PA. Environ. Defense Fd., Aplt. v. Com & Gov. Wolf

• Court: Supreme Court of Pennsylvania
• Decided: July 21, 2021
• Docket: 64 MAP 2019
• Status: Published

Opinion

[J-78-2020] IN THE SUPREME COURT OF PENNSYLVANIA MIDDLE DISTRICT

BAER, C.J., SAYLOR, TODD, DONOHUE, DOUGHERTY, WECHT, MUNDY, JJ.

PENNSYLVANIA ENVIRONMENTAL : No. 64 MAP 2019 DEFENSE FOUNDATION, : : Appeal from the Order of the Appellant : Commonwealth Court dated July 29, : 2019 at No. 228 MD 2012 : v. : ARGUED: September 17, 2020 : : COMMONWEALTH OF PENNSYLVANIA, : AND GOVERNOR OF PENNSYLVANIA, : TOM WOLF, IN HIS OFFICIAL CAPACITY : AS GOVERNOR, : : Appellees :

OPINION

JUSTICE DONOHUE DECIDED: July 21, 2021

I. Introduction

This decision is the final resolution of a lawsuit brought by the Pennsylvania

Environmental Defense Foundation (“PEDF”) challenging amendments to the Fiscal

Code1 by the Pennsylvania General Assembly that diverted to the General Fund revenues

generated from oil and gas leases on state forest and game lands. The challenge

1 Specifically, the PEDF challenged 72 P.S. §§ 1602-E, 1603-E, 1604-E, and 1605-E, as well as a provision of the Supplemental General Appropriations Act of 2009. Act of Oct. 9, 2009, P.L. 779, No. 10A, § 1912. asserted that the legislation was violative of Article I, Section 27 of the Pennsylvania

Constitution,2 typically referred to as the Environmental Rights Amendment (the “ERA”).

This case returned to the Commonwealth Court following PEDF II,3 where this

Court adopted the plurality approach in Robinson Township, Washington County v.

Commonwealth, 83 A.3d 901 (Pa. 2013), and held that the ERA created a constitutional

public trust that is subject to private trust principles. Applying trust law, we determined

that royalty revenue streams generated by the sale of gas extracted from Commonwealth

lands represents the sale of trust assets and must be returned to the corpus of the trust.

To the extent that 72 P.S. §§ 1602-E and 1603-E diverted royalties to the General Fund,

we found the provisions violated the ERA. We lacked sufficient advocacy to determine if

the remaining three revenue streams, consisting of large upfront bonus payments, yearly

rental fees, and interest penalties for late payments that were allocated to the General

Fund under Sections 1604-E and 1605-E, as well as Section 1912 of the Supplemental

2 The text of Article I, Section 27 states as follows: 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.

Pa. Const. art. I, § 27. 3 This opinion is the fourth decision of this line. Because the caption is identical in all four cases, for ease of clarity we provide the full citations here. The initial decision was reported at PEDF v. Commonwealth, 108 A.3d 140 (Pa. Commw. 2015) (“PEDF I”). We reversed and remanded in PEDF v. Commonwealth, 161 A.3d 911 (Pa. 2017) (“PEDF II”). The decision entered on remand that was appealed here today is found at PEDF v. Commonwealth, 214 A.3d 748 (Pa. Commw. 2019) (“PEDF III”).

[J-78-2020] - 2 General Appropriations Act of 2009, also constituted the sale of trust assets. We were

thus not able to adjudicate whether the diversion of these revenue streams to the General

Fund violated the ERA. We instructed the Commonwealth Court, inter alia, that, “to the

extent that the lease agreements reflect the generation of revenue streams for amounts

other than for the purchase of the oil and gas extracted,” its role was to determine “in the

first instance and in strict accordance and fidelity to Pennsylvania trust principles ...

whether these funds belong in the corpus of the Section 27 trust.” PEDF II, 161 A.3d at

935-36.

On remand, the Commonwealth Court, sitting en banc, determined that the three

revenue streams did not constitute the sale of trust assets. The court concluded that

“proceeds designated as ‘income’ are not required to remain in the corpus of the Section

27 trust and used solely for the conservation and maintenance of our public resources,”

and therefore “may be appropriated for General Fund purposes.” PEDF III, 214 A.3d at

774. It concluded that these incomes could be distributed between two classes of

beneficiaries: (1) current Pennsylvania citizens, which the court treated as life tenants,

and (2) future generations, treated as remaindermen under its analysis. It further

determined that, per a 1947 statute governing the distributions of income that was the law

at the time of the ERA’s enactment, one-third of the revenues could be used for non-trust

purposes and the remaining two-thirds must be returned to the trust. This outcome

corresponded to the court’s conclusion that the ERA created life tenants (entitled to the

one-third as income) and remaindermen (entitled to the remaining two-thirds as principal

that must be reinvested). The court deemed it “necessary to make this analogy” to life

[J-78-2020] - 3 tenants and remaindermen because of the unique legal issues involved in mineral rights.

Id. at 761.

We find that the Commonwealth Court’s holding is at odds with our decision in

PEDF II, principles of private trust law, and the plain language of the ERA. As explained

in this opinion, we agree with the Commonwealth Court that all three revenue streams at

issue qualify as incomes generated from trust assets. However, the viability of the

Commonwealth Court’s holding turns on its erroneous conclusion that the ERA created

successive beneficiaries in the form of life tenants and remaindermen with entitlement to

income. Another remand is unnecessary, however, as the record is now sufficiently

developed and based upon that record we hold that the incomes generated under these

oil and gas leases must be returned to the corpus. As a result, we reverse the decision

of the Commonwealth Court.

II. History

The dispute in this case centers on natural gas deposits located within the

Marcellus Shale gas formation and the ERA’s role as a constraint on the Commonwealth’s

promotion of the oil and gas industry, including its leasing of Commonwealth lands for

commercial purposes. While our opinions in PEDF II and the plurality in Robinson

Township extensively set forth that history, our rejection of the Commonwealth Court’s

approach requires discussion of factual and legal developments incidental to the narrow

question presented on remand regarding the classification of certain revenue streams.

Factual history

In 1955, the General Assembly established the Oil and Gas Lease Fund (“Lease

Fund”), 71 P.S. § 1331, repealed by, Act 2017, Oct. 30, P.L. 725, which received “all rents

[J-78-2020] - 4 and royalties from oil and gas leases” executed on Commonwealth lands. These funds

were exclusively dedicated to “conservation, recreation, dams, or flood control” or to

match Federal grants for those same purposes, with a Commonwealth environmental

agency given the discretion “to determine the need for and the location of any project

authorized.” Former 71 P.S. § 1332, repealed by Act 2017, Oct. 30, P.L. 725. In 1995,

the Conservation and Natural Resources Act (“CNRA”) was enacted and empowered the

Department of Conservation and Natural Resources (“DCNR”) to “make and execute

contracts or leases” on behalf of the Commonwealth for mining or removing any minerals

in State forests if the DCNR finds it is in the best interest of the Commonwealth. 71 P.S.

§ 1340.302(a)(6). The DCNR replaced the Department of Forests and Waters for

purposes of the Lease Fund and the CNRA further altered the Lease Fund to specifically

appropriate all moneys in it to the DCNR.

From its inception in 1955 through 2008, the Lease Fund received a total of $165

million. The flow of revenue into the Lease Fund increased dramatically starting in 2009,

the year after the DCNR first leased a total of approximately 74,000 acres for Marcellus

Shale drilling. That and subsequent leases generated approximately $600 million,

comprised of four types of revenue streams: large one-time upfront bonus payments,

annual rent fees paid by the acre, royalties based on the amount of marketable gas

extracted, and interest penalties for late payments.

The DCNR self-imposed a moratorium on further leasing of Marcellus Shale lands

pending further study and development of large tracts that had already been leased.

However, the large amounts of money generated by the 2008 leases inspired the

executive and legislative branches to pressure the DCNR to lease more land. To take

[J-78-2020] - 5 advantage of the expected revenues, the General Assembly inserted four new provisions

into the Fiscal Code.

The most significant change was Section 1602-E, which stated that no Lease Fund

royalty money, with an exception discussed next, should be expended unless

appropriated or transferred to the general budgetary fund by the General Assembly.

Thus, all the royalties in the Lease Fund would be transferred to a larger pool of money,

whereupon the General Assembly would allocate back to the DCNR whatever amount it

saw fit. This provision therefore overrode the “all moneys” language of the Lease Fund

by restricting the formerly automatic appropriation of all Lease Fund royalty money to the

DCNR. The exception was established within Section 1603-E, which annually earmarked

up to $50 million in royalties to the DCNR but with the further direction that preference be

given to operation and maintenance of State parks and forests (as opposed to the other

uses listed in the Lease Fund).4

The Fiscal Code was also amended to transfer $60 million from the Lease Fund to

the General Fund for fiscal year 2009-2010. 72 P.S. § 1604-E. A fourth provision

transferred $180 million from the Lease Fund to the General Fund for fiscal year 2010-

2011. 72 P.S. § 1605-E(a). These fiscal adjustments prompted DCNR to lift its

moratorium and in January 2010 it leased approximately 32,000 acres plus an additional

33,000 acres in May 2010.

