Montgomery, A. v. R. Oil & Gas Enterprises ( 2017 )

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NON-PRECEDENTIAL DECISION - SEE SUPERIOR COURT I.O.P. 65.37
ARTHUR MONTGOMERY AND BARBARA J. IN THE SUPERIOR COURT OF
MONTGOMERY, HUSBAND AND WIFE, PENNSYLVANIA
Appellees
v.
R. OIL & GAS ENTERPRISES, INC.,
Appellant No. 1164 WDA 2015
Appeal from the Judgment Entered July 1, 2015
In the Court of Common Pleas of Venango County
Civil Division at No(s): Civil No 392-2014
BEFORE: SHOGAN, OLSON and STRASSBURGER,* JJ.
DISSENTING MEMORANDUM BY OLSON, J.: FILED MARCH 17, 2017
I believe that the trial court lacked subject matter jurisdiction over this
case because the Montgomerys failed to join Quaker State, an indispensable
party. Therefore, I would vacate the trial court’s judgment. Accordingly, I
respectfully dissent.
As the learned Majority lucidly sets forth the relevant factual
background and procedural history of this case, I turn to why I believe that
the Lease is not vertically severable. In other words, I believe that the oil
and gas estate above the Formation is not severable from the oil and gas
estate below the Formation.
No express language in the Lease addresses whether the agreement is
entire or severable. Nonetheless, principles of construction indicate that the
* Retired Senior Judge assigned to the Superior Court
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Lease is not vertically severable. Specifically, nowhere in the Lease is the
word “Onondaga” mentioned. Instead, the Lease only speaks to the entirety
of the oil and gas estate below the earth’s surface. The word “Onondaga”
was not relevant to the Lease until 16 years after its execution when Quaker
State reserved to itself and its successors and assignees all oil and gas rights
found below the Formation. There is nothing in the Lease that indicates that
the MacDonalds and Quaker State, at the time the Lease was signed, viewed
the area above the Formation differently from the area below the Formation.
Cf. Vernon Twp. Volunteer Fire Dep’t, Inc. v. Connor, 855 A.2d 873,
879 (Pa. 2004) (citation omitted) (“It is a fundamental rule of contract
interpretation that the intention of the parties at the time of contract
governs[.]”). No terms of revenue or consideration turn on generation of oil
and gas from the area above the Formation as opposed to the area below
the Formation. To the contrary, the Lease addresses as a whole the entirety
of the oil and gas estate below the surface lands of the 240 acres covered by
the Lease.
The learned Majority focuses on the parties’ conduct in concluding that
that lease is vertically severable. See Majority Memorandum at 9. I find
this reasoning unpersuasive for two reasons. First, the Majority’s holding
permits one party to unilaterally determine that a lease is severable. Under
the Majority’s rationale, if the lessee assigns a portion of its rights, the lease
is severable. Our Supreme Court has held that it is the parties’ mutual
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actions that must be considered when determining if a lease is entire or
severable - not a party’s unilateral actions. See Jacobs v. CNG
Transmission Corp., 772 A.2d 445, 452 (Pa. 2001). In this case, the
Montgomerys and their predecessors were not involved in the assignment of
Quaker State’s rights to the area above the Formation. Thus, I do not
believe that the parties’ conduct indicates that the Lease is vertically
severable.
Moreover, the learned Majority’s rationale conflicts with this Court’s
holding in Loughman v. Equitable Gas Co., LLC, 134 A.3d 470 (Pa. Super.
2016). In Loughman, the oil and gas lease included both production and
storage rights. Thereafter, the lessee assigned its production rights to a
third-party and retained the storage rights. The successors of the original
lessor filed suit arguing that the production and storage rights under the
lease were severable. In support thereof, the plaintiffs argued that the
assignment of the production rights by the lessee indicated that the
production and storage rights were severable. This Court rejected that
argument and held that the production and storage rights were not
severable. See Loughman, 134 A.3d at 476. Under Loughman, a lessee’s
assignment of a portion of its rights under a lease does not prove that the
lease is severable. In the case sub judice, it means that the Lease is not
severable with respect to the area above and below the Formation. As noted
above, I believe that the remaining Jacobs factors indicate that the Lease is
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not vertically severable. Accordingly, I would conclude that the Lease is not
vertically severable.
