Were Deeds Properly Worded to Pass Oil and Gas Rights onto Heirs?

Peppertree Farms, LLC et al. v. Joy Ann Thonen et al., Case No. 2020-0812
Fifth District Court of Appeals (Monroe County)

ISSUES:

• Does a document created prior to 1925 that severs oil and gas rights from surface property using the words “excepts and reserves,” or “reserved and is not made part of the transfer,” retain an existing interest in the minerals or create a new interest?
• Does an oil and gas severance document that “reserves” oil and gas rights actually “except” the rights, meaning the rights can be passed to the heirs without any additional words of the inheritance in the document?

OVERVIEW:
The Ohio Supreme Court will consider two similar, but distinct, appeals regarding mineral disputes on the same 84 acres of property in Monroe County. In each case, the two current owners of the surface property entered into agreements with oil and gas companies to drill. As the landowners attempted to claim full ownership of the surface and mineral rights, more than 100 individuals and companies objected, claiming to be partial owners of the mineral rights through inheritances.

When accepted by the Supreme Court, both cases contained two key legal arguments, known as propositions of law, and were held for the Court’s decision in West v. Bode¸ which was decided in December 2020. The West opinion resolved one of the arguments raised by the heirs in the first case – the Fleahman and Kremer descendants -- and will not be argued. In the second case, the remaining heirs – the Jones descendants -- argue their rights to the oil and gas are still valid under both propositions of law.

BACKGROUND:
Gary and Cathie Pepper owned approximately 79 acres of land in Monroe County and transferred the property to their business, Peppertree Farms, in 2012. In 2013, Peppertree leased its oil and gas rights to Gulfport Energy. Five acres of land adjoining Peppertree Farms was acquired by Jay and Amy Moore in 2013. That year the couple leased their oil and gas rights to Eclipse Resources.

In 2017, Peppertree filed a complaint in Monroe County Common Pleas Court to extinguish all prior claims on the oil and gas rights. More than 100 defendants were notified of the action. Because the oil and gas rights under the Peppertree property included land below the Moores’ property, the Moores were added to the case, and they also sought to have the prior claims extinguished.

Dispute Springs from Deed Language
The individuals and business disputing Peppertree’s and the Moores’ claim received their rights through four separate conveyances that the parties label the W.T. Fleahman Interest, the Mary Fleahman Interest, the T.J. Kremer Interest, and the H.J. Jones Interest. (The Jones Interest is the subject of the second case the Court will hear.)

At issue in this case is the wording of the W.T. Fleahman and Mary Fleahman documents that severed their oil and gas rights from the surface lands now owned by Peppertree and the Moores.

In 1916, W.T. Fleahman executed a deed that sold the surface property and stated that he “excepts and reserves one-half the royalty of the oil and gas under the above described real estate.” In 1920, Mary Fleahman executed a deed to H.J. Jones that stated, “1/4 of oil royalty and one half of the gas is hereby reserved and is not made part of the transfer.”

The trial court recognized that the words “exception” and “reservation” were commonly used indiscriminately to mean the same thing, but are two separate and distinct interests in property. The words used in a document transferring ownership have to be examined further to assess the actual intent of the parties, especially because of the law at the time the documents were drafted, the trial court explained.

In 1925, Ohio adopted a law that stated words of inheritance were no longer required in a document if the person reserving rights in land intended on passing down the rights to heirs. The Fleahman documents both were created prior to 1925.

Prior to the law change, a claim to reserve rights in property was considered to be “life estates,” which ended when the person claiming the rights died, unless they included words of inheritances such as to “my heirs and assigns.” 

Peppertree and the Moores argued in the trial court that the Fleahman documents “reserved” the rights of the property owners and, when they died, their rights expired. Because the T.J. Kremer interests stem from the W.T. Fleahman document, the Kremer interests were never valid, and they also are extinguished, the landowners maintained. The landowners also argued that under Ohio’s Marketable Title Act, the rights of the Fleahman and Kremer interests were extinguished decades ago because no recorded documents expressed an interest in maintaining the rights.

The trial court sided with Peppertree and the Moores. The descendants appealed to the Fifth District Court of Appeals. The Fifth District affirmed the trial court’s decision. The descendants appealed to the Supreme Court, which agreed to hear the cases. 

