PENNSYLVANIA ENVIRONMENTAL DEFENSE FOUNDATION, Appellant v. COMMONWEALTH OF PENNSYLVANIA, AND GOVERNOR OF PENNSYLVANIA, TOM WOLF, IN HIS OFFICIAL CAPACITY AS GOVERNOR, Appellees
No. 64 MAP 2019
IN THE SUPREME COURT OF PENNSYLVANIA MIDDLE DISTRICT
DECIDED: July 21, 2021
BAER, C.J., SAYLOR, TODD, DONOHUE, DOUGHERTY, WECHT, MUNDY, JJ. [J-78-2020]
JUSTICE DONOHUE
I. Introduction
This decision is the final resolution of a lawsuit brought by the Pennsylvania Environmental Defense Foundation (“PEDF“) challenging amendments to the Fiscal Code1 by the Pennsylvania General Assembly that diverted to the General Fund revenues generated from oil and gas leases on state forest and game lands. The challenge asserted that the legislation was violative of Article I, Section 27 of the Pennsylvania Constitution,2 typically referred to as the Environmental Rights Amendment (the “ERA“).
This case returned to the Commonwealth Court following PEDF II,3 where this Court adopted the plurality approach in Robinson Township, Washington County v. Commonwealth, 83 A.3d 901 (Pa. 2013), and held that the ERA created a constitutional public trust that is subject to private trust principles. Applying trust law, we determined that royalty revenue streams generated by the sale of gas extracted from Commonwealth lands represents the sale of trust assets and must be returned to the corpus of the trust. To the extent that
General Appropriations Act of 2009, also constituted the sale of trust
On remand, the Commonwealth Court, sitting en banc, determined that the three revenue streams did not constitute the sale of trust assets. The court concluded that “proceeds designated as ‘income’ are not required to remain in the corpus of the Section 27 trust and used solely for the conservation and maintenance of our public resources,” and therefore “may be appropriated for General Fund purposes.” PEDF III, 214 A.3d at 774. It concluded that these incomes could be distributed between two classes of beneficiaries: (1) current Pennsylvania citizens, which the court treated as life tenants, and (2) future generations, treated as remaindermen under its analysis. It further determined that, per a 1947 statute governing the distributions of income that was the law at the time of the ERA‘s enactment, one-third of the revenues could be used for non-trust purposes and the remaining two-thirds must be returned to the trust. This outcome corresponded to the court‘s conclusion that the ERA created life tenants (entitled to the one-third as income) and remaindermen (entitled to the remaining two-thirds as principal that must be reinvested). The court deemed it “necessary to make this analogy” to life tenants and remaindermen because of the unique legal issues involved in mineral rights. Id. at 761.
We find that the Commonwealth Court‘s holding is at odds with our decision in PEDF II, principles of private trust law, and the plain language of the ERA. As explained in this opinion, we agree with the Commonwealth Court that all three revenue streams at issue qualify as incomes generated from trust assets. However, the viability of the Commonwealth Court‘s holding turns on its erroneous conclusion that the ERA created successive beneficiaries in the form of life tenants and remaindermen with entitlement to income. Another remand is unnecessary, however, as the record is now sufficiently developed and based upon that record we hold that the incomes generated under these oil and gas leases must be returned to the corpus. As a result, we reverse the decision of the Commonwealth Court.
II. History
The dispute in this case centers on natural gas deposits located within the Marcellus Shale gas formation and the ERA‘s role as a constraint on the Commonwealth‘s promotion of the oil and gas industry, including its leasing of Commonwealth lands for commercial purposes. While our opinions in PEDF II and the plurality in Robinson Township extensively set forth that history, our rejection of the Commonwealth Court‘s approach requires discussion of factual and legal developments incidental to the narrow question presented on remand regarding the classification of certain revenue streams.
Factual history
In 1955, the General Assembly established the Oil and Gas Lease Fund (“Lease Fund“),
From its inception in 1955 through 2008, the Lease Fund received a total of $165 million. The flow of revenue into the Lease Fund increased dramatically starting in 2009, the year after the DCNR first leased a total of approximately 74,000 acres for Marcellus Shale drilling. That and subsequent leases generated approximately $600 million, comprised of four types of revenue streams: large one-time upfront bonus payments, annual rent fees paid by the acre, royalties based on the amount of marketable gas extracted, and interest penalties for late payments.
The DCNR self-imposed a moratorium on further leasing of Marcellus Shale lands pending further study and development of large tracts that had already been leased. However, the large amounts of money generated by the 2008 leases inspired the executive and legislative branches to pressure the DCNR to lease more land. To take advantage of the expected revenues, the General Assembly inserted four new provisions into the Fiscal Code.
The most significant change was Section 1602-E, which stated that no Lease Fund royalty money, with an exception discussed next, should be expended unless appropriated or transferred to the general budgetary fund by the General Assembly. Thus, all the royalties in the Lease Fund would be transferred to a larger pool of money, whereupon the General Assembly would allocate back to the DCNR whatever amount it saw fit. This provision therefore overrode the “all moneys” language of the Lease Fund by restricting the formerly automatic appropriation of all Lease Fund royalty money to the DCNR. The exception was established within Section 1603-E, which annually earmarked up to $50 million in royalties to the DCNR but with the further direction that preference be given to operation and maintenance of State parks and forests (as opposed to the other uses listed in the Lease Fund).4
The Fiscal Code was also amended to transfer $60 million from the Lease Fund to the General Fund for fiscal year 2009-2010.
