The 18th Annual Robert C. Sneed TEXAS LAND TITLE INSTITUTE Thursday, December 4, 2008

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1 The 18th Annual Robert C. Sneed TEXAS LAND TITLE INSTITUTE Thursday, December 4, 2008 SELECTED ISSUES IN REAL ESTATE DRAFTING- CONTRACTS AND CONVEYANCING, INCLUDING BANKRUPTCY ORDERS OF SALE; MINERAL CONSIDERATIONS Richard Melamed 6750 West Loop South, Suite 615 Bellaire, Texas Ph: (713) Fax: (713)

2 Richard Melamed 6750 West Loop South Suite 615 Bellaire, Texas Phone: Fax: Richard Melamed is a real estate and business attorney doing deals in Harris, Fort Bend and surrounding counties. He is board certified by the Texas Board of Legal Specialization in Residential, Commercial and Farm & Ranch Real Estate law. He is listed in the Martindale Hubbell Registry of Preeminent Lawyers, and holds an A-V rating. Mr. Melamed s daily practice involves representation of borrowers and purchasers of residential and commercial real estate properties, including homes, investment properties, office buildings, retail centers and land to be developed. He operates a fee attorney title office for First American Title Company, and has been in the title insurance business for over 25 years. He is also a licensed real estate agent and mortgage broker. Additionally, he is litigating various cases pending before the courts representing land owners in litigation to clear the title to their properties or to establish title by adverse possession. Education: University of Texas, (B.A., Government/ History, 1975); South Texas College of Law (J.D., 1978). Board Certification: Board Certified in Residential Real Estate Law by the Texas Board of Legal Specialization, and twice certified in Commercial and Farm and Ranch Real Estate law. Admitted to Practice: U. S. District Court, Southern District of Texas; U. S. Court of Appeals, Fifth Circuit; U. S. Court of Appeals for the Federal Circuit; U. S. Court of Customs and Patent Appeals; U. S. Supreme Court; U. S. Tax Court; all state Courts of Texas. Member: American Bar Association; State Bar of Texas; Houston Bar Association; Texas Land Title Association; Texas Association of Business Brokers; State Bar of Texas/Texas Real Estate Commission- Broker Lawyer Committee Listed: Who s Who in American Law , Kensington s Who s Who , The Best Lawyers in America , and one of the top 100 Real Estate Lawyers in Inside Houston Magazine, ; Listed- Houston s Top Lawyers, H Texas Magazine , Superlawyers

3 TABLE OF CONTENTS I. Contracts...1 II. Conveyancing...1 III. Subsurface Interests...9 A. Generally...9 B. Mineral Estate...9 C. Royalties...10 D. Executive Rights...10 E. Common Law Principles...10 F. Execution of the Warranty Deed...11 G. Other Suggested Forms Of Exceptions...13 IV. Bankruptcy...13 A. The Section 363 Sale...13 B. The Sale Order...14 C. Big Differences From District To District...14 D. Bankruptcy Sale Process E. Motions for Authority to Sell Property of the Estate...15 F. Motions for Sale Free and Clear of Liens, Claims, and Interests...17 G. Motions to Value Secured Claims...18 H. Motions to Assume and Assign Executory Contracts or Unexpired Leases...18 APPENDIX A 19 APPENDIX B APPENDIX C 25 APPENDIX D 27 APPENDIX E 28 i

4 REAL ESTATE DRAFTING- CONTRACTS AND CONVEYANCING, INCUDING BANKRUPTCY ORDERS OF SALE; MINERAL CONSIDERATIONS I. Contracts Discussing the issues related to contracts could make a full seminar all to itself. Suffice it to say that if the language you want to include in the closing documents isn't set out or referred to in the contract, you may have no right to demand that it be included in the closing documents. It is therefore necessary that your contract be as complete and inclusive as possible. It is not uncommon to see owner financed sales contracts with the form of the Note and Deed of Trust attached as Exhibits. Many option agreements have the earnest money contract form attached to the option agreement as an exhibit. Do not expect the buyer's lawyer to allow the seller's lawyer to put "as-is" language in the deed, if it wasn't referred to in the contract. Likewise, if all the contract has is a reference to including an "as-is" provision, and doesn't set out the exact language, be ready for a fight over the exact wording and length of the provision. The closing documents follow the agreement of the parties. II. Conveyancing The Property code contains various provisions related to conveyancing in Texas. Many practitioners are surprisingly unaware of the statutes. Sec FEE SIMPLE. (a) An estate in land that is conveyed or devised is a fee simple unless the estate is limited by express words or unless a lesser estate is conveyed or devised by construction or operation of law. Words previously necessary at common law to transfer a fee simple estate are not necessary. (b) This section applies only to a conveyance occurring on or after February 5, Sec FAILING AS A CONVEYANCE. An instrument intended as a conveyance of real property or an interest in real property that, because of this chapter, fails as a conveyance in whole or in part is enforceable to the extent permitted by law as a contract to convey the property or interest. Sec PARTIAL CONVEYANCE. (a) An alienation of real property that purports to transfer a greater right or estate in the property than the person making the alienation may lawfully transfer alienates only the right or estate that the person may convey. (b) Neither the alienation by deed or will of an estate on which a remainder depends nor the union of the estate with an inheritance by purchase or descent affects the remainder. Sec CONVEYANCE BY AUTHORIZED OFFICER. (a) A conveyance of real property by an officer legally authorized to sell the property under a judgment of a court within the state passes absolute title to the property to the purchaser. (b) This section does not affect the rights of a person who is not or who does not claim under a party to the conveyance or judgment.. 1

