Two complaints recently filed in the U.S. District Court for the Western District of Pennsylvania serve as examples of the wide scope of gas lease-related litigation coming out of the state’s natural gas plays.
In one case, a landowner filed a class action suit against two subsidiaries of Royal Dutch Shell, alleging one of the companies forestalled competitors by holding itself out as the landowner’s oil and gas lessee, only to ultimately cancel the lease and renege on an agreement to pay the landowner a nearly $140,000 signing bonus once gas prices dropped.
In the other, Texas-based driller Endeavor Energy Resources filed suit against Pittsburgh law firm Gatto & Reitz, alleging the firm has failed to account for or return about $2.7 million Endeavor had placed in the firm’s escrow account to be used as a potential bonus payment to landowners in lease negotiations that eventually fell through.
The driller further alleged that the firm has also failed to account for or return an additional $200,000 that was to have been deducted from proceeds the driller received in an Ohio land deal and earmarked for bonus payments in a separate Pennsylvania deal.
Steve Saunders, a Scranton-based oil and gas lawyer who was not involved in either case, said the amount of lease litigation between landowners and drillers has decreased recently compared to four or five years ago.
Saunders said this is at least in part because of the fact that operators have largely staked out their positions in Pennsylvania and the majority of the leases being negotiated now are renewals of existing leases.
As for litigation between drillers and their attorneys, Saunders said those types of cases are rare, particularly with regard to the larger operators, which tend to pay their counsel on an hourly basis.
Saunders said this type of litigation could, however, pick up if deals in which firms have agreed to work with smaller operators on a contingency-fee basis begin to sour and fee disputes arise.
In Walney v. SWEPI, plaintiff Thomas J. Walney filed suit against defendants SWEPI LP and its general partner, Shell Energy Holding Group, in the Venango County Court of Common Pleas on March 5, but the defendants removed the case to the Western District on April 12.
On April 15, Walney filed a motion to have the case remanded back to the Venango County trial court, arguing that the defendants’ motion to remove the case to federal court had been filed more than 30 days after they were served the complaint on March 11 and was therefore invalid.
The defendants stated in their notice of removal that they were served with the complaint March 14.
Walney’s attorney, Joseph E. Altomare of Titusville, Pa., told the Law Weekly that the class currently consists of about 165 people, with claims totaling about $30 million.
According to the complaint, Walney holds a deed to a 42-acre parcel of land in Rockland Township, Pa.
In December 2011, the complaint said, SWEPI delivered a lease to Walney along with an offer to pay him a $137,000 signing bonus.
The complaint alleges that Walney signed and delivered the lease, along with a lease memorandum, to SWEPI’s agent on January 16, 2012.
SWEPI subsequently issued a time draft to Walney, made payable in the amount of $137,085, according to the complaint.
The complaint said SWEPI also delivered Walney a letter instructing him to deposit the time draft in his bank.
According to the complaint, the time draft gave SWEPI 90 banking days to conduct a title examination and make payment. It also prohibited Walney from retrieving the lease and other documents until those 90 days passed without payment of the signing bonus.
The complaint said SWEPI recorded the lease memorandum in the Venango County Recorder of Deeds’ office on January 31, 2012, but has failed to pay Walney the signing bonus.
Instead, according to the complaint, SWEPI canceled the lease in July 2012.
Walney alleged breach of contract, seeking payment of the signing bonus plus prejudgment interest from January 16, 2012, as well as any additional costs, according to the complaint.
Walney also alleged fraud, pointing to language in the time draft that stated, "’No liability for payment or otherwise shall be attached to any of the parties hereto,’" according to the complaint.
"SWEPI knew the time draft was a worthless medium of payment as to which it could at its sole discretion claim to have no payment liability," the complaint said. "SWEPI nevertheless intentionally utilized the worthless draft as a means of procuring delivery of the executed lease and lease memorandum in recordable form before ever first actually paying the signing bonus."
The complaint further alleged that SWEPI fraudulently withheld from Walney that it had recorded the lease memorandum in the Recorder of Deeds’ office on January 31, 2012.
Walney alleged in the complaint that he did not discover this until SWEPI sent him a lease cancellation letter July 23, 2012.
