CHAPTER 10 TITLE TO SEVERED MINERALS: A MARKETING PERSPECTIVE
| Jurisdiction | United States |
(Mar 1985)
TITLE TO SEVERED MINERALS: A MARKETING PERSPECTIVE
Rooker, Larsen, Kimball & Parr
Salt Lake City, Utah
INDEX
Page
I. INTRODUCTION
II. NATURE OF TITLE TO SEVERED ORE
A. Real v. Personal Property
B. Power to Transfer Title to Ores
1. Private Lands
2. Federal Lands
3. Private Mineral Leases
4. Mining Licenses
5. Cotenancy
6. Successive Interests
III. FAILURE OF TITLE
A. Effect of Mining Trespass
1. Trespassing Miner's Power to Transfer Title to Ores
2. Ore Buyer Statutes
3. Choice of Law Issues in Interstate Sales
B. Seller's Power to Transfer Voidable Title
1. Voidable Title Defined
2. Good Faith Purchaser for Value
C. Entrustment
1. Entrusting of Possession
2. Requirement of a Merchant
3. Rights Transferred
4. Buyer in Ordinary Course
IV. LIENS AGAINST SEVERED MINERAL PRODUCT
A. Creating an Article 9 Security Interest in Severed Ores
1. Classifying Severed Ores
2. Causing the Security Interest to Attach
a. The written security agreement
b. Value given by the secured party
c. Acquiring rights in the collateral
3. Perfecting the Security Interest
a. Collateral
b. Place and time of filing the financing statement
c. The order of steps
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B. Duty to Search for Prior Encumbrances
C. Priority
1. Priority Between the Secured Party and Ore Purchasers
2. Priority Between Conflicting Perfected Security Interests
3. Priority Between a Secured Party and a Statutory Lienor
4. Priority Between a Security Interest and a Federal Tax Lien
5. Priority Between a Secured Party and a Trustee in Bankruptcy
V. TITLE TO SEVERED ORE DURING MARKETING
A. Documents of Title
B. Processing or Servicing Arrangements
VI. CONCLUSION
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I. INTRODUCTION
The smooth delivery and transfer of title to severed mineral product is essential to the success of any mining venture. There are numerous points in the marketing chain, however, at which uncertainties may develop concerning the ownership of the product, the power of the seller to transfer ownership to a buyer, the nature of the buyer's ownership or the rights of the creditors of the buyer and seller.
The adoption of the Uniform Commercial Code (the "Code") by most states has drastically altered the law in this area. This paper will address the fundamental law concerning title to severed minerals, the impact of the Code, including Article 9 security interests, and title pitfalls to avoid during the marketing process.
II. NATURE OF TITLE TO SEVERED ORE
A. Real v. Personal Property
Ore is unique in that it has characteristics of both real and personal property. At different times ore may be classified as either real or personal property. The correct classification is critical to ore buyers and sellers and their creditors.
Ores "in place" are considered to be part of the realty on which they are found.1 As such, the ores are governed by the applicable real property laws. For example, because minerals in place are classified as real property, the mineral estate may be severed from the surface estate by a conveyance and the grantee of the mineral estate receives a real property interest.2
On the other hand, ores that have been artificially
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severed are classified as personal property,3 the act of artificial severance being the event which changes the nature of ore from real to personal property.4 Because severed ores are personal property, the creation, effectiveness, and priority of security interests therein are governed by Article 9 of the Code.5 Moreover, severed ores are governed by all other laws applicable to personal property.6
The determination of whether certain ores are "in place" and thus realty, or have become personalty through artificial severance, depends on the intention of the miner.7 If a miner extracts minerals from the ground and dumps the material on his own land merely to remove a part of the realty from one portion of the property to another without the intent to sever the material from the realty, the removal does not change the nature of the ores from real to personal property.8 Similarly, ores extracted with the intent that they become personalty may once again become real property depending on the intent of the owner of the severed ores. In the absence of a specific agreement to the contrary, material removed from a mine and dumped on the land of another becomes real property and is appurtenant to
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the land on which it is dumped.9 Further, severed ores or tailings may become real property if the owner of the ores or tailings intends to abandon them and relinquishes possession.10
B. Power to Transfer Title to Ores
To an ore buyer, it is often not readily apparent who has the power to transfer title to ores whether the ores are in place or have been artificially severed. Courts have rarely discussed the question of who has title to ores. The question is usually characterized as who has the right to mine, and under what circumstances.11 Once it is determined who has the right to mine, however, it clearly follows that the rightful miner secures title to the ores he extracts and the power to transfer title to such ores.12 The following discussion briefly outlines who has the right to mine (and thus, power to transfer title to the ores mined) under the mining ownership patterns typically encountered.13
