Montgomery, A. v. R. Oil & Gas Enterprises
Montgomery, A. v. R. Oil & Gas Enterprises No. 1164 WDA 2015
| Pa. Super. Ct. | Mar 17, 2017Background
- 1975 oil and gas lease (240 acres) from MacDonalds to Quaker State: 10-year primary term "and as long thereafter as oil and gas is or can be produced in paying quantities." Lessee has right to "subdivide and release."
- Over time the 240 acres were broken into separate tracts; MacDonalds sold 32.318 acres to the Montgomerys in 2010.
- In 1991 the lease interests were split by depth at the top of the Onondaga Formation into Area A (above) and Area B (below); Appellant (R. Oil) acquired the Area A interest in 2009; Quaker State (or its assignee) retained Area B.
- Montgomerys sued in 2014 seeking declaration that R. Oil’s lease rights over their 32.318 acres (Area A) had terminated by lapse/abandonment or failure to produce in paying quantities; R. Oil answered and raised failure to join indispensable parties.
- Trial court granted Montgomerys’ motion for judgment on the pleadings, finding the lease as to the Montgomery tract had expired/been abandoned (no production since ~2001) and that the lease was severable; Appellant appealed.
Issues
| Issue | Plaintiff's Argument (Montgomery) | Defendant's Argument (R. Oil) | Held |
|---|---|---|---|
| 1. Severability of the lease (entirety vs. severable parcels) | Lease is severable; Montgomerys’ tract can be adjudicated alone | Lease is not severable; all owners of the 240-acre parcel are indispensable parties | Held severable: lease allowed subdivision/release and acreage consisted of distinct parcels, so court could decide as to Montgomerys alone |
| 2. Failure to join indispensable parties | No indispensable parties; decision affects only R. Oil’s interest in Area A for Montgomerys’ tract | Other surface owners and Area B owner are indispensable | Held plaintiff met requirements; absent parties’ rights would not be prejudiced and jurisdiction was proper |
| 3. Whether factual dispute exists about production in paying quantities / abandonment | Lease had ceased producing in paying quantities on Montgomery tract; Harmony abandoned lease before assignment to R. Oil | Dispute exists whether production continued or shut-in/deferred payments were made; judgment on pleadings premature | Held no genuine factual dispute in pleadings: record shows no paying production since ~2001, implied covenant breached, and abandonment/lapse occurred as a matter of law for Montgomerys’ tract |
| 4. Use of DEP consent order (admissibility under Pa.R.E. 408) | Consent order (attached by R. Oil) supports that wells were abandoned; admissible as attached document and not a settlement admission by Montgomerys | Consent order is an offer/compromise and inadmissible to prove liability under Rule 408 | Held court permissibly considered the consent order: Montgomerys were non-parties to the COA, R. Oil itself filed the COA with its pleadings, and the court relied on multiple sources besides the COA |
Key Cases Cited
- Seneca Res. Corp. v. S & T Bank, 122 A.3d 374 (Pa. Super. 2015) (framework for analyzing severability of oil-and-gas leases)
- T. W. Phillips Gas & Oil Co. v. Jodlicka, 42 A.3d 261 (Pa. 2012) (leases construed as contracts; habendum clauses and production rules)
- Heasley v. KSM Energy, Inc., 52 A.3d 341 (Pa. Super. 2012) (production-based leases lapse to tenancy at will when production stops)
- Aye v. Philadelphia Co., 44 A. 555 (Pa. 1899) (unexplained cessation of operations raises presumption of abandonment)
- Clark v. Wright, 166 A. 775 (Pa. 1933) (duration of lease measured by period of active production where lessor's share depends on production)
- Cassell v. Crothers, 44 A. 446 (Pa. 1899) (lease continuing "as long thereafter as oil is found in paying quantities" creates tenancy susceptible to termination when production ceases)