CHAPTER 6 BUSINESS ASPECTS OF CURING TITLE IN THE 1990s
| Jurisdiction | United States |
(Jan 1994)
BUSINESS ASPECTS OF CURING TITLE IN THE 1990s
Clanahan, Tanner, Downing & Knowlton, P.C.
Denver, Colorado
Table of Contents
1. Introduction
2. Analysis of Title Defects
A. Evaluating the Risk
B. How Much Production is Affected by the Title Defect?
C. What Damages are Recoverable in a Trespass or Accounting Action?
D. What is the Likelihood that Title Will Fail?
3. Common Title Defects and Methods of Curing Them
A. Defective Conveyances Resulting in a Prior Owner Retaining an Interest in the Lands
B. Individuals in the Chain of Title Who Cannot Be Located
C. Death and Passage of Record Title
D. Ancillary Probate Issues
E. Federal Tax Liens
4. Execution of Curative Instruments
A. Individuals
B. Corporations
C. Defunct Corporations
D. Limited Liability Companies
E. Partnerships
5. Conclusion
———————
[Page 6-1]
1. Introduction
Curing title involves analyzing title defects and the documents or other steps that would be required to resolve the title problem. The cost of curing the title problem must be weighed against the harm which could occur if the title defect is not cured.
This paper will discuss the liability a company could incur if a title defect is not cured. It will address several common title defects and the methods of curing them. The requirements for proper execution of curative instruments by individuals and various entities will be set forth.
Many of the matters discussed in this paper have previously been addressed in an excellent paper regarding title problems and curative measures.1
2. Analysis of Title Defects
A. Evaluating the Risk
Curing title is problem solving. The first step in solving the problem is to understand the risk created by the title defect. "Risk" in this paper refers to the likelihood that a loss will occur and to the amount of the possible loss. In evaluating the risk created by a title defect, it is useful to estimate the amount of money which would be lost if the title defect results in title failure. It is also necessary in some circumstances to evaluate the likelihood that a title defect will lead to title failure.
B. How Much Production is Affected by the Title Defect?
An important factor in evaluating the risk created by a title defect is whether the interest affected is a mineral, oil and gas leasehold, royalty or overriding royalty interest. Title opinions are often organized to list first the defects affecting mineral ownership, then those defects affecting leasehold, royalty or overriding royalty ownership. One reason to organize an opinion in this way is that defects affecting mineral interests tend to involve greater exposure.
In a drilling title opinion, an important determination is whether there is 100% oil and gas leasehold coverage. If there is a title defect affecting mineral ownership, there is usually a risk that there is an unleased mineral interest. An unleased mineral
[Page 6-2]
interest is one of the most severe types of title defects, because it could result in the true owners being able to recover damages equal to the value of oil and gas produced from a well, without having to bear any of the costs or risk of drilling the well.
Title defects regarding royalty and overriding royalty ownership generally carry a lesser degree of financial risk than title defects relating to oil and gas leasehold coverage. This is because only the landowner's royalty (for example 1/8) or the overriding royalty (for example 5%) share of the production is at risk. If a royalty or overriding royalty interest owner sues an oil and gas company for improper payments on the interest, the plaintiff will only be entitled to damages based on the 1/8 or other percentage share of his interest. Thus, the relative risk is less than the risk of a title defect affecting 100% of the minerals.
Another important factor in evaluating the risk raised by a title defect is the total amount of production that is involved in the transaction. In a drilling or division order project, this would be the anticipated total production from the well, and in an acquisition it would be the total value of the reserves for the well or prospects affected by a particular title defect. A drilling title defect affecting 10% of the production is a greater risk in a well expected to produce $10,000,000 worth of production than it would be in a well estimated to produce $1,000,000. This information can be useful to a title attorney, because it helps the attorney work with the client to evaluate on a very practical basis the severity of a title defect.
C. What Damages are Recoverable in a Trespass or Accounting Action?
If a company drills a well on an unleased parcel, the company is a trespasser. Trespass is the unauthorized entry upon lands. It does not require evil intent, and even an innocent entry under what is believed to be a valid oil and gas lease is actually a trespass if the oil and gas lease is not from the true owner of the lands.
