Community Land Trusts and the Effort to Implement Affordable Housing

Community land trusts (“CLTs”) are gaining popularity across the country as many communities and city leaders search for ways to develop and maintain affordable housing. Although CLTs are not a new tool, they are becoming more widespread with over 200 now in operation and more likely to follow as people flock to city centers.1 CLTs developed as a mechanism to combat complex social issues - the first CLT was established in Georgia as part of the civil rights movement - and they are certainly not without their critics. It is undeniable, however, that the demand for affordable housing only continues to rise and CLTs may be one answer to this growing problem.

A CLT is defined by the Institute for Community Economics as “an organization created to hold land for the benefit of a community and of individuals within the community.”2 Although typically a nonprofit organization, there are numerous CLT models that can be tailored to fit the community in which they operate. CLTs are typically governed by a board of trustees or directors and acquire land either through purchase or donation. The acquired land can be vacant, agricultural, or residential in nature, but the goal is to determine the best use of this land in the community and develop it accordingly.

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The Surge in DUC Wells Begs the Question: How Long Can a DUC Well Hold a Lease?

Just over a year ago, the U.S. Energy Information Administration (“EIA”) began including a supplement to its Drilling Productivity Report that contains monthly estimates of the number of drilled but uncompleted (“DUC”) wells in seven key oil and gas producing basins (the Anadarko, Appalachia, Bakken, Eagle Ford, Niobrara, Haynesville, and Permian basins). Prior DUC well inventory numbers made headlines starting in late 2015 (see here and here). The most recent EIA Drilling Productivity Report 1 shows that while DUC well inventory began to subside in the latter part of 2016 and first part of 2017, there has been a recent surge - largely led by significant growth in the Permian basin.

The economic impact of completing and bringing these wells online could create a surge in oil supply and destabilize recent crude oil price gains. Aside from the potential implications to crude oil prices, one consideration that remains top of mind for operators with DUC wells on maturing oil and gas leases is whether, or for how long, a DUC well can hold a lease.

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Russia Fails to Defeat Fracking

Gazprom, Russia’s government owned natural gas company, has for decades supplied many Eastern European countries with most or all of their natural gas. It has also had a habit of using its dominant market position to bully its customers into paying more, often by cutting off natural gas supplies needed for heating in midwinter. Gazprom reduced or completely stopped flows of gas to Ukraine in 2006 and 2008, to 18 European countries in 2009, to Ukraine and Poland in 2014, and to Ukraine, Bulgaria, Romania, Slovenia and Bosnia in 2015.

Several years ago Russia and Gazprom identified U.S. hydraulic fracturing technology (fracking) as a threat to Gazprom’s market share, especially its near monopoly over supplying gas to Eastern Europe. The Russians realized that fracking technology had the potential to undermine their position by increasing the development of natural gas that would compete on the open market with Russian gas. In an attempt to address this threat, Russia turned to RT (formerly Russia Today), Russia’s government controlled television network aimed at influencing audiences outside of Russia.

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IBLA Resolves Procedural Question for Review of Lease Suspension Decisions

Most decisions of the Bureau of Land Management (BLM) are appealable to the Interior Board of Land Appeals (IBLA). However, some decisions must first be reviewed by the applicable BLM State Director. Parties who wish to appeal from decisions issued under the oil and gas operating regulations (43 C.F.R. Part 3160) and unitization regulations (43 C.F.R. Part 3180) must first seek State Director review before appealing to the IBLA.

Until recently, it was unclear whether a decision granting, denying or lifting a suspension of a federal oil and gas lease was a decision issued under the Part 3160 regulations, and therefore subject to State Director review, or was a decision issued under the Part 3100 regulations appealable directly to the IBLA. The reason for this uncertainty was that regulations pertaining to suspensions of leases are found in both Part 3160 (43 C.F.R. §3165.1) and Part 3100 (43 C.F.R. § 3103.4-4). Consequently, in the past, if a suspension request was denied by the BLM, we advised clients to file both a State Director review request and a provisional notice of appeal with the IBLA. Of course, the duplicate processes added cost and time to the appeal. In their responses to such provisional notices of appeal, the solicitor’s office generally took the position that such decisions should first be reviewed by the State Director. Now there is a recent decision of the IBLA that clarifies that decisions challenging a BLM suspension decision should first be reviewed by the State Director under the State Director review regulations.