The legislative and executive branches took other steps that served to restrict the

allocation of Lease Fund monies to the DCNR. These included using Lease Fund money

4This $50 million was not guaranteed, as the allocation was “subject to the availability of money” following other transfers. 72 P.S. § 1603-E.

[J-78-2020] - 6 to support the DCNR’s overall budget – as opposed to using money from the General

Fund to fund the DCNR – thereby reducing the amount of money available for

conservation purposes. The legislature further specified that transfers from the Lease

Fund to the DCNR from the General Fund were permissible only if the remaining balance

was adequate to fund the DCNR. Additionally, Section 1605-E was amended to provide

for $95 million from the Lease Fund to the General Fund for fiscal year 2014-2015. 72

P.S. § 1605-E(b). “Finally, the Supplemental General Appropriations Act of 2009 directed

a transfer of $143 million from the Lease Fund to the General Fund.” PEDF II, 161 A.3d

at 922.

The General Assembly also created the Marcellus Legacy Fund, which supplied

money for environmental projects not controlled by the DCNR, and was funded in part by

annual appropriations from the Lease Fund. The Marcellus Legacy Fund’s creation was

one component of Act 13 of 2012, which “amended the Pennsylvania Lease Fund Act

with substantial benefits to the natural gas industry in response to the Marcellus Shale

boom.” Id. at 930 n.21.

Development of the law that the ERA creates a trust

The Act 13 legislation prompted various lawsuits, including the one that led to our

decision in Robinson Township. The primary issue in that case focused on statutes

imposing uniform zoning requirements across the Commonwealth, thereby overriding

local municipalities’ ability to regulate. Numerous petitioners asserted that these acts

represented a breach of the Commonwealth’s fiduciary duties imposed by the ERA.

Then-Chief Justice Castille, joined by Justice Todd and former Justice McCaffery,

would have decided the case based on that theory. Chief Justice Castille authored an

[J-78-2020] - 7 opinion signaling, for the first time, that this Court would view the ERA as a constitutional

right of the people, enforceable by the judiciary and not a merely aspirational policy

statement. Robinson Twp., 83 A.3d at 952. The plurality criticized the test set forth in

Payne v. Kassab, 312 A.2d 86 (Pa. Commw. 1973) (en banc), which established three

factors to apply when examining an ERA claim. Id. at 94. The plurality commented that

the Payne test largely neutered the ERA’s protections by limiting the viability of

constitutional claims to cases in which “the General Assembly had acted and by the

General Assembly's policy choices, rather than by the plain language of the amendment.”

Robinson Twp., 83 A.3d at 966. It further noted that “the Payne test appear[ed] to have

become, for the Commonwealth Court, the benchmark for Section 27 decisions in lieu of

the constitutional text.” Id.

Because Robinson Township did not garner a majority, Payne remained the

benchmark in the PEDF I litigation. See PEDF I, 108 A.3d at 159 (“In the absence of a

majority opinion from the Supreme Court or a decision from this Court overruling Payne[

], that opinion is still binding precedent on this Court.”). In its complaint, the PEDF sought

relief under the fiduciary provisions of the Declaratory Judgment Act, 42 Pa.C.S. §

7535(2), challenging the 2009 through 2015 budget decisions. The PEDF raised over

twenty issues and its prayer for relief sought fifteen separate declarations, which the

Commonwealth Court reduced to three questions.

(1) Whether Sections 1602–E and 1603–E of the Fiscal Code, which respectively provide that the General Assembly shall appropriate all royalty monies [of] the Lease Fund and that, subject to availability, up to $50 million of the Lease Fund royalties shall be appropriated to [the] DCNR, violate Article I, § 27;

[J-78-2020] - 8 (2) Whether the General Assembly's transfers/appropriations from the Lease Fund violate Article I, § 27; and

(3) Who within the Commonwealth has the duty and thus bears the responsibility to make determinations with respect to the leasing of State lands for oil and natural gas extraction.

PEDF I, 108 A.3d at 155.

Applying Payne, the Commonwealth Court held that Section 1602-E was not

facially unconstitutional because although the DCNR was deprived of control over royalty

monies, the General Assembly, as a Commonwealth entity, is bound to safeguard the

Commonwealth’s natural resources. Regarding the decision to allocate only $50 million

of the royalty money to the DCNR, the intermediate appellate court redefined the

challenge as whether the DCNR was adequately funded to achieve its mission and

answered that framing in the affirmative. As to the remaining challenges to the budgetary

decisions implicated by Sections 1604-E, 1605-E, and other similar transfers, the court

held that the ERA “does not also expressly command that all revenues derived from the

sale or leasing of the Commonwealth's natural resources must be funneled to those

purposes and those purposes only.” Id. at 168.

On appeal to this Court, both parties urged us to reject Payne. We unanimously

agreed that the Payne test was incompatible with the ERA, thus “solidify[ing] the

jurisprudential sea-change begun by Chief Justice Castille's plurality in Robinson

Township [.]” PEDF II, 161 A.3d at 940 (Baer, J., concurring and dissenting). The lead

opinion adopted the Robinson Township plurality framework, making clear that the plain

text of the ERA controls and must be given the same effect as any other constitutional

provision. Tracking Robinson Township’s plurality opinion, we held that the ERA

contained three clauses which collectively advance “two primary goals, via prohibitory

[J-78-2020] - 9 and non-prohibitory clauses: (1) the constitutional provision ... prevent[s] the state from

acting in certain ways, and (2) … establishes a nascent framework for the Commonwealth

to participate affirmatively in the development and enforcement of these rights.” Robinson

Twp., 83 A.3d at 950. Thus, a legal claim “may proceed upon alternative theories that

either the government has infringed upon citizens’ rights or the government has failed in

its trustee obligations, or upon both theories, given that the two paradigms, while serving

different purposes in the amendatory scheme, are also related and overlap to a significant

degree.” Id. at 950-51.

We further agreed with the Robinson Township plurality’s explication of the three

clauses in the ERA. The ERA “establishes two separate rights in the people,” with the

first being the declared environmental rights, namely “a right to clean air, pure water, and

to preservation of the natural, scenic, historic and esthetic values of the environment.”

Pa. Const. art. I, § 27. This first right constitutes a limitation on the Commonwealth’s

power to act in degradation of those values. Robinson Twp., 83 A.3d at 951. It does not

deal with trust principles, whereas the second and third clauses do. The second clause

establish the second right: specifically, “common ownership of the people, including

future generations, of Pennsylvania’s public natural resources.” Id. at 954. The third

clause “establishes the Commonwealth’s duties” with respect to the commonly owned

resources, with the natural resources as the corpus of the trust, the Commonwealth as

the trustee, and the people as the named beneficiaries. The people are also the settlors

and the terms of the trust must be construed according to their intentions. Id. at 956.

When ascertaining the settlors’ intent, the Robinson Township plurality stated that

the terms “‘trust’ and ‘trustee’ are terms of art that carried legal implications well

[J-78-2020] - 10 developed at Pennsylvania law at the time the amendment was adopted.” Id. It cited

numerous sources of materials that may bear on that inquiry, including case law applying

trust principles, the Restatement (Second) of Trusts, the legislative history surrounding

the ERA’s enactment, and Pennsylvania’s Uniform Trust Act. See Robinson Twp., 83

A.3d at 959 n.45 (noting that the trust “is presumptively subject to the Uniform Trust Act”).

Additionally, the Commonwealth, as trustee, is obligated “to comply with the terms of the

trust and with standards governing a fiduciary’s conduct,” including the duties of

prudence, loyalty, and impartiality. Id. at 957. The Commonwealth’s obligations must be

considered in light of the two rights created by the ERA. Id.

The adoption of private trust law principles by this Court in PEDF II, including

imposing fiduciary duties as a component of the ERA analysis, prompted then-Justice,

now-Chief Justice, Baer’s concurring and dissenting opinion as well as then-Chief Justice

Saylor’s dissent. Then-Justice Baer agreed that the time had come to jettison Payne but

favored imposing a public trust doctrine subject to a more flexible “fiduciary-like

construct,” PEDF II, 161 A.3d at 943 (Baer, C.J., concurring and dissenting). Justice

Baer opined that “the focus of Section 27 is on the natural resources themselves, not the

money gained from the resources. The trustee's duties are to ‘conserve and maintain’

the resources, not the money.” Id. at 946-47 (Baer, C.J., concurring and dissenting).

Additionally, Justice Baer agreed with the Commonwealth’s analysis of the phrase

“‘benefit of all the people,’ which includes both the enjoyment of the natural environment

but also the utilization of the resources, without waste, for the current benefit of the public.”

Id. at 947. Justice Baer would have held that the proceeds generated “may be used for

public purposes other than conservation,” and where the Commonwealth provides

[J-78-2020] - 11 adequate funding to agencies to maintain and conserve the people’s natural resources,

“it is not required to take the illogical step of leaving substantial monies unused in a fund

for the environment while being unable to meet other pressing needs of the people.” Id.

at 948. Then-Chief Justice, now Justice, Saylor dissented but “join[ed] the central

analysis” of Justice Baer’s opinion relating to the public trust doctrine. Id. at 949 (Saylor,

C.J., dissenting).

Application of trust law in PEDF II

Having established in PEDF II that the ERA created a trust subject to private trust

law, we addressed the PEDF’s challenges pursuant to those newly adopted principles.

