Hildebrand, J. v. EQT Production

J-A07021-17

2017 PA Super 179

JON C. HILDEBRAND AND ELLEN L. IN THE SUPERIOR COURT OF
HILDEBRAND, HIS WIFE PENNSYLVANIA

Appellants

v.

EQT PRODUCTION COMPANY;
EQUITRANS, L.P., BRYAN A. LONG AND
COURTNEY R. LONG, HIS WIFE, AND
MAX W. SCHINKOVEC

Appellees No. 1046 WDA 2016

Appeal from the Order entered June 24, 2016
In the Court of Common Pleas of Greene County
Civil Division at No: 922 AD 2012

BEFORE: OLSON, STABILE, and STRASSBURGER, JJ.*

OPINION BY STABILE, J.: FILED JUNE 8, 2017

Appellants, Jon C. Hildebrand and Ellen L. Hildebrand (together

“Hildebrand” or “Appellants”), appeal from the order entered on June 24,

2016 in the Court of Common Pleas of Greene County, granting summary

judgment in favor of Max Schinkovec (“Schinkovec”) and EQT Production

Company and Equitrans, L.P. (together “EQT”) in this declaratory judgment

action involving oil and gas leases. The trial court’s June 24, 2016 order was

based in significant part on two prior orders and opinions from the same

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*
Retired Senior Judge assigned to the Superior Court.
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court dated May 20, 2014 (denying Appellants’ motion for summary

judgment) and January 29, 2015 (granting summary judgment in favor of

Schinkovec and EQT and dismissing Counts I and II of Appellants’ three-

count complaint).1 The claims against Appellees, Bryan A. Long and

Courtney R. Long (together “Long”), were also dismissed by virtue of the

trial court’s orders. Following considered review, we reverse and remand.

In this appeal from the grant of summary judgment, Appellants

present five issues for our consideration:

1. Did the Honorable Trial Judges err as a matter of law or abuse
their discretion in concluding that the Lease Modifications
amended and nullified the Non-Apportionment Language
contained in the Hupp Lease, thereby essentially converting it
into an “apportionment lease,” by in particular, failing to
interpret Paragraph 5 of the Hildebrand Modification as a
“lesser interest clause” and instead requiring that production
royalties generated from the Hupp lease be paid to all owners
of the oil and gas interests encumbered by the Hupp Lease in
proportion of their interests?

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1
Each of the three orders and opinions was authored by a different trial
judge. The 2014 order and opinion was authored by the Honorable William
R. Nalitz. The Honorable Farley Toothman relied on the 2014 ruling in his
2015 opinion. Judge Toothman did not issue a separate order but his
opinion indicated that the summary judgment motion was granted. The
Honorable Gerald R. Solomon adopted the earlier rulings in his June 24,
2016 order from which this appeal is taken. In his 2016 order, Judge
Solomon determined that Schinkovec was entitled to 1.34% of the net
revenue interest in Hildebrand Unit #1, which will be discussed herein.
Appellants filed this appeal from the June 24, 2016 order and complied with
the trial court’s directive to file a Rule 1925(b) statement. Judge Solomon
subsequently issued a statement in lieu of a Rule 1925(a) opinion, relying
upon the opinions and orders of Judges Nalitz and Toothman. Statement in
Lieu of Opinion, 9/19/16.

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2. Did the Honorable Trial Judges err as a matter of law or abuse
their discretion by holding that the Lease Modifications
nullified/amended the Non-Apportionment Language
contained in the Hupp lease given that the Long and
Schinkovec Modifications did not contain language similar to
Paragraph 5 of the Hildebrand Modification?

3. Did the Honorable Trial Judges, particularly Judge Nalitz
pursuant to his misunderstanding of the makeup of the Unit
and the nature of the Hildebrands’ claims, err as a matter of
law or abuse their discretion in concluding that the Lease
Modifications amended the Non-Apportionment Language
contained in the Hupp Lease and required a share of the
production royalties to be apportioned to Schinkovec, given
that the Schinkovec oil and gas tract was not, and has not
ever been “pooled” in the Unit?

4. Did the Honorable Trial Judges err as a matter of law or abuse
their discretion in granting EQT and Schinkovec’s Motions for
Partial Summary Judgment on the basis of the law of the case
doctrine and Judge Nalitz’s flawed Opinion and Order of May
24, 2010?

