Kathryn Haight has been a consulting, trial and appellate counsel on a variety of matters, including the resolution or avoidance of complex disputes and civil and criminal litigation concerning environmental issues, major construction projects, securities, antitrust, and natural resource issues.

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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EPA Haze Rule – U.S. Court of Appeals for the 5th Circuit Stays EPA From Implementing Final Haze Rule in Texas and Oklahoma.

The federal Clean Air Act requires the states and the federal government to establish and meet targets for visibility in protected national parks and wildlife areas through regulations that control air pollutants in ambient air. 42 U.S.C. §§ 7410, 7491, 7492(e)(2). The federal government has the primary responsibility for identifying air pollutants and setting standards. The states, however, bear the primary responsibility for implementing those EPA standards by promulgating state implementation plans ("SIPs"). In accordance with the Act, the EPA issued a Regional Haze Rule in 1999 requiring states (1) to develop implementation plans by the end of 2007 for the 2009–2018 period and (2) to submit revised plans every ten years thereafter. 40 C.F.R. § 51.308(b), (f).

In January 2009, EPA found that Texas and Oklahoma (and several other states) had missed the 2007 deadline. Texas and Oklahoma subsequently submitted plans which were partially disapproved by EPA. In 2014, EPA proposed substitute federal plans and later issued its Final Rule in 2016. 81 Fed. Reg. 296 (Jan. 5, 2016). Claiming that the EPA was improperly targeting coal-fired power plants, the State of Texas, power plants, numerous energy companies, state regulators, and others filed a petition to review the Final Rule in the U.S. Court of Appeals for the 5th Circuit ("5th Circuit"). State of Texas v. U.S. Environmental Protection Agency, Case No. 16-60118. On July 15, 2016, the 5th Circuit issued an order denying EPA's motion to dismiss or transfer of venue of the petition, finding that:

• The 5th Circuit, which encompasses Texas, has jurisdiction to review the Final Rule pursuant to the Clean Air Act, 42 U.S.C. § 7607(b)(1);
• Venue in the 5th Circuit is proper because the petitioners' challenge addresses locally or regionally applicable action under the Act; and,
• Because staying implementation of the Final Rule was warranted, the 5th Circuit granted petitioners' motion for a stay pending resolution of the petitions for review on the   merits.

Because the EPA's actions involve 37 other states in other federal circuits, this matter may see inconsistent analyses by the several federal circuit courts and require final resolution by the U.S. Supreme Court.

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2012 and 2013 Local Fracking Regulations Held Invalid and Preempted by State Law

In companion decisions issued May 2, 2016, the Colorado Supreme Court (Gabriel, J.) affirmed district court summary judgment orders invalidating home-rule oil and gas regulations concerned with hydraulic fracturing (“fracking”). The Court relied on the intent and scope of state-wide oil and gas legislation as reflected in the Colorado Oil and Gas Conservation Act, §§ 34-60-101 to -103, CRS (2015) (“the state Act”), and principles of operational preemption. The Court rejected express and implied preemption arguments.

In City of Longmont v. Colo. Oil and Gas Ass’n, Case No. 15SC667, the Court found Longmont’s voter-approved attempt to ban fracking to be in operational conflict with and, hence, preempted by the state Act. The Court noted that available alternatives to fracking did not lessen the state’s interest in fracking under the state’s Act and the district court’s factual finding that “virtually all oil and gas wells” in Colorado are fracked. The Court recognized that Longmont’s fracking ban implicated possible increased costs in producing oil and gas, reduced royalties, and the potential for a ripple-effect of local patchwork regulation across the state which could result in a de facto statewide ban notwithstanding the intent of the state Act. Similarly, in City of Fort Collins v. Colo. Oil and Gas Ass’n, Case No. 15SC668, the Court agreed that a 5-year voter-approved moratorium on fracking and storing fracking waste within the City was preempted by the state Act. The Court found the 5-year moratorium improperly rendered the state’s statutory and regulatory scheme superfluous, “at least for a lengthy period of time, because it prevents operators who abide by the Commission’s rules and regulations from fracking until 2018.” The Court, however, stated that it’s opinion expressed “no view as to the propriety of a moratorium of materially shorter duration.”

