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SD weighs in on the dormant mineral laws

Posted on: February 19th, 2019
by David Ganje

A  recent South Dakota Supreme Court decision, Holsti v. Kimber, has shed light on two areas of the dormant mineral act, previously untouched by South Dakota’s highest court: first, what constitutes “use” and “nonuse” of a mineral interest in order for a claimant to keep ownership of the mineral interests, and second, who may exercise that “use” of mineral interests. Though other issues remain unanswered following the decision, the ruling suggests what a mineral interest owner may do to prevent lapse of one’s mineral interest and what a mineral interest owner may do to keep his interest in a mineral estate. This case is the first time the South Dakota Supreme Court has addressed head-on dormant mineral laws.

South Dakota defines a mineral interest as “any interest, in oil, gas, coal, clay, gravel, uranium, and all other minerals of any kind and nature, whether created by grant, assignment, exception, reservation, or otherwise, owned by a person other than the owner of the surface estate.” A mineral interest is considered abandoned if it is “unused” for 23 years (20 years in North Dakota), and a statement of claim is not recorded within that time. I call this the “Mineral Rights Grace Period.” Upon an abandonment, that is a non-use, the surface estate owner may succeed to the mineral interest of another claimant.

In order to maintain ownership of a mineral interest and avoid lapse, the mineral interest must be “used.” “Use” under the statute may include one of several statutorily defined “uses.” One such “use” relevant to this case is:

Any conveyance, valid lease, mortgage, assignment, order in an estate settlement proceeding, inheritance tax determination affidavit, termination of life estate affidavit, or any judgment or decree that makes specific reference to the mineral interest is recorded …

It is the burden of the mineral interest owner to maintain his interest. Upon lapse, the burden shifts to the surface estate owner (the landowner) to take steps to succeed in the mineral interest. In Holsti, the issue before the court was whether the mineral interest owners fulfilled their burden to maintain their interest in the mineral estate.

The facts of the case: in 1967, Severt Kvalhein conveyed real property to Holsti and recorded the deed. In the sale Kvalhein reserved 50 percent of the mineral rights for himself. Two years later, in 1969, Kvalhein died and his estate was devised to eight heirs, each heir taking a one-eighth interest in the minerals.

In 2007, Holsti conveyed his surface estate to his sons (“the Holstis”). In December 2011, the Holstis published a notice of lapse of mineral interest in the official county newspaper in according with the statutes to recover mineral interests. No one responded by recording a statement of claim asserting ownership of the mineral interest. The Holstis filed a quiet title action in May 2012 alleging abandonment of the mineral interest due to “nonuse.”

Kvalhein heirs answered and rejected the argument that the mineral interest was abandoned. In their defense, the heirs referenced several 1978 oil and gas leases, a 1994 statement of claim by one of the heirs, and two mineral deeds recorded by one of the heirs in 1998 and 2011.

The court looked to whether the Kvalheim heirs had a valid mineral interest at all. The trial court had decided they did not have a valid interest because no document was recorded evidencing transfer of the mineral interests to the heirs and reasoned that “use” of a mineral interest could only be done by a “record owner.” The Supreme Court rejected that reading of the statute and found that the heirs did not need a recorded written document conveying Kvalheim’s mineral interest to them. The court found the Kvalheim’s last will and testament, though unrecorded, was sufficient to convey the mineral interest to the heirs upon Kvalheim’s death.

Once the court determined the heirs had an interest in the mineral estate, it next turned to whether or not that interest had been abandoned due to “nonuse,” or if the heirs had satisfied “use” requirements. The circuit court found the 1978 oil and gas leases recorded by the heirs were insufficient because they did not make specific reference to the mineral deed recorded by Kvalheim in 1967. The Supreme Court disagreed. Because the language of the statute does not specifically use the words “record holder” or “original deed” the court held the only two requirements for a recorded oil and gas lease to satisfy “use” were: 1) a specific reference to the mineral interest in question and 2) recording in the county register of deeds office. Because the heirs’ oil and gas leases specifically referred to the legal description of the mineral and because the leases were recorded in the proper county’s register of deeds office, the Court found the leases to be sufficient as “use.” (In a similar 2013 case decided by the North Dakota Supreme Court, Estate of Christeson v. Gilstad, the court also found that a legal mineral interest owner by inheritance, but not a record owner, could record an oil and gas lease to preclude abandonment of the mineral interest).

