Pa. Envtl. Def. Found. v. Commonwealth

• Decision Date: 29 July 2019
• Docket Number: No. 228 M.D. 2012,228 M.D. 2012
• Citation: 214 A.3d 748
• Parties: PENNSYLVANIA ENVIRONMENTAL DEFENSE FOUNDATION, Petitioner v. COMMONWEALTH of Pennsylvania, and Governor of Pennsylvania, Thomas W. Corbett, Jr., in his official Capacity as Governor, Respondents
• Court: Pennsylvania Commonwealth Court

214 A.3d 748

PENNSYLVANIA ENVIRONMENTAL DEFENSE FOUNDATION, Petitioner

v.COMMONWEALTH of Pennsylvania, and Governor of Pennsylvania, Thomas W. Corbett, Jr., in his official Capacity as Governor, Respondents

No. 228 M.D. 2012

Commonwealth Court of Pennsylvania.

Argued: December 12, 2018

Filed: July 29, 2019

John E. Childe, Camp Hill, for Petitioner.

M. Abbegael Giunta, Deputy General Counsel and Audrey F. Miner, Chief Counsel, Harrisburg, for Governor of Pennsylvania.

Howard G. Hopkirk, Sr. Deputy Attorney General, Harrisburg, for Commonwealth of Pennsylvania.

BEFORE: HONORABLE MARY HANNAH LEAVITT, President Judge, HONORABLE RENÉE COHN JUBELIRER, Judge, HONORABLE ROBERT SIMPSON, Judge, HONORABLE P. KEVIN BROBSON, Judge, HONORABLE ANNE E. COVEY, Judge, HONORABLE MICHAEL H. WOJCIK, Judge, HONORABLE ELLEN CEISLER, Judge

OPINION BY JUDGE WOJCIK

This case returns to us following the Pennsylvania Supreme Court's remand in Pennsylvania Environmental Defense Foundation v. Commonwealth , 640 Pa. 55, 161 A.3d 911 (2017) ( PEDF II ). Before this Court for disposition are the parties' cross-applications for summary relief in this declaratory judgment action filed in our original jurisdiction.¹ Petitioner Pennsylvania Environmental Defense Foundation (the Foundation)² and Respondents Commonwealth of Pennsylvania and Tom Wolf in his official capacity as Governor of Pennsylvania (collectively, Commonwealth) seek declaratory relief under the Declaratory Judgment Act³ as to whether money received from payments due under leases for the extraction and sale of oil and gas on State forest lands, including bonuses and annual rental payments, are part of the corpus of the environmental public trust established by Article I, Section 27 of the Pennsylvania Constitution (Environmental Rights Amendment), and if so, whether various fiscal enactments appropriating those funds for non-trust purposes are unconstitutional under Section 27. The Foundation argues that bonuses and rental payments are part of the corpus trust; the Commonwealth argues that they are not. For the reasons that follow, we grant the Commonwealth's application upon determining that one third of the proceeds constituting bonuses and rental payments are not part of the corpus trust, and thus, the challenged fiscal enactments are not facially unconstitutional. We deny the Foundation's application.

I. PROCEDURAL HISTORY

We begin by summarizing the Supreme Court's opinion in PEDF II and its directives to this Court on remand.⁴ In PEDF II , the Supreme Court examined the constitutionality of legislative enactments to The Fiscal Code⁵ relating to funds generated from the leasing of State forest and park lands for oil and gas exploration and extraction. The Supreme Court began its analysis by closely examining the contours of the Environmental Rights Amendment, which provides:

The people have a right to clean air, pure water, and to the preservation of the natural, scenic, historic and esthetic values of the environment. Pennsylvania's public natural resources are the common property of all the people, including generations yet to come. As trustee of these resources, the Commonwealth shall conserve and maintain them for the benefit of all the people.

Pa. Const. art. I, § 27. The Supreme Court determined that Section 27 "establishes a public trust, pursuant to which the natural resources are the corpus of the trust, the Commonwealth is the trustee, and the people are the named beneficiaries." PEDF II , 161 A.3d at 931-32.

The Supreme Court continued that the "public natural resources" referenced in Section 27 "include the [S]tate forest and park lands leased for oil and gas exploration and ... the oil and gas themselves." PEDF II , 161 A.3d at 931. "[S]tate parks and forests, including the oil and gas minerals therein, are part of the corpus of Pennsylvania's environmental public trust." Id. at 916.

The Commonwealth is the trustee and not the proprietor of public natural resources. PEDF II , 161 A.3d at 932. As trustee of the public natural resources, the Commonwealth has the duty to act toward the corpus of the trust with loyalty, impartiality and prudence. Id. at 932 (citing Robinson Township v. Commonwealth , 623 Pa. 564, 83 A.3d 901, 956-57 (2013) (plurality)). This includes the "duty to prohibit the degradation, diminution, and depletion of our public natural resources." Id. at 933. In addition, the Commonwealth "must act affirmatively via legislative actions to protect the environment." Id. at 933 (citing Robinson Township , 83 A.3d at 957-58 ).