Hence, the Court invalidated Longmont’s ban and Fort Collins’s moratorium because they (i) involved questions of mixed state and local concern and (ii) each local regulation was preempted due to operational conflicts with the operation of the state Act. The Court also took the opportunity to reject a “beyond a reasonable doubt” standard of proof for the preemption proponent; rejected intervenor-citizens’ “inalienable rights” argument; and, clarified earlier Court preemption decisions (Voss and Bowen-Edwards), emphasizing (i) that the judicial question of “whether a matter is one of statewide, local or mixed state and local concern is separate and distinct from the question of whether a conflict between state and local law exists,” and (ii) that the preemption analysis requires the court to examine the interplay between state and regulatory schemes and to conduct “a facial evaluation of the respective regulatory schemes, not a factual inquiry as to the effect of those schemes ‘on the ground.’”

Once these Court decisions become final they are not subject to further review. Although these decisions may impact similar local government measures imposing local control over oil and gas activity in Colorado, they are not likely to stop or slow citizen-initiative efforts to increase local control of oil and gas activity.

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CLAIMANTS MAY SUE INDUSTRY FOR DAMAGES RESULTING FROM EARTHQUAKES

On June 30, 2015, the Oklahoma Supreme Court ruled in Sandra Ladra v. New Dominion LLC, Spess Oil Co. [and other unnamed companies], that Plaintiff could sue operators of wastewater injection wells in and around Lincoln County, Oklahoma, for personal injury damages resulting from injuries she suffered from an earthquake while in her Lincoln County home. Plaintiff claimed that the Defendants' high-pressure disposal wells were responsible for the earthquake. The Court rejected the argument that the Oklahoma Corporation Commission (Oil and Gas Conservation Division) had exclusive jurisdiction and held that allowing "district courts to have jurisdiction in these types of private matters does not exert inappropriate 'oversight and control' over the OCC," and that it "conforms to the long-held rule that district courts have exclusive jurisdiction over private tort actions when regulated oil and gas operations are at issue." The Oklahoma Court's ruling also supports a finding of district court jurisdiction in a similar class action suit brought by representative plaintiff Jennifer Lin Cooper against New Dominion LLC, Spess Oil Co., and other unnamed companies which was also filed in Lincoln County, Oklahoma, earlier this year. Since the Oklahoma Court’s June ruling, the OCC and some industry members have taken preventative and regulatory steps to avoid or mitigate seismic activity.

In Colorado there have been several seismic events related to oil and gas activities, particularly near Greeley and Trinidad. Since 2011, the Colorado Oil and Gas Conservation Commission has engaged in rule-making that has increased regulatory requirements with respect to hydraulic fracturing and disposal activities. The COGCC now has enhanced technical, bonding and insurance requirements as well as geophysical reporting and seismic monitoring. The COGCC has also taken steps to shut down injection wells utilizing a ‘stoplight system’ – if a seismic event is only a magnitude 1 to 2 on the Richter Scale, underground injections wells may receive a green light from the COGCC; if the seismic activity is rated at M2 but below M5, a modified operations amber light may be given; and, if the seismic activity is measured at M5 or more, underground well operations are suspended and red-lighted by the COGCC.

Like Oklahoma, it is the Colorado courts that have jurisdiction to address private claimants’ damages claims based on concussion-related damage or injury. Moreover, Colorado law imposes strict liability for concussion damage and proscribes the outsourcing of liability. Thus, Colorado provides claimants with broad, direct damages relief. For a further discussion, see Richards, Emery Gullickson, “Finding Fault: Induced Earthquake Liability and Regulation,” COLUMBIA JOURNAL OF ENVIRONMENTAL LAW, 1 April 2015.