The legislative and executive branches took other steps that served to restrict the allocation of Lease Fund monies to the DCNR. These included using Lease Fund money
to support the DCNR‘s overall budget – as opposed to using money from the General Fund to fund the DCNR – thereby
The General Assembly also created the Marcellus Legacy Fund, which supplied money for environmental projects not controlled by the DCNR, and was funded in part by annual appropriations from the Lease Fund. The Marcellus Legacy Fund‘s creation was one component of Act 13 of 2012, which “amended the Pennsylvania Lease Fund Act with substantial benefits to the natural gas industry in response to the Marcellus Shale boom.” Id. at 930 n.21.
Development of the law that the ERA creates a trust
The Act 13 legislation prompted various lawsuits, including the one that led to our decision in Robinson Township. The primary issue in that case focused on statutes imposing uniform zoning requirements across the Commonwealth, thereby overriding local municipalities’ ability to regulate. Numerous petitioners asserted that these acts represented a breach of the Commonwealth‘s fiduciary duties imposed by the ERA.
Then-Chief Justice Castille, joined by Justice Todd and former Justice McCaffery, would have decided the case based on that theory. Chief Justice Castille authored an opinion signaling, for the first time, that this Court would view the ERA as a constitutional right of the people, enforceable by the judiciary and not a merely aspirational policy statement. Robinson Twp., 83 A.3d at 952. The plurality criticized the test set forth in Payne v. Kassab, 312 A.2d 86 (Pa. Commw. 1973) (en banc), which established three factors to apply when examining an ERA claim. Id. at 94. The plurality commented that the Payne test largely neutered the ERA‘s protections by limiting the viability of constitutional claims to cases in which “the General Assembly had acted and by the General Assembly‘s policy choices, rather than by the plain language of the amendment.” Robinson Twp., 83 A.3d at 966. It further noted that “the Payne test appear[ed] to have become, for the Commonwealth Court, the benchmark for Section 27 decisions in lieu of the constitutional text.” Id.
Because Robinson Township did not garner a majority, Payne remained the benchmark in the PEDF I litigation. See PEDF I, 108 A.3d at 159 (“In the absence of a majority opinion from the Supreme Court or a decision from this Court overruling Payne[], that opinion is still binding precedent on this Court.“). In its complaint, the PEDF sought relief under the fiduciary provisions of the Declaratory Judgment Act,
(1) Whether Sections 1602-E and 1603-E of the Fiscal Code, which respectively provide that the General Assembly shall appropriate all royalty monies [of] the Lease Fund and that, subject to availability, up to $50 million of the Lease Fund royalties shall be appropriated to [the] DCNR, violate Article I, § 27;
PEDF I, 108 A.3d at 155.
(2) Whether the General Assembly‘s transfers/appropriations from the Lease Fund violate Article I, § 27; and (3) Who within the Commonwealth has the duty and thus bears the responsibility to make determinations with respect to the leasing of State lands for oil and natural gas extraction.
Applying Payne, the Commonwealth Court held that Section 1602-E was not facially unconstitutional because although the DCNR was deprived of control over royalty monies, the General Assembly, as a Commonwealth entity, is bound to safeguard the Commonwealth‘s natural resources. Regarding the decision to allocate only $50 million of the royalty money to the DCNR, the intermediate appellate court redefined the challenge as whether the DCNR was adequately funded to achieve its mission and answered that framing in the affirmative. As to the remaining challenges to the budgetary decisions implicated by Sections 1604-E, 1605-E, and other similar transfers, the court held that the ERA “does not also expressly command that all revenues derived from the sale or leasing of the Commonwealth‘s natural resources must be funneled to those purposes and those purposes only.” Id. at 168.
On appeal to this Court, both parties urged us to reject Payne. We unanimously agreed that the Payne test was incompatible with the ERA, thus “solidify[ing] the jurisprudential sea-change begun by Chief Justice Castille‘s plurality in Robinson Township [.]” PEDF II, 161 A.3d at 940 (Baer, J., concurring and dissenting). The lead opinion adopted the Robinson Township plurality framework, making clear that the plain text of the ERA controls and must be given the same effect as any other constitutional provision. Tracking Robinson Township‘s plurality opinion, we held that the ERA contained three clauses which collectively advance “two primary goals, via prohibitory
and non-prohibitory clauses: (1) the constitutional provision ... prevent[s] the state from acting in certain ways, and (2) ... establishes a nascent framework for the Commonwealth to participate affirmatively in the development and enforcement of these rights.” Robinson Twp., 83 A.3d at 950. Thus, a legal claim “may proceed upon alternative theories that either the government has infringed upon citizens’ rights or the government has failed in its trustee obligations, or upon both theories, given that the two paradigms, while serving different purposes in the amendatory scheme, are also related and overlap to a significant degree.” Id. at 950-51.
We further agreed with the Robinson Township plurality‘s explication of the three clauses in the ERA. The ERA “establishes two separate rights in the people,” with the first being the declared environmental rights, namely “a right to clean air, pure water, and to preservation of the natural, scenic, historic and esthetic values of the environment.”
When ascertaining the settlors’ intent, the Robinson Township plurality stated that the terms “trust” and “trustee” are terms of art that carried legal implications well
developed at Pennsylvania law at the time the amendment was adopted.” Id. It cited numerous sources of materials that may bear on that inquiry, including case law applying trust principles, the Restatement (Second) of Trusts, the legislative history surrounding the ERA‘s enactment, and Pennsylvania‘s Uniform Trust Act. See Robinson Twp., 83 A.3d at 959 n.45 (noting that the trust “is presumptively subject to the Uniform Trust Act“). Additionally, the Commonwealth, as trustee, is obligated “to comply with the terms of the trust and with standards governing a fiduciary‘s conduct,” including the duties of prudence, loyalty, and impartiality. Id. at 957. The Commonwealth‘s obligations must be considered in light of the two rights created by the ERA. Id.
