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Walney v. Swepi LP

United States District Court, W.D. Pennsylvania

April 20, 2018

THOMAS J. WALNEY and RODNEY A. BEDOW, SR., individually and on behalf of all others similarly situated, Plaintiffs,


          Joy Flowers Conti Chief United States District Judge

         This class action is being prosecuted by Thomas J. Walney (“Walney”) and Rodney A. Bedow, Sr. (“Bedow”) on behalf of certain Pennsylvania landowners who executed gas and oil leases for the benefit of SWEPI LP. In this action, Walney and Bedow (collectively, “plaintiffs”) allege that SWEPI LP and its general partner, Shell Energy Holding GP, LLC (collectively, “SWEPI” or “defendants”), failed to pay bonus monies that were owed to the various class members under the terms of their respective leases.

         Presently pending before the court are cross-motions for summary judgment filed by plaintiffs (ECF No. 140) and SWEPI (ECF No. 156). For the reasons that follow, plaintiffs' motion will be granted in part and denied in part; defendants' motion will be denied.

         I. Factual and Procedural Background

         SWEPI LP is a limited partnership engaged in the business of oil and gas exploration and production. (PCSF ¶2.)[1] Beginning in 2011, SWEPI sought to acquire mineral leases in certain parts of Pennsylvania with the help of independent contractors, including Southeast Land Services, LLC (“Southeast”), who acted as SWEPI's agents. (PCSF ¶¶ 4, 5.) Ultimately, Southeast helped SWEPI obtain more than 2, 800 oil and gas leases. (Id. ¶5)

         An account of SWEPI's lease acquisition practices is set forth in the declarations of Ian Haney (“Haney”), a Senior Land Representative in SWEPI's Land Department, [2] and Eric Jenevein (“Jenevein”), manager of Southeast's Appalachia Region. (See ECF Nos. 163-9, 163-10, and 150-1.) According to Haney and Jenevein, in 2011, Southeast's “landmen” began contacting individual landowners who, based on county property records, appeared to own oil and gas interests in Butler and Venango Counties. (First Haney Decl. ¶ 6, ECF No. 163-9; Jenevein Decl. ¶ 6, ECF No. 163-10.) Based upon their initial contact with landowners, the landmen would determine whether the property in question was already under lease to another company and, if not, whether the landowner was interested in entering into a lease with SWEPI. (Id.) If the landowner expressed interest, the landman and landowner would discuss possible bonus amounts or other potential terms of the lease. (Id.) Negotiations might occur over the course of days, weeks, or months. (Id.) During late 2011 and 2012, other companies in competition with SWEPI were actively leasing in the same area. (Id.) Consequently, landowners often negotiated with other oil and gas companies at the same time that they were negotiating with SWEPI's contracted landmen. (Id.)

         Most landowners verbally inquired during the course of negotiations about how and when they would be paid their lease bonus. (Jenevein Decl. ¶8.) With respect to these inquiries, Southeast instructed its landmen to explain that payment would be made by a bank draft rather than a check. (Id.) According to Jenevein,

it was the practice of Southeast's landmen to inform the landowner prior to obtaining the written lease that the payment would be made by a bank draft and not be payable until the expiration of a set number of banking days, usually ninety (90) days, that banking days differ from calendar days, and that ultimate payment would not be made if the title examination during the ninety (90) days did not result in a clean title examination acceptable to SWEPI. It was not the usual practice of Southeast landmen to make any representations or promises about the payment of a SWEPI lease bonus different than the terms reflected in the written bank draft.