5 Sec ALIENS. An alien has the same real and personal property rights as a United States citizen. Sec ATTORNEY'S FEES IN BREACH OF RESTRICTIVE COVENANT ACTION. (a) In an action based on breach of a restrictive covenant pertaining to real property, the court shall allow to a prevailing party who asserted the action reasonable attorney's fees in addition to the party's costs and claim. (b) To determine reasonable attorney's fees, the court shall consider: (1) the time and labor required; (2) the novelty and difficulty of the questions; (3) the expertise, reputation, and ability of the attorney; and (4) any other factor. Sec VENDOR AND PURCHASER RISK ACT. (a) Any contract made in this state for the purchase and sale of real property shall be interpreted as including an agreement that the parties have the rights and duties prescribed by this section, unless the contract expressly provides otherwise. (b) If, when neither the legal title nor the possession of the subject matter of the contract has been transferred, all or a material part of the property is destroyed without fault of the purchaser or is taken by eminent domain, the vendor may not enforce the contract, and the purchaser is entitled to recover any portion of the contract price paid. (c) If, when either the legal title or the possession of the subject matter of the contract has been transferred, all or any part of the property is destroyed without fault of the vendor or is taken by eminent domain, the purchaser is not relieved from the duty to pay the contract price, nor is the purchaser entitled to recover any portion of the price already paid. (d) This section shall be interpreted and construed to accomplish its general purpose to make uniform the law of those states that enact the Uniform Vendor and Purchaser Risk Act. (e) This section may be cited as the Uniform Vendor and Purchaser Risk Act. Sec SELLER'S DISCLOSURE OF PROPERTY CONDITION. (a) A seller of residential real property comprising not more than one dwelling unit located in this state shall give to the purchaser of the property a written notice as prescribed by this section or a written notice substantially similar to the notice prescribed by this section which contains, at a minimum, all of the items in the notice prescribed by this section. (b) A seller or seller's agent shall have no duty to make a disclosure or release information related to whether a death by natural causes, suicide, or accident unrelated to the condition of the property occurred on the property or whether a previous occupant had, may have had, has, or may have AIDS, HIV related illnesses, or HIV infection. (c) The notice shall be completed to the best of seller's belief and knowledge as of the date the notice is completed and signed by the seller. If the information required by the notice is 2

6 unknown to the seller, the seller shall indicate that fact on the notice, and by that act is in compliance with this section. (d) This section does not apply to a transfer: (1) pursuant to a court order or foreclosure sale; (2) by a trustee in bankruptcy; (3) to a mortgagee by a mortgagor or successor in interest, or to a beneficiary of a deed of trust by a trustor or successor in interest; (4) by a mortgagee or a beneficiary under a deed of trust who has acquired the real property at a sale conducted pursuant to a power of sale under a deed of trust or a sale pursuant to a court ordered foreclosure or has acquired the real property by a deed in lieu of foreclosure; (5) by a fiduciary in the course of the administration of a decedent's estate, guardianship, conservatorship, or trust; (6) from one co-owner to one or more other co-owners; (7) made to a spouse or to a person or persons in the lineal line of consanguinity of one or more of the transferors; (8) between spouses resulting from a decree of dissolution of marriage or a decree of legal separation or from a property settlement agreement incidental to such a decree; (9) to or from any governmental entity; (10) of a new residence of not more than one dwelling unit which has not previously been occupied for residential purposes; or (11) of real property where the value of any dwelling does not exceed five percent of the value of the property. (e) The notice shall be delivered by the seller to the purchaser on or before the effective date of an executory contract binding the purchaser to purchase the property. If a contract is entered without the seller providing the notice required by this section, the purchaser may terminate the contract for any reason within seven days after receiving the notice. Sec DUTIES OF LIFE TENANT. (a) Subject to Subsection (b), if the life tenant of a legal life estate is given the power to sell and reinvest any life tenancy property, the life tenant is subject, with respect to the sale and investment of the property, to all of the fiduciary duties of a trustee imposed by the Texas Trust Code (Subtitle B, Title 9, Property Code) or the common law of this state. (b) A life tenant may retain, as life tenancy property, any real property originally conveyed to the life tenant without being subject to the fiduciary duties of a trustee; however, the life tenant is subject to the common law duties of a life tenant. Sec NOTICE OF ADDITIONAL TAX LIABILITY. (a) A person who is the owner of an interest in vacant land and who contracts for the transfer of that interest shall include in the contract the following bold-faced notice: 3

