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What Goes Up … Quick Glance #3 at Ohio Oil and Gas Leases in Bankruptcy

As with prior posts about oil and gas leases in bankruptcy (located here and, on Porter Wright’s Banking & Finance Law Report blog, here), this post presents another thorny issue — namely, “Is an oil and gas lease a lease at all?”

Whether an oil and gas lease is a “lease” is significant in the bankruptcy context, because the Bankruptcy Code has several provisions regarding the treatment of leases.

This post considers two cases that interpret 11 U.S.C. § 365(d)(4), which provides that unless the bankruptcy court orders an extension, “an unexpired lease of nonresidential real property under which the debtor is the lessee shall be deemed rejected, and the trustee shall immediately surrender that nonresidential real property to the lessor, if the trustee does not assume or reject the unexpired lease by … the date that is 120 days after the date of the order for relief [(typically, the commencement of the case)]….” The Code further provides that “the rejection of an … unexpired lease of the debtor constitutes a breach of such contract or lease … immediately before the date of the filing of the petition.”…

Part 2: Who owns the minerals under Ohio Township Section 16?

In our first post about Section 16 lands, we provided background on such public lands here in Ohio. We summarized that in 1785, a Federal land ordinance granted one square mile — usually Section 16 — out of every six square mile township to be held in trust by the state and to be dedicated to support public education pursuant to federal law. The Ohio Legislature then began leasing the land, and in 1827 it authorized sale of the land with proceeds going to the “Common School Fund.” Interest from the fund was to be paid to the schools within the townships. See, Dr. George W. Knepper, The Auditor of State, The Official Ohio Lands Book, 2002. (“Knepper”).

In regard to the funds collected from the sale of all school lands, the Ohio Constitution provided:

“The principal of all funds, arising from the sale, or other disposition of lands, or other property, granted or entrusted to this state for educational and religious purposes, shall forever be preserved inviolate, and undiminished; and, the income arising therefrom, shall be faithfully applied to the specific objects of the original grants, or appropriations.” Ohio Constitution, Article VI, Section 1 1

Who owns the minerals under Ohio Township Section 16?

Oil and gas law is, at its core, real estate law that has been shaped by a thousand years of common law and, more recently, statutory law. Ohio is no exception, and one area that has been impacted significantly by shifting legal policies and statutes is the ownership of minerals beneath “school lands” in Section 16 of Ohio’s Townships.

In the Federal Land Ordinance of 1785, Ohio was required to reserve one section of land (i.e., one square mile, usually section 16), in every Ohio township for the support of public education. Extending that federal mandate, in 1917, the Ohio Legislature passed a law that, among other provisions, provided, “It is declared to be the policy of the state to conserve … mineral resources of the [school lands held in trust] … and to this end the state reserves all gas, oil, coal, iron and other minerals that may be upon or under the said school lands… .” H.B. No. 192, passed March, 20, 1917 (107 Ohio Laws 357). Realizing the magnitude of this reservation and the fact that the Ohio Dormant Minerals Act cannot be used against government interests, my interest was tweaked and I decided to dig a little deeper.…

Nothing New Under the Sun — A 1901 Oil and Gas Lease

Mineral and land owners in Ohio who are presented with a proposed lease from a landman or oil company often launch an intense study of royalty provisions, development covenants, delay rentals, Pugh clauses, well spacing and the like. They often refer to the Internet, land owner groups, owner-oriented attorneys and other resources. Like so many things, it turns out that our forefathers pretty much had it figured out. I recently reviewed a 1901 oil and gas lease from Putman County; my thoughts and observations are below.

The lease was granted by Noah Moser to The Sun Oil Co., an Ohio corporation, on Sept. 19, 1901. The recordation of this transaction is hand written into the Putman County records by the recorder. The consideration, what is today called the “signing bonus,” was $80 for a 160-acre parcel. (In today’s dollars, that’s an “economic power” of $56,300, or $352 per acre.)

