Argued: December 12, 2018
BEFORE: HONORABLE MARY HANNAH LEAVITT, President Judge
HONORABLE RENÉE COHN JUBELIRER, Judge HONORABLE ROBERT
SIMPSON, Judge HONORABLE P. KEVIN BROBSON, Judge HONORABLE
ANNE E. COVEY, Judge HONORABLE MICHAEL H. WOJCIK, Judge
HONORABLE ELLEN CEISLER, Judge
MICHAEL H. WOJCIK, JUDGE.
case returns to us following the Pennsylvania Supreme
Court's remand in Pennsylvania Environmental Defense
Foundation v. Commonwealth, 161 A.3d 911 (Pa. 2017)
(PEDF II). Before this Court for disposition are the
parties' cross-applications for summary relief in this
declaratory judgment action filed in our original
jurisdiction. Petitioner Pennsylvania Environmental
Defense Foundation (the Foundation) and Respondents Commonwealth
of Pennsylvania and Tom Wolf in his official capacity as
Governor of Pennsylvania (collectively, Commonwealth) seek
declaratory relief under the Declaratory Judgment
as to whether money received from payments due under leases
for the extraction and sale of oil and gas on State forest
lands, including bonuses and annual rental payments, are part
of the corpus of the environmental public trust established
by Article I, Section 27 of the Pennsylvania Constitution
(Environmental Rights Amendment), and if so, whether various
fiscal enactments appropriating those funds for non-trust
purposes are unconstitutional under Section 27. The
Foundation argues that bonuses and rental payments are part
of the corpus trust; the Commonwealth argues that they are
not. For the reasons that follow, we grant the
Commonwealth's application upon determining that one
third of the proceeds constituting bonuses and rental
payments are not part of the corpus trust, and thus, the
challenged fiscal enactments are not facially
unconstitutional. We deny the Foundation's application.
begin by summarizing the Supreme Court's opinion in
PEDF II and its directives to this Court on
remand. In PEDF II, the Supreme Court
examined the constitutionality of legislative enactments to
The Fiscal Coderelating to funds generated from the
leasing of State forest and park lands for oil and gas
exploration and extraction. The Supreme Court began its
analysis by closely examining the contours of the
Environmental Rights Amendment, which provides:
The people have a right to clean air, pure water, and to the
preservation of the natural, scenic, historic and esthetic
values of the environment. Pennsylvania's public natural
resources are the common property of all the people,
including generations yet to come. As trustee of these
resources, the Commonwealth shall conserve and maintain them
for the benefit of all the people.
Pa. Const. art. I, §27. The Supreme Court determined
that Section 27 "establishes a public trust, pursuant to
which the natural resources are the corpus of the trust, the
Commonwealth is the trustee, and the people are the named
beneficiaries." PEDF II, 161 A.3d at 931-32.
Supreme Court continued that the "public natural
resources" referenced in Section 27 "include the
[S]tate forest and park lands leased for oil and gas
exploration and . . . the oil and gas themselves."
PEDF II, 161 A.3d at 931. "[S]tate parks and
forests, including the oil and gas minerals therein, are part
of the corpus of Pennsylvania's environmental public
trust." Id. at 916.
Commonwealth is the trustee and not the proprietor of public
natural resources. PEDF II, 161 A.3d at 932. As
trustee of the public natural resources, the Commonwealth has
the duty to act toward the corpus of the trust with loyalty,
impartiality and prudence. Id. at 932 (citing
Robinson Township v. Commonwealth, 83 A.3d 901,
956-57 (Pa. 2013) (plurality)). This includes the "duty
to prohibit the degradation, diminution, and depletion of our
public natural resources." Id. at 933. In
addition, the Commonwealth "must act affirmatively via
legislative actions to protect the environment."
Id. at 933 (citing Robinson Township, 83
A.3d at 957-58).
Supreme Court also reviewed the history of the laws relative
to oil and gas funds and the recent legislative transfers.
Briefly, in 1955, the General Assembly enacted the Oil and
Gas Lease Fund Act ("Lease Fund Act"),
which has since been repealed,  requiring "[a]ll rents and
royalties from oil and gas leases" of Commonwealth land
to be deposited in the "Oil and Gas Lease Fund"
("Lease Fund") to be "exclusively used for
conservation, recreation, dams, or flood control or to match
any Federal grants which may be made for any of the
aforementioned purposes." Former Section 1 of
the Lease Fund Act, formerly 71 P.S. §1331.