7 NOTICE REGARDING POSSIBLE LIABILITY FOR ADDITIONAL TAXES If for the current ad valorem tax year the taxable value of the land that is the subject of this contract is determined by a special appraisal method that allows for appraisal of the land at less than its market value, the person to whom the land is transferred may not be allowed to qualify the land for that special appraisal in a subsequent tax year and the land may then be appraised at its full market value. In addition, the transfer of the land or a subsequent change in the use of the land may result in the imposition of an additional tax plus interest as a penalty for the transfer or the change in the use of the land. The taxable value of the land and the applicable method of appraisal for the current tax year is public information and may be obtained from the tax appraisal district established for the county in which the land is located. (b) This section does not apply to a contract for a transfer: (1) under a court order or foreclosure sale; (2) by a trustee in bankruptcy; (3) to a mortgagee by a mortgagor or successor in interest or to a beneficiary of a deed of trust by a trustor or successor in interest; (4) by a mortgagee or a beneficiary under a deed of trust who has acquired the land at a sale conducted under a power of sale under a deed of trust or a sale under a court-ordered foreclosure or has acquired the land by a deed in lieu of foreclosure; (5) by a fiduciary in the course of the administration of a decedent's estate, guardianship, conservatorship, or trust; (6) of only a mineral interest, leasehold interest, or security interest; or (7) to or from a governmental entity. (c) The notice described by Subsection (a) is not required to be included in a contract for transfer of an interest in land if every transferee under the contract is: (1) a person who is a co-owner with an owner described by Subsection (a) of an undivided interest in the land; or (2) a spouse or a person in the lineal line of consanguinity of an owner described by Subsection (a). (d) The notice described by Subsection (a) is not required to be given if in a separate paragraph of the contract the contract expressly provides for the payment of any additional ad valorem taxes and interest that become due as a penalty because of: (1) the transfer of the land; or (2) a subsequent change in the use of the land. (e) If the owner fails to include in the contract the notice described by Subsection (a), the person to whom the land is transferred is entitled to recover from that owner an amount equal to the amount of any additional taxes and interest that the person is required to pay as a penalty because of: 4

8 (1) the transfer of the land; or (2) a subsequent change in the use of the land that occurs before the fifth anniversary of the date of the transfer. Sec SELLER'S DISCLOSURE OF LOCATION OF CONDITIONS UNDER SURFACE OF UNIMPROVED REAL PROPERTY. (a) A seller of unimproved real property to be used for residential purposes shall provide to the purchaser of the property a written notice disclosing the location of a transportation pipeline, including a pipeline for the transportation of natural gas, natural gas liquids, synthetic gas, liquefied petroleum gas, petroleum or a petroleum product, or a hazardous substance. (b) The notice must state the information to the best of the seller's belief and knowledge as of the date the notice is completed and signed by the seller. If the information required to be disclosed is not known to the seller, the seller shall indicate that fact in the notice. (c) The notice must be delivered by the seller on or before the effective date of an executory contract binding the purchaser to purchase the property. If a contract is entered without the seller providing the notice as required by this section, the purchaser may terminate the contract for any reason not later than the seventh day after the effective date of the contract. (d) This section applies to any seller of unimproved real property, including a seller who is the developer of the property and who sells the property to others for resale. (e) In this section, "hazardous substance" and "hazardous waste" have the meanings assigned by Section , Health and Safety Code. (f) A seller is not required to give the notice if: (1) the seller is obligated under an earnest money contract to furnish a title insurance commitment to the buyer prior to closing; and (2) the buyer is entitled to terminate the contract if the buyer's objections to title as permitted by the contract are not cured by the seller prior to closing. Added by Acts 1997, 75th Leg., ch. 1239, Sec. 1, eff. Sept. 1, Renumbered from Property. Sec CONVEYANCE OF RESIDENTIAL PROPERTY ENCUMBERED BY LIEN. (a) A person may not convey an interest in or enter into a contract to convey an interest in residential real property that will be encumbered by a recorded lien at the time the interest is conveyed unless, on or before the seventh day before the earlier of the effective date of the conveyance or the execution of an executory contract binding the purchaser to purchase the property, an option contract, or other contract, the person provides the purchaser and each lienholder a separate written disclosure statement in at least 12-point type that: (1) identifies the property and includes the name, address, and phone number of each lienholder; (2) states the amount of the debt that is secured by each lien; (3) specifies the terms of any contract or law under which the debt that is 5

9 secured by the lien was incurred, including, as applicable: (A) (B) (C) the rate of interest; the periodic installments required to be paid; and the account number; (4) indicates whether the lienholder has consented to the transfer of the property to the purchaser; (5) specifies the details of any insurance policy relating to the property, including: (A) (B) (C) the name of the insurer and insured; the amount for which the property is insured; and the property that is insured; (6) states the amount of any property taxes that are due on the property; and (7) includes a statement at the top of the disclosure in a form substantially similar to the following: WARNING: ONE OR MORE RECORDED LIENS HAVE BEEN FILED THAT MAKE A CLAIM AGAINST THIS PROPERTY AS LISTED BELOW. IF A LIEN IS NOT RELEASED AND THE PROPERTY IS CONVEYED WITHOUT THE CONSENT OF THE LIENHOLDER, IT IS POSSIBLE THE LIENHOLDER COULD DEMAND FULL PAYMENT OF THE OUTSTANDING BALANCE OF THE LIEN IMMEDIATELY. YOU MAY WISH TO CONTACT EACH LIENHOLDER FOR FURTHER INFORMATION AND DISCUSS THIS MATTER WITH AN ATTORNEY. (b) A violation of this section does not invalidate a conveyance. Except as provided by Subsections (c) and (d), if a contract is entered into without the seller providing the notice required by this section, the purchaser may terminate the contract for any reason on or before the seventh day after the date the purchaser receives the notice in addition to other remedies provided by this section or other law. (c) This section does not apply to a transfer: (1) under a court order or foreclosure sale; (2) by a trustee in bankruptcy; (3) to a mortgagee by a mortgagor or successor in interest or to a beneficiary of a deed of trust by a trustor or successor in interest; (4) by a mortgagee or a beneficiary under a deed of trust who has acquired the real property at a sale conducted under a power of sale under a deed of trust or a sale under a court-ordered foreclosure or has acquired the real property by a deed in lieu of foreclosure; (5) by a fiduciary in the course of the administration of a decedent's estate, guardianship, conservatorship, or trust; (6) from one co-owner to one or more other co-owners; (7) to a spouse or to a person or persons in the lineal line of consanguinity of one or more of the transferors; 6

