Should You Pay for Something You’re Not Getting? The Pennsylvania Supreme Court Will Take Up Shedden v. Anadarko E&P Company, L.P.

by K&L Gates LLP

The Pennsylvania Supreme Court will consider whether an oil and gas lessee’s refusal to pay a “bonus” on acreage that the lease supposedly conveyed to it, but that the lessor did not own at the time of leasing and had not acquired when the payment became due, prevents the lessee from later acquiring that acreage through the “after-acquired title” doctrine. Oil and gas producers have an interest in this appeal and may wish to participate in it as amicus curiae.

Under Pennsylvania law, the after-acquired title doctrine helps to give force to warranties of title that are contained in real property instruments. The doctrine provides that, “[w]here one conveys with a general warranty land which he does not own at the time, but afterwards acquires the ownership of it, the principle of estoppel is that such acquisition inures to the benefit of the grantee, because the grantor is estopped to deny, against the terms of his warranty, that he had the title in question.” Jordan v. Chambers, 75 A. 956, 958 (Pa. 1910). Put differently, “an estate or title subsequently acquired by the grantor who conveys under warranty inures to the benefit of the grantee.” Daley v. Hornbaker, 472 A.2d 703, 706 (Pa. Super. Ct. 1984).

In Shedden v. Anadarko E&P Company, L.P., 88 A.3d 228 (Pa. Super. Ct. 2014), these principles came into play in connection with an oil and gas lease. Under the lease, the lessors agreed to convey to the lessee the oil and gas interests in 62 acres of land. When the parties executed the lease, however, the lessors owned the oil and gas interests in only 31 of the acres. The lessee discovered this fact and, as a result, paid the “bonus” (as required by the lease) on only 31 acres. In turn, through a quiet title action, the lessors acquired ownership of the oil and gas interests in the remaining 31 acres. Later, the lessee became obligated under the lease to make an “extension payment” if it wished to extend the life of the lease for an additional five years. It made the payment on all 62 acres. The lessors, however, refused to accept half of the payment, claiming that, under the circumstances, they had not conveyed the oil and gas interests in the “after-acquired” 31 acres.

The Tioga County Court of Common Pleas rejected this position and, on appeal, its decision was affirmed by the Pennsylvania Superior Court. The Superior Court emphasized that the lease contains a warranty of title provision, which provides that the lessors have “full title to the premises and to all the oil and gas therein at the time of granting [the] Lease.” 88 A.3d at 233. The court explained that, given this factor, the after-acquired title doctrine establishes that the lessors “are barred from denying that the Lease covers all 62 acres of the leased premises by pointing out that, at the time of execution of the Lease, they did not have the power to lease the rights to the reserved 31 acres.” Id. The “after-acquired title to the reserved 31 acres,” the court explained, “inured, by the way of estoppel, to the use and benefit of” the lessee. Id.

The court then rejected the lessors’ argument that the after-acquired title doctrine was inapplicable because the lessee had made the bonus payment on only 31 of the 62 acres at issue. The court, on this point, highlighted language in the lease that, “[i]f Lessor owns less than all of the oil and gas rights in the premises, Lessor shall be entitled to only a share of the rentals and royalties equivalent to the proportion of such oil and gas rights owned by Lessor.” Id. The court also explained that the lessors’ “receipt of the Bonus Payment did not convert the terms of the Lease to applying to only one-half of the oil and gas underlying the premises, instead of the agreed upon 62-acres of oil and gas.” Id.

The lessors, in turn, asked the Pennsylvania Supreme Court to accept an appeal of the Superior Court’s decision. On August 14, 2014, the Supreme Court granted their request. It framed issue on appeal as follows:

The [t]rial [c]ourt found as a matter of law that the [l]essors are estopped from denying that an oil[-]and[-]gas lease covered after-acquired oil[-]and[-]gas rights even though the [l]essee only paid the lessors in proportion to the [l]essors’ actual interest. Was it error for the Superior Court to affirm the [t]rial [c]ourt’s grant of [s]ummary [j]udgment in favor of the [l]essee and against the [l]essors?

Aug. 14, 2014 Order in Shedden v. Anadarko E&P Company, L.P., Dkt. No. 103 MAP 2014. 

The court, therefore, will consider whether the lessee’s refusal to pay the bonus on the “after-acquired” 31 acres of oil and gas interests prevented it from later acquiring those interests by operation of the after-acquired title doctrine. It seems likely that, in addition, the court will address the after-acquired title doctrine, generally, along with the doctrine’s role in the oil-and gas-leasing context.

Oil and gas producers may wish to weigh-in on these important issues by participating in the appeal as amicus curiae.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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