Tuesday, January 5, 2021
Today’s post continues my trek through the “Almost Top 10” ag law and tax developments of 2020. 2020 was another big year for many illustrations of the law intersecting with agriculture. In today’s final installation of the “Almost Top 10” I look at an Indiana case involving the state’s right-to-farm law; a Montana case involving the issue of whether dinosaur fossils are minerals and, thus, belong to the mineral estate owner; and force majeure clauses in contracts and their application to events that make contract performance impossible.
The final installment of the “Almost Top Ten” of 2020 – it’s the topic of today’s post.
Himsel v. Himsel, 122 N.E. 3d 395 (Ind. Ct. App. 2019); reh’g. den., No. 18A-PL-645, 2019 Ind App. LEXIS 314 (Ind. Ct. App. Jul. 12, 2019); rev. den., 143 N.E.3d 950 (Ind. 2020).
Every state has enacted a right-to-farm (RTF) law that is designed to protect existing agricultural operations by giving farmers and ranchers who meet the legal requirements a defense in nuisance suits. It may not be only traditional row crop or livestock operations that are protected. But, the RTF laws vary widely from state-to-state. One such law, the Indiana version (Ind. Code §32-30-6-9), was at issue in 2019 and 2020.
The Himsel Litigation
The Indiana Court of Appeals determined that the Indiana RTF law applied to protect the defendant because the change in the nature of the defendant’s hog operation from row crop farming to a large-scale confined animal feeding operation (CAFO) involving 8,000 hogs was “not a significant change” that would make the RTF law inapplicable. In other words, 8,000 hogs in a confinement building raised by a contracting party that likely doesn’t make management decisions concerning the hogs, doesn’t report some the associated contract income as farm income on Schedule F, and cannot pledge the hogs as loan collateral due to a lack of an ownership interest in the hogs, was somehow not significantly different from a farmer raising 200 hogs and 200 head of cattle with associated crop ground who manages the diversified operation. Just the sheer number of hogs alone stands out in stark contrast. Indeed, the hog operation required a change in the existing zoning of the tract.
The plaintiffs in Himsel, members of the same family as the defendants, were found to have essentially come to the nuisance because one of them chose to retire from farming and remain on the land that he had lived on for nearly 80 years, and the other didn’t move from the rural home he built in 1971. An 8,000-head hog confinement operation and the presence of 3.9 million gallons of untreated hog manure was deemed to be comparable to farming in this area in 1941.
The court also determined that a “taking” had not occurred because the plaintiff had not sold his home and moved away from the place where he grew up and lived all of his life, and the RTF law did not take the entire value of the plaintiffs’ property away. The appellate court, however, did not address the implications of whether its opinion essentially granted the CAFO an easement to produce odors across the plaintiffs’ property.
The appellate court declined to rehear the case and the Indiana Supreme Court declined to review the appellate court’s decision by a single vote. On July 17, 2020, a petition for certiorari was filed with the U.S. Supreme Court. On October 5, 2020, the U.S. Supreme Court declined to hear the case.
Following Indiana’s lead, several states have modified their state RTF laws to more closely align with the Indiana provision.
Dinosaur Fossils Are Not Minerals
A common granting clause in a mineral deed specifies that the grantor either conveys or reserves “the oil, gas and other minerals.” That language can raise an issue concerning what “other minerals” means. Does it include such things as gravel, clay granite, sandstone, limestone, coal, carbon dioxide, hot water and steam? The courts have struggled with this issue and have reached differing conclusions. Does the phrase mean anything that is in the soil that the surface estate owner doesn’t use for agricultural purposes? Does is matter how the substance is extracted? Does it matter if the material is located in the subsoil rather than the topsoil? Is it material if the substance can be extracted without significant damage to the surface estate?
