Ohio Supreme Court Rules on Interpretation of Ohio Dormant Mineral Act

Today, the Ohio Supreme Court issued three written opinions interpreting the Ohio Dormant Mineral Act (O.R.C. §5301.56) (the “ODMA”) and decided 10 related cases based upon its decisions set forth in the written opinions. Notably, in Corban v. Chesapeake Exploration L.L.C., (Slip Opinion No. 2016-Ohio-5796), the Supreme Court held that the 1989 version of the ODMA (the “1989 Act”) did not automatically abandon oil, gas and mineral rights in favor of the surface owner. Instead, the Supreme Court interpreted the statute to require the surface owner to seek a judicial decree that the mineral rights were abandoned. The Court focused on the statutory phrase “shall be deemed abandoned and vested in the owner of the surface” in determining that the legislature intended the 1989 Act to serve as a method of terminating abandoned mineral rights through a quiet title action rather than automatically transferring the mineral interests to the surface owner by operation of law. Additionally, the Court held that payment of delay rentals under a lease does not constitute a “title transaction” under Ohio law since the payment of delay rentals are not filed or recorded in the county recorder’s office.

In Walker v. Shondrick-Nau, Exr., (Slip Opinion No 2016-Ohio-5793), the Ohio Supreme Court built upon its decision in Corban and held that, if a surface owner failed to quiet title under the 1989 Act prior to the enactment of the 2006 version of the ODMA (the “2006 Act”), then the 1989 Act is unavailable and the surface owner can only pursue a claim to abandon mineral interests under the 2006 Act.

Finally, in Albanese, Exr. v. Batman et al., (Slip Opinion No. 2016-Ohio-5814), the Ohio Supreme Court followed the rationale of Corban regarding the necessity of filing an action to quiet title under the 1989 Act prior to the enactment of the 2006 Act. The Court further held that under the 2006 Act mineral rights cannot be deemed abandoned if the owner of the minerals had not been served notice of the abandonment pursuant to the 2006 Act. The notice requirement is mandatory under the 2006 Act.

Citing to the above cases, the Supreme Court decided 10 additional cases consistent with the three written opinions. The 10 cases are listed below:

Carney et al. v. Shockley et al., (Slip Opinion No. 2016-Ohio-5824)
Dahlgren et al. v. Brown Farm Prop. L.L.C., et al., (Slip Opinion No. 2016-Ohio-5818)
Eisenbarth et al. v. Reusser et al., (Slip Opinion No. 2016-Ohio-5819)
Farnsworth et al. v. Burkhart et al., (Slip Opinion No. 2016-Ohio-5816)
Swartz v. Householder et al., (Slip Opinion No. 2016-Ohio-5817)
Shannon et al. v. Householder et al., (Slip Opinion No. 2016-Ohio-5817)
Taylor et al. v. Crosby et al., (Slip Opinion No. 2016-Ohio-5820)
Thompson et al. v. Custer et al., (Slip Opinion No. 2016-Ohio-5823)
Tribett v. Shepherd et al., (Slip Opinion No. 2016-Ohio-5821)
Wendt et al. v. Dickerson et al., (Slip Opinion No. 2016-Ohio-5822)

Pipeline Safety Alert: FAA Issues Performance-Based Standards for Applicants Seeking a Waiver of the Small Unmanned Aircraft Rules

The Federal Aviation Administration (FAA) recently issued Performance-Based Standards highlighting information that an applicant must include in order to seek a waiver of Part 107, the rules that apply to the operation of a small unmanned aircraft system.  The FAA previously released the form and instructions on how to apply for a waiver from certain requirements (See previous Babst Calland pipeline safety alerts for more information on the Small UAS Final Rule and the waiver process.).  Babst Calland’s Pipeline and HazMat Safety team has prepared a Pipeline Safety Alert noting observations on the Performance-Based Standards as they pertain to the line-of-sight requirement (14 C.F.R. § 107.31).

Pipeline Safety Alert: FAA Releases Application and Instructions for Small Drone Waivers

On August 29, 2016, the Federal Aviation Administration (FAA) released the form and on how to apply for a waiver from certain requirements included in the “Operation and Certification of Small Unmanned Aircraft Systems” Final Rule.  This final rule went into effect on August 29, 2016, and permits the use, with certain limitations, of small unmanned aircraft systems (small drones) for non-hobby and non-recreational purposes. Babst Calland’s Pipeline and HazMat Safety team has prepared a Pipeline Safety Alert providing additional details on the application process.

