590 F. App'x 189
3rd Cir.2014Background
- William and Angela Smith leased 105.572 acres to PGE (later assigned to Steckman Ridge) by a dual-purpose oil-and-gas lease (production and storage) signed May 18, 2000; primary term 5 years, with secondary term dependent on payments, operations, a producing well, or use for gas storage.
- PGE produced from Well 1663 from April 22, 2004 until it was shut in on December 6, 2006; the well remained capable of producing in paying quantities when shut in.
- PGE paid delay rentals through 2004 and paid royalties of $872,031.52 for production; PGE assigned the lease to Steckman in March 2007.
- Steckman tendered payments in 2007, 2008, and March 4, 2009 (including a large payment in July 2007 alleged to value recoverable reserves and a separate shut-in/delay payment offers); the Smiths refused some offers but accepted the March 4, 2009 check for stored-reserve value.
- The Smiths sued claiming the storage constituted a de facto taking because the lease expired (they argued forfeiture occurred after production ceased and conditions in the lease were not met); the district court granted Steckman summary judgment and this Court affirmed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the 90-day cessation-of-production clause was triggered when Well 1663 was shut in Dec. 6, 2006 | Smith: shut-in triggered the cessation clause; production ceased and lease expired after 90 days | Steckman: the cessation clause applies only to involuntary incapacity to produce; this was a voluntary shut-in invoking the shut-in clause | Court: cessation clause applies to involuntary stoppages; here shut-in clause controls because well remained capable of production |
| Whether Steckman satisfied the shut-in clause (timely shut-in payment) | Smith: Steckman failed to make the annual-in-advance shut-in/delay payment and so forfeited the lease | Steckman: it tendered substantially more than required (payment for reserves plus rental offers) in good faith | Court: Steckman satisfied the shut-in clause in substance; tender of larger proper payments in good faith precluded forfeiture (damages remedy for any shortfall) |
| Whether the lease is an unenforceable “no-term” lease | Smith: delay rentals improperly allow indefinite extension without development | Steckman: lessee developed during primary term, paid royalties, and did not seek speculative indefinite extension | Court: Hite is distinguishable; here development occurred and payments were in good faith; lease not a no-term lease |
| Whether failure to give notice of conversion to storage forfeited the lease | Smith: conversion to storage without notice invalidated the lease | Steckman: lease’s conversion-to-storage clause requires payment for recoverable reserves, not notice | Court: lease imposes no notice requirement; Steckman complied by tendering payment for reserves; no forfeiture |
| Whether acceptance of March 4, 2009 payment is estoppel to deny lease validity | Smith: they accepted only partial royalty check and consistently rejected rental payments; not estopped | Steckman: acceptance of payment for stored reserves is acceptance of benefits and estops claim of prior forfeiture | Court: acceptance of the March 4, 2009 payment estops the Smiths from asserting the lease had been forfeited in 2007 |
Key Cases Cited
- T.W. Phillips Gas & Oil Co. v. Jedlicka, 42 A.3d 261 (Pa. 2012) (principles for interpreting oil and gas leases and disfavors forfeiture)
- Allied Erecting & Dismantling v. USX Corp., 249 F.3d 191 (3d Cir. 2001) (summary judgment appropriate where contract admits one reasonable reading)
- Hite v. Falcon Partners, 13 A.3d 942 (Pa. Super. Ct. 2011) (delay-rental arrangements can be forfeited where lessee never attempted development during primary term)
- McCausland v. Wagner, 78 A.3d 1093 (Pa. Super. Ct. 2013) (Pennsylvania courts disfavor forfeiture and apply estoppel when lessors accept lease benefits)
- Pack v. Santa Fe Minerals, 869 P.2d 323 (Okla. 1994) (cessation-of-production clause applies where well becomes incapable of producing)
- Anadarko Petroleum Corp. v. Thompson, 94 S.W.3d 550 (Tex. 2002) (cessation-of-production clause applies only if well ceases to be capable of producing)