RPITA, LLC v. M & T ( 2015 )

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NON-PRECEDENTIAL DECISION – SEE SUPERIOR COURT I.O.P. 65.37
RPITA, LLC, : IN THE SUPERIOR COURT OF
: PENNSYLVANIA
Appellant :
:
v. :
:
MANUFACTURERS AND TRADERS :
TRUST COMPANY, : No. 1036 MDA 2014
SOUTHWESTERN ENERGY CORP., :
TNT 1, LIMITED PARTNERSHIP :
Appeal from the Order Entered May 21, 2014,
in the Court of Common Pleas of Susquehanna County
Civil Division at No. 2013-CV-1500
BEFORE: FORD ELLIOTT, P.J.E., SHOGAN AND STABILE, JJ.
MEMORANDUM BY FORD ELLIOTT, P.J.E.: FILED MAY 06, 2015
RPITA, LLC, appeals1 from the order of May 21, 2014, granting
summary judgment for WM Capital, successor-in-interest to Manufacturers
and Traders Trust Company, in this declaratory judgment action. After
careful review, we affirm.
The action arises out of an oil and gas lease
(“the Lease”) originally entered into between TNT1,
Limited Partnership (“TNT1”) and Chesapeake
Appalachia, LLC (“Chesapeake”) on January 31, 2008
and the dispute is over the priority of royalty
interests arising out of the Lease. Prior to the entry
of the Lease, TNT1 acquired large parcels of land
throughout Susquehanna County. Then, in 2004,
Manufacturers and Traders Trust Company (“M&T”),
1
RPITA was substituted as appellant for Peoples Neighborhood Bank on
December 3, 2014.
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WM Capital Partners XXXIX, LLC’s (“WM Capital”)
predecessor-in-interest, granted loans to TNT1 and
subsequently TNT1 executed and delivered to M&T a
mortgage dated September 28, 2004. The mortgage
was subsequently recorded. The mortgage pertained
to eight parcels of land and specifically to the
property subject to this action.
On January 31, 2008, TNT1 then entered into
the Lease with Chesapeake. The Lease was
subsequently assigned to Southwestern Energy
Production Company (“SEPCO”). On August 5, 2008,
TNT1 executed and delivered a Security Agreement
to M&T granting M&T a security interest in TNT1’s
remaining assets including personal property and
collateral. The UCC Financing Statement for the
Security Agreement was filed on August 7, 2008.
In addition to the transactions with M&T, TNT1
also entered into an agreement with Peoples
Neighborhood Bank (“PNB”). The agreement dated
July 13, 2012 titled Assignment of Rents, Royalties
and Profits (“Assignment”) granted PNB the rights to
all rents, income, royalties, and profits derived from
the oil and gas lease.
On July 18, 2012, TNT1, SEPCO, and M&T
entered into a Non-Disturbance and Attornment
Agreement (“NDA Agreement”). Subsequently TNT1
defaulted on its loan obligations with M&T which led
to M&T seeking the royalty payments. Following the
demand for royalty payments, WM Capital became
the successor-in-interest to the TNT1 loans when
M&T assigned all of its right, title and interest in
loans, including the interest in the Lease and the
collateral to WM Capital on November 15, 2013.
On December 3, 2013, PNB filed a Complaint
against M&T, SEPCO, and TNT1. On December 24,
2013, WM Capital as successor-in-interest to M&T
filed its Answer to the Complaint.
On March 4, 2014, WM Capital filed a Motion
for Summary Judgment. PNB then filed a response
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in opposition to WM Capital’s Motion for Summary
Judgment.
PNB alleges that because of the July 2012
Assignment, PNB is entitled to payments of all the
rents, income, royalties and profits derived from the
Lease. PNB alleges that such Assignment gives
priority on the royalties since it was executed and
recorded prior to a[n] NDA Agreement between
TNT1, M&T and SEPCO dated July 18, 2012.
On the other hand, WM Capital alleges that it
has the right to the royalties because of the
mortgage and Security Agreement which were
executed, delivered, and perfected in 2004 and
2008, years prior to the PNB Assignment. Argument
was held on April 28, 2014 to determine who has the
right to the royalties.
Trial court opinion, 5/21/14 at 1-3.
The trial court determined that the royalty payments are personal
property and therefore M&T’s UCC-1 financing statement was sufficient to
perfect its interest. The trial court also found that M&T’s Security Agreement
with TNT1, giving it a security interest in all of TNT1’s assets and personal
property, including collateral, was executed on August 5, 2008, before PNB’s
July 31, 2012 Assignment. Therefore, the 2008 Security Agreement takes
priority over the 2012 Assignment and WM Capital, as successor-in-interest
to M&T, has a priority claim to the royalties. This timely appeal followed.
