2014 Annual Convention. Title Issues and Recent Cases Relating to Oil and Gas Developments in Ohio

Transcription

1 2014 Annual Convention Title Issues and Recent Cases Relating to Oil and Gas Developments in Ohio Real Property Section 1.0 General CLE Hour April 30 May 2, 2014 Columbus

2 Contributors Ilya Batikov Vorys Sater Seymour and Pease LLP Cincinnati, Ohio Mr. Batikov received his BA from John Carroll University and his JD from Cleveland State University Cleveland-Marshall College of Law. He is a member of the Volunteer Lawyers Project (Volunteer Attorney). Mr. Batikov is an attorney in his firm and a member of the Energy Group. He has experience advising on matters relating to title, leasing, and ownership of mineral rights, including the Ohio Dormant Mineral Act and the Ohio Marketable Title Act. Mr. Batikov also has experience preparing drilling and division order title opinions involving oil and gas properties in Ohio. For additional information, please visit Kevin F. Eichner First American Title Insurance Company Columbus, Ohio Mr. Eichner received his BS from Miami University and his JD from The Ohio State University Michael E. Moritz College of Law. His professional memberships include the Ohio State Bar Association (Section Council, Real Property Law Section) and Columbus Bar Association. Mr. Eichner is State Counsel for First American Title Insurance Company and President of Ohio Bar Title Insurance Company in Columbus. Prior to First American s acquisition of Ohio Bar Title, he managed the Columbus Commercial Division of Ohio Bar Title Insurance Company and its 1031 exchange qualified intermediary subsidiary, OBT Exchange Corporation. Before entering the title insurance industry, Mr. Eichner was in the private practice of law focusing primarily in the areas of real estate, real estate development, federal and state taxation, and estate and probate law. For additional information, please visit Sheila Nolan Gartland Vorys Sater Seymour and Pease LLP Columbus, Ohio Ms. Gartland received her undergraduate degree from the University of Dayton and her JD from The University of Toledo College of Law. Her professional memberships include the American College of Real Estate Lawyers (Fellow) and Ohio State Bar Association (Section Council, Real Property Law Section). Ms. Gartland is a partner in her firm and a member of the firm s Finance, Energy, and Real Estate Group. She regularly advises clients in the acquisition, sale, leasing, and financing of real property and real property development matters, including annexation and zoning. Ms. Gartland also assists clients in obtaining economic development incentives and represents lenders in mortgage based financing. In addition, she represents clients in connection with oil and gas transactions, including acquisitions, dispositions, joint ventures, title matters, lending, and leasing. Ms. Gartland also manages the firm s oil and gas title opinion practice, which focuses primarily on properties located in the Utica Shale play. She is the author of a variety of articles and is a frequent lecturer on both real property issues and oil and gas related matters. For additional information, please visit Matthew W. Warnock Bricker & Eckler LLP Columbus, Ohio Mr. Warnock received his BS from Ohio Wesleyan University and his JD from Capital University Law School. His professional memberships include the Chief Justice Thomas J. Moyer American Inn of Court and the National Association of Royalty Owners. Mr. Warnock is a member of his firm s Energy and Public Utilities Group and co-chair of its Shale Task Force. He focuses his practice on a wide range of energy issues, including oil and gas related litigation and transaction matters. Mr. Warnock has extensive experience with mineral rights disputes under the Ohio Dormant Minerals Act and Ohio Marketable Title Act; negotiating oil and gas leases, pipeline rights of way, amendments to oil and gas leases, water use agreements, surface use agreements, and seismic testing agreements; oil and gas litigation; and serving as local counsel for oil and gas companies. He also appears in utility regulatory matters before the Public Utilities Commission of Ohio on behalf of hospitals, public schools, and the largest public retail energy governmental aggregator in the country. Mr. Warnock also represents applicants before the Ohio Power Siting Board, including electric generation facilities, wind farms, and natural gas pipelines. For more information, please visit

3 Chapter 1: Title Issues and Recent Cases Relating to Oil and Gas Developments in Ohio Matthew W. Warnock Bricker & Eckler LLP Columbus, Ohio Ilya Batikov Vorys Sater Seymour and Pease LLP Cincinnati, Ohio Table of Contents Nature of Oil and Gas Leases in Ohio Does an Oil and Gas Lease Convey a Fee Interest in the Oil and Gas Rights or only a Mere License?... 1 A. Some courts hold that an oil and gas lease conveys a fee estate in oil and gas rights:... 1 B. Other courts hold that an oil and gas lease only conveys a license Enforceability of Arbitration Clauses in Oil and Gas Leases... 3 Enforceability of Consent-to-Assign Clauses in Oil and Gas Leases... 3 Defectively Notarized or Acknowledged Leases as Effective Between the Parties... 4 Affidavits of Forfeiture... 5 Perpetual Leases... 5 State and Local Regulation of Oil and Gas... 5 Ohio s Dormant Minerals Act... 6 A. What are minerals?... 6 B. Ohio s Dormant Minerals Act Ohio Revised Code (Ohio Rev. Code) C. Unanswered legal issues relating to the Dormant Minerals Act Which version of the statute applies? 1989? 2006? Both? Title Issues and Recent Cases i

4 2. Is the use of the 1989 version of the statute constitutional? If the 1989 version of Ohio s Dormant Minerals Act applies, what is the appropriate 20- year look-back period? What is the definition of a title transaction for purposes of the Ohio Dormant Minerals Act? What is the interplay of Ohio s Marketable Title Act and the Ohio Dormant Minerals Act? ii Title Issues and Recent Cases