We rejected the Commonwealth’s averment that revenues generated from the sale of

trust assets may be redirected to general budgetary matters (i.e., non-trust purposes) on

the theory that the ERA was silent on that point. We stated that argument was “plainly

inaccurate, as Section 27 expressly creates a trust, and pursuant to Pennsylvania law in

effect at the time of enactment, proceeds from the sale of trust assets are part of the

corpus of the trust.” Id. at 933.

Relatedly, the Commonwealth argued that the concluding phrase of the ERA, “for

the benefit of all the people,” conferred discretion upon the General Assembly to use

Marcellus Shale revenues for any use that broadly benefited Pennsylvania citizens. Id.

at 934. We disagreed, noting that the phrase “may not be read in isolation[.]” Id. “The

Commonwealth's fiduciary duty to ‘conserve and maintain’ our public natural resources is

a duty owed to the beneficiaries of the public trust[.]” Id. In context, the phrase “is

unambiguous and clearly indicates that assets of the trust are to be used for conservation

and maintenance purposes.” Id. at 935.

[J-78-2020] - 12 We then held that royalty revenue streams must be returned to the trust. The

critical feature of those revenue streams was their direct relation to the sale of trust assets.

Under Pennsylvania trust law, “proceeds from the sale of trust assets are trust principal

and remain part of the corpus of the trust.” Id. For that proposition we cited McKeown's

Estate, 106 A. 189 (Pa. 1919), a case reflecting that when trust assets are sold the

proceeds are presumptively treated as principal. 106 A. at 190 (“Being a sale of assets

in the corpus of the trust, presumptively all the proceeds are principal[.]”). “The

unavoidable result is that proceeds from the sale of oil and gas from Section 27's public

trust remain in the corpus of the trust.” PEDF II, 161 A.3d at 933.

Because we held that royalties must be returned to the corpus, we determined that

Sections 1602-E and 1603-E of the Fiscal Code, which related to royalties, were facially

unconstitutional. We could not determine whether the same held true for Sections 1604-

E and 1605-E, as well as Section 1912 of the Supplemental General Appropriations Act

of 2009, all of which transferred money from the Lease Fund to the General Fund. The

record lacked evidentiary support to decide whether these provisions were also

unconstitutional, as those determinations could be made only after deciding how the other

revenue streams (bonus payments, rents and interest penalties) must be treated under

trust law. We cited In re Rosenblum's Estate, 328 A.2d 158 (Pa. 1974), and noted in a

parenthetical explanation of the case that rents from realty have traditionally been treated

as income payable to the trust’s beneficiaries. As other possible sources of law on

remand we cited, inter alia, 20 Pa.C.S. § 8145, a section of the Uniform Principal and

Income Act.

[J-78-2020] - 13 III. Remand Proceedings

On remand to the Commonwealth Court, the parties developed the record through

further discovery and presented cross-applications for summary relief. Both staked out

absolute positions, with each contending that all revenues must be directed to one

purpose or another. The PEDF adhered to its view that all the revenues must be returned

to the corpus of the trust as principal. “PEDF requests this Honorable Court to find and

declare that all payments made under leases for the extraction and sale of oil and gas on

State forest lands, including bonus and annual ‘rental’ payments, are part of the corpus[.]”

Brief in Opposition to Commonwealth’s Application for Summary Relief, 6/4/18, at 1. The

Commonwealth disagreed, indicating that “[a]t this time, the singular remaining claim to

be analyzed is whether payments other than royalty payments also constitute trust

corpus,” and contended that “the undisputed material facts show that these payments are

not corpus of the trust.” Brief in Opposition of PEDF’s Application for Summary Relief,

7/9/18, at 2.

The Commonwealth argued that bonus and rent payments are not in exchange for

severing the minerals because the government keeps those upfront payments regardless

of whether the successful bidder develops the land. The Commonwealth, alluding to our

statement in PEDF II that the trust retains the trust asset in its entirety after a rental period

expires, 161 A.3d at 935 n.27, asserted that the bonus and rental payments convey a

leasehold interest only with the bonus bid payments “made in exchange for obtaining that

inchoate title,” as opposed to in exchange for the actual extraction of gas.

Commonwealth’s Brief at 17. This argument was premised on the legal characterization

of the different types of title that vests when a lessee leases mineral rights. Before drilling

[J-78-2020] - 14 can start, the lessee must confirm that the minerals can be extracted. In cases where the

exploratory process does not result in a productive well, no actual estate vests and the

lease terminates at the end of the primary term. In the Commonwealth’s view, because

the resources remain in the corpus, there is no depletion of trust assets and when it

procures rentals and bonus payments in exchange for a mere inchoate leasehold interest,

those revenues are not for the sale of trust assets and therefore may be used for other

purposes. In support, it cited sixteen leases in which the Commonwealth kept over $124

million in bonuses and rental payments even though none resulted in a productive well.

See Commonwealth’s Brief at 16-19 (listing leases and amounts). The Commonwealth

argued that those leases prove that payments can be made in which the trust assets were

not depleted because no mineral estate ever vested.

The Commonwealth argued that it may generate revenues in this manner

consistent with Pennsylvania statutory trust law that classifies rental payments as trust

income, as opposed to trust principal.

Pursuant to Pennsylvania trust law, rent from real or personal property is to be allocated as trust income, not trust principal. 20 Pa.C.S. § 8145(a). Further, only "refundable deposits" for rent "shall be applied to principal." 20 Pa.C.S. § 8145(b)(1). As neither the up-front bonus payment, nor the rent payments are refundable at the termination of the Department’s leases, they are not “deposits” as defined by Pennsylvania trust law. They are therefore income rather than trust principal. Trust principal is defined as “[p]roperty held in trust for distribution to a remainder beneficiary when the trust terminates or property held in trust in perpetuity.” 20 Pa.C.S. § 8102. Neither of these revenue streams are trust principal or corpus.

Accordingly, the answer to the remaining question on remand is that the true purpose of the bonus-bid and rental payments is an inchoate leasehold interest in the State forest land. They are not the conversion of a trust asset from one form to another. Rather, they are income, as they do not dispose of

[J-78-2020] - 15 or deprive the trust of any further benefit from the trust asset. See In re Rosenblum's Estate, 328 A.2d 158, 163 (Pa. 1974) (holding that rents from realty, unrelated to oil and gas leases, have traditionally been treated as income (and payable directly to the trust’s beneficiaries) rather than principal).

Commonwealth’s Brief at 15-16; accord PEDF II, 161 A.3d at 935 (citing 20 Pa.C.S.

§ 8145).

Section 8145 is codified within the Pennsylvania Uniform Principal and Income Act,

20 Pa.C.S. §§ 8101-8191, which was enacted in 2002. The Commonwealth viewed

Section 8145 as establishing that an inchoate leasehold interest is equivalent to a rental

and therefore the associated bonuses, rents, and late fees revenue streams could be

used for non-trust purposes because “they do not dispose of or deprive the trust of any

further benefit from the trust asset.” Commonwealth’s Brief at 19.

The PEDF, in contrast, characterized the bonus payments as inextricably linked to

the actual sale of gas and therefore constituted the sale of trust assets. See Amendment

to Application for Summary Relief, 7/13/2017, at unnumbered 3 (“[B]onus payments for

oil and gas development are … a cost directly related to the sale of the natural gas. …

DCNR does not consider leasing of our forests as rent, similar to renting a pavilion or a

cabin.”). The PEDF maintained that the leases themselves, read in tandem with case law

involving analysis of contractual consideration principles, confirmed that these payments

must be construed as consideration for the sale of trust assets which must be returned to

the trust. The leases, in PEDF’s view, “clearly defined” the purpose of bonus and rental

payments. Bonus and rental payments are therefore “express consideration paid by

lessees for the right to enter upon our State forests to extract and remove the oil and gas.”

PEDF’s Brief at 9 (emphasis omitted).

[J-78-2020] - 16 Responding to the Commonwealth’s theory that only an inchoate leasehold

interest was conveyed via the bonus and rental payments, the PEDF submitted that the

argument is flawed because it “arbitrarily bifurcates the activities necessary to remove oil

and gas from the sale itself and is not supported by law, which recognizes an agreement

to remove and sell all the oil and gas on a parcel of land is the agreement to convey fee

title of the oil and gas that is part of the real estate.” PEDF’s Brief in Opposition to

Summary Relief, 6/4/2018, at 15. It cited this Court’s observation in In re Bruner's Will,

70 A.2d 222 (Pa. 1950), that bonus payments are considered inseparable from the sale

of mineral rights as a matter of law. See id. at 225 (“In reality, the lease contemplates

removal of all the oil and is in effect a sale, with payment to be made as the mineral is

removed. Obviously, it was a sale of part of the principle [sic] of the trust and properly

the moneys received therefrom belonged to the corpus.”).

Additionally, the PEDF challenged the application of 20 Pa.C.S. § 8145. It

conceded that the statute “does allow a certain portion of receipts from an interest in

minerals to be allocated to income when an income beneficiary exists,” but argued that

“Section 27 does not establish any income beneficiary, so an allocation of any receipts to

income would not be consistent with the express terms of the trust created.” PEDF’s Brief

in Opposition to Summary Relief, 6/4/2018, at 24. The PEDF argued that “[t]he plain

language of Section 27 controls how the Section 27 trust must be used and the Supreme

Court in PEDF II has recognized the sole purpose of the trust is to conserve and maintain

public natural resources.” Id. at 24-25.