5. Upon ruling that the Lease Modifications amended and
nullified the Non-Apportionment Language contained in the
Hupp Lease, did the Honorable Trial Judges err as a matter of
law or abuse their discretion by applying Pennsylvania’s
“apportionment rule,” as stated in Wettengel v. Gormley,
28 A. 934 (Pa. 1894), to the subject horizontal wells drilled by
EQT?

Appellants’ Brief at 8-10. Because Appellants’ issues are interrelated, we

shall consider them together.

As this Court has recognized:

When reviewing a trial court’s grant of summary judgment, our
standard and scope of review are as follows:

Our scope of review is plenary, and our standard of review
is the same as that applied by the trial court. Our
Supreme Court has stated the applicable standard of
review as follows: An appellate court may reverse the

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entry of a summary judgment only where it finds that the
lower court erred in concluding that the matter presented
no genuine issue as to any material fact and that it is clear
that the moving party was entitled to a judgment as a
matter of law. In making this assessment, we view the
record in the light most favorable to the non-moving party,
and all doubts as to the existence of a genuine issue of
material fact must be resolved against the moving party.
As our inquiry involves solely questions of law, our review
is de novo.

Reinoso v. Heritage Warminster SPE, LLC, 108 A.3d 80, 84
(Pa. Super. 2015) (en banc) (additional citations omitted). With
respect to the denial of summary judgment, “[w]e review the
trial court’s denial of summary judgment for an abuse of
discretion or error of law.” Ramsay v. Pierre, 822 A.2d 85, 90
(Pa. Super. 2003).

Birdie Associates, L.P. v. CNX Gas Company, LLC, 149 A.3d 367, 371

(Pa. Super. 2016) (quoting Bezjak v. Diamond, 135 A.2d 623, 627 (Pa.

2016)).

The parties do not suggest that there are issues of material fact in

dispute here. Rather, Appellants challenge the trial court’s interpretation of

various leases and lease modifications entered into between lessee EQT (and

its predecessor2) and lessors Hildebrand, Schinkovec and Long. The three

lessors own neighboring properties that were once owned by A.H. Hupp and

Emma M. Hupp and were leased to EQT in 1928 (“Hupp Lease”). Ultimately,

Hildebrand filed a declaratory judgment action asking the trial court to

declare that EQT had wrongly paid royalties to Schinkovec. Hildebrand also
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2
For ease of discussion, we shall refer to EQT and its predecessor, The
Peoples Natural Gas Company, simply as EQT throughout this Opinion.

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requested an accounting to determine the sums improperly paid or placed in

a suspense account pending resolution of the dispute. The trial court

determined that Schinkovec was entitled to the sums received and paid into

the suspense account and held that Hildebrand was not entitled to an

accounting.

The relevant lease provisions, presented in chronological order, are as

follows:

The Hupp Lease provides, in pertinent part:

In case of a conveyance of all or a part of the premises leased,
Lessee may continue to pay delay rentals to Lessor until
furnished with a certified or sworn copy of any such deed of
conveyance and other documents or proof to enable Lessee to
identify land conveyed as being all or part of leaseland, or on
written note of any such conveyance, may hold all installments
of delay rental and other payments until furnished with such
copy and other documents and proof, and shall apportion the
delay rental, in case of any decision, according to acreage, and
shall deliver all royalty oil and gas well rental to the
owner or owners of the particular tract of land upon
which the well is located.

Hupp Lease at 3 (emphasis added). The Hupp lease covered 96 acres and

provided for an initial term of five years and a secondary term for as long as

the land was operated by the lessee in search of, or in the production of, oil

and gas. Id. The lease was modified in 1951 to permit gas storage. The

parties agree that the 1951 amendment has no bearing on the

apportionment of royalties at issue in this case. See Trial Court Opinion

(“T.C.O.”), 5/20/14, at 2.

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In 2009, the Hupp Lease was again modified with four separate lease

modifications between EQT and the current owners of the Hupp tract,

Hildebrand, who owns 88.897 acres of oil and gas and 75.897 acres of

surface; George and Rebecca Schmidt (together “Schmidt”), who own 13

surface acres but no oil and gas interests below their property; Long, who

owns one acre of oil and gas as well as surface; and Schinkovec, who owns

5.853 acres of oil and gas as well as surface. The Hildebrand Modification,

which was prepared by EQT, erroneously indicated that the acreage subject

to the Hupp Lease was 75.66 acres based on the surface acreage controlled

by Hildebrand3 while the remaining three modifications correctly recognized

the full 96 acres subject to the Hupp Lease.