In the two-page document, Mr. Moser granted all the oil and gas in and under the described premises together with the right to enter at all times for the purpose of drilling and operating for oil, gas or water. This included the right to erect, maintain and remove all buildings, structures, pipelines and machinery necessary, provided that Mr. Moser retained the right to farm the land not actually used. Just what one would expect. But here’s where Mr. Moser shows he knew what he was doing:…

Ownership of Minerals Under Public Roads

This is the second post in a two-part series examining ownership of minerals located under bodies of water and roads. See part I discussing the ownership of minerals under adjoining waters.

Who owns the minerals underneath public roads in Ohio? This is really two questions:

  1. What ownership interest does the state, county, or township have in the land underlying the road? 
  2. What is the rule for abutting landowners in the event the government owns less than a fee simple absolute?

Historical Ownership Interest of the State, Counties and Municipalities

Over time, the interest acquired in the land underlying roads has changed for states, counties, and townships. Ownership interests are transaction specific, but there is a general trend. Municipal roads were usually taken in fee, while roads outside municipalities are likely to be easements unless they were granted in the past 30 years, in which case they are likely to be held in fee.…

Common Oil and Gas Lease Conundrums

Understanding rights and obligations associated with oil and gas leases can be challenging. Imprecise lease language, implied legal duties, formulaic statutes and evolving case law all affect oil and gas leases in different ways. We’ve written several articles on these topics during the past several months and have compiled them into an eBook to help bring clarity to some of these issues. Download our Common Oil and Gas Lease Conundrums eBook.…

Ownership of Minerals Under Adjoining Waters

This post is the first of two articles examining ownership of minerals located under bodies of water and roads.

Who owns the minerals under bodies of water? When oil and gas were being produced in meager quantities, not many people cared. But the story is different when lease bonuses are thousands of dollars per acre and royalties could be worth millions. Now, every acre in eastern Ohio is cast in a different light and suddenly there is enormous interest in figuring out who owns the minerals beneath Ohio’s lakes, rivers, ponds, streams and reservoirs. The following press release helps drive home the point about what is at stake:…

Ownership Theory of Oil and Gas Influences Bankruptcy Law in Ohio

One of the most fundamental questions in oil and gas law is whether oil and gas in the ground are capable of being “owned.” The answer to this question shapes the law and influences legal analysis in a variety of ways.

Different states have answered this question in different ways, and the answer is not yet clear in Ohio. But the characterization under Ohio law is critically important in federal bankruptcy law, as Andy Nicoll discusses in his recent post on the Banking & Finance Law Report blog. It is worth the read.…

Unitization in Ohio: Compelled Participation in the New Context of the Utica Shale

In many ways, the Utica Shale play caught Ohio off guard. The state became a main focus of the oil and gas industry almost overnight. Ohio responded by updating its oil and gas laws, including major overhauls resulting from Senate bills 165 in 2010 and 315 in 2012. But in some cases, operators and regulatory agencies are still applying old law that was written with conventional drilling methods in mind. In this post, part 3 of our series on compelled participation (see Part 1 and Part 2), we look at unitization — one of these old laws being put to new use.

What Is Unitization?

Unitization is the creation or designation of a contiguous area of land, called a “unit,” for the efficient development of the oil and gas resources underlying that land. Units can be formed by order of the Ohio Department of Natural Resources (ODNR), on application from an operator. Units also can be formed voluntarily by consent of interest owners, usually owners of the leasehold. Inevitably, the land sought to be unitized — really the geologic formation below the surface — is subject to a patchwork of different ownership interests. The operator attempts to negotiate lease rights with all such land or mineral rights owners, but it is often the case that the operator cannot reach an agreement with all of them. When an operator has the consent of all but a small portion of the land for a unit, Ohio law allows the operator to …

Oil and Gas Rights — Reserved? A Litigator’s Perspective On The Mong Case

A decision out of the Eleventh District Court of Appeals of Ohio, Mong v. Kovach Holdings, LLC, 2013-Ohio-882 (Ohio 11th Dist. March 11, 2013), represents a cautionary reminder that parties should carefully review the language of contracts they enter, especially the essential terms of the document, and especially contracts that convey away property rights. That is particularly true when a party parts with property rights set forth in warranty deeds. My colleague Jeff Fort blogged about this recently and asked me to add my thoughts.

