NON-PRECEDENTIAL DECISION - SEE SUPERIOR COURT I.O.P

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1 NON-PRECEDENTIAL DECISION - SEE SUPERIOR COURT I.O.P ESTATE OF CARL STILES, JUDY ARMSTRONG, AND ANGELINA FIORENTINO IN THE SUPERIOR COURT OF PENNSYLVANIA Appellee v. CHESAPEAKE APPALACHIA, LLC, CHESAPEAKE ENERGY CORPORATION, NOMAC DRILLING, LLC, GREAT PLAINS OILFIELD RENTAL, LLC. AND DIAMOND Y ENTERPRISE, INC. Appellants No MDA 2012 Appeal from the Order Entered June 27, 2012 In the Court of Common Pleas of Bradford County Civil Division at No(s): 10-CV BEFORE: DONOHUE, J., OTT, J., and PLATT, J. * MEMORANDUM BY OTT, J.: FILED JUNE 17, 2014 Chesapeake Appalachia, LLC, Chesapeake Energy Corporation, Nomac Drilling LLC, Great Plains Oilfield Rental LLC, and Diamond Y Enterprise, Inc., (collectively, Chesapeake ) appeal from the order entered on June 27, 2012, in the Court of Common Pleas of Bradford County overruling their preliminary objections seeking to compel arbitration of the lawsuit instituted by the Estate of Carl Stiles, Judy Armstrong, and Angelina Fiorentino. Chesapeake claims the trial court erred in construing that the term, * Retired Senior Judge assigned to the Superior Court.

2 operations, as used in the arbitration provision of the parties oil and gas lease, to cover only the lessee s operations on the leased premises and not (as in the present matter) on other lands. See Chesapeake s Brief at 3. After a thorough review of the submissions by the parties, the certified record, and relevant law, we affirm. The facts and procedural history are as follows: At the times relevant to this suit, Plaintiff Carl Stiles, now deceased, resided at the property ( the Property ) located at 479 Quicks Bend Road, Sugar Run, Pennsylvania, with his wife, Plaintiff Judy Armstrong. Armstrong is the mother and biological parent of Plaintiff Angelina Fiorentino, who also resided at the Property. 1, 2 In 2009, Chesapeake engaged in drilling activities, and owned and operated four natural gas wells in Terry Township, Bradford County. 3 Chesapeake located, drilled, and conducted oil and gas explorations of the wells ( the Wells ) within approximately three miles of the Property and water supply. 1 We will refer to Stiles, Armstrong, and Fiorentino collectively as the Residents. 2 Armstrong no longer resides at the Property. 3 The Wells were identified as #831081, #627644, #831206, and #

3 On January 12, 2010, Stiles entered into an oil and gas lease ( Lease ) with Chesapeake Appalachia, LLC. 4 Pursuant to the Lease, Chesapeake Appalachia, LLC, acquired an interest in any oil and gas that lay beneath the Property. 5 On October 27, 2010, Armstrong initiated this action by filing a complaint in law and in equity against Chesapeake Appalachia, LLC, Chesapeake Energy Corporation, and Nomac Drilling, Inc. 6 She claimed her water supply was contaminated as a result of negligent actions by Chesapeake with respect to its drilling techniques and materials in relation to the Wells, which were not on the Property. Consequently, she asserted she was exposed to hazardous chemicals and materials, the value of her property went down, and she suffered damages. On November 30, 2010, Chesapeake served notice of removal of the case to the United States District Court for the Middle District of Pennsylvania on the basis of federal diversity jurisdiction. Chesapeake also filed a motion to dismiss on December 6, Armstrong and Fiorentino were not parties to the Lease. 5 During this time, Stiles passed away and Armstrong was subsequently named the administratrix for Stiles s estate on February 12, Chesapeake Appalachia, LLC, is a West Virginia limited liability company. Chesapeake Energy Corporation is an Oklahoma corporation. Nomac Drilling, Inc., a subsidiary of Chesapeake Energy Corporation, is a Pennsylvania corporation with its principal place of business in Oklahoma City, Oklahama

