The Court of Appeals of Ohio, Seventh Appellate District, recently held that (i) heirs had standing to challenge a surface owners’ notice of abandonment under the Dormant Mineral Act (DMA), and (ii) an affidavit of preservation constitutes a valid claim to preserve mineral interests, regardless of whether the affidavit specifies a savings event. In M&H P’ship v. Hines, 2017-Ohio-923, the appellant surface owner asserted that the heirs were not holders of the mineral interest, and therefore, had no standing to challenge the notice of abandonment. The surface owner also asserted that the claim and affidavit filed by the heirs in response to the notice of abandonment did not identify any savings events that occurred in the 20-year period preceding the notice of abandonment, and therefore, the heirs did not properly preserve their interest. The Court found both assertions to be meritless.
With regard to the standing issue, the Court held that the broad definition of “Holder” under the DMA includes heirs of the original record owner of the mineral. Holder means the record holder of a mineral interest, and any person who derives the person’s rights from, or has a common source with, the record holder and whose claim does not indicate, expressly or by clear implication, that it is adverse to the interest of the record holder. In this case, the heirs derive their rights from or have a common source with grandparents, who were the original record owner of the mineral interest. Therefore, the court found that the definition of holder in the DMA is broad and includes the heirs.
As for the affidavit of preservation issue, the Court relied on the reasoning in Dodd v. Croskey, 2015-Ohio-2362, to hold that heirs’ affidavit of preservation constituted a valid claim to preserve their interest under the DMA. Nothing in the DMA states that a claim to preserve must refer to a saving event that occurred within the preceding 20 years. Additionally, the notice procedures do not require that the claim to preserve be itself filed in the 20 years preceding notice by the surface owner. Instead, the statute plainly states that such a claim can be filed within 60 days after notice from the surface owner. Accordingly, the plain language of the DMA allows the holder to file a claim to preserve the mineral interest or an affidavit that identifies a saving event that occurred within the 20 years preceding notice. In this case, the heirs filed a document titled Affidavit Preserving Minerals, which identified the heirs as the current owners of the mineral interest and stated that the heirs did not intend to abandon their rights in the mineral interest, but intend to preserve their rights. The Court held that this affidavit constituted a valid claim to preserve under the DMA and that no savings event needed to be specified therein.
The Supreme Court of Appeals of West Virginia recently emphasized that a party seeking a partition of property by allotment or by sale under W. Va. Code §37-4-3 must strictly follow the prerequisites in the statute — but only those prerequisites.
In Bowyer v. Wyckoff, 2017 W. Va. LEXIS 27 (Jan. 26, 2017) (Link to PDF of the case here), the Court addressed an effort by Wyckoff to partition the surface of property in kind or by sale. Bowyer, however, counterclaimed and sought to partition both the surface and the mineral interests either though by allotment or by sale, allegedly because he wanted to develop the shallow natural gas under the property. The circuit court granted judgment to Wyckoff, and Bowyer appealed.
The Court initially confirmed that, under W. Va. Code §37-4-3, “a party desiring to compel partition through sale is required to demonstrate that the property cannot be conveniently partitioned in kind, that the interests of one or more of the parties will be promoted by the sale, and that the interests of the other parties will not be prejudiced by the sale.” Bowyer at *8. The circuit court, however, added another, general requirement for any partition: “It is predicate to the partition of an oil and gas mineral interest that there be an inability of the mineral owners to agree on how to develop the mineral estate.” Bowyer at *6.
The Court rejected the circuit court’s attempt to add a requirement that mineral owners not agree on how to develop a mineral estate before allowing partition; however, the Court affirmed the circuit court’s decision that rejected partition by sale of the surface and mineral interests because Bowyer had not otherwise proven his entitlement to partition by sale under §37-4-3. (The Court did not address Bowyer’s attempt to partition by allotment because Bowyers failed to preserve that issue for appeal.)
Perhaps most important for parties seeking partition by either sale or allotment, however, was the circuit court’s rationale for rejecting sale by partition — a rationale affirmed by the Court:
The forced sale of oil and gas minerals precludes the owner of the benefit of lease consideration and the prospect of production proceeds, which represent the primary and perhaps the exclusive value which such ownership vests. Therefore, the public interest will not be promoted by sale.
