Kendall v. Lancaster Exploration & Dev. Co.

• Decision Date: 23 May 2018
• Docket Number: No. 4:17–CV–01117,4:17–CV–01117
• Citation: 323 F.Supp.3d 664
• Parties: Charles Rice KENDALL and Ann P. Hochberg, as Trustees for The Thomas E. Proctor Heirs Trust, and Bank of America, N.A., and John J. Slocum, Jr., as Trustees for The Margaret O.F. Proctor Trust, Plaintiffs. v. LANCASTER EXPLORATION & DEVELOPMENT COMPANY, LLC, Defendants.
• Court: U.S. District Court — Middle District of Pennsylvania

323 F.Supp.3d 664

Charles Rice KENDALL and Ann P. Hochberg, as Trustees for The Thomas E. Proctor Heirs Trust, and Bank of America, N.A., and John J. Slocum, Jr., as Trustees for The Margaret O.F. Proctor Trust, Plaintiffs.

v.LANCASTER EXPLORATION & DEVELOPMENT COMPANY, LLC, Defendants.

No. 4:17–CV–01117

United States District Court, M.D. Pennsylvania.

Filed May 23, 2018

Laura A. Lange, McGuire Woods LLP, Paul K. Stockman, Kazmarek Mowrey Cloud Laseter LLP, Pittsburgh, PA, for Plaintiffs.

Kevin J. McKeon, Whitney E. Snyder, Hawke McKeon Sniscak & Kennard LLP, Harrisburg, PA, for Defendants.

MEMORANDUM OPINION

Matthew W. Brann, United States District JudgeBefore the Court for disposition are (1) Defendant Lancaster Exploration and Development Company, LLC's Motion to Dismiss, (2) Defendant SWN Production Company, LLC's Motion to Dismiss, (3) Defendants Chief Oil & Gas, LLC, Chief Exploration and Development, LLC, Radler 2000 L.P., Tug Hill Marcellus, LLC, and Enerplus Resources (USA) Corporation's Motion to Dismiss, and (4) Plaintiff Trustees of the Thomas E. Proctor Heirs Trust and the Trustees of the Margaret O.F. Proctor Trust's Motion for Summary Judgment. For the following reasons, Defendants' Motions to Dismiss will be denied in all respects, and Plaintiffs' Motion for Summary Judgment will be granted.

I. BACKGROUND

A. The Parties

This is an action to quiet title brought pursuant to Pennsylvania state law.¹ The parties to this suit, holding interests in estates spanning Bradford, Cameron, Clearfield, Elk, Jefferson, Lycoming and Sullivan counties, are as follows.² The Plaintiffs are trustees for The Thomas E. Proctor Heirs Trust ("PHT") and The Margaret O.F. Proctor Trust ("MPT"). Plaintiffs Charles Rice Kendall, an individual domiciled in Maine, and Ann P. Hochberg, an individual domiciled in Massachusetts, are co-trustees of the PHT.³ Plaintiffs Bank of America, N.A., a citizen of North Carolina, and John J. Slocum, Jr., an individual domiciled in Rhode Island, are co-trustees of the MPT.⁴ Together, the PHT and the MPT are trusts held for the benefit of heirs of Thomas E. Proctor, Sr. and Margaret O.F. Proctor, respectively.⁵

Defendants, named in both the original Complaint and added through intervention pursuant to Federal Rule of Civil Procedure 24, are as follows. Defendant Lancaster Exploration & Development Company, LLC ("Defendant Lancaster") is a limited liability company with both a principal place of business in the state of Michigan and members residing in Michigan.⁶ It is therefore deemed a citizen of that state. On August 15, 2017, the Court approved a stipulation of the parties allowing for the intervention of SWN Production Company LLC ("Defendant SWN"), Chief Oil and Gas, LLC, Chief Exploration and Development, LLC, Radler 2000 L.P., Tug Hill Marcellus, LLC, and Enerplus Resources (USA) ("Chief Defendants") as Defendants to this action.⁷ These additional Defendants are the assignees of the Lease Agreement executed between Plaintiffs and Defendant Lancaster.⁸

B. The Lease Agreement

Together, the PHT and MPT Trusts (collectively "Proctor Trusts") own 100% of the oil and gas rights to certain properties in Bradford, Cameron, Clearfield, Elk, Jefferson, Lycoming and Sullivan Counties ("subject property").⁹ These properties cover approximately 100, 240 acres.¹⁰ PHT owns a 93.75 % interest in the subject property and MPT owns a 6.25% interest.¹¹ MPT has not assigned its interest to PHT.¹²

On June 17, 2002, PHT entered into an Agreement in which it leased all of its petroleum and natural gas rights in the subject property to Defendant Lancaster for five years.¹³ Thereafter, on February 17, 2005 and June 22, 2005, PHT and Defendant Lancaster executed a Letter Agreement ("2005 Letter Agreement") and Extension of Oil and Gas Lease, ("2005 Extension") respectively, which extended the term of this lease for ten years and modified the royalty to be paid to PHT.¹⁴ This agreement was further amended by a "Second Letter Agreement," on August 5, 2005, to exclude property located outside Pennsylvania.¹⁵ Together, Plaintiffs aver that the Lease forged in 2002, as modified by Letter Agreement and Extension in 2005, constitutes the whole agreement ("Lease Agreement") between the parties.¹⁶ Not a party to this suit is the Thomas E. Proctor, Jr. Trust ("TEP Jr. Trust"). Through agreements identical to those between PHT and Defendant Lancaster, TEP Jr. Trust leased all of its petroleum and natural gas rights in Pennsylvania to Defendant Lancaster for an initial period of five and later ten years.¹⁷ TEP Jr. Trust later terminated and its beneficiaries have since transferred or assigned their interests to PHT.¹⁸