4 On January 20, 2011, Armstrong filed a first amended complaint in the district court. The amended complaint added Stiles and Fiorentino as plaintiffs, and non-diverse defendants Great Plains Oilfield Rental, LLC, and Diamond Y Enterprise, Inc. The amended complaint included the following causes of action: (1) the Hazardous Sites Cleanup Act; (2) negligence; (3) negligence per se; (4) private nuisance; (5) strict liability; (6) trespass; and (7) medical monitoring trust funds. The Residents also sought punitive and compensatory damages. On February 10, 2011, Chesapeake filed a motion to strike and a motion to dismiss the amended complaint. On February 18, 2011, the Residents then filed a motion to remand, claiming diversity no longer existed because Great Plains Oilfield Rental, LLC, and Diamond Y Enterprise, Inc., were non-diverse parties. On July 29, 2011, the federal district court (1) granted the Residents motion to remand, (2) determined Chesapeake s motion to strike and motion to dismiss was moot, and (3) remanded the matter to the trial court. Upon remand, on September 14, 2011, Chesapeake filed a motion to compel arbitration pursuant to 42 Pa.C.S. 7304(a) and for interim and permanent stay. On November 1, 2011, the Residents filed a memorandum of law in opposition to Chesapeake s motion to compel arbitration and to stay. On June 27, 2012, the trial court entered an order, and concomitant - 4 -

5 opinion, denying and dismissing Chesapeake s preliminary objections seeking to compel arbitration. This appeal followed. 7 Chesapeake s sole issue is as follows: Whether the trial court erred when it concluded that the term operations, as used in an arbitration provision in an oil and gas lease, covers only the lessee s operations on the leased premises and not (as here) on other lands, given that the arbitration provision does not so limit operations and the lease, considered in its entirety, evidences that the parties intended that operations, as used in the arbitration provision, includes activities by the lessee that occur on or off the leased premises. See Chesapeake s Brief at 3. Specifically, Chesapeake states that in each count of the complaint, the Residents allege that they sustained damages as a result of Chesapeake s activities that constitute operations, as that term is used in the Lease. Id. at 8. Chesapeake contends for purposes of the arbitration provision, there is a dispute concerning damages caused by Lessee s operations and, therefore, the Residents claims should be submitted to arbitration. Id. (citation omitted). Moreover, it points to the following two reasons for reversing the court s order: (1) the court s interpretation is inconsistent with the plain meaning of the arbitration provision, and as a matter of law, the plain meaning should govern; and (2) 7 On July 20, 2012, the trial court ordered Chesapeake to file a concise statement of errors complained of on appeal pursuant to Pa.R.A.P. 1925(b). Chesapeake filed a concise statement on August 9, The trial court issued a statement pursuant to Pa.R.A.P. 1925(a), relying on its June 27, 2012, opinion

6 the court s interpretation disregards the parties intent as separately evidenced by the Lease as a whole. Id. at We begin with our well-settled standard of review: Our standard of review of a denial of preliminary objections in the nature of a petition to compel arbitration is limited to determining whether the trial court s findings are supported by substantial evidence and whether the trial court abused its discretion in denying the petition. Midomo Co., Inc. v. Presbyterian Hous. Dev. Co., 1999 PA Super 233, 739 A.2d 180, 186 (Pa. Super. 1999). Where a party to a civil action seeks to compel arbitration of that action, a two-part test is employed to determine if arbitration is required. First, the trial court must determine if a valid agreement to arbitrate exists between the parties. Id. Second, if the trial court determines that such an agreement does exist, it must then determine if the dispute involved is within the scope of the arbitration provision. Id. The scope of arbitration is determined by the intention of the parties as ascertained in accordance with the rules governing contracts generally. Henning v. State Farm Mut. Automobile Ins. Co., 2002 PA Super 80, 795, 795 A.2d 994, 996 (Pa. Super. 2002), citing, State Farm Mut. Automobile Ins. Co. v. Coviello, 233 F.3d 710, 716 3rd Cir. 2000). Pittsburgh Logistics Sys., Inc. v. Prof l Transp. & Logistics, Inc., 803 A.2d 776, 779 (Pa. Super. 2002). The interpretation of any contract is a question of law and this Court s scope of review is plenary. Moreover, [w]e need not defer to the conclusions of the trial court and are free to draw our own inferences. In interpreting a contract, the ultimate goal is to ascertain and give effect to the intent of the parties as reasonably manifested by the language of their written agreement. When construing agreements involving clear and unambiguous terms, this Court need only examine the writing itself to give effect to the parties understanding. This Court must construe the - 6 -

