In a March 8, 2011 opinion, the United States District Court for the Middle District of Pennsylvania held that a gas production company was not entitled to an equitable ruling extending the terms of leases for the same period of time that production under the leases was delayed pending resolution of challenges to the leases. In Lauchle v. Keeton Group, LLC, — F. Supp. 2d —, 2011 WL782024 (M.D.Pa. March 8, 2011), the Plaintiffs/Lessors (landowners) had challenged the validity of gas leases that they had entered into with Defendants/Lessees (gas production companies), arguing noncompliance with the Guaranteed Minimum Royalty Act, 58 P.S. § 33 (“GMRA”). On October 6, 2010, the District Court issued a Memorandum and Order granting Defendants’ Motion to Dismiss and upholding the leases as valid under the GMRA. The Defendants then asked the Court to equitably extend the leases to account for the period of time during which the Plaintiffs contested the leases with the Court.
Each lease had a primary term of five years and, if the lessees were producing oil or gas in paying quantities at the end of the five year term, the leases would automatically extend for as long as production continued. After the Plaintiffs filed the actions to seek a determination of whether the leases were valid under the GMRA, the Defendants voluntarily ceased development and drilling on the Plaintiffs’ properties. The Defendants argued that the declaratory judgment actions initiated by the Plaintiffs created such uncertainty about the validity of the leases that the Defendants were forced to forego operations on the Plaintiffs’ properties and were thereby deprived of the benefits of the leases’ full terms. Plaintiffs argument was two fold: (i) the declaratory judgment actions did not prevent the Defendants from conducting drilling operations on the Plaintiffs’ properties during the pendency of those actions; and (ii) it was inequitable to require Plaintiffs to extend the leases merely because the Defendants decided to voluntarily forego operations in the face of litigation over leases that the Defendants themselves had drafted.
The District Court, relying on the Pennsylvania Superior Court decision in Derrickheim Company v. Brown, 305 Pa. Super. 173 (Pa. Super. 1982), found that the Plaintiffs did not repudiate their leases by filing the declaratory judgment action. The District Court further found that “oil companies … wield significant, if not exclusive, power in the drafting of oil and gas leases” and “a determination that Plaintiffs had repudiated their leases via the filing of [the declaratory judgment actions] further tips the balance of power in favor of the oil companies” and that such would “likely dissuade lessors from bringing potentially meritorious actions.” Lauchle at *4. The District Court further went on to say “deeming these leases to have been repudiated under the circumstances of this case is both bad law and even worse public policy, and we decline to accept [Defendants’] invitation to so penalize Plaintiffs.” Id at *4.