Having determined that Area A is not severable from Area B, I next
consider whether Quaker State has a right or an interest related to the
Montgomerys’ claim. The trial court concluded that Quaker State does not
have such a right or interest because the Montgomerys’ prayer for relief did
not seek termination of Quaker State’s interest in Area B. I would conclude
that this determination was legally flawed because whether or not the
Montgomerys sought such termination, the effect of the trial court’s order
was termination of that interest.
Because the Lease is not vertically severable, it necessarily follows
that Quaker State has an interest related to the Montgomerys’ claim. The
trial court found that Appellant’s predecessor abandoned the Lease because
“wells on that property have not been produced at any time after the year
2001.” Trial Court Opinion, 6/30/15, at 12. In concluding that Appellant
lost the oil and gas rights to Area A, the trial court necessarily found that
Appellant and Quaker State abandoned Areas A and B respectively. If
Appellant and Quaker State abandoned Areas A and B respectively, then
both Appellant and Quaker State lost the oil and gas rights to Areas A and B
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respectively.1 Thus, Quaker State has a right or interest to the subject
matter of this litigation.
As noted above, the issue before this Court is whether Quaker State
can retain a valid interest in its oil and gas estate located in Area B if
Appellant’s rights and interest in Area A terminated through abandonment.
Owing to the fact that the Lease is not vertically severable, the order
invalidating Appellant’s rights and interest in Area A automatically
terminated Quaker State’s interest in Area B. Therefore, justice cannot be
afforded without violating Quaker State’s right to due process. Quaker State
may not have abandoned Area B. Nonetheless, its rights have been
terminated by the trial court’s action.
My opinion that Quaker State is an indispensable party is consistent
with our Supreme Court’s decision in North Star Coal Co. v. Waverly Oil
Works Co., 288 A.2d 768 (Pa. 1972). In that case, North Star filed an
action to declare that lack of oil and gas production at the subject property
terminated a lease between the predecessors of both parties. Waverly,
however, only possessed the oil and gas rights to the “shallow sands.”
1
The trial court focused on abandonment in its decision granting the
Montgomerys judgment on the pleadings and the learned Majority affirms on
this basis. I express no view on whether such an abandonment inquiry is
appropriate under the specific facts of this case. Instead, I focus on
abandonment because if the trial court terminated Appellant’s rights to Area
A on abandonment grounds then it necessarily follows that it terminated
Quaker State’s interest in Area B because the areas are not vertically
severable.
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Pennzoil, a non-party to the litigation, had the oil and gas rights to the “deep
sands.” Our Supreme Court held that Pennzoil was an indispensable party to
the action and thus the trial court lacked subject matter jurisdiction over the
dispute between Waverly and North Star. See id. at 771.
The Montgomerys and the trial court attempt to distinguish North
Star by noting that North Star sought termination of the entire lease while
the Montgomerys’ complaint only requested termination of Appellant’s rights
as to Area A. I agree that this is an important factual distinction; however,
this factual distinction only matters if the Lease is vertically severable. If the
Lease was vertically severable and the Montgomerys sought only termination
of Appellant’s interest in Area A, then Quaker State may not be an
indispensable party. As noted above, however, I believe the Lease is not
vertically severable and therefore the termination of Appellant’s interest in
Area A necessarily terminates Quaker State’s interest in Area B. As such, I
believe Quaker State is an indispensable party to this litigation and without
its joinder the trial court lacked subject matter jurisdiction over this dispute.
I respectfully dissent.
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