Dormancy Mineral Legislation A Cure for the Malady or Another Afﬂiction? · Dormancy Mineral Legislation A Cure for the Malady or Another Afﬂiction? Professor Phillip E. Norvell1

Dormancy Mineral LegislationA Cure for the Malady or Another Affliction?

Professor Phillip E. Norvell1University of Arkansas School of Law

Fayetteville, Arkansas

Synopsis§ 12.01. Introduction. ....................................................................... 432§ 12.02. The Indiana Dormant Mineral Act. ................................. 435

[1] — Use of the Interest that Avoids a Lapse. ................... 436[a] — Production. ..................................................... 436[b] — Payment of Rents or Royalties. ..................... 437[c] — Shut-in Gas Royalties. .................................... 438[d] — Payment of Taxes. .......................................... 438[e] — Production from a Common Seam of Coal

or Other Hard Minerals. ................................. 440[f] — Gas Storage Operations. ................................. 440

[2] — The Effect of Transfers on the Limitations Period. .. 441[3] — The Statement of Claim. ........................................... 443

[a] — General Requirements. ................................... 443[b] — Timely Recording. ......................................... 444[c] — The Problem of the Repeat Filing. ................. 446

[4] — Potential Applicability of CommonLaw Disabilities. ....................................................... 447

[5] — The Reversion of the Lapsed Interest. ...................... 447[6] — The Constitutionality of the Act. .............................. 449[7] — The Criticism of the Indiana Dormant Mineral Act. 451

§ 12.03. The Michigan Dormant Mineral Act. .............................. 451[1] — Tolling the Abandonment Period. ............................. 453

[a] — Drilling Permit. .............................................. 453[b] — Production. ..................................................... 454[c] — Sale, Lease, Mortgage or Transfer by Recorded

Instrument. ..................................................... 455[d] — Transfer by Testate or Intestate

Succession. ..................................................... 456[e] — The Oil and Gas Lease and the Intricacies

of the Tolling of the Abandonment Period. ... 457[f] — Delay Rental Payments. .................................. 458

1 The author wishes to express his appreciation for the invaluable assistance of Mr.

Ross Viguet in the research and preparation of this paper.

Cite as 16 E. Min. L. Inst. ch. 12 (1997)

Chapter 12

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[2] — Notice of Interest Claimed. ....................................... 458[a] — General Requirements. ................................... 458[b] — Timely Recording. ......................................... 459[c] — Repeat Filing and Common Law Disability. . 460

[3] — The Reversion of the Abandoned Interest. ............... 461[4] — The Constitutionality of the Act. .............................. 461[5] — The Criticism of the Michigan Dormant

Mineral Act. ............................................................... 461§ 12.04. Conclusion. ......................................................................... 462

§ 12.01. Introduction.Highly fractionalized ownership of severed mineral titles is endemic

to areas where coal, oil and gas production and exploration are prevalent.The geometric increase in ownership of a severed mineral interest thatoccurs with each passing generation by testate and intestate succession,resulting in greater fractional ownership, i.e., more owners of diminishedfractional interests, impedes the development of coal, oil and gasprospects.2 The small fractional interest owner’s bonus and royalty shareis so trivial that little incentive is provided to communicate with thelandman, much less to execute the lease. Consequently, locating the smallfractional interest owner and acquiring an oil and gas lease from such ade minimis interest owner is time-consuming, expensive and often anexercise in futility.3 Likewise, examination of title and the incidental

2 The literature on the dormant severed mineral interests problem is extensive. SeePatrick J. Garver & Patricia J. Winmill, “Medicine for Ailing Mineral Titles: AnAssessment of the Impact of Adverse Possession, Statutes of Limitation, and DormantMineral Acts,” 29 Rocky Mt. Min. L. Inst. 267 (1983); George W. Hardy, III, “AncientMineral Claims — An Obstacle to Development,” 28 Inst. on Oil & Gas L. & Tax’n 137(1977); Dwight F. Kalash, “Severed Mineral Interests, a Problem Without a Solution?”46 N.D. L. Rev. 451 (1970); Eugene Kuntz, “Old and New Solutions to the Problem ofthe Outstanding Undeveloped Mineral Interest,” 22 Inst. on Oil & Gas L. & Tax’n 81(1971); Cheryl Outerbridge, “Missing and Unknown Mineral Owners,” 25 Rocky Mt.Min. L. Inst. 20-1 (1979); Ronald W. Polston, “Legislation, Existing and Proposed,Concerning Marketability of Mineral Titles,” 7 Land & Water L. Rev. 73 (1972); JamesC. Roberton, “Abandonment of Mineral Rights,” 21 Stan. L. Rev. 1227 (1969); Victor A.Sachse, III & Robert L. Atkinson, “Reuniting Unused Mineral Interests With the Land,”44 Inst. on Oil & Gas L. & Tax’n 2-1 (1993).3 Locating the “lost and unknown” mineral owner who is not assessed taxes on thesevered interest, may have never lived in the area, or has long since departed, is difficultif not impossible. Even if the owner is located, acquiring a lease is another matter. Becausethe bonus and royalty share as to small fractional interests is relatively insignificant, the

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curative work required to ensure marketable or defensible title to suchdiminutive fractional interests is excessively costly and burdensome.4

Dormancy mineral legislation5 is the modern solution to the problemsassociated with severed mineral titles of ancient origin.6 Once an oddity,dormant mineral acts are now a common feature of mineral law. Twenty-three states have some form of Dormant Mineral Act.7 Most of the

small interest owner has no incentive to negotiate or grant the lease. Even if a minimumbonus that far exceeds the per-acre bonus allotment for the prospect is utilized to furtherentice the de minimis interest owner to execute the lease, unanswered letters and unreturnedphone calls remain the norm. (Does anyone today cash a $50 check and sign a documentthat he or she knows nothing about?).4 The title examination reflects the last record title owner of a severed mineral interest.If the date of the conveyance vesting title in the owner is ancient, testate or intestatesuccession inevitably results in different ownership. Probate of wills or judicialdetermination of heirs are often not done as to severed mineral interests. The ownershipmust be reconstructed from information furnished by the present owner, if located. Thecost of title examination and subsequent title curative work is expensive.5 The literature on dormant mineral legislation is also extensive. See Owen L. Anderson,“Dormant Mineral Statute Upheld,” Nat. Resources & Env’t, Summer 1989, at 50;Laurence M. Elkus, “The Dormant Mineral Act for the General & Real Estate Practitioner,”71 Mich. B.J. 62 (1992); Cyril A. Fox, jr., “Clearing Mineral Titles by Statute AfterTexaco, Inc. v. Short,” 3 E. Min. L. Inst. 25-1 (1982); Louis B. Guttmann, “DormantMinerals Statute — Do We Need It in Florida?” 58 Fla. B.J. 111 (1984); Jeffry A.Townsend, “The Model Dormant Mineral Interest Act: Limited Practicability,” 8 E. Min.L. Inst. 20-1 (1987).6 Traditional remedies applicable to cotenants or non-consenting mineral owners, suchas partition, compulsory pooling, receivership statutes, and tax sales of delinquent interests,may not solve the problem of the “lost” or “unknown” mineral owner. See CherylOuterbridge, “Missing and Unknown Mineral Owners,” 25 Rocky Mt. Min. L. Inst. 20-1,10-27 (1979). Even if the remedy provides a solution for securing the developmentright, it does not eliminate the costs associated with title examination or satisfying thedue process requirement of notice.7 Cal. Civ. Code §§ 883.210-.270 (West Supp. 1995); Conn. Gen. Stat. Ann. §§ 47-33mto -33t (West Supp. 1995); Ga. Code Ann. § 44-5-168 (1991); Ill. Ann. Stat. ch. 765,para. 515/1 to /17 (Smith-Hurd 1993); Ind. Code Ann. §§ 32-5-11-1 to -8 (Burns Repl.1995); Iowa Code Ann. §§ 557C.1-.6 (West 1992); Kan. Stat. Ann. §§ 55-1601 to -1607(1994); Ky. Rev. Stat. Ann. §§ 353.460-.476 (Michie/Bobbs-Merrill Repl. 1993); Me.Rev. Stat. Ann. tit. 14, § 6662 (West Supp. 1994); Mich. Comp. Laws Ann. §§ 554.291-.294 (West 1988); Minn. Stat. Ann. §§ 93.52-.58 (West 1995); Neb. Rev. Stat. §§ 57-228to -231 (Reissue 1993); N.H. Rev. Stat. Ann. § 498:5-e (Repl. 1983); N.C. Gen. Stat. §§1-42.1 to -42.9 (1983 & Supp. 1994); N.D. Cent. Code §§ 38-18.1-01 to -08 (Repl. 1987

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legislation was enacted during 1980s. A Uniform Dormant MineralInterests Act (1986) has been drafted under the auspices of the NationalConference of Commissioners on Uniform State Law.8

Dormant Mineral Acts solve the problem of fractionalized andunproductive mineral estates by terminating severed mineral interests aftera specified period of non-use. Typically, the dormant interest owner canavoid termination by filing a recorded document.9 Almost universally,the terminated interest reverts to the surface owner.10 The Acts vary as tothe individual requirements. Some are “self executing” while othersrequire an adjudication of the termination.11 Historically, the salientcriticism of dormancy mineral legislation was directed at the windfallthat accrues to the surface owner who paid only for the surface estate butis likely to own, or will ultimately own, the mineral estate by operation ofthe Act. Large landowners, such as timber companies, or governmententities, as opposed to small farmers, are often the prime beneficiaries ofthe windfall.