In Southern Utah Wilderness Alliance, 190 IBLA 152 (2017), the IBLA addressed the ambiguity as to the proper appeal route from suspension decisions. It acknowledged that suspsensions are addressed in both parts of the regulations but noted that the regulation at § 3165.1(b) directs the authorized officer to act on suspension applications filed under § 3103.4-4, so that the decision-making authority is more clearly placed in the Part 3160 regulations. The Board also noted that, historically, when the U.S. Geological Survey (USGS) managed operations on federal leases, suspension decisions were first appealable to the Director of the USGS and then to the IBLA. Finally, the IBLA cited to a few of its earlier decisions which, although not directly addressing the question of whether suspension decisions should first be reviewed by the State Director, at least assumed that was the proper route. With the Southern Utah Wilderness Alliance decision, it is now clear that review of any BLM decision granting or denying a suspension of an oil and gas lease must first be reviewed by the State Director under the regulation at § 3165.3(b).

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The Battle over Local Control Heats up Again as Thornton’s Oil and Gas Regulations Challenged in Court

Six weeks following the City of Thornton’s adoption of strict new regulations on oil and gas operations, the Colorado Oil and Gas Association (“COGA”) and the American Petroleum Institute (“API”) have filed suit, in what looks to be just the latest clash in Colorado’s struggle over who manages oil and gas in the state – the Colorado Oil and Gas Conservation Commission (“COGCC”) or cities and towns?

In August, after what COGA described as “an extremely limited stakeholder process,” Thornton’s City Council adopted Ordinance No. 3477 by a 7-2 vote. The ordinance provides for much stricter standards than the rules of the COGCC. Some of the differences are highlighted below:

   Thornton's Ordinance COGCC Rules
Setback from Buildings/Lots Well pad must be at least 750 feet from existing or planned buildings and existing or platted residential lots (Section 18-881.(a)(1), (2)) Well must be at least 500 feet from a Building Unit (Rule 604.a.(1))
Setback from Water Bodies Well pad must be at least 500 feet from the ordinary High Water Mark (HWM) or the edge of the bank of any irrigation or lateral ditch (Section 18-881.(a)(3)) Setbacks only required for Drilling, Completion, Production and Storage Operations within Public Water System Surface Water Supply Areas (Rule 317B)
Surface Disturbance Multiple wells proposed by Operator must be located on a multi-well pad
(Section 18-881.(b)(1))
Operators must consolidate wells on multi-well pads only in Designated Setback Locations and only where technologically feasible and economically practicable (Rule 604.c.(2)E.i.)
Liability Insurance Operator must maintain general liability insurance of $5 million per occurrence (Section 18-881.(y)) Operator must maintain general liability insurance of $1 million per occurrence (Rule 708)
Flowlines  Abandoned flowlines must be removed (Section 18-881.(c)(1))  Flowlines may be abandoned in place if disconnected, buried, and permanently sealed (Rule 1103)


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Tenth Circuit Finds Wyoming Statutes Concerning Data Collection on Public Lands Violate First Amendment

In what is being hailed as a victory for conservation groups, the Tenth Circuit recently held that Wyoming Statutes1 concerning data collection on public lands violate the First Amendment. The statutes at issue were passed after fifteen Wyoming ranchers settled with Western Watersheds Project (“WWP”) after filing a lawsuit accusing the group of trespassing on private lands in Fremont, Sublette, and Uinta Counties in order to access public lands to sample water for fecal coliform. The statutes imposed both criminal and civil liability on any individual who entered “open land for the purposes of collecting resource data” without permission of the owner. “Resource data” is broadly defined and includes “numerous activities on public lands, such as writing notes on habitat conditions, photographing wildlife, or taking water samples, so long as an individual also records the location from which the data was collected.”2 In order to fall under the statutes, resource data must have also been submitted to a government agency.3 The criminal statute imposed a maximum penalty of a year in jail and a fine of $1,000.00 for first-time offenders and a minimum of ten days’ imprisonment (maximum of one year) and a $5,000.00 fine for repeat offenders; notably, the fine and imprisonment term were greater than those imposed under Wyoming’s preexisting general trespass statutes.4 The civil statute imposed liability for proximate damages and litigation costs, including attorneys’ fees.5 Additionally, any government agency that received resource data collected after a trespass occurred was required to expunge any collected data from its records.6

