

Dunham Rule). At the same time, the Court said that for private deeds, "minerals"

include only metallic minerals. This is contrary to the rule in virtually all other juris

dictions, the understanding of the mining industry and mining professionals, and

possibly a surprise to many who own or have sold"mineral"rights.65

As the Supreme Court itself noted,"innumerable private, real property transac

tions for nearly two centuries"in Pennsylvania have relied on the Dunham Rule "and

its longstanding progeny" when conveying or reserving minerals and oil and gas.66

Likewise, thousands of deeds and leases conveying Marcellus shale gas could have

been upset by a change in the Dunham Rule.67

7. A PARTY SEEKING TO TERMINATE A LEASE BEARS A HEAVY

BURDEN OF PROOF

Citing to a century-old Pennsylvania Supreme Court decision for support, Jeffer

son County Gas Co. v. United Natural Gas Co.,68 the Supreme Court in T. W. Phillips v.

Jedlicka ruled that,"a party seeking to terminate a lease bears the burden of proof/'69

The Supreme Court in Jefferson County had evaluated the plaintiff's efforts to ter

minate an oil and gas lease. It appears that the plaintiff had acquired the property

after the defendant had leased it and then sought to have the lease declared either

terminated or repudiated. The trial court held that the law "imposed upon [the

plaintiff] the duty of proving a forfeiture either by reason of termination of the ten

ancy or repudiation of the terms of the agreement, or from some other cause."70

The Court in Jefferson County cited to an Eighteenth Century Pennsylvania

Supreme Court decision which placed the burden of proof on the party seeking to

terminate a lease (for land, not oil and gas): "[S]ince the case of Penn v. Divellin, 2

Yeates, 309, a landlord, in order to support his ejectment, must show a forfeiture of

the lease."71

If nothing else, the provenance of the principle that the burden of proof is on the

party seeking to overturn the lease is ancient and well-accepted under Pennsylvania

law. As the superior court's decision in Herder Spring has shown, the burden of proof

is a heavy burden.72

65. See Pifer at 14 ("Pennsylvania's Dunham rule—creating a presumption that oil and gas are not'min

erals' for purposes of title—is an excellent example of common law that is unique to Pennsylvania."). See,

e.g., Murray v. Allard, 43 S.W. 355,359 (Tenn. 1897); Moore v. Indian Camp Coal Co. v. Emma Coal Co., 80 N.E.

6, 7 (Oh. 1907); Texas Co. v. Daugherty, 107 Tex. 226, 234-35 (1915); Callahan v. Martin, 43 P.2d 788,791 (Cal.

1935). Indeed, Justice Saylor, in his concurring opinion in Butler, found the Dunham Rule to be "cryptic,

conclusory, and highly debatable." Butler, 65 A.3d at 899-900 (Saylor, J., concurring).

66. Butler, 65 A.3d at 897.

67. See, e.g., Pechin Leasing LLC. v. Garland, 2013 WL 11250213 (Pa. Super. 2013), applying the Dunham

Rule as the reservation in the deed was for "all mineral rights," thus it did not reserve oil and gas.

68. Jefferson County Gas Co. v. United Natural Gas Co., 93 A. 340 (Pa. 1915).

69. Jedlicka, supra note 7, at 267.

70. Jefferson County Gas and Oil Co., 93 A. at 341.

71. Id.

72. Herder Spring Hunting Club, 93 A.3d at 473 (the application of the burden of proof "may be seen as

being unduly harsh.").


8. PENNSYLVANIA OIL AND GAS LAW IS VERY OLD—AND VERY

NEW. TO MAINTAIN STABILITY AND THE STATUS QUO, THE

PREFERENCE OF THE COURTS IS TO PRESERVE OLD LAW

Title to minerals has been the subject of leases and deeds since the Eighteenth

Century in Pennsylvania.73 Rules that directly impact title to oil and gas include the

Dunham Rule (1882), the burden of proof rule (1915),74 and the rule disallowing the

use of equitable extension of a lease.75 Parties and commentators have questioned

whether these ancient court-made rules would withstand the rigors of time.76

The Butler Court probably best expressed the reason for continuing these ancient

principles:

Indeed, such a conclusion [maintaining the Dunham Rule] was demanded by the long-standing jurisprudence of this Commonwealth concerning property law: "A rule of property long acquiesced in should not be overthrown except for compelling reasons of public policy or the imperative demands of justice."77

The Pennsylvania Supreme Court's recent decision in Herder Spring Hunting Club

v. Keller, while not technically an oil and gas lease case (it deals with "title washing"

of lands containing mineral rights), demonstrates again how the courts will rely on

old law to preserve the status quo.78 At issue was whether a 1935 tax sale to "un

seated" (i.e. undeveloped) land resulted in transfer of the entire property or merely

the surface rights. The factual history of the matter is complex. In 1894, the Kellers'

ancestors had purchased the property at a tax sale. Then, in 1899 they sold the sur

face rights to the Becks, "reserving the subsurface rights to themselves through an

extensive reservation that indisputably covered the natural gas at issue (in 2016)." It

appears that they failed to provide notice to the county commissioners of this trans

fer, so, as far as the county commissioners knew, they were still assessing taxes on

the entire property. During the Depression, the county commissioners acquired the

property through yet another tax sale in 1935. In 1941, the commissioners sold the

property to Mr. Herr, whose widow sold the property to Herder Spring in 1959.

Herder Spring subsequently entered into several oil and gas leases which were duly

recorded.

In 2008, Herder Spring brought an action to quiet title against the Kellers, assert

ing that the 1935 tax sale extinguished the Kellers' 1899 reservation of subsurface

rights. Interpreting various Acts of 1804,1806, and 1815, the Supreme Court ruled in

July 2016 that the tax sale of 1935 did extinguish the Kellers' ancestors' reservation

of subsurface rights.

