Birdie Associates, L.P. v. CNX Gas Co.

J-A13021-16
2016 PA Super 228BIRDIE ASSOCIATES, L.P., A IN THE SUPERIOR COURT OF
PENNSYLVANIA LIMITED PARTNERSHIP PENNSYLVANIA
Appellant
v.
CNX GAS COMPANY, LLC, A
CORPORTION, A/K/A CONSOLIDATION
COAL CO., A CORPORATION AND/OR
CONSOL PENNSYLVANIA COAL CO., A
CORPORATION
Appellees No. 1020 WDA 2015
Appeal from the Order Entered June 4, 2015
In the Court of Common Pleas of Washington County
Civil Division at No: 2010-8183
BEFORE: OLSON, STABILE, and MUSMANNO, JJ.
OPINION BY STABILE, J.: FILED OCTOBER 20, 2016
At issue in this appeal from the June 4, 2015 order entered in the
Washington County Court of Common Pleas is “the recurring question of
whether an instrument captioned ‘Lease’ that transfers some interest in a
tract of coal is or is not in fact a sale of the coal.” Trial Court Opinion
(“T.C.O.”), 6/4/15, at 1. The trial court determined that the leases in
question constituted a sale and granted summary judgment in favor of
Appellees, CNX Gas Company, LLC a/k/a Consolidation Coal Co. and/or
Consol Pennsylvania Coal Co., and dismissed the complaint filed by
Appellant, Birdie Associates, L.P. The trial court also denied Appellant’s
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motion for summary judgment. Following review, we affirm the June 4,
2015 order.
The underlying facts are not in dispute. As the trial court explained in
its opinion in support of its grant of summary judgment:
In 1985, Ethel Spragg executed a document presented to her by
Consol Land Development Company by which she agreed to
“lease and let to lessees, its successors and assigns all of [her]
undivided one-half interest in and to all of the Pittsburgh seams
or measures of coal and all constituent products of such coal in
and underlying” certain lands in Gilmore, Jackson, Springhill and
Freeport Townships in Greene County, containing a total of
289.81 acres. On the same day Joan Spragg Wermlinger and
David L. Wermlinger, wife and husband, executed a substantially
identical lease to the same lessee for the other one-half of those
parcels of coal. All parties were represented by counsel. The
instruments included the usual mining rights.
The term of the lease was to be for 20 years, plus an option to
renew prior to the termination of the original term, if prior to the
termination of the original term the lessee tendered to the lessor
a renewal charge of $100.00 per acre. The consideration for the
transfer of coal and mining rights was to be three percent of the
sale price of the coal, or 50 cents per ton, whichever was
greater. During the original term and the extension thereof,
lessee would pay to lessor the sum of $50.00 per acre per year
as Advance Minimum Royalty, to be credited against tonnage
royalties if and when produced. All such Advance Minimum
Royalties have regularly been paid. The leases would have
expired in 2005, but the lessee’s assignees tendered the renewal
payment and, therefore, the leases run to 2025. Lessee and its
assignees have always paid the Advance Minimum Royalty, but
no coal has been mined from these tracts. [Appellant] alleges,
and [Appellees] do not deny, that there are no current plans to
mine the coal.
[Appellant] . . . is the assignee of the original lessors, and
[Appellees are] the assignee of the original lessees. In 2010
[Appellant] filed a complaint containing counts alleging
conversion, unjust enrichment and trespass, plus a demand for
punitive damages. This complaint described how [Appellees
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were] exploiting and marketing through a system of wells and
pipeline the coal bed methane [CBM] produced from the subject
coal, but was paying lessor nothing for it. CBM, as its name
implies, is methane found in coal. It is doubtless a “constituent
product” of coal. Title to CBM is vested in the owner of the coal.
U.S. Steel v. Hoge, 468 A.2d 1380 (Pa. 1983). The 1985
leases are silent as to CBM or to wells and royalties resulting
from the sale of CBM.
T.C.O., 6/4/15, at 1-2.
Following the close of discovery, both parties filed motions for
summary judgment. Essentially, Appellant argued that Appellees were
producing gas from coal that was the subject of the leases and that the
leases violated the Guaranteed Minimum Royalty Act (“GMRA”), 58 P.S.
