On August 28, 2014, the Seventh Judicial District of the Ohio Court of Appeals upheld a trial court’s verdict in favor of mineral estate holders who had been the subject of a declaratory judgment action under the Ohio Dormant Minerals Act (“DMA”). In Eisenbarth v. Reusser, the court of appeals concluded that an oil and gas lease is a savings event under the DMA and that the DMA has a fixed look-back period for determining when a savings event took place.
The Ohio legislature first enacted the DMA in 1989. It is one of many dormant minerals laws in operation around the country.
The purpose of the law is to encourage energy development, either by locating mineral owners or by declaring mineral interests abandoned so an interested party can develop them. Ohio’s position in the Utica shale region and the increased interest in hydraulic fracturing (“fracking”) in that region will likely contribute to mineral estate owners invoking this law more frequently. Ohio revised the law in 2006 to strengthen its notice requirements to dormant mineral interest holders. Under the law, a mineral interest held by a person other than the surface owner of the land subject to the interest will be deemed abandoned unless (a) the mineral interest deals with coal; (b) the mineral interest is held by the government; or (c) a savings event occurred within the preceding twenty years. See Eisenbarth v. Reusser, No. 13 MO 10, 2014 Ohio App. LEXIS 3720, *6 (Ohio App. Aug. 28, 2014), citing R.C. § 5301.56(B)(1). The law identifies the following savings events: (i) the mineral interest has been the subject of a title transaction that has been filed or recorded in the recorder’s office; (ii) there has been actual production or withdrawal by the holder; (iii) the holder used the mineral interest for underground gas storage; (iv) a mining permit has been issued to the holder; (v) a claim to preserve the mineral interest has been filed; or (vi) a separately listed tax parcel number has been created. See id. at *7, citing R.C. § 5301.56(B)(1)(c)(i)-(vi).
The lawsuit at the center of Eisenbarth v. Reusser was a family dispute over the mineral rights on two tracts of land in Monroe County, a rural county near the West Virginia border that lies within the Utica shale region. Two groups of cousins each held a property interest in the two tracts of land. By a series of property transactions originating from their grandfather, the Eisenbarth group held the right to lease the minerals on the two tracts of land while the Reusser group held half of the mineral estate. The parents of the Eisenbarth children, who previously held the group’s interest, had signed various oil and gas leases, the last one recorded in 1974. In 2008, the Eisenbarths signed an oil and gas lease. In 2009, they published a notice of abandonment of the Reussers’ one-half mineral interest, to which the Reussers responded with a claim to preserve. In 2012, the Eisenbarths signed an oil and gas lease with another company. See id. at *3-5.
The Eisenbarths then filed a suit within a suit, seeking a declaration that the Reussers’ mineral interest was abandoned under the DMA. The Reussers counterclaimed with a suit to quiet title to their one-half mineral interest. The parties filed cross motions for summary judgment. The trial court sided with the Reussers, concluding that their mineral interest had not been abandoned because there was an oil and gas lease over all the minerals on the tract that had been recorded in 1974. The trial court deemed this a savings event under the DMA, stating that an oil and gas lease conveys a determinable fee interest in the minerals that is subject to reverter in the event there is no production or the lease expires. See id. at *5-6.
The Eisenbarths claimed on appeal that a lease was merely a contract and not a title transaction. The Reussers argued that a lease can affect title to an interest in land and that the title transaction definition under Ohio law was enacted to prevent termination unless it was in compliance with the DMA. See id. at *9-11. Ohio law defines a “title transaction” as “any transaction affecting title to any interest in land, including title by will or descent, title by tax deed, or by trustee’s, assignee’s, guardian’s, executor’s, administrator’s, or sheriff’s deed, or decree of any court, as well as warranty deed, quit claim deed, or mortgage.” See id. at *8-9, quoting R.C. § 5301.47.
