Oxy USA, Inc. v. Red Wing Oil, LLC ( 2015 )

No. 111,973
IN THE COURT OF APPEALS OF THE STATE OF KANSAS
OXY USA, INC.,
Appellee,
v.
RED WING OIL, LLC, et al.,
Appellees,
(ALICE LAVELLE KING),
Appellant.
SYLLABUS BY THE COURT
1.
A deed conveying an interest in subsurface minerals for a fixed term of years and
so long thereafter as minerals are produced creates and immediately vests a defeasible
property interest.
2.
The grantor of such a defeasible property interest retains a reversionary interest in
the mineral rights that reverts to the grantor upon a cessation of production.
3.
Based upon the rule stated in Smith v. Home Royalty Association, Inc., 209 Kan.
609, 498 P.2d 98 (1972), which is applicable to this case, production on property
included in a unitized or consolidated lease is not production within the meaning of the
property deed containing the reservation of a half-interest in the mineral rights.
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4.
K.S.A. 60-507 is construed and applied.
5.
The right of reversion or the possibility of reverter is a vested future interest
known as a fee simple determinable. A fee simple determinable is legally distinguishable
from a fee simple subject to a condition subsequent. The former creates a reversionary
interest that reverts the property back to the grantor upon the condition set for reversion.
The latter creates a right of reentry that requires the interest holder to act upon the
condition.
6.
K.S.A. 60-503 is construed and applied.
7.
A cotenant may not obtain ownership of another cotenant's property by adverse
possession.
8.
Acquiescence, as used in this case, is a form of estoppel precluding a party from
taking a legal position inconsistent with past actions.
9.
The reservation of mineral rights in a deed is not read in pari materia with the
terms of an oil and gas lease extant at the time the deed is created.
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Appeal from Haskell District Court; BRADLEY E. AMBROSIER, judge. Opinion filed October 16,
2015. Reversed and remanded with instructions.
Jacob M. Cunningham, of Doering & Grisell, P.A., of Garden City, for appellant.
Willard B. Thompson, David G. Seely, and Dan E. Lawrence, of Fleeson, Gooing, Coulson &
Kitch, L.L.C., of Wichita, and Erick E. Nordling, of Kramer, Nordling & Nordling, LLC, of Hugoton, for
appellees Red Wing Oil, LLC, et al.
Before MCANANY, P.J., GARDNER, J., and WALKER, S.J.
WALKER, J.: In this appeal, we consider whether the district court properly
terminated the reversionary rights of a landowner to one-half of the minerals under her
land. Because we find the court did not correctly apply the law, we reverse and remand
with instructions to restore the mineral rights to the landowner.
FACTS
In January 1945, Frank Luther obtained the northeast quarter of a section of land
in Haskell County (the northeast quarter), which was subject to an existing lease for the
production of oil and gas. Shortly thereafter, in April 1945, Luther sold the 160-acre tract
to E.W. Rahenkamp. In his deed to Rahenkamp, Luther reserved a one-half interest in the
mineral rights for a period of 20 years "or as long thereafter as oil, gas or other minerals
is produced therefrom."
After a few other subsequent conveyances, in 1955 the northeast quarter was
deeded to Floyd W. Leonard, subject to the Luther half-interest and the oil and gas lease.
In the intervening years after Luther's ownership of the land, the company holding the
lease interest in the exploration and production of minerals in the northeast quarter
unitized and consolidated the lease on the northeast quarter with leases on neighboring
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property. These other properties produced oil and/or gas under the unitized and
consolidated lease, but no minerals were produced on the northeast quarter from
March 27, 1945, until 2009, when Oxy USA, Inc. began producing oil and/or gas from
the Tice Cattle #3 well on the northeast quarter.
In 1992, Floyd W. Leonard quit-claimed half of his interest in the northeast
quarter to his wife, M. Berenece Leonard. Both Floyd and Berenece drafted mirror-image
wills that left their property in trust for the benefit of the surviving spouse and then their
children. Berenece died on December 22, 1999; Lloyd died on March 24, 2005. In March
2008, Floyd Junior Leonard, as trustee, conveyed the northeast quarter to Alice LaVelle
King, a daughter of Floyd and Berenece. King is the current owner of the northeast
quarter, including the one-half mineral interest which was not reserved by Luther, and
she is the appellant in this action.
