Birdie Associates, L.P. v. CNX Gas Co.
149 A.3d 367
| Pa. Super. Ct. | 2016Background
- In 1985 two "coal leases" conveyed to Consol (now CNX) all of the lessors' interest in the Pittsburgh coal seams and “all constituent products of such coal” under ~289.81 acres; term 20 years with renewal option (extended to 2025); consideration: $50/acre/year advance minimum royalty plus 3% of sale price or $0.50/ton.
- Lessees/assignees have paid advance minimum royalties regularly but have never mined coal and have no plans to mine; instead they produced and marketed coal-bed methane (CBM) from the seams.
- Appellant Birdie (assignee of original lessors) sued in 2010 asserting conversion, unjust enrichment, trespass and seeking royalties for CBM, arguing the leases are subject to the Guaranteed Minimum Royalty Act (GMRA) and thus require at least a 1/8 royalty for gas.
- CNX argued the instruments, though labeled leases, were in substance grants (sales) of the coal and its constituent products, so CNX owns the coal and CBM and owes only the payments specified in the instruments.
- Trial court granted CNX's summary judgment and dismissed Birdie; Birdie appealed. The Superior Court affirmed, holding the instruments conveyed a fee interest in coal (a sale) including constituent products like CBM, so the GMRA did not apply.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the 1985 instruments are leases or sales of the coal (and CBM) | The instruments are coal leases; CBM is a constituent product owned by lessor when conveyance is a lease, so Birdie owns CBM and is owed gas royalties | Instruments transfer all coal and "all constituent products" and grant broad mining rights; they function as a sale/grant in fee, so CNX owns coal and CBM and owes only contractual payments | Court held instruments are sales/fee transfers of coal and constituent products; CBM belongs to CNX under the instruments |
| Whether the Pennsylvania Oil & Gas Act / GMRA (1/8 royalty) applies | GMRA applies to any agreement conveying right to remove gas; the coal instruments did not guarantee 1/8 royalty for gas, so they are invalid re: gas royalties | GMRA does not apply because the instruments are sales of coal (not gas leases); owner of coal owns CBM so statute inapplicable | Court held GMRA inapplicable because the instruments conveyed the coal (and constituent products) as a sale, not an oil/gas lease |
| Whether non-production of coal (and use only to harvest CBM) defeats characterization as a sale | Non-mining for decades shows instrument is a lease/contract to mine rather than a sale; Birdie should get royalties for CBM removal | The instruments impose no obligation to mine; payment structure (advance royalties, tonnage royalties, title warranties) and broad conveyance show sale of coal regardless of production | Court held lack of coal production did not change the substantive characterization as a sale; CNX need not mine to hold the conveyed interest |
| Admissibility/weight of other leases and counsel opinion (Covert/Wallace, counsel letter) | CNX's other CBM leases and counsel's opinion show CNX knew it owed CBM royalties to coal lessors, undermining CNX's position | Those separate CBM leases are irrelevant; the controlling 1985 instruments control rights here; counsel letters do not change legal effect | Court rejected reliance on separate leases and counsel opinion; they do not alter the legal effect of the 1985 conveyances |
Key Cases Cited
- Smith v. Glen Alden Coal Co., 32 A.2d 227 (Pa. 1943) (a coal lease that vests the right to mine coal in the lessee may vest a fee in the lessee)
- Shenandoah Borough v. Philadelphia, 79 A.2d 433 (Pa. 1951) (instruments granting right to mine coal often operate as conditional sales of the coal in place)
- Hummel v. McFadden, 150 A.2d 856 (Pa. 1959) (contractual scope and "unrestricted dominion" determine whether a coal agreement is a sale or ordinary lease)
- Olbum v. Old Home Manor, Inc., 459 A.2d 757 (Pa. Super. 1983) (coal instruments are not automatically sales; characterization depends on contract language and circumstances)
- U.S. Steel v. Hoge, 468 A.2d 1380 (Pa. 1983) (when a coal severance deed is silent on CBM, the coal owner holds CBM unless conveyed)
- Kennedy v. Consol Energy, 116 A.3d 626 (Pa. Super. 2015) (applies Hoge to hold that CBM follows coal ownership absent reservation)