PHMSA Issues New Advisory Bulletin Covering “Purged but Active” Pipelines

Today, the Pipeline and Hazardous Materials Safety Administration (PHMSA) published an Advisory Bulletin entitled  “Clarification of Terms Relating to Pipeline Operational Status.”  Section 23 of the PIPES Act required PHMSA to issue an ADB within 90 days of enactment summarizing the procedures for changing the status of a pipeline facility from “active” to “abandoned”.  Historically, PHMSA has stated that it does not recognize “idle” status for pipelines (only active or abandoned).  PHMSA’s ADB introduces the concept of “purged but active” status, arguably a new category for operational status.  The ADB states that PHMSA is considering a future rulemaking requiring operators to notify the agency of “purged but active” pipelines, but that in the meantime “owners or operators planning to defer certain activities for purged pipelines should coordinate the deferral in advance with regulators.”  PHMSA’s guidance on integrity management currently allows deferral of certain inspection activities for out-of-service pipe. 

 

Pennsylvania Supreme Court Affirms Title Washing

On July 19, in Herder Spring Hunting Club v. Keller (Case No. 5 MAP 2015), the Pennsylvania Supreme Court ruled in a 5-0 decision to confirm the practice of “title washing” of unseated or unimproved land in Pennsylvania. Prior to January 1, 1948, “title washing” occurred through a tax sale of unseated land from which oil, gas and/or minerals (the “subsurface estate”) had been previously severed. If the subsurface estate had not been separately assessed, the tax sale of the unseated land would extinguish the prior severance and vest the tax sale purchaser with full ownership in the surface and subsurface estates. If the oil and gas had been separately assessed, then the tax sale of the surface would have no effect on the subsurface estate. After January 1, 1948, mineral estates were no longer separately assessed from the surface in Pennsylvania and title washing could no longer occur.

In Herder Spring, the Court held that a 1935 tax sale for unseated land which was subject to an unassessed 1899 subsurface severance conveyed both the surface and subsurface estates. Citing prior case law, the Court reasoned that, under the prior tax sale law, taxes on unseated land were against the land itself rather than any particular owner. The law placed a duty on the owner of a severed interest to notify the taxing authorities. Tax commissioners had no duty to search the deed records to discover severances relating to unimproved lands. Therefore, if the subsurface was never separately assessed, then the property would be assessed and taxed as a whole, and a tax sale thereunder would encompass the entire estate. Additionally, the Court pointed out that owners of the mineral estate had two years to challenge the tax sale or redeem the property, but failed to do so. The Court also rejected the Appellants’ due process and estoppel by deed argument.

The Court limited its holding in Herder Spring to a very narrow subset of cases and noted that its decision would not govern: (i) tax sales for assessments of surface or mineral rights only; (ii) tax sales where severances occurred after the tax assessment; or (iii) situations in which surface owners can meet the adverse possession standard.

Justice Todd filed a concurring opinion agreeing with the majority but for its position on Appellants’ due process claim that notice by publication of the tax sale was inadequate. According to Justice Todd, such claim was waived for purposes of this appeal because it was untimely raised.

 

PA Federal Court Finds Operator Obligated to Pay Bonuses Under Surrendered Lease

On July 15, a Judge for the U.S. District Court for the Middle District of Pennsylvania found that SWEPI LP (“SWEPI”) was obligated to pay bonuses under an oil and gas lease that it had surrendered prior to a 90 day title verification period. In Masciantonio , et al. v. SWEPI LP, the plaintiff-landowners executed oil and gas leases, with attached addenda, in favor of SWEPI for a primary term of five years. The leases stated “[i]n consideration of the bonus consideration paid, the receipt of which is hereby acknowledged,…Lessor does hereby grant…to Lessee,…the lands hereafter described for the purpose of exploring for, developing, producing and marketing oil, gas or their related substances.” The addenda included a payment provision stating that “[i]in consideration for the attached paid-up Oil and Gas Lease, Lessee hereby agrees to pay Lessor [$4,000.00] per net mineral acre. Payment shall be due within ninety (90) banking days of the Lessor presenting the Bank Draft to the financial institution of his/her/their choosing. All payment obligations are subject to title verification by Lessee.” SWEPI presented bank drafts to the plaintiffs, who presented them to their respective banks. Prior to 90 days thereafter, SWEPI decided to surrender the leases, due to a geohazard running through the leased premises and the presence of competitor leases covering neighboring lands. Upon surrender of the leases, SWEPI cancelled the bank drafts.

The plaintiffs brought suit for breach of contract, claiming that the obligation to pay the bonuses accrued immediately upon the parties executing the leases, and that the surrender did not extinguish SWEPI’s payment obligation. SWEPI countered with several arguments, all of which were rejected by the Court. First, SWEPI argued that the leases were ineffective, because the payment of the bonus was the sole consideration for the lease, without which the leases never went into effect. SWEPI also argued that the leases were subject to a condition precedent to formation and were ineffective unless and until SWEPI verified plaintiffs’ title to the property. The Court found that the language of the leases indicated that the actual consideration was the exchange of a bargained-for promise, not the immediate exchange of the value thereof. Similarly, the title verification condition operated as a condition precedent to the obligation to pay, not to the formation of the contracts. Therefore, the leases were valid and enforceable, despite the lack of bonus payment.

