trending title topics from around the country...mar 22, 2017 · 3/22/2017 1 trending title topics...

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Trending Title Topics From Around the Country

Presented to

1st National Young Energy Professionals Law Conference

New Orleans, LA

March 31, 2017by

Diana S. Prulhiere, Matthew S. Schlensker, & Benedict J. KirchnerSteptoe & Johnson PLLC

Disclaimer

• This presentation does NOT constitute legal advice

• Opinions stated in this presentation are NOT the opinion

– a.) of the presenter’s firm

– b.) of any client of the presenter’s firm

– c.) (necessarily) of the presenter at any future time

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Trending Title Topics in PA & OH

Presented to


New Orleans, LA

March 31, 2017

byBenedict J. Kirchner

Steptoe & Johnson PLLC

OH & PA Basics

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PA – No statutory provisions for expiration of mortgages.

OH – Mortgages which remain unreleased of record for more than 21years after the latter of the written or maturity date are expired as tosubsequent bona fide purchasers, mortgagees, and other persons dealingwith such land for value. O.R.C. § 5301.30.

Mortgages / Deeds of Trust

OH – valid for 5 years from latter of date of entry or date of last executionor certificate of judgment and can be revived for successive 5 year periodsuntil paid and satisfied of record. O.R.C. § 2329.07

o Judgments only apply to real property owned at the time of judgmententry; must re‐file judgment lien to attach it to debtor’s subsequentlyacquired property. Bank of Ohio v. Lawrence, 161 Ohio St. 543, 120N.E.2d 88 (1954)

PA– valid for 5 years from latter of date of entry in the judgment index ordate of last revival and can be revived for successive 5 year periods until paidand satisfied of record. See Pa.R.C.P. No. 3023 and 42 Pa.C.S. § 5526.

o Judgments only apply to real property owned at the time of judgmententry; must re‐file judgment to attach it to debtor’s subsequentlyacquired property. Philadelphia Nat. Bank v. Taylor, 421 Pa. 35, 218 A.2d246 (1966)

Judgment Liens (Except in Favor of Government):

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PA – As to subsequent purchasers, mortgagees or lessees, unpaid stateinheritance taxes act as a lien on the decedent’s property for 20 years afterbecoming delinquent unless certificate of non‐payment of lien is filed. Ifcertificate is filed within original 20 year period, lien can be renewedindefinitely for successive 5 year periods. 72 Pa. Stat. § 9169

OH – No estate taxes are due on estates of individuals who died on or afterJanuary 1, 2013.

o For estates of decedents who died prior to January 1, 2013, unpaidestate taxes act as a lien on the decedent’s property for 10 years after thedecedent’s death. O.R.C. § 5731.38

State Inheritance & Estate Tax Liens

PA – 21 years. 42 Pa.C.S. § 5530o Adverse possession of oil and gas requires actual entry upon anduse of the underlying minerals for the requisite time period. Hoffman v.Arcelormittal Pristine Resources, Inc., 2011 WL 1791709 (May 10, 2011W.D. Pa.)

OH – 21 years. O.R.C. § 2305.04o Adverse possession cannot occur against property registered underthe Torrens System. O.R.C. § 5309.89o Title to mineral estates can be established through adversepossession of that estate for a period of twenty‐one years. Gill v.Fletcher, 74 Ohio St. 295, 305, 78 N.E. 433, 435 (1906).

Adverse Possession

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PA – dower abolished in 1978.o Prior to 1917, dower was a 1/3 life estate in spouse’spropertyo From 1917‐1978, dower was a 1/3 fee interest in spouse’sproperty

OH – dower remains in existence today.o A life estate in one‐third of the real property seized as anestate of the inheritance at any time during the marriage.O.R.C. § 2103.02

oVery, very difficult to get rid of dower

Dower

PA – “Race‐notice” state (except mortgages) ‐‐Unrecordeddeeds void as to any subsequent bona fide purchaser ormortgagee or holder of any judgment of record, without notice,unless such deed is recorded before the deed or conveyance orthe entry of the judgment under which such subsequentpurchaser, mortgagee, or judgment creditor shall claim. 21 P.S. §351.

o “Race” state as to mortgages ‐‐ No mortgage is sufficientunless it is acknowledged or proved and recorded within 6months after the date thereof. 21 P.S. § 621.

Recording Acts

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OH – “Race ‐ Notice” state (except mortgages & oil and gasleases) ‐‐ Until so recorded or filed for record, deeds arefraudulent insofar as they relate to a subsequent bona fidepurchaser having, at the time of purchase, no knowledge of theexistence of that former deed, land contract, or instrument. O.R.C§ 5301.25(A)

o “Race” state as to mortgages ‐‐ All properly executedmortgages shall be recorded in the office of the countyrecorder of the county in which the mortgaged premises aresituated and shall take effect at the time they are delivered tothe recorder for record. O.R.C § 5301.23

o “Race” state as to oil and gas leases and assignments ‐‐ Nooil and gas lease shall be valid until it is filed for record, exceptas between the parties thereto, unless the person claimingthereunder is in actual and open possession. O.R.C. §5301.09

Recording Acts

PA – A memorandum of lease shall be executed by all parties to said leaseand acknowledged according to law by the lessor and contain at least thefollowing information:

1) The names and addresses of the lessors and lessees;

2) a reference to the date thereof;

3) the description of the premises in the form set forth therein;

4) the date of commencement of the term of the lease, if a fixed date, andif not the full provision or provisions thereof pursuant to which such date ofcommencement is to be fixed;

5) the term of the lease;

6) if the lessee has a right of extension or renewal, the date of expiration ofthe final period for which such right is given; and

7) if the lessee has a right of purchase of or refusal on the demisedpremises or any part thereof, a statement of the term during which saidright is exercisable. 21 P.S. § 405

Memorandum of Lease

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OH – Amemorandum of lease shall contain:

1) the names of the lessor and the lessee and their addresses as set forth in thelease;

2) a reference to the lease with its date of execution;

3) a description of the leased premises with such certainty as to identify theproperty, including the source of title;

4) the term of the lease, together with any rights of renewal or extension of thelease;

5) and the date of commencement of the term or the manner of determining thecommencement of the term as set forth in the lease.

A memorandum of lease that is entitled to be so recorded also may set forth any otherprovisions contained in the lease, or the substance of those provisions, and shall beconstructive notice of only that information contained in the memorandum. O.R.C. §5301.251

Memorandum of Lease

OH – a conveyance to two or more persons for their joint lives and then to thesurvivor or survivors of them, creates a JTWROS, but any conveyance that shows aclear intent to create a survivorship tenancy shall be liberally construed to do so.O.R.C. 5302.20 (A)

o A conveyance from less than all survivorship tenants to a person who is not asurvivorship tenant vests the title of the grantor(s) in the grantee, conditioned onthe survivorship of the grantor(s), and does not alter the title of any of the othersurvivorship tenants who do not join in the conveyance. O.R.C. 5302.20 (C)(2)

o Linking multiple grantees with “or” does not by itself create a survivorshiptenancy. O.R.C. 5302.20 (A)

o Divorce between married joint tenants severs JTWROS, creating tenancy incommon, except when married couple are joint tenants as to additional owners;then the survivorship tenancy is not altered by the divorce unless the courtspecifically alters the interests between the divorcing couple. O.R.C. 5302.20(C)(5)

Joint Tenancy

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PA – JTWROS must be created at the same time by the sameinstrument, by express words or implication, but no particular wordsmust be used. In Re: Estate of Robert H. Quick, 588 Pa. 485; 905 A.2d471 (2006).

Joint Tenancy

PA ‐ Created by default in any conveyance or devise tomarried couple as long as no other tenancy is expressly stated.Madden v. Gosztonvi Savings & Trust Co., 331 Pa. 476, 200 A.624 (1938).

