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

As Ohio enjoys its latest boom in oil and gas exploration, it is important to understand how oil and gas leases are treated in bankruptcy. Unsettled Ohio law regarding whether a debtor owns unextracted oil and gas as part of the debtor’s real property can make this a difficult issue. 

In In re Loveday, No. 10-64110, 2012 WL 1565479 (Bankr. N.D. Ohio May 2, 2012), the Northern District of Ohio examined whether a Chapter 13 debtor had properly included in his bankruptcy schedules his interest in unextracted oil and gas relating to the debtor’s real property. Whether the debtor’s oil and gas rights were properly scheduled was a significant factor in determining whether the debtor could retain the proceeds of the sale of his oil and gas rights. But more importantly, for the companies who sought to purchase the debtor’s oil and gas rights, knowing whether such rights were properly scheduled was necessary to determine whether the debtor had unfettered authority to sell his oil and gas rights without court approval.
Continue Reading What Goes Up … A Quick Glance at Ohio Oil and Gas Leases in Bankruptcy

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.
Continue Reading When Is an Assignment of a Lease not an Assignment of Obligations?

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

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:
Continue Reading Who Owns the Mineral Rights on My Property?

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).
Continue Reading Is Gas a Mineral?

The Supreme Court of Kansas recently decided an interesting oil and gas case. The opinion in Rucker v. DeLay, 289 P.3d 1166, (Kansas, Oct. 19, 2012) contains an intriguing analysis of future royalty interests vs. mineral interests. Though the decision has interesting legal implications, it should be a practical lesson for those trying to convey or reserve oil and gas rights.

Summary of Facts

In 1924, Earl and Leah DeLay sold their farm and reserved the following interest:

“The grantor herein reserves 60% of the land owner’s one-eighth interest to the oil, gas or other minerals that may hereafter be developed under any oil and gas lease made by the grantee or by his subsequent grantees.”

Over the following nine decades Mr. and Mrs. Delay or their successors ratified two different oil and gas leases on the property but no oil or gas was ever produced.

In 2008, Mr. and Mrs. Rucker, the current owners of the property, filed a quiet title action against the DeLay heirs alleging that the 1924 deed reservation was a royalty interest that had not vested in the DeLay heirs (because there was no production) and therefore violated the rule against perpetuities (RAP). The DeLay heirs alleged that the reservation created a mineral interest and that the RAP did not apply.


Continue Reading Kansas Reverses Course; Royalty Interests Reserved in the Grantor Vest Immediately

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 right to possess the land, while the remaindermen’s interest become activated only upon her death.


Continue Reading Life Estates: Oil and Gas Law Implications

This week the Ohio legislature takes on a busy legislative schedule after the holiday break.  Among the many pieces of legislation getting attention are five bills pertaining to the oil and gas industry. These bills, all of them Democrat-sponsored, are up for hearing before the House Agriculture and Natural Resources Committee this week. While no further action is expected before the end of the year, these bills propose significant changes to existing oil and gas regulations and threaten to undermine the regulatory framework in Ohio. 

Here are brief summaries of the bills:

HB 537: Local Government Authority To Regulate Oil and Gas Industry

HB 537 would bring the largest changes to the regulatory landscape. This bill seeks to give political subdivisions (i.e. local governments) authority to enact their own regulations on oil and gas operations. 

The existing law, R.C. 1509.02, gives “sole authority” for oil and gas regulation to the Ohio Department of Natural Resources (“ODNR”), which prevents local governments from creating their own regulations. 

This bill removes the language from the statute that establishes the ODNR as the “sole authority” and authorizes political subdivisions to write their own oil and gas regulations. The bill preserves state regulations as a “floor” and allows political subdivisions to further restrict oil and gas operations. 

This bill would fundamentally alter the regulatory landscape in Ohio. In one of our September posts we already discussed state preemption of local oil and gas regulation through R.C. 1509.02. This bill upsets the current balance of power between state and local governments, and would add yet another layer of complexity to Ohio’s oil and gas regulations. Local governments would have the power to transform Ohio into a patchwork of different and changing regulations that could present significant challenges to the oil and gas industry.

Unrelated to the shift in regulatory authority, this bill also increases setback requirements to 1000 feet for new oil and gas wells, tank batteries of wells, mechanical separators, and heating vessels, with exceptions.


Continue Reading Ohio House Considers Proposed Legislation To Change Ohio’s Oil and Gas Regulations [UPDATE]