The adoption of private trust law principles by this Court in PEDF II, including imposing fiduciary duties as a component of the ERA analysis, prompted then-Justice, now-Chief Justice, Baer‘s concurring and dissenting opinion as well as then-Chief Justice Saylor‘s dissent. Then-Justice Baer agreed that the time had come to jettison Payne but favored imposing a public trust doctrine subject to a more flexible “fiduciary-like construct,” PEDF II, 161 A.3d at 943 (Baer, C.J., concurring and dissenting). Justice Baer opined that “the focus of Section 27 is on the natural resources themselves, not the money gained from the resources. The trustee‘s duties are to ‘conserve and maintain’ the resources, not the money.” Id. at 946-47 (Baer, C.J., concurring and dissenting). Additionally, Justice Baer agreed with the Commonwealth‘s analysis of the phrase “benefit of all the people,” which includes both the enjoyment of the natural environment but also the utilization of the resources, without waste, for the current benefit of the public.” Id. at 947. Justice Baer would have held that the proceeds generated “may be used for public purposes other than conservation,” and where the Commonwealth provides
adequate funding to agencies to maintain and conserve the people‘s natural resources, “it is not required to take the illogical step of leaving substantial monies unused in a fund for the environment while being unable to meet other pressing needs of the people.” Id. at 948. Then-Chief Justice, now Justice, Saylor dissented but “join[ed] the central analysis” of Justice Baer‘s opinion relating to the public trust doctrine. Id. at 949 (Saylor, C.J., dissenting).
Application of trust law in PEDF II
Having established in PEDF II that the ERA created a trust subject to private trust law, we addressed the PEDF‘s challenges pursuant to those newly adopted principles. We rejected the Commonwealth‘s averment that revenues generated from the sale of trust assets may be redirected to general budgetary matters (i.e., non-trust purposes) on the theory that the ERA was silent on that point. We stated that argument was “plainly inaccurate, as Section 27 expressly creates a trust, and pursuant to Pennsylvania law in effect at the time of enactment, proceeds from the sale of trust assets are part of the corpus of the trust.” Id. at 933.
Relatedly, the Commonwealth argued that the concluding phrase of the ERA, “for the benefit of all the people,” conferred discretion upon the General Assembly to use Marcellus Shale revenues for any use that broadly benefited Pennsylvania citizens. Id. at 934. We disagreed, noting that the phrase “may not be read in isolation[.]” Id. “The Commonwealth‘s fiduciary
We then held that royalty revenue streams must be returned to the trust. The critical feature of those revenue streams was their direct relation to the sale of trust assets. Under Pennsylvania trust law, “proceeds from the sale of trust assets are trust principal and remain part of the corpus of the trust.” Id. For that proposition we cited McKeown‘s Estate, 106 A. 189 (Pa. 1919), a case reflecting that when trust assets are sold the proceeds are presumptively treated as principal. 106 A. at 190 (“Being a sale of assets the unavoidable result is that proceeds from the sale of oil and gas from Section 27‘s public trust remain in the corpus of the trust.” PEDF II, 161 A.3d at 933).
Because we held that royalties must be returned to the corpus, we determined that Sections 1602-E and 1603-E of the Fiscal Code, which related to royalties, were facially unconstitutional. We could not determine whether the same held true for Sections 1604-E and 1605-E, as well as Section 1912 of the Supplemental General Appropriations Act of 2009, all of which transferred money from the Lease Fund to the General Fund. The record lacked evidentiary support to decide whether these provisions were also unconstitutional, as those determinations could be made only after deciding how the other revenue streams (bonus payments, rents and interest penalties) must be treated under trust law. We cited In re Rosenblum‘s Estate, 328 A.2d 158 (Pa. 1974), and noted in a parenthetical explanation of the case that rents from realty have traditionally been treated as income payable to the trust‘s beneficiaries. As other possible sources of law on remand we cited, inter alia,
III. Remand Proceedings
On remand to the Commonwealth Court, the parties developed the record through further discovery and presented cross-applications for summary relief. Both staked out absolute positions, with each contending that all revenues must be directed to one purpose or another. The PEDF adhered to its view that all the revenues must be returned to the corpus of the trust as principal. “PEDF requests this Honorable Court to find and declare that all payments made under leases for the extraction and sale of oil and gas on State forest lands, including bonus and annual ‘rental’ payments, are part of the corpus[.]” Brief in Opposition to Commonwealth‘s Application for Summary Relief, 6/4/18, at 1. The Commonwealth disagreed, indicating that “[a]t this time, the singular remaining claim to be analyzed is whether payments other than royalty payments also constitute trust corpus,” and contended that “the undisputed material facts show that these payments are not corpus of the trust.” Brief in Opposition to PEDF‘s Application for Summary Relief, 7/9/18, at 2.
The Commonwealth argued that bonus and rent payments are not in exchange for severing the minerals because the government keeps those upfront payments regardless of whether the successful bidder develops the land. The Commonwealth, alluding to our statement in PEDF II that the trust retains the trust asset in its entirety after a rental period expires, 161 A.3d at 935 n.27, asserted that the bonus and rental payments convey a leasehold interest only with the bonus bid payments
The Commonwealth argued that it may generate revenues in this manner consistent with Pennsylvania statutory trust law that classifies rental payments as trust income, as opposed to trust principal.
