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Ganje selected as Super Lawyer for 2014
David Ganje has been selected to the 2014 New York Super Lawyers list in the category of energy and natural resources. Each year no more than five percent of the lawyers in the state are selected by the research team at Super Lawyers to receive this honor. Super Lawyers is a rating service of outstanding lawyers from more than 70 practice areas who have attained a high degree of peer recognition and professional achievement
LANDMEN – OIL AND GAS LEASE BROKERS
By entering into an oil and gas lease, a landowner provides an oil and gas lessee, usually an oil company, with the right to explore for and produce oil and gas found under the landowner’s property. (In the article I will use the accepted term ‘oil and gas lease’, although an oil and gas lease is not in a correct legal context a real estate or commercial lease.) Both the oil company and the landowner enter into an oil and gas lease with the same goal: profit. However, the underlying interests of each party are very different. An oil company wants as much access to the surface and subsurface as possible. In contrast, a landowner desires to limit access and to limit any potential damage caused by drilling and recovery operations. An oil company also desires to keep a lease alive despite a lack of production or a failure to drill. A landowner desires, among other things, that the lease end quickly if the oil company fails to produce in well paying quantities. Some landowners enter into oil and gas negotiations with little experience or knowledge of oil and gas matters.
A “landman” is the usual point of contact between a landowner and an oil company or a so-called lease investor. The American Association of Professional Landmen (AAPL) reports that a landman’s services include: “negotiating for the acquisition or divestiture of mineral rights; negotiating business agreements that provide for the exploration for and/or development of minerals; determining ownership in minerals through the research of public and private records; reviewing the status of title, curing title defects and otherwise reducing title risk associated with ownership in minerals; managing rights and/or obligations derived from ownership of interests in minerals; and unitizing or pooling of interests in minerals.” Given these responsibilities, landmen have influence over oil and gas leases, and over the effect that leases will have on a landowner. One could say that landmen are the “real estate brokers” of the oil and gas industry. Despite this influence, landmen generally do not need to be licensed or even certified by a state in which they are making deals. The only national organization to implement ethical standards for landmen is the American Association of Professional Landmen. The AAPL is a nationwide organization with over 20,000 members. This organization offers various training programs, sets ethical standards for landmen and lobbies congress on behalf of its members.
Landmen are paid by the lessee. Landmen are for all intents and purposes agents of the oil and gas producers. This leads some landmen to resort to high-pressure sales tactics. A report by the AAPL Licensing Task Force in 2008 recommended that the organization support landmen licensing efforts. The report concluded that licensing requirements were most needed in Texas and other states where many landmen interact with residents, and where the areas are experiencing an oil and gas boom. Opponents of licensing argue that requiring a license or certification will not make landmen better. This argument fails to consider the true purpose behind man-made laws. Laws are created to encourage people not to act on their impulses, and also allow the state to take action if they do act on their impulses. Licensing requirements for landmen will not make all parties better, but regulations allow a state to step in if a landman’s practices are contrary to established legal standards.
Landmen in South Dakota must be licensed as real estate brokers and licensees. Landmen in North Dakota are not required to be licensed. Landmen in South Dakota come under the jurisdiction of the South Dakota Real Estate Commission. The South Dakota Codified Laws define “Real Estate” to include mineral rights. Because of South Dakota law, several disclosure requirements are mandated of landmen before they can close an oil and gas lease. South Dakota law also defines a “Real Estate Broker” as someone who “buys, rents, sells, manages, leases, etc., an interest or estate in Real Estate.” The South Dakota Attorney General has opined that landmen are “Real Estate Brokers.” Accordingly, landmen must be licensed as such. The Code provides that any landman operating without the requisite license is committing a Class 1 misdemeanor and is required to forfeit any compensation for the deal he brokers. A separate legal question may lie as to whether an oil and gas lease created by and negotiated by such a landman is enforceable as a contract.
David Ganje of Ganje Law Offices practices natural resources, environmental and commercial law in North Dakota and South Dakota. The website: lexenergy.net . The contents of this article are intended for general information purposes only and are not intended as legal advice.