The Fleahman and Kremer Interests are the subject of the first appeal because the Fleahman documents sought to maintain the rights to the oil and gas royalty that would be paid. The H.J. Jones document maintained that Jones retained an interest in the oil and gas itself as well as the financial benefits derived from future sales, which raises a legal argument that differs from the Fleahman and Kremer heirs.

Mineral Rights Were Exceptions, Heirs Argue
While the word “reserve” appears in the Fleahman documents, the additional language of the transfers indicates the Fleahmans were actually making “exceptions” and not reservations, the heirs explain. When a property right is “excepted,” the person selling the property, known as the “grantor,” is retaining a right to the property that the grantor owned. Ohio hasn’t required that property transfers with exceptions need words of inheritance to pass along the right after the death of the grantors.

The heirs argue that before the surface property and the mineral rights are split, the rights to all the land and the minerals belong to the grantor. An “exception” states that the grantor intends to keep some of the rights that existed at the time of transfer, the descendants explain. A “reservation” is a creation of a new right that occurs when the property is divided, they note. As an example, the heirs state that a typical reservation in a property sale is an “easement,” where the grantor has completely sold the property but has created a new right to cross it.

The W.T. Fleahman document stated he “excepts and reserves” the royalty interests, and that indicates he sought an exception, the descendants maintain. Because it was an exception, he had the right to pass along the rights to his descendants without any additional words of inheritance in the property transfer documents, the heirs conclude. Mary Fleahman stated her rights were reserved and “is not made part of the transfer.” The heirs argue “not made part of the transfer” constitutes an exception and that she clearly didn’t intend to create a new right. Because the documents allowed the grantors to pass along the royalty rights without further words of inheritance, the rights the descendants now claim are still valid, the heirs assert.

The descendants concede their arguments that the Marketable Title Act (MTA) didn’t extinguish their rights were answered by the Court in its West decision.

Royalty Rights Were Reservations, Landowners Assert
Peppertree and the Moores note the Fifth District concluded that, because of the West decision, the Mary Fleahman interests were extinguished, and only the W.T. Fleahman and Kremer interests are still before the Court.

The landowners argue the documents clearly indicate the Fleahmans attempted to reserve the rights, and the law at the time required words of inheritance if they intended to pass the rights along. Because they didn’t, their rights were life estates that expired when the Fleahmans died, the landowners conclude.

The landowners also cite the Supreme Court’s 2015 Chesapeake Expl., LLC v. Buell decision, which stated an “owner who conveys the surface estate may retain an interest in the mineral estate by reservation.”  Peppertree and Moore argue the case made it clear that attempts to retain oil and gas royalty rights are newly created rights made through reservations. Because the only way a new right can be obtained is through reservation, the Fleahman documents would have to be reservations if they intended to access future royalties from oil and gas drilling, the landowners explain. Since these are reservations, then words of inheritance were required, and without them, the rights ended when the Fleahmans died.

Friend-of-the Court Brief Submitted
An amicus curiae brief supporting Peppertree and the Moores was submitted by Gregory and Brenda Goble, Monroe County landowners involved in a similar lawsuit regarding a pre-1925 oil and gas conveyance.

– Dan Trevas

Docket entries, memoranda, briefs (including amicus briefs), and other information about this case may be accessed through the case docket.

Contacts
Representing Joy Ann Thonen et al.: Erik Schramm, 740.695.1444

Representing Peppertree Farms LLC et al.: Matthew Onest, 330.497.0700

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Did Deed and Will Pass Oil and Gas Rights to Heirs?

Peppertree Farms, LLC et al. v. Joy Ann Thonen et al., Case No. 2020-0814
Fifth District Court of Appeals (Monroe County)

ISSUES:

• Does an instrument created prior to 1925 that severs oil and gas rights from surface property and uses the words “excepts and reserves” or “reserved and is not made part of the transfer” retain an existing interest in the minerals or create a new interest?
• Does an oil and gas severance instrument that “reserves” oil and gas rights actually “except” the rights, meaning the rights were passed to the heirs of the rights holder without any additional words of the inheritance in the document?
• Is a transfer by will of mineral rights that affects the title of surface property a “title transaction” under the Ohio Marketable Title Act?

