Update: Following publication of this legal update, the Superior Court decided to publish the opinion. Accordingly, it is now binding precedent that can be cited to lower courts.
The development of the Marcellus Shale in Pennsylvania has led to a number of disputes about historical judgments that purportedly divested reserved oil and gas rights from their owners. During the 20th century, surface owners used a variety of mechanisms in an attempt to regain subsurface rights that their predecessors in title had severed. Although the full extent of these shenanigans is still emerging, a recent Pennsylvania Superior Court case casts a jaundiced eye on one such effort, and reminds litigants that these efforts can only be upheld if there has been scrupulous compliance with applicable procedural rules, and will succeed only when they are grounded in fact and law.
On November 6, 2015, the Pennsylvania Superior Court affirmed the trial court’s decision in Northern Forests II, Inc. v. Keta Realty Company, et al ., which struck a 1989 default judgment entered in favor of the surface owner. That default judgment, entered in favor of Northern Forests II, Inc., purported to award previously-reserved oil and gas rights based upon Northern Forests’ alleged adverse possession of those subsurface interests. The Court’s ruling striking the default judgment was based on two fatal defects appearing on the face of the record – Northern Forests’ failure to name indispensable parties, which deprived the court of subject matter jurisdiction, and Northern Forests’ failure to make proper service on any defendant it had named in the action.
The Superior Court observed that at the time of the filing of the complaint, “none of the named defendants had any ownership interest in the subsurface rights, a fact that was evident from instruments of record in the Lycoming County Recorder of Deeds.” Instead, “[i]nstruments of record as of December 1988 showed that the record title owners of subsurface rights included Clarence Moore…, Kenneth Yates…, and the heirs of Thomas Proctor….” Northern Forests sought in its quiet title action to divest Moore, Yates and the Proctor Heirs of their ownership rights, but failed to name them in their complaint or join them as defendants. The Court held that Northern Forests’ “failure to join them as defendants mandated that [the] judgment be stricken.” Northern Forests had claimed that its failure to name Moore, Yates and Proctor resulted from conveyancing errors by its predecessors in title. The Court rejected any argument that such errors could preserve a judgment explaining that “[n]o matter how exhaustive or diligent the plaintiff’s title search may be, its failure to join an indispensable party deprives the court of jurisdiction.”
In connection with the failure to make proper service of process on any defendant named in the 1988 action, the Superior Court relied heavily upon the recent decision of Sisson v. Stanley, 109 A.3d 265 (Pa. Super. 2015) (a different aspect of which is now before the Supreme Court). Northern Forests had served the named defendants by publication after filing an affidavit under Pennsylvania Rule of Civil Procedure 430 stating only that it had been unable to locate the defendants. In rejecting the sufficiency of this affidavit, the Superior Court reiterated that service by publication is an “extraordinary” manner that requires strict compliance with Rule 430, and that Northern Forests’ counsel’s “affidavit totally failed to describe what efforts he made to discover the whereabouts of any person holding an interest in the Property.”
The Court further rejected the surface owners’ plea for equitable considerations – namely, their contention that people had transacted business in reliance upon the 1989 judgment in the ensuing years and it therefore would be unjust to strike the judgment now. In rejecting this argument, the Court explained that “[u]like fine wine, void judgments in Pennsylvania do not improve with age; void ab initio, void for all time.”
In a final attempt to claim title to the oil and gas rights, Northern Forests’ successors amended their complaint to allege that their consummation of leases and their recording of the default judgment established the necessary “actual possession” needed to obtain title through adverse possession. The Superior Court rejected this contention as well. First, the Court refused to “tack” periods of ownership, because the deeds conveying the property did not purport to convey subsurface rights or any claims to adverse possession of subsurface rights. In addition, the Court held that the mere entry and recording of a judgment, or the mere leasing of oil and gas rights, do not constitute visible and notorious possession. Instead, “actual possession, meaning drilling and production, of the minerals must occur.” Finally, the Court explained that a void judgment, which the 1989 judgment was, is a legal nullity that has no force and effect. Therefore, Northern Forests could not “exploit the void 1989 judgment for any purpose, including acquisition of title by adverse possession.”
The Superior Court’s decision is unpublished, which limits its use in subsequent proceedings. Even so, because it rests upon well-established Pennsylvania precedent, it provides a helpful window into the manner in which Pennsylvania courts will evaluate these disputes. It also serves as a helpful reminder – to surface owners, reserved oil and gas owners, and potential lessors alike – that surface ownership, the execution of oil and gas leases, and even the recordation of a judgment declaring ownership of oil and gas rights are not necessarily proof that the surface owner actually has a valid claim to oil and gas rights.
(In the interest of full disclosure, McGuireWoods successfully represented the Trustees of the Margaret O.F. Proctor Trust in this appeal and in the underlying litigation.)