7 contract only as written and may not modify the plain meaning under the guise of interpretation. Szymanowski v. Brace, 2009 PA Super 218, 987 A.2d 717, 722 (Pa. Super. 2009) (quoting Abbott v. Schnader, Harrison, Segal & Lewis, LLP, 2002 PA Super 247, 805 A.2d 547, 553 (Pa. Super. 2002) (internal citations omitted)). The task of interpreting a contract is generally performed by a court rather than by a jury. The goal of that task is, of course, to ascertain the intent of the parties as manifested by the language of the written instrument. Maguire v. Ohio Casualty Ins. Co., 412 Pa. Super. 59, 602 A.2d 893, 894 (Pa. Super. 1992). Humberston v. Chevron U.S.A., Inc., 75 A.3d 504, (Pa. Super. 2013). Where the language of the contract is ambiguous, the provision is to be construed against the drafter. State Farm Fire and Casualty Company v. PECO, 54 A.3d 921, 928 (Pa. Super. 2012); see also Standard Venetian Blind Co. v. American Empire Ins. Co., 469 A.2d 563, 566 (Pa. 1983). Turning to the first element of the two-part test to determine if arbitration is required, whether a valid agreement to arbitrate exists between the parties, we note the trial court does not address this prong in its June 27, 2012, opinion. Moreover, the record establishes that the only named parties on the Lease are Stiles and Chesapeake Appalachia, LLC. See First Amended Complaint, 1/20/2011, Exhibit C at unnumbered 1. However, we are guided by the following: In general, only parties to an arbitration agreement are subject to arbitration. See Cumberland-Perry Area Vocational- Technical School v. Bogar & Bink, 261 Pa. Super. 350, 396 A.2d 433 (Pa. Super. 1978) (parties cannot be compelled to arbitrate disputes absent agreement to arbitrate). However, a - 7 -

8 nonparty, such as a third-party beneficiary, may fall within the scope of an arbitration agreement if that is the parties intent. Cf. Highmark Inc. v. Hospital Service Association of Northeastern Pennsylvania, 2001 PA Super 278, 785 A.2d 93 (Pa. Super. 2001) (third-party beneficiary may enforce arbitration clause even though it is not a signatory to the contract). Smay v. E.R. Stuebner, Inc., 864 A.2d 1266, 1271 (Pa. Super. 2004). Armstrong and Fiorentino could be considered third-party beneficiaries of the Lease either because they resided on the Property or are beneficiaries under Stiles s estate. Therefore, an agreement between the parties arguably existed. Nevertheless, for the reasons that follow, we find the arbitration clause does not encompass the dispute at issue. With respect to the second element of the test, whether, the dispute involved is within the scope of the arbitration provision, we note the Lease provided, in pertinent part: LEASING CLAUSE. Lessor hereby leases exclusively to Lessee all the oil and gas..., and their liquid or gaseous constituents, whether hydrocarbon or non-hydrocarbon, underlying the land herein leased, together with such exclusive rights as may be necessary or convenient for Lessee, at its election, to explore for, develop, produce, measure, and market production from the Leasehold, and from adjoining lands, using methods and techniques which are not restricted to current technology, including the right to conduct geophysical and other exploratory tests; to drill, maintain, operate, cease to operate, plug, abandon, and remove wells; to use or install roads, electric power and telephone facilities, and to construct pipelines with appurtenant facilities, including data acquisition, compression and collection facilities for use in the production and transportation of products from the Leasehold or from neighboring lands across the Leasehold, to use oil, gas, and non-domestic water sources, free of cost, to store gas of any kind underground, regardless of the source thereof, including the - 8 -

