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Oil & Gas Law Report

Reporting on recent legal developments and trends in the oil and gas industry.

The Ohio Dormant Minerals Act: Part 4

Posted in Contracts and Leases, Exploration & Production, Mineral Interest, Ohio, Real Estate

In the previous three parts of this series (read part 1, part 2 and part 3), we reviewed the Ohio Marketable Title Act (MTA), its application to severed minerals, and the experience of neighboring states, all of which played a role in the development of the Ohio Dormant Minerals Act (DMA).

To summarize:

  • The MTA was enacted in 1961 to make land titles marketable, i.e., free of stale claims. It included a grace period and did not require notice before a chain of title was extinguished in favor of another.
  • The MTA generally applies to any property interest (presumably still including oil and gas interests) where no conveyance or claim to preserve has been filed during the past 40 years.
  • The MTA does not necessarily extinguish all old severed mineral interests, even those with a root of title more than 40 years old, because the severed interest may be a separate chain of title.
  • The Illinois DMA was found unconstitutional by the Illinois Supreme Court in 1980 as violating due process because it did not require severed mineral owners to be given notice and an opportunity to be heard.
  • Indiana’s Dormant Mineral Interests Act, Ind. Code §§ 32-5-11-1 through 32-5-11-8 (1976) — which includes a grace period, a 20-year use-it-or-lose-it attribute and no notice requirement — was held to be constitutional by the U.S. Supreme Court in 1982. Texaco, Inc. v. Short, 454 U.S. 516, 102 S. Ct. 781, 70 L. Ed. 2d 738, (1982)
  • Illinois enacted its Severed Mineral Interest Act, which is based on presumptive adverse possession and requires notice, in 1983.
  • Ohio’s lease forfeiture law requires notice and the filing of an affidavit. The law suspends the statutory determination when the lessee files an affidavit contesting the alleged forfeiture. The lessee’s filing must occur no more than 30 days after receiving notice.
  • The National Conference of Commissioners on Uniform State Laws approved the Uniform Dormant Interests Act in 1986. Continue Reading

The Ohio Dormant Minerals Act: Part 3

Posted in Contracts and Leases, Exploration & Production, Mineral Interest, Ohio, Real Estate

In part 2 of this series, we reviewed the application of the Marketable Title Act (MTA) in a 1982 case involving a severed mineral interest and two independent chains of title. The Ohio courts appeared to struggle with the application of the MTA to the facts of that case. Courts and legislatures in neighboring states also struggled with how to handle dormant severed minerals. Those states’ case law and statutes played a role in the formulation of the Ohio Dormant Minerals Act, which was enacted in 1989 as part of the MTA. Examples of such influential laws and cases from Illinois and Indiana follow.

Illinois DMA held unconstitutional in 19801

In Illinois, at common law, once a mineral estate has been severed from the surface estate, it cannot be terminated by mere nonuse or abandonment. Uphoff v Trustees of Tufts College, 351 Ill 146, 155, 184 NE 213, 216 (Ill 1932). Thus, mineral interests can lie dormant, even through several transfers of title. This situation, over time, can result in missing or unknown owners. The difficulty in ascertaining and locating severed mineral owners had a substantial deterrent effect on would-be gas and oil developers.

The Illinois legislature responded by enacting the Dormant Mineral Interests Act in 1969. The act was intended to facilitate development of dormant oil and gas interests by permitting consolidation of mineral ownership in one person in instances where it had formerly been diffused among many unknown or missing persons. The act provided that unless an individual duly recorded his interest, his failure to actually produce oil or gas in any 25-year period created a presumption of abandonment. There was great uncertainty among oil and gas title examiners regarding the act’s validity because, at common law, abandonment required both intent to abandon and an affirmative act of relinquishment. Furthermore, the act did not require entities who sought a ruling of abandonment to give unknown mineral owners notice or an opportunity to be heard. Continue Reading

Anti-assignment clause in oil and gas lease enforced

Posted in Contracts and Leases, Exploration & Production, Mineral Interest, Ohio

In a case involving the assignment of oil and gas leases from one company to another, an Ohio appellate court enforced an anti-assignment provision in the original lease. Harding v. Viking Internatl. Resources Co., Inc., 4th Dist. Washington No. 13CA13, 2013-Ohio-5236.