Luther's one-half interest in mineral rights on the northeast quarter was divided
and passed to multiple parties. The bulk of the named defendants in this litigation are
holders of some fraction of Luther's one-half interest and include at least 41 separate
persons or entities. Because all of the defendants except King and the M. Berenece
Testamentary Trust appear united in interest in this litigation and in order to reduce
confusion, all of the defendants holding some fractional mineral interest will be
collectively referred to as "the Luther mineral interest holders."
Though the record is unclear as to details, Oxy USA, Inc. became the successor-
in-interest to the unitized and consolidated oil and gas lease encompassing the northeast
quarter. In 2009, Oxy USA, Inc. began to produce oil and/or gas on the Tice Cattle #3
well located on the northeast quarter. Unable to discern the rightful recipient of royalty
payments, Oxy USA, Inc. filed this interpleader and quiet title action to determine who
currently holds the mineral rights to the property.
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After the parties responded to the petition and the district court established the
pertinent issues in the case through a pretrial conference, the Luther mineral interest
holders and King filed competing motions for summary judgment. On March 17, 2014,
the district court rendered a decision, construing the applicable caselaw to conclude that
King's reversionary interest was triggered in 1972 but holding that her claim was
untimely and that she acquiesced in the continuation of the Luther mineral interest. The
court granted summary judgment in favor of the Luther mineral interest holders. Though
the district court judge did not specifically rule on King's competing motion for summary
judgment, his granting of summary judgment to the Luther mineral interest holders had
the practical effect of denying King's motion to terminate their interests and order the
Luther one-half interest returned to her.
King filed a timely notice of appeal from the district court's judgment, and the
Luther mineral interest holders filed a timely notice of cross-appeal.
ANALYSIS
Before turning to the specific issues in this case, we must consider the legal nature
of the parties' interests.
A deed conveying an interest in subsurface minerals for a fixed term of years and
so long thereafter as minerals are produced creates and immediately vests a defeasible
property interest. Wilson v. Holm, 164 Kan. 229, 234-35, 188 P.2d 899 (1948) ("[I]n this
state a deed, conveying oil and gas in place for a fixed term of years and so long
thereafter as either or both are produced in paying quantities, creates a base or
determinable fee and that title to the estate so created vests immediately upon the
execution and delivery of such an instrument but remains defeasible in the event of
cessation of production.").
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The conveyance of mineral rights severs the property interest in the surface rights
from the property interest in the subsurface minerals. Mining Co. v. Atkinson, 85 Kan.
357, 360, 116 P. 499 (1911) ("'After the mineral is conveyed apart from the land, or vice
versa, two separate estates exist, each of which is distinct; the surface and the mineral
right are then held by separate and distinct titles in severalty, and each is a freehold estate
of inheritance separate from and independent of the other.'" [quoting 27 Cyc. 687]). The
grantor of this defeasible property interest retains a reversionary interest in the mineral
rights because the interest will revert to the grantor upon a cessation of production. See
Wilson, 164 Kan. at 236-37.
In this case, when Frank Luther conveyed the northeast quarter to E.W.
Rahenkamp, which subsequently descended to Alice LaVelle King, he actually created a
defeasible estate by reservation rather than affirmative grant. But the law makes no
distinction between how these interests are treated. Classen v. Federal Land Bank of
Wichita, 228 Kan. 426, 428-29, 617 P.2d 1255 (1980) ("[A] term mineral interest may be
created by either grant or reservation, resulting in two types of future interests. Many
courts and authorities describe the potential interest to be obtained by the fee owner upon
termination of the term mineral interest as a 'reversion,' regardless of the method of
creation, and the owner thereof as the 'reversioner.' As rules of law considered herein
apply equally to either method of creation, we will not attempt to differentiate between
the two types of interests and will use the more commonly understood terms relating to
reversionary interests.").
