The Insecurity of Mortgages on Federal Mineral Leases
| Jurisdiction | United States,Federal |
| Citation | Vol. 18 No. 3 Pg. 447 |
| Pages | 447 |
| Publication year | 1989 |
1989, March, Pg. 447. The Insecurity of Mortgages on Federal Mineral Leases
Mortgaging the lessee's interest in a federal mineral lease is a common means of raising capital in the minerals industry. Lenders and sellers often accept these mortgages based primarily on the value of the underlying deposit. As long as the lease remains valid, the mortgagee can foreclose and realize the value of its security. However, a federal mineral lease can terminate, leaving the mortgagee without a remedy and without security.
Protecting the mortgagee's interest requires drafting appropriate mortgage provisions, recording the mortgage, and filing a Notice of Encumbrance with the Bureau of Land Management ("BLM"). However, because the Mineral Leasing Act of 1920 ("Act")(fn1) and the regulations thereunder, as supplemented by the Colorado recording laws, offer little express protection to mortgagees of federal mineral leases, none of these methods provide the level of security usually enjoyed by a real estate mortgagee.(fn2) This article examines a mortgagee's rights on termination and looks at the limited protection which can be afforded to a mortgagee of a federal mineral lease.
The Act does not expressly recognize mortgages of federal mineral leases, but does provide for transfers of "interests" by whole and partial assignments of federal oil and gas leases to qualified assignees.(fn3) "Interest," as defined in the regulations, encompasses indirect interests in leases.(fn4) The mortgagee of a lease in Colorado holds the right to foreclose, which is arguably an interest within the scope of the assignment regulations.(fn5)
Mortgaging a federal mineral lease simply does not fit within the current regulatory scheme for assignments of interests in leases.(fn8) Thus, few mineral lease mortgagees are even slightly protected under the Act against the unexpected termination of such leases.
The mortgagee of a federal mineral lease may foreclose its interest so long as the lease remains in effect. The Act appears to allow any purchaser at a foreclosure sale to avoid the qualification provisions discussed above for two years after the sale.
Section 184(g) of the Act states that any ownership interest in federal mineral leases that is otherwise forbidden by the Act may be held for two years if it is acquired by descent, will, judgment or decree. This provision is implemented in the oil and gas leasing regulations to the extent that transfers by merger, change of name or descent do not require approval by the Secretary.(fn9) However, the regulations do not address transfers by judgment or decree,(fn10) and nothing appears in the leasing regulations implementing § 184(g) for coal or other minerals.
The case law is not entirely consistent on whether § 184(g) requires the Secretary's prior approval for a transfer by judgment or decree. In Witbeck v. Hardeman,(fn11) a contest between two applicants for an oil and gas prospecting permit, the court held that the Secretary's consent is to be implied in a judicially ordered transfer and that consent would be compelled if refused. In Hockman
v. Sunhew Petroleum Corp.,(fn12) an action foreclosing a mechanic's lien on a federal oil and gas lease, the court held that transfers by operation of law can...
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