Article on Mineral Rights in Community Property States

Bryan Mackay (Business Manager, EPJ Vol. 5, J.D. Candidate, 2013) recently published an article entitled, Marriage and Minerals in Texas: Confronting the Community Property Presumption and Potential Improvements in California, 5 Est. Plan. & Community Prop. L.J. 195. Provided below is the introduction:

In Texas, widespread mineral interest ownership has created a complex body of law that presents owners with difficulties in proving ownership.

Texas recognized mineral interests early-not only in the state’s constitution but also by various judicial decisions.Courts have held that the severed mineral estate contains five “essential attributes” that the owner has full authority to sever and convey as the owner sees fit. These interests are as follows:

(1) the right to develop (the right of ingress and egress), (2) the right to lease (the executive right), (3) the right to receive bonus payments [(a onetime payment in consideration for signing a lease)], (4) the right to receive delay rentals [(payments by the lessee for delays in drilling a well)], and (5) the right to receive royalty payments.

Difficulties arise when this “bundle of sticks” contained within the mineral estate becomes vested in different owners, which can happen when the surface estate owner reserves the interest by retaining the minerals or grants the interest by signing a lease for a lessee to develop the minerals.

As demand and prices have increased, Texas has experienced a boom in oil and gas production. The demand for mineral rights from oil and gas exploration companies and royalty clearinghouses has led to increasing pressure on families and estates to sell or transfer their rights as a viable means to wise estate planning choices. Consequently, estate planning attorneys should understand some of the basics of the mineral estate and some of the long-term implications marriage can have on these unique interests. Texas, as a community property state, presents the unique situation of a large number of married individuals owning interests in minerals such as oil and gas, which results in complex methods for classifying those interests. This leads to highly controversial disputes and begs the question: When dealing with the adjudication of these property rights between spouses, is there an easier way of classifying them or a solution that fixes some of the issues the community property system; creates for examining title? Thus, the discussion of statutes and presumptions seeks to simplify many of the issues that title and estate planning attorneys often confront.

Mineral interests are treated the same as all other marital property in Texas, and courts subject these interests to the same presumptions found in the Texas Family Code. The Texas Legislature has classified a spouse’s separate property during marriage as follows: (1) property owned by either spouse prior to the marriage; (2) any property obtained by gift, devise, or descent; and (3) personal injury rewards (excluding money) received for loss of earning capacity. Texas, historically rich in oil and gas, has produced many judicial decisions regarding the classification of marital property in minerals since petroleum first became a precious commodity. However, to gain a grasp of how Texas courts treat mineral interests in the context of marital property, one must first have a working knowledge of the basic rights of a mineral owner and the legal effects of multiple conveyances over time. Professor Kramer remarks, “One of the universal objectives of real property conveyancing rules is that courts will attempt to reach results which ensure title certainty. But at times, courts in Texas and Oklahoma pay little heed to this objective.” This opinion could relate not only to conveyances, as Professor Kramer discusses, but also to current judicial trends in marital property cases that stem from basic misunderstandings of the severable rights contained within the mineral estate.

The following is a straightforward analysis of current law that practitioners need to know and recommendations on potential improvements. Part II of this comment expands on the background of Texas as a community property state and provides an outline of the analysis required to determine marital property rights. Part III surveys the treatment of mineral interests under the analytical framework used to determine marital property rights and explains judicial trends of Texas courts characterizing marital property over time. Part IV uses the Texas Supreme Court case Pearson v. Fillingim to illustrate the problems caused by the community property presumption in Texas and offers potential improvements based on the burden of proof in California.

Part V briefly concludes this comment with a recap of the community property distinctions between Texas and California and stresses the importance of applying an equitable burden of proof in disputes over the characterization of mineral and royalty interests.