Therefore, for purposes of this case, Luther retained for himself and his heirs a
term mineral interest in an undivided half of the mineral rights of the northeast quarter,
while granting to Rahenkamp and his assigns a reversionary interest in those mineral
rights. There is no dispute in this case that King now holds that reversionary interest. She
also holds all of the surface property rights and an undivided one-half interest in the
mineral rights of the northeast quarter originally conveyed to Rahenkamp in 1945. The
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dispute in this case revolves around King's reversionary interest. More specifically, the
issue in this case concerns whether the Luther mineral one-half interest has reverted to
King due to nonproduction of minerals.
The material facts are undisputed. No production of minerals has occurred on the
northeast quarter since the defeasible interest was created in 1945 until Oxy USA, Inc.
began producing oil and/or gas from the Tice Cattle #3 well in 2009. Although the record
is unclear, oil and/or gas has apparently been continuously produced from wells within
the same unitized lease. A determination of whether the defeasible interest of the Luther
mineral interest holders terminated rests on whether production under a unitized lease
qualifies for production under the defeasible deed reservation. Three Kansas Supreme
Court cases are important to the resolution of this question.
In Smith v. Home Royalty Association, Inc., 209 Kan. 609, 613-14, 498 P.2d 98
(1972), the Kansas Supreme Court first considered the question. After reviewing
pertinent precedent, the court reasoned that the terms of a lease had no bearing upon the
terms of a defeasible property interest created by deed. The terms of one could not
control the interpretation given the other. Since production was not defined in the deed to
include production under a unitized or consolidated lease agreement, "production" within
the meaning of the deed must refer to production occurring on the subject property.
Eight years later, the Kansas Supreme Court revisited its ruling and overturned
Smith. The Classen court ruled that production within the meaning of a defeasible term
mineral interest included production occurring on unitized or consolidated lease property.
228 Kan. at 435-37. Ten years after Classen was decided, the court revisited the issue
again to determine whether a defeasible mineral interest, the term of which had expired
before Classen was decided, would be retroactively governed by the rule stated in
Classen. Because it was impossible to determine what had happened to the myriad of
interests that might have expired or how many innocent purchasers for value had changed
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position because of Smith, the Supreme Court determined that Classen could not be given
retroactive effect. Kneller v. Federal Land Bank of Wichita, 247 Kan. 399, 404, 799 P.2d
485 (1990).
After reviewing these cases, the district court in the present case reasoned that the
construction of the Luther mineral interest should be governed by Smith. Accordingly,
since no production had occurred on the northeast quarter during the 20-year term
provided by the deed reservation, King's reversionary interest was triggered. But, since
the court believed King or her predecessors should have been aware of their reversionary
rights as of Smith in 1972, the court held that the 15-year statute of limitations under
K.S.A. 60-507 barred enforcement of that reversionary interest.
Additionally, the court implied that King should be estopped from claiming her
reversionary interest by acquiescing to the Luther mineral interest holders' continued
possession of a portion of her property. In effect, the court held that King had waived her
right to complain about the rights of the Luther mineral interest holders by failing to take
legal action to seek their cancellation. The district court cited no legal authority for this
last holding.
On appeal, King claims that the district court erred in holding that her reversionary
claim was barred by the statute of limitations and/or acquiescence. The Luther mineral
interest holders counter that the district court's application of procedural bars to King's
claim was proper but that the district court's decision may be alternately affirmed by
correctly construing the extent of the holding in Smith. Each of these arguments will be
considered in turn.
The legislative enactment containing the statute of limitations for actions affecting
real property is K.S.A. 60-507, which provides:
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"No action shall be maintained for the recovery of real property or for the
determination of any adverse claim or interest therein, not provided for in this article,
after fifteen (15) years from the time the cause of action accrued." (Emphasis added.)
A statute of limitations is a procedural bar to the right to pursue a remedy for an
accrued cause of action after a period of time. See Harding v. K.C. Wall Products, Inc.,
250 Kan. 655, 668, 831 P.2d 958 (1992). The district court read K.S.A. 60-507 to require
King to assert her claim to the Luther mineral interest 15 years after her right to reversion
was established when Smith was decided. We disagree with this interpretation.