OH ‐ Between 1972 and 1985, O.R.C. § 5302.17 authorizedtenancies by the entirety. Tenancy by the entirety no longerexists, but those created during the effective dates of the oldstatute remain valid. O.R.C. § 5302.21(A)

Tenancy by the Entirety

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Unique Aspects of Ohio Law

Oil & Gas Lease Survives Mortgage Foreclosure If mortgaged property in foreclosure is subject to valid oil or gas lease and thelease was recorded subsequent to the mortgage, then the lease has priority over allother liens, claims, or encumbrances on the property so that the lease is notterminated upon the foreclosure sale. Any oil or gas royalties under the lease shall bepaid to the purchaser of the foreclosed property. O.R.C. § 1509.31 (D)

o Note – enacted in 2010, O.R.C. §1509.31(D) does not apply retroactively.

Marketable Title Act Ohio’s Marketable Title Act provides that “any person having the legal capacity toown land in Ohio, who has an unbroken chain of title of record to any interest in landfor forty years or more, has a marketable record title to such interest,” subject tovarious exceptions. O.R.C.§ 5301.48 “Marketable record title” is defined as “a title of record … which operates toextinguish such interests and claims, existing prior to the effective date of the root oftitle...” O.R.C.§ 5301.47(A)


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Dormant Mineral Act (O.R.C. § 5301.56 ) 1989 version – Provides that oil and gas interest held by any person other than surfaceowner is deemed abandoned and vested in the surface owner after 20 years subject tocertain exceptions or the occurrence of a “savings event” during the said 20 year period. 2006 amendments – Require notice of claim by surface owner be given to oil and gas“holder” with a 20 year look back from date of the notice for a “savings event”.

o “Holder” must respond to notice of claim within 60 days with either a claim topreserve or an affidavit identifying a savings event, or else forfeit the oil and gasinterest to the surface owner.

BUT, see Corban v. Chesapeake Exploration, L.L.C., Slip Opinion No. 2016‐Ohio‐5796o HELD: (1) The 1989 version of the DMA is not self‐executing, (2) because the 1989 DMA is not self‐executing, a surface owner must prevail in a quiet title action before an oil and gas interest can be abandoned and merged with the surface under the 1989 DMA, and (3) the 2006 DMA, and not the 1989 DMA, applies to all claims asserted after June 30, 2006, the effective date of the 2006 amendments to the statute.


Oil & Gas Lease Forfeiture Statute (O.R.C. §5301.332) Notice of Forfeiture procedure to have the oil and gas lease cancelled. Cannot be a producing oil and gas well under the original lease. Owner mustfollow statutorily described process:

1. The oil and gas owner serves a Notice of Forfeiture on the lessee advisinglessee of the owner’s intent to have the lease cancelled.2. Oil and gas owner then must record an Affidavit of Forfeiture stating that theNotice of Forfeiture has been served upon lessee.3. Affidavit of Forfeiture must be filed after 30 days, but less than 60 days afterserving the original Notice of Forfeiture.4. Lessee then has a period of 60 days in which to file an Affidavit in theCounty Recorder’s office advising that the lease has not been forfeited.5. If lessee timely files its Affidavit, then the lease will remain of record.6. Effective January 30, 2014, if lessee fails to file its Affidavit within 60 days ofreceiving the Notice of Forfeiture, then the oil and gas owner shall record a“Notice of Failure to File” describing the lease cancellation.


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Transfer on Death Deeds / Affidavits: In effect from 2000 to 2009, it is a way to pass real property to beneficiaries withoutgoing through probate. The execution of a TOD document creates no interest in property; the beneficiary inthe TOD document receives the property at the owner’s death.

o The owner can convey the property without consent of the beneficiary time,thereby extinguishing the TOD document.o If multiple TOD documents are filed, the real estate will transfer to thebeneficiary listed in the most recent document of record.o If a TOD beneficiary dies prior to the death of the real estate owner, the realestate will become part of the owner’s probate estate.

Certificates / Affidavits of Transfer Required to be placed of record when real property passes by intestacy or by will.Title Transfers record title, not actual title; actual title generally transfers on death.


Recent Ohio Case Law

• Corban v. Chesapeake Exploration, L.L.C.,Slip Opinion No. 2016‐Ohio‐5796

Finally give guidance on how to interpret the interplay of the 1989 and 2006 versions of the ODMA

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• ORC 5301.56

• Process for reuniting severed oil and gas interests with surface

• 20 year requirement

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1989 Dormant Mineral Act

The Old Version of the Act

1989 Version

• Automatic divestiture if

• In the last 20 years:

• No title transaction

• No production (or pooled production)

• No Storage

• No separate assessment

• No claim to preserve

• Not owned by state

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• All criteria of old act must be met, plus new notice requirements

• Effective June 30, 2006

2006 Dormant Mineral Act

Ohio’s Dormant Mineral Act

Unlike the 1989 Version, the 2006 Version actually has detailed “notice” requirements:

• Surface owner sends notice by certified mail, return receipt requested, to mineral interest owner at last known address

• If such notice not received, publish once in a paper of general circulation

• At least 30, but not later than 60, days after service or publication, surface owner files affidavit of abandonment in recorder’s office

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Ohio’s Dormant Mineral Act• Mineral interest owner has 60 days from

service of notice by mail or publication to either file a claim to preserve interest or an affidavit identifying one of the saving events in the 20 years prior to notice

• After 60 days with no filing by mineral interest owner, surface owner directs the county recorder to memorialize the abandonment on the record for the mineral interest being abandoned

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CONCLUSION

This was a very sticky area of Ohio Law

• Ohio Supreme Court had been silent

• July 1, 1986 was an important date

• Lower courts had been split over treatment of the ODMA

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Corban v. Chesapeake

• Does the 2006 version or the 1989 version of the [Dormant Mineral Act] apply to claims asserted after 2006 alleging that the rights to oil, gas, and other minerals automatically vested in the surface land holder prior to the 2006 amendments as a result of abandonment?”

Corban v. Chesapeake

• 2006 applies to all claims after June 30, 2006

• 1989 Act is not self‐executing

• 2006 applies to all claims prospectively

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Walker v. Shondrick‐Nau

Slip Opinion No. 2016‐Ohio‐5793

• Lower court held mineral interest abandoned on March 22, 1992

• No court action by surface owner

• Conclusion: Minerals are preserved

Albanese v. Batman &Lipperman v. Batman

Slip Opinion No. 2016‐Ohio‐5814

• Surface owners had filed claim under 1989 Act

• Did not comply with 2006 Act


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Albanese v. Batman &Lipperman v. Batman

{¶ 30} We learned in oral argument that the root of the Batman interest came from bartering undertaken by Nile Batman’s great‐great‐grandfather, a dentist who traded dental care for interests in his patients’ mineral rights; he put them in dentures and they gave him indentures. Hopefully, there were no hard fillings. Now his patience with those mineral rights has paid off for his progeny, a crowning achievement, even if the prices for the commodities involved have receded somewhat from their crest. Somewhere, the good doctor is smiling, knowing that ancient fees owed for drilling and extractions have been paid many times over by fees paid for drilling and extraction. He wouldn’t care that the 1989 ODMA has been rendered toothless. – Justice Pfeifer Dissent

Dodd v. Croskey (2015)

143 Ohio St.3d 293, 2015‐Ohio‐2362

• Surface owner initiates 2006 process

• Mineral owner files preservation notice


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Conclusion

• “…Corban held to the contrary. In doing so, Corban has simplified the law. All it took was rewriting it.”

– Justice Pfeifer, Walker v. Nau dissent

Pennsylvania

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Where it all started

August 27, 1859, Titusville, PA

Minimum Royalty Act Any document that purports to grant rights to remove oil or gas from a propertythat does not also guarantee a 1/8th royalty to the landowner of all oil or gasremoved from the property shall “not be valid.” 58 P.S. § 33.3 Leases / wells in existence in 1979 are exempt from the Minimum Royalty Actprovided that no new wells are drilled on the lease or existing wells refurbished.

No Oil and Gas Tax Assessments Since 2002 No real estate taxes upon severed oil and gas interests in Pennsylvania after 2002;however, oil and gas tax sales prior to 2002 are not retroactively invalidated andmust be examined as any other tax sale.

Clean & Green / Agricultural Security Areas Participation in most programs is evidenced in the record chain of title and/ornoted in the assessment records and should be reported in the oil and gas titleopinion.