The issue of whether dinosaur fossils are “minerals” for the purposes of a mineral reservation clause in a mineral deed was an issue in a recent Montana case. In Murray, court dealt with the issue in a case with millions of dollars on the line. Under the facts of the case, the plaintiffs (a married couple), leased farm and ranch land beginning in 1983. Over a period of years, the owner of the land transferred portions of his interest in the property to his two sons and sold the balance to the plaintiffs. From 1991 to 2005, the plaintiffs and the sons operated the property as a partnership. In 2005, the sons severed the surface estate from the mineral estate and sold their remaining interests in the surface estate to the plaintiffs. A mineral deed was to be executed at closing that apportioned one-third of the mineral rights to each son and one-third to the plaintiffs. After the transactions were completed, the plaintiffs owned all of the surface estate of the 27,000-acre property and one-third of the mineral (subsurface) estate. At the time, none of the parties suspected there were valuable dinosaur fossils on the property, and none of them gave any thought to whether dinosaur fossils were part of the mineral estate as defined in the mineral deed. Likewise, none of the parties expressed any intent about who might own dinosaur fossils that might be found on the property.
Specifically, the mineral deed stated that the parties would own, as tenants in common, “all right, title and interest in and to all of the oil, gas, hydrocarbons, and minerals in, on and under, and that may be produced from the [Ranch].” The purchase agreement required the parties “to inform all of the other parties of any material event which may [affect] the mineral interests and [to] share all communications and contracts with all other Parties.”
In 2006, the plaintiffs gave permission to a trio of fossil hunters to search (and later dig) for fossils on the property. The hunters ultimately uncovered dinosaur fossils of great value including a nearly intact Tyrannosaurus rex skeleton and two separate dinosaurs that died locked in battle. The fossils turned out to be extremely rare and quite valuable, with the “Dueling Dinosaurs” valued at between $7 million and $9 million. In 2014, the plaintiffs sold the Tyrannosaurus rex skeleton to a Dutch museum for several million dollars. A Triceratops foot was sold for $20,000 and a Triceratops skull was offered for sale for over $200,000. The proceeds of sale were placed in an escrow account pending the outcome of a lawsuit that the sons filed. The sons (the defendants in the present action) sued claiming that the fossils were “minerals” and that they were entitled to a portion of any sale proceeds. The plaintiffs brought a declaratory judgment action in state court claiming that the fossils were theirs as owners of the surface estate. The defendants removed the action to federal court and asserted a counterclaim on the basis that the fossils should be included in the mineral estate. The trial court granted summary judgment for the plaintiffs on the basis that, under Montana law, fossils are not included in the ordinary and natural meaning of “mineral” and are thus not part of the mineral estate.
On appeal, the appellate court reversed. The appellate court determined that the term “fossil” fit within the dictionary definition of “mineral.” Specifically, the appellate court noted that Black’s Law Dictionary defined “mineral” in terms of the “use” of a substance, but that defining “mineral” in that fashion did not exclude fossils. The appellate court also noted that an earlier version of Black’s Law Dictionary defined “mineral” as including “all fossil bodies or matters dug out of mines or quarries, whence anything may be dug, such as beds of stone which may be quarried.” Thus, the appellate court disagreed with the trial court that the deed did not encompass dinosaur fossils. Turning to state court interpretations of the term “mineral”, the appellate court noted that the Montana Supreme Court had held certain substances other than oil and gas can be minerals if they are rare and exceptional. Thus, the appellate court determined that to be a mineral under Montana law, the substance would have to meet the scientific definition of a “mineral” and be rare and exceptional. The appellate court held that those standards had been met. The plaintiffs sought a rehearing by the full Ninth Circuit and their request was granted. The appellate court then determined that the issue was one of first impression under Montana law and certified the question of whether dinosaur fossils constitute “minerals” for the purpose of a mineral reservation under Montana law to the Montana Supreme Court.
The Montana Supreme Court answered the certified question in the negative – dinosaur fossils are not “minerals” for the purpose of the mineral reservation at issue because they were not included in the expression, “oil, gas and hydrocarbons,” and could not be implied in the deed’s general grant of all other minerals. “Fossils” and “minerals” were mutually exclusive terms as the parties used those terms in the mineral deed. In making its determination, the Montana Supreme Court reasoned that whether a substance or material is a “mineral” is based on whether it is rare and valuable for its mineral properties, whether the conveying instrument expressed an intent to use the scientific definition of the term, and the relation of the substance or material to the land’s surface and the method and effect of its removal. The Court also noted that deeds are like contracts and should be interpreted in accordance with their plain and ordinary meaning to give effect to the parties’ mutual intent at the time of execution.
