PennEnergy Res., LLC v. Winfield Res., LLC

• Docket Number: 464 WDA 2022,No. 464 WDA 2022
• Decision Date: 25 July 2023
• Citation: PennEnergy Res., LLC v. Winfield Res., LLC, 301 A.3d 439 (Pa. Super. Ct. 2023)
• Parties: PENNENERGY RESOURCES, LLC, Appellant v. WINFIELD RESOURCES, LLC and MDS Energy Development, LLC
• Court: Pennsylvania Superior Court

301 A.3d 439

PENNENERGY RESOURCES, LLC, Appellant v. WINFIELD RESOURCES, LLC and MDS Energy Development, LLC

No. 464 WDA 2022

Superior Court of Pennsylvania.

Argued March 1, 2023

Filed July 25, 2023

Reargument Denied October 2, 2023

Thomas S. Jones, Pittsburgh, for appellant.

Chad A. Wissinger, Pittsburgh, for MDS Energy Resources LLC, appellee.

Ray F. Middleman, Pittsburgh, for Winfield Resources LLC, appellee.

BEFORE: OLSON, J., NICHOLS, J., and PELLEGRINI, J. ^*

OPINION BY PELLEGRINI, J.:

PennEnergy Resources, LLC (PennEnergy) appeals from the order of the Court of Common Pleas of Allegheny County (trial court) denying its petition to vacate an arbitrator's award of $2.4 million in damages in favor of MDS Energy Development, LCC (MDS).

Briefly, PennEnergy and Winfield Resources, LLC (Winfield) entered an agreement to develop gas leases in Western Pennsylvania. Winfield later wanted to transfer part of its interest in the venture to MDS. The two executed an agreement under which MDS would get almost half of Winfield's working interest and Winfield would get membership units in a not-yet-identified MDS limited partnership that would develop the working interest. PennEnergy rejected the transfer and initiated arbitration against Winfield. After being joined to the arbitration, MDS counterclaimed for tortious interference with contract but waited until the arbitration hearing to disclose that it was prosecuting its claim for not only itself but also 2017 Marcellus Shale Development-LP (MDS 2017), the limited partnership intended to receive the working interest. While not disputing that a general partner may prosecute a claim on a limited partnership's behalf, PennEnergy objected to MDS not disclosing that it was doing so until the arbitration. In his final award, the arbitrator recognized that MDS was proceeding as general partner for MDS 2017 and awarded it $2.4 million in damages after finding that PennEnergy tortiously interfered with the putative transfer between Winfield and MDS. PennEnergy petitioned to vacate the award of damages and made several arguments based on MDS prosecuting the claim in a representative capacity. For its part, MDS countered that it could litigate the claim because it was MDS 2017's managing general partner and PennEnergy knew about the limited partnership's role before the hearing. Finding this argument persuasive, the trial court confirmed the award.

On appeal, PennEnergy asserts several arguments for why the arbitrator's award should have been vacated. Among others, PennEnergy contends that the award was fundamentally unjust and beyond the arbitrator's power because: (1) MDS never disclosed that it was acting in a fiduciary capacity for the real party in interest that suffered damages, MDA 2017; (2) there was no arbitration agreement between PennEnergy and MDS 2017; and (3) MDS 2017 was not an intended beneficiary of Winfield and MDS's agreement. For the reasons set forth in this Opinion, we reverse and vacate the trial court's order confirming the arbitration award of damages.

I.

A.

In February 2012, PennEnergy entered into an asset purchase and sale agreement (APSA) to buy gas leaseholds and rights from Snyder Associated Companies and several of its affiliates, including Winfield. A few months later, as required by the APSA, PennEnergy and Winfield entered into a joint development agreement (JDA) to develop the leases within an 88,000-acre area of mutual interest (AMI) in Butler and Armstrong Counties. Under the agreement, PennEnergy owned about 80 percent of the working interest within the AMI while Winfield's portion was almost 20 percent.

The dispute arose a few years later when Winfield notified PennEnergy that it intended to transfer its working interest in three contract areas within the AMI to MDS. In November 2017, Winfield notified PennEnergy of the potential transfer through a draft "Notice of Joinder" naming MDS as the transferee of its interest in the JDA. Under § 6.2 of the JDA, Winfield had a right to transfer all or part of its interest provided that:

A Transfer by any Party that is permitted pursuant to Section 6.1 shall not be effective unless each other Party has received a document executed by both the transferring Party (or its legal representative) and the permitted transferee that includes: ... (b) such permitted transferee's express agreement in writing to be bound by all of the terms and conditions of this [JDA] and the Applicable Operating Agreements; ... and (d) representations and warranties from both the transferring Party and the permitted transferee that the Transfer was made in accordance with applicable Law (including state and federal securities Law) and the terms and conditions of this [JDA] and any applicable Associated Agreements.