Unique Aspects of PA Law

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Title Washing The tax sale of (1) unseated land where (2) the oil and gas was previously reservedor conveyed away and not separately assessed (3) with such sale resulting in thegrantee obtaining the unseated land, including the oil and gas, in fee. Hutchinson v.Kline, 199 Pa. 564, 49 A. 312 (1901) Historically involves the north‐central Pennsylvania counties (namely Elk, Potter,Clinton, Sullivan and Lycoming Counties)

Dunham Rule Rebuttable presumption that a grant or reservation of “minerals” does not includeoil or gas and “oil” or “gas” does not include the other.

o In the opinion issued April 24, 2013, Butler v. Charles Powers Estate ex rel.Warren, 620 Pa. 1, 65 A.3d 885, the Supreme Court of Pennsylvania reaffirmedthe Dunham Rule, holding that a reservation of minerals in a deed does notreserve the gas in unconventional formations, such as the Marcellus Shale.


Apportionment Pennsylvania takes an apportionment approach to paying royalties. When a leasedtract is subdivided into smaller parcels with different owners after the lease isgranted, the owner of each parcel is entitled to a proportionate share of the totallease royalty regardless of the well location. (See Wettengel v. Gormley, 28 A.934(1894), reh’g, 39 A. 57 (Pa. 1898).)

Deed Without Husband’s Signature (Prior to July 17, 1957) Prior to July 17, 1957, married women did not have the legal capacity to conveytheir separate property without their husband’s signature.


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Recent PA Case Law

• Herder Spring Hunting Club v. Keller, No. 5 MAP 2015, 143 A.3d 358, 2016 WL 3909038 (Pa. July 19, 2016)

– Title washing

• N. Forests II, Inc. v. Keta Realty Co., 130 A.3d 19 (Pa. Super. Ct. December 4, 2015).

– Adequacy of service

Title Washing

• A conveys Tract 1 to B, excepting and reserving the Oil and Gas

• A = severed oil and gas

• B = surface estate

• B fails to pay taxes

• Treasurer sells Tract 1 in Tax Sale to B (or B’s agent, who eventually sells it to B)

• A is divested of interest in the oil and gas

• B has title to the surface and oil and gas

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Hutchinson v. Kline, 199 Pa. 564 (Pa. 1901)

1892 Tax Sale in Elk County parcel which was subject to a prior oil and gas severance

– Holding:

• Grantee acquired title to the surface and previously severed O/G Estate (even though the purchaser at Tax Sale was also the owner of the surface estate )

– Considerations:

• Unseated land and un‐assessed O/G

• No Duty between Surface owner and Severed O/G Owner

Herder Spring Hunting Club v. Keller

Facts:

• Kellers reserved subsurface estate, including gas, in unseated land in 1899

• No evidence that subsurface was separately assessed

• Assessed surface tract was sold at treasurer’s sale to the county for delinquent taxes in 1935

• Herder Spring Hunting Club’s predecessor purchased the property from the county in 1941

• Keller heirs and Club both claimed rights to OGMs

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Herder Holding

• Title washes are still the law in PA

• The Supreme Court concluded that if neither the Kellers, nor the purchasers in 1899 notified the county commissioners, the tax assessment would cover the entire Siddons Warrant.

• Rejected the Keller heirs’ claims that the 1936 deed only conveyed the surface and that the reserved rights had no value in 1935. The Court noted the Keller heirs failed to challenge the tax sale during the two year redemption period, as required by the Act of 1815.

Herder Holding

• The 1935 tax sale conveyed the severed subsurface estate formerly held by the Kellers.

• Notice by publication under the Act of 1815 did not violate the Keller heirs’ due process rights due to the difficulties in ascertaining the ownership of unseated lands and the right to redeem the property after sale, even under the due process analysis of Mennonite Bd. of Missions v. Adams, 462 U.S. 791 (1983). The 1959 Deed did not reserve any interest, since at the time the prior reservation had already been extinguished.

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N. Forests II, Inc. v. Keta Realty Co.

Facts:

• Northern Forests II acquired 3,665 surface acres June 24, 1987

• 1988: Surface owner files a quiet title action and served notice by publication

• Based on adverse possession of minerals and timber

• 1989: Default judgment in Plaintiff’s favor

• 2012 and 2013: energy lessees and grantees filed petitions to strike or open the default judgment, claiming that the default judgment was void because indispensable parties were not joined in the action and that counsel’s affidavit was insufficient to support notice by publication

Title Washing Take Aways

To have a title wash:

1) Must be an O&G Severance

2) Must be for unseated land

3) O&G must not be separately assessed

4) Must be prior to 1947 when the distinction between seated and unseated land was abolished by passage of the Real Estate Tax Sale Law. 72 P.S. §§ 5860.101 et seq

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N. Forests Holding

• Superior Court concluded that the 1989 judgment was jurisdictionally defective because surface owner failed to join indispensable party subsurface property owners.

• Rejected plaintiff’s contention that naming “successors and assigns” of former owners was sufficient for due process.

• Judgment was defective because counsel’s affidavit was facially insufficient under Civil Procedure Rule 430 in that it failed to specify what efforts were made to locate defendants. (citing Orman v. Mortgage I.T., 118 A.3d 403, 406‐407 (Pa. Super. Ct. 2015).

N. Forests Holding

The Court roundly rejected arguments that the passage of time should bar the court from striking the judgment: “Unlike fine wine, void judgments in Pennsylvania do not improve with age; void ab initio, void for all time.”

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N. Forests Take Away

If you want to serve by publication in PA, you must provide proof of an extensive and nearly exhaustive search for heirs, successors, and assigns

Contact Information

Benedict J. KirchnerSteptoe & Johnson PLLC

201 Chestnut St, Suite 200

Meadville, PA 16335

benedict.kirchner@steptoe‐johnson.com

814‐333‐4910

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Trending Title Topics in WV & CO

Presented to


New Orleans, LA

March 31, 2017by

Diana S. PrulhiereSteptoe & Johnson PLLC

WV: Mineral vs. Royalty

• Grant or reservation of a “1/8 royalty” interest in the oil & gas– Usually gives a full fee interest

• Grant or reservation of a “1/16 royalty” interest– Usually gives a one‐half

(1/2) fee interest

• Depends on year and precise language– Above rules generally apply pre‐1963

Source: http://www.digital‐topo‐maps.com/county‐map/west‐virginia.shtml

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• “The confusion in the West Virginia cases makes it dangerous to assert that the transfer of a share of royalty, or of royalty, bonus and rentals, creates respectively a royalty and a non‐executive interest in that state, but at least there are signs pointing that way.” 3 Williams & Meyers Oil and Gas Law § 304.09.


• “Royalty” as in‐place interest – A reservation of “all the oil rental” to vest in the grantor

“the title to that thing, the beneficial use whereof has been reserved, namely, the oil in place.” ‐Toothman v. Courtney, 62 W. Va. 167, 58 S.E. 915 (1907)

– A reservation of “all the rental or royalty to be derived from [the oil], compels the court to hold, by construction of the instrument, that it vests in him the title to that thing, the beneficial use whereof has been reserved, namely, the oil in place.” ‐Paxton v. Benedum‐Trees Oil Co., 80 W. Va. 187, 94 S.E. 472 (1917)

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• Courts do not apply a bright‐line rule in construing the grant or conveyance of “royalty”– Minerals in‐place – e.g. “in and under”

• A grant of “all the royalty interest in the oil and rentals from gas wells,” together with the conveyance of exclusive authority to drill for oil and gas after the termination of the prior lease without restriction or limitation upon the exercise of such right, vests in the grantee the fee simple title to the oil and gas in place in the land. ‐Snodgrass v. Koen, 82 W. Va. 337, 96 S.E. 606 (1918)

• A reservation of “one half of the oil and gas royalty upon and as to said tracts of land” with no further provision, reserves one‐half of the mineral in place. ‐United Carbon Co. v. Presley, 126 W. Va. 636, 29 S.E.2d 466 (1944)


• Courts do not apply a bright‐line rule in construing the grant or conveyance of “royalty”– Non‐participating royalty interest – e.g. “when produced”

• The court construed a reservation of “1/8 of all the oil and gas in and underlying said tract of land that may be produced therefrom, and the right of ingress and egress for the purpose of utilizing the same” to reserve 1/8 of the oil and gas produced. ‐McDonald v. Bennett, 112 W. Va. 347, 164 S.E. 298 (1932)