§ 33.3, because the leases did not guarantee the lessor a minimum royalty
of one-eighth of all gas removed from the property.1
Appellees countered that the GMRA did not apply because the leases,
regardless of their designation as “leases,” were actually grants in fee and
that Appellees, as owner of the coal and its constituent parts, could sell the
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1
The GMRA provides:
A lease or other such agreement conveying the right to remove
or recover oil, natural gas or gas of any other designation from
the lessor to the lessee shall not be valid if the lease does not
guarantee the lessor at least one-eighth royalty of all oil, natural
gas or gas of other designations removed or recovered from the
subject real property.
58 P.S. § 33.3. Royalty guaranteed (formerly cited as 58 P.S. § 33).
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CBM without any obligation to pay Appellant any amount other than that
stated in the leases, i.e., Advance Minimum Royalty payments and/or 3% of
the market value of the coal when sold.2
By order entered on June 4, 2015, the trial court granted Appellees’
motion for summary judgment and dismissed Appellant’s complaint. In the
same order, the trial court denied Appellant’s motion for summary
judgment. Appellant filed this timely appeal. The trial court directed
Appellant to file a statement of matters complained of on appeal and
Appellant complied. In response, the trial court issued an order indicating
that Appellant’s issues were adequately addressed in its June 4 opinion and
order. Appellant now presents the following five issues for this Court’s
consideration:
1. Did the [t]rial [c]ourt err when it interpreted the 1985 coal
[l]eases and failed to acknowledge at the time the [l]ease
agreement was executed that the coal bed methane gas
(“CBM”) as a “constituent product” of the coal was owned by
Appellant when the [c]ourt came to the conclusion that the
coal lease was a sale of the coal and the CBM and, thus,
Appellees could produce the CBM contained in the coal
without paying for the right to do so[?].
2. Did the [t]rial [c]ourt err when it interpreted the [c]oal
[l]eases and ignored the plain wording and meaning of the
Pennsylvania Oil and Gas Act . . ., Section 1.3 Royalty
guaranteed, which clearly states that a [l]ease or other such
agreement conveying the right to remove or recover oil,
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2
As noted by the trial court, Appellant did not contend Appellees failed to
make the required Advance Minimum Royalty payments due under the
leases of $50 per acre per year. T.C.O., 6/4/15, at 2.
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natural gas or gas of any other designation from the lessor to
the lessee shall not be valid if the [l]ease does not guarantee
the lessor at least one-eighth royalty of all oil, natural gas or
gas of other designations (CBM gas) removed or recovered
from the subject real property, and the 1985 leases or other
such agreement at issue did not guarantee Appellant a royalty
for the right to remove CBM gas from the subject real
property[?]
3. Did the [t]rial [c]ourt err when it granted [s]ummary
[j]udgment and dismissed the [c]omplaint when presented
with the undisputed fact that in 29 years of the 40-year term
[l]ease(s) (1985-2025) Appellees . . . had not mined one
lump of coal and admitted that it had no intention of ever
mining any coal (Appellee assigned its right to mine the coal
to Murray Energy Corporation) during the 40-year term of the
[l]ease(s) and has only used the [l]ease(s) to remove and
recover the CBM gas without paying any royalty to Appellant
as required by law[?]
4. Did the [t]rial [c]ourt err as a matter of law in its
interpretation of the plain meaning and intent of the parties
to the 1985 [l]ease(s) and the plain meaning of [t]he
Pennsylvania Oil and Gas Act . . . when it ruled that the coal
[l]ease(s) acted as a sale and conveyance of both the coal
and the CBM gas, and, therefore, no consideration by way of
royalty is due on the CBM gas removed and recovered under
the [l]ease(s) entered into[?]
5. Did the [t]rial [c]ourt err when it refused to acknowledge the
facts of record, i.e., the legal opinion of Wesley A. Cramer,
Esq., along with the Covert/Wallace coal [l]ease, which is
identical to Appellant’s coal [l]ease and the fact that Appellees
entered into a CBM gas [l]ease with Covert/Wallace, that
clearly demonstrate that Appellees know that they were
required by law to pay a royalty to coal owners it had entered
into [l]eases with when, in 2006, Appellees decided to remove
and recover any CBM gas from the coal properties it had
under [l]ease[?]
Appellant’s Brief at 6-8 (footnote omitted).