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The U.S. Supreme Court Disagreed with 10th Circuit's Analysis in a Refusal-to-Hire Case Focused on the Wearing of a Religious Headscarf

On June 1, 2015, in an 8-1 decision, the U.S. Supreme Court ruled against Abercrombie & Fitch and for a Muslim job applicant, Elauf, who had been rejected for employment because her headscarf would conflict with the store's "Look Policy" which prohibited the wearing of caps on the sales floor. E.E.O.C. v. Abercrombie & Fitch Stores, Inc., No. 14-86, 2015 WL 2464053. The evidence showed that the store's interviewer believed Elauf wore her headscarf because of her faith. The EEOC sued Abercrombie on Elauf's behalf for violation of Title VII. The U.S. District Court granted summary judgment for Elauf and awarded $20,000 in damages. The U.S. Court of Appeals for the 10th Circuit reversed, awarded Abercrombie summary judgment instead, and held that employer liability under Title VII ordinarily requires the job applicant to first prove that the employer had actual knowledge of her need for an "accommodation." 731 F.3d 1106, 1131 (2013).

Writing for the Court, Justice Scalia noted at the outset that the case was a “really easy” one. Scalia wrote Title VII proscribes two employment-practice categories described as "the 'disparate treatment' (or 'intentional discrimination') provision and the 'disparate impact' provision," and that the "word 'religion' is defined to “'includ[e] all aspects of religious observance and practice, as well as belief, unless an employer demonstrates that he is unable to reasonably accommodate to' a 'religious observance or practice without undue hardship on the conduct of the employer's business.'” 42 U.S.C. § 2000e–2(a) and § 2000e(j). 2015 WL 2464053, at *2-3. The Court rejected the argument that a Title VII plaintiff must show that the an employer had “actual knowledge” of the applicant's need for an accommodation and that, instead, the plaintiff "need only show that his need for an accommodation was a motivating factor in the employer's decision….[T]he intentional discrimination provision prohibits certain motives, regardless of the state of the actor's knowledge. Motive and knowledge are separate concepts. An employer who has actual knowledge of the need for an accommodation does not violate Title VII by refusing to hire an applicant if avoiding that accommodation is not his motive. Conversely, an employer who acts with the motive of avoiding accommodation may violate Title VII even if he has no more than an unsubstantiated suspicion that accommodation would be needed. Thus, the rule for disparate-treatment claims based on a failure to accommodate a religious practice is straightforward: An employer may not make an applicant's religious practice, confirmed or otherwise, a factor in employment decisions." 2015 WL 2464053, at *3 (emphasis added). The Court rejected Abercrombie's argument that the store's neutral policy cannot constitute “intentional discrimination” because "Title VII does not demand mere neutrality with regard to religious practices…. Rather, it gives them favored treatment, affirmatively obligating employers not 'to fail or refuse to hire or discharge any individual ... because of such individual's' 'religious observance and practice.' An employer is surely entitled to have, for example, a no-headwear policy as an ordinary matter. But when an applicant requires an accommodation as an 'aspec[t] of religious ... practice,' it is no response that the subsequent 'fail[ure] ... to hire' was due to an otherwise-neutral policy." 2015 WL 2464053, at *4 (emphasis added). Finding that the 10th Circuit had misconstrued Title VII, the case was remanded for further consideration.

Justice Alito concurred in the result but disagreed with the Court's "knowledge" analysis. Justice Thomas (a former EEOC Chairman) concurred in part and dissented: "I would hold that Abercrombie's conduct did not constitute 'intentional discrimination.' Abercrombie refused to create an exception to its neutral Look Policy…. To be sure, the effects of Abercrombie's neutral Look Policy, absent an accommodation, fall more harshly on those who wear headscarves as an aspect of their faith. But that is a classic case of an alleged disparate impact" and not "disparate treatment because Elauf received the same treatment from Abercrombie as any other applicant who appeared unable to comply with the company's Look Policy." 2015 WL 2464053, at *8.