• The various grantors’ use of language conveying the right to sign leases and to receive bonus and delay rentals “tend[s] to disclose an intent to convey to the several grantees the ownership of the oil and gas in place, subject only to mere royalty interests in the grantors.” ‐Davis v. Hardman, 148 W. Va. 82, 88‐9, 133 S.E.2d 77 (1963)

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• Court’s duty is “to ascertain the true intent of the parties as expressed by them in the deed, lease or other written instrument under consideration.” ‐Davis v. Hardman, 148 W. Va. 82, 88‐9, 133 S.E.2d 77 (1963)

• Understanding attributes of ownership is important

• What is a non‐participating royalty interest?– A nonparticipating royalty interest owner, unlike the owner of the oil

and gas in place, (1) cannot be charged with any of the costs of discovery and production, (2) has no right to do any act or thing to discover and produce the oil and gas, (3) has no right to grant leases, (4) has no right to receive bonuses, and (5) has right to receive delay rentals. ‐Davis v. Hardman, 148 W. Va. 82, 133 S.E.2d 77 (1963)

WV: Tax Sales

• Severed in‐place mineral interests must be separately assessed as real property for taxation– True NPRIs should not be assessed on the real property land

books but often times they are so assessed

• In West Virginia, in‐place minerals which have been severed from the surface but are not separately assessed may be sold at a tax sale of delinquent surface property– Prior to 1983, mineral owners did NOT have to be provided with

notice of such sale

– After 1983, a mineral interest cannot be sold with the surface unless the mineral owners are also served with notice

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WV: Assessment Basics

• The County Assessor has duty to make land books and assess property

• The owner has duty to assure property is properly assessed and pay taxes

• Taxes are a lien on the property (not the person)

• The State is entitled to one full payment of taxes on each property

• An estate in fee is presumed unless the description states otherwise

WV: Land Books

• Land book audits can provide clues to: locate lost tracts; close gaps in the chain of title; acreage discrepancies; owner’s intent; validity of tax deeds; etc.

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WV: Land Books

• How can land books help clean up your chain of title?

– Owner dies without estate information

• Locate owner in land books during life and follow forward looking for Clerk’s notations

– Owner only conveys part of a tract forward or a tract appears without a clear parent tract

• Locate the owner on the land books and trace backwards looking for Clerk’s notations

– Owner conveys a fractional interest and you’re unable to determine intent

• See if/how many other parties were assessed before and after questionable conveyances; how interests described

WV: Land Books

• How can land books assist in determining the validity of tax deeds?

– Assessment history prior to a tax sale is important

– Confirm that taxes were assessed in delinquent owner’s name

– Confirm no other assessments cover delinquent interest

– Determine whether assessment covers oil & gas

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WV: Tax Sales

• Peterson v. Hall, 57 W.Va. 535, 50 S.E. 603 (1905)

– Syllabus Pt. 3: “When the surface of land is owned by one person, the oil in place by another, a sale for taxes in the name of the owner of the surface will pass also the oil owned by the other person, his estate not being charged on the tax books, under Section 25, c. 31, Code 1899.”

– W. Va. Code 31‐25 (1899): A tax deed shall pass “such right, title and interest in and to said real estate as was vested in the person or persons charged with taxes thereon . . . and all such right, title and interest therein of any other person having title thereto, who have not in his or their own name been charged on the land book of the proper county or assessment district, with the taxes chargeable . . .” (in effect until 3/6/1941)

WV: Tax Sales

• Peterson Facts– Peterson leased 1,050 acres to South Penn on March 5, 1892

– Peterson conveyed to Hall 64 acres of the 1,050 acres on April 15, 1894, subject to the lease and excepting ½ oil royalty

– After the deed, Peterson had no assessment for 64 acres

– Hall was assessed with 64 acres but the interest went delinquent in 1898 and was sold for taxes to Snodgrass in 1899

– Snodgrass leased 64 acres to South Penn on November 19, 1901, reserving the royalty on the lease

– Snodgrass later conveyed ½ of his royalty to South Penn but South Penn had already drilled on the 1,050 acre Peterson tract

– South Penn also drilled on 64 acres after the Snodgrass lease

– South Penn produced oil and delivered to Eureka Pipeline

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WV: Tax Sales

• Peterson Facts– South Penn withheld royalty payments because of conflicting

claims of Peterson and Snodgrass

– Peterson brought suit against Hall, Snodgrass, South Penn and Eureka

• Enjoin development; enjoin Snodgrass from claiming 1/16th

royalty; accounting; set aside Snodgrass lease; trespass (if South Penn drilled on the Snodgrass lease, it abandoned the Peterson lease and therefore did not have right to take oil therefrom)

– HELD: If oil & gas estate is not separately assessed at the time of severance AND the surface estate is subsequently sold by tax deed, the surface, oil and gas pass to the tax deed purchaser

WV: Tax Sales

• Peterson Illustration– 1900 – Ben owned 100 acres in fee

– 1902 – Ben conveyed to Matt ½ interest in oil and gas

– 1903 – Ben entered on land books for 100 acres

– 1903 – 1920 – Matt is not entered on land books

– 1918 – Ben’s assessment of 100 acres goes delinquent; a tax deed is issued to Diana for 100 acres

– RESULT: Tax deed conveys both Ben’s and Matt’s interests; Diana is vested with all surface, oil and gas of the 100 acres

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WV: Tax Sales

• W. Va. Code § 11A‐3‐28 (1941) (now § 11A‐3‐30 & 62)– “Whenever the purchaser of any real estate sold at a tax sale, his heirs

or assigns, shall have obtained a deed for such real estate from the clerk of the county court or from a commissioner appointed to make the deed, he or they shall thereby acquire all such right, title and interest, in and to the real estate, as was, at the time of the execution and delivery of the deed, vested in or held by any person who was entitled to redeem, unless such person is one who, being required by law to have his interests separately assessed and taxed, has done so, and has paid all the taxes due thereon.”

– Who has the right to redeem has never been defined by statute

• W. Va. Code § 11A‐3‐2(b) provides list of persons the Sheriff should notify, including lienholders and others who have requested notice in writing

– Whether Peterson applies to tax deeds delivered after 1941 is unsettled

WV: Tax Sales

• What about due process?

• Mennonite Bd. Of Missions v. Adams, 462 U.S. 791 (decided June 22, 1983)– Indiana statute required county auditor to post notice in county

courthouse of sale of real property for delinquent taxes and to publish notice once each week for three consecutive weeks

– Notice by certified mail to property owner, but no provision for notice by mail or personal service to mortgagees

– Property was sold for delinquent taxes; appellant held a mortgage on property, was not notified of sale and did not learn of the same until redemption period had expired

– Lower courts upheld the tax sale statute

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WV: Tax Sales

• Mennonite Bd. Of Missions v. Adams, 462 U.S. 791 (decided June 22, 1983)– US Supreme Court held: “The manner of notice provided to

appellant did not meet the requirements of the Due Process Clause of the Fourteenth Amendment.

• (a) Prior to an action that will affect an interest in life, liberty, or property protected by the Due Process Clause, a State must provide ‘notice reasonably calculated, under all the circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objectives.’ Notice by publication is not reasonably calculated to inform interested parties who can be notified by more effective means such as personal service or mailed notice.”

WV: Tax Sales

• Geibel v. Clark, 185 W. Va. 505, 408 SE.2d 84 (1991)

– Notice requirements discussed in Mennonitewill only be applied prospectively

• The U.S. Supreme Court decision finding W. Va. Code 11A‐3‐2 (1967) is constitutionally invalid insofar as it permits the sale of real property without personal notice to affected owners and others having an interest in the property is not to be applied with general retroactive effect

• “General retroactive application will have severely disruptive effects on land titles in West Virginia”

– Tax sales of surface property occurring after June 22, 1983 will not take unassessed, severed minerals if the owners of such unassessed, severed minerals were not provided with actual notice of the sale

• If severed mineral owners are provided with notice of sale and they do not redeem, their interests will still be sold

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WV: Tax Sales

• What about oil and gas leases?