         Once lease terms were finalized, the landman would meet again with the interested landowner, usually at the office of a notary public. At that point, the landman would obtain the signed lease and a signed memorandum of lease (“MOL”) in exchange for a draft instrument issued in the amount of the agreed upon bonus. (First Haney Decl. ¶¶ 4, 10; Jenevein Decl. ¶ 9.) The lease, MOL and bank draft were usually executed and exchanged at the same time. (Jenevein Decl. ¶9.) The amount of the lease bonus was normally not specified in the lease agreement itself; instead, it was reflected in the bank drafts that landmen issued on behalf of SWEPI. (First Haney Decl. ¶8; Jenevein Decl. ¶7.) The drafts were payable through SWEPI's bank, Amegy Bank N.A. (“Amegy”), and typically allowed 90 banking days (or sometimes 30 banking days) “for title examination and for payment” once the draft was submitted by the landowner's bank to Amegy for collection.[3] (ECF No. 150-30; see First Haney Decl. ¶8; Jenevein Decl. ¶7.) The drafts also included the statement: “No liability for payment or otherwise shall be attached to any of the parties hereto.” (Id.)

         After the landmen obtained the signed leases and MOLs from the landowners, they would return those documents to Southeast's or SWEPI's administrative offices for processing. (First Haney Decl. ¶ 10; Jenevein Decl. ¶ 10.) The MOL would typically be recorded in the county records office within a few days thereafter. (Id.)

         Following recordation, Southeast would undertake an in-depth records search to confirm that title to the oil and gas interest was in the acreage amount represented and that no other problems existed with respect to the chain of title. (First Haney Decl. ¶ 10; Jenevein Decl. ¶ 10.) Upon completion of its search, Southeast would provide SWEPI a confidential report and analysis relative to each parcel of property in question in order to identify whether a failure of title existed as to the particular property and, if so, whether curative action was required. (First Haney Decl. ¶ 12; Jenevein Decl. ¶ 11.) Sometimes the title problems could be cured by having the landowner execute a new lease reflecting the correct acreage or the correct ownership names; this curative action would involve cancellation of the original draft and issuance of a new one, if the landowner was agreeable. (First Haney Decl. ¶ 14; Jenevein Decl. ¶ 13.) In cases where there was a title problem that could not be readily cured, SWEPI would cancel the bank draft and surrender the lease back to the landowner. (Id.) When drafts were cancelled prior to payment and no substitute draft was issued for the same lease, SWEPI or its contract landmen would file written surrenders of the oil and gas lease in the county records. (First Haney Decl. ¶21.)

         According to SWEPI, the title examination process was both cumbersome and time consuming, as it required substantial manual research. (First Haney Decl. ¶13; Jenevein Decl. ¶12.) In the first half of 2012, the Venango county courthouse experienced significant congestion, as dozens of oil and gas leasing companies undertook title searches and competed for access to public records. (Id.) By April 2012, the congestion in the courthouse had become so severe that the Venango County commissioners restricted access to the register and recorder's offices. (Id.) As a result of these restrictions, Southeast's landmen were substantially delayed in their efforts to complete their title searches for Venango County properties. (Id.) In many cases, landmen could not complete their title searches in Venango County, or SWEPI could not complete its evaluation of Southeast's title analysis, within the time frame specified in the drafts. (Id.) Because of these difficulties, SWEPI decided, in or around June 2012, to stop acquiring new leases in most of Venango County and to cancel any outstanding drafts that had not already been paid. (First Haney Decl. ¶20.)

         Between December 2010 and November 2013, SWEPI funded approximately 4, 927 drafts and paid lease bonuses totaling approximately $313, 000, 000.00. (Second Haney Decl. ¶23, ECF No. 150-1.) Approximately 283 drafts that were issued during this time frame (the “Claimed Class Drafts”) were never funded for various reasons. (ECF Nos. 150-7; Second Haney Decl. ¶23.)