Neither rents nor royalties were defined therein. The Lease
Fund Act specifically appropriated all money in the Lease
Fund to the Department of Forests and Waters to carry out the
purposes of the act and provided the Secretary of Forests and
Waters with the discretion to determine the need and the
location for projects. PEDF II, 161 A.3d at 919-20;
former Sections 2 and 3 of the Lease Fund Act,
formerly 71 P.S. §§1332, 1333.
the enactment of the Conservation and Natural Resources Act
("CNRA"),  the Department of Conservation and Natural
Resources ("DCNR"), replaced the Department of
Forests and Waters as the relevant entity for purposes of the
Lease Fund. Section 101 of the CNRA(b)(1), 71 P.S.
§1340.101(b)(1); Section 301 of the CNRA, 71 P.S.
§1340.301; Section 304 of the CNRA 71 P.S.
§1340.304; see former 71 P.S. §1333. The
CNRA altered the Lease Fund Act "to provide that
'all moneys' paid in to the Lease Fund were
'specifically appropriated to' the DCNR."
PEDF II, 161 A.3d at 920 (quoting former 71
P.S. §1333). The CNRA empowered DCNR "to make and
execute contracts or leases in the name of the Commonwealth
for the mining or removal of any valuable minerals that may
be found in State forests" if the DCNR determines that
it "would be for the best interests of this
Commonwealth." 71 P.S. § 1340.302(a)(6).
to this authority, DCNR entered into oil and gas leases for
natural gas extraction. Of significance here, in 2008, DCNR
began lease sales of State forest land in the Marcellus Shale
region of northcentral Pennsylvania. "The Marcellus
Shale leases dramatically increased the money flowing into
the Lease Fund." PEDF II , 161 A.3d at 920.
and gas leases generated funds in the form of royalties,
rents and bonuses. PEDF II , 161 A.3d at 920. Per
the lease terms, royalties are paid when gas is extracted,
with the payment based upon the amount of marketable gas
extracted. Id. at 921. The rents are comprised of
annual rental fees, an example of which ranged from $20-35
per acre, in addition to large initial "bonus
payments" ranging in the millions of dollars.
determining whether those payments constituted part of the
trust corpus, the Supreme Court opined that, "pursuant
to Pennsylvania law in effect at the time of enactment,
proceeds from the sale of trust assets are part of the corpus
of the trust." PEDF II , 161 A.3d at 933
(citing In re McKeown`s Estate, 106 A. 189, 190 (Pa.
1919) ("Being a sale of assets in the corpus of the
trust, presumptively all the proceeds are principal. . .
.")). "Pennsylvania trust law dictates that
proceeds from the sale of trust assets are trust
principal and remain part of the corpus of the trust."
PEDF II, 161 A.3d at 935 (citing McKeown's
Estate, 106 A. at 190) (emphasis added). "When a
trust asset is removed from the trust, all revenue
received in exchange for the trust asset is returned to the
trust as part of its corpus." PEDF II, 161 A.3d
at 935 (citing Bolton v. Stillwagon, 190 A.2d 105,
109 (Pa. 1963)) (emphasis added).
the Supreme Court determined that "all proceeds from the
sale of our public natural resources are part of the corpus
of our environmental public trust and that the Commonwealth
must manage the entire corpus according to its fiduciary
obligations as trustee." PEDF II, 161 A.3d at
939. The Supreme Court held that "royalties - monthly
payments based on the gross production of oil and gas at each
well - are unequivocally proceeds from the sale of oil and
gas resources." Id. at 935. As such, funds
generated from royalties are part of the corpus and must be
committed to furthering the purposes, rights and protections
afforded under Section 27, i.e., to conserve and maintain our
natural resources. Id. at 935. "They are part
of the corpus of the trust and the Commonwealth must manage
them pursuant to its duties as trustee." Id.
