Hayward, W. v. LPR Energy ( 2019 )

J-S05006-19
NON-PRECEDENTIAL DECISION - SEE SUPERIOR COURT I.O.P. 65.37
WILLIAM C. HAYWARD, : IN THE SUPERIOR COURT OF
INDIVIDUALLY AND TRADING AND : PENNSYLVANIA
DOING BUSINESS AS, HAYWARD :
NATURAL RESOURCE, AND :
JACQUELINE WEINHOLD :
:
Appellants :
:
: No. 794 WDA 2018
v. :
:
:
LPR ENERGY, LLC, SUCCESSOR IN :
INTEREST TO CHEVRON U.S.A. INC., :
A CORPORATION; ANDRAY MINING :
COMPANY, A GENERAL :
PARTNERSHIP, AND MID-WEST OIL :
COMPANY, A CORPORATION :
Appeal from the Order Entered April 27, 2018
In the Court of Common Pleas of Indiana County
Civil Division at No(s): 10599 CD 2013
WILLIAM C. HAYWARD, : IN THE SUPERIOR COURT OF
INDIVIDUALLY AND TRADING AND : PENNSYLVANIA
DOING BUSINESS AS, HAYWARD :
NATURAL RESOURCES, AND :
JACQUELINE WEINHOLD :
:
:
v. :
: No. 877 WDA 2018
:
LPR ENERGY, LLC, SUCCESSOR IN :
INTEREST TO CHEVRON U.S.A. INC., :
A CORPORATION; ANDRAY MINING :
COMPANY, A GENERAL :
PARTNERSHIP, AND MID-EAST OIL :
COMPANY, A CORPORATION :
:
:
APPEAL OF: LPR ENERGY, LLC :
J-S05006-19
Appeal from the Order Entered April 27, 2018
In the Court of Common Pleas of Indiana County
Civil Division at No(s): 10599 CD 2013
BEFORE: PANELLA, P.J., NICHOLS, J., and STRASSBURGER, J.*
MEMORANDUM BY PANELLA, P.J.: FILED DECEMBER 31, 2019
In these consolidated1 cross-appeals,2 the parties challenge the trial
court’s allocation, following a bench trial, of royalties based on natural gas
leases.3 Specifically, William C. Hayward, doing business as Hayward Natural
Resources, together with Jacqueline Weinhold, (collectively, “the Hayward
Interests,”) assert that they own equal shares of an overriding royalty interest
(“ORRI”)4 of 3.125% in leases on 11,000 acres of real property which they
____________________________________________
* Retired Senior Judge assigned to the Superior Court.
1This Court, per curiam, consolidated the cross-appeals sua sponte. See
Order, 7/19/18.
2 The Hayward interests erroneously claim jurisdiction by virtue of 42
Pa.C.S.A. § 762, which provides for the jurisdiction of the Commonwealth
Court. See Appellants’ Brief, at 1. This Court has jurisdiction by virtue of 42
Pa.C.S.A. § 742.
3 Appellants purport to appeal from the order dated April 26, 2018. However,
an order is not final and appealable until it was entered on the docket, here,
April 27, 2018. See Pa.R.A.P. 301(a)(1) (providing generally that no order of
court shall be appealable until it has been entered on appropriate docket in
lower court). We have amended the caption accordingly.
4 An ORRI is a “share of either production or revenue from production (free of
the costs of production) carved out of a lessee’s interest under an oil-and-gas
lease. Overriding-royalty interests are often used to compensate those who
-2-
J-S05006-19
assigned to the Mid-East Oil Company. Mid-East Oil agreed to the ORRI, but
did not inform successive assignees of the Hayward Interests’s 3.125%
reservation. The Hayward Interests did not record the ORRI reservation until
over twelve years after the original assignment.
The court declared that LPR Energy, LLC (“LPR”), a later assignee, owed
royalties to the Hayward Interests for leases on 1,987 acres of real property,
which involved recorded assignments that referenced the ORRI, but not on
another 10,860 acres, which did not. In its cross-appeal, LPR does not dispute
the trial court’s order on royalties owed for the 1,987 acres. However, it
assigns error to the trial court’s holding that the Hayward Interests’s royalty
interests were real property interests and not simply contract interests. LPR
argues that the court erroneously awarded The Hayward Interests a perpetual
right to receive royalty payments from it.
The trial court also decided that Andray Mining Company, another
assignee, was not liable to pay The Hayward Interests a royalty. Andray Mining
had made a loan of $750,000 to Mid-East Oil, taking Mid-East’s reserved
royalty rights as collateral. When Mid-East defaulted, Andray retained the
____________________________________________
have helped structure a drilling venture. An overriding-royalty interest ends
when the underlying lease terminates.” Black’s Law Dictionary (8 th Ed. 2004).