Pursuant to Pennsylvania trust law, rent from real or personal property is to be allocated as trust income, not trust principal.
20 Pa.C.S. § 8145(a) . Further, only “refundable deposits” for rent “shall be applied to principal.”20 Pa.C.S. § 8145(b)(1) . As neither the up-front bonus payment, nor the rent payments are refundable at the termination of the Department‘s leases, they are not “deposits” as defined by Pennsylvania trust law. They are therefore income rather than trust principal. Trust principal is defined as “[p]roperty held in trust for distribution to a remainder beneficiary when the trust terminates or property held in trust in perpetuity.”20 Pa.C.S. § 8102 . Neither of these revenue streams are trust principal or corpus.Accordingly, the answer to the remaining question on remand is that the true purpose of the bonus-bid and rental payments is an inchoate leasehold interest in the State forest land. They are not the conversion of a trust asset from one form to another. Rather, they are income, as they do not dispose of
or deprive the trust of any further benefit from the trust asset. See In re Rosenblum‘s Estate, 328 A.2d 158, 163 (Pa. 1974) (holding that rents from realty, unrelated to oil and gas leases, have traditionally been treated as income (and payable directly to the trust‘s beneficiaries) rather than principal).
Commonwealth‘s Brief at 15-16; accord PEDF II, 161 A.3d at 935 (citing
Section 8145 is codified within the Pennsylvania Uniform Principal and Income Act,
The PEDF, in contrast, characterized the bonus payments as inextricably linked to the actual sale of gas and therefore constituted the sale of trust assets. See Amendment to Application for Summary Relief, 7/13/2017, at unnumbered 3 (“[B]onus payments for oil and gas development
Responding to the Commonwealth‘s theory that only an inchoate leasehold interest was conveyed via the bonus and rental payments, the PEDF submitted that the argument is flawed because it “arbitrarily bifurcates the activities necessary to remove oil and gas from the sale itself and is not supported by law, which recognizes an agreement to remove and sell all the oil and gas on a parcel of land is the agreement to convey fee title of the oil and gas that is part of the real estate.” PEDF‘s Brief in Opposition to Summary Relief, 6/4/2018, at 15. It cited this Court‘s observation in In re Bruner‘s Will, 70 A.2d 222 (Pa. 1950), that bonus payments are considered inseparable from the sale of mineral rights as a matter of law. See id. at 225 (“In reality, the lease contemplates removal of all the oil and is in effect a sale, with payment to be made as the mineral is removed. Obviously, it was a sale of part of the principle [sic] of the trust and properly the moneys received therefrom belonged to the corpus.“).
Additionally, the PEDF challenged the application of
The Commonwealth Court‘s decision
The Commonwealth Court rejected the arguments of both parties. According to the Commonwealth Court, incomes generated from the oil and gas leases are subject to the 1947 Act (which was the law when the ERA was adopted) based on its conclusion that the ERA recognized two distinct classes of beneficiaries. PEDF III, 214 A.3d at 761. This conclusion was based on a cursory analysis of the ERA‘s text.
[T]he trust instrument here is Section 27; the trust property is Pennsylvania‘s public natural resources; the Commonwealth is the trustee; and the people of Pennsylvania – both current and future generations – are the beneficiaries. Pennsylvanians have both a present and future interest in the trust. In essence, today‘s generation represents life tenants or life beneficiaries of the trust and tomorrow‘s generation represents the remainder interest.
Id. at 761 (citation omitted).
The foregoing is the totality of its constitutional analysis. The Commonwealth Court candidly acknowledged that it manufactured this framework by way of analogy to cases cited by the PEDF that dealt with present and future rights in minerals. Id.
In lieu of grounding its life tenants and remaindermen framework in the actual text of the ERA, the Commonwealth Court‘s analysis emphasized the difficulties inherent in the determination of what legal interests are conveyed in mineral lease contracts, which the court recognized are “unique and ‘far from the simplest of property concepts.‘” Id. at 758 (quoting Brown v. Haight, 255 A.2d 508, 510 (Pa. 1969)). The landowner/lessor has three distinct interests in leased land: “(1) a possessory interest in the surface except insofar as it may interfere with drilling operations; (2) a right to receive bonus, rentals and royalties under the lease; and (3) the possibility of reverter in the minerals in place.” Id. (quoting Robert E. Sullivan, Handbook of Oil and Gas Law 69 (1955)).
The different types of legal title acquired by a mineral lessee tied into the Commonwealth‘s argument that the purpose of the bonus and rental payments was to convey only an inchoate leasehold. The Commonwealth Court noted that Pennsylvania case law initially classified the lessee‘s interest as an “incorporeal hereditament, not a conveyance of title[,]” id. (citation omitted), but since the early 20th century cases have “consistently held that the title conveyed in an oil and gas lease is inchoate, and is initially for the purpose of exploration and development.” Id. (collecting cases). But no matter how the lessee‘s interest is classified, the Commonwealth Court observed that “the general purpose of an oil and gas lease is to secure the right to explore and develop the property with the expectation of receiving large returns from the royalties payable on production.” Id. at 759. Once minerals are removed from the property, the lessee‘s interest becomes vested as a fee simple determinable estate. In the event minerals are not extracted, no estate ever vests. Id. (citations omitted).
