December 2016 Legal Update by James L. Bullen
LOUISIANA LEGAL UPDATE
James L. Bullen
Bullen & Plauché, LLC
PUBLIC POLICY AGAINST RESERVING OUTSTANDING MINERAL RIGHTS AFFIRMED
In Sterling Timber Assocs., L.L.C. v. Union Gas Operating Co., 2016 La. App. LEXIS 2034; 16-433 (La. App. 3 Cir. 11/02/2106), Sterling Timber Associates (“Sterling”) sold two parcels of property in Allen Parish, Louisiana to O’Neal Stuart Investment, L.L.C. and Barbara L. O’Neal (collectively “OSI”) as part of a transfer of more than 14,000 acres in Allen, Beauregard, Calcasieu, and Jefferson Davis parishes. The two parcels at issue were subject to a mineral servitude created in August 1995. Nevertheless, when Sterling sold the parcels on October 8, 2004, it reserved all mineral rights to the property in the act of sale. The same day, the vendee, OSI, executed a mineral deed in favor of Sterling on the 14,000 plus acres Sterling had just sold to OSI even though OSI did not own any mineral rights. In August 2010, OSI granted mineral leases on the two parcels to Orbit Energy Partners, which leases were eventually assigned to Union Gas Operating Company (“Union Gas”). Union Gas drilled and began producing from the two parcels, and Sterling filed suit, alleging it was entitled to the minerals being extracted therefrom.
On appeal, the Third Circuit agreed with the trial court that Rodgers v. CNG Producing Co., 528 So. 2d 786 (La. App. 3 Cir.), writ denied, 532 So.2d 180 (La. 1988) applied to the Sterling to OSI transaction and warranted the application of Louisiana Mineral Code Article 76 instead of Louisiana Mineral Code Article 77. La. R.S. 31:76 provides that “[t]he expectancy of a landowner in the extinction of an outstanding mineral servitude cannot be conveyed or reserved directly or indirectly.” An exception to this rule is provided in La. R.S. 31:77, which states: “If a party purports to acquire a mineral servitude from a landowner when the right purportedly acquired is outstanding in another and the landowner either subsequently acquires the outstanding right or is the owner of the land at the time it is extinguished, the after-acquired title doctrine operates to vest the right in the party who purported to acquire it to the full extent of his title.”
The application of Mineral Code Article 76 versus Article 77 was at issue in the Rodgers case decided by the Third Circuit in 1988. Like the facts in Sterling, the Rodgers seller sold property burdened by a mineral servitude and, in the sale instrument, indicated the reservation of mineral rights was part of the consideration for the transfer. Also like Sterling, the buyer in the Rodgers transaction executed a mineral deed in favor of the seller on the same day as the sale of the land. Furthermore, like Sterling, the Rodgers buyer knew that the seller owned no mineral interest in the land at the time it was sold. In both cases, only a future right to receive the mineral rights through prescription of nonuse existed.
Based on the factual similarities between Rodgers and the present case, the Sterling court reasoned that Rodgers was directly on point and merited the application of Mineral Code Article 76 to the contested transaction. The Sterling court adopted the Rodgers’ holding that the mineral conveyance from buyer to seller of a known outstanding mineral servitude was a disguised reservation of reversionary mineral rights, a violation of Louisiana public policy, and directly forbidden by La. R.S. 31:76. Furthermore, the Sterling court adopted Rogers’ finding that La. R.S. 31:77 did not apply because the purpose of Mineral Code Article 77 is to “… protect an innocent purchaser from an oversale of mineral rights by a land owner.” Sterling at 8, citing Rodgers at 789. An “oversale” occurs “… when a tract might be subject to grants or reservations in excess of the grantor’s ownership interest, i.e. the putative burden in excess of the owned mineral rights” [Sterling, citing Patrick H. Martin, Louisiana Mineral Law Treatise 141 (Patrick H. Martin ed., Claitor’s Publishing Division) 2012].