The purpose of this chapter is to examine the operation of dormancymineral legislation to determine if it reduces the problems of fractionalizedand unknown mineral ownership. Likewise, the affect of the legislation

§ 12.01

& Supp. 1993); Ohio Rev. Code Ann. § 5301.56 (Anderson Supp. 1994); Or. Rev. Stat.§§ 517.170-.180 (1988); S.D. Codified Laws Ann. §§ 43-30A-1 to -10 (Supp. 1995);Tenn. Code Ann. § 66-5-108 (Repl. 1993); Va. Code Ann. §§ 55-153 to -155 (MichieRepl. 1986 & Supp. 1994); Wash. Rev. Code Ann. §§ 78.22.010-.090 (West Supp. 1995);W. Va. Code §§ 55-12A-1 to -10 (Repl. 1994 & Supp. 1994); Wis. Stat. Ann. § 706.057(West Supp. 1994)8 Unif. Dormant Mineral Interests Act, 7A U.L.A. 60 (Supp. 1995). For a critical analysisof the Act see Jeffry A. Townsend, “The Model Dormant Mineral Interest Act: LimitedPracticability,” 8 E. Min. L. Inst. 20-1 (1987).9 But see Ga. Code Ann. § 44-5-168(a)(1991)(providing working or attempting to workthe mineral interest and payment of taxes as the only means to preserve the interest).10 But see Minn. Stat. Ann. § 93.55 (West 1995)(providing for forfeiture to the state);Ind. Code Ann. § 32-5-11-1 (Burns Repl. 1995)(providing for reversion to the ownerfrom which the interest was carved).11 Some Dormant Mineral Acts expressly require a judicial determination of the lapse ofthe dormant mineral interest. See Cal. Civ. Code § 883.240 (West Supp. 1995); Conn.Gen. Stat. Ann. § 47-33q (West Supp. 1995); Ga. Code Ann. § 44-5-168(b)(1)(1991);Me. Rev. Stat. Ann. tit. 14, § 6662(2)(West Supp. 1994); N.H. Rev. Stat. Ann. § 498:5-e(1)(Repl. 1983).


435

on determining mineral ownership on the basis of record title will also beconsidered. The focus of the inquiry will be the Indiana and MichiganActs. Those state statutory schemes were selected for analysis becausethey are somewhat representative12 of typical dormant mineral acts yetreflect significant differences. Also, both Acts have been subject tolitigation. The resulting reported appellate cases facilitate theunderstanding of the operation of the Acts.

§ 12.02. The Indiana Dormant Mineral Act.The Indiana Dormant Mineral Act operates as a statute of limitation

under which non-use for a period of 20 years and the failure to file therequisite claim results in a “lapse” of any interest in the mineral estate.13

An interest of “any kind” in “coal, oil and gas, and other minerals” isexpressly subject to the Act.14 Thus, non-participating royalty interests,executive rights, or any other interest incident to or derivative from amineral estate are susceptible to extinguishment. The Act is not limitedto unknown and mineral owners who cannot be located.15 Interests ofknown and locatable mineral owners may also be extinguished by theAct.16 The Act is “self executing,” thus, a judicial determination that alapse pursuant to the statute has occurred is not required to vest title inthe surface or other owner.17 Likewise, notice need not be given to the

12 Referring to a “representative” dormant mineral act is somewhat illusory. Thenumerous acts vary as to the limitations period, recording requirements and grace periods,retroactive applicability, requirement of judicial proceeding to terminate the extinguishedinterest, and the requirements of use that toll the limitations period. For a description ofmany of the acts, utilizing a chart to highlight the significant differences, see Joshua E.Teichman, Comment, “Dormant Mineral Acts and Texaco, Inc. v. Short: Undermining

the Taking Clause,” 32 Am. U. L. Rev. 157, 161 n.25 (1982).13 Ind. Code Ann. § 32-5-11-1 to -8 (Burns Repl. 1995).14 Id. § 32-5-11-2.15 McCoy v. Richards, 771 F.2d 1108, 1112 (7th Cir. 1985); Texaco, Inc. v. Short, 454U.S. 516, 519 (1982).16 Some Dormant Mineral Acts are applicable only to unknown and non-locatable

mineral owners. See Ill. Ann. Stat. ch. 765, para. 515/3 (Smith-Hurd 1993); Ky. Rev.Stat. Ann. § 353.464 (Michie/Bobbs-Merrill Repl. 1993); W. Va. Code § 55-12A-4 (Repl.1994).

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owner of the lapsed interest by the person who succeeds to the interest.18

Reliance on public records to determine whether a mineral interest haslapsed pursuant to the Act is contemplated.19 The Act reflects a liberalpolicy to facilitate the development of surface estates as well as mineralresources by extinguishing dormant mineral interests.20

[1] — Use of the Interest that Avoids a Lapse.[a] — Production.

Production from the land or from a pooled or unitized tract thatincludes the land is specifically defined as a use that avoids lapse.21

Unfortunately, the Act does not specifically define production. Some caseshave utilized the phrase “actual or attempted production of minerals” to

17 McCoy, 623 F. Supp. at 1305); see also Short, 454 U.S. at 533 (1982).18 McCoy, 623 F. Supp. at 1307. Section 6 of the Act provides, inter alia, that theperson succeeding to the lapsed interest may give notice by publication or personal mailto the owner of the lapsed interest and record the notice, thereby establishing primafacie, that the interest has lapsed. This procedure is permissive, not mandatory. Ind.Code Ann.§ 32-5-11-6 (Burns Repl. 1995).19 Any individual interested in obtaining operating rights from a mineral interestowner . . . only needs to search the public records for a period extending back twentyyears. If, during that period, he or she finds that the interest was neither used nor thesubject of any statement of claim, he or she may conclude that any interest prior to thattime has lapsed. McCoy, 771 F.2d at 1110 n.3.20 In Short v. Texaco, Inc., 406 N.E.2d 625, 627, (1980), discussed infra at § 12.02[6],the Indiana Supreme Court observed:

The Act reflects the legislative belief that the existence of a mineral interestabout which there has been no display of activity or interest by the ownersthereof for a period of twenty years or more is mischievous and contrary to theeconomic interests and welfare of the public. The existence of such stale andabandoned interests creates uncertainties in titles and constitutes an impedimentto the development of mineral interests that may be present and to thedevelopment of the surface rights as well. The Act removes this impedimentby returning the severed mineral estate to the surface rights owner. There is adecided public interest to be served when this occurs. The extinguishment ofsuch an interest makes the entire productive potential of the property againavailable for human use. See also Short, 454 U.S. at 521 (1982).

Some irony exists in recognizing that the legislative intent of the Act encompasses theextinguishment of dormant mineral interests to reduce the impediments to surfacedevelopment when the lapsed interest does not always revert to the surface owner. Seetext, infra, § 12.02[5].21 Ind. Code Ann. § 32-5-11-3 (Burns Repl. 1995).

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define the Act’s production requirement.22 Such language suggests that“drilling operations” on the tract would constitute a use that tolls thelimitations period. However, there is no case holding that mere drillingoperations will toll the limitations period. Such a construction is contraryto a literal interpretation of the Act.

Likewise, the failure of the statute to define production with specificityraises the issue as to whether the standard of “commercial production” isrequired to constitute the requisite use. A severed mineral or non-participating royalty owner receives royalty payments derived from thesale of production, regardless of whether such production is commercialor non-commercial. Therefore, in keeping with the purpose of the Act,the production requirement for such interests should be construed as non-commercial production.23

After all, the Act is intended to extinguish interests characterized byprolonged periods of inactivity. Receipt of monies from any productioninvolves a “use” contemplated by the creation of the interest, and shouldconsequently satisfy the Act.

