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Judge Rules Against Drilling Companies in Marcellus Case

A federal judge ruled last week that Pennsylvania landowners who signed Marcellus Shale leases with oil and gas companies -- then unsuccessfully sued to have them nullified -- did not "repudiate" the lease terms, and turned down the companies' counter suit to extend the leases by two years to regain time lost during litigation.

"Deeming these leases to have been repudiated under the circumstances of this case is both bad law and even worse public policy," Judge John E. Jones III, who serves on the U.S. District Court for the Middle District of Pennsylvania, wrote in his 11-page opinion.

The ruling affects three combined cases -- Lauchle et al. v. Keeton Group LLC et al. (No. 4:08-CV-1868); Beach et al. v. MK Resource Partners II LP et al. (No. 4:08-CV-1950); and Hooker v. Keeton Group LLC et al. (No. 4:08-CV-2091).

Landowners had filed suit in the fall of 2008, arguing that the five-year contracts they signed should be invalid under the terms of Pennsylvania's Guaranteed Minimum Royalty Act (GMRA). After the Pennsylvania Supreme Court ruled on a related case, the lawsuits were dismissed on Oct. 6, 2010.

The oil and gas companies then countersued, arguing that since the landowners had filed the original lawsuit and lost, the leases should be extended to make up for lost time. Jones disagreed.

"We think this distinction puts too fine a point on the matter by placing undue emphasis on the party initiating the legal action," Jones said, adding that the companies "wield significant, if not exclusive, power in the drafting of oil and gas leases. A determination that (the landowners) had repudiated their leases via the filing of these actions further tips the balance in favor of the oil companies."

He further argued that ruling in favor of the companies "would discourage lessors from bringing actions to determine the validity of their leases, since they would risk a finding that they had thus repudiated those agreements even in the event the underlying actions proved unsuccessful."

"I think the judge made the right ruling," Michael Dinges, an attorney for the landowners with the Williamsport, PA, law firm of Elion, Wayne, Grieco, Carlucci, Shipman, Dinges & Dinges PC, told NGI's Shale Daily. "We were very pleased with it and felt it was the right thing to do."

David R. Fine, an attorney with the law firm K&L Gates LLP of Harrisburg, PA, told NGI's Shale Daily that his clients, the oil and gas companies, had not yet decided if they will appeal the decision.

"I think (Jones) had it in mind that the remedy we sought was somehow punitive toward the landowners, when in fact that wasn't in any sense the goal," Fine said Monday. "In the jurisdictions that recognize the sort of equitable extension that we were seeking, it's not employed for the purposes of punishing anyone, it's simply to make sure that the company that entered into the lease gets the benefit of its bargain."

Fine said the court cases involved between 60 and 70 leases, some of which have since expired. He said it was premature to speculate if the language of the leases needed to be modified to protect the companies in the future.

"Pretty much every other jurisdiction in which there is any substantial oil and gas work recognizes some form of equitable extension," Fine said. "This is certainly a minority determination. We'll see whether other courts, particularly the Pennsylvania Supreme Court, will agree with it. I'm sure the issue will at some point find its way there, as many other oil and gas cases have in the last few years."

Dinges declined to go into specifics on why the landowners had sued in the first place, other than to say that they felt the leases didn't meet GMRA guidelines.

"I have a lot of clients with a lot of issues in oil and gas," Dinges said, adding that those clients represented "a substantial part" of his current caseload.

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