10 (8) between spouses resulting from a decree of dissolution of marriage or a decree of legal separation or from a property settlement agreement incidental to one of those decrees; (9) to or from a governmental entity; (10) where the purchaser obtains a title insurance policy insuring the transfer of title to the real property; or (11) to a person who has purchased, conveyed, or entered into contracts to purchase or convey an interest in real property four or more times in the preceding 12 months. (d) A violation of this section is not actionable if the person required to give notice reasonably believes and takes any necessary action to ensure that each lien for which notice was not provided will be released on or before the 30th day after the date on which title to the property is transferred. Sec FEE FOR FUTURE CONVEYANCE OF RESIDENTIAL REAL PROPERTY AND RELATED LIEN PROHIBITED. (a) In this section, "property owners' association" has the meaning assigned by Section (b) A deed restriction or other covenant running with the land applicable to the conveyance of residential real property that requires a transferee of residential real property or the transferee's heirs, successors, or assigns to pay a declarant or other person imposing the deed restriction or covenant on the property or a third party designated by a transferor of the property a fee in connection with a future transfer of the property is prohibited. A deed restriction or other covenant running with the land that violates this section or a lien purporting to encumber the land to secure a right under a deed restriction or other covenant running with the land that violates this section is void and unenforceable. For purposes of this section, a conveyance of real property includes a conveyance or other transfer of an interest or estate in residential real property. (c) This section does not apply to a deed restriction or other covenant running with the land that requires a fee associated with the conveyance of property in a subdivision that is payable to: (1) a property owners' association that manages or regulates the subdivision or the association's managing agent if the subdivision contains more than one platted lot; (2) an entity organized under Section 501(c)(3), Internal Revenue Code of 1986; or (3) a governmental entity. SUBCHAPTER B. FORM AND CONSTRUCTION OF INSTRUMENTS Sec INSTRUMENT OF CONVEYANCE. A conveyance of an estate of inheritance, a freehold, or an estate for more than one year, in land and tenements, must be in writing and must be subscribed and delivered by the conveyor or by the conveyor's agent authorized in writing. 7

11 Sec FORM. (a) The following form or a form that is the same in substance conveys a fee simple estate in real property with a covenant of general warranty: "The State of Texas, "County of. "Know all men by these presents, That I,, of the (give name of city, town, or county), in the state aforesaid, for and in consideration of dollars, to me in hand paid by, have granted, sold, and conveyed, and by these presents do grant, sell, and convey unto the said, of the (give name of city, town, or county), in the state of, all that certain (describe the premises). To have and to hold the above described premises, together with all and singular the rights and appurtenances thereto in any wise belonging, unto the said, his heirs or assigns forever. And I do hereby bind myself, my heirs, executors, and administrators to warrant and forever defend all and singular the said premises unto the said, his heirs, and assigns, against every person whomsoever, lawfully claiming or to claim the same, or any part thereof. "Witness my hand, this day of, A.D. 19. "Signed and delivered in the presence of " (b) A covenant of warranty is not required in a conveyance. (c) The parties to a conveyance may insert any clause or use any form not in contravention of law. Sec IMPLIED COVENANTS. (a) Unless the conveyance expressly provides otherwise, the use of "grant" or "convey" in a conveyance of an estate of inheritance or fee simple implies only that the grantor and the grantor's heirs covenant to the grantee and the grantee's heirs or assigns: (1) that prior to the execution of the conveyance the grantor has not conveyed the estate or any interest in the estate to a person other than the grantee; and (2) that at the time of the execution of the conveyance the estate is free from encumbrances. (b) An implied covenant under this section may be the basis for a lawsuit as if it had been expressed in the conveyance. Sec ENCUMBRANCES. "Encumbrance" includes a tax, an assessment, and a lien on real property. Sec WOOD SHINGLE ROOF. To the extent that a deed restriction applicable to a structure on residential property requires the use of a wood shingle roof, the restriction is void. 8

