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September 26, 2012 Articles

Leasing the Mineral Owner Who's Gone AWOL

When an owner cannot be identified, a receivership may be the solution.

By Thomas G. Ciarlone Jr. – September 26, 2012

Exploration and production (E&P) companies in Texas are encountering with increasing frequency the vexing problem of mineral and royalty owners who have gone AWOL. The most common scenario is where an E&P has leased some—but not all—of the minerals in a tract of land, and where one or more of the other mineral owners in the same tract cannot be identified or found. Depending on the size and location of the land, this can bring the E&P’s operations to a sudden halt.

The mineral receivership, a creature of statute, can help resolve this problem. Enacted by the Texas legislature specifically “to encourage the exploration and development of mineral resources,” the receivership statute sets out a process for the E&P to continue its work notwithstanding the missing mineral owner. Tex. Civ. Prac. & Rem. Code § 64.091(a). A word of caution, however: While the statute is not especially complex, its strictures must be followed to the letter. Otherwise, a receivership—including any leases taken under it—will be subject to collateral attack. Errors can translate into costly problems for an E&P that has already commenced drilling or other operations on the land.

First Things First: Gathering the Facts
Proceeding straight to the courthouse is a recipe for disaster. Careful due diligence should be performed before seeking relief. Most fundamentally, the plaintiff in a receivership action must be able to demonstrate that he or she made diligent, albeit unsuccessful, efforts to identify and locate the missing mineral owner. Because the defendant in a receivership action is by definition absent, the unwary practitioner might be inclined to rush through this exercise. After all, the mineral owner will not be there to challenge the truth or thoroughness of the applicant’s efforts. Most judges, however, are sensitive to this unlevel playing field and will subject the receivership application to strict scrutiny. Furthermore, if it is later shown that the applicant did not conduct a good-faith search, the receivership could be undone, with expensive retroactive consequences.

The statute does not prescribe the steps that the plaintiff in a receivership action is obliged to take before filing suit. Following, however, are some common examples of actions that, in the aggregate, can be expected to carry the plaintiff’s burden of proof:

  • Review the deeds, probate records, or other instruments that conveyed the mineral interest in question.
  • Examine the clerk’s register for the name and address of the individual to whom the original instrument was returned.
  • Query social-networking sites such as LinkedIn and Facebook.
  • Search the probate and death records in the county of the defendant’s last known address.
  • Check the telephone listings in the vicinity of the defendant’s last known address.
  • Consult the tax rolls at the central appraisal district.
  • Canvass census records, as well as voter-registration lists.
  • Contact the grantor of the mineral interest at issue and inquire about the whereabouts of the grantee.

There is one important caveat. You should not have just anybody conduct this kind of due diligence. A qualified landman is probably the best choice. In fact, some judges will not order a receivership under any circumstances unless a professional landman—as opposed to a paralegal or private investigator—has made the “diligent” search required by the statute.

You should ensure that whoever does this legwork takes detailed notes because, at the receivership hearing, he or she will need to give testimony on each step he or she took to try to find the missing mineral owner. Since he or she will testify, you will make your job easier if you choose an articulate, well-spoken landman with presence and personality. On some level, the landman is serving in the role of a pseudo-expert witness, so everything you can do to make the court comfortable that the search was conducted by a competent and intelligent individual will help your client’s case.

Filing the Receivership Application
The receivership application should be filed, as a verified petition, in the district court of the county where the land is located. Naturally, the named plaintiff is the party seeking the receivership (often an E&P or other lessee), and the named defendant is the mineral or royalty owner who cannot be found. Notably, relief is unavailable under the receivership statute if the defendant paid taxes on the land during the five-year period immediately preceding the filing of the action. See Tex. Civ. Prac. & Rem. Code §§ 64.091(b-1)(2) and 64.093(b)(2).

The verified petition should particularize the steps the plaintiff took to locate the mineral owner and state that these efforts proved unsuccessful. In addition, the petition must allege that the plaintiff “will suffer substantial damage or injury unless the receiver is appointed.” Tex. Civ. Prac. & Rem. Code §§ 64.091(c)(2) and 64.093(c)(2). The exact nature of damages will be fact-intensive and can vary widely from case to case. Generalized allegations of harm or injury will not suffice. Unless the plaintiff pleads and proves the specific harm with particularity, the receivership application is likely to fail.