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Appellant complied with Pa.R.A.P., Rule 1925(b), 42 Pa.C.S.A., and the trial
court filed a Rule 1925(a) opinion.2
The following issues have been presented for our review:
1. Did the Trial Court err in ruling that the royalty
payments at issue in this matter are personal
property such that the 2008 Manufacturers and
Traders Trust Company, predecessor in
interest to WM Capital Partners XXXIX, LLC
(hereinafter, “M&T”) Security Agreement and
Financing Statement granted M&T a perfected
security interest in the royalty payments?
2. Did the Trial Court err in finding that the
Security Agreement and Financing Statements
filed by M&T were sufficient to perfect M&T’s
interest in the royalties from the Oil & Gas
Leases of record?
3. As M&T did not have a perfected security
interest in the rents, royalties and payments
from the Oil & Gas Lease as a result of its 2008
filing, did the Trial Court err in ruling that the
2008 M&T Security Agreement takes priority
over the 2012 Assignments of the Leases,
Rents and Royalties to Peoples Neighborhood
2
The record indicates that summary judgment was granted in favor of WM
Capital only. In addition, SEPCO filed preliminary objections to the
complaint that were never decided, including a claim that the Pennsylvania
Industrial Development Authority is a necessary and interested party.
However, this action is in the nature of a declaratory judgment and the only
issue is who is entitled to the royalty payments; there is nothing left to be
established. SEPCO, the oil and gas well developer, has declined to file a
brief in this matter, indicating that its only concern is that the royalties be
paid to the proper party. Those funds are currently being paid into escrow.
It appears that TNT1 did not file any responsive pleadings, nor has it filed a
brief on appeal. According to WM Capital, the property formerly owned by
TNT1 was sold at sheriff’s sale to WM Capital. (WM Capital’s brief at 5.)
This case involves the very narrow legal issue of whose security interest
takes priority. As such, we decline to remand to the trial court for a
determination of finality.
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Bank, predecessor in interest to Peoples
Security Bank and Trust Company (hereinafter,
“PNB”)?
4. Did the Trial Court err in that it failed to
address PNB’s contention that the language of
the Subordination and Non-Disturbance
Agreement entered into between M&T, TNT1,
LP and Southwestern Energy Production
Company in 2012 constituted an Assignment of
the Rights to Royalties that was subsequent to
the Assignment of those rights to PNB[?]
Appellant’s brief at 5-6.
Initially, we note:
Our scope of review of a trial court’s
order disposing of a motion for summary
judgment is plenary. Accordingly, we
must consider the order in the context of
the entire record. Our standard of
review is the same as that of the trial
court; thus, we determine whether the
record documents a question of material
fact concerning an element of the claim
or defense at issue. If no such question
appears, the court must then determine
whether the moving party is entitled to
judgment on the basis of substantive
law. Conversely, if a question of
material fact is apparent, the court must
defer the question for consideration of a
jury and deny the motion for summary
judgment. We will reverse the resulting
order only where it is established that
the court committed an error of law or
clearly abused its discretion.
Grimminger v. Maitra, 887 A.2d 276, 279
(Pa.Super.2005) (quotation omitted). “[Moreover,]
we will view the record in the light most favorable to
the non-moving party, and all doubts as to the
existence of a genuine issue of material fact must be
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resolved against the moving party.” Evans v.
Sodexho, 946 A.2d 733, 739 (Pa.Super.2008)
(quotation omitted).
Ford Motor Co. v. Buseman, 954 A.2d 580, 582-583 (Pa.Super. 2008),
appeal denied, 970 A.2d 431 (Pa. 2009).
Appellant argues that the right to royalty payments is an account
arising out of the sale of oil and gas at the wellhead within the meaning of
the term “as-extracted collateral,” to which special rules apply for perfecting
security interests. WM Capital contends that royalties are personal property,
not real property or “as-extracted collateral,” and therefore M&T perfected
its security interest when it filed its financing statement with the Secretary
of the Commonwealth in August 2008. WM Capital argues that it is well
settled as a matter of Pennsylvania law that royalty payments, including
under an oil and gas lease, are considered personal property. According to
WM Capital, royalties are not payments out of the sale of oil and gas at the
wellhead; rather, they represent payments by a lessee to a lessor for the
right to obtain a fee interest in the oil and gas and to remove same. (WM
Capital’s brief at 11.) According to WM Capital, the fact that royalty
payments may be generated by the sale of oil and gas by the lessee does
not change their character as personal property rather than real property.
