Comparative Title Analysis in Texas, North Dakota and Montana co-authored by Katie English and Taylor Lamb

The Title Question

Harold Smith, the owner of Blackacre, and his wife, Wendy Smith, execute a deed covering all of their interest in Blackacre to Tiger Drilling. The deed reserves to Harold and Wendy a 50% mineral interest. Does the third party mineral reservation in the deed reserve an interest to Wendy?

We refer to the mineral reservation to Wendy as a “third party reservation” because Wendy did not own an interest in Blackacre and is considered a stranger (or third party) to the deed. Some states, like Texas, follow the common law rule that such third party reservations are invalid, while other states, like North Dakota and Montana, will look to the grantor’s intent.

Texas: No Third Party Mineral Reservations

In Texas, Wendy is out of luck. (For purposes of our Texas discussion, this was Harold’s separate property.) Texas courts hold that mineral reservations to third parties are ineffective. Even a mineral reservation to the grantor’s spouse will not pass title to that third-party spouse.

North Dakota: Look to Intent and Possibly the Spousal Relationship to Grantor

In North Dakota, Wendy gets the mineral interest since it was Harold’s intent to reserve it to her. However, if Harold made the reservation to Ned the neighbor instead of Wendy, the answer would not be as clear. In addition to the grantor’s intent, whether a third party will receive the reserved mineral interest might also depend on whether or not the third party is the grantor’s spouse. In Stetson v. Nelson, 118 N.W.2d 685 (N.D. 1962), the North Dakota Supreme Court followed the common law rule that an attempted third party reservation was inoperative as to the third party. However, in Malloy v. Boettcher, 334 N.W.2d 8 (N.D. 1983), the Court did not apply Stetson where the third party reservation was to the grantor’s wife. Instead, it looked to the grantor’s intent to determine that the reservation was effective. However, there is some question as to whether Stetson or Malloy would apply where the reservation is made to third party who is not the grantor’s spouse (such as Ned the neighbor), and for all cases of third party reservations, North Dakota Mineral Title Standard 3-06 requires clarification of the intent of the parties by stipulation of interest or quiet title action.

Montana: Only Look to Intent

In Montana, like North Dakota, Wendy gets the mineral interest since it was Harold’s intent. Also, if Harold reserved the interest to Ned the neighbor instead of Wendy, Ned would acquire the mineral interest. In Montana, the effectiveness of third party mineral reservations is purely a question of the grantor’s intent.

Co-author Michael Kelsheimer

Are your landmen independent contractors? Are they employees? What do they look like to the government?

Why should you care about these questions? Because your government cares. When independent contractors do not report all of their income, or take questionable deductions to reduce their earnings, Uncle Sam is deprived of income, FICA, and FUTA taxes. Unable to raise taxes on their own, the IRS and Department of Labor are squeezing tax dollars from any place they can. The “misclassification” of independent contractors is a pot of gold.

New investigators have been hired. Fines are up 500%. The IRS has sophisticated new software programs that monitor businesses fitting the misclassification profile: Large numbers of 1099-type payments to individuals in excess of threshold amounts, and 1099’s to the same individuals year after year. To make matters worse, government agencies have started to cooperate and share data on potential violators.

But wait, there’s more!

Assuming the IRS finds you before you turn yourself in or the DOL finds you, they will assess the employer’s half of back payroll taxes, penalties and interest, possibly the “contractor’s” half of back payroll taxes, and the amount that “contractor” should have withheld. In some cases, this number approaches 40% of the amount paid to each “contractor” over the last three years. Do the math. The liability could add up quickly.

But wait, there’s more!

It might not end with the IRS. You could be handed off to the DOL, who will ask for time sheets for those “contractors” who have now been re-classified as employees. You treated them as contractors, so you won’t have time sheets, so DOL will interview them and ask about the overtime they worked, say in the last three years. With a free pass to answer and no time records to dispute them, some witnesses will say just about anything and DOL will then assess for overtime.

If you are in Texas, the Texas Workforce Commission may audit for unemployment benefits due to terminated “contractors” who should have been treated as employees.

