Tuesday, July 30, 2019

Commonwealth Court Rules Two-Thirds State Forest Drilling Money Transferred Out Of The Oil & Gas Lease Fund Was Part Of The Public Trust; PEDF Says Court Ignores PA Supreme Court Decision

On July 29, Commonwealth Court issued a ruling saying about $135.3 million of State Forest gas drilling money transferred by the General Assembly from DCNR’s Oil and Gas Lease Fund to the state General Fund in 2009 was part of the trust determined to exist in the 2017 PA Supreme Court ruling applying the public trust provisions of the Environmental Rights Amendment.
However, the Court said $67.6 million of the shale gas money generated from bonus and rental payments were not part of the trust, one-third of these payments, under an interpretation of a 1947 state law, not the constitution.
If this one-third rule holds for the 2010 bonus and rental payments, a total of about $255 million in bonus and rental payments that were part of the public trust established by the Environmental Rights Amendment were transferred by the General Assembly in 2009 and 2010, the years covered by this initial litigation. About $122.6 million-- one-third-- were transferred was part of the trust.
PEDF Reaction
The ruling was based on motions for summary judgment filed by the PA Environmental Defense Foundation, which brought the original case resulting in the 2017 opinion, and the Commonwealth.
John E. Childe, the attorney handling the case for the PEDF, said Commonwealth Court ignored the direction of the PA Supreme Court’s 2017 in making its decision--
“Yesterday, the Commonwealth Court issued findings and conclusions in the 2012 case, PEDF v. Governor Corbett answering the Supreme Court’s remand order in its opinion in the same case, 161 A.3d 911, (Pa. June 20, 2017). 
“The Supreme Court remanded two questions: First, whether money received from payments due under leases for the extraction and sale of oil and gas on state forest lands, including bonuses and annual rental payments, are part of the corpus of the environmental public trust established by Article I Section 27 of Pennsylvania’s Constitution. Second, whether the enactments of Section 1604-E and 1605-E of the 2009 Fiscal Code are unconstitutional.
“The Supreme Court delineated the framework for the Commonwealth Court, stating: “In construing Section 1604-E and 1605-E [of the Fiscal Code], to the extent that the lease agreements reflect the generation of revenue streams for amounts other than for the purchase of the oil and gas extracted, it is up to the Commonwealth Court, in the first instance, and in strict accordance and fidelity to Pennsylvania trust principles, to determine whether these funds belong in the corpus of the Section 27 trust.” Id.
“As to the first issue the Commonwealth Court ignored the direction of the Supreme Court, and determined that, based on the leases, bonus and rental payments are not payments for the “severance” of the oil and gas from the land, and that they are payments only for exploring for the oil and gas.
“But the leases expressly state otherwise. The leases specifically state that they are “for the sole purposes of (1) exploring, drilling, operating, producing, and removing of oil, gas and liquid hydrocarbons, and (2) at locations approved by the Department, laying pipelines and constructing roads, tanks, towers, stations, and structures thereon to produce, save, take care of, and transport extracted products.” 
“The purpose of these lease provisions is to expressly allow the oil and gas, the Section 27 trust assets, to be physically changed, to be drilled, produced, removed, saved, taken and transported away from the control of the trust. 
“These actions would dispose of the trust assets and deprive the trust of those assets. If no oil or gas is actually found and removed, that does not change the purposes of the leases and the payments made thereunder as intended by the parties to the lease. 
“The bonus and annual rental payments are express consideration paid by lessees for the right to enter upon our State forests to extract and remove the oil and gas. 
“Contrary to the direction of the Supreme Court the Commonwealth Court did not reaching its findings and conclusions in strict accordance and fidelity to Pennsylvania trust principles, to determine whether these funds belong in the corpus of the Section 27 trust. Instead, Commonwealth Court relied “Principal and Income Act of 1947”. 
“To get there the court determined that the beneficiaries of the trust who are both living today and for future generations must be broken down into two categories. Those beneficiaries living today must be life tenants or income beneficiaries, those of future generations are remaindermen. 
“These designations are based on the court’s analysis of the principals under lease law, not under strict principles of trust law. 
“Under Article I Section 27 the beneficiaries of the trust are also owners of the public natural resources. The second sentence of Section 27 states, “Pennsylvania’s public natural resources are the common property of all the people, including generations yet to come.” As common owners of the natural resources the beneficiaries cannot be limited as either life tenants or income beneficiaries. 
“The Supreme Court emphasized that the proper standard of judicial review lies in the text of the Article I Section 27 itself as well as the underlying principles of Pennsylvania Trust law. 
