1. NORTH DAKOTA PROBATE, DORMANT MINERALS, AND OTHER COMMON TITLE ISSUES
National Association of Division Order Analysts
2012 Spring Seminar
Denver, CO – April 11-12, 2012
Christopher D. Friez
Crowley Fleck PLLP
Bismarck, North Dakota

2. North Dakota Oil and Gas
Probate
Dormant Mineral Act – Abandoned Mineral Interests
Spacing and Pooling
Other Common Title Issues
Questions

3. Probate ND follows the Uniform Probate Code
Individually owned mineral interests must pass through probate
If individual dies owning mineral interests – ONLY way to legally pass title in ND is through probate
ND probate is required
Small estate affidavit procedure does NOT apply to real property (minerals)

4. Probate If estate previously probated in another state
If estate still open, North Dakota court can grant Personal Representative authority to act in ND, based on authority granted in other state
If estate closed, Personal Representative MUST be appointed in North Dakota, but other state probate is relied upon

5. Probate transfers North Dakota probate ND Title Standards require
Personal Representative’s Deed
Letters Testamentary appointing Personal Representative
MUST be certified to be in full force and effect on or after the date of the Personal Representative’s Deed

6. Probate transfers Out of State probate ND Title Standards require
Personal Representative’s Deed
Letters Testamentary from state court where PR was appointed
MUST be certified to be in full force and effect on or after the date of the Personal Representative’s Deed
Order or proof of authority establishing that appropriate copies of out of state probate documents were filed in ND

7. Alternatives to Probate
NO legal alternative to properly pass title
Some methods to provide notice without probate
Proofs of Death and Affidavits of Heirship
Statements of Claim
Out of state probate documents
Copies of Wills
NONE of these are effective to legally pass title
Some RISK involved with each

8. Alternatives to Probate
Affidavits of Heirship
Identify deceased, probate anywhere, identify survivors/heirs
For leasing and sometimes for payment
Dangers
Incorrect (innocently or not)
Affiant doesn’t have all information
Intestate rules or Will directs other distribution
Creditor’s liens
State of North Dakota lien

9. Alternatives to Probate
Statements of Claim
Identify record title owner
Explain record title owner is deceased and claimant is an heir
Explain why entitled to interest
Attach documentation
Prevent loss from dormant mineral claim – maybe
Put potential lessees on notice who to contact

10. Alternatives to Probate
Out of State Probate Documents
Less risky than relying solely on affidavits
More assurance of a valid Will
North Dakota court will recognize admission of will
North Dakota assets should be distributed in same manner

11. Alternatives to Probate
Copy of Will
Not certain that Will is last/correct Will
Not yet admitted to probate and given blessing of Court
Is there another Will? A more recent Will?

12. Alternatives to Probate
No risk-free alternative
Acceptance of alternative depends largely on size of interest/production of well(s)
For absolute certainty – MUST probate

13. Dormant Mineral Act
Desire to reunite dormant or abandoned mineral interest with the surface estate
Overrules common law doctrine that mineral interests cannot be abandoned
Generally require mineral owners to act to preserve their interest

14. Dormant (Abandoned) Mineral Statutes
Initially believed to be unconstitutional taking
Texaco v. Short, 454 U.S. 516 (1982)
Upheld Indiana’s Act against constitutional challenges
“severed mineral interest that is not used for a period of 20 years automatically lapses and reverts to the current surface owner of the property, unless the mineral owner files a statement of claim in the local county recorder’s office”

15. Dormant (Abandoned) Mineral Statutes
Challenged as:
Depriving of property without due process – lack of notice
State may condition right to retention of property right upon performance of reasonable conditions that indicate intent to retain the interest
Taking private property without just compensation
States have the power to permit unused property to revert to another after the passage of time
Indiana has not exercised this power in an arbitrary manner and the action required by the State to avoid abandonment furthers a legitimate goal
Violating equal protection through an exception in the statute for owners of more than 10 mineral interests
Exception furthers legitimate purpose, has no adverse impact on owners of fewer mineral interests, and does not violate equal protection

16. Dormant Mineral Act North Dakota Century Code Section 38-18.1-01
“Any mineral interest is, if unused for a period of twenty years…deemed to be abandoned…”
Surface owner may succeed to ownership