The required showing is often made through allegations that, absent the appointment of a receiver, the missing mineral interest will go unleased, thereby precluding the plaintiff from drilling. An inability to drill can, in turn, spawn damages in the form of a lost lease or drainage from neighboring offset operations.

The receivership statute requires the plaintiff to serve notice on the defendant by publication as provided by the Texas Rules of Civil Procedure. The theory here, of course, is that—because the plaintiff cannot personally serve someone he or she cannot find—an ad in the newspaper provides the best alternative. Each county has a somewhat different process for handling citation by publication, including unwritten or unofficial guidelines. You would be well advised to make a polite call to the district clerk to learn the local preferences and avoid unnecessary delay later.

Local idiosyncrasies aside, the citation should command the defendant to appear and answer at or before 10:00 a.m. on the first Monday after the expiration of 42 days from the date of the citation. The citation should also include a legal description of the land, along with the names of the parties and a short statement of the nature of the case. An appropriate officer should serve the citation by having it published once a week for four consecutive weeks, preferably in a newspaper published in the county where the land is situated. SeeTex. R. Civ. P. 114–16.

Ensure that the newspaper correctly publishes the notice. Draft a letter to the editor that includes, among other things, specific instructions about when to publish the citation. Be sure to monitor the newspaper to ensure the citation is printed on the correct dates, with all the necessary content. If it turns out the citation is defective, even in what might strike you as a relatively minor way, you could find yourself back at square one. And if your client is an E&P that is poised to drill and waiting only on a receivership to come through, the client will not be pleased if the notice needs to be re-run because the newspaper made a mistake.

Next comes the matter of selecting the receiver. A natural choice is the county judge of the county in which the land is located and, indeed, the receivership statute specifically contemplates this. See Tex. Civ. Prac. & Rem. Code §§ 64.091(d) and 64.093(d). But under the statute, any resident of the county in which the land is located is permissible. This alternative may be preferable if the county judge signals any hesitancy to serve in the role of receiver. If this author tries to read the tea leaves, as the use of the receivership statute continues to rise—as it has been—he would not be be surprised to see a growing reluctance from the bench to assume this additional layer of duties. With the volume of applications spiking, it may soon reach a point where it is simply too much work for the county judges.

After choosing the receiver, a hearing date for the application should be set. The hearing must occur after the defendant’s appearance date and, self-evidently, at a time convenient for the receiver. Ideally, the hearing date should be reduced to writing as a proposed order, which should be signed by the district judge and filed in the cause.

Preparing for the Hearing
Much work remains before the hearing. This consists primarily of three things: (1) drafting the mineral lease (or ratification, as the case may be) that the receiver will execute on behalf of the defendant mineral or royalty owner; (2) selecting an attorney ad litem to represent the absent defendant; and (3) preparing fact witnesses to testify at the hearing.

The ultimate goal of this preparation is, of course, to present a unified, well-organized case to the court. In other words, the receiver, the attorney ad litem, and the plaintiff’s witnesses should all be on the same page, telling the same story. This is by no means to tacitly advocate for collusion. To the contrary, the point is that the key considerations—details such as whether the terms of the proposed mineral lease are fair to the absent defendant—should be discussed (and, as necessary, compromises reached) prior to the hearing, not at it.

As for preparing the proposed mineral lease, the best practice is simple: Offer competitive terms. Avoid skimping on the royalty or bonus payment. If the prevailing royalty in the same or surrounding tracts is 1/4, for example, pushing through a 20 percent lease is inviting disaster if the missing mineral owner later materializes and demands to know why all of his neighbors got better deals than he did.

While the fact that the defendant will not be present makes the hearing a somewhat one-sided affair, the plaintiff still carries the burden of proof. This requires preparation. In most instances, the only witnesses will be the plaintiff and the landman or other person who conducted the search for the missing mineral or royalty owner. The landman should be prepared to offer testimony about the procedures he or she employed to search for the mineral owner, the property interests of the plaintiff and defendant in the subject land, and the reasonableness of the bonus and royalty payments. Typically, the plaintiff’s testimony will be limited to describing the damages or injuries likely to be sustained if a receiver is not appointed.

