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Court News Ohio
Court News Ohio

Oil and Gas Lease Disputes Subject to 21-Year Statute of Limitations

The Ohio Supreme Court today ruled the state’s 21-year statute of limitations on real property disputes applies to claims about whether an oil and gas lease terminates when a well fails to produce.

The Supreme Court voted 4-3 to return a Guernsey County case to the trial court to consider claims from landowners seeking recognition that the lease has terminated. Writing for the Court majority, Justice Judith L. French stated the trial court and the Fifth District Court of Appeals wrongly applied a 15-year statute of limitations to the dispute, which barred the landowners from introducing evidence from the 1990s.

Chief Justice Maureen O’Connor and Justices Patrick F. Fischer and R. Patrick DeWine joined Justice French’s opinion.

In a dissenting opinion, Justice Sharon L. Kennedy wrote that the landowner’s appeal is moot because the limited arguments the Supreme Court addressed will not change the outcome of the case when it returns to the trial court.

Justice Melody J. Stewart joined Justice Kennedy’s opinion.

Justice Michael P. Donnelly dissented, stating he would dismiss the appeal as improvidently accepted.

New Owners Dispute Old Lease
Barry and Rosa Browne acquired 86 acres of land in Guernsey County in 2012 that included the oil and gas rights underlying the property. In 1975, an oil and gas lease had been granted by the landowner to a drilling company. The lease included a common industry provision that granted a one-year primary term to drill and operate a well, and a secondary term that lasted for as “long thereafter as oil and gas, or either of them, is produced by lessee from said land.” The company drilled one well on the property.

Artex Oil Company and other related oil drillers acquired the lease on the Brownes’ property. Artex has operated the well since 1999 and its records showed the well produced more than 1,700 barrels of oil between 1999 and 2014, generating about $100,000 in revenues. The company presented evidence that it paid the Brownes royalties from the oil sales in 2013, 2014, and 2015.

In December 2014, the Brownes filed a lawsuit seeking a declaratory judgment that the lease had terminated because of a lack of production. The couple contended the well did not produce any oil and gas from its inception in the 1970s until 1999. The Brownes based their allegations on reports from the Ohio Department of Natural Resources (ODNR), which allegedly showed no reported production from the well through 1999.

Artex asked the court to rule the lease was valid and claimed that the well has been continuously producing oil since 1977. Both sides asked for summary judgment, and the trial court sided with Artex.

The trial court agreed with Artex’s contention that a 15-year statute of limitations applied to the lawsuit filed in 2014. The court stated that any claims of lack of production before 1999 were irrelevant based on the 15-year limit. The court stated that only evidence from 1999 and later was valid, and found Artex proved it had satisfied the terms of the lease requiring continuous production since then.

The Brownes appealed to the Fifth District Court of Appeals, which affirmed the trial court’s decision. The Brownes then appealed to the Supreme Court, raising several arguments, including that a 21-year statute of limitations applies, not the 15-year limit the lower courts used. The Supreme Court accepted the case, but agreed only to consider the issue of which statute of limitations applied.

Court Examined Lawsuit Filing Limits
To determine which statute of limitations applies, the Court looks to the actual nature or subject matter of the dispute rather than how the parties label the claim, Justice French explained. The Brownes’ complaint stated that the oil companies “breached the express provision of the lease” requiring the continuous production of oil and gas. While the couple used the word “breach,” the Brownes were not seeking damages for a breach of contract, which is subject to the 15-year statute of limitations (lawmakers have since reduced it  to eight years). Rather, the majority opinion noted, the Brownes sought a declaration that the contract terminated automatically when oil and gas was not produced, which entitles them to an order “quieting title” to their property.

The opinion stated that Ohio, like a majority of states, recognizes the minerals underlying the surface are real property that can be severed to create separate ownership of the surface property and minerals. Citing the Court’s 2015 Chesapeake Exploration v. Buell decision, the opinion stated that oil and gas leases “straddle the line between property and contract,” and in disputes about whether the lease expired because of lack of production, the Court considers it as a property issue.

The Fifth District used the 15-year statute of limitations in R.C. 2305.041, which Artex advocated for, when affirming the trial court’s decision. The Supreme Court today determined that the 21-year statute of limitations for real property disputes in R.C. 2305.04 is the correct standard. The couple cited the Fourth District Court of Appeals’ 2017 Rudolph v. Viking Internatl. Resources Co., Inc.,decision to support their argument that a claim stating an oil and gas lease expired by its own terms when the well stopped producing is not a contract claim, but a property claim.

The Court majority noted, that based on Buell, the Fourth District in Rudolph held that the 21-year limit applied. The opinion stated it agreed with the Fourth District’s reasoning and applied it to the Brownes’ claim.

Majority Rejects Landowner Has Meritless Claim
The opinion remanded the case to the Guernsey County Common Pleas Court. The majority rejected the dissenting justices’ opinion that the case is moot because, based on other arguments already settled in the case, the oil companies will prevail again.

The opinion noted that the trial court ruled for Artex after determining that it would not consider any evidence regarding the well production prior to 1999. Based on today’s decision, the trial court will now have to consider evidence dating back to 1993 that the Brownes may have regarding the production of the well.

Majority’s Decision Is Advisory and Erroneous, Dissent Stated
In her dissent, Justice Kennedy explained that the Brownes’ appeal should be dismissed as moot. Because the Court accepted only the proposition of law related to the statute-of-limitations issue, the appellate court’s rulings on other issues will remain in place on remand to the trial court. It will be “the law of the case” that the Brownes bear the burden of proving that the well had gone out of production. It will also be the law of the case that the Brownes cannot use the failure to file production reports with the ODNR as proof that the well was not producing oil or gas. The dissent noted that the Brownes by their own admission do not have evidence to prove that the lease terminated for lack of production, and the oil companies will ultimately prevail.

“Because a summary judgment in favor of Artex is inescapable on remand, determining what statute of limitation controls does not affect the outcome of this case,” the dissent stated.

The dissent pointed out that the majority’s “advisory opinion” relies on dicta in Buell that misunderstood Ohio law and improperly classified the property interest created by an oil and gas lease. It noted that for more than a century, Ohio case law had recognized that oil and gas subject to an oil and gas lease remains the property of the landowner until it is produced at the well. Once produced, it becomes the property of the well owner. The dissent explained that long before the Court decided Buell, Ohio had already adopted “the incorporeal-hereditament theory” followed by other states such as Oklahoma. In Buell, the Court’s statement that a lease transfers a fee-simple determinable interest in land “turned a century of caselaw on its head and . . . may yet have consequences this court did not intend.”

The dissent also stated the majority’s analysis of the statute of limitations was incorrect. When an oil and gas lease expires for lack of production, it terminates automatically and by operation of law. No court action is needed because the landowner has full ownership of his or her property after the expiration of a lease, and a statute, R.C. 5301.332, creates a vehicle for a landowner to record the expiration of an oil and gas lease without resorting to the courts. For this reason, “no statute of limitations can limit the right of a landowner to his or her own property, including the right to seek a declaration that the lease has terminated on its own terms,” the dissent concluded.

2018-0942. Browne v. Artex Oil Co., Slip Opinion No. 2019-Ohio-4809.

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