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The plaintiffs in this case are a group of landowners in Nobel County who, from 2008 to 2010, entered into oil and gas leases, some of which were assigned to Chesapeake Exploration, LLC. Some of the leases had a three-year primary term, some five years, with typical provisions to extend the primary term. However, the lease provision really at issue was titled “Preferential Right to Renew,” referred to as “paragraph 14.” Both the plaintiffs and defendants filed motions for summary judgment. Judge Edmund A. Sargus Jr. of the federal District Court in Columbus decided the case on Sept. 26, 2013. Wiley v. Triad Hunter LLC, 2013 U.S. Dist. LEXIS 143058 United States District Court for the Southern District of Ohio, Eastern Division.

Paragraph 14 provides, in summary, that if during the primary term and one year thereafter, the lessor receives an acceptable, bona fide third-party offer to lease, the lessor would provide the lessee with the particulars. The lessee then would have 30 days to advise the lessor of its agreement to match the offer. Also, any lease “granted by lessor in contravention of the purposes of this paragraph shall be deemed null and void.”

The plaintiffs received a bona fide offer to lease their land. At this point, let me digress. Hoping that an existing lease will expire, third parties will offer a new lease to the landowner, sometimes called a “top lease,” that will take effect upon the existing lease’s termination. Paragraph 14 would seem to protect the lessee by giving, in effect, a right of first refusal on equal terms.

Picking up the story and summarizing for brevity, apparently the new leases were a better deal. So, despite the fact that the existing leases were within their primary terms, the plaintiffs forwarded the offered lease to the lessee. In one of the letters to the lessee, the plaintiffs informed the lessee that the lease had in fact been forfeited based on the plaintiff’s interpretation of paragraph 14. The lessee responded by saying that it disagreed with the plaintiff’s interpretation and taking the position that it need do nothing pursuant to paragraph 14.
Continue Reading Ohio landowners challenge oil and gas leases; does the offer of a new lease terminate the existing one?

For estate planning purposes, in 2005 Willard and Ruth Liggett put real estate they owned into a revocable trusts with themselves as trustees. In 2008, the Liggetts signed an oil and gas lease in their personal capacity. In 2012, Plaintiffs Willard and Ruth Liggett, co-trustees under 10/10/05 Liggett Trusts, filed a complaint in Tuscarawas County. The Lessee, Chesapeake Exploration, L.L.C., counterclaimed. The case was removed to federal court in Youngstown, Ohio. See Liggett v. Chesapeake Exploration, L.L.C., 2013 U.S. Dist. LEXIS 147392, United States District Court for the Northern District of Ohio, Eastern Division.

The Liggetts claimed the lease was unenforceable because it was signed by them personally, not as trustees, and asked for summary judgment. Chesapeake asked for a declaratory judgment that the lease is valid and enforceable, and filed counterclaims.

On Oct. 11, 2013, Judge Benita Y. Pearson ruled that the lease is valid and enforceable. Chesapeake’s motion for summary judgment for its claims against the Liggetts remain pending for trial. They are:
Continue Reading Lessors fail in an attempt to terminate — land held by a trust is subject to a valid oil and gas lease

An essential function of the law is to provide predictability as questions arise. When legal questions arise in the oil field regarding ownership rights, a consensus in the law — especially in the common law — is crucial. With that consensus, the attributes of conveyances related to those hydrocarbons (rights) can be examined. Specifically, what are the landowner’s rights with regard to the hydrocarbons under a piece of land in Ohio? Does he or she actually own them, or do they just have the right to capture them? If he or she would grant a lease to an oil company, what does the oil company own — is it an interest in real estate or is it simply a right to search? And, if found, what is the nature of the interest owned by the oil company pursuant to the lease? These fundamental questions have not been answered clearly in Ohio despite the fact that courts have struggled with them for over a century.

