Chesapeake Exploration, L. L.C. v. Buell

• Court: Ohio Supreme Court
• Writing for the Court: O'CONNOR, C.J.
• Citation: Chesapeake Exploration, L. L.C. v. Buell, 144 Ohio St.3d 490, 45 N.E.3d 185, 2015 Ohio 4551 (Ohio 2015)
• Decision Date: 05 November 2015
• Docket Number: No. 2014–0067.,2014–0067.
• Parties: CHESAPEAKE EXPLORATION, L.L.C., et al., v. BUELL et al.

144 Ohio St.3d 490

45 N.E.3d 185

2015 Ohio 4551

CHESAPEAKE EXPLORATION, L.L.C., et al.,

v.BUELL et al.

No. 2014–0067.

Supreme Court of Ohio.

Submitted Aug. 20, 2014.

Decided Nov. 5, 2015.

Jones Day, Jeffery D. Ubersax, and Dean C. Williams; and Thornburg & Bean and Charles H. Bean, for petitioner North American Coal Royalty Company.

Roetzel & Andress, L.P.A., Robert B. Graziano, and Michael R. Traven ; and Reed Smith, L.L.P., Nicolle R. Snyder Bagnell, and Kevin C. Abbott, for petitioners Chesapeake Exploration, L.L.C., CHK Utica, L.L.C., Larchmont Resources, L.L.C., Dale Pennsylvania Royalty, L.P., Dale Property Services Penn, L.P., and Total E&P USA, Inc.

Tzangas, Plakas, Mannos, Ltd., Gary A. Corroto, Lee E. Plakas, and Joshua E. O'Farrell, Canton, for respondents.

Vorys, Sater, Seymour & Pease, L.L.P., and John K. Keller, Columbus, in support of neither side for amicus curiae Ohio Oil and Gas Association.

Michael DeWine, Attorney General, Eric E. Murphy, Solicitor General, and Samuel C. Peterson, Deputy Solicitor, in support of respondents for amicus curiae the state of Ohio.

Ice Miller, L.L.P., Matthew L. Fornshell, and Nicole R. Woods, Columbus, in support of petitioners for amicus curiae Bedway Land & Minerals Company.

O'CONNOR, C.J.

{¶ 1} In this case, which is before us on the certification of state-law questions by the United States District Court for the Southern District of Ohio, Eastern Division, we address whether, under Ohio's Dormant Mineral Act, codified in R.C. 5301.56, a recorded lease of severed oil and gas rights, or the expiration of that lease, is a title transaction that constitutes a saving event to preclude the severed mineral rights from being deemed abandoned and reunited with the rights to the corresponding surface property. We hold that a recorded oil and gas lease is a title transaction under R.C. 5301.56(B)(3)(a), but the expiration of such a lease is not.

RELEVANT BACKGROUND

{¶ 2} The parties dispute who is the legal owner or holder of the mineral rights. The federal court provided the facts, circumstances, and allegations from which the legal questions of ownership arise.

The Leases

{¶ 3} In 1958, Powhatan Mining Company severed the surface rights from the mineral rights of a 90.2063-acre parcel located in Harrison County by transferring the surface rights to Clarence and Anna Bell Sedoris and retaining the oil, gas, coal, or other mineral rights for itself and its successors. Powhatan transferred the mineral rights to North American Coal Corporation in 1959 when the two companies merged. Over the years since then, both the surface and mineral rights have been the subjects of various transfers and transactions.

{¶ 4} The history of the mineral-rights leases is labyrinthine.

{¶ 5} North American Coal leased the mineral rights in 1973 and recorded the lease in Harrison County in February 1974, but the leased rights eventually reverted to North American Coal at the expiration of the lease term. The next lease of mineral rights was recorded in 1984, but in 1989, the lease expired by its terms, and the rights reverted again to North American Coal.

{¶ 6} In 2008, North American Coal transferred the mineral rights to North American Coal Royalty Company ("Coal Royalty") by quitclaim deed.

{¶ 7} By the most recent lease, dated January 28, 2009, the lessor, Coal Royalty, ultimately leased the mineral rights, following multiple assignments, to Dale Property Services Penn, L.P., which then assigned its interest to the lessee Ohio Buckeye Energy, L.L.C. Dale Property Services reserved a 1.25 percent royalty interest, which it assigned to Dale Pennsylvania Royalty, L.P. ("Dale"), in 2012 (the "2009 Lease").

{¶ 8} In October 2011, Buckeye Energy assigned a portion of its interest to Larchmont Resources, L.L.C. In November 2011, Buckeye Energy assigned another portion of its interest to CHK Utica, L.L.C.

{¶ 9} In December 2011, Buckeye Energy merged with Chesapeake Exploration, L.L.C., which resulted in Chesapeake holding the remainder of Buckeye Energy's interest in the 2009 lease.

{¶ 10} On December 30, 2011, Chesapeake transferred a portion of its interest to Total E&P USA, Inc., but retained the remainder.

{¶ 11} Currently, petitioner Coal Royalty is the record owner of the mineral rights. Petitioners CHK Utica and Larchmont lease a portion of the mineral rights by assignment. Petitioners Chesapeake and Total E&P are lessees of the remainder of the lease with petitioner Dale holding a 1.25 percent royalty interest in the lease.

