J. A34006/14


NON-PRECEDENTIAL DECISION – SEE SUPERIOR COURT I.O.P. 65.37

RPITA, LLC,                               :     IN THE SUPERIOR COURT OF
                                          :           PENNSYLVANIA
                          Appellant       :
                                          :
                     v.                   :
                                          :
MANUFACTURERS AND TRADERS                 :
TRUST COMPANY,                            :         No. 1036 MDA 2014
SOUTHWESTERN ENERGY CORP.,                :
TNT 1, LIMITED PARTNERSHIP                :


                Appeal from the Order Entered May 21, 2014,
           in the Court of Common Pleas of Susquehanna County
                     Civil Division at No. 2013-CV-1500


BEFORE: FORD ELLIOTT, P.J.E., SHOGAN AND STABILE, JJ.


MEMORANDUM BY FORD ELLIOTT, P.J.E.:                      FILED MAY 06, 2015

      RPITA, LLC, appeals1 from the order of May 21, 2014, granting

summary judgment for WM Capital, successor-in-interest to Manufacturers

and Traders Trust Company, in this declaratory judgment action.         After

careful review, we affirm.

                    The action arises out of an oil and gas lease
              (“the Lease”) originally entered into between TNT1,
              Limited Partnership (“TNT1”) and Chesapeake
              Appalachia, LLC (“Chesapeake”) on January 31, 2008
              and the dispute is over the priority of royalty
              interests arising out of the Lease. Prior to the entry
              of the Lease, TNT1 acquired large parcels of land
              throughout Susquehanna County. Then, in 2004,
              Manufacturers and Traders Trust Company (“M&T”),

1
 RPITA was substituted as appellant for Peoples Neighborhood Bank on
December 3, 2014.
J. A34006/14


          WM Capital Partners XXXIX, LLC’s (“WM Capital”)
          predecessor-in-interest, granted loans to TNT1 and
          subsequently TNT1 executed and delivered to M&T a
          mortgage dated September 28, 2004. The mortgage
          was subsequently recorded. The mortgage pertained
          to eight parcels of land and specifically to the
          property subject to this action.

                 On January 31, 2008, TNT1 then entered into
          the Lease with Chesapeake.        The Lease was
          subsequently assigned to Southwestern Energy
          Production Company (“SEPCO”). On August 5, 2008,
          TNT1 executed and delivered a Security Agreement
          to M&T granting M&T a security interest in TNT1’s
          remaining assets including personal property and
          collateral. The UCC Financing Statement for the
          Security Agreement was filed on August 7, 2008.

                 In addition to the transactions with M&T, TNT1
          also entered into an agreement with Peoples
          Neighborhood Bank (“PNB”). The agreement dated
          July 13, 2012 titled Assignment of Rents, Royalties
          and Profits (“Assignment”) granted PNB the rights to
          all rents, income, royalties, and profits derived from
          the oil and gas lease.

                 On July 18, 2012, TNT1, SEPCO, and M&T
          entered into a Non-Disturbance and Attornment
          Agreement (“NDA Agreement”). Subsequently TNT1
          defaulted on its loan obligations with M&T which led
          to M&T seeking the royalty payments. Following the
          demand for royalty payments, WM Capital became
          the successor-in-interest to the TNT1 loans when
          M&T assigned all of its right, title and interest in
          loans, including the interest in the Lease and the
          collateral to WM Capital on November 15, 2013.

                  On December 3, 2013, PNB filed a Complaint
          against M&T, SEPCO, and TNT1. On December 24,
          2013, WM Capital as successor-in-interest to M&T
          filed its Answer to the Complaint.

                On March 4, 2014, WM Capital filed a Motion
          for Summary Judgment. PNB then filed a response


                                  -2-
J. A34006/14


            in opposition to WM Capital’s Motion for Summary
            Judgment.

                   PNB alleges that because of the July 2012
            Assignment, PNB is entitled to payments of all the
            rents, income, royalties and profits derived from the
            Lease.    PNB alleges that such Assignment gives
            priority on the royalties since it was executed and
            recorded prior to a[n] NDA Agreement between
            TNT1, M&T and SEPCO dated July 18, 2012.