5 Chapter 1: Title Issues and Recent Cases Relating to Oil and Gas Developments in Ohio Matthew W. Warnock Bricker & Eckler LLP Columbus, Ohio Ilya Batikov Vorys Sater Seymour and Pease LLP Cincinnati, Ohio Nature of Oil and Gas Leases in Ohio Does an Oil and Gas Lease Convey a Fee Interest in the Oil and Gas Rights or only a Mere License? 1. The nature of an oil and gas agreement in Ohio is unsettled. Chesapeake v. Buell, N.D. Ohio No. 2:12-cv-916 (Jan. 2, 2014). [O]il and gas agreements have been characterized as leases, licenses, corporeal hereditaments, rights, easements, and/or interests in real estate. Rayl v. E. Ohio Gas Co., 348 N.E.2d 385 (9th Dist.1973). Some courts hold that an oil and gas lease conveys a fee estate in the oil and gas rights. Other courts hold that an oil and gas lease conveys only a mere license. 2. Why is the characterization of an oil and gas lease important? It may affect the treatment of oil and gas leases in certain respects, including bankruptcy, real estate broker licensing, issues pertaining to the application of the statute of frauds, and the ownership of minerals under the Ohio Marketable Title Act and the Ohio Dormant Mineral Act. A. Some courts hold that an oil and gas lease conveys a fee estate in oil and gas rights: 1. In an oil and gas lease, [i]t is the land that is granted demised, and let for the limited purpose and period named in the lease. An instrument in such form is more than a mere license; it is a lease of the land for the purpose and period limited therein, and the lessee has a vested right to the possession of the land to the extent reasonably necessary to perform the terms of the instrument on this part. Harris v. Ohio Oil Co., 57 Ohio St. 118 (1897). 2. A leasehold for oil and gas, with the right to the use of the fee for the purposes of producing oil or gas, or of drilling for or otherwise discovering the same, in an estate of land such as contemplated by the statute, may be the subject of partition. Black v. Sylvania Producing Co., 105 Ohio St. 346 (1922). Title Issues and Recent Cases 1.1

6 3. [T]he creation of a separate interest in the mineral with the right to remove the same, whether by deed, grant, lease, reservation or exception, unless expressly restricted, confers upon the owner of the mineral a fee simple estate, which is of course determinable upon the exhaustion of the mine. Moore v. Indian Camp Coal Co., 75 Ohio St. 493 (1907), at syllabus. 4. In Kramer v. PAC Drilling Oil & Gas, LLC, 197 Ohio App.3d 554 (9th Dist.2011), the court cited Harris for the proposition that an oil and gas lease conveys more than a mere license. The court went on to hold that the lessee of an oil and gas lease became the fee-simple owner of the conveyed oil and gas estates while the [lessor] retained a possibility of reverter. However [b]ecause of the possibility of reverter, [the lessor s] fee-simple estate in the oil and gas was a fee simple determinable rather than a fee-simple absolute. 5. In Binder v. Trinity OG Land Development and Exploration, N.D. Ohio No. 4:11-cv-02621, 2012 U.S. Dist. LEXIS (May 31, 2012) the court concluded that the plaintiff, who negotiated the sale of oil and gas leases on behalf of defendant, was not entitled to compensation under a statute that precluded a real estate broker from seeking compensation for referring interests in real estate unless the broker was licensed at the time the referrals took place. The court found that [r]eal estate includes leaseholds as well as any and every interest or estate in land situated in the state Real estate, under Ohio law, has been held to include mineral rights B. Other courts hold that an oil and gas lease only conveys a license. 1. In Back v. The Ohio Fuel Gas Co., 160 Ohio St. 81 (1953), the Supreme Court of Ohio considered an instrument in the form of a warranty deed that conveyed all the oil and gas in and under the premises and the right and privilege of operating upon the said premises as aforesaid for the obtaining of such oil and gas The issue before the Court was whether the surface owner purchased the property with constructive notice of the instrument. Whether the instrument was properly recorded in the lease records determined the issue of constructive notice. The instrument was recorded in the lease records of the country recorder s office under a statute that required [a]ll leases and licenses to be recorded in the lease records. Ohio Fuel Gas Co. conceded that the instrument was not a lease, [b]ecause it grants rights in perpetuity, reserves nothing in the nature of rent, and the rights granted are not subject to defeasement upon the happening of any conditions. As it was not a lease, the surface owner would only have taken the property with constructive notice of the instrument if it was a license rather than a deed. The Court concluded that [t]he character of the instrument reveals that it is other than a grant of real property. Possession of oil and gas, having as they do a migratory character, can be acquired only by severing them from the land under which they lie, and effect the instrument of conveyance is no more than a license to effect such a severance The instrument of conveyance, as a whole, bears the earmarks of a license instead of a deed or conveyance. 2. In In Re Frederick Petroleum Corp. S.D. Ohio, 98 B.R. 762, 1989 U.S. Dist. LEXIS 3797 (Ap. 13, 1989), the court considered whether an oil and gas lease could be characterized as a lease of nonresidential real property for the purposes of 11 U.S.C. 365(a), et seq., which allows a bankruptcy trustee to assume or reject certain unexpired leases of nonresidential real property. The court concluded that an oil and gas lease does not qualify as a lease of nonresidential real property. Citing Back, the court concluded that Ohio courts appear to recognize that such leases create a license to enter upon the land for the purposes of exploring and drilling for oil and gas, and any oil and gas produced under the terms of the lease becomes the personal property of the lessee, with the exception of the one-eight royalty reserved by the lessor. 1.2 Title Issues and Recent Cases