Several conservation groups, including the WWP, National Press Photographers Association, Natural Resources Defense Council, PETA and Center for Food Safety, sued the State in Federal District Court7, arguing that the imposition of these greater penalties amounted to a violation of several constitutional rights, including the Free Speech and Petition Clauses of the First Amendment and the Equal Protection Clause of the Fourteenth Amendment, and argued that they were preempted by Federal law. After the State filed a Motion to Dismiss the claims, the Federal District Court allowed the Plaintiffs’ claims regarding the First Amendment and Equal Protection Clause to go forward, but held that the Plaintiffs failed to state a preemption claim.8

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Know When to Hold ‘em and Know When to Fold ‘em - Managing Deal Fatigue During the Negotiation Process ~ Part 2

Upon completion of the majority of due diligence, frustration with the transactional process has generally started to set in, at least for sellers. However, the process is far from over. If a purchase and sale agreement has not already been signed, the real negotiations begin at this stage. It may also take time to draft other major transaction documents such as employment contracts and forward-looking operational agreements such as operating agreements and shareholder agreements.

It is extraordinarily important for parties to review all documents, or at least changes to those documents, as those documents and changes are prepared. The parties should discuss the documents with their attorneys and accountants so that they understand the financial and legal implications for each document as well as the purpose of each document. The role of accountants, attorneys and similar advisors is to provide advice, counsel and guidance during the negotiation process; however, all decisions are ultimately up to the parties. Consequently, the parties must understand the implications and nuances of each term and condition in the various documents.

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A “Momentous” Supreme Court Term

The United States Supreme Court was back in action on Monday, October 2, 2017, and is now moving into what Justice Ruth Bader Ginsburg says is going to be a “momentous” upcoming term. This will be the first full term for Justice Neil M. Gorsuch, who replaced Justice Scalia, providing an extended look at his jurisprudence. The upcoming term also promises to showcase cases touching several hot button issues. Here is a quick overview of some of the notable cases coming before the Supreme Court.1

Gill v. Whitford, No. 16-1161, which is being argued before the Supreme Court on Tuesday, October 3, 2017, could have important impacts in how elections are conducted. In this case, the Supreme Court is being asked to rule that extreme political gerrymandering violates the U.S. Constitution. The Supreme Court has never struck down a voting map on the ground that politics overly impacted how it was drawn, but Justice Kennedy has expressed uneasiness about this issue in the past. The decision in this case has the potential to not only reshape voting maps, but in so doing, shift the political landscape.

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Know When to Hold ‘em and Know When to Fold ‘em - Managing Deal Fatigue in Mergers and Acquisitions ~ Part 1

Anyone who has ever purchased a car or bought a house knows that purchases and sales of large assets are stressful, time consuming, expensive and involve more paperwork than expected. In many transactions, either or both parties reach a point in the process where they just want the process to be done.  In corporate transactions, this point in the decision making process can be dangerous because parties agree to liabilities, indemnities, potential losses, reductions in the purchase price, broad or too narrow non-competes, unreasonable or unlikely forward measured financial requirements and generally unfavorable terms, or they cut corners on due diligence simply to make the process stop.  Alternatively, either or both parties throw their hands up and walk away from a good deal, not because of the deal terms, but out of frustration with the process.