[b] — Payment of Rents or Royalties.Section three of the Act specifically provides that payment of rents

and royalties for the “purpose of delaying or enjoying the exercise ofsuch rights,” not the collection of rents and royalties, tolls the limitationsperiod.24 It is anomalous that an act designed to extinguish inactiveinterests does not define the receipt of monies as a use. Neverthelessdicta in the cases indicates that the distinction between the payment of

22 McCoy v. Richards, 581 F. Supp. 143, 146 (S.D. Ind. 1983), aff ’d, 771 F.2d 1108(7th Cir. 1985); Short, 454 U.S. at 519.23 However, for purposes of satisfying the production requirement of the Act as to theleasehold working interest, or any interest derived therefrom, such as a net profit or anoverriding royalty interest, production may be construed as requiring commercialproduction. After all, the oil and gas lessee must produce in “paying quantities,” i.e.,commercial production, to maintain the oil and gas lease during the secondary term.Nevertheless, as the lease will terminate during the secondary term for failure tocommercially produce, it’s unlikely that the dormant mineral act would ever be appliedto oil and gas lease interests that involve non-commercial production. For a discussionof commercial production, see 2 Eugene Kuntz, A Treatise on the Law of Oil and Gas§ 26.7 (1962).24 Ind. Code Ann. § 32-5-11-3 (Burns Repl. 1995).

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delay rentals and royalties, as opposed to the collection of delay rentalsand royalties, contained in the statute is the standard that will be applied.25

Thus, receipt of delay rental payments by the lessor, pursuant to an oiland gas lease, does not toll the limitations period for the lessor’sreversionary interest. However, payment of delay rentals by the lesseetolls the limitations period for the oil and gas lease for the year of thepayment. Since the oil and gas lease is generally drafted with a shortprimary term, delay rental payments have an inconsequential effect ontolling the limitations period for the oil and gas lease.

Similarly, receipt of advance or minimum royalties by the lessor,pursuant to a coal lease, does not toll the limitations period for the lessor’sretained interest. However, payment of annual or minimum royalties bythe lessee tolls the limitations period applicable to the coal lease for theyear in which the payment is made. Thus, an extended term coal lease,held solely by the payment of minimum annual royalties, will not lapseunder the Act. Whether payment of advance minimum royalties paid “upfront” tolls the limitations period for that year in which the amount waspaid, or for the entire term, is undecided. This issue should inspire cautionin the drafting of extended term coal leases.

[c] — Shut-in Gas Royalties.Payment and receipt of shut-in gas royalties presents a unique problem

of construction under the Act. First, part of section three specifies thatpayment of royalties to defer or enjoy the use or exercise of such rightsconstitutes a use that tolls the running of the limitations period. Shut-ingas royalty clauses are typically drafted so that payments constitute“constructive production” to permit the lessee to hold the oil and gaslease during the secondary term in the absence of gas marketing.26 Sinceshut-in gas royalty is paid to delay exercising the right to produce, paymentby the lessee of shut-in gas royalties will toll the limitations period for theoil and gas lease for the year of the payment.

25 See McCoy v. Richards, 581 F. Supp. 143, 146 (S.D. Ind. 1983), aff ’d, 771 F.2d 1108(7th Cir. 1985); Kirby v. Ashland Oil, Inc., 463 N.E.2d 1127, 1129 n.3 (Ind. Ct. App.1984); cf. McCoy v. Richards, 623 F. Supp. 1300, 1304 (S.D. Ind. 1984)(discussing alessee’s use inuring to the benefit of the lessor).26 For a discussion of the purpose of shut-in gas royalty clauses, see 4 Eugene Kuntz, ATreatise on the Law of Oil and Gas § 46.1 (1962).

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However, following the language of the Act and the inference fromthe cases,27 receipt of shut-in gas royalties by the lessor will not toll thelimitations period for the lessor’s reversionary interest pursuant to thepayment of royalties provision in section three. Yet, shut-in gas royaltypayments are typically drafted as “constructive production” which is a“substitute” for production. Therefore, the possibility exists that thelessee’s maintenance of the lease by paying shut-in gas royalties may betreated as production, pursuant to the production provision of section three.Such a construction will toll the limitations period on the lessor’sreversionary interest. Unfortunately, there is, as yet, no case on point.

[d] — Payment of Taxes.Payment of taxes on the mineral interest prevents or tolls the limitations

period.28 Severed mineral interests may be assessed for taxation; non-participating royalty and executive interests may not be assessed fortaxation. Thus, paying taxes to preserve the interest may not be a feasiblesolution for some interest owners. Additionally, the Act has not ensuredthat the taxes assessed on severed dormant mineral interests will be paidin the event of a lapse. The surface owner is not liable for the delinquenttaxes of a mineral interest that lapses and reverts to the surface estate.29

Moreover, the surface owner has no duty to inform the tax assessor of thereversion of the lapsed interest, and bears no liability for the taxesimproperly assessed against the owner of the lapsed interest after thereversion has occurred.30 Having no knowledge that the lapse hasoccurred, the assessor will continue the practice of assessing taxes againstthe owner of the lapsed interest. Thus, surface owners may receive an

27 See McCoy v. Richards, 581 F. Supp. 143, 146 (S.D. Ind. 1983), aff ’d, 771 F.2d1108 (7th Cir. 1985); Kirby v. Ashland Oil, Inc., 463 N.E.2d 1127, 1129 n.3 (Ind. Ct.

App. 1984).28 Ind. Code Ann. § 32-5-11-3 (Burns Repl. 1995). See Consolidation Coal Co. v.Mutchman, 565 N.E.2d 1074 (Ind. Ct. App. 1990); see also Jeffry A. Townsend, “TheModel Dormant Mineral Act: Limited Practicability,” 8 E. Min. L. Inst. 20-1, 20-22(1987)(observing minimal likelihood exists that a dormant mineral interest will beassessed).29 Ohning v. Buckskin Coal Corp., 528 N.E.2d 493, 495 (Ind. Ct. App. 1988).30 Id. at 495.

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additional benefit under the Act–– a lengthy reprieve from paying taxeson the increased value of their land –– and the mineral interest owner isdenied reliance on a potential solution to preserve the interest.31

[e] — Production from a Common Seamof Coal or Other Hard Minerals.

The mining of a seam of coal from one tract that is adjacent anunmined tract constitutes a use of the coal on the latter tract if the ownershipof the coal on both tracts is common.32 This exception also applies toother hard minerals.33 Whether the tracts be contiguous or there be ageographic proximity of the mined and unmined tracts is not addressedby the Act.34

[f] — Gas Storage Operations.Gas storage operations inevitably involve the issue of the ownership

of the subsurface storage strata. The cases are split as to whether thesurface owner or the owner of the severed interest in the oil and gas ownsthe depleted strata for storage purposes. For example, Mississippi RiverTransmission Corp. v. Tabor,35 holds that the surface owner, and not themineral owner, is entitled to be compensated for the use of the subsurfacefor gas storage operations. Mapco, Inc. v. Carter,36 holds that the mineralowner retains ownership of the depleted strata and is entitled tocompensation for gas storage use. The author finds no Indiana case whichresolves the ownership of the subsurface strata as between the owner ofthe oil and gas mineral estate and the surface owner. Richardson v. CitizensGas & Coke Utility,37 does hold, inter alia, that the owner of the coalestate does not own any gas storage rights to a depleted gas formation.

31 Id.32 Ind. Code Ann. § 32-5-11-3 (Burns Repl. 1995).33 Id.34 Gas storage or salt water disposal operations are also designated as uses which tollor prevent the running of the limitations period. Id. The Act specifically provides that“operations for injection, withdrawal, storage or disposal of . . . gas” constitute a use

under the Act. Id.35 Mississippi River Transmission Corp. v. Tabor, 757 F.2d 662 (5th Cir. 1985).36 Mapco, Inc. v. Carter, 808 S.W.2d 262 (Tex. Civ. App. 1991).37 Richardson v. Citizens Gas & Coke Utility, 422 N.E.2d 704 (Ind. Ct. App. 1981).

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Despite the specific language of the Act, the mineral interest ownershould own the subsurface storage rights before a gas storage operationwill constitute a use that prevents a statutory lapse. A result to the contraryis inconsistent with the legislative intent of the Act and existing case law.

Although the Act specifically makes “injection” or “disposal” of“water” or “other fluid” a use which prevents lapse, salt water disposaloperations would seem to apply only to a dormant mineral interest thatincluded the right to dispose of salt water in the subsurface strata, or thatthe salt water was being disposed pursuant to an existing oil and gas leaseoperation. Similar issues exist for water injected for secondary recoveryoperations. To be preserved under this section of the Act, the dormantmineral interest must be included within the confines of an existingwaterflood project.38

[2] — The Effect of Transfers on the Limitations Period.Conspicuously absent from the statutory uses that toll the limitations

period in the Indiana Act is the transfer of a mineral interest. Despite thatomission, a conveyance of a mineral interest tolls the limitations periodto the extent of the interest conveyed. However, the limitations period isnot tolled as to any interest retained by the grantor.

McCoy v. Richards39 illustrates the effect of transferring a portion ofthe mineral interest owned. The grantor, owner of an undivided one-halfof the mineral estate, conveyed to a third-party an undivided one-halfinterest in the coal. At the time of the conveyance, the 20-year non-useperiod was running on the grantor’s mineral interest. Shortly after theconveyance, the limitations period expired. The court held, inter alia,that the conveyance of the coal did not constitute a use of the grantor’sundivided one-half mineral interest.40 The court reasoned that the statutedid not define a sale of an interest in the minerals as a “use” that tolled thelimitations period. Thus, the retained interest of the grantor, his one-halfmineral estate minus the interest in the coal, reverted to the surface owner.The interest in the coal, the subject matter of the conveyance, did not

38 There is no existing case law on point for either issue.39 McCoy v. Richards, 581 F. Supp. 143, (S.D. Ind. 1983), aff ’d, 771 F.2d 1108 (7th

Cir. 1985).40 Id. at 145.

