The Fractionalization Dilemma Roberto L. Seda

What is happiness?

What is happiness for a title attorney? 1

What is happiness for a title attorney? 1 1.000000000

Why is “1” important to us? Easier on the eyes than 0.999999999. It signifies that our title opinion is complete. It probably means that as attorneys that we will get a paycheck. It represents the whole. Most importantly, it means that all the complexities and nuances of record title have been resolved and addressed within the title opinion. You have a happy client….hopefully!

Where is the state of title currently at? BEFORE AFTER

Where is the state of title currently at? Title problems are created by: Conveyances Deaths Divorce Foreclosure Tax sales Statutes The law changes over time. This list is not all inclusive!

Where is the state of title currently at? Title problems grow exponentially, not linearly. Fee Surface Minerals Leasehold Working interests Overriding royalty interests Other Term Non-participating mineral/royalty interest Life estates

Where is the state of title currently at? Acreage ownership = At least six decimals Large, costly opinions Long lead times to get completed title opinions No relief in sight Title is only going to get worse In some states, we are not even 100 years into statehood.

How big of an effect are those small interests? Administrative costs for oil and gas companies Tracking all the small interests Payments Locating and leasing minerals owners can be an overwhelming tasks. Townsite opinions become more difficult because you are dealing with many small tracts and then potentially multiplying that by the number of severed mineral owners

TITLE DEFECTS Increase with time. Unfortunately, more are created than are cured. Each title defect may require a title requirement Title requirements can be expensive Probates Quiet titles Some title requirements may be impossible to cure resulting in a quiet title.

What are options to counter the fractionalization dilemma? Some fractionalization issues will resolve themselves with time Life estate / remainderman interests merge with expiration of life estate Term interests expire Fee Non-participating Leasehold interests expire

What are options to counter the fractionalization dilemma? Marketable Record Title Act Michigan North Dakota Oklahoma Also has Simplification of Land Titles Act Texas Mineral Marketable Record Title Act

What are options to counter the fractionalization dilemma? Ways to clear title in small interests in a cost effective manner Oklahoma Affidavit of Death and Heirship Statute (16 O.S. § 67) Summary Administration Probate Texas Rocket probate procedure However, this still requires initiating a probate

What are options to counter the fractionalization dilemma? Dormant Mineral Act States include: Michigan (MCL 554.291 et seq) North Dakota (N.D.C.C. § 38-18.1) Ohio (Ohio Rev. Code § 5301.56) Severed mineral interest merge with the surface interest if the elements required by their state are satisfied. Minimum of 20 years in the states named above before interest is subject to merging with surface interest.

What are options to counter the fractionalization dilemma? Nonuse Statutes Kansas (K.S.A. 55-1601 et seq) Mineral interest can be lost if unused for a period of 20 years Louisiana (La. R.S. 31:27(1)) Mineral servitude extinguished if there is a period of 10 years of nonuse.

What are options to counter the fractionalization dilemma? Other Options Family Trusts Non-profit entities Limited Liability Companies Taxation of severed mineral interests? Would require new legislation Unpaid taxes after a certain number of years would result in a tax sale after a few years It may be that sophisticated mineral owners benefit the most.

What are options to counter the fractionalization dilemma? Other Options Setting/increasing minimum amount for aggregate payments to reduce administrative costs for oil and gas companies Escheat: Property escheats to the state if: Under 84 O.S. § 271(1), any real property interest (including minerals) shall escheat to the state if a person owning said interest dies without any devise and having no heirs, or Under 84 O.S. § 271(2), certain property interests escheat to the state after a person owning any real or personal property is “absent” for a term of 7 years and is not known to exist. Except mineral interests subject to sale under 84 O.S. § 271.1

What are options to counter the fractionalization dilemma? Other Options Abandoned Mineral Interest – Sale (84 O.S. § 271.1) It states that if “the proceeds or other intangible interest from any mineral interest are abandoned for a period of fifteen (15) years, as provided for in the Uniform Unclaimed Property Act, then the mineral interest which generates the intangible property interest shall not be subject to escheat, but shall be subject to judicial sale by the state as provided for in Sections 273 through 277 of this title.” Attorney General or district attorney files a petition to asking to take possession of the mineral interest on behalf of the state. If petition is granted, mineral interest is then sold by the sheriff.

Questions? Roberto L. Seda rseda@sedalawfirm.com sedalawfirm.com