My partner, Ken Barbe, has astutely termed this behavior “Deal Fatigue.”  We liken it to the point in a torture session where the individual being tortured is willing to say anything in order to make the torture stop.  Decisions made as a result of Deal Fatigue can have long-reaching fiscal, legal and mental impacts. Accordingly it is important to manage Deal Fatigue to the extent possible so that parties do not make a bad deal or walk away from a good deal.

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Standing to Challenge Decisions Approving Federal Units or Suspending Federal Leases

Non-governmental organizations that oppose oil and gas development have in the last few years begun to challenge not only Bureau of Land Management (BLM) decisions authorizing oil and gas drilling operations but also BLM decisions that could have the effect of continuing leases in effect that might otherwise expire. In two recent decisions, the Interior Board of Land Appeals (IBLA) reiterated its position that, in order to seek State Director review of a decision or to appeal a decision to the IBLA, the appellant must demonstrate that the “legally cognizable interests” of it or its members will be adversely affected by the decision under review. Southern Utah Wilderness Alliance, 190 IBLA 152 (2017) (SUWA); Citizens of Huerfano County, 190 IBLA 253 (2017) (Huerfano).

Legally cognizable interests can include cultural, recreational and aesthetic use and enjoyment of the lands. But there must be a causal relationship between the alleged injury to those interests and the BLM decision under review. In addition, the threat of injury must be real and immediate. In SUWA, the appellant challenged a BLM decision suspending leases committed to the Deseret Unit in the Uintah Basin. BLM granted the suspension because its approval of the drilling permit (APD) for the unit obligation well would be delayed for several months while analysis of the proposal under the National Environmental Policy Act (NEPA) was prepared. SUWA asserted that the suspension was improperly granted because the unit operator had allegedly delayed in developing the leases, its application was not supported by sufficient information, and the BLM should have prepared an environmental assessment or environmental impact statement on the suspsension application. The IBLA did not address the substance of SUWA’s allegations because it found that SUWA had failed to demonstrate that its members’ health, recreational, spiritual, educational, aesthetic and other interests would be directly harmed by BLM’s decision to approve the suspension. The Board concluded that SUWA’s interests would be harmed only if oil and gas development occurred (i.e., if the APD was approved). The suspension of the leases did not result in “real and immediate” harm to SUWA’s interests so there was no causal link between the alleged injury and the BLM decision to suspend the lease. Any injury to SUWA which might occur was contingent on a future decision to approve drilling. Therefore, the IBLA upheld the State Director’s decision dismissing SUWA’s State Director review request for lack of standing.

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Colorado Supreme Court upholds optional liquidated damages provisions

This week the Colorado Supreme Court answered a lingering question about liquidated damages provisions; namely, are they enforceable if the non-breaching party can elect to pursue actual damages instead? The Court said yes. Ravenstar v. One Ski Hill Place, 2017 CO 83.

Liquidated damages are an amount the parties designate in their contract as a reasonable compensation for a specific breach of a contract. To be enforceable, courts typically require that liquidated damage provisions meet three elements: "1) the parties intended to liquidate damages; 2) the amount of liquidated damages, when viewed as of the time the contract was made, was a reasonable estimate of the presumed actual damages that the breach would cause, and 3) when viewed again as of the date of the contract, it was difficult to ascertain the amount of actual damages that would result from a breach.” Id. at ¶ 10 (quotation marks omitted).

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A New Order Under the New Administration: The DOI Seeks to Streamline the Federal Leasing Process

On July 6, 2017, Department of the Interior (“DOI”) Secretary Ryan Zinke signed Secretarial Order No. 3354, “Supporting and Improving the Federal Onshore Oil and Gas Leasing Program and Federal Solid Mineral Leasing Program.” In an accompanying press release, Secretary Zinke touted the Order as a promise the DOI would “be a better neighbor in the new Trump Administration,” and noted that the Order is in “support [of] the President’s goal of American energy dominance.”

