We have spilled a lot of “digital ink” on this blog addressing how Ohio courts have confronted oil and gas disputes about Ohio’s Dormant Mineral Act (DMA) and regulatory/zoning matters. As we noted previously, there are no less than five cases now pending before the Ohio Supreme Court about the DMA, presenting some 15 propositions of law. And the court still has not ruled on the long-pending Munroe Falls appeal, which addresses the extent to which municipalities may be preempted from applying zoning regulations to state-permitted oil and gas wells.
It has been interesting for those of us who practice in the firm’s Appellate and Supreme Court Practice Group to watch Ohio’s oil and gas boom touch other areas of the law, beyond the predictable DMA, leasing, and regulatory contexts. Two recent appellate decisions from Guernsey County – one of which is set to be argued before the Ohio Supreme Court in May – reflect how Ohioans’ interest in valuable mineral rights is affecting other facets of the law.
Is income from an oil and gas lease marital property?
On May 5, the Ohio Supreme Court is scheduled to hear arguments in Kuhn v. Kuhn n.k.a. Cottle. In Kuhn we see the effects of the oil and gas boom in the context of a divorce. Mr. Kuhn owned certain property, including mineral rights, before the parties were married. After their marriage, the husband’s property became the marital residence. Four years into their marriage, Mr. and Mrs. Kuhn executed an oil and gas lease with Gulfport Energy Corp., leasing the property for oil and gas development. The lease provided for a signing bonus of more than $120,000 and 20% royalties from any future oil and gas production.
Soon after they received their bonus check, Mr. and Mrs. Kuhn divorced and agreed on all issues except for the disposition of the signing bonus and royalties. A magistrate determined that the marital residence property was Mr. Kuhn’s separate property, and that both the signing bonus and future royalties were his sole property. The trial court agreed and Mrs. Kuhn appealed.
The Guernsey County Court of Appeals partially reversed the trial court, agreeing that Mr. Kuhn was entitled to all future royalties, but concluding that the signing bonus was marital property like other income generated during a marriage and therefore divisible by half. Mr. Kuhn appealed to the Supreme Court, asking it to hold that:
Where one spouse owns real property in an area experiencing a high volume of oil and gas exploration and leasing, the acquisition and execution of a lease by the property owner is not the result of contribution of labor, money or in-kind contribution such that any income generated from said lease could be considered ‘active income’ pursuant to Ohio Revised Code Section 3105.171 but is instead ‘passive income’ generated from the separate property and therefore is not subject to division between the spouses in an action for divorce.
Mem. in Supp. of Jurisdiction at 9. If you are interested in the outcome of Kuhn, you can follow it by subscribing to receive case updates from the Ohio Supreme Court or watch the argument on the court’s website.
Fifth District holds real estate agent liable for nondisclosure
The Guernsey County Court of Appeals just issued another notable decision, Duncan v. Maag, affirming summary judgment for the plaintiff in action by a landowner (and seller of real estate) against a Realtor for breach of fiduciary duty, fraudulent misrepresentation and fraudulent inducement. The plaintiff alleged that when he sold a 184.015 acre vacant tract of land, one of the defendants (a real estate broker, acting as a dual agent) arranged for the other defendant (the buyer) to purchase the land without disclosing to the plaintiff the value of the mineral rights or the buyer’s intent to exploit them. The buyer settled the claims against him, but the plaintiff’s claims against the real estate agent continued.
When the Realtor failed to respond to requests for admission, and they were “deemed admitted” by the court, the plaintiff used them in a motion for summary judgment that the trial court granted. These included admissions by the Realtor that he and/or the buyer had represented to the seller that the land was being purchased solely for use as pasture for livestock, even though the Realtor “was specifically seeking land for the purpose of oil, gas, or mineral rights, sales, or leases on behalf of [the buyer] as his real estate agent.” On appeal, the Realtor argued that disputes of fact remained as to damages, but the court of appeals disagreed, affirming the trial court’s decision that the Realtor’s intentional misrepresentation of the property’s true value resulted in damages to the seller of $1.2 million, plus interest and costs.
Duncan certainly presents a cautionary tale for real estate agents acting as dual agents (and their clients) where valuable oil and gas interests are at stake.