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lapse because the conveyance of the coal to the third-party created a “newmineral interest” under the Act.41 The limitations period for the “newinterest” runs from the date of its creation, i.e., the date of the conveyance.42

Note again the result in McCoy. The conveyance of the coal preventedthat interest from being extinguished when the limitations period on itsderivative mineral estate expired. The coal interest was shielded solelybecause the conveyance created a “new mineral interest” under the Act,which commenced the running of the limitations period at the date of theconveyance. Conversely, the mineral estate, excepting the subsequentlyconveyed coal, was extinguished because a conveyance is not a “use”under the Act that tolls the limitations period.

McCoy explained this result on the basis of the doctrine of “divisibilityof mineral estates,” which is the phenomena that each mineral interest,regardless of whether it is derived from a subdivision of a separate mineralinterest, is tested independently for purposes of a lapse under the Act.43

The court in McCoy noted that the Act “resolved the issue of divisibilityin favor of complete divisibility of interests.”44 Logically, a conveyanceof all of the grantor’s interest in the minerals to a third party creates a“new interest” in the grantee with the limitations period calculated fromthe date of the conveyance. Thus, the limitations period is tolled by theconveyance. Although there is no case so holding, this result is consistentwith the analysis reflected in McCoy.

41 Id.42 Holding that the coal interest conveyed to the grantee was a “newly created interest”in which the limitations period runs from the date of its creation was likely mandated bysection 2 of the Indiana code, which defines a mineral interest subject to lapse as aninterest “created by an instrument transferring, either by grant, assignment, or reservation,or otherwise an interest, of any kind, coal, oil and gas, and other minerals.” Ind. CodeAnn. § 32-5-11-2 (Burns Repl. 1995).43 The court in McCoy explained this doctrine as follows: “Thus, when a mineral interestis subdivided into two or more mineral interests, any part interest may lapse independentlyof any other interest which may exist.” McCoy v. Richards, 581 F. Supp. 143, 146 (S.D.Ind. 1983), aff’d, 771 F.2d 1108 (7th Cir. 1985); see also McCoy v. Richards, 623 F.Supp. 1300, 1304-05 (S.D. Ind. 1984).44 McCoy v. Richards, 581 F. Supp. 143, 146 (S.D. Ind. 1983), aff ’d, 771 F.2d 1108(7th Cir. 1985)(citing professor Ronald Polston, the drafter of the Act); see also McCoy

v. Richards, 623 F. Supp. 1300, 1302 (S.D. Ind. 1984).

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The result and rationale of McCoy is also applicable to the executionof oil and gas leases. The execution of an oil and gas lease does not tollthe limitations period for the lessor’s reversionary interest.45 Applyingthe rationale further, as with any conveyance of a grantor’s interest in theminerals, the interest created in the oil and gas lessee is a newly createdinterest. This interest’s limitations period is calculated from the date ofthe lease.

There is no case law determining whether a transfer by testate orintestate succession during the period in which the limitations period isrunning creates “new interests” in the devisee or heirs. If section two ofthe Act is definitive as to the creation of “new interests,”46 the language“created by an instrument transferring, either by grant, assignment, orreservation, or otherwise” would seem to encompass a probated will or afinal decree determining heirship.47

[3] — The Statement of Claim.[a] — General Requirements.

A dormant mineral interest that is unproductive, delinquent as to taxpayments, or not otherwise used pursuant to the statutorily defined uses,may be preserved from extinguishment by the recording of a statement ofclaim. The statement of claim, if timely recorded within the countywherein the mineral interest is located, constitutes a “use” of the mineralinterest.48 The statement of claim must include the name and address ofthe mineral owner, as well as the description of the land.49 McCoy v.Richards50 held, inter alia, that a recorded deed of a mineral interest,even though it contained the same information required by the statement

45 McCoy v. Richards, 623 F. Supp. 1300, 1304 (S.D. Ind. 1984); McCoy v. Richards,581 F. Supp. 143, 146 (S.D. Ind. 1983), aff ’d, 771 F.2d 1108 (7th Cir. 1985); Kirby v.Ashland Oil, Inc., 463 N.E.2d 1127, 1129 (Ind. Ct. App. 1984).46 See supra note 33.47 Thus, devisees or heirs may be treated the same as third-party grantees. However, all

bets are off as to heirs or devisees whose status or will has not been adjudicated.48 Ind. Code Ann. § 32-5-11-4 (Burns Repl. 1995).49 Id.50 McCoy, 581 F. Supp. 143, 147-48 (S.D. Ind. 1983), aff ’d, 771 F.2d 1108 (7th Cir.

1985).

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of claim, did not literally or substantially comply with the statement ofclaim requirement. McCoy is the only case dealing with the statement ofclaim requirement. McCoy suggests that the validity of such statementsis to be measured by a literal or strict compliance with the statutoryprerequisites.

[b] — Timely Recording.The statement of claim must be timely recorded in order to preserve

the unused interest. For interests that lapsed prior to the implementationof the Act, determining the date of the time of recording is simple. TheAct established a two year “grace period,” beginning September 2, 1971and ending September 2, 1973, during which a lapsed interest could bepreserved by the recording of the statement of claim.51

Ascertaining the day for recording the claim on interests that lapsedafter the effective date of the Act presents problems. The Act providesthat the claim could be filed prior to the end of the 20-year period of non-use or during the grace period, “whichever is later.”52 Clearly, a literalinterpretation of the language requires that a statement of claim be recordedprior to the end of the expiration of the 20-year period when the lapseoccurs after the grace period. However, when the interest lapses duringthe grace period, the language permits the statement of claim to be recordedprior to the date of the lapse or anytime within the grace period. There isno case holding that the “two date” construction prevails for recordingthe statement of claim when the interest lapses during the grace period.

A myriad of problems surrounds the determination of the exact dateon which the statement of claim must be filed when the limitations periodexpires after the grace period. If the dormant interest was non-productive,or not used by gas storage, salt water disposal or waterflood operations,53

and taxes were not paid on the interest, the limitations period is calculatedfrom the date of the creation of the interest. Thus, the statement of claimmust be filed before the expiration of 20 years from the date the interestwas created. Obviously, the date the interest was created must be

51 Ind. Code Ann. § 32-5-11-4 (Burns Repl. 1995).52 Id.53 See supra note 36.

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determined before the appropriate date for a timely filing can be resolved.What is the date that the interest was created for purposes of a timelyfiling pursuant to the statute? Unfortunately, more than one possibleanswer may exist. For example, if the interest was created by deed, eitherthe date of delivery, the date reflected on the instrument, or the date ofrecording may apply. Likewise, if the instrument creating the interest wasa probated will or an adjudicated heirship, the date of the decedent’s deathor the date of the final decree in the probate or the judicial determinationof heirship may apply.

If non-payment of taxes precipitates the running of the limitationsperiod, the date for calculating the period of non-use is also unclear.More than one date is possible: the first date on which the taxes wereinitially due and unpaid, or the last date that the payment could havebeen made. Finally, the dates on which the redemption period either beginsor ends could be utilized.

Ambiguity also exists as to when to record a statement of claimfollowing cessation of production. At what point does “cessation ofproduction” trigger the running of the limitations period under the Act?The following possibilities are not exhaustive: non-commercial production;cessation of production; plugging or abandonment of the well by theoperator; receipt of the last royalty payments; or, release of the oil andgas lease by the lessee. The question remains unanswered, which leavesunresolved the date on which the statement of claim is to be recorded.

No definitive case law exists that determines the date from which thelimitations period is calculated when non-use is occasioned by the creationof the interest by deed, testate or intestate succession, by non-payment oftaxes, or by cessation of production. Thus the precise date on which thestatement of claim must be recorded remains in doubt. This lack ofspecificity ranks as the Act’s major weakness.

The effect of a “premature filing” of a statement of claim also remainsunresolved. The Act specifies that the filing must be prior to the end ofthe 20-year period of non-use. By implication, the statute permits adormant mineral owner to make a timely recording within a “reasonabletime” before the effective date of the expiration of the limitations period.No case determines how premature a filing may be under the “reasonabletime” standard. The issue is exacerbated by the fact that cautious and

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unsophisticated mineral owners may file at any time, regardless of whenproduction or payment of taxes ceased or when the interest was created.54

[c] — The Problem of the Repeat Filing.The long term applicability of the Act seems to ensure that

unsophisticated owners of small mineral interests will eventually fail tomake a timely recording and unwittingly lose their dormant mineralinterests under the Act. A statement of claim must be filed prior to theend of each subsequent 20-year period of non-use to avoid a lapse. Timewill dim the mineral owner’s appreciation of the necessity to file, and therepeated filing requirement at 20-year intervals may be a trap for theunwary owners of small mineral interests.