12 Sec DISCRIMINATORY PROVISIONS. (a) If a restriction that affects real property, or a provision in a deed that conveys real property or an interest in real property, whether express or incorporated by reference, prohibits the use by or the sale, lease, or transfer to a person because of race, color, religion, or national origin, the provision or restriction is void. (b) A court shall dismiss a suit or part of a suit to enforce a provision that is void under this section. III. Subsurface Interests A. Generally Subsurface rights to real property are a freehold estate and an interest in land. Title to subsurface rights may be separated from the right to use the surface estate of a piece of property, and sold separately. However, unless subsurface rights are expressly reserved or excepted in a deed, all surface and subsurface rights to real property owned by the grantor will be conveyed in a deed. Cockrell v. Texas Gulf Sulphur Co., 299 S.W.2d 672 (Tex. 1956). Thus, a conveyance of property without a reference to the minerals will automatically convey both the surface and mineral estates in the described lands. Texas Co. v. Daugherty, 176 S.W. 717 (Tex. 1915).Subsurface estates can be divided into six (6) principal interests: (1) minerals or mineral estate or mineral fee; (2) royalty; (3) right to receive bonus payments; (4) right to receive delay rentals; (5) executive right or right to lease; and (6) the right to develop, or the right of ingress and egress. Day & Co. v. Texland Petroleum, 786 S.W.2d 667 (Tex. 1990); Altman v. Blake, 712 S.W.2d 117 (Tex. 1986). Because of their common effect on conveyances, a review of the distinctions between a mineral interest and a royalty, and executive rights issues that may be confronted in the conveyance of real property. B. Mineral Estate Mineral estates are created by the lateral severance of the surface estate from the subsurface estate. Moser v. United States Steel Corp., 676 S.W.2d 99 (Tex. 1984). Once severed, they may be owned by one or more parties in undivided interests in the same manner as fee simple estates. This severance creates a conflict of interest between the surface owner who wants to use the surface for his own purpose and the subsurface owner who must necessarily use the surface in order to extract the minerals and realize the value of his own estate. Under Texas law, the subsurface or mineral estate is the dominant estate, giving the owner thereof the right to use the surface reasonably to extract the minerals from the subsurface. Humble Oil & Refining Co. v. Williams, 420 S.W.2d 133 (Tex. 1967). However, the subsurface owner must exercise his rights with "due regard" for the rights of the surface owner. Getty Oil Company v. Jones, 470 S.W.2d 618 (Tex. 1971). The conflict between the mineral estate and the surface estate, and what uses can be made of each, is a complicated issue about which much has been written. Although mineral estates have been derived from a variety of conveyance and reservation provisions, they are typically created by the conveyance or reservation of an interest in and to "all of the oil, gas and other minerals in and under, or that may be produced from," the described real estate. 9

13 C. Royalties A royalty is distinguished from a mineral estate in that a royalty interest owner is entitled to receive a cost free share of the minerals produced from the subsurface estate if and when produced, saved or sold. Because the owner of a royalty interest does not automatically receive a share of any bonus paid to the landowner for executing a lease, or any part of any delay rental payment made to the landowner to extend a lease, it is often referred to as a "nonparticipating royalty". In addition, and perhaps most importantly, a royalty owner does not have any right to enter upon the surface owner's estate. Consequently, he cannot explore for minerals on his own or sign a lease giving others the right to do so. He can only wait and participate if a lease is signed. There are several different types of royalties. The most important are an overriding royalty and a shut-in royalty. An overriding royalty is a royalty retained by a lessee when property is subleased. A shut-in royalty is a royalty payment made to keep an oil and gas lease in force even though there is no production. D. Executive Rights For purposes of most real estate transactions, the key factor distinguishing a mineral estate from a royalty interest is the right of a mineral interest owner, no matter how small the interest, to enter into the surface of the property to explore for oil and gas, or to sign a lease granting such rights to a lessee. Where a mineral interest exists, the owner of the surface is on notice of the potential conflict of interest and should investigate whether surface waivers or other means of comfort can be obtained. In many instances, the existence of an outstanding mineral estate and the risk of development can be accepted by a purchaser because of the practical likelihood that no well can be drilled because of economic reality, because of a violation of drilling ordinances or because of the ability of the landowner to obtain a mineral subdivision designating specific drill sites. However, even where only a royalty interest exists, the fiduciary duty of the holder of the executive rights to the owner of a nonexecutive interest may make the existence of such a royalty a potential problem. E. Common Law Principles 1. Severance. Severance of the surface and mineral estates in Texas occurs either through grant of the minerals in a deed or lease or by reservation of the minerals in a conveyance of the property. Humphreys-Mexia Co. v. Gammon, 113 Tex. 247, 254 S.W. 296 (1923). Severance is frequently accomplished in Texas by a grant or reservation of "oil, gas, and other minerals," but can be effectuated by a grant or reservation of the "surface estate" or the "mineral estate" in land or by words of similar import. Heinatz v. Allen, 147 Tex. 512, 217 S.W.2d 994 (1949). An oil and gas lease creates a determinable fee interest in the leased substances and is a severance of those substances from the surface. See Natural Gas Pipeline Co. of America v. Pool, 124 S.W.3d 188 (Tex. 2003); W. T. Waggoner Estate v. Sigler Oil Co., 118 Tex. 509, 19 S.W.2d 27, (1929). A severance need not include the entire mineral estate to cause potential conflict with the surface estate. Even the smallest undivided mineral interest could, at least in theory, give rise to significant surface use issues since mineral cotenants have the same essential rights of possession and use regardless of the size of their respective interests. Cox v. Davison, 397 S.W.2d 200, 203 (Tex. 1965). 10

