Recent Developments and Current Issues in Pennsylvania Oil and Gas Litigation

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1 Recent Developments and Current Issues in Pennsylvania Oil and Gas Litigation Paul K. Stockman

2 What s New and Trending The big picture Equitable tolling of leases Tax Washing The aftereffects of Robinson Township Citizen challenges to midstream project development And more McGuireWoods 2

3 The Big Picture The Pennsylvania Supreme Court continues to go it alone. Pennsylvania precedent still tends to trump majority rule. Plain meaning still rules. Lease language > creative lessor arguments. Lease and title disputes still matter, even in a low-price environment. The pipeline is still full Robinson Township might not turn out to be a big deal. Plus ça change, plus c est la même chose. But that s not stopping anyone There s been no slow-down in citizen challenges. McGuireWoods 3

4 Harrison v. Cabot Oil & Gas 110 A.3d 178 (Pa. 2015). The upshot: lessors challenges to lease validity do not toll the primary term. Lessor challenged the lease, alleging fraudulent inducement; Cabot counterclaimed, seeking a declaration that primary term was tolled during the pendency of the dispute. The M.D. Pa. upheld the lease, but declined to toll the lease term. The Supreme Court, on certification from the Third Circuit, agreed. The mere filing of a dec action is not per se anticipatory repudiation. But other, more affirmative acts may be sufficient. E.g., would barring access to the property be an anticipatory repudiation? The Court focused on the fact that the lessee could have included an express provision tolling the lease term. Note: the Court disregarded decisions from other jurisdictions. McGuireWoods 4

5 Harrison v. Cabot Oil & Gas, cont d The take-aways: Include an express tolling provision in the lease, and/or a covenant that lessor will not cause or create an encumbrance or cloud on title. Consider demanding adequate assurance of future performance The Court did not address this doctrine, so it may or may not work. Consider steps to expedite lease litigation. Consider early dispositive motions. Especially if you re in federal court, where they re not as disfavored. Consider taking steps to begin operations, so as to continue the lease into the secondary term. Fairly modest steps, if taken in good faith, have been held to extend a lease into the secondary term (e.g., staking well locations, unloading timber, permitting activities, grading of access road, etc.) McGuireWoods 5

6 Herder Spring Hunting Club v. Keller 93 A.3d 465 (Pa. Super Ct. 2014), alloc. granted, 108 A.3d 1279 (Pa. 2015) The Supreme Court will decide whether historical (pre-1962) tax sales of unseated (i.e., undeveloped) land can convey previously-severed oil and gas estates. The backdrop: An 1806 statute required those becoming a holder of unseated lands to report them for assessment. Taxes against unseated property were deemed to be assessed against the property itself in rem. Historically, landowners would take advantage of this to try to wash their title, defaulting on taxes and buying the property back at tax sale in order to eliminate clouds on the title. Because taxes were deemed to be owed by the property itself, there was no effort to provide individual notice to interested owners. McGuireWoods 6

7 Herder Spring Hunting Club v. Keller, cont d The Herder Spring case: The Kellers sold property in 1899, reserving subsurface rights. The record did not show that they reported the severed subsurface rights for taxation. Note: at the time, oil and gas was not taxable unless it could be valued by reference to production in the area. In 1935, Centre County obtained the property at tax sale and sold it to Herder Spring s predecessor-in-title. The Court of Common Pleas held that the reserved oil and gas estate could not be taxed, and thus could not have been sold at the tax sale. The Superior Court disagreed. McGuireWoods 7

8 Herder Spring Hunting Club v. Keller, cont d The Superior Court s ruling: The entire property was included in the assessment, including the subsurface, unless the owners of the severed subsurface could prove that it was separately reported. The tax sale thus conveyed the entire property, including the severed subsurface estate (even though that subsurface estate could not legally be taxed). The court recognized the apparent injustice, but held its nose: We are aware that our resolution of this matter is at odds with modern legal concepts and may be seen as unduly harsh, but [w]e do not believe it proper to reach back, more than three score years, to apply a modern sensibility and thereby undo that which was legally done. 93 A.3d at 473 McGuireWoods 8

9 Herder Spring Hunting Club v. Keller, cont d The Supreme Court has accepted review. The principal questions: How should the 1806 statute be construed? It requires action by those becoming a holder of unseated lands. Does someone retaining a reserved interest become a holder? Should the holder of a reservation be penalized because its successor-in-title failed to report its interest, or mis-reported the limited nature of its interest? Would subsurface oil and gas have been considered lands in 1806? Note that the Court directed that tax statutes are to be construed strictly. Do in rem tax sales without any effort at individual notice to property owners violate due process? An elementary and fundamental requirement of due process in any proceeding which is to be accorded finality is notice reasonably calculated, under all the circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections. Mullane v. Central Hanover Bank & Trust Co., 339 U.S. 306, 314 (1950). McGuireWoods 9