Consequently, the Supreme Court ruled that legislative
enactments relating to the use of royalties in the Lease Fund
were facially unconstitutional because they diverted proceeds
from the sale of oil and gas, i.e., royalties, to non-trust
purposes in violation of Section 27. Id. at 938-39.
the Supreme Court was less clear on how to categorize other
revenue streams from State forest oil and gas leases, i.e.,
rents and bonuses, stating that "the record on appeal is
undeveloped regarding the purpose of up-front bonus payments,
and thus no factual basis exists on which to determine how to
categorize this revenue." PEDF II, 161 A.3d at
935. The Supreme Court recognized that the leases designate
bonuses and other annual payments as "rental
payments," but stated that "such a classification
does not shed any light on the true purpose of the payment,
e.g., rental of a leasehold interest in the land, payment for
the natural gas extracted, or some other purpose."
Id. Thus, the Supreme Court remanded the matter to
this Court for further proceedings. Id.
remand, the question before us is whether the proceeds
generated from rents and bonuses under the oil and gas leases
must be devoted to the conservation and maintenance of our
public natural resources, or may be used for other purposes
without violating the Environmental Rights Amendment. More
particularly, we are tasked with determining the
constitutionality of Sections 1604-E and 1605-E of The Fiscal
Code,  and Section 1912 of the Supplemental
General Appropriations Act of 2009,  which directed that
certain money deposited into the Lease Fund be transferred to
the General Fund to pay for government operations in 2009 and
2010. None of these enactments indicate on their face whether
the funds transferred related to royalties, rents, or bonus
bid payments, or some combination of the three. See PEDF
II, 161 A.3d at 923 n.11.
Supreme Court instructed, the constitutionality of these acts
"depends on whether they result from the
Commonwealth's faithful exercise of its fiduciary duties
vis a vis our public natural resources and any proceeds
derived from the sale thereof." PEDF II, 161
A.3d at 939. The Supreme Court opined that "the
legislature's diversion of funds from the Lease Fund (and
from the DCNR's exclusive control) does not, in and of
itself, constitute a violation of Section 27."
Id. Rather, "the legislature violates Section
27 when it diverts proceeds from oil and gas development to a
non-trust purpose without exercising its fiduciary duties as
Supreme Court directed:
In construing Sections 1604-E and 1605-E, to the extent that
the lease agreements reflect the generation of revenue
streams for amounts other than for the purchase of the oil
and gas extracted, it is up to the Commonwealth Court, in the
first instance and in strict accordance and fidelity to
Pennsylvania trust principles, to determine whether
these funds belong in the corpus of the Section 27 trust.
PEDF II, 161 A.3d at 935-36 (emphasis added). More
particularly, we must adhere to private trust principles.
Id. at 933 n.26.
Supreme Court elaborated that, although Section 27 creates a
public trust, the "'public trust doctrine' does
not set forth universally applicable black letter law and
that Pennsylvania has no established public trust principles
applicable to Section 27." Id. "At most,
the public trust doctrine provides a framework for states to
draft their own public trust provisions, which (like many
trust instruments) will ultimately be interpreted by the
state courts." Id. The Supreme Court instructed
that Pennsylvania's "private trust principles
provide . . . the necessary tools to properly interpret the
trust created by Section 27." Id.
the Supreme Court directed:
On remand, the parties should be given the opportunity to
develop arguments concerning the proper classification,
pursuant to trust law, of any payments called 'rental
payments' under the lease terms. To the extent such
payments are consideration for the oil and gas that is
extracted, they are proceeds from the sale of trust principal
and remain in the corpus. These proceeds remain in the trust
and must be devoted to the conservation and maintenance of
our public natural resources, consistent with the plain
language of Section 27.
Id. at 936 (emphasis added).
the Supreme Court emphasized that "the proper standard
of judicial review lies in the text of Article I, Section
27 itself as well as the underlying principles of
Pennsylvania trust law in effect at the time of its
enactment." PEDF II , 161 A.3d at 930
(emphasis added). In accordance with these remand
instructions, we review the matter before us.