                   On the other hand, WM Capital alleges that it
            has the right to the royalties because of the
            mortgage and Security Agreement which were
            executed, delivered, and perfected in 2004 and
            2008, years prior to the PNB Assignment. Argument
            was held on April 28, 2014 to determine who has the
            right to the royalties.

Trial court opinion, 5/21/14 at 1-3.

      The trial court determined that the royalty payments are personal

property and therefore M&T’s UCC-1 financing statement was sufficient to

perfect its interest. The trial court also found that M&T’s Security Agreement

with TNT1, giving it a security interest in all of TNT1’s assets and personal

property, including collateral, was executed on August 5, 2008, before PNB’s

July 31, 2012 Assignment. Therefore, the 2008 Security Agreement takes

priority over the 2012 Assignment and WM Capital, as successor-in-interest

to M&T, has a priority claim to the royalties.   This timely appeal followed.




                                       -3-
J. A34006/14


Appellant complied with Pa.R.A.P., Rule 1925(b), 42 Pa.C.S.A., and the trial

court filed a Rule 1925(a) opinion.2

      The following issues have been presented for our review:

            1.    Did the Trial Court err in ruling that the royalty
                  payments at issue in this matter are personal
                  property such that the 2008 Manufacturers and
                  Traders Trust Company, predecessor in
                  interest to WM Capital Partners XXXIX, LLC
                  (hereinafter, “M&T”) Security Agreement and
                  Financing Statement granted M&T a perfected
                  security interest in the royalty payments?

            2.    Did the Trial Court err in finding that the
                  Security Agreement and Financing Statements
                  filed by M&T were sufficient to perfect M&T’s
                  interest in the royalties from the Oil & Gas
                  Leases of record?

            3.    As M&T did not have a perfected security
                  interest in the rents, royalties and payments
                  from the Oil & Gas Lease as a result of its 2008
                  filing, did the Trial Court err in ruling that the
                  2008 M&T Security Agreement takes priority
                  over the 2012 Assignments of the Leases,
                  Rents and Royalties to Peoples Neighborhood

2
  The record indicates that summary judgment was granted in favor of WM
Capital only.    In addition, SEPCO filed preliminary objections to the
complaint that were never decided, including a claim that the Pennsylvania
Industrial Development Authority is a necessary and interested party.
However, this action is in the nature of a declaratory judgment and the only
issue is who is entitled to the royalty payments; there is nothing left to be
established. SEPCO, the oil and gas well developer, has declined to file a
brief in this matter, indicating that its only concern is that the royalties be
paid to the proper party. Those funds are currently being paid into escrow.
It appears that TNT1 did not file any responsive pleadings, nor has it filed a
brief on appeal. According to WM Capital, the property formerly owned by
TNT1 was sold at sheriff’s sale to WM Capital. (WM Capital’s brief at 5.)
This case involves the very narrow legal issue of whose security interest
takes priority. As such, we decline to remand to the trial court for a
determination of finality.


                                       -4-
J. A34006/14


                  Bank, predecessor in interest to Peoples
                  Security Bank and Trust Company (hereinafter,
                  “PNB”)?

            4.    Did the Trial Court err in that it failed to
                  address PNB’s contention that the language of
                  the   Subordination     and   Non-Disturbance
                  Agreement entered into between M&T, TNT1,
                  LP and Southwestern Energy Production
                  Company in 2012 constituted an Assignment of
                  the Rights to Royalties that was subsequent to
                  the Assignment of those rights to PNB[?]

Appellant’s brief at 5-6.