17. Dormant Mineral Act “USE” under the Act Production
Operations – injection, withdrawal, storage, disposal
Subject to lease, mortgage, assignment, conveyance which is recorded
Subject to pooling/unitization which is recorded
Payment of taxes
Statement of claim

18. Dormant Mineral Act North Dakota Century Code Section 38-18.1-06
Surface owner shall give notice of lapse by publication
Publication once a week for three weeks
“if the address of the mineral interest owner is shown of record or can be determined upon reasonable inquiry…notice must also be made…[by mail] within ten days after the last publication is made”

19. Dormant Mineral Act Reasonable inquiry Must search:
North Dakota Century Code Section (6)
Reasonable inquiry
Must search:
County records
Clerk of Court’s records
Social security death index
One or more public databases

20. Dormant Mineral Act North Dakota Supreme Court
Spring Creek Ranch, LLC v. Svenberg (1999)
Reasonable inquiry must be made regardless of address of record
“Reasonable” is case specific
Recent Supreme Court interpretation
Sorenson v. Felton; Sorenson v. Alinder (2011); Johnson v. Taliaferro (2011)
If address is of record, no further inquiry required
Interpreted pre-2009 Act

21. Dormant Mineral Act 2009 Amendments NDCC 38-18.1-06.1
Provides quiet title action as means to perfect title in surface owner
(4) – a mineral lessee that obtains a lease from an owner who has obtained a judgment pursuant to this section is a bona fide purchaser and the lease remains effective even if the judgment is subsequently vacated
Lessee is not liable to any third party for lease bonus, royalties, or other proceeds paid to surface owner before the judgment is vacated

22. Dormant Mineral Act 2009 Amendments CONTINUED NDCC 38-18.1-06.1
“In an action brought under this section, the owner or owners of the surface estate shall submit evidence to the district court establishing that all procedures required by this chapter were properly completed and that a reasonable inquiry as defined by subsection 6 of section was conducted. If the district court finds that the surface owner has complied with all procedures of the chapter and has conducted a reasonably inquiry, the district court shall…enter judgment perfecting title to the mineral interest in the owner or owners of the surface estate.”

23. Dormant Mineral Act 2009 Amendments CONTINUED
Open question as to whether reasonably inquiry is required in claim brought after 2009 amendments
Can a post-2009 claim succeed without conducting a reasonable inquiry
Johnson v. Taliaferro (ND 2011)
Chief Justice VandeWalle concurrence:
“our decision does not resolve the issue of whether or not, in light of the amendments to N.D.C.C. § l(2), a quiet title action would lie or whether or not a severed mineral interest would even be considered abandoned under the provisions of N.D.C.C. § if the procedures under § were begun after the 2009 amendments to § l(2) became effective and no reasonable inquiry was conducted. I believe this is an open question that invites further legislative clarification or awaits a judicial determination.”

24. Dormant (Abandoned) Mineral Statutes
Division Order Analysts
Title examiners
Landmen
Must be aware of dormant mineral act provisions and potential effect on mineral and leasehold ownership
If ownership is in doubt, protective leases are reasonable
Advisable to require quiet title action because of uncertainty of compliance with the acts

25. Pooling – Division Of Interest
Forced pooling
, NDCC
Three requirements
Spacing unit – can’t force pool drilling unit
Separately owned tracts or separately owned interests within tracts
No voluntary pooling agreement covering all interests

26. Pooling Effects of pooling
No pooling – drilling well doesn’t constitute operations on Tract A , production from well isn’t production from Tract A
-lease covering Tract A is extended by operations on or production from Tract A or lands pooled therewith
As a result of pooling, operations and production are operations and production on lands “pooled” with Tract A and constitute constructive operations and production A B C

27. Pooling Penalty issues “Non-consent penalty” or “risk compensation”
Party that incurs risk should be rewarded for risk
Unleased mineral owner – 50% of reasonable actual costs of drilling and completing
In addition to proportionate share of actual costs, so unleased owner is not paid until 150% is recovered