-3-
J-S05006-19
collateral. Andray requests that this Court affirm both the order of March 22,
2017 and the order dated April 26, 2018.5
The court also decided that Mid-East Oil Company, which originally
agreed to the ORRI but failed to disclose it to assignees, had breached its
contract with The Hayward Interests. For this breach, the trial court entered
a judgment against Mid-East Oil and in favor of the Hayward Interests, for
thirty-five million, four hundred eighty-eight thousand, four hundred and
nineteen dollars ($35,488,419.00), less any amounts paid by LPR. We affirm.
For the underlying facts of the case, we rely on the trial court opinion of
March 22, 2017, and our independent review of the certified record.6 This
case history is somewhat complicated, in part due to numerous assignments
and reassignments of the various interests at issue, noted by the trial court
as a common practice in the natural gas industry. 7 The record describes
____________________________________________
5 Andray has also filed an application to reconsider its previous application to
quash Hayward’s appeal due to alleged defects in the reproduced record filed
by Hayward. We preliminarily denied the application without prejudice to
Andray’s right to re-file the application to this panel. As any defect in the
reproduced record has not hindered our review of this matter, we deny the
application to quash and therefore the application to reconsider.
6The trial court adopted its opinion of March 22, 2017, in support of its original
order, as its Rule 1925(a) opinion on appeal. See Order, 7/30/18; see also
Pennsylvania Rule of Appellate Procedure 1925.
7 See Trial Court Opinion, 3/22/17, at 38.
-4-
J-S05006-19
numerous assignments not at issue here. To the extent possible, we limit our
review to the facts and issues directly relevant to the questions on appeal.
Beginning around 1996 and 1997, William C. Hayward, a certified
geologist, began operating as Hayward Natural Resources, using publicly
available geological data to identify certain properties in Clearfield County that
held promise for the production of natural gas. See N.T. Trial, 11/1/16, at 90-
91. He worked with Jacqueline Weinhold. See id. at 91. Weinhold acted as a
petroleum land manager (also referred to as a leasing agent), to secure leases
on properties in the area Hayward had determined to have favorable
prospects. See id. at 10-11.
Once the Hayward Interests had secured leasing rights, they would
endeavor to assign them to operators who could develop a working interest in
the parcels to produce the natural gas. See id. at 89-90. Hayward testified
that he and Weinhold intended to reserve ORRIs in the leases for themselves
to derive passive income from the producing parcels without getting directly
involved in the actual extraction and production process. See id. at 90.
On February 18, 1997, Hayward and Weinhold executed a “Drilling
Agreement,” with the Mid-East Oil Company.8 See id. at 13-14, 94. Mid-East
____________________________________________
8 Despite the title of the contract, as confirmed in the record, Appellants refer
to the Drilling Agreement as “an agreement known as an Area of Mutual
Interest Agreement (A.M.I.) . . . first entered into February 19, 1997.”
Appellants’ Brief, at 7 (emphasis added). The trial court also refers to the “AMI
Agreement.” Trial Court Opinion, 3/22/17, at 3. Subsequent references and
-5-
J-S05006-19
Oil was owned by Mark Thompson, who was also its president. 9 The agreement
assigned the Hayward lease interests in a designated “agreement area,” or
“area of mutual interest” (“AMI”) in Clearfield County to the Mid-East Oil
Company. See id. at 13-21.10
____________________________________________
cross-references confirm that the contract was actually signed, or at least
became effective, on February 18, 1997, not February 19.
9Neither Mid-East Oil nor Thompson was present or represented at trial. See
Trial Court Opinion, 3/22/17, at 13, 35; see also N.T. Trial, at 4. Neither
Mid-East Oil nor Thompson submitted a brief on appeal.
10 We note for background that :
Within the oil and gas industry, oil and gas leases generally
contain several key provisions, including the granting clause,
which initially conveys to the lessee the right to drill for and
produce oil or gas from the property; the habendum clause, which
is used to fix the ultimate duration of the lease; the royalty clause;
and the terms of surrender.
* * *
Typically . . . the habendum clause in an oil and gas lease provides
that a lease will remain in effect for as long as oil or gas is
produced “in paying quantities.” Traditionally, use of the term “in
paying quantities” in a habendum clause of an oil or gas lease was
regarded as for the benefit of the lessee, as a lessee would not
want to be obligated to pay rent for premises which have ceased
to be productive, or for which the operating expenses exceed the
income.
Seneca Res. Corp. v. S & T Bank, 122 A.3d 374, 379–81 (Pa. Super. 2015)
(citations omitted).
-6-
J-S05006-19
The original agreement provided that Hayward and Weinhold would
receive “and split” a gross ORRI of 3.125% (fractionally, a one thirty-second
interest), in each oil/gas producing well under lease in the agreement area
“free from the costs of operation, transportation, maintenance, and/or
abandonment.” Drilling Agreement, 2/18/97. Specifically, the relevant
paragraph provides:
3. Hayward and Weinhold shall receive and split 3.125% of 100%
gross overriding royalty in each oil and gas producing wells [sic]
drilled and produced from the above leases within the agreement
area, free from the costs of operation, transportation,
maintenance, and/or abandonment.
