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Ridgefield Permian v. Diamondback: To what interest does a tax lien on a royalty reserved in an oil and gas lease attach?

Ridgefield Permian v. Diamondback is another case arising out of the same tax foreclosure suit that was addressed in Mitchell v. MAP Resources, decided earlier this year by the Texas Supreme Court. My discussion of Mitchell can be found here. Both Ridgefield and Mitchell were initially decided by the El Paso Court of Appeals. While Mitchell’s appeal to the Supreme Court was pending the El Paso Court handed down its opinion in Ridgefield, 2021 WL 1783260 (May 5, 2021). In Ridgefield, the El Paso Court held that the taxing authorities’ lien attached only to the royalty interest reserved in the lease; once the lease terminated, the purchaser of the royalty interest foreclosed upon owned no interest in the mineral estate. This week, the Texas Supreme Court declined to hear Ridgefield’s appeal of the El Paso Court’s judgment.

Alberta Griffith owned a 1/7th interest in the surface and minerals in a section of land in Reeves County. When she died her interest passed to her two sons, Albert and David, subject to a life estate interest in her surviving husband. In 1975, the husband and sons signed an oil and gas lease to Billings, reserving a 1/8th royalty. A well, the Meriwether No. 1, was completed on the lease.

In 1998, there was a small tax debt owed by Mr. Griffith and Albert on their royalty in the Meriwether lease. That year the taxing districts filed suit to foreclose tax liens against several hundred defendants, including Mr. Griffith and Albert. In the suit their interests were each described as a .005952 decimal interest in the Meriwether lease (each owning a royalty of 1/3 of 1/7 of 1/8 royalty). Judgment was entered foreclosing the lien, the interests were sold at Sheriff’s sale, and the interests came to be owned by Magnolia, LLC.

In October 2012 the Meriwether well stopped producing and the 1975 lease expired. The Griffith Trust, successor to the interest of Albert, David and Mr. Griffith, later leased the Griffith interest to Ridgefield. Magnolia signed a lease later acquired by Diamondback, which established production from the property. Ridgefield and the Griffith Trust then sued Magnolia and Diamondback over ownership of the 1/7th mineral interest.

The Court’s opinion explains that, when an oil and gas lease is granted, it conveys the mineral estate to the lessee for the term of the lease. The lessor then owns the royalty reserved in the lease and the “possibility of reverter” – the right to receive back the mineral estate leased when the lease expires.

Relying on prior Supreme Court precedent, the Court held that the possibility of reverter owned by the Griffiths at the time of the tax foreclosure was a “non-taxable interest,” so “there could not have been delinquent taxes on that interest.” Therefore, the tax lien was on the reserved royalty interest only, and that royalty interest terminated when the Meriwether lease expired. So the Griffith Trust owns the royalty interest reserved in its lease to Ridgefield and Ridgefield owns the leasehold estate in the 1/7th mineral interest, and Magnolia and Diamondback own no interest:

In summary, the possibility of reverter could not have been foreclosed upon because it was a non-taxable interest, meaning there were no delinquent taxes on which a lien could attach. Similarly, the possibility of reverter could not have been foreclosed upon along with the royalty interest because it did not derive from the royalty interest, nor was it attached to the royalty interest; in fact, the possibility of reverter remained attached to the surface estate.

The Court also ruled for Griffith and Ridgefield for a second reason: The description in the judgment and the Sheriff’s deed only described the royalty interest under the Meriwether lease and did not purport to foreclose on the possibility of reverter.

The Court’s statement that the possibility of reverter was “attached to the surface estate” seems odd, because it is a possibility of reverter in the mineral estate, not the surface estate. The Court relied for its conclusion on the opinion of the Houston [14th District] court of appeals in Pounds v. Jurgens, 296 S.W.3d 100 (2009, Pet. denied.) In that case, there was a tax foreclosure on a surface interest; the owner of the surface also owned a mineral interest, but the mineral interest was leased. The owner paid taxes on his royalty interest but failed to pay taxes on his surface interest. The Houston court held that the foreclosure did not include the owner’s royalty interest but did include the possibility of reverter; so when the lease terminated, the owner’s mineral interest passed to the buyer at the Sheriff’s sale. This seems to be inconsistent with the El Paso court’s reasoning that the possibility of reverter is a non-taxable interest.

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