            Initially, we note:

                  Our scope of review of a trial court’s
                  order disposing of a motion for summary
                  judgment is plenary. Accordingly, we
                  must consider the order in the context of
                  the entire record.       Our standard of
                  review is the same as that of the trial
                  court; thus, we determine whether the
                  record documents a question of material
                  fact concerning an element of the claim
                  or defense at issue. If no such question
                  appears, the court must then determine
                  whether the moving party is entitled to
                  judgment on the basis of substantive
                  law.     Conversely, if a question of
                  material fact is apparent, the court must
                  defer the question for consideration of a
                  jury and deny the motion for summary
                  judgment. We will reverse the resulting
                  order only where it is established that
                  the court committed an error of law or
                  clearly abused its discretion.

            Grimminger v. Maitra, 887 A.2d 276, 279
            (Pa.Super.2005) (quotation omitted). “[Moreover,]
            we will view the record in the light most favorable to
            the non-moving party, and all doubts as to the
            existence of a genuine issue of material fact must be


                                    -5-
J. A34006/14


            resolved against the moving party.” Evans v.
            Sodexho, 946 A.2d 733, 739 (Pa.Super.2008)
            (quotation omitted).

Ford Motor Co. v. Buseman, 954 A.2d 580, 582-583 (Pa.Super. 2008),

appeal denied, 970 A.2d 431 (Pa. 2009).

      Appellant argues that the right to royalty payments is an account

arising out of the sale of oil and gas at the wellhead within the meaning of

the term “as-extracted collateral,” to which special rules apply for perfecting

security interests. WM Capital contends that royalties are personal property,

not real property or “as-extracted collateral,” and therefore M&T perfected

its security interest when it filed its financing statement with the Secretary

of the Commonwealth in August 2008.        WM Capital argues that it is well

settled as a matter of Pennsylvania law that royalty payments, including

under an oil and gas lease, are considered personal property. According to

WM Capital, royalties are not payments out of the sale of oil and gas at the

wellhead; rather, they represent payments by a lessee to a lessor for the

right to obtain a fee interest in the oil and gas and to remove same. (WM

Capital’s brief at 11.)   According to WM Capital, the fact that royalty

payments may be generated by the sale of oil and gas by the lessee does

not change their character as personal property rather than real property.

(Id. at 11-12.)

      Pennsylvania’s Uniform Commercial Code (“UCC”), defines “account,”

in relevant part, as:



                                     -6-
J. A34006/14


            (1)   Except as used in “account for,” a right to
                  payment of a monetary obligation, whether or
                  not earned by performance:

                  (i)    for property which has been or is
                         to be sold, leased, licensed,
                         assigned or otherwise disposed
                         of[.]

13 Pa.C.S.A. § 9102(a).

      “As-extracted collateral” is defined as any of the following:

            (1)   Oil, gas or other minerals which are subject to
                  a security interest which:

                  (i)    is created by a debtor having an
                         interest in the minerals before
                         extraction; and

                  (ii)   attaches to     the   minerals    as
                         extracted.

            (2)   Accounts arising out of the sale at the wellhead
                  or minehead of oil, gas or other minerals in
                  which the debtor had an interest before
                  extraction.

Id.

            Under this Article, oil, gas, and other minerals that
            have not been extracted from the ground are treated
            as real property, to which this Article does not apply.
            Upon extraction, minerals become personal property
            (goods) and eligible to be collateral under this
            Article.    See the definition of “goods,” which
            excludes “oil, gas, and other minerals before
            extraction.” To take account of financing practices
            reflecting the shift from real to personal property,
            this Article contains special rules for perfecting
            security interests in minerals which attach upon
            extraction and in accounts resulting from the sale of
            minerals at the wellhead or minehead. See, e.g.,
            Sections 9-301(4) (law governing perfection and


                                     -7-
J. A34006/14


            priority); 9-501 (place of filing), 9-502 (contents of
            financing statement), 9-519 (indexing of records).
            The new term, “as-extracted collateral,” refers to the
            minerals and related accounts to which the special
            rules apply.       The term “at the wellhead”
            encompasses arrangements based on a sale of the
            produce at the moment that it issues from the
            ground and is measured, without technical
            distinctions as to whether title passes at the
            “Christmas tree” of a well, the far side of a gathering
            tank, or at some other point. The term “at . . . the
            minehead” is comparable.

Id., Comment.