BACKGROUND:
Gary and Cathie Pepper owned approximately 79 acres of land in Monroe County and transferred the property to their business, Peppertree Farms in 2012. In 2013, Peppertree leased its oil and gas rights to Gulfport Energy. Five acres of land adjoining Peppertree Farms was acquired by Jay and Amy Moore in 2013. That year the couple leased their oil and gas rights to Eclipse Resources.

In 2017, Peppertree filed a complaint in Monroe County Common Pleas Court to extinguish all prior claims on the oil and gas rights. More than 100 defendants were notified of the action. Because the oil and gas rights under the Peppertree property included land below the Moores’ property, the Moores were added to the case, and they also sought to have the prior claims extinguished.

Dispute Springs from Deed Language
The individuals and business disputing the Peppertree and Moores’ claim received their rights through four separate conveyances that the parties label the W.T. Fleahman Interest, the Mary Fleahman Interest, the T.J. Kremer Interest, and the H.J. Jones Interest.

The Fleahman and Kremer documents attempt to reserve the oil and gas royalty rights under the surface property sold.

In 1921, H.J. Jones conveyed a portion of surface property that is now owned by Peppertree Farms and the Moores. Jones’ deed stated, “All oil and gas underlying the above described premises is hereby reserved and is not made a part of the transfer.”

Jones died in 1932, and Earl S. Ward acquired Jones’ interests in the property. Ward died in 1972, but his will didn’t describe his interest in Jones’ mineral rights or detail that his rights passed on to his daughters.

As described in the Peppertree v. Thonen preview above, the trial court considered the language in the Jones transfer document to be a reservation. Since he didn’t include words of inheritance, the property right was considered to be a “life estate,” which ended when Jones died, the trial court concluded. The Jones heirs appealed the decision to the Fifth District Court of Appeals, which affirmed the trial court’s decision.

The Jones heirs appealed to the Supreme Court, which agreed to hear the case.

Mineral Rights Were Exceptions, Heirs Argue
The Jones descendants’ arguments are similar to those about the Fleahman and Kremer interests, described in the Peppertree v. Thonen preview above. However, unlike the Fleahmans and Kremer, who sought to retain royalty rights, Jones claimed rights to the oil and gas itself.

The Jones heirs state that logically includes the royalty rights. Since Jones clearly never intended to give up his rights to the oil and gas itself, he created an exception and not a reservation, they assert. Because the rights were excepted, Jones’ rights passed to Ward then on to his heirs without the need for words of inheritance in the transfer documents, the heirs conclude.

Royalty Rights Were Reservations, Landowners Assert 
Peppertree and the Moores make the same assertions regarding the reservation language in the deeds as they did in the Peppertree v. Thonen preview above.

Will Transferred Rights to Children, Mineral Owners Claim
The Jones heirs also dispute the decision by the Fifth District Court of Appeals that the Marketable Title Act (MTA) extinguished their mineral claims. The heirs argue the appellate court wrongly concluded that because the mineral rights weren’t described and transferred in the Ward will, the document doesn’t qualify as a “title transaction” under R.C. 5301.49(D).

Under the MTA, the deed that marks the beginning of ownership of the surface land by Peppertree and the Moores is a 1954 deed, the parties note. Under the MTA, any title transaction made within 40 years of the 1954 deed impacts the rights of the landowners, the Jones heirs explain.

The Ward will was recorded in Monroe County probate court in 1971, which is within the 40-year range, the heirs explain. The MTA considers recorded wills as title transactions. Because Ward passed on all his property rights to his daughters, he didn’t have to specify in his will that he acquired the Jones mineral rights, the heirs explain.

A valid title transaction under the MTA doesn’t need to transfer the rights of the landowners’ 1954 deed, the heirs note, it just has to “affect the title.” The transferring of mineral rights to the heirs affects the title of the land above, the descendants argue, and is a valid title transaction that prevents it from being extinguished by the MTA.

