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Utah Supreme Court Invalidates Tax Title as to Severed Minerals on Due Process Grounds

Can Utah’s four-year statute of limitations for challenging a tax sale prevent a property owner who never received notice of the sale from contesting it? In prior years, the answer may have been “yes.” In Jordan v. Jensen, 2017 UT 1, 2017 WL 104642, however, the Utah Supreme Court held that the answer is an unequivocal “no.”

In Jordan, the owners of the surface and mineral estates conveyed the surface and reserved the minerals in a deed recorded in early 1995, prior to levy and assessment of the property taxes by Uintah County. The new surface owner failed to fully pay the property taxes levied by the County for 1995, and as a result, the County sold the property at a tax sale in 2000, without notifying the mineral interest owners. Id. ¶¶ 4-6. Years later, an oil and gas company seeking to develop the mineral estate obtained a title opinion that indicated that there was a question whether the severed minerals passed at the tax sale because the tax deed did not contain any language reserving the mineral interest. The mineral interest owners unsuccessfully tried to obtain a quitclaim deed from the surface owners and eventually sued to quiet title to the minerals. Id. ¶¶ 9-10.

The surface owners argued, among other things, that the County’s general property tax assessment included the nonproducing mineral estate and that the failure to give notice to the mineral owners did not void the tax deed as to the mineral interest because Utah has a four-year statute of limitations that bars challenges to a tax deed. See id. ¶¶ 13-14. (Under Utah law, the authority to tax minerals has been delegated exclusively to the Utah State Tax Commission. The surface owners argued that his delegation was limited to producing minerals and that the counties had the authority to tax the nonproducing minerals). The district court rejected the surface owners’ arguments and entered summary judgment in favor of the mineral owners. The surface owners appealed. Id. ¶ 11.

In its decision in Jordan, the Utah Supreme Court did not address the issue of whether a county has the authority to assess the nonproducing mineral interest, instead limiting its holding to the due process issue. Id. ¶ 12.

Specifically, the court analyzed whether the four-year statute of limitations provided by Utah Code Ann. § 78B-2-206 prevented a challenge to the tax title even though the mineral owners never received notice of the County’s tax sale as required by the Due Process Clause of the Fourteenth Amendment to the U.S. Constitution. Jordan, 2017 UT 1, ¶ 16. In Hansen v. Morris, 283 P.2d 884 (Utah 1955), the Utah Supreme Court rejected a challenge to a tax sale based on the predecessor to section 206. The court in Hansen stated that “a failure to provide notice or a due process violation does not prevent section 206 from applying to ‘validate tax titles.’” Jordan, 2017 UT 1, ¶ 22 (quoting Hansen, 283 P.2d at 885).

In overturning Hansen, the Jordan court noted that subsequent U.S. Supreme Court cases have taken a different approach, finding that a statute of limitations “will not apply when it is triggered by constitutionally defective state action.” Id. ¶ 23 (citing Schroeder v. City of N.Y., 371 U.S. 208 (1962); Mennonite Bd. of Missions v. Adams, 462 U.S. 791 (1983); Tulsa Prof’l Collection Servs., Inc. v. Pope, 485 U.S. 478 (1988)). Applying these cases, the Jordan court held that section 206 requires state action—the conducting of a tax sale—before it takes effect, and that section 206 will not prevent a party from challenging a tax sale if constitutionally adequate notice is not provided to that party. Id. ¶ 34. The court also noted that constructive notice by recording a tax title is insufficient where the mineral owners’ names and addresses are “reasonably ascertainable and known to the county,” as was the case here. Id. ¶ 38; see id. ¶ 37. Rather, notice to such owners must be mailed to their last known address of record or otherwise given in a manner that ensures its delivery. Id. ¶ 37.

The court concluded that because the mineral owners did not receive constitutionally adequate notice, the County did not have jurisdiction over the mineral interest, thus voiding the tax title to the extent it purported to convey the mineral interest. Id. ¶ 42. In doing so, the court overruled Hansen “[t]o the extent [it] states that section 206 can apply where a state or county fails to provide constitutionally adequate notice to an interested party of a tax sale….” Id. ¶ 40.