The right of reversion or the possibility of reverter is a vested future interest
known as a fee simple determinable. This right is distinguishable from the right of entry
when a grantor creates a fee simple subject to condition subsequent. Practically speaking,
the difference between the right of reversion (or possibility of reverter) and the right of
entry by condition subsequent is that reverter occurs automatically upon the condition set
for reversion, and the right of entry upon a condition subsequent requires action by the
grantor when the condition is satisfied. See State v. Goldberg, 437 Md. 191, 223, 85 A.3d
231 (2014) (citing 1 Simes and Smith, The Law of Future Interests § 92 [Borron 3d ed.
2002]); Ditmore v. Michalik, 244 Mich. App. 569, 580, 625 N.W.2d 462 (2001); 1 Kuntz,
Oil and Gas § 15.8, p. 459 (1987) ("When there has been neither a discovery nor
production within the fixed or primary term of the interest granted, the interest will
terminate automatically upon expiration of the fixed term, and if the grantee remains in
possession and subsequently produces, he [or she] will be treated as a tenant at will.").
Though Kansas cases use "reverter" and "right of entry" interchangeably, see
Miller v. Stoppel, 172 Kan. 391, 397, 241 P.2d 488 (1952), there is clear indication in
Kansas caselaw indicating that a defeasible mineral interest conditioned on mineral
production creates a reversionary interest in the property owner and that the terminable
mineral interest terminates immediately upon cessation of production. See Wilson, 164
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Kan. at 240 ("In the event of their failure to do so, it is our view production as
contemplated by the parties is to be regarded as having ceased, their conveyance
terminates and any estate theretofor held by them under and by virtue of its terms reverts
to the grantors.").
If reversion occurs automatically upon the cessation of production, as many
authorities suggest, see generally 1 Kuntz, Oil and Gas § 15.8, p. 459 (1987), King was
not required to reenter the property or to bring a lawsuit to protect her interests in the
property. Once production actually ceased, the term mineral interest reverted
automatically to King. This is consistent with the Kansas Supreme Court's ruling that a
mineral interest holder bears the burden of proving that reversion has not occurred by
establishing that the cessation in production was merely temporary.
"Obviously, since production under a lease depends in the first instance upon
action or inaction on the part of the lessee and since the ultimate test as to whether an
estate created by a deed has terminated depends entirely upon its own provisions, it must
follow that the parties to a mineral deed, providing the estate conveyed to the grantees
shall continue so long as oil is produced in paying quantities, do not contemplate that
failure of a lessee to produce oil in paying quantities works a defeasance ipso facto. To
hold otherwise would mean that failure of the lessee to so produce because of neglect,
poor judgment, fraud, connivance with the owners of other mineral interests, voluntary
abandonment of the lease, or any unjustifiable reason over which the grantees had no
control, would have that result. That, however, does not mean that owners of mineral
interests can sit idly by and do nothing when the lessee ceases to operate or production
stops for any other reason. Neither does it mean, as appellants contend, that any cessation
which is resumed at some future date cannot be deemed permanent but must be construed
as temporary for the construction would result in a nullification of the defeasance clause
itself. We believe proper construction of such an instrument requires the conclusion that
if for any reason there is a cessation of production of oil in paying quantities on the land
covered by its terms the owners of the minerals in place are required to move promptly
and by their efforts actually establish that such cessation, regardless of its cause, is
temporary, not permanent. In the event of their failure to do so, it is our view production
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as contemplated by the parties is to be regarded as having ceased, their conveyance
terminates and any estate theretofor held by them under and by virtue of its terms reverts
to the grantors." Wilson, 164 Kan. at 239-40.
A contrary ruling would essentially divest King of her reversionary interest 15
years after production ceased, akin to obtaining the property interest through adverse
possession. The district court concluded that nonproduction of the mineral interests on
the property should have triggered reversion but, as King did not bring an action to
enforce her rights, the statute of limitations barred her claim of reversion in the quiet title
action. This ruling has the practical effect of divesting King of her reversionary interest in
the property.