Thus, even though a literal standard of compliance with the recordingrequirement may now exist,55 future cases may apply a more liberal“substantial compliance” standard. Such a standard would becommensurate with the uncertainty existing over the determination of theproper date to make a timely filing, the “premature filing” problem, and,the “trap” occasioned by the “repeat filing” requirement.

54 The act also provides for an inadvertent filing defense that permits an owner of 10 ormore mineral interests in the County that inadvertently fails to make a timely filing as toan interest to cure the omission by a subsequently filing. To cure, the owner must haveexercised diligence in attempting to preserve all interests, and must have preserved someinterests in the County by a proper filing within a 10-year period prior to the expirationdate for filing pursuant to section 5. Additionally, the statement of claim must be filedwithin 60 days after notice of publication or after discovering the lapse of the interest.Ind. Code Ann. § 32-5-11-5(4)(Burns Repl. 1995).

The inadvertent filing defense precludes the determination of the existence ofmarketable title to interests that may have apparently reverted to the surface owner for,inter alia, failing to file a statement of claim. In effect, the possibility of a subsequentproper filing under the exception provision must be eliminated before a marketable titlein the surface owner can be established. Thus, the relevant records in the County must bechecked to ascertain if 10 other mineral interests, some of which were preserved by aproper filing, were owned by the severed mineral owner in the county on the expirationdate. Then it must be determined if the statement of claim was filed within 60 days ofnotice of publication pursuant to section 6, which is discretionary, or after discoveringthe lapse of the interest. Ind. Code Ann. § 32-5-11-5(4)(Burns Repl. 1995). The latterfact can not be ascertained from the record title.55 McCoy v. Richards, 581 F. Supp. 143, 147-48 (S.D. Ind. 1983), aff ’d, 771 F.2d 1108

(7th Cir. 1985).

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[4] — Potential Applicability of Common Law Disabilities.The statute of limitations for adverse possession does not commence

to run when the true owner is under a disability, such as minority orinsanity.56 The 20-year non-use period provided by the Act is analogousto a period of limitations. Therefore, the period of non-use, or the time inwhich to file the statement of claim, may be tolled if the dormant mineralowner is under a disability. An anomaly would clearly exist if thedisabilities that toll the statute of limitations for adverse possession didnot toll the limitations period for the dormant mineral interest act. Afterall, the beneficiary of the dormant mineral interest act (typically the surfaceowner) is purely a “passive beneficiary” — not required to do any act orincur any detriment to acquire title by operation of the Act. The trespasseracquiring title by adverse possession must enter into and maintainpossession for the limitations period. More justification exists to bar thecommencement of the limitations period, or the necessity to timely recorda statement of claim, when a dormant mineral owner is laboring under adisability than exists to toll the limitations period against an adversepossessor under identical circumstances. The possibility exists that thecommon law disabilities applicable to adverse possession may apply todormant mineral acts.57 Given that intestate succession is common tosevered mineral titles, the primary concern will be with the ownership ofa minor.

[5] — The Reversion of the Lapsed Interest.Section one of the Act provides that the lapsed interest “shall revert

to the then owner of the interest out of which it was carved.”58 Thus, aswith the lapse of the interest under the Act, the reversion of the lapsedinterest follows the doctrine of divisibility of mineral estates.59

56 For a discussion of common law disabilities applicable to adverse possession, see 4

R. G. Patton, The American Law of Property § 15.12 (1951).57 The Uniform Dormant Mineral Interests Act specifically provides that disabilitiesof the dormant mineral interest owner do not suspend the running of the limitationsperiod. Unif. Dormant Mineral Interest Act § 4(a), 7A U.L.A. 65 (Supp. 1995).58 Ind. Code Ann. § 32-5-11-1 (Burns Repl. 1995).59 For a discussion of reversion of the lapsed interest under the act, see Ronald W.Polston, “Legislation, Existing and Proposed, Concerning Marketability of MineralTitles,” 7 Land & Water L. Rev. 73, 94-100 (1972).

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Even though the lapsed interest does not always revert to the surfaceowner, the surface owner is typically the beneficiary of the reversion. Acommon fact pattern would involve the severance of the minerals longprior to the Act, non-use continuing until the date of the Act, and nostatement of claim filed during the grace period. Under this scenario, theminerals revert to the surface owner.

However, the lapsed interest may not revert to the surface owner. Thefollowing hypothetical illustrates this fact.60 Assume that O owns the feesimple absolute interest in Blackacre. O conveys the mineral estate to Bin 1950. B then conveys a non-participating royalty interest to C in 1962.Non-use for the 20-year period continues to the date of the enactment ofthe Act. B, the owner of the mineral estate, files a statement of claimduring the grace period. The non-use continues and C fails to timely filea statement of claim in 1982. C’s non-participating royalty interest lapsesand reverts to B.

The Act is not without ambiguity as to when the lapsed interest willrevert. Examine the following hypothetical: O owns Whiteacre in feesimple absolute. In 1950, O conveys the mineral estate to “B and C, astenants in common.” Non-use continues to the date of the enactment ofthe Act. B, the cotenant to the mineral estate, files a statement of claim asto his one-half mineral interest. C does not file and his interest lapses.C’s interest reverts to the surface owner. Or, does it? Which is the “interestout of which it was carved?” The surface estate of O or the prior mineralcotenancy of B and C? Does the cited statutory language have referenceto a conveyance or to the ownership entity, the mineral cotenancy, as thesource of title? If the former is the answer, the surface owner gets thewindfall from the reversion. If the latter is the correct answer, the mineralcotenant gets the windfall. The issue remains undecided.

Note the following twist on the last hypothetical. Assume the samefacts except for the following: after O’s conveyance of the mineral estateto B and C as tenants in common, C conveys his one-half interest to D in1960. Non-use continues to the date of the enactment of the Act andbeyond. B files his statement of claim during the grace period as to hisone-half interest. D fails to file his statement of claim in 1980 and his

60 The hypotheticals used to illustrate the reversion of the lapsed interest under the Actare derived from or suggested by Professor Polston, id. at 94-100.

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interest lapses. To whom does it revert? To the surface owner or to B?Note B’s argument is stronger here because the source of D’s title is theconveyance from C, who was B’s cotenant. If the surface owner prevailsin the previous hypothetical above, does the co-tenant mineral ownerprevail under this scenario? As to this hypothetical, one distinguishedscholar involved in the drafting of the Act opined that the reversion shouldbe to the mineral cotenant and not the surface owner.61 Finally, one shouldobserve that the reversion under the Act is to the owner of the presentinterest in the chain-of-title that succeeds to the lapsed interest. Despitethe language in the Act that the lapsed interest reverts to the “then” ownerof the interest, the successors-in-interest succeed to the rights of theirpredecessors-in-interest, as to any reversionary interest.62 Obviously acontrary conclusion would result in the reversion of mineral interests tothe heirs and devisees of grantors, etc., in ancient deeds under an Actintended to simplify the location of mineral owners.

Construing the Act so that the reversion is to the present owner, ratherthan former owners, may simplify leasing. However, the fact that the Actmay operate to vest the reversion in a mineral interest owner, as opposedto the surface owner, does not necessarily simplify title examination. Theseparate chain of titles for the separate interests must be delineated todetermine which owner of a current interest gets the reversion.

In sum, the Indiana Act mitigates the common criticism of dormantmineral acts, i.e., the surface owner is the beneficiary of the windfall, byproviding under some circumstances that a mineral interest owner maybe the beneficiary. The Indiana Act mitigates this criticism at the expenseof simplicity of operation, creates uncertainty of ownership, and requiresa more meticulous and burdensome title examination.

[6] — The Constitutionality of the Act.In Texaco, Inc. v. Short,63 the Supreme Court of the United States

affirmed an Indiana Supreme Court decision.64 In that case, the Court

61 Id. at 94-95.62 See McCoy v. Richards, 771 F.2d 1108, 1111 n.4 (7th Cir. 1985); Ronald W. Polston,“Legislation, Existing and Proposed, Concerning Marketability of Mineral Titles,” 7Land & Water L. Rev. 73, 95 (1972).63 454 U.S. 516 (1982).64 Short v. Texaco, Inc., 406 N.E.2d 625 (1980).

