Monday, December 17, 2012

The Duhig Rule Explained (Mineral Reservations are Tricky)

Because natural gas exploration has increased in Arkansas in recent years, my clients are often negotiating land transactions where they convey the surface, but retain all or a portion of their mineral interests.  One would think that it would be simple to reserve a fractional interest in minerals from the grant, but in truth, it can be tricky.  Ask any person who has drafted a title opinion--if the deed drafter is not careful, he can be tripped up by the Duhig rule.

The Duhig rule is a rule of objective deed construction that has been adopted in several mineral producing states.  The rule was borne from the Texas case Duhig v. Peavey-Moore, 135 Tex. 503, 144 S.W.2d 878 (Tex. 1940).  Several other mineral producing jurisdictions have adopted the Duhig rule, either in whole, or with modifications, including Arkansas, Texas, Oklahoma, North Dakota, and Wyoming.

In several jurisdictions, including Arkansas, Duhig is employed by a judge to construe conveyances that meet the following criteria: 1) the conveyance is between parties that are not also part of the litigation; 2) the grantor of a deed owns a surface and a fractional interest in the minerals, with the remaining mineral interest outstanding and owned by a third-party; 3) the grantor purports to convey title with a warranty and without excepting prior mineral severances; 4) the grantor also reserves a fractional mineral interest; 5) both the grant and the reservation to the grantor can not be given effect because of the outstanding mineral reservation.  In such a case where the above criteria is met, the court will place the risk of loss on the grantor (thus, reserving to him nothing) and awarding the transfer of minerals to the grantee.

In other words, imagine a situation where the grantor owns the surface and only one-half of the minerals.  The other one-half mineral interest was previously conveyed to another party.  If the grantor purports to convey, "all right title and interest" to the tract, by warranty deed, and only purports to reserve, out of the grant, "less and except one-half of the minerals" without making an exception of the prior reservation, he has not reserved any additional interest to himself.  All the grantor has done is warrant that only one-half of the minerals were reserved from the grant, meaning that the other half was conveyed to the grantee (probably inadvertently).  The Arkansas cases that discuss the adoption of the Duhig rule are Peterson v. Simpson, 286 Ark. 177, 690 S.W.2d 720 (1985) and Hill v. Gilliam, 284 Ark. 383, 682 S.W. 737 (1985).

Most Duhig cases involve reservations or conveyances of fractional "mineral" interests, but one recent North Dakota Supreme Court case illustrates how Duhig can apply to non-participating royalty interests also.  In Wenco v. EOG Resources, Inc., the North Dakota Supreme Court affirmed a district court's decision holding that the Duhig rule applied to a conveyance of minerals that was subsequent to a conveyance of a non-participating royalty interest.  Like most Duhig cases, the facts are a bit convoluted, but can be summarized by paying attention to three conveyances.

The first conveyance occurred in 1954 when the Docktors, who owned 100% of the minerals under a tract of property in Mountrail County, North Dakota, conveyed an undivided 64/160th interest in "all of the oil, gas royalty, and royalty in casinghead gas, gasoline, and royalty in other minerals in and under" the subject property to Northwestern National Bank of Minneapolis ("Northwestern").  Northwestern's interest is not at issue in this case.  There was no dispute as to whether the conveyance constituted a non-participating royalty interest.

Subsequently, in 1957, the Docktors conveyed an undivided one-half mineral interest to Wm F. Grinnan by mineral deed.  Specifically, the deed conveyed all of the "oil, gas and other minerals in and under" the subject property.  The mineral deed contained a warranty clause, thereby assuring title to the one-half mineral interest, and did not reference the prior royalty conveyance to Northwestern.  The mineral deed did state that it was "subject to any rights now existing to any lessee or assigns under any valid and subsisting oil and gas lease of record heretofore executed."  Grinnan's interest was later assigned to QEP.

Plaintiff Wenco purchased the Docktor's remaining interest in 1993 by warranty deed.  The instrument stated that the conveyance was subject to "prior mineral reservations . . . now of record."  Wenco leased to EOG's predecessor in interest.

EOG drilled a well on the property that was productive.  Wenco disagreed with the interest that EOG calculated and sued, claiming that the royalty interest in favor of Northwestern should proportionately burden the mineral interests.  In other words, Wenco asserted that its interest and QEP's interest should have been identical, sharing the Northwestern royalty burden.  The district court relied on the North Dakota Supreme Court's decision in Acoma Oil Corp. v. Wilson, 471 N.W. 2d 476 (N.D. 1991) and held that as a matter of law, the rationale of the Duhig rule would apply to this series of conveyances.  The Docktor's 1954 royalty conveyance in favor of Northwestern conveyed a 64/160th royalty interest.  The Docktor's 1957 mineral conveyance in favor of Grinnan was warranted to convey an undivided one-half mineral interest.  All that remained to the Docktors was a sixteen/one hundred sixtieths (16/160ths) after reduction for the Bank's interest.

While this case does not present any new ground breaking property rules, per se, it is comforting from a title attorney's perspective that the court reviewed the documents on an objective basis without resorting to subjective rules of construction.  That is, the court read the conveyance from corner to corner, taking into account the previously recorded instruments, but did not permit the parties to testify on what the parties may have subjectively intended.  While Wenco may cry foul, a rule like Duhig makes sense because it upholds the usefulness of the real estate document recording system.

Is Duhig complicated?  Yes.  Is Duhig avoidable?  Of course.  If the grantor has less than 100% of the minerals attached to the surface, Duhig must be considered.  To avoid the application of Duhig, I often advise my clients reserve a specified quantum of a mineral interest and also reserve prior mineral reservations.  Also, in some jurisdictions like Arkansas, a quitclaim deed will avoid the application of Duhig. At any rate, if you are preparing to sell real property, but reserve the minerals, the advice of experienced counsel should be obtained.

C. Michael Daily is an attorney with the long-established law firm of Daily & Woods, P.L.L.C.  Mr. Daily can be contacted by telephone at 479-242-3953, by email at mdaily@dailywoods.com, or by regular post at 58 South 6th Street, Fort Smith, Arkansas 72902.  You can follow Mr. Daily via social network using any of the social network links in the right hand column of the page.  Disclaimer:  This blog is for informational purposesis certainly not to be considered legal advice and is absolutely not substitute for any of the benefits that are associated with the attorney-client relationship.