Under the district court's reasoning, the Luther mineral interest holders have
perpetuated their right to the mineral interests of the northeast quarter indefinitely
through wrongfully retained possession of their interest for more than 15 years. As King
notes, this result is tantamount to permitting the Luther mineral interest holders to take an
interest in property by adverse possession. See K.S.A. 60-503 ("No action shall be
maintained against any person for the recovery of real property who has been in open,
exclusive and continuous possession of such real property, either under a claim
knowingly adverse or under a belief of ownership, for a period of fifteen [15] years.").
But, under Kansas law, a cotenant may not obtain ownership of another cotenant's
property by adverse possession.
"We also note the rule that a tenant cannot acquire title by adverse possession
against his [or her] contenants. The rule as applied to mineral interests is stated in 3 Am.
Jur. 2d, Adverse Possession, § 221, pp. 317, 318, as follows:
"'After severance of the surface and mineral estates, the mineral
owner must be disseised to lose his [or her] rights, and there can be no
disseisin by any act which does not actually take the mineral out of his
[or her] possession. It follows of course that the execution or recording
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of deeds or leases of the minerals does not give title to the minerals by
adverse possession.
"'In accordance with the general rule as to cotenants, it seems
that where there is a severance of the surface and mineral estates the
possession of the minerals by one cotenant does not give him [or her]
title by adverse possession as against his [or her] cotenants unless there is
an ouster of which they have notice.'" Smith, 209 Kan. at 615.
See also Kneller, 247 Kan. at 405 ("[T]he Land Bank does not meet the requirements for
adverse possession in regard to its interest herein. Its role was wholly passive.");
Buchanan v. Rediger, 26 Kan. App. 2d 59, 65, 975 P.2d 1235 ("The general common law
rule of adverse possession is that a cotenant cannot claim full title against other cotenants
absent an ouster because a cotenant's possession would not be adverse. This rule is based
on the principle that a cotenant may safely assume, absent an ouster or other notice, that
possession of property by one cotenant is not adverse."), rev. denied 267 Kan. 888
(1999).
If the Luther one-half interest in the minerals in the northeast quarter automatically
reverted to King when the term of production ended and the Luther mineral interest
holders became tenants-at-will with King, the statute of limitations simply does not apply
because King owns all of the mineral rights and has merely allowed the Luther mineral
interest holders to retain their interest while no production was occurring on the property.
Stated another way, King has not taken action to oust the Luther mineral interest holders,
although she certainly could have done so. But until the property began producing in
payable quantities, there was probably not much incentive to do so. Nevertheless, in
defending her claim to ownership of the property, we hold that King is not barred by the
statute of limitations.
As noted above, in ruling on the statute of limitations issue, the district court
mentioned that King had acquiesced to the term mineral holders. It is unclear whether the
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court was simply stating that King had been sitting on her rights or whether the court
intended acquiescence to form an independent basis for its judgment. But, since the
Luther mineral interest holders claim that acquiescence formed an alternate basis for the
judgment, it will be examined as such.
As used in this context, acquiescence is a species of estoppel. See Chelf v. State,
46 Kan. App. 2d 522, 536, 263 P.3d 852 (2011) (defining quasi-estoppel as "'an assertion
of rights inconsistent with past conduct, silence by those who ought to speak, or
situations wherein it would be unconscionable to permit a person to maintain a position
inconsistent with one in which [the person] has acquiesced'" [quoting Harrin v. Brown
Realty Co., 226 Kan. 453, 458-59, 602 P.2d 79 (1979)]). In other words, acquiescence
precludes a party from taking a legal position, in this case a claim of ownership,
inconsistent with past actions.
We fail to see how King's actions have been inconsistent with her current claim of
ownership. The record is not clear whether the parties were receiving royalty payments.
If King received royalty payments and knew that no production was occurring on the
northeast quarter, she could easily presume that the royalties were paid as the result of the
unitized oil and gas lease, payment under which not being governed by the terms of the
deed reservation for mineral interests.
