SLT Holdings v. Mitch-Well Energy, Aplt. ( 2021 )

[J-92-2020] [MO: Mundy, J.]
IN THE SUPREME COURT OF PENNSYLVANIA
WESTERN DISTRICT
SLT HOLDINGS,
: LLC, JACK E. No. 6 WAP 2020
MCLAUGHLIN, AND ZUREYA :
MCLAUGHLIN, : Appeal from the Order of the
: Superior Court entered August 23,
Appellees : 2019, at No. 542 WDA 2018,
: affirming the order of the Court of
: Common Pleas of Warren County
v. : entered March 13, 2018, at No. 626
: of 2013.
:
MITCH-WELL ENERGY, INC., AND : ARGUED: October 22, 2020
WILLIAM E. MITCHELL, JR., AN :
INDIVIDUAL, :
:
Appellants :
CONCURRING AND DISSENTING OPINION
JUSTICE WECHT DECIDED: APRIL 29, 2021
In Hutchison v. Sunbeam Coal Corp.,1 this Court reaffirmed a principle that long
has governed our approach to oil, gas, and mineral contracts.
In letting land for the extraction of minerals, an obligation to pay minimum
advance royalties does not create an implied duty to mine under
Pennsylvania law. We have never implied such a duty and decline to do so
now.
In coal mining leases, where the consideration for the privilege of removing
the mineral is a royalty on the amount extracted, it is common for the parties
to stipulate that a minimum advance royalty will be paid to the landowner if
no mining is done. . . . In Hummel v. McFadden, 150 A.2d 856 (Pa. 1956),
this Court implied a duty to mine in a lease agreement which did not provide
for minimum royalties in the absence of mining. There, the implied covenant
imposed upon the mining company a duty to commence operations in order
1 519 A.2d 385 (Pa. 1986).
to provide the landowner some return on his agreement. Our holding in
Hummel leaves the contracting parties free to bargain for a provision
addressing the amount and type of consideration to be paid in lieu of
forfeiture should the mining company fail to commence mining operations.
Pennsylvania courts have reasoned that minimum advance royalties are in
the nature of liquidated damages for the lessee’s failure to mine. . . . Such
reasoning recognizes minimum advance royalties as the consideration
flowing from the coal company to the landowner in lieu of the tonnage
royalties which would be paid if mining operations were undertaken.
Implying a duty to mine in the face of a minimum advance royalty clause
ignores the terms agreed to by the contracting parties.2
In this case, the Leases,3 in providing for “Shut-In Gas Royalties” (hereinafter,
“Shut-In Royalty”) that appear to have no time limitation,4 can be said to reflect the leasing
parties’ recognition of the prospect of non-production and their bargained-for intention to
ensure a monetary benefit to Lessors if Lessees fail to produce in sufficient quantities to
2 Id. at 388 (cleaned up); accord Jacobs v. CNG Transmission Corp., 772 A.2d 445,
454-55 (Pa. 2001) (applying the same reasoning to a natural gas lease).
3 As set forth by the Majority, the interests upon which the instant claims are founded
changed hands during the terms of the Leases for Warrant 769 (hereinafter “the
McLaughlin Property”) and Warrant 3010 (“the SLT Property”). See Maj. Op. at 2-4; see
also Tr. Ct. Op., 1/9/2018, at 1-2; Am. Compl. at 3-6. For ease of reference, I refer
hereinafter to Appellant-Lessees Mitch-Well Energy, Inc., and William E. Mitchell, Jr.,
collectively as “Lessees” and Appellee-Lessors SLT Holdings, LLC, Jack E. McLaughlin,
and Zureya McLaughlin collectively as “Lessors.” I refer to the corresponding leases as
the “McLaughlin Lease” and the “SLT Lease,” collectively the “Leases.” Hereinafter, I cite
the McLaughlin Lease provisions, which are materially identical to the corresponding
terms of the SLT Lease.
4 See, e.g., McLaughlin Lease at 2 ¶ 8 (providing for temporarily “shut-in” wells, and
prescribing a royalty by cross-reference to ¶ 5 (“Rental Payment”), prescribing advance
payment, every twelve months, of $12.00 per acre). Paragraph 18 of the McLaughlin
Lease provided for a minimum payment of $5 per acre per twelve months when the royalty
does not exceed that amount. The SLT Lease provided similarly, albeit at a different rate
per acre. See Maj. Op. at 2-3 & n.2. I elect the “Shut-In Royalty” language because there
is no question that both wells produced in paying quantities before Lessees ceased
operations, and it has been Lessees’ position that the wells, despite being inactive
presently, satisfy the legal definition of “in paying quantities,” as that term is used in oil
and gas leases.
