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Wheeland Family Ltd. Partnership LP v. Rockdale Marcellus LLC

United States District Court, M.D. Pennsylvania

July 3, 2019

WHEELAND FAMILY LTD. PARTNERSHIP LP, et al., Plaintiffs and Counterclaim Defendants,
v.
ROCKDALE MARCELLUS LLC, Defendant and Counterclaim Plaintiff.

          MEMORANDUM OPINION

          Matthew W. Brann United States District Judge.

         Rockdale Marcellus LLC (“Rockdale”) has moved for partial judgment on the pleadings. For the reasons that follow, that motion will be granted.

         I. BACKGROUND

         Plaintiffs own various parcels of land in Tioga County, Pennsylvania, [1] and executed seven separate oil and gas leases with Rockdale's predecessor in interest, East Resources Inc.[2] East Resources Inc. conveyed its rights to SWEPI LP (“SWEPI”), and SWEPI later conveyed its rights to Rockdale.[3] Five of these leases-Leases 3 through 7-are at issue in the present motion.

         During Leases 3-7 primary terms, which expired in 2011, [4] SWEPI pooled its interests into a drilling unit (“731 Unit”) and began constructing a well (“731-IV Well”) intending to drill into the Marcellus Shale.[5] Plaintiffs explain that drilling operations ceased in 2011, and the Department of Environmental Protection ultimately deemed the 731-IV Well inactive.[6] According to Plaintiffs, because of the well's non-production, Leases 3-7 expired in 2011.[7]

         Rockdale, however, explains that despite the well's inactivity, Leases 3-7 have been extended pursuant to Rockdale and SWEPI's compliance with a so-called “shut-in” provision within each lease. According to Rockdale, because shut-in royalties have been tendered to each lessor, the leases did not expire.[8]

         In 2018, Plaintiffs demanded that Rockdale surrender the leases.[9] Rockdale refused, arguing that the leases remain valid and enforceable.[10]

         Plaintiffs filed a 21-count complaint in the Court of Common Pleas of Tioga County, Pennsylvania, seeking declaratory relief (Counts I, II, IV, V, VII, VIII, X, XI, XIII, XIV, XVI, XVII, XIX, XX) and to quiet title (Counts III, VI, IX, XII, XV, XVIII, XXI), and arguing that Rockdale's interest in the seven leases is either invalid or has expired.[11] Rockdale filed an answer and alleged a counterclaim, seeking a declaration that the leases were held beyond their primary terms through payment of shut-in royalties.[12] Plaintiffs answered Rockdale's counterclaim.[13]

         Rockdale presently moves for partial judgment on the pleadings on counts VII-XII of Plaintiffs' complaint and Count I of Rockdale's counterclaim.[14]Rockdale argues that, as a matter of law, it has successfully maintained the lease terms for Leases 3-7 by complying with the shut-in provision within each lease.[15]Plaintiffs disagree that the shut-in provision applies.[16] Plaintiffs additionally argue that judgment on pleadings is inappropriate because factual questions linger as to whether the 731 Unit was pooled in good faith and whether the 731-IV Well was drilled pursuant to a valid lease given this Court's disposition in Marshall Bros. Inc. v. Rockdale Marcellus LLC.[17]

         II. DISCUSSION

         A. Standard of Review

         When considering a motion for judgment on the pleadings, [18] a court draws all inferences from facts presented in the pleadings in favor of the nonmoving party.[19] Judgment will only be granted “if the movant clearly establishes that no material issue of fact remains to be resolved and that [the movant] is entitled to judgment as a matter of law.”[20]

         B. Under Messner, Rockdale Has Extended Leases 3-7 by Complying with the Shut-In Provision.

         Plaintiffs argue that because a well can only be deemed shut-in if it was capable of producing hydrocarbons in paying quantities, a question of fact arises as to whether the 731-1V Well's productive capacity allowed Rockdale to invoke the shut-in provision and extend Leases 3-7 beyond their primary terms.[21] Rockdale, however, contends that because the shut-in provision expressly allowed Rockdale and SWEPI to shut-in a well when it was “otherwise not producing for any reason whatsoever, ” the shut-in provision's application is not predicated on whether the 731-1V Well was capable of production.[22]

         The shut-in royalty provision within Leases 3-7 provides as follows:

If during or after the primary term of this lease, all wells on the leased premises or within a unit that includes all or a part of the lease premises, are shut-in, suspended or otherwise not producing for any reason whatsoever for a period of twelve (12) consecutive months, and there is no current production of oil or operations on said leased premises sufficient to keep this lease in force and this lease is not otherwise kept in force by other provisions of this lease, Lessee may maintain this lease in effect by tendering to Lessor a shut-in royalty equal to the Delay Rental as found elsewhere in this lease. Said shut-in royalty shall be paid or tendered to the Lessor within ninety (90) days after the next ensuing yearly anniversary of the Effective Date of this lease, and thereafter on or before each yearly anniversary of the Effective Date hereof while the wells are shut-in or production therefrom is not being marketed by Lessee. Upon payment of the shut-in royalty as provided herein, this lease will continue in force during all of the time or times while such wells are shut-in but failure to properly pay shut-in royalties shall [r]ender Lessee liable only for the amount due and shall not operate to terminate this lease.[23]