[J-78-2020] - 17 The Commonwealth Court’s decision

The Commonwealth Court rejected the arguments of both parties. According to

the Commonwealth Court, incomes generated from the oil and gas leases are subject to

the 1947 Act (which was the law when the ERA was adopted) based on its conclusion

that the ERA recognized two distinct classes of beneficiaries. PEDF III, 214 A.3d at 761.

This conclusion was based on a cursory analysis of the ERA’s text.

[T]he trust instrument here is Section 27; the trust property is Pennsylvania’s public natural resources; the Commonwealth is the trustee; and the people of Pennsylvania – both current and future generations – are the beneficiaries. Pennsylvanians have both a present and future interest in the trust. In essence, today’s generation represents life tenants or life beneficiaries of the trust and tomorrow’s generation represents the remainder interest.

Id. at 761 (citation omitted).

The foregoing is the totality of its constitutional analysis. The Commonwealth

Court candidly acknowledged that it manufactured this framework by way of analogy to

cases cited by the PEDF that dealt with present and future rights in minerals. Id. In its

view, those who hold a present right in minerals, represented by the current generation

of Pennsylvanians, and the holder of the remainder interest, represented by the future

generations, are each entitled to a share of the proceeds generated from the sale of trust

assets. Id. With no explanation as to how those purported distinct classes of beneficiaries

could benefit in different ways, the Commonwealth Court reasoned that the ERA “did not

specify the method for allocating receipts.” Id. at 768. Contrary to our holding in PEDF

II that trust assets are to be used for conservation and maintenance, this analogy led the

court to conclude that the ERA could be construed to “allow[ ] today's generation of

Pennsylvanians to benefit in other ways from the revenue produced.” Id. at 774. This is

[J-78-2020] - 18 a successive beneficiary framework. See RESTATEMENT (SECOND) OF TRUSTS § 232 (“If

a trust is created for beneficiaries in succession, the trustee is under a duty to the

successive beneficiaries to act with due regard to their respective interests.”).

In lieu of grounding its life tenants and remaindermen framework in the actual text

of the ERA, the Commonwealth Court’s analysis emphasized the difficulties inherent in

the determination of what legal interests are conveyed in mineral lease contracts, which

the court recognized are “unique and ‘far from the simplest of property concepts.’” Id. at

758 (quoting Brown v. Haight, 255 A.2d 508, 510 (Pa. 1969)). The landowner/lessor has

three distinct interests in leased land: “(1) a possessory interest in the surface except

insofar as it may interfere with drilling operations; (2) a right to receive bonus, rentals and

royalties under the lease; and (3) the possibility of reverter in the minerals in place.” Id.

(quoting Robert E. Sullivan, Handbook of Oil and Gas Law 69 (1955)).

The different types of legal title acquired by a mineral lessee tied into the

Commonwealth’s argument that the purpose of the bonus and rental payments was to

convey only an inchoate leasehold. The Commonwealth Court noted that Pennsylvania

case law initially classified the lessee’s interest as an “incorporeal hereditament, not a

conveyance of title[,]” id. (citation omitted), but since the early 20th century cases have

“consistently held that the title conveyed in an oil and gas lease is inchoate, and is initially

for the purpose of exploration and development.” Id. (collecting cases). But no matter

how the lessee’s interest is classified, the Commonwealth Court observed that “the

general purpose of an oil and gas lease is to secure the right to explore and develop the

property with the expectation of receiving large returns from the royalties payable on

production.” Id. at 759. Once minerals are removed from the property, the lessee’s

[J-78-2020] - 19 interest becomes vested as a fee simple determinable estate. In the event minerals are

not extracted, no estate ever vests. Id. (citations omitted).

Next, the Commonwealth Court discussed the issue of contractual consideration

in generic terms and distinguished rentals from bonuses. Rents “refer[] to the

consideration paid to the lessor for the privilege of delaying drilling operations” and

typically “do not depend on the discovery or production of oil and gas, but rather represent

compensation for the time to explore.” Id. (citations omitted). Regarding bonus

payments, the court noted that the term can refer to different things and cited various

cases in which “bonus provisions … have served different purposes.” Id. For example,

in some cases the bonus amounts were not based on actual production, whereas in other

situations they were; sometimes, bonus payments were split with one part of the bonus

linked to the right to occupy and explore the land while the remaining part was tied to

actual production. And, finally, “[b]onuses have also been used as part of a competitive

bidding process in securing oil and gas leases.” Id. at 760.

Having established these background principles, the Commonwealth Court

determined that the relevant question is “whether rents and bonuses ... constitute income

or principal pursuant to Pennsylvania trust principles in effect” when the ERA was

enacted, a question that the Commonwealth Court recognized “is a complex one.” Id. A

complicating factor is that the foregoing cases discussing bonuses and rents were not

necessarily trust cases. In the footnote appended to that observation, the panel noted

that absent a special trust provision or statute, “the allocation among beneficiaries of

proceeds from oil and gas leases follows the division of proceeds between the owner of

a legal life estate and the owner of the complementary future interest” depending upon

[J-78-2020] - 20 application of common law doctrines. Id. at 760 n.14. The court also noted “a split of

authority as to whether a bonus paid for an oil and gas lease is income or principal to be

conserved for the remainder beneficiary.” Id. (citations omitted).

The Commonwealth Court then “reexamine[d] the intent embodied in Section 27

to determine whether Section 9 of the 1947 Act applies.” PEDF III, 214 A.3d at 768. In

its “re-examination,” when analyzing the settlors’ intent, instead of applying the holding

as expressed in the Majority Opinion, the panel drew on then-Justice, now Chief Justice,

Baer’s concurring and dissenting opinion in PEDF II and concluded that the settlors

“contemplate[d] the ‘continued, but judicious, use of the resources.’” Id. (quoting PEDF

II, 161 A.3d at 947 (Baer, J., concurring and dissenting)).5 The Commonwealth Court

then concluded that the ERA’s silence on the method for disposing of net proceeds

required the application of the 1947 Act’s apportionment methodology:

Although Section 27 expressed the intent to conserve and maintain the corpus – public natural resources – for the benefit of all the people, it made no provision for the disposition of the net proceeds obtained from the use thereof. In other words, it did not specify the method for allocating receipts. Though Section 27's intent was clear, the directions for administration of the trust were not expressly delineated. Consequently, Section 9 of the 1947 Act governs the ascertainment of income and principal and the apportionment of proceeds between income and principal. See former 20 P.S. §§ 3470.2, 3470.9.

PEDF III, 214 A.3d at 768.

The final question was whether the bonus, rental payments, and late fees were in

consideration for the sale of trust assets. The Commonwealth Court concluded that the

5 We recognize that now-Chief Justice Baer continues to maintain the views expressed in his PEDF II opinion. See Dissenting Op. (Baer, C.J.).

[J-78-2020] - 21 bonuses, rentals and late fees were in consideration for a leasehold interest only, and

thus, subject to an accounting, the 1947 Act’s proceed-splitting provisions applied.6

IV. Parties’ Arguments

The PEDF

The PEDF challenges the notion that Article I, Section 27 created life tenants and

remaindermen, arguing that this was an artificial construct. The PEDF asserts that “the

Commonwealth Court started from the belief that Article I, § 27 authorizes the sale of trust

assets to generate income” and challenges this premise. PEDF’s Brief at 32. The PEDF

further alleges that the Commonwealth Court reasoned backwards, pointing to the court’s

statement that “[t]he 1947 Act's allocation of proceeds to principal and income reflects an

equitable balance between the needs of present and future generations of

Pennsylvanians,” PEDF III, 214 A.3d at 774, as an indicator that the panel strived to

achieve a pragmatic result instead of strictly applying our directions on remand.

The PEDF contends that the Commonwealth Court’s identification of life tenant

beneficiaries and remaindermen within Article I, Section 27 is without any textual

foundation. The Commonwealth Court did not view the revenues as constituting a sale

of trust assets in part because of a split of authority regarding how to allocate those

revenues between life tenants and remaindermen, id. at 760 n.14, which involved

application of common law doctrines that exclusively favored one group or the other

depending on a combination of facts involving whether mines were opened during the

6 “However, an accounting is necessary to ensure that only one-third of the proceeds allocable to income are removed from the Lease Fund for non-conservation purposes and that the funds designated as principal are ultimately used in accordance with the trustee's obligation to conserve and maintain our natural resources.” PEDF III, 214 A.3d at 774.

[J-78-2020] - 22 testator’s lifetime and whether the relevant instrument granted powers to lease mineral

rights. However, statutes like the 1947 Act served to statutorily abolish those common

law doctrines. In the Commonwealth Court’s view, the abolishment of those doctrines

necessitated its analogy to life tenants and remaindermen to coherently apply the mineral

rights cases in tandem with private trust principles as ordered by this Court. The PEDF

challenges that premise.

[T]he Commonwealth Court started from the belief that Article I, § 27 authorizes the sale of trust assets to generate income. From that assumption, the Court determined that the Principle [sic] and Income Act of 1947 should be applied to define how bonus and annual rental payments should be allocated. From there, the Court concluded that one third of the upfront bonus and annual rental payments is income that can be transferred to the General Fund.