remand, the parties developed the record and now present
their cross-applications for summary relief. The crux of
the matter is whether bonuses and rental payments set forth
in the Commonwealth's oil and gas leases are compensation
for the sale of natural resources and, thus, part of the
corpus trust that must be used to conserve and maintain those
natural resources, or income that may be used for General
Fund purposes under the Environmental Rights
The Foundation's Position
Foundation contends that bonus and rental payments from the
Commonwealth's oil and gas leases are part of the corpus
of the Section 27 environmental trust. The leases make no
distinction between bonuses and rental payments and royalty
payments. These payments are all consideration for the
purchase of oil and gas. Under trust principles in effect
when Section 27 was adopted, when a lease authorized the
complete removal of oil and gas from the leased premises,
all of the proceeds were considered payments for the
sale of oil and gas and remained part of the corpus or
principal. See Petitioner's Amended Application
for Relief at 12-13 (citing In re Bruner's Will,
70 A.2d 222 (Pa. 1950) and Blakley v. Marshall, 334
A. 564 (Pa. 1896)). The trust established by Section 27 does
not authorize the trustee to allocate proceeds from the sale
of Pennsylvania's public natural resources for purposes
other than the conservation and maintenance of those
resources. Thus, the Commonwealth's fiscal enactments
authorizing the transfer of corpus funds for non-trust
purposes are facially unconstitutional under Section 27.
Commonwealth contends that up-front bonus bid payments and
rental payments do not constitute compensation for sale of
the trust principal. The bonus payment is money paid by the
highest bidder to obtain the lease in a formal bid process.
Rental payments are due on an annual basis and secure the
lessee's right to explore for oil and gas. Neither
payment is consideration for the severance of natural
resources from the land. Rather, under common law, they are
consideration for an inchoate title for the right to explore
for oil and gas. This is supported by the fact that DCNR
retains any bonus bid payments and rentals received even when
no oil or gas is produced. If the exploration for oil and gas
is unsuccessful, no estate vests in the lessee and the lease
terminates at the end of the lease's primary term.
payments, on the other hand, are directly related to the
extraction of oil and gas, and only become due and owing if
oil or gas is extracted. Royalty payments represent proceeds
from the extracted oil and gas and are consideration to DCNR
for those public natural resources.
current statutory law, rent is to be allocated as trust
income, not as trust principal. See Section 8145(a)
of the Pennsylvania Uniform Principal and Income Act (2002
Act), 20 Pa. C.S. §8145(a). Only refundable deposits for
rent shall be applied to principal. See Section
8145(b)(1) of the 2002 Act, 20 Pa. C.S. §8145(b)(1).
Neither bonuses nor rent payments are refundable at the
termination of DCNR's leases. Thus, they are income, not
the Commonwealth avers that, because bonus-bid and rent
payments are not compensation for the sale of trust assets,
they are not corpus of the trust and the appropriation of
those funds does not violate Article I, Section 27 of the
Fundamentals of Oil and Gas Leases
begin our discussion with an examination of oil and gas
leases and the interests conveyed therein. America's
foray into oil and gas extraction began in Pennsylvania in
the early 1850s. The first oil well in the United States was
established on Oil Creek (present-day Oil Creek State Park),
Cherrytree Township, Venango County, Pennsylvania, and the
first gas well was bored in Erie, Pennsylvania. Eugene Kuntz,
A Treatise on the Law of Oil and Gas §1.6
(1987). The basic instrument of the petroleum industry is the
oil and gas lease. Robert E. Sullivan, Handbook of Oil
and Gas Law 69 (1955). The first oil lease entered in
America occurred in 1853 in Pennsylvania. Kuntz §1.32.
"[T]he Commonwealth has a history of leasing its land to
private parties for oil and gas exploration dating back to
1947." PEDF II, 161 A.3d at 919.
A Lease is a Contract
then, the area of law dealing with oil and gas leases has
burgeoned. "[T]here have been many and radical
developments in the industry with corresponding changes in
the contracts employed to define the respective rights of
land owners and operators and the laws and decisions have
kept pace with these advances." Appeal of
Baird, 6 A.2d 306, 310 (Pa. 1939). As our Supreme Court
has recognized, the traditional oil and gas 'lease'
is unique and "far from the simplest of property
concepts." Brown v. Haight, 255 A.2d 508, 510
(Pa. 1969). At its core, "a lease is in the nature of a
contract and is controlled by principles of contract
law." T.W. Phillips Gas & Oil Co. v.
