Relying on the recent authority in State ex rel. Morrison v. Beck Energy Corp., the Cuyahoga County Common Pleas Court struck down a local Ohio drilling ban. In Bass Energy, Inc. v. City of Broadview Heights, the court held that a charter amendment prohibiting new oil and gas drilling was in conflict with Ohio’s comprehensive statutes regulating oil and gas drilling. Because the local ban conflicted with the statewide regulatory scheme, it did not meet the requirements of Ohio’s Home Rule Amendment and was ruled to be unenforceable. The court specifically stated that the charter amendment was an invalid exercise of Broadview Heights’ home rule authority.
Earlier this week, the U.S. District Court for the Middle District of Pennsylvania granted a motion for summary judgment in favor of a natural gas operator in a closely-watched case involving air aggregation issues. In 2011, Citizens for Pennsylvania’s Future (PennFuture) filed suit alleging that Ultra Resources, Inc. (Ultra) constructed a major source of nitrogen oxides (NOx) without the appropriate New Source Review (NSR) permit. The case involved eight compressor stations in Tioga and Potter counties for which Ultra had obtained separate authorizations from the Pennsylvania Department of Environmental Protection (DEP) to use the General Plan Approval/General Operating Permit known as “GP-5”. PennFuture viewed the compressor stations as functionally interrelated, operating in concert with a metering station as a single facility with potential NOx emissions in excess of the NSR major source threshold, thereby subjecting Ultra to heightened permitting requirements.
In granting Ultra’s motion for summary judgment, the District Court concluded that Ultra’s compressor stations did not constitute a single facility. The regulatory definition of a single facility requires, in relevant part, that sources be “located on one or more contiguous or adjacent properties” in order to be aggregated into a single facility. The central issue in this case was whether Ultra’s compressor stations are on “adjacent” properties.
The District Court found that Ultra’s compressor stations are not on “adjacent” properties under either the distance-based, plain meaning approach advocated by Ultra, or the functional relationship theory put forth by PennFuture. According to the District Court, the stipulated facts showed that the compressor stations are not “sufficiently close to, or near enough, each other to be considered adjacent.” Also, with respect to functional relationship, the District Court found no unique facts suggesting that Ultra’s emission sources were “unusual or outside of the normal oil and gas configurations and arrangements contemplated by [DEP].”
Although the District Court concluded that “the plain meaning of ‘contiguous’ and ‘adjacent’ should control a determination of whether two or more facilities should be aggregated,” it specifically “decline[d] to hold that functional interrelatedness can never lead to, or contribute to, a finding of contiguousness or adjacency.” Read our Administrative Watch for additional information regarding the District Court decision in Citizens for Pennsylvania’s Future v. Ultra Resources, Inc.
Yesterday, the Pennsylvania Supreme Court issued Harrison v. Cabot Oil & Gas Corp., a significant opinion in which the Court refused to apply equitable tolling principles that other oil and gas jurisdictions have adopted. Such principles prevent oil and gas leases from expiring during the pendency of lease litigation.
The lessors in this case filed a declaratory judgment action and a fraudulent inducement claim in federal court challenging the validity of their lease, which was two years into its primary term. Out of an abundance of caution, the operator refrained from all operations during the pendency of the litigation. It then asserted a counterclaim seeking to equitably toll the lease in the event it prevailed. Though the operator successfully defeated the lessors’ claims, the District Court denied its equitable tolling claim. As a result, the lease expired while the case was being litigated.
The operator appealed to the Third Circuit, which certified the case to the Pennsylvania Supreme Court on the grounds that it was an issue “of first impression and of significant public importance, given that its resolution may affect a large number of oil-and-gas leases in Pennsylvania.”
In a unanimous decision, the Pennsylvania Supreme Court upheld the District Court’s decision not to toll the lease. In so ruling, the Court noted that its decision went against other jurisdictions that have decided this issue. The Court also noted that the operator should have addressed the issue in its lease by adding a tolling provision. The Court also held that the result may have been different if the lessors had prevented the operator from entering the property to conduct operations.
The case is significant in several respects. First, it opens the door for lessors to try to “run out the clock” on leases by filing frivolous lease litigation. Second, it imposes on operators the obligation and risk to continue operations even in the face of suits challenging the validity of their leases. Third, if a lessor files suit to challenge a lease’s validity, and simultaneously denies the operator the right to conduct operations, the operator must now consider filing for equitable relief through an injunction before seeking to toll the lease term. Lastly, it essentially requires operators to add tolling provisions to their new leases.