Transaction Not Part of Land Title, Landowners Counter
Peppertree and the Moores agree with the Fifth District. They argue the MTA applies to title transactions arising from the title to the land. Nothing in the 1954 deed or subsequent transfers of the surface property notes a reservation of mineral rights by Ward or his descendants. Because there is no recorded transaction in the landowners “chain-of-title” that indicates a mineral right reservation, the rights were extinguished, Peppertree and the Moores conclude.

Friend-of-the Court Brief Submitted
An amicus curiae brief backing Peppertree and the Moores was submitted by Gregory and Brenda Goble, landowners involved in a similar lawsuit regarding a pre-1925 oil and gas transfer.

– Dan Trevas

Docket entries, memoranda, briefs (including amicus briefs), and other information about this case may be accessed through the case docket.

Contacts
Representing Joy Ann Thonen et al.: Emily Anglewicz, 614.463.9770

Representing Peppertree Farms LLC et al.: Matthew Onest, 330.497.0700

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Must State Board Approve City District Tax-Sharing Agreement?

Warrensville Heights City School District Board of Education v. Beachwood City School District Board of Education, Case No. 2020-1326
Eighth District Court of Appeals (Cuyahoga County)

ISSUES:

• Under R.C. 3311.06, must the State Board of Education approve a tax-sharing settlement by two local boards of education after a city’s annexation of territory if there is no actual transfer of physical territory between the school districts?
• Under R.C. 5705.41, must a contract between two school districts, including a future tax-sharing agreement, contain a fiscal certificate from a school fiscal officer?

BACKGROUND:
In 1990, a site for a new corporate headquarters that envisioned the development of future commercial properties, but no residential development, was proposed. The property known as Chagrin Highlands was located in Cleveland and was annexed by the city of Beachwood in 1990.

Later that year, the Beachwood City School District applied to the State Board of Education to annex the Highlands territory. The territory wasn’t located in the Cleveland City School District, but rather in the Warrensville Heights City School District. Warrensville Heights objected to the annexation.

As a result of Warrensville Heights’ objection, the Warrensville Heights and Beachwood followed a process under R.C. 3311.06 and school board rules to make a good faith effort to negotiate a settlement. The boards couldn’t reach an agreement on their own and engaged retired federal district court Judge Robert Duncan to mediate the dispute. In 1997, Judge Duncan proposed a three-point deal: first, Beachwood would withdraw its territory-transfer request; second, once the Highlands property exceeded approximately $22 million in value, the boards would split the property tax revenues with 70 percent for Warrensville Heights and 30 percent to Beachwood; and third, the two would conduct joint educational activities.

Both school boards approved the settlement. The respective school board presidents, superintendents, and treasurers signed copies of the agreement. Beachwood sent a copy of the settlement to the state board of education, however, neither school board sought state board approval. The state also was informed of the settlement when Beachwood withdrew the school territory transfer request.

Revenue-Sharing Date Triggered
In 2013, the value of the Highlands property exceeded the $22 million threshold, triggering the revenue split. Warrensville Heights refused to transfer tax revenues to Beachwood, arguing there wasn’t an approved settlement.

In 2018, Beachwood sued Warrensville Heights in Cuyahoga County Common Pleas Court, claiming the school district breached the contract, and made other claims including that Warrensville Heights schools committed fraud.

The trial court granted Warrensville Heights summary judgment, finding that without the state board’s final approval, there was no valid contract. Beachwood appealed to the Eighth District Court of Appeals. In a split decision, the Eighth District reversed the trial court, finding an agreement that doesn’t transfer physical territory from one district to another doesn’t need state board approval.

Warrensville Heights appealed the Eighth District’s decision to the Ohio Supreme Court, which agreed to hear the case.

Board Approval Required, District Argues
Warrensville Heights explains municipal boundaries and their related school district boundaries are not the same. When a city annexes land outside of its city school district boundaries, the land doesn’t automatically transfer into the city school district. Instead, the state school board is authorized to oversee a transfer of school territory from one district to another following a municipal annexation, Warrensville Heights notes.

Under R.C. 3311.06, the two districts involved in a transfer must follow a negotiation process. Warrensville Heights argues that no agreement between the districts is valid without state board approval. The district notes that R.C. 3311.06(C)(2)(I) states: “No transfer of school district territory or division of funds and indebtedness incident thereto, pursuant to annexation of territory to a city or village shall be completed in any other manner than that prescribed in this section.”

