CHAPTER 15 BALANCING RISK IN TITLE OPINIONS1

• Jurisdiction: United States

Advanced Mineral Title Examination
(Jan 2014)
CHAPTER 15
BALANCING RISK IN TITLE OPINIONS¹
Angela L. Franklin
Amy M. Mowry
Holland & Hart LLP
Salt Lake City, Utah & Denver, Colorado

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ANGELA L. FRANKLIN is a Partner with Holland & Hart LLP, in Salt Lake City, Utah. She is a Wyoming native and from a multi-generational oil and gas family. She has over 23 years experience representing oil, gas, and mining clients in virtually all types of acquisition, divestiture, exploration, and production transactions. Angela has extensive experience with title examination of private, Federal, State, and Indian lands throughout the Rocky Mountain region and rendering drilling, division order, acquisition, and financing opinions. In addition, she advises clients in complex acquisition and divestiture transactions and prepares the transaction agreements. Angela counsels clients and prepares a variety of upstream agreements including farmout, exploration, joint operating, participation, pooling, and unitization agreements. She has extensive knowledge of federal exploratory units and issues associated therewith. She assists clients' land and division order departments with all aspects of curative work, day-to-day operations, and leasing and conveyancing issues. She represents clients on matters involving well permits, spacing orders, force pooling, and field rules. Angela is admitted to practice in Wyoming and Utah. She has received numerous recognitions, including Best Lawyer in America 2014 Salt Lake City Oil & Gas Law Lawyer of the Year; Best Lawyer in America in Oil and Gas Law (2007-2013); Mountain States Super Lawyer in the area of Energy and Natural Resources (2008-2012); and recipient of the "Best Published Article in an AAPL Publication" Award: American Association of Professional Landmen (2005). She is an active member of the Rocky Mountain Mineral Law Foundation, American Association of Professional Landmen, and Utah Association of Professional Landmen. She has authored numerous papers and publications on behalf of the Rocky Mountain Mineral Law Foundation and the American Association of Professional Landmen on such topics as comparison of state laws on leasing, exploration, and production; curative documents and tools; pooling issues; and communitization agreements. Angela spends her free time with her family. She can always be found cheering at her teenage daughter's and son's games.

AMY M. MOWRY provides all types of title opinions for clients operating throughout the Rocky Mountain region. She is licensed in Colorado, Wyoming, North Dakota, and Montana and has authored opinions in all those states, as well as co-authored opinions in Kansas and Utah. Ms. Mowry advises clients on contracts, agreements, and conveyances involving a wide range of mineral and real property interests, and she also prepares curative instruments and transactional documents. She is a graduate of the University of Wyoming College of Law, prior to which she earned graduate degrees in both English and Education and served as a Peace Corps Volunteer in Morocco. She was a contributing presenter for the RMMLF's 2012 Mineral Title Institute and the Denver Association of Professional Landmen's 2012 Fall Land Institute.

TABLE OF CONTENTS

I. Introduction 2

II. Identifying Risk 2

(a) Risk Defined 2

(b) Risk Factors in Development Projects 3

(c) Acquisition and Drilling Risks: Inconvenient Truths 3

(d) Payment Risks: Fear and Loathing 4

III. Measuring Risk: How Much is Too Much? 5

(a) Prioritizing Risk: Approaching a Structured Discussion 5

(b) Priority Factors 6

(c) Attaching a Value to Risk 6

IV. Suspending Proceeds: A Temporary Comfort 7

V. Mitigating Risk: Alternative Cures and Temporary Fixes 10

(a) Curative Instruments 10

i. Corrective Deeds 11

ii. Disclaimers and Quitclaims 11

iii. Ratifications, Releases and Subordinations 12

iv. Stipulations and Cross-Conveyances 12

(b) Affidavits 13

(c) Division Orders 14

(d) Remedial Statutes 14

i. Marketable Record Title Acts 14

ii. Dormant Mineral Acts 16

iii. Adverse Possession Statutes 17

VI. Eliminating Risk: Unavoidable Actions 20

(a) Actions to Quiet Title 20

(b) Estate Proceedings 24

VII. Allocating Risk: Who Bears the Burden? 25

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(a) Reliance on a Title Opinion: Liability for Mistakes 25