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The 10th Circuit Rebuffs Environmental Groups' Challenges to Keystone XL Pipeline Permit and Verification Letters

On May 29, 2015, the U.S. Court of Appeals for the 10th Circuit upheld the entry of judgment for defendant and rejected National Environmental Policy Act (NEPA) and Clean Water Act (CWA) challenges to the validity of Army Corps of Engineers' Nationwide Permit 12 (NWP 12) for the Gulf Coast Pipeline (the southern segment of the Keystone XL Pipeline) and to the verification letters issued by the Corps. Sierra Club, Inc., et al. v. Bostick, No. 14-6099, 2015 WL 3422924. Writing for the Court, Circuit Judge Bacharach (Oklahoma) held that the environmental groups had waived their NEPA claims that the Corps failed to consider the risk of oil spills and the cumulative impacts of pipelines before first issuing NWP 12 because the groups failed to raise those issues below, and (i) the risk of pipeline oil spills is not so "obvious" as to avoid waiver, (ii) the Corps' knowledge of the risk of pipeline oil spills and responsibility deferral to the Pipeline and Hazardous Materials Safety Administration (PHMSA) did not apply to avoid waiver, and (iii) the groups' cumulative-impacts objections did not adequately challenge the rationality of agency action. The Court further rejected arguments that the Corps should have prepared a new NEPA analysis for the entire Gulf Coast Pipeline before issuing Permit verification letters, holding that the issuance of verification letters did not constitute "major federal action" but mere verification that permittees may proceed under a nationwide permit, and "the Corps had no obligation to assess the environmental impacts of the entire Gulf Coast Pipeline." The environmental groups' challenges under § 404(e) of the CWA (dredge-and-fill activities) were also rejected by the Court, stating, the "environmental groups have not shown that the permit authorizes linear projects with more-than-minimal impacts, and the Corps has permissibly interpreted the statute to allow partial deferral of its minimal-impacts analysis."

Notably, NWP 12 was issued after TransCanada decided to divide the Keystone XL Pipeline into two parts after the original comment period had closed for NWP 12. The Court recognized that nationwide permits are inherently broad, encompassing a variety of activities, some of which may or may not be predicted by the permitting agency. Here, the "Corps made an environmental assessment of the predictable uses of Permit 12, but recognized the futility of predicting every conceivable use for every conceivable type of utility line anywhere in the United States. The Corps need not conduct a new NEPA analysis every time someone conceives a new use for a national permit." The Court also concluded that the record showed that the agency engineers had adequately considered cumulative impacts at proposed crossings.

In his concurring opinion, Circuit Judge Baldock (New Mexico) concurred but found "this case to be prudentially moot" due to changed circumstances.

In her concurring opinion, Circuit Judge McHugh (Utah) wrote separately concerning the Corps' problematic, overly broad definition of "pipeline" and its obligations under NEPA, finding that the Corps improperly conflated its obligations under NEPA with its obligations under § 404(e) of the CWA. "The Corps may not limit its NEPA analysis to the consideration of the environmental effects of the discharge of dredged and fill material into jurisdictional waters, as would be appropriate under § 404(e) of the CWA. Rather, for NEPA purposes, the Corps is required to consider the direct, indirect, and cumulative effects reasonably foreseeable as a result of its permitting decision. This includes the environmental effects caused by the operation of the installations authorized by the Corps' permitting decision. And this understanding of the Corps' NEPA responsibilities has been universally adopted." 2015 WL 3422924, at *18 (citations omitted). Judge McHugh nevertheless "would affirm the district court because I conclude that Sierra Club's argument that the Corps improperly deferred portions of its NEPA analysis to the verification stage was not made to the agency during the reissuance process and is therefore waived…. The Corps has been issuing and reissuing NWP 12 for decades, with no party objecting to the deferral practice." 2015 WL 3422924, at *21.

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U.S. Supreme Court Refuses to Consider Colorado Rancher's Attempt to Bar Oil Drillers from Ranch

On April 27, 2015, the U.S. Supreme Court denied a petition for writ of certiorari to review a Colorado rancher's attempt to prevent oil development and related access on his ranch. Petitioner Stull Ranches had requested that the high court review and reverse a 2014 decision of the 10th U.S. Circuit Court of Appeals decided in favor of the federal mineral lessee, Entek GRB, which allowed Entek reasonable surface access to drill for oil and to use a road to access another unitized Entek well.