Bowyer at *9. Under this rationale, any partition for sale or by allotment under §37-4-3 can be forestalled by a single interest holder who does not wish to sell his or her interest. In fact, this rationale undercuts the entire purpose of the partition statute, which necessarily results in a “forced” sale of a person’s property interest, whether the partition be by sale or by allotment.
For oil and natural gas producers that seek partition in order to develop mineral interests, the Court’s implicit acceptance of the notion that any “forced sale of oil and gas interests” precludes partition could significantly hamper efforts to use the partition statute to develop minerals. For questions about West Virginia’s partition statute, contact Mychal Schulz (mschulz@babstcalland.com) or Matt Casto (mcasto@babstcalland.com).
On January 17, 2017, the Superior Court of Pennsylvania vacated a trial court’s order denying class certification of two classes of lessors to oil and gas leases covering property in Clearfield County, Pennsylvania in Cardinale v. R.E. Gas Dev., 2017 PA Super 13. The case involved two classes of plaintiffs because two similar class action complaints were consolidated. These cases involved whether the lessees were required to tender paid-up bonuses when the lessee untimely rejected an oil and gas lease based upon title, surface or geology within a specified due diligence period. The trial court previously rejected the class certification that would have combined these two classes because common questions of law or fact did not predominate over individual questions with respect to the breach of contract claim, stating “[t]o fully resolve the case, the finder of fact would have to analyze each individual property and the circumstances surrounding the Defendants’ refusal to pay the bonus to determine if the Defendants breached each contract, or if the Defendants simply did not approve of the surface, title or geology of each parcel of land.”
On appeal, the Superior Court indicated that the critical inquiry for the certifying court is whether the material facts and issues of law are substantially the same for all class members. The court further provided that the existence of distinguishing individual acts is not fatal to class certification and that it is Pennsylvania’s policy to favor certification of class actions. Because the court identified six fundamental questions that are common to all class members, it found that the trial court erroneously denied class certification. Accordingly, the court vacated the trial court’s order and remanded so that the trial court may utilize its discretion and determine whether class certification is proper in this case, including whether the class definition is overly broad insofar as it may include individuals whose leases were rejected in a timely fashion.
On Tuesday, the Supreme Court of the United States denied certiorari in Walker v. Shondrick-Nau, Exr. (Slip Opinion No. 2016-Ohio-5793). As more fully explained in our Blog post discussing Walker, in September the Ohio Supreme Court held that, if a surface owner failed to quiet title under the 1989 version of the Ohio Dormant Mineral Act (the “ODMA”) prior to the enactment of the 2006 version of the ODMA, then the 1989 version is unavailable and the surface owner can only pursue a claim to abandon mineral interests under the 2006 version of the ODMA. Walker subsequently appealed this decision to the Supreme Court of the United States. In denying certiorari, the U. S. Supreme Court refused to hear the case meaning that the decision of the Ohio Supreme Court will stand as the law in Ohio.
In Lutz et al. v. Chesapeake Appalachia, L.L.C., Slip Opinion No. 2016-Ohio-7549, the Ohio Supreme Court declined to answer the certified question submitted by the U.S. District Court for the Northern District of Ohio as to whether Ohio follows the “at the well rule” or some version of the “marketable product” rule to calculate royalty payments made under an oil and gas lease. The “at the well rule” permits the lessee to deduct post-production costs from royalty payments made to the lessor. Conversely, the “marketable product” rule places limits on the lessee’s ability to deduct post-production costs under certain circumstances. Rather than adopting a blanket rule, the Court stated that the payment of royalties under a lease will be controlled by the specific language in the lease agreement. If an oil and gas lease is silent on the right to deduct post-production costs, it appears unlikely that Ohio courts will allow such deductions. The Court emphasized that leases should be viewed as contracts and the traditional rules for interpreting contractual terms should be used to determine the allocation of post-production costs under an oil and gas lease.
