“Bonus Payments” Paid to the Commonwealth under Oil and gas Leases on State Forest Land
Pennsylvania Environmental Defense Foundation v. Commonwealth of Pennsylvania and Tom Wolf, 214 A.3d 748 (Pa. Cmwlth. 2019), appeal docket 64 MAP 2019
This is a direct appeal (i.e., not an appeal by allowance) from the decision by Commonwealth Court sitting en banc in an original jurisdiction action seeking declaratory and injunctive relief brought by the Pennsylvania Environmental Defense Foundation (PEDF), PEDF v. Commonwealth, 214 A.3d 748 (Pa. Cmwlth. 2019), in which the court denied PEDF’s application for summary relief and granted the same filed by the Commonwealth. At issue is whether “bonus” and “rental” payments (payments) paid to the Commonwealth under oil and gas leases on state forest land are part of the trust corpus under Article I, Section 27 of the Pennsylvania Constitution.
This will be the second time the Supreme Court considers this issue. In 2017, the Court remanded to Commonwealth Court to determine the constitutionality of the Commonwealth’s transfers of the payments from the Oil and Gas Lease Fund to the General Fund to pay for general government operations. These transfers were mandated by Sections 1604-E and 1605-E of the Fiscal Code and Section 1912 of the Supplemental General Appropriations Act of 2009. PEDF v. Commonwealth, 161 A.3d 911, 929 (Pa. 2017).
In the 2017 decision, the Court determined that royalties paid under oil and gas leases are part of the corpus of the public trust established by Article I, § 27, and that Sections 1602-E and 1603-E of the Fiscal Code were facially unconstitutional because they directed the use of these royalties for non-trust purposes. The Court remanded for a determination of whether the payments were part of the corpus of the trust. If so, transfers to the General Fund also would be facially unconstitutional. The Court directed Commonwealth Court to determine (1) the true purpose of bonus payments paid when the leases are executed and annual per-acre payments (rental payments) made prior to the generation of royalties; and (2) whether these payments, if not directly for the purchase of the oil and gas extracted, are nonetheless part of the trust corpus.
The oil and gas leases at issue provide that the intent is to allow the lessee to enter state forest land for the specific purposes of finding, extracting, removing, and transporting the oil and natural gas to market for sale. On remand, PEDF argued that these activities are necessary to accomplish the purchase and sale of those trust assets and that the payments are consideration paid for entering state forest lands to conduct all such activities, the result of which is to permanently sever the oil and natural gas from the state forest lands and hence the trust corpus.
Commonwealth Court concluded that the payments are only for exploration because the Commonwealth retains these payments under the terms of the State Forest oil and gas leases even if lessees fail to produce any oil or gas. The court denied PEDF’s application for summary relief holding that one third of the bonus payments made under state forest oil and gas leases are income and not part of the trust corpus, and thus may be distributed under the terms of Section 9 of the Principal and Income Act of 1947. On that basis, the court found that Sections 1604-E and 1605-E of the Fiscal Code and Section 1912 of the Supplemental General Appropriations Act of 2009 transferring the payments to the General Fund are not facially unconstitutional under Article I, § 27.
Now back before the Supreme Court, PEDF seeks a declaration that the bonus payments received from state forest oil and gas leases must remain in their entirety as part of the corpus of the Article I Section 27 trust and must be used for trust purposes; and that Sections 1604-E and 1605-E of the Fiscal Code and Section 1912 of the Supplemental General Appropriations Act of 2009 are facially unconstitutional.