7 The court further noted that Oklahoma and other jurisdictions hold that an oil and gas lease does not grant an estate in land, but instead only creates a chattel real, an incorporeal hereditament and a profit a prendre which is in the nature of a license to explore by drilling and permits the lessee to capture oil and gas which is then treated as personalty. The court feels that the Ohio courts, if given the opportunity to do so, would characterize the property interest involved as being like or similar to the interest recognized under Oklahoma law. 3. In Wellington Resource Group LLC v. Beck Energy Corp, S.D. Ohio No. 2:12-CV-104, 2013 U.S. Dist. LEXIS (Sep. 20, 2013), the district court, holding contrary to Binder v. Trinity OG Land Development and Exploration (discussed above), concluded that the plaintiff, who negotiated the sale of oil and gas leases on behalf of defendant, was not barred from recovering compensation by a statute that required real estate brokers to be licensed in Ohio. The court, citing Back and Frederick, concluded that the Ohio Supreme Court would still hold that oil and gas leases are not part of the real estate in Ohio. Enforceability of Arbitration Clauses in Oil and Gas Leases 1. In New Hope Cmty. Church v. Patriot Energy Partners, LLC, 7th Dist. Columbiana No. 12-CO- 23, 2013-Ohio-5882, the court held that the plaintiff property owners failed to demonstrate that an arbitration clause in an oil and gas lease was unconscionable, and therefore, the arbitration clause was enforceable. In order to recover, the property owners were required to establish that the arbitration clause was both procedurally and substantively unconscionable. While the court accepted the plaintiff s argument that the arbitration clause which the court concluded contained misleading language and failed to apprise the lessors of the potentially high costs of arbitration was substantively unconscionable, the court found no evidence that the clause was procedurally unconscionable. The property owners, who were average to above average educationally and financially had several months to review the leases, retain counsel, and propose revisions. 2. In Riggs v. Patriot Energy Partners, LLC, 7th Dist. Carroll No. 11 CA 877, 2014-Ohio-558, the court held that the plaintiff property owners failed to demonstrate that an arbitration clause in their oil and gas leases was either procedurally or substantively unconscionable. The court noted that the plaintiffs failed to introduce relevant evidence on substantive unconscionability, such as the cost of arbitration. Further, the court determined that the plaintiffs failed to establish procedural unconscionability, noting that while the age and educational backgrounds of some of the plaintiffs suggested unconscionability, all the property owners had an opportunity to review the leases and negotiate the lease terms. As such, the oil and gas leases were not contracts of adhesion, and the arbitration clause was valid. However, while most of plaintiffs claims were subject to arbitration, the court determined that the plaintiffs claim for quiet title was a controversy involving title to or possession of real estate and was not subject to arbitration pursuant to Ohio Rev. Code Enforceability of Consent-to-Assign Clauses in Oil and Gas Leases 1. In Harding v. Viking International Resources Company, Inc., 4th Dist. Washington No. 13CA13, 2013-Ohio-5236, the court held that assignments of oil and gas leases in violation of a consentto-assign clause were void, thereby invalidating the assignments. The leases at issue, which were executed with Carlton Oil Corporation as lessee, contained a consent-to-assign clause that provided: Title Issues and Recent Cases 1.3

8 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 leases were assigned by Carlton Oil Corporation to appellant. The lessors were not parties to the assignments and did not provide written consent for the assignments. However, the lessors accepted and cashed royalty checks for eight months before they objected to the assignments and brought suit, seeking forfeiture of the leases. The trial court held that the assignment made without the written consent of the lessors as expressly required by the leases were void. However, the trial court refused to invalidate the original leases and determined that Carlton Oil Corporation remained as the lessee. The court of appeals affirmed the trial court. The State of Ohio enforces anti-assignment clauses where there is clear contractual language prohibiting an assignment. The court rejected the appellant s argument that by accepting royalties, the lessors were estopped from denying the validity of the assignments and distinguished authorities cited by the appellant, which concerned the forfeiture of the original oil and gas lease. Because the court was concerned with the validity of the assignments, rather than the validity of the original leases, in the face of clear contractual language prohibiting an assignment the court determined that the consent-to-assign clause was enforceable. 2. It is possible that a court may imply a reasonableness limitation on a lessor s ability to withhold consent under a consent-to-assign clause. In Littlejohn v. Parrish, 163 Ohio App.3d 456, 2005-Ohio-4850 (1st Dist.), the appellate court held that mortgagees could not unreasonably withhold consent to the mortgagors request to prepay the note under a mortgage that provided that prepayment shall be subject to approval of holder(s). The court noted that many jurisdictions have followed the trend of imposing a requirement of reasonableness on the withholding of consent by adopting Section 15.2(2) of the Restatement Second of Property: A restraint on alienation without the consent of the landlord of the tenant's interest in the leased property is valid, but the landlord's consent to an alienation by the tenant cannot be withheld unreasonably, unless a freely negotiated provision in the lease gives the landlord an absolute right to withhold consent. However, no Ohio court has expressly considered the imposition of a reasonableness limitation in the context of a consent-to-assign clause in an oil and gas lease. Defectively Notarized or Acknowledged Leases as Effective Between the Parties In Bailey v. Reserve Energy Exploration Company, Belmont C.P. No. 12 CV 212 (Sept. 27, 2013), the plaintiff property owners entered into oil and gas leases with the defendant. However, the notary was not present when the leases were executed. The plaintiffs claimed that the oil and gas leases were defective under Ohio Rev. Code , which requires that the execution of a lease be acknowledged by the lessor before a notary public Rejecting the plaintiff s argument, the court determined that the oil and gas leases were valid as between the parties, analogizing Ohio decisions which held that improperly acknowledged oil and gas leases were enforceable between the parties to the leases. See Seabrooke v. Garcia, 7 Ohio App.3d 167 (9th Dist.1982) (holding that defectively acknowledged instruments are enforceable between the parties and the parties assignees); Swallie v. Rousenberg, 190 Ohio App.3d 473, 2010-Ohio (7th Dist.) (improperly acknowledged oil and gas lease was enforceable between the parties thereto). 1.4 Title Issues and Recent Cases