As this Court has recognized:
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When reviewing a trial court’s grant of summary judgment, our
standard and scope of review are as follows:
Our scope of review is plenary, and our standard of review
is the same as that applied by the trial court. Our
Supreme Court has stated the applicable standard of
review as follows: An appellate court may reverse the
entry of a summary judgment only where it finds that the
lower court erred in concluding that the matter presented
no genuine issue as to any material fact and that it is clear
that the moving party was entitled to a judgment as a
matter of law. In making this assessment, we view the
record in the light most favorable to the non-moving party,
and all doubts as to the existence of a genuine issue of
material fact must be resolved against the moving party.
As our inquiry involves solely questions of law, our review
is de novo.
Reinoso v. Heritage Warminster SPE, LLC, 108 A.3d 80, 84
(Pa. Super. 2015) (en banc) (additional citations omitted). With
respect to the denial of summary judgment, “[w]e review the
trial court’s denial of summary judgment for an abuse of
discretion or error of law.” Ramsay v. Pierre, 822 A.2d 85, 90
(Pa. Super. 2003).
Bezjak v. Diamond, 135 A.3d 623, 627 (Pa. Super. 2016).
In its first issue, Appellant asserts trial court error for its interpretation
of the 1985 leases, for determining that the lease was a sale of coal and
CBM because the CBM, as a “constituent product,” was owned by Appellant.
A review of coal lease cases is instructive.
Coal leases have been the subject of litigation in this Commonwealth
for well over a hundred years. In Smith v. Glen Alden Coal Co., 32 A.2d
227 (Pa. 1943), our Supreme Court recognized the established rule in
Pennsylvania “that the lease of coal in place with the right to mine and
remove all of it for a stipulated royalty vests in the lessee a fee.” Id. at
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233. Therefore, “if the fee to the severed coal is vested in the lessee no
interest in the coal as real property remains in the lessor and [] his only
interest therein is personal property. The lessor’s interest in the lease is
properly termed a possibility of reverter.” Id.In Shenandoah Borough v. Philadelphia, 79 A.2d 433 (Pa. 1951),
cert. denied, 342 U.S. 821 (1951), our Supreme Court explained:
To a great many people who do not live in coal counties, the
aforesaid instrument having the usual terms and attributes of a
lease, would seem to be a lease. Nevertheless the law is long
and well settled in Pennsylvania that “[t]he grant of a right to
mine coal in the lands of the lessor, and remove it therefrom,
although the instrument may be called a ‘lease,’ is a grant of an
interest in the land itself, and not a mere license to take the
coal. The transaction . . . constituted a sale of the coal,
conditioned upon its being removed within the period
specified[.]” Lazarus's Estate, 145 Pa. 1, 8, 23 A. 372, 373
[(1892)].
Id. at 436. More recently, the Court noted:
The term “lease” is in some respects a misnomer. What is really
involved is a transfer of an interest in real estate, the mineral in
place. Hummel v. McFadden, 395 Pa. 543, 552, 150 A.2d
856, 860 (1959); Shenandoah Borough v. Philadelphia, 367
Pa. 180, 186–87, 79 A.2d 433, 436, cert. denied, 342 U.S. 821,
72 S.Ct. 39, 96 L.Ed. 621 (1951). Common Pleas’ construction
gives the transfer involved the characteristics of a fee simple
determinable in the coal, which the lease severs from appellees’
interest in the surface.
Hutchinson v. Sunbeam Coal Corp., 519 A.2d 385, 387 n.1 (Pa. 1986).
Even more recently, this Court reviewed a coal lease in a case that
also involved extraction of CBM. In Kennedy v. Consol Energy, 116 A.3d
626 (Pa. Super. 2015), this Court examined U.S. Steel v. Hoge, 468 A.2d
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1380 (Pa. 1983). Although Hoge involved an oil and gas lease as well as a
coal lease, we find this Court’s conclusion regarding ownership of CBM
applicable to the case before us. This Court stated:
We read Hoge as establishing the general rule that, when a coal
severance deed is silent as to ownership of the coalbed methane,
or does not expressly reserve coalbed methane from the coal
conveyance or specifically define coalbed methane as a gas, the
coalbed methane gas contained in the coal belongs to the owner
of the coal.
Kennedy, 116 A.3d at 633.