Today, the Ohio Supreme Court issued three written opinions interpreting the Ohio Dormant Mineral Act (O.R.C. §5301.56) (the “ODMA”) and decided 10 related cases based upon its decisions set forth in the written opinions. Notably, in Corban v. Chesapeake Exploration L.L.C., (Slip Opinion No. 2016-Ohio-5796), the Supreme Court held that the 1989 version of the ODMA (the “1989 Act”) did not automatically abandon oil, gas and mineral rights in favor of the surface owner. Instead, the Supreme Court interpreted the statute to require the surface owner to seek a judicial decree that the mineral rights were abandoned. The Court focused on the statutory phrase “shall be deemed abandoned and vested in the owner of the surface” in determining that the legislature intended the 1989 Act to serve as a method of terminating abandoned mineral rights through a quiet title action rather than automatically transferring the mineral interests to the surface owner by operation of law. Additionally, the Court held that payment of delay rentals under a lease does not constitute a “title transaction” under Ohio law since the payment of delay rentals are not filed or recorded in the country recorder’s office.
In Walker v. Shondrick-Nau, Exr., (Slip Opinion No 2016-Ohio-5793), the Ohio Supreme Court built upon its decision in Corban and held that, if a surface owner failed to quiet title under the 1989 Act prior to the enactment of the 2006 version of the ODMA (the “2006 Act”), then the 1989 Act is unavailable and the surface owner can only pursue a claim to abandon mineral interests under the 2006 Act.
Finally, in Albanese, Exr. v. Batman et al., (Slip Opinion No. 2016-Ohio-5814), the Ohio Supreme Court followed the rationale of Corban regarding the necessity of filing an action to quiet title under the 1989 Act prior to the enactment of the 2006 Act. The Court further held that under the 2006 Act mineral rights cannot be deemed abandoned if the owner of the minerals had not been served notice of the abandonment pursuant to the 2006 Act. The notice requirement is mandatory under the 2006 Act.
Citing to the above cases, the Supreme Court decided 10 additional cases consistent with the three written opinions. The 10 cases are listed below:
Carney et al. v. Shockley et al., (Slip Opinion No. 2016-Ohio-5824)
Dahlgren et al. v. Brown Farm Prop. L.L.C., et al., (Slip Opinion No. 2016-Ohio-5818)
Eisenbarth et al. v. Reusser et al., (Slip Opinion No. 2016-Ohio-5819)
Farnsworth et al. v. Burkhart et al., (Slip Opinion No. 2016-Ohio-5816)
Swartz v. Householder et al., (Slip Opinion No. 2016-Ohio-5817)
Shannon et al. v. Householder et al., (Slip Opinion No. 2016-Ohio-5817)
Taylor et al. v. Crosby et al., (Slip Opinion No. 2016-Ohio-5820)
Thompson et al. v. Custer et al., (Slip Opinion No. 2016-Ohio-5823)
Tribett v. Shepherd et al., (Slip Opinion No. 2016-Ohio-5821)
Wendt et al. v. Dickerson et al., (Slip Opinion No. 2016-Ohio-5822)
On July 19, in Herder Spring Hunting Club v. Keller (Case No. 5 MAP 2015), the Pennsylvania Supreme Court ruled in a 5-0 decision to confirm the practice of “title washing” of unseated or unimproved land in Pennsylvania. Prior to January 1, 1948, “title washing” occurred through a tax sale of unseated land from which oil, gas and/or minerals (the “subsurface estate”) had been previously severed. If the subsurface estate had not been separately assessed, the tax sale of the unseated land would extinguish the prior severance and vest the tax sale purchaser with full ownership in the surface and subsurface estates. If the oil and gas had been separately assessed, then the tax sale of the surface would have no effect on the subsurface estate. After January 1, 1948, mineral estates were no longer separately assessed from the surface in Pennsylvania and title washing could no longer occur.