But wait, there’s more! 

Once bitten by the IRS and DOL, your more entrepreneurial competitors might decide to turn in everybody else they believe uses the same approach. For this treachery they will receive up to 15% of the government’s recovery.

What to do?

There are at least two options: (1) take steps to reduce the appearance of landmen as employees ; or (2) If you believe you have a problem, re-characterize landmen as employees and take advantage of the very favorable settlement program now offered by the government and thereby reduce your liability by as much as 95%.

Study your treatment of landmen to determine which method is right for you. Don’t wait around; the settlement program does not have a definite end date.

Co-author Brooke Sizer

PanAmerican Operating Inc. v. Maud Smith Estate highlights the perils of working through independent landmen:  maintaining enough control to be sure the work is done as you like it, but also wanting authority to disavow his actions should you desire. 

PanAmerican hired an independent contractor, Wormser, to obtain oil and gas leases from mineral owners, including Maud Smith. Wormser contacted Elder, Ms. Smith’s attorney, and negotiated a lease. After executing and mailing the lease to PanAmerican and attempting for seven months to get paid, Ms. Smith sued for breach of contract.

PanAmerican claimed the lease was invalid because Wormser did not have authority to bind the company. The trial and appellate courts found that Wormser had apparent authority, which bound PanAmerican, and that PanAmerican ratified the lease.

Agent or Not an Agent – The Factors

Evidence that the independent contractor had apparent authority:

• Used a “@panampo.com” e-mail address,

• Had a cubicle in the PanAmerican offices,

• Used a company telephone line,

• The founder and president of PanAmerican knew he was negotiating the lease,

• In reports he was required to submit to PanAmerican, the landman described all of his efforts to secure the lease,

• His e-mails used words such as “we,” “our,” “they,” and “our attorney”.

PanAmerican argued that it had done nothing to give Maud Smith reason to rely on the landman’s authority. The court found that the formal business relationship between PanAmerican and Wormser, with no limitation of Wormser’s power known to the third party, presented a reasonable inference that Wormser was authorized to execute leases on PanAmerican’s behalf.

The Real Story?

The medieval morality play goes like this: Man begins in innocence, Man falls into temptation, Man repents and is saved. The court apparently thought PanAmerican didn’t stick around for the third act. It failed to timely repudiate the lease when the opportunity presented itself. Instead, it did nothing until the price of oil made honoring the lease uneconomical.

Intent to ratify will be inferred if there is an acceptance of benefits while having full knowledge of any act that would make the lease voidable. PanAmerican retained the benefit of the lease while it waited to see if economics would make honoring the lease favorable.

How to Avoid The Predicament

See the factors above for how to maintain separation between the independent landman and his client. No single factor will carry the day one way or another. And there are surely others, depending on the situation.

And remember, this case was about apparent authority. The principal has the duty to give notice to third parties of the agent’s limitations when the agent is dealing on behalf of the principal. If your landman has limited authority, make certain that the parties he deals with know that.

J J Cale – RIP.

Ross et al v. Enervest Operating, L.L.C. et al has several teachable moments for Louisiana royalty owners. 

“Nice to Meet You” is Not a Demand

Under the Louisiana Mineral Code, a lessee is entitled to written notice from the lessor that royalties are due. The court concluded that such a notice must be more than a notification that the royalty owner had purchased the land. An “introductory letter” that doesn’t indicate that the lessor is requesting royalties or that any royalties were past due is insufficient. It was helpful to the equities of the case that the lessee in charge of royalty payments paid royalties immediately after receiving notice that the monies were past due.

Is it a Royalty or a Rental?

Ross also differentiates between the Mineral Code definitions of a “rental” – money or other property given to maintain a mineral lease in the absence of drilling or mining operations or production of minerals, and “royalty” – any interest in production from or attributable to land subject to a mineral lease that is payable to the lessor. A payment for production is a royalty, no matter if the value paid never exceeds an annual minimum payment required. In Ross, the annual payment was a royalty because the amount was tied to the amount of gas production. Had the payment been a rental, a breach of the lessee’s duty could have resulted in forfeiture of the lease.