The PHT and TEP Jr. Lease Agreements, as modified above, purport to assign 50% of the royalty to be earned by PHT and TEP Jr., as part of the lessors' 6.25% royalty.¹⁹ The specific provisions of these identical lease agreements state as follows.²⁰ In the February 17, 2005 Letter Agreement executed between PHT and Defendant Lancaster, Section 3(b) states as follows:

The Proctor Pennsylvania Property's Lease, as amended by the First Amendment, provides for the industry standard twelve and one-half (12.5%) percent royalty. A "royalty interest" is the economic interest reserved by the mineral estate owner and is typically free of the cost of exploration and development of oil and gas wells. Lessor shall retain fifty percent (50%) of such royalty of Lessor's interest in the Proctor Pennsylvania Property and Lancaster shall be assigned the remaining fifty percent (50%),²¹

This provision, in application, is explained in Section 3(d):

Example 1—Oil and Gas. Lessee subleases to exploration companies X, Y and Z, the parcels A, B, and C, respectively, for cash consideration of $10,000, $30,000 and $20,000, respectively, and also receives an overriding royalty interestof 0%, 4%, and 6%, respectively. Lessor would receive a total cash consideration of $30,000 ($10,000 + $30,000 + $20,000 = $60,000 x 50% = $30,000 and Lessee would also receive a total cash consideration of $30,000). Lessor would receive its 6.25% royalty interest in parcels A, B and C. Lessee would also receive 6.25% royalty interest in parcels A, B, and C. Lessor would also receive an overriding royalty interest of 0%, 2%, and 3% in parcels A, B and C, respectively. Lessee would also receive an overriding royalty interest of 0%, 2%, and 3% in parcels A, B and C, respectively. The amounts contained in this Example 1 are for illustrative purposes only and are not to be construed as any type of representation or projection.²²

C. Procedural History of the State Litigation

In 2012, based in part on the above royalty provision of 6.25%, state court litigation was commenced in Court of Common Pleas of Lycoming County ("Lycoming County Court").²³ In that case, Plaintiffs alleged declaratory relief and constructive trust claims against Defendants Lancaster and SWN.²⁴ These claims asked the Lycoming County Court to "determine the validity of any writing affecting the rights, status or other legal relations of the parties in this lawsuit, including, but not limited to deeds, leases and assignments," and, more pertinently, enter an order that the PHT Lease, as amended, and the TEP Jr. Lease, as amended, violate the Guaranteed Minimum Royalty Act [GMRA], and therefore are both considered invalid."²⁵ The Lycoming County Court subsequently granted judgment on the pleadings to instant Defendants Lancaster and SWN on these counterclaims, but was later reversed by the Superior Court of Pennsylvania in Southwestern Energy Prod. Co. v. Forest Resources, LLC (" Forest Resources, LLC ").²⁶ In that case, the Superior Court (1) found, among other things, that the trial court "erred as a matter of law in concluding on the pleadings in this declaratory judgment action that the PHT/Lancaster Lease Agreement ... did not violate the GMRA," and (2) remanded the case to that court "[t]o the extent the various motions and preliminary objections raised other grounds not addressed."²⁷

On remand, the Lycoming County Court ordered Plaintiffs to join indispensable parties, but then dismissed their claims concerning the GMRA as barred by the statute of limitations.²⁸ That court specifically found dismissal to be appropriate because both the lease invalidity claims and the quiet title claims were barred by a four year statute of limitations.²⁹ Plaintiffs attempted to appeal this adverse ruling but the interlocutory appeal was quashed by a per curiam order of the Superior Court of Pennsylvania.³⁰ Trial for the remaining claims in this state action is scheduled to commence in May 2018, and continue through June 2018.³¹

D. The Filing of a Declaration of Claim of Interest and Commencement of this Federal Litigation

On August 24, 2016, Defendant Lancaster filed a declaration of claim of interest against the subject property with the Sullivan County Recorder of Deeds ("2016 Declaration of Interests").³² Defendant Lancaster has since filed similar declarations against the subject property in other counties.³³ These filings have created a cloud on Plaintiffs' title to the subject property and have prevented them from leasing their interests in same.³⁴

Based on these 2016 filings, this action was commenced in this Court by way of Complaint on June 23, 2017.³⁵ In this Complaint, Plaintiffs assert a quiet title claim, and seek the following relief:

(i) That the Court enter an order requiring Lancaster to strike, withdraw or otherwise remove all Lancaster Filings in the chains of title for the Subject Property;

(ii) That the Court enter an order compelling Lancaster to record surrenders of the Leases in the Recorder of Deeds Office for each county; (iii) That the Court enter an order enjoining Lancaster from (i) entering into any additional leases relating to the Subject Property, (ii) filing any documents claiming title or interest in the Subject Property;

(iii) receiving, accepting and/or depositing any funds

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