9 Affidavits of Forfeiture In Cox v. Doris J. Kimble, dba Red Hill Development, et al, Guernsey C.P. No. 12-OG-301 (Aug. 5, 2013), the plaintiff landowners challenged the validity of their oil and gas lease on several grounds, including forfeiture of the lease for non-production. The plaintiff s claim was premised on a recorded affidavit of forfeiture under Ohio Rev. Code that alleged that no producing oil and gas well existed on the plaintiff s property. The affidavit of forfeiture was not contested by the lessee within the statutory 60 day period. However, at trial, the defendant lessee established that the well continuously produced oil and gas, albeit in modest quantities. The court held that Plaintiff s claim of forfeiture must fail on its face as a matter of law, as the Statute [Ohio Rev. Code ] provides on its face that there is no producing oil and gas well on the premises. Because the defendant demonstrated that the well was producing, Ohio Rev. Code was facially inapplicable. Perpetual Leases 1. Several recent trial court decisions have voided oil and gas leases where the leases were deemed leases in perpetuity. For instance, in Hupp v. Beck Energy Corporation, Monroe C.P. No (July 12, 2012), the court considered a habendum clause that provided for a 10 year primary term, and as much longer thereafter as oil or gas or their constituents are produced or are capable of being produced on the premises in paying quantities, in the judgment of the Lessee, or as the premises shall be operated by the Lessee in the search for oil and gas The lease further provided that the lease shall become null and void unless, within 12-months from the date hereof, a well shall be commenced on the premises, or unless the Lessee shall thereafter pay a delay rental of $ Dollars each year until the commencement of a well. The court determined that the lease, by its terms, only required that a well be commenced, rather than completed, within 12 months, and permitted the operator to indefinitely pay a delay rental in lieu of commencing a well. Further, the court concluded that the lease left the determination of paying quantities to the unfettered subjective judgment of the operator. The court found that these terms created a perpetual lease in violation of public policy and declared the lease void ab initio. See also Belmont Hills Country Club vs. Beck Energy Corp, Belmont C.P 11-CV-290 (July 28, 2013) and Oxford Oil Company v. Barry M. West, Belmont C.P. 22CV435 (Oct. 4, 2013), both of which adopt the rule in Hupp. 2. Hupp, Belmont Hills Country Club, and Oxford Oil Company are each pending appeal to the Seventh District Court of Appeals. Further, contrary authority suggests that leases labeled as perpetual may be valid in certain circumstances. See, e.g., Phillips Exploration, Inc. v. Reitz, S.D. Ohio No. 2:11-cv-920, 2012 U.S. Dist. LEXIS (Dec. 18, 2012) ( [E]ven if there is a perpetual lease here.it would not invariably mandate proclaiming the lease void as against public policy. Although Ohio disfavors perpetual leases, it nonetheless permits them when that is what the parties intended. ). State and Local Regulation of Oil and Gas Ohio Rev. Code Chapter 1509 vests the Ohio Department of Natural Resources with the sole and exclusive authority to regulate the permitting, location, and spacing of oil and gas wells and production operations within the state. Excepting only those activities regulated under federal laws Title Issues and Recent Cases 1.5

10 In State ex rel Morrison v. Beck Energy Corp, 9th Dist. Summit No , 2013-Ohio-356, the court held that certain city ordinances, which required an operator to obtain from the city a drilling permit, certain zoning certificates, pay fees, and post a performance bond as a condition of drilling a well, were preempted by the state s comprehensive statutory scheme for drilling set forth in Ohio Rev. Code Chapter The issue to be resolved in this appeal, as we see it, is whether under a home-rule analysis, Ohio Rev. Code Chapter 1509 precludes any local control or oversight of oil and drilling taking place within the municipality s boundaries. The court undertook a home rule analysis and determined that the city s ordinances constituted an exercise of its police-powers. If an ordinance is determined to be an exercise of police power, the court is then required to review the statute at issue to determine whether the statute is a general law. If the statute qualifies as a general law, it trumps the local ordinance, if the local ordinance conflicts with the state statute. The court found that Ohio Rev. Code 1509 et seq. regulates the conservation of natural resources and is unquestionably a general law. The court held that the zoning and drilling ordinances directly conflicted with Ohio Rev. Code Chapter 1509, and were therefore preempted. However, certain other ordinances pertaining to the care, supervision, and control of the city s rights-of-way were enforceable by the city, but could not be enforced in a way that discriminates against, unfairly impedes, or obstructs oil and gas activities and operations. Morrison is pending appeal before the Supreme Court of Ohio. Ohio s Dormant Minerals Act A. What are minerals? 1. Under Ohio law, the words minerals, other minerals, or valuable minerals in a deed generally include oil and gas unless language in the granting instrument suggests the parties intended otherwise. a. Kelley v. Ohio Oil Co., 57 Ohio St. 317 (1897), syllabus 1 (recognizing that [p]etroleum oil is a mineral ). b. Jividen v. New Pittsburgh Coal Co., 45 Ohio App. 294, 187 N.E. 124 (4th Dist.1933) (explaining that while the authorities at that time were in conflict as to whether the term minerals included oil and natural gas, the rule in Ohio was that the term, taken in its broadest sense... includes such oil ). 2. Examples. a. Detlor v. Holland, 57 Ohio St. 492, 49 N.E. 690 (1898) The Supreme Court of Ohio held that a conveyance of mining rights covering all the coal of every variety and all the iron ore, fire clay and other valuable minerals did not include oil and gas. In reaching its conclusion, the Detlor Court focused on certain easement language incorporated into the deed. Because that language did not include anything necessary for the production of oil and gas (e.g., the use of the words derricks, pipe lines, tanks, the use of water for drilling, or the removal of machinery ), the Court reasoned that the deed reservation did not contemplate the recovery of oil or gas on the property. As a result, there was nothing to show that it was the intention of the parties that oil should be included in the word minerals,.... If it had been, apt words would have been used to express such intention. 1.6 Title Issues and Recent Cases

