The Reports of a Marcellus Exception to the Dunham Rule Have Been Greatly Exaggerated: Why the Pennsylvania Superior Court’s Recent Decision in Butler v. Powers Does Not Except the Marcellus Shale from the Dunham Rule

An easy way to grab a headline these days is to implicate the Marcellus Shale in a controversy, whether real or not. Such is the case with the reporting on the Pennsylvania Superior Court’s recent decision Butler v. Charles Powers’ Estate, et al., 2011 Pa. Super. 198 (Pa.Super. Sept. 7, 2011). The dispute in Butler centers on whether the Marcellus Shale and the natural gas contained therein constitutes a “mineral” under Pennsylvania real property law. The law in Pennsylvania for over 100 years has been that there is a rebuttable presumption that natural gas is not a mineral for land conveyance purposes. Nevertheless, the fact that a Pennsylvania appellate court allowed such a “settled” question to even be asked has reverberated throughout the Commonwealth's oil and gas industry. However, the Butler decision did nothing to undermine the well-settled Pennsylvania law that there is a rebuttable presumption that the term “minerals” does not include natural gas irrespective of whether it is found in the Marcellus Shale or any other geological formation.

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 Dunham 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. More specifically, 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. Id. This presumption can only be overcome by “clear and convincing evidence, that the parties intended that natural gas be included within the term 'minerals'.” Id.

The Dunham Rule is a rule of deed construction applied in connection with a conveyance or reservation of land. Highland, at 398. When interpreting a deed, a court’s primary objective is to ascertain and effectuate what the parties themselves intended. Id. at 402 (citing Yuscavage v. Hamlin, 137 A.2d 242, 244 (Pa. 1958)). Courts seek to ascertain not what the parties may have subjectively intended, but what is the meaning of the words the parties used. Kimmel v. Svonavec, 85 A.2d 146, 148 (Pa. 1952). For this purpose, the language of a deed should be interpreted in light of the subject matter, the apparent object or purpose of the parties and the conditions existing when it was executed. Highland, at 398.

Understanding the analytical framework and application of the rules of construction established by Dunham and Highland is essential to evaluating why the Butler case does not exempt or necessarily portend to exempt the Marcellus Shale from the Dunham Rule. The key elements of the Butler case are that, in 1881, the Estate of Charles Powers sold the property at issue but retained “[o]ne half the minerals and Petroleum Oils”. Butler, at P.2. In 2009, the current surface owners filed a quiet title action to establish themselves as owners of the entire fee simple interest in and to the property, including the minerals and petroleum oils reserved by the Estate of Charles Powers. The heirs of Charles Powers countered by claiming that the reservation of one half of the minerals included one half of the “Marcellus Shale gas”. Id. at P.3-4.

The trial court in Butler found that the deed at issue reserved "minerals" but made no specific mention of natural gas and that there was no other indication that Charles Powers or his heirs attempted to claim the natural gas. Id. at P.13-14. Accordingly, the trial court ruled that the natural gas was not reserved in the Powers' deed as a matter of law. Id. On appeal, the Pennsylvania Superior Court reversed the trial court and remanded the case so that findings could be made as to whether the term "minerals" in the Powers reservation was intended to include the Marcellus Shale and the gas contained therein. Id. at P.14-15. The Butler court did not rule that the Marcellus Shale and the gas contained therein constitutes a mineral nor did it suggest that the case would be finally resolved without application of the Dunham Rule.

The Butler court also appeared to be open to hearing argument that the "unconventional" gas found in the Marcellus Shale was more like coal bed methane found in coal than "conventional" natural gas commonly found in limestone, sandstone and other shallow shale formations in Pennsylvania. Id. There is precedent in Pennsylvania that the owner of the coal also owns the coal bed methane found within the coal seam. See, US Steel Corp. v. Hoge, 468 A.2d 1380 (Pa. 1983). In Hoge, however, the dispute did not involve the definition of the term "mineral". Instead, the deed at issue provided that US Steel owned "[a]ll the coal of the Pittsburgh or River Vein" while the surface owners owned "the right to drill and operate through said coal for oil and gas." Id. at 1382. The Hoge court noted that, at the time, coal bed methane gas was not commercially exploitable but rather a dangerous waste product found in the coal which was vented to allow for safe mining of the coal. Id. at 1384. The Hoge court concluded that, by retaining the right to drill "through" and not "into and through", the language of the granting instrument gave the surface owner only the right to produce the gas found beneath the coal and, by implication, gave the coal owner the right to the coal bed methane found in the coal. Id. at 1389.

Ultimately, Hoge should have very little bearing on the outcome in Butler. Unlike Hoge, Butler deals with a simple reservation of "one-half of the minerals". There is no competing subterranean or mineral estate reservation that could evidence an intent to treat Marcellus Shale gas differently from other natural gas. Absent clear and convincing evidence that the term "minerals" as used in the 1881 conveyance and reservation in Butler was intended to include Marcellus Shale and the gas contained therein, Pennsylvania courts will be compelled under the Dunham Rule to conclude that the term minerals in the Butler conveyance does not include the Marcellus Shale and the gas contained therein.

One Pennsylvania federal court recently addressed whether the Marcellus Shale and the gas contained therein should be treated differently than natural gas in other formations. See, Hoffman v. Arcelormittal Pristine Resources, Inc., No. 11-cv-0322 (W.D.Pa. May 10, 2011). In Hoffman, Arcelormittal acquired title to the oil and gas pursuant to a 1928 deed reservation that excepted and reserved "all gas and oil within and underlying" the subject property. Id. at P.4. The current surface owner challenged Arcelormittal's right to Marcellus Shale gas claiming that the reservation was only effective as to the natural gas "contained within the sandstone strata underlying the subject land". Id. at P.6. Relying on Hoge, the surface owner argued that shale formations like the Marcellus were not economically viable in 1928 and, therefore, Arcelormittal's predecessors could not have intended to reserve the gas in the Marcellus Shale or deeper shale formations. Id. at P.9. In rejecting the surface owner's claims, the Hoffman court concluded that Hoge did not apply, that the 1928 deed's reservation of "all gas" reserved gas in shale formations and all other formations, and that the surface owner had no rights to the Marcellus Shale or any natural gas contained in the shale. Id. at P.10.

In the end, the Butler court did nothing more than remand the case to the trial court for findings, based on "clear and convincing" evidence, as to whether the word "minerals" as used in the Powers' reservation was intended to include the Marcellus Shale and the natural gas contained therein. The Butler court did not create, nor did it open the door for the creation of, a Marcellus exception to the Dunham Rule. Rather, the Butler court found itself simply "unable to say with certainty that Appellants have no cognizable claim based on the facts averred." Butler, at P. 15 (emphasis added). Accordingly, the reports of a Marcellus exception to the Dunham Rule are greatly exaggerated; the Dunham Rule remains a well-settled law of Pennsylvania real property.