Tribes cast eye to water laws and protecting resource
Peter Harriman, pharrima@argusleader.com 11:09 p.m. CDT July 25, 2014
At the Indian Water Rights Conference this week in Rapid City, lawyer David Ganje gave a overview of water laws as they relate to tribes and offered recommendations on writing and maintaining successful tribal water codes. The conference, hosted by the Great Plains Water Alliance, included tribes from South Dakota, North Dakota, Minnesota, Montana and Alaska.
Ganje, who specializes in natural resources law, recently answered five questions on the subject for the Argus Leader.
1. Federal law already assigns primary water rights to tribes for the exterior boundaries of reservations. Why do tribes need water codes?
“Water codes are really property management vehicles for managing both a right and a commodity. Tribes, as all government bodies now, are more and more aware of the proper management of water. Historically, all of them had been inattentive to water. There had more or less been enough of it around, both surface and groundwater. Now there is a realization that surface and groundwater interact with each other, and climate is affecting all of them. This goes for states and reservations.”
2. What is the relationship between state government and tribes in the Dakotas regarding water?
“Different states over time have approached reservations and undertaken water compacts. There are about 14 different water compacts in the region. In Idaho, Utah and Colorado, some tribes have completed successful water compacts, effective agreements between reservations and the state. There are no compacts in South Dakota and North Dakota. It is always possible. It is a matter of how willing each side is to negotiate, put everything on the table and address it.”
3. As they deal with the issue of managing water, are states and tribes also further developing the concept of tribal sovereignty?
“Water is a major issue in terms of what is tribal sovereignty. While there is precedent for strong water rights in favor of tribes, the question is how does that coexist with an immediate neighbor’s rights, and how does it exist on checker-boarded reservations? Those are questions where water is developing the idea of sovereignty.”
4. Is the historical assumption in the Dakotas that there will always be enough water undergoing review?
“Yes, the scientists are telling us the ebb and flow of water is still unpredictable, notwithstanding the management of flood control dams. They are not the panacea not the bottom line. Nor are they a guarantee that there can be a proper allocation of those resources. The question of who owns the water, who owns the flow is not yet resolved. Science has taught us to be careful, to be more prudent about this.”
5. Because it is out of sight, is groundwater also out of mind with regard to water quality, even in the face of potential development in South Dakota such as uranium mining, fracking to increase oil and gas production and the Keystone XL pipeline that could possibly threaten it?
“Groundwater quality is an emerging issue. The uranium leach mining currently under consideration has risks involved. There is a school of scientific thought that the dispersal of water is as problematic as the water itself used in natural gas production. There is some evidence that water has a tendency to leach itself into groundwater.”
To Trust Or Not To Trust
Placing mineral interests and mineral royalty rights or interests in a “mineral trust” is an economic and efficient way for a current or future transfer of mineral rights to family members or beneficiaries in order to independently own and manage such rights. Mineral trusts are sometimes called a ‘Family Mineral Trust’ but can be used for more than conveyances to family members. When one creates a mineral trust one is creating it to convey to the trust all or a portion of one’s ownership in mineral rights. A mineral trust has a number of advantages over a traditional last will and testament. Assets held in a mineral trust are not included in an individual’s taxable estate. These trust assets are in effect owned and managed independent of any other property of the granting owners. The value of mineral interests, due to production increases or the changing market value of the minerals, may also increase dramatically. If a mineral trust is to be considered, it is important that these assets are included in a mineral trust as early as possible. This is done ideally prior to an increase in value in any royalties to avoid estate taxes. Mineral trusts may also take advantage of gift tax rules by gifting early in the ownership or value of the mineral interest and thereby shifting income and value to the trust rather than the original grantor.
A trustee is the “manager” of the trust property. The trustee is given his marching orders by the written terms of the trust instrument. It is said, ‘The trust controls the trustee.’ A designated trustee in a mineral trust handles all decision making concerning multiple mineral interests or multiple beneficiaries as a single operating unit. This can make for more efficient decision making and collection of royalty rights.