– An oil and gas leasehold is “chattel real” and can be assessed and taxed as personal property in West Virginia. ‐ Harvey Coal & Coke v. Tax Com’r, 59 W.Va. 605 (1905); Drainer v. Travis, 116 W.Va. 390 (1935)

– State v. Black Band Consol. Coal Co., 113 W. Va. 872• Is an oil and gas lease extinguished when the land to which it

pertains is sold by the state as forfeited, after having become delinquent for nonpayment of taxes and purchased by the state at a sheriff's sale, though the lease was separately assessed to the owner thereof as personalty and taxes thereon paid for the year of the delinquency of the land?

WV: Tax Sales

• Can a tax sale really terminate a lease?

– State v. Black Band Consol. Coal Co., 113 W.Va. 872• Court held that because the oil and gas leasehold estates had been separately assessed, the tax sale did not terminate the leases

• Does not say what would have happened had the leasehold estates not been separately assessed, but implies that the leases would have terminated

• The title vested in the previous owner was subject to the existing lease, so arguably the title acquired by the purchaser is still subject to the lease

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WV: Tax Sales

• Can a tax sale really terminate a lease?– Generally, purchasers of oil and gas interests at a tax sale do not

provide notice to redeem to oil and gas lessees, nor do they generally claim that their title is free of existing oil and gas leases

– It seems clear that in order for a purchaser at a tax sale to argue that the he/she is free of the encumbrance of the lease, they must have provided notice to the oil and gas lessee of the right to redeem the property

– Answer of whether a tax sale will terminate an oil and gas lease if the leasehold is not separately assessed is unclear

WV: Tax Sales

• Can a tax sale really terminate a lease?– It is clear that the best practice for the oil and gas lessee is to

have the leasehold interest separately assessed

• The county assessor is able to value producing leases

• Non‐producing leases are difficult to value, so they may not be assessed by the county assessor; however, it is a good idea to have these leases assessed even if for a nominal amount to protect the lessee

– It can be very difficult to tie a personal property tax ticket to a particular tract of real property

• The assessment may have an API number, a well name, a tax parcel, or a historic farm name on the tax ticket

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WV: Forced Pooling

• Forced pooling for “deep wells” only– Oil & Gas Conservation Commission has

authority to regulate under W. Va. Code § 22‐6‐1(g), 22C‐9‐4

– Procedural rules – W. Va. Admin. Code Title 39, Series 2

• Onondaga formation is the dividing line between shallow and deep– Utica formation is below the Onondaga

– Marcellus formation is above the Onondaga

• Forced pooling bills recently proposed in legislative sessions –failed by narrow margins

Source: http://www.pic2fly.com/Eagle+Ford+Stratigraphic+Column.html

WV: Cotenant Development

• Must have 100% of interests leased before drilling. ‐Devon Corp. v. Miller, 167 W. Va. 363 (1981)

• Development of minerals without consent of all cotenants is waste. ‐W. Va. Code § 37‐7‐2

• What happens when you have unknown owners or “missing heirs” who are not leased?

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WV: Missing Heirs

• File a missing heirs petition (W. Va. Code § 55‐12A‐1 et seq)

– Process by which the Court appoints a guardian ad litem to represent the missing heirs, allowing development to occur

• Policy: “To facilitate development of coal, oil, gas, and other minerals, as part of the public policy of the State, by removing certain barriers to such development caused by interests in minerals owned by unknown or missing owners or by abandoning owners.”

• Who can file?– Owner of an interest in surface estate

– Owner of an interest in minerals sought to be developed

– Lessee, assignee, or successor to lessee under a valid lease

WV: Missing Heirs

• “Unknown or missing owner” = a person vested with title whose present identity or location cannot be determined– All missing owners or abandoning owners

having record title

– All heirs, successors and assigns of missing owners

– All unknown heirs, successors and assigns

Source: http://imgarcade.com/1/milk‐carton‐missing‐clip‐art/

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WV: Missing Heirs

• Diligence in ascertaining owners required– Must attempt to identify the “unknown” owners, locate the “missing”

owners, and contact the “abandoning” owners

• If still unknown/missing/abandoning owners after above, Special Commissioner appointed– Signs a lease on behalf of the missing heirs

– Files a report with the Court recommending approval

– Court confirms the lease and funds and paid to the General Receiver

• Seven year cut off– Within 7 years of lease being signed, missing persons can move the

Court to reopen the matter in an attempt to prove their interest

– If after 7 years no one comes forward, Court shall begin the process of conveying the minerals and accumulated royalties to surface owner

WV: Minimum Royalty

• W. Va. Code § 22‐6‐8– Prohibits the issuance of any permit required by it for the

development of oil or gas where the right to develop, extract, produce or market the same is based upon flat‐rate leases.

– No permit shall be issued for the drilling of a new, or modification of a prior, oil or gas well, where or if the right to extract, produce or market the oil or gas is based upon a lease providing for flat well royalty unless the applicant files with such permit application an affidavit which certifies that the owner of the working interest in the well shall tender to the owner of the oil or gas in place not less than 1/8 of the total amount paid to or received by or allowed to the owner of the working interest.

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CO: Major Shale Plays

CO: Tract Indices

• Courthouse records are indexed by grantor/grantee parties, but private title warehouses have created county‐specific indices by tract of land– Many abstracting companies rely solely on the Tract Index for

compiling titles

– Various pitfalls: rarely catches estate documents, name changes/mergers, “all interest in County,” releases of mortgages/trust deeds, mere indexing error, etc.

– Good tool for checking gaps, quickly obtaining copies of instruments, etc.

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CO: Codified NPRI

• Codified non‐participating royalty interest– The creation of a non‐participating royalty interest and the

attributes of the same (no right to lease, no right to develop, no right to share in bonuses/rentals or similar payments) is set forth in C.R.S. § 38‐30‐107.5

– Statute effective as of July 1, 1991 and not retroactive

– Prior to that date, there is some uncertainty as to whether a conveyance/reservation of an NPRI would be construed as a true NPRI or a full mineral interest

CO: Taxation and Tax Sales

• Similarities to West Virginia– Statutory requirement for counties to separately assess severed

minerals (C.R.S. § 39‐1‐106)• Counties often do not comply

• Differences from West Virginia– Duty to assess minerals is currently on the Assessor (C.R.S § 39‐

5‐101, 102)

– Severed mineral interests are not sold with delinquent surface

• A tax sale and issuance of a treasurer’s deed on surface from which minerals were previous severed will not pass such mineral rights unless the minerals are separately assessed and sold. ‐Colo. Title Standards Sec. 4.2.1; Mitchell v. Espinosa, 125 Colo. 267, 243 P.2d 412 (1952); Johnson v. McLaughlin, 125 Colo. 298, 242 P.2d 812 (1952)

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CO: Federal & State Lands

• Require obtaining a separate lease file from either the Bureau of Land Management (federal) or the State Land Board (state) in addition to a county records search

• Different rules for interests assigned in leases (e.g. record title vs. operating rights; approval from BLM/State obtained for assignments; limits on ORRIs; etc.)

• Several Congressional Acts necessitate a separate lease covering federally owned oil and gas (or other minerals) underlying certain rights‐of‐way

– Which Act applies depends on various factors such as type of minerals being leased, whether land was patented/unpatented, which railroad Act applies, etc.

– Types of rights‐of‐way that may require a separate lease: railroad, reservoirs, canals, public highways, electric/power uses, water transportation, etc.

