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Ohio Supreme Court Has An Active 2020 Regarding Oil And Gas Law

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Oh, what a year 2020 has been.  Not only did Covid-19 hit our shores earlier than we realized, its impact on the oil and gas industry was, to say the least, challenging. Leasing activity took a nosedive in Southeast Ohio.

However, that did not stop the Ohio Supreme Court and the Seventh District Court of Appeals (our most prolific oil and gas appellate court, since that is “where the oil and gas is”) from making numerous pronouncements on oil and gas laws this year.

In one key decision, the Ohio Supreme Court clarified, in a close four-to-three decision, that the Ohio Marketable Title Act (“MTA”) and the Ohio Dormant Mineral Act (“DMA”), as amended in 2006, provide separate statutory procedures, either of which may be used by surface owners to attempt to reunite severed oil and gas rights with the surface rights.  West v. Bode, Slip Opinion No. 2020-Ohio-5473.

To reach this conclusion, the Court had to determine that the MTA and DMA were not in irreconcilable conflict, and in so doing, affirmed the decision of the Seventh District Court of Appeals. The Seventh District had noted that the MTA applies to extinguishment of mineral rights, while the DMA applies to abandonment, citing an oft-quoted Ohio Supreme Court Decision, Corban v. Chesapeake Exploration LLC, 2016-Ohio-5796.  The Supreme Court agreed, stating that the MTA pertains to extinguishment of mineral rights, which happens automatically after the lapse of a period of time without any use of the mineral rights. Alternatively, the DMA offers surface owners a way to terminate and reclaim mineral rights that have been abandoned.  The DMA currently requires notice to any known or unknown mineral rights holders and gives those holders a chance to preserve their rights by following the enumerated statutory processes, including, but not limited to, filing a preservation notice with the recorder of the county where the mineral rights are located. Either procedure, the Court concluded, could be used to terminate severed oil and gas interests.

Now that it is clear surface owners have two ways to terminate old reservations and exceptions of oil and gas rights, it makes it difficult for exploration companies to identify the correct leasing parties.  The Court nevertheless concluded that the General Assembly intended to allow for two methods to reunite the severed mineral interests with the surface rights.

Fifteen days later, in Gerrity v. Chervenak, Slip Opinion No. 2020-Ohio-6705, the Supreme Court issued an important decision explaining the steps a surface owner must take to achieve statutory abandonment and reattach severed mineral rights.  The Court addressed an important practical issue: how diligent must a surface owner be in attempting to identify and locate unknown heirs before resorting to notice by publication (which of course usually will not result in actual notice of the proposed abandonment reaching the mineral rights holders)?  The Court, as is usually the case, did not set out a bright-line rule, but instead “clarified” the due diligence standard by establishing a reasonable diligence test.

In Gerrity, surface owners in Guernsey County wanted to reunite the mineral rights with their surface property rights. They first had a title search performed in Guernsey County. The search revealed that the original mineral rights holder assigned his interest to his daughter, Richards, by a transfer recorded in 1965. The address listed for Richards in the transfer document was in Cuyahoga County, Ohio.  A search of the recorder’s and probate court’s records in both Guernsey and Cuyahoga counties did not reveal a more recent address for Richards, nor did it uncover information as to an estate or heirs of Richards. The surface owners next sent notice to Richards’ last known address by certified mail, but it was returned as undeliverable.  The owners then published a notice in a newspaper of general circulation in Guernsey County to declare the mineral interests abandoned.

Five years later, Richards’ son filed a declaratory judgment action seeking to have himself declared the exclusive owner of the mineral rights.  Richards’ son argued the surface owners did not use reasonable search methods to locate him.  He contended that the owners could have used internet records or a subscription-based genealogy service to discover that Richards had died in Florida, and that the Florida probate records would have shown that her son was her heir.  Internet searches and genealogy searches are common search practices, and the Supreme Court could have required those additional steps in order to satisfy the standard for reasonable diligence. However, in the absence of any guidance from the Ohio General Assembly, the Court held that the exercise of reasonable due diligence would depend on the facts and circumstances of each case.  Since there was no evidence presented by Richards’ son that he could have been located by an internet or genealogical search, the Court determined that the surface owner had taken reasonable steps to satisfy the DMA due diligence requirement. The Seventh District got it right again, since the Supreme Court majority’s decision in Gerrity affirmed earlier holdings in several Seventh District cases that a case-by-case reasonableness test should be used to determine whether the surface owner had used appropriate means to try to locate unknown heirs.

