A U.S. District Court for the Western District of Pennsylvania judge has declined to take up a contract dispute between two Greene County, Pa., landowners and two gas companies, saying despite evolving Pennsylvania oil and gas law he could not confidently predict that the state Supreme Court would overturn a precedent first established more than a century ago governing the contractual liability of drillers who assign their leases to other drillers.
Because failing to make such a prediction destroyed the diversity of citizenship among the parties in Rice v. Chesapeake Energy , U.S. District Judge Mark R. Hornak said in an Aug. 1 ruling that the federal courts did not have subject-matter jurisdiction over the case and granted the plaintiff landowners’ motion to remand the suit to the Greene County Court of Common Pleas.
One attorney involved with the case said the table is now set for the state courts to determine whether or not they will overturn 123-year-old case law holding that an oil and gas lessee who assigns the lease to another company is not absolved of liability.
Hornak rejected the defendants’ — Dale Property Services Penn and Chesapeake Energy Corp. — motion for removal, in which they had argued Dale had been fraudulently joined as a defendant because it had assigned its lease to another driller and thus, under Pennsylvania law, had handed off its liability for any alleged contractual violations.
Hornak said the case must be remanded because there still exists the possibility that state courts will find that Dale has retained its contractual liability.
Because both Dale and the plaintiffs are Pennsylvania citizens, there is not sufficient diversity of citizenship among the parties and therefore no federal jurisdiction in the case, Hornak said.
Hornak said the state Supreme Court’s 1889 ruling in Washington Natural Gas Co. v. Johnson held that a party who assigns an oil and gas lease to another party retains liability for alleged contractual breaches.
While he noted that the Supreme Court’s ruling in T.W. Phillips Gas and Oil Co. v. Jedlicka earlier this year cast some doubt on whether that principle will continue to hold in the future, Hornak said the court has not expressly overturned Washington Natural Gas.
Hornak added that he also could not “predict with certain confidence” that the Supreme Court would overturn the case.
In March, the justices ruled 5-1 in Jedlicka that even oil and gas wells that are operated sporadically and don’t consistently turn a profit can be considered to be producing “in paying quantities” so long as the operator has maintained the well in good faith.
The Jedlicka court also found that a lease is inchoate until the production of oil and gas actually begins.
That holding, however, was not enough to convince Hornak that Pennsylvania courts had or would invalidate the ruling in Washington Natural Gas .
“While Jedlicka may be a harbinger that the Pennsylvania Supreme Court will soon declare that the ‘fee simple determinable’ attributes of an oil and gas lease trump any and all vestiges of ‘lease as a contract’ principles, and thus abrogate Washington Natural Gas , such a declaration has not yet occurred,” he said, adding that the Supreme Court’s recognition of certain contractual aspects of an oil and gas lease in Jedlicka demonstrates the uncertainty in attempting to predict whether the justices will overturn Washington Natural Ga s.
In Rice , according to Hornak, plaintiffs James Rice Jr. and his wife, Veronica Rice, entered into a natural gas lease with Dale, which Dale said it subsequently assigned to Chesapeake.
The Rices filed suit alleging both defendants had breached provisions of the lease and the defendants sought removal of the action to federal court on the basis of diversity of citizenship, according to Hornak.
Although the parties stipulated at a May hearing that Dale is a citizen of Pennsylvania for diversity purposes, the defendants argued in their motion for removal that Dale should not be a party to the suit anyway since it assigned the lease to Chesapeake, Hornak said.
Dale argued that Pennsylvania law is unique in that it views oil and gas leases as having different legal principles than conventional leases, according to Hornak.
Dale said Pennsylvania law has evolved in such a way that lessors may only hold assignees, not lessees, responsible for leasehold performance, according to Hornak.
The Rices, however, contended that, without their consent and release, Dale could not have assigned away its liability along with the lease, Hornak said.
They also argued that the several other lease-based covenants they allege were also breached may be enforced against Dale, according to Hornak.
Hornak noted that the 2011 state Superior Court ruling in Hite v. Falcon Partners held that oil and gas leases are not subject to the same principles as landlord/tenant leases, but ultimately sided with the Rices’ argument that, pursuant to Washington Natural Gas , an oil and gas lease is no different than any other lease with regard to the effect of an assignment.
“The issue thus framed is whether this court can state that Pennsylvania substantive law, as to the effect of an assignment of an oil and gas lease, is now so clear that there is ‘not even a possibility’ that a state court could find that the Rices’ claims against Dale exist notwithstanding Dale’s assignment of the lease to Chesapeake,” Hornak said.
“That is a conclusion that this court cannot reach, even though Jedlicka and Hite demonstrate a distinct evolution of Pennsylvania oil and gas law which may likely have as its end point the abrogation of the doctrine of lessee/assignor liability as stated in Washington Natural Gas . No case in the intervening 123 years has overruled, or expressly questioned the vitality of, Washington Natural Gas , and the Pennsylvania Supreme Court did not address it in Jedlicka .”
Hornak said the U.S. Court of Appeals for the Third Circuit has held that district courts must find that the joinder of a defendant is proper in any case where there’s even “a possibility” that a state court would find that the plaintiff had a valid cause of action against that defendant.
According to Hornak, the Third Circuit has also warned district courts not to confuse rulings on subject-matter jurisdiction issues related to “fraudulent joinder” claims with rulings on the merits related to summary judgment or dismissal.
“It is entirely possible that, in state court, Dale’s theories to defeat the claims asserted against it will ultimately prevail,” Hornak said. “Similarly, this court cannot hold that Rices’ claims against Dale cannot prevail.”
Counsel for the Rices, David F. Pollock of Pollock Morris in Waynesburg, Pa., said it will now be up to the state courts to determine whether or not Dale relieved itself of its liability when it assigned the lease to Chesapeake.
Pollock also said he’s pleased that a jury of Greene County residents will now have an opportunity to decide whether his clients were wronged.
Counsel for Chesapeake and Dale, Brian J. Pulito of Steptoe & Johnson in Meadville, Pa., could not be reached for comment at press time.
(Copies of the nine-page opinion in Rice v. Chesapeake Energy, PICS No. 12-1472, are available from The Legal Intelligencer. Please call the Pennsylvania Instant Case Service at 800-276-PICS to order or for information.) •