Warrensville Heights argues the Eighth District misinterpreted the meaning of “or division of funds and indebtedness incident thereto” by concluding the division of funds results from the transfer of district territory. Because no actual territory was being transferred, the law didn’t apply, the Eighth District reasoned. Warrensville Heights maintains the law’s use of “or” applies to two different types of arrangements – the transfer of territory or the division of funds. The agreement between the two districts is a division of funds, Warrensville Heights maintain. “Incident thereto” doesn’t mean “result of” the transfer of territory, but “related to” a transfer. Warrensville Heights maintains the trial court correctly determined the agreement was void without state board approval.

Other Law Invalidated Contract, District Maintains
Even if the two school districts had the authority to implement the agreement without state board approval, this agreement wouldn’t be valid because there was no fiscal certificate attached to it when passed by the boards in 1997, Warrensville Heights maintains.

The district argues that under R.C. 5705.41, a school district cannot make any kind of contract involving the expenditure of money unless a certificate of the fiscal officer is attached. Warrensville Heights explains a fiscal certificate confirms the school district has appropriated the funds for the expenditure and has adequate resources to pay before it enters a contract.

The Eighth District majority ruled a sharing of tax funds isn’t an “expenditure” and the certificate wasn’t required. Warrensville Heights argues that while “expenditure” is not defined in R.C. 5705.41, it is generally defined as “an agreement that benefits another monetarily.” Since Warrensville Heights collected 100 percent of the tax revenue from the Highlands area before the agreement, and Beachwood now would be receiving 30 percent of the millions of tax dollars collected, the contract included an expenditure and required a certificate, the district asserts. Under R.C. 5705.41, contracts without the required certificate are void, the district concludes.

State Board Approval Unnecessary, City School Argues
Beachwood City Schools notes that once it sought annexation, it agreed to enter a lengthy settlement process under the direction of the state board. Those negotiations involved years of discussion and mediation led by a federal judge and, as a result, led to an agreement that both the Warrensville Heights and Beachwood school boards unanimously passed and was signed by all the required officials.

Beachwood notes that after it sent a copy of the settlement to the state there was no evidence the Ohio Department of Education requested any further action, such as the state board’s approval.

Beachwood maintains the provisions of R.C. 3311.06 don’t apply because the tax-sharing agreement is the result of a private agreement between the two districts and not a petition to transfer Warrensville Heights school territory to Beachwood. The district also maintains the law only applies to the transfer of actual territory and not to a tax-sharing agreement.

Beachwood also maintains the Eighth District correctly ruled that a tax-sharing agreement is not an expenditure of funds. At the time of the agreement in 1997, the plan didn’t call for the immediate sharing of tax revenues as the Highlands territory was in an early stage of development. The plan called for the future sharing of tax revenues once the Highlands’ value exceeded $22 million, which happened in 2013, the district notes. Because there was no specific amount to identify, there was no need for a certificate from the fiscal officer certifying funds were available to pay, the district concludes.

– Dan Trevas

Docket entries, memoranda, briefs (including amicus briefs), and other information about this case may be accessed through the case docket.

Contacts
Representing Warrensville Heights City School District Board of Education: Christian Williams, 216.520.0088

Representing Beachwood City School District Board of Education: Daniel McIntyre, 216.621.5900

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Suspension Recommended for Attorney Who Didn’t Follow Referral Program Instructions

Lorain County Bar Association v. Kenneth A. Nelson II, Case No. 2021-0759
Lorain County

An Avon Lake attorney accused of mishandling bar association referrals of clients and falsely stating in a legal document that he wasn’t being investigated for professional misconduct is facing a two-year suspension, with one year stayed.

Kenneth Nelson participated in a Lorain County Bar Association lawyer referral program called “Modest Means” for clients experiencing financial hardships. Nelson was given a fee agreement to use with Modest Means clients. The Board of Professional Conduct determined that he didn’t employ the agreement with multiple clients in 2019 and 2020.

Nelson has been disciplined twice before for attorney misconduct. In May 2020, he applied to the Ohio Supreme Court to end a period of probation that was part of his second disciplinary sanction. In the paperwork he submitted, he stated there were no pending disciplinary proceedings against him.