“Nothing in the terms of the trust language of Section 27 authorizes the trustee to lease and sell our public natural resources. Nothing in Section 27 authorizes the trustee to limit the beneficiaries, as common owners, to life tenants and remaindermen. 
“One of the basic principles of trust law is that it is the duty of the trustee to protect the corpus of the trust for the benefit of the people, not the trustee. Interpreting the leases of the trustee to provide that the trustee receives the income from leases in the form of bonus and rental payments belies this principle.
“The Supreme Court in PEDF II recognized this fact, stating that the “Commonwealth, as trustee, has the constitutional obligation to negotiate and structure leases in a manner consistent with its Article I Section 27 duties. Oil and gas leases may not be drafted in ways that remove assets from the corpus of the trust or otherwise deprive the trust beneficiaries (the people, including future generations) of the funds necessary to conserve and maintain the public natural resources.” 161 A.3d at 936.
Commonwealth Court Argument
Commonwealth Court was directed by the 2017 PA Supreme Court opinion to apply public trust law to the 2009 and 2010 appropriations acts using the findings of its opinion to determine specifically which shale gas lease payments made to DCNR for drilling on state forest land and then transferred to the General Fund were unconstitutional-- upfront bonus payments, rental payments or royalties-- or portions of those payments. 
Commonwealth Court concluded, “Based upon the evidence presented and our review of Pennsylvania's trust law in effect in 1971, we conclude that bonus and rental payments are not for the severance [extraction] of natural resources. 
“Rather, these payments are consideration for the exploration for oil and gas on public land. More particularly, the rentals secure the lessee's right to enter the property for exploratory and development purposes and the rents accrue based on mere passage of time, not the production of oil or  gas. 
“The purpose of the bonuses is to determine the highest bidder for the award of the lease. The bonuses are consideration for the execution of the lease, and not consideration for severance of the mineral. Though bonuses and rental payments are made in anticipation of extraction, these payments relate directly to the lessee's ability to secure the lease and the right to explore for oil and gas on the property. 
“As demonstrated by the evidence presented, the Commonwealth is entitled to keep this money regardless of production, even when the lease is terminated. Thus, we conclude that these payments were received as rent or payment on a lease and were not "received as consideration for the permanent severance" of natural resources from the land.”
Commonwealth Court, using the trust law prevailing at the time, said the Principal and Income Act of 1947 guided the further apportionment of the bonus and rental payments between income and the trust.
The Court said, “Pursuant to former Section 9 of the 1947 Act, "one-third of the net proceeds, if received as rent or payment on a lease, . . . shall be deemed income,  and the remaining two-thirds thereof shall be deemed principal to be invested to produce income." 
“Therefore, we conclude that one third of the rental and bonus payments going into the Lease Fund constitute income; the other two thirds of rental and bonus payments constitute part of the corpus [the public trust]. 
“Because proceeds designated as "income" are not required to remain in the corpus of the Section 27 [Environmental Rights Amendment] trust and used solely for the conservation and maintenance of our public resources, this money may be appropriated for General Fund purposes. 
“However, an accounting is necessary to ensure that only one-third of the proceeds allocable to income are removed from the Lease Fund for non-conservation purposes and that the funds designated as principal are ultimately used in accordance with the trustee's obligation to conserve and maintain our natural resources.”
In the July 29 ruling, the Court further reiterated that the 2017 PA Supreme Court decision determined royalty payment transfers were facially unconstitutional because they are paid for the extraction of the natural gas.
Almost all the of transfers made out of the Oil and Gas Lease Fund after 2010, including in the just passed FY 2019-20 budget were royalty payments.
The courts have not yet ruled on motions and petitions by the PA Environmental Defense Foundation to declare all these subsequent transfers unconstitutional which pay for DCNR operating expenses which total, as a minimum, an additional $311.5 million from FY 2011-12 through the current budget.
The transfers from the Oil and Gas Lease Fund to pay for DCNR operating expenses were: $69.774 million in FY 2019-20, $48.7 million in FY 2018-19, $11.2 million in FY 2017-18, $31.9 million in FY 2015-16, $62.5 million in 2014-15, $16.1 million in FY 2012-13 and $15 million in FY 2011-12.
The PA Environmental Defense Foundation has motions and petitions before Commonwealth Court to declare other transfers from environmental funds as unconstitutional under the Environmental Rights Amendment.
Since this is a summary judgment ruling only, there will be additional legal argument on these points covering both 2009 and 2010 and transfers made in subsequent years.
Note: This is just a preliminary review of the decision. This post will be updated as more information becomes available.
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