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upheld the constitutionality of the Indiana Dormant Mineral Act in a fiveto four decision. The Court held that the Act did not violate due processby taking private property without compensation, provided that adequatenotice was given to the property owner, and did not impermissibly impairthe obligation of contracts.65 Similarly, applying the inadvertent statementof claim defense to the owners of ten or more mineral interests did notviolate equal protection.66

65 For a treatment of the constitutional issues raised by dormant mineral acts, see GregoryBubalo, “Constitutionality of Retroactive Land Statutes — Indiana’s Model DormantMineral Act,” 12 Ind. L. Rev. 455 (1979); Shirley N. Jones, “Constitutional and PracticalProblems in Legislation to Terminate Non-Productive Mineral Interests,” 3 Miss. C. L.Rev. 175 (1983); Jarisse J. Sanborn, “Property-Mineral Rights — Nebraska SupremeCourt Finds Retroactive Statutory Extinguishment of Outstanding Mineral InterestsUnconstitutional,” 13 Creighton L. Rev. 687 (1979).66 The constitutionality of dormant mineral acts and analogous statutory schemes hasbeen often litigated with varying results. See U.S. v. Locke, 471 U.S. 84 (1985)(holdingsection 314(c) of the Federal Land Policy and Management Act of 1976, where a miningclaim is extinguished for failure to file a claim, is not unconstitutional); Mixon v. OneNewco, Inc., 863 F.2d 846 (11th Cir. 1989)(holding the Georgia mineral adverse possessionstatute, actually a mineral lapse statute which extinguishes the severed mineral estate ifunused for the statutory period, is constitutional); McCoy v. Richards, 771 F.2d 1108(7th Cir. 1985)(holding the Indiana Dormant Mineral Interests Act did not violate equalprotection or due process); Am. Petrofina Co. of Texas v. Nance, 697 F. Supp. 1183(W.D. Okla. 1986)(holding the 1984 Oklahoma unclaimed property statute, which providedfor abandoned mineral estates to escheat to the state, was unconstitutional); Wilson v.Bishop, 412 N.E.2d 522 (Ill. 1980)(holding the Illinois Dormant Mineral Interests Act,which required actual production, recorded transfer of the interest, or a recorded claim ofinterest within the statutory period, violated due process); Van Slooten v. Larsen, 299N.W.2d 704 (Mich. 1980)(holding the Michigan Dormant Mineral Act, which requiresthe severed mineral estate to be used or a notice of interest claimed to be filed in thestatutory period, does not unconstitutionally impair the obligation of contract nor violatedue process); Contos v. Herbst, 278 N.W.2d 732 (Minn. 1979)(holding the MinnesotaMineral Registration Act, providing for registration, taxation, and forfeiture of severedmineral estates, did not violate due process as applied prospectively); Wheelock v. Heath,272 N.W.2d 768 (Neb. 1978)(holding the Nebraska statute, providing for abandonmentof severed mineral estates unless the registered owner exercised ownership rights withinthe statutory period, is unconstitutional); Love v. Lynchburg Nat’l Bank & Trust Co., 140S.E.2d 650 (Va. 1965)(holding the Virginia statute, which provided for extinguishmentof severed mineral estates which remained unused for the statutory period, constitutionalby using a presumption that no minerals were on the property); Chicago & N.W. Transp.Co. v. Pedersen, 259 N.W.2d 316 (Wis. 1977)(holding the Wisconsin statute, requiringmineral rights owners and long term lessees of mineral rights to register and pay yearly

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[7] — The Criticism of the Indiana Dormant Mineral Act.The criticism of the Indiana Act emphasizes the uncertainty and

complexity inherent in the application of the statute. As illustrated,unanswered questions abound relating to the construction of the Act andits operation.

One court has observed: “. . . the statute is, at best, (sic, inartfully)drawn and in some respects raises more questions than it answers.”67

More importantly, even though the Act contemplated that ownership couldbe determined from the record title,68 title to a lapsed mineral interest islikely not marketable absent a judicial determination of the lapse.

Some requirements of the Act relating to a lapse of a mineral interest,such as lack of production for 20 years, non-payment of taxes, or theexistence of a possible inadvertent filing of a statement of claim defense,may only be determined by facts extrinsic to the record title.69 Also,questions relating to the proper calculation of the limitations period, thetimely recording of the statement of claim, applicability of common lawdisabilities, inter alia, further necessitate a judicial determination of thelapsed interest and the ownership thereof.

§ 12.03. The Michigan Dormant Mineral Act.The Michigan Dormant Mineral Act70 creates a rebuttable

presumption of abandonment when an oil and gas interest experiences 20years without a record transfer, attempted or actual production, or use in

registration fee within statutory period or the interest will revert to the surface owner,violative of due process).67 McCoy v. Richards, 623 F. Supp. 1300, 1309 (S.D. Ind. 1984).68 Any individual interested in obtaining operating rights from a mineral interest

owner . . . only needs to search the public records for a period extending backtwenty years. If, during that period, he or she finds that the interest was neitherused nor the subject of any statement of claim, he or she may conclude thatany interest prior to that time has lapsed. McCoy v. Richards, 771 F.2d 1108,1110 n.3 (7th Cir. 1985).

69 See Jeffry A. Townsend, “The Model Dormant Mineral Act: Limited Practicability,”

8 E. Min. L. Inst. 20-1, 20-15 to 20-19 (1987).70 The Act is actually entitled “Termination of Oil or Gas Interests in Land.” However,the Act is commonly referred to in the industry in Michigan as the dormant minerals act.Mask v. Shell Oil Co., 257 N.W.2d 256, 257 n.1 (Mich. Ct. App. 1977).

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underground gas storage operations.71 The recording of a “notice ofinterest claimed” conclusively rebuts the abandonment.72 Conversely,failing to file the notice of interest claimed results in a conclusivepresumption of abandonment.73 Despite the emphasis on abandonment,the Michigan Act, like the Indiana Act, operates as a statute of limitationin which the 20-year non-performance period, in the absence of therecording of the claim notice, results in “abandonment” of the interest.74

The Michigan Act is applicable only to “oil or gas interests.” Thisterm includes oil or gas estates, non-participating royalty interests, oiland gas leases, overriding royalty and net profits interests. Interests incoal or other minerals are excluded from the Act.75 Oil and gas interestsincluded in a reservation or conveyance by the generic language “minerals”or “mineral rights” are subject to the Act.76 The Act is not limited tounknown mineral owners or those who cannot be located. Interests ofknown and locatable mineral owners may also be extinguished byoperation of the statute.77 The Act is “self executing,” thus, a judicialdetermination that abandonment has occurred is unnecessary to vest titlein the surface owner.78 Reliance on public records to determine whethera mineral interest has lapsed pursuant to the Act seems to have beencontemplated.79

Additionally, the Act operates independently on separately ownedinterests, including cotenants of oil or gas estates, gas owned separately

71 Mich. Comp. Laws Ann. § 554.291 (West 1988).72 Id.73 Id.; see Van Slooten v. Larsen, 272 N.W.2d 675, 680 (Mich. Ct. App. 1978), aff ’d,

299 N.W.2d 704 (Mich. 1980).74 The Supreme Court of Michigan has opined that the “same result could have beenachieved without any reference to the concept of abandonment by deeming the owner ofthe surface estate to have marketable record title to the severed interest” at the expiration

of the statutory period. Van Slooten v. Larsen, 299 N.W.2d 704, 714 n.24 (Mich. 1980).75 Mich. Comp. Laws Ann. § 554.291 (West 1988).76 Wagner v. Dooley, 282 N.W.2d 469, 471 (Mich. Ct. App. 1979).77 Van Slooten v. Larsen, 272 N.W.2d 675, 681 (Mich. Ct. App. 1978), aff ’d, 299 N.W.2d

704 (Mich. 1980).78 See Van Slooten v. Larsen, 299 N.W.2d 704, 715 (Mich. 1980).79 Id. at 714 n.24.

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from oil, separately owned subsurface strata as to oil or gas interests, anddiffering types of oil and gas interests, such as mineral estates, non-participating royalty interests, executive interests, working interests,overriding royalty interests and net profit interests.80 Thus, the MichiganAct, like the Indiana Act, recognizes the doctrine of “divisibility” ofmineral estates when determining abandonment of oil and gas interests.

Finally, unlike the Indiana Act, the legislative intent of the MichiganAct does not embrace a policy to eliminate severed mineral interests toreduce the burden on development of the surface estate. The legislativeintent of the Act is to facilitate the development of oil and gas reserves byreducing the problems of fractionalized and unknown mineral ownership.81

Consequently, a more narrow construction has prevailed under theMichigan Act than under the Indiana Act.

[1] — Tolling the Abandonment Period.[a] — Drilling Permit.

The issuance of a drilling permit that covers the oil and gas interesttolls the abandonment period.82 The tolling of the period occurs even ifthe permit is for a well location that is not on the oil or gas interest tract.83

The oil and gas lease of the permittee must, however, include the tract of

80 The independent applicability of the Act to separately owned interests is mandatedby section 1 which provides, inter alia, that “[a]ny interest in oil or gas” that does notmeet the performance requirements “shall . . . be deemed abandoned.” Mich. Comp.Laws Ann. § 554.291 (West 1988). See Southwestern Oil Co. v. Wolverine Gas & OilCo., 450 N.W.2d 1 (Mich. Ct. App. 1989)(holding, apparently, that a gas storage operationconducted by the owner of the gas stored in the subsurface strata, which extended fromthe surface, to and including, the Marshall formation, did not prevent the abandonmentto the surface owner of the separately owned gas lying below the Marshall formation orthe oil underlying the tract).81 The primary purpose of the act [sic] is not to vest title to the severed interests in

the surface owner but rather is to facilitate development of those subsurfaceproperties by reducing the problems presented by fragmented and unknownownership. The act [sic] as a whole works to the benefit of the public byimproving the marketability of severed mineral interests and thereby increasingthe development of fossil fuels, the revenues from property taxes, andemployment with its related benefits. Van Slooten v. Larsen, 299 N.W.2d 704,710 (Mich. 1980).