Id. at ¶3.
Weinhold testified she “believed” that she and Hayward drafted the
agreement themselves, although she was not sure. N.T. Trial, 11/1/16, at
52.11 The agreement also included Mid-East Oil’s commitment to indemnify
Hayward and Weinhold and hold them harmless from “any and all claims . . .
resulting from Mideast [sic] Oil Company’s operations on the leases within the
agreement area.” Drilling Agreement, 2/18/97, at ¶6.
On the same date, February 18, 1997, an “Assignment of Oil and Gas
Lease” signed by William C. Hayward, as president of Hayward Natural
Resources, (but not Weinhold), was notarized and recorded in Indiana County.
____________________________________________
11 Hayward’s testimony is less explicit but also suggests he and Weinhold
drafted the agreements themselves. See N.T. Trial, 11/1/16, at 95 (“Every
word in those agreements was very deliberate.”); see also id. at 110 (“I did
my best to try to make them [the assignments] similar.”).
-7-
J-S05006-19
Assignment of Oil and Gas Lease, 2/18/97, at the Indiana County Recorder’s
Office, Vol. 1824, pages 476-77. A date stamp confirms that the assignment
was also recorded a month later in the Recorder’s Office of Clearfield County,
on March 19, 1997.
The Assignment included the following parallel provision:
Hayward hereby excepts and reserves unto itself an overriding
royalty interest consisting of 3.125% of 100% [sic] of the gross
income derived from the sale of all oil and/or gas produced and
sold from the Subject Lease, and to be split between Hayward and
Jackie [sic] Weinhold, [address omitted] and free from the costs
of exploration, operation, transportation, maintenance, or
abandonment.
Id. (unnumbered fourth paragraph).
The Assignment further provided: “This assignment is under and subject
to an executed and unrecorded agreement between Hayward and Assignee
[i.e., Mid-East Oil] dated February 18, 1997.” Id. (unnumbered eighth
paragraph).
Notably for the issues in this appeal, Hayward recorded certain
assignments reserving to Hayward and Weinhold their shared ORRI of 3.125%
of the gross production of any wells drilled on the leases subject to the
assignments. See Trial Court Opinion, 3/22/17, at 3. However, to avoid
revealing his business plans to competition, Hayward testified that he
deliberately chose not to record the master AMI Agreement of February 18,
1997 (which was actually captioned the “Drilling Agreement”). See id.; see
also N.T. Trial, 11/1/16, at 110-11; and Appellants’ Brief, at 7. Subsequent
-8-
J-S05006-19
assignments included the notation that they were “under and subject to an
executed and unrecorded agreement between Hayward and Assignee [Mid-
East Oil] dated February 18, 1997.” Trial Court Opinion, 3/22/17, at 3-4
(emphasis added).
On July 6, 2009, more than twelve years after the execution of the
original agreement, Weinhold recorded the agreement (as revised June 17,
1998), between Hayward, Weinhold, and Mid-East, in the Clearfield County
Recorder’s Office. See N.T. Trial, 11/1/16, at 111. The trial court notes that
the recording on July 6, 2009 is the only recording of the AMI Agreement.
See Trial Court Opinion, 3/22/17, at 4.
The trial court identified seven different versions or amendments to the
AMI Agreement, each expanding the inventory of leased properties included
in the area of agreement. See Trial Court Opinion, 3/22/17, at 5.
Initially, Appellants received overriding royalties on several shallow gas
wells (defined to be wells at depths of 5000 feet and above) through Mid-East
Oil. However, in 2008 Mid-East made two partial assignments of natural gas
interests for deep gas (defined as wells at depths below 5,000 feet) to Chief
Exploration and Development, LLC (“Chief Exploration” or “Chief”), reserving
overriding royalties to itself, but without notifying Chief Exploration of the
ORRI reserved by Hayward. See Trial Court Opinion, 3/22/17, at 6. In both,
Mid-East Oil warrantied title to Chief. See id.
-9-
J-S05006-19
The trial court found that Hayward asked Thompson, the President of
Mid-East Oil, to include the Hayward ORRI in such deep well assignments, but
Thompson did not do so. See id. at 7. Chief did not conduct a full title search
of the leasehold properties prior to the purchase. See id. Chief later assigned
the leases and deep gas rights to Chevron, U.S.A. Chevron assigned the same
interests to LPR Energy LLC. Hayward and Weinhold did not receive royalties.
See id. at 8.
On October 3, 2008, Mid-East Oil assigned the ORRIs it had reserved for
itself in the Chief Exploration assignments as collateral for a loan of $750,000
from another assignee, Andray Mining. Andray did not conduct a full title
search, opting instead for a “Bring-down” or “Drop-down” search, an
abbreviated search limited to the interval from the last full search to shortly
before closing.12 See id. at 9, n.1. Here, Andray limited the search to the
interval between the assignment from Mid-East Oil to Chief and the execution
of the loan agreement. When Mid-East defaulted on the loan, Andray retained
the royalty interests. See id. at 8.