PEDF’s Brief at 32 (citations omitted).

Relatedly, the PEDF also faults the Commonwealth Court’s analysis of the lease

language. PEDF reiterates its argument that the language of the leases themselves

specifically state that their sole purpose was to sever the minerals from the land. “[DCNR]

does hereby grant, demise, lease, and let, exclusively unto Lessee for the purposes only

of exploring, drilling, operating, producing, and removing of oil, gas and liquid

hydrocarbons ... .” PEDF III, 214 A.3d at 771 (quoting leases). The Commonwealth Court

determined that the bonuses and rents were only in consideration of securing the lease,

and therefore the lease granted only an inchoate leasehold that does not vest until

minerals are extracted. The PEDF argues that this conclusion is sound only to the extent

that the contractual language regarding “removing of oil, gas and liquid hydrocarbons”

may be ignored. The PEDF argues, as a matter of law, the plain language of the contract

establishes that the parties intended for the payments to be in consideration for removing

[J-78-2020] - 23 minerals. Therefore, the Commonwealth Court erroneously concluded that the “true

purpose” was for something other than sale of minerals, which would plainly qualify as

sale of trust proceeds that must all be returned to the corpus under PEDF II without any

need to apply the 1947 Act.

The Commonwealth

The Commonwealth has abandoned its absolutist position advanced in the

Commonwealth Court as well as its reliance on the modern principal and income act, and

now agrees that Section 9 of the 1947 Act controls.7 It further agrees with the

Commonwealth Court’s analysis of that statute’s application.

Additionally, the government maintains its focus on the fact that bonus and lease

payments are retained even if the tract is unproductive. In the Commonwealth’s view, the

sixteen leases in which it received approximately $140 million dollars despite the fact

minerals were not removed establishes the correctness of the Commonwealth Court

conclusion that those payments were in consideration for only an inchoate leasehold and

not in consideration for the sale of trust assets. Unlike royalty payments, which are tied

directly to the extraction of oil and gas from State forests and game lands as

compensation for the severance of that asset from the Section 27 trust, bonus bid

payments and rental payments are made purely to secure the lease and for the lessee’s

ability to explore and develop the property in anticipation of extraction. They are,

7 The Commonwealth Court applied the 1947 Act because it was the law in place at the time of the ERA’s enactment, and it further recognized that retroactive application of statutes to trusts may be unlawful. See PEDF III, 214 A.3d at 767 n.24. In contrast, we note that a section of the modern principal and income act, 20 Pa.C.S. § 8191, states that its provisions apply to trusts “existing on or after the effective date of this act.” Act 2002, May 16, 2002, P.L. 330. Because of our resolution, we need not resolve which version would apply.

[J-78-2020] - 24 therefore, not proceeds received as consideration for severance of a trust asset and are

income that need not remain in the trust corpus.

V. Analysis

The first question presented on remand was how to classify the revenue streams

from bonuses, rentals and penalty interest. If these revenue streams were for the “true

purpose” of selling trust assets, then those streams are indistinguishable from royalties

and must remain in the trust corpus and no further analysis would be required. We thus

begin our analysis with the appropriate classification of the revenue streams.

Bonus payments

The parties agree that the analysis of bonus payments turns, in large part, on

contractual law. A lease “is in the nature of a contract and is controlled by principles of

contract law.” T.W. Phillips Gas & Oil Co. v. Jedlicka, 42 A.3d 261, 267 (Pa. 2012). The

fundamental rule of contract interpretation is to give effect to the parties’ intent in

accordance with the contract’s terms. See, e.g., Hagarty v. William Akers, Jr. Co., 20

A.2d 317 (Pa. 1941) (“[I]t is not the function of this Court to re-write it, or to give it a

construction in conflict with that which accords with the accepted and plain meaning of

the language used.”); Gamesa Energy USA, LLC v. Ten Penn Ctr. Assocs., L.P., 217

A.3d 1227, 1238 (Pa. 2019) (quoting Amoco Oil Co. v. Snyder, 478 A.2d 795, 798 (Pa.

1984)). The meaning of an unambiguous contract is a question of law for which our

review is de novo. Lesko, 15 A.3d at 341-42. Additionally, “custom in the industry or

usage in the trade is always relevant and admissible in construing commercial contracts

and does not depend on any obvious ambiguity in the words of the contract.” Sunbeam

Corp. v. Liberty Mut. Ins. Co., 781 A.2d 1189, 1193 (Pa. 2001). Where a term has a

[J-78-2020] - 25 special meaning or usage in the industry, “members of that industry are presumed to use

the words in that special way,” regardless of any apparent ambiguity. Id.

An exemplar contract8 states that the lease resulted from a “[c]ompetitive, sealed

bid submission received by Department on or before September 3, 2008, and with bids

submitted pursuant to such advertising,” with the lessee “be[ing] the highest responsible

bidder.” The lease further states that it was executed “in consideration of the sum of

TWELVE MILLION TWO HUNDRED EIGHTY-SEVEN THOUSAND TWO HUNDRED

THIRTY-NINE DOLLARS ($12,287,239.00) paid by Lessee to Department[.]” The clause

continues that the lease “does hereby grant, demise, lease, and let, exclusively unto

Lessee for the purposes only of exploring, drilling, operating, producing, and removing of

oil, gas and liquid hydrocarbons” on the applicable tracts as defined by the lease. R.R.

Vol. 1 at 24.

The lease is for a term of ten years, with a requirement that the lessee construct a

well within the first five years. The lease continues from year-to-year thereafter and may

be extended beyond the initial ten-year period. The lessee owes annual rental payments

to the Commonwealth, payable by the acre. The contract refers to the upfront payment

as the “bonus payment” or the “competitive sealed bid.” Id. at 25. The lessee “must

operate each well with a discrete well meter at the well site, which will measure all the

gas produced from that well.” Id. at 26. Royalties are paid to the Commonwealth based

on the marketable gas that is extracted.

8 PEDF attached full copies of the leases to its Amended Application for Relief. According

to the parties, the leases identified as exhibits are representative of the Commonwealth leases involved in the respective lease sales. PEDF III, 214 A.3d at 770.

[J-78-2020] - 26 The parties frame their arguments in terms of contractual consideration. See, e.g.,

PEDF’s Brief at 17 (“The bonus and rental payments are the express consideration paid

for the right to enter upon the State Forest to extract and remove the oil and natural gas

so that it can be purchased.”); Commonwealth’s Brief at 13-14 (“These up-front, bonus

bid payments are not consideration for oil and gas that is extracted from the land.”).

“Consideration is defined as a benefit to the party promising, or a loss or detriment to the

party to whom the promise is made.” Stelmack v. Glen Alden Coal Co., 14 A.2d 127, 128

(Pa. 1940) (quoting Hillcrest Found., Inc. v. McFeaters, 2 A.2d 775, 778 (Pa. 1938)). Our

courts have recognized that the precise nature of the legal interest conveyed to a lessee

in a mineral lease resists easy characterization. See, e.g., Sabella v. Appalachian Dev.

Corp., 103 A.3d 83, 101 n.8 (Pa. Super. 2014) (recognizing that the characterization of

the legal interest conveyed in a mineral estate has historically been described in a

multitude of ways, some of which are contradictory).

As the Commonwealth Court explained, the parties submitted evidence on the

purpose of bonus payments in the oil and gas industry to shed light on what its “true

purpose” was. The court remarked that “[t]he word ‘bonus’ has a definite meaning in the

oil and gas industry. It is defined ... as a premium paid to a grantor or vendor, and strictly

in the cash consideration or down payment paid or agreed to be paid for the execution of

an oil and gas lease.” PEDF III, 214 A.3d at 759 (quoting Robert E. Sullivan, Handbook

of Oil and Gas Law 69 at 126 n.9 (1955)).

On that point, there is no question that the bonuses were the primary, if not

exclusive, factor used to determine the recipient of the lease. John H. Quigley, who

[J-78-2020] - 27 served in a variety of executive positions with the DCNR from February of 2005 through

January of 2011, submitted an affidavit stating:

The bonus bid was designed to reflect the partial or potential value of the natural gas that would be extracted. The competitive “bonus bid” component of the process was the basis upon which DCNR awarded the leases … for the purpose of extracting the publicly-owned natural gas resources.

Affidavit of John H. Quigley, R.R. Vol. 1 at 5.

As previously noted, the Commonwealth executed eighteen leases in early 2009,

awarded based on “[thirty-nine] bids from seven different pre-qualified bidders.” R.R. Vol.

1 at 9. The leases were awarded to five different bidders9 and encompassed slightly over

74,000 acres. The Commonwealth received upfront bonus payments totaling

$189,786,688.18 for these eighteen leases. The bonus payments varied depending on

the tracts at issue. While other variables may be at play regarding the variation in price,

we accept that the upfront bonus bid reflects, in part, the expected profitability of the

extracted oil and gas. But this does not establish that the “true purpose” of the bonus is

to purchase whatever is ultimately extracted, as the Commonwealth keeps the bonus

money regardless of whether the lessees’ hope becomes a reality.

