In Sabella v. Appalachian Development Corp., --- A.3d ----, 2014 Pa. Super. 237 (Pa. Super. Oct. 20, 2014), the Superior Court of Pennsylvania held that an oil and gas developer who innocently drilled on another’s mineral estate without actual knowledge of their ownership was still a bad faith trespasser with constructive notice of the true owner’s rights, and therefore, liable to the owner for all revenues derived from the well without any deduction for costs because the developer conducted an abbreviated “bring down” title search instead of a full-scale title search prior to drilling.
The facts of Sabella are as follows: In 1997, the Plaintiff purchased 66 acres of subsurface oil and gas rights at a tax sale and duly recorded his deed. In 2001, the surface owners, mistakenly believing they owned the property in fee, leased the mineral estate to an oil and gas company for drilling and development. In 2003, the Defendants purchased that company and its assets, including the oil and gas lease. As part of the acquisition, counsel advised Defendants that they could conduct a full-scale search of the property's title or an abbreviated and less costly “bring down” title search, bridging the gap between the date the original search was performed and the date of the closing. Defendants chose the latter, and began drilling wells on the property.
Subsequently in 2008, Plaintiff and Defendants met through a mutual acquaintance to discuss potential joint oil and gas business opportunities. At this meeting, Defendants for the first time learned that they had been drilling on Plaintiff’s property; however, Defendants declined to reveal this fact to Plaintiff. Instead, after the meeting, Defendants went on to drill three (3) more wells on Plaintiff’s property. In 2010, Plaintiff finally discovered Defendants were drilling on his property and brought suit against Defendants for trespass, conversion, and ejectment.
In Pennsylvania, a bad faith trespasser must pay the owner all revenues derived from the property; the bad faith trespasser cannot deduct its costs associated with drilling and operating the well. A good faith trespasser, on the other hand, can deduct its costs, and only owes the owner any net profits earned.
The Sabella court held that Defendants trespassed in good faith from 2001 to 2008, thereby only owing profits over that time span, but trespassed in bad faith from 2008 to 2010, consequently owing revenues. Defendants only drilled on property they knew belonged to Plaintiff following the 2008 meeting. Prior to that time, they had no actual knowledge of his ownership and reasonably believed they had a valid oil and gas lease on the property.
On appeal, the Superior Court reversed in part, holding that while Defendants did not have actual knowledge of Plaintiff’s ownership until the 2008 meeting, they had constructive knowledge of his recorded deed in 2003 when they “willfully elected not to conduct the full title search that would have informed them of [Plaintiff’s] interest.” Sabella at p. 30. Since Defendants had constructive notice of Plaintiff’s ownership in 2003, they were “barred from recovering any offset when they willfully left themselves ignorant of [Plaintiff’s] interest by consciously…declining to run complete title searches for the property, thus assuming the risk of bad-faith status.” Id. at p. 31. The Court concluded that Defendants owed Plaintiff all revenues derived from the wells from 2003 to present without any deduction for costs.
In light of Sabella, oil and gas developers in Pennsylvania should avoid “bring down” title searches and conduct full title searches prior to drilling.
This article was authored by Daniel R. Michelmore, Jackson Kelly PLLC. For more information on the author, see here.