The Ohio Supreme Court issued a ruling in favor of Beck Energy, holding that Ohio Constitution’s home rule amendment does not allow a municipality to enforce its own oil and gas permitting scheme on top of the state system. In the case, the city of Munroe Falls adopted an ordinance prohibiting the drilling of an oil and gas well until a conditional zoning certificate had been obtained. The ordinance also required payment of additional application fees and the posting of a performance bond. The Ohio General Assembly had adopted a uniform statewide regulation of all oil and gas operations in Revised Code Chapter 1509. The Court held that the Ohio Constitution vests the General Assembly with the power to to pass laws providing for the “regulation of methods of mining, weighing, measuring and marketing coal, oil, gas and all other minerals” and the comprehensive regulatory scheme created by the General Assembly does exactly that. The home rule amendment to the Ohio Constitution does not allow a municipality to discriminate against, unfairly impede, or obstruct oil and gas activities and production operations that the state has permitted under R.C. Chapter 1509.
The Ohio Supreme Court scheduled oral argument in two significant Dormant Mineral Act (“DMA”) cases. Oral argument has been scheduled on Corban v. Chesapeake Exploration, L.L.C. for May 6, 2015. As previously reported on ShaleEnergyLawBlog, the Corban case is likely to decide whether the 1989 or 2006 version of the DMA applies to current cases.
The Court also scheduled oral arguments in Walker v. Shondrick-Nau for June 23, 2015. The Walker case is set to decide similar issues concerning application of the DMA.
On January 27, 2015, the Pennsylvania Superior Court affirmed an order by the Court of Common Pleas of Susquehanna County in Sisson, et al. v. Stanley, et al. The trial court’s order allowed the heirs of Joseph Stanley, who previously reserved all the oil and gas under a tract of land in 1953, to open a default judgment from an action to quiet title.
One of the three issues in this case was whether the lower court should have granted a petition to open a default judgment because of an insufficient search under Pa.R.C.P. 430 due to additional evidence being presented by the ‘after-found’ heirs, when the lower court already determined the Appellants conducted a sufficient good-faith investigated based upon Appellants’ affidavit and a hearing in according with Pa.R.C.P. 430. The Superior Court held that the lower court correctly granted such petition because the heirs did not receive proper service of process. Rule 430(a) provides that motions for service, including service by publication, shall 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. Due process of law requires an adequate investigation for interested parties and service of process be reasonably calculated, under all circumstances, to apprised interested parties of the pendency of the action and afford them an opportunity to present their objections.
In this case, the court found the affidavit to be facially deficient for several reasons and granted the petition to open the default judgment. First, the affidavit indicated that the appellant searched the Recorder of Deeds office and not the Register of Wills office. The court stated that if the appellant searched the records at the Register of Wills office, he would have found the will of Joseph Stanley and identified his twelve heirs. Second, the affidavit indicated that the appellant did not consider that some of Joseph Stanley’s heirs could have moved. The court stated that if the appellant would have searched the local newspaper obituaries, he would have discovered that some the of heirs moved to the neighboring county. Finally, the court indicated that the appellant’s failure to identify which Internet sites he visited or what search he ran provided a basis that he did not exercise due diligence and good faith in his efforts to locate the heirs. It reasoned that given the ease of identifying and using sophisticated Internet services to trace ancestry and family history, it is inconceivable that the plaintiff, employing good faith efforts, was unable to locate a single heir.
Given the sparse information included in the affidavit, and the seeming ease with the plaintiff could and should have located interested parties, the court affirmed the lower court’s conclusion that the plaintiff’s investigation was deficient.
The Ohio Supreme Court accepted jurisdiction over Hupp v. Beck Energy, an important Ohio case involving the interpretation of oil and gas leases. The case involves a challenge by landowners in Monroe County to a standard form oil and gas lease. The landowners argued that the leases could be maintained indefinitely without development of the oil and gas and, as a result, were void against public policy. The Monroe County trial court agreed and granted the landowner’s Motion for Summary Judgment finding the leases were void ab initio. On appeal, the Seventh District Court of Appeals reversed the trial court finding that the leases have two distinct terms – a primary term and secondary term – and were not “no term” or perpetual leases. The Seventh District also ruled that the leases’ delay rental provision did not allow the lessee to extend the lease indefinitely by the payment of delay rentals.
The Propositions of Law to be reviewed by the Ohio Supreme Court are (1) whether an oil and gas lease which can be maintained indefinitely without development is a perpetual lease that is void against public policy and (2) whether the leases are subject to an implied covenant of reasonable development notwithstanding a general disclaimer of all implied covenants.
Shale Energy Law Blog will continue to post updates to the case including the scheduling of oral argument.