      As the trial court states, this court has long held that royalties are

considered personal property.     (Trial court opinion, 8/12/14 at 4, citing

Snyder Bros., Inc. v. Peoples Natural Gas Co., 676 A.2d 1226, 1230

(Pa.Super. 1996), appeal denied, 686 A.2d 1312 (Pa. 1996) (“A lease of

minerals in the ground is a sale of an estate in fee simple until all the

available minerals are removed; this leaves the lessor with only an interest

in the royalties to be paid under the lease, which are personal property.”

(emphasis deleted) (citation omitted)); see also Miller v. Dierken, 33 A.2d

804, 807 (Pa.Super. 1943) (royalty interests under oil and gas lease are

personalty) (citations omitted).) We agree with appellees that an interest in

the royalties is not an account arising out of the sale of oil and gas “at the

wellhead.” Rather, they are payments for the right to obtain a fee interest

in the oil and gas that has been severed from the estate.       Therefore, the

royalties are personal property, not as-extracted collateral.




                                     -8-
J. A34006/14


     In appellant’s second issue, it claims that since M&T filed its UCC-1

financing   statement     with      the    Department    of   State,     rather   than    in

Susquehanna County, where the real property was located, M&T does not

have a perfected security interest in the royalty payments. Section 9501 of

the PA-UCC provides, in relevant part:

             (a)    Filing offices.--Except as otherwise provided
                    in subsection (b), if the local law of this
                    Commonwealth governs perfection of a
                    security interest or agricultural lien, the office
                    in which to file a financing statement to perfect
                    the security interest or agricultural lien is one
                    of the following:

                    (1)    The office designated for the filing
                           or recording of a record of a
                           mortgage on the related real
                           property if:

                           (i)      the     collateral     is
                                    as-extracted collateral

13 Pa.C.S.A. § 9501(a)(1)(i).

     As     discussed     above,     the    royalties   are   personal    property,      not

as-extracted collateral. Therefore, M&T was only required to file a financing

statement    with   the    office    of    the   Secretary    of   the   Commonwealth.

13 Pa.C.S.A. § 9501(a)(2).            As the trial court states, M&T’s financing

statement provided the name of the debtor (TNT1 Limited Partnership); the

name of the secured party (M&T); and indicated the collateral covered by

the financing statement (“all assets”). (Trial court opinion, 8/12/14 at 4-5.)

See 13 Pa.C.S.A. § 9502(a) (“Sufficiency of financing statement”). As such,



                                            -9-
J. A34006/14


the Security Agreement providing M&T with a security interest in all of

TNT1’s assets and personal property including the royalties was properly

perfected by the financing statement filed on August 8, 2008. M&T was not

required to file a financing statement with the Susquehanna County

Recorder of Deeds as contended by appellant. There is no error here.

     Next, appellant argues that its July 13, 2012 Assignment with TNT1,

providing appellant with an interest in the royalties, is superior to M&T’s

August 5, 2008 Security Agreement.           Again, however, this argument

presupposes that M&T’s security interest was not properly perfected.

Therefore, the argument fails.

     Section 9322 of the PA-UCC provides:

           § 9322. Priorities among conflicting security
           interests in and agricultural liens on same
           collateral

           (a)   General priority rules.--Except as otherwise
                 provided in this section, priority among
                 conflicting security interests and agricultural
                 liens in the same collateral is determined
                 according to the following rules:

                 (1)   Conflicting     perfected        security
                       interests and agricultural liens rank
                       according to priority in time of
                       filing or perfection. Priority dates
                       from the earlier of the time a filing
                       covering the collateral is first made
                       or    the    security     interest     or
                       agricultural lien is first perfected, if
                       there is no period thereafter when
                       there     is   neither      filing   nor
                       perfection.



                                    - 10 -
J. A34006/14


                  (2)    A perfected security interest or
                         agricultural lien has priority over a
                         conflicting unperfected security
                         interest or agricultural lien.

                  (3)    The first security interest or
                         agricultural lien to attach or
                         become effective has priority if
                         conflicting security interests and
                         agricultural liens are unperfected.