____________________________________________
12 At trial, David Prushnock, a partner in Andray Mining, testified that because
Thompson was in immediate need of a loan for tax issues, and Chief had closed
on its leases, Andray considered that it would be “prohibitive” to do a full title
search of all the leases. N.T. Trial, at 155; see also id. at 153-55.
Correspondence in the record before us confirms that Thompson felt under
great pressure to make a quick loan. See Email from Mark Thompson to David
M. Prushnock, 9/19/08. Andray did a drop down title search from the Chief
closing only. See id. at 155.
- 10 -
J-S05006-19
Sometime after the assignment from Mid-East to Andray, Weinhold and
Hayward became aware that they were not receiving royalty payments due
under the ORRI. Weinhold wrote Chief, requesting payment. Chief denied
liability. See id. at 9. On July 6, 2009, as previously noted, Weinhold recorded
the June 17, 1998 agreement between Hayward, Weinhold, and Mid-East, in
the Clearfield County Recorder’s Office.
Hayward and Weinhold filed a complaint on April 17, 2013, seeking a
declaratory judgment on their ownership of the ORRI royalty interests as prior
and superior to those of Chevron, Andray, and Mid-East Oil.13 See Complaint,
4/17/13, at 13-14. The complaint also claimed breach of contract by Mid-East
Oil, seeking a judgment against Mid-East for the lease royalties. Hayward and
Weinhold both testified at trial. Hayward and Andray also presented expert
witnesses. As previously noted, neither Mid-East Oil nor Thompson was
present or represented at trial. See Trial Court Opinion, 3/22/17, , at 13, 35;
see also N.T. Trial, at 4. Neither Mid-East Oil nor Thompson submitted a brief
on appeal.
After the trial, the court declared the Hayward Interests were entitled
to a shared 3.125% overriding royalty from deep natural gas wells limited to
the assignments between Hayward and Mid-East Oil that contained language
referencing the grant of the ORRI to Hayward, specifically, 1,987 acres. See
____________________________________________
13 LPR, successor assignee, was later substituted for Chevron as a party.
- 11 -
J-S05006-19
Order, 3/22/17. This award was to be paid by LPR. Notably, LPR was not
liable for any royalties on the additional 10,860 acres.
The court also decided that Mid-East Oil had breached its contract to the
Hayward Interests, and was liable for damages to be determined later. See
Order, 3/22/17; see also Trial Court Opinion, 3/22/17, at 40. The Hayward
Interests preserved their issues on appeal by filing timely motion for
reconsideration of the partial, bifurcated verdict. The court subsequently fixed
the damages at $35,488,419, after a hearing. See N.T. Hearing, 9/07/17;
see also Order, dated April 26, 2018, filed 4/27/18.
This timely appeal followed the court’s denial of reconsideration. LPR
filed a timely cross-appeal pursuant to Pa.R.A.P. 121(e). Appellants filed a
court-ordered statement of errors, on June 18, 2018.14
The Hayward Interests present two overlapping issues, framed as one
question, on appeal:
I. Did the trial court commit an error of law or abuse its discretion
in failing to divest Appellee Andray Mining of the overriding royalty
interest Appellants claim in the subject 11,000 acres in Clearfield
County, as set forth in successive agreements between the
parties, and failing to hold that Appellees were not bona fide
purchasers for value?
Appellants’ Brief, at 5.
LPR presents three questions on appeal:
____________________________________________
14 The trial court, as previously noted, adopted its opinion of March 22, 2017
in support of its original order, as its Rule 1925(a) opinion on appeal. See
Order, 7/30/18; see also Pennsylvania Rule of Appellate Procedure 1925.
- 12 -
J-S05006-19
1. Did the [t]rial [c]ourt err in concluding that all of Hayward’s
interests involved in this action are real property interests, where
the vast majority of them are contractual interests because they
are interests in potential future production from gas wells, as
opposed to production from an existing oil and gas lease?
2. Did the [t]rial [c]ourt err by declaring that Hayward’s interests,
and therefore LPR’s obligations, existed without any limitation as
to time, thereby aggrieving LPR?
3. Did the [t]rial [c]ourt err by crafting a remedy for Hayward that
purportedly granted it a perpetual right to receive payments from
LPR, without regard to any subsequent assignments or transfers
of the interests in question, thereby aggrieving LPR?
LPR’s Brief, at 3-4.
Andray Mining presents four questions on appeal:
1. Does Appellants’ failure to appeal the April 26, 2018 Order
determining that Andray was entitled to the Escrowed Funds being
held by LPR Energy preclude the Appellants from arguing on
appeal that Andray should be divested of its overriding royalty
interest?
2. Is the Appellants’ appeal of the declaratory judgment action
improper as Appellants elected to pursue damages for breach of
contract against Mid–East Oil, obtaining a judgment as set forth
in April 26, 2018 Order of Court?
