Earl D. HALL Sr.; Betty Jane Hall; and Earl D. Hall, Jr., on behalf of Them-selves and All Others Similarly Situated, Appellants v. CNX GAS COMPANY, LLC, in Its Own Right and as Successor-In Interest to Consol Gas Company, LLC, Appellee.
Superior Court of Pennsylvania.
April 7, 2016.
597-605
Argued Sept. 17, 2015.
the policy must be purchased for more than one vehicle.
Here, when Mother purchased her policy in 2004, there was only one vehicle insured under the policy, and there was nothing to stack. Thus, as Appellant asserts, the UM/UIM stacking waiver obtained from Mother by Travelers at the time when she only was insuring one vehicle “was not mandatory and, therefore, [was] unenforceable.” Appellant‘s Brief at 15.
I am persuaded that the Sackett trilogy of cases is inapposite to the case sub judice because here, Mother had a single-vehicle policy when she signed a stacking waiver, and the waiver was not enforceable. As Appellant submits, the Sackett cases discuss the legal ramifications of a UM/UIM stacking waiver when adding a car to an already existing multi-vehicle policy; they do not pertain to UM/UIM claims and stacking waivers where a car is added to a single-vehicle policy.
I find Bumbarger similarly distinguishable. In that case, the insurance company issued a personal automobile policy to Ms. Bumbarger providing coverage for two vehicles. At that time, the insured executed forms rejecting stacking of UM/UIM coverage. Approximately two months later, a third vehicle was added to the policy through an endorsement. A fourth vehicle was added two years later; unlike the third vehicle, it was added by an amended declarations page. Bumbarger, 93 A.3d at 874. After the insured was involved in an accident in the third vehicle and filed a claim for stacked UM benefits, the insurer maintained that the original waiver of stacked UM/UIM benefits remained in effect. Id. Bumbarger thus has different considerations from the instant case, as well.5
I conclude that a new stacking waiver form should have been provided to Mother when she added the second vehicle to her policy in February of 2007 because that was the first time there existed the possibility that stacking, in particular, intra-policy stacking, became possible. Thus, I would reverse the order of the trial court granting Travelers’ motion for summary judgment and denying Appellant‘s motion for summary judgment.
Daniel K. Bricmont, Pittsburgh and Robert Sanders, Upper Marlboro, MD, for Hall, B., Hall, E. Jr. and Hall, E. Sr. appellants.
Kevin C. Abbott, Pittsburgh, for appellee.
BEFORE: BOWES, OLSON, and STABILE, JJ.
Earl D. Hall, Sr., Betty Jane Hall, and Earl D. Hall, Jr. (hereinafter “the Halls” or “Lessors“) appeal from the October 7, 2014 order entered by the trial court that granted summary judgment in favor of CNX Gas Company (hereinafter “CNX” or “Lessee“) and dismissed their claims. After thorough review, we affirm.
The instant appeal involves the interpretation of an oil and gas lease. In March 1998, Earl Hall, Jr., leased the oil and gas rights on his Fayette County property to a predecessor company of CNX. Earl, Sr. and Betty Hall leased the same rights in their real estate in October 2002. The leases contain nearly identical language throughout and specifically utilize the same royalty clause at issue in this matter. That provision reads:
3. Royalties The royalties to be paid by the Lessee are:
. . . .
(b) on gas, including casinghead gas or other gaseous substance, produced from said land and sold or used beyond the well or for the extraction of gasoline or other product, an amount equal to one-eighth of the net amount realized by Lessee computed at the wellhead from the sale of such substances. On gas sold at the well, the royalty shall be one-eighth of the amount realized by Lessee from such sale.
Lease, Earl, Sr. and Betty Hall (“the Hall lease“), 10/23/02, at 1 3.1
The two Hall properties are part of a system of wellheads and pipelines that feed into a gathering system. At various points along that pipeline, gas produced from other lessors’ wells is commingled with that of the Halls and transported to the point of sale. The Hall lease conferred upon CNX the right to drill and operate the Halls’ wells in conjunction with the wells on neighboring properties. See Hall lease at 1 1(b) (granting to CNX “any and all other rights and privileges necessary, incident to, or convenient for the economical operation of the lands, alone or jointly with neighboring lands for these purposes“). Significantly, the lease also gave Lessee the right “to use, free of cost, oil, gas and water produced on said land for its operations.” Id. at 1 13.
