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
www.crowleyfleck.com
cfriez@crowleyfleck.com
North Dakota Oil and Gas
• Probate
• Dormant Mineral Act – Abandoned Mineral
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Interests
Spacing and Pooling
Other Common Title Issues
Questions
Probate
• ND follows the Uniform Probate Code
• Individually owned mineral interests must pass
through probate
• If individual dies owning mineral interests – ONLY
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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)
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
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
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
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
Alternatives to Probate
• Affidavits of Heirship
• Identify deceased, probate anywhere, identify
survivors/heirs
• For leasing and sometimes for payment
• Dangers
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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
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
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
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?
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
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
Dormant (Abandoned) Mineral Statutes
• Initially believed to be unconstitutional taking
• Texaco v. Short, 454 U.S. 516 (1982)
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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”
Dormant (Abandoned) Mineral Statutes
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Challenged as:
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Depriving of property without due process – lack of notice
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Taking private property without just compensation
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State may condition right to retention of property right upon
performance of reasonable conditions that indicate intent to
retain the interest
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
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Exception furthers legitimate purpose, has no adverse impact
on owners of fewer mineral interests, and does not violate
equal protection
Dormant Mineral Act
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North Dakota Century Code Section 38-18.1-01
• “Any mineral interest is, if unused for a period of
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twenty years…deemed to be abandoned…”
Surface owner may succeed to ownership
Dormant Mineral Act
• “USE” under the Act
• Production
• Operations – injection, withdrawal, storage, disposal
• Subject to lease, mortgage, assignment, conveyance
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which is recorded
Subject to pooling/unitization which is recorded
Payment of taxes
Statement of claim
Dormant Mineral Act
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North Dakota Century Code Section 38-18.1-06
• Surface owner shall give notice of lapse by
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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”
Dormant Mineral Act
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North Dakota Century Code Section 38-18.1-06(6)
• Reasonable inquiry
• Must search:
• County records
• Clerk of Court’s records
• Social security death index
• One or more public databases
Dormant Mineral Act
• North Dakota Supreme Court
• Spring Creek Ranch, LLC v. Svenberg (1999)
• Reasonable inquiry must be made regardless of
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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
Dormant Mineral Act
• 2009 Amendments
• NDCC 38-18.1-06.1
• Provides quiet title action as means to perfect title in
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surface owner
38-18.1-06.1(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
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 38-18.1-06 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.”
Dormant Mineral Act
• 2009 Amendments CONTINUED
• Open question as to whether reasonably inquiry is required in
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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 2009
amendments to N.D.C.C. § 38-18.1-06.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. § 38-18.1-06 if the procedures under § 38-18.1-06 were
begun after the 2009 amendments to § 38.18.1-06.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.”
Dormant (Abandoned) Mineral Statutes
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Division Order Analysts
Title examiners
Landmen
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Must be aware of dormant mineral act provisions and
potential effect on mineral and leasehold ownership
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If ownership is in doubt, protective leases are reasonable
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Advisable to require quiet title action because of
uncertainty of compliance with the acts
Pooling – Division Of Interest
• Forced pooling
• 38-08-08, 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
Pooling
• Effects of
pooling
A
B
C
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
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
Pooling
• Risk penalty – limitations
• 38-08-08(2) – owners are responsible for costs of
drilling and operating
• 38-08-08(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
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
Pooling
• Penalty requirements
• Force pooling order
• Election not to participate
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
Statutory Royalty for Unleased Owners
and Pooling
• North Dakota Century Code Section 38-08-08
• 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 2009 - 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
Pooling
• Unleased mineral owner – cont’d
• Acreage weighted average royalty
Open
1/6
160 acres unleased
1120 acres leased
(1/6 X 480/1120) + (1/8 X 640/1120) =
.142847
Computation can be difficult
Amount changes every time a new lease is
acquired
1/8
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
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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
Mineral Reservations to Third
Parties
• Stetson v. Nelson (ND Supreme Court – 1962)
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Follows “general” rule
NO third party reservations
• Malloy v. Boettcher (ND Supreme Court – 1983)
• A reservation can be effective to convey a property
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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
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
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)
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
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
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• Surface case – no adjudication of mineral ownership
State now claims ownership of minerals between
High Water Mark and Low Water Mark
• Leasing and Litigation
Post-production costs
• Bice v. Petro-Hunt, L.L.C. (ND Supreme Court 2009)
• ND adopts “majority rule”
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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
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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”
Thank you!
• Questions