3. Did the court commit an error of law or abuse its discretion in
holding that the Appellants’ claims to its overriding royalty
interests are limited to those assigned leases that Appellants
made "subject to the AMI Agreement"?
4. Did the trial court commit an error of law or abuse its discretion
when it found that Andray Mining Company owed no overriding
royalty interests to Plaintiffs, as Andray’s rights in the gas wells at
issue derive from a reservation of overriding royalty interests
wholly distinct and separate from Plaintiffs’ unrecorded interest?
Andray’s Brief, at 1.
- 13 -
J-S05006-19
In their appeal, the Hayward Interests assign error to the trial court’s
declaration that Andray is not liable for Hayward’s ORRI. In support of this
assertion, the Hayward Interests maintains that Andray, and the other
assignees in between, had constructive notice of the ORRI. See Appellants’
Brief, at 15. The Hayward Interests also argue that the subsequent assignees
of the gas interests at issue were not bona fide purchasers for value because
they “declin[ed] to conduct a full title search[.]” Id. at 17. They conclude the
trial court’s order should be modified to award them an overriding royalty
interest in the 10,860 acres at issue. See Appellants’ Brief, at 21. We
disagree.
Our scope and standard of review of these claims is well-defined.
Our appellate role in cases arising from non-jury trial verdicts is
to determine whether the findings of the trial court are supported
by competent evidence and whether the trial court committed
error in any application of the law. The findings of fact of the trial
judge must be given the same weight and effect on appeal as the
verdict of a jury. We consider the evidence in a light most
favorable to the verdict winner.
J.J. DeLuca Company, Inc. v. Toll Naval Associates, 56 A.3d 402, 410
(Pa. Super. 2012) (quotation marks, formatting, and citations omitted).
Our standard of review for a declaration of rights is also well settled.
Under the Declaratory Judgments Act, the trial court is
empowered to declare the rights and obligations of the parties
involved. Our standard of review in a declaratory judgment action
is limited to determining whether the trial court clearly abused its
discretion or committed an error of law. We may not substitute
our judgment for that of the trial court if the court’s determination
is supported by the evidence.
- 14 -
J-S05006-19
Robson v. EMC Ins. Cos., 785 A.2d 507, 509 (Pa. Super. 2001) (citations
and internal quotation marks omitted).
The trial court further decided that Mid-East Oil was in breach of
contract. See Trial Court Opinion, 3/22/17, at 35-40.
Whether a trial court properly interpreted a contract is a question
of law and this Court’s scope of review is plenary. We need not
defer to the conclusions of the trial court and are free to draw our
own inferences. In interpreting a contract, the ultimate goal is to
ascertain and give effect to the intent of the parties as reasonably
manifested by the language of their written agreement.
Liddle v. Scholze, 768 A.2d 1183, 1185 (Pa. Super. 2001) (citations
omitted). “Moreover, when the terms of a contract are clear and unequivocal,
meaning must be determined from the language itself.” Beemus v.
Interstate Nat. Dealer Servs., Inc., 823 A.2d 979, 982 (Pa. Super. 2003)
(citation omitted).
We also remain mindful of the following applicable legal principles:
[A]n oil and gas lease reflects a conveyance of property rights
within a highly technical and well-developed industry, and thus
certain aspects of property law as refined by and utilized within
the industry are necessarily brought into play. [Daset Mining
Corp. v. Industrial Fuels Corp., 326 Pa.Super. 14, 473 A.2d
584, 592 (Pa.Super.1984)]; [Hutchison v. Sunbeam Coal [513
Pa. 192], 519 A.2d 385, 387 n. 1 (Pa.1986)] (‘using the term
‘lease’ with regard to the conveyance of mineral rights ‘is in some
respects a misnomer’ [because] what is really involved is a
transfer of an interest in real estate, the mineral in place.’).
Nolt v. TS Calkins & Assocs., LP, 96 A.3d 1042, 1046 (Pa.
Super. 2014).
Furthermore, a lease is in the nature of a contract and is controlled
by principles of contract law. It must be construed in accordance
with the terms of the agreement as manifestly expressed, and the
- 15 -
J-S05006-19
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[.]
T.W. Phillips Gas & Oil Co. v. Jedlicka, 42 A.3d 261, 267 (Pa. 2012)
(emphasis added; citations, quotation marks, and other internal punctuation
omitted).
The interpretation of any contract is a question of law and
this Court’s scope of review is plenary. Moreover, we need not
defer to the conclusions of the trial court and are free to draw our
own inferences. In interpreting a contract, the ultimate goal is to
ascertain and give effect to the intent of the parties as reasonably
manifested by the language of their written agreement. When
construing agreements involving clear and unambiguous terms,
this Court need only examine the writing itself to give effect to the
parties’ understanding. This Court must construe the contract only
as written and may not modify the plain meaning under the guise
of interpretation.
Further, it is fundamental that one part of a contract cannot
be so interpreted as to annul another part, and that writings which
comprise an agreement must be interpreted as a whole.
