In re Thexton

• Decision Date: 09 April 1984
• Docket Number: Adv. No. 83-0836.,Bankruptcy No. 83-11398
• Citation: 39 BR 367
• Parties: In re John Thomas THEXTON, Debtor. Edward J. NAZAR, Trustee, Plaintiff, v. John Thomas THEXTON, Defendant.
• Court: U.S. Bankruptcy Court — District of Kansas

39 B.R. 367 (1984)

In re John Thomas THEXTON, Debtor Edward J. NAZAR, Trustee, Plaintiff, v. John Thomas THEXTON, Defendant.

Bankruptcy No. 83-11398, Adv. No. 83-0836.

United States Bankruptcy Court, D. Kansas.

April 9, 1984.

Connie J. Nordboe of Robbins, Tinker, Smith & Metzger, Wichita, Kan., for debtor.

Edward J. Nazar of Redmond, Redmond, O'Brien & Nazar, Wichita, Kan., Trustee.

Steven B. Doering of Cole & Doering, Garnett, Kan., for Bank of Kincaid, a creditor.

MEMORANDUM OF DECISION

JAMES A. PUSATERI, Bankruptcy Judge.

In this chapter 7 proceeding, the trustee has filed a complaint seeking turnover of the unaccrued royalty interest under an oil and gas lease. The trustee and a creditor have filed objections to the debtor's exemption of his unaccrued royalty interest. The matters are joined for the purpose of this decision.

The issue which must be resolved is:

Is a lessor-mineral owner entitled to an exemption for an unaccrued royalty interest in unsevered oil and gas arising from a lease of oil and gas beneath surface homestead real estate, where the lessee has a producing well.

Briefs have been submitted and the Court is prepared to rule.

FINDINGS OF FACT

The debtor filed a chapter 7 petition in bankruptcy on September 28, 1983. The debtor is a farmer.

The debtor resides on the West Half of the Southwest Quarter of Section 23, Township 22 South, Range 19 East of the 6th P.M. and on the West Half of the Northwest Quarter of Section 26, Township 22 South, Range 19 East. These are contiguous tracts of land amounting to 160 acres outside the limits of an incorporated town or city. This property has been exempted by the debtor in his bankruptcy schedule B-4.

The debtor has also claimed as exempt property an undivided one-half interest in all minerals in place and all income from the sale or production of the minerals. The debtor is apparently married and claims a one-half interest in this proceeding because his wife has not filed a petition in bankruptcy.

On December 8, 1983 the debtor turned over to the trustee a sum representing the debtor's undivided one-half interest in the oil and gas run check associated with oil and gas production for the period immediately preceding the filing of his bankruptcy petition.

The royalties of the debtor mineral owner-lessor arise out of two oil and gas leases. The first lease covers the West Half of SW ¼, 23-22-19 and is dated August 21, 1921. It was executed by the debtor's predecessors and produced approximately 109 barrels of oil in 1982. Oil was produced during only two months.

The second lease covers the West Half of NW ¼ 26-22-19, and is dated March 11, 1937. This lease has also yielded a producing well, and it appears to have produced 1,794 barrels of oil in 1982. Oil was pumped during 11 months.

CONCLUSIONS OF LAW

1. Nature of Lessor's Royalty Interest in Kansas

In Redmond v. Koch Oil Co. (In Re Kittle), 32 B.R. 690 (Bkrtcy.D.Kan.1983) this Court stated that in Kansas:

First, a lessee\'s leasehold interest in an oil and gas lease is treated as a real property interest and governed by real property laws: (a) when a creditor acquires, perfects, enforces or forecloses a mortgage on the lessee\'s leasehold interest (Ingram v. Ingram 214 Kan. 415, 521 P.2d 254 (1974); K.S.A. § 55-210); (b) for the purposes of venue (K.S.A. § 60-1001); (c) for the purpose of satisfaction of judgment (K.S.A. § 60-2401). Second, a lessee\'s leasehold interest in an oil and gas lease is treated as a personal property interest and governed by personal property law when: (a) a creditor with no previous interest in the leasehold seeks to obtain a judgment lien on the judgment debtor\'s lessee\'s leasehold interest (Utica Nat\'l Bank & Trust Co. v. Marney, 233 Kan. 432, 661 P.2d 1246 (1983)); K.S.A. § 60-2202); (b) certain taxes are involved (see K.S.A. § 79-420).

32 B.R. at 693. These confusing rules concerning the nature of a lessee's interest all stem from one general Kansas rule: a lessee's interest under an oil and gas lease is a license to explore, an incorporeal hereditament, a profit a prendre, a personal property right, unless a statute otherwise specifically classifies the interest as real property. See, e.g., Utica Nat'l. Bank & Trust Co. v. Marney, 233 Kan. supra, at 433-34, 661 P.2d 1246, and cases cited therein. For example, the case of Ingram v. Ingram, supra, involved the issue of whether an assignment by the lessee of a three-fourth's working interest in an oil and gas lease was an assignment of personal property or real property. The Kansas Supreme Court held that a lessee's interest in unextracted oil and gas is governed by real property laws of perfection. The rationale for the Ingram holding can be explained as a recognition that a statute, the Uniform Commercial Code, provides that unextracted oil and gas are not goods, but rather realty. See K.S.A. §§ 84-9-105(h), -104(j) (1983); Ingram v. Ingram, 214 Kan. supra at 419, 422-23, 521 P.2d 254.

