Pa. Supreme Court won’t consider oil and gas royalty Minimums

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The state Supreme Court has declined to hear arguments in a case that dealt with the interpretation of oil and gas royalties under the Guaranteed Minimum Royalty Act.

That lets stand the state Superior Court’s decision in Southwestern Energy Production v. Forest Resources that an amendment to an oil and gas lease reducing a royalty percentage below 12.5 percent violated the act.

Writing for a unanimous three-judge panel of the court, Judge Sallie Updyke Mundy reversed the trial court’s decision holding that the amendment, referred to in the opinion as an “assignment back,” was separate from the initial lease and did not violate the required royalty minimums.

“We conclude that a provision in a lease couched in the guise of an assignment back of a portion of a defined royalty that results in a lessor’s net royalty being less than one-eighth fails to guarantee the minimum royalty mandated by the [Guaranteed Minimum Royalty Act],” Judge Mundy said. “To allow such provisions in a lease, where a trick of drafting permits the left hand to remove what the right hand has given, would render the [Guaranteed Minimum Royalty Act] meaningless and run contrary to the plain language and intent of the legislation.”

The act requires a lease to pay at least a 12.5 percent royalty on all oil or gas removed from the property.

According to Judge Mundy, in 2002, the trustees of the Thomas E. Proctor Heirs Trust entered into an agreement to lease oil and gas rights of a property to Lancaster Exploration & Development Co. The agreement was modified with a letter agreement in 2002 and a letter agreement in 2005. The 2005 agreement “assigned back” 50 percent of the royalties to the lessee.

After Southwestern Energy Production Co., which had succeeded to Lancaster’s interest in the property, sought a “quiet title” regarding other energy companies’ interests in the oil and gas rights, the trust made a counterclaim, seeking a declaratory judgment that the amended lease was invalid.

The trust contended that the lease only nominally provided the minimum royalty to the landowners, and that the transaction, as a whole, left the trust with less than 50 percent of the minimum royalty.

Judge Mundy said there is little authority on the technical requirements for compliance with the act; however, she said the terms of the statute were unambiguous, and the intent was clear that the act doesn't merely require the designation of a minimum royalty in a lease, but a guarantee of at least one-eighth royalty.

The lessees, according to Judge Mundy, had contended that, as long as a lease provides the mandated minimum royalty, a lessor is free to assign that royalty in any way it chooses. A provision in the 2005 letter agreement included an “assignment back” of 50 percent of the royalties in exchange for Lancaster’s marketing services, as Lancaster would not be producing any oil and gas because it is not a production company.

Pepper Hamilton attorney Justin G. Weber, who represented the trust, said the Superior Court’s decision was straightforward.

“The Superior Court panel had unanimously applied well-established contract interpretation precedent,” Mr. Weber said. “There was no reason for the Supreme Court to take up an appeal and address the Superior Court’s straightforward application of precedent.”

Ronald Hicks Jr. of Meyer, Unkovic & Scott, who represented Lancaster, and Jeffrey Malak of Chariton, Schwager & Malak, who represented Southwestern Energy, did not return a call for comment.

Max Mitchell can be contacted at 215-557-2354 or mmitchell@alm.com. Follow him on Twitter @MMitchellTLI. To read more articles like this, visit www.thelegalintelligencer.com.


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