The PEDF’s argument that the true purpose of the bonus payments must be for

the sale of trust assets draws heavily on the fact that the contract lists its purposes as

including “removing of oil, gas and liquid hydrocarbons[.]” There is no doubt that the “true

purpose” of the lease was to ultimately extract oil and gas. The record evidence, however,

establishes that the Commonwealth kept significant sums of money even in cases where

9 Seneca Resources, Anadarko E&P, ExxonMobil, Fortuna Energy, and Hunt Oil.

[J-78-2020] - 28 nothing was extracted. To hold that the true purpose of bonus payments was for the sale

of trust assets requires that we ignore that fact. Additionally, there is no evidence to

suggest that the bonus payment was an upfront payment of royalties as opposed to a

means to differentiate the various bidders.

We thus agree with the Commonwealth Court that the title conveyed in the leases

were inchoate, initially for the purpose of exploration and development with title vesting

only after minerals are removed. The PEDF’s “plain language” interpretation of the

contractual language focuses exclusively on what happens after the exploratory and

development processes succeed. However, this ignores that those activities are

substantial and costly. As Mr. Quigley stated, “Those activities involved clearing land and

converting it from public forest to industrialized, private use. Extraction activities included

the construction of well pads, pipelines, compressor stations, roads, staging areas,

impoundments, and all other infrastructure required for the extraction and production of

natural gas.” Affidavit of John H. Quigley, R.R. Vol. 1 at 5. The right to conduct these

activities is, in part, in exchange for the consideration paid in the form of the upfront bonus

bid.10

Furthermore, the parties presented evidence regarding industrial practices

surrounding mineral leases. The Commonwealth Court noted that Daniel Devlin, the

10 The PEDF relies heavily on the observation In re Bruner's Will that “In reality, the lease contemplates removal of all the oil and is in effect a sale, with payment to be made as the mineral is removed. Obviously, it was a sale of part of the principle of the trust and properly the moneys received therefrom belonged to the corpus.” In re Bruner's Will, 70 A.2d 222, 225 (Pa. 1950). While the lease in question remained in force so long as oil or gas was produced or the lessee commenced drilling a well with reasonable diligence, the case does not clearly indicate what happened to the bonus payment if those conditions were not met. Thus, Bruner’s Will is not dispositive of the case and leases presented here.

[J-78-2020] - 29 Director of the Bureau of Forestry, testified by deposition and explained that oil and gas

companies can “nominate” lands and ask the DCNR to put them up for bid. PEDF III, 214

A.3d at 772. DCNR then “advertises the tract in multiple outlets with bidding instructions,”

and generally requires sealed bids. In this respect, Mr. Devlin explained that “it's our

fiduciary responsibility to get the best value for the tract of land possible.” Id. (quoting

deposition). The bonus payment therefore represents a gamble on the part of the lessee.

While the amount of the bonus bid is no doubt tied to the expected profitability of the tract,

the fact is that the industry practice is to solicit the highest bid upfront. Indeed, as Mr.

Devlin alluded to, a failure to follow this practice would pose its own set of problems. The

record establishes that sixteen leases have been terminated for non-production, with the

DCNR retaining a total of over $124,000,000 in bonuses and rentals. See id. (“DCNR

received and retained a total of $120,479,684 in bonus payments and $3,528,630 in rental

payments, without any gas or oil removed.”) Had the Commonwealth not followed

industry practices, these monies would never be received, thus subjecting the

Commonwealth to a charge that it violated its duties as trustee by failing to follow the

industrial practice of soliciting bonus bids upfront. See In re Warfel's Estate, 209 A.2d

293, 295 (Pa. 1965) (“The duty of a fiduciary to obtain for his or its estate the most

advantageous price is a duty owing to the estate and the beneficiaries thereof[.]”)

(quotation marks and citation omitted). For these reasons, we conclude that the bonus

bids are not subject to the same treatment as royalties and are properly classifiable as

income.

[J-78-2020] - 30 Rentals and late fees

The only sum paid upfront in exchange for the lease is the bonus payment. As we

have found that sum is not for the sale of trust assets, it naturally follows that rentals and

late fees would likewise not qualify. We briefly discuss additional reasons why that is the

case.

The exemplar contract specified that the first year’s rental payment was the bonus

payment. R.R. Vol 1 at 25. Rentals for the second, third, and fourth years were set at

$20 per acre per year, payable on the anniversary date of the lease. For the remaining

years, the rent increased to $35 per acre per year. Id. These payments were not fixed,

however, as the price was reduced based on the number of productive wells. Each well

drilled within the leased premises “shall reduce the rental set out in the preceding

paragraph by the amount of rental on the number of acres attributable to each well …

which reduction shall become effective on the next rental date, provided the well is

producing in paying quantities.” Id. Additionally, if there is a well capable of producing

gas and was not productive, the lessee “shall pay Department at the expiration of each

said year for that year a rental payment for each such well at the full rental rate per acre

for the ‘acreage attributable to the well’, as referred to in Section 21 (“Subsequent Wells”)

of the lease.” Id. Regarding late fees, the lessee “agrees to pay an additional twelve

percent (12%) annual interest on the defaulted amount calculated from the time of such

default.” Id. at 27.11

11 Because late fees are payable based solely on failures to make timely payments as called for by the lease agreement, rental payments and the late fees are treated alike in our analysis.

[J-78-2020] - 31 These rental payments and late fees have no bearing on the execution of the lease

itself. They are obligations that are payable even if wells on the acreage are not

productive. Rental obligations are paid based on the passage of time, while the late fees

are triggered only if the lessee fails to timely make payments to the lessor. Because both

revenue streams are generated even if no oil or gas is extracted, they, like the bonus

payments, are not received in exchange for the purchase of trust assets. Consequently,

those payments are properly classified, in trust terms,12 as income.

Having determined these revenues are appropriately classified as income

streams, the remaining question becomes whether, while not qualifying as the sale of

trust assets, these funds may be diverted to non-trust purposes – as the Commonwealth

Court held. We conclude that the answer is no. A fuller examination of the ERA’s text in

light of our previous analysis in PEDF II in conjunction with application of trust principles

illustrates that the Commonwealth Court’s identification of successive beneficiaries

possessing income entitlements is without any foundation.

Where the trust beneficiaries are entitled to income, the appropriate distribution of

that income is a duty of the trustee. See 20 Pa.C.S. § 8131(a) (“An income beneficiary

is entitled to net income from the date on which the income interest begins.”). See

12 The parties and the Commonwealth Court did not distinguish between principles of trust law pertaining to private charitable versus noncharitable trusts. The ERA is an express trust presumptively subject to the Uniform Trust Act, see PEDF II, 161 A.3d at 932-33, and that act applies to both charitable and noncharitable trusts. See 20 Pa.C.S. § 7702 (“This chapter applies to express trusts, charitable and noncharitable[.]”) “The great majority of the [statute]'s provisions apply to both charitable and noncharitable trusts without distinction.” 20 Pa.C.S. § 7703, cmt. Thus, the interpretive tools applicable to both types of trusts are largely the same. We address the issues as the parties and the Commonwealth Court did without distinction between private charitable versus noncharitable trusts.

[J-78-2020] - 32 RESTATEMENT (SECOND) OF TRUSTS § 182 (“Where a trust is created to pay the income

to a beneficiary for a designated period, the trustee is under a duty to the beneficiary to

pay to him at reasonable intervals the net income of the trust property.”) 13 How to

distribute income is a question dictated by the trust instrument. See id. cmt c (“By the

terms of the trust the trustee may be authorized or directed to accumulate the whole or a

part of the income.”); id. (“To the extent to which the trustee by the terms of the trust has

discretion to withhold the income from the beneficiary, he is not under a duty to pay it to

the beneficiary.”); accord 20 Pa.C.S. § 8103(a)(1) (“A fiduciary shall administer a trust or

estate in accordance with the governing instrument[.]”). For example, Section 9 of the

1947 Act offers the mechanism for the trustee to follow when allocating incomes between

life tenants and remaindermen, i.e., successive beneficiaries, in the absence of a trust

provision addressing that point. Section 9 of the 1947 Act requires both an income

entitlement and the absence of a trust provision instructing the trustee how to distribute

income to successive beneficiaries. See former 20 P.S. § 3470.1 (defining “tenant” as

“the person to whom income is presently or currently payable, or for whom it is

accumulated, or who is entitled to the beneficial use of the principal presently and for a

time prior to its distribution.”); former 20 P.S. § 3470.9 (directing that the proceed splitting

provisions apply if “no provision is made for the disposition of the net proceeds thereof[.]”).

Thus, the Commonwealth Court correctly concluded that the 1947 Act is designed to

13 In PEDF II, we agreed with the Robinson Township plurality that the ERA is an express

trust presumptively subject to the Uniform Trust Act. See supra note 12. As in Robinson Township and PEDF II, we cite the Restatement (Second) of Trusts for general illustrations of trust law principles.

[J-78-2020] - 33 address the conflict involved when dealing with successive beneficiaries.14 See PEDF

III, 214 A.3d at 774 (describing the 1947 Act’s provisions as “reflect[ing] an equitable

balance between the needs of present and future generations of Pennsylvanians”).