{¶ 12} Respondents are property owners who, through various transfers originating from the Sedorises, own surface rights to a portion of the 90-plus acres of property.¹

{¶ 13} In October 2012, Chesapeake, CHK Utica, Larchmont, and Dale Pennsylvania Royalty, all claiming an interest in the leased mineral rights as lessees, filed a complaint in federal court to quiet title to the oil and gas rights against respondent surface property owners, as well as against Coal Royalty and Total E&P. The surface property owners counterclaimed and also filed cross-claims against Coal Royalty and Total E&P to quiet title. Coal Royalty, Dale Property Services, and Total E&P were realigned as plaintiffs in the trial court action and are petitioners here together with Chesapeake, CHK Utica, Larchmont, and Dale.

The Questions of State Law

{¶ 14} The federal court concluded that the interpretation of Ohio's Dormant Mineral Act in the context of an oil and gas lease is determinative of the case, but it declined to decide the questions before it, given the lack of available authority from Ohio courts. Finding no controlling precedent on the determinative issue in Ohio case law, the federal court certified the following questions to us for answers:

1. Is the recorded lease of a severed subsurface mineral estate a title transaction under the ODMA, Ohio Revised Code § 5301.56(B)(3)(a) ?

2. Is the expiration of a recorded lease and the reversion of the rights granted under that lease a title transaction that restarts the twenty-year forfeiture clock under the ODMA at the time of the reversion?

{¶ 15} Thus, the questions are limited to recorded leases, and we offer no opinion on any other kind of transaction that may have occurred in this case. Petitioners contend that we should answer both questions in the affirmative because the recorded oil and gas lease makes a mineral interest the subject of a title transaction under the plain language of R.C. 5301.56(B)(3)(a), and the same is true of the lease's expiration. But respondents assert that an oil and gas lease is a license, and therefore neither a recorded lease nor the expiration of that lease is a title transaction. Thus, they urge this court to answer both questions in the negative.

ANALYSIS

Oil and Gas Leases

{¶ 16} The oil and gas lease is central to the oil and gas industry. 1 Brown, Brown & Gillaspia, The Law of Oil and Gas Leases, foreword (2d Ed.2014). "The principal or basic consideration for a [mineral rights] lease is the agreement by the lessee to develop the premises for oil and gas and pay royalties thereon to the lessor." Id. at Section 3.01(2). In this context, "royalty" generally refers to the "share of the product or profit reserved by the owner of land for permitting another to develop his land for oil or gas." Id . at Section 6.01.

{¶ 17} In Ohio, during an oil boom in the mid-1960s, it was estimated that over three-fourths of Ohio was leased for oil and gas. Cissel, Oil and Gas Law in Ohio, Ohio Legislative Service Commission, Staff Research Report No. 63, at 13 (1965). With the recent advances in techniques for extracting oil and natural gas from shale beds, such as the Marcellus and Utica Shale regions underlying parts of eastern Ohio, oil and gas leases are potentially lucrative instruments for both landowners and energy developers. Richardson, Hite v. Falcon Partners: A Model Rule for Marcellus and Utica Shale States Precluding the Use of Delay Rental Payments to Extend the Primary Term in an Oil and Gas Lease, 46 Akron L.Rev. 1133, 1135–1136 (2013). The lease provides a mechanism by which an owner of mineral rights can permit others to explore and exploit the land's mineral resources in exchange for royalties and other consideration. Brown at Section 3.01(2); Garman v. Conoco, Inc., 886 P.2d 652, 656 (Colo.1994) ; Bibikos & King, A Primer on Oil and Gas Law in the Marcellus Shale States, 4 Tex.J. Oil, Gas, & Energy L. 155, 156–167 (2009).

{¶ 18} The difficulty arises when, as demonstrated in this case, the history of transfers, assignments, reservations, and leases involving the mineral rights creates confusion as to who holds legal ownership and the corresponding ability to lease the valuable mineral rights.

{¶ 19} We review the multiple ownership interests that may exist for a given mineral-rich tract of land.

{¶ 20} Oil and gas can be viewed as realty or as personalty depending on the location of the oil and gas relative to the land in which it lies.

{¶ 21} Ohio has long recognized that minerals underlying the surface, including oil and gas, are part of the realty. Pure Oil Co. v. Kindall, 116 Ohio St. 188, 201–202, 156 N.E. 119 (1927) ; Nonamaker v. Amos, 73 Ohio St. 163, 170–171, 76 N.E. 949 (1905) ; Kelly v. Ohio Oil Co., 57 Ohio St. 317, 49 N.E. 399 (1897), paragraph one of the syllabus. While the mineral remains underground, it is "in place" and is "the same as any part of the realty." Pure Oil at 201, 156 N.E. 119 ; Kelly at 328, 49 N.E. 399 ("Petroleum oil is a mineral, and while in the earth it is part of the realty * * * "). The minerals may be severed from the rest of the realty for purposes of separate ownership. Pure Oil at 202, 156 N.E. 119 ; Gill v. Fletcher, 74 Ohio St. 295, 302–303, 78 N.E. 433 (1906).

{¶ 22} Ohio's view is consistent with the majority of the states, including neighboring states Pennsylvania and West Virginia, which enjoy the same oil and gas-rich shale beds. Bibikos & King, 4 Tex.J. Oil, Gas, &...