[J-92-2020] [MO: Mundy, J.] - 2
pay royalties equal to or greater than the Shut-In Royalty. That Lessees patently
breached their contractual duty in this regard for at least sixteen years, after a relatively
brief initial period of production, does not transform this case into one sounding in equity,
even if the result arguably is inequitable; any remedy must spring from the Leases
themselves.5 In this regard, I agree with the Majority.
The temptation to resort to equity arises from what is difficult not to interpret as
Lessees’ bad-faith. After a few years of minimal production that did not even approach
the number of working wells Lessees agreed to establish (conditions permitting),6
Lessees ceased operations entirely and thereafter made no effort to avail themselves of
their subsurface rights. During that span, Lessees ignored communications by Lessors
expressing their concern over the inactivity and their belief that Lessees were in default
under the Leases. In effect, Lessees made it plain for years on end that they intended to
do nothing with their rights to well over a thousand acres spanning two properties—
including pay for them.
In long-term or indefinite leases, such as those before us, a fixed Shut-In Royalty
diminishes in value over time by virtue of inflation and other market forces, such that the
5 But see Tr. Ct. Op., 1/9/2018, at 6 (citing Jacobs v. CNG Transmission Corp., 332
F. Supp.2d 759 (W.D. Pa. 2004)) (“An obligation to make payments in lieu of production
royalties is only intended to spur the lessee toward the development and compensate the
lessor for the delay. The Jacobs court expressly rejected the proposition that the
defendant could indefinitely postpone development of the property by paying rental fees
in place of royalties. This proposition would render the lease a mere option.” (citations
omitted)).
6 McLaughlin Lease at 3 ¶17 (obligating Lessees to drill, “if warranted,” one well
during the first year of the lease, and five wells each year thereafter until thirty wells are
drilled). Lessees drilled only one well on each of the Properties.
[J-92-2020] [MO: Mundy, J.] - 3
lessor in each passing year receives less and less value for granting his or her rights to
the lessee. But we may not inquire as to the soundness of the bargain; we may ask only
whether the agreement has all the contours of a binding contract, including consideration,
however imbalanced we may believe it to be.7 Notably the Shut-In Royalty provisions are
not the only ones that reflect the contracting parties’ clear intention to hedge against non-
production. The Leases also specify that only a court can terminate the lease—and only
if Lessors provide written notice of default and a thirty-day period during which Lessees
have the opportunity to cure the default.8 And as the Majority notes, where a contract
expressly provides for the remedies available in the event of breach, the court should not
reach outside its four corners in search of an equitable remedy. So per Hutchinson and
Jacobs, the Leases must govern, and must be construed consistently with the law of
contract.9
But unlike the Majority, I find no cause to question that notice and an ample
opportunity to cure were provided in this case. First, the Leases’ written notice
7 See Hillcrest Found. v. McFeaters, 2 A.2d 775, 778 (Pa. 1938) (“It is an elementary
principle that the law will not enter into an inquiry as to the adequacy of the consideration”
for a contract (quoting 1 W ILLISTON ON CONTRACTS § 115 (rev’d ed.))); Dreifus v.
Columbian Exposition Salvage Co., 45 A. 370, 371 (Pa. 1900) (“In the absence of fraud,
the courts never inquire into the adequacy of the consideration of an agreement.”).
8 See McLaughlin Lease at 3 ¶ 12 (“Default and Election of Remedies—In the event
of a default, Lessor agrees to notify Lessee in writing as to the nature of the default and
Lessee shall have thirty (30) days from receipt of Lessor’s notice to cure such default. . . .
Lessor agrees that its exclusive remedy shall be to terminate this lease in the event a
court of law determines that the default has not been cured as hereinabove provided.”).
9 See J.K. Willison v. Consol. Coal Co., 637 A.2d 979, 982 (Pa. 1994).
Unambiguous contracts are interpreted by the court as a matter of law. Ins. Adjustment
Bureau, Inc. v. Allstate Ins. Co., 905 A.2d 462, 469 (Pa. 2006).
