Decision: Central Natural Resources v. Davis Operating Co.

February 6th. The Kansas Supreme Court has issued its opinion in Central Natural Resources Inc v. Davis Operating Company (No. 96,463) a property law dispute involving mineral rights to coalbed methane gas (CBM). In a unanimous opinion, written by Justice Johnson, the Court affirmed the District Court’s granting of summary judgement rejecting Central Natural Resources contention that its rights to the coal in certain tracts of land in Labette County also gave it ownership of the methane gas contained there. Note: This was an interlocutory appeal. The remainder of the case involving a variety of disputes continues in the District Court which had ruled that an interlocutory appeal would aid the rest of the case. This was because its outcome profoundly affects the remainder of the case and because this was a question of law over which there was a strong difference of opinion.

Davis Operating Company and its co-defendants obtained leases to extract gas from 16 separate pieces of land. After these had been developed and were producing gas, Central Natural Resources filed a suit claiming that the (unused) leases it held covering the coal rights (granted to prior companies Central was successor) gave it ownership of the gas. It therefore sought damages for trespass and conversion for the drilling and production activities. The leases Central holds date back to the 1920s. The District Court rejected Central’s arguments and held that the gas was a separate mineral to the coal and therefore the coal leases did not encompass the gas. Central’s deeds gave it the rights to extract the coal and made no mention of any other mineral.

This ruling is affirmed by the Kansas Supreme Court. In its opinion the Court considers several arguments made by Central and rejects them all. Firstly, Central had suggested that as a matter of law the CBM gas is part and parcel of the coalbed in which it is to be found if the coal rights are the first mineral rights granted and there is no specific reservation of the rights to the gas. The Court dismissed this argument on the grounds that it did not fit with normal mineral rights and other property law. When an estate is subdivided it becomes multiple distinct estates, the boundaries of which are governed by the title deed. The Court refused to create a rule here that held that anything contained in the coalbed was conveyed by a deed to ‘the coal’.

Central also argued that the Court should alter its normal approach to interpreting the meaning of deeds (which involves discerning the intent of the parties entering the deed, in the context of the deed they wrote) to one based on an ‘intelligent person’ standard, where an external analysis of the logical meaning of the deed would be applied. Central’s aim here was to then establish that since CBM is mainly held within the pores of the coal through adsorption to the rock surface, transfer of the coalbed must mean transfer of the CBM. The Court declined to change its approach to deed interpretation, and Central’s argument here therefore failed.

Central next argued that a statute required that the deeds to the coal have transferred all rights to the gas. The Court rejected this argument, too – the statute in question clarifies that in real estate transfers all interest in the land passes to the grantee unless otherwise stated in the deed. Central believed that this meant that absent a reservation the deed to the ‘coal’ axiomatically meant ‘everything within the coalbed’. However, the Court pointed out that the statute did not apply here. In these cases the transfer of the property had been subdivided since the original owners had retained all rights except to the coal.

Having dispensed with Central’s alternative approaches the Court followed its normal approach and examined the intent of those who had made the deeds. In doing so Central’s arguments about the origin and nature of CBM did not help it. At the time the deeds were written, CBM was seen as a hazardous gas responsible for mining accidents and little else. To those writing the deeds it held no economic value, but at the same time was not considered a part of the coal. The deeds gave Central’s predecessors rights to the coal and the coal alone (though all parties understood that if the coal were removed the gas would go too). They did not by extension grant rights to extract the gas while leaving the coal in place, which is what the defendants are doing and obtained separate rights to do.

Central’s case against the defendants for alleged damage to the unworked coalbed by the gas extraction drilling continues.


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