In Mong v. Kovach Holdings, the plaintiff, Joseph Mong, sold approximately 70 acres of land near Warren, Ohio, he had recently acquired from Alice McMenamin to Defendant Kovach Holdings at auction. Mr. Mong apparently intended to reserve to himself the oil and gas rights associated with the property. According to Mr. Mong, the auctioneer informed the prospective purchasers of that reservation immediately preceding and subsequent to the auction. The auctioneer confirmed that he did so in a following affidavit. The purchaser of the property, Kovach Holdings, denied that that the auctioneer described any such limitations or reservations. The property sold for $245,300.

The parties shortly thereafter executed a standard purchase agreement, but which included the following handwritten language: “Gas + oil Royalty Reserved by Present owner.” Mr. Mong argued this language revealed that the oil and gas rights were not a part of the sale to Kovach Holdings. The problem, for Mr. Mong at least, was that the subsequent warranty deed by which …

Life Estates: More Oil and Gas Law Implications

We recently received a question regarding our earlier post Life Estates: Oil and Gas Law Implications, wondering: “What happens to a mineral lease which the life tenant entered into and received renewal payments each year that was never ratified by the remaindermen upon the termination of the life estate and complete possession is realized by the remaindermen?”

The Noble County, Ohio Court of Common Pleas recently addressed this issue in Dickson v. Chesapeake AEC Acquisition, LLC, Case No. 212-0051. In Dickson, a life tenant entered into an oil and gas lease with an exploration company. Just before the original term of the lease expired, the lessee’s successor sent the life tenant a check, as was required to extend the primary term of the lease. The plaintiffs (the remaindermen of the life estate) returned the check and notified the lessee that the lessor owned only a life estate in the property, that the plaintiffs owned the remainder interest in the property, and that the life tenant had no right to lease mineral rights. When the dispute could not be resolved, the remaindermen sued the lessee. The remaindermen then moved for summary judgment, asking the court to declare the lease between the life tenant and the exploration company void.…

ODNR Issues Second Unitization Order for Horizontal Utica Shale Wells

The chief of the Division of Oil and Gas Resources Management (DOGRM) recently issued a new unitization order pursuant to R.C. §1509.28. This is only the second such order since the beginning of Ohio’s shale drilling boom. The unitization statute has become an increasingly important legal tool for oil and gas operators. We are seeing a new body of law take shape in Ohio, and last week’s order doubled its volume.

The process of unitization is conceptually related to mandatory pooling (R.C. § 1509.27), and is part of our ongoing blog series on Ohio’s compelled participation laws. (Read part 1 and part 2.) A unitization order allows oil and gas operators to join, or unitize, recalcitrant mineral owners to create the large tracts of land — often comprising hundreds of acres — that are necessary to profitably and efficiently produce hydrocarbons from shale formations while protecting each owner’s correlative rights.…

Be Careful Drafting Contracts and Deeds When the Ownership of Minerals Is at Stake

A recent decision by the Court of Appeals of Ohio highlights several errors by a seller of property who may have intended to reserve mineral rights. (See Mong v. Kovach Holdings LLC, 2013 Ohio 882, Court of Appeals of Ohio, Eleventh Appellate District, Lake County, March 11, 2013.)

Facts
In August 2009, McMenamin conveyed real estate in Trumbull County to Mong. The deed contained a reservation:

“Grantor [McMenamin] herein reserves the oil and gas royalties for the duration of her natural life, but for a term not to exceed 10 years from the date hereof [August 4, 2009].”

The minerals were subject to an oil and gas lease. So at this point, McMenamin had a life estate in the royalty interest. Mong had a future interest in the royalties and a present ownership interest of the minerals.…

A Tool of Last Resort: Mandatory Pooling in Ohio

This is the second in a multi-part series on the practice of compelled participation – forcing unwilling mineral rights owners to participate in oil and gas production from their property. Part I discussed the history and constitutionality of this practice in the U.S.

Every day, crowds of title researchers and landmen pack county offices in Eastern Ohio looking for the owners of unleased property. They are discovering a quilt of landowners with varying degrees of interest in leasing their land for oil and gas drilling. But even after attempting to negotiate with landowners, oil and gas companies often cannot lease enough land to comply with Ohio’s minimum spacing laws. As a result of those laws, uncooperative landowners threaten to interfere with landowners who have leased and want to have oil produced from their land.

