Common Oil and Gas Title Issues and How to Address Them

Lisa C. McManusVice-President, Legal & General Counsel

Pennsylvania General Energy Company, LLC

Oil and Gas Title Failure• Standard residential title search does not encompass oil and gas title search

• Many landowners do not own the oil and gas rights underlying their property, or own only a fractional interest

• Common issues faced by counsel include the following:

– Request to Quiet Title

– Advice as to rights of Joint Tenants

– Moving forward with development despite missing fractional owners

– Discovery of loss of oil and gas estate through quiet title action

Types of Oil & Gas Title Issues

• Severance of entire oil and gas estate through– Exception and Reservation of Oil and Gas– Outright Conveyance

• Partial severance, e.g., Excepting and Reserving ½ of the oil and gas

• Exception and reservation of royalty interest

What Happens to the Lessor?

• Lease is invalidated if complete title failure• Proportionate reduction clause allows lessee

to reduce bonus and royalties• Depends on Lease as to what happens if

outstanding royalty interests exist

Viability of the Quiet Title Action to Obtain Ownership of OGMs

• Plaintiff must have color of title and be merely seeking to remove some cloud on that title!!!

• Plaintiff must prevail on strength of his own title, not the weakness of defendant’s.

• Possible causes of action if the plaintiff has color of title:1. Adverse Possession2. Abandonment3. Ouster

Adverse Possession• The Act of March 26, 1785, 2 Sm.L. 299 § 2, 12 P.S. § 72 (see 42

Pa.C.S. § 5530; 68 P.S. § 81), provides for a 21-year limitations period

• Actual, continuous, exclusive, visible, open/notorious, distinct, and hostile possession of the land for 21 years. o Open & Notorious = Notice to true ownero Actual = Reduction to Possession

• Possession of surface after severance is insufficient to take oil and gas from possession of its owner

• Execution of leases is insufficient notice

Abandonment

• Requires actual & voluntary relinquishment of possession & ownership

• Non-user is insufficient• Requires both intent and external act • Unintentional abandonment = forfeiture

Ouster

• Joint tenant may enter to explore for and produce oil and gas without the consent of his cotenants except where entry is made with intention to deny other cotenants’ rights or entry results in unnecessary or gratuitous injury to property

• Decisive, unequivocal acts or conduct of joint tenant required• In ordinary case, receipt of all profits & payment of taxes on whole

property for 21 years alone insufficient• If continuous extraction of O&G for 21 years with no accounting, jury

may infer ouster & adverse possession• See Jordan v. Schug

Leasing Joint Owners

Why lease joint owners?1.Unleased cotenants have a right to lease and develop independently of the other cotenants.2.Unleased cotenant is entitled to accounting: who does that? 3.Is unleased cotenant a working interest owner?

Dormant Oil & Gas Act

• DOGA permits development of oil and gas reserves when all owners of oil or gas interests cannot be located or identified.

Create a trustTrustee negotiates and enters leaseLessee pays Trustee bonus and royalties

and obtains insulation from further liability

• Not intended to reunify surface and subsurface estates

Diligence in Finding Heirs

• Diligence is key to upholding orders in QTAs and DOGAs

• Due process requires notice to property owner reasonably calculated to give him actual notice of action

• Improper service is not a mere procedural defect – robs the court of jurisdiction

Rule 410

Rule 410. Real Property Actions (a) In actions involving title to, interest in, possession of, or charges or liens upon real property, original process shall be served upon the defendant in the manner provided by Rule 400 et seq. * * * (c) If service is made pursuant to an order of court under Rule 430(a), the court shall direct one or more of the following methods of service:

(1) publication as provided by Rule 430(b) . . .

Pa.R.C.P., Rule 410, 42 Pa.C.S.A.

Rule 430

Rule 430. Service Pursuant to Special Order of Court. Publication (a) If service cannot be made under the applicable rule the plaintiff may move the court for a special order directing the method of service. The motion shall be accompanied by an affidavit stating the nature and extent of the investigation which has been made to determine the whereabouts of the defendant and the reasons why service cannot be made. (b)(1) If service of process by publication has been authorized by rule of civil procedure or order of court, the publication shall be by advertising a notice of the action once in the legal publication, if any, designated by the court for the publication of legal notices and in one newspaper of general circulation within the county. The publication shall contain the caption of the action and the names of the parties, state the nature of the action and conclude with a notice . . . . (2) When service is made by publication upon the heirs and assigns of a named former owner or party in interest, the court may permit publication against the heirs or assigns generally if it is set forth in the complaint or an affidavit that they are unknown. Pa.R.C.P., Rule 430, 42 Pa.C.S.A.

