Cabot Oil & Gas Corp. v Jordan (2010)

Case summary by Ross Bruch, Esquire, Saul Ewing LLP

Cabot Oil & Gas Corp. v Jordan, 698 F. Supp. 2d 474 (M.D. Pa., Feb. 12, 2010) (Conaboy, J.)

 

Summary: Due to a conflict in Pennsylvania law, the United States Court for the Middle District of Pennsylvania refused to consider a declaratory judgment to resolve a dispute between an operator and a landowner over alleged deficiencies in an oil and gas lease and in negotiations.

 

            In November of 2009, Cabot Oil & Gas Corporation (“Cabot”) filed a claim seeking a declaratory judgment with the United States District Court for the Middle District of Pennsylvania following an oil and gas lease dispute between Cabot and Carol Manning Jordan, a Susquehanna County, Pennsylvania landowner.  Ms. Jordan claimed her lease with Cabot was invalid because (1) the individual who notarized the documents was an agent of Cabot whose fee was contingent on the Lease being entered into, (2) Cabot’s representatives made false representations to Ms. Jordan which induced her to enter into the agreement, and (3) the lease’s bonus payment was not timely and was not in the proper amount.  Ms. Cabot conceded that the notarization was not invalid; therefore the false representation and bonus payment issues went before the court.

 

            Ms. Jordan claimed that Cabot stated it would not pay any more than a 1/8th royalty to Susquehanna County landowners, that no landowner would be offered more than $500 per acre signing bonus, and that if Ms. Jordan did not enter into the lease, the gas under her property could be captured and removed via activity on neighboring properties.  Cabot assumed these arguments to be true for the purposes of argument and asserted they do not render the lease invalid for two reasons.  First, Cabot claims, any evidence of the alleged misrepresentations are barred by the parol evidence rule and the integration clause contained in the lease documents.  Second, the alleged statement regarding the “rule of “capture” would not have been misrepresentation under Pennsylvania law.

 

            The court declined jurisdiction over this declaratory judgment action.  In doing so, the Court refused to engage in discussions of Pennsylvania law on the parol evidence rule, the integration clause contained in the lease documents, and the rule of capture because it found the applicable law to be unclear and unsettled.  The court  held that “any decision about corporate practices and/or landowner responsibility has potential broad impact on the matters of state law presented and the state courts should make such vital determinations.”  Cabot Oil & Gas Corp. v Jordan, 698 F. Supp. 2d at 479.

 

            The court noted that federal district courts have discretion to determine when they will entertain an action under the Declaratory Judgment Act, “even when the suit otherwise satisfies subject matter jurisdiction prerequisites.”  Id. at 476.  One of the bases for denying jurisdiction is when a matter comes before the court that must be decided under state law and “when the state law involved is close or unsettled.”  At 476, quoting State Auto Ins. Co., v. Summy, 234 F.3d 131, 135 (3d Cir. 2001).  In this instance the court found that there are “important issues raised in this action [that] are matters which have not been settled under Pennsylvania law.”  Cabot Oil & Gas Corp. v Jordan, 698 F. Supp. 2d at 476.  The court found that “[w]hile Pennsylvania courts have extensively discussed the operation of the parol evidence rule related to such claims, their pronouncements on the matter are far from clear.”  Id.

 

            The court examined a number of cases dealing with fraud in the inducement and the parol evidence rule.  It found instances where the Pennsylvania Supreme Court ignored its own precedent (citing Berger v. Pittsburgh Auto Equip. Co., 387 Pa. 61, 127 A.2d 334 (1956)) and instances where Pennsylvania courts cited one Supreme Court determination discussing the parol evidence rule but not the other.  More recently, the court found that the Pennsylvania Supreme Court “provides some clarification of the apparent conflict.”  Cabot Oil & Gas Corp. v Jordan, 698 F. Supp. 2d at 477.  This clarification, however “does not resolve the question of whether claims of fraudulent inducement based on misrepresentation not related to subjects specifically addressed in the written contract are barred by the parol evidence rule.”  Id.

 

Many Pennsylvania and Federal courts have examined the question of the applicability of the parol evidence rule and have found a way to issue a determination.  In this instance, however, the District Court was sending a message to the courts of Pennsylvania that there is substantial conflicting state authority regarding important issues like fraud in the inducement and the parol evidence.  The court’s ruling reinforces the fact that these conflicting Pennsylvania rulings need to be clarified by the state courts and not left to the Federal courts for a resolution.

 

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