On June 25, 2015, the United States Court of Appeals for the Third Circuit affirmed the District Court for the Middle District of Pennsylvania’s prior entry of summary judgment in favor of the lessor plaintiffs on the counterclaims of the lessee defendant, Cabot Oil and Gas Corporation. Harrison v. Cabot Oil & Gas Corp., No. 12-3613 (3d Cir. June 25, 2015).
According to Cabot, the plaintiffs’ lawsuit was a repudiation of the lease because it sought declaratory relief invalidating the lease. Thus, Cabot’s counterclaims asserted it was entitled to an extension of the five-year lease term for the length of time it took to defeat the plaintiffs’ suit. This concept is known as “equitable extension,” and courts have repeatedly permitted its application in other oil-and-gas-producing jurisdictions such as Louisiana and Texas. See Harrison v. Cabot Oil & Gas Corp., Civ. No. 3:10-cv-00312, Doc. No. 51 at p. 12.
The complex procedural history of this case is important to this current ruling. In 2010, the plaintiffs filed suit against Cabot, seeking a declaratory judgment that the lease was invalid. Cabot filed counterclaims, specifically seeking an extension of the lease should it prevail against the plaintiffs. In August 2012, the district court entered an order for summary judgment, knocking out the plaintiffs’ claims as well as Cabot’s counterclaims for a lease extension.
The district court’s rationale for ruling against Cabot on its counterclaims was based on its finding that “[u]ntil the Pennsylvania courts say otherwise, this Court will not find that a party’s filing of a lawsuit in federal court amounts to a repudiation of a lease between the parties, despite what courts in other jurisdictions have held.” Id. at p. 16.
Cabot appealed the district court’s entry of summary judgment in favor of the plaintiffs as to its counterclaims. After Third Circuit briefing on the appeal was complete, the Third Circuit petitioned the Pennsylvania Supreme Court for certification of the following question: “When an oil and gas lessor files an unsuccessful lawsuit to invalidate a lease, is the lessee entitled to an equitable extension of the primary lease term equal to the length of the time the lawsuit was pending?” Harrison v. Cabot Oil & Gas Corp., No. 12-3613 (3d Cir. June 25, 2015), at p. 2.
The Pennsylvania Supreme Court granted this petition and declared on February 17, 2015, that:
“We do not foreclose that equitable relief may be available to oil-and-gas-producing companies – subject to applicable requirements governing recourse to equity – where there is an affirmative repudiation of a lease.” But, the court continued, “the mere pursuit of declaratory relief challenging the validity of a lease does not amount to such.” Id. It explained that it “has required more than the mere assertion of a challenge to the validity of an agreement to demonstrate such repudiation. Under Pennsylvania law, anticipatory repudiation or breach requires an ‘absolute and unequivocal refusal to perform or a distinct and positive statement of an inability to do so.’”
(internal citations omitted).
The Third Circuit then found on June 25, 2015, that the Pennsylvania Supreme Court’s ruling effectively decided the issue Cabot had raised on appeal. It also refrained from determining whether equitable extension could exist based on an unsuccessful lawsuit under theories other than repudiation of the lease.
This opinion and the Pennsylvania Supreme Court ruling upon which it relies make Pennsylvania an outlier on this issue. Thus, producers should not rely on the doctrine of equitable extension if a lessor attempts to invalidate a lease through declaratory relief. The safest approach would be to have specific tolling provisions within the lease, in the event of lessor-initiated litigation. As it is unclear whether this case law will affect other jurisdictions’ treatment of this doctrine in the future, it may be wise to seek such tolling provisions when securing leases in other jurisdictions as well.