9 injecting of gas therein and removing the same therefrom; to protect stored gas; to operate, maintain, repair, and remove material and equipment. **** UNITIZATION AND POOLING. [Stiles] grants [Chesapeake Appalachia, LLC] the right to pool, unitize, or combine all or parts of the Leasehold with other lands, whether contiguous or not contiguous, leased or unleased, whether owned by Lessee or by others, at a time before or after drilling to create drilling or production units either by contract right or pursuant to governmental authorization. **** DISPOSAL AND INJECTION WELLS. [Stiles] hereby grants to [Chesapeake Appalachia, LLC] the right to drill wells and/or reenter existing wells, including necessary location, roadway and pipeline easements and rights of way, on any part of the Leasehold or lands pooled or unitized therewith for the disposal and/or injection into any subsurface strata including, but not limited to wells on the Leasehold or lands pooled or unitized therewith or from properties and lands outside the Leasehold, or lands pooled or unitized therewith, and to conduct all operations as may be required, for so long as necessary and required by [Chesapeake Appalachia, LLC] for purposes as herein provided. **** ARBITRATION. In the event of a disagreement between [Stiles] and [Chesapeake Appalachia, LLC] concerning this Lease, performance thereunder, or damages caused by [Chesapeake Appalachia, LLC] s operations, the resolution of all such disputes shall be determined by arbitration in accordance with the rules of the American Arbitration Association. All fees and costs associated with the arbitration shall be borne equally by [Stiles] and [Chesapeake Appalachia, LLC]. First Amended Complaint, 1/20/2011, Exhibit C at unnumbered 3 (emphasis added). With respect to the substantive allegations raised by the Residents in the original complaint and first amended complaint, the Residents - 9 -

10 maintained Chesapeake was negligent in the drilling, construction, and operation of the Wells, such that [m]ethane, ethane and other pollutants and industrial and/or residual waste, was caused to be discharged into or otherwise enter and contaminate the ground and aquifer near and under the [Residents ] home and into the ground water well used and relied upon as their water supply. See First Amended Complaint, 1/20/2011, at 26(a); see also Complaint At Law and in Equity, 10/27/2010, at 5. Moreover, in the Residents opposition to Chesapeake s motion to compel arbitration and to stay, they averred that after executing the Lease, Chesapeake engaged in improper and negligent behavior during their oil and gas exploration and extraction activities on property near [the Residents ] property and which was unrelated to any oil or gas extraction activities on or under Stiles property that was the subject of the lease. It was [Chesapeake s] actions on the nearby property, with no relation to the Lease between the parties to this action that proximately caused damage to [the Residents ] surface water, subsurface water and property and which are now the basis of the present action. It was not [Chesapeake s] actions resulting from the Lease between Stiles and [Chesapeake] that damaged [the Residents]. Further, nothing in the Lease expressly or reasonably requires that claims for personal injury and property damage from environmental contamination be arbitrated. The Residents Memorandum of Law in Opposition to Chesapeake s Motion to Compel Arbitration and to Stay, 11/1/2011, at 5-6 (italics in original). In construing the Lease with respect to the Residents allegations, the trial court found the following: None of [the Residents ] claims allege that the operations which contaminated [the Residents ] water supply arose from operations relating to the Stiles lease, but [Chesapeake s]

11 motion to compel arbitration implicitly suggests that a claim for damages arising from any of its operations must be referred to arbitration, if the party claiming damages has executed a lease containing the arbitration clause in question. There is no need for exegetical analysis of the scope of the arbitration clause. Clearly the parties to the lease intended that it would apply to operations involving a gas well drilled on Plaintiff Stiles s property. Conversely, it is equally clear that the arbitration clause would not apply to damage claims arising from some other operations, e.g., if Defendant Chesapeake Appalachia s corporate jet crashed into a car carrying [the Residents] on a California highway. The trial court holds that the arbitration clause, which identifies the principals as Lessor and Lessee, was intended by the parties to govern disagreements which arise between them qua lessor and lessee. That is not the case here. All of [the Residents ] claims, sounding in trespass, would be viable in the absence of a lease. The lease is wholly incidental to the alleged cause of action. Trial Court Opinion, 6/27/2012, at 3 (italics in original). We agree. As indicated above, Chesapeake argues the parties intent with respect to on-premises and off premises operations is evidenced by the language in the leasing clause of the Lease, which precedes the arbitration clause. Specifically, Chesapeake notes the leasing clause references the following rights, given by Stiles as lessor to Chesapeake as lessee: (1) to explore for, develop, produce, measure, and market production from the Leasehold, and from adjoining lands; and (2) to construct pipelines for use in the production and transportation of products from the Leasehold or from neighboring lands across the Leasehold[.] Chesapeake s Brief at Chesapeake requests this Court to interpret the Lease broadly, and to read the agreement as a whole, in order to find that the term operations