Next, the Commonwealth Court discussed the issue of contractual consideration in generic terms and distinguished rentals from bonuses. Rents “refer[] to the consideration paid to the lessor for the privilege of delaying drilling operations” and typically “do not depend on the discovery or production of oil and gas, but rather represent compensation for the time to explore.” Id. (citations omitted). Regarding bonus payments, the court noted that the term can refer to different things and cited various cases in which “bonus provisions ... have served different purposes.” Id. at 760. For example, in some cases the bonus amounts were not based on actual production, whereas in other situations they were; sometimes, bonus payments were split with one part of the bonus linked to the right to occupy and explore the land
Having established these background principles, the Commonwealth Court determined that the relevant question is “whether rents and bonuses ... constitute income or principal pursuant to Pennsylvania trust principles in effect” when the ERA was enacted, a question that the Commonwealth Court recognized “is a complex one.” Id. A complicating factor is that the foregoing cases discussing bonuses and rents were not necessarily trust cases. In the footnote appended to that observation, the panel noted that absent a special trust provision or statute, “the allocation among beneficiaries of proceeds from oil and gas leases follows the division of proceeds between the owner of a legal life estate and the owner of the complementary future interest” depending upon
application of common law doctrines. Id. at 760 n.14. The court also noted “a split of authority as to whether a bonus paid for an oil and gas lease is income or principal to be conserved for the remainder beneficiary.” Id. (citations omitted).The Commonwealth Court then “reexamine[d] the intent embodied in Section 27 to determine whether Section 9 of the 1947 Act applies.” PEDF III, 214 A.3d at 768. In its “re-examination,” when analyzing the settlors’ intent, instead of applying the holding as expressed in the Majority Opinion, the panel drew on then-Justice, now Chief Justice, Baer‘s concurring and dissenting opinion in PEDF II and concluded that the settlors “contemplate[d] the ‘continued, but judicious, use of the resources.‘” Id. (quoting PEDF II, 161 A.3d at 947 (Baer, J., concurring and dissenting)).5 The Commonwealth Court then concluded that the ERA‘s silence on the method for disposing of net proceeds required the application of the 1947 Act‘s apportionment methodology:
Although Section 27 expressed the intent to conserve and maintain the corpus – public natural resources – for the benefit of all the people, it made no provision for the disposition of the net proceeds obtained from the use thereof. In other words, it did not specify the method for allocating receipts. Though Section 27‘s intent was clear, the directions for administration of the trust were not expressly delineated. Consequently, Section 9 of the 1947 Act governs the ascertainment of income and principal and the apportionment of proceeds between income and principal. See former
20 P.S. §§ 3470.2 ,3470.9 .
The final question was whether the bonus, rental payments, and late fees were in consideration for the sale of trust assets. The Commonwealth Court concluded that the bonuses, rentals and late fees were in consideration for a leasehold interest only, and thus, subject to an accounting, the 1947 Act‘s proceed-splitting provisions applied.6
IV. Parties’ Arguments
The PEDF
The PEDF challenges the notion that
The PEDF contends that the Commonwealth Court‘s identification of life tenant beneficiaries and remaindermen within
[T]he Commonwealth Court started from the belief that
Article I, § 27 authorizes the sale of trust assets to generate income. From that assumption, the Court determined that the Principle [sic] and Income Act of 1947 should be applied to define how bonus and annual rental payments should be allocated. From there, the Court concluded that one third of the upfront bonus and annual rental payments is income that can be transferred to the General Fund.
PEDF‘s Brief at 32 (citations omitted).
Relatedly, the PEDF also faults the Commonwealth Court‘s analysis of the lease language. PEDF reiterates its argument that the language of the leases themselves specifically state that their sole purpose was to sever the minerals from the land. “[DCNR] does hereby grant, demise, lease, and let, exclusively unto Lessee for the purposes only of exploring, drilling, operating, producing, and removing of oil, gas and liquid hydrocarbons . . . .” PEDF III, 214 A.3d at 771 (quoting leases). The Commonwealth Court determined that the bonuses and rents were only in consideration of securing the lease, and therefore the lease granted only an inchoate leasehold that does not vest until minerals are extracted. The PEDF argues that this conclusion is sound only to the extent that the contractual language regarding “removing of oil, gas and liquid hydrocarbons” may be ignored. The PEDF argues, as a matter of law, the plain language of the contract establishes that the parties intended for the payments to be in consideration for removing minerals. Therefore, the Commonwealth Court erroneously concluded that the “true purpose” was for something other than sale of minerals, which would plainly qualify as sale of trust proceeds that must all be returned to the corpus under PEDF II without any need to apply the 1947 Act.
The Commonwealth
The Commonwealth has abandoned its absolutist position advanced in the Commonwealth
Additionally, the government maintains its focus on the fact that bonus and lease payments are retained even if the tract is unproductive. In the Commonwealth‘s view, the sixteen leases in which it received approximately $140 million dollars despite the fact minerals were not removed establishes the correctness of the Commonwealth Court conclusion that those payments were in consideration for only an inchoate leasehold and not in consideration for the sale of trust assets. Unlike royalty payments, which are tied directly to the extraction of oil and gas from State forests and game lands as compensation for the severance of that asset from the
V. Analysis
The first question presented on remand was how to classify the revenue streams from bonuses, rentals and penalty interest. If these revenue streams were for the “true purpose” of selling trust assets, then those streams are indistinguishable from royalties and must remain in the trust corpus and no further analysis would be required. We thus begin our analysis with the appropriate classification of the revenue streams.