The Fourth District Court of Appeals held in Marshall v. Beekay Company that continuous production from shallow wells pursuant to two oil and gas leases holds the deep rights to the property. The landowners in the case claimed that an assignment of the shallow rights of the oil and gas leases split the oil and gas estate into two different pieces — shallow and deep. Although there was continuous production from the shallow wells, there was no production from the deeper oil and gas formations. The landowners argued that reservation of the deep rights created an obligation of reasonable development of the deep rights. The court disagreed holding that the assignment does not sever the lease because it granted all of the oil and gas rights under the acreage at issue for so long as oil and gas was producted in paying quantities. The court concluded that the granting clause of the lease included all oil and gas at all depths and the deep rights to the property were held by the production from the shallow wells.
On January 7, 2015, the Commonwealth Court of Pennsylvania entered an opinion and order in the case Pennsylvania Environmental Defense Foundation v. Commonwealth of Pennsylvania. The Pennsylvania Environmental Defense Foundation (“PEDF”) sought declaratory judgment with respect to past and future leasing of State land for oil and natural gas development as well as for the propriety of the use of monies in the Oil and Gas Lease Fund. The Court did not address the legality of leases executed by the Department of Conservation and Natural Resources (“DCNR”) in 2008 and 2010, due to the absence of indispensable parties, i.e., the lessees.
First, the Court held that neither 1602-E nor 1603-E of the Pennsylvania Fiscal Code violates Article I, Section 27, the Environmental Rights Amendment (“ERA”) of the Pennsylvania Constitution. Section 1602-E mandates that the General Assembly, rather than DCNR, appropriate all royalties paid into the Lease Fund. The Lease Fund is a depository for all rents and royalties paid from oil and gas leases on Commonwealth lands. Based upon the plain language of the Fiscal Code, which left rent revenue and bonus payments under the control of DCNR, the Court held that PEDF failed in its burden to show that the General Assembly had infringed on rights protected under the ERA or had not acted consistently with its trustee obligations under the ERA.
Section 1603-E appropriates up to $50 million in royalty monies annually to DCNR to carry out the purposes of the Lease Fund, which include conservation, recreation, dams, and flood control in state parks and forests. The Court determined whether the funding provided to DCNR for the agency to meet its duties under the ERA was adequate by applying its standard for public funding inquiries. Under this standard, the constitutional challenge was denied because PEDF presented no evidence that the funding appropriated was “so deficient that DCNR cannot conserve and maintain our State natural resources.”
Second, the Court held that the General Assembly’s transfers and appropriations from the Lease Fund for the benefit of the Commonwealth generally were not inconsistent with the Environmental Rights Amendment. The Court found that while the Environmental Rights Amendment places a duty on the Commonwealth to conserve and maintain public natural resources. It does not prohibit the use of revenues derived from public natural resources for non-conservation purposes. The Court rejected PEDF’s contention that the Lease fund is a trust fund that must be reinvested into the conservation and maintenance of the Commonwealth’s public natural resources.
Third, the Court found that DCNR has the exclusive statutory authority to determine whether to lease Commonwealth lands for oil and natural gas extraction. The Court reasoned that the Conservation and Natural Resources Act gives DCNR the authority to determine whether leasing public lands is in the best interest of the Commonwealth and, if so, to execute leases as the agency deems appropriate.
Ohio landowners are opposing the use of eminent domain in the construction of a 76 mile pipeline between Columbiana County and Monroe County. The OPEN pipeline would connect to the Texas Eastern Pipeline and was recently approved by the Federal Energy Regulatory Commission (FERC). After receiving approval for FERC, the pipeline owner began issuing eminent domain notices to landowners who did not grant easements across their property. Two landowners, Roger and Lana Barack, are teaming with an advocacy group called the Ohio 1851 Center for Constitutional Law to oppose the eminent domain proceedings. The groups claims recent federal court decisions state that Congress may not delegate its power, including the power to seize property, to purely private companies.
Judge David W. Hummel, Jr. of Marshall County, West Virginia has dismissed the second in a pair of lawsuits aimed to restrict operator Gastar Exploration, Inc.’s ability to hydraulically fracture several wells in Marshall County, West Virginia. According to the Order entered by Judge Hummel in December, on April 22, 2014 Eagle Natrium, LLC, a wholly owned subsidiary of Axiall Corporation, filed suit against Gastar seeking a preliminary injunction to keep Gastar from hydraulically fracturing wells located under Eagle’s lands in Marshall County, West Virginia, due to the threat of irreparable damage to existing salt wells and operations. Judge Hummel denied Eagle’s request for a preliminary injunction and dismissed the Case (Civil Action No. 14-C-179), noting that the issue had already been resolved by a Pennsylvania court, and that a party cannot seek relief for the same problem in multiple courts without some intervening change in circumstance.