CO: Railroad Acts

• Various Congressional Acts that grant certain rights to railroad companies for construction of railroads in Colorado

• Type of interest acquired depends under which Act interest was granted

https://commons.wikimedia.org/wiki/File:1901_Poor's_Denver_and_Rio_Grande_Railroad.jpg

Source: ngdiscussion.net/phorum/read.php?1,275654,275659

Source: en.wikipedia.org/wiki/History_of_Kansas

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CO: Railroad Acts

• General summary of Railroad Acts:– Pre 1871 Alternate Sections = Limited Fee

• Mineral rights conveyed to railroad company

• All minerals can be leased through private agreement with railroad company or successors in interest

– Pre‐1871 Right of Way = Limited Fee

• Mineral rights reserved to the federal government

• Oil and Gas can be leased under Act of 1930; other minerals (except coal and iron) can be leased under Act of 1920

– Post‐1871 Right of Way = Mere Easement

• Mineral rights reserved to the federal government

• Oil and Gas can be leased under Act of 1930; all other minerals can be leased under Act of 1920

CO: Unrecorded Instruments

• When a recorded instrument contains a reference to another instrument which has not been recorded, such reference shall bind only the parties to the instrument and shall not be notice to any other person unless the referenced instrument is also recorded; no person shall be required to make inquiry or investigation regarding such reference. C.R.S. § 38‐35‐108 – May apply to the recording of Memoranda of Oil and Gas

Leases, Operating Agreements, and other instruments traditionally not recorded in full

– Suggestion: treat Memo as a “short form lease” with specific granting language, including material terms that third parties need to know, to provide sufficient notice

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CO: Affidavits of Extension

• For any mineral lease granted on or after March 28, 1967, an affidavit claiming extension of a lease beyond the primary or definite term must be recorded within 6 months after the expiration of said term; if affidavit is not timely recorded, the lease shall cease to be notice and have no more effect than an unrecorded instrument. C.R.S. § 38‐42‐106 – Slightly different rules for leases granted before March 28, 1967

– Arguably applies to exercising options to extend a primary term

CO: Ballot Initiatives

Source: https://vimeo.com/87310319

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• Section 1(1) of Article 5 in the Colorado Constitution reserves to the people of Colorado “the power to propose laws and amendments to the constitution and to enact or reject them at the polls independent of the general assembly . . .”

• During 2016 voters submitted a number of proposed initiatives directed at oil and gas industry– Four of these initiatives advanced to the point of having titles

set and the form of voter petitions approved

– Each of these initiatives essentially proposed to overrule Colorado Supreme Court’s state preemption holdings in the City of Longmont and City of Fort Collins cases (discussed below)

Source: http://www.levellers.org/fracking/


• Summary of four ballot initiatives– The proponents of Ballot Initiatives #40 and #63 failed to return any

signatures to the Colorado Secretary of State, so these measures were not voted on the November 2016 ballot

• Proposed Ballot Initiative #40 would have recognized “an inherent and inalienable right of local community self‐government in each county, city, town and other municipality” to use “prohibitions and other means” to protect the health, safety and welfare of “natural persons” as opposed to corporations or other business entities

• Proposed Ballot Initiative #63 would have empowered citizens, by pursuing lawsuits, and local governments, by enacting ordinances which would not have been preempted by contrary state laws, to seek to enforce the “inherent, indefeasible, and inalienable right” of natural persons “to a healthy environment.”

See 2015‐2016 Proposed Initiatives, http://www.sos.state.co.us/pubs/elections/Initiatives/titleBoard.index.html


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• Summary of four ballot initiatives– On August 8, 2016, proponents of Ballot Initiatives #75 and #78 submitted

signatures to the Colorado Secretary of State in support of these two measures; however, on August 29, 2016, the Colorado Secretary of State announced that random sampling required by state law had revealed that these petitions had failed to garner the minimum number of signatures required to be placed on the November 2016 ballot.

• Proposed Ballot Initiative #75 proposed to expressly grant to local governments, “without risk of state preemption,” the authority “to prevent or mitigate detrimental impacts on public health, safety and welfare, and the environment” by imposing “restrictions on oil and gas development.”

• Proposed Ballot Initiative #78 would have required oil and gas wells and other facilities to be located at least 2,560 feet from an “occupied structure or areas of special concern,” defined as “public and community drinking water sources, lakes, rivers, perennial or intermittent streams, creeks, irrigation canals, riparian areas, playgrounds, permanent sports fields, amphitheaters, public parks and public open space.”

See 2015‐2016 Proposed Initiatives, http://www.sos.state.co.us/pubs/elections/Initiatives/titleBoard.index.html


CO: “Fracking” Ban Cases

• Two “sister” cases– City of Longmont v. Colo. Oil and Gas Ass’n, 369 P.3d 573, 2016

CO 29 (Colo. 2016)

– City of Ft. Collins v. Colo. Oil and Gas Ass’n, 369 P.3d 586, 2016 CO 28 (Colo. 2016)

• COGA brought suit against the respective home‐rule cities and sought injunctions against enforcement of each city’s regulations relating to bans on fracking

• Slightly different arguments, but same rationale applied and same conclusion reached in both cases

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• Do local governments have ability to regulate fracking?– Colorado law of pre‐emption

• State Constitution recognizes the sovereignty of home‐rule cities:

– “The people of each city or town of this state … are hereby vested with, and they shall always have, power to make, amend, add to or replace the charter of said city or town, which shall be its organic law and extend to all its local and municipal matters. Such charter and ordinances made pursuant thereto in such matters shall supersede within the territorial limits and other jurisdiction of said city or town any law of the state in conflict therewith.”

• A home‐rule ordinance will supersede a conflicting state statute in a matter purely of local concern

• If, however, the subject matter is of purely state, or mixed state and local, concern, the state law will supersede a conflicting home‐rule ordinance

• If no conflict exists between the state and local law, then both may coexist


• Do local governments have ability to regulate fracking?– No bright‐line rule: “relative interests of the state and the

municipality in regulating the particular issue” must be considered “on a case‐by‐case basis considering the totality of the circumstances”

– The following factors should guide the court’s inquiry: “(1) the need for statewide uniformity of regulation, (2) the extraterritorial impact of the local regulation, (3) whether the state or local governments have traditionally regulated the matter, and (4) whether the Colorado Constitution specifically commits the matter to either state or local regulation.”

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• Three types of preemption– Express = the legislature “clearly and unequivocally states its intent to prohibit a

local government from exercising its authority over the subject matter at issue”

– Implied = when there is evidence of “legislative intent to completely occupy a given field by reason of a dominant state interest”

– Operational conflict = when “the effectuation of a local interest would materially impede or destroy a state interest”

• Preemption arguments– None of the parties in either case alleged that state law expressly preempted

local governments from regulating oil and gas development or fracking

– In both cases the court disagreed with COGA’s assertion that the Colorado’s Oil and Gas Conservation Act (“Act”) impliedly preempted the home‐rule regulations at issue, stating that “[t]o the contrary, the General Assembly has recognized the propriety of local land‐use ordinances that relate to oil and gas development.”


• Preemption arguments continued– The question of whether preemption existed in City of Fort Collins and City of

Longmont turned on whether there was operational conflict between the home‐rule regulation and the Act

– Legislature’s intent behind the Act: “It is the intent and purpose of this article to permit each oil and gas pool in Colorado to produce up to its maximum efficient rate of production, subject to the prevention of waste, consistent with the protection of public health, safety, and welfare, including protection of the coequal and correlative rights of the owners and producers of a common source of oil and gas, so that each common owner and producer may obtain a just and equitable share of production therefrom.” C.R.S. § 34‐60‐102(1)(b) (2015)

– Under the Act, the COGCC promulgates rules, regulations and orders covering a number of topics, including rules aimed at preventing waste and conserving oil and gas resources while protecting the public health, safety and welfare

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• HELD: the Act and the COGCC’s rules and regulations evidenced a strong state interest and control over numerous aspects of fracking and that each respective local regulation “materially impedes the effectuation of the state’s interest”

• Take‐aways for attorneys and clients?– Be aware of public opinion

– Be prepared to negotiate

– Advanced planning is critical

– Incorporate into business risk analysis

Contact Information

Diana S. PrulhiereSteptoe & Johnson PLLC

Dominion Towers

600 17th Street, Suite 2300 South

Denver, CO 80211

diana.prulhiere@steptoe‐johnson.com

303‐389‐4365

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Trending Title Topics in TX & OK

Presented to


New Orleans, LA

March 31, 2017by

Matthew S. SchlenskerSteptoe & Johnson PLLC

TEXAS: Retained Acreage

• Retained acreage clauses in leases can be potential minefields for litigation

• When did drilling end?

• How much acreage can the well hold?

• What are the field rules?