(Re-printed from Andrew J. LeMieux, Utah Oil & Gas, Rocky Mountain Mineral Law Foundation Mineral Law Newsletter, Volume XXXIV, Number 1, 2017)

Utah Oil & Gas Update

UTAH COURT OF APPEALS APPLIES THE OPEN MINES DOCTRINE, REJECTS PETITION TO CONSTRUE WILL IN FAVOR OF LIFE TENANTS

In re Estate of Womack, 2016 UT App 83, 2016 WL 1729528, involved a decedent whose formally probated Will devised a 160-acre parcel to his three children, in equal shares. See id. ¶ 2. In his Will, the decedent specified that “the oil, gas and mineral rights under the said property . . . are devised to each of my children, share and share alike, for life,” remainder to the decedent’s grandchildren. Id. In 1990, the district court entered an estate closing order that named the decedent’s three children as the owners of the 160-acre parcel outright. Id. ¶ 3. In 1992, the district court amended the estate closing order “to conform to the Will” and provide for the grandchildren’s remainder in the minerals, which had been incorrectly omitted in the prior order. Id. ¶ 4. In 2008, an oil and gas company leased the minerals underlying the 160-acre parcel, but a question arose as to who was entitled to the proceeds of production. Id. ¶ 5.

In an effort to clarify who was entitled to the proceeds of production, one of the life tenants petitioned the district court to reopen the decedent’s estate and construe the Will in favor of the life tenants. According to the life tenant, the prior order’s lack of specificity resulted in an ambiguity that should be resolved in favor of the life tenants, based on an affidavit from the drafting attorney regarding the decedent’s intent. Id. ¶¶ 5 and 6. Two of the remaindermen challenged the petition, asserting that the requested relief would require the court to re-construe a provision of the Will that had already been construed, and that the court would be required to vacate or modify its prior order. This, the remaindermen contended, was barred by a six-month statute of limitations. Id. ¶ 14 (citing Utah Code Ann. § 75-3-412). The district court agreed with the remaindermen and denied the life tenant’s petition to construe the Will.

The life tenant appealed, claiming that the district court had misinterpreted the nature of the petition, and that the petition only sought clarification of the prior estate closing order, which was not subject to the six-month limitations period. The Court of Appeals affirmed the district court’s decision. The Court cited the open mines doctrine and concluded that the remaindermen were entitled to the proceeds of production because the Will did not specify otherwise. The Court found that the prior estate closing order had already construed the Will as creating life estates in mineral rights, and “[l]ife estates in mineral rights, by default, do not encompass a right to any proceeds from new mineral extraction.” Id. ¶ 17 (citing Hynson v. Jeffries, 697 So.2d 792, 797 (Miss. Ct. App. 1997). In the Court’s view, the Will was not ambiguous, and clarification was not necessary. Id. The Court found that the prior estate closing order “implicitly granted extraction proceeds to the [remaindermen] (albeit by default).” Id. ¶ 19. Because the petition sought to prove the decedent’s intent for the life tenants to receive income from the minerals, “rather than letting such proceeds default to the holders of the remainder” under common law, the Court found that the six-month time limit for vacations and modifications of prior orders applied, and the petition was time-barred. Id.

UTAH LEGISLATURE CONFIRMS THAT FEDERAL, STATE, AND TRIBAL INTERESTS MUST BE EXCLUDED WHEN CALCULATING SEVERANCE TAX ON OIL AND GAS

In the May 2015 edition of the Rocky Mountain Mineral Law Foundation Mineral Law Newsletter, we reported on the Utah Supreme Court’s decision in Anadarko Petroleum Corporation v. Utah State Tax Comm’n, 2015 UT 25, 345 P.3d 648 (Utah 2015). In Anadarko, the Court held that an oil and gas operator may exclude federal, state, and tribal interests when calculating its severance tax rate.

The Utah legislature recently codified the rule established by Anadarko. See S.B. 17, ch. 324, 2016 Utah Laws (amending Utah Code Ann. §§ 59-5-102 and 59-5-103.1). S.B. 17 confirms that the severance tax on oil and gas does not apply to federal, state, or tribal interests in oil and gas. As such, for purposes of determining the amount of severance tax, these exempt interests should be excluded when calculating the value of oil and gas and the tax rate. S.B. 17 applies to a taxable year beginning on or after January 1, 2015, as well as to severance taxes “for any taxable year, including a taxable year beginning before January 1, 2015, that is the subject of an appeal that was filed or pending on or after January 1, 2016.” Id.

(Re-printed from Andrew J. LeMieux, Utah Oil & Gas, Rocky Mountain Mineral Law Foundation Mineral Law Newsletter, May 2016)