[J-92-2020] [MO: Mundy, J.] - 4
requirements do not specify the form such notice must take, and it is undisputed that
Lessors sent, and Lessees received, Affidavits of Non-Production asserting default under
the Leases—in 2005 as to the McLaughlin Property and in 2012 as to the SLT Property.10
In the absence of more contractual particularity regarding the form such notice should
take, I would construe the Leases in a common-sense fashion, concluding that Lessees
received written notice of default.11 And given the delay between those notices and the
initiation of this action, Lessees indisputably had years to cure by resuming activity or by
10 See Aff. of Non-Production, Am. Compl., Ex. U (asserting that “there has been no
production upon the premises of [the McLaughlin Property], and that the McLaughlin
Lease “[has] expired, and that [its] terms have not been adhered to by [Lessee], and that,
therefore, at this time the [McLaughlin Lease has] been abandoned, and [is] void”), Ex. T
(SLT asserting that “since they have owned [the SLT Property] there has been no activity
on the subject acreage,” “[t]here has been no royalty paid,” “there is no equipment of any
kind located” on the SLT Property, and “[a]s a result of the above [the SLT Lease] has
been forfeited as per its terms”).
11 The Majority disregards the affidavits of non-production in this connection,
asserting that Lessors only “argue that their complaint should be deemed such a notice.”
Maj. Op. at 12. This narrowing inference contradicts Lessors’ brief. See Lessors’ Br.
at 25 (“The questionable applicability of the notice provision and its lack of specificity
confirm it is not a competent basis to disturb the trial court’s entry of summary judgment.
First, both [Lessors] filed Affidavits of Non-Production prior to the commencement of
these proceedings.” (emphasis added)). The Majority then turns the passage of years
between the commencement of non-production, the transmission of the affidavits of non-
production, and the filing of the first complaint against Lessors, characterizing it as an
“attempt to bypass the notice requirement and avoid any statute of limitations attendant
with such delay.” Maj. Op. at 13. Relatedly, the Majority suggests that laches would
render Lessors’ claim of abandonment—assuming it was viable—“problematic” for want
of due diligence. Be all of that as it may, by rule, a defendant must raise statute of
limitations and laches defenses in their answer to the complaint as “new matter,” failing
which, the defenses will be waived. See Pa.R.C.P. 1030 (specifying that statute of
limitations and/or laches must be raised in new matter); Pa.R.C.P. 1032(a) (“A party
waives all defenses and objections which are not presented either by preliminary
objection, answer or reply.”). Lessees raised neither. Accordingly, those defenses have
been waived. Moreover, under the clear terms of the Leases, Lessees continue to be in
breach with every passing year that they do not produce or pay Lessors the Shut-In
Royalty.
[J-92-2020] [MO: Mundy, J.] - 5
paying the Shut-In Royalty. Second, in light of Lessors’ Amended Complaint and their
Motion for Partial Summary Judgment, as well as the trial court’s comments, I would read
the trial court’s ruling as comprising precisely the judicial termination of the Leases for
default that the Leases, themselves, require.
The Majority, viewing the case less holistically, believes that the trial court erred in
granting summary judgment, concluding:
It was incumbent upon the trial court to address [Lessors’] motion for
summary judgment to determine if an adequate remedy at law existed
through a contract analysis of the specific provisions of the [Leases],
including the obligation for [Lessors] to provide notice of default and [an]
opportunity to cure, the prescribed exclusive remedy for breach, and any
retained rights [Lessees] may have in the event of termination.12
Ostensibly, the Majority adopts this cautious approach because it views the trial court’s
ruling as based solely upon abandonment because that is the theory Lessors pursued
most vigorously and, until now, successfully.
