The economic viability of extracting oil and natural gas from unconventional shale formations has resulted in a significant direct financial benefit to thousands of landowners in Pennsylvania. It has focused attention on the importance — and in some cases the difficulty — of identifying the parties who possess the ability to lease the rights to develop these resources when ownership of the oil or gas interests is not easily determined. In many cases, the unknown status of the subsurface interest owners results from the passage of many decades after the severance of all or part of the oil and gas estate by a previous owner in the chain of title. Increasingly, Pennsylvania lawyers have turned to the action to quiet title as a means to clear legal impediments from the road to development.
The natural gas industry requires certainty in order to make the considerable financial investment to prospect and produce oil and gas from unconventional shale gas plays. Competing claimants to these valuable rights have a strong interest in securing title. The misuse and, in some cases, abuse of the action to quiet title has resulted in the opening and striking of judgments (almost always obtained by default) reuniting oil and gas estates with that of surface owners, in some instances only after oil and gas leases to develop those resources have been entered into. An additional concern in split estate situations is the marketability of the surface owner's title to his or her land, coupled with the fear of adverse impact to his or her property from the development of the separately owned oil and gas reserves.
The Pennsylvania Legislature has drafted a number of bills to deal with the problems created by long unclaimed mineral interests. One piece of legislation has emerged over the 2011-12 and current legislative sessions to substantially alter the action to quiet title — as it relates to severed subsurface estates in a broad category of minerals, including oil and gas — and, along with it, a well-developed body of common law interpreting the concept of abandonment and adverse possession in Pennsylvania. Senate Bill 258 raises threshold questions about whether it will promote certainty of title to oil and gas interests, dissipate the fog surrounding the test for justifying alternative service over the unknown owners of lost subsurface interests in a quiet title action and whether an action to quiet title is even the appropriate vehicle to address the concerns of both industry and land and mineral rights owners. Space limitations prohibit a complete enumeration of the range of problems created by oil and gas interests whose owners cannot be located or all the issues raised by S 258. This article will focus on the central feature of the pending Senate legislation: the rebuttable presumption of abandonment in favor of the surface owner after 50 years of non–use, and the issues it raises.
There are two causes of action that surface owners in the Marcellus Shale region have relied upon in recent years to attempt to unify their estate with long-unused subsurface mineral interests: adverse possession and abandonment. However, the typical plaintiff-surface owner is unlikely to be successful utilizing either approach because of the long-settled state of the law regarding both types of claims as applied to the usual circumstance of the mere failure of the owner to exercise rights over the severed subsurface estate. In the case of an action based upon adverse possession, a plaintiff must openly, continuously and notoriously possess the property at issue such that the rightful owner would be placed on notice that he or she must act to protect his or her interest within the statutory period of 21 years, as in Conneaut Lake Park v. Klingensmith, 66 A.2d 829 (Pa. 1949).
The decisions are numerous which essentially require actual possession of the property at issue in order to prevail. The typical surface owner cannot establish the conduct necessary to gain title to the disputed interest. Equally unavailing to the common surface owner is a claim to acquire title to a severed mineral estate grounded in abandonment, because the intent to abandon and an overt act by the defendant evidencing that intention are required, lack of use being insufficient, as in Llewellyn v. Philadelphia & Reading Coal & Iron, 162 A.2d 429 (Pa. 1932). The economic conditions created in the post-Marcellus Shale era and the proven nature of natural gas reserves and production reduce these prospects even further.
In contrast to the long-recognized body of law disfavoring the transfer of real property ownership by either practice, the language of S 258 would establish a rebuttable presumption in quiet title actions and proposes, in part, the following amendment to Title 42 of the Pennsylvania Consolidated Statutes, on actions to quiet title involving subsurface rights:
"In an action to quiet title involving subsurface rights to real property, failure by any person claiming to hold the subsurface rights, other than the surface owner of the real property, to exercise the subsurface rights for a period in excess of 50 years shall create a rebuttable presumption that the subsurface rights have been abandoned by such person in favor of the surface owner."