By exercising their rights as mineral interest holders and recording oil and gas leases in 1978, the Kvalheim heirs reset the clock back to zero on the 23-year test for abandonment. Therefore, from the last recorded lease in 1978, the heirs had 23 years in which the surface estate owners could not claim abandonment. Before the expiration of the 23 years (1978-2001), two Kvalheim heirs recorded documents sufficient to toll the clock back to zero again: in 1994, one heir recorded a valid statement of claim; and in 1998 and 2011 two valid deeds were recorded conveying the mineral interest between heirs. The court found both the statement of claim and mineral deeds constituted a “use” under the law and precluded abandonment. The court did not decide and instead remanded to the circuit court an additional issue: whether these two “uses” by Kvalhein heirs were sufficient to preserve the other six heir’s mineral interests.

In their holding, the court has clarified who may be a mineral interest holder and what they must do to satisfy the burden of “using” their mineral estate. This clarification is to the benefit of mineral interest holders because non-record holders may still protect their interests (though, it would be better practice to record an interest). Interestingly, in this case the mineral interest claimants were able to keep their claims even though the claims came through a will that was never probated.

David Ganje of Ganje Law Offices practices natural resources, environmental and commercial law.

 

 

David L Ganje
Ganje Law Offices
Web: lexenergy.net

605 385 0330

davidganje@ganjelaw.com

The Problem With South Dakota Boards

Posted on: November 9th, 2018
by David Ganje

‘Changes in regulations must await a demonstrated need.’ This is more than a concept but is the actual practice and the mantra of most governments. In keeping with the principles of government restraint, adopting new regulations must await a serious event which only then calls for new regulations.  A preferred ideology is to respond to events after they have happened.  Otherwise, it is argued that premature action is experimentation and not the job of government.

 Should a state board or a commission appointed by the governor be more than a policeman or a Justice of the Peace?  That is the question. Examples are necessary.  One must look at what power or authority is given to a board. In this instance I will use two boards and discuss their significance, and present to the reader the legal power granted to them.  The state Water Management Board and the Board of Minerals and Environment each consist of citizen members appointed by the Governor, not all of whom may be from the same political party.  So the beauty is that these appointees are not lobbyists, government employees or hired guns.

 Both named boards have an advisory function giving the public, the legislature and the governor advice, gathering information, and making recommendations.  In addition the boards have a rulemaking and permitting function.  This is extraordinary in government.  A group of citizens is in effect managing environmental and water policy.

 How extraordinary this is was borne out by my recent experience.  I was privileged to just complete the teaching of a seminar on natural resources and environmental law to Czech law students at a university in the Czech Republic.  In the seminar I compared and contrasted South Dakota’s water and natural resources law with that of the Czech Republic.  In South Dakota authority for water use permits and mining permits as well as overseeing permit holders and permit holder problems lies with the two citizen boards I mentioned.  That’s a lot of power in the hands of appointed citizens of the state, not in the hands of government employees.  Some of the seminar students had a hard time appreciating this difference in the law.  Their struggle has to do with the fact that all natural resource and environmental laws in their country are controlled by government agencies and its employees — not by boards or commissions.

 Is the preferred ideology of responding to events after they have happened the better way to preserve property, prevent loss and prevent harm to the environment?  No.  I have over the last couple of years provided numerous examples of historical events causing financial or other harm for which state government has provided no adequate response, and have suggested rules which will prevent future harm.  These examples can be found in the archives of this newspaper and in the various articles and blogs on my website. The subject of several of my suggestions is the lack of preparedness for accidents, spills or so-called disasters. In almost each instance the suggested points have not been addressed.  Alas these boards have the full authority to anticipate such problems and legal authority to act in advance; that is they have the power to make fair, open and public rules.  The rulemaking process itself allows for public input.  Secret rule making is not permitted.  And the boards are not burdened with lawmaking pressures of lobbyists hanging on their every word, interest groups petitioning them with incessant ‘concerns’ and other normal challenges of publicly elected politicians.  Boards are blessed with the legal authority to be agents of change in the fast evolving world of environmental and natural resource management.  They need to be more than just policemen or Justices of the Peace.  

Boards are not using their advisory and rulemaking authority to their advantage and to the advantage of the state.  Boards are given the legal framework to propose rulemaking but prefer to manage the status quo.  This exceptional citizen rulemaking power does not exist in other governments and in other countries.  This is indeed an opportunity squandered.