In reaching its decision, the Supreme Court reviewed the DMA and noted that of the six statutory events that will avoid reattachment of severed mineral interests, four do not involve actual use of the mineral interest (i.e., leasing, actual production) but rather filing notices or recording the rights in county records.  The Court found that a search of county land and court records to research the property’s chain of title form a baseline for reasonable due diligence.  However, there may be circumstances in which the surface owner uncovers information during that search that would require the owner to conduct further due diligence. The surface owner in Gerrity did just that by checking Cuyahoga County records when Guernsey County records indicated that an assignee had lived in Cleveland.

The Gerrity result gives finality to a process that otherwise could leave the rightful owner of the minerals in doubt, but without specific standards adopted, it will take years of litigation to know if a surface owner’s due diligence was reasonable, and so sufficient to result in termination of severed mineral rights.

The Supreme Court issued another important decision in the case of State ex rel. AWMS Water Solutions, L.L.C., vs. Mertz, Slip Opinion No. 2020-Ohio-5482, in which it considered whether a saltwater-injection well permit holder could pursue a regulatory takings case against the State of Ohio when the Ohio Division of Oil and Gas (“Division”) suspended the permit holder’s operations.

In 2011, AWMS entered into a lease to operate saltwater-injection wells in Trumbull County.  These wells are used to dispose of saltwater, a byproduct of oil and natural gas production.  AWMS applied through the Division for permits to construct and operate two saltwater-injection wells.  Unfortunately, the next day an earthquake was recorded in Youngstown, Ohio, near an existing injection well and about seven miles from the proposed site of one of AWMS’s wells.

As a result of the earthquake, the governor imposed a moratorium on certain injection-well activities to allow the Division to study whether the earthquakes were triggered by human activity, also known as “induced seismicity”. The Division ultimately adopted rules regarding induced seismicity; in the interim, the moratorium caused a delay of processing AWMS’s permit applications. Finally, on July 18, 2013, the Division authorized AWMS to drill two wells. After spending approximately $5.6 million drilling the wells, AWMS received Division authority to commence injections. About a year later, two more earthquakes were recorded near one of the wells. As a result, in September 2014, the Division ordered AWMS to suspend its operations at both wells.  AWMS was required to submit a written plan to the Division for evaluating the seismic concerns.  The Division later determined that one of the wells likely did not contribute to seismicity in the area and terminated its suspension of operations of that well, but continued the suspension of the second well.

On September 14, 2014, AWMS submitted its written plan for the second well, noting that it had not received direction from the Division as to what to include in the plan. The Division found the plan to be “generic and inadequate”.  AWMS appealed the Division’s suspension to the Ohio Oil and Gas Commission (the “Commission”).  During the pendency of the appeal, AWMS and the Division met to discuss the induced-seismicity issue, and AWMS submitted a plan to the Division addressing the Division’s proposed criteria.  The Division never formally responded.  On August 15, 2015, the Commission issued a decision confirming the Division’s suspension of operations of the second well.

AWMS appealed the Commission’s order to the Franklin County Court of Common Pleas, which vacated the Commission’s order confirming the suspension.  The Division appealed to the Tenth District Court of Appeals.  The court affirmed in part, reversed in part, and, after modifying the lower court’s judgment, affirmed the Commission’s decision and reimposed the suspension of operations of the second well. The Supreme Court refused to accept a discretionary appeal.

Although the Supreme Court refused to hear AWMS’s appeal of the well suspension, it did agree to hear the appeal in the related case filed by AWMS, State ex rel. AWMS Water Solutions, L.L.C., vs. Mertz, supra.  In that case, the Eleventh District Court of Appeals had affirmed the trial court’s grant of summary judgment to the State, finding that AWMS could not compel the State to commence appropriation proceedings to compensate for the suspension of AWMS’s well operations.

As stated by the Ohio Supreme Court in 2002, regulatory takings cases such as AWMS present “complex and difficult” questions that often elude a “simple solution”.   State ex rel. R.T.G., Inc. v. 98 Ohio, 2002-Ohio-6716.  In AWMS, the Court first dispensed with the State’s argument that the takings case was not ripe for consideration. The Court also held that the State had waived a critical defense that a nuisance existed, which might have obviated the need to compensate AWMS. The Supreme Court also rejected the State’s argument that the suspension of operations of the second well was temporary. The Supreme Court further rejected the lower court’s conclusion that AWMS did not suffer a total taking because it could have sublet its property to a third party.  The Court found it doubtful that subletting would be a viable option. The Court remanded the case to the court of appeals to consider whether, based on the testimony of AWMS’s expert, suspension of well operations deprived AWMS of all economically beneficial use of its leasehold, thus constituting a total taking.