"At the time of the execution of the lease by plaintiff, SWEPI had been engaged in a highly competitive race among major and independent gas producers to secure for their respective accounts as much leasehold acreage as possible in the Marcellus Shale, Utica Shale and Tully Limestone regions of Pennsylvania," the complaint said, alleging that SWEPI recorded the lease memorandum so that it could hold itself out as Walney’s lessee in order to keep competitors away.
By the time SWEPI canceled the lease, the complaint alleged, natural gas prices "had become severely depressed" and Walney has since not been approached by anyone else interested in leasing his land.
In addition to seeking payment of the bonus, prejudgment interest and costs, Walney also sought punitive damages, alleging in the complaint that SWEPI’s conduct was "intentional and malicious, and carried out with reckless disregard of injury to plaintiff."
The complaint also included claims of disparagement of title and promissory estoppel.
SWEPI, in its answer to the complaint filed April 19, argued that Walney’s reliance on the time draft was not reasonable and that the time draft did not constitute a valid contract.
SWEPI further argued in its answer to the complaint that it had properly surrendered the lease and, therefore, "was not liable for any rentals or obligations that had not yet come due, including the alleged ‘signing bonus.’"
Counsel for SWEPI, Jeremy A. Mercer of Fulbright & Jaworski in Canonsburg, Pa., could not be reached for comment.
Saunders said plaintiffs have a difficult burden of proof when claiming that one driller’s actions cost them the opportunity to enter into a lease agreement with another driller.
In that type of case, it’s likely a plaintiff would have to depose other gas operators doing business nearby to determine whether they had been interested in the plaintiff’s property but had passed it over when they saw that an executed lease had already been recorded.
In addition, Saunders said he suspects many drillers are uncomfortable testifying against competitors with whom they may have a need to do business in the future.
In Endeavor Energy Resources v. Gatto & Reitz, according to Endeavor Energy Resources’ April 15 complaint, the Texas-based driller began working with Marcellus Mineral Group LLC to acquire oil and gas leases in the Marcellus and Utica shale plays in 2010.
Gatto & Reitz, a firm that focuses on oil and gas lease agreement work, among other areas related to natural resources, represented both Endeavor and MMG, according to the complaint.
At some point in 2010, MMG entered into negotiations with a family in Fayette County, Pa., in an attempt to acquire oil and gas leases for Endeavor on the family’s 1,081-acre property, the complaint said.
Endeavor agreed to pay the family a signing bonus of $2,500 per acre, according to the complaint.
Endeavor put about $2.7 million into Gatto & Reitz’s escrow account for use as bonus payments to the family, but negotiations between Endeavor and the landowners eventually broke down, the complaint said.
However, when Endeavor requested that Gatto & Reitz return the $2.7 million the company had placed in escrow, the firm refused, according to the complaint.
MMG then asked Endeavor to keep the money in Gatto & Reitz’s escrow account to be used as bonus payments for other landowners in the future, the complaint said.
Endeavor eventually entered into an oral contract to acquire a lease from Pennsylvania-based Ridec Inc., thereafter agreeing to pay Ridec a bonus payment in excess of the $2.7 million already in Gatto & Reitz’s escrow account, according to the complaint.
The balance of the bonus payment — about $200,000 — was to be deducted from what were referred to as the "Ohio deal proceeds," according to the complaint.
The complaint alleged that Endeavor’s counsel had instructed Gatto & Reitz not to disperse the funds until Endeavor received a finalized copy of the Ridec lease, containing all the agreed-upon revisions.
But according to the complaint, Gatto & Reitz has failed to return or account for both the $2.7 million that had been placed in its escrow account and the $200,000 that was to be deducted from the Ohio deal proceeds.
"Upon information and belief, Gatto & Reitz have distributed or otherwise have dispensed with the escrow funds despite the fact that the conditions have not been met and despite an explicit instruction by Endeavor not to distribute or dispense with the funds," the complaint alleged.
Endeavor alleged in the complaint breach of contract, breach of fiduciary duty, conversion, fraud, civil conspiracy and accounting, demanding a judgment of at least $2.7 million, plus punitive damages, prejudgment and post-judgment interest, attorney fees and costs.
Counsel for Endeavor, Denise Pentino of Dinsmore & Shohl in Wheeling, W.Va., could not be reached for comment at press time.
Gatto & Reitz principal Bradley Reitz declined to comment on the case.