But the Majority also acknowledges that Lessors’ Motion for Partial Summary
Judgment was not so confined: “[Lessors] alleged in their motion for partial summary
judgment [that Lessees] admitted [they] breached material terms of the lease for nearly
20 years, for which [Lessors] sought a finding that their rights ‘terminated or otherwise
lapsed’ as a matter of law.”13 And reviewing Lessors’ motion shows still more evidence
that Lessors sought a ruling based upon either termination or abandonment. Referring
to Lessees’ admissions, Lessors asserted that Lessees’ failure to perform “operate[d] as
a termination of both [L]eases,” adding that, “[a]lternatively, [Lessees’] admitted conduct
12 Maj. Op. at 14.
13 Id. at 10 n.8 (Majority’s emphasis).
[J-92-2020] [MO: Mundy, J.] - 6
constitutes an abandonment of the Leases.”14 And though the Majority opines that
Lessors “did not distinguish among the remedies sought,” the Motion suggests not so
much a lack of specificity, but rather a prayer for relief in the alternative: “[U]nder either
construction, [Lessees’] admissions confirm their rights to [the Properties] terminated or
otherwise lapsed several years ago, as a matter of law.”15 Thus, it cannot fairly be said
that Lessors did not seek termination as a remedy. In specifically seeking declaratory
judgment establishing their “undisputed right to the properties at issue,”16 Lessors sought
legal rather than equitable relief, or at least did not foreclose such relief in favor of the
equitable injunctive relief Lessors also sought. Notably, the corresponding section of
Lessors’ proposed order provided: “Because [Lessees] failed to remit the payments
required by Paragraph 18 of the Leases . . ., any rights either of the [Lessees] ever held
with respect to said properties are hereby TERMINATED.”17 This posited a legal remedy
for a breach of the Leases, one that—if granted in those terms—would have rendered
moot the separate prayer for injunctive relief.
For this reason, I would not be as parsimonious as the Majority, inviting further
litigation of a question that seems settled. Lessors provided an undisputed basis upon
which to decide the claim on a contractual basis, and the trial court’s ruling taken as a
whole foreclosed any effective defense to termination, even if its discussion highlighted
14 Mot. for Partial Summ. J. at 13 ¶ 30.
15 Id. at 13 ¶ 31.
16 Id. at 14 ¶ 35.
17 Id. at 19, Proposed order ¶ 2(a) (emphasis in original).
[J-92-2020] [MO: Mundy, J.] - 7
abandonment principles.18 Near categorical non-performance spanning nearly two
decades is as material a breach as one will find, and there can be no question that the
trial court perceived the Leases as terminated as part and parcel of its broader, more
problematic finding of equitable abandonment. That the latter aspect of the trial court’s
ruling is infirm does not taint the trial court’s clear determination that, en route to what the
court deemed abandonment, Lessees materially breached the Leases.19 The trial court
18 Notably, the trial court interpreted Lessors’ complaint as seeking relief on the basis
of either termination or abandonment. See Tr. Ct. Op., 1/9/2018, at 4 (“[Lessors] argue
that because [Lessees have] defaulted on the lease[s], the lease[s have] terminated or
else [they have] been abandoned.”).
19 The breadth of the trial court’s findings in this regard is reflected in its determination
that Lessees would not be entitled to the retained acreage nominally provided for in the
Leases. See Tr. Ct. Op., 1/9/2018, at 7 (“Even if the [c]ourt were to apply the terms of
¶ 17 as though the [L]eases were still in effect, the limiting language contained therein
precludes application to the instant case. The retention of acreage around wells is only
permitted when the wells are capable of producing oil and/or gas. The wells in question
went approximately sixteen years without producing a marketable quantity of oil and/or
gas.”); see also McLaughlin Lease at 4 (“In the event [Mitchell] fails to fulfill [his] drilling
commitment . . ., this lease will terminate with the exception that the Lessee shall retain
twenty acres (20) surrounding each well drilled pursuant to this lease and which is capable
of producing oil and/or gas . . . .”). It also appeared earlier in the trial court’s 2014
preliminary injunction ruling, where the court observed that “[i]t follows logically” from the
Shut-In Royalty “that if no shut-in gas royalties are paid and the wells are capable of
production, then the Lease[s] terminate[].” See SLT Holdings, LLC v. Mitch-Well Energy,
Inc., 217 A.3d 1258, 1265 (Pa. Super. 2019) (quoting Tr. Ct. Op., 2/14/2014, at 3). For
these reasons, the Majority is incorrect to insist categorically that “the trial court did not
address” these matters, and also appears to miss my point in suggesting that I propose
“to resolve the breach of contract claim” of whole cloth. Maj. Op. at 13 n.9. I would
recognize termination in this posture because it harmonizes the trial court’s repeated
commentary with the unambiguous terms of the contract that sustain those observations.
