The state Superior Court has reinstated a class action suit against two natural gas companies in which the plaintiffs allege the companies reneged on their lease agreements.

In Cardinale v. R.E. Gas Development, a three-judge panel unanimously reversed Clearfield County Court of Common Pleas President Judge Fredric J. Ammerman’s ruling granting the defendants’ preliminary objections and dismissing the complaint.

Senior Judge Robert E. Colville, writing for the court, said Ammerman erred in finding that the lease agreements between the plaintiffs and the defendants were invalid.

“The pertinent portions of appellees’ preliminary objections do not cite any language in the lease agreement documents that suggest that the parties did not intend to enter binding lease agreements,” Colville said. “Moreover, after reviewing these documents, we find that the language utilized in the lease agreement documents strongly indicates that the parties manifested an intent to be bound by the terms of the documents, that the terms of the documents were sufficiently definite, and that consideration existed.”

Colville was joined by Judges Mary Jane Bowes and Anne E. Lazarus.

In Cardinale, plaintiffs Lucinda A. Cardinale and Iola Hugney alleged defendants R.E. Gas Development and Rex Energy Corp. entered into gas leases with several landowners in the Marcellus Shale region, agreeing to pay each of them $2,500 per acre, but have since refused to honor those leases, Colville said.

The plaintiffs alleged breach of contract against R.E. Gas, tortious interference against Rex Energy and civil conspiracy against both companies, according to Colville.

Ammerman, in dismissing the complaint, relied on paragraphs eight through 55 of the defendants’ preliminary objections, in which they argued that they never had binding contracts with the plaintiffs and that the “orders for payment” they signed along with the leases included the caveat that payment was subject to the gas companies’ “‘inspection, approval of the surface, geology and title,’” Colville said.

According to Colville, the defendants argued in their preliminary objections that those orders for payment “‘(i) gave R.E. Gas an unlimited right to terminate the orders of payment and, therefore, decide later the nature and extent of its performance, and (ii) required a further manifestation of assent by R.E. Gas.’”

Therefore, the defendants argued, the proposed leases and orders of payment were merely invitations to landowners to bargain with R.E. Gas, which the plaintiffs did by signing and returning them, according to Colville.

The defendants further argued that R.E. Gas explicitly turned those offers down in rejection letters effectively precluding any contracts from being formed, Colville said.

Ammerman agreed with this reasoning, but the plaintiffs argued on appeal to the Superior Court that they signed valid leases and that Ammerman improperly failed to read the language in the orders of payment in conjunction with the other documents, which would have shown that binding contracts did exist and that the defendants did not have unlimited discretion to terminate those agreements.

Colville’s analysis centered on the documents pertaining to Cardinale, though he said in a footnote that the Hugney documents were identical and that the court’s ruling applied with equal force to them.

According to Colville, the document Cardinale signed titled “oil and gas lease” placed “an unconditional duty” on R.E. Gas to pay a $106,000 bonus payment.
Turning to the order for payment Cardinale signed, Colville said that while the document “arguably affects the parties’ duties under their lease agreement, the language utilized in the ‘order for payment’ suggests that it is something separate from the actual lease agreement.”

Colville said the “‘inspection, approval of the surface, geology and title’” language in the order for payment does not pertain directly to whether or not an agreement existed between Cardinale and R.E. Gas.

“Rather, the language deals with R.E. Gas’s duty of performance,” Colville said. “R.E. Gas is required to perform by paying Cardinale as indicated in the ‘order for payment,’ subject to the conditions stated therein. Consequently, this provision in the ‘order for payment’ does not render the parties’ lease agreements invalid.”

In addition, Colville said, the order for payment includes language stating that it “‘expires one year from date of issuance, unless paid sooner, terminated or replaced by lessee.’”

While the defendants claimed they had unlimited discretion to terminate the agreements, Colville disagreed.

“In terms of R.E. Gas’s position, this statement, at best, allows R.E. Gas to terminate the ‘order for payment,’” Colville said. “This statement does not allow R.E. Gas to terminate the parties’ lease agreement or even R.E. Gas’s duty to perform under the lease agreement. Moreover, there is nothing of record that suggests that R.E. Gas sought to terminate the ‘order of payment.’”

Counsel for the plaintiffs, David A. Borkovic of Jones, Gregg, Creehan & Gerace in Pittsburgh, could not be reached for comment.

Counsel for the defendants, Mark D. Feczko of K&L Gates in Pittsburgh, also could not be reached.

Zack Needles can be contacted at 215-557-2493 or zneedles@alm.com. Follow him on Twitter @ZNeedlesTLI.

(Copies of the 10-page opinion in Cardinale v. R.E. Gas Development, PICS No. 13-1344, are available from The Legal Intelligencer. Please call the Pennsylvania Instant Case Service at 800-276-PICS to order or for information.)