Asserting a Claim for Bad Faith Pooling
By Paul R. Yagelski, Esquire
Does Pennsylvania Recognize a Claim for Bad Faith Pooling as a Claim in and of Itself or Must It Be Asserted Within an Action for Breach of Contract?
You, the landowner or royalty owner, have leased your oil and gas. There is a pooling/unitization provision within your oil and gas lease. Nothing, however, has happened to develop the oil and gas and there has been no pooling or unitization to form a production unit. Suddenly, just prior to the expiration of the primary term of the lease, the oil and gas company pools or unitizes the land with another parcel to form a drilling unit. You file suit asserting that the pooling or unitization is a sham and the lease has expired as the oil and gas company engaged in bad faith pooling. Can you allege the bad faith pooling claim by itself or must you also allege a breach of contract claim? Must there be some breach of contract or breach of the oil and gas lease before a bad faith pooling claim can be asserted?
In Wheeland Family Ltd. Parntership LP v. Rockdale Marcellus LLC, No. 4:18-CV-01976, 2019 WL 2868937 (M.D. Pa. July 3, 2019), the court held that a bad faith pooling claim or a claim for breach of the covenant of good faith and fair dealing must be pled as part of a breach of contract claim. A bad faith pooling claim or a claim for breach of the covenant of good faith and fair dealing cannot be alleged by itself as a claim. There is no such claim unless the lease has been breached and the bad faith pooling claim is alleged as a breach of the covenant of good faith and fair dealing within or as a part of a breach of contract claim.
In Wheeland, a claim for bad faith pooling was asserted as a claim for breach of the covenant of good faith and fair dealing, which, as the court noted, is recognized under Pennsylvania law as being implied in every contract. To the extent that the plaintiffs styled their bad faith allegations as independent claims alleging a breach of the covenant of good faith and fair dealing, this covenant does not give rise to an independent action aside from breach of contract. In so holding, the court cited Stewart v. Swepi, 918 F. Supp. 2d 333 (M.D. Pa. 2013).
In Stewart, the landowners alleged that a lessee breached the covenant of good faith and fair dealing, arguing that an oil and gas lease expired because the last minute unitization of two parcels with a drilling unit and the drilling of an alleged placeholder well were speculative in nature and failed to extend the lease. Critically, the court noted that the landowners did not allege that the lessor breached the terms of the lease. As such, the court in Stewart dismissed the landowners’ claim for breach of the covenant of good faith and fair dealing because the plaintiffs did not allege a breach of contract. Id.
In Wheeland, the Court noted that it did not appear that the plaintiffs claimed that Rockdale breached the terms of the leases in question. Plaintiffs’ complaint contended that Rockdale acted in bad faith because unitization of the leases “occurred approximately one month prior to the conclusion of the primary term” of the leases and the unit that was created was centered around a well that was not producing and could not produce hydrocarbons. Under Stewart, the claims asserted by plaintiffs for breach of the covenant of good faith and fair dealing could not survive because it did not appear that plaintiffs alleged breach of contract claims.
The Wheeland Court went on to note that alternatively, to the extent that the plaintiffs alleged a breach of contract and their bad faith pooling claims were cognizable, the duty of the implied covenant of good faith and fair dealing could not trump the express provisions of the contract; the implied obligation of good faith and fair dealing could not usurp the express rights conferred upon the lessees.
Accordingly, if it appears that there is a bad faith pooling claim, the lease must be scrutinized along with the circumstances to see whether a breach of contract claim can be pursued against the lessee. If there is no breach of contract claim, the lessee can argue that there is no bad faith pooling claim as that is no cause of action for breach of the covenant of good faith and fair dealing in and of itself, or in this case a bad faith pooling claim. In addition, if a bad faith pooling claim is alleged within the context of a breach of contract claim, there may be express provisions in the lease, which would trump any such claim, such that the provisions of the lease and the surrounding circumstances should be scrutinized prior to asserting any such claim.
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