         Typically, SWEPI made its decision about whether to fund a draft prior to the draft's due date (usually 90 banking days). (Second Haney Decl. ¶23.) The most common reason for SWEPI's refusal to fund drafts was a perceived problem with the lessor's chain of title to the underlying minerals. (Id. ¶¶24, 28.) SWEPI, however, cites other reasons for refusing to fund class members' drafts. In 17 instances, funds were not paid because SWEPI surrendered the underlying lease at the landowner's request. (Id. ¶31.) In addition, “the inability of [SWEPI's] contract landmen at Southeast to complete courthouse title searches due to difficulty accessing the courthouse in the Spring and Summer of 2012 was a substantial reason why many drafts in Venango County were canceled and not paid.” (Id. ¶25.) SWEPI also acknowledges that, by June 2012, a drop in the commodity price of natural gas made leasing in Venango County “less attractive, ” and this -- together with the difficulty of completing timely title analysis -- played into its decision to cancel some of the unpaid drafts. (Id.)

         Plaintiffs Walney and Bedow are among those landowners who signed lease agreements and MOLs in favor of SWEPI but were never paid. (ECF No. 57 ¶1; ECF No. 58 ¶1; ECF Nos. 150-21, 150-54, 150-56, and 150-60.) Walney alleges that, in January 2012, he signed a lease agreement covering 42.18 acres of land in exchange for a promised bonus of $137, 085.00. (ECF No. 57 ¶¶15, 17-18; ECF No. 63-1.) Bedow signed multiple lease agreements in 2011 and early 2012, which he claims covered 215.897 acres of land. (ECF No. 57 ¶17; ECF No. 63-2.) Bedow maintains that he was promised bonuses totaling $701, 666.88. (ECF No. 57 ¶18; ECF No. 63-2.)

         In March 2013, Walney commenced this civil class action in the Venango County Court of Common Pleas, asserting claims for breach of contract, fraud, disparagement of title, and promissory estoppel. (Compl. Ex. A, ECF No. 1-1.) The case was subsequently removed to this court (ECF No. 1) and, following various pretrial proceedings, [4] Walney filed the operative Second Amended Complaint (ECF No. 57), which added Bedow as a co-plaintiff and asserted additional claims for breach of implied contract and unjust enrichment.

         On September 14, 2015, this court entered a memorandum opinion and order certifying a class action relative to the breach of contract claims in Counts I and I(A) of the Second Amended Complaint, [5] pursuant to Rule 23(b)(3). See Walney v. SWEPI, LP, No. 1:13-cv-102, 2015 WL 5333541 (W.D. Pa. Sept. 14, 2015). Having engaged in extensive discovery, the parties now seek a summary judgment ruling relative to the breach of contract claims.

         To that end, the parties submitted cross-motions for summary judgment (ECF Nos. 140 and 165) and extensive related filings (see Doc. Nos. 141-145, 149-150, 153, 155, 157-158, 162-164, 166-167, 169, and 171-174). The issues raised in the parties' motions are now sufficiently joined and ripe for disposition.[6]

         II. The Transactional Documents

         A. The Form Lease Agreements

         At issue in this case are certain form documents that SWEPI utilized in connection with its lease acquisitions during the time period in question. Among the relevant documents are two materially identical lease agreements, i.e., “Paid Up Oil and Gas Lease, Rev. 06.09.2011” and “PA Paid Up Lease Rev. 05.01/2011” (ECF Nos. 150-21 and 150-54, hereafter referred to collectively at times as the “Lease(s)” or the “Lease Agreement(s)”).

         The introductory clause of each form Lease stated: “This Lease Agreement is made and entered into this [enter date] between [enter landowner's name] as Lessor (whether one or more), and SWEPI LP, having an office at 190 THORN HIILL ROAD, WARRENDALE, PENNSYLVANIA 15086, as Lessee.” (ECF No. 150-21 (emphasis in the original).)

         Paragraph 1 of the Lease Agreement stated, in relevant part:

In consideration of the bonus consideration paid, the receipt of which is hereby acknowledged, and in further consideration of the covenants and agreements herein contained, Lessor does hereby grant, demise, lease and let exclusively to Lessee, its successors and assigns, the lands hereafter described for the purpose of exploring for, developing, producing and marketing oil, gas or other related substances produced in association therewith . . . in and under the following described land . . . .