Appellant argues that this Court rejected as outdated the
“Pennsylvania Doctrine,” i.e., that a coal lease automatically constitutes a
sale in fee, in Olbum v. Old Home Manor, Inc., 459 A.2d 757 (Pa. Super.
1983). We find Olbum factually distinguishable and inapposite. In that
case, landowners sued to recover payments for strip-mining their property
under a four-year lease that called for set monthly payments over the term
of the lease. When the mining company determined further mining was not
economically justified after fourteen months, they ceased making payments
called for in the lease. In that case, it was the landowners who sought a
ruling that the lease was a sale so they could collect royalties for the
remainder of the lease term. Finding that the lease did not constitute a sale,
this Court explained:
We reject the use of the “Pennsylvania Doctrine” as unjustified.
The assumption that a lease of land for coal mining operations
amounts to an automatic “sale in place” of the coal is long out-
dated:
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Not every agreement for the mining of coal, however, amounts
to a sale of the coal in place. “A contract regarding coal in place
may be a sale absolute, a conditional sale, a lease in the
ordinary expression of that term, or a mere license to make and
remove the minerals.” Hummel v. McFadden, 395 Pa. 543,
150 A.2d 856, [8]61 (1959) and cases cited therein.
The Hummel court stressed that the “unrestricted dominion”
contractually given to the miners in that case was the factual
basis for a holding that the contract represented a sale of the
coal in place.
The most cursory reading of the contract in the instant matter
shows that the appellant-landowners executed a document
carefully tailored to protect their land, their interests in the land
and in the coal payments. In particular, we note that the
agreement in question, unlike the agreement in Hummel was
limited to a term of four (4) years. In short, without lengthy
discussion of the matter, we conclude that the instant case
should be decided on the general law of contracts, and we
approach the matter from that posture.
Id. at 760 (emphasis in original).
Despite Appellant’s suggestion to the contrary, Olbum did not abolish
the so-called Pennsylvania Doctrine. Rather, the case stands for the
proposition that while a coal lease does not automatically convey a sale of
the coal in place, the conveyance may be a sale, depending on the language
of the contract. Here, the leases conveyed all interest in coal and its
constituent products for a period of twenty years, now forty years by
extension. Leases, 4/15/85, at 1.3 The leases conveyed the right to the
coal and its constituent products “together with the right to mine and
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3
The inclusion of a term of years does not defeat the characterization of a
lease as a sale. See, e.g., Shenandoah Borough, supra, 79 A.2d at 436.
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remove all of said coal and the free and uninterrupted right and right-of-way
into, through and under the said land . . . .” Id. at 2. After outlining other
rights, the lease provides, “It is understood and agreed that the rights
hereinbefore mentioned are in enlargement and not in restriction of the
rights incidental to the mineral estate and ownership of said coal.” Id.
Further, Appellant “warrant[ed] generally the title to the Leased Premises
and Lessee’s quiet enjoyment of the same and agree[d] that Lessee, at its
option, may discharge any tax, mortgage, other lien, or encumbrance
suffered or permitted upon or against the Leased Premises.” Id.
In addition to the interests and rights conveyed, the leases provide for
payment to Appellant of an annual per-acre advance minimum royalty,
regardless of whether any coal was mined. Appellees agreed to payment of
tonnage royalties for all coal mined, receiving a credit for advance minimum
royalties based on coal mined. Appellees also assumed the obligation to pay
all taxes assessed against the premises and to indemnify and save harmless
Appellant from all claims arising out of Appellees’ negligence.
Based on the language of the lease, the trial court appropriately
determined that the lease constituted a sale of coal and its constituent
products and rejected Appellant’s claim of ownership of the CBM. As the
trial court explained, the leases in question clearly conveyed the “interest in
and to all of the Pittsburgh seams or measures of coal and all constituent
products of such coal in and underlying” the various lands in Greene County.
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T.C.O., 6/4/15, at 1. Further, CBM “is doubtless a ‘constituent product’ of
coal.” Id. at 2. We find the trial court’s conclusion in these regards
consistent with applicable case law. We find no error in the trial court’s
interpretation of the leases, and specifically its determination that CBM is a
constituent product to which Appellees were entitled without additional
payment to Appellant. Therefore, Appellant’s first issue fails.