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• “After the termination of the primary term, each producing wellLessee has on the leased premises will continue to be governed bythis lease, but only as to the area then assigned as a governmentalproration unit to such well by the Railroad Commission of Texas…Inthe absence of such an assigned proration unit, such area shall beforty (40) acres.”

• “After the termination of the primary term” means this is the pointin time a well must be drilled to hold any acreage.

• If the operator has a producing well at the termination of theprimary term, and the operator thinks the well is holding 80 acres,but the RRC has not assigned a proration unit to the well, then thewell will only hold, or retain, 40 acres.


• “At the end of the primary term, or upon cessation of the continuousdevelopment of the lease premises required above, whichever is later, thislease shall terminate as to all lands covered herein, except as to thoselands located within a governmental proration unit assigned to a wellproducing oil and gas in paying quantities. Within said producinggovernmental proration units, this lease shall also terminate at such timeas to those depths lined below: (1) 100 feet below the stratigraphicequivalent of the deepest producing formation of said governmentalproration unit, or (2) 100 feet below total depth drilled, whichever is thelesser depth.”

• Now the point in time is either the end of the primary term, or cessation ofcontinuous development, which could be years down the road.

• This clause also adds a depth limitation, meaning the proration unit islimited in size and depth.

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• Endeavor Energy Res., L.P. v Discovery Operating, Inc., 448 S.W.3d 169 (Tex. App. – Eastland 2014, pet. filed)

• Also see Brandon Durrett, Fun New Ways for Density and Proration Rules to Bust Your Lease: Retained Acreage Clauses and “Governmental Authority” Language in the Wake of Three Recent Texas Cases, State Bar Oil, Gas & Energy Resources Law Section Newsletter (Spring 2016).

• At the end of the continuous development period, the lease terminates except as to “those lands…located within a governmental proration unit assigned to a well…with each governmental proration unit to contain the number of acres required…for obtaining the maximum producing allowable for the particular well.”


• Field rules allowed for 80 acre proration units with up to 80 additional acres

• Lease covered 320 acres; base lessee drilled two vertical wells and assigned 80 acre units to each well

• Top lessee argued each well only held 80 acres because that was all the acreage that was assigned to each proration unit, even though each well could have held 160 acres

• Base lessee argued each well held 160 acres because the lease said each unit should contain the number of acres required to obtain the maximum producing allowable

• Eastland Court of Appeals ruled each well only held 80 acres; lease obligated base lessee to assign the maximum amount of acreage to each proration unit, which base lessee failed to do

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• XOG Operating, LLC v Chesapeake Expl. L.P., 480 S.W.3d 22 (Tex. App. – Amarillo 2015, pet. filed).

• “save and except that portion of said lease included within theproration or pooled unit of each well drilled under this Assignmentand producing or capable of producing oil and/or gas in payingquantities. The term ‘proration unit’ as used herein, shall mean thearea within the surface boundaries of the proration unit thenestablished or prescribed by field rules or special order of theappropriate regulatory authority…In the absence of such field rulesor special order, each proration unit shall be deemed to be 320acres[.]”


• Term assignment involving 1,625 acres, so when term expires, all acreage reverts to assignor except for proration units

• Assignee completed five vertical gas wells

• Field rules prescribed 320 acre proration units, but allowed for smaller “fractional” units

• Assignee designated 802 acres in proration units, or about 160 acres per well

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• Assignor argued the assignee only retained 802 acres, and the remaining acreage reverted to assignor

• Assignee argued the proration units should hold 320 acres per well because the field rules allowed 320 acre units and the assignment defined a proration unit as the area prescribed by the field rules

• Based on this assignment, assignee argued the acreage designated by the operator to a proration unit does not control how much acreage is retained


• Amarillo Court of Appeals ruled in favor of assignee –proration units held all 1,625 acres

• Court determined the assignment specifically defined a proration unit as the area prescribed by the field rules, which was 320 acres

• Court rejected assignor’s argument that only an operator can designate or assign acreage to a proration unit

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TEXAS: Pooling NPRs

• Do you remember your bundle of sticks?– Right to develop

– Right to lease (executive rights)

– Right to bonus

– Right to delay rentals

– Right to royalty

TEXAS: Pooling NPRs

• What is a nonparticipating royalty interest?

• An NPR owner only has the right to share in royalty, or production from the land

• An NPR owner is not entitled to any bonus or delay rentals and may not drill their own well

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TEXAS: Pooling NPRs

• Matt conveys a portion of his royalty to Ben and then Matt executes a lease

• Operator pools Matt’s lease into a larger unit; however, Ben is not subject to the pooling provision in Matt’s lease

• Operator must obtain Ben’s consent to pool Matt’s lease; until Ben consents, he is not bound by the terms of any pooling agreement

• Mere reservation of an NPRI under a tract did not mean NPRI owner intended to give the executive rights owner the power to diminish their interest. Montgomery v. Rittersbacher, 424 S.W.2d 210 (Tex. 1968)

TEXAS: Pooling NPRs

• In a pooled unit, production is allocated based on a surface acreage basis

• Operator pools tracts A and B into a unit

• Matt’s lease covers all of the minerals in tract A and Ben’s NPR burdens tract A

• If Ben ratifies the unit, then he is entitled to his share of production from a (vertical) well located anywhere within the unit on a surface acreage basis

• If Ben does not ratify the unit, then he is only entitled to his share of production from a well located on tract A

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TEXAS: Pooling NPRs

• Ben ratifies a 100 acre unit – entitled to 1/16 of 40/100 acres of production from a well drilled anywhere within the unit = 0.025

• Ben does NOT ratify – entitled to 1/16 of production from a (vertical) well drilled on tract A = 0.0625

B60 acres

A40 acres

1/16 NPRI

TEXAS: Pooling NPRs

• So when does Ben have to ratify? Does he have to ratify a unit before drilling begins?

• Ben must make a timely decision to ratify a lease, but he does not have to do so before drilling has begun. Brown v. Getty Reserve Oil, Inc., 626 S.W.2d 810 (Tex. App. – Amarillo 1981, writ dism’d w.o.j)

• Ben may even be able to wait to determine if the well is productive. Montgomery v. Rittersbacher

• In one case an NPR owner was allowed to retroactively ratify a lease seven years after a well had ceased production, but only because the NPR owner did not know about the pooling. De Benavides v. Warren, 674 S.W.2d 353 (Tex. App. – San Antonio 1984, writ ref’d n.r.e.)

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TEXAS: Pooling NPRs

• What if a lease covers 500 acres, but the NPR only burdens 100 acres?

• Matt owns fee title to 500 acres, and he conveys a portion of his royalty in 100 acres to Ben

• Matt then executes a lease covering the entire 500 acres

• If Ben ratifies the lease, his NPR now burdens every tract covered by the lease, not just the 100 acres

TEXAS: Pooling NPRs

• In effect, the ratification itself is an offer to create a community lease, which Ben could accept by executing the ratification

• To avoid this result, Matt and the operator should limit the ratification to the lands burdened by Ben’s NPR, being the 100 acres

• See London v. Merriman, 756 S.W.2d 736 (Tex. App. –Corpus Christi 1988, writ ref’d), where the court ruled an NPR owner could ratify the pooling clause in a lease without being subject to an anti‐communitization clause in the lease.

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TEXAS: Pooling NPRs

• Pooling clause may not address horizontal drilling

• Well starts in A and crosses B before bottoming out in C

• How are royalties allocated?

A B C

TEXAS: Pooling NPRs

• Lessee must allocate production reasonably Browning Oil Co. v. Luecke, 38 S.W.3d 625 (Tex. App. – Austin 2000)

• Surface acreage basis

• Take points or perforation points

• Length of wellbore underneath tract

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TEXAS: Double Fractions

• What is the “double fraction” issue?

• Used to show a fractional conveyance of the Grantor’s interest

– 1/3 of the usual 1/8 royalty

– 1/3 of 1/8 of the oil, gas and other mineral royalty that may be produced


• Devise in a 1947 will:

• “That each of my children shall have and hold an undivided one‐third (1/3) of an undivided one‐eighth (1/8) of all oil, gas or other minerals in or under of that may be produced from any said lands, the same being a non‐participating royalty interest.”