(Id.) Paragraph 3 of the Lease established a primary lease term of five years which, at SWEPI's option, could be extended if SWEPI made a specified extension payment, calculated on a “per acre” basis, prior to the expiration of the primary term. (Id. ¶3.) Paragraph 4 set forth the lessor's entitlement to an 18% royalty payment for oil and gas produced and marketed from the leased premises. (Id. ¶4.) Paragraph 10 of the Lease provided, in part, that: “Lessee at any time, and from time to time, may surrender this lease as to all or any part thereof by recording an appropriate instrument of surrender in the proper county and thereupon this lease and the rights, rentals and obligations of the parties hereunder shall terminate as to the part so surrendered.” (Id. ¶10.) Paragraph 14 set forth a “force majeure” clause. (Id. ¶14.) Paragraph 15 ensured that “[n]o default shall be declared against the Lessee for failure to make payment or perform any conditions provided for herein unless the Lessee shall refuse or neglect to pay or perform the same for sixty (60) days after having received written notice from Lessor.” (Id. ¶15.) Paragraph 17 acknowledged:

This lease contains all of the agreements and understanding of the Lessor and Lessee respecting the subject matter hereof and no implied covenants or obligations, or verbal representations or promises have been made or relied upon by Lessor or Lessee supplementing or modifying this lease or as an inducement thereto.

(Id. ¶17.)

         B. The Form Draft Instrument

         Also relevant is the form draft instrument (hereafter, “Draft(s)” or “Draft Instrument(s)”) that SWEPI issued to landowners in exchange for the signed Leases. Each Draft Instrument contained standard language stating: “This draft when paid is payment in full for lease or conveyance covering the following described land: [enter description].” (ECF No. 150-30.) Each instrument contained the language “No Protest” and “Not a Cash Item.” (Id.) The Drafts further provided that:

[t]he payor shall have banking days after receipt of this draft by the collecting bank, whether accompanied by other papers or not, for title examination and for payment. Neither forwarding bank nor payee(s) nor the grantor(s) of such lease or conveyance may demand return of this draft or any accompanying papers prior to expiration of the time fixed. Upon payment hereof collecting bank shall deliver this draft and any accompanying papers to payor and remit payment to forwarding bank. No. liability for payment or otherwise shall be attached to any of the parties hereto.


         C. The Memorandum of Lease

         The third standard document is the form MOL that class members executed and delivered to SWEPI's landmen along with their signed Leases. The first two sentences of each MOL state that: “THIS MEMORANDUM OF LEASE has been made to indicate the existence of an Oil and Gas Lease (“Lease”) dated [ enter date ] by and between [landowner] of [subject property], as Lessor and SWEPI, LP . . . as Lessee. Lessor did grant, demise, lease and let exclusively to Lessee, its successors and assigns, the rights to explore, develop, produce, and market oil and gas from [the subject property] subject to the provisions contained in the Lease . . . .” (ECF No. 150-23.) Paragraph 1 of the MOL further provides that:

The primary term of the Lease is for a period of Five (5) years commencing on the date immediately set forth above and for so long thereafter as oil, gas or other substances covered by the Lease are capable of being produced in paying quantities from the leased premises or from lands pooled therewith or the Lease is otherwise maintained or prolonged pursuant to the provisions contained in the Lease, including an extension of term contained therein. Lessee may extend the primary term of the Lease for an additional Five (5) years after the end of the primary term, thereby continuing the term of the Lease to the end of the extended primary term.

(Id.) Elsewhere, the MOL acknowledges that its intended purpose is to “provid[e] notice in the Recorders Office of [enter county] County, Commonwealth of Pennsylvania, of the existence of the Lease, ” and it “shall not be considered in any way a modification or alteration of the Lease.” (Id.)