In Herder Spring, the Court held that a 1935 tax sale for unseated land which was subject to an unassessed 1899 subsurface severance conveyed both the surface and subsurface estates. Citing prior case law, the Court reasoned that, under the prior tax sale law, taxes on unseated land were against the land itself rather than any particular owner. The law placed a duty on the owner of a severed interest to notify the taxing authorities. Tax commissioners had no duty to search the deed records to discover severances relating to unimproved lands. Therefore, if the subsurface was never separately assessed, then the property would be assessed and taxed as a whole, and a tax sale thereunder would encompass the entire estate. Additionally, the Court pointed out that owners of the mineral estate had two years to challenge the tax sale or redeem the property, but failed to do so. The Court also rejected the Appellants’ due process and estoppel by deed argument.
The Court limited its holding in Herder Spring to a very narrow subset of cases and noted that its decision would not govern: (i) tax sales for assessments of surface or mineral rights only; (ii) tax sales where severances occurred after the tax assessment; or (iii) situations in which surface owners can meet the adverse possession standard.
Justice Todd filed a concurring opinion agreeing with the majority but for its position on Appellants’ due process claim that notice by publication of the tax sale was inadequate. According to Justice Todd, such claim was waived for purposes of this appeal because it was untimely raised.
On July 15, a Judge for the U.S. District Court for the Middle District of Pennsylvania found that SWEPI LP (“SWEPI”) was obligated to pay bonuses under an oil and gas lease that it had surrendered prior to a 90 day title verification period. In Masciantonio , et al. v. SWEPI LP, the plaintiff-landowners executed oil and gas leases, with attached addenda, in favor of SWEPI for a primary term of five years. The leases stated “[i]n consideration of the bonus consideration paid, the receipt of which is hereby acknowledged,…Lessor does hereby grant…to Lessee,…the lands hereafter described for the purpose of exploring for, developing, producing and marketing oil, gas or their related substances.” The addenda included a payment provision stating that “[i]in consideration for the attached paid-up Oil and Gas Lease, Lessee hereby agrees to pay Lessor [$4,000.00] per net mineral acre. Payment shall be due within ninety (90) banking days of the Lessor presenting the Bank Draft to the financial institution of his/her/their choosing. All payment obligations are subject to title verification by Lessee.” SWEPI presented bank drafts to the plaintiffs, who presented them to their respective banks. Prior to 90 days thereafter, SWEPI decided to surrender the leases, due to a geohazard running through the leased premises and the presence of competitor leases covering neighboring lands. Upon surrender of the leases, SWEPI cancelled the bank drafts.
The plaintiffs brought suit for breach of contract, claiming that the obligation to pay the bonuses accrued immediately upon the parties executing the leases, and that the surrender did not extinguish SWEPI’s payment obligation. SWEPI countered with several arguments, all of which were rejected by the Court. First, SWEPI argued that the leases were ineffective, because the payment of the bonus was the sole consideration for the lease, without which the leases never went into effect. SWEPI also argued that the leases were subject to a condition precedent to formation and were ineffective unless and until SWEPI verified plaintiffs’ title to the property. The Court found that the language of the leases indicated that the actual consideration was the exchange of a bargained-for promise, not the immediate exchange of the value thereof. Similarly, the title verification condition operated as a condition precedent to the obligation to pay, not to the formation of the contracts. Therefore, the leases were valid and enforceable, despite the lack of bonus payment.
Next, the Court considered the two interpretations of the lease provisions presented by each party and determined that the plaintiffs’ interpretation was the more reasonable one. SWEPI argued that the contract terms allowed it to dishonor the bank drafts for any reason, or for no reason, until the expiration of the 90-day banking period. SWEPI presented language of industry standards, quoting Williams & Meyers’ Oil & Gas Law, which said that the use of a bank draft which will not become effective for a period of time subject to approval of title was often used by lessees to void a lease if they decided that conditions were no longer desirable. However, the Court found that the industry standards, including Williams & Meyers’, always provided that the precise language of the lease controlled and did not support an across-the-board provision that the use of a bank draft allows a lessee to void a lease for any reason until the expiration of a certain time period. The Court further stated that the language of the SWEPI leases consisted of an unequivocal agreement by SWEPI to pay the bonus and further provided a description of the time and manner in which it must do so. Therefore, the language did not provide SWEPI with the opportunity to avoid payment but instead bound SWEPI to pay, subject only to the condition of title verification. SWEPI was unable to present any meaningful evidence that it decided to surrender the leases due to a problem with plaintiffs’ title. On the contrary, plaintiffs presented sufficient evidence that they had good title to the leased premises. The Court further rejected the argument that the factors of geohazards and competitor activity on neighboring lands were part of the consideration of “title verification.” Those considerations were encompassed under the realm of a title “examination,” but not “title verification,” according to the plain meaning of such terms.
