The state Supreme Court has decided there is no need for a scientific debate over whether shale and the natural gas contained within it fall under the definition of "minerals" for the purposes of deed reservations.
Instead, the justices said, the Dunham rule, named after the 1882 Supreme Court case Dunham and Shortt v. Kirkpatrick, requires courts interpreting deed reservations that do not specifically mention shale or natural gas and where there exists no parol evidence to suggest the parties intended to include shale or natural gas to rely only on the layperson’s understanding of what a mineral is: a substance of a metallic nature.
By refusing to expand the meaning of "minerals" in deed reservations, the ruling avoids what some lawyers have told The Legal could have been a potentially sticky situation for oil and gas operators who have already paid landowners millions to drill on their properties.
In Butler v. Charles Powers Estate, the six-justice court unanimously overturned a state Superior Court ruling, which had reversed an order by Susquehanna County Court of Common Pleas President Judge Kenneth W. Seamans and remanded the case back to the trial court so experts could present scientific and historic evidence as to whether shale and natural gas constitute minerals.
In a 24-page opinion issued Wednesday, Justice Max Baer said the Superior Court’s order for an evidentiary hearing "violated the Dunham jurisprudence."
In addition, Baer said, the fact that other jurisdictions and state statutes have classified natural gas as a mineral is of no consequence because the Dunham rule clearly states that "the common, layperson understanding of what is and is not a mineral is the only acceptable construction of a private deed."
"Notwithstanding different interpretations proffered by other jurisdictions, the rule in Pennsylvania is that natural gas and oil simply are not minerals because they are not of a metallic nature, as the common person would understand minerals," Baer said.
Baer was joined by Chief Justice Ronald D. Castille and Justices Thomas G. Saylor, J. Michael Eakin, Debra Todd and Seamus P. McCaffery.
But Saylor penned a concurring opinion saying he finds "the original, 19th-century rationale for the Dunham rule to be cryptic, conclusory, and highly debatable."
For this reason, Saylor said, parties drafting deeds today should clearly state whether they intend to reserve natural gas rights.
In Butler, plaintiffs John E. and Mary Josephine Butler were the owners of a 244-acre piece of land in Apolacon Township, Susquehanna County, according to court documents.
The defendants, William H. and Craig L. Pritchard, were the heirs to the estate of Charles Powers and had a deed, drafted in 1881, that contained an exception reserving for them half of "the minerals and petroleum oils" contained on the land, court documents said.
In July 2009, the plaintiffs filed a complaint to quiet title, alleging ownership of the land and adverse possession of the "minerals and petroleum oils" referred to in the deed’s exception, according to court documents.
In November 2009, the defendants filed for a declaratory judgment, claiming the reservation of rights in the deed’s exception included natural gas and disputing the plaintiffs’ adverse possession claim, court documents said.
The plaintiffs filed preliminary objections claiming the defendants lacked standing, should have filed separate declaratory judgment actions rather than a motion for declaratory judgment and failed to state a claim upon which relief can be granted, according to court documents.
Seamans sustained these objections, according to court documents, and dismissed with prejudice the defendants’ request for a declaratory judgment that natural gas is included in the reservation of the deed.
But on appeal, a three-judge Superior Court panel, led by Judge Susan Peikes Gantman, overturned the ruling.
Seamans had found that Dunham was controlling in Butler,but Gantman disagreed, saying Dunham and the high court’s similar 1960 ruling in Highland v. Commonwealth "do not end the analysis, absent a more sufficient understanding of whether, inter alia (1) Marcellus Shale constitutes a ‘mineral’; (2) Marcellus Shale gas constitutes the type of conventional natural gas contemplated in Dunham and Highland; and (3) Marcellus Shale is similar to coal to the extent that whoever owns the shale, owns the shale gas."
The defense had argued that coal and shale gas are similar in that they can both only be extracted while the coal or shale is still in the ground, citing the state Supreme Court’s 1983 ruling in U.S. Steel v. Hoge — known as Hoge II — which held that the owner of coal owns the gas contained in the coal while any coalbed gas that makes its way into the surrounding property belongs to the owner of the surrounding property, according to court documents.
The Hoge II court had ruled that a party who owned the rights to coal on a property also owned the rights to the coalbed gas contained within, according to court documents.
But Baer called Hoge II "distinguishable and inapplicable" because it involved coal rights and the ventilation of coalbed gas.
Unlike the natural gas at issue in Butler, Baer said, coalbed gas is potentially explosive, extremely dangerous and not commercially viable at the time the deed reservation was executed, so Hoge II centered on which party had the right to ventilate the gas.
Baer further noted that the Hoge II court "made a legal distinction between coalbed gas and natural gas, despite recognizing the chemical similarities between the two, by upholding the landowners’ right to drill through the coal seam to obtain natural gas."
Finally, Baer said, the fact that hydrofracturing is used to obtain both shale gas and coalbed gas is irrelevant, because the Dunham rule centers on the common understanding of the substance itself, not the means by which it’s extracted.
"We therefore find no merit in any contention that because Marcellus Shale natural gas is contained within shale rock, regardless of whether shale rock is or is not a mineral, such consequentially renders the natural gas therein a mineral," Baer said.
Several of the oil and gas attorneys The Legal spoke to Thursday said they were not surprised the Supreme Court ruled as it did in Butler.
Steve Saunders, an oil and gas and mineral rights attorney in Scranton, said that if anything was unanticipated about the ruling, it was the fact that not a single justice dissented.
"Once you start from the premise that the Dunham rule cannot be disturbed, the core precept that parol evidence to interpret the intent of the parties is required to rebut the presumption that ‘all minerals’ does not include natural gas, evaluating the modern methodology of extracting a substance to determine if it was intended by the grantor and grantee to be included as part of a reservation of ‘minerals’ becomes irrelevant," Saunders said.
Nathaniel I. Holland, an oil and gas attorney with Steptoe & Johnson in Meadville, Pa., had a similar take, saying he had been much more surprised by the Superior Court’s ruling in Butler than he was by the Supreme Court’s decision.
"This opinion is reaffirming that the Dunham rule still applies after 131 years," Holland said, noting that the ruling is likely to resolve a number of pending claims filed by landowners in the wake of the Superior Court’s Butler ruling.
Holland said the Supreme Court’s decision will also provide more certainty to oil and gas operators, who had previously been operating under the assumption that the Dunham rule applied to deed reservations.
Counsel for the plaintiffs, Gregory J. Krock of Pittsburgh-based Buchanan Ingersoll & Rooney, said he and his clients were "very pleased" with the ruling and felt the opinion addressed all the key issues in the case.
The defendants’ attorney, Laurence M. Kelly of Kelly & Kelly in Montrose, Pa., said he was "disappointed" by the ruling.
(Copies of the 26-page opinion in Butler v. Charles Powers Estate, PICS No. 13-0993, are available from The Legal Intelligencer. Please call the Pennsylvania Instant Case Service at 800-276-PICS to order or for information.) •