Bonus payments
The parties agree that the analysis of bonus payments turns, in large part, on contractual law. A lease “is in the nature of a contract and is controlled by principles of contract law.” T.W. Phillips Gas & Oil Co. v. Jedlicka, 42 A.3d 261, 267 (Pa. 2012). The fundamental rule of contract interpretation is to give effect to the parties’ intent in accordance with the contract‘s terms. See, e.g., Hagarty v. William Akers, Jr. Co., 20 A.2d 317 (Pa. 1941) (“[I]t is not the function of this Court to re-write it, or to give it a construction in conflict with that which accords with the accepted and plain meaning of the language used.“); Gamesa Energy USA, LLC v. Ten Penn Ctr. Assocs., L.P., 217 A.3d 1227, 1238 (Pa. 2019) (quoting Amoco Oil Co. v. Snyder, 478 A.2d 795, 798 (Pa. 1984)). The meaning of an unambiguous contract is a question of law for which our review is de novo. Lesko, 15 A.3d at 341-42. Additionally, “custom in the industry or usage in the trade is always relevant and admissible in construing commercial contracts and does not depend on any obvious ambiguity in the words of the contract.” Sunbeam Corp. v. Liberty Mut. Ins. Co., 781 A.2d 1189, 1193 (Pa. 2001). Where a term has a special meaning or usage in the industry, “members of that industry are presumed to use the words in that special way,” regardless of any apparent ambiguity. Id.
The lease is for a term of ten years, with a requirement that the lessee construct a well within the first five years. The lease continues from year-to-year thereafter and may be extended beyond the initial ten-year period. The lessee owes annual rental payments to the Commonwealth, payable by the acre. The contract refers to the upfront payment as the “bonus payment” or the “competitive sealed bid.” Id. at 25. The lessee “must operate each well with a discrete well meter at the well site, which will measure all the gas produced from that well.” Id. at 26. Royalties are paid to the Commonwealth based on the marketable gas that is extracted.
The parties frame their arguments in terms of contractual consideration. See, e.g., PEDF‘s Brief at 17 (“The bonus and rental payments are the express consideration paid for the right to enter upon the State Forest to extract and remove the oil and natural gas so that it can be purchased.“); Commonwealth‘s Brief at 13-14 (“These up-front, bonus bid payments are not consideration for oil and gas that is extracted from the land.“). “Consideration is defined as a benefit to the party promising, or a loss or detriment to the party to whom the promise is made.” Stelmack v. Glen Alden Coal Co., 14 A.2d 127, 128 (Pa. 1940) (quoting Hillcrest Found., Inc. v. McFeaters, 2 A.2d 775, 778 (Pa. 1938)). Our courts have recognized that the precise nature of the legal interest conveyed to a lessee in a mineral lease resists easy characterization. See, e.g., Sabella v. Appalachian Dev. Corp., 103 A.3d 83, 101 n.8 (Pa. Super. 2014) (recognizing that the characterization of the legal interest conveyed in a mineral estate has historically been described in a multitude of ways, some of which are contradictory).
As the Commonwealth Court explained, the parties submitted evidence on the purpose of bonus payments in the oil and gas industry to shed light on what its “true purpose” was. The court remarked that “[t]he word ‘bonus’ has a definite meaning in the oil and gas industry. It is defined . . . as a premium paid to a grantor or vendor, and strictly in the cash consideration or down payment paid or agreed to be paid for the execution of an oil and gas lease.” PEDF III, 214 A.3d at 759 (quoting Robert E. Sullivan, Handbook of Oil and Gas Law 69 at 126 n.9 (1955)).
On that point, there is no question that the bonuses were the primary, if not exclusive, factor used to determine the recipient of the lease. John H. Quigley, who served in a variety of executive positions with the DCNR from February of 2005 through January of 2011, submitted an affidavit stating:
The bonus bid was designed to reflect the partial or potential value of the natural gas that would be extracted. The competitive “bonus bid” component of the process was the basis upon which DCNR awarded the leases . . . for the purpose of extracting the publicly-owned natural gas resources.
Affidavit of John H. Quigley, R.R. Vol. 1 at 5.
As previously noted, the Commonwealth executed eighteen leases in early 2009, awarded based on “[thirty-nine] bids from seven different pre-qualified bidders.” R.R. Vol. 1 at 9. The leases were awarded to five different bidders9 and encompassed slightly over 74,000 acres. The Commonwealth received upfront bonus payments totaling $189,786,688.18 for these eighteen leases. The bonus payments varied depending on the tracts at issue. While other variables may be at play regarding the variation in price, we accept that the upfront bonus bid reflects, in part, the expected profitability of the extracted oil and gas. But this does not establish that the “true purpose” of the bonus is to purchase whatever is ultimately extracted, as the Commonwealth keeps the bonus money regardless of whether the lessees’ hope becomes a reality.
The PEDF‘s argument that the true purpose of the bonus payments must be for the sale of trust assets draws heavily on the fact that the contract lists its purposes as including “removing of oil, gas and liquid hydrocarbons[.]” There is no doubt that the “true purpose” of the lease was to ultimately extract oil and gas. The record evidence, however, establishes that the Commonwealth kept significant sums of money even in cases where nothing was extracted. To hold that the true purpose of bonus payments was for the sale of trust assets requires that we ignore that fact. Additionally, there is no evidence to suggest that the bonus payment was an upfront payment of royalties as opposed to a means to differentiate the various bidders.