As far as the record demonstrates, King would have no specific knowledge
whether the Luther mineral interest holders were also receiving royalty payments or that
her royalty payments represented only half of the royalty payments available. Based on
Oxy USA, Inc.'s inability to determine the proper recipient of royalty payments for the
Tice Cattle #3 well, it is far more likely that King and the Luther mineral interest holders
were not receiving any royalties until 2009. If the northeast quarter was not generating
revenue, King would have had notice that the property was not producing minerals, but
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she also would lack any specific incentive to quiet title against the Luther mineral interest
holders unless she planned to sell the property.
Permitting a tenancy-at-will when no royalty payments are at issue for the
production of minerals on a property is not a position inconsistent with King's claim of
ownership that should preclude her from making a claim of ownership in a quiet title
action brought by another party. We hold that a claim of acquiescence simply does not
apply to the reversionary interest of King to the Luther mineral interests.
As an alternative basis for affirming the district court's ultimate conclusion, the
Luther mineral interest holders claim that the district court improperly construed the
holding of Smith in applying it to trigger King's reversionary interest.
In Smith, the Kansas Supreme Court held that production on property other than
the subject property under a unitized lease agreement could not prevent reversion of a
defeasible mineral interest conditioned upon production when no production was
occurring on the subject property. 209 Kan. at 614. While the language in the deed
creating the defeasible property interest in Smith was very similar to the language used in
this case, the Luther mineral interest holders contend that Smith is factually
distinguishable in that the lease in Smith was created after the deed, whereas the deed at
issue in this case reflected the parties' understanding of an extant lease.
In July 1943, Flora A. Meredith executed an oil and gas lease with Joe E. Denham
on the northeast quarter. The lease provided for a term of 10 years but included an
extension "as long thereafter as oil, gas, casinghead gas, casinghead gasoline, or any of
them is produced." The lease defined production in the following provision:
"9. As to the gas leasehold estate hereby granted (excluding casinghead gas
produced from oil wells), lessee is expressly granted the right and privilege to consolidate
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said gas leasehold with any other adjacent or contiguous gas leasehold estates to form a
consolidated gas leasehold estate which shall not exceed a total area of 640 acres; and in
the event lessee exercises the right and privilege of consolidation as herein granted, the
consolidated gas leasehold estate shall be deemed, treated and operated in the same
manner as though the entire consolidated leasehold estate were originally covered by and
included in this lease, and all royalties which shall accrue on gas (excluding casinghead
gas produced from oil wells), produced and marketed from the consolidated estate,
including all royalties payable hereunder, shall be prorated and paid to the lessors of the
various tracts included in the consolidated estate in the same proportion that the acreage
of each said lessor bears to the total acreage of the consolidated estate, and a producing
gas well on any portion of the consolidated estate shall operate to continue the oil and gas
leasehold estate hereby granted so long as gas is produced therefrom."
When Luther conveyed the property to E.W. Rahenkamp in 1945, he conveyed the
property subject to the lease.
The Luther mineral interest holders contend that "production" as used in the
reservation of mineral interests in the deed should be read as "production" as defined in
the lease agreement. The reasoning is tenuous. None of the authority cited by the Luther
mineral interest holders suggests that a court will read the creation of a defeasible
property interest together with the terms of a lease.
Courts often refer to the manner in which terms-of-art are construed in oil and gas
leases to determine the legal effect of similar terms in a reservation of mineral rights. See
Texaco, Inc. v. Fox, 228 Kan. 589, 592, 618 P.2d 844 (1980) (construing "thereafter" in a
deed in the same manner as it is commonly understood in an oil and gas lease); McAfee v.
City of Garnett, 205 Kan. 269, 274-75, 469 P.2d 295 (1970) (noting that specialized
terms in a given trade are presumed to carry the specialized meaning in contracts
involving those trades); Wilson, 164 Kan. at 237 (looking generally to the application of
habendum clauses in oil and gas leases to construe the effect of similar clauses in a
mineral deed). The use of trade language to interpret a deed conveying a term mineral
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interest, however, does not justify the use of specific contract terms in a given oil and gas
lease to interpret the meaning of a term mineral interest.
