by Philip on September 29, 2010
In a recent decision from the Federal Bankruptcy Court of Western Michigan, a decision opposed by members of the oil and gas industry, a Debtor oil and gas producer which filed for bankruptcy protection under Chapter 7 of the Bankruptcy Code and which owed lessors for unpaid royalties, has the duty to make an election under section 365 of the Code to either ratify existing leases and pay the lessors of those ratified leases all of the outstanding unpaid royalties OR reject the leases and have the unpaid royalties included among other unsecured debts. The industry position appeared to be that the debtor did not have no make such an election, that it could treat the unpaid royalties as merely unsecured debts to be paid only a fraction of their face amounts and that the debtor could, in the future, continue to operate under terms of the lease and could sell or assign that lease to another operator. If, on the other hand, consistent with the court’s reasoning, a debtor is forced to reject an existing lease that is the basis for current operations and production of oil or gas, facially, the lessor should thereafter be free to negotiate a new lease with another operator without the same constraints as existed when the initial lease was negotiated.
In view of the complexity of the oil and gas industry and the potential impact on the multiple other parties with whom the Debtor may have had agreements including investors and working interest owners, an appeal would be expected.
by Philip on September 29, 2010
There has been a dramatic change in the enthusiasm among oil and gas landmen in leasing the oil and gas rights of landowners in Lower Michigan’s northern counties. The excitement that may have engendered the very high and unprecedented bid prices at the State’s Auction of May 4, 2010, followed on the heels of the news of a deep well into the Utica /Collingwood shale by Encana. Since then, the news regarding that well has been reserved, at best, as production does not appear to be as high as initially forecast. In the meantime, many leases that had been negotiated by landmen with landowners were not only, allegedly, not paid, but also many were also rejected by the very companies whose landmen had negotiated them. It is not clear what is actually going on since, at least among industry insiders, there is still a reasonable potential for a very big play in the Lower Michigan counties. Currently, additional wells are being drilled in an effort to establish the parameters for future exploration and it is important for landowners who may be within the play area who have not, as yet, become Lessors under accepted leases and received the “Bonus” sums agreed to, to keep informed on what is going on.
The State has scheduled another auction for October 26-28 and industry representatives have nominated more than 450,000 mineral acres to be considered at that auction, of which, reportedly, more than 120,000 acres are in Roscommon County. The total acreage, reportedly, would be the third all time in size acreage offering for a single lease auction. At this time one can only speculate as to whether the prices at the next auction would approach or even exceed those of the May 4 auction where the average amount received by the State was $1,507
There are a variety of options available to provide for the orderly transfer of the family Vacation home from one generation to another, some of which may be successful in protecting the property from being lost to the TAX MAN upon the death of the senior generation.
1. Sale to the next generation, although there may be some Capital Gains Tax if the property has been held for some time.
2. A simple bequest can keep the property in the family but there may not be any tax savings .
3. A Qualified Personal Residence Trust may be useful. The Grantor retains the right to continue to use and control the use of the property for a defined period and unless he dies during the period, the value will not be in his estate.
4. A family Limited Liability company (LLC) will limit liability of the owners if someone is injured on the property and affords the senior generation a vehicle for transferring ownership over a period of time to the next generation.
Passing property to the next generation often results in dividing the pie, so to speak, into ever small pieces, often with differing percentages of ownership. Whatever approach is used, it is important to to provide a means for individual owners of ever smaller portions to sell their interests at fair rates to other members, using, for instance, at least two appraisals to reach a fair value of the share at issue.
At the invitation of the MSU Extension Service, I was a presenter at a Workshop held at the Haggerty Center in Traverse City of June 24 on the subject of Oil and Gas Leasing in light of the current excitement regarding the Utica Shale. I invite you to go to MSU’s Grand Traverse County Portal at http://www.msue.msu.edu/portal/default.cfm?pageset_id=27320 for the several papers presented including the outline of my comments as an attorney who represents only Landowners in Oil and Gas matters. In short, my position regarding leasing was that the landman who may contact a landowner IS NOT THE LANDOWNERS FRIEND, that contrary to what the landman may say, THERE IS NO SUCH THING AS A STANDARD LEASE and that taking the high sum b being offered as a BONUS on the terms proposed by landman is usually not be in the best interests of the landowner. Papers by representatives of MSU that my be retrieved from the MSU Portal detailed the fine points of oil and gas leasing as well as the risks associated with merely accepting what the landman may offer. Each is worth a landowner’s review to be better educated on the fine points thereof.
The Traverse City Film Festival is showing GasLand, a recently released HBO documentary that reveals problems faced by landowners in other states who had their lands subjected to Hydrofracking of deep shale formations to obtain natural gas, processes not different from that proposed in Michigan. Although some of the companies involved, which incidentally are also actively seeking leases in Michigan, claimed that the problems were not the result of their activities, substantial questions are left unanswered that may also need to be addressed here in Michigan. Tickets can be obtained on line at the “Traverse City Film Festival” or from the Box Office at 231-922-8903 for showings on July 30 at 9:39AM or July 31 at 3:00PM.