11 b. Hartman v. Patton, 4th Dist. Athens No. 1343, 1987 Ohio App. LEXIS 8602 (September 1, 1987) This appellate court concluded that a deed that conveyed [a]ll of the surface with an exception of [a]ll the coal of every variety and the iron ore, fire clay, and salt water in and under the surface did not reserve the oil the gas. Even though the granting language conveyed only the surface, the court reasoned that if the grantors intended to withhold their interest in oil and gas from the conveyance, they would have specifically provided for such an exception. The record shows that [the grantors] were brokers in and owners of acres in Athens County, Ohio at the time of the conveyance. During the time of their brokering activities, extensive oil and gas development took place in York Township. Thus, [the grantors] recognized the value of the oil and gas in the vicinity and most definitely would have expressly reserved or excepted such interest, if that was their intention. c. Muffley v. M.B. Operating Co., Inc., 5th Dist. Stark No. CA-6910, 1986 Ohio App. LEXIS 8865 (Oct. 27, 1986) This appellate court held that a deed that reserved all minerals, clay, and coal underlying the soil did not include oil and gas. The court concluded that the grantors did not intend to reserve oil and gas rights. Since oil and gas wells are common in this area, plaintiff could have expressly included a reservation covering such rights. It is beyond dispute that in [the year the deed was executed] oil and gas drilling had been conducted in Tuscarawas County for decades. Thus, the absence of a specific oil and gas reservation must be construed in favor of [the grantee]. vs. d. Wiseman v. Cambria Products Co., 61 Ohio App.3d 294, 572 N.E.2d 759 (4th Dist.1989). This appellate court concluded that a deed excepting and reserving to the grantor all coal, iron ore and other minerals, in, on and underlying the above-designated and described lands, together with full and free rights of ingress, egress, regress and of way, and other necessary or convenient rights and privileges included the oil and gas mineral rights. NOTE: A strong dissenting opinion in Wiseman noted that the term minerals means different things depending upon whether it is used in the geographical sense (a broader interpretation) or the economic sense (a more restrictive interpretation). The dissent concluded that this ambiguity rendered the case improper for summary judgment. e. Stocker & Sitler, Inc. v. Metzger, 19 Ohio App.2d 135, 250 N.E.2d 269 (5th Dist.1969) (holding that a deed exception covering all the veins of coal and other substances of value included oil and gas where nothing in the deed indicated the parties intended to convey less than all substances of value under the surface). f. Hardesty v. Harrison, 6 Ohio Law Abs. 445, 1928 Ohio Misc. LEXIS 1074 (5th Dist.1928) (holding that a deed exception covering all the coal, clay and mineral rights under a particular piece of property included oil and gas because a grant without qualifying or limiting words of the minerals underlying certain real estate will include oil and gas ). B. Ohio s Dormant Minerals Act Ohio Revised Code (Ohio Rev. Code) The Ohio s Dormant Minerals Act, which is codified in Ohio Rev. Code , provides a surface owner with the opportunity to gain title to previously severed mineral rights if those rights have not been used during a specific 20-year time period. Successful use of the Dormant Minerals Act vests title to the mineral rights with the surface owner. Title Issues and Recent Cases 1.7

12 2. What interests does the Dormant Minerals Act apply to? a. The 2006 version of the Dormant Minerals Act specifically applies to any mineral interest, which phrase is defined in Ohio Rev. Code (A)(3) as a fee interest in at least one mineral regardless of how the interest is created and of the form of the interest, which may be absolute or fractional or divided or undivided. The 1989 version of the statute did not specifically define the interests subject to abandonment. b. The definition of mineral in Ohio Rev. Code (A)(4) specifically includes gas, oil, and other gaseous, liquid, and solid hydrocarbons. The 1989 version of the statute did not have such a definition. c. The statute does not apply to coal interests. d. The statute does not apply to any mineral interests owned by the United States, State of Ohio, or any political subdivision (e.g. county, township, municipality or school district). 3. The 1989 version of the Dormant Minerals Act The 1989 version has been described as a use it or lose it statute: if the mineral-interest owners did not use their mineral interests during a 20-year time period, they automatically vested in the surface owner. Uses of the mineral interest are defined by the statute as the following six events: a. The mineral interest has been the subject of a title transaction... recorded in the office of the county recorder of the county in which the lands are located. b. There has been actual production or withdrawal of minerals by the holder... or, in the case of oil or gas, from lands pooled, unitized, or included in unit operations, under sections to of the Revised Code, in which the mineral interest is participating, provided that the instrument or order creating or providing for the pooling or unitization of oil or gas interests has been filed or recorded. c. The mineral interest has been used in underground gas storage. d. A drilling or mining permit has been issued to the holder. e. A claim to preserve the mineral interest has been filed under Ohio Rev. Code (C). f. In the case of a separated mineral interest, a separately listed tax parcel number has been created for the mineral interest in the county auditor's tax list and the county treasurer's duplicate tax list in the county in which the lands are located. These uses are commonly referred to as savings events. 4. The 2006 version of the Dormant Minerals Act The statute was substantially rewritten in Under the current version of Ohio s Dormant Minerals Act, effective June 30, 2006, the surface owner must adhere to the following multi-step process to accomplish the merging of the surface and mineral interests: a. The surface owner must confirm that the oil and gas mineral interests have not been used within the previous 20 years. The 2006 version of the Dormant Minerals Act retains the savings events listed in the 1989 version. b. Serve notice by certified mail, return receipt requested, to each holder or each holder s successors or assignees, at the last known address of each, of the owner s intent to declare the mineral interest abandoned. See Ohio Rev. Code (E)(1). The notice must contain: 1.8 Title Issues and Recent Cases