The Court noted that the term “minerals” is defined in various areas of Montana statutory law (including tax provisions) and none include “fossils,” and that the only statutory provision mentioning fossils and minerals in the same statute referred to them separately. The Court also noted that the U.S. Department of Interior (for purposes of federal law) had made an administrative decision in 1915 that dinosaur fossils are not “minerals.” As such, the terms were mutually exclusive as used in the mineral deed between the parties, and the plaintiffs maintained ownership of any interests that the two sons had not specifically reserved in the mineral deed. The deed simply did not contemplate including “fossils” under the mineral reservation clause. Instead, the Court concluded that “minerals” under Montana law are a resource that is mined as a raw material for further processing, refinement and eventual economic exploitation. Fossils are not mined, they are excavated, and they are not rare and valuable due to their mineral properties. Therefore, unless specifically mentioned in the mineral deed, language identifying “minerals” would not “ordinarily and naturally” include fossils.
Based on the Montana Supreme Court’s answer to the certified question, the U.S. Court of Appeals for the Ninth Circuit affirmed the federal district court’s order granting summary judgment to the plaintiffs and declaring them the sole owners of the dinosaur fossils.
Force Majeure Clauses in Contracts
Governmental reaction to the China-originated virus in 2020 created legal and economic issues for many persons and businesses. One of those legal issues involves existing contracts. The issuance of various Executive Orders by state governors as a result of the anticipated impact of the virus shut down significant economic activity in those states and triggered problems up and down the food supply chain. That raised numerous questions. What happens when a supply chain is disrupted? What recourse exists for a farmer that entered into a contract to sell corn to an ethanol plant, and now the ethanol price has collapsed and the plant refuses to pay? What if a hog buyer won’t buy hogs because the processing plant is shut-down? What if a milk buyer backs out of a milk contract because the milk market has disintegrated? Grain can be stored and milk can be dumped, but what do you do with a 300-lb. fat hog?
A common provision in some agricultural contracts (particularly hog production contracts) is known as a “force majeure” provision. Under such a provision, a contracting party is not liable for damages due to the delay or failure to perform under the contract because of an event that is beyond the party’s control. Performance is excused until it becomes possible for the party to perform under the contract.
Force Majeure means “superior force” or “unavoidable accident.” It applies when there are circumstances beyond a party’s control that excuses the party from performing, such as an extraordinary event like war, riot, crime, pandemic, etc. Most often, a “force majeure” event involves an “act of God” (i.e. flooding, earthquakes, or volcanoes) or the failure of third parties (such as suppliers and subcontractors) to perform their obligations to a contracting party. However, sometimes a contracting party will attempt to use the clause to extract themselves from a contract that has turned out to not be profitable for them.
A force majeure clause is not uncommon in contracts. It concerns how the parties allocate risk and, in essence, frees the contracting parties from liability or obligation when an extraordinary event or circumstance beyond their control prevents at least one party from fulfilling their contractual obligations. The event or circumstance must be one that the parties couldn’t have anticipated at the time the contract was entered into; the party seeking to remove themselves from the contract must not have caused the problem; and the event or circumstance makes it impossible or impractical to perform the contract.
The wording of a force majeure clause is critical and should be negotiated by the contracting parties so that it applies equally to all parties to the contract. Often, it is helpful if the clause includes examples of acts that will excuse performance under the provision.
A contract may distinguish between “acts of God” and force majeure, and a contract may include an “act of God” clause rather than a force majeure clause. Many contracts contain language specifying that if a particular event occurs, then no performance is required. That type of language tends to deal with “acts of God.” Again, it’s a matter of how the parties allocated risk. Perhaps the virus is such an event that is comparable to those that fall under the category of an “act of God.”
In the next post, I will start the journey through the “Top Ten” of 2020 in ag law and ag tax.