         III. The Parties' Respective Arguments

         Plaintiffs contend that - taken together - the Leases, MOLs and Drafts (collectively, the “Transactional Documents”) constituted enforceable contracts as of the time that the documents were signed and exchanged between the various class members and SWEPI's representatives. Plaintiffs theorize that these contracts provided for an unconditional payment of a sum certain (i.e., the amount of the bonus set forth in the draft instrument), deferred to a date certain (i.e., the time period set forth in the draft). According to plaintiffs, SWEPI breached its contracts when it failed to pay the bonuses. Consequently, plaintiffs consider the full amounts of the bonuses to be the correct measure of damages in each instance.

         SWEPI contests each element of plaintiffs' claims and also asserts various affirmative defenses. Fundamentally, SWEPI denies that enforceable contracts ever came into existence. Assuming that enforceable contracts did exist, SWEPI denies that it breached the contracts. SWEPI theorizes that good title was a condition of payment in every case and no evidence exists to show that all class members had good title to the lease rights they purported to convey. On the contrary, SWEPI argues that many class members indisputably lacked good title to the gas and oil interests at issue in their leases and, with respect to certain other class members, SWEPI was unable to verify the landowner's title through no fault of its own.

         In the alternative, SWEPI challenges plaintiffs' request for summary judgment on the grounds that: (i) factual inquires exist concerning the meaning of the contracts; (ii) class members failed to provide the requisite “written notice” of SWEPI's alleged breach; (iii) SWEPI's payment obligations, if any, were excused in cases where the Leases were surrendered prior to expiration of the time period designated in the Draft Instrument or where they were surrendered at the request of the lessor; and (iv) plaintiffs cannot obtain summary judgment on behalf of landowners who never presented their Drafts for payment or who are not members of the class.

         Assuming that its liability can be established, SWEPI contests plaintiffs' calculation of damages. SWEPI maintains that proper measurement is the difference between the contract price (i.e., the bonus amount) and the fair market value of each lease at the time of the alleged breach. SWEPI contends that plaintiffs failed to prove the class's damages because there is no evidence in the record to establish the relevant fair market values of the leases at issue.

         IV. Standard of Review

         Summary judgment is appropriate when “there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a); see Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986). In reviewing the evidence, the court draws all reasonable inferences in favor of the nonmoving party. See Reeves v. Sanderson Plumbing Prods., Inc., 530 U.S. 133, 150 (2000) (discussing identical standard of review under Rule 50). The court may not make credibility determinations or weigh the evidence. Id. “Where the record taken as a whole could not lead a reasonable trier of fact to find for the nonmoving party, there is no ‘genuine issue for trial.'” Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986).

         Courts are permitted to resolve concurrently cross-motions for summary judgment. Johnson v. Federal Exp. Corp., 996 F.Supp.2d 302, 312 (M.D. Pa. 2014) (citing authority); see Lawrence v. City of Phila., 527 F.3d 299, 310 (3d Cir. 2008) (considering cross-motions for summary judgment under the Fair Labor Standards Act); 10A CHARLES ALAN WRIGHT ET AL., FEDERAL PRACTICE AND PROCEDURE § 2720 (3d ed. 2014). “When doing so, the court is bound to view the evidence in the light most favorable to the non-moving party with respect to each motion.” Johnson, 996 F.Supp.2d at 312; see Lawrence, 527 F.3d at 310 (noting that the rule for granting summary judgment “is no different where there are cross-motions for summary judgment.”).

         V. Discussion

         To succeed on a breach of contract claim, a plaintiff must prove: (1) the existence of a contract; (2) the breach of a duty required by the contract; and (3) damages from the breach. Zamos v. McNeil-PPC Inc., a Div. of Johnson & Johnson, 713 Fed.Appx. 133, 135 (3d Cir. 2017) (citing Williams v. Nationwide Mut. Ins., 750 A.2d 881, 884 (Pa. Super. Ct. 2000)).[7] Here, plaintiffs contend that all three elements of the class's claims were established as a matter of law, while SWEPI contends that none of the elements can be established based on the uncontroverted facts.