 

David Ganje of Ganje Law Offices practices in the area of natural resources, environmental and commercial law

Memo to Commission on Wind Farms

Posted on: September 8th, 2018
by David Ganje

To:  Campbell County Commissioners

From:  David L Ganje attorney   //   605 385 0330

davidganje@ganjelaw.com

Re:   Campbell County’s prospective comprehensive plan, temporary zoning ordinance and proposed Campbell County Wind Farm Phase 2

Date:    August 15th 2018

 

 

 

By way of introduction, I represent Campbell County landowners Larry and Bea Odde and Donna Rossow.

  1. Wind farms are a significant structural and economic part of a county.  Each county naturally has the right to encourage the development of privately operated wind farms. A county, by virtue of South Dakota law, may also have the obligation of watchful care over wind farms within its borders.  My clients are certainly not opposed to wind energy projects.  My clients are however concerned about property rights and protections, wind energy ordinances, and Campbell County’s consideration of infrastructure projects.
  2. Infrastructure is described as physical improvements in a county such as road systems, water systems, bridges and some utilities.  This includes physical structures that are essential to a community.  Infrastructure has environmental, social and economic benefits as well as costs to a county. One does not usually think of private business as owning and operating infrastructure, yet it does.   Privately owned infrastructure includes wind farms and electrical utilities. A wind farm is private infrastructure.  Infrastructure does not consist of a small business enterprise which would only affect a piece of property off in a corner somewhere.  Due to infrastructure’s broader effect on a county, it is subject to more than just private property rights.  A wind farm is private enterprise with public consequences.   Commissioners have the right, and a legal duty, to oversee the planning, development and maintenance of certain infrastructure within a county.
  3. The state of North Dakota regulates the siting of a wind energy facility greater than 500 kW.  That is not the case in South Dakota.  The South Dakota Public Utilities Commission (PUC) does not regulate the legal siting terms and conditions of a wind energy facility producing under 100 MW of electricity.  In SD a “wind energy facility” is defined as a system designed for or capable of generation of 100 MW or more of electricity.  A wind energy facility is the same thing as a wind farm.  The county commission will take notice that neither the existing Campbell County Wind Farm Phase 1, nor the proposed new Phase 2 equal 100 MW of electrical capacity generation per the developer’s information.  Phase 1 and Phase 2 are both outside of the PUC’s siting authority.  This leaves only one lead agency to oversee and manage the project siting process for a wind farm in Campbell County:  the Campbell County Commission.
  4. Wind energy projects, also known as wind farms, create a number of siting issues.  The physical placement and configuration of wind turbines, roads, fences, collection lines and the like must be considered. Relevant questions include a project’s impact on existing land use, a neighbor’s land use, and the environment.  For example, authorizing a wind farm in close proximity to a residence may create a claim for inverse condemnation or a regulatory taking of private property. A regulatory taking, that is, a taking by government rulemaking, may occur if a land-use regulation “goes too far.”  The commission is challenged to create a balance between private property rights and the government’s power to regulate in the public interest.
  5. Campbell County is naked. The county has no comprehensive plan and has no zoning ordinances.  A comprehensive general plan lays out the physical development of the county. In South Dakota a comprehensive plan is required for the purpose of protecting the development of the county; to protect the county’s tax base; for planning land use that will make adequate provisions of transportation, roads, water supply, drainage, sanitation, education, recreation, or other public requirements; to reduce governmental expenditure; and to conserve and develop natural resources.  Zoning ordinances are adjunct to, and must be in accordance with, a county’s comprehensive plan.  Without a comprehensive plan zoning ordinances cannot be adopted.  The only exception to this restriction is the passage of a so-called emergency temporary ordinance.
  6. The Phase 1 Campbell County wind farm became a public matter in approximately 2010.  At that time the county did not have a comprehensive plan, a wind energy ordinance or a procedure for obtaining special use permits.  The Phase 1 wind farm became operational in December of 2015.  At that time the county did not create a county comprehensive plan, wind energy ordinance or a procedure for obtaining special use permits.   A new proposed Campbell County wind farm referred to as Phase 2 has been proposed since approximately March of this year.  Yet, at this time the county still does not have a comprehensive plan, a wind energy ordinance or a procedure for obtaining special use permits.  The county commission in July of this year hired a consulting agency to help write a temporary ordinance or comprehensive plan.  It is of concern that Campbell County with its natural and physical features does not have wind energy regulations on the books.
