Can a landowner in Louisiana whose land is burdened by a mineral servitude sell the land and reserve the reversionary mineral rights or sell the reversionary rights to another?  Although almost no jurisprudence addresses these issues, the Louisiana Third Circuit did so recently.  On November 2, 2016, in Sterling Timber Associates, L.L.C. v. Union Gas Operating Co., the Third Circuit adhered to the slim line of cases that have looked unfavorably at most efforts to reserve or sell reversionary mineral rights in Louisiana.

These issues were first squarely presented in the 1954 Louisiana Supreme Court case of Hicks v. Clark.  That case involved a 1941 sale of lands where the seller, W.C. Raines, reserved one-fourth of the mineral rights.  Hicks Company, Ltd., Inc. then acquired the property subject to this mineral reservation.  In 1948, Hicks Company sold the surface together with one-half of the minerals to Red Chute Land Company, Inc. and specifically reserved the right of reversion of Raines’ outstanding one-fourth mineral interest; the sale further provided that the reversionary mineral right retained by Hicks Company should prescribe at the same time as the other (1/4) mineral rights then owned and reserved by Hicks Company.  After the sale to Red Chute, Hicks Company was liquidated; the liquidator executed an instrument purporting to convey to S.B. Hicks and two other individuals “all of the mineral and reversionary rights in and to all of the lands conveyed by the Hicks Company, Ltd., Inc., to Red Chute Land Company.”  The ten-year prescriptive period following the 1941 sale was not interrupted, so that Raines’ mineral servitude prescribed for non-use. Sometime thereafter, these three individuals sued the then-current landowners to be recognized as owners of one-fourth of the mineral rights originally reserved by Raines in the 1941 sale.

The Louisiana Supreme Court considered the reservation of the reversionary interest in Hicks as an attempt to circumvent Louisiana’s public policy against mineral servitudes remaining in effect for more than 10 years without operations or production and thus refused to recognize or give effect to it.  The Court also noted that the stipulation in the reservation that prescription would commence at the date of the reservation does not make the reservation any less objectionable from a public policy standpoint: “Even with this limitation the mineral rights could still be outstanding for more than 10 years without exercise of the right to explore.”

With the enactment of the Mineral Code in 1974, article 76 codified this holding in Hicks v. Clark.  Article 76 (entitled “Expectancy of extinction not an article of commerce”) provides: “The expectancy of a landowner in the extinction of an outstanding mineral servitude cannot be conveyed or reserved directly or indirectly.”  A narrow exception to this rule is found in article 77 on the after-acquired title doctrine:

If a party purports to acquire a mineral servitude from a landowner when the right purportedly acquired is outstanding in another and the landowner either subsequently acquires the outstanding right or is the owner of the land at the time it is extinguished, the after-acquired title doctrine operates to vest the right in the party who purported to acquire it to the full extent of his title.

In Rodgers v. CNG Producing Co., the Third Circuit affirmed Louisiana’s strong public policy against circumventing the laws of prescription and discussed Mineral Code articles 76 and 77.  On October 22, 1968, the Thompsons acquired a 1580-acre tract of land subject to the vendors’ reservation of all mineral rights.  Thereafter, the Thompsons agreed to sell the 1580-acre tract to the Rodgers.  Their agreement was subject to “reservation of a mineral servitude contained in the deed of acquisition of vendor” and provided that the Rodgers would grant to the Thompsons the right to purchase all oil, gas and other mineral rights in, on and under the tract at the time of this sale.  In 1975, the Thompsons then conveyed to the Rodgers the 1580-acre tract with warranty of title and subject to prior reservation of the mineral servitude contained in the Thompsons’ 1968 deed of acquisition.  As agreed, following the sale of land to the Rodgers, the Rodgers executed a deed conveying all of the oil, gas and other mineral rights in the tract to the Thompsons.  On October 22, 1978, the mineral servitudes reserved in the 1968 deed to the Thompsons were extinguished by prescription of ten years non-use.  In 1984, the Thompsons executed a mineral lease covering this same tract.  A month later, the Rodgers executed a mineral lease covering some of the same property as covered by the Thompsons lease.

The Rodgers and their lessee then sued the Thompsons and their lessee for (among other things) a declaration of mineral ownership in these same lands.  The Thompsons’ lessee argued that under Mineral Code article 77 the after acquired title doctrine vested a mineral servitude in the Thompsons.

The Comments to Article 77 state that there is no requirement that either or both parties act in good faith.  Insofar as this rule might permit a party to enter into a deliberate “oversale” of mineral rights, there is no damage to the prescriptive system because the “overpurchaser’s” title cannot be perfected unless the “overseller” later acquires the rights previously outstanding or remains owner of the land at the time of their extinction.  No subsequent owner of the land may be bound by the oversale unless after-acquired title has already vested in the overpurchaser at the time the subsequent owner takes title to the land.  Therefore, permitting deliberate entry into oversale transactions cannot result in the creation of real rights burdening the land for periods greater than ten years.

