Heath, D. v. Dellich, G.
239 WDA 2016
| Pa. Super. Ct. | Dec 13, 2016Background
- In 1982 George and Mary Dellich (lessors) leased ~59 acres to Peoples Natural Gas; lease contained a 5‑year term with habendum clause continuing "as long as" land is operated in search or production and a shut‑in royalty clause ($29.50 quarterly).
- Peoples pooled the acreage, drilled Ken Greene No. 1 (Well #1) in 1987; production declined due to a salt/sand problem and stopped in April 2008; Plaintiff Heath later acquired the lessee interest and pursued repairs.
- From Feb 2009–Feb 2011 Heath sent $29.50 checks and letters stating efforts to restore production; lessors cashed checks until 2011 then returned them; Heath escrowed subsequent payments.
- DEP inspected, characterized the well as abandoned, denied inactive‑status in Dec 2010; Heath plugged Well #1 in May 2011, applied for and obtained permits, and drilled Ken Greene No. 2 (Well #2) in 2012, which produced by Nov 2012; Heath spent large sums (≈$400k drilling, $300k compression) to restore production.
- The Dellichs sent a lease termination notice June 9, 2011; Heath filed quiet title and declaratory judgment (July 15, 2011). After a bench trial the court declared the lease in force and entered judgment for Heath; Dellichs appealed.
Issues
| Issue | Plaintiff's Argument (Heath) | Defendant's Argument (Dellich) | Held |
|---|---|---|---|
| Burden of proof on lease termination | Once historical production exists, burden shifts to lessor to prove lease ceased; Heath argued lessors must prove termination | Dellich argued plaintiff must first make a prima facie showing of title/production before burden shifts | Court: Agreed with Heath and Jedlicka: once production history shown, burden is on lessor to prove lessee no longer in search/production; trial court properly applied this rule |
| Standard for evaluating lessee's conduct/good faith | Heath: application of Jedlicka’s business‑judgment/good‑faith standard is appropriate to assess efforts to maintain lease | Dellich: Jedlicka applies only to continuous producers; here Well #1 ceased producing so a stricter diligence/operation standard (e.g., Pemco) should apply | Court: Applied Jedlicka (binding), used subjective good‑faith/business judgment test; found Heath acted in good faith despite delays |
| Validity/role of shut‑in payments | Heath: payments and letters evidenced good‑faith efforts to maintain lease and demonstrated intent to operate; payments supported finding of good faith | Dellich: Well incapable of producing after 4/17/2008 so shut‑in royalty clause (which requires capability) could not apply; payments irrelevant or invalid | Court: Did not need to decide technical validity of payments under shut‑in clause; treated the payments and accompanying letters as circumstantial evidence of Heath’s good faith efforts to maintain the lease and relied on totality of circumstances |
| Reliance on Exhibit 26 (letter) not admitted into evidence | Heath: record showed the letter was sent and witnesses testified to its existence so court could consider the fact of the letter being sent | Dellich: Trial court erred by relying on an exhibit not admitted | Held: No reversible error — counsel had withdrawn the exhibit but testimony established the letter’s existence; Dellichs did not preserve the claim properly and suffered no prejudice |
Key Cases Cited
- T.W. Phillips Gas & Oil Co. v. Jedlicka, 42 A.3d 261 (Pa. 2012) (establishes burden rules and permits a subjective business‑judgment/good‑faith inquiry when lessee has historically produced)
- Kennedy v. Consol Energy Inc., 116 A.3d 626 (Pa. Super. 2015) (standard of review for non‑jury trial findings)
- Peters v. Nat’l Interstate Ins. Co., 108 A.3d 38 (Pa. Super. 2014) (declaratory judgment standard of review)
- Young v. Forest Oil Co., 45 A. 119 (Pa. 1899) (early Pennsylvania authority on construing leases and lessee business discretion)