(Id. at 11-12.)
Pennsylvania’s Uniform Commercial Code (“UCC”), defines “account,”
in relevant part, as:
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(1) Except as used in “account for,” a right to
payment of a monetary obligation, whether or
not earned by performance:
(i) for property which has been or is
to be sold, leased, licensed,
assigned or otherwise disposed
of[.]
13 Pa.C.S.A. § 9102(a).
“As-extracted collateral” is defined as any of the following:
(1) Oil, gas or other minerals which are subject to
a security interest which:
(i) is created by a debtor having an
interest in the minerals before
extraction; and
(ii) attaches to the minerals as
extracted.
(2) Accounts arising out of the sale at the wellhead
or minehead of oil, gas or other minerals in
which the debtor had an interest before
extraction.
Id.
Under this Article, oil, gas, and other minerals that
have not been extracted from the ground are treated
as real property, to which this Article does not apply.
Upon extraction, minerals become personal property
(goods) and eligible to be collateral under this
Article. See the definition of “goods,” which
excludes “oil, gas, and other minerals before
extraction.” To take account of financing practices
reflecting the shift from real to personal property,
this Article contains special rules for perfecting
security interests in minerals which attach upon
extraction and in accounts resulting from the sale of
minerals at the wellhead or minehead. See, e.g.,
Sections 9-301(4) (law governing perfection and
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priority); 9-501 (place of filing), 9-502 (contents of
financing statement), 9-519 (indexing of records).
The new term, “as-extracted collateral,” refers to the
minerals and related accounts to which the special
rules apply. The term “at the wellhead”
encompasses arrangements based on a sale of the
produce at the moment that it issues from the
ground and is measured, without technical
distinctions as to whether title passes at the
“Christmas tree” of a well, the far side of a gathering
tank, or at some other point. The term “at . . . the
minehead” is comparable.
Id., Comment.
As the trial court states, this court has long held that royalties are
considered personal property. (Trial court opinion, 8/12/14 at 4, citing
Snyder Bros., Inc. v. Peoples Natural Gas Co., 676 A.2d 1226, 1230
(Pa.Super. 1996), appeal denied, 686 A.2d 1312 (Pa. 1996) (“A lease of
minerals in the ground is a sale of an estate in fee simple until all the
available minerals are removed; this leaves the lessor with only an interest
in the royalties to be paid under the lease, which are personal property.”
(emphasis deleted) (citation omitted)); see also Miller v. Dierken, 33 A.2d
804, 807 (Pa.Super. 1943) (royalty interests under oil and gas lease are
personalty) (citations omitted).) We agree with appellees that an interest in
the royalties is not an account arising out of the sale of oil and gas “at the
wellhead.” Rather, they are payments for the right to obtain a fee interest
in the oil and gas that has been severed from the estate. Therefore, the
royalties are personal property, not as-extracted collateral.
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In appellant’s second issue, it claims that since M&T filed its UCC-1
financing statement with the Department of State, rather than in
Susquehanna County, where the real property was located, M&T does not
have a perfected security interest in the royalty payments. Section 9501 of
the PA-UCC provides, in relevant part:
(a) Filing offices.--Except as otherwise provided
in subsection (b), if the local law of this
Commonwealth governs perfection of a
security interest or agricultural lien, the office
in which to file a financing statement to perfect
the security interest or agricultural lien is one
of the following:
(1) The office designated for the filing
or recording of a record of a
mortgage on the related real
property if:
(i) the collateral is
as-extracted collateral
13 Pa.C.S.A. § 9501(a)(1)(i).
As discussed above, the royalties are personal property, not
as-extracted collateral. Therefore, M&T was only required to file a financing
statement with the office of the Secretary of the Commonwealth.
13 Pa.C.S.A. § 9501(a)(2). As the trial court states, M&T’s financing
statement provided the name of the debtor (TNT1 Limited Partnership); the
name of the secured party (M&T); and indicated the collateral covered by
the financing statement (“all assets”). (Trial court opinion, 8/12/14 at 4-5.)
See 13 Pa.C.S.A. § 9502(a) (“Sufficiency of financing statement”). As such,
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the Security Agreement providing M&T with a security interest in all of
TNT1’s assets and personal property including the royalties was properly
perfected by the financing statement filed on August 8, 2008. M&T was not
required to file a financing statement with the Susquehanna County
Recorder of Deeds as contended by appellant. There is no error here.
Next, appellant argues that its July 13, 2012 Assignment with TNT1,
providing appellant with an interest in the royalties, is superior to M&T’s
August 5, 2008 Security Agreement. Again, however, this argument
presupposes that M&T’s security interest was not properly perfected.
