North Dakota Clarifies Allocation of Oil & Gas Proceeds Between Life Tenants and Remaindermen and Adopts the Open Mines Doctrine

April 9, 2020 — In Reese v. Reese-Young, 938 N.W.2d 405 (N.D. 2020), the Supreme Court of North Dakota provided long overdue guidance on the allocation of oil and gas proceeds as between life tenants and remaindermen. Formerly, practitioners were relegated to the “general rules” that had emerged from legal treatises and the laws of other states. The statutory guidance provided only that the owner of a life estate must “do no act to the injury of the inheritance,” and must prevent “ordinary waste.” See N.D. CENT. CODE §§ 47-02-33, 34. In addressing these successive estates, the court also formally adopted the Open Mines Doctrine.

In 2005, Dennis and Tia Reese-Young, co-owners of a tract of land in Mountrail County, North Dakota, executed an oil and gas lease covering their interest. Oil production was obtained on the leased lands in 2007. In 2008, Dennis and Cheryl Reese quitclaimed their entire mineral interest in said tract to Tia Reese-Young, reserving a joint tenancy life estate. However, the quitclaim deed did not address how proceeds from the production of oil and gas were to be allocated as between the life tenants and remaindermen. Dennis died later that year, leaving Cheryl Reese as the sole remaining life tenant.

Due in part to the quitclaim deed’s silence on the matter, a dispute arose between the life tenant and remainderman as to how the oil and gas proceeds were to be allocated. The life tenant argued that under the so-called “Open Mines Doctrine” she was entitled to all of the royalty payments because the lease had been executed and production obtained prior to the creation of the life estate. Conversely, the remainderman argued that the Open Mines Doctrine was not the law in North Dakota, having never been formally adopted. The district court sided with the remainderman in holding that the Open Mines Doctrine did not apply, and that no statutory law indicated that it was the legislature’s intent to follow the Doctrine.

In North Dakota, it is common for a conveyance creating a life estate to specifically address the allocation of bonus, rentals and royalties under an oil and gas lease. In the absence of such a provision, the majority of jurisdictions require a life tenant to hold the corpus of such payments in trust. To prevent a devaluation of the property, the life tenant is entitled only to income generated from such corpus during her life. Upon the life tenant’s death, this corpus vests in the remainderman. The North Dakota Supreme Court affirmed this general rule that a life estate owner has a duty not to act in a manner that causes the market value of the remainderman’s interest to diminish (i.e., commit “waste”). However, the Open Mines Doctrine creates an exception to the general rule that a life tenant cannot commit waste. It allows a life tenant to deplete the value and resources of a parcel of land “without impeachment for waste.” The Doctrine states that if a lease was in effect or a well was producing at the time a life estate was created, the life tenant can continue the use even though continuing the use causes the market value of the future interest holder’s interest to diminish.

In reversing the district court, the Supreme Court of North Dakota held that the Open Mines Doctrine is part of the law in North Dakota and applies unless it conflicts with any statutory law. The court also noted that if the instrument creating the life estate provides for an allocation of proceeds, it may “contract around” and exclude application of the Doctrine.

In this case, the plain language of the deed conveyed from the Reese’s to Reese-Young reserved a life estate interest in the minerals. The two parties had previously entered into an oil and gas lease for the property in 2005 and oil was being produced by November 2007, which was prior to the creation of the life estate at issue. In addition, the deed contained no language excluding the application of the Open Mines Doctrine. The Supreme Court thus concluded that where no North Dakota statute specifically addressed how the proceeds from the sale of minerals or other payments under a mineral lease should be allocated between life tenants and remaindermen, and the instrument creating the life estate did not exclude application of the Open Mines Doctrine, the Open Mines Doctrine clearly applied and the life tenant is entitled to the proceeds from production.

The Supreme Court added that “[a] life estate in mineral interests alone is nearly worthless except for mining or oil and gas production purposes and, without application of the Open Mines Doctrine, the result would be that the entity holding the life estate could have the responsibility of being the trustee for the remainder interest with little or no benefit therefrom.” Thus, the Supreme Court of North Dakota has made clear that the Open Mines Doctrine is clearly applicable in North Dakota law as it applies to oil and gas interests in land.

This case confirmed the suspicion of many practitioners that the Open Mines Doctrine should apply in North Dakota, and affirmed the default rules regarding allocation between a life tenant and remainderman. It underscores the importance of carefully reading the deed creating the life tenancy, and being aware of the point of time the life estate was created in relation to leasing and production. We note that in the absence of a clear indication of the distribution of proceeds as between the life tenant and remaindermen, it is often prudent to have the parties stipulate as to allocation prior to disbursement.

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Licensed to practice in North Dakota, Texas, Kansas and Wyoming

 


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