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As we have noted previously, the sale to investors of interests in an oil and gas venture typically involves the sale of a security under federal and state securities laws, regardless of whether the investment vehicle is stock, a limited partnership or limited liability company interest, or even a fractional undivided interest in a lease (such as a working interest) if the investor is relying on someone else to manage operations. A corollary of this principle is that persons involved in marketing and selling the investment, if they receive compensation based on the transaction, must be licensed as a broker under state and federal securities laws. The lore that an unregistered “finder” can perform such services is mostly just that — lore. For the issuer, the consequence may well be loss of an exemption from registration and rescission claims from investors.  For the “finder” it may mean that his contract is not enforceable.

In Legacy Resources, Inc. v. Liberty Pioneer Energy Source, Inc. (No. 20120142, Dec. 20, 2013), the Utah Supreme Court held that a finder of investors for a prospective oil and gas project could not enforce an agent agreement with the issuer because the finder acted as an unregistered broker in violation of the Utah’s state securities laws. The court noted that the record contained undisputed evidence that the finder:
Continue Reading Utah decision highlights unregistered finder risks in sale of oil and gas investments

The Ohio Supreme Court recently accepted a new group of civil cases; among them is Chesapeake Exploration, LLC v. Buell. In this case, the Supreme Court has agreed to answer the following two questions of Ohio law certified by United States District Judge Watson of the Southern District of Ohio in Case No. 2:12-cv-916:

  1. Is the recorded lease of a severed subsurface mineral estate a title transaction under the Ohio Dormant Mineral Act, R.C. 5301.56(B)(3)(a)?
  2. Is the expiration of a recorded lease and the reversion of the rights granted under that lease a title transaction that restarts the 20-year forfeiture clock under the ODMA at the time of the reversion?

Read the court’s certification order and preliminary memoranda.
Continue Reading Ohio Supreme Court accepts second Dormant Mineral Act case

An agreement to enter into an oil and gas lease is an enforceable contract in Ohio

Landowner enters into an agreement to sign an oil and gas lease, finds outs there may be a better deal elsewhere and tries to get out of the first deal. A federal court in Ohio says, “No, a deal is a deal.” Bruzzese v. Chesapeake Exploration, LLC, U.S. District Court for the Southern District of Ohio, Eastern Division (Feb. 13, 2014).

Background

A group of landowners in eastern Ohio had engaged attorneys to negotiate oil and gas leases on their collective behalves. They signed an Agreement to Accept Lease Offer from Chesapeake Exploration, LLC. About 75 members of the group later sued Chesapeake Exploration, LLC, claiming that the agreement was unenforceable. Chesapeake settled with all the landowners except Stephen and Elizabeth Albery.

The Alberys had printed out the agreement, filled in blanks, signed it and emailed it to the group attorneys on July 16, 2011. Immediately thereafter, Mrs. Albery’s sister told them that she had heard that other energy companies were making better offers to landowners. Under the apparent understanding that they could back out of the agreement because they believed they could still opt out of the landowners group, the Alberys sent a letter to counsel on July 24, 2011, stating that they wished to terminate the agreement.
Continue Reading An agreement to enter into an oil and gas lease is an enforceable contract in Ohio

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

To summarize:

  • The MTA was enacted in 1961 to make land titles marketable, i.e., free of stale claims. It included a grace period and did not require notice before a chain of title was extinguished in favor of another.
  • The MTA generally applies to any property interest (presumably still including oil and gas interests) where no conveyance or claim to preserve has been filed during the past 40 years.
  • The MTA does not necessarily extinguish all old severed mineral interests, even those with a root of title more than 40 years old, because the severed interest may be a separate chain of title.
  • The Illinois DMA was found unconstitutional by the Illinois Supreme Court in 1980 as violating due process because it did not require severed mineral owners to be given notice and an opportunity to be heard.
  • Indiana’s Dormant Mineral Interests Act, Ind. Code §§ 32-5-11-1 through 32-5-11-8 (1976) — which includes a grace period, a 20-year use-it-or-lose-it attribute and no notice requirement — was held to be constitutional by the U.S. Supreme Court in 1982. Texaco, Inc. v. Short, 454 U.S. 516, 102 S. Ct. 781, 70 L. Ed. 2d 738, (1982)
  • Illinois enacted its Severed Mineral Interest Act, which is based on presumptive adverse possession and requires notice, in 1983.
  • Ohio’s lease forfeiture law requires notice and the filing of an affidavit. The law suspends the statutory determination when the lessee files an affidavit contesting the alleged forfeiture. The lessee’s filing must occur no more than 30 days after receiving notice.
  • The National Conference of Commissioners on Uniform State Laws approved the Uniform Dormant Interests Act in 1986.
    Continue Reading The Ohio Dormant Minerals Act: Part 4

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

Illinois DMA held unconstitutional in 19801

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

The Illinois legislature responded by enacting the Dormant Mineral Interests Act in 1969. The act was intended to facilitate development of dormant oil and gas interests by permitting consolidation of mineral ownership in one person in instances where it had formerly been diffused among many unknown or missing persons. The act provided that unless an individual duly recorded his interest, his failure to actually produce oil or gas in any 25-year period created a presumption of abandonment. There was great uncertainty among oil and gas title examiners regarding the act’s validity because, at common law, abandonment required both intent to abandon and an affirmative act of relinquishment. Furthermore, the act did not require entities who sought a ruling of abandonment to give unknown mineral owners notice or an opportunity to be heard.
Continue Reading The Ohio Dormant Minerals Act: Part 3

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

The facts

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

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

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

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

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

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

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

The facts

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

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

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

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

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

The DMA was enacted in 1989 as part of the Ohio Marketable Title Act (MTA), which itself became law in 1961. The MTA is best understood not in the abstract, but (at least for this writer) in the context of actual facts. A recent case from Licking County is illustrative.
Continue Reading The Ohio Dormant Minerals Act: Part 1