For those reasons, the Court held that SWEPI breached its obligation under the valid oil and gas leases and it was required to pay the bonus to the plaintiffs.
On June 21, 2016, the U.S. District Court for the District of Wyoming (“District Court”) set aside the U.S. Department of the Interior, Bureau of Land Management’s (“BLM’s”) “Hydraulic Fracturing on Federal and Indian Lands” rule, finding that the rule exceeded BLM’s statutory authority. Challengers to the rule previously succeeded in obtaining a preliminary injunction in September 2015, pending a final decision on the merits of the case. In the merits decision issued this week, the District Court held that “Congress has not delegated to the Department of Interior the authority to regulate hydraulic fracturing.”
The BLM rule would have, among other requirements, mandated that operators planning to conduct hydraulic fracturing on federal and Indian lands: (1) submit detailed information regarding the proposed operation, including wellbore geology information and the estimated length of fracture propagation; (2) design and implement a casing and cementing program that meets certain best management practices and performance standards; (3) manage recovered fluids in rigid enclosed, covered, or netted and screened aboveground storage tanks, with very limited exceptions; and (4) disclose the chemicals to be used in hydraulic fracturing to BLM and the public, with limited exceptions for trade secrets.
BLM is expected to appeal the District Court’s decision to the U.S. Court of Appeals for the Tenth Circuit.
On June 10, 2016, the U.S. District Court for the Southern District of West Virginia issued a Memorandum Opinion and Order invalidating those parts of a Fayette County (W.Va.) ordinance that prohibit the use of underground injection wells for the disposal of produced water, and regulate the handling and storage of produced water at conventional oil and gas well sites. The court held that those provisions are preempted by state and federal law, and also struck down a provision that would have allowed local residents to bring enforcement actions under the ordinance. EQT Production Company v. Wender, et al. Civil Action No. 2:16cv290 (S.D.W.Va.).
On May 20, 2016, the Middle District of Pennsylvania granted summary judgment in favor of Babst Calland’s client in Montrose Hillbillies II, LLP v. WPX Energy Keystone, LLP and Stern Marcellus Holdings, LLC , a case involving the extension of the primary term of an oil and gas lease. The plaintiff, a successor lessor, filed a quiet title action to strike the extension of an oil and gas lease where the extension payment was tendered to the prior owner of the property, rather than to the plaintiff. The plaintiff asserted that the payment was insufficient to extend the lease. The defendant lessee maintained that the primary term of the lease was properly extended pursuant to the lease terms because neither the plaintiff nor the prior lessor provided the lessee notice of the ownership change, and it was the lessor’s duty to do so under the lease. The District Court held that the defendants’ payment to the prior owner fulfilled any extension obligation under the lease, as the plaintiff admitted that the defendants were not notified of the ownership change.
The District Court rejected the plaintiff’s argument that it was not bound by the extension provision and notice of ownership change provision because such terms were not disclosed in the memorandum of oil and gas lease filed of record in place of the actual lease. The memorandum contained the basic terms of the lease but did not provide all the provisions of the agreement between the lessor and lessee. The plaintiff asserted that it was a bona fide purchaser without constructive notice of the unrecorded provisions, including the extension provision and notification requirement for ownership change, and was entitled to rely solely on the recorded memorandum of lease. The District Court held that there is a duty under Pennsylvania law for a purchaser to undertake a reasonable inquiry into the title of the property being purchased before being considered a bona fide purchaser. The Court held that due diligence by the purchaser includes both an examination of recorded documents and an inquiry of the possessor or other parties where there is reason to believe such persons may know facts related to the title of the property. Under the circumstances of the case, the Court found that the plaintiff had notice of the lease and it was reasonable for it to have requested a copy of the full lease to become aware of each of its provisions.