Seneca Res. Corp., 122 A.3d at 380 (emphases added; citations, quotation
marks, and other internal punctuation marks omitted).
“An oil and gas lease is considered a conveyance of a property interest.”
Shedden v. Anadarko E. & P. Co., L.P., 136 A.3d 485, 489 n.4 (Pa. 2016)
The oil and natural gas rights are part of the land, and
therefore have to be recorded. Although oil and gas rights may
not be considered the same as other real estate interests for tax
and other purposes, since granting an oil and gas lease limits the
rights of a landowner who might buy the property, they must be
on record to protect the owner against the claim of a bona fide
purchaser.
- 16 -
J-S05006-19
Oil and natural gas leases have been recorded in this
Commonwealth since at least the 1890’s. See Thompson v.
Christie, 138 Pa. 230, 20 A. 934 (1890). Duquesne Natural Gas
Co. v. Fefolt, 203 Pa. Super. 102, 198 A.2d 608 (1964) reiterates
the fact that Pennsylvania considers such gas “leases” to be, in
reality, transfers of realty. . . . The Commonwealth Court also
recognizes that an oil and gas lease such as is at issue here is
statutorily required to be recorded. See In re Correction of
Official Records with Civil Action. Appeal of Energy
Explorations, 44 Pa. Cmwlth. 511, 404 A.2d 741, 742 (1979).
Additionally, 23 P.S. § 351 requires all transferences of real
property to be recorded or “they shall be judged fraudulent and
void as to any subsequent bona fide purchaser. . . .”
* * *
The purpose of recording such leases is to provide the public
with proper assurances of exactly what, if anything, is being
transferred along with the title to the property. There is no point
in recording such information if the buyer is not entitled to rely
upon such information.
A bona fide purchaser is one who buys real or personal
property without notice of claim of others’ outstanding rights in
the property.
Lesnick v. Chartiers Nat. Gas Co., 889 A.2d 1282, 1284–85 (Pa. Super.
2005) (footnote omitted). The relevant statutes provide as follows:
All agreements in writing relating to real property situate in this
Commonwealth by the terms whereof the parties executing the
same do grant, bargain, sell, or convey any rights or privileges of
a permanent nature pertaining to such real property, or do release
the grantee or vendee thereunder against damages which may be
inflicted upon such real property at some future time, shall be
acknowledged according to law by the parties thereto or proved
in the manner provided by law, and shall be recorded in the
office for the recording of deeds in the county or counties wherein
such real property is situate.
21 P.S. § 356 (emphasis added); see also 21 P.S. § 351.
- 17 -
J-S05006-19
The legal effect of the recording of such agreements shall be to
give constructive notice to subsequent purchasers, mortgagees,
and/or judgment creditors of the parties to said agreements of the
fact of the granting of such rights or privileges and/or of the
execution of said releases, and the rights of the subsequent
purchasers, mortgagees, and/or judgment creditors of the parties
to said agreements shall be limited thereby with the same force
and effect as if said subsequent purchasers, mortgagees, and/or
judgment creditors had actually joined in the execution of the
agreement or agreements aforesaid.
21 P.S. § 357 (emphasis added).
All deeds and conveyances, which, from and after the passage of
this act, shall be made and executed within this commonwealth of
or concerning any lands, tenements or hereditaments in this
commonwealth, or whereby the title to the same may be in any
way affected in law or equity, shall be acknowledged by the
grantor, or grantors, bargainor or bargainors, or proved by one or
more of the subscribing witnesses thereto, before one of the
judges of the supreme court, or before one of the judges of the
court of common pleas, or recorder of deeds, prothonotary, or
clerk of any court of record, justice of the peace, or notary public
of the county wherein said conveyed lands lie, and shall be
recorded in the office for the recording of deeds where such lands,
tenements or hereditaments are lying and being, within ninety
days after the execution of such deeds or conveyance, and every
such deed and conveyance that shall at any time after the passage
of this act be made and executed in this commonwealth, and
which shall not be proved and recorded as aforesaid, shall be
adjudged fraudulent and void against any subsequent purchaser
or mortgagee for a valid consideration, or any creditor of the
grantor or bargainor in said deed of conveyance, and all deeds or
conveyances that may have been made and executed prior to the
passage of this act, having been duly proved and acknowledged
as now directed by law, which shall not be recorded in the office
for recording of deeds in the county where said lands and
tenements and hereditaments are lying and being, within ninety
days after the date of the passage of this act, shall be adjudged
fraudulent and void as to any subsequent purchaser for a valid
consideration, or mortgagee, or creditor of the grantor, or
bargainor therein.
- 18 -
J-S05006-19
21 P.S. § 444 (emphasis added); accord, 21 P.S. § 351 § 351, Failure to
record conveyance, (“shall be adjudged fraudulent and void as to any
subsequent bona fide purchaser . . .”).