  7. My clients may have believed that Consolidated Edison Development, Inc. operates Phase 1.  Department of Revenue papers received by the County Auditor in April of 2018 indicate that Campbell County Wind LLC is the entity paying taxes on Phase 1.  A company that owns or holds property under a lease and who operates the same for the purpose of furnishing electricity is the party that pays taxes.  A November 2015 federal filing by Campbell County Wind Farm, LLC reports that Campbell County Wind Farm, LLC is a Delaware limited liability company and that it “will own and operate” a 98 MW wind energy project located in Campbell County, South Dakota.
  8. One South Dakota official was recently quoted as saying that wind energy development in the state is a “gold rush.”  I wonder whether that state official understands the connotation of a gold rush.   A gold rush creates huge challenges and can leave a government with a bucketful of problems.  In a gold rush there are often no established rules or laws in the area and no established infrastructure to deal with the influx of activity.  A comprehensive plan as well as zoning ordinances, if written fairly, create good rules of the road.  A gold rush is like a community with no road signs, no speed limits and no traffic rules.  Thinking of zoning ordinances as writing a traffic code for the county makes sense.  A plan and ordinances can be written to protect people and property, and to keep things moving smoothly.  A plan and ordinances should establish county oversight, safety, uniformity and a road map which wind farm operators can read and follow.
  9. Campbell County in July outsourced to a consulting agency the preparation of a wind farm zoning ordinance.  I understand the county wishes to adopt an emergency and temporary ordinance. While commissioners will be the ones to formally adopt any ordinance after normal county public notice procedures, it is respectfully submitted that the process would be well served by requiring that the consultants themselves seek public input from landowners and residents at the early drafting stage, rather than wait until final ordinance readings. Letting another party write your local laws may be somewhat akin to letting a stranger use your credit card.  Please consider that lawyers as a group are said to be the second oldest profession.  But now that I think about it perhaps consultants as a group are really the second oldest profession– not lawyers.  The commission will of course be the government body taking final ownership of the local zoning and planning law and its effects on the county.
  10. When poor wind farm government oversight is in place, real operational consequences arise. In a workshop a few years ago a speaker at the Michigan Association of Planning discussed problems a wind farm created in Altamont Pass California.  Apparently the older technology wind turbines caused a great number of bird deaths.  The turbines were shut down in 2015.  I do not here suggest or imply that this would be the case with Campbell County Wind Farm Phase 1 or Phase 2.  Rather I provide the speaker’s comments on possible wind farm oversight issues.  The presentation indicated that there was no environmental analysis before turbines were first installed; that there was a fragmented regulatory scheme letting the government avoid responsibility for solving the problem; and that the industry avoided taking responsibility and did not address the Altamont problem proactively.
  11. South Dakota has no state environmental regulations on the siting of wind turbines.  And, except for language in projects which may be under the joint jurisdiction of the PUC and local governments, wind power siting and permitting processes varies by county. Suggested guidelines are provided in a jointly issued statement by the state Game, Fish and Parks and the state Bat Working Group Organization.  The following issues should be considered in a permit application:  1) Land Use 2) Natural and Biological Resources 3) Noise 4) Visual Resources 5) Public Interaction 6) Soil Erosion and/or Water Quality 7) Health and Safety 8) Cultural, Archaeological, and Paleontological Resources 9) Socioeconomic, Public Service, and Infrastructure 10) Solid and Hazardous Wastes 11) Air Quality and Climate.
  12. Local laws are best tailored for each county.  Lincoln County is different than Walworth County.  And, yes, Walworth County may be different than Campbell County. The Walworth ordinance dealing with wind energy says that a decision to grant a wind permit is an administrative matter.  It is not.  The South Dakota Supreme Court in 2009 ruled that a conditional use permit application (a common process for wind farm approval) is quasi-judicial.  Such ordinances are subject to a constitutional due process of the law review.  This requires that a county be visibly fair to all parties affected by the permitting decision.  Wind farm permits are exceptional permits because one might get approval in an area where regular zoning rules would not allow it.  Due process in South Dakota requires a.) reasonable notice to all parties effected, and  b.) an opportunity to be heard at a meaningful time and in a meaningful manner.  The current ordinance fails on both counts.
  13. The challenge for the county is to not create a chilling effect on new wind energy development and yet to protect the community, property owners, property values and the environment. One method occasionally used to write a new zoning ordinance is problematic. This problematic method is the adoption by a county of ordinance language based on that of another or several other sister counties. Adopting boilerplate central resource terms for suggested ordinance language is also not the best answer.  In 2009 the PUC published and placed on the web a recommended general model wind farm siting ordinance.  In an opinion piece on wind ordinances I previously critiqued part of the PUC recommended model language.  Several months later the PUC withdrew the model ordinance.