The Lessee’s Duty of Good Faith Has Limits 

The decision also addressed lessees’ duty to perform their obligations in good faith. The court concluded that the party responsible for royalty payments does not have the obligation to pursue knowledge of lessors’ change of address and/or ownership in the property upon which monies were due. The plaintiffs were in a much better position to be aware of address and/or ownership changes regarding property they owned.  Lessees everywhere will appreciate the court’s rejection of the assertion that lessees’ duty included investigation of the conveyance records of the parish where the property is located.

 Ancient Agreements Count

Ross also discussed the effect of amendments in 1921 and 1935 to a 1916 oil and gas lease. Space doesn’t permit discussion of that aspect of the decision, except to say that you will be bound by the lease language agreed by your predecessors 78 years ago, despite the efforts of your very capable lawyer to contort it into something else. 

Ross is rather long on facts. If you have an interest in these issues I recommend you read the decision itself.

Thanks to Katie Beard, our summer intern and SMU law student, for her capable assistance.

Why Lou Brock?  He knew how to steal a base, and he’s from Morehouse Parish, where this case originated.

Co-author Travis Booher.

All legislation is not good legislation. The good news is that some of it fails. Such is the case with H.B. 2590 passed by the 2013 Texas legislature but vetoed by the Governor. We mention it because it will be back in the next session.

The Bill, “An act relating to the foreclosure sale of property subject to an oil or gas lease”, addresses the age old problem of foreclosure of property subject to an oil and gas lease.

Any oil and gas lease acquired after a deed of trust is subordinate to the deed of trust. Title examiners require a subordination agreement from the lender in order to prevent termination of the lease in the event a foreclosure occurs. H.B. 2590 provided that an oil and gas lease on land that has been foreclosed would remain effective after the foreclosure sale ifthe lease was valid, and was:

  • executed and recorded in the real property records of the county before the security interest was recorded; or
  • executed and recorded in the real property records of the county after the security interest was recorded but before the foreclosure sale.

The Bill was drafted with urban drillers in mind, and would be useful where an urban unit includes thousands of home lots.

But there were hidden perils:

  • The Bill required the lessee to “indemnify the purchaser and any mortgagee of the foreclosed real property from actual damages resulting from the lessee’s operations conducted pursuant to the oil or gas lease”.
  • The Bill provided that foreclosure sale “terminates and extinguishes the lessee’s right to use the surface … “.

Supporters argued that if property is foreclosed and there is no subordination agreement the lease would be lost anyway! Correct, and as a result the Bill had great practical application.

Critics disagreed with increased indemnification liability, and were unsettled about the wording of the surface provision. (We call them “critics” and not “opponents” because the Bill was discovered by many industry insiders only after it had passed with no opposition. The sponsors denied any monkey business.)

The Bill created more questions than it answered. For instance, it was writen as if the surface owner always owns 100% of the minerals, and not only portion. This is uncommon in rural acreage. Also, the loss of surface rights could be contrary to the mineral estate’s dominance in tracts covered by more than one lease (where the foreclosure would be of less than 100% of the minerals).

In any event, the Bill died. Expect it to be re-introduced in the next session. If so, it will not escape scrutiny and may not have the opportunity to meet our new governor.

Comparative Title Analysis in Texas, North Dakota and Montana. Co-authored by Katie English and Taylor Lamb

The Title Question

Your title examiner often encounters a conveyance to an individual “as Trustee” with no Trust specified in the instrument. For example, the Mineral Deed conveys all right, title and interest in Blackacre to “Harold Smith, Trustee,” but the Mineral Deed does not identify the trust or disclose the names of the beneficiaries. These unidentified trusts are commonly referred to as “blind trusts,” and not all states treat these the same way.

Texas

In Texas an examiner “may presume the authority to convey, transfer or encumber the title to the property.” See Texas Mineral Title Standard 9.20. Thus, in Texas, if “Harold Smith, Trustee” appeared in a subsequent conveyance purporting to convey Blackacre to a third party, the examiner may treat this as an effective conveyance. If “Harold Smith, Trustee” never reappeared in the chain of title, record title of Blackacre would be held by “Harold Smith, Trustee.”