Here, the Hayward Interests acknowledges that “the central issue in this
matter concerns the legal implications of an unrecorded agreement . . .
governed by Pennsylvania’s recording statutes.” Appellants’ Brief, at 15
(emphasis added).
Nevertheless, citing a plethora of purportedly applicable precedents, the
Hayward Interests chiefly argue that Appellees failed in their duty as lease
assignees to exercise due diligence, by doing incomplete title searches.
Therefore, the Hayward Interests maintain, the assignees were not entitled to
the protection of bona fide purchaser status. Furthermore, the Hayward
Interests assert Appellees were bound by constructive notice of the
unrecorded assignments. The Hayward Interests conclude that they should
be declared owners of the ORRI to the additional 10,860 acres of the real
property at issue. See Appellants’ Brief, at 14-21. We disagree.
The fatal flaw of the Hayward Interests’s argument is their conceded
failure to record the assignments in a timely manner as required by statute.
See 21 P.S. § 356 (“All agreements . . . shall be recorded . . .”); see also
21 P.S. § 351. Because they intentionally declined, for an assumed
competitive advantage, to record their interest in the leases (until twelve
years later), the Hayward Interests had no legal right to claim the benefit of
- 19 -
J-S05006-19
constructive notice imputed to the assignees. An owner of a property interest
is entitled to impute constructive notice to a subsequent purchaser for value
if it complies with the recording statute, not by disregarding it. To the
contrary, a non-recorder’s interest in a property “shall be adjudged
fraudulent and void against any subsequent purchaser.” 21 P.S. § 444
(emphasis added).
None of the case law about due diligence proffered by the Hayward
Interests supports the proposition that a defective title search by an assignee
excuses or exonerates a willful non-recorder for failure to comply with the
recording statute.
Moreover, “the burden of proving that a purchaser for value had
constructive notice of facts not appearing in the record is upon him who
asserts it.” Lund v. Heinrich, 189 A.2d 581, 585 (Pa. 1963) (emphasis
added). Here, we conclude that Appellants fail to meet this burden.
The Hayward Interests maintain that the assignees had constructive
notice of the unrecorded assignments by virtue of the following language in
the assignment: “[t]his Assignment is under and subject to an executed and
unrecorded agreement between Hayward and Assignee dated February 18 and
March 26, 1997 . . . .” Appellants’ Brief, at 19 (emphasis added). We disagree.
Initially, we note that the Hayward Interests’s argument would have this
Court adopt the exact opposite of the statutory recording scheme. Instead of
giving a party who recorded an interest in property the benefit of constructive
- 20 -
J-S05006-19
notice of the encumbrance, the Hayward Interests maintain, in effect, that the
benefits should go to a party, like Hayward, that refuses to record. We cannot
agree.
In any event, the Hayward Interests’ due diligence argument would
require this Court to accept the implicit but necessary contention that they
would have voluntarily provided on request to a hypothetical diligent searcher
the very documents they refused to record in the first place. We find no basis
in the record or under controlling authority for such self-serving after-the-fact
speculation.
Because the Hayward Interests did not comply with the requirements of
the recording statute, they are not entitled to the presumption of constructive
notice. They have failed to meet their burden to prove that later purchasers
for value were on constructive notice of facts not appearing in the record. The
trial court properly declined to declare Appellants were entitled to claim
royalties in the approximately 11,000 acres in Clearfield County. The Hayward
Interests’s claim challenging the declaratory judgment does not merit relief.
Moreover, as noted, Mid-East Oil declined to participate in the trial,
leaving both of the Hayward Interests’ claims against it (the demand for a
declaratory judgment and the breach of contract claim) uncontested.
Accordingly, we deem any defense for Mid-East Oil abandoned.
In their complaint, the Hayward Interests also alleged breach of
contract. However, in their brief, the Hayward Interests failed to develop a
- 21 -
J-S05006-19
separate argument on the breach of contract issue. See Appellants’ Brief at
14-21. Nevertheless, in addition to ruling on the claim for a declaratory
judgment, the trial court undertook a merit analysis of the Hayward Interests’
breach of contract claim. See Trial Court Opinion, 3/22/17, at 35-40.
Briefly summarized, the trial court reasoned that even though the
contract at issue had missing terms, the court could supply necessary terms
under the doctrine of necessary implication.
Under the doctrine of necessary implication, in the absence of an
express provision, the law will [imply] an agreement by the parties
to a contract to do and perform those things that according to
reason and justice they should do in order to carry out the purpose
for which the contract was made and to refrain from doing
anything that would destroy or injure the other party’s right to
receive the fruits of the contract.
Glassmere Fuel Serv., Inc. v. Clear, 900 A.2d 398, 402–03 (Pa. Super.
2006).
Here, finding that Mid-East Oil had an implied duty to pay the ORRI to
Appellants, and a duty to inform new leaseholders of the ORRI, the trial court
concluded that Mid-East had breached its contract with the Hayward Interests.
On independent review, we agree with the result reached by the trial court.