(b) Mistakes and Omissions: What you don't know can hurt you! 26

(c) Uninvited Attention: The Risk of Third-Party Reliance 27

(d) Avoiding Liability: Disclaimers and Exclusions 29

VIII. Conclusion 30

I. Introduction

"Nothing will ever be attempted, if all possible objections must be first overcome." - Samuel Johnson, Rasselas, 1759

Seasoned explorers have through history admonished their successors, in life and in business, to shrug off doubt, throw caution to the wind and leap feet-first into the raging seas of uncertainty, promising only the greatest rewards when the storms settle. "Fishermen know that the sea is dangerous and the storm terrible," observed Vincent van Gogh, "but they have never found these dangers sufficient to keep them ashore."² Do they believe that only in the most torrential waters will the biggest fish bite? Are they certain, as J. Paul Getty was, that "without the element of uncertainty, the bringing off of even the greatest business triumph would be dull, routine and eminently unsatisfying,"³ and thus even the biggest catch would bring little joy? Or, rather than embracing an opportunity to live life to its fullest, are these brave fishermen simply accepting an unavoidable occupational hazard?

To a title examiner or an oil and gas operator, the idea of embracing risk may seem as natural as jumping off a very tall building. In the context of a title opinion, risk is met not with excitement, but with trepidation or even fear, and sometimes loathing. This paper will discuss the challenge of identifying risk in the context of a title opinion, both for the attorneys preparing those opinions and for the operators using them. It will also weigh the companion challenges of recognizing when big risks posed by serious title problems need serious cures, and where hidden risks lurk beneath what appear to be small issues. In exploring these differences we will attempt to identify where actual costs and potential costs must be reconciled, and where the risk of exposure to liability for potentially devastating costs plays its part in striking that balance.

II. Identifying Risk

(a) Risk Defined

Risk has been defined as "[a] probability or threat of damage, injury, liability, loss, or any other negative occurrence that is caused by external or internal vulnerabilities, and that may be avoided through preemptive action."⁴ In a broader sense, "risk" can be technically applied in a

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number of contexts to denote some aspect of undesirability, including (1) an unwanted event which may or may not occur; (2) the cause of such an event; (3) the probability that such an event will occur; (4) the statistical expectation value of such an event, where "expectation value" considers both the likelihood of the event and its severity (e.g., the severity of an environmental disaster is measured by the number of fatalities), and (5) the fact that a decision is made under conditions of "known probabilities" (versus a decision made under uncertainty).⁵ Any of these contexts is helpful in understanding the crucial features of risk for our purposes, to identify uncertainty and to recognize alternatives to undesirable outcomes.

(b) Risk Factors in Exploration and Development Projects

Risks inherent in oil and gas exploration and development projects may be driven by geographic factors, financing challenges, record title uncertainties or the actual stages of the project itself. New technologies for data systems and drilling techniques and changes in accounting practices all have an important impact on how the definition of risk has evolved, and how curative imperatives should be identified. These types of technological advances also help shape the current understanding of implied duties, operator standards, the concept of good faith and the scope of mitigating activities. With new technologies come many uncertainties, though - how will the changes affect current operations in a broader context? Will current practices and operational standards need to change, and in what ways? Will retrofitting current operations to conform to new concepts of acceptable behavior be necessary, and what will all this cost?

For an operator, risk may threaten its investment capital, it may expose the operator to liability for nonpayment or trespass, or it may threaten its reputation for doing business responsibly or honorably. A title opinion can alleviate uncertainties for the operator about its investment by helping identify the status of a company's assets. Are its leases valid? Do they cover what they are intended to cover? Do the lessors appear as record owners of the leased interests? What is the value of any potential problem? A title examiner must grapple with these questions in characterizing the importance of any title problem, and thus in identifying the relative value to the operator of the risk attached to that problem.

(c) Acquisition and Drilling Risks: Inconvenient Truths

An acquisition title opinion identifies the status of ownership of lands proposed for a purchase and sale transaction. Many of the risks associated with the acquisition of property for an oil and gas exploration and development project involve uncertainties about whether a prospective seller actually owns what they claim to own, and whether those assets are properly valued in light of any existing title defects. While an acquisition title opinion may rely upon a purchase and sale valuation to gauge which interests may bear a greater importance in ranking and identified related title issues, the nature of the issues identified will...