NORTH DAKOTA PROBATE, DORMANT MINERALS, AND OTHER COMMON TITLE ISSUES

1. National Association of Division Order Analysts 2012 Spring Seminar Denver, CO – April 11-12, 2012 NORTH DAKOTA PROBATE, DORMANT MINERALS, AND OTHER COMMON TITLE ISSUES Christopher D. Friez Crowley Fleck PLLP Bismarck, North Dakota www.crowleyfleck.com cfriez@crowleyfleck.com

2. North Dakota Oil and Gas • Probate • Dormant Mineral Act – Abandoned Mineral Interests • Spacing and Pooling • Other Common Title Issues • Questions

3. Probate • ND follows the Uniform Probate Code • Individually owned mineral interests must pass through probate • If individual dies owning mineral interests – ONLY way to legally pass title in ND is through probate • ND probate is required • Small estate affidavit procedure does NOT apply to real property (minerals)

4. Probate • If estate previously probated in another state • If estate still open, North Dakota court can grant Personal Representative authority to act in ND, based on authority granted in other state • If estate closed, Personal Representative MUST be appointed in North Dakota, but other state probate is relied upon

5. Probate transfers • North Dakota probate • ND Title Standards require • Personal Representative’s Deed • Letters Testamentary appointing Personal Representative • MUST be certified to be in full force and effect on or after the date of the Personal Representative’s Deed

6. Probate transfers • Out of State probate • ND Title Standards require • Personal Representative’s Deed • Letters Testamentary from state court where PR was appointed • MUST be certified to be in full force and effect on or after the date of the Personal Representative’s Deed • Order or proof of authority establishing that appropriate copies of out of state probate documents were filed in ND

7. Alternatives to Probate • NO legal alternative to properly pass title • Some methods to provide notice without probate • Proofs of Death and Affidavits of Heirship • Statements of Claim • Out of state probate documents • Copies of Wills • NONE of these are effective to legally pass title • Some RISK involved with each

8. Alternatives to Probate • Affidavits of Heirship • Identify deceased, probate anywhere, identify survivors/heirs • For leasing and sometimes for payment • Dangers • Incorrect (innocently or not) • Affiant doesn’t have all information • Intestate rules or Will directs other distribution • Creditor’s liens • State of North Dakota lien

9. Alternatives to Probate • Statements of Claim • Identify record title owner • Explain record title owner is deceased and claimant is an heir • Explain why entitled to interest • Attach documentation • Prevent loss from dormant mineral claim – maybe • Put potential lessees on notice who to contact

10. Alternatives to Probate • Out of State Probate Documents • Less risky than relying solely on affidavits • More assurance of a valid Will • North Dakota court will recognize admission of will • North Dakota assets should be distributed in same manner

11. Alternatives to Probate • Copy of Will • Not certain that Will is last/correct Will • Not yet admitted to probate and given blessing of Court • Is there another Will? A more recent Will?

12. Alternatives to Probate • No risk-free alternative • Acceptance of alternative depends largely on size of interest/production of well(s) • For absolute certainty – MUST probate

13. Dormant Mineral Act • Desire to reunite dormant or abandoned mineral interest with the surface estate • Overrules common law doctrine that mineral interests cannot be abandoned • Generally require mineral owners to act to preserve their interest

14. Dormant (Abandoned) Mineral Statutes • Initially believed to be unconstitutional taking • Texaco v. Short, 454 U.S. 516 (1982) • Upheld Indiana’s Act against constitutional challenges • “severed mineral interest that is not used for a period of 20 years automatically lapses and reverts to the current surface owner of the property, unless the mineral owner files a statement of claim in the local county recorder’s office”

15. Dormant (Abandoned) Mineral Statutes • Challenged as: • Depriving of property without due process – lack of notice • State may condition right to retention of property right upon performance of reasonable conditions that indicate intent to retain the interest • Taking private property without just compensation • States have the power to permit unused property to revert to another after the passage of time • Indiana has not exercised this power in an arbitrary manner and the action required by the State to avoid abandonment furthers a legitimate goal • Violating equal protection through an exception in the statute for owners of more than 10 mineral interests • Exception furthers legitimate purpose, has no adverse impact on owners of fewer mineral interests, and does not violate equal protection

16. Dormant Mineral Act • North Dakota Century Code Section 38-18.1-01 • “Any mineral interest is, if unused for a period of twenty years…deemed to be abandoned…” • Surface owner may succeed to ownership