 

 

I respectfully suggest the commission regard in a comprehensive manner, and help the public understand, any proposed ordinance as well as related land use issues effected by any proposed plan.  Uncertainty among landowners and residents often leads to controversy.  The particular language of an ordinance is always where the rubber meets the road.  I look forward to looking at the proposed ordinance language from you and your consultants.  Part of my job is to help my clients ask better questions. This memo is given for discussion purposes and is not intended as a complete assessment of any legal matters considered.  If you would like to discuss the memo or have any questions please feel free to contact me.  Thank you.

 

 

 

 

 

 

 

 

 

 

 

 

 

Ganje Seminar in Pierre – May 18

Posted on: May 23rd, 2018
by David Ganje

David Ganje, a South Dakota attorney who specializes in natural resources law led a seminar on mineral and water rights in Pierre May, 18.

How not to transfer real estate and mineral interests

Posted on: January 31st, 2018
by David Ganje

It’s not your father’s Oldsmobile anymore:  the world of real estate and mineral interests has changed.  Yet, in the law, adherents to customs abound aplenty.  Keeping, transferring and ‘devising’ real estate and mineral interests is not what you were taught.  Following long-standing old usages can result in modern mistakes.  Let me provide but a few examples.

  1. Old practices die hard. The old practice of a current deed simply cutting and pasting some prior deed language is risky business. A prior deed holder’s assertion in a deed that he owned something does not make it so.  In a case this year the SD Supreme Court ruled that current property owner’s reliance on their deed and on prior recorded deeds which asserted that an easement existed was wrong.  The reason?  Historically no party had ever properly created or declared the so-called easement.  That’s a big problem for the current owners.  Do not blindly rely upon the historical chain of title.  Just because your father told you Oldsmobiles are the best cars made, you had better check.  Oldsmobiles aren’t made anymore.
  2. Christmas gifts and girlfriends.  In South Dakota you cannot convey to a purchaser but still reserve back as a Christmas gift an interest in the property in favor of your current or future girlfriend.  Yes, this has happened.  Reservations in a deed in favor of a third party do not work.  Nevertheless there are modern statutes authorizing the use of a deed outside of probate by which you can designate recipients to the property upon the expiration of your ‘credit card.’   When done correctly it is an alternative to formal estate planning.  This procedure is not used enough although it is less expensive than other estate planning tools.
  3. Caveat Emptor is for fools. All buyers require special attention.  I insist that my commercial and ag sellers comply, at a minimum, with similar a disclosure report following the disclosures required for residential sales.  I also require that a buyer of property which includes mineral interests make a representation that he has himself researched the value of the interests.  When selling real estate do not allow for a small item to become a deal breaker.  Over-disclose.  I know of a transaction where the seller did not disclose that an end-of-life event had occurred in the cistern of a property.  This could have canceled the deal.  On the obnoxiously humorous side, in a large transaction involving land and buildings, the buyers at the closing table were petty and complained about holes in the wall of the residence.  The small holes were caused by the removal of the seller’s hanging pictures.  At the closing table I volunteered that the holes came with the sale.  This comment could have canceled the deal.  Disclose. Disclose.  A transaction is not the same as a first date when one suggests to the date that he is a professional baseball player.  Disclose and be truthful.
  4. Getting title insurance is daredevil business. The use of title insurance is common today.  Advising a land or commercial client to only obtain standard title insurance is to invite a malpractice claim.  Under South Dakota law standard title insurance insures against “loss by encumbrance, or defective titles, or invalidity, or adverse claim to title.”  Standard title insurance has significant limitations.  Generally speaking, title insurance covers only whether the owner has good ‘legal title’ to the land. Title insurance will not cover the physical state or condition of the land.  Mineral interests and mineral ownership are not covered by title insurance.  The existence of environmental contamination is not an insured event.  The existence of zoning laws or related covenants which restrict the use of property are not an insured condition.  One court has held that, “zoning or environmental laws of general application, which are not recorded against specific parcels of property, are generally excluded from standard form ALTA title insurance policies . . .”  There is an important difference between having good legal title —  and the physical condition of the land itself.  One can obtain perfectly good insured legal title to valueless property.  That’s why you hire a lawyer.

 

David Ganje of Ganje Law Offices practices in the area of natural resources, environmental and commercial law.