         A. Whether Enforceable Contracts Existed

         As a preliminary matter, the court must determine whether plaintiffs can prove the existence of enforceable contracts between SWEPI and the class members. Because oil and gas leases are in the nature of contracts, they are controlled by principles of contract law. See T.W. Phillips Gas & Oil Co. v. Jedlicka, 42 A.3d 261, 267 (Pa. 2012). Under Pennsylvania law, a contract is enforceable where: (1) both parties have manifested an intent to be bound by the terms of the agreement, (2) the contractual terms are sufficiently definite, and (3) consideration exists to support the agreement. Cook v. Gen. Nutrition Corp., No. CV 17-135, 2017 WL 4340664, at *6 (W.D. Pa. Sept. 29, 2017) (citing Johnston the Florist, Inc. v. TEDCO Constr. Corp., 657 A.2d 511, 516 (Pa. Super. Ct. 1995)).

         Plaintiffs contend that - taken together -- the Leases, MOLs and Drafts constituted enforceable contracts. They argue that the contracts came into existence when the parties signed and exchanged the Transactional Documents - an event which plaintiffs liken to a real estate “closing.”

SWEPI denies that the Transactional Documents constituted enforceable contracts. According to SWEPI, the Lease Agreements did not set forth any binding promise on its part to pay the subject bonuses; rather, the parties contemplated that only actual payment of the bonuses would supply the necessary consideration. Because SWEPI opted not to fund the class members' Drafts, it posits that the Lease Agreements fail for lack of consideration or mutuality. Additionally, SWEPI argues that there was no completed offer and acceptance to establish its intent to be contractually bound. Alternatively, SWEPI argues that the agreements contained a condition precedent to contract formation that did not occur - namely verification of good title within the time period specified in each draft.

         The parties' competing theories raise questions of contract interpretation, the “paramount goal” of which is “to ascertain and give effect to the intent of the parties.” PBS Coals, Inc. v. Burnham Coal Co., 558 A.2d 562, 564 (Pa. Super. Ct. 1989). “‘[T]he intent of the parties to a written contract is to be regarded as being embodied in the writing itself, and when the words are clear and unambiguous the intent is to be discovered only from the express language of the agreement.'” Jeddo Coal Co. v. Rio Tinto Procurement (Singapore) PTE Ltd., No. 3:16-CV-621, 2017 WL 937737, at *4 (M.D. Pa. Mar. 9, 2017) (quoting Steuart v. McChesney, 444 A.2d 659, 661 (Pa. 1982)). Accordingly, the court must determine what document or documents comprise the alleged “contracts” in this case.

         Under Pennsylvania law, “‘[w]here several instruments are made as part of one transaction they will be read together, and each will be construed with reference to the other; and this is so although the instruments may have been executed at different times and do not in terms refer to each other.'” Jeddo Coal Co., 2017 WL 937737, at *4 (quoting Huegel v. Mifflin Const. Co., 796 A.2d 350, 354-55 (Pa. Super. Ct. 2002)); see Kroblin Refrigerated Xpress, Inc. v. Pitterich, 805 F.2d 96, 107 (3d Cir. 1986) (“It is a general rule of contract law that where two writings are executed at the same time and are intertwined by the same subject matter, they should be construed together and interpreted as a whole, each one contributing to the ascertainment of the true intent of the parties.”).

         Here, it is undisputed that the Transactional Documents were typically signed and exchanged contemporaneously as part of a singular transaction between SWEPI and the various class members. In addition, the documents reference one another. The Leases expressly acknowledge the lessor's receipt of a “bonus” in an unspecified amount. (ECF Nos. 150-21, 150-60). The Draft Instruments indicated that, when funded, they would constitute “payment in full for lease or conveyance” covering the specific parcel in question. (ECF No. 163-4). Each MOL was expressly intended to provide public notice of the existence of the corresponding oil and gas lease. (ECF No. 163-3). Because the Leases, Drafts, and MOLs expressly ...

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