17. Dormant Mineral Act • “USE” under the Act • Production • Operations – injection, withdrawal, storage, disposal • Subject to lease, mortgage, assignment, conveyance which is recorded • Subject to pooling/unitization which is recorded • Payment of taxes • Statement of claim

18. Dormant Mineral Act • North Dakota Century Code Section 38-18.1-06 • Surface owner shall give notice of lapse by publication • Publication once a week for three weeks • “if the address of the mineral interest owner is shown of record or can be determined upon reasonable inquiry…notice must also be made…[by mail] within ten days after the last publication is made”

19. Dormant Mineral Act • North Dakota Century Code Section 38-18.1-06(6) • Reasonable inquiry • Must search: • County records • Clerk of Court’s records • Social security death index • One or more public databases

20. Dormant Mineral Act • North Dakota Supreme Court • Spring Creek Ranch, LLC v. Svenberg (1999) • Reasonable inquiry must be made regardless of address of record • “Reasonable” is case specific • Recent Supreme Court interpretation • Sorenson v. Felton; Sorenson v. Alinder (2011); Johnson v. Taliaferro (2011) • If address is of record, no further inquiry required • Interpreted pre-2009 Act

21. Dormant Mineral Act • 2009 Amendments • NDCC 38-18.1-06.1 • Provides quiet title action as means to perfect title in surface owner • 38-18.1-06.1(4) – a mineral lessee that obtains a lease from an owner who has obtained a judgment pursuant to this section is a bona fide purchaser and the lease remains effective even if the judgment is subsequently vacated • Lessee is not liable to any third party for lease bonus, royalties, or other proceeds paid to surface owner before the judgment is vacated

22. Dormant Mineral Act • 2009 Amendments CONTINUED • NDCC 38-18.1-06.1 • “In an action brought under this section, the owner or owners of the surface estate shall submit evidence to the district court establishing that all procedures required by this chapter were properly completed and that a reasonable inquiryas defined by subsection 6 of section 38-18.1-06 was conducted. If the district court finds that the surface owner has complied with all procedures of the chapter and has conducted a reasonably inquiry, the district court shall…enter judgment perfecting title to the mineral interest in the owner or owners of the surface estate.”

23. Dormant Mineral Act • 2009 Amendments CONTINUED • Open question as to whether reasonably inquiry is required in claim brought after 2009 amendments • Can a post-2009 claim succeed without conducting a reasonable inquiry • Johnson v. Taliaferro (ND 2011) • Chief Justice VandeWalle concurrence: • “our decision does not resolve the issue of whether or not, in light of the 2009 amendments to N.D.C.C. § 38-18.1-06.l(2), a quiet title action would lie or whether or not a severed mineral interest would even be considered abandoned under the provisions of N.D.C.C. § 38-18.1-06 if the procedures under § 38-18.1-06 were begun after the 2009 amendments to § 38.18.1-06.l(2) became effective and no reasonable inquiry was conducted. I believe this is an open question that invites further legislative clarification or awaits a judicial determination.”

24. Dormant (Abandoned) Mineral Statutes • Division Order Analysts • Title examiners • Landmen • Must be aware of dormant mineral act provisions and potential effect on mineral and leasehold ownership • If ownership is in doubt, protective leases are reasonable • Advisable to require quiet title action because of uncertainty of compliance with the acts

25. Pooling – Division Of Interest • Forced pooling • 38-08-08, NDCC • Three requirements • Spacing unit – can’t force pool drilling unit • Separately owned tracts or separately owned interests within tracts • No voluntary pooling agreement covering all interests

26. Pooling • Effects of pooling No pooling – drilling well doesn’t constitute operations on Tract A , production from well isn’t production from Tract A -lease covering Tract A is extended by operations on or production from Tract A or lands pooled therewith As a result of pooling, operations and production are operations and production on lands “pooled” with Tract A and constitute constructive operations and production A B C

27. Pooling • Penalty issues • “Non-consent penalty” or “risk compensation” • Party that incurs risk should be rewarded for risk • Unleased mineral owner – 50% of reasonable actual costs of drilling and completing • In addition to proportionate share of actual costs, so unleased owner is not paid until 150% is recovered