To all who did not have the opportunity to see the HBO documentary Gasland” premiered last evening, June 21, I recommend going to the Diane Rehm interview of June 21 of Josh Fox on NPR.com. Mr. Fox, the maker of the documentary gave a brief synopsis of what he reported in the documentary regarding the adverse impacts of Hydraulic Fracking, the technique used to extract gas from the Utica and Collingwood Shale, located about two miles below the surface. For those who viewed the documentary, I presume you are as disturbed as I am about both the industry and governmental denial that there are any problems, although faced with countless denial individual circumstances in such far ranging locations as Pennsylvania, New York, Wyoming, Colorado, Arkansas, Texas and Louisiana. The documentary showed several instances where gas and associated chemicals had invaded underground aquifiers that had been providing fresh water, resulting in instances where water from kitchen faucets could be ignited with a match. Similarly, the documentary showed water seeps which could also be ignited. The documentary discussed the total absence of Federal oversight due to the congressional exemption of the oil industry from essentially all of the Federal environmental laws including the Clean Water Act and the Clean Air Act as well as the wholesale surrendering of public lands to oil and gas developers without regard to the adverse impact on both people and wildlife.
If any reader has further information on the foregoing, input would be welcomed.
On Wednesday, June 2nd , I attended and spoke briefly at exceptional educational programs in Cheboygan and Petoskey sponsored by the MSU Extension Service regarding the current activities of several large companies who are offering unusually large sums to lease oil and gas rights. Several hundred persons attended the programs which were standing room only. The thrust of the speakers was don’t be hasty in signing the leases presented not only because within the fine print are provisions that may not be to a landowner’s best interest but also because the leases lack provisions that could be beneficial to the landowner. On the MSU Extension Service website, www.msue.msu.edu, are educational bulletins that are a Must Read for anyone approached by a lease buyer hired by one of several companies who’s only interest is in acquiring for his employer as many leases as he can at the lowest price for the lowest royalty. If one cannot find the information, a call to the local Extension Service office should get it for you.
In addition to the foregoing we direct your attention to www.oil-gas-leases.com, a good site for a basic education on the issues and possible pitfalls involved in oil and gas leasing.
Since my last note of May 11, more information has arisen regarding the activities of many large and smaller gas exploration companies thatare seeking leases in Kalkaska, Crawford, Charlevoix and Missaukee counties both before and after the May 4 Lease Auction. Landownwers are first offered leases with an up front “bonus” of pehaps $100, which if refused rapidly increases to several hundred dollars. Also information regarding the character of the play is appearing at various locations on the internet suggesting that the prospect, if successful could dramatically impact the financial character of the area.
I was asked to participate in a radio broadcast on Interlochen Public Radio – Points North – to discuss the play. It can be found at the Interlochen Website.
Last week the State held an auction of its mineral interests in several mid Michigan counties: Kalkaska, Crawford and Otsego to name a few. At the auction, the average lease bonus received by the State, according to the Record Eagle, exceeded $1,000 per acre, apparently in reaction to a successful deep well drilled in Missaukee County In the meantime, several oil and gas developers have been approaching private landowners seeking to lease their acreage at up front prices well below the average price paid to the State. If a mineral owner wants to rationally determine whether to accept any specific offer, the owner needs to undertake an analysis of various complex options that are available but not necessarily well known. We may be able to help.
by Philip on February 17, 2010
The plans for one’s estate and the passage of real and personal property to the next generation involves several very personal decisions, not the least of which is to minimize any estate tax liability. In the current economic climate, it is reasonable to expect that effective in 2010 any estate valued in excess of $1,000,000 may be subjected to an estate tax with a minimum rate of 45%. There are several legal means for avoiding some or all of those taxes. However, each method requires careful consideration and may not be appropriate for every case.
Beyond estate tax considerations, the distribution of property to family members, churches, charities and the like and the perpetuation, at least for the next generation, of a family business, are each decisions of a more personal nature. Many estates may not have tax ramifications but nonetheless will involve distribution issues. Beyond the use of a simple will, individuals often find that a trust, either prepared as a living or “inter vivos” trust or as an element of the will itself, is the best method for accomplishing the goals of an estate plan. Depending upon the complexities of any trust as well as the sophistication and business experience of other family members, the trustee of any trust may be either a family member, a close friend, or, if need be, a trust department of a local bank in which the individual has confidence.
Depending upon the circumstances of each individual, estate planning may also involve planning for the potential need for nursing home and other medical care as well as the necessity for Medicaid and Medicare Assistance. The laws surrounding those matters are complex and ever changing. Consistent herewith, an estate plan should also address circumstances when, during one’s life, possibly as the result of an accident or unanticipated illness, the individual is unable to either care for himself or herself or is otherwise unable to communicate his or her wishes regarding future medical care. To address those concerns a durable power of attorney as well as the appointment of a patient advocate – sometimes referred to as a living will – are appropriate. In such cases, the involvement by all family members in the development of an appropriate estate plan may avoid unanticipated adverse consequences, not the least of which are disputes that may cause unintended rifts in future family relationships.
A carefully developed estate plan is specifically tailored to accomplish the directives and needs of an individual or family, and can have a substantial impact on the protection of wealth. As the timing of an incapacity, death, or other triggering event can never be predicted, it is important to take a proactive approach in consulting an experienced legal professional and implementing a plan.