The Sterling court observed that “… in Rodgers and in this case, the purchaser of the property knew that the seller presently owned no mineral interest in the land. Only a future right to receive the mineral rights through nonuse was potentially present. As such, like in Rodgers, there was not an “oversale” here where an innocent party needed protection from a seller’s attempt to sell something that the seller did not presently own.” Sterling at 9.
Sterling and Rodgers confirm that a buyer’s execution of a mineral deed in favor of the seller in anticipation of applying the after-acquired title doctrine will be rejected as an attempt to circumvent Louisiana’s public policy against reserving reversionary mineral rights. Only “innocent” parties will benefit from the protection of Mineral Code Article 77, which exists to remedy an “oversale” where the buyer is unaware the seller does not own the mineral rights purportedly conveyed.
ROYALTY AND OVERRIDING ROYALTY DIFFERENTIATED FOR APPLICATION OF MANDATE
In Encana Oil & Gas (USA), Inc. v. Brammer Engineering, Inc., 2016 La. App. Lexis 2099, 51,045 (La. App. 2 Cir. 11/16/16) the Second Circuit Court of Appeal held that the language in a contract of mandate did not authorize the mandatary (Brammer) to reserve a free “overriding royalty” on its Principals’ (mineral lessor’s) royalty in a mineral lease without actually securing an additional [overriding] royalty for the mineral lessor.
A contract of mandate is commonly referred to as a “power-of-attorney” and may be onerous (performed for compensation) or gratuitous (performed for free). See La. C.C. Arts. 2989, et seq. The onerous contract of mandate in this case provided:
“It is recognized that mineral leases executed in the future by Agent on behalf of Principal will provide for the reservation of an additional free overriding royalty interest on behalf of the lessors. It is agreed that in consideration of the services rendered and to be rendered by Agent, [sic] shall be entitled to compensation as follows, to wit: 1. On oil, gas and mineral leases under the terms of which not less than 1/16 free overriding royalty is reserved, Agent shall be entitled to a 1/32 free overriding royalty…”. Brammer at 8.
Pursuant to the contract of mandate, Brammer agreed to place its Principals’ mineral rights in a lease offer package with other mineral owners; and, the package offered a mineral lease with a 25% lessor’s royalty to the high bidder. Encana acquired the package and Brammer inserted a reservation of a 1/32 royalty interest in its favor in the lease it granted to Encana as Agent for its Principals. A dispute arose between Brammer and its Principals as to Brammer’s right to reserve the 1/32 overriding royalty interest, and consequently Encana filed this concursus action.
The contract of mandate was based on the terms of an earlier mandate between the lessors and a third party executed in 1962 when a lessor’s royalty of 1/8 was common in north Louisiana. Therefore, Brammer asserted it was entitled to a 1/32 royalty on any lease providing for more than the “standard” lessor’s royalty of 1/8.
The trial court rendered summary judgment in favor of Brammer, but the Court of Appeal reversed. The Second Circuit recognized that, unlike lessor’s “royalty” (see La. R.S. 31:213) and “mineral royalty” (see La. R.S. 31:80), the Louisiana Mineral Code does not expressly define “overriding royalty”, but the term is acknowledged in Mineral Code Articles 126, 171, and 191. The court explained that the term “overriding royalty” is used to describe “a royalty carved out of the working interest created by an oil and gas lease,” and cited Williams & Meyers Manual of Oil & Gas Terms’ definition of “overriding royalty” as “an interest in oil and gas produced at the surface, free of the expense of production, and in addition to the usual landowner’s royalty reserved to the lessor in an oil and gas lease.” Brammer @ 8.