14 2. Substances Covered by Mineral Grant or Reservation. Courts in Texas and elsewhere have long struggled with whether or not a particular substance is covered by a mineral grant or reservation when that substance is not specifically identified in the grant or reservation. The question has caused particular difficulty when extraction of the claimed mineral substance is destructive or consumptive of the surface. The Texas Supreme Court itself repeatedly stumbled over this issue through the well known cases of Acker v. Guinn, 464 S.W.2d 348 (Tex. 1971), Reed v. Wylie, 554 S.W.2d 169 (Tex. 1977) (Reed I), and Reed v. Wylie, 597 S.W.2d 743 (Tex. 1980) (Reed II), before returning to basics in Moser v. U.S. Steel Corp., 676 S.W.2d 99 (Tex. 1984). Moser specifically holds that uranium is a reserved mineral under a reservation of "oil, gas, and other minerals," without regard to whether or not its extraction is destructive of the surface. Id. at 101. In so holding, the Supreme Court rejected its earlier surface destruction formulations in Acker, Reed I, and Reed II in favor of an "ordinary meaning" test, holding that "a severance of minerals in an oil, gas and other minerals clause includes all substances within the ordinary and natural meaning of that word, whether their presence or value is known at the time of severance." Id. at 102. Moser opts for a bright line rule in lieu of the factually intensive inquiries required under its early decisions. Under this ordinary meaning test, which remains the law, affected persons are able to determine the scope of applicable mineral conveyances and reservations by reference solely to the instrument and applicable case law and without necessity of resort to extrinsic facts and circumstances. See e.g. Robinson v. Robbins Petroleum Corp., Inc., 501 S.W.2d 865, 867 (Tex. 1973). F. Execution of the Warranty Deed. 1. Existing oil and gas leases on the property and instruments effecting prior mineral estate severances are exceptions. The instruments may be excepted in broad or specific terms. Generally, the broad exceptions are preferred by sellers and the specific exceptions are preferred by buyers. Whether or not title to the property has been examined is an issue in deciding between broad and specific exceptions. A combination of the 2 forms can be used where a grantor wants to specifically list the exceptions he is aware of and then cover any other exceptions that he is unsure about with broad exceptions. 2. Reservations. When the grantor wishes to reserve some part of his estate, the reservation should be described carefully under that heading in the deed. A reservation in a deed in favor of a party other than the grantor is ineffective. Joiner v. Sullivan, 260 S.W. 2d 439 (Tex. Civ. App.-Texarkana 1953, writ ref'd). 3. A common problem with stating exceptions and reservations is excepting something that should be reserved and reserving something that should be excepted, for example: a. Reservation of an existing oil and gas lease. b. Exception of a mineral interest intended to be reserved by the Grantor. Carefully consider your exceptions and reservations in completing this part of the Warranty Deed. 11

15 4. The reservations from and exceptions to conveyance and warranty are incorporated into the granting and warranty clauses of the form of Warranty Deed in the State Bar Real Estate Form Manual to eliminate conflicting provisions in the deed. 5. Broad Exceptions Easements, rights-of-way, and prescriptive rights, whether or record or not; all presently recorded restrictions, reservations, covenants, conditions, oil and gas leases, mineral severances, and other instruments, other than liens and conveyances, that affect the property; rights of adjoining owners in any walls and fences situated on a common boundary; any discrepancies, conflicts, or shortages in area or boundary lines; any encroachments or overlapping of improvements; all rights, obligations, and other matters emanating from and existing by reason of the creation, establishment, maintenance, and operation of the County Water Improvement District [or other applicable governmental district, agency, authority, etc.]; taxes for [current year], the payment of which Grantee assumes; [and subsequent assessments for that and prior years due to change in land usage, ownership, or both, the payment of which Grantee assumes] [or, if grantor is to pay] [but not subsequent assessments for that and prior years due to change in land usage, ownership, or both, the payment of which Grantor assumes]. OR Easements, rights-of-way, and prescriptive rights, whether of record or not; all presently recorded instruments, other than liens and conveyances, that affect the property; taxes for [current year], the payment of which Grantee assumes; [and subsequent assessments for that and prior years due to change in land usage, ownership, or both, the payment of which Grantee assumes] [or, if grantor is to pay] [but not subsequent assessments for that and prior years due to change in land usage, ownership, or both, the payment of which Grantor assumes]. State Bar Real Estate Form Manual, pp et seq. 6. Specific Exceptions. (a) Restrictions running with the land recorded in Volume, Page, official public records of real property of County, Texas [OR deed records of County, Texas, ETC.]. (b) Easements provided for by the map referred to in the description of property. (c) Easement from _ t o _, d a t e and recorded in Volume, Page, official public records of real property of County, Texas [OR deed records of County, Texas, ETC.]. (d) Party wall agreement dated b e t w e e n a n d, recorded in Volume, Page, official public records of real property of County, Texas [OR deed records of County, Texas, ETC.]. (e) Taxes for [current year], the payment of which Grantee assumes; [and subsequent assessments for that and prior years due to change in land usage, ownership, or both, the 12