12 includes those acts on the leased premises but also all other operations, such as those on adjoining or neighboring lands. Id. at 12 (emphasis added). We cannot read the terms of the Lease so broadly as to mandate arbitration for the specific acts alleged in the complaint which sound in tort. We note there is some ambiguity as to the terms adjoining lands or neighboring lands as used in the Lease. 8 However, it is unclear how a lessor could grant rights to a lessee to engage operations as prescribed in the Lease on adjoining lands that he or she does not own. Further, we are required to interpret the Lease against Chesapeake as the drafter. State Farm Fire and Casualty Company, 54 A.3d at 928. Consequently, the trial court did not abuse its discretion in refusing to interpret the Lease to include Chesapeake s operations on land that was three miles away from the Property as such activity fell outside the scope of the arbitration provision of the Lease. 9 Lastly, we note that Chesapeake relies on several cases for the principle that arbitration clauses should be given the broadest interpretation. 8 See State Farm Fire and Casualty Company, 54 A.3d at We note because the parties are at the early stage of the proceedings, if after discovery, it is determined that the contamination resulted from Chesapeake s operations on the Property, then the parties may be bound by the arbitration clause. However, based on the facts so far alleged, there is no evidence to support that conclusion

13 See Chesapeake s Brief at 10. However, we find that these cases are distinguishable from the present matter. For example, Chesapeake relies on Muhlenberg Township School Dist. Authority v. Pennsylvania Fortunato Constr. Co., 333 A.2d 184 (Pa. 1975), for the conclusion that for purposes of [an] arbitration clause, [t]o suffer damage in any manner in our opinion is all inclusive and claims means all claims. Chesapeake s Brief at 10. However, Chesapeake s interpretation of Muhlenberg Township is misplaced as the arbitration provision in the case specifically provided: 1. Should either party to this Contract suffer damage in any manner because of any wrongful act or neglect of the other party or of anyone employed by him, then he shall be reimbursed by the other party for such damages. 2. Claims under this clause shall be made in writing to the party liable within a reasonable time at the first observance of such damage and not later than the time of final payment, except as expressly stipulated otherwise in the case of faulty work or materials, and shall be adjusted by agreement or arbitration. Muhlenberg Township, 333 A.2d at 186 (quotation marks and footnote omitted). The Pennsylvania Supreme Court rejected the argument that this language applies only to incidents involving injury to persons or property and concluded that [t]o suffer damage in any manner in our opinion is all inclusive and the provision: Claims... shall be adjusted by agreement or arbitration means all claims. Id. Here, on the other hand, the arbitration provision was not all inclusive and did not encompass all claims where it specifically designated that

14 arbitration could be compelled as to a disagreement regarding performance thereunder, or damages caused by [Chesapeake Appalachia, LLC] s operations on the Property. First Amended Complaint, 1/20/2011, Exhibit C at unnumbered 3. As analyzed above, operations on another individual s property does not fall under the terms of the Lease. Moreover, Chesapeake cites to Ambridge Water Authority v. Columbia, 328 A.2d 498 (Pa. 1974) and Smay, supra, for the argument that the arbitration clause was framed in the broadest language and therefore, the scope of the provision was unlimited. Chesapeake s Brief at 10. However, again, these arbitration clauses 10 are different from the arbitration clause at issue because broad language was not used and the ability to compel arbitration was limited to operations on this specific property. Accordingly, we conclude the trial court did not err in denying Chesapeake s preliminary objections seeking to compel arbitration, as the trial court s findings are supported by substantial evidence and the court did 10 See Ambridge Water Authority,328 A.2d at 499 (arbitration clause provided: That any controversy or claim arising out of or relating to this Agreement or the breach thereof shall be settled by arbitration[.]. ); Smay, 864 A.2d at 1271 (arbitration clause stated: Any controversy or Claim arising out of or related to the Contract, or the breach thereof, shall be settled by arbitration except controversies or Claims relating to aesthetic effect and except those waived as provided for in Subparagraph [(Waiver of Claims: Final Payment)]. )

15 not abuse its discretion in denying the petition. See Midomo Co., Inc., supra. Order affirmed. Judgment Entered. Joseph D. Seletyn, Esq. Prothonotary Date: 6/17/