It is undisputed that the Hall lease requires CNX to pay a one-eighth royalty to the Halls and the other lessors calculated upon the net amount realized at the point of sale. CNX allocates royalties among the lessors based on each lessor‘s proportionate contribution to the volume of gas as measured at the wellhead by the well meter. CNX succinctly described the calculation as follows:
The royalty payment to each [lessor] is computed by dividing the volume of gas as measured at each well head by the total volume of gas measured at all of the wellheads that feed into the sales point. This value is multiplied by the amount realized on the sale by CNX to compute each well‘s proportionate share of the amount realized from the sale.
Appellant‘s brief at 8 n. 1 (quoting CNX‘s Answer to Interrogatory No. 3, Plaintiff‘s Motion for Partial Summary Judgment as to Liability on Counts I and II of the Second Amended Complaint, Exhibit 1 at 2-3). Thus, if there are multiple lessors contributing gas to the system, CNX measures the volume of gas at each wellhead, and totals the volumes. For purposes of illustration, we assume that the total volume produced is 10,000 units. If Earl, Sr. and Betty Jane‘s well contributed 2000 units, which is twenty per cent of the aggregate, they would receive a royalty of twenty percent of one-eighth royalty computed on the net amount realized from the sale. Assuming Earl, Jr.‘s, well contributed 1000 units, he would be entitled to ten percent of the one-eighth royalty. The other lessors would receive royalties based upon the proportion of their volumetric contribution of gas to the aggregate as measured at the wellhead.
The Halls subsequently amended their complaint to allege, inter alia, that CNX‘s allocation of the lost and used gas among the lessors was unauthorized under the lease.4 Lost gas is a reduction in the volume of gas due to evaporation or leakage as it is transported through a pipeline. Used gas refers to volumes of gas that are used along the pipeline for compression, flaring, venting, and other operations associated with processing raw gas into a marketable gas and transporting it to the point of sale.
The Halls moved for summary judgment as to counts I and II of their complaint alleging breach of contract based on the allocation of lost and used gas. They contended that since the lease did not authorize the pro rata allocation of lost and used gas among the lessors, CNX was limited to deducting only actual volumes of lost and used gas from each lessor‘s share of the royalty. As CNX does not measure the volume of gas from each well just prior to the point of commingling, and therefore cannot attribute to an individual well the precise amount of gas lost or used from that well, the Halls contended that CNX was obligated to pay royalties based on the volume of gas measured at each wellhead.
CNX sought summary judgment in its favor. In support thereof, it maintained that, due to the fungible nature of the compound and the physical impossibility of independently tracking each molecule from its source, it was impossible to attribute any specific amount of gas lost or used to any one of the individual wells along the pipeline. CNX renewed its argument that no royalty was due on gas that was lost or used prior to the point of sale. It also steadfastly maintained that it did not deduct an allocated amount of lost and used gas from the royalty payable on each well.
The trial court entered summary judgment in favor of CNX and adopted its opinion in Lawrence v. Atlas Resources, Inc., GD-10-011904 (Alleg. Co. 2012) as the basis for its decision. The Halls appealed to this Court and they present one issue for our consideration:
Whether a natural gas producer may allocate lost and used gas even without a provision in the lease authorizing it to do so when, under established Pennsylvania law, oil and gas leases are to be narrow-
ly construed and the rights not directly conferred by the lease language are to be considered withheld by the lessor?
Appellant‘s brief at 2.
We follow a well-established standard of review in evaluating a trial court‘s grant or denial of summary judgment:
We view the record in the light most favorable to the nonmoving party, and all doubts as to the existence of a genuine issue of material fact must be resolved against the moving party. Only where there is no genuine issue as to any material fact and it is clear that the moving party is entitled to a judgment as a matter of law will summary judgment be entered. Our scope of review of a trial court‘s order granting or denying summary judgment is plenary, and our standard of review is clear: the trial court‘s order will be reversed only where it is established that the court committed an error of law or abused its discretion.
Daley v. A.W. Chesterton, Inc., 614 Pa. 335, 37 A.3d 1175, 1179 (2012) (citation omitted). Instantly, there is no dispute between the parties regarding the facts underlying this appeal; therefore, we confine our review to the trial court‘s legal conclusions.