         This Court has already confronted identical language and similar facts in Messner v. Swepi. There, a lessee and landowner entered into a lease bound by a five-year primary term.[24] Relying on the lease's shut-in provision, the lessee tendered shut-in royalties to the landowner after the leased acreage was pooled, two wells were drilled during the lease's primary term, and the wells were not producing.[25] The landowner, however, refused to accept those payments and argued that the shut-in provision could not maintain the lease because the wells were not actually shut-in-that is, according to the landowner, the wells could not be shut-in because they were not capable of producing gas in paying quantities.[26]Considering the shut-in provision inapplicable, the landowner maintained that the lease has expired, and accused the lessee of wrongfully maintaining an interest in the property.[27]

         The Messner court disagreed with the landowner. The court explained that when interpreting an oil and gas lease under Pennsylvania law, principles of contract law are followed, [28] and the court consequently construes the lease “in accordance with the terms of the agreement as manifestly expressed, ”[29] giving effect to the language's “accepted and plain meaning, rather than the silent intentions of the contracting parties.”[30] The court noted that the shut-in provision's “expansive language” applied whenever a well was “not producing for any reason whatsoever, ” and explained that nothing in the lease conditioned the shut-in provision's application upon a factual finding as to whether the wells were, in fact, capable of producing in paying quantities.[31] Giving effect to the language used by the parties, the court concluded that the lessee maintained the lease beyond its primary term by invoking and complying with the shut-in royalty provision.[32] The court's reasoning and conclusion was affirmed, albeit non-precedentially, by the United States Court of Appeals for the Third Circuit.[33]

         Messner's reasoning controls here. Messner involved substantially similar facts, and the shut-in provision within Leases 3-7 is identical to the provision at issue in Messner. Like in the lease at issue in Messner, nowhere do Leases 3-7 condition the application of the shut-in provision on a factual finding as to whether the 731-1V was capable of producing hydrocarbons in paying quantities. Rather, Rockdale was authorized to invoke the expansive shut-in provision when, among other requirements, the well was “not producing for any reason whatsoever.” Therefore, Plaintiffs cannot point to the 731-1V well's production capacity as a fact barring judgment on the pleadings.

         Consequently, just as the Messner court accepted all factual allegations in the complaint as true which required dismissing the landowner's complaint, the pleadings here establish that Rockdale and SWEPI have complied with the shut-in provision within Leases 3-7. Leases 3-7 had five-year primary terms, the parcels subject to Leases 3-7 were pooled into the 731 Unit, the 731-1V well was drilled in the 731 Unit during the leases' primary terms, and the 731-1V well was not producing. Rockdale and SWEPI tendered to each lessor an annual shut-in royalty.[34] In sum, because the pleadings-even construed in Plaintiffs' favor- place this dispute squarely within the shut-in royalty provision, Rockdale, like the lessee in Messner, “properly exercised its right to maintain the lease in effect by tendering the shut-in royalty payment after wells that were drilled on the units were ‘not producing for any reason whatsoever.'”[35]

         Plaintiffs' distinguish Messner by calling it an “outlier, ” arguing that it constitutes non-binding authority that was wrongly decided.[36] The Messner decision encompasses the review of five federal judicial officers: the opinion and order was originally authored as a report and recommendation by a United States Magistrate Judge, it was later adopted in full by a United States District Judge, and finally, it was wholly affirmed by a three-judge panel on the Third Circuit. Although the Third Circuit affirmed Messner in a nonprecedential opinion, it nevertheless remains highly persuasive as the Messner court confronted nearly the same legal issues and facts that are present here. Insofar as Messner should be revisited, that issue is best left to our Court of Appeals.

         In sum, Rockdale has met its burden to show that no material issues of fact exist as to whether Rockdale properly exercised its rights to extend Leases 3-7 by invoking the shut-in provisions therein. Accordingly, Rockdale entitled to judgment on the pleadings on counts VII-XII of Plaintiffs' complaint and Count I of Rockdale's counterclaim, to the extent Count I is based on Leases 3-7.

         C. Plaintiffs' Allegations of Bad Faith Do Not Preclude Judgment on the Pleadings.

         Plaintiffs argue that judgment on the pleadings is improper because whether Leases 3-7 were pooled in good faith and in accordance with the leases' terms is a question of fact.[37]

         Plaintiffs argument cannot forestall judgment on the pleadings for two reasons. Pennsylvania law recognizes that the covenant of good faith and fair dealing is implied in every contract.[38] To the extent Plaintiffs have styled their bad faith allegations as independent claims alleging breach of the implied covenant, [39]that covenant “gives rise to no independent action aside from breach of contract.”[40]For example, in Stewart v. Swepi, landowners alleged that a lessee breached the covenant of good faith and fair dealing, arguing that an oil and gas lease expired because “the last-minute unitization of [two] parcels with the [drilling unit], and the drilling of the alleged placeholder well, were speculative in nature and failed to extend the lease.”[41] Critically, the court noted, the landowners did not allege that the lessor breached the terms of the lease.[42] The court dismissed the landowners' claim for breach of the covenant of good faith and fair dealing “because plaintiffs have not alleged breach of contract.”[43]

         Here, it does not appear that Plaintiffs claim that Rockdale breached the terms of Leases 3-7. Instead, Plaintiffs' complaint contends that Rockdale acted in bad faith because the unitization of Leases 3-7 in the 731 unit “occurred approximately one month prior to the conclusion of the primary term” of the leases, and the 731 Unit was centered around a well that was not producing and could not produce hydrocarbons.[44] Under Stewart, claims asserted by Plaintiffs for breach of the ...


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