The Secretary also highlighted the importance of compliance with the Mineral Leasing Act (“MLA”), the existing federal law governing lease sales, which states “[l]ease sales shall be held for each State where eligible lands are available at least quarterly and more frequently if the Secretary of the Interior determines such sales are necessary [emphasis added].”1 Once a parcel is leased, an Application for Permit to Drill (“APD”) is filed and there is a statutory thirty-day window to either issue the permit, or notify the applicant of a deferred decision and list the reasons for deferral.2 As Secretary Zinke stated in an interview, the current average wait for APD approval is approximately 257 days, and exceeds 500 days at certain Bureau of Land Management (“BLM”) offices.3 Although the Secretary did not mention any pending litigation as grounds for his Order, it is notable that on August 11, 2016, prior to the issuance of the Order, the Western Energy Alliance filed a lawsuit against the Secretary and the BLM centered on the agency’s lack of compliance with the MLA timing mandates discussed above.4

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What Contract? Unsigned Email Satisfies Signature Requirement under Texas Statute of Frauds

The Statute of Frauds is an age-old law requiring certain agreements be in writing and signed by the parties to be a binding contract. If you are thinking calligraphy, feathered pens and beautiful cursive signatures, think again. A Texas Court of Appeals recently ruled that merely having your name in the “From” field of an email constitutes a signature for purposes of satisfying the Texas Statute of Frauds. Khoury v. Tomlinson, 518 S.W.3d. 568 (Tex. App. 2017).

In the events that lead to the Khoury case, John Khoury had invested $400,000 in PetroGulf, Ltd., a company that purportedly had contracts to transport oil from Iraq to Syria and other Middle Eastern countries, in return for repayment of his investment with substantial interest. After no payments were made to Mr. Khoury, he met with Mr. Tomlinson, the President and CEO of PetroGulf, Ltd., who agreed to repay him the $400,000 over 4 or 5 years at a new interest rate. One week after the meeting, an email exchange ensued between Mr. Khoury and Mr. Tomlinson.  Read it here.

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Extension of Federal Oil and Gas Leases

Operators who do not regularly operate on federal lands may be surprised to discover that, unlike the typical private lands oil and gas lease, a federal lease does not contain a drilling operations clause that would extend the lease beyond the expiration of its primary term while drilling operations are being conducted. A recent decision of the Interior Board of Land Appeals (IBLA) drives home the importance of understanding exactly what facts are sufficient to extend a federal lease.

In Coastal Petroleum Company, 190 IBLA 347 (July 25, 2017), the IBLA upheld a decision of the Montana State Office of the Bureau of Land Management (BLM) which concluded that a lease had terminated at the end of its primary term because the lessee had not established that the well it had drilled and completed was capable of producing gas in paying quantities. Coastal’s lease would expire October 31, 2012. According to the decision, a well was spud prior to that date, the well was fracture treated on September 14, 2012, Coastal pulled two gas samples and determined that the well had good pressure and was able to flow on October 16, 2012, and Coastal received the gas analysis report on October 29, 2012. Based on these operations, Coastal concluded that at least two formations on the structure contained gas and that the well was capable of producing in paying quantities. But the BLM concluded that, without a flow test, BLM was unable to determine whether the amount of production would be of sufficient value to exceed operating costs; i.e., production in paying quantities. The IBLA agreed and noted that the burden is on the lessee to establish that a lease has been extended by a well capable of producing in paying quantities. The lesson for federal lessees is to plan operations that are intended to extend an expiring lease so that the well is completed for production and flow tested prior to the expiration date.

Another cautionary lesson from the Coastal decision is the need for a contingency plan in the event a well drilled near the end of the primary terms may not be completed as capable of producing in provable paying quantities prior to that date. Coastal argued in the alternative before the IBLA that it was engaged in testing and completing operations at the expiration of the primary term and so was entitled to a two-year extension of the lease under the "drilling over” provision of 30 U.S.C. §226(e). Coastal had not raised this argument in its request for State Director review of the BLM Field Office decision that the lease had terminated. It is not clear from the facts whether Coastal was actually conducting operations that would qualify as testing or completing under the regulation (43 C.F.R. §3100.0-5(g)) or whether Coastal had timely tendered the 11th year rental which is necessary in order to earn the drilling over extension. Instead, the IBLA refused to consider the argument at all because Coastal had not raised it before the State Director. The IBLA cited prior cases which establish that the Board will not consider issues raised for the first time on appeal except in extraordinary circumstances. The Coastal case appears to be a situation that easily could have been avoided by timing the drilling, completing and testing operations on the well to continue at the expiration of the primary term and by payment of the 11th year rental.

