Pennsylvania Supreme Court holds abandonment analysis improper where oil and gas lease provided remedies for conduct at issue

The following article by By Jeremy Mercer and Kevin Meacham of Porter Wright Morris & Arthur LLP appears in the May 2021 issue of The PIOGA Press

In a 6-1 decision, the Pennsylvania Supreme Court reversed the lower courts and held that a decision finding an oil and gas lease to be abandoned pursuant to the equitable doctrine of abandonment was improper where the lease provided remedies for the allegedly wrongful conduct of the lessee.

“Analysis of the trial court and Superior Court opinions in this case reveals an essential initial step was skipped to determine whether the case properly sounded in equity as to be resolvable employing the equitable doctrine of abandonment,” the Supreme Court majority wrote. “‘Injunctive relief will lie where there is no adequate remedy at law.’ … Absent from the analysis of the trial court or the Superior Court is any inquiry as to whether Appellees demonstrated that their remedy under a breach of contract action is inadequate.”

In SLT Holdings v. Mitch-Well Energy, the trial court had granted summary judgment in favor of the lessor, finding that the lessee, by allegedly failing either to produce in paying quantities from the wells drilled on the leased acreage or otherwise make requisite payments pursuant to the lease, had abandoned the lease. The Superior Court affirmed, relying heavily on the trial court’s analysis, despite the lessee’s arguments that:

  • Material facts were disputed;
  • The leases required advance notice of breach and opportunity to cure prior to termination, which notice was not provided; and
  • The leases expressly allowed the lessee to retain certain acreage around the completed wells if the leases terminated.

The Supreme Court granted allowance of appeal to determine whether the grant of summary judgment was improper where wells were drilled and no testimony was taken regarding the lessee’s good faith production decision under T.W. Phillips Gas & Oil Co. & v. Jedlicka. The Supreme Court then directed the parties also to address two specific cases and the doctrine of abandonment.

In determining that the lower courts erred in granting and affirming summary judgment, the Supreme Court majority noted the oil and gas leases at issue contained numerous provisions relevant to the question of whether the leases remained valid in light of the lessee drilling only two wells (when the terms of the leases provided for at least 200 wells) and failing to pay any royalty or other payment for nearly two decades. These provisions included:

  • The lease term;
  • Rental payment;
  • Continuing payments;
  • Shut-in royalty payment;
  • Default/election of remedies;
  • Drilling commitment; and
  • Minimum payments.

Accordingly, the lower courts erred in granting equitable relief pursuant to the doctrine of abandonment because relief was available at law pursuant to the terms of the leases.

The Supreme Court rejected the lower courts’ reliance on the Supreme Court’s Aye v. Philadelphia Co. decision from 1899 and on the Jacobs v. CNG Transmission Corp. federal decision from 2004. As to Aye, the Supreme Court held that decision was inapplicable because it addressed abandonment only after the court determined there was an “inadequate remedy under the terms of the lease.” Further, abandonment is a question of intention, not performance or lack thereof.

As to Jacobs, the Supreme Court held that the lower courts had failed to recognize the abandonment discussion contained therein was dicta, an argument advanced by the court in the alternative if the lease terms did not provide a remedy at law.

While the Supreme Court understood that there may be overlap between a claim of lease termination and lease abandonment, it stressed that “there must be a determination of the inadequacy of a remedy at law before equitable relief under the doctrine of abandonment is an issue. Appellees never explain why their bargain for remedy of termination under Paragraph 12 of the lease is unavailable or inadequate. Neither did the trial court or Superior Court provide such explanation.”

The Supreme Court determined that a remand was necessary to allow the lower courts to review the alternative arguments being raised as those arguments had not been addressed in the first instance—including whether notice of breach was provided to the lessee or whether a recorded affidavit of non-production suffices as such notice. The court noted that another issue possibly to be addressed is whether the appellees waited too long to bring their claim. “By pursuing an equitable remedy, Appellees effectively attempt to bypass the notice requirement and avoid any statute of limitations attendant with such delay.” “Even if equitable relief was facially available to Appellees in this case, given their own years of inaction their right to an award could be problematic.”

Concluding that the leases were not silent as to the alleged breaches raised by the lessors, the Supreme Court determined that “[i]t was incumbent upon the trial court to address Appellees [sic] motion for summary judgment to determine if an adequate remedy at law existed through a contract analysis of the specific provisions of the leases in question, including the obligation for Appellees to provide notice of default and opportunity to cure, the prescribed exclusive remedy for breach, and any retained rights Appellant may have in the event of termination.”

In his lone dissent, Justice David Wecht agreed with the majority that equitable relief of abandonment was not appropriate but dissented from the remand, concluding that the lower court record contained enough factual stipulations or was devoid of questions of fact as to enough elements to uphold the trial court’s decision on alternative grounds. He would have affirmed the lower court decision effecting a termination of the lease and remanded to address the conversion claim, the declaratory judgment question and any remedies available to either party.

This decision reinforces that both lessors and lessees should look first to the terms of their oil and gas leases—both to determine what requirements are necessary to maintain the leases in effect and to determine what legal theories can be pursued to challenge the on-going enforceability of those leases. As the Supreme Court held, the equitable abandonment doctrine—and allegations relevant thereto—should be relegated to those rare cases where the lease at issue does not address the specific conduct or lack thereof that is at issue.

Jeremy Mercer is an experienced commercial litigator who, for more than a decade, has focused on energy, with an emphasis on oil and gas litigation. Kevin Meacham is an experienced commercial litigator who, for over a decade, has advised and represented companies in complex matters arising out of business and contractual disputes, toxic torts, governmental investigations and industrial accidents.

PIOGA’s participation in the case

PIOGA participated in this case for the benefit of its producer and royalty owner members because of its potential to authorize courts to avoid looking first to the terms of the oil and gas leases to resolve lease disputes by allowing claims of abandonment even when the leases address the subject of the dispute. There’s a saying that students hear in law school։ “Bad facts make bad law.” There were certainly bad facts in this case, on both sides—no oil produced or payments made in lieu of production for over 16 years, but no action taken by the royalty owners per the leases during this time either. These facts arouse sympathy and support for a remedy that may not be what correct application of the law requires, hence the saying above.

As PIOGA stated in its amicus reply brief։

Oil and gas leases are to be operated for the mutual benefit of both parties according to the provisions to which the parties have expressly agreed. As the express provisions are for the parties’ mutual benefit, both parties must be required to adhere to them and the courts should enforce the parties’ compliance. That is all PIOGA is trying to do by its participation in this matter.

Our Supreme Court recognized what was at stake, stating that “[t]his case brings into focus the remedies available to, and duties imposed upon, . . . lessors . . . under two oil, gas, and mineral rights leases granted to lessee.”

So, this is case in which bad facts nonetheless made good law.

―Kevin J. Moody, General Counsel, PIOGA

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