13 (i) the name of each mineral interest holder and any successors and assignees; (ii) a description of the surface, including references to recorded documents; (iii) a description of the mineral interest to be abandoned; (iv) a statement that none of the uses described above occurred within the 20 years preceding the date the notice was served or published; and (v) a statement that the surface owner intends to record an affidavit of abandonment at least 30, but not later than 60, days after the date on which notice was served or published. c. If certified mail notice is not possible, the surface owner must publish notice at least once in a newspaper of general circulation in each county in which the land is located. See Ohio Rev. Code (E)(1). d. Confirm that one of the mineral interest holders has not recorded one of the following documents within 60 days of service or publication of the notice: (i) a claim to preserve the mineral interest pursuant to Ohio Rev. Code (C); or (ii) an affidavit that identifies an event described in Ohio Rev. Code (B) [e.g. a savings event] that has occurred within the 20 years preceding the date of service or publication. NOTE: A successful claim preserving mineral interests preserves the rights of all holders of a mineral interest in the same lands, not just the person(s) recording the affidavit. Ohio Rev. Code (C). e. File in the county recorder s office an affidavit of abandonment at least 30, but not later than 60, days after the date on which the notice was served or published by the surface owner. See Ohio Rev. Code (E)(2). The affidavit must contain: (i) a statement that the person filing the affidavit is the surface owner; (ii) the volume and page number of the recorded instrument where the mineral interest was severed; (iii) a statement that the mineral interest has been abandoned; (iv) the facts constituting the abandonment; and (v) a statement that notice was served on each mineral interest holder or their successors or assignees. Ohio Rev. Code (G). Note: Successful use of the abandonment process is only effective as to the property of the surface owner that filed the affidavit of abandonment, not other property subject to the same reservation and owned by a different surface owner. f. If the mineral interest holder(s) failed to file a claim to preserve the mineral interest or filed the claim more than 60 after the date on which the notice was served or published under Ohio Rev. Code (E), the surface owner must file in the county recorder s office a notice of failure to file. The notice must contain: (i) a statement that the person filing the notice is the owner of the surface of the lands subject to the mineral interest; (ii) a description of the surface of the land that is subject to the mineral interest; (iii) the statement This mineral interest abandoned pursuant to affidavit of abandoned recorded in volume.,page. Ohio Rev. Code (H). Note: This notice process took effect on January 31, Prior to that date, the final step in the process involved the surface owner requesting that the county recorder note on the severance deed the following: This mineral interest abandoned pursuant to affidavit of abandoned recorded in volume.,page. g. Immediately after the notice of failure to file a mineral interest is recorded, the mineral interest shall vest in the surface owner. Further, the record of the mineral interest shall cease to be notice to the public of the existence of the mineral interest or of any rights under it. Additionally, the record shall not be received as evidence in any court in the state on behalf of the former holder of the mineral interest, or his successors or assignees against the surface owner. Ohio Rev. Code (H). Title Issues and Recent Cases 1.9

14 C. Unanswered legal issues relating to the Dormant Minerals Act. 1. Which version of the statute applies? 1989? 2006? Both? a. Majority of trial court decisions apply the 1989 version of the DMA. i. For example, in Wendt v. Dickerson, Tuscarawas C.P. No CV (Feb. 21, 2013), the trial court concluded that the 1989 version of the statute applied (finding that under Ohio Rev. Code 1.58, the 2006 amendment to the Dormant Minerals Act did not affect rights previously acquired under the 1989 version and holding that Plaintiffs were not required to comply with the provisions contained in the amended version of Ohio Rev. Code (E) before their mineral interests in the subject property became vested because the mineral interest became vested in the owner of the surface of the lands on 3/22/1992. ii. See also Walker v. Noon, Noble C.P. No (Mar. 20, 2013); Marty v. Dennis, Monroe C.P. No (Apr. 11, 2013); Eisenbarth v. Reusser, Monroe C.P. No (June 6, 2013); Shannon v. Householder, Jefferson C.P. No. 12CV226 (July 17, 2013); Tribett v. Shepherd, Belmont C.P. No. 12-CV-180 (July 22, 2013); Taylor v. Crosby, Belmont C.P. No. 11 CV 472 (Sept. 16, 2013); Hendershot v. Korner, Belmont C.P. No. 12-CV-453 (Oct. 28, 2013); Swartz v. Householder, Jefferson C.P. No. 12CV328 (July 17, 2013); Blackstone v. Moore, Monroe C.P. No (Jan. 22, 2014); b. But, visiting Judge Richard Markus decision in Dahlgren v. Brown Farm Properties, LLC, Carroll C.P. No. 13CVH27445 (Nov. 5, 2013) concluded that the 1989 version does not cause the automatic abandonment of severed mineral interest: i. Specifically, the Dahlgren court concluded that the 2006 version of the Ohio Dormant Minerals Act controls over the 1989 version, and that the 1989 version impliedly required implementation before it finally settled the parties rights, at least by a recorded abandonment claim that permitted the adverse party to challenge its validity, if not by an appropriate court proceeding to confirm that abandonment.... Absent any implementation or enforcement of claimed abandonment rights before the 2006 amendment, the landowner defendants must comply with the procedures which the 2006 amendment requires. (a) Application of the 1989 version of the DMA conflicts with the Marketable Title Act s stated legislative purpose of simplifying and facilitating land title transactions by allowing persons to rely on a record chain of title. (b) Forfeitures are disfavored by courts. (c) Constitutional due process concerns. ii. See also M&H Partnership v. Hines, Harrison C.P. No. CVH (Jan. 14, 2014). (a)automatic vesting under the 1989 version of the DMA is contrary to simplifying and facilitating land title transaction by allowing persons to rely on a record chain of title. (b) This Court does not believe it was the legislative intent at enactment to make surface holders automatically vested in the mineral rights pursuant to the 1989 Dormant Mineral Act. The terms vesting, terminated, null and void, or extinguished were not used in the statute. (c)the surface owner at the minimum must have filed a quiet title action prior to 2006 to have the 1989 law apply. Absent such action and determination, notice of the reversion of mineral interest would not be apparent in the record chain of title and thus violate the purpose of the Marketable Title Act Title Issues and Recent Cases