Therefore, the argument fails.
Section 9322 of the PA-UCC provides:
§ 9322. Priorities among conflicting security
interests in and agricultural liens on same
collateral
(a) General priority rules.--Except as otherwise
provided in this section, priority among
conflicting security interests and agricultural
liens in the same collateral is determined
according to the following rules:
(1) Conflicting perfected security
interests and agricultural liens rank
according to priority in time of
filing or perfection. Priority dates
from the earlier of the time a filing
covering the collateral is first made
or the security interest or
agricultural lien is first perfected, if
there is no period thereafter when
there is neither filing nor
perfection.
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(2) A perfected security interest or
agricultural lien has priority over a
conflicting unperfected security
interest or agricultural lien.
(3) The first security interest or
agricultural lien to attach or
become effective has priority if
conflicting security interests and
agricultural liens are unperfected.
13 Pa.C.S.A. § 9322(a). See also Chrysler Credit Corp. v. B.J.M., Jr.,
Inc., 834 F.Supp. 813, 830 (E.D.Pa. 1993) (where two or more creditors
have perfected security interests in the same collateral, the party who filed
his security interest first will have priority) (citations omitted). As the trial
court properly determined, the July 13, 2012 Assignment was executed and
recorded after the perfected mortgage and Security Agreement with M&T.
(Trial court opinion, 8/12/14 at 5-6.) Therefore, appellant does not have
priority to the royalties. Appellant’s interest in the royalties is subordinate to
M&T’s perfected security interest.
Finally, appellant argues that the July 18, 2012 “Non-Disturbance and
Attornment Agreement” (“NDA”) between SEPCO (Lessee), TNT1 (Lessor),
and M&T (Lender) constituted an acknowledgment that M&T did not have a
perfected security interest in the payment of royalties from the oil and gas
leases. (Appellant’s brief at 25.) According to appellant, the NDA included
an authorization by TNT1 that lease payments were to be made to M&T on
demand; if that right had already been vested in M&T by the Security
Agreement, such authorization would have been unnecessary. (Id. at
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25-26.) Appellant states that the NDA was executed and filed subsequent to
July 13, 2012, when the PNB Assignment was filed in Susquehanna County.
(Id. at 26.)
The NDA provided, in relevant part, as follows:
WHEREAS, Lender, at the request of Lessor
and Lessee, has agreed to enter into this Agreement
with respect to the Property and Lessee’s interest in
the Property pursuant to the Lease.
NOW, THEREFORE, the parties, intending to be
legally bound, hereby agree as follows:
1. Nondisturbance. Insofar and only insofar
as it relates to the Property, Lender acknowledges
and agrees that for so long as the Lease remains in
effect, Lender will not infringe upon, diminish,
interfere, terminate or disturb the Lease and
Lessee’s leasehold interests therein, including,
without limitation, in the event of a foreclosure or
other proceedings brought to enforce the Mortgage
or if the Property shall be transferred by deed in lieu
of foreclosure or otherwise, and Lessee shall
continue in the quiet enjoyment of the same,
including, subject to the provisions of Section 2
hereof, the right to pay all rents and royalties
payable under the Lease to the Lessee.
2. Payment of Royalties. Lessee agrees, in
consideration of the execution of this Agreement by
Lender, that in the event the Lender advises Lessee
in writing (“Payment Demand”), with a copy to
Lessor, that any loan or other obligation of Lessor is
delinquent, in default or that Lender has become the
owner of the Property, then Lessee shall pay to
Lender all royalties, rentals and any other
remuneration due or to become due under the Lease
until further written notice from Lender.
RR at 63-64.
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After careful review, we agree with appellees that it is clear from the
language of the NDA that the parties did not intend any assignment of
rights, but merely to memorialize an agreement not to disturb the lease and
SEPCO’s interest therein in the event that a foreclosure or other proceeding
to enforce the mortgage occurred. (Appellees’ brief at 23.) As the trial
court states, the NDA was not an assignment of the royalties and related to
the real property, not the personal property. (Trial court opinion, 8/12/14 at
6.) The NDA did not establish any present intention to make an assignment;
rather, when the provisions are read together, they recognize M&T’s existing
right to the royalties and its agreement not to disturb or interfere with
TNT1’s right to collect the royalties unless TNT1 defaults on the mortgage.
Therefore, the NDA has no bearing on the issue of relative lien priorities and
the trial court did not err in its determination that WM Capital, as
successor-in-interest to M&T, has a priority claim to the royalties.
Order affirmed.
Judgment Entered.
Joseph D. Seletyn, Esq.
Prothonotary
Date: 5/6/2015
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