The facts

The Hardings owned property in Washington County that was subject to three oil and gas leases signed by the prior property owners, their parents. All of the leases contained the following anti-assignment clause:

The rights of the Lessor may be assigned in whole or in part and shall be binding upon their heirs, executors and assigns. The rights and responsibilities of the Lessee may not be assigned without the mutual agreement of the parties in writing.

The original lessee, Carlton Oil Corporation, assigned the leases to Viking in 2011. Though the assignment was recorded, the Hardings were not parties nor did they provide written consent to the assignment. However, after the assignment, the Hardings completed and returned a W-9 form that Viking mailed to them and they accepted and cashed royalty checks from Viking for eight months before they objected to the assignment and filed suit against Viking to have the court declare the leases void and forfeited because of the violation of the assignment provision. Continue Reading

The Ohio Dormant Minerals Act: Part 2

Posted in Contracts and Leases, Exploration & Production, Mineral Interest, Ohio, Real Estate

In the first part of this series, we reviewed a 2010 Licking County case, which held that Ohio’s Marketable Title Act (MTA) extinguished an adjoining landowner’s claim against former railroad property. This article discusses how the MTA was used to reconcile competing claims to a severed mineral interest before Ohio’s Dormant Minerals Act was passed.

The Marketable Title Act and severed minerals: coal excepted, but not oil and gas

When the MTA was first enacted in 1961, it expressly excepted all mineral interests . But in 1973 the Ohio Legislature amended the mineral interest exception so that only coal was excepted from the operation of the MTA. That amendment set the stage for Heifner v. Bradford, 5th Dist. Muskingum No. CA-81-10, 1982 Ohio App. LEXIS 14859 (Jan. 29, 1982), overruled by Heifner v. Bradford, 4 Ohio St. 3d 49; 446 N.E.2d 440 (1983). Continue Reading

Carroll County dormant minerals interest case — decision favors mineral owners

Posted in Contracts and Leases, Exploration & Production, Mineral Interest, Ohio

We are in the process of posting a series of articles on the Ohio Dormant Minerals Act (DMA), in which we’ll provide analysis about Dahlgren-v-Brown, Carroll C.P., 13CVH27445, (Nov. 5, 2013). However, today we wanted to share news about this Carroll County opinion and what it may portend for future cases.

The facts

Leora Dahlgren owned severed minerals pursuant to a reservation in a deed to Walter Dunlap in 1949. When Leora passed away in 1977, her estate was probated and a Certificate of Transfer conveying the minerals to her heirs was issued and recorded — at the Probate Court rather than the Recorder’s Office — in 1978.1 More than 30 years later, in 2009, the mineral owners leased their oil and gas. During that same period of time, the surface had become owned by successors to Dunlap pursuant to deeds reciting the reservation in the 1949 deed. The surface owners filed a DMA notice of abandonment in March 2012. Within the following 60-day period, the Dahlgren mineral heirs filed their notice of claim and, in 2013, sued to quiet title. Continue Reading

The Ohio Dormant Minerals Act: Part 1

Posted in Contracts and Leases, Mineral Interest, Ohio

This is the first in a series of articles delving into the history and influence of the Ohio Dormant Minerals Act since it was enacted in 1989.

The oil boom at the turn of the last century led property owners selling their land to reserve from the sale, for themselves, “the oil and gas and other minerals” — thus creating severed mineral interests. During the next 40 to 50 years there were two world wars, divorces, deaths and myriad other family-changing events. In many cases, the ownership of severed mineral interests became clouded. Through the years, legislatures in the Midwest have worked to address the situation through mineral lapse acts or dormant minerals acts, whereby the severed interest is reunited with the surface.

With the advent of horizontal wells, consternation around determining who owns the minerals has become exacerbated. Horizontal wells and fracking have made severed interests, even small ones, a matter of animated debate. Furthermore, any time the legislature tries to decide who wins, the loser is bound to argue that the Constitution requires restitution. As Justice Oliver Wendell Holmes Jr. said in one of his famous dissents, “Great cases, like hard cases, make bad law.” Northern Securities Co. v. United States, 193 U.S. 197 (1904). The severed mineral interest issue pits two fundamental principles against each other: the certainty title to land vs. the need to extinguish dormant claims so that development can proceed.

The objective of this series of articles is to trace the history and evolution of Ohio’s Dormant Minerals Act (DMA), and to examine current issues related to its implementation.

The DMA was enacted in 1989 as part of the Ohio Marketable Title Act (MTA), which itself became law in 1961. The MTA is best understood not in the abstract, but (at least for this writer) in the context of actual facts. A recent case from Licking County is illustrative. Continue Reading

Who owns oil and gas when people (or businesses) go bankrupt?