Next, the Court considered the two interpretations of the lease provisions presented by each party and determined that the plaintiffs’ interpretation was the more reasonable one. SWEPI argued that the contract terms allowed it to dishonor the bank drafts for any reason, or for no reason, until the expiration of the 90-day banking period. SWEPI presented language of industry standards, quoting Williams & Meyers’ Oil & Gas Law, which said that the use of a bank draft which will not become effective for a period of time subject to approval of title was often used by lessees to void a lease if they decided that conditions were no longer desirable. However, the Court found that the industry standards, including Williams & Meyers’, always provided that the precise language of the lease controlled and did not support an across-the-board provision that the use of a bank draft allows a lessee to void a lease for any reason until the expiration of a certain time period. The Court further stated that the language of the SWEPI leases consisted of an unequivocal agreement by SWEPI to pay the bonus and further provided a description of the time and manner in which it must do so. Therefore, the language did not provide SWEPI with the opportunity to avoid payment but instead bound SWEPI to pay, subject only to the condition of title verification. SWEPI was unable to present any meaningful evidence that it decided to surrender the leases due to a problem with plaintiffs’ title. On the contrary, plaintiffs presented sufficient evidence that they had good title to the leased premises. The Court further rejected the argument that the factors of geohazards and competitor activity on neighboring lands were part of the consideration of “title verification.” Those considerations were encompassed under the realm of a title “examination,” but not “title verification,” according to the plain meaning of such terms.

For those reasons, the Court held that SWEPI breached its obligation under the valid oil and gas leases and it was required to pay the bonus to the plaintiffs.

Pipeline Safety Alert: Congress and the FAA Ease the Way for Use of Drones by the Energy Industry

The Federal Aviation Administration (FAA) recently issued regulations permitting the use, with certain limitations, of small unmanned aircraft systems (small drones) for non-hobby and non-recreational purposes. On July 13, 2016, Congress passed several provisions specific to drone use by the energy industry as part of the reauthorization bill for the FAA.  Babst Calland’s Pipeline and HazMat Safety team has prepared a Pipeline Safety Alert noting observations on some of the key provisions in the FAA Extension, Safety, and Security Act of 2016.

PHMSA Releases New Crude By Rail Rulemaking Proposal

On July 13, 2016, the U.S. Department of Transportation’s Pipeline and Hazardous Materials Safety Administration (PHMSA) released an advance copy of a rulemaking proposal that would amend the oil spill response plan requirements in 49 C.F.R. Part 130 and establish new information sharing requirements for high-hazard flammable trains in 49 C.F.R. Part 174.  The proposal would also incorporate by reference a new test method for determining the initial boiling point of crude oil and other flammable liquids to ensure consistency with the American National Standards Institute/American Petroleum Institute Recommend Practice 3000, “Classifying and Loading of Crude Oil into Rail Tank Cars,” First Edition, September 2014.  PHMSA is providing a 60-day period for submitting comments on the proposal, which runs from the date of its publication in the Federal Register.

 

PHMSA Increases Maximum Civil Penalties for Violations of Pipeline Safety Laws and Regulations

On June 30, 2016, the Pipeline and Hazardous Materials Safety Administration (PHMSA) issued an interim final rule, effective August 1, 2016, titled “Pipeline Safety:  Inflation Adjustment of Maximum Civil Penalties.”  This interim rule increases the maximum administrative civil penalties that may be issued for a violation of the pipeline safety laws and regulations from $200,000.00 per violation per day up to $205,638.00, and from $2 million for a related series of violations up to $2,056,380.00.  The interim rule also increases the maximum for the additional civil penalties applicable to violations of PHMSA’s LNG regulations from $50,000.00 to $75,123.00 and increases the maximums for violations of the pipeline safety whistle blower protection laws from $1,000.00 to $1,194.00.  PHMSA issued the rule pursuant to the “Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015” and used a multiplier of 1.02819 pursuant to guidance provided by the Office of Management and Budget in order to calculate the increase.

 

 

Pipeline Safety Alert: Reauthorization Bill Provides PHMSA with Significant New Authority

On June 22, 2016, the President signed into law the PIPES Act, reauthorizing the Pipeline and Hazardous Materials Safety Administration’s (PHMSA) federal pipeline safety program through fiscal year 2019.  Among several amendments to the Pipeline Safety Laws, the PIPES Act provides PHMSA with significant new authority to issue industry-wide emergency orders and requires PHMSA to develop underground gas storage standards.  Babst Calland’s Pipeline and HazMat Safety team has prepared a Pipeline Safety Alert noting observations on some of the key provisions in the PIPES Act.