Finally, going through the long and necessarily arduous task of considering the partial taking analysis first set out by the United States Supreme Court in the infamous Penn Central Case, the Ohio Supreme Court held that the Eleventh District also erred by granting summary judgement to the State on the partial takings claim.  The appellate court was directed to balance all three Penn Central factors (economic impact of the regulation on the claimant, the extent to which the regulation has interfered with distinct investment-backed expectations, and the character of the governmental action).  Of note, depending on the terms of an injection well lease, the surface owner may also be able to claim a taking occurred, but that issue was not before the AWMS Court.

This Article already feels as long as 2020, but it would be a shame not to recognize the quality and quantity of the Seventh District Court of Appeal’s output on oil and gas cases to make it easier for practicing mineral rights attorneys to advise clients.  Three of that court’s noteworthy decisions are noted here. In Hogue v. Whitacre, 2017-Ohio-9377, the court discussed the meaning of “paying quantities”, a term typically used in leases to describe the amount of production that will serve to extend an initial lease term.   Finding that there was no Ohio precedent directly addressing whether the paying quantities analysis includes indirect expenses such as business overhead costs, the court said it would only consider direct operating costs and exclude any indirect costs that do not contribute to the production of oil or gas. This may also be helpful in cases in which a marginal well operator tries to “share” revenue from wells that share a sales line to meet the paying quantities test.  This decision gives guidance to courts to look only at operating revenue and costs from the well(s) that are the subject of the lease that the surface owner seeks to terminate.

In McAuley v. Brooker, 2017-Ohio-9222, the surface owner seeking to reunite severed mineral interests made a novel argument, contending that a mineral interest was subject to a conclusive presumption of abandonment, and that a claim to preserve under the DMA is not a savings event under the DMA. The Seventh District found that the Supreme Court had already considered and rejected this argument in a motion to reconsider its decision in Farnsworth v. Burkhart, 2016-Ohio-5816.  In that case, the surface owner published a notice of abandonment; the mineral rights holder then had sixty days to either file an affidavit or a claim of preservation. The mineral rights holder filed a claim of preservation within sixty days of publication of notice, thus successfully halting the abandonment process instituted by the surface owner.

Finally, in Porterfield v. Bruner Land Company, 2017-Ohio-9045, there is a lesson to be learned: landowners should not draft mineral rights reservations in their own deeds. In Porterfield, Bruner’s predecessor in interest, Consolidation Coal Company, had excepted coal and mining rights but not oil and gas rights when it conveyed the property to Bruner. Bruner divided the property into four parcels, then conveyed all four parcels to itself. In these deeds, Bruner excepted and reserved to “the former grantors, their heirs and assigns”, all coal, oil, and gas rights.  When two (2) of the four parcels were sold to third parties, Bruner used the same language, again excepting and reserving coal, oil, and gas rights to “the former grantors, their heirs and assigns”.

Bruner was able to avoid a disaster and able to hang on to the mineral rights. However, it took two courts’ determination before this was accomplished.  By putting more words into the reservation than was required, Bruner created uncertainty as to the effect of the language used. Since Bruner could not vest title to the Consolidation Coal Company by using a reservation or exception in a deed where the coal company was a stranger to the deed, the court held that no oil and gas rights vested in the coal company.  Likewise, the language in the Bruner to Bruner deeds did not reserve the unreserved coal, oil, and gas interest for Bruner, because it was not a “former grantor”. However, in the subsequent deeds where Bruner conveyed to third parties, use of the term “former grantors” would now include Bruner. Since those deeds reserved and excepted coal, oil and gas in the former grantors, and Bruner was a former grantor, the Court found the oil and gas interest was reserved by Bruner.  Hopefully, this case is a lesson to the readers of this article that you should engage counsel whenever you are involved in oil and gas matters, since errors can have a material economic impact on your property rights. Oil and gas law has been and remains a complex and difficult area of the law that often eludes simple solutions; thus, it is always better to first obtain advice from an experienced mineral rights attorney.

May 2021 bring a safer year to all of us.