15 2. Is the use of the 1989 version of the statute constitutional? a. Yes? The constitutionality of the 1989 version of Ohio s Dormant Minerals Act has not been ruled upon by the Supreme Court of Ohio, but two recent trial court decisions from Belmont County (Tribett v. Shepherd, Belmont County C.P. No. 12-CV-180 (July 22, 2013); and, Taylor v. Crosby, Belmont C.P. No. 11 CV 472 (Sept. 16, 2013)) did conclude that the 1989 version of the statute was constitutional based on the United States Supreme Court s decision in Texaco v. Short, 454 U.S. 516 (1981) (upholding the constitutionality of Indiana s dormant mineral act, which was similar to the 1989 version of the Ohio statute). Many practitioners agree that Texaco v. Short is instructive, BUT that decision only addresses federal constitutional claims. Although the United States Supreme Court s decision in Texaco v. Short did uphold the constitutionality of Indiana s self-executing dormant minerals act, the decision was rendered by a split court where the four dissenting justices (Brennan, White, Marshall and Powell) concluded: As applied retrospectively to extinguish the rights of mineral interest owners for their failure to have made use of their interests within a prior 20-year period, Indiana s statutory scheme would likely effect an unlawful taking of property absent the proviso that such mineral interest owners could preserve their rights by filing a notice of claim within the 2- year grace period. Given the nature of the scheme established, there is no discernible basis for failing to afford those owners such notice as would make the saving proviso meaningful. As applied to mineral interest owners who were without knowledge of their legal obligations, and who were not permitted to file a saving statement of claim within some period following the giving of statutory notice by the surface owner, the statute operates unconstitutionally. In my view, under these circumstances, the provision of no process simply cannot be deemed due process of law. b. No (?). i. Ohio Const. Art. II, 28 ( The general assembly shall have no power to pass retroactive laws ). (a) The U.S. Supreme Court s decision in Texaco also was in conflict with a number of other state supreme court decisions analyzing their own respective dormant mineral statutes under state constitutional law. At least four state supreme courts determined their own dormant minerals statutes to be unconstitutional (based on state constitutional provisions), many on the grounds of retroactivity. See Wilson v. Bishop, 82 Ill.2d 364, 412 N.E.2d 522 (Ill. 1980); Contos v. Herbst, 278 N.W.2d 732 (Minn. 1979); Wheelock & Manning OO Ranches, Inc. v. Heath, 201 Neb. 835, 272 N.W.2d 768 (Neb. 1978); Chicago & N.W. Transp. Co. v. Pedersen, 80 Wis.2d 566, 259 N.W.2d 316 (Wisc. 1977). But see Van Slooten v. Larsen and Bickel v. Fairchild, 410 Mich. 21, 299 N.W.2d 704 (Mich. 1980) (upholding the constitutionality of Michigan s statute). ii. Ohio Const. Art. 1, 6 and 19. Dahlgren v. Brown Farm Properties, LLC, Carroll C.P. No. 13CVH27445 (Nov. 5, 2013) (explaining that the Court doubts that statutory abandonment is constitutionally enforceable without giving the adverse party an opportunity to dispute the relevant claims ). 3. If the 1989 version of Ohio s Dormant Minerals Act applies, what is the appropriate 20-year look-back period? The 1989 version of Ohio s Dormant Minerals Act prohibited the automatic vesting of mineral rights in the surface owner if the land was used within the preceding twenty years. The 2006 version of the statute specifies that the 20-year time period begins on the date on which notice is served or published. The 1989 version, however, did not specify the starting point for the 20-year look-back period. There are several interpretations of the 20-year look-back period under the 1989 version. Title Issues and Recent Cases 1.11