16 payment of which Grantee assumes] [or, if grantor is to pay] [but not subsequent assessments for that and prior years due to change in land usage, ownership, or both, the payment of which Grantor assumes]. (f) Set-back lines shown on the plat recorded in Volume, Page, of the plat records of County, Texas. (g) Interest in the mineral estate owned by third parties, as indicated in a deed recorded in. (h) Any valid, existing oil and gas leases relating to the mineral estate in the property, recorded in. G. Other Suggested Forms Of Exceptions. For Outstanding Mineral Interests And Oil And Gas Leases 1. Mineral interest reserved by A in the property under Warranty Deed dated, recorded Volume, Page, records of County, Texas from A, as Grantor, to B, as Grantee. 2. Mineral interest in the S ½ of the property conveyed by A, as Grantor, to B, as Grantee, under Mineral Deed dated, recorded Volume, Page, records of County, Texas. 3. Term royalty interest in the property conveyed by A, as Grantor, to B, as Grantee, under Term Royalty Deed dated, recorded Volume, Page, records of County, Texas. 4. Oil and Gas Lease dated, 19, recorded Volume, Page, records of County, Texas from A, as Lessor, to Y Oil Co., as Lessee, covering the S/2 of the property. NOTE: Thought should be given to setting out the size of the mineral interests covered by the deeds or leases excepted if the grantor under the Warranty Deed is certain about the size of the interests so that as much information as possible about outstanding interests can be set out in the Warranty Deed. If there is a question about what was conveyed or reserved under an excepted mineral deed, or what mineral interest is covered by an excepted oil and gas lease, then the instrument should just be referred to so that all of the interest covered thereby, whatever it is, is excepted from the Warranty Deed. IV. Bankruptcy. A. The Section 363 Sale. A sale of assets in a Bankruptcy often happens in the first few weeks or months of a Chapter 11 case, rather than as part of a plan of reorganization. Frequently this will involve a sale of all or substantially all of a debtor's business as a going concern. The sale is generally referred to as a "Section 363 sale" because Section 363 is the key Bankruptcy 13

17 Code section that governs a debtor's sale of assets in bankruptcy. The debtor must seek bankruptcy court approval of a sale that is not in the ordinary course of business and of any effort to transfer executory contracts, intellectual property licenses, or commercial real estate leases to the buyer. B. The Sale Order. For a buyer of assets in a Section 363 bankruptcy sale, the type of factual findings and legal rulings the bankruptcy court will include -- or refuse to include -- in the order approving the sale is very important.. Buyers typically desire that the sale be ordered "free and clear" of all liens, claims, interests, and encumbrances, rather than only certain ones specifically identified in the notice of sale and corresponding motion. They also prefer to have findings added to the order on issues such as fair value paid and no successor liability, and often ask for an injunction against actions affecting the buyer that are inconsistent with the sale order's findings and provisions. C. Big Differences From District To District. As bankruptcy lawyers know, courts in different districts around the country have taken surprisingly divergent views on what is, and is not, appropriate in Section 363 sale orders. D. Bankruptcy Sale Process. Most bankruptcy asset sales are "as is where is with no warranties implied or stated". This means that after the sale is complete, the buyer cannot obtain a refund if the assets they bought do not meet their expectations. Some buyers will try and seek relief by filing an action at their local court; however, the matter will most likely be moved to the bankruptcy court responsible for the case in which the asset is held. Most Bankruptcy Courts affirm the sale, since it is commonly understood that bankruptcy sales are "as is where is with no warranties implied or stated" Bankruptcy sales are usually "subject to any existing liens and encumbrances". This means that there may be some existing liens against the property sold and that a buyer of the property should expect to satisfy the lien. Since bankruptcy sales are "as is where is with no warranties implied or stated", an ultimate buyer will be presumed to have done their own "due diligence" regarding the property prior to bidding on that asset. Some bankruptcy sales are sold "free and clear of all liens and encumbrances". In these sales, a buyer receives the property with a guarantee that the asset purchased is free and clear of any existing liens. In these situations, the funds received from the buyer are used to apply to any existing liens after approval from the Bankruptcy Court. Often, a buyer will received a Court Order approving the sale if it is sold "free and clear of liens and encumbrances". Most bankruptcy sales of real property such as raw land and timeshares are done without title insurance or with the assistance of a title agency. These real estate assets are also sold "as is where is with no warranties implied or stated subject to any existing liens and encumbrances". Accordingly, buyers must do their own due diligence prior to bidding and will usually only receive a "bankruptcy trustee's deed" after the sale is complete. Buyers should expect to incur the costs to record and transfer the property to their name without the assistance of the bankruptcy court. If a buyer wants title insurance, the buyer should expect to incur the cost of 14