"Production" does not have a specialized meaning within the oil and gas industry
that encompasses oil or gas obtained from any well under a unitized lease and certainly
did not have that meaning in 1945 when the deed at issue was created. If "production"
had the specialized meaning the Luther mineral interest holders claim, the lease
agreement would not have needed to specify that "production" meant payable quantities
of oil or gas from any well within the unitized properties. If "production" was a term-of-
art in the oil and gas community in 1945 that meant what the Luther mineral interest
holders propose, Smith would have been decided very differently.
Instead, borrowing reasoning from Dewell v. Federal Land Bank, 191 Kan. 258,
263, 380 P.2d 379 (1963), the Smith court noted the legal distinctions between the lease
and the deed:
"[T]he shut-in royalty clause contained in the leases was for the sole benefit of the lessee.
It was a privilege granted the lessee in lieu of production. It does not purport to convey
any rights to anyone else. It does not purport to extend the interest of the holders of the
mineral rights. We said the mineral reservation and the separate oil and gas leases
executed by the parties should not be construed together." Smith, 209 Kan. at 612.
Although the Kansas Supreme Court reversed its reasoning in Smith a few years
later in Classen, it did not do so on the basis of reading the oil and gas lease and the deed
reservation in pari materia, as the Luther mineral interest holders suggest. Instead,
Classen affirmed the portion of Smith that held: "[A]bsent agreement to the contrary, a
term mineral interest cannot be changed or altered by the terms of an oil and gas lease or
a unitization agreement entered into between the term mineral owner and a third party
lessee or by the holder of the reversionary interest and a third party lessee." Classen, 228
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Kan. at 434. The court reversed its decision in Smith on "other controlling
circumstances," involving primarily policy decisions.
Moreover, the Kansas Supreme Court has more recently rejected an argument
similar to the argument forwarded by the Luther mineral interest holders in this case. See
Netahla v. Netahla, 301 Kan. 693, 346 P.3d 1079 (2015).
In Netahla, the landowners entered a lease for the production of oil and gas. About
7 months later, the landowners conveyed the mineral interests in the property for a period
of 15 years "'and as long thereafter as oil and/or gas is produced from these premises or
the property is being developed or operated.'" 301 Kan. at 694-95. Although a well was
drilled, the lessee declared it a shut-in well and did not produce oil or gas from the well
from June 1, 1985, until 2003. As in the present case, the holders of the mineral deed in
Netahla argued that production under the terms of the mineral deed should be construed
according to the terms of the lease in effect at the time of the deed. The Kansas Supreme
Court disagreed. 301 Kan. at 693-96.
After reaffirming its reasoning in Dewell regarding the different parties involved
in the creation of the lease and in the creation of the mineral interest, the court ultimately
concluded:
"In light of the caselaw cited above, we hold that the 'subject to' clause in the
mineral deed here did not incorporate the provisions of the lease. We therefore look only
at the provisions of the mineral deed itself to determine whether defendants' mineral
interest has terminated." Netahla, 301 Kan. at 702.
Consequently, the district court here correctly rejected the Luther mineral interest
holders' argument related to reading the deed reservation in light of the oil and gas lease.
Since the change in law stated within Classen operated only prospectively, the court
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properly held that the rule announced in Smith governed the reversionary interest in this
case. Because the defeasible property interest terminated under the authority of Smith, it
could not be revived under the authority of Classen. See Kneller, 247 Kan. at 404 ("To
apply Classen retroactively herein would make a phoenix out of a defeasible or mineral
interest which had, under the existing Kansas law, expired eight years prior to the filing
of Classen. Such would not constitute an extension of the term interest but a revival of
the same many years after its demise."); Wagner v. Sunray Mid-Continent Oil Co., 182
Kan. 81, 88-89, 318 P.2d 1039 (1957) ("[W]hen a mineral deed has terminated because
of cessation of production, it is not revived by subsequent production of oil even though
it be in the same well.").
Although the district court correctly held that the cessation of production on the
northeast quarter triggered reversion of the Luther mineral interest to the property owner,
i.e., King, the court incorrectly interpreted the effect of reversion and improperly held
that King's claim to the property was barred by the statute of limitations and/or
acquiescence.
Reversed and remanded with instructions to enter judgment for King.
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