10 Herder Spring Hunting Club v. Keller, cont d Briefing is complete and the parties are awaiting an argument date. The take-aways: Don t assume that a title search going back only a few decades will disclose all potentially-interested parties or potential adverse claims. Many of these potentially-questionable sales took place in the late 19 th or early 20 th centuries. Assume that any oil and gas interest flowing from a treasurer s deed may be subject to attack. Even if the Supreme Court affirms Herder Spring, it may just shift the terrain of battle to issues involving the conduct of the tax sale. McGuireWoods 10

11 The aftermath of Robinson Township 83 A.3d 901 (Pa. 2013) Robinson Township struck down Act 13 s state-wide land use provisions. But the plurality did not stop there. To recap, it held: The Pennsylvania Constitution s Environmental Rights Amendment (Article I, Section 27) requires each branch of government to consider in advance of proceeding the environmental effect of any proposed action. 83 A.3d at 952. The General Assembly, despite having the right to enumerate municipal powers, has no authority to remove a political subdivision s implicitly necessary authority to carry into effect its constitutional duties. Id. at 977. The Amendment is self-executing, creating a constitutional right personal to each citizen and that is judicially enforceable. Id. at 951 n.39; see also id. at , 974. McGuireWoods 11

12 The aftermath of Robinson Township, cont d The plurality opinion also reflected a deep-seated hostility toward shale gas development: By any responsible account, the exploitation of the Marcellus Shale Formation will produce a detrimental effect on the environment, the people, their children, and future generations, and potentially on the public purse, potentially rivaling the environmental effects of coal extraction. 83 A.3d at 976. (Tellingly, the plurality made these findings on a record consisting only of affidavits from Act 13 s critics.) What would this mean? McGuireWoods 12

13 The aftermath of Robinson Township, cont d The Commonwealth Court s opinion on remand: The court upheld 58 Pa.C.S. 3302, precluding municipalities from regulating areas already covered by the Oil and Gas Act. 96 A.3d 1104, 1120 (2014). This reaffirms Range Resources Appalachia v. Salem Township, 964 A.2d 569 (Pa. 2009). The court upheld provisions requiring DEP to provide notice of spills to public, but not private, water supplies, and allowing health care professionals to obtain information about the chemical composition of fracturing fluids while still protecting its proprietary character. 96 A.3d at The court held that 58 Pa.C.S , allowing the PaPUC to review local ordinances, were not severable from the invalid portions of Act 13, and thus were invalid. Id. at PaPUC has asked the Supreme Court to review and reverse this holding. McGuireWoods 13

14 The aftermath of Robinson Township, cont d Pennsylvania Environmental Defense Fund v. Commonwealth, A.3d 140 (2015): PEDF challenged the allocation of public oil and gas revenues, arguing that Article I, Section 27 required that those funds be spent only for environmental protection or resource conservation. The Commonwealth Court disagreed. The court buried its blockbuster holding in a footnote: The Robinson Township plurality is not binding, and is persuasive only to the extent it is consistent with binding precedent from this Court and the Supreme Court on the same subject. Id. at 156 n.37. The court continued to apply the three-part test from Payne v. Kassab, 312 A.2d 86 (Pa. Commw. Ct. 1973). Other courts, and the Environmental Hearing Board, are in accord. McGuireWoods 14

15 The aftermath of Robinson Township, cont d Unanswered questions Is local zoning now constitutionalized? The plurality plus Justice Baer s concurrence together suggest yes. Is there a constitutional tort claim available to challenge any governmental act? The Commonwealth Court seemed to assume as much in Feudale v. Aqua Pennsylvania, although it rejected the claim on the merits WL (Pa. Commw. Ct. July 22, 2015). Even under Payne v. Kassab, there s a lot of room for argument. Can the right to challenge governmental inaction allow litigation that would seek to preclude purely private activities? Does Article I, Section 27 require pre-development environmental impact assessments as a matter of constitutional law? McGuireWoods 15

16 The aftermath of Robinson Township, cont d What s next Citizen groups still treat Robinson Township as a case for all seasons. As a result, the Supreme Court at some point will need to wade back into this dispute. In that event, would a majority of the Court speak so broadly? Note that two of the members of the Robinson Township plurality are no longer on the Court (former Chief Justice Castille and former Justice McCaffery). McGuireWoods 16

17 The aftermath of Robinson Township, cont d The take-aways For now, Robinson Township s effect has been dampened by the ruling in PEDF. Even so, do not overlook the potential for citizen group challenges, and stay attuned to the developing case law in this area. Because land use decisions are once again made on a local basis, be prepared to engage with municipal zoning boards. At the same time, because Oil and Gas Act standards still trump local rules, also be prepared to launch challenges if municipalities overreach. McGuireWoods 17

18 The Next Battleground: Midstream Citizen groups have shifted their strategy from attempting to preclude or limit drilling toward attempting to prevent oil and gas from getting to end-users. New pipeline proposals face widespread opposition, and challenges upon a number of regulatory fronts. Challenges to emission permits before PaDEP and the EHB. Challenges to eminent domain and pipeline companies status as public utilities. Challenges in FERC certification proceedings. Local land use challenges. Etc. McGuireWoods 18