82 Mich. Comp. Laws Ann. § 554.291 (West 1988).83 Mask v. Shell Oil Co., 257 N.W. 256, 258 (Mich. Ct. App. 1977).

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the oil and gas interest.84 Even though the statute provides that the issuanceof a drilling permit tolls the abandonment period, subsequent drilling ofthe permitted prospect may be required to preserve the dormant interestunder this provision. Otherwise the intent of the Act could be defeated bya dormant interest owner’s acquisition of a drilling permit solely for thepurpose of avoiding abandonment. The issue remains for adjudication.85

[b] — Production.Production86 from the land covered by a lease or from a unitized or

pooled operation that includes the oil and gas interest tolls the abandonmentperiod.87 The argument has been made, but not addressed, that theproduction required to toll the abandonment period is “commercialproduction.”88 Such a construction would be contrary to a literalinterpretation of the Act, as the language clearly provides that “actualproduction or withdrawal of oil or gas” tolls the abandonment period.89

An issue not yet adjudicated is whether the payment of shut-in-gasroyalties, or any other lease-extending activity, will constitute “constructiveproduction” so as to toll the abandonment period. However, the issue is

84 Id.85 Dicta in Mask, supra, portends that the subsequent drilling of the permitted prospectmay be required for the drilling permit to toll the abandonment period. The language ofthe court is as follows: “The permit to drill and the subsequent drilling of a well evidencedan active and ongoing relationship by which the world was further put on notice that theproperty was being actively developed. The statute expressly provides that this drillingpermit constitutes conclusive evidence that the oil and gas interest was not dormant.” Id.86 Section 1 also provides that “the use of such interests for underground gas storageoperations” tolls the abandonment period. Mich. Comp. Laws Ann. § 554.291 (West1988). However, gas storage operations raise the issue of the ownership of the subsurfacestorage strata and despite the specific language of the Act, the oil and gas interest ownershould own the subsurface storage rights before a gas storage operation will constitute ause that prevents an abandonment. See discussion, supra, note 33; see also SouthwesternOil Co. v. Wolverine Gas & Oil Co., 450 N.W.2d 1 (Mich. Ct. App. 1989)(holding,apparently, that a gas storage operation conducted by the owner of the gas stored in thesubsurface strata, which extended from the surface, to and including, the Marshallformation, did not prevent the abandonment to the surface owner of the separately ownedgas lying below the Marshall formation or the oil underlying the tract).87 Mich. Comp. Laws Ann. § 554.291 (West 1988).88 Walch v. Crandall, 416 N.W.2d 375, 379 n.3 (Mich. Ct. App. 1987).89 Mich. Comp. Laws Ann. § 554.291 (West 1988).

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less crucial to severed oil and gas interest owners in Michigan than tosevered mineral owners in Indiana. The Michigan Act, unlike the IndianaAct, tolls the limitations period as to the lessor’s retained interest90 –– thepossibility of reverter–– upon the execution of an oil and gas lease.

[c] — A Sale, Lease, Mortgage or Transferby Recorded Instrument.

Recorded conveyances of oil and gas interests, including sales, leasesand mortgages, toll the abandonment period as to the otherwise dormantoil and gas interests.91 Exempting mineral interests that exhibit recordtitle activity from extinguishment by dormant mineral acts is premised onone of the theories supporting such acts. The theory holds that the primaryimpediment to development of mineral resources occasioned by severedmineral interests is the extended “inactive” interest which is likely to entailunknown or unlocatable ownership interests. Activity as to the recordtitle is an indicia of known and locatable ownership interests. TheMichigan Act, as drafted, as well as the cases interpreting the Act,92 reflectthis perspective. In addition to fairness –– and perhaps even generosity –– to owners of severed oil and gas interests, tolling the abandonment periodby recorded conveyances simplifies the operation of the Act, and in manyinstances permits determination of ownership from the record title.

The sufficiency of a recorded instrument for purposes of tolling theabandonment period has been fairly well delineated. The sale, lease,mortgage or transfer of the interest must effectuate an “actual transfer” ofan ownership interest to toll the abandonment period.93 The subsequent

90 Likewise, because the release of the oil and gas lease by the lessee constitutes a“transfer” to the lessor-interest owner which tolls the limitations period, calculating theproper date to make a timely recording of a notice claim on the basis of the last date onwhich shut-in-gas royalties were paid appears to be unwarranted.91 Mich. Comp. Laws Ann. § 554.291 (West 1988).92 For example, see Mask v. Shell Oil Co. wherein the court defined a “dormant” interestpursuant to the Act as “‘literally, sleeping; hence inactive; in abeyance, unknown;concealed; silent.’” 257 N.W.2d at 257)(quoting Black’s Law Dictionary 576 (4th ed.1976)). The court held in Mask, inter alia, that a recorded release of an oil and gas leaseconstituted a “transfer” to the lessor that tolled the abandonment period. Id. at 259.93 See Bates v. Keso, 468 N.W.2d 251, 252-53 (Mich. Ct. App. 1991); Wagner v. Dooley,

282 N.W.2d 469, 472 (Mich. Ct. App. 1979).

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re-recording of a valid conveyance or other transfer will not toll theabandonment period.94 Likewise, an undelivered deed, even thoughrecorded, is ineffective to pass title to the oil and gas interest and does nottoll the abandonment period.95 However, errors in the legal description –– or an omnibus legal description –– in the instrument of sale, lease,mortgage or transfer, may not prevent the tolling of the abandonmentperiod.96

There is no case on point as to whether a partial conveyance of aninterest tolls the abandonment period as to the grantor’s retained interest.Section one provides that “[a]ny interest. . . which has not been sold,leased, mortgaged or transferred. . . during the limitations period, absentmeeting the other performance standards, is abandoned.97 When a grantorconveys only a share of the interest owned, the interest retained by thegrantor has not been “sold” or “transferred.” Thus, a literal interpretationof the Act (and the probable result based on the clear intent of the languageof section one) is that the limitations period is only tolled for the interestconveyed.

[d] — Transfer by Testate or Intestate Succession.Probate orders distributing the decedent’s estate or judicial decrees

determining heirship that are recorded with the register of deeds constitutea “transfer”98 of oil and gas interests to the devisees or heirs that tolls theabandonment period.99 Devisees or heirs of oil and gas interests whose

94 Wagner v. Dooley, 282 N.W.2d 469, 472 (Mich. Ct. App. 1979); see also Bates, 468

N.W.2d at 253.95 Energetics, Ltd. v. Whitmill, 497 N.W.2d 497, 505 (Mich. 1993).96 See Gibbs v. Smock, 491 N.W.2d 614, 616 (Mich. Ct. App. 1992)(indicating that thespecificity for the legal description required in section 2 of the Act, that establishes the

criteria for the “notice of claim,” did not apply to section one of the Act).97 Mich. Comp. Laws Ann. § 554.291 (West 1988).98 See Bates, 468 N.W.2d 251.99 A probate order, recorded by the register of deeds, that assigned the residue of thedecedent’s estate, including oil and gas interests, to the devisees, without a legal descriptionof land to which the oil and gas interests pertained, tolled the abandonment period. Gibbs,

491 N.W.2d 614.

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title derives from non-probated wills or non-judicially determined heirship,as well as probated wills or judicial determinations of heirship decreesthat are not recorded, are precluded from asserting that testate or intestatesuccession of the interest tolls the abandonment period. Section onerequires that an instrument of “transfer” be recorded.100

[e] — The Oil and Gas Lease and the Intricaciesof Tolling the Abandonment Period.

The execution of an oil and gas lease, pursuant to section one of theAct, tolls the abandonment period for the oil and gas estate.101 Theabandonment period may be tolled even though the oil and gas lease wasnot executed by the real party in interest. For example, when title to theoil and gas interest was held in trust, and the trustee executed the lease asan individual, not as a trustee, the lease tolled the abandonment periodbecause the transaction was conducted on behalf of the trust.102 Likewise,the execution of an oil and gas lease by a non-participating mineral ownerwho did not own the executive right (the right to lease), tolled theabandonment period.103

However, even though the execution of the lease tolls the limitationsperiod, the abandonment period is not tolled for the time that the leasesubsists. The abandonment period runs while the interest is subject to arecorded lease. Thus, “lease” pursuant to section one is defined as “togrant or convey to another a lease.” Construing the term “lease” to mean“to be under lease” or “to be subject to a lease” would undermine thepurposes of the Act.104

A recorded release of an oil and gas lease constitutes a “transfer” ofthe leasehold interest to the lessor-interest owner and tolls the abandonmentperiod.105 Likewise, expiration of an oil and gas lease at the end of the

100 Mich. Comp. Laws Ann. § 554.291 (West 1988).101 Energetics, 497 N.W.2d at 502.102 Walch, 416 N.W.2d at 378.103 Id. at 379.104 Energetics, 497 N.W.2d at 501.105 Mask, 257 N.W. at 259.