On May 4, 2016, seven environmental groups followed through on a prior threat to sue the United States Environmental Protection Agency (EPA) by filing a lawsuit against the EPA in a bid to force the agency to develop tailored rules for the disposal, storage, transportation, and handling of oil and gas waste under the Resource Conservation and Recovery Act (RCRA) Subtitle D solid waste program. In an effort to trigger movement on the issue, the environmentalists had previously sent the EPA a 60-day Notice of Intent to Sue in August 2015; however, according to the environmentalists, the agency did not formally respond to the Notice. The Complaint, filed with the U.S. District Court for the District of Columbia, alleges that the agency has not within the statutorily required three-year timeframe (1) reviewed and, where necessary, revised RCRA’s Subtitle D solid waste regulations for oil and gas waste, and (2) reviewed and/or revised its guidelines for state solid waste management plans for oil and gas waste.
For more information, read our Administrative Watch.
On March 29, Federal Magistrate Judge Susan Paradise Baxter dismissed a motion made by Highland Township in Elk County, PA (the “Township”) and allowed a suit brought by Seneca Resources Corporation (“Seneca”) to proceed. The action filed by Seneca challenges an ordinance banning injection wells within the Township. Prior to the filing of the suit, Seneca had received a federal permit from the United States Environmental Protection Agency to convert some of its natural gas wells in the Township into underground injection wells. Seneca then applied for a permit from the PA Department of Environmental Protection (“DEP”), and the DEP indicated that it was suspending any review of the permit application in light of the conflict with the Township’s ordinance. Seneca filed its complaint on February 18, 2015, stating that the ordinance violates the state and federal Constitutions and is preempted by several state and federal laws. The Township filed a motion to dismiss the complaint, alleging that Seneca did not have standing to challenge the ordinance. The Judge denied the Township’s motion to dismiss and held that Seneca does have standing to proceed with its suit. The Judge found that Seneca had met all of the requirements for demonstrating constitutional standing. Seneca sustained and continues to sustain injury as a result of the ordinance, because the DEP suspended its review of Seneca’s permit application due to the conflict with the ordinance. In addition, Seneca demonstrated that a favorable decision is substantially likely to redress the injury, because it would remove the ordinance as an impediment to the DEP’s review of Seneca’s permit application.
The Ohio Supreme Court definitively decided a case that at one time threatened the validity of thousands of Ohio oil and gas leases. As previously reported in April of 2014, the Seventh District Court of Appeals overturned the decision of the Monroe County trial court in Hupp v. Beck Energy Corp., which originally held that a standard oil and gas lease form was void against public policy because it allowed a lease to be held in perpetuity. In January of 2015, the case was accepted for review by the Supreme Court of Ohio which issued a decision this morning affirming the District Court’s ruling. The Court held that the leases were not void against public policy and could not held in perpetuity because (i) delay rentals could only be used to maintain the leases during their stated primary term; (ii) the phrase “capable of being produced,” as used in the lease referred to the potential for production from a well drilled on the leased lands rather than the lands themselves; and (iii) that production “in the judgment of the Lessee” also applied to production from an existing well and not possible production from the leased lands. The Court also declined to read an implied covenant of reasonable development into the leases as they required development to commence within a certain period and contained specific language disclaiming implied covenants.
As previously reported, in November 2014, the Lycoming County Court of Common Pleas granted the condemnation of a temporary construction easement to UGI Penn Natural Gas, Inc., a public utility. As a result, UGI was allowed to use the easement to park and store vehicles, equipment and materials related to the construction and maintenance of a pipeline which is to provide gas service to the Moxie/Panda Electric Generation Plant. Law360 reported that the Commonwealth Court of Pennsylvania recently issued a pair of opinions upholding the decision of the trial court. CourtListener recently posted a copy of the opinions. Among other findings concerning the timeliness of the landowners’ claims, the Commonwealth Court concluded that: (1) a pipeline meant to supply a power plant could constitute a public utility service; and (2) the scope of UGI’s taking was not greater than necessary to acquire the property rights in connection with the easement. In short, the court determined that the landowners’ challenges were meritless.