The Kellers argued that the notice requirement placed on them violated due

process.79 But, the Court found that the notice requirements must be looked at in

terms of what was applicable at that time and not now:

As this Court has found the notice provision of the Act of 1815 to be reasonable given the difficulties of ascertaining ownership information relating to unseated

. landowners and the protection provided by the redemption period, we will not

73. John Penn v. Divellin, 2Yeates at 309.

74. Jefferson County Gas Co., 93 A. at 341.

75. Harrison v. Cabot Oil & Gas Corporation, 110 A.3d 178 (Pa. 2015).

76. See Pifer at 14 ("Does Pennsylvania case law from the 1800s and early 1900s remain good law?");

Greevy & Shoemaker at 114 ("Because of the enormous amounts of money involved, various groups are

now putting forward new ideas as to why established rules of property should be retroactively upset.").

77. Butler, 65 A.3d at 891-92 (citations omitted).

78. Herder Spring Hunting Club, 143 A.3d at 358.

79. Id. at 375.


upset that conclusion based on preconceived notions of what is reasonable in the age of the Internet. Accordingly,... we conclude that the process of providing notice under the Act of 1815 complies with the dictates of those cases, which recognize that a government entity is not 'required to undertake extraordinary efforts' in p 1*0viding notice.80

Considering the vast number of acres of unseated land over nearly 150 years of

tax sales subject to title washing, particularly in the northern and western parts of

Pennsylvania, in which the oil, gas and minerals were reunited with the surface, it is

apparent that the Court is working hard to maintain the status quo by preserving

Pennsylvania's ancient law of title washing.81

However irrational or unscientific an old rule may appear, thousands of leases po

tentially affecting millions of acres of land may be impacted if the courts were to up

end ancient property rules. This would create instability and upend the legal status

quo, which is and ought to be intolerable to the courts. Consequently, where there

is an ancient rule of property that has been relied upon in the transfer and creation

of property rights, the courts likely will not overturn the ancient rule.82

9. THE PENNSYLVANIA COURTS ARE LOOKING FOR THE

PRAGMATIC SOLUTION

Pennsylvania's Supreme Court often takes a pragmatic approach to the resolution

of cases before it. The surest way to attempt to divine an outcome is to determine the

most pragmatic resolution of the case.

In Butler, the Court explicitly noted that innumerable transactions could be at

stake if it overturned the Dunham Rule.83 Likewise, Kilmer was not based on ancient

law but had the potential to impact many leases.The Supreme Court first noted that

"numerous cases [were] pending in Pennsylvania trial courts involving the same

question" at the time the original complaint was filed before the court of common

pleas.84 Also, the Court noted that "more than seventy suits were currently on hold

pending the appellate litigation in this case and [petitioners fear] that uncertainty

would stymie economic development. . ,"85 In Herder Spring, the Court acknowl

edged that the "courts interpreting Pennsylvania law have a long history of accept

ing the concept of a tax sale reuniting severed estates of unseated property and per

fecting previously defective titles."86

The decisions in Butler, Kilmer, and Herder Spring—on very different legal grounds—

resulted in similar outcomes: the decisions prevented numerous parties from com

ing forward and challenging their leases, which would have had an untold effect on

the validity of mineral rights and leases in Pennsylvania and would have clogged

the courts for years as they sorted out the numerous legal challenges that likely

would have been filed.

80. Id. at 378 (citations omitted).

81. Even though in its conclusion it understates the huge impact of its decision.

82. See Saunders at 84 ("Although Pennsylvania's oil and gas jurisprudence is currently old and

underdeveloped, existing case law does provide a sound footing upon which a unique Pennsylvania law

can be developed that will achieve the prime goal of any legitimate legal regime—consistency and

predictability.").

83. Butler, 65 A.3d at 897.

84. Kilmer, 990 A.2d at 1151.

85. Id.

86. Herder Spring Hunting Club, 143 A.3d at 368.


10. THE SUPREME COURT WILL EMBRACE A LEGAL PRINCIPLE

THAT IS A MINORITY POSITION, IF IT IS CONSISTENT

WITH PENNSYLVANIA LAW

The Pennsylvania courts are not adverse to taking a position in oil and gas matters

that no other court in the nation embraces. Thus an additional rule of construction

is that the Pennsylvania courts will not adopt a position merely because it is the

majority rule.

For example, Pennsylvania has held to the Dunham Rule even though, as one com

mentator has stated, "[t]he vast majority of jurisdictions consider a transfer of all

minerals presumptively to include natural gas, unless the conveying instrument as

a whole produces ambiguity."87

Another oil and gas case in which Pennsylvania adopted the minority approach

is Harrison v. Cabot Oil and Gas Corp.88 In Harrison, the Court refused to adopt the

equitable extension doctrine allowing for the extension of a lease term while a

lessor challenges the lease's validity in court, even though that is the rule in the

majority of other jurisdictions.

This article has identified Rules of Construction relating to oil and gas title dis

putes based on the guidance of the courts from the earliest cases in the Common

wealth to the present, which should be applicable well into the future.

87. Mark T. Wilhelm, 'All' is Not Everything: The Pennsylvania Supreme Court's Restriction of Natural Gas

Conveyances in Butler v. Charles Powers Estate ex rel. Warren, 59 Vill. L. Rev. 375, 384 (2014), and cases cited

therein. See also/ Pifer at 14 ("Pennsylvania's Dunham rule—creating a presumption that oil and gas

are not 'minerals' for purposes of title—is an excellent example of common lam that is unique to

Pennsylvania.")

88. Harrison, 110 A.3d 178.

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