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Special Needs Trusts for Individuals with Disabilities

Special needs trusts are a helpful planning tool if a client has a disability or has family members or friends who are disabled. These kinds of trusts are designed to preserve a disabled person’s eligibility for government benefits. Monthly income and the value of resources in the person’s possession are evaluated to determine eligibility for certain government benefits. If disabled individuals receive public benefits, then it is possible that small inheritances or gifts may imperil their eligibility for public assistance. The goal of these trusts is to provide individuals with disabilities an option for supplementing their daily living expenses when the government benefits received are insufficient and to allow family and friends of individuals with disabilities to retain assets for accommodation of the individual’s comfort and well-being.

Special needs trusts are discretionary, spendthrift trusts. This means that the trustees of these trusts have complete control over distributions made to the beneficiaries to prevent depletion of trust funds, which could be caused either by overspending on the beneficiary’s behalf or beneficiary’s creditors reaching the trust monies. The trustee has the additional responsibility of ensuring that the amount of funds distributed to the disabled beneficiary does not render him or her ineligible for government benefits.

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Don’t Slay the Drones – New FAA Guidance for Recreational and Commercial use of Unmanned Aerial Vehicles

Lately, it seems like drones are everywhere. From flying over crowds at concerts to monitoring pipelines for leaks, drones are here to stay. As popular as drones have become, however, there is little consistent regulation from state to state, causing confusion and potential legal consequences for users, casual and commercial alike.

For example, in early 2017, a man using a drone to film elk on the National Wildlife Refuge in Wyoming spooked the herd, causing a stampede of over 1,500 animals; he was fined by the U.S. Fish and Wildlife Service for disturbing wildlife.1 Elsewhere, a suit filed in the Sixth Circuit against William Merideth, a/k/a the “Drone Slayer,” who shot down a recreational drone that was hovering over his backyard and invading his privacy, was dismissed for failing to raise a federal issue, not involving federal parties, and not being important to the federal system.2 The drone’s owner brought the suit after charges of criminal mischief and wanton endangerment against Mr. Merideth were dismissed in state court. The Federal District Judge felt that the case was more appropriately a state tort case concerning trespass and invasion of privacy. Unfortunately for Mr. Boggs, the drone pilot, Kentucky is one of several states that currently lack enacted legislation concerning Unmanned Aerial Vehicles (UAVs).3 The absence of such legislation makes it difficult for those who use drones, whether for commercial or recreational purposes, as well as those who disapprove of drones, to understand their rights when it comes to where, when, and how they may operate their UAVs.

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Colorado Legislature Protects Existing Recreational Water Rights

On May 25, 2017, the Colorado legislature passed House Bill 17-1990 addressing the 2015 Colorado Supreme Court decision of St. Jude’s Co. v. Roaring Fork Club LLC denying a private club’s ability to obtain an instream water right. Colorado, as a prior appropriation state, requires its water users to demonstrate that the water will be (1) diverted and (2) put to a beneficial use, in order to claim a water right. Beneficial use is defined by statute in C.R.S. §37-92-103(4), which by its terms does not allow private parties to appropriate instream flow rights.

In St. Jude’s Co., the applicant, Roaring Fork Club, was granted a new direct-flow appropriative right for aesthetic, recreation, and piscatorial uses. On appeal, the Supreme Court of Colorado held that a private club could not obtain a direct-flow water right for aesthetic, recreation, and piscatorial use because such uses are not beneficial uses of water under Colorado law. 351 P.3d 442, 445 ("the Club failed to demonstrate an intent to apply the amount of water for which it sought a decree to any beneficial use").