All four of the 2009 lease modifications include a provision entitled,

“Pooling and Unitization,” which permitted EQT at any time “to pool or

unitize all or any part of parts of the leased premises or rights therein with

any other land in the vicinity thereof . . . to create units of such size and

surface as Lessee may desire, but containing not more than 640 acres[.]”

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3
See EQT’s Answer to Interrogatories, 6/28/13, at 10-17. By letter dated
August 24, 2010, EQT acknowledged that the reference to 75.66 acres was a
typographical error and should have been 88.897 acres based on Appellants’
oil and gas ownership. EQT requested that Appellants execute a corrective
modification indicating that “the acreage contained within the Leased
Premises, and therefore covered by the Lease, as amended by the Original
Modification, is 88.897 acres, more or less.” Corrective Modification at ¶ 2.

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Hildebrand Lease Modification at ¶ 2; Schmidt, Long and Schinkovec Lease

Modifications at ¶ 2 b. Paragraphs 2 and 2 b also provided:

There shall be allocated to the portion of the leased premises
included in any pooling such proportion of the actual production
from all lands so pooled as to such portion of the leased
premises, computed on an acreage basis, bears to the entire
acreage of the lands so pooled. The production so allocated shall
be considered for the purpose of payment or delivery of royalty
to be the entire production from the portion of the leased
premises included in such pooling in the same manner as though
produced from such portion under the terms of this lease.

Id.4

The following provision appears in the Hildebrand Lease Modification

only:

In the event the lessor herein should own less than the entire
undivided fee simple in the property subject to the original oil
and gas lease, then any royalties or rentals accruing under this
lease, if any, shall be reduced proportionally; and if the
production from the lands embraced in this lease, or any part
thereof, is subject to any royalty or interest in production other
than the royalty provided herein, then such interest in
production shall be deducted from the Lessor’s royalty or other
share of production herein specified.

Hildebrand Modification at ¶ 5.

EQT issued a Notice of Unitization of “Hildebrand #1 Unit” on January

19, 2011, comprised of 346.71 acres of land, including 76.15 acres of lands
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4
The only difference between the quoted language and the corresponding
provisions of the Schmidt, Long and Schinkovec Modifications is in the final
word, “lease.” The word “Agreement” appears in place of “lease” in those
modifications. See Schmidt, Long and Schinkovec Modifications at ¶ 2 b.

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subject to the Huff Lease. EQT acknowledged that the 76.15 acres of Huff

Lease lands pooled into Hildebrand #1 Unit included 75.15 acres owned by

Hildebrand and the single acre owned by Long. No Schinkovec property was

included in the unit. EQT’s Answers to Interrogatories, 6/28/13, at 5. Even

though no Schinkovec lands were pooled, EQT assigned Schinkovec 1.34%

of the net revenue in Hildebrand #1 Unit based on Schinkovec’s ownership

of 6.1% of the Hupp Lease lands, which comprised 21.96% of the total

acreage included in the Hildebrand #1 Unit. Id. at 6. EQT also explained

that it executed the Hildebrand Modification for 75.66 acres, the surface

acreage controlled by Hildebrand, rather than the amount of oil and gas

rights, totaling 88.897 acres, held by Hildebrand. Id. at 15 and 16.

In its May 20, 2014 opinion, the trial court stated:

The gist of [Appellants’] Complaint is that the Hupp [L]ease
provides that in the event of a subdivision of the Hupp tract, all
the royalties go to the owner of the surface where the well or
wells are located. This provision of the lease is not typical of oil
and gas leases because Pennsylvania law generally follows the
apportionment rule, announced in Wettengel v. Gormley, 39
A. 57 (Pa. 1898).[5] Upon subdivision, “each should receive such
share of the royalty as his or her share of the land bears to the
whole tract covered by the lease. It does not matter on what
acre or hundred acres the wells may be situated[.” Id. at 58.]

Here, however, the [Hupp L]ease is very specific that royalties
are to be paid to [Appellants], unless that provision was modified
by later amendment. [Appellants] in their Motion for Summary
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5
In Wettengel v. Gormley, 39 A. 57 (Pa. 1898), our Supreme Court
revisited its ruling in Wettengel v. Gormley, 28 A. 934 (Pa. 1894), and
reaffirmed that Pennsylvania law generally follows the apportionment rule.