North Dakota

In North Dakota, identifications such as “‘trustee’ . . . without further identification of the beneficiary by name or the nature of the trust, are merely descriptive and the person is deemed to be acting in an individual capacity.” See North Dakota Title Standard 10-06. Thus, unlike in Texas, the Mineral Deed would not convey Blackacre to a blind trust with Harold Smith as Trustee. Instead, “Harold Smith” in his individual capacity would hold Blackacre.

However, because Standard 10-06 applies to both grantees and grantors, if “Harold Smith, Trustee” reappeared to convey Blackacre, the Examiner would be able to credit this second conveyance because the grantor’s “Trustee” title would be viewed as merely surplus. Thus, the result is the same here as it would be in Texas, although through different means.

Montana

In Montana any conveyance to an individual as “‘trustee’ . . . must be considered as though . . . the word ‘trustee’, or ‘as trustee’, or any equivalent fiduciary expression had not been used in connection with the grantee’s name.” See MCA 70-21-307. In other words, Montana follows the same approach as North Dakota.

The Takeaway

Instruments with identical language can have different meanings, depending on the state. If you are operating in a new state don’t assume the law there is the same as the law you are used to.

Co-author Bill Drabble

It must be maddening to non-lawyers that a large segment of an industry can operate in harmony by agreeing that a contract in widespread use means one thing, only to have party-crashers decide it means another. Total E & P U.S.A., Inc. v. Kerr-McGee Oil & Gas Corp. et al arose out of assignments of overriding royalty interests in an offshore Louisiana lease. The assignments had “calculate and pay” clauses stating that the assigned interest “shall be calculated and paid in the same manner and subject to the same conditions as the landowner’s royalty under the Lease.” The Outer Continental Shelf Deep Water Relief Act suspended the federal government’s royalty until 87.5 million BOE had been produced. Lessees Total and Statoil argued that the calculate and pay clauses also suspended payment of the overrides. The other working interest owner, Chevron, disagreed and paid on the overrides.

Reversing a district court ruling in favor of the lessees, the 5th Circuit said the assignment was, at the very least, ambiguous.

An overriding royalty is different from a lessor’s royalty.

The court relied upon the “well-recognized distinction between overriding royalty interests and a lessor’s royalty” under Louisiana law. According the court, an overriding royalty is in addition to the royalty paid to the landowner. Thus, the court disagreed with the trial court that the language had to explicitly state that the royalty suspension would not apply to the overrides.

Because the assignments did not explicitly state that the suspension of the federal government’s royalties counter-intuitively applied to the overrides, the contracts were ambiguous. Furthermore, the assignments stated the overrides shall be paid out of “all oil, gas, and casinghead gas … produced, saved, and marketed from the lease.” This broad language indicated that the royalty would be calculated based on total production, and not merely on the period in which the federal government was entitled to its royalty.

You go your way, I’ll go mine

The aspect of the case likely to frustrate the override owners the most was an expert’s survey, ignored by the trial court (but not by the appeals court because they took the time to mention it) that in 80 other overriding royalty instruments with language like the that at issue no other party interpreted the provisions so as to subject the overrides to the DWRRA royalty suspension.

A concurring opinion arrived at the same conclusion – the agreements were ambiguous – from another direction, relying on the structure of the calculate and pay clause to create the ambiguity. The meaning turned on what portion of the clause was modified by “in the same manner and subject to the same terms and conditions”.  If you want more grammar, I respectfully refer you to the opinion.

What next?

The case was remanded for a trial at which extrinsic evidence, perhaps including the report on the 80 similar agreements and Chevron’s position, will be admitted to determine the intent of the parties.

Most of the time, if you read Stroud et al v. Hosford et al. even Hamilton Burger might have won on these facts. But when a lease subject to an override is terminated and replaced by another, Texas cases usually end up against the overriding royalty owner.