This ambiguity in the law puts federal courts in a potentially difficult position. Absent a clear indication of state law, federal judges deciding these issues under Ohio law are required to consider how the Ohio Supreme Court would decide the issue. Recently, a federal judge weighed in on the nature of an oil and gas lease in the case of Wellington Resource Group LLC v. Beck Energy Corporation, Case No. 2:12-CC-104 in the United States District Court for the Southern District of Ohio, Eastern Division, Sept. 20, 2013.

Whether the interest granted in the lease is an interest in real estate, or is something other than that, has implications in a variety of laws and contexts. Does the lease need to be in writing? Does the lease need to be recorded? Is a mechanics’ lien able to attach to it? How is the lease characterized in a bankruptcy context? (Read more in previously published articles about bankruptcy and mechanics’ liens.)
Continue Reading What is an oil and gas lease? A federal court in Ohio predicts Ohio law

We wrote previously about the United States District Court for the District of Columbia vacating Securities and Exchange Commission Rule 13q-1, which required certain companies to disclose payments made to foreign governments in connection with the commercial development of oil, natural gas or minerals. The SEC announced Sept. 3, 2013 that it would not appeal…

In our previous two segments on Section 16 lands — Part 1 and Part 2 — we examined the dedication, by Congress, of one section in each Ohio township, usually Section 16, for the support of public education. Initially, while retaining title to such lands in trust, Ohio vested administrative control in township trustees. However, the allocation of authority to the townships did not go well and in 1914 and 1917 the legislature reallocated responsibility to the Auditor of State as administrator of school lands remaining in state hands.

From 1827 to 1917, when the township trustees were authorized to sell or lease school land to private individuals, mineral title typically passed with the fee simple title. However, this practice ended in 1917 when the auditor assumed authority.

The 1917 legislation, known as the Garver Act, was enacted to provide for better administration of school lands. H.B. No. 192, 107 Ohio Laws 357, G.C. 3203. One of the issues was confusion about the status and ownership of leases of Section 16 parcels granted by township trustees. Section 23 of the Garver Act —provided procedure by which someone claiming title could file a claim with the state supervisor who, after public notice and if satisfied that the claim was valid, would execute a new lease. The Garver Act also provided a mechanism whereby a lessee could surrender his lease and obtain a fee simple title.
Continue Reading Part 3: Who owns the minerals under Ohio Township Section 16?

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

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

This post considers two cases that interpret 11 U.S.C. § 365(d)(4), which provides that unless the bankruptcy court orders an extension, “an unexpired lease of nonresidential real property under which the debtor is the lessee shall be deemed rejected, and the trustee shall immediately surrender that nonresidential real property to the lessor, if the trustee does not assume or reject the unexpired lease by … the date that is 120 days after the date of the order for relief [(typically, the commencement of the case)]….” The Code further provides that “the rejection of an … unexpired lease of the debtor constitutes a breach of such contract or lease … immediately before the date of the filing of the petition.”
Continue Reading What Goes Up … Quick Glance #3 at Ohio Oil and Gas Leases in Bankruptcy

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

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

“The principal of all funds, arising from the sale, or other disposition of lands, or other property, granted or entrusted to this state for educational and religious purposes, shall forever be preserved inviolate, and undiminished; and, the income arising therefrom, shall be faithfully applied to the specific objects of the original grants, or appropriations.” Ohio Constitution, Article VI, Section 1 1Continue Reading Part 2: Who owns the minerals under Ohio Township Section 16?

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

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

On July 2, 2013, the United States District Court for the District of Columbia vacated Securities and Exchange Commission (SEC) Rule 13q-1, which required certain companies to disclose payments made to foreign governments in connection with the commercial development of oil, natural gas or minerals. The court found:

  1. the SEC erroneously read the statutory language as requiring public disclosure of these payments; and
  2. the SEC’s decision to deny any exemption to the disclosure requirements, specifically in the case of countries that prohibit disclosure of these payments, was arbitrary and capricious.


Continue Reading District Court Vacates Resource Extraction Issuer Payment Disclosure Rules; May Foreshadow Ruling on Conflict Minerals Challenge