But the foregoing principles apply only when the trust creates successive

beneficiaries and income entitlements. The ERA does neither. “[W]hen reviewing

challenges to the constitutionality of Commonwealth actions under Section 27, the proper

standard of judicial review lies in the text of Article I, Section 27 as well as the underlying

principles of Pennsylvania private trust law in effect at the time of its enactment. PEDF

II, 161 A.3d at 930. “In construing a constitutional provision, as when construing a statute,

this Court begins with the plain language.” Jubelirer v. Rendell, 953 A.2d 514, 525 n.12

(Pa. 2008). The Commonwealth Court assumed, with no elaboration, that the ERA

created life estates for the benefit of current Pennsylvania citizens, followed by

successive beneficiaries in the form of future generations of Pennsylvanians as the

remaindermen. We agree with the PEDF that “[n]othing in the plain language of Article I,

§ 27 can be reasonably construed as authority to treat ‘today’s generation’ of

Pennsylvanians as life tenants entitled to income from the Section 27 trust assets.”

PEDF’s Brief at 37. There are two critical trust concepts underlying that point: whether

the beneficiaries’ interests are simultaneous or successive, and whether the ERA created

income entitlements.15

14 A life tenant entitled to income from the sale of mineral assets has a motive to extract and sell as many of the minerals as possible, which necessarily comes at the expense of the remaindermen since those assets obviously cannot be again sold. 15 While we apply trust principles to answer these questions we must keep in mind, as

the Robinson Township plurality stated, that those principles must be considered

[J-78-2020] - 34 Trust entitlements and successive versus simultaneous beneficiaries

The two clauses of Article I, Section 27 creating the trust provide: “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.” Pa. Const. art. I, § 27. The named

beneficiaries are “all the people, including generations yet to come.” The text does not

distinguish between “current Pennsylvanians” and future generations. Instead,

generations yet to come are included within the broadly defined beneficiary: “all the

people.” The unity of interest of current Pennsylvanians and generations of

Pennsylvanians yet to come is evident from the structure of the trust. The first clause

vests the public natural resources as common property of “all the people” including

generations yet to come. The second clause, delineating the purpose of the trust reverts

to the use of the phrase “all the people” making clear that the conservation and

maintenance of the public natural resources is not temporally limited. The first clause can

only be read to clarify the breadth of the phrase “all the people” and in no way

alongside the fact that the ERA, unlike virtually any other trust, has a constitutional dimension.

Although the Environmental Rights Amendment creates an express trust that is presumptively subject to the Uniform Trust Act, the ultimate power and authority to interpret the constitutional command regarding the purposes and obligations of the public trust created by Section 27 rests with the Judiciary, and in particular with this Court.

Robinson Twp., 83 A.3d at 959 n.45 (quotation marks and citations omitted).

[J-78-2020] - 35 distinguishes between the generations. In trust terms, this means that the beneficiaries

are simultaneous in nature as opposed to successive.

In this respect, we agree with the Robinson Township Court’s view that the ERA

contains a “cross-generational dimension [that] reinforces the conservation imperative:

future generations are among the beneficiaries entitled to equal access and

distribution of the resources, thus, the trustee cannot be shortsighted.” Robinson Twp.,

83 A.3d at 959 (emphasis added).16 Interpreting the ERA to encompass a “cross-

generational dimension” reflects that the beneficiaries’ interests are the same across that

divide: the conservation and maintenance of the public natural resources. Far from

setting up any kind of conflict between these beneficiaries regarding profiting from trust

assets, the express inclusion of generations yet to come in “all of the people” establishes

that current and future Pennsylvanians stand on equal footing and have identical interests

in the environmental values broadly protected by the ERA. See also PEDF II, 161 A.3d

at 931 (“The second right reserved by Section 27 ... is the common ownership by the

people, including future generations, of Pennsylvania's public natural resources.”).

The language unmistakably conveys to the Commonwealth that when it acts as a

trustee it must consider an incredibly long timeline and cannot prioritize the needs of the

living over those yet to be born. The explicit inclusion as simultaneous beneficiaries of

the future generations of Pennsylvanians creates a cross-generational dimension and

reminds the Commonwealth that it may not succumb to “the inevitable bias toward

present consumption of public resources by the current generation, reinforced by a

16 The Robinson Township plurality noted that inclusion of generations yet to come as beneficiaries may be superfluous. Robinson Twp., 83 A.3d at 959 (citing 1970 Pa. Legislative Journal–House at 2273 (analysis of Professor Broughton)).

[J-78-2020] - 36 political process characterized by limited terms of office.” Robinson Twp., 83 A.3d at 959

n.46.

The ERA does not create income entitlements

Having established that the ERA created simultaneous beneficiaries with equal

interests in the trust’s management, there is no foundation for the allocation of income to

life tenants since there are none. The appropriate disposition of income generated by

these leases is also determined by the language of the ERA Trust.17

17 The Commonwealth Court’s analysis assumed that its task was to determine how to divide income and not whether income may be used for any non-trust purposes, such as the General Fund expenditures that prompted this suit. In this respect, the Commonwealth Court was plainly influenced by the minority opinion authored by our learned colleague Chief Justice Baer, which expressed the view that the settlors contemplated the continued and judicious use of the resources and that “income generated by the assets … would not be deemed part of the corpus of the trust under private trust principles.” PEDF II, 161 A.3d at 947 and 941 n.3 (Baer, C.J., concurring and dissenting). Based on its preference for the dissenting posture, the Commonwealth Court “reexamine[d] the intent embodied in Section 27 to determine whether Section 9 of the 1947 Act applies.” PEDF III, 214 A.3d at 768. This inverts the analysis. The proper question is whether the settlors created life tenants and remaindermen with an income entitlement. Finally, although concluding that the 1947 Act applied, neither the Commonwealth nor the Commonwealth Court addressed how the Commonwealth as trustee could follow the statute consistently with its trustee obligations. In particular, we agree with the PEDF that this raises the specter of self-dealing. A trustee “is under a duty to the beneficiary to administer the trust solely in the interest of the beneficiary.” RESTATEMENT (SECOND) OF TRUSTS § 170 (1959). A comment to this section states: Bonus, commission or other compensation. The trustee violates his duty to the beneficiary if he accepts for himself from a third person any bonus or commission for any act done by him in connection with the administration of the trust. Thus, if he sells trust property and accepts from the purchaser a bonus for making the sale, he commits a breach of trust.

RESTATEMENT (SECOND) OF TRUSTS § 170, cmt. o. Accepting a bonus payment to advance a non-trust purpose would benefit the Commonwealth, not the beneficiaries. See infra note 19.

[J-78-2020] - 37 Pursuant to the terms of the trust, these incomes must be returned to the corpus

of the trust. This conclusion is based on the absence in the trust of language creating

any entitlement in the beneficiaries to receive trust income in the form of what is

essentially a cash payment that does not serve the trust’s purpose.

The trustee’s basic fiduciary duty is to administer the trust. RESTATEMENT

(SECOND) OF TRUSTS § 169. Accord 20 Pa.C.S. § 7771 (the trustee “shall administer the

trust in good faith”); Comment (referencing, inter alia, Restatement (Second) of Trusts

§ 169 for background on trustee’s duties to administer trust). A trustee is also obligated

to deal impartially with the beneficiaries. “When there are two or more beneficiaries of a

trust, the trustee is under a duty to deal impartially with them.” RESTATEMENT (SECOND)

OF TRUSTS § 183. This duty exists whether the beneficiaries’ interests are simultaneous

or successive. Id. Accord 20 Pa.C.S. § 7773 (trustee’s duty to act impartially).

The trust’s purpose dictates how the trustee must deal with the beneficiaries.

“Dealing impartially with all beneficiaries means that the trustee must treat all equitably in

light of the purposes of the trust.” Robinson Twp., 83 A.3d at 959. Critical then is the

determination of whether the purpose of the trust includes income entitlements. Again,

the ERA Trust provides:

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.

Pa. Const. art. I, § 27.

As we held in PEDF II, the purpose of the trust, as clearly expressed in its text, is

the conservation and maintenance of Pennsylvania’s public natural resources. PEDF II,

[J-78-2020] - 38 161 A.3d at 935. There is no language that indicates an intent to create an income

entitlement and the creation of simultaneous beneficiaries suggests otherwise.18

The benefit conferred on the beneficiaries through the ERA is the conservation

and maintenance of the public natural resources. In the proper administration of the trust,

income may be generated as here through rental income. In PEDF II, we broadly

addressed the allowance of proceeds derived from the trust income, and we defined the

trust’s purpose as encompassing what may roughly be characterized as environmental

benefits. PEDF II, 161 A.3d at 930-35. The Commonwealth attempted to isolate the

phrase “for the benefit of all the people” from the remainder of the ERA to establish that

allocating revenues generated from Marcellus Shale leases towards general budgetary

matters broadly benefited all the people and was therefore permissible under the ERA.

We disagreed and made clear that the Commonwealth must administer the trust in light

of its purposes.