In a sponsorship memorandum released in January, at the time when S 258 was introduced (substantially similar to legislation offered as S 1324 in the last legislative session), the bill's author, state Senator Gene Yaw, R-Bradford, chair of the Senate Environmental Resources and Energy Committee, explained that the purpose of S 258 is to provide "an advantage" to surface owners who initiate action "when the ownership of oil or gas rights is unclear or unknown." Although not specifically stated, the presumed goal of the surface owner who would gain this advantage is to reunify his or her surface ownership with the severed but dormant subsurface estate through the vehicle of a quiet title action. The impetus for S 258 was the outcry from some landowners (whose rights were limited to the surface estate) regarding the difficulties they encountered in attempting to locate and effect valid service on the owners of severed oil and gas estates in actions to quiet title to subsurface interests. The term "subsurface rights" in S 258 is defined broadly to include "coal or other mineral, oil or gas rights or interests." The proposed amendment would also limit application of the presumption to mineral interests created by reservation, as opposed to title created by an express grant.
One concern raised by the rebuttable presumption in S 258 is that it would seem to alter settled Pennsylvania law with regard to causes of action for abandonment and adverse possession involving subsurface mineral interests, including those for oil and gas. While the presumption is a rule of evidence and the proponents of the bill stress that a plaintiff relying upon it in a quiet title action would still have to prove his or her case by a preponderance of the evidence, there is no explanation as to how the presumption could be overcome. The presumption might assist the surface owner in obtaining a judgment by default and control over a dormant mineral estate, but it also has the possibility of destabilizing the certainty of title to such interests, a prospect that could be counterproductive to the development of the successful plaintiff's newly acquired interest. The real problem with the use of the quiet title action in cases involving unknown or unlocatable owners of subsurface interests seems to be in the ill-defined and antiquated standard for determining what constitutes a good-faith effort to find a defendant contained in Pennsylvania Rule of Civil Procedure 430, which is a necessary precondition to gaining court approval for service by publication. Generally, a minimal review of public records has been held sufficient to support a claim of a reasonable or "diligent" search, and the necessity of utilizing the various Internet search engines such as Ancestry.com and others have not been addressed by the courts.
During a hearing of the Senate Environmental Resources and Energy Committee held in March to discuss S 258, one industry witness reviewed the results of its survey of 124 recent cases in which quiet title had been used in actions to resolve title to dormant mineral estates in Northeastern and North Central Pennsylvania. This survey purported to reveal a striking number of cases in which service by publication had apparently been negligently or willfully misused by plaintiffs counsel to obtain default judgments in actions to quiet title to "abandoned" mineral interests. While this conduct may be the exception rather than the rule, the volume and examples of cases in which default judgments were entered based upon inadequate or poorly executed efforts to locate defendants — and the resultant number of those judgments either subjected to challenge or successfully opened or stricken — was alarming.
It has also been suggested that a preferred alternative to the amendment of the action to quiet title proffered by S 258 would be to revise the Dormant Oil and Gas Act. The DOGA's purpose is the facilitation of the development of subsurface properties when the owners of fragmented interests are truly unable to be found. Because a DOGA trust is established for the benefit of unknown owners as a consequence of the inability to locate them and Rule 430 is used to effect service by publication for this reason, the same deficiencies with the Rule 430 procedure discussed above would need to be addressed. The DOGA has other real and perceived problems, including the prospect that if the fund created is not eventually claimed by a purported owner, it simply escheats to the state. In addition, a DOGA action does not result in the reunification of previously severed mineral interests in the surface owner, but its insulation from liability to parties who fund the trust aids in providing the certainty of title to incentivize development.
S 258 raises a number of legitimate concerns, only one of which is addressed above. To be sure, there are financial and other hardships resulting from numerous instances of the historical severance of mineral interests from the full estate in real property. However, any attempt to redress these adverse impacts must seek out a balance between and reconcile the interests of the surface owner, the dormant mineral owner and the mineral development industries. Whether and how those interests can successfully be addressed by amendments to the procedure for quieting title, the DOGA or some other legislative initiative remains open to debate.
Stephen Saunders of Saunders Law is a frequent speaker and author and is an editor for the comprehensive treatise, Law of Oil & Gas in Pennsylvania, which is scheduled for publication by the Pennsylvania Bar Institute in 2014. He can be contacted at email@example.com. Saunders Law is an oil and gas, environmental and energy law firm representing clients throughout Pennsylvania from its office in Scranton.