However, the board stated, he was communicating with the bar association about the current allegations just days before filing his request to terminate his probation.

Nelson objects to the board’s factual findings, legal conclusions, and proposed suspension. Maintaining that his missteps were caused by his misunderstanding of the referral program, he argues a fully stayed suspension will protect the public.

Because of his objections, the Ohio Supreme Court must hold oral argument in the disciplinary case.

Attorney Accepts 18 Referrals from Modest Means Program
As part of participating in the Modest Means program, Nelson agreed to accept a $500 retainer from referred clients and to charge a rate of $75 per hour. In 2019 and 2020, he worked with 18 clients referred from the program. The board’s report states that Nelson didn’t use the fee agreement provided by the program but, instead, created his own. Nor did he deposit his referral clients’ money into his client trust account, known as an IOLTA, the board noted.

The attorney argued he thought the program was a flat-fee arrangement “earned upon receipt” for clients who were referred. He believed that the professional conduct rules prohibited him from depositing money earned in this manner into a client trust account. He waived all fees above $500, which he said illustrated his misunderstanding of the program.

The board report noted Nelson was asked to provide the 18 signed fee agreements for the referral program clients, but he produced only one. He testified at a deposition that he and his legal assistant were forced to leave their office during the May 2020 racial justice protests in Cleveland. He said his legal assistant took the box with the fee agreements and was unable to locate them afterward.

Board Panel Reviews Misconduct Allegations
The board’s three-member panel that heard his case questioned the truthfulness of this testimony. In part, the panel noted, Nelson didn’t call his legal assistant at the disciplinary hearing to corroborate his argument and he didn’t reach out to his clients to testify or provide their copies of the fee agreements to support his defense.

“[Nelson] is not a novice attorney and not unfamiliar with the disciplinary process,” the panel stated in the board report. “The panel finds that such conduct evidences [Nelson’s] failure to learn from his prior sanctions or an attempt to cover up his mistake, or both.”

The board determined that Nelson violated professional conduct rules regarding the proper administration of client funds, as well as rules prohibiting false statements to disciplinary authorities and conduct involving fraud, deceit, dishonesty, or misrepresentation.

One year of the board’s suggested two-year suspension will be stayed if Nelson commits no further misconduct. The board recommends that, if reinstated, Nelson be required to work with a monitoring attorney for two years – which will include monthly reviews of his fee agreements and compliance with IOLTA regulations. 

Attorney Disputes Aspects of Findings, Believes Stayed Suspension Protects Public
Nelson notes that the panel found the one fee agreement from 2020 he did provide complied with professional conduct rules. He maintains that this agreement was executed in March 2020 before the bar association began its investigation.

He contends that a fully stayed suspension was agreeable to the bar association, but the panel rejected the proposal because of his prior discipline. He also contends that when he filed his May 2020 request to end his probation, he thought the bar association was investigating his compliance with his probation terms, not a new violation of the ethics rules.

He states that no client was harmed and an actual suspension isn’t necessary to protect the public. Two years of oversight by a monitor will ensure that he commits no future disciplinary violations, he concludes.

Bar Association Contends Timeout Necessary
The bar association maintains that it informed Nelson in late April 2020 of its intent to request that his probation be revoked because he wasn’t depositing referral client funds into his client trust account. On May 18, Nelson attended a meeting with the bar association to discuss his noncompliance, yet he still filed his application with the Court to end his probation from the earlier disciplinary case just four days later, the group states. It agrees with the board’s conclusion that Nelson knew his affidavit statement that no disciplinary proceedings were pending against him was false.

The bar association notes that Nelson’s monitor testified that Nelson committed misconduct during his probationary period. Nelson needs time away from the practice of law to consider the seriousness of his misconduct, while also allowing him to return to being an attorney at a later time with stringent precautions, the bar association maintains.

– Kathleen Maloney

Docket entries, memoranda, briefs (including amicus briefs), and other information about this case may be accessed through the case docket.

Contacts
Kenneth Allen Nelson II, representing himself: 216.272.8518

Representing the Lorain County Bar Association: Matthew Dooley, 440.930.4001

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