Fractionalized mineral interests (smaller multiple interests) can often be lost in the shuffle and sometimes forgotten by later generations of beneficiaries. When a mineral trust is created, the earnings from royalties, leases and other income based payments, are held in perpetuity if an heir is lost, until that heir is located. Unlike abandoned property, with privately created mineral trusts beneficiaries are able to collect on past proceeds when they claim ownership.
Mineral trusts keep the beneficiaries invested in the asset(s). Without a mineral trust, ownership sometimes becomes unmanageably fractionalized. In a large family situation, or when the ownership transfers to third and fourth generation, an individual ownership percentage may be small. The cost of managing minerals can also increase when each individual must be consulted or when multiple small beneficiaries are receiving separate royalties based on their individual ownership. However when a trustee is managing the unit as a whole, the cost of managing is less expensive and the individuals usually have a better ability to monitor the trust asset.
Reconstructing and consolidating several divided mineral interests is an onerous process. This may be avoided by creating a mineral trust early on. It is also intended beneficiaries by proper drafting of the ownership terms in a mineral trust. Creating sound asset management to eliminate disagreement or confusion among owners and beneficiaries, a mineral trust agreement enables the trust maker to detail explicit rules. All beneficiaries are placed on notice of the trust terms which will designate how the trustee will manage the assets and income derived from royalties or income. Unlike a will, a trust does not have to be filed publicly. Using this type of trust allows individuals to maintain privacy.
A recent South Dakota Supreme Court decision, Holsti v. Kimber, 2014 S.D. 21, has shed light on two areas of the state’s dormant or abandoned mineral interests act (see South Dakota Codified Laws § 43-30A et. al.): first, what constitutes “use” (S.D.C.L. § 43-30A-3) and “nonuse” (S.D.C.L. § 43- 30A-2) of a mineral interest in order for a claimant to keep ownership; and second, who may claim and exercise that “use.” North and South Dakota’s Dormant/Lapsed Mineral Act are substantially similar. This case adds to the body of case law discussing this important natural resources law. Though some questions remain unanswered following the decision, the Court’s decision discusses what a mineral interest owner may do to prevent lapse of one’s mineral interest and what a mineral interest owner may do to maintain his interest in a mineral estate. This case is the first time the South Dakota Court has addressed head on the state’s dormant mineral interest law.
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.” (S.D.C.L. § 43-30A-1 (emphasis added)). A mineral interest is considered abandoned if it is “unused” for twenty-three years (twenty years in North Dakota) and a statement of claim is not recorded within that time. (S.D.C.L. § 43-30A-2; N.D.C.C. § 38-18.1-02). Upon abandonment, the surface estate owner may succeed to the mineral interest of another claimant, and unite the two estates. (S.D.C.L. § 43-30A-6).
In order to maintain ownership of a mineral interest and avoid lapse, the mineral interest must be “used.” (See S.D.C.L. § 43-30A-3). “Use” under the statute may include any one of eight statutorily defined “uses.” (Id.) One such “use” relevant to this case, includes:
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 . . . .
(S.D.C.L. § 43-30A-3(4)). It is the burden of the mineral interest holder to maintain his interest. (See Holsti, 2014 S.D. 21 at ¶ 12 (citing Texaco, Inc. v. Short, 454 U.S. 516, 529-30 (1982)). Upon lapse, the burden shifts to the surface estate owner (the landowner) to take steps to succeed in the mineral interest. (See S.D.C.L. § 43-30A-6). In Holsti, the issue before the Court was whether the mineral interest holders fulfilled their burden to maintain their interest in the mineral estate. (See ¶ 11).
The facts of the case: in 1967, Severt Kvalhein (“Kvalhein”) conveyed real property to Gordan Holsti and recorded the deed. (Holsti at ¶ 2). In the sale, Kvalhein reserved fifty percent of the mineral rights for himself. (Id.). 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. (Id.).
In 2007, Mr. Holsti conveyed his surface estate to his sons (“the Holstis”). (Id. at ¶ 3). In December 2011, the Holstis published a notice of lapse of mineral interest in the official county newspaper in accordance with the statutes to recover mineral interests. (Id.; see S.D.C.L. § 43-30A-6.). No one responded by recording a statement of claim asserting ownership of the mineral interest. (Holsti, at ¶ 3). The Holstis filed a quiet title action in May 2012 alleging abandonment of the mineral interest due to “nonuse.” (Id. at ¶ 4).
