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In an environmental case focused on where hundreds of millions of dollars gained from leasing state land for oil and gas extraction should go, the Commonwealth Court has ruled that a still-in-dispute portion of the funds can be funneled into the state's general fund—for any use—rather than into the state's conservation-minded environmental public trust.

The unanimous July 29 Commonwealth Court en banc decision, penned by Judge Michael Wojcik, amounts to a loss for the Pennsylvania Environmental Defense Foundation, which in 2012 launched litigation in an effort to make sure that vast monetary sums being made by the state through leasing out forest and park lands to the gas industry was at least directed into the public trust charged with maintaining and conserving Pennsylvania's rich natural landscape.

The foundation's general counsel, John Childe, said his group will appeal the Commonwealth Court's decision. He also noted that that appeal will come “as of right” under state law.

Still, the environmental foundation's larger effort in the long-running case has been far from fruitless. Instead, it has been marked by a major 2017 victory in the state's high court. In that ruling, which some have termed “a landmark,” the state Supreme Court found that Pennsylvania's Environmental Rights Amendment to the state constitution was broadly protective of the state's natural resources and the important trust set up to protect them. Moreover, the high court ruled that the same amendment mandated that gas industry lease-related “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 therefore must be placed into the corpus of the state's environmental public trust.

In its July 29 ruling, the Commonwealth Court, on remand from the Supreme Court, examined two other, non-royalty sources of money flowing from the state's leasing of rich land to the gas industry companies: bonus and rental payments tied to leases.

The Supreme Court had remanded to the Commonwealth Court the question of whether those two other sources of funds—as opposed to royalties—should also be sent into the environmental public trust corpus, or be allowed to be used for varied purposes as part of the state's general fund.

Wojcik, joined by President Judge Mary Hannah Leavitt and Judges Renee Cohn Jubelirer, Robert Simpson, P. Kevin Brobson, Anne Covey and Ellen Ceisler, ruled that one-third of the continued bonus and rental payments may go into the general fund, since bonus and rental payments are not tied to the “severance of natural resources from the land.”

In reaching the particular one-third amount, Wojcik pointed to the state's Principal and Income Act of 1947, writing that “pursuant to former Section 9 of the 1947 Act, 'one-third of the net proceeds, if received as rent or payment on a lease … shall be deemed income,'” and “therefore, we conclude that one third of the rental and bonus payments going into the Lease Fund constitute income; the other two thirds of rental and bonus payments constitute part of the corpus.”

But it was the intermediate appellate court's analysis of why the bonus and rental payments are “not for the severance [from the rural, largely northcentral state land] of natural resources” that made up much of the opinion's heart.

As Wojcik explained, the Supreme Court, in remanding part of the issue before it back to the Commonwealth Court, decided that there was a remaining question of “how to categorize other [non-royalty] revenue streams from state forest oil and gas leases.”

Wojcik quoted the Supreme Court as saying that “the record on appeal is undeveloped regarding the purpose of up-front bonus payments, and thus no factual basis exists on which to determine how to categorize this revenue.”

In addition, Wojick of the Commonwealth Court—which has been a court of first resort, acting as a trial court in the case—further framed the issue before the court as “whether bonuses and rental payments … are compensation for the sale of natural resources and, thus, part of the corpus trust that must be used to conserve and maintain those natural resources, or income.”

Wojcik noted that the Supreme Court had importantly, and clearly, determined in its landmark 2017 opinion that “all proceeds from the sale of our public natural resources are part of the corpus of our environmental public trust and that the commonwealth must manage the entire corpus according to its fiduciary obligations as trustee” to the state's people, who are resources' common property owners.

Then, in analyzing diverging views between the petitioner foundation and the respondents, the commonwealth of Pennsylvania and then-Gov. Tom Corbett, on what the bonus and rental payments represent, Wojcik sided with the governor's view.

“Based upon the evidence presented and our review of Pennsylvania's trust law in effect in 1971, we conclude that bonus and rental payments are not for the severance of natural resources,” Wojcik wrote. “Rather, these payments are consideration for the exploration for oil and gas on public land.”

“The rentals 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,” he continued. “The purpose of the bonuses is to determine the highest bidder for the award of the lease. The bonuses are consideration for the execution of the lease, and not consideration for severance of the mineral.”

He added, “Though bonuses and rental payments are made in anticipation of extraction, these payments relate directly to the lessee's ability to secure the lease and the right to explore for oil and gas on the property.”

Moreover, noted Wojcik, “the commonwealth is entitled to keep this money regardless of production, even when the lease is terminated” and thus the payments “were not received as consideration for the permanent severance of natural resources from the land.”

Childe said he and the group disagreed with the court's reasoning.

“The Commonwealth Court opinion ignored the Supreme Court opinion of 2017, and developed its own law based on statutory law, rather than on the language of the constitutional amendment,” he said.

Continuing on the point, he contended that the lower appellate court was “ignoring the Supreme Court saying the terms set forth in the constitution are what are used to determine if you are in compliance or not” with the Environmental Rights Amendment.

The state Attorney General's Office, which represented the commonwealth and governor, could not be reached for comment.