A federal judge has tossed a landowner’s suit against two drillers, including a subsidiary of Royal Dutch Shell, saying the landowner failed to prove that the companies do not possess a valid oil and gas lease.
The ruling also touched on what appears to have been an issue of first impression for the U.S. District Court for the Middle District of Pennsylvania: whether a party’s right to rescind a lease on the grounds of fraud transfers when the lease is conveyed to another party.
Ultimately, however, the court appeared to stop short of definitively ruling that it does not.
In Markowicz v. SWEPI, U.S. District Judge Matthew W. Brann of the Middle District of Pennsylvania granted summary judgment to defendants SWEPI LP and Ultra Resources Inc. and against plaintiff Karl Markowicz, who had claimed that he never signed the lease and that his mother, Beverly Markowicz, who signed the lease for him, had no authority to do so and had been fraudulently induced to sign by a representative of the defendants.
"If Beverly — as then-owner of an undivided half-interest in the 46 acres as tenant-in-common with Karl — entered into the September 21, 2005, lease with defendants, Karl’s noninvolvement does not provide a basis for declaring the agreement void in its entirety," Brann said. "Neither Karl’s agreement to enter into the lease, nor the authorization of his mother to do so on his behalf, was necessary to create a valid agreement giving defendants the right to explore and exploit the 46 acres for oil and gas. Beverly’s consent was enough."
In Markowicz, according to Brann, Karl Markowicz had alleged that Ultra leasing agent Michael Reese had visited Beverly Markowicz in September 2005 and had deceived her into signing a lease by presenting the document to her on a clipboard, folded so that only the space for her signature was visible.
According to Karl Markowicz, Beverly Markowicz was, at the time, in the process of settling her deceased mother’s estate and had signed the lease mistakenly believing it was a document pertaining to the estate, Brann said.
Karl Markowicz claimed his mother had signed his name on the document so that he could be contacted if something were to happen to her, according to Brann.
Brann said the defendants disputed the claim that Reese deceived Beverly Markowicz, but offered no witness testimony to refute it.
The initial term of the lease was five years from September 21, 2005, but it also allowed for that term to be extended indefinitely once drilling operations commenced either on the property or on other properties with which it had been "’unitized,’" Brann said.
The lease was recorded with the Tioga County Recorder of Deeds in November 2005, according to Brann, and soon after Beverly Markowicz conveyed her half-interest in the 46-acre property to Karl Markowicz.
Brann said Beverly Markowicz did not receive a copy of the lease at the time of her signing and had written to Ultra in December 2005 to request a copy, signing the letter with Karl Markowicz’s name.
Beverly Markowicz received a copy of the lease later that month, Brann said.
Beverly Markowicz also began receiving delay rental payments from Ultra as early as 2005, which she continued to believe were related to her mother’s estate, according to Brann.
Karl Markowicz instructed his mother to keep the proceeds, Brann said.
According to Brann, once Karl Markowicz learned of the gas lease sometime in late 2010, he authorized his mother to communicate with the defendants on his behalf, believing that she would relay his position that no valid lease existed.
In February 2011, Karl Markowicz filed suit against Ultra and SWEPI, the successor-in-interest to East Resources Inc., according to Brann.
Brann said Pennsylvania law allows for one co-tenant to lease his or her exploration and production rights without the consent of the other co-tenant.
"Where one co-tenant is party to a mineral lease and the other is not, the ‘usual rule where there are no facts showing intentional wrong’ simply compensates (according to his interest) the tenant who is not a party for the fair value of the minerals extracted by the lessee," Brann said, quoting language from the state Supreme Court’s 1912 ruling in McIntosh v. Ropp.
But Karl Markowicz claimed that the lease should be voided regardless, because his mother had been fraudulently induced into signing it.
Brann, however, said there was "a fundamental problem with this argument: Even assuming he can establish that Beverly was fraudulently induced to enter into the lease, Karl is in no position to ask the court to void it."
"As Karl recognizes, a contract entered into as a result of fraudulent inducement is not void but merely voidable," Brann said.
According to Brann, Karl Markowicz was not entitled to relief unless he had properly exercised his right to rescind, which he did not.
Brann said it’s unclear whether Pennsylvania law would even allow Karl Markowicz to rescind a lease conveyed to him by his mother on the grounds that she’d been fraudulently induced into signing it.
The only case that addressed the issue, according to Brann, was Peoples Pittsburgh Trust v. Commonwealth from 1946, in which the state Supreme Court ruled that the right to rescind an agreement is "wholly personal" to the party that originally entered into the agreement and is not assignable to another party.
"Applying the reasoning of Peoples Pittsburgh to the case at bar, Beverly’s right to rescind her lease of the 46 acres on the ground she was defrauded was ‘wholly personal,’ and did not survive her transfer of the lease to Karl," Brann said.
But even if it did, Brann continued, the state Supreme Court held in its 1964 case Sixsmith v. Martsolf that rescission must be sought "’promptly’" upon the discovery of fraud.
"Karl filed this suit for rescission more than 50 months after he was put on notice of the lease and its terms," Brann said. "Although Karl asserts that he was unaware of the lease on the 46 acres until sometime in 2010, by operation of Pennsylvania law he was on notice by the end of 2005."
According to Brann, even if Beverly Markowicz had no authority to sign the lease in her son’s name, Karl Markowicz ratified the agreement.
"The undisputed facts show that Karl not only failed to take affirmative steps to disavow the lease until (at best) late 2010, he also effectively accepted its benefits when he — albeit as a result of a misapprehension — transferred to Beverly delay rental checks that Ultra dispenses pursuant to the terms of the lease," Brann said.
As for Karl Markowicz’s claim that his mother had been fraudulently induced, Brann said it’s "at least a close question whether summary judgment should be ordered for defendants on the issue of justifiable reliance," because Beverly Markowicz failed to even ask Reese whether she could read the document before signing it.
Regardless, Brann said, the parol evidence rule precluded the court from considering anything Reese may have said about the lease during his visit with Beverly Markowicz.
Counsel for Markowicz, Thomas Waffenschmidt of Rieders, Travis, Humphrey, Harris, Waters & Waffenschmidt in Williamsport, Pa., declined to comment on the case.
Counsel for the defendants, J. David Smith of McCormick Law Firm in Williamsport, could not be reached for comment.
(Copies of the 22-page opinion in Markowicz v. SWEPI, PICS No. 13-0918, are available from Pennsylvania Law Weekly. Please call the Pennsylvania Instant Case Service at 800-276-PICS to order or for information.) •