Nonetheless, the Rodgers court stated that there was no true oversale of minerals, as no present mineral rights existed for the Rodgers to convey to the Thompsons at the time.  The court refused to allow the Thompsons, who were parties to both the 1968 and 1975 transactions, to acquire a future mineral servitude by virtue of Article 77.  The court reasoned that “Article 77 concerns purchases of present servitudes by third parties rendered invalid for reasons of the absence of the mineral rights in the seller who purports to sell them, whether by accidental or intentional oversale.  Article 77 does not legislate the creation of future mineral reservations.”  The trial court held that the two-step process by which the Thompsons ultimately acquired the minerals was an indirect attempt to defeat Article 76, and the Third Circuit agreed.

The Third Circuit reinforced these holdings in Hicks and Rodgers in the recent case of Sterling Timber Assocs., L.L.C. v. Union Gas Operating Co.*  In Sterling Timber, a mineral servitude burdening the subject lands was created in 1995.  Thus, this servitude was set to terminate in 2005 unless prescription of non-use was timely interrupted.  In 2004, Sterling Timber sold the subject lands to OSI as part of a sale of more than 14,000 acres.  At the time, the 1995 mineral servitude was still outstanding.  Nonetheless, Sterling Timber reserved all mineral rights to the 14,000 plus acres in the sale.  On this same date, OSI executed a mineral deed to Sterling Timber on the 14,000 plus acres.  Thereafter, in 2010, OSI executed mineral leases covering the subject lands in favor of Orbit.  Union Gas ultimately acquired Orbit’s interest in the leases and successfully obtained production.  Shortly thereafter, and following Sterling Timber’s unanswered notice and demand upon Union Gas, Sterling Timber sued Union and OSI alleging entitlement to the mineral rights and royalty from production.

Here, like in Rodgers, the seller sold property that was burdened by a mineral servitude and the sale instrument included an indication that the seller’s reservation of the mineral rights was a consideration of the sale.  Additionally, as in Rodgers, the buyer of the property in Sterling Timber conveyed the mineral rights back to the seller in an instrument executed on the same day as the sale of the land.  Finally, as in Rodgers, the purchaser of the property knew that the seller presently owned no mineral interest in the land.  Only a future right to receive the mineral rights through nonuse was potentially present.  The Sterling Timber court noted that, like Rodgers, this was not an “oversale” where an innocent party needs protection from a seller’s attempt to sell something he does not presently own.  Given all the factual similarities, the Sterling Timber court found Rodgers directly on point and controlling.  The court ruled that “Sterling’s claim to ownership in the minerals is based on disguised reservations of reversionary mineral rights.  This is a violation of public policy and is directly forbidden by La. R.S. 31:76.”

As an aside, the rules provided in Articles 78 and 79 concerning the running of prescription, if the doctrine of after-acquired title operates, are necessary complements to Article 77 in assuring that parties are not free to avoid the system of prescription.  Mineral Code article 78 provides: “If the landowner who purported to create the mineral servitude acquires the previously outstanding mineral servitude, after having alienated the land, the party in whose favor the doctrine operates has ten years from the date of the transaction by which he purported to acquire or the remaining period of the rights acquired by his grantor in which to exercise his rights, whichever period is greater.”  Mineral Code article 79 provides: “If the landowner who purported to create the servitude remains the owner of the land at the time of the extinction of the previously outstanding rights, the party in whose favor the doctrine operates has whatever time remains between the date of vesting of title in him and ten years from the date of the transaction by which he purported to acquired [sic] in which to exercise his rights.”  Thus Articles 78 and 79 deal with the problem of the prescriptive period applicable to the title of the overpurchaser once it vests by operation of after-acquired title.  Interestingly, it is possible that the overpurchaser could theoretically have a prescriptive period greater than ten years from the date of the oversale to him in which to exercise his rights as mineral servitude owner, but, coincidentally, no damage is done to the system of prescription because the landowner would have had to create the mineral servitude acquired by the overseller and thus would have consented to having that particular servitude outstanding for the applicable prescriptive period.

Before the Mineral Code was enacted, the Louisiana Supreme Court declared it against the public policy of Louisiana to allow servitudes to remain alive for period longer than ten years without use and that any contract to the contrary is therefore void.  The recent Sterling Timber case confirms that Louisiana’s public policy favoring the timely return of outstanding mineral rights to the owner of the land remains strong.  If you have any questions about mineral servitudes in Louisiana, please give us a call.

* This case is not yet final, and thus is subject to change.