The interpretation of an unambiguous contract is a question of law within our purview,
and also is amenable of summary disposition, something Lessees expressly invited. I
recognize that my approach would not entirely end the matter, and explain as much
below. But it disserves the interests of justice to invite additional papering and argument,
at risk of considerable additional delay, simply to return to the conclusions that Lessees
sought and the trial court drew for sound reasons.
[J-92-2020] [MO: Mundy, J.] - 8
clearly concluded that the Leases were terminated. To require it to tolerate additional
proceedings to confirm what has already been admitted and repeat what it has already
found would be the hollowest of exercises, while Lessors’ rights languish.
That is not to say there is nothing left to determine on remand. In finding that this
case hinges upon the law of contract rather than abandonment, and that contract law
leads to summary judgment for Lessors, that leaves open the question of what if any
remedies are available beyond termination of the Leases. The trial court’s observations
regarding relief are not readily adapted to a narrower contract-based resolution. For
example, the trial court found that Lessees were not entitled to take ownership of a certain
number of acres immediately surrounding the two shuttered wells, but that conclusion
was substantially informed by abandonment and consequent nullification of the Leases.
Termination is not nullification. Whether the trial court would deny Lessees this acreage
in the context of a termination-driven ruling requires further development.20
The trial court also based its ruling on conversion upon its finding of abandonment
and nullification of the Leases.21 But if the Leases were terminated rather than
abandoned, then when Lessees emptied the storage tank on the McLaughlin Property,
they may well have had a legal right to the tank’s contents, leaving Lessors entitled only
to royalties. Thus, I would reverse the lower court’s affirmance of the trial court’s entry of
summary judgment on conversion.
20 Cf. Tr. Ct. Op., 1/9/2018, at 4 (describing several irregularities and uncertainty with
respect to the retained-acreage provision).
21 Id. at 7-8.
[J-92-2020] [MO: Mundy, J.] - 9
In any event, to find that the parties in this case entered into Leases sufficient to
fully address how default under the Leases must be rectified must not be taken to diminish
the importance of the implied covenant of production and equitable abandonment to an
area of commerce rife with the risk of asymmetrical bargaining power and fraught with
unscrupulous dealings, where one misstep may invite what amounts to indefinite
squatting on valuable mineral rights.22 Where, as here, a mineral lease opens with a clear
assurance that the intent of the parties is to maintain a partnership contingent upon the
active exploitation of sub-surface minerals,23 but contains no express provision for the
contingency that the lessee simply absconds, the law must retain some equitable means
to disencumber the fee owner’s mineral rights. Were there no Shut-In Royalty provisions
in the Leases in this case, I would conclude not only that Lessees abandoned their
leaseholds as a matter of equity, but that they did so intentionally, making this the rare
case that merits the entry of summary judgment for the lessor.24
22 See generally Ann M. Eisenberg, Land Shark at the Door? Why & How States
Should Regulate Landmen, 27 FORDHAM ENVTL. L. REV. 157 (2016).
23 See McLaughlin Lease at 1, ¶ 1 (“Lessor hereby grants exclusively to Lessee, its
successors and assigns, for the purpose of exploring for, developing, producing and
marketing oil and gas . . . a lease on the following described land . . . .”).
24 See Aye v. Phila. Co., 44 A. 555, 556 (Pa. 1899) (“An unexplained cessation of
[drilling] operations for the [four-year] period involved in this case gives rise to a fair
presumption of abandonment, and, standing alone and admitted, would justify the court
in declaring an abandonment as [a] matter of law. But it may be capable of an
explanation, and is therefore usually a question for the jury on the evidence of the acts
and declarations of the parties.”); see also Clark v. Wright, 166 A. 775, 777 (Pa. 1933)
(“Under a lease of this character appellants’ acts show an intention to surrender. This
intention was effectuated by withdrawal from the premises. The failure of appellants’
market is not a sufficient explanation of their withdrawal, for it appears that there was a
market for the gas had they been willing to expend a reasonable sum to procure it.”).
[J-92-2020] [MO: Mundy, J.] - 10
But that is not the case before us. In keeping with Hutchinson, I must conclude
that the Leases govern their own continuing effect or termination. I simply disagree that
termination remains an open question on remand. Accordingly, I would affirm the lower
courts’ rulings just insofar as they effected termination of the Leases under their own
terms, and remand to address conversion and any remedies available in addition to
declaratory judgment on the termination question.
[J-92-2020] [MO: Mundy, J.] - 11