JDA, 7/12/12, ¶ 6.2 (R. 86a-87a) (emphasis added).

PennEnergy did not consent to the joinder because MDS would not agree to be bound by all the provisions in the JDA. Their disagreement centered on whether MDS would be subject to the JDA for the entire AMI or only the geographic area involved in the transfer.

Notwithstanding PennEnergy's refusal to consent to joinder, on February 5, 2018, Winfield and MDS executed a purchase and sale agreement (PSA). The PSA states that the Seller (Winfield) agreed to sell, assign and transfer 9.93 percent of Winfield's working interest from its participating interest share from the JDA. MDS would in turn assign the working interest to a not-yet-identified limited partnership of which MDS would be the managing general partner. As compensation for the transfer, Winfield would receive units in that unidentified limited partnership, later denominated as MDS 2017. ¹ The PSA also provided that "[o]nly the parties hereto, their respective successors and permitted assigned are intended to benefit from this Agreement and no other Party, including the Limited Partnership, is intended to be a beneficiary hereof."

Concurrent with their agreement, Winfield and MDS sent PennEnergy notice of joinder. As laid out in the notice, MDS agreed only to be bound by the JDA "specifically as it relates to and limited to" the three contract areas within the AMI that it was receiving. Upon receiving the notice, PennEnergy rejected it and challenged the validity of Winfield's transfer of the 9.93 percent interest to MDS because it refused to consent to all the provisions of the JDA.

When PennEnergy later that month issued a capital call for the three contract areas, Winfield tendered PennEnergy nearly $6.3 million (10 percent of the total working interest) while MDS tendered almost $6 million (9.93 percent of the total working interest). After accepting Winfield's tender but rejecting MDS's, PennEnergy informed Winfield that it was in default.

B.

With the dispute now clear, on March 9, 2018, MDS filed a two-count complaint against PennEnergy for tortious interference with contract and declaratory judgment in the Court of Common Pleas of Armstrong County. ² Ten days later, on March 19, 2018, PennEnergy submitted a demand for arbitration seeking declaratory relief against Winfield with the American Arbitration Association (AAA).

In response to the demand, MDS and Winfield both filed motions in Armstrong County to stay arbitration. PennEnergy, however, pointed out that both the JDA and APSA contain broad arbitration provisions requiring all contractual disputes be arbitrated. ³ Agreeing with PennEnergy, the Court of Common Pleas of Armstrong County denied the motions on April 4, 2018, finding that "an applicable agreement to arbitrate exists and governs the dispute," and that there was "nothing in the record indicating that all parties cannot participate in the already-initiated arbitration proceedings, as [MDS's] claims are based upon, and derivative of, the rights and obligations of the applicable agreement between [PennEnergy] and [Winfield.]" ⁴

Accordingly, a few weeks later, on April 23, 2018, PennEnergy joined MDS as a respondent to its pending arbitration. After being joined, MDS filed its counterclaim in the arbitration. However, rather than seek both monetary damages for tortious interference and declaratory relief like it did in its state court action, MDS sought only declaratory relief that PennEnergy's interpretation of the JDA's transfer provisions were incorrect.

C.

In October 2018, MDS and Winfield rescinded their PSA. A month later, MDS moved to dismiss itself from the arbitration, arguing that rescission of the agreement had rendered moot any determination about its propriety. In so doing, MDS contended that it believed that its tortious interference claim remained pending in Armstrong County and was not referred to arbitration. If the arbitrator disagreed, however, MDS requested that it be granted leave to amend its counterclaim so that it could add its tortious interference claim. As will become relevant when addressing whether there was an arbitration agreement, PennEnergy opposed MDS's attempt to get out of the arbitration and reasserted the arguments it raised in opposition to MDS's and Winfield's motions to stay arbitration. On December 18, 2018, the arbitrator issued a procedural order denying MDS's motion to dismiss but granting it leave to amend its pleadings "so that the arbitrator can hear and decide its tortious interference claims and other claims urged against PennEnergy in the Pennsylvania state court." ⁵

In accordance with the arbitrator's order, on January 11, 2019, MDS amended its counterclaim to include the tortious interference claim against PennEnergy. In its claim, MDS alleged that PennEnergy improperly rejected its transfer with Winfield, causing it to suffer damages "in the tens of millions of dollars" because it missed out on tax deductions attributable to MDS's intangible drilling costs for the wells, lost opportunity costs and lost profits. ⁶

D.

The four-day arbitration hearing was held in Pittsburgh in February 2019. At the hearing, MDS's...