Fortunately, under the right circumstances, an operator or the consenting landowners may be able to invoke Ohio’s mandatory pooling laws, the most common form of compelled participation. Mandatory pooling laws force hold-out landowners to submit their mineral rights to oil and gas operations when their recalcitrance prevents an operator from meeting state spacing requirements. Read more about these and other industry terms in a previous post.…

When Is an Assignment of a Lease not an Assignment of Obligations?

When oil companies transfer oil property among themselves, they frequently do so by an assignment of lease rights. Sometimes they assign all their interest under a lease, but they often assign just a portion of the lease, or reserve some interest in the property. In the event of multiple assignments — such as when party A assigns to party B, who assigns to party C, and so on — there can be confusion about what was assigned, and who is obligated to do what.

This kind of controversy set the stage for the recent decision by the North Dakota Supreme Court captioned Golden v. SM Energy Co., 2013 ND 17, Feb. 1, 2013. The Golden decision presents an interesting discussion about royalty payments, division orders and assigned obligations. Does this case portend what can happen in Ohio? Only for companies that do not learn from mistakes made in other states.…

Mandatory Pooling and Unitization in Ohio, Part I: History and Constitutionality

Landowners, in certain situations, can be compelled by the state to combine their mineral interest with their neighbors for the purpose of producing oil and gas. In Part I of a multi-part series, I explain the history and constitutionality of this practice.

What is Compelled Participation?

“Compelled participation” is the term I will use throughout this blog series to refer collectively to mandatory pooling and unitization. Mandatory pooling and unitization are variations of similar state action — forcing mineral owners to include their mineral interests with other owners in a pool or unit. In later posts the two concepts will be distinguished and discussed separately, but because they have the same legal and historical origins, it also makes sense to discuss them collectively. Admittedly, this term is imperfect, but is preferable to untangling the Gordian knot of terminology in this area of oil and gas law (see our earlier blog discussing these confusing terms).

Compelled participation occurs when an operator cannot negotiate an agreement (usually in the form of an oil and gas lease) with enough landowners to legally or efficiently develop oil and gas resources. In those situations the operator can apply for an order from a state agency forcing the recalcitrant landowners to nevertheless participate.…

Who Owns the Mineral Rights on My Property?

As oil and gas companies flock to eastern Ohio to take advantage of the Utica shale play, trying to figure out “who owns the mineral rights” continues to be a difficult and increasingly important question.

As noted in a recent post, Ohio title insurance companies are excepting from title insurance policies the ownership of the subsurface mineral rights, including interests in oil and gas, and the existence of any leases for the minerals on a given property. Apart from whether title insurance is required by a lender or requested by a party on a transaction, it is difficult to find a title company in Ohio that is willing, and qualified, to render a title opinion on the status of a property’s mineral interests.

Though title insurance companies are not providing mineral estate coverage, mineral rights title searches are still possible, but not easy. Here is the “CliffsNotes” summary:…

Is There a Right To Appeal an Oil and Gas Drilling Permit in Ohio? [UPDATE: No]

Ohio Supreme Court Rules Drilling Permits Are Not Appealable to the Oil and Gas Commission

The Ohio Supreme Court this week ruled in the case Chesapeake Exploration, LLC v. Oil and Gas Commission, Slip Opinion No. 2013-Ohio-224, agreeing with Chesapeake and holding that there is no right to appeal a drilling permit in Ohio. In doing so, the Court decided that R.C. 1509.06(F) does exclude drilling permits as appealable orders. This means that once a drilling permit is issued by the Chief, it cannot be appealed to the Oil and Gas Commission. You can read the whole opinion (it’s short). 

To learn more about this topic, read our original post.…

Dealing With a Mineral Interest Not Administered as Part of Predeceased Owner’s Estate

You are interested in acquiring a gas lease on certain parcel. When you look at the real property records, however, you discover the record owner is deceased. Now what do you do? Who owns the interests? How do you evidence this ownership?

This issue might be best discussed in the context of an example. Roger Farmer sold his farm, located in Muskingum County, Ohio, in 1978 and retained the mineral interests. That is, Roger “severed” the mineral interest from the rest of the property. He died in 1995 without transferring those interests. He left a will, admitted to probate in Franklin County, Ohio, which left all his property, real and personal, to his son, John.