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Judgment and their Brief in Support Thereof quote at length the
portion of the 2009 modification captioned “POOLING AND
UNITIZATION” . . . . The Motion also contains in Paragraph 16
the bald assertion that: “None of the amendments to the Lease
contained in the Hildebrand Modification altered the provision in
the [Hupp] Lease that stated that production royalty payments
would only be directed to those tracts where a well was
situated[.”] With this claim we cannot agree.

T.C.O., 5/20/14, at 4. The basis for the trial court’s rejection of Appellants’

argument was language in Paragraph 5 of the Hildebrand Modification

directing that royalties would be reduced proportionately in the event the

Lessees “should own less than the entire undivided fee simple estate in the

property subject to the oil and gas lease.” Id. at 5 (quoting Hildebrand

Modification at ¶ 5). The trial court reasoned that the Hupps owned 96

acres in 1928 but Appellants owned only 88.897 acres of oil and gas subject

to the Hupp Lease. Therefore,

When [Appellants] agreed to the modification, they also agreed
that “any royalties accruing under the lease . . . shall be reduced
accordingly.” To put it another way, before 2009, royalties
produced from the Hupp [L]ease would be paid to whomever
owned the land where the well was located. After 2009,
royalties would be paid to all owners of the oil and gas interests
encumbered by the 1928 Hupp lease in proportion of their
interests (provided it was included in the unit).

Id. at 5-6. Appellants counter that the language of Paragraph 5 did not

alter the non-apportionment language of the Hupp Lease but was included in

the Hildebrand Modification to serve as a “lesser interest clause.” As this

Court explained in Kepple v. Fairman Drilling Co., 551 A.2d 226 (Pa.

Super. 1988),

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“The proportionate reduction clause or lesser interest clause is
inserted in an oil and gas lease for the lessee’s protection in case
it is later found that the lease covers a smaller interest in the
minerals than the lessee believed it was leasing.”
R. Hemmingway, Law of Oil and Gas § 7.8 (2d ed. 1983). The
existence of such a clause permits the lessee to reduce the
royalty and rental payments to correspond to the interest
actually owned by the lessor. Id.; 3A W. Sommers, The Law of
Oil and Gas § 609.2 (Flittie Supp. 1987). Clearly, the presence
of such a clause in a lease agreement implies that the title of the
lessor is not inviolate.

Id. at 231 (emphasis added). Appellants explain,

Generally, a lesser interest clause (also known as a
“proportionate reduction clause”) provides that if the lessor owns
less than a 100% undivided fee simple interest in the oil and gas
underlying his/her own tract, i.e., less [] than the full mineral
estate, then any royalty payments are made based upon the
actual percentage of ownership of each owner.

Appellants’ Brief at 26 (citing Kepple, 551 A.3d at 231) (emphasis in

original).

Appellants note that the Hildebrand Modification contains the lesser

interest clause whereas neither the Long nor Schinkovec Modification does,

undermining the trial court’s characterization of the 2009 modifications as

“three separate but almost identical documents.” T.C.O., 5/20/14, at 3.

See also T.C.O., 1/29/15, at 2 (referring to the lease modifications as

“three (3) separate but nearly identical documents.”). As Appellants assert,

the trial court’s choice of language is “puzzling given the very language that

was cited as the basis for their [o]pinions (Paragraph 5 of the Hildebrand

Modification) fails to appear in either the Schinkovec or Long Modifications.”

Appellant’s Brief at 32-33. Moreover, as EQT acknowledges, as of 2009,

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EQT believed that Schmidt had an interest in oil and gas rights underlying 13

acres of land subject to the Huff Lease when, in fact, Appellants possessed

those oil and gas rights. Schmidt owned only the surface estate. See

EQT’s Answers to Interrogatories, 6/28/13, at Nos. 10-17. Further

highlighting the fallacy of the trial court’s interpretation is the fact that the

Hupp lands had been divided into multiple parcels prior to the 2009

modifications and, therefore, EQT was already aware that Appellants owned

less than an “undivided fee simple to [the 96 acres] subject to the Hupp

lease.” Hildebrand Modification at ¶ 5.