18 the title insurance as the bankruptcy court or Trustee will generally not share or pay for the cost of this service. E. Motions for Authority to Sell Property of the Estate 1. A motion to sell property of the estate outside the ordinary course of business under section 363(b) merely seeks authority to take such action on behalf of the estate. Accordingly, the order should be very simple and need identify only the property to be sold, the purchaser, and the general terms of sale. 2. The order should not include findings of fact or conclusions of law. All necessary findings and conclusions should be stated orally on the record or in a separate statement of findings of fact and conclusions of law, memorandum or opinion. Generally, the court will state its findings orally on the record. Accordingly, parties should not prepare separate proposed findings and conclusions unless invited to do so by the court. 3. The court acknowledges that the purchaser may seek to review or approve the form of the sale order and may seek to condition its purchase upon the entry of a sale order that is satisfactory to the purchaser. In general, the court will not permit the purchaser to exercise any such condition to obtain entry of an order that does not comply with these guidelines. 4. The court will generally approve the following in the sale order: a. A finding that notice of the motion was proper and adequate given the circumstances; b. A finding that a purchaser is in good faith and entitled to the protections of Section 363 (m), where such a request is supported by competent evidence, where creditors have been given notice that such a finding will be requested, and where there are no objections to the request or all objections have been overruled; c. A provision approving the sale as the highest and best offer; d. A provision addressing any back-up bids, as necessary or appropriate; e. A provision granting the motion and authorizing the debtor in possession or trustee to enter into the purchase and sale agreement on behalf of the estate; f. A provision authorizing the debtor in possession or trustee to execute the purchase and sale agreement and to undertake such other actions as may be reasonably necessary to complete the sale; g. A provision authorizing the debtor in possession or trustee to pay any closing costs, broker's fees or commissions as requested in the motion; h. A provision authorizing the debtor in possession or trustee to pay the amounts secured by any liens which are not in dispute and authorizing the debtor in possession or trustee to file or record termination statements, instruments of satisfaction, 15

19 releases of liens and any other documents necessary for the purpose of documenting the release of specified liens; basis; i. A provision that the sale is on an "as is, where is" and "with all faults" j. A provision that the purchase and sale agreement and related documents or instruments may be modified, amended or supplemented by the parties without further order of the court, provided that such modification, amendment or supplement does not have a material adverse effect on the estate; k. A provision waiving any applicable stay under Rule 6004(h) of the Federal Rules of Bankruptcy Procedure, upon a proper showing of cause; and l. A provision reserving bankruptcy court jurisdiction to implement the sale, enforce the sale order or to resolve any disputes arising in connection with or related to the sale. 5. Any bidder that intends to request that the court make a finding under Bankruptcy Code section 363(m) that such bidder's purchase of the assets or the assignment to it of an executory contract or unexpired lease is in good faith, shall, by a date established by the court, file with the court and serve as required by the court, a written declaration of a competent witness demonstrating (1) the bidder's good faith and (2) the absence of fraud or collusion between the bidder and any other bidder or between the bidder and the debtor's or the estate's agents or employees. The declaration shall also disclose any facts material to the good faith determination, including: a. The bidder's pre- and post-petition relationships with (i) any other bidder, (ii) the debtor or the debtor's current or former officers, directors, agents or employees, and (iii) any of the debtor's major creditors or equity security holders; b. The bidder's anticipated relationship after the sale with any of the debtor's current or former officers, directors, agents or employees; c. Whether any offers of employment or compensation have been or will be made to any of the debtor's current or former officers, directors, agents or employees; and d. Whether the bidder has paid or contemplates paying consideration in connection with the sale to any person other than the debtor. 6. The court generally will not approve any of the following: a. Any provision that incorporates the terms of any written or oral agreement into the order, or directs the debtor in possession or trustee to perform any act, except as provided in paragraph 4 f. As noted above, an order under section 363 (b) merely authorizes the debtor-in-possession to act. 16

20 b. Any provision that purports to exempt the transaction from transfer taxes under section 1146(c). By its own terms, that section applies only to a sale pursuant to a plan of reorganization, not a sale outside of a plan under section 363 (b). c. Any provision that purports to grant a purchaser an administrative claim with respect to a breach of the purchase and sale agreement by the debtor in possession or trustee. Though a purchaser may be entitled to an administrative claim for any damages resulting from such breach, the court is unwilling to give an advisory ruling on the potential recourse available to a purchaser in the event of a breach. d. Except as otherwise provided herein, any provision that purports to grant declarative or injunctive relief. e. Any provision that purports to excuse any party from complying with applicable state or federal law. F. Motions for Sale Free and Clear of Liens, Claims, and Interests 1. A motion to sell free and clear of liens, claims, or interests pursuant to section 363(f) may be added to a motion for authority to sell under section 363 (b). 2. The motion must identify each lienholder or other party claiming a property right in the assets to be sold, must be served on each lienholder or party that is to be affected, and must expressly state the grounds for relief under section 363 (f) with respect to each lien, claim, or interest to be affected, and must comply with B.L.R The court will grant a motion to sell free and clear only where there is a genuine case or controversy. That is, there must be evidence that the party to be affected actually asserts a lien, claim, or other interest that would follow the property into the hands of the purchaser absent an order from the court. This requirement is generally satisfied by any written instrument purporting to be a security interest, whether recorded or not, and generally will be satisfied with respect to all scheduled creditors who do not assert a security interest or lien in the property to be sold and any party that has filed a proof of claim or a request for notice and who does not assert a security interest or lien in the property to be sold. Other types of liens, claims, and interests may require more detailed proof. 4. An order for sale free and clear of liens must identify with particularity the parties to be affected and the liens, claims, and interests to be affected. The order must also provide that any affected property interest such as a lien or other interest is transferred to the proceeds of the sale with the same force, effect, validity and priority that such property interest had against the assets sold. 5. The court will generally not approve a blanket order that purports to provide for a sale free and clear of all liens, claims and interests, or free and clear of all liens, claims and interests of all parties that were served with the motion. Where adequate notice is served, the court will, however, approve an order providing for the sale free and clear of the claims of all creditors that do not assert a lien or security interest in the assets who (a) are listed on the schedules, (b) have filed a proof of claim, or (c) filed a request for notice. 17