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Butters Living Trust v. Swepi, Inc.

United States District Court, Third Circuit

October 18, 2013

BUTTERS LIVING TRUST, Plaintiff,
v.
SWEPI, INC., Defendant.

MEMORANDUM OPINION

MARTIN C. CARLSON, Magistrate Judge.

I. Introduction, Procedural History and Statement of Facts

This case, which comes before us on a summary judgment motion, presents a dispute regarding the interpretation and construction of an habendum clause in an oil and gas lease, a clause which enables the lessee, an oil and gas producer, to extend the term of the lease by undertaking certain activities upon the leased property.

Specifically, we are called upon to ascertain the meaning of a December 2009 addendum to an oil and gas lease between the parties which contained the following habendum clause: "In the event a pooled unit is created which encompasses land located outside the lease premises and some, but not all, of the lease premises, any drilling or reworking operations on or production from a well located on that pooled unit shall continue this Lease in full force and effect but only as to that part of the lease premises contained within the pooled unit." (Emphasis added). The parties present two starkly contrasting meanings to this language, with the plaintiff insisting that the language means that the lease term could only be extended if "drilling" occurred during the original term of the lease, and the defendant arguing that this clause allows for the extension of the lease term if the defendant engages in "drilling... operations" prior to the expiration of the original lease term, a term that the defendants construe as including preparatory drilling operations. This linguistic dispute, in turn, has real significance for the parties since it is undisputed in this case that SWEPI performed substantial preparatory drilling work in connection with a unitized property leased from the plaintiff prior to expiration of the original term of the lease, but did not actually insert a drill into the earth until shortly after the original lease term expired.

On January 2, 2012, the plaintiff, Butters Living Trust, filed this action in the Court of Common Pleas of Tioga County, seeking declaratory relief regarding the interpretation of this lease agreement between Butters and SWEPI, Inc., (Doc. 1.) On February 10, 2012, SWEPI removed this state court action to the United States District Court for the Middle District of Pennsylvania. (Doc. 1.) At the close of discovery, SWEPI then moved for summary judgment, (Doc. 19), a motion which has been fully briefed, (Docs. 20-22, 26, 29-30, 39, and 40), by the parties. Therefore, this matter is now ripe for resolution. For the reasons set forth below, the motion will be denied.

With respect to the interpretation of this particular hydro-carbon lease, the undisputed facts reveal the following: The plaintiff, the Butters Living Trust (the "Trust" or "Plaintiff"), is a trust formed under the laws of Pennsylvania. The trust assets include certain real estate holdings in the northern tier counties of Pennsylvania, and the oil and gas leases relating to those real estate holdings. Gary R. Butters (Mr. Butters) serves as a trustee for the Trust, and has served in this position at all times relevant to this lawsuit. While Mr. Butters' principal entrepreneurial activities have involved businesses outside the oil and gas industry, in his capacity as a trustee of the Butters Living Trust, Mr. Butters has had significant dealings in this industry, and has negotiated dozens oil and gas leases on behalf of the trust.

The defendant, SWEPI, is a natural gas producer, which has in the past held leasehold interests on properties which comprise part of the Butters' Living Trust, leases that permit SWEPI to, inter alia, engage in natural gas exploration among Marcellus shale deposits located within these leased properties. In some instances, the leases currently held by SWEPI were previously negotiated by other oil and gas producers.

Among its real estate holdings, the Butters Living Trust is the owner of oil, gas, and mineral rights for several contiguous parcels of property located in Charleston Township, Tioga County, Pennsylvania, totaling approximately 81.38 acres, which Butters acquired on December 11, 2008 from Allan J. Lilley and Melanie J. Lilley (the "Lilleys"). At the time Butters acquired this property from the Lilleys, the property was subject to an oil and gas lease originally executed between the Lilleys and Phillips Production Company. Phillips, in turn, later transferred this lease to East Resources, Inc., which in turn subsequently transferred the lease to SWEPI.

