Buchanan Oil & Gas Shareholders Krock and Moran Gear Up for "Landmark" Shale Case

If overturned, the century-old Pennsylvania law that exempts shale as a "mineral" could wreak havoc on the oil and gas industry.

But as Buchanan Ingersoll & Rooney Energy shareholders Gregory J. Krock and Sean W. Moran argued in their petition of appeal to the Pennsylvania Supreme Court, the question of whether shale is a "mineral" is immaterial to the ongoing Butler v. Charles Powers Estate case.

In September, the Pennsylvania Superior Court reversed a trial court decision in favor of the Butlers and remanded the case for review, calling for expert testimony regarding Marcellus Shale's classification as or exclusion from the definition of "mineral."

As reported by The Legal Intelligencer, Bloomberg News and other media outlets, Moran and Krock appealed to the state Supreme Court in October, hoping to stop litigation before clients incur "significant unnecessary expert and legal costs."

The appeal was granted on April 4, 2012, to determine whether the case was remanded in error.

The Appeal
In their petition to the Supreme Court, Moran and Krock argued that expert testimony regarding the definition of minerals is "wholly irrelevant" to the case.

"Science really has nothing to do with the dispute," Krock told the Pittsburgh Tribune-Review.

"It's old law, but it's established law – and what it established and why it's important today is that when people buy and sell their properties they often have a different idea of what mineral means to them compared to what it means to scientists and geologists."

As detailed in the appeal, Moran and Krock argued that while Superior Court acknowledged the Dunham rule presumes parties did not intend to include natural gas in their definition of minerals, it "failed to recognize that Dunham rule also requires courts to presume that the parties additionally intended to exclude other non-metallic substances, including Marcellus Shale, from the term 'minerals.'"

The court "compounded this error by disregarding the most fundamental tenet of contract interpretation: that courts must ascertain and imply the intent of the parties."

Krock explained that Butler is the "very type of case that's appropriate for review" by the Supreme Court because "it involves what we believe was a clear error by the Superior Court, as well as issues of public importance that will impact people other than just the plaintiffs and defendants."

The Butler Case
At issue in Butler is whether the defendants' deed, which contained an exception reserving half of "the minerals and petroleum oils" contained in a 244-acre parcel of land, includes rights to the Marcellus Shale and the gas it contains.

A Susquehanna County trial court found the Butler deed reserved rights to "minerals," but made no mention of natural gas and as there was no attempt made by Charles Powers or his heirs to claim such rights, the deed did not reserve natural gas.

The Dunham Rule
The key to understanding the Butler decision and its impact on the oil and gas industry lies in the Dunham rule –

The rule in Pennsylvania that the term “minerals” includes only metallic substances like gold, silver, copper and iron — and does not include “petroleum oils” — is known as the "Dunham rule" because it was first enunciated by the Pennsylvania Supreme Court in Dunham v. Kirkpatrick, 101 Pa. 36 (Pa. 1882).

The rule was clarified by the Supreme Court to expressly exclude “natural gas” from the term minerals in 1906 in Silver v. Bush, 62 A. 832, and again in 1960 in Highland v. Commonwealth, 161 A.2d 390.

Under the Dunham rule as explained by the Highland court, where a deed grants or reserves "minerals" without any specific mention of natural gas or oil, a rebuttable presumption is created that the word "minerals" was not intended by the parties to include natural gas or oil. This presumption can only be overcome by “clear and convincing evidence, that the parties intended that natural gas be included within the term 'minerals'.”

– from "Reports of a Marcellus Exception to the Dunham Rule Have Been Greatly Exaggerated,"
September 29, 2011
Buchanan Client Advisory