1. Private Lands.
Title to ore in place on private lands is vested in the
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owner.14 Of course, the fee owner may sever the mineral estate from the remainder of the fee. He can accomplish such a severance by a grant of the mineral estate,15 a reservation in a conveyance of the surface,16 or by devise.17 Further, the severance of the mineral estate may be of a fractional interest;18 it may be a vertical severance by conveyance or reservation of a specific area;19 or the owner may sever the mineral estate horizontally by conveying or reserving particular kinds or strata of minerals.20 The owner of the mineral fee has the right to sever and market the ore.
2. Federal Lands.
The holder of a valid unpatented mining claim on federal lands has vested property rights that are enforceable
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against third parties and the United States.21 Prior to artificial severance, however title to ore in place on federal land is in the United States.22 The owner of the claim has the right, "to extract and convert to his own use all the ores and precious metals which may be found" within the surface boundaries of the claim.23 Further, an unpatented mining claim has the general characteristics of real property and may be conveyed, transferred and inherited as the mineral estate in private lands.24 Thus, the owner of a valid mining claim has the right to mine and market the ores found thereon.
3. Private Mineral Leases.
The most common method of securing the right to explore, develop and produce minerals on private lands is by lease.25 By contrast, leasing is the exception and not the rule for securing rights to mine hard rock minerals on federal lands. The general procedure for acquiring rights to mine hard rock minerals in public domain lands is the location of mining claims.26 It is quite common, however, for the owner of an
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unpatented mining claim to lease his possessory right to the claims to a third party for exploration, development and mining of ores.27
A majority of courts hold that a mineral lease does not constitute a conveyance of ores in place. Instead, a lease is considered as a grant of the right to explore for and develop minerals as permitted by the terms of the lease.28 Thus, title to ores vests in the lessee when the ores are severed from the earth. The lessee has the right to mine and market the ores subject only to any royalty interest of the lessor.
4. Mining Licenses.
The term "mining license" has been used to describe a variety of mining arrangements that are less than a mining lease. A license permits the licensee to enter, explore, and mine property. The property interest created by a license may be an incorporeal hereditament, profit a prendre, personal privilege or it may not even be a recognized interest.29 The classification is important, however, since different common law rules are
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applicable to each type of property interest.30 Those common law distinctions have resulted in many uncertainties surrounding licenses, which have caused the term "mining license" to have a clearly negative connotation. Nevertheless, a carefully drawn mining license may be the ideal vehicle for acquiring mineral rights in specialized situations.31 Regardless of how the license is classified, title to ore vests in the licensee only when severed from the earth.32 The licensee, like the lessee, has the right to mine and market ores subject to the licensor's royalty interest.
5. Cotenancy.
The joint ownership of minerals in place (or of a possessory interest in an unpatented mining claim) presents unique problems in determining who has the right to convey title to severed ores. Most jurisdictions allow a single cotenant to appropriate and dispose of ores.33 If a cotenant or his lessee begins actual mineral production, he must account to the non-participating cotenants for their share of the minerals that are permanently removed from the land.34
Since each cotenant may grant non-exclusive rights of use and possession,35 different cotenants could grant inconsistent rights. For example, two cotenants could each grant a lease
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to different competing mineral developers.36 Concurrent leasehold ownership creates complex operating, liability and accounting problems. The risks inherent in such a situation are simply too great for a developer to rely upon a lease from a single cotenant. Thus, as a practical...
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