Appellant’s second issue claims trial court error for ignoring the
provisions of the Pennsylvania Oil and Gas Act, 58 P.S. § 33.3, that
invalidate an oil and gas lease that does not provide a minimum one-eighth
royalty of all oil, natural gas or gas recovered from the subject property.
Appellant is not entitled to relief on this issue. We have already determined
that the trial court correctly classified the leases in question as a sale. As
such, Appellant does not own the coal or the CBM, a constituent product of
the coal. Again, “the coalbed methane gas contained in the coal belongs to
the owner of the coal.” Kennedy, 116 A.3d at 633. Therefore, the Oil and
Gas Act is not applicable.4 Appellant’s second issue fails.
In its third issue, Appellant asserts trial court error for granting
summary judgment despite the fact Appellees “have not mined one lump of
coal and admitted that they had no intention of ever mining any coal” and
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4
We note our agreement with Appellees that Appellant did not assert a claim
under the Pennsylvania Oil and Gas Act in its complaint. Appellees’ Brief at
21-22.
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were using the leases solely to remove CBM without paying royalties
required by law. Appellant’s Brief at 21. Initially, as we noted above,
Appellees were not under any obligation to pay royalties for CBM separate
and apart from any royalties that might be due Appellant as advance
minimum royalties under the lease. Royalties aside, it is clear under the
leases that Appellees were not under any obligation to mine any coal. The
leases provided for annual advance minimum royalties. Those royalties
would be applied as a credit against any tonnage royalties due. The leases
did not include any provisions mandating mining of coal. Rather, the leases
conveyed the rights to any coal and constituent products to Appellees and
provided for payments to Appellant determined by the amount of coal
mined, if any, and advance minimum royalties, regardless of whether coal
was actually mined.
Once again, Appellant is basing an argument on their erroneous
conclusion that the there was no sale of coal, only the right to mine the coal,
and that the unmined coal remained the property of Appellant. Appellant’s
Brief at 22. We find no error of law in the trial court’s grant of summary
judgment, despite the fact Appellees have not mined any coal.
Appellant next argues that the trial court erred in its interpretation of
the leases in light of the Pennsylvania Oil and Gas Act (GMRA) by ruling that
the leases constituted a sale of coal and CBM gas such that no CBM royalties
were due Appellant. At issue here are only the two leases between
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Appellant and Appellees, not any other leases involving Appellees. The trial
court correctly ruled that the leases were, in actuality, sales of coal and
constituent products. As stated above, the Pennsylvania Oil and Gas Act is
not relevant to the sale. Appellant’s fourth issue fails.
In Appellant’s fifth and final issue, Appellant argues that the trial court
erred by refusing to acknowledge the legal opinion of Wesley A. Cramer,
Esq.,5 and the Covert/Wallace leases6 under which Appellant maintains
Appellees are paying CBM royalties to the lessors. Once again, Appellant
looks to the provisions of the GMRA for support. As the trial court stated,
“[Appellant’s] reliance on the [GMRA] is misplaced. As we have seen, these
“Leases” are actually grants in fee and therefore [Appellant] has no interest
in any constituent element of the coal, including CBM.” T.C.O. 6/4/15, at 7.
Appellant’s fifth issue lacks merit.
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5
Appellant suggests the February 23, 2005 letter from Attorney Cramer,
counsel for Appellees, puts forth an incorrect statement of Pennsylvania law
by advising Appellees that no separate agreement is necessary for Appellees
to operate a CBM well on the subject property and that Appellees had
absolute dominion over the coal and coal constituent products, including
CBM. As we have already determined, we believe it is Appellant’s
interpretation that is incorrect.
6
The Covert/Wallace leases are two separate “Coalbed Methane Gas Leases”
entered into between Appellee, CNX Gas Company, and the Coverts and the
Wallaces in July 2005. Appellees have not entered into a separate coalbed
methane gas leases with Appellants. The Covert/Wallace methane gas
leases are irrelevant to the leases at issue before us.
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Finding no merit in any of Appellant’s issues, we affirm the trial court’s
June 4, 2015 order granting summary judgment in favor of Appellee and
dismissing Appellant’s complaint as well as the trial court’s denial of
Appellant’s motion for summary judgment.
Order affirmed.
Judgment Entered.
Joseph D. Seletyn, Esq.
Prothonotary
Date: 10/20/2016
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