In Devitis v. Draper (Case No. 13 MO 0017), the Ohio Seventh District Court of Appeals considered whether an oil and gas royalty interest is subject to abandonment under R.C. 5301.56 (the Dormant Mineral Act).
Issue: Is a royalty interest in an oil and gas estate subject to abandonment under the Dormant Mineral Act?
First, the court comments that this is an issue of first impression in Ohio. The court notes in Pollock v. Mooney, 2014-Ohio-4435, the Seventh District determined that a royalty interest is subject to extinguishment under Ohio's Marketable Title Act. The court determined oil and gas royalty interests can also be subject to abandonment under R.C. 5301.56. The court provided the following reasoning for this decision:
Expanding on the rationale in Pollock, we hold that oil and gas royalty interests can be subject to abandonment under R.C. 5301.56. First, given that its statutory section is found within Chapter 5301, the DMA is part of the MTA. Although R.C. 5301.56 only applies to the specific mineral interests defined within it, parallels can be drawn because the statute's definition of a mineral interest includes the phrase "regardless of how the interest is created and of the form of the interest," R.C. 5301.56(A)(3), which is consistent with the MTA's use of the phrase, "[a]ll such interests * * * however denominated." R.C. 5301.50.
Id. at ¶ 17. The court went on to explain that "a royalty interest is 'one stick in the bundle' of the five attributes of a severed mineral estate: the right to develop (with ingress and egress), the right to receive bonus payments, the right to receive delay rentals, the right to receive royalty payments and the right to lease (executive rights). Id. at ¶ 18. The court concluded that "mineral interest, as defined in R.C. 5301.56 included an oil and gas royalty interest making that interest subject to abandonment." Id. at ¶ 19.
This is an important decision because the appeals court has confirmed that the Dormant Mineral Act can be utilized to extinguish a severed mineral interest. While many surface owners have made this assumption prior to this decision, the court has validated those assumptions. In Pollock, the seventh district court made clear that both accrued and unaccrued royalty is personal property. This is contrary to other states, including Oklahoma, in which unaccrued royalty is real property. For this reason, the argument has been made that the Dormant Mineral Act does not apply to a personal property interest. The court reasoned that a royalty interest can be extinguished by the Dormant Mineral Act because the statute includes mineral interest "regardless of how the interest is created and of the form of the interest" and also because the royalty is "one stick in the bundle." Based on this reasoning, does the Dormant Mineral Act apply to other sticks in the bundle? Is it reasonable to assume that the Dormant Mineral Act can also be used to extinguish the right to develop, the right to receive bonus payments, the right to receive delay rentals and the right to lease (executive rights)? Of course, this issue was not before the court and was therefore not addressed. However, it is arguable that the above reasoning can be used to extend the Dormant Mineral Act to all the different types of mineral interests.
Dated: April 3, 2017
Prepared by: Jeremy James