We agree with Appellants’ interpretation of the lesser interest provision

included only in the Hildebrand Modification. EQT was not clear on the oil

and gas rights owned by the Hildebrands at the time they entered into the

Modification. However, there was no question as to the Long and

Schinkovec ownership interests. In further support, Appellants note that the

Pooling and Unitization provisions included in the 2009 modifications

permitted EQT to pool or unitize any portion of the premises covered by the

modifications and obligated EQT to pay royalties only on the portion of

leased premises that were pooled. As the modification language reflects:

Any well which is commenced, or is drilled or is producing on any
part of any lands, theretofore or thereafter so pooled shall,
except for the payment of royalties[,] be considered a well
commenced, drilled and producing on the lands hereby leased.
There shall be allocated to the portion of the leased premises
included in any pooling such proportion of the actual production
from all lands so pooled as to such portion of the leased
premises, computed on an acreage basis, bears to the entire

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acreage of the lands so pooled. The production so allocated shall
be considered for the purpose of payment or delivery of royalty
to be the entire production from the portion of the leased
premises included in such pooling in the same manner as though
produced from such portion under the terms of this lease.

Hildebrand Modification at ¶ 2; Long and Schinkovec Modifications at ¶ 2 b.6

As Appellants contend,

[G]iven the mechanism in which royalties from the Unit would be
paid was clearly identified within the “Pooling and Unitization”
paragraph which was contained in each of the Lease
Modifications, there is no logical reason to support the notion
that EQT would have then included a separate paragraph, in the
Hildebrand Modification only, which entirely contradicted that
method. In essence the [trial court’s] interpretation of
Paragraph 5 renders the “Pooling and unitization” clauses
superfluous.

Appellant’s Brief at 34-35 (emphasis in original).

We agree with Appellants that the non-apportionment language of the

Hupp lease was not nullified by the lesser interest clause in the Hildebrand

Modification or by any provisions of the Long or Schinkovec Modifications.

In the wake of the oil and gas industry moving from vertical to horizontal

drilling, EQT executed the modifications to pool leased lands and provide a

mechanism for calculating and paying royalties based on pooled acreage.

For Appellants, those royalties were to be based on their 75.15 acres

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6
See n. 4.

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included in the pooled lands.7 For Long, royalties were to be based on the

single acre included in the pooled lands. For Schinkovec, there would be no

royalties because none of the Schinkovec land was included in the pooled

lands. See EQT’s Discovery Responses, 6/28/13, and in particular the Letter

from EQT, 1/12/11, to various recipients included Appellants and Schinkovec

(indicating that the Hupp Lease “contributes 76.15 acres to the Unit” but

that “[t]he portion of the Leased Premises owned by the Schinkovec family

is not within the Unit’s boundaries.”).8

We find that the trial court committed an error of law in denying

Appellants’ motion for summary judgment in 2014 based on its erroneous

interpretation of the lesser interest clause included solely in the Hildebrand

Modification. That erroneous interpretation was the basis for the trial court’s

2015 determination, based on the “law of the case” doctrine, not to

reexamine the 2009 modifications. See T.C.O. 1/28/15, at 3-4
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7
We note in passing that there are three wells in Unit #1, all of which are
located on Appellants’ property.
8
It appears the trial court did not recognize that the Schinkovec property
was not included in the pooled property. The trial court indicated that,
“After 2009, royalties would be paid to all owners of the oil and gas interests
encumbered by the 1928 Hupp [L]ease in proportion of their interests
(provided it was included in the unit).” T.C.O. 5/20/14, at 5-6. The court
continued, “This only makes good sense, because a horizontal well is likely
to pool gas from within many tracts, and it would be only fair for all parties
subject to the lease to receive their proportionate share.” Id. However, the
Schinkovec property was not pooled into the Unit and there is no language
whatsoever in the Schinkovec Modification that entitles Schinkovec to
receive any royalties from the Unit’s production.

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(unnumbered). That, in turn, led to the error in the trial court’s 2016 ruling

that Appellants had failed to state a claim for an equitable accounting and

that EQT and Schinkovec were entitled to summary judgment. However,

while the trial court believed it was compelled to follow the law of the case

doctrine, this Court is not similarly bound. Clearly, there is no impediment

to this Court correcting the trial court’s initial erroneous ruling or its

subsequent orders. Because we conclude the trial court committed error of

law in its interpretation of Paragraph 5 of the Hildebrand Modification, we

reverse the trial court’s grant of summary judgment in favor of EQT and

Schinkovec.

Order reversed. Case remanded for proceedings consistent with this

Opinion, including grant of the relief requested in Counts I and II of

Appellants’ Declaratory Judgment Complaint. Jurisdiction relinquished.

Judgment Entered.

Joseph D. Seletyn, Esq.
Prothonotary

Date: 6/8/2017

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