28. Pooling Risk penalty – limitations
(2) – owners are responsible for costs of drilling and operating
(3) – risk penalty is on costs of drilling and completing
No penalty on operating costs
NDIC has held that no penalty on workovers or similar activities unless “drilling” (i.e., deepening) or “completing” (i.e., recompleting) is involved
Probably no penalty on costs of equipping the well

29. Pooling Risk penalty Risk penalty is a statutory right
“If the owner of an interest … elects not to participate … the owner paying for the nonconsenting owner’s share … may recover … a risk penalty.”
No discretion on part of NDIC as to whether drilling party is entitled to penalty or the amount of the penalty
No discretion on part of NDIC to authorize smaller or greater penalty than the statutory amount

30. Pooling Penalty requirements Force pooling order
Election not to participate

31. Pooling Unleased mineral owners “Cost free royalty share”
Unleased owner entitled to a cost-free royalty share from date of first production
Rest of interest is subject to right of operator to recover cost and applicable penalty

32. Statutory Royalty for Unleased Owners and Pooling
North Dakota Century Code Section
Before 2009 – Average royalty
Any unleased pooled mineral interest is entitled to a cost-free royalty equal to the average royalty of the leased tracts within the spacing unit (but never less than 1/8)
After Operator’s Election
If Pooled after July 31, 2009:
Entitled to average royalty OR 16% (operator’s choice)
All leases in spacing 3/16, use 16%
All leases in spacing 1/8, use average

33. Pooling Unleased mineral owner – cont’d
Acreage weighted average royalty
160 acres unleased
1120 acres leased
(1/6 X 480/1120) + (1/8 X 640/1120) =
Computation can be difficult
Amount changes every time a new lease is acquired
Open
1/6
1/8

34. Pooling Multiple well issues – cont’d 38-08-08 (3), NDCC -
“if the owner of an interest in a spacing unit elects not to participate in the risk and cost of drilling a well thereon, the owner paying … may recover… a risk penalty”
Requires “good faith attempt …to have the … owner … participate in the risk and cost of drilling the well”
Penalty is on a well basis
Owner who is non-consent in the first well still entitled to elect to participate in subsequent well
Unleased owner still entitled to offer to lease
Lease would not cover prior wells in which unleased owner was non-consent

35. Mineral Reservations to Third Parties
Stetson v. Nelson (ND Supreme Court – 1962)
Follows “general” rule
NO third party reservations
Malloy v. Boettcher (ND Supreme Court – 1983)
A reservation can be effective to convey a property interest to a spouse, who does not own an interest in the land prior to the deed, but joins in the execution of the deed, where it is determined to have been the grantor's intent
Spouse is not a “stranger” and may acquire an interest through a reservation

36. Mineral Reservations to Third Parties
How do you cure a “Malloy” defect
Probate spouse’s estate
Disclaimer from estate of spouse
Conveyance from spouse’s estate
Stipulation
Disclaimer

37. Corrective Deeds To be effective: MUST be executed by original grantor
MUST be executed by grantee, UNLESS beneficial to grantee
If beneficial to grantee, recording may be presumption of acceptance
CUNA Mortgage v. Aafedt (ND Supreme Court 1990)
Gawryluk v. Poynter (ND Supreme Court 2002)
Johnson v. Hovland (ND Supreme Court 2011)

38. Mineral ownership under lakes and rivers
Recent developments
Missouri River – Navigable
State of ND owns minerals underlying Missouri River
From Low Water Mark on one side to Low Water Mark on other side

39. Mineral ownership under lakes and rivers
Who owns between High Water Mark and Low Water Mark?
Caselaw – State and adjoining landowner’s share correlative rights between High Water Mark and Low Water Mark
Surface case – no adjudication of mineral ownership
State now claims ownership of minerals between High Water Mark and Low Water Mark
Leasing and Litigation

40. Post-production costs
Bice v. Petro-Hunt, L.L.C. (ND Supreme Court 2009)
ND adopts “majority rule”
Upholds the deduction of post-production costs based on “at the well” royalty clause language
“market value at the well” means royalty is calculated based on the value of the gas at the wellhead
Thus, “any costs incurred by the lessee after the [gas] reaches the wellhead, whether to improve the quality of the [gas] or to transport it to a market where it may be sold may be deducted before the royalty is calculated”

41. Thank you!
Questions