Jedlicka, 42 A.3d 261, 267 (Pa. 2012). Accordingly, it
must be construed "in accordance with the terms of the
agreement as manifestly expressed, and '[t]he accepted
and plain meaning of the language used, rather than the
silent intentions of the contracting parties, determines the
construction to be given the agreement.'"
Id. (citation omitted).
the landowner, as the oil and gas lessor, has three distinct
interests in the land and the minerals contained therein: (1)
a possessory interest in the surface except insofar as it may
interfere with drilling operations; (2) a right to receive
bonus, rentals and royalties under the lease; and (3) the
possibility of reverter in the minerals in place. Sullivan at
tenant, or oil and gas lessee, acquires a possessory interest
in the minerals. Id. The tenant is able to use only
so much of the surface as may be necessary for drilling
operations. Id. His possession of the mineral estate
is contingent upon discovery and production. Id.
Many cases have considered the interests of lessees under oil
and gas leases in various contexts. Baird's
Appeal, 6 A.2d at 310. It is helpful in this context in
determining the nature of the payments exchanged for that
the case law[, ] oil and gas Teases' have been described
as anything from licenses to grants in fee."
Brown, 255 A.2d at 510. Initially, Pennsylvania
classified the lessee's interest as an incorporeal
hereditament, not a conveyance of title. Funk v.
Haldeman, 53 Pa. 229, 241 (1866) (a grant of the right
to search for or "experiment for oil" and take all
the minerals in the land of another, yielding a royalty to
the grantor, is an incorporeal hereditament). Later cases
consistently held that the title conveyed in an oil and gas
lease is inchoate, and is initially for the purpose of
exploration and development. Burgan v. South Penn Oil
Co., 89 A. 823, 826 (Pa. 1914); Calhoon v.
Neely, 50 A. 967, 968 (Pa. 1902); Venture Oil Co. v.
Fretts, 25 A. 732 (Pa. 1893); see also Sabella v.
Appalachian Development Corp., 103 A.3d 83, 101 (Pa.
Super. 2014); Hite v. Falcon Partners, 13 A.3d 942,
945 (Pa. Super. 2011); Jacobs v. CNG Transmission
Corp., 332 F.Supp.2d 759, 772 (W.D. Pa. 2004).
of how the interests are classified, the general purpose of
an oil and gas lease is to secure the right to explore and
develop the property with the expectation of receiving large
returns from the royalties payable on production. Sullivan at
72. Once oil or gas is discovered, captured, and removed, it
becomes the property of the lessee. Brown, 255 A.2d
at 512; Venture Oil Co. v. Fretts, 25 A. at 735. The
lessee obtains a fee simple determinable estate.
Brown, 255 A.2d at 512; Venture Oil, 25 A.
at 735. The lessee's right to extract oil or gas becomes
vested. Venture Oil, 25 A. at 735. If no oil or gas
is produced, no estate vests. Id.
order for the contract to be valid, there must be
consideration conveyed. Shedden v. Anadarko E. & P.
Co., L.P., 136 A.3d 485, 490 (Pa. 2016) (citing T.W.
Phillips Gas, 42 A.3d at 267). The same holds true with
oil and gas leases. Id. There are various forms of
consideration paid by a lessee for the privilege of exploring
for and producing oil and gas such as royalties, rentals,
bonuses, and interest. Our focus on remand is on rentals and
term 'rental' as used in standard oil and gas leases,
refers to the consideration paid to the lessor for the
privilege of delaying drilling operations." Sullivan at
126 n.9. Sometimes, this is referred to as a "delayed
rental." The term "rent" has also been used to
describe a flat sum to be paid for each producing well.
George G. Bogert, The Law of Trusts and Trustees
§827 (rev. 2019). Typically, rents do not depend on the
discovery or production of oil and gas, but rather represent
compensation for the time to explore. Sullivan at 125 n.4.
oil and gas leases provide for rents for a set number of
years until oil and gas is discovered. Sullivan at 104. This
affords the lessee time to explore and develop the property.
Id. at 104. If oil or gas is not found within that
set time, the lease automatically terminates. Id.
Therefore, it is incumbent for the tenant to secure the
testing, development and operation of the leased premises for
oil and gas purposes during the set term. Id. The
purpose of the rent is to compensate the landowner for this
exploration time because he is not receiving royalties.