While not expressly required by the receivership statute, the plaintiff would be well advised to arrange for an attorney ad litem to represent the missing mineral owner at the hearing. While his or her role will overlap with that of the receiver, the attorney ad litem still serves an important purpose. He or she counteracts any appearance of self-dealing or other collusive behavior, which increases the likelihood that the district judge will approve the receivership application and, perhaps more importantly, helps insulate the receivership from collateral attack.

Prior to the hearing, the plaintiff should file a motion to have an attorney ad litem appointed. Because the plaintiff is responsible for paying the attorney ad litem’s fees, a consensus on fees should be reached before making the motion. Take time to educate the attorney ad litem and familiarize him or her with the specific facts of your client’s case and the salient legal issues. It is imperative that the receiver and attorney ad litem be in agreement by the time of the hearing, especially with respect to bonus and royalty payments and other core lease terms. Any divisiveness between the receiver and attorney ad litem runs the risk of derailing or delaying the receivership.

The Receivership Hearing
By the day of the hearing itself, most of the heavy lifting will have already been done. The landman and the plaintiff should testify about the limited matters described earlier, and a stenographic record of the proceedings should be made. Otherwise, the receivership can fail if it is challenged later.

The plaintiff should introduce into evidence a certified copy of the instrument that reflects his or her mineral interest in the subject property. In the context of a royalty receivership, the plaintiff should offer into the record the lease or pooling agreement that the receiver intends to ratify.

The proposed order appointing the receiver should be thoughtfully drafted in advance of the hearing. The proposed receiver should be comfortable with the terms of the order. The order should be drafted broadly enough to ensure the receiver is unquestionably vested with adequate authority to execute the mineral lease, to sign pooling or unitization agreements, and to attend to other routine matters such as the payment of taxes. Prudence would also dictate that the order outline the key terms of the mineral lease and include the lease form itself as an exhibit. Put another way, the more details that are specifically blessed by the judge, the better.

A Post-Hearing Checklist
At the conclusion of the hearing, the first thing the plaintiff should do is remit the bonus payment to the clerk. Do not procrastinate: The receivership statute specifically requires that payment be made before the lease is executed by the receiver. Regarding royalty receiverships, the statute accurately observes that, “because ratifications, pooling agreements, and unitization agreements are typically entered into in consideration of the future benefits accruing to the grantor thereof, an initial monetary consideration is not typically paid for the execution of such instruments.” Tex. Civ. Prac. & Rem. Code § 64.091(h). To the extent any upfront consideration is due, however, it too must be paid to the clerk at the end of the hearing.

After filing the mandatory statutory oath with the clerk of court, the receiver should execute the lease—or, as applicable, the ratification—and prepare his or her report. At a minimum, the report should attach the lease or ratification, enumerate the bonus monies already paid to the clerk, and specifically state that he or she executed the lease or ratification on behalf of the defendant pursuant to the powers vested in him or her as a receiver.

The receiver’s report should be delivered to the district court along with a proposed order approving the report. The proposed order should state that the terms of the lease executed by the receiver are fair and reasonable and, in the case of a ratification, that any applicable acreage restrictions have been satisfied. The proposed order should also direct the plaintiff to record the lease or ratification with the county clerk, and the plaintiff must be certain to comply with this directive. Filing of record is essential, and the failure to do so can have dire consequences down the road.

Mineral receiverships are becoming a fact of life when doing business in the Eagle Ford and the other major shale plays in Texas. The process for securing a receivership is multifaceted and has many moving parts. The receivership is a useful tool, but one that can be used only in specific circumstances, and its success or failure will depend on doing a thorough job up front to document a bona fide effort to track down the missing mineral owner. By making this investment at the onset, you have gone a long way toward securing a receivership—provided that you then observe the formalities required by the statute; that you present a unified front at the hearing; and that you do not overreach and try to get better lease terms than what you would expect if the mineral owner were not, in fact, missing.

Keywords: energy litigation, exploration and production, mineral receivership, drilling, Eagle Ford, shale, Texas

Thomas G. Ciarlone Jr. is a senior counsel at Burleson LLP in the firm's San Antonio, Texas, office.

Copyright © 2012, American Bar Association. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or downloaded or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. The views expressed in this article are those of the author(s) and do not necessarily reflect the positions or policies of the American Bar Association, the Section of Litigation, this committee, or the employer(s) of the author(s).