Sisson v. Stanley2015 PA Super 18 (Pa. Super. Ct. 2015)

Superior Court determined that affidavit underlying motion to serve notice by publication reflected complete lack of due diligence and good faith and upheld opening of default judgment:

• OGMs were reserved from 1953 conveyance

• In 2010, surface owner filed QTA to “acquire” the OGMs

• Trial court granted motion for “alternative service” under 430(a), and surface owner published notice of the suit in local newspaper

• Default judgment was entered on August 2, 2010

• In November, 2010, surviving heir of 1953 grantor filed to open judgment and ultimately obtained a judgment on the pleadings

Sisson v. StanleyKey Holdings

• Deer Park Lumber and Rule 430 require a diligent search in order to support notice by publication

• More than a paper search is required

• Plaintiff’s counsel must search not only local records but must take steps to ensure that the defendants are located if possible, including internet search

• Plaintiff’s affidavit must include what internet sites were searched and all other efforts taken to locate defendants

Proper Due Diligence

•In all cases, a search in the county where the property is located of grantor/grantee indexes, estate records, judgment indexes, tax assessments, guardianship proceedings, voting records, marriage/death records, veterans’ records, cemetery records, and historical society records; an internet search of genealogical sites; a search of the internet white page directory; and an open internet search of the name and variations of the name of the owner/claimant. • In cases in which the last document of record identifying the owner or claimant was recorded or filed within twenty years of the search, inquiries of postal authorities including inquiries pursuant to the Freedom of information Act, 39 C.F.R. Part 265; inquiries of relatives, neighbors, friends, and employers of the owner/claimant; and examinations of local telephone directories. • In cases in which the location of the subject property is within twenty miles of a county line, a search in the county adjacent to where the property is located of grantor/grantee indexes, estate records, judgment indexes, tax assessments, guardianship proceedings, voting records, marriage/death records, veterans’ records, and cemetery records.

Busy slide, I know.

What if Your Client Has Lost Rights?

Default judgments are meant to speed the cause where defendant is dilatory, not to strip property rights of an unknowing owner.

Improperly entered judgments may be set aside:Petition to StrikePetition to Open Petition to Vacate

Petition to Strike

• Attack upon the validity of the judgment.• Default judgment may be stricken if the judgment is facially invalid or has a

fatal defect on its face. • Order striking a judgment annuls the original judgment and the parties are

left as if no judgment had been entered.“• The court may only look at what was in the record when the judgment was

entered.• A void judgment is subject to attack by the parties at any time in the same

court or another (collateral attack).

This means that the passage of time is irrelevant if the defect is on the face of the record, as such a judgment is void!

Petition to Open

Petition to Vacate

• Final judgment after adverse proceeding may be vacated if fraud or another circumstance so grave or compelling exists such as to constitute extraordinary cause that would justify court intervention.

• “Extraordinary cause” is associated with extrinsic fraud, lack of jurisdiction over the subject matter or a fatal defect apparent on the face of the record.

• Default judgments remain within the control of the court indefinitely and may be opened or vacated at any time upon proper cause shown.Simpson v. Allstate Ins. Co., 350 Pa. Super. 239, 243-244, 504 A.2d 335, 337, 1986 Pa. Super. LEXIS 9353, 6 (Pa. Super. Ct. 1986)

Choice of Procedure

• If error is on the face of the record, file a motion to strike No discretion. No need for meritorious defense. Appropriate where improper service is apparent based on faulty

affidavit. Apply the appropriate standard! Pa. R.C.P. 1064 only required the

affidavit to aver that defendant was dead or his identity or whereabouts were unknown. But what about due process?

• If extrinsic evidence is required, petition to open the judgment must be used Must meet timeliness requirement, which can be difficult Meritorious defense – attach draft complaint to petition Averment that Plaintiff actually knew whereabouts of Defendants or their

heirs is appropriate in a petition to open, not petition to strike

Example

• Plaintiff files QTA with motion seeking permission to serve by publication. Attached affidavit avers that attorney searched all county records, internet genealogical sites, and Google (open internet search) against the name and variations of defendant’s name and any potential heirs that might have been identified in the record. Trial court enters default judgment. Search of the county estate records reveals defendant’s estate that clearly identifies his heirs, who can easily be found.

• Facially, affidavit appears to pass muster, so despite defective search, petition to strike filed by the heirs would likely be denied.

• Timely petition to open would allow the heirs to present evidence that they could easily have been found. Provided that they have a meritorious defense, the judgment could be opened.

Questions?