Dormant Mineral Act royalties and a bundle of sticks

The rights of severed oil and gas interests have often been described as a “bundle of sticks” which consists of five interests (sticks): “(1) the right to develop (the right of ingress and egress), (2) the right to lease (the executive right), (3) the right to receive bonus payments, (4) the right to receive delay rentals, (5) the right to receive royalty payments.”^[i]

In 1989, the Ohio General Assembly enacted the Dormant Mineral Act,^[ii] which supplements the Marketable Title Act,^[iii] and provides a mechanism to reunite severed and abandoned mineral rights with the surface estate. The purpose of the Marketable Title Act is to simplify and facilitate land title transactions and concurrently, the purpose of the Dormant Mineral Act (“DMA”)^[iv] is to eliminate dormant or unused mineral claims. In 2006, the Ohio General Assembly amended the DMA to clarify the procedure for reuniting the severed mineral estate with the surface estate.

A change in the 2006 DMA is the inclusion of the definition of “mineral interest,” which was not defined in the 1989 version of the DMA. A mineral interest is defined as “a fee interest in at least one mineral regardless of how the interest is created and of the form of the interest, which may be absolute or fractional or divided or undivided” (emphasis added). By using the word fee, the implication is that the DMA would only apply to real property interests and not personal property. Whether that was the intent of the Ohio legislature is hard to know.

The Ohio Supreme Court and Ohio Appellate Courts have yet to address whether a reservation of only royalty (the fifth stick of the bundle) is subject to either the 1989 and/or the 2006 version of the DMA. In 2012, the Monroe County Court of Common Pleas decided Marty, et al v. Dennis (Winkler), et al.^[v] The issue was whether a reservation of “the one-half (1/2) of the oil and gas royalty, same being one-sixteenth (1/16) of all the oil and one-half (1/2) of all monies received from the sale of gas. . .” was subject to the 1989 and/or the 2006 DMA. Among their defenses, the defendants in the case argued that a reserved royalty interest is not a mineral interest that can be forfeited under the DMA.

The court in Marty held that, “a royalty interest remains an interest in realty until the minerals are removed from the ground and materialized as personal property.”^[vi] Thus, the court found that a royalty reservation is a “mineral interest” and is subject to abandonment under the 2006 DMA based upon the same reasoning the court had applied under the 1989 DMA.^[vii] Marty was appealed and subsequently dismissed on motion by appellants.

In Pollock v. Mooney,^[viii] the Seventh District Court of Appeals decided that a royalty interest is subject to the Marketable Title Act. Citing Traicoff v. Christman,^[ix] the Pollock court held that a royalty interest is personal property as opposed to realty but nonetheless subject to the Marketable Title Act. Specifically, the court stated as follows,

the tendency of many jurisdictions was to treat unaccrued royalty interests (oil and gas still in the ground) as realty and to treat royalty (oil and gas severed from the ground) as personal property. Id., citing 131 A.L.R. 1371. Nonetheless, this court went on to find that based on Pure Oil Co., 116 Ohio St. 188, Ohio has held that unaccrued oil and gas royalties are personal property. We reaffirmed this holding in Buegel v. Amos, 7th Dist. No. 577, 1984 WL 7725, *1 (June 5, 1984). Based on these cases, appellant's royalty interest is personal property.^[x]

Based on the Seventh District’s logic in Pollock, a royalty interest, being considered personal property, may not be subject to the 1989 or 2006 DMA. With Pollock stating that unaccrued royalty interests are personal property, it would appear that a reservation of a mere stick (the royalty interest) is afforded greater protection under at least the 2006 DMA than a reservation of the whole bundle.