This Court further stated in In Re Kittle:

Third, a lessor\'s right to share in royalties from severed oil and gas is a personal property right (In Re Sellens, 7 Kan. App.2d 48, 637 P.2d 483, review denied 230 Kan. 818 (1982)). Fourth, a lessor\'s future, unaccrued royalty interest in an oil and gas lease is a real property interest governed by the law of real property (In Re Sellens).

32 B.R. at 693. In arriving at its decision in In Re Sellens, the Kansas Court of Appeals described the nature of the lessor's interest as follows:

Neither is an oil and gas lease a usual contract. It is signed by only one party, the lessor. It is a grant with conditions. One of the conditions is a reservation to the lessor of a share in the production. . . . The lessor\'s rights to royalty do not originate with the lease. The lessor reserves his rights to royalty out of the grant. His rights arise from his ownership of the real estate rather than the lease and are therefore interests in real estate until the oil and gas are captured. It follows then that future royalty (unaccrued royalty) is a part of the real estate of the lessor; it is uncaptured and of an undetermined amount or location. Present royalty (accrued royalty) on the other hand, is captured and severed from the realty; it is personal property.

In Re Sellens, 7 Kan.App.2d supra at 51, 637 P.2d 483. See also 3 Kuntz, Law of Oil and Gas § 38.2 at 242 (1967). It is interesting to note that in Sellens, the oil and gas leases were producing, and the Court held that a bequest by the lessor/mineral owner of personal property included accrued royalties and passed to the heir receiving the personal property under the lessor/mineral owner's will, but the right to future royalties passed to the heirs receiving the real property under the lessor/mineral owner's will.

Finally, the Supreme Court of Kansas has recently held that a non-mineral owner/non-lessor royalty interest in oil and gas produced is a personal property interest. Kumberg v. Kumberg, 232 Kan. 692, 699, 659 P.2d 823 (1983).

In short, as this Court held in In Re Kittle, a lessor-mineral owner's right to future, unaccrued royalties from oil and gas that has not yet been severed, even if there is a producing well, is in fact a real property interest, until such time as severance occurs. The Court believes this is the law in Kansas, and the law in other states. See, e.g., U.S. Pipeline v. Kinder, 609 S.W.2d 837 (Tex.Civ.App.1977); Evans v. Mills, 67 F.2d 840 (5th Cir.1933).

2. Question of Exemption

The Kansas Constitution provides an exemption:

to the extent of one hundred and sixty acres of farming land . . . occupied as a residence by the family of the owner, together with all improvements on the same. . . . The homestead shall not be alienated without the joint consent of husband and wife. . . . And provided further, that the legislature . . . may provide that when it is shown the husband or wife while occupying a homestead is adjudged to be insane, the duly appointed guardian of the insane spouse may be authorized to join with the sane spouse . . . in executing a lease thereon authorizing the lessee to explore and produce therefrom oil, gas, coal, lead, zinc, or other minerals.

Kan. Const. Art. 15 § 9. The homestead exemption must be liberally construed in favor of the homestead. See, e.g., State, ex rel. Apt. v. Mitchell, 194 Kan. 463, 399 P.2d 556 (1965). "The term homestead is not restricted to the dwelling house alone." Note, Survey of Kansas Homestead Law, 13 Washburn L.J. 446, 450 (1974). Leasing a portion of the homestead is not necessarily an abandonment of that portion of the homestead. Barten v. Martin, 133 Kan. 329, 299 P. 614 (1931).

In Franklin Land Co. v. The Wea Gas, Coal & Oil Co., 43 Kan. 518, 23 P. 630 (1887), and 54 Kan. 533, 38 P. 790 (1895), an oil and gas lease executed by the husband alone was held invalid where the lease covered oil and gas beneath the husband and wife's surface homestead. 43 Kan. at 523, 23 P. 630. In order to execute the conveyance by lease of oil and gas beneath a homestead, the court held both husband and wife must consent because the lease of oil and gas rights will interfere with the use and enjoyment of the surface rights. See also Peterson v. Skidmore, 108 Kan. 339, 195 P. 600 (1921); Thompson v. Millikin, 93 Kan. 72, 143 P. 470 (1914); Palmer Oil & Gas Co. v. Parish, 61 Kan. 311, 59 P. 640 (1900). These cases appear to stop just short of holding that the oil and gas beneath the surface homestead are exempt as part of the exempt surface realty, but nothing in these cases indicate that oil and gas are not part of the surface homestead exemption and these cases did not involve attempted enforcement of creditors' rights. See Collins, The Nature and Execution of Oil and Gas Leases and Mineral Conveyances, 8 Kan.B.A.J. 25, 26-27 (1939). Furthermore, these cases were all decided before Art. 15, § 9 was amended in 1944 to provide that the guardian of an...