Posted in Contracts and Leases, Mineral Interest, Ohio

Businesses active in Ohio’s current oil and gas boom should be aware of how oil and gas leases are treated in bankruptcy. Unsettled Ohio law regarding whether a debtor owns unextracted oil and gas as part of the debtor’s real property can make this a difficult issue. This eBook discusses recent court opinions and examines the question of just who owns unextracted oil and gas in a bankruptcy context. Download Oil and Gas Leases in Bankruptcy.

Is a reservation of oil and gas ambiguous?

Posted in Mineral Interest

Siblings at odds before the North Dakota Supreme Court

Reservations of mineral interests in deeds is tricky business. A particular case in North Dakota was resolved only after five years of litigation — including a trial and an appeal to the state supreme court. As we have written previously, whether in Ohio or North Dakota, shale source rock and horizontal drilling seem to make mineral interests worth fighting for — even between siblings.

Background

George Tank and his wife owned property in McKenzie County, North Dakota. After his wife had passed away, George executed a quitclaim deed conveying his interest in part of his property to one of his five children — his son, Greggory Tank, who had stayed on the farm to work with his parents.

George’s quitclaim deed was captioned “(Life Estate Reserved)” and contained the following reservation clauses: Continue Reading

Sixth Circuit affirms “paragraph 14” lease interpretation

Posted in Exploration & Production, Mineral Interest, Real Estate

The right, but not the obligation, to renew an existing lease

As we discussed previously, state and federal courts in Ohio have been asked to interpret the meaning of “paragraph 14” in oil and gas leases. On Oct. 30, 2013, the Sixth Circuit Court of Appeals held that paragraph 14 does not require a lessee to match a third-party offer or have the lease terminated. The federal court opinion issued in Stewart v. Chesapeake Exploration, L.L.C., 2013 U.S. App. LEXIS 22302, 2013 FED App. 0928N (6th Cir.), 2013 WL 5832343 (6th Cir. Ohio 2013) is consistent with other holdings interpreting this lease provision.

The court found the landowners’ interpretation “strange at best,” “implausible” and in conflict with several other provisions in the lease.

The court closed by holding:

“In summary, we agree with the district court that, by its terms, Paragraph 14 does not grant the landowners a right to terminate their leases, but instead grants Chesapeake a ‘preferential right to renew’ them.”

 

Ohio landowners challenge oil and gas leases; does the offer of a new lease terminate the existing one?

Posted in Contracts and Leases, Exploration & Production, Ohio

The plaintiffs in this case are a group of landowners in Nobel County who, from 2008 to 2010, entered into oil and gas leases, some of which were assigned to Chesapeake Exploration, LLC. Some of the leases had a three-year primary term, some five years, with typical provisions to extend the primary term. However, the lease provision really at issue was titled “Preferential Right to Renew,” referred to as “paragraph 14.” Both the plaintiffs and defendants filed motions for summary judgment. Judge Edmund A. Sargus Jr. of the federal District Court in Columbus decided the case on Sept. 26, 2013. Wiley v. Triad Hunter LLC, 2013 U.S. Dist. LEXIS 143058 United States District Court for the Southern District of Ohio, Eastern Division.

Paragraph 14 provides, in summary, that if during the primary term and one year thereafter, the lessor receives an acceptable, bona fide third-party offer to lease, the lessor would provide the lessee with the particulars. The lessee then would have 30 days to advise the lessor of its agreement to match the offer. Also, any lease “granted by lessor in contravention of the purposes of this paragraph shall be deemed null and void.”

The plaintiffs received a bona fide offer to lease their land. At this point, let me digress. Hoping that an existing lease will expire, third parties will offer a new lease to the landowner, sometimes called a “top lease,” that will take effect upon the existing lease’s termination. Paragraph 14 would seem to protect the lessee by giving, in effect, a right of first refusal on equal terms.

Picking up the story and summarizing for brevity, apparently the new leases were a better deal. So, despite the fact that the existing leases were within their primary terms, the plaintiffs forwarded the offered lease to the lessee. In one of the letters to the lessee, the plaintiffs informed the lessee that the lease had in fact been forfeited based on the plaintiff’s interpretation of paragraph 14. The lessee responded by saying that it disagreed with the plaintiff’s interpretation and taking the position that it need do nothing pursuant to paragraph 14. Continue Reading