The question of whether or not an oil and gas lease is a title transaction has never been considered by an Ohio appeals court. However, shortly before this appeal, a federal court in Ohio handling a different lawsuit certified this question to the Ohio Supreme Court.
The parties in the federal lawsuit completed their appellate briefing in June 2014, but as of this writing, the court has not yet issued a decision. The Seventh District appeals court considered staying their decision until the Supreme Court issued its decision but decided to proceed on the issue. See id. at *11.
The court of appeals agreed with the trial court that the 1974 oil and gas lease was a savings event because an oil and gas lease is a “title transaction” under Ohio law. See id. at *18. The Eisenbarths argued that they are unable to convey the Reussers’ actual title to the mineral right because a surface owner cannot defeat title to the mineral rights by signing an oil and gas lease. The court pointed out, though, that the Eisenbarths (the surface owners) owned half the mineral estate, had the right to sign oil and gas leases covering all the mineral rights, and that this was not a situation where a party was attempting to defeat title or convey more rights than the Eisenbarths were permitted to transfer. See id. at *15.
The court also said that an oil and gas lease is a transaction that affects title to an interest in land because it stays with the real property if the title is transferred during the lease terms. A lease follows both the surface owner and the mineral owner. It is an encumbrance on the land and would have to be removed if one were to provide title “free and clear of liens and encumbrances.” The court was unmoved by the fact that the Eisenbarths were the parties who signed the leases in question and thus performed the savings event for the Reussers. The Eisenbarths had the executive right to sign oil and gas leases over the entire mineral estate. Thus, any lease they signed affected the entire estate and its minerals. See id. at *16-17.
The Eisenbarths also argued that the trial court incorrectly concluded that the oil and gas interest was not abandoned under the 1989 DMA. See id. at *18. The 1989 DMA provided a twenty-year look-back period for determining abandonment by requiring a title transaction “within the preceding twenty years.” See id. at *18-19. The Eisenbarths argued that the 1989 DMA was in effect from 1989 to 2006, when it was amended, and thus the look-back period should be a rolling period. That is, the look-back period could begin at any date between March 22, 1989 to June 30, 2006, the dates of enactment for the two versions of the DMA. See id. at *19-20. The Reussers argued that a plain reading of the statute established that the look-back period was fixed at twenty years from the date the 1989 DMA was enacted with an allowance for the three-year grace period built in the statute. Thus, the oil and gas lease recorded in 1974 occurred within the twenty-year look-back period. See id. at *20.
The appeals court again sided with the Reussers. See id. at *26. It noted their interpretation of the look-back period was consistent with another appellate court’s decision. See id. at *21. It also conceded that this provision of the law was ambiguous and that the Eisenbarths’ arguments in favor of a rolling look-back period were reasonable. See id. at *24-25. However, the court implied that a rolling look-back period could leave estate owners with fewer protections against abandonment and that “forfeitures are abhorred in the law.” It surmised that the legislature adopted a “dead letter law” because it was trying to eliminate or refresh state mineral claims in the original look-back period and planned to re-enact a new version of the law within twenty years (which it did, in 2006). See id. at *25-26. The 1974 lease was a title transaction performed within the twenty-year period under the 1989 DMA. Therefore, the Reussers had not abandoned their interest.
The Supreme Court upheld the constitutionality of such laws in 1982 in Texaco, Inc. v. Short, 102 S. Ct. 781 (1982), which considered Indiana’s dormant minerals law.
The underlying federal case is Chesapeake Explorations L.L.C. v. Buell, pending in the Southern District of Ohio (No. 2:12-CV-00916), a suit to quiet title brought by various fracking companies. The land in question is located in Harrison County, Ohio, which is in the eastern part of the state in the Utica shale region. The case is stayed pending a decision by the Ohio Supreme Court on the title transaction question.
The Eisenbarths originally stated their claims under both the 1989 and 2006 laws. The Reussers originally contested the application of the 1989 law but abandoned that argument on appeal. The court of appeals only applied the 1989 law in its decision.