Tax Foreclosure on a Landowner Royalty: The Ridgefield Decision

In Ridgefield Permian LLC. V. Diamondback E & P LLC,[1] the El Paso Court of Appeals held that following a tax foreclosure an original lessee retained ownership of his interest in the mineral estate, which carried with it the possibility of reverter.[2] The dispute in Ridgefield arose over the scope of a tax judgment and the subsequent sheriff’s deed, and whether the minerals and possibility of reverter or only the tax debtor’s royalty interest then existing under a producing mineral lease, was foreclosed upon and subsequently conveyed.[3]

The land in dispute is in Reeves County, Texas. Mrs. Alberta Jeffryes Griffith (“Mrs. Griffith”) owned a 1/7 interest in the surface and mineral estate of the subject tract. When Mrs. Griffith died intestate in 1974, her interest passed to (i) her son Royer Griffith (“David”), an undivided 1/21 (1/3 of 1/7) in fee; (ii) her son Albert Jeffryes Griffith (“Albert”), an undivided 1/21 in fee; and (iii) her husband David W. Griffith (“Mr. Griffith”), an undivided 1/21 as a life estate, remainder to David and Albert. In 1975, Mr. Griffith, David, and Albert executed an oil and gas lease (the “Meriwether Lease”) with a 1/8th landowner royalty.[4]

In 1998, the Reeves County tax authorities filed suit against several hundred defendants, including Mr. Griffith’s life estate and Albert, seeking to collect unpaid taxes on the royalty payments under the Meriwether Lease.[5] A judgment was entered into in 1999, and the Reeves County tax authorities foreclosed on various interests, which included both Griffith Lessors’ interests. The County Clerk then issued an Order of Sale to the Reeves County Sheriff, who sold the foreclosed interests by a sheriff’s deed. Mr. Griffith later died, terminating his life estate and vesting David and Albert each with an undivided 1/14 mineral interest.[6]

In 2008, Albert granted whatever interest(s) he still owned in the land to the Albert Jeffryes Griffiths Trust (the “Trust”). Meanwhile, the purchaser from the tax sale conveyed whatever interest(s) it purchased to Magnolia, LLC (“Magnolia”). In 2012, the Meriweather Lease automatically terminated after the cessation of production.[7] Magnolia, under the belief that the minerals and possibility of reverter had been foreclosed upon, executed a lease with Finley Resources, Inc (“Finley”). After subsequent assignments, Finley’s interest was acquired by Diamondback LLC (“Diamondback”). The Trust, under the belief that the minerals and possibility of reverter had never been foreclosed upon, executed its own oil and gas lease with Ridgefield Energy Investments, LLC, who later transferred its interest under the lease to Ridgefield Permian, LLC (“Ridgefield”).[8]

Ridgefield and the Trust sued Magnolia and Diamondback, seeking to quiet title on their competing leases. Both sides filed motions for summary judgment to determine whether the minerals and possibility of reverter had been foreclosed by the taxing authorities and sold by the Reeve County Sheriff.[9] If the minerals and possibility of reverter had been foreclosed on, then Diamondback held a valid lease from Magnolia. If they had not been foreclosed on, then Ridgefield had a superior lease from the Trust. The Trial Court granted summary judgment in favor of Diamondback, and Ridgefield filed this appeal.

The Court began its analysis with the well-established principle that minerals in place are realty, which is subject to ownership, severance, and sales taxes. Because the mineral estate can be severed from the surface estate either by a grant of the minerals in a deed or lease or by reservation in a conveyance, oil, and gas leases are not “leases” in the traditional sense. Rather, the lessor is a grantor who grants a fee simple determinable interest to the lessee/grantee.[10] The lessee’s interest is “determinable” because it may terminate and revert entirely to the lessor if there is an occurrence of events that terminates the lease. The lessor thus retains a reversionary interest called a “possibility of reverter” in the mineral estate, being a right to fee ownership in the real property reverting to themselves if the condition terminating the determinable fee occurs.[11]

All real property and tangible personal property, which includes producing minerals, is subject to tax in proportion to its value. Thus, in the face of tax delinquency, all property belonging to the delinquent taxpayer is subject to seizure and sale for the payment of the taxes.[12] At the time of Mr. Griffith’s death, David and Albert were each vested with: (i) a 1/14 interest in the surface estate; (ii) a 1/14 of 1/8 royalty interest under the Meriwether Lease; and (iii) a 1/14 reversionary interest in the mineral estate as a possibility of reverter.[13] The dispositive issue of an appeal was what combination of these three interests was foreclosed upon by the tax judgment and subsequently conveyed by the Sherriff’s Deed. 

The court looked to several factors in finding that the only interest foreclosed on was Albert’s 1/14 of 1/8 royalty interest under the Meriwether Lease.[14] First, when the tax foreclosure occurred it made explicit reference to a said royalty interest but did not reference the surface, minerals, or the possibility of reverter. Moreover, a possibility of reverter is non-taxable interest, so there could not have been delinquent taxes attached to that interest.[15] Finally, the tax deed referred only to the royalty interest under the Meriwether Lease and included no mention of the possibility of reverter.[16] Therefore, the possibility of reverter remained attached to the surface estate and when the Meriwether lease terminated, an undivided 1/14 mineral interest reverted to the Trust.

At least in the Ridgefield case, the possibility of reverter was found to have stayed with the surface owner following a tax foreclosure. All that was foreclosed on was the landowner royalty under a now-expired lease. However, it is unclear whether this case would have turned out differently if the Trust did not retain surface rights (and thus something for the possibility of reverter to remain “attached” to), or if the sheriff’s deed had been worded differently or more broadly. What Ridgefield does make clear is that the possibility of reverter is a non-taxable interest and that the specific language of a foreclosure judgment and tax deed will control whether the minerals and/or possibility of reverter passed in a foreclosure of a royalty interest under an oil and gas lease.[17] If a tax deed conveys only the royalty under a specific producing (or formerly producing) lease, it is possible that the tax grantee, like Magnolia and Diamondback, will own nothing once the producing lease terminates

[1] 626 S.W.3d 537 (Tex.App.—El Paso 2021, pet. denied).

[2] Id. at 29.

[3] Id. at 2.

[4] Id. at 2-3.

[5] Mr. Griffith and Albert owed a relatively small tax debt on royalties received under the Meriwether Lease.

[6] Id. at 4-5.

[7] Id. at 5.

[8] Id. at 6.

[9] Id.

[10] Id. at 9-10.

[11] Id. at 10.

[12] Id. at 12.

[13] Id. at 14.

[14] David’s interest had apparently not been made part of the Reeves County foreclosure proceedings or at least is not made subject to this dispute.

[15] The Court referenced the Supreme Court’s holding in Texas Turnpike Co. v. Dallas County, 153 Tex. 474, 271 S.W.2d 400, 402 (Tex. 1954), which held that, like a contingent remainder in property, a possibility of reverter is not a taxable title).

[16] Ridgefield Permian LLC v. Diamondback E & P LLC at 22-24.

[17] Id. at 22-24, 29.