Steptoe & Johnson PLLC: Pennsylvania Superior Court Challenges Dunham Rule for Marcellus Shale

Steptoe & Johnson PLLC: Pennsylvania Superior Court Challenges Dunham Rule for Marcellus Shale

By Russell L. Schetroma

In 1882, the Pennsylvania Supreme Court announced a presumption that a reservation of "minerals" does not include oil absent evidence within the four corners of the deed of a contrary intent. Dunham v. Kirkpatick, 101 Pa. 36 (1882) [enhanced version available to subscribers]. In 1960, the Supreme Court announced that its decision in Dunham was a rule of Pennsylvania property law and that pursuant to the Dunham logic, a grant or reservation of "oil" would not include "gas" absent clear expression of the parties' intent to do so. Highland v. Commonwealth, 161 A.2d 390 (Pa. 1960) [enhanced version] was a rule of Pennsylvania property law.

In  Butler v. Charles Powers Estate, the Court of Common Pleas of Susquehanna County was faced with a similar claim that a reservation of "one half the minerals and Petroleum Oils" included the Marcellus Shale and, therefore, any gas contained therein. The Common Pleas court ruled that Dunham and Highland controlled the case and dismissed the claim on preliminary motion.

On September 7, 2011, the Superior Court of Pennsylvania (at No. 1795 MDA 2010,  2011 PA Super 198 [enhanced version / unenhanced version available from lexisONE Free Case Law]) reversed and remanded Butler, ruling that the Plaintiffs should be given the right to develop a record in an attempt to prove: a) that the Marcellus Shale is a "mineral" and therefore within the reservation; b) that as unconventional gas, Marcellus Shale gas was not the type of natural gas contemplated in Dunham and Highland; and c) that shale may be more similar to coal than conventional oil and gas reservoirs, so that under Pennsylvania's nearly unique position that coalbed methane is owned by the owner of the coal (see U.S. Steel Corp. v. Hoge, 468 A.2d 1380 (Pa. 1983) [enhanced version]), the owner of the shale may own any gas contained therein.

Butler is a very unfortunate decision, and it is hard to imagine a more unfortunate time for an appellate court to introduce uncertainty into a fundamental issue of property law. It challenges a settled and widely followed principle of Pennsylvania property law while remanding the case for trial and probable subsequent appeal that will leave this fundamental issue of oil and gas title law uncertain for many years.  (Read the entire opinion in Butler by clicking HERE.)

What to do? It is essential that companies with significant Marcellus Shale holdings review the Butler case and arrange for competent participation in the trial and any subsequent appeal of the case.  Industry should encourage an immediate review of Butler by the Pennsylvania Supreme Court in an effort to shorten the extended period of uncertainty that will result from waiting for pre-trial procedures, discovery, trial, post-trial motions, and another appeal to the Superior Court. 

Titles that rely upon any application of Dunham and Highland must be identified and segregated. Some companies may elect to defer drilling on such parcels until the uncertainty created by the Superior Court is resolved. Companies need to review their force majeure language to determine if it can be used to assert a continuance of leases pending a resolution of this unanticipated legal uncertainty. So long as competitors avoid leases affected by this uncertainty, perhaps custom, issue-specific lease extensions can be obtained from landowners.

In all events, it must be remembered that the result of Butler is only uncertainty, and that no final decision was made on the application of Dunham, Highland or Hoge. However, Butler does have the potential for judicially-caused land title chaos affecting the Commonwealth's greatest potential driver of wealth and employment, and thus the uncertainty should not be taken lightly.

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