The Legal Intelligencer - July 25, 2016
By: Brian Lawton
What happens when a deed is unclear and the parties to a transaction involving oil and gas interests are long deceased? How do the heirs to the parties involved resolve their disputes? This is a relevant issue courts and practitioners in Pennsylvania have faced for a long time. A recent Pennsylvania Supreme Court decision, Shedden v. Anadarko E&P, No. 103 MAP 2014, A.3d (Pa. 2016), applied the doctrine of estoppel by deed to an oil and gas lease, precluding the lessors from denying that the lease at issue covered the lessors' after-acquired interest in the oil and gas rights. Estoppel by deed may be further extended to resolve these thorny disputes.
The Sheddens entered into an oil and gas lease with Anadarko E&P Co., in 2006, for their 62-acre tract. Subsequent to entering into the lease, Anadarko's agent discovered that under an 1894 deed, Ezra and Emma Baxter reserved one-half of the oil and gas rights to this property. Anadarko paid the Sheddens half of the bonus payment for entering into the lease on account of their half-interest. The Sheddens commenced a quiet title action in connection with the Baxters' one-half reserved interest, and in 2008, a court ordered that the Sheddens owned in fee simple all of the oil and gas rights associated with the property. Anadarko subsequently exercised an option to extend the term of the lease and tendered a payment to the Sheddens for the full 62-acre interest. The Sheddens rejected the payment, contending that the lease covered only one-half of their interest in the tract. In the litigation that ensued between the Sheddens and Anadarko, the Sheddens asserted that Anadarko's original payment for a half-interest under the lease operated as an amendment to the lease, leaving the Sheddens free to lease the other one-half interest.
Affirming the trial court's grant of summary judgment in favor of Anadarko, the Pennsylvania Supreme Court held that the lease covered the full 62 acres, including the half-interest obtained by the Sheddens through the quiet title litigation. The lease contained a warranty covenant that the Sheddens have "full title to the premises and to all the oil and gas therein at the time of granting this lease, and forever warrants title to the leasehold estate hereby conveyed" to Anadarko. Applying the doctrine of estoppel by deed, as set forth in its prior decision in Jordan v. Chambers, 226 Pa. 573, 75 A. 956 (Pa. 1910), the court stated "where one conveys with a general warranty land which he does not own at the time, but afterwards acquires the ownership of it, the principle of estoppel is that such acquisition inures to the benefit of the grantee, because the grantor is estopped to deny, against the terms of his warranty, that he had the title in question."
Estoppel by deed has the broader purpose to prohibit a grantor from asserting anything in derogation of his deed as against the grantee. This principle can aid in determining the title to property interests in circumstances where a deed is not clear on its face concerning what is being conveyed. A persistent issue facing courts and practitioners in Pennsylvania, with its long history of mineral production, is the common circumstance that title to mineral interests is often fractionalized, with ownership in the hands of many different persons. Indeed, this is demonstrated in Shedden, where the dispute had its genesis in the Baxters' 1894 reservation of a one-half interest in the oil and gas. The unartfully drafted deed frequently fails to account for prior, fractional mineral interests, raising the prospect that title to the mineral estate becomes unsettled.
Consider the following situation. Party A conveys Blackacre to Party B by a warranty deed that contains the following clause—excepting and reserving one-half of the oil and gas rights in and underlying the above tract of land. Party B thereafter conveys Blackacre to Party C by a warranty deed that contains the same clause. The second deed, however, makes no reference to the prior reservation of a one-half interest by Party A.
The effect of the clause in the first deed is clear, Party A retained a one-half interest in the oil and gas underlying Blackacre. Without greater context, the effect of the second deed is not so clear. Was the reference to a reservation of a one-half interest intended to denote the prior reservation by Party A? Or was Party B intending to retain to himself the other one-half interest, thereby conveying to Party C the surface, but no oil and gas rights? Given that in many instances the problematic deed was entered into long ago, extrinsic evidence often is unavailable to assist in resolving the ambiguity in the deed.