This lease was executed on May 28, 2001 and had a primary of ten years. Thus, the lease would expire at midnight on May 27, 2011, unless extended. After purchasing this property from the Lilleys, the Trust and East executed an amendment to the Lease on December 18, 2009. The purpose of the amendment was to modify the "Unitization"[1] paragraph of the lease to allow East, and later SWEPI, to unitize and produce hydro-carbon fuels from Marcellus shale formations found within the leased properties.

This amendment was the product of negotiations between Butters and SWEPI's predecessor, East Resources. According to Mr. Butters, who directly participated in these negotiations, with respect to the secondary term of the lease, the proposed amendment initially prepared by East stated:

The commencement [sic] drilling completion of or production from a well on any portion of the unit created under the terms of this paragraph shall have the same effect upon the terms of this lease as if a well were commenced, drilled, completed or producing on the land described herein.

Butters contends that he was unsatisfied with the inclusion of the phrase "commencement [sic] drilling" in this addendum because he regarded it as vague. Therefore, Mr. Butters, acting on behalf of the Trust, would not agree to the term extension language initially proffered by East. Negotiations then ensued, negotiations in which Mr. Butters alleges that he sought an amendment of the lease to provide that the secondary term of the lease would only be triggered by "a definable moment."

Ultimately these negotiations culminated on December 18, 2009, with the execution of a lease addendum between the Trust and East which included the following habendum clause:

In the event a pooled unit is created which encompasses land located outside the lease premises and some, but not all, of the lease premises, any drilling or reworking operations on or production from a well located on that pooled unit shall continue this Lease in full force and effect but only as to that part of the lease premises contained within the pooled unit. (emphasis added).

In the weeks immediately preceding the May 27, 2011, expiration of the primary term of this lease, SWEPI undertook preparatory drilling activities on several unitized tracts which were associated with this leased property, tracts referred to as the Propheta Unit and the Salevesky Unit. These preparatory activities included surveying, permitting, site preparation and grading, timber removal, access road development, and well pad installation. It is undisputed, however, that actual drilling did not occur at these sites until days or weeks after the May 27, 2011, expiration of the primary lease term.

On May 31, 2011, Butters, through its counsel, Williams Stokes, notified SWEPI that, in its view, the lease had expired since no drilling had commenced on the site. While the parties were discussing this issue, Butters then engaged in other negotiations relating to mineral rights on this property. As part of these negotiations, on June 30, 2011, more than one month after the alleged expiration of the primary term of the Lease, the Trust conveyed a portion of the surface rights of the property to Vanderra Resources, LP. This deed conveying these surface rights also specifically reserved to the Trust the oil, gas, and mineral rights,

including the right to lease those rights and to receive rents and royalties therefrom, and the right to retain all past and future rents and royalties from the existing oil and gas lease on the property, including any extension or renewal of the existing lease. (emphasis added).

The Vanderra property deed was prepared by the same law firm that is representing the Trust in the instant lawsuit. At the time the Vanderra property deed was executed, SWEPI contends that the Trust had no reason to believe that there was any other oil and gas lease related to the property, other than the lease at issue in this lawsuit. Thus, the Vanderra property deed can be read to imply that there is an existing gas and oil lease on this property in June 2011, a position that is inconsistent with the posture taken by Butters in this litigation. Butters disputes this interpretation as a factual matter, insisting that this language was simply surplusage that was inadvertently included in the deed.

During the Summer and Fall of 2011, the parties continued to engage in discussions and negotiations regarding the terms and extension of this lease. In the course of these discussions, counsel for the plaintiff, William Stokes, articulated the position voiced by the plaintiff in this litigation; namely, that the lease term had expired because SWEPI had not commenced drilling by May 27, 2011. Stokes alleges that on or about October 10, 2011, in a conversation with a SWEPI employee assigned to this matter, Brad Hallum, Stokes informed Hallum of Butters' position regarding the interpretation of this lease and confirmed that no drilling had occurred on the property. According to Stokes, in this conversation Hallum conceded that if no drilling had occurred that SWEPI would be interested in negotiating a new lease with Butters, remarks that the plaintiff construed as at least a tacit admission that Butters' interpretation of the lease was correct. For his part, Hallum has a far less definitive recollection ...


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