The Supreme Court also reviewed the history of the laws relative to oil and gas funds and the recent legislative transfers. Briefly, in 1955, the General Assembly enacted the Oil and Gas Lease Fund Act ("Lease Fund Act"),⁶ which has since been repealed,⁷ requiring "[a]ll rents and royalties from oil and gas leases" of Commonwealth land to be deposited in the "Oil and Gas Lease Fund" ("Lease Fund") to be "exclusively used for conservation, recreation, dams, or flood control or to match any Federal grants which may be made for any of the aforementioned purposes." Former Section 1 of the Lease Fund Act, formerly 71 P.S. § 1331. Neither rents nor royalties were defined therein. The Lease Fund Act specifically appropriated all money in the Lease Fund to the Department of Forests and Waters to carry out the purposes of the act and provided the Secretary of Forests and Waters with the discretion to determine the need and the location for projects. PEDF II , 161 A.3d at 919-20 ; former Sections 2 and 3 of the Lease Fund Act, formerly 71 P.S. §§ 1332, 1333.

With the enactment of the Conservation and Natural Resources Act ("CNRA"),⁸ the Department of Conservation and Natural Resources ("DCNR"), replaced the Department of Forests and Waters as the relevant entity for purposes of the Lease Fund. Section 101 of the CNRA(b)(1), 71 P.S. § 1340.101(b)(1) ; Section 301 of the CNRA, 71 P.S. § 1340.301 ; Section 304 of the CNRA 71 P.S. § 1340.304 ; see former 71 P.S. § 1333. The CNRA altered the Lease Fund Act "to provide that ‘all moneys’ paid in to the Lease Fund were ‘specifically appropriated to’ the DCNR." PEDF II , 161 A.3d at 920 (quoting former 71 P.S. § 1333 ). The CNRA empowered DCNR "to make and execute contracts or leases in the name of the Commonwealth for the mining or removal of any valuable minerals that may be found in State forests" if the DCNR determines that it "would be for the best interests of this Commonwealth." 71 P.S. § 1340.302(a)(6).

Pursuant to this authority, DCNR entered into oil and gas leases for natural gas extraction. Of significance here, in 2008, DCNR began lease sales of State forest land in the Marcellus Shale region of northcentral Pennsylvania. "The Marcellus Shale leases dramatically increased the money flowing into the Lease Fund." PEDF II , 161 A.3d at 920.

The oil and gas leases generated funds in the form of royalties, rents and bonuses. PEDF II , 161 A.3d at 920. Per the lease terms, royalties are paid when gas is extracted, with the payment based upon the amount of marketable gas extracted.

Id. at 921. The rents are comprised of annual rental fees, an example of which ranged from $20-35 per acre, in addition to large initial "bonus payments" ranging in the millions of dollars. Id.

In determining whether those payments constituted part of the trust corpus, the Supreme Court opined that, "pursuant to Pennsylvania law in effect at the time of enactment, proceeds from the sale of trust assets are part of the corpus of the trust." PEDF II , 161 A.3d at 933 (citing In re McKeown's Estate , 263 Pa. 78, 106 A. 189, 190 (1919) ("Being a sale of assets in the corpus of the trust, presumptively all the proceeds are principal. ...")). "Pennsylvania trust law dictates that proceeds from the sale of trust assets are trust principal and remain part of the corpus of the trust." PEDF II , 161 A.3d at 935 (citing McKeown's Estate , 106 A. at 190 ) (emphasis added). "When a trust asset is removed from the trust , all revenue received in exchange for the trust asset is returned to the trust as part of its corpus." PEDF II , 161 A.3d at 935 (citing Bolton v. Stillwagon , 410 Pa. 618, 190 A.2d 105, 109 (1963) ) (emphasis added).

Ultimately, the Supreme Court determined that "all proceeds from the sale of our public natural resources are part of the corpus of our environmental public trust and that the Commonwealth must manage the entire corpus according to its fiduciary obligations as trustee." PEDF II , 161 A.3d at 939. The Supreme Court held that "royalties - monthly payments based on the gross production of oil and gas at each well - are unequivocally proceeds from the sale of oil and gas resources." Id. at 935. As such, funds generated from royalties are part of the corpus and must be committed to furthering the purposes, rights and protections afforded under Section 27, i.e., to conserve and maintain our natural resources. Id. at 935. "They are part of the corpus of the trust and the Commonwealth must manage them pursuant to its duties as trustee." Id. Consequently, the Supreme Court ruled that legislative enactments relating to the use of royalties in the Lease Fund were facially unconstitutional because they diverted proceeds from the sale of oil and gas, i.e., royalties, to non-trust purposes in violation of Section 27.⁹ Id. at 938-39.

However, the Supreme Court was less clear on how to categorize other revenue streams from State forest oil and gas leases, i.e., rents and bonuses, stating that "the record on appeal is undeveloped regarding the purpose of up-front bonus payments, and thus no factual basis exists on which to determine how to categorize this revenue." PEDF II , 161 A.3d at 935. The Supreme Court recognized that the leases designate bonuses and other annual payments as "rental payments," but stated that "such a classification does not shed any light on the true purpose of the payment, e.g., rental of a leasehold...