We thus agree with the Commonwealth Court that the title conveyed in the leases were inchoate, initially for the purpose of exploration and development with title vesting only after minerals are removed. The PEDF‘s “plain language” interpretation of the contractual language focuses exclusively on what happens after the exploratory and development processes succeed. However, this ignores that those activities are substantial and costly. As Mr. Quigley stated, “Those activities involved clearing land and converting it from public forest to industrialized, private use. Extraction activities included the construction of well pads, pipelines, compressor stations, roads, staging areas, impoundments, and all other infrastructure required for the extraction and production of natural gas.” Affidavit of John H. Quigley, R.R. Vol. 1 at 5. The right to conduct these activities is, in part, in exchange for the consideration paid in the form of the upfront bonus bid.10
Rentals and late fees
The only sum paid upfront in exchange for the lease is the bonus payment. As we have found that sum is not for the sale of trust assets, it naturally follows that rentals and late fees would likewise not qualify. We briefly discuss additional reasons why that is the case.
The exemplar contract specified that the first year‘s rental payment was the bonus payment. R.R. Vol 1 at 25. Rentals for the second, third, and fourth years were set at $20 per acre per year, payable on the anniversary date of the lease. For the remaining years, the rent increased to $35 per acre per year. Id. These payments were not fixed, however, as the price was reduced based on the number of productive wells. Each well drilled within the leased premises “shall reduce the rental set out in the preceding paragraph by the amount of rental on the number of acres attributable to each well . . . which reduction shall become effective on the next rental date, provided the well is producing in paying quantities.” Id. Additionally, if there is a well capable of producing gas and was not productive, the lessee “shall pay Department at the expiration of each said year for that year a rental payment for each such well at the full rental rate per acre for the ‘acreage attributable to the well‘, as referred to in Section 21 (“Subsequent Wells“) of the lease.” Id. Regarding late fees, the lessee “agrees to pay an additional twelve percent (12%) annual interest on the defaulted amount calculated from the time of such default.” Id. at 27.11
Having determined these revenues are appropriately classified as income streams, the remaining question becomes whether, while not qualifying as the sale of trust assets, these funds may be diverted to non-trust purposes – as the Commonwealth Court held. We conclude that the answer is no. A fuller examination of the ERA‘s text in light of our previous analysis in PEDF II in conjunction with application of trust principles illustrates that the Commonwealth Court‘s identification of successive beneficiaries possessing income entitlements is without any foundation.
Where the trust beneficiaries are entitled to income, the appropriate distribution of that income is a duty of the trustee. See
But the foregoing principles apply only when the trust creates successive beneficiaries and income entitlements. The ERA does neither. “[W]hen reviewing challenges to the constitutionality of Commonwealth actions under
Trust entitlements and successive versus simultaneous beneficiaries
The two clauses of
In this respect, we agree with the Robinson Township Court‘s view that the ERA contains a “cross-generational dimension [that] reinforces the conservation imperative: future generations are among the beneficiaries entitled to equal access and distribution of the resources, thus, the trustee cannot be shortsighted.” Robinson Twp., 83 A.3d at 959 (emphasis added).16 Interpreting the ERA to encompass a “cross-generational dimension” reflects that the beneficiaries’ interests are the same across that divide: the conservation and maintenance of the public natural resources. Far from setting up any kind of conflict between these beneficiaries regarding profiting from trust assets, the express inclusion of generations yet to come in “all the people” establishes that current and future Pennsylvanians stand on equal footing and have identical interests in the environmental values broadly protected by the ERA. See also PEDF II, 161 A.3d at 931 (“The second right reserved by Section 27 . . . is the common ownership by the people, including future generations, of Pennsylvania‘s public natural resources.“).
The language unmistakably conveys to the Commonwealth that when it acts as a trustee it must consider an incredibly long timeline and cannot prioritize the needs of the living over those yet to be born. The explicit inclusion as simultaneous beneficiaries of the future generations of Pennsylvanians creates a cross-generational dimension and reminds the Commonwealth that it may not succumb to “the inevitable bias toward present consumption of public resources by the current generation, reinforced by a political process characterized by limited terms of office.” Robinson Twp., 83 A.3d at 959 n.46.
The ERA does not create income entitlements
Having established that the ERA created simultaneous beneficiaries with equal interests in the trust‘s management, there is no foundation for the allocation of income to life tenants since there are none. The appropriate disposition of income generated by these leases is also determined by the language of the ERA Trust.17
The trustee‘s basic fiduciary duty is to administer the trust. RESTATEMENT (SECOND) OF TRUSTS § 169. Accord
The trust‘s purpose dictates how the trustee must deal with the beneficiaries. “Dealing impartially with all beneficiaries means that the trustee must treat all equitably in light of the purposes of the trust.” Robinson Twp., 83 A.3d at 959. Critical then is the determination of whether the purpose of the trust includes income entitlements. Again, the ERA Trust provides:
Pennsylvania‘s public natural resources are the common property of all the people, including generations yet to come. As trustee of these resources, the Commonwealth shall conserve and maintain them for the benefit of all the people.
As we held in PEDF II, the purpose of the trust, as clearly expressed in its text, is the conservation and maintenance of Pennsylvania‘s public natural resources. PEDF II, 161 A.3d at 935. There is no language that indicates an intent to create an income entitlement and the creation of simultaneous beneficiaries suggests otherwise.18
[T]he Commonwealth insists that the concluding phrase of Section 27, “for the benefit of all the people,” confers discretion upon the General Assembly to direct the proceeds from oil and gas development toward any uses that benefit all the people of the Commonwealth, even if those uses do nothing to “conserve and maintain” our public natural resources. Commonwealth‘s Brief at 41 (citing PEDF, 108 A.3d at 168). We are wholly unconvinced. The phrase “for the benefit of all the people” may not be read in isolation and does not confer upon the Commonwealth a right to spend proceeds on general budgetary items.