The Holding:

The court agreed with the jury that the lessee intentionally terminated the lease to, in part, terminate the overrides. The question was whether that conduct is actionable under Texas law. The court reviewed Texas decisions on the subject and said that, even with what appeared to be bad faith, absent a relationship giving rise to a duty of good faith and fair dealing the override owners had no right to recover. The lessee doesn’t generally owe an implied contractual covenant or a fiduciary type duty to protect the interest of an override owner such as to require the lessee to make repairs to well equipment, perpetuate the lease, and ensure that overrides are not extinguished, and the lessee was not precluded by any contract from entering into a new lease.

The court acknowledged cases suggesting that a party that engages in conduct to intentionally wash out an override may be subject to liability. But the facts of this case did not support liability. The override owners have asked the Texas Supreme Court to review the decision. 

The (Simplified) Facts:

Do the facts get more “intentional” than these?

  • A few days after the lessee was notified that the ORRI owners didn’t have renewal and extension clauses, the well ceased to produce because of a mechanical defect (not caused by the lessee).
  • The lessee was advised by his lawyer that he had no obligation to pay the ORRI owners.
  • He knew he had a 90-day cessation of operations clause.
  • He didn’t order repairs on the well because, among other reasons, he had already offered interests in the property to other investors under other (new) leases.
  • There was no work during the 90 days and the lease terminated.
  • The lessee admitted that he intentionally returned the well to production after the lease had terminated and he had obtained a new lease.
  • He did it that way because he didn’t want overrides on the new lease.
  • The new lease was signed less than one month after the well ceased to produce and during the 90-day continuance operations period.
  • After the 90-day period expired, the lessee represented to potential investors that he intended to repair the broken well.
  • The well was repaired at a cost of $7,500 and production was resumed under the new lease.
  • The new lease and well were sold for $2.5 million.

The Dissent

The lone dissent appeared to be offended that such disregard for the rights of others could be rewarded.  Relying on lease provisions ignored by the majority and viewing some of the same cases differently, she would have reached a different result.  She also would have found that the lessee tortuously interfered with the override owners’ rights in the leases.

Where Do Override Owners Go Now? 

I’m sorry to say, it could be here.  

Thanks to Bill Drabble for his valuable assistance.

Noted scientists Yoko and Sean share their knowledge of fracking

Gasland II made its villainous debut this week on HBO.  It‘s more egregious than the first in that it not only repeats disproven scenarios, but adds new ones that are equally misinformed. I complain about these injustices as a hobby, so don’t take my word for it. Listen to someone who makes a living understanding and explaining these matters.      

Steve Everley of Energy in Depth reveals Gasland II‘s misstatements and exaggerations about Dimock, Pennsylvania; Dish, Texas; the Lipskys in Parker County, Texas; methane leaks and climate change; water quality in Pavillion, Wyoming (and the EPA’s testing malpractice); Deborah Rogers in Fort Worth; fracking and earthquakes; alleged well failures and casing leaks, and more.

To be fair to the many Americans who have formed a negative opinion about oil and gas exploration, movies like Gasland could be their only source of information on the subject. Those who haven’t heard the other side of the story can now be enlightened. Let them decide for themselves.

Many years ago, in the days of cheap oil and cheaper natural gas, The Superior Oil Company often hired geologists and engineers away from Mobil Oil. As a result of many years of attracting good talent, Superior became the largest independent producer in the U.S. In 1986 Mobil acquired Superior. It was said at the time that the only reason for the transaction was so that Mobil could get its maps back. Sounds like a joke, but it makes you wonder how often things like that go on in the oil business. I don’t know, but I’d bet the answer is, with electronic records and the thumb-drive, more than you would think.

I’ve written before on the importance of protecting trade secrets, and how miscreants who’ve been careless on their journey to perdition have paid the price. Now it will be more difficult for data thieves.       

The Texas legislature adopted the Uniform Trade Secrets Act, effective September 1, 2013.  I direct you to Tilting the Scales, a blog from Jamie Ribman and Cleve Clinton, two of  my Looper Reed colleagues who explain the changes in the law very well.

The good news is the opportunity for a musical interlude about treachery, one of  a trial lawyer’s favorite topics.