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The Complicated Consequences of a Simple Change

Colorado water law provides a simplified procedure to change a water right when the only change is in the point of diversion of a surface water right where there are no intervening diversions or inflows between the old and new locations. C.R.S. § 37-92-305(3.5). This simplified procedure makes it easier to replace old diversion structures by constructing new ones nearby without many of the risks involved in a full change of water rights proceeding.

In Select Energy Servs., LLC v. K-LOW, LLC, 2017 CO 43, 394 P.3d 695, the owner of a water right used the simplified procedure to change its point of diversion from an old ditch to a new pump downstream of the ditch. The water rights owner afterwards quit-claimed its remaining interest, if any, in the old ditch to the defendant. Id., ¶ 8. Because the water rights owner merely had an easement for the old ditch based on its water right and no ownership of the underlying land, the issue was whether it had any interest to convey to defendant after it changed its water right. Id.

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Colorado Supreme Court upholds retroactive tax assessment against oil and gas lessee

On June 19, 2017, the Colorado Supreme Court ruled against the petition of Kinder Morgan CO2 Co., LP -- the operator of oil and gas leaseholds -- disputing the Montezuma County Assessor's 2009 corrective tax assessment on leaseholds for the prior tax year which resulted in a retroactive assessment of over $2 million in property taxes. Kinder Morgan CO2 Co., L.P. v. Montezuma County Board of Commissioners; Colorado Board of Assessment Appeals; and Colorado Property Tax Administrator. The Board of Assessment Appeals upheld the retroactive assessment finding that Kinder Morgan had underreported the selling price of its production by over-deducting its costs.

Oil and gas leaseholds and lands are valued under Colorado statutes, Article 7 of Title 39, pursuant to which a lessee must submit an annual statement (reporting the volume and price of product sold at the wellhead), following which the county assessor determines property value and tax liability. See § 39-7-101 -103(2). Because the sale of unprocessed oil or gas rarely occurs at the wellhead, an operator usually estimates the wellhead selling price, deducting costs for, e.g. gathering, processing, and transporting the extracted material – called the “netback” method of calculating the wellhead price. See § 39-7-101(1)(d) (“The net taxable revenues shall be equal to the gross lease revenues, minus deductions for gathering, transportation, manufacturing, and processing costs borne by the taxpayer pursuant to guidelines established by the [Property Tax Administrator].”). The resulting price for purposes of § 39-7-101(1)(d) is an estimate. An “operator’s netback calculation depends on whether the operator contracts with a related or an unrelated party to perform these gathering, processing, and transportation services. If the operator enters into a bona fide, arm’s-length transaction with an unrelated party to perform these services, then the operator may deduct the full amount paid for these services from its final, downstream sales price in its netback calculation (the ‘unrelated-parties netback method’). See 3 Div. of Prop. Taxation, Colo. Dep’t of Local Affairs, Assessor’s Reference Library: Real Property Valuation Manual (ARL) 6.35–6.36 (Rev. Jan. 2017).” Accordingly, if, as here, “the operator instead enters into a transaction with a related party . . . then it may deduct only a portion of the amount paid for these services (the ‘related-parties netback method’). 3 ARL 6.39–6.41.” (Emphasis added.)

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Colorado Supreme Court Rules in Favor of Condominium Developers in Construction Defects Cases

On June 5, 2017, the Colorado Supreme Court issued a decision in Vallagio at Inverness Residential Condo. Ass’n v. Metro Homes, Inc., 2017 CO 69, June 5, 2017 (“Vallagio”) that will likely benefit condominium developers in Colorado by helping to alleviate litigation costs related to construction defects claims, thereby incentivizing new construction of condominiums along the Front Range.

For the past several years, the Colorado General Assembly has ardently debated construction defects reform. Senate Bill 156, introduced earlier this year, was intended to make arbitration mandatory for construction defects claims, but failed to pass. House Bill 1279 requiring the consent of the majority of condominium unit owners to bring a claim, as opposed to just the HOA board, passed this session. Developers supported both of these bills as a means to decrease the amount of construction defects claims that would be brought, thereby spurring more condominium projects in Colorado.

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