Not surprisingly, the issue has confronted other states with a history or oil and gas extraction. Courts in other mineral-producing states have adopted the Duhig Rule, derived from its namesake case, Duhig v. Peavy-Moore Lumber, 135 Tex. 503, 144 S.W.2d 878 (1940), as a means to aid in the construction of deeds in such circumstances. The underlying factual dispute in Duhig was similar to the hypothetical concerning Blackacre. The Alexander Gilmer estate conveyed a tract to W.J. Duhig, subject to reservation of an undivided one-half interest in the minerals. Thereafter, Duhig conveyed the property to the Miller-Link Lumber Co., and in that deed the grantor purported to retain a one-half interest in the minerals. The Peavy-Moore Lumber Co. acquired Miller-Link's interest in a portion of the tract and sued Duhig's heirs to establish its title to a one-half interest in the minerals.
The Texas Supreme Court resolved title to the disputed one-half interest in favor of Peavy-Moore. The court determined that the deed at issue contained a title warranty, which extended to the entire premises except an undivided one-half interest in the minerals. After giving effect to the undisputed one-half interest retained by the Gilmer estate, the Texas court concluded that "the warranty is breached at the very time of the execution and delivery of the deed." The grantor, however, "has and holds in virtue of the deed containing the warranty the very interest, one-half of the minerals, required to remedy the breach." The Texas court likened this circumstance to the application of estoppel by deed to after acquired title, articulating the rule using language almost identical to that employed by the Pennsylvania Supreme Court in Shedden.
The Duhig Rule is a principle to aid in deed construction. If there is a prior reservation of a fractional mineral interest, and the grantor under a warranty deed purports to reserve a fractional mineral interest in his deed without referencing the prior fractional reservation, then the grantor is estopped from claiming the total fractional share of the minerals reserved in the deed. Priority will be given to the interest that was presumably conveyed by the deed over the interests that were purportedly reserved. Applying the Rule to the Blackacre hypothetical, the dispute between Party B and Party C to the one-half interest can be readily resolved. The deed would be interpreted so that Party B conveyed to Party C all of the surface and one-half of the oil and gas interests.
The rule's premise upon the precept of estoppel by deed is consistent with Pennsylvania's jurisprudence on this subject, as articulated in Shedden. Indeed, the Pennsylvania Superior Court cited to Duhig in its opinion in the Shedden case as an instance where estoppel by deed was applied in connection with oil and gas interests, Shedden v. Anadarko E&P, 88 A.3d 228, 233 n. 3 (Pa.Super. 2014). Furthermore, it fits squarely within the commonwealth's existing canon of deed construction, requiring "that a doubtful reservation or exception in a deed will be construed most strongly against the grantor and in favor of the grantee. This rule applies with special force to a reservation or exception which amounts to a cutting down of the grant," as in Wilkes-Barre School District v. Cogan, 403 Pa. 383, 170 A.2d 97, 99 (Pa. 1961).
The Duhig Rule gives way to the explicit language in the deed. The dispute between Party B and Party C was avoidable. Assuming that Party B's intent was, indeed, to retain the one-half interest, the draftsman easily could have made reference in the second deed to the prior reservation by Party A and then reserve the other one-half to Party B.
The obvious utility of the Duhig Rule is to assist courts and practitioners in resolving dispute over historical deeds, often entered into decades, if not centuries, before. While the prospect certainly exists that Party B and Party C dispute what their intent was, more often, the dispute is between the heirs and successors of Party B and Party C. With the deed unclear on its face and the parties to the transaction long deceased, the application of construction principles such as the Duhig Rule may provide the only assistance in resolving title disputes to valuable oil and gas rights.
Reprinted with permission from the “July 25, 2016” edition of the “The Legal Intelligencer”© 2016 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited. For information, contact 877-257-3382 -firstname.lastname@example.org or visit www.almreprints.com.