13 Pa.C.S.A. § 9322(a).     See also Chrysler Credit Corp. v. B.J.M., Jr.,

Inc., 834 F.Supp. 813, 830 (E.D.Pa. 1993) (where two or more creditors

have perfected security interests in the same collateral, the party who filed

his security interest first will have priority) (citations omitted). As the trial

court properly determined, the July 13, 2012 Assignment was executed and

recorded after the perfected mortgage and Security Agreement with M&T.

(Trial court opinion, 8/12/14 at 5-6.)     Therefore, appellant does not have

priority to the royalties. Appellant’s interest in the royalties is subordinate to

M&T’s perfected security interest.

      Finally, appellant argues that the July 18, 2012 “Non-Disturbance and

Attornment Agreement” (“NDA”) between SEPCO (Lessee), TNT1 (Lessor),

and M&T (Lender) constituted an acknowledgment that M&T did not have a

perfected security interest in the payment of royalties from the oil and gas

leases. (Appellant’s brief at 25.) According to appellant, the NDA included

an authorization by TNT1 that lease payments were to be made to M&T on

demand; if that right had already been vested in M&T by the Security

Agreement, such authorization would have been unnecessary.                (Id. at


                                     - 11 -
J. A34006/14


25-26.) Appellant states that the NDA was executed and filed subsequent to

July 13, 2012, when the PNB Assignment was filed in Susquehanna County.

(Id. at 26.)

      The NDA provided, in relevant part, as follows:

                     WHEREAS, Lender, at the request of Lessor
               and Lessee, has agreed to enter into this Agreement
               with respect to the Property and Lessee’s interest in
               the Property pursuant to the Lease.

                      NOW, THEREFORE, the parties, intending to be
               legally bound, hereby agree as follows:

                      1.    Nondisturbance. Insofar and only insofar
               as it relates to the Property, Lender acknowledges
               and agrees that for so long as the Lease remains in
               effect, Lender will not infringe upon, diminish,
               interfere, terminate or disturb the Lease and
               Lessee’s leasehold interests therein, including,
               without limitation, in the event of a foreclosure or
               other proceedings brought to enforce the Mortgage
               or if the Property shall be transferred by deed in lieu
               of foreclosure or otherwise, and Lessee shall
               continue in the quiet enjoyment of the same,
               including, subject to the provisions of Section 2
               hereof, the right to pay all rents and royalties
               payable under the Lease to the Lessee.

                      2.    Payment of Royalties. Lessee agrees, in
               consideration of the execution of this Agreement by
               Lender, that in the event the Lender advises Lessee
               in writing (“Payment Demand”), with a copy to
               Lessor, that any loan or other obligation of Lessor is
               delinquent, in default or that Lender has become the
               owner of the Property, then Lessee shall pay to
               Lender all royalties, rentals and any other
               remuneration due or to become due under the Lease
               until further written notice from Lender.

RR at 63-64.



                                       - 12 -
J. A34006/14


      After careful review, we agree with appellees that it is clear from the

language of the NDA that the parties did not intend any assignment of

rights, but merely to memorialize an agreement not to disturb the lease and

SEPCO’s interest therein in the event that a foreclosure or other proceeding

to enforce the mortgage occurred.      (Appellees’ brief at 23.)   As the trial

court states, the NDA was not an assignment of the royalties and related to

the real property, not the personal property. (Trial court opinion, 8/12/14 at

6.) The NDA did not establish any present intention to make an assignment;

rather, when the provisions are read together, they recognize M&T’s existing

right to the royalties and its agreement not to disturb or interfere with

TNT1’s right to collect the royalties unless TNT1 defaults on the mortgage.

Therefore, the NDA has no bearing on the issue of relative lien priorities and

the trial court did not err in its determination that WM Capital, as

successor-in-interest to M&T, has a priority claim to the royalties.

      Order affirmed.



Judgment Entered.




Joseph D. Seletyn, Esq.
Prothonotary

Date: 5/6/2015




                                     - 13 -