18 The absence of any language in the ERA to create an income entitlement is in contrast to the cases cited by the Commonwealth Court, in which the relevant instrument explicitly created successive beneficiaries and an income entitlement and instructed the trustee to pay those incomes. See, e.g., Appeal of Eley, 103 Pa. 300, 305 (Pa. 1883) (“In the body of his will, the testator … further directed that the portion thus given to his grandchildren should be held in trust … ‘the interest or income arising from the same’ to be paid to his said son, by the executors, during his natural life.”); Bruner’s Will, 70 A.2d at 223 (“Testator … direct[ed] to pay the net income semi-annually, as follows … . He also directed his trustees, for a period of three years after the death of both Joseph Bruner and Elizabeth Rodgers, to pay the net income … .”); McClintock v. Dana, 106 Pa. 386, 391–92 (Pa. 1884) (applying Eley’s Appeal and noting, “Nor is there any provision, express or implied, in the will that the incomes are to be accumulated for those in remainder.”); In re Rosenblum's Estate, 328 A.2d 158, 160 (Pa. 1974) (“Each beneficiary was made life tenant of the trust for his or her benefit. The net income from each trust was to be paid to the life tenant during his or her lifetime, and on the death of the life tenant, the corpus was to be distributed free of trust … .”); In re McKeown's Estate, 106 A. 189 (Pa. 1919) (directing estate “to be held by the trustee, upon an active trust, ‘to pay annually one-third of the net income from the said remaining three-fourths to each of my sons … with certain remainders over, not necessary to be considered at this time’ ”).

[J-78-2020] - 39 [T]he Commonwealth insists that the concluding phrase of Section 27, “for the benefit of all the people,” confers discretion upon the General Assembly to direct the proceeds from oil and gas development toward any uses that benefit all the people of the Commonwealth, even if those uses do nothing to “conserve and maintain” our public natural resources. Commonwealth’s Brief at 41 (citing PEDF, 108 A.3d at 168). We are wholly unconvinced. The phrase “for the benefit of all of the people” may not be read in isolation and does not confer upon the Commonwealth a right to spend proceeds on general budgetary items. Pa. Const. art I, § 27. The Commonwealth’s fiduciary duty to “conserve and maintain” our public natural resources is a duty owed to the beneficiaries of the public trust, namely “the people, including generations yet to come,” as set forth in the second sentence of Section 27. Id. The “people,” in turn, are those endowed with “a right to clean air, pure water, and to the preservation of the natural, scenic, historic and esthetic values of the environment,” as set forth in the first sentence of Section 27. Id.

Accordingly, the [ERA] mandates that the Commonwealth, as a trustee, “conserve and maintain” our public natural resources in furtherance of the people’s specifically enumerated rights. Thus understood in context of the entire amendment, the phrase “for the benefit of all the people” is unambiguous and clearly indicates that assets of the trust are to be used for conservation and maintenance purposes. See Robinson Twp., 83 A.3d at 957 (holding that the “explicit terms of the trust require the government to ‘conserve and maintain’ the corpus of the trust”). Only within those parameters, clearly set forth in the text of Section 27, does the General Assembly, or any other Commonwealth entity, have discretion to determine the public benefit to which trust proceeds—generated from the sale of trust assets—are directed.

PEDF II, 161 A.3d at 934–35 (second emphasis added).

The Commonwealth argues that it can keep these incomes because they “do not

dispose of or deprive the trust of any further benefit from the trust asset.”

Commonwealth’s Brief at 26. That latter proposition is true but irrelevant to this question.

In the absence of income entitlements, there is no authority for the trustee to generate

[J-78-2020] - 40 income from oil and gas assets and then use that income to benefit itself for non-trust

purposes and not the beneficiaries.19 See, e.g., Stahl v. First Pa. Banking & Tr. Co., 191

A.2d 386, 388 (Pa. 1963) (“It is a well recognized general rule that a trustee or fiduciary

may not use trust property for his own benefit and if he does he is liable to a cestui que

trust for profits made by him from the use of trust property.”);20 Appeal of Baker, 13 A.

487, 495 (Pa. 1888) (“[A] trustee will not, under any circumstances, be allowed to make

a profit out of the trust funds. Whatever profit arises therefrom in any way belongs to the

owner of the funds, and not to its custodian.”); Raybold v. Raybold, 20 Pa. 308, 311-12

(Pa. 1853) ([T]here is no principle better settled than that a trustee is not permitted to

obtain any profit or advantage to himself in managing the concerns of the cestui que

trust.”).

19 It is unclear how the Commonwealth categorizes itself for its argument that it can allocate to itself income generated from the trust assets. If it views itself as the representative of the life tenants created by the Commonwealth Court, we have rejected that construction. Moreover, as discussed, it is violative of the purpose of the trust to divert revenue generated from the use of the trust assets for non-trust purposes. If the Commonwealth sees itself as the sovereign retaining some ownership in the public natural resources, that notion is dispelled by the express language of the ERA. Finally, as discussed in the text, an allocation of the income to itself as trustee violates its basic fiduciary duties as trustee. 20 We note that the Commonwealth Court addressed fiduciary obligations, albeit in the context of how the mineral leases at issue here were structured. See PEDF III, 214 A.3d at 773 n.28. The court concluded that by using “standard industry leases, which have included rents, bonuses and royalties as forms of payments since oil and gas development began, DCNR did not structure or draft the leases in an attempt to remove rents and bonuses from the corpus of the trust.” Id.

We agree with the Commonwealth Court that the Commonwealth did not breach its fiduciary duties by employing standard industry terms in the relevant leases. That conclusion, however, answers only whether the generation of income via those leases was acceptable. It does not address the critical question of whether it can then use that income to benefit itself and not the beneficiaries. See supra note 17.

[J-78-2020] - 41 The Robinson Township plurality stressed the ERA’s placement within Article I of

the Pennsylvania Constitution, the Commonwealth’s Declaration of Rights. “The

Declaration of Rights assumes that the rights of the people articulated in Article I of our

Constitution—vis-à-vis the government created by the people—are inherent in man's

nature and preserved rather than created by the Pennsylvania Constitution.” Robinson

Twp., 83 A.3d at 948. Thus, the environmental public trust “was created by the people of

Pennsylvania, as the common owners of the Commonwealth’s public natural resources[.]”

Id. at 956. Pursuant to fundamental principles of private trust law, we cannot conclude

that the Commonwealth, as trustee of the constitutional trust created for the conservation

and maintenance of the public natural resources that are owned by “all of the people,”

can divert for its own use revenue generated from the trust and its administration. The

Commonwealth acts as a trustee managing the corpus, not as a sovereign owner that

may use income in a manner that does not benefit the trust.

Finally, in determining the intent of the settlors in creating the trust, it is relevant to

consider the “circumstances under which the trust is to be administered,” RESTATEMENT

(SECOND) OF TRUSTS, § 4, cmt. a. Those circumstances include that, at the time of the

ERA’s enactment, the Commonwealth was already generating revenue, including

income, by leasing mineral rights. The Commonwealth established the Oil and Gas

Lease fund in 1955 and the General Assembly required that all rents and royalties

generated by leasing minerals be “exclusively used for conservation, recreation, dams,

or flood control or to match any Federal grants which may be made for any of the

aforementioned purposes.” PEDF II, 161 A.3d at 919 (quoting statute). That was still the

case in 1971, and it remained the case through 2009 when revenues soared as a result

[J-78-2020] - 42 of leasing lands within which the Marcellus Shale lies. From the perspective of the

settlors, the ERA was enacted when the Commonwealth was already devoting the

revenues generated by mineral leases to conservation purposes. Redirecting those

revenues to non-trust purposes is inconsistent with the backdrop against which the ERA

was enacted.

In this respect, we stress the distinction between the generation of income and the

distribution of that income. Although the trustee (the Commonwealth) is authorized to

generate income from trust assets in its discretion, it does not follow that the beneficiaries

are entitled to distribution of those monies through allocation to the general fund. Such

distribution is not supported by the purpose of the trust: to conserve and maintain the

public natural resources. Thus, the income generated from bonus payments, rentals, and

late fees must be returned to the corpus to benefit the conservation and maintenance of

the public resources for all the people. To hold otherwise and allow allocation of the

income to the general fund would permit the Commonwealth to use trust income to

advance a non-trust purpose, an outcome we previously rejected. Private trust law

principles preclude that outcome.21

VI. Conclusion

The Commonwealth Court correctly concluded that the ERA did not provide a

mechanism to allocate revenue generated from income produced based on the use of

trust assets. The textual absence of an allocation mechanism has a straightforward

21 We reiterate that “the legislature’s diversion of funds from the Lease Fund (and from the DCNR's exclusive control) does not, in and of itself, constitute a violation of Section 27.” PEDF II, 161 A.3d at 939. The General Assembly “would not run afoul of the constitution by appropriating trust funds to some other initiative or agency dedicated to effectuating Section 27.” Id.

[J-78-2020] - 43 explanation: the settlors did not intend to create any income entitlements, hence

eliminating the need to allocate receipts. We conclude that the bonus payments, rentals

and penalty interest qualify as income and not the sale of trust assets. Since the ERA

does not create an entitlement to income in the beneficiaries, the revenue generated from

these Marcellus Shale leases must be returned to the corpus to benefit all the people.

Accordingly, we hold that the income generated from the revenue streams at issue must

be returned to the corpus as a matter of trust law. As a result, Sections 1604-E and 1605-

E, as well as Section 1912 of the Supplemental General Appropriations Act of 2009, are

facially unconstitutional.

Justices Todd, Dougherty and Wecht join the opinion.

Justice Wecht files a concurring opinion.

Justice Mundy files a concurring and dissenting opinion.

Chief Justice Baer and Justice Saylor file dissenting opinions.

[J-78-2020] - 44