Our Supreme Court has recognized that an oil and gas lease “is in the nature of a contract and is controlled by principles of contract law.” T.W. Phillips Gas and Oil Co. v. Jedlicka, 615 Pa. 199, 42 A.3d 261, 267 (2012). It must be construed in accordance with the terms of the agreement as manifestly expressed, and “[t]he accepted and plain meaning of the language used, rather than the silent intentions of the contracting parties, determines the construction to be given the agreement.” J.K. Willison v. Consol. Coal Co., 536 Pa. 49, 637 A.2d 979, 982 (1994) (citations omitted). The interpretation of any contract is a question of law and this Court‘s scope of review is plenary. Id. Moreover, “[w]e need not defer to the conclusions of the trial court and are free to draw our own inferences. In interpreting a contract, the ultimate goal is to ascertain and give effect to the intent of the parties as reasonably manifested by the language of their written agreement.” Humberston v. Chevron U.S.A., Inc., 75 A.3d 504, 509 (Pa. Super. 2013).
No one disputes that the Hall lease is silent as to the allocation of royalties generally among the Halls and other lessors.5 However, that is not the issue before us. The Halls have not assailed CNX‘s right to pro rata allocate royalties generally. Rather, their challenge is limited to CNX‘s proportionate allocation of lost and used gas, absent a provision authorizing such allocation. The issue is one of first impression for this Court.
The Halls contend that, without language permitting a proportionate allocation of lost and used gas, CNX can deduct from their royalties only the amount of gas actually lost and/or used as measured from each well. The Halls rely upon this Court‘s decision in Pomposini v. T.W. Phillips Gas & Oil Co., 397 Pa. Super. 564, 580 A.2d 776, 778 (1990), for the proposi-
In Pomposini, this Court examined whether a lease for the rights to extract oil and gas from a lessor‘s property permitted the lessee company to use the well as an underground reservoir to store gas. The lease, which was “for the sole and only purpose of drilling and operating for natural gas,” was effective for 20 years or for as long as the lessor‘s well produced natural gas in paying quantities. Id. at 777. The lessor accepted quarterly payments from the lessee for twenty-five years, believing them to be payment for gas produced on his land. Instead, the property was being used solely for storage and not production of gas. The lessor filed suit against the lessee alleging that the use of his well for the storage of gas was fraudulent and unauthorized, and was awarded compensatory damages based on the fair rental value of the well for that period.
Both parties appealed. This Court pointedly noted that the lease to which both parties agreed did not expressly authorize the storage of gas, that it did not establish a rent to be paid for storage purposes, and that it did not “disclose an implied intent” to allow the same. Id. at 778. Accordingly, we concluded that the parties did not contemplate that the leased premises would be used for gas storage. Since the lease did not expressly authorize or fairly imply that the lessee was permitted to use the property to store gas, the right to such storage was not conferred to the company and was instead retained by the lessors. Id. at 779 (“Because the lessee did not acquire an estate in the caverns and was not authorized to store gas on plaintiff‘s land, . . . the lessee was liable for the unauthorized storage of gas on Pomposini‘s land.“).
The Halls contend that, under the reasoning in Pomposini, since CNX can deduct from royalties only the actual amount of gas actually lost and/or used from each well, and CNX has no means to measure that amount at the point of commingling, the lessors retain the right to all of the royalties on the lost and used gas. Accordingly, the Halls argue they are entitled to royalties based on the volume of gas as measured at each wellhead, despite the lease provision calculating the royalty on the volumes of gas sold.
CNX counters that the trial court ruled, and the Halls concede, that the lease provides for the payment of a one-eighth royalty on the amounts realized from the sale of gas. See Appellant‘s brief at 6. It also cites the trial court‘s earlier ruling on preliminary objections that the Halls were not entitled to a royalty on gas that was lost or used prior to the point of sale since the Hall lease only provides for royalties on the net amount realized from the sale of gas. According to CNX, “if the gas does not reach the point of sale and there are no proceeds, there is no royalty due.” Appellee‘s brief at 10. Consequently, lost and used gas is not allocated as part of the royalty allocation.