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primary term, even without the recording of a release of the oil and gaslease, constitutes a “transfer” to the lessor-interest owner and tolls theabandonment period.106

In sum, an oil and gas lease involves two “transfers:” one when thelease is executed, and the second when the lease terminates.107 Each ofthese transfers toll the abandonment period under the Michigan Act.

[f] — Delay Rental Payments.Receipt of delay rental payments by the lessor does not constitute an

event that tolls the abandonment period. However, if the lease terminatesduring the primary term due to the lessee’s failure to properly pay rentals,the reversion of the leasehold interest to the lessor-interest ownerconstitutes a transfer which then tolls the abandonment period.108

[2] — Notice of Interest Claimed.[a] — General Requirements.

The “notice of claim,” if timely recorded within the county whereinthe oil or gas interest is located, constitutes an act of non-abandonmentthat tolls the abandonment period.109 Section two requires the notice ofinterest claim to include the nature of the interest claimed, description ofthe land, name and address of the claimant, and indication of an intent notto abandon.110 The notice of claim must be verified by oath.111 Oberlinv. Wolverine Gas & Oil Co.,112 however, held that a recorded deed of amineral interest, even though it did not contain all of the above information,complied with the notice of claim requirement. Thus “substantialcompliance,” as opposed to “strict compliance,” measures the validity ofthe notice of interest claim. In fact, dictum in Oberlin indicates that therequirement can be met “by the filing of virtually any document whichidentifies the holder of mineral rights.”113

106 Energetics, 497 N.W.2d at 502.107 Id.108 Id. at 502 n.16.109 Mich. Comp. Laws Ann. § 554.292 (West 1988).110 Id.111 Id.112 Oberlin, 450 N.W.2d at 71-72.113 Id. at 71.

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[b] — Timely Recording.The notice of interest claim must be timely recorded to preserve the

dormant interest pursuant to the Act. For interests that lapsed prior to thedate of the implementation of the Act, determining the date of the time ofrecording is simple. The Act established a three- year “grace period,”beginning September 6, 1963 and ending Sept. 6, 1966, during which anabandoned interest could be preserved by the recording of the notice ofinterest claim.114 Ascertaining the date to timely record the notice ofinterest claim on dormant interests abandoned after the effective date ofthe Act presents some of the identical problems encountered under theIndiana Act’s statement of claim provision.115 As to dormant interests onwhich the abandonment period expires during the grace period, theMichigan Act, like the Indiana Act, provides that the claim could be filedprior to the end of the 20-year dormancy period or during the grace period,“whichever is later.”116 Thus, the Michigan Act is also susceptible to a“two date” construction; i.e., recording prior to the end of the 20-yeardormancy period or, alternatively, at any time within the grace period.Again, there is no case holding that the “two date” construction prevailsfor recording the notice of interest claim when the interest lapses duringthe grace period.

As to interests which are dormant for the 20-year limitations period,the Act requires the notice of interest claim to be filed “within 20 yearsafter the last . . . transfer of record . . . or . . . last issuance of a drillingpermit . . . or actual production . . . .”117 Thus, the notice of interestclaim, like the Indiana statement of claim, must be recorded prior to theend of the 20-year abandonment period.

Just as the precise date of the “creation of the interest” for purposesof determining the commencement of the limitations period in Indianaremains undecided, the date on which the abandonment period commenceswhen an oil and gas interest has been conveyed or leased is also unresolvedin Michigan. The pivotal date may either be when the deed or lease is

114 Mich. Comp. Laws Ann. § 554.291 (West 1988).115 See text, supra, § 12.02[3] for discussion.116 Mich. Comp. Laws Ann. § 554.291 (West 1988).117 Id.

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executed, delivered, or recorded. Also unresolved is whether the date of(1) the decedent’s death, (2) entry of the order distributing the estate oradjudicating heirship, or (3) the recording date in the Register of Deedsoffice establishes the “transfer” date and commences the running of theabandonment period. However, when a release of an oil and gas leasecommences the running of the abandonment period (as a “transfer” undersection one), the date of the recording of the release has been used.118

The date of the expiration of the primary term, when no release wasrecorded, has also been used.119 When the issuance of a drilling permitcommences the running of the abandonment period, the date of the permitcontrols.120

The Michigan Dormant Mineral Act, like the Indiana Act, is alsoindefinite as to when cessation of production occurs for purposes ofcommencing the abandonment period and calculating the time in whichto properly record the notice of interest claim. Although cessation ofproduction likely does not embrace cessation of commercial production,considerable ambiguity exists as to the determination of the date whenproduction ceases. The precise date may be determined by when the wellceased actual production, when the well was plugged or abandoned bythe operator, by receipt of the last royalty payments, or by the release ofthe oil and gas lease by the lessee.

[c] — Repeat Filing and Common Law Disability.The Michigan Act, although drafted differently, suffers equally with

the Indiana Act in some respects. The previously discussed problems121

associated with the “premature filing,” “repeat filing,” and the potentialapplicability of the common-law disabilities in respect to the Indiana Actare similarly applicable to the Michigan Act.122

118 Mask, 257 N.W.2d at 258.119 Energetics, 497 N.W.2d at 504.120 Mask, 257 N.W.2d 256.121 See text, supra, § 12.02[3][b]-[4].122 The Michigan Act expressly provides for the periodic “repeat” recording of the

notice of interest claim. Mich. Comp. Laws Ann. § 554.292 (West 1988).

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[3] — The Reversion of the Abandoned Interest.Section one provides that any interest deemed abandoned by the Act

vests in the surface owner or owners “in keeping with the character of thesurface ownership.”123 Thus, the surface owner is always the beneficiaryof the windfall occasioned by the abandonment of oil and gas interestspursuant to the Act. Land personnel and title examiners also benefit bythe predictability of the reversion. Coping with the complexities ofdetermining ownership of the reversion, as well as the inordinate attentionthat must be devoted to the multitude of severed mineral titles as requiredby the Indiana Dormant Mineral Act, is avoided.

[4] — The Constitutionality of the Act.In Van Slooten v. Larsen,124 the Michigan Supreme Court, reversed

Bickel v. Fairchild,125 and upheld the constitutionality of the MichiganDormant Mineral Act. The court held that the Act did not impermissiblyimpair the obligation of contracts nor amount to an unconstitutional takingof property by failing to provide adequate notice or a pre-hearing on theissue of abandonment.

[5] — The Criticism of the Michigan Dormant MineralAct.

As with the Indiana Act, the Michigan Act contemplates that oil andgas ownership can be determined from the record title. However, thelikelihood is that title to an abandoned interest is unmarketable. Anunmarketable title will most surely result because facts, extrinsic of therecord title, will have to be determined to ensure that the abandonmentperiod has expired and the interest has not otherwise been preserved.126

Clearly though, the Michigan Act is easier to apply and comprehend thanthe Indiana Act.

123 Mich. Comp. Laws Ann. § 554.291 (West 1988).124 Van Slooten v. Larsen, 299 N.W.2d 704 (Mich. 1980), aff ’g 272 N.W. 675 (Mich.

Ct. App. 1978).125 Bickel v. Fairchild, 268 N.W.2d 881 (Mich. Ct. App. 1978).126 See text and notes, supra, § 12.02[5] for discussion.

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§ 12.04. Conclusion.The Indiana and Michigan Dormant Mineral Acts are not a panacea

for the problems occasioned by highly fractionalized ownership of severedmineral titles. Obviously, some severed mineral interests will beextinguished under the Acts which will facilitate lease acquisition anddevelopment of such interests. However, the complexity and uncertaintyinherent in the operation of the Acts, the difficulty of determiningmarketable or defensible title from the record title, and the practicalnecessity to judicially determine the extinguishment of dormant interestsreveals that these Acts do not represent the optimum solution to theproblems occasioned by highly fractionalized mineral ownership.Dormancy mineral legislation may have the potential to cure the maladyby inflicting yet another affliction. Likewise, the inequity to the mineralowner occasioned by the loss of her property, along with the windfall tothe surface owner –– often large corporate landowners –– is an obstacleto adoption of this statutory remedy in some major mineral producingstates.

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Documents

Dormancy Mineral Legislation A Cure for the Malady or Another Afﬂiction? · Dormancy Mineral Legislation A Cure for the Malady or Another Afﬂiction? Professor Phillip E. Norvell1