Pa. Const. art I, § 27 . The Commonwealth‘s fiduciary duty to “conserve and maintain” our public natural resources is a duty owed to the beneficiaries of the public trust, namely “the people, including generations yet to come,” as set forth in the second sentence of Section 27. Id. The “people,” in turn, are those endowed with “a right to clean air, pure water, and to the preservation of the natural, scenic, historic and esthetic values of the environment,” as set forth in the first sentence of Section 27. Id.Accordingly, the [ERA] mandates that the Commonwealth, as a trustee, “conserve and maintain” our public natural resources in furtherance of the people‘s specifically enumerated rights. Thus understood in context of the entire amendment, the phrase “for the benefit of all the people” is unambiguous and clearly indicates that assets of the trust are to be used for conservation and maintenance purposes. See Robinson Twp., 83 A.3d at 957 (holding that the “explicit terms of the trust require the government to ‘conserve and maintain’ the corpus of the trust“). Only within those parameters, clearly set forth in the text of Section 27, does the General Assembly, or any other Commonwealth entity, have discretion to determine the public benefit to which trust proceeds—generated from the sale of trust assets—are directed.
PEDF II, 161 A.3d at 934–35 (second emphasis added).
The Robinson Township plurality stressed the ERA‘s placement within Article I of the Pennsylvania Constitution, the Commonwealth‘s Declaration of Rights. “The Declaration of Rights assumes that the rights of the people articulated in Article I of our Constitution—vis-à-vis the government created by the people—are inherent in man‘s nature and preserved rather than created by the Pennsylvania Constitution.” Robinson Twp., 83 A.3d at 948. Thus, the environmental public trust “was created by the people of Pennsylvania, as the common owners of the Commonwealth‘s public natural resources[.]” Id. at 956. Pursuant to fundamental principles of private trust law, we cannot conclude that the Commonwealth, as trustee of the constitutional trust created for the conservation and maintenance of the public natural resources that are owned by “all the people,” can divert for its own use revenue generated from the trust and its administration. The Commonwealth acts as a trustee managing the corpus, not as a sovereign owner that may use income in a manner that does not benefit the trust.
In this respect, we stress the distinction between the generation of income and the distribution of that income. Although the trustee (the Commonwealth) is authorized to generate income from trust assets in its discretion, it does not follow that the beneficiaries are entitled to distribution of those monies through allocation to the general fund. Such distribution is not supported by the purpose of the trust: to conserve and maintain the public natural resources. Thus, the income generated from bonus payments, rentals, and late fees must be returned to the corpus to benefit the conservation and maintenance of the public resources for all the people. To hold otherwise and allow allocation of the income to the general fund would permit the Commonwealth to use trust income to advance a non-trust purpose, an outcome we previously rejected. Private trust law principles preclude that outcome.21
VI. Conclusion
The Commonwealth Court correctly concluded that the ERA did not provide a mechanism to allocate revenue generated from income produced based on the use of trust assets. The textual absence of an allocation mechanism has a straightforward explanation: the settlors did not intend to create any income entitlements, hence eliminating the need to allocate receipts. We conclude that the bonus payments, rentals and penalty interest qualify as income and not the sale of trust assets. Since the ERA does not create an entitlement to income in the beneficiaries, the revenue generated from these Marcellus Shale leases must be returned to the corpus to benefit all the people. Accordingly, we hold that the income generated from the revenue streams at issue must be returned to the corpus as a matter of trust law. As a result, Sections 1604-E and 1605-E, as well as Section 1912 of the Supplemental General Appropriations Act of 2009, are facially unconstitutional.
Justices Todd, Dougherty and Wecht join the opinion.
Justice Wecht files a concurring opinion.
Chief Justice Baer and Justice Saylor file dissenting opinions.
Notes
The people have a right to clean air, pure water, and to the preservation of the natural, scenic, historic and esthetic values of the environment. Pennsylvania‘s public natural resources are the common property of all the people, including generations yet to come. As trustee of these resources, the Commonwealth shall conserve and maintain them for the benefit of all the people.
Finally, although concluding that the 1947 Act applied, neither the Commonwealth nor the Commonwealth Court addressed how the Commonwealth as trustee could follow the statute consistently with its trustee obligations. In particular, we agree with the PEDF that this raises the specter of self-dealing. A trustee “is under a duty to the beneficiary to administer the trust solely in the interest of the beneficiary.” RESTATEMENT (SECOND) OF TRUSTS § 170 (1959). A comment to this section states:
RESTATEMENT (SECOND) OF TRUSTS § 170, cmt. o. Accepting a bonus payment to advance a non-trust purpose would benefit the Commonwealth, not the beneficiaries. See infra note 19.Bonus, commission or other compensation. The trustee violates his duty to the beneficiary if he accepts for himself from a third person any bonus or commission for any act done by him in connection with the administration of the trust. Thus, if he sells trust property and accepts from the purchaser a bonus for making the sale, he commits a breach of trust.
We agree with the Commonwealth Court that the Commonwealth did not breach its fiduciary duties by employing standard industry terms in the relevant leases. That conclusion, however, answers only whether the generation of income via those leases was acceptable. It does not address the critical question of whether it can then use that income to benefit itself and not the beneficiaries. See supra note 17.