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• Fixed Royalty

• an undivided one‐third (1/3) of an undivided one‐eighth (1/8)

• A set fraction or fractional royalty

– 1/3 of 1/8 will always equal 1/24


• Floating Royalty

• an undivided one‐third (1/3) of an undivided one‐eighth (1/8)

• A fraction of royalty, which varies based on the size of the royalty negotiated in the lease

– 1/3 of [royalty]

– Changes each time there is a new lease with a different royalty

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• 1/8 the usual landowner’s royalty in leases

• Estate misconception: landowner retaining only 1/8 of minerals in place after executing lease

• With the 1/8 royalty no longer the standard, issues have arisen over the interpretation of double fraction language


• Jurisdictions vary, but usually 3‐step process:

– Intent is examined by four corners

– If unclear, canons of construction

– If remains unclear, document deemed ambiguous and extrinsic evidence allowed

• Parties in double fraction cases typically agree document is unambiguous

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• Deed reserving “one‐half interest in the [minerals]” and describing the reservation as “one half of the usual one eighth royalty [sic]”

– Sundance Minerals, L.P. v. Moore, 354 S.W.3d 507 (Tex. App.–Fort Worth 2011, pet. denied)


• Deed reserved “one‐eighth (1/8) interest in and to all of the [royalty],” subject to a “one‐eighth (1/8) of all royalties payable under the terms of [an existing lease],” and further reserved “one‐eighth (1/8) of the usual one‐eighth (1/8) royalties provided for [in future leases],” on the condition that such lease “shall provide for at least a royalty on oil of the usual one‐eighth (1/8)” and further reserving “an undivided one‐sixty‐fourth (1/64)” of production in the event of development by the mineral fee owner

– Coghill v. Griffith, 358 S.W.3d 834 (Tex. App.–Tyler 2012, pet. denied)

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• Deed granted “one‐half interest” in the minerals, “one‐half” of the 1/8 royalties under an existing lease and “1/16th” of production payable out of the royalty provided in future leases

– Coates Energy Trust v. Frost Nat’l Bank, 2012 WL 5984693


• Hysaw v. Dawkins, No. 14‐0984, 2016 WL 352229 (Tex. 2016)

• Will interpretation dispute

• Ethel Hysaw had three children and divided her lands in Karnes County, Texas via her will

• She gave one tract (each differing in size) to each child in fee‐simple title, however the devise of interest in royalty produced from the land differed

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• “An undivided one‐third (1/3) of an undivided one‐eighth (1/8) of all oil, gas or other minerals in or under or that may be produced from any of said lands”

• Each child “shall receive one‐third of one‐eighth royalty,” unless there has been an inter vivos sale or conveyance of royalty on land willed to that child, in which case the children “shall each receive one‐third of the remainder of the unsold royalty”

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• Trial Court/Appellate Court Findings

“The proper construction of instruments containing double‐fraction language is a dilemma of increasing concern in the oil and gas industry, as uncertainty abounds, disputes proliferate, and courts have seemingly varied in their approaches to this complicated issue.” Hysaw, 483 S.W.3d 1, 4 (Tex. 2016).


• Holding

– The Supreme Court found that Ethel intended to treat her children equally and therefore her intent was to equally divide the royalties among the children.

– The four corners rule applies to wills as well as other non‐testamentary instruments conveying mineral interests.

– Holistic approach

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• Dragon v. Harrell, No. 04‐14‐00711‐CV, 2016 WL 1238165 (Tex. App. – San Antonio Mar. 30,2016)

– Fraction of royalty

– Follows Hysaw analysis

• “…reserved unto the Grantors . . . A free non‐participating interest in and to the royalty on oil, gas and other mineral in and under the hereinabove described property consisting of ONE‐HALF (1/2) of the interest now owned by Grantors together with ONE‐HALF (1/2) of the reversionary rights in and to the presently outstanding royalty . . .”


• Laborde Properties, L.P. v. U.S. Shale Energy II, LLC, No. 04‐16‐00168‐CV (Tex. App. – San Antonio Oct. 12,2016)– Fixed 1/16

– Follows Hysaw analysis

• “There is reserved and excepted from this conveyance unto the grantors herein … an undivided one‐half (1/2) interest in and to the Oil Royalty, Gas Royalty … in and under or that may be produced or mined from the above described premises, the same being equal to one‐sixteenth (1/16) of the production.”

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OK: Affidavits

• Marketable Title of Minerals Claimed Via Recorded Heirship Affidavits or Recitals

Under 16 O.S. § 67(A), a party who claims ownership of a severed mineralinterest through an heirship affidavit recorded for 10 years in the countywhere the real estate is located acquires marketable title against claimsadverse to such affidavit as long as the affidavit meets the requirementsspecifically laid out in 16 O.S. § 67(C).

o No instrument inconsistent with the affidavit could have been placed ofrecord during the 10 year time period. 16 O.S. § 67(C)(5)

o For affidavits recorded before November 1, 1999, the 10 year periodshall not expire until November 1, 2000. Id.

o Purchasers of several mineral interest from parties claiming title underthis section can also rely upon an heirship recital in any recordedinstrument. 16 O.S. § 67(B).

OK: Affidavits

• Sometimes an operator will not accept an affidavit of heirship to pass title

• OK title standards state an affidavit of heirship cannot be used as a substitute for a probate of a will

• In that case, we make a requirement to have the purported mineral owner go to court to obtain a judicial determination of heirship

• Until a court order is obtained, the operator will keep any funds attributable to that mineral interest in suspense

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OK: Statutory Pugh Clause

• Effective May 25, 1977

• “In case of a spacing unit of one hundred sixty (160) acres or more, no oil and/or gas leasehold interest outside the spacing unit involved may be held by production from the spacing unit more than ninety (90) days beyond the expiration of the primary term of the lease.” 52 O.S. § 87.1 (b)

OK: Forced Pooling

• Frequently used by OK operators – see 52 O.S. § 87

• Operators file an application for a drilling and spacing order with the Oklahoma Corporation Commission (OCC)

• The order will generally accomplish three things:– Establish a geographical area to drill a well (i.e., Section 7)

– Designate the common sources of supply where the well may produce

– Establish the parties with the right to drill a well

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OK: Forced Pooling

• Generally, the applicant will be the operator of the well, and other working interest owners and unleased owners will have the opportunity to participate

• Each party with the right to drill a well must make an election based on choices set forth in the forced pooling order

• Parties have 20 days from the date of the Order to either participate in the drilling of the well or elect a cash bonus and royalty option

– 1/8 royalty plus $3,100 per acre (usually when parties fail to elect)

– 3/16 royalty plus $3,000 per acre

– 1/5 royalty plus $2,000 per acre

– 1/4 royalty and no bonus

OK: Forced Pooling

• Order may set forth the terms for participation in subsequent operations

• Often only those owners who elect to participate in the drilling of the initial well will be allowed to participate in subsequent wells

• If you elect to participate in the initial well, but not the second well, then you will not be allowed to participate in the third well, or the fourth well, etc.

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OK: Marketable Title Act

• 16 O.S. §§ 71‐80

• A person has an unbroken chain of title of record extending back at least 30 years; nothing appears of record purporting to divest such person of title.

• Parties may rely on this act when the owner owns the surface and all the minerals, and there are title defects more than 30 years old

OK: Marital Property

• OK is a common law state in terms of marital property

• OK was a community property state from 1939 to 1949 when the community property statute was repealed

• Property acquired during marriage but in the name of one spouse is their separate property

• Property acquired jointly during marriage is owned equally by both spouses

• Many grantors convey property to both spouses as joint tenants with the right of survivorship

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OK: Forced Heirship

• A surviving spouse may not be deprived of less of a share of the deceased spouse’s estate by will than he would be entitled to under the intestate succession statutes. 84 O.S. § 44

Contact Information

Matt SchlenskerSteptoe & Johnson PLLC

10001 Woodloch Forest Dr., Suite 300

The Woodlands, TX 77380

matt.schlensker@steptoe‐johnson.com

281‐203‐5776

Special thanks to Don Hueske, Christina

Denmark, Kelli Smith & Zach Gaver

trending title topics from around the country...mar 22, 2017 · 3/22/2017 1 trending title topics...

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