If a company drills on an unleased parcel, obtains production and is sued for trespass, the question will arise whether the company is a bad faith trespasser or a good faith trespasser. A bad faith trespasser is liable for damages equal to the value of the minerals produced, plus interest.2 A bad faith trespasser does not receive credit or a setoff for the costs of drilling and operating the well. Thus, if a well is drilled by a bad faith trespasser on a 100% unleased parcel, and the well produced
[Page 6-3]
$10,000,000 worth of oil and gas, the true owner is entitled to recover the full $10,000,000, plus interest. The company has drilled a free well for the mineral owner.
A good faith trespasser is liable to the true mineral owner for the value of minerals "in place."3 Generally, this means that the company is entitled to deduct the reasonable cost of extraction of the minerals. If the well which produced $10,000,000 worth of oil or gas cost $2,000,000 to drill, the mineral owner in a suit against a good faith trespasser would receive damages equal to $8,000,000, plus interest. There have been a substantial number of cases regarding what are "reasonable costs" which may be deducted from the value of gross production, including cases arguing whether bonuses, royalties and income taxes are "reasonable costs."4
The distinction between a bad faith trespasser and a good faith trespasser in our example turns on whether the trespasser had knowledge that the mineral interest was unleased. A court has held that a trespasser was a good faith trespasser where there was an ambiguous instrument in the chain of title and the trespasser in good faith misconstrued the instrument.5 Good faith trespass has also been found where title failed because of adverse possession.6
If the unleased mineral interest is an undivided interest, a different legal analysis applies but in most states the end result is the same as in the case of a good faith trespasser. Owners of undivided mineral interests are cotenants with one another. Any one cotenant has the right to develop the land for oil and gas.7 The other cotenants, however, have the right to receive a share of the net profits if the drilling is successful. If the drilling is unsuccessful, the developing cotenant is not entitled to recover any of his costs from his cotenants. Thus, the developing cotenant bears all the financial risk of the drilling but would have to share the financial rewards if the drilling is successful and his cotenant sues for an accounting. In such a suit, the developing
[Page 6-4]
cotenant, like the good faith trespasser, is entitled to a credit or setoff for reasonable expenses incurred in developing the oil and gas. Here too there are many reported cases because there is much room to argue about whether a particular development expense is reasonable.8
An oil and gas lessee who hold a lease from the owner of an undivided mineral interest steps into the mineral owner's shoes with respect to rights as among the cotenants. If a company has a lease from the owner of an undivided one-half mineral interest, and drills a well resulting in production without force pooling the unleased interest, the lessee can be sued by the owner of the unleased one-half mineral owner for damages equal to one-half of the production less one-half of the reasonable expenses of drilling and completion of the well.
D. What is the Likelihood that Title Will Fail?
Another important factor in evaluating the risk of a title defect is the likelihood that the defect will result in title failure. In a few instances, there is 100% certainty that a title defect will cause title failure if the defect is not cured. For example, if a surface inspection and other factual investigation shows that lands have been adversely possessed for longer than the statutory period, resulting in surface and mineral ownership in the adverse possessor, an oil and gas lease from the former record owner will not be valid.
In most instances, a title defect involves the possibility or probability that there will be title failure. For example, a title defect might involve an ambiguous mineral deed which could be interpreted to reserve no minerals to the grantor or to reserve a 1/4 mineral interest to the grantor. If the mineral deed was executed many years ago and subsequent conveyancing suggests that the grantee interpreted the deed not to reserve any minerals to the grantor, the question may arise whether to "let sleeping dogs lie." Generally, a title examiner will require a quitclaim deed from the original grantor, since the ambiguous mineral deed could be construed to reserve a 1/4 mineral interest to the grantor. A landman reviewing the title opinion may question whether it is better to raise the issue with the original grantor and possibly alert him to rights he would not otherwise claim, or to take a business risk and...
To continue reading
Request your trial