The federal mineral rights at issue had been reserved by and for the federal government pursuant to the Stock-Raising Homestead Act of 1916 [Pub.L. No. 64–290, 39 Stat. 862 (codified at 43 U.S.C. §§ 291–301)] and, pursuant thereto, the land-grant surface successor acquired its real property interests subject to the government's reservation of mineral rights and interests, which includes: "(1) the right to enter and use so much of the surface as might be 'reasonably incident' to the exploration and removal of mineral deposits, and (2) the right to enact future laws and regulations regarding the 'disposal' of the mineral estate." Entek GRB, LLC v. Stull Ranches, LLC, 763 F.3d 1252, 1254 (10th Cir. 2014), cert. denied sub nom. Stull Ranches, LCC v. Entek GRB, LCC, No. 14-1007, 2015 WL 730880 (U.S. Apr. 27, 2015). According to the 10th Circuit, this "second right … sweeps broadly when it places the minerals at the government's 'disposal,' signifying not just the government's power to 'bestow[ ]' or 'assign[ ]' the minerals, but also a power to 'manage[ ],' 'make use of,' and 'deal with [them] as [it] pleases.'" Id. (Citation omitted.) The legal framework for disposition is that provided by the 1920 Mineral Leasing Act [Pub.L. No. 66–146, 41 Stat. 437 (codified in scattered sections of 30 U.S.C.)] as amended, which entitles the federal lessee the reasonable right to access and explore the mineral estate, a statutory right to unitize, and a reasonable right to access unitized wells and minerals.

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Case Management and Rejection of “Lone Pine Orders” in Colorado

On April 27, 2015, the U.S. Supreme Court denied a petition for writ of certiorari to review a Colorado rancher's attempt to prevent oil development and related access on his ranch. Petitioner Stull Ranches had requested that the high court review and reverse a 2014 decision of the 10th U.S. Circuit Court of Appeals decided in favor of the federal mineral lessee, Entek GRB, which allowed Entek reasonable surface access to drill for oil and to use a road to access another unitized Entek well.

The federal mineral rights at issue had been reserved by and for the federal government pursuant to the Stock-Raising Homestead Act of 1916 [Pub.L. No. 64–290, 39 Stat. 862 (codified at 43 U.S.C. §§ 291–301)] and, pursuant thereto, the land-grant surface successor acquired its real property interests subject to the government's reservation of mineral rights and interests, which includes: "(1) the right to enter and use so much of the surface as might be 'reasonably incident' to the exploration and removal of mineral deposits, and (2) the right to enact future laws and regulations regarding the 'disposal' of the mineral estate." Entek GRB, LLC v. Stull Ranches, LLC, 763 F.3d 1252, 1254 (10th Cir. 2014), cert. denied sub nom. Stull Ranches, LCC v. Entek GRB, LCC, No. 14-1007, 2015 WL 730880 (U.S. Apr. 27, 2015). According to the 10th Circuit, this "second right … sweeps broadly when it places the minerals at the government's 'disposal,' signifying not just the government's power to 'bestow[ ]' or 'assign[ ]' the minerals, but also a power to 'manage[ ],' 'make use of,' and 'deal with [them] as [it] pleases.'" Id. (Citation omitted.) The legal framework for disposition is that provided by the 1920 Mineral Leasing Act [Pub.L. No. 66–146, 41 Stat. 437 (codified in scattered sections of 30 U.S.C.)] as amended, which entitles the federal lessee the reasonable right to access and explore the mineral estate, a statutory right to unitize, and a reasonable right to access unitized wells and minerals.

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Equitable Extension of Oil and Gas Lease Rejected During Pendency of Lessor’s Declaratory Judgment Action to Declare Lease Invalid: Pennsylvania

On February 17, 2015, in a decision that is contrary to the principle that is nearly universally applied in other oil and gas producing jurisdictions, the Pennsylvania Supreme Court held that an oil and gas lessee is not entitled to an equitable extension of the primary term of a lease when the lessee is forced to spend years litigating the question of the lease’s validity. This decision represents a material departure from the general rule followed in other jurisdictions that, when a suit by a lessor challenging the validity of an oil and gas lease is unsuccessful, equitable principles apply to ensure that the lessee is not deprived of the agreed-upon time within which it must perform to maintain the lease.