Kvalhein heirs (“the heirs”) answered and rejected the argument that the mineral interest was abandoned. (Id. at ¶ 5). 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. (Id.).
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.” (See id. at ¶ 9). 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. (Id. at ¶ 15). 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. (Id., at ¶ 15; S.D.C.L. § 43-30A-1).
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 the law’s “use” requirements. (Holsti, at ¶ 16). 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. (Id.). The Supreme Court disagreed. (Id.). 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. (Id.). Because the heirs’ oil and gas leases specifically referred to the legal description of the minerals 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.” (Id.). (In a similar 2013 case decided by the North Dakota Supreme Court, Estate of Christeson v. Gilstad, the North Dakota 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. (829 N.W.2d 453 (N.D. 2013)).
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 twenty-three year test for abandonment. (See SDCL 43-30A-2). Therefore, from the last recorded lease in 1978, the heirs had twenty-three years in which the surface estate owners could not claim abandonment. Before the expiration of this twenty-three years (1978-2001), two Kvalheim heirs recorded documents sufficient to toll the clock again: in 1994, one heir recorded a valid statement of claim (Holsti, at ¶ 18); and in 1998 and 2011 two mineral deeds were recorded conveying the mineral interest between heirs. (Id. at ¶ 17). The Court found both the statement of claim and mineral deeds constituted a “use” under the law and precluded abandonment. (Id. at ¶ 17-18). The Court did not decide and instead remanded to the circuit court an additional issue: whether these two “uses” by some of the Kvalhein heirs were sufficient to preserve the other six heir’s mineral interests. (Id. at ¶ 19).
In their holding, the Court discussed who may be a mineral interest holder and what they may do to satisfy the burden of “using” their mineral estate. This clarification is to the benefit of mineral interest holders because non-record holders, that is parties who claim mineral interest rights but have no deed of record, may still protect their interests (it nevertheless a better practice to record an interest).
Chronological Timeline of Events
|
Kvalheim & heirs/Defendants |
Holsti/Plaintiff |
| 1967: Severt Kvalhein conveyed real property to Gordan Holsti, but reserved 50% of the mineral rights for himself. The deed was recorded in Harding County, South Dakota. | |
| 1969: Severt Kvalhein died, and devised his estate to his eight heirs; therefore, each heir individually inherited 6.25% of the property’s total mineral interest. | |
| 1978: Multiple oil and gas leases were recorded in Harding County by several of Kvalhein’s heirs (including: Nina Grev and Sylvia & Jerome Hjelmeland). | |
| 1994: Nina Grev, a Kvalhein heir, filed and recorded in Harding County a statement of claim related to the mineral interest. | |
| 1996: Gordon Holsti published a notice of lapse of mineral interest in the official Harding County newspaper once a week for three weeks, which notices and affidavit were recorded in the Harding County Register of Deeds Office. | |
| 1998: Jerome Hjelmeland, a Kvalhein heir, conveyed his 6.25% mineral interest to his wife, Sylvia Hjelmeland, by “Mineral Deed” which was recorded in Harding County. | |
| 2007: Gordon Holsti conveyed his surface estate to his sons, John and Mark (“the Holstis). | |
| June 2011: Sylvia Hjelmeland conveyed her 6.25% mineral interest to her two children, Katherine and Gregory, and recorded the deed in Harding County. | |
| December 2011: The Holstis published a notice of lapse of mineral interest in the official Harding County newspaper, once a week for three weeks, as required. No notice was mailed to Kvalheim, because he died in 1969 a single man. No inquiry was made into who was the owner of Kvalheim’s mineral interest following his death. | |
| May 2012: The Holstis brought a quiet title action alleging Kvalheim’s mineral interest lapsed due to nonuse and that Gordan had succeeded Kvalheim’s mineral interest in 1996 due to his published notice of lapse; or, alternatively, that they had succeeded Kvalheim’s mineral interest in 2011 based on their publication of the notice of lapse. |