However, on independent review, we conclude that application of the
doctrine of necessary implication is unnecessary. The agreements created by
Hayward may have been inartfully drafted. Nevertheless, in the master
contract (Drilling Agreement) between Hayward, Weinhold and Mid-East Oil,
paragraph 3 expressly reserves a 3.125% royalty for the Hayward Interests.
- 22 -
J-S05006-19
Paragraph 5 plainly provides that “Mid-East Oil Company shall become
responsible for the payment of all rentals and royalties[.]” And Paragraph 6
explicitly requires Mid-East Oil to indemnify and hold Hayward and Weinhold
harmless for “any and all claims” etc. Drilling Agreement, 2/18/97, ¶ 3, 5, and
6.
We determine that these terms of the Drilling Agreement established an
unambiguous requirement for Mid-East Oil to pay the reserved royalty to the
Hayward interests or to inform subsequent assignees that the royalties have
been reserved and must be paid, at the risk of having to indemnify Hayward
itself.
Moreover, Mid-East Oil abandoned any defense to breach of contract by
its failure to participate in the trial or to respond to this appeal. Application
of the doctrine of necessary implication is not required. In any event, it would
yield the same result. On the merits, the trial court correctly found that Mid-
East Oil was in breach of contract.
In its issues on appeal, Cross-Appellant LPR asserts that the trial court
erred by concluding that all of the Hayward Interests’ claims are real property
interests even though the “vast majority of them are contractual interests[.]”
LPR’s Brief, at 3. We disagree.
First, we note our agreement with the trial court’s conclusion that LPR’s
main argument, that contractual interests, not real property interests, are at
issue, is irrelevant to the disposition of this appeal. See Trial Court Opinion,
- 23 -
J-S05006-19
3/22/17, at 24-25; see also LPR’s Brief, at 20-25. The trial court properly
concluded that the dispositive issue is compliance with the recordation statute.
See Trial Court Opinion, 3/22/17, at 25.
Moreover, it is well-settled that, contrary to LPR’s either/or supposition,
oil and gas leases involve both real property interests (requiring recordation),
and contractual interests. See Nolt, 96 A.3d at 1046, Hutchison v.
Sunbeam Coal, 519 A.2d at 387 n.1; T.W. Phillips Gas & Oil Co., 42 A.3d
at 267; Shedden v. Anadarko E. & P. Co., L.P., 136 A.3d at 489 n.4; and
Lesnick, 889 A.2d at 1284–85. LPR’s first issue does not merit relief.
LPR’s second and third issues challenge the duration of the royalties
payable to Hayward. See LPR’s Brief, at 20-25. LPR maintains, “the AMI
Agreement is void or voidable as a perpetual contract.” These issues are
implicitly premised on LPR’s meritless argument that the trial court erred in
ruling that the leases at issue represented interests in real property, and not
merely contractual claims. The trial court ruled correctly.
LPR also claims that it would be obligated to pay an ORRI “even if those
leases are subsequently assigned to someone else.” Id. at 25. LPR’s argument
is not only dependent on its erroneous contract-only premise, it is also
hypothetical, undeveloped beyond the mere bald assertion, and unsupported
by reference to any controlling authority. See id.
Courts should not give answers to academic questions or render
advisory opinions or make decisions based on assertions as to hypothetical
- 24 -
J-S05006-19
events that might occur in the future. See Philadelphia Entm't & Dev.
Partners, L.P. v. City of Philadelphia, 594 Pa. 468, 480, 937 A.2d 385, 392
(Pa. 2007). LPR’s hypothetical question does not establish any grounds for
relief. LPR’s second and third claims merit no relief.
Finally, Andray Mining has filed what amounts to a defensive brief, which
in pertinent part simply asks this Court to affirm the orders of the trial court.
See Andray Mining’s Brief, at 13. The trial court found that Andray was not
liable to the Hayward Interests because the royalties reserved by Mid-East Oil
and pledged as collateral were separate and distinct from the royalties claimed
by the Hayward Interests. We agree.
Because we do affirm, and the trial court’s decision on royalties is in
favor of Andray Mining, Andray’s remaining claims are moot. “An issue before
a court is moot if in ruling upon the issue the court cannot enter an order that
has any legal force or effect.” Selective Way Ins. Co. v. Hosp. Grp. Servs.,
Inc., 119 A.3d 1035, 1040 (Pa. Super. 2015) (citation omitted). We need not
address Andray’s remaining questions and we decline to do so.
Our reasoning differs somewhat from that of the trial court. However,
“[i]t is well-settled that we may affirm the trial court’s order on any valid
basis.” Seneca Res. Corp., 122 A.3d at 387. (citation omitted).
Judgment affirmed. Application to reconsider order denying quashal
denied.
Judge Nichols joins the memorandum.
- 25 -
J-S05006-19
Judge Strassburger files a concurring statement.
Judgment Entered.
Joseph D. Seletyn, Esq.
Prothonotary
Date: 12/31/2019
- 26 -