In Harrison v. Cabot Oil & Gas Corp., No. 75 MAP 2014, Harrison, the owner of real property leased for oil and gas production to Cabot, sued Cabot seeking a declaration that the lease was invalid. Harrison argued that the lease was invalid because he signed the lease after Cabot represented that Harrison would not receive more than $100 per acre as a lease bonus. Cabot filed a counterclaim requesting that the primary term of the lease be extended for the period of time during which the lawsuit was pending in the event that the courts confirmed the validity of the lease.

The U.S. District Judge granted summary judgment in favor of Cabot on Harrison’s claim, finding that the lease was valid and enforceable. However, the court ruled against Cabot on the counterclaim, declining to extend the primary term of the lease. The court reasoned that equitable extension of the lease was not proper because the filing of a declaratory judgment action by a lessor seeking invalidation of an oil and gas lease is not a “repudiation of the contract,” which would justify an equitable extension under Pennsylvania law.

On appeal to the Third Circuit, the Third Circuit certified a question of law to the Pennsylvania Supreme Court, asking the state court to determine “whether the primary term of an oil-and-gas lease should be equitably extended by the courts, where the lessor has pursued an unsuccessful lawsuit challenging the validity of the lease.”

The Pennsylvania Supreme Court agreed with the U.S. District Court’s refusal to equitably extend the lease, concluding that commencement of an action seeking judicial declaration of an oil and gas lease’s invalidity is not a “repudiation of the lease” because, under Pennsylvania law, repudiation requires an “absolute and unequivocal refusal to perform” the contract. Rather than an outright refusal to perform the lease, the Pennsylvania Supreme Court found that Harrison was only trying to “settle and to afford relief from uncertainty and insecurity with respect to rights, status, and other legal relations,” as set out in Pennsylvania’s Declaratory Judgment Act.

The Court concluded that to hold otherwise would be to adopt a special repudiation rule for oil and gas leases. The Court also emphasized lessor’s observation “that oil-and-gas-producing companies are free to proceed according to their own devices to negotiate express tolling provisions for inclusion in their leases.” (Emphasis added.) The Court concluded that the result might be different where evidence of “affirmative repudiation of a lease” is present: “Our determination is only that, consistent with the prevailing substantive law of this Commonwealth, the mere pursuit of declaratory relief challenging the validity of a lease does not amount to such.”

Therefore, even though Cabot was forced to standby and do nothing to develop the leasehold while the litigation was occurring, all while the primary term of the lease ticked-by, the court concluded that Cabot was without a remedy to recoup the time lost during the litigation.

This outcome is contrary to the decision of almost every other court to consider the issue. As explained by Patrick H. Martin & Bruce M. Kramer, “courts have almost universally held that when the lessor has brought a suit during the primary term claiming the termination of the lessee's interest, the lessee, should he prevail in such action, will be entitled to a period of time extending beyond the expiration of the primary term to gain production.” 3 Patrick H. Martin & Bruce M. Kramer, Williams & Meyers, Oil and Gas Law § 604.7 (2009). For example, in Southwestern Energy Production, Inc. v. Elkins, 374 S.W.3d 678 (Ark. 2010), the Arkansas Supreme Court applied the repudiation doctrine to toll lease performance from the date the suit was filed, finding that not tolling lessee’s “obligation to drill as of that date would create an impossible dilemma” for lessee to “either use the contested lands and potentially expose itself to more liability or refrain from using the lands and lose its investment....” Other courts have reached similar conclusions. See, e.g., Snowden v. JRE Investments, Inc., 2010 Ark. 276, 370 S.W.3d 215, 221-22; Barby v. Cabot Petroleum, Inc., 944 F.3d 798, 799 (10th Cir. 1991), citing Duerson v. Mills, 648 P.2d 1276, 1277 (Ok. 1982), overruled on other grounds, Baytide Petroleum, Inc. v. Continental Resources, Inc., 231 P.3d 1144 (Okla. 2010).

Oil and gas lessees should be concerned that other courts may adopt this precedent because it could allow a lessor or other interested party to challenge the validity of an oil and gas lease and force the lessee to decide between continuing to develop the lease in the face of the risk that the lease will be invalidated (and, arguably, that lessee’s actions are a trespass on lessor’s land) and losing the lease for failure to develop during the primary term. It appears that this issue has yet to be decided by the Colorado Supreme Court. As such, it would be prudent for Colorado lessees to include express tolling provisions in their leases.