16 a. The first interpretation is a fixed 20-year period running from March 22, 1969, through March 22, 1989 (the effective date of the 1989 version of the Dormant Minerals Act). Some Ohio courts that have analyzed the 1989 version of the Dormant Minerals Act apply this fixed 20-year period... Riddel v. Layman, 5th Dist. Licking No. 94-VA-114, 1995 Ohio App. LEXIS 6121 (July 10, 1995): This is the only appellate court to have addressed the 1989 version of the Ohio Dormant Minerals Act. M&H Partnership v. Hines, Harrison C.P. No. CVH (Jan. 14, 2014) b. Similarly, a court could also apply a fixed 20-year period running from March 22, 1972, through March 22, 1992 (the date of vesting under the 1989 version of the Dormant Minerals Act, after the 3-year grace period). c. A third interpretation posited is a rolling 20-year look-back period. This rolling look-back requires that the minerals first be used within the 20 year period preceding the effective date of the 1989 version (March 22, 1969-March 22, 1989) or during the 3-year grace period (which ended on March 22, 1992), and then again during every 20-year period until the effective date of the 2006 version on June 30, For example, in Shannon v. Householder, Jefferson C.P. No. 12CV226 (July 17, 2013), the court did not specifically define the 20-year look back, but concluded that if an instrument recorded on July 12, 1979 qualified as a savings event, then the twenty year period of inactivity would have run, at the latest, on July 13, See also Taylor v. Crosby, Belmont C.P. No. 11 CV 472 (Sept. 16, 2013); Swartz v. Householder, Jefferson C.P. No. 12CV328 (July 17, 2013); Lipperman v. Batman, Belmont C.P. No. 12-CV-0085 (Dec. 16, 2013); Farnsworth v. Burkhart, Monroe C.P. No (July 16, 2013); But see M&H Partnership v. Hines, Harrison C.P. No. CVH (Jan. 14, 2014) (concluding that a rolling 20-year period of look back is not authorized by the 1989 statute ). d. The fourth interpretation set forth in briefing by several practitioners ties the 20-year look back to the date of the filing of a quiet title action in which one of the claims is based on the 1989 version of the statute. 4. What is the definition of a title transaction for purposes of the Ohio Dormant Minerals Act? The phrase title transaction is not defined in the prior or current version of the Dormant Minerals Act. It should be noted, however, that the phrase is defined in Ohio s Marketable Title Act. See Ohio Rev. Code (F). When the definitions of mineral interest in Ohio Rev. Code (A)(3) and title transaction in Ohio Rev. Code (F) are merged together, it becomes clear that the savings event occurs when the mineral interest [defined as including the fee interest in oil and/or gas] has been the subject of a title transaction [defined as a transaction affecting title to any interest in land, including title by will or descent, as well as warranty deed, quit claim deed, or mortgage] that has been filed or recorded in the office of the county recorder of the county in which the lands are located Title Issues and Recent Cases

17 a. Ohio Marketable Title Act case law. i. A title transaction not only includes instruments in the chain of title for the party seeking to establish marketable title under the Act, but also instruments that are part of an independent chain of title. Heifner v. Bradford, 4 Ohio St. 3d 49, 446 N.E.2d 440 (1983). But see Morgenstern v. National City Bank of Cleveland, 4th Dist. Washington No. 85-CA-33, 1987 Ohio App. LEXIS 5677 * 8 (Jan. 27, 1987) at *21-*22 (stating that Ohio Rev. Code requires that the claimant s chain of title be examined to determine if such chain is unbroken and rejecting the surface owners argument that instruments in their independent chain of title divest claimant s interest). ii. A title transaction includes the conveyance of interests passing under the terms of a will. Heifner v. Bradford, supra. See also Blakely v. Capitan, 34 Ohio App.3d 46, 516 N.E.2d 248 (11th Dist. 1986) (a certificate of transfer preserved restrictions); Morgenstern, supra at *17-*18 (a certificate of transfer qualified as a title transaction and served as a preservation notice). iii. A court decree which affects title to an interest in land is a title transaction. iv. An agreement of sale is a title transaction. Edward H. Everett Co. v. Jadoil, Inc., 5th Dist. Licking No. CA-3211, 1987 Ohio App. LEXIS 5684 (Jan. 26, 1987). v. The annexation of parcels of real estate by the City of Cleveland is a title transaction. Carlson v. Koch, 8th Dist. Cuyahoga Nos and 36498, 1978 Ohio App. LEXIS 9501 (Jan. 19, 1978). b. Broad nature of the title transaction savings event. A title transaction means any transaction affecting title to any interest in land. It is difficult for the Court to conceive of a broader definition than the one chosen by Ohio law. By its plain language, the statute does not require a conveyance or transfer of real property in order to constitute a title transaction. McLaughlin v. CNX Gas Co., N.D. Ohio No. 5:13CV1502, 2013 U.S. Dist. LEXIS (Dec. 13, 2013). c. The legislative history surrounding the enactment of Ohio s Dormant Minerals Act sheds some light on the definition of title transaction. When Ohio s Dormant Minerals Act was first introduced before the Ohio Senate in 1987 as Senate Bill 223, the description of the title transaction savings event looked much different. In fact, the savings event in the as-introduced bill did not use the phrase title transaction, and instead referred to situations where the interest has been conveyed, leased, transferred, or mortgaged by an instrument filed or recorded in the recorder s office of the county in which the lands are located. See Ohio S.B. 223 (1987) (as introduced) at 2, 2(a). This language, however, changed in the amended bill, Substitute Senate Bill 223. Specifically, the as-introduced language was removed and replaced with the following savings event: when the mineral interest has been the subject of a title transaction filed or recorded in the office of the recorder of the county in which the land is located. See Ohio Sub. S.B. 223 (1987) (as passed by the Senate) at 2, 2. The new savings event in Substitute Senate Bill 223 not only replaced the provision in the as-introduced bill, but ended up being the language unanimously passed by the Senate, and that remains in the current version of Ohio s Dormant Minerals Act. d. The comments to Section 4 of the Uniform Dormant Mineral Interests Act explain: Paragraph (b)(3) [the paragraph analogous to Ohio Rev. Code (B)(3)(a) in Ohio dealing with title transactions ] is intended to cover any recorded instrument evidencing an intention to own or affect an interest in the minerals, including a recorded oil, gas, or mineral Title Issues and Recent Cases 1.13