August 17, 2016

Vertical Assignments

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John A. Thomason
Member, Stoll Keenon Ogden PLLC

There is a good chance that a title opinion covering the minerals under a tract will include a vertical assignment at some point in the leasehold chain of title, either of a wellbore or a drill site. Moreover, in a pooled unit that may encompass upwards of 640 acres, the chances of confronting a vertical assignment on one of the tracts within that unit approach a certainty.

The next several articles will discuss title issues that have arisen in connection with vertical assignments and the current state of the law in West Virginia, Pennsylvania, Ohio, Kentucky, Indiana and Illinois.

A case that illustrates the potential issues that could arise in what would appear to be a straightforward vertical assignment is Plano Petroleum, LLC v. GHK Exploration, L.P., 250 P.3d (Okla. 2011).

In Plano, the original owners of a 320-acre lease made an assignment to Clydesdale Energy, LLC that included the following granting clause:

[Original owners] do hereby sell, assign, transfer and set over unto Clydesdale Energy, LLC all right, title and interest in and to that certain wellbore, all leasehold, limited in depth from the surface of the earth to the base of the Tonkawa Formation, and all surface and subsurface equipment and materials thereon and therein, more particularly described as the Claude E. Newell # 1 well. Said leases and well located in the northwest quarter of Section 23-17N-25W, Roger Mills County, Oklahoma, which wellbore, leases and associated equipment and materials so specified are hereinafter referred to as “SAID WELL.”

The description in this granting clause was the only description in the instrument.

Clydesdale subsequently assigned its interest to Plano using the same granting clause but adding an exhibit that described the entire 320-acre lease.

The original owners subsequently assigned their interest to GHK, including a description of the entire 320-acre lease and excepting the assignment to Clydesdale, which was described as an assignment of the wellbore only.

Plano later filed an action to quiet the title to the 320-acre lease. At trial, Plano prevailed on a summary judgment motion. The appellate court affirmed the ruling. The Oklahoma Supreme Court vacated the Court of Appeals decision, reversed the trial court. Based on the principal that the intent of the parties to an instrument must be ascertained from the four corners of the instrument, and since the legal description of “all leasehold” was absent from the assignment, the Supreme Court of Oklahoma concluded that the instrument was “patently ambiguous” and therefore not susceptible of summary judgment and so it remanded the case for further proceedings. 

The Plano case demonstrates what can happen when confronted with a  vertical assignment.  What at first reading would appear to be a fairly straightforward assignment of a wellbore was, according to the Oklahoma Supreme Court, capable of at least five different interpretations:

The four corners of the 2002 Assignment support several possible intents including: (1) the instrument was a wellbore only assignment of the Newell # 1 well, as GHK argued, and the “all leasehold” language refers to leasehold rights insofar as the Newell # 1 well and production therefrom is concerned; (2) it assigned the entire 320-acre Newell Lease, as Plano argued and the lower courts held; (3) it assigned a leasehold of 80 acres in the quarter section which contains the Newell # 1 well; (4) it assigned a leasehold of 80 acres in the quarter section which contains the Newell # 1 well limited in depth to the base of the Tonkawa Formation; or (5) it assigned the entire Newell Lease limited in depth to the base of the Tonkawa Formation.

The case law varies from state to state, and appears to depend on different underlying rules of law, including the approach of a state’s courts to contract interpretation and whether the state adheres to the rule of capture.

The next installments of this topic will, hopefully, provide some insight in how Courts in the several states in which we practice might rule under circumstances similar to those in the Plano case.

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