For more information about Harrison v. Cabot Oil & Gas Corp., oil and gas lease validity litigation, and equitable principles, please contact Kathryn Haight or Steve Sullivan.

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State vs Local Control of Oil and Gas Activity: Ohio

On February 17, 2015, in State ex rel. Morrison v. Beck Energy Corp. (Slip Opinion No. 2015-Ohio-485), the Ohio Supreme Court ruled, in a 4-3 decision, that Munroe Falls, a suburb or Akron, could not use local zoning laws to supersede or override the state of Ohio’s regulatory scheme for oil and gas activity. Recognizing that Ohio law “preserves certain powers for local governments, it gives state government ‘sole and exclusive authority’ to regulate the permitting, location, and spacing of oil and gas wells and production operations within the state.” The Ohio Supreme Court rejected the argument that the Home Rule Amendment to the Ohio Constitution grants to the city of Munroe Falls the power to enforce its own permitting scheme on top of the state system and does not allow a municipality to block drilling activities otherwise permitted by the state.

In that case, Beck Energy had obtained a state-issued permit in 2011 to drill a traditional well on private property in Munroe Falls. The city’s resulting suit claimed that Beck Energy had illegally sidestepped local ordinances, rendering its conduct illegal. The Ohio Supreme Court majority rejected Munroe Falls’ claim and held that a town cannot enforce oil and gas drilling regulations that conflict with statewide law and, hence, Munroe Falls had exceeded the limits of Ohio’s Home Rule Amendment. In Justice Terrence O’Donnell’s special concurrence he emphasized that while he agreed with the result, the scope of the majority’s decision was limited, stating: “it remains to be decided whether the General Assembly intended to wholly supplant all local zoning ordinances limiting land uses to certain zoning districts without regulating the details of oil and gas drilling” addressed in state law.

Even though courts in New York and Pennsylvania have ruled in favor of some level of local government control over oil and gas development, decisions rejecting similar local oil and gas activity bans were issued in New Mexico in 2015 by U.S. District Judge James Browning and in 2014 by Boulder District Court Judge D.D. Mallard (now at issue in the Colorado Court of Appeals).

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Federal Judge Strikes Down County Ordinance Banning Hydraulic Fracturing

On January 19, 2015, in a 199-page summary judgment opinion in SWEPI, LP v. Mora County, New Mexico (CIV 14-0035 JB/SCY), New Mexico U.S. District Court Judge James Browning declared that a 2013 Mora County ordinance banning corporate oil and gas drilling and hydraulic fracturing unconstitutional and in violation of the corporate-plaintiff developer's property rights and the Supremacy Clause under the U.S. Constitution. The law, titled the Mora County Community Water Rights and Local Self-Government Ordinance, banned such activity within a substantially rural county approximately 100 miles northeast of Santa Fe. The Plaintiff is a subsidiary of Royal Dutch Shell PLC.

Although subject to review by the Tenth Circuit U.S. Court of Appeals, this federal court's decision is a setback for local control activists. Judge Browning found that the Ordinance expressly attempted to circumvent corporate rights protected by federal law. In fact, the Ordinance declared that companies "shall not have the rights of 'persons' afforded by the United States and New Mexico Constitutions," including First Amendment rights and due process. Judge Browning noted that the "Defendants' argument that corporations should not be granted constitutional rights, or that corporate rights should be subservient to people's rights, are arguments that are best made before the Supreme Court -- the only court that can overrule Supreme Court precedent -- rather than a district court." Although the federal court did not find Plaintiff's "takings" claim to be ripe because Plaintiff had not sought just compensation through a state inverse condemnation action, Judge Browning further found the Ordinance violative of, and impliedly preempted by state law since it would create waste and prohibit activity that New Mexico law allows.
Although state courts in New York and Pennsylvania have ruled in favor of some level of local government control over oil and gas development, decisions rejecting similar oil and gas activity bans were issued in 2014 by Boulder District Court Judge D.D. Mallard, which are now at issue in the Colorado Court of Appeals.

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