On Monday, July 29, 2019, a seven-judge panel of the Pennsylvania Commonwealth Court, in Pa. Envtl. Defense Found. v. Commonwealth, No. 228 M.D. 2012 (Pa. Cmwlth. Dec. 12, 2018) (“PEDF III”), held that two-thirds of rental payments and up-front bonuses received by the Commonwealth as proceeds from oil and gas leases on state forest and park lands must be reserved for conservation purposes under Article I, Section 27 of the Pennsylvania Constitution, also called the Environmental Rights Amendment (“ERA”).
The ERA states:
The people have a right to clean air, pure water, and to the preservation of the natural, scenic, historic and esthetic values of the environment. Pennsylvania’s public natural resources are the common property of all the people, including generations yet to come. As trustee of these resources, the Commonwealth shall conserve and maintain them for the benefit of all the people.
In 2017, the Pennsylvania Supreme Court, in Pa. Envtl. Defense Found. v. Commonwealth, 161 A.3d 911 (Pa. 2017) (“PEDF II”), applied the second and third sentences of the ERA in the context of private trust principles that existed at the time the ERA was enacted in 1971, and struck down as unconstitutional statutory enactments that directed oil and gas royalties to the Commonwealth’s general fund rather than a fund used exclusively for conservation purposes. The Supreme Court found that “royalties – monthly payments based on the gross production of oil and gas at each well – are unequivocally proceeds from the sale of oil and gas resources,” and must therefore remain in the trust. The Supreme Court remanded to the Commonwealth Court the issue of whether rental payments and up-front bonuses made under those oil and gas leases constituted trust assets that must also be used exclusively for conservation purposes.
In PEDF III, the Commonwealth Court found that, unlike royalties, rental payments and up-front bonuses are simply “consideration for the exploration for oil and gas on public land” and “not for the severance of natural resources.” The Court reasoned that rental payments merely “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.” Up-front bonuses, the Court reasoned, “are consideration for the execution of the lease” and are only intended to “determine the highest bidder for the award of the lease.”
The Court then, however, looked to the “Principal and Income Act of 1947” (“1947 Act”), Act of July 5, 1947, P.L. 1283, as amended, formerly 20 P.S. §§ 3470.1-3740.15, which distinguished income from principle in the context of private trust law at the time the ERA was enacted in 1971. In the context of a trust’s disposition of natural resources, the 1947 Act deemed one-third of “rent or payment on a lease” as “income” and the remaining two-thirds as “principal.” The Court therefore concluded that, under the ERA, one-third of the rental and bonus payments from oil and gas leases constitute income, and the remaining two-thirds of those rental and bonus payments constitute part of the corpus of the trust. Proceeds designated as income, the Court held, are not required to remain in the corpus of the trust and used solely for conservation purposes, and may instead be appropriated for general fund purposes. The Court therefore found that the legislative enactments that directed the transfer of the rental and bonus payments to the Commonwealth’s general fund were not facially unconstitutionally, but the Court noted that an accounting is necessary to ensure that no more than one-third of the rental and bonus payments were used for non-conservation purposes.
The Court believes that its holding strikes an “equitable balance” and “fulfills Section 27’s purpose and intent to ‘conserve and maintain’ Pennsylvania’s public natural resources for the benefit of all the people while also allowing today’s generation of Pennsylvanians to benefit in other ways from the revenue produced.” Pennsylvania Environmental Defense Foundation will likely seek an appeal, which would give the Pennsylvania Supreme Court the opportunity to weigh in on this issue next year.