John died in 2002, also without transferring the interests. There is no record of any will being admitted to probate, or of the administration of his estate. To determine the current owners of the mineral interest, we have to analyze Roger’s will and John’s family situation.…

Is Gas a Mineral?

A case pending before the Supreme Court of Pennsylvania considers a question that seemingly has been settled in that state for 130 years: Is gas a mineral? 

In Butler v. Charles Powers Estate, Pennsylvania’s highest court will consider whether rights to natural gas produced from the Marcellus shale should qualify as “mineral” rights under an 1881 deed. The deed at issue contained an exception reserving “one half the minerals and Petroleum Oils to said Charles Powers and his heirs and assigns forever…”

In 2009, the owners of the surface estate filed a complaint to quiet title to the property, including the minerals and petroleum oils. The heirs to Powers’ estate opposed the action and sought a declaratory judgment that the reservation rights in the deed’s exception included Marcellus shale gas. The trial court dismissed the heirs’ declaratory judgment action with prejudice, holding that the heirs failed to state a cognizable cause of action based upon two Pennsylvania Supreme Court decisions — Dunham v. Kirkpatrick, 101 Pa. 36 (1882), and Highland v. Commonwealth, 400 Pa. 261, 161 A.2d 390 (1960).…

Life Estates: Oil and Gas Law Implications

Life estates have been recognized as an interest in land at common law since the Middle Ages. Even so, how they relate to the ownership of and payment for oil and gas can result in outcomes that may not be intuitive.

According to common law and statute, there can be no gap in the perpetual ownership of land. For instance, if the owner of a piece of property dies intestate, state statute (in Ohio, R.C. 2105.06) often states to whom the land will be distributed. For this reason and others, land ownership often is divided between a “present” interest and a “future” interest. Frequently, that division takes the form of a life estate and a remainder.

Life Estates Generally
A life estate is an estate that its holder, the “life tenant,” holds only for the duration of a specified person’s (usually the life tenant’s) life. At the death of the life tenant (or, if the life estate is one “for the duration of another person’s life, upon that person’s death), the property passes automatically to one or more individuals or organizations called “remaindermen.” A life estate can be created by deed, by devise in a will, or, if a will is unclear or ambiguous, by judicial implication.

Both the life tenant and the remaindermen have real interests in the property, but they do not have rights to the property at the same time. Instead, their interests in the property are “stacked in time;” the life tenant has a current, exclusive …

Lawsuits Over “Fraudulent” Oil & Gas Leases Often Lack Merit

The Ohio shale boom started slowly when a few small companies quietly began acquiring mineral leases for as little as $25 per acre.  This soon gave way to a full blown land rush in the fall of 2010.  But as lease prices skyrocketed through the Fall of 2011, disillusioned lessors who signed before the peak of the market were the ones rushing – to the courthouse to file lawsuits to cancel their leases.

In order to gain leverage and legitimize their lawsuit, lessors frequently allege that their lease is “unconscionable” or they were fraudulently induced to sign it.  “Exhibit A” to these lawsuits is often a technical error in the lease signing or a “fraudulent” statement made by a landman.  There are exceptions, but many of these kinds of lawsuits have no legal basis.…

US Supreme Court Decision in Nitro-Lift Technologies case this week

One of our Partners, Bryan Faller, added an interesting post to our Employer Law Report blog today we thought you might find of interest.

In United States Supreme Court: A Challenge To The Enforceability Of A Non-Competition Agreement Must Be Presented To The Arbitrator, And Not A Court, If The Contract Contains An Arbitration Provision, Bryan covers the Nitro-Lift Technologies, L.L.C. v. Howard case and its implications for employers.  Nitro-Lift Technologies, L.L.C. provides services to operators of oil and gas wells that enhance production of those natural resources.  The U.S. Supreme Court held that if a contract contains an arbitration provision and there is a challenge to the validity of the contract, it is for the arbitrator and not a court to hear that challenge. The case is important for employers because the challenge was to the validity of a non-competition agreement.  Given the industry and nature of the matter, we wanted to bring the post to your attention.…

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