28. Pooling • Risk penalty – limitations • 38-08-08(2) – owners are responsible for costs of drilling and operating • 38-08-08(3) – risk penalty is on costs of drilling and completing • No penalty on operating costs • NDIC has held that no penalty on workovers or similar activities unless “drilling” (i.e., deepening) or “completing” (i.e., recompleting) is involved • Probably no penalty on costs of equipping the well

29. Pooling • Risk penalty • Risk penalty is a statutory right • “If the owner of an interest … elects not to participate … the owner paying for the nonconsenting owner’s share … may recover … a risk penalty.” • No discretion on part of NDIC as to whether drilling party is entitled to penalty or the amount of the penalty • No discretion on part of NDIC to authorize smaller or greater penalty than the statutory amount

30. Pooling • Penalty requirements • Force pooling order • Election not to participate

31. Pooling • Unleased mineral owners • “Cost free royalty share” • Unleased owner entitled to a cost-free royalty share from date of first production • Rest of interest is subject to right of operator to recover cost and applicable penalty

32. Statutory Royalty for Unleased Ownersand Pooling • North Dakota Century Code Section 38-08-08 • Before 2009 – Average royalty • Any unleased pooled mineral interest is entitled to a cost-free royalty equal to the average royalty of the leased tracts within the spacing unit (but never less than 1/8) • After 2009 - Operator’s Election • If Pooled after July 31, 2009: • Entitled to average royalty OR 16% (operator’s choice) • All leases in spacing 3/16, use 16% • All leases in spacing 1/8, use average

33. Pooling • Unleased mineral owner – cont’d • Acreage weighted average royalty 160 acres unleased 1120 acres leased (1/6 X 480/1120) + (1/8 X 640/1120) = .142847 Computation can be difficult Amount changes every time a new lease is acquired Open 1/6 1/8

34. Pooling • Multiple well issues – cont’d • 38-08-08 (3), NDCC - • “if the owner of an interest in a spacing unit elects not to participate in the risk and cost of drilling a well thereon, the owner paying … may recover… a risk penalty” • Requires “good faith attempt …to have the … owner … participate in the risk and cost of drilling the well” • Penalty is on a well basis • Owner who is non-consent in the first well still entitled to elect to participate in subsequent well • Unleased owner still entitled to offer to lease • Lease would not cover prior wells in which unleased owner was non-consent

35. Mineral Reservations to Third Parties • Stetson v. Nelson (ND Supreme Court – 1962) • Follows “general” rule • NO third party reservations • Malloy v. Boettcher (ND Supreme Court – 1983) • A reservation can be effective to convey a property interest to a spouse, who does not own an interest in the land prior to the deed, but joins in the execution of the deed, where it is determined to have been the grantor's intent • Spouse is not a “stranger” and may acquire an interest through a reservation

36. Mineral Reservations to Third Parties • How do you cure a “Malloy” defect • Probate spouse’s estate • Disclaimer from estate of spouse • Conveyance from spouse’s estate • Stipulation • Disclaimer

37. Corrective Deeds • To be effective: • MUST be executed by original grantor • MUST be executed by grantee, UNLESS beneficial to grantee • If beneficial to grantee, recording may be presumption of acceptance • CUNA Mortgage v. Aafedt (ND Supreme Court 1990) • Gawryluk v. Poynter (ND Supreme Court 2002) • Johnson v. Hovland (ND Supreme Court 2011)

38. Mineral ownership under lakes and rivers • Recent developments • Missouri River – Navigable • State of ND owns minerals underlying Missouri River • From Low Water Mark on one side to Low Water Mark on other side

39. Mineral ownership under lakes and rivers • Who owns between High Water Mark and Low Water Mark? • Caselaw – State and adjoining landowner’s share correlative rights between High Water Mark and Low Water Mark • Surface case – no adjudication of mineral ownership • State now claims ownership of minerals between High Water Mark and Low Water Mark • Leasing and Litigation

40. Post-production costs • Bice v. Petro-Hunt, L.L.C. (ND Supreme Court 2009) • ND adopts “majority rule” • Upholds the deduction of post-production costs based on “at the well” royalty clause language • “market value at the well” means royalty is calculated based on the value of the gas at the wellhead • Thus, “any costs incurred by the lessee after the [gas] reaches the wellhead, whether to improve the quality of the [gas] or to transport it to a market where it may be sold may be deducted before the royalty is calculated”

41. Thank you! • Questions