Based on the definitions of royalty and overriding royalty set forth above, the Second Circuit found “it is clear that an overriding royalty is in addition to a lessor’s royalty.” Brammer at 9. Furthermore, based on the plain meaning of the word “additional” in the Brammer power of attorney and an assignment of overriding royalty in the Encana lease to itself, the court concluded that Brammer had to expressly reserve an additional royalty interest on behalf of the mineral owners to trigger its right to compensation by overriding royalty interest. Id. In addition, the court noted that “Brammer’s argument redefines the term “royalty” to mean “standard lessor’s royalty”, whatever that “standard” may be.” Id. Whereas 1/8 may have been the standard lessor’s royalty in the past, the court stated that by 2008, a 1/4 royalty was offered at the outset in the Haynesville Shale. Based on the fact that all lessors in the lease package received a 25% royalty from Encana, the court found Brammer “did nothing” to obtain an additional royalty for the lessors to trigger its right to an override in the leased interest. Brammer at 10.
SALE OF MINERAL RIGHTS BY MAIL SOLICITATION
Act 179 of the Louisiana Legislature, 2016
The Louisiana Legislature recently enacted the Sale of Mineral Rights by Mail Solicitation Act (La. R.S. 9:2991.1 through 9:2991.11). The Act provides form requirements for the sale of mineral rights that were solicited by mail, provides the method of rescinding such a sale, and imposes penalties on the mineral rights buyer for failure to comply with the form requirements set out in the Act. The Act is designed to protect landowners and other mineral rights owners who are at risk of exploitation. Because the doctrine of lesion beyond moiety does not apply to mineral rights under Louisiana law, mineral right owners could not previously rescind a sale of their rights for less than half of their value. The Sale of Mineral Rights by Mail Solicitation Act addresses this issue by allowing mineral rights sellers the option to rescind a mineral rights sale within a given time period, when the sale was solicited by mail containing a check, draft, or other form of payment.
La. R.S. 9:2991.2 defines the sale of mineral rights by mail solicitation as “the creation or transfer of a mineral servitude or mineral royalty, or the granting of an option, right of first refusal, or contract to create or to transfer a mineral servitude or mineral royalty, that is contracted pursuant to an offer…received by the transferor through the mail…and is accompanied by any form of payment.” Interestingly, the Act does not apply when there was a “prior personal contact” that included a “meaningful exchange” between the buyer and the seller. (La. R.S. 9:2991.3). What may constitute a “meaningful exchange” between the buyer and seller can include negotiations in person, by telephone, or by written or electronic communication. By contrast, mass-mailings and automated telephone calls do not constitute a “meaningful exchange.” [See Act 179, La. R.S. 9:2991.3, comment (c)].
Landmen mailing out “cold” offers to buy mineral rights are encouraged to follow the form requirements for a sale of mineral rights set out in La. R.S. 9:2991.4, and use the notice of rescission language provided in La. R.S. 9:2991.5 in the act of sale. They should also omit the prohibited terms described in La. R.S. 9:2991.10 from the act of sale. The notice of rescission disclosure is particularly important because when it is not included in the act of sale, the seller has a three year peremptive period in which to rescind the sale, and the buyer may be liable for attorney’s fees, court costs, and additional damages at the court’s discretion. On the other hand, when the notice of rescission disclosure is included in the act of sale, the seller has only 60 days from the date of signing the transfer to rescind the sale, and the buyer is not liable for attorney’s fees, court costs and potential additional damages as provided in La. R.S. 9:2991.9.
The Sale of Mineral Rights by Mail Solicitation Act further provides that if a seller exercises its right to rescind the sale, the written act of rescission is effective between the parties as soon as it is transmitted. The seller must repay any payments made to him by the buyer within 60 days “after rescission”. The rescission’s effect on third parties is governed by La. R.S. 9:2991.7, which generally provides that third parties are subject to the rescission only when it contains the name of the transferor and transferee and is filed for record within 90 days of the recordation of the mineral rights sale. Additional provisions regarding the effect of the rescission are contained in La. R.S. 9:2991.8 and 9:2991.9. Landmen are encouraged to read the entirety of the Sale of Mineral Rights by Mail Solicitation Act to become familiar with the form, notice, and timing provisions it contains.
Sara T. Donohue contributed to this article. Copies of the cases and/or statutes discussed above may be obtained upon request from James L. Bullen by facsimile (337-233-9095) or e-mail (email@example.com).