19 The Next Battleground: Midstream, cont d Source aggregation: Citizen groups have been challenging air emission permits, contending that multiple facilities should be deemed a single emission source. This would require more complicated and costly new source review and major source permitting. The regulations require grouping of sources located on contiguous or adjacent properties. It is argued that this requires grouping of sources that are functionally interrelated. McGuireWoods 19

20 The Next Battleground: Midstream, cont d Source aggregation: To date, citizen groups efforts to aggregate multiple facilities have not been successful. E.g., in Citizens for Pennsylvania s Future v. Ultra Resources, the court held that eight compressor stations should not be daisychained together to establish a contiguous grouping, where they were not connected and operate independently of one another, with no discernable relationship between the individual stations WL (M.D. Pa. Feb. 23, 2015). But the court in PennFuture v. Ultra would not categorically rule out functional interrelatedness as a basis for aggregating multiple sources. And the EHB has opined that it is a fact-specific determination. National Fuel Gas Midstream v. PaDEP, 2014 WL (Oct. 31, 2014). McGuireWoods 20

21 The Next Battleground: Midstream, cont d Challenges to pipelines status as public utilities : Citizen groups and landowners are also challenging pipeline companies ability to exercise rights given to public utilities. E.g., in Sunoco Pipeline v. Loker, a York County court held that Sunoco was not a public utility with the right of eminent domain (because it was regulated by FERC as a common carrier ). No SU (C.C.P. York C ty Feb. 24, 2014). E.g., two PaPUC administrative law judges ruled that Sunoco was not a public utility within the meaning of the Municipalities Planning Code, and thus was not exempt from municipal zoning. Petition of Sunoco Pipeline, L.P., No. P The full PUC disagreed, by a 4-1 margin. Before the issue could be resolved definitively, Sunoco reached agreements with the affected municipalities and withdrew its petitions. So the issue remains unsettled. McGuireWoods 21

22 The Next Battleground: Midstream, cont d Quaere what effect the Wolf administration s newly-appointed pipeline task force will have? McGuireWoods 22

23 But wait, there s more Lease disputes: Pennsylvania courts continue to give language its plain meaning, rejecting creative lessor arguments. Shedden v. Anadarko E. & P. Co., 88 A.3d 228 (Pa. Super. Ct. 2014). While largely about estoppel by deed, the Superior Court also relied on the lease s Mother Hubbard clause to hold that after-acquired property is subject to lease. Supreme Court accepted appeal; to be argued in November. Warren v. Equitable Gas Co. and Mason v. Range Resources, No 697 WDA 2014 (Pa. Super. Ct. Feb. 4, 2015); 2015 WL (W.D. Pa. July 27, 2015). Under dual purpose (production and storage) leases, use of the property for storage holds the lease in effect for all purposes. The production and storage aspects of the habendum clause are not severable. Danko Holdings v. EXCO Resources, 57 F. Supp. 2d 389 (M.D. Pa 2014) Change in ownership clauses are enforceable. McGuireWoods 23

24 But wait, there s more Pooling issues and missing or non-consenting owners: Pennsylvania law remains unclear. How does compulsory unitization under the Oil and Gas Conservation Law work? See 58 P.S. 401 et seq. This is potentially applicable to the Utica Shale, but not the Marcellus. Hilcorp Energy has withdrawn its efforts to create well spacing and drilling units in Mercer County. How are trusts in favor of absent owners created under the Dormant Oil and Gas Act? See 58 P.S et seq. Chesapeake s efforts to create such a trust have so far proven fruitless. See In re Hill, No MDA 2013 (Pa. Super. Ct. Apr. 21, 2014 & May 22, 2014). Is the recent amendment to the Oil and Gas Lease Act, permitting unitization in the absence of expressly preclusive lease language, valid? See 58 P.S One trial court says yes, but the litigation remains pending. See EQT Prod. Co. v. Opatkiewicz, No. GD (C.C.P. Allegheny C ty July 22, 2013). McGuireWoods 24

25 But wait, there s more Enforcement civil and even criminal remains a priority. Exhibit A: the June 2015 $8.9 million civil penalty against Range Resources. Exhibit B: the ongoing criminal charges against XTO. Contamination claims remain hard for landowners to prove.. E.g., in Kiskadden v. DEP, the EHB found that drilling did not cause contamination in the appellant s private well WL (June 12, 2015) But it still is difficult to make these cases go away quickly. See, e.g., Russell v. Chesapeake Appalachia, 305 F.R.D. 78 (M.D. Pa. 2015) (declining to enter Lone Pine order). Restrictions on health care workers ability to disclose proprietary fracturing fluid formulas have survived challenge. See Rodriguez v. Secretary, 604 Fed. App x 113 (3d Cir. 2015); Robinson Twp. v. Commonwealth, 96 A.3d 1104, (Pa. Commw. Ct. 2014). But disclosure still has been compelled in civil proceedings. See Haney v. Range Resources, 2015 WL ; Kiskadden v. PaDEP, 2014 WL (EHB June 10, 2014). McGuireWoods 25

26 Questions or Comments? Paul Stockman McGuireWoods 26