The Ohio legislature has clarified that oil and gas leases create an interest in real property. Ohio’s Substitute House Bill 9 includes a provision amending Ohio’s lease recording statute (R.C. 5301.09) as follows:
In recognition that such leases and licenses create an interest in real estate, all leases, licenses, and assignments thereof, or of any interest therein, given or made concerning lands or tenements in this state, by which any right is granted to operate or to sink or drill wells thereon for natural gas and petroleum or either, or pertaining thereto, shall be filed for record and recorded in such lease record without delay, and shall not be removed until recorded.
While oil and gas leases are traditionally thought to create an interest in real property, one recent federal court case called the status of oil and gas leases into question. In Wellington Resource Group v. Beck Energy Corp., a district court for the Southern District of Ohio ruled that oil and gas leases merely constitute the right to search for oil and gas on a property and are not an interest in the real property. The amendment in House Bill 9 would appear to supersede the court’s decision and conclusively establish the status of oil and gas leases in Ohio real property law. The bill is set to go into effect on March 20, 2015.
The Fifth District Court of Appeals issued a ruling addressing several issues concerning the interpretation of oil and gas leases. The lessee of several oil and gas leases created a 145-acre drilling unit utilizing a small portion of one of the leases. The lessor of the lease claimed that this violated the implied covenant of reasonable development. The court analyzed the oil and gas lease and enforced a provision that generally waived any implied covenants under the lease. The decision noted that Ohio courts have consistently enforced express provisions in leases that disclaim implied covenants. The court also held that the “reasonable prudent operator” standard applies to a claim of bad faith inclusion of the portion of the leasehold in the unit. As applied to the lessee the inclusion of the small portion of the leasehold in the unit was necessary to comply with set-back requirements imposed by the State and therefore a prudent operator would include the leasehold acreage in the unit.
The court also held that the lessors’ acceptance of royalty payments did not preclude them from asserting claims that the lessee had breached the lease in other respects.
The Pennsylvania Superior Court recently ruled that constructive notice of a title defect may toll the running of the statute of limitations and affect damages for an action in trespass and conversion to oil and gas rights in Sabella v. Appalachian Development Corp., et al., Case No. 722 WDA 2013. Sabella purchased the oil and gas underlying 66 acres of land in 1997. The owner of the surface executed a lease purporting to cover Sabella’s oil and gas interest in favor of Appalachian Development Corporation, who subsequently assigned its interest in the lease to Brian and Lisa Haner, d/b/a Pine Ridge Energy. The Haners opted not to conduct a full title search upon its acquisition, but instead conducted a bring-down title search. The Haners drilled several wells pursuant to the lease prior to receiving actual notice that their lease was producing interests actually owned by Sabella.
The Court held that the two year statute of limitations did not preclude the trespass and conversion claims, because the statute had been tolled by the discovery rule. The trespass and conversion began in 2003, approximately 7 years before Sabella filed the suit. However, Sabella met his burden of establishing that he was unaware of the trespass and that a reasonable person would not have discovered the trespass. Sabella drove down the public road along the property to look for oil and gas activity, but did not enter upon the surface of the property to determine whether activities were taking place. Despite the open oil and gas development that had occurred on the property for years, the activity was not clearly visible from any public areas or other areas in which Sabella may have been. The Court held that, in properly recording his mineral deed, Sabella could reasonably expect that anyone seeking to drill on the property would discover his interest through a title search. The Court stated that the mere recording of a deed in all instances does not relieve a party of an obligation of affirmative observation in protecting his interests. However, the specific factors showed that a reasonable person would not have discovered the trespass in this case.
The Court also ruled that because the Defendants had constructive notice of Sabella’s interest under Pennsylvania’s Constructive Notice Statute, they were precluded from asserting a good faith defense to trespass damages. The Haners were ignorant of Sabella’s interest not because of a recording error or latency, but because they willfully chose not to conduct a title search. Therefore, the Haners were found by the Court to have acted in bad faith.
On October 16, 2014, the New York Court of Appeals denied a request by the bankruptcy trustee for Norse Energy to re-hear arguments in the landmark case affirming local zoning laws adopted by two upstate towns that prohibited oil and gas-related activities within their borders. In June 2014, the Court of Appeals issued an opinion that the New York Oil, Gas and Solution Mining Law did not preempt a municipality’s home rule authority to regulate land use. Meanwhile, since June 2008, New York has imposed a de facto moratorium on high-volume hydraulic fracturing. Governor Andrew Cuomo has stated that a decision on whether to lift the moratorium will not be made until the New York Commissioner of Health finalizes a study on the public health effects of hydraulic fracturing. During a gubernatorial debate on October 22, 2014, Governor Cuomo said that the highly anticipated report should be done by the end of the year, but he did not indicate whether the moratorium would be lifted at that time.