Marcellus Shale Update – Sabella v. Appalachian Dev. Corp.

The Superior Court, on October 20, 2014, issued a decision in the case of Sabella v. Appalachian Development Corp. 2014 Pa Super 237, wherein it held that an unwitting trespasser may be considered acting in “bad faith” where a diligent deed search would have revealed the fact that the property belonged to another. As the following case highlights, damages can drastically increase for a bad faith trespasser, especially when one takes another’s oil and gas as a result of the trespass.

In 1997, Sabella, the Plaintiff purchased the subsurface mineral rights to 66 undeveloped acres in Warren County. Sabella then immediately recorded his interest at the Warren County Recorder of Deeds office, but did not drill or lease the property. In 2001, the surface rights above the 66 acres were owned by another party, and following a series of gas lease transactions, Co-defendants, the Haners, ended up with a gas lease to drill Sabella’s 66 acres. The Haners never discovered Sabella’s recorded interest because they failed to perform a sufficient title search. Unaware of Sabella, they thus erected 6 oil and gas wells on the property from 2004 to 2008, in effect, extracting Sabella’s oil and gas. During a chance business meeting between Brian Haner and Sabella in 2008, Sabella told Haner of his mineral rights to the 66 acres, and showed Haner a map of the property. While recognizing the area as one in which he was drilling, Haner never informed Sabella of that fact, and subsequently, never performed any additional title search, nor paid royalties to Sabella––but still erected three more wells on the property. When Sabella brought suit against the Haners in 2012, it was undisputed that they trespassed upon his subsurface mineral rights and converted his oil and gas to their own use.

The main issue was damages. In Pennsylvania, when an unknowing trespasser enters the land of another, and making improvements therein (i.e. constructing gas wells), generates profits from the activity, such a “good faith” trespasser is liable to the owner for the net profits (i.e. the value of the extracted minerals less the cost of extraction, including well construction). “However, when a party trespasses in bad faith, the injured party is entitled to all moneys derived from the trespass without any offset for the cost of generating those moneys. Sabella v. Appalachian Dev. Corp., supra (emphasis added). Based on the 2008 meeting between the parties, the trial court held that Haner was a good faith trespasser until he had actual knowledge of Sabella’s mineral rights, presumably allowing the Haners to subtract the cost of the 6 pre-2008 wells from the damages.

However on appeal, the Superior Court reversed and deemed the Haners bad faith trespassers from the time they acquired the gas lease in 2003. In doing so, the Court relied on Pennsylvania’s constructive notice statue, which effectually imputes constrictive notice, of any prior recorded interest in property, to any subsequent “purchaser”[1] who contracts to purchase that same interest. More important to the issue of whether the Haners were “good faith” trespassers prior to 2008, the statute also provides that when one has record (constructive) notice of that prior recorded interest––it shall have the legal effect of actual notice “as if said subsequent purchaser . . . had actually joined in the execution of the [previously recorded] agreement.” 21 P.S § 357. Here the Court reasoned that the Haners would have actually discovered Sabella’s prior recorded mineral rights had they performed a sufficient title search in 2003. The Court thus remanded the case to the trial court to modify its previous judgment of nearly $250,000 to add back Haners’ extraction costs between the years 2003 and 2008 (presumably the cost of constructing the first 6 wells), to account for the total value of the extracted mineral resources.

[1] Although the Haners did not purchase the mineral rights but only acquired a lease to them, gas and oil leases in Pennsylvania are not considered leases, but rather upon extraction, vest “a potentially indefinite fee simple determinable” in the lease. Sabella, 2014 WL 5316625, at *18. This is a transfer of interest in title, or a “purchase” of mineral rights.