CNX also takes issue with the Halls’ assertion that it deducted some value from the royalty payable for lost and used gas.6
Rather, the one-eighth royalty was calculated when the gas was sold, and at that point, the lost and used gas was not in existence. In short, royalties were not due on lost and used gas as it did not reach the point of sale. CNX contends that the foregoing analysis is dispositive of the issue. It alleges that the Halls’ argument based on Pomposini is misplaced and nothing more than an attempt to circumvent clear language in the lease that royalties are to be calculated at the point of sale.
Although CNX consistently maintains that there is no missing allocation term vis à vis lost and used gas, it argues in the alternative that, even assuming a term is missing, the trial court properly supplied that term. CNX contends that either the Restatement (Second) of Contracts § 204, utilized by the trial court below and in Lawrence, or custom and practice in the industry as employed by the district court in Pollock v. Energy Corp. of Am., 2013 WL 275327 (W.D. Pa. 2013), can remedy any deficiency.
In Lawrence, the gas lease provided for a one-eighth royalty computed at the point of sale, minus a deduction of charges for transportation and compression. The lessee apportioned pro rata the royalty among the landowners based upon each well‘s percentage of the overall production. The landowners argued that, as a result of the allocation method used, some property owners did not receive what was promised, i.e., a royalty of at least one-eighth of the sale value of his gas less the deduction for transportation and compression.7 The court concluded that the lease unambigu-
I find that the use of the pro rata method allows each party to receive what the party expected to receive. [The lessee] intended to expend seven-eighths of the transportation costs and receive seven-eighths of the purchase price. By using the pro rata method for calculating what each property owner will receive, [the lessee] will receive the share described in the lease.
Trial Court Opinion, Lawrence, supra, at 8. The method, the trial court opined, was consistent with the expectations of both sophisticated and unsophisticated sellers and community standards of fairness.
In Pollock, the landowners advanced an argument similar to the one proffered herein regarding the allocation of lost and used gas. Since the lease did not contain a provision for allocating lost and used gas, the lessor argued that the lessee could only deduct the value of the volumes of gas
We observe preliminarily that the Halls’ position is predicated on the assumption that lost and used gas is part of the royalty, a premise that CNX disputes and the trial court rejected. See Appellant‘s brief at 8 (“CNX allocates lost and used gas when calculating gas royalties.“). CNX maintains that it “allocates pro rata the amounts realized from the volumes of gas sold back to the various wells and lessors that contribute to the sold volumes,” and “pays a royalty based on those amounts.” Appellee‘s brief at 7 (emphasis added). According to CNX, there is no volume of lost and used gas at the point of sale to allocate.
We agree with CNX. Its argument highlights a critical distinction between the lease in Lawrence and the Hall lease that the trial court did not appreciate. See Trial Court Opinion, 10/27/14, at 1 (stating “there are no material factual differences between the present case and Lawrence“). The argument in Lawrence was that there was no lease term authorizing the allocation of royalties. The Halls argue here that there is no term allocating the royalties on lost and used gas. Admittedly, both leases state that royalties are to be based on the net amount realized at the point of sale. However, as the trial court properly concluded when it sustained preliminary objections to the Halls’ claim of breach of contract for non-payment of royalties for lost and used gas, the volume of lost and used gas is not part of the royalty calculation in this case. Despite the Halls’ insistence that CNX deducts the volume of lost or used gas from the one-eighth royalty computed at the point of sale, the record does not support that contention. Gas lost or used on the way to the point of sale is simply not part of the royalty computation. It necessarily follows that lost and used gas is not allocated when the royalty is allocated among the various lessors.8
Hence, with regard to the lost and used gas specifically, we find no ambiguity or missing allocation term in the Hall lease. The language providing for royalties to be calculated on the net amount realized at the point of sale obviates the need for a term allocating lost and used gas.9 Accordingly, for purposes of our disposition herein, we need not engage in the debate whether our Supreme Court has adopted or sanctioned the Restatement (Second) of Contracts § 204, that would permit us to supply an essential missing term into the lease. See Lawrence, supra; see Banks Engineering Co. v. Polons, 561 Pa. 638, 752 A.2d 883 (2000).
Order affirmed.
MARY JANE BOWES
SUPERIOR COURT JUDGE