Id. Typically, once oil or gas is discovered in
paying quantities, payments from rentals convert to
and gas leases became more lucrative, it became common
practice to pay a bonus, i.e., "a substantial sum
initially as an inducement to the landowner to grant the
lease." Sullivan at 108. The amount varies depending
upon the prospective value of the land for oil and gas
word 'bonus' has a definite meaning in the oil and
gas industry. It is defined . . . as a premium paid to a
grantor or vendor, and strictly in the cash consideration or
down payment paid or agreed to be paid for the execution of
an oil and gas lease." Sullivan at 126 n.9. A bonus is a
sum paid for the execution of the lease, representing its
market value, or to be paid later out of the lessee's
share of the production of a well. Bogert §827.
Pennsylvania, bonus provisions in mineral leases have served
different purposes. In some cases, the bonuses were due and
owing based upon actual production. See Burgan (the
lease required lessee to pay a bonus if the first well
drilled produced 50 barrels of oil per day for 60 days);
Akin v. Marshall Oil Co., 41 A. 748 (Pa.),
aff'd sub nom. Stone v. Washington Oil Co., 41
A. 1119 (Pa. 1898) (bonus payable if gas discovered and
produced in paying quantities); Nelson v. Eachel, 27
A. 1103 (Pa. 1893) (a bonus in the form of a judgment note
was payable only upon production); Brushwood Developing
Co. v. Hickey, 16 A. 70 (Pa. 1888) (bonuses were based
on the amount of oil extracted); see also Wilson v.
Philadelphia Co., 60 A. 149, 150 (Pa. 1904) (bonus due
upon the completion of the first well).
other cases, the bonuses were given for the right to explore
or enter the lease, but were not based on the actual
production of oil and gas. See Brandon v. McKinney,
82 A. 764 (Pa. 1912) (a bonus was paid for the lease);
Glasgow v. Chartiers Oil Co., 25 A. 232 (Pa. 1892)
(bonus paid for the right to explore and develop the land);
see also Carnegie National Gas Co. v. Philadelphia
Co., 27 A. 951 (Pa. 1893) (the lessee forfeited an
existing lease and entered a new lease by paying a bonus).
cases, the bonus payment was split for a dual purpose.
See McMillin v. Titus, 72 A. 240, 243 (Pa. 1909)
(one bonus was given as consideration for the initial right
to occupy the premises and explore for oil; the other bonus
was payable only if oil or gas was found in paying
quantities); Smiley v. Gallagher, 30 A. 713 (Pa.
1894) (part of the bonus was to be paid when the lease was
delivered, part of the bonus was to be paid out of the first
have also been used as part of a competitive bidding process
in securing oil and gas leases. See Parry v. Miller,
93 A. 30, 32 (Pa. 1915); Lenau v. Co-eXprise, Inc.,
102 A.3d 423, 425 (Pa. Super. 2014).
Duty to Explore and Drill
addition to paying consideration, early cases imposed a duty
upon the lessee to explore during the lease term or risk loss
by abandonment. See Baird's Appeal, 6 A.2d at
311; Venture Oil, 25 A. at 735. Later cases backed
away from this premise, particularly where the lease provided
for rentals and bonuses as compensation for a set term.
See Hite, 13 A.3d at 946 (delay rental payment
relieved the company of any obligation to develop the
leasehold during the primary term, but not beyond). Such
payments ensured that the lessor would be compensated for the
lessee's delay or default in exploring and developing the
property. Ray v. Western Pennsylvania Natural Gas
Co., 20 A. 1065, 1066 (Pa. 1891) (the payments
"were intended not only to spur the operator, but to
compensate [the lessor] for the operator's delay or
we examine whether rents and bonuses in the
Commonwealth's oil and gas leases constitute income or
principal pursuant to Pennsylvania trust principles in effect
at the time of Section 27's enactment. PEDF II,
161 A.3d at 930.
Pennsylvania Trust Law
trust law, the question of the relative rights between
present and future interests, particularly with regard to
rents or bonuses under oil and gas leases, is a complex
one. As our Supreme Court instructed, we must
adhere to Pennsylvania trust law principles at the time of
Section 27's enactment. To understand trust law as it
stood in ...