Wyoming Supreme Court Justices Disagree: Were Tax Assessments of Minerals Constitutional?

As noted in a prior blog post, Wyoming’s Supreme Court Justices agree most of the time. In fact, in 2016 more than 95% of the Court’s orders and opinions were unanimous. This post highlights a recent disagreement between the members of the Wyoming Supreme Court in the case of Anadarko Land Corp. f/k/a Union Pacific Land Resources Corp., and Three Sisters, LLC v. Family Tree Corporation, 2017 WY 24, 389 P.3d 1218 (Wyo. 2017) concerning a 1911 tax assessment that changed--or did it--the ownership of minerals in 2017.

This case features the appeal of a district court decision upholding the validity of a 1911 Laramie County tax assessment against minerals owned by Anadarko Land Corporation’s (“Anadarko”) predecessor-in-interest1. Anadarko’s predecessor, the Union Pacific Railroad, acquired the mineral interests at issue in a Patent issued by the United States in 1901. In 1911, Laramie County assessed taxes on these unproduced minerals. Anadarko’s predecessor did not pay the assessed taxes, and Laramie County put the mineral interests up for bid at a tax sale. When no bids were made for the mineral interests, Laramie County acquired the minerals and then, by a tax deed in 1919, sold the mineral interests to Iowa Land & Livestock Company. At this point, two divergent chains of title emerged. One chain derived from Anadarko’s predecessor and the other from the Laramie County tax sale

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Wyoming Supreme Court Justices Disagree: An Unusual Circumstance

Wyoming’s Supreme Court Justices seem to agree most of the time.  In fact, in 2016 more than 95% of the Court’s orders and opinions were unanimous.  The most recent disagreement is in Cheyenne Newspapers, Inc. v. The Board of Trustees of Laramie County School District Number One, 2016 WY 113, 2016 WL 6995555 (Wyo. 2016).

This case features a dispute between Cheyenne Newspapers, Inc., doing business as the Tribune-Eagle (“Tribune-Eagle”), and Laramie County School District No. 1 (“School District”) regarding a public records request.  The Tribune-Eagle submitted a request February 11, 2014, to inspect all emails to, among and from school board members since December 1, 2013, regarding school board topics.  This required the School Board to search not only the School District’s computer system, but also the personal email accounts of the school board members, because school board members use their personal email accounts to conduct school board business.  After completing the search the School District informed the Tribune-Eagle that the requested records could be obtained upon the payment of a $110.  The fee was for the clerical staff time and professional personnel time required to process the request.  The Tribune-Eagle refused to pay the fee and filed a declaratory judgment action seeking a ruling that the Wyoming Public Records Act (the “Act”) does not allow a government entity to charge for access to electronic records when the records request is for inspection only and not copying of the records.  The District Court found the fees to be allowable under the Act and also to be reasonable.  The Wyoming Supreme Court affirmed in a 3-2 split decision.

In interpreting the Act (specifically, Wyo. Stat. Ann. § 16-4-202(d)) the majority held that “[w]hether the request for electronic records is framed as a request to inspect or as a request for a copy, if the only way for the custodian to provide the record is to produce a copy of it, the cost of producing that copy is to be borne by the party making the request.”  Cheyenne Newspapers, Inc., 2016 WY 113 at ¶ 14.  Further, “the limitation on the costs charged is that they be the reasonable costs of producing a copy.”  Id. at ¶ 32.

The Tribune-Eagle and the dissenting members of the Court raised several issues in response.  One such issue is the possible “chilling effect” the majority decision will have on public access to government records.  Justice Davis writing for the dissent stated:

Although imposition of a fee for a member of the public to inspect public records is not the same as denying access, imposing a cost for inspection could limit the access the Act was intended to provide.  While I have no reason to question the district’s good faith, and can accept that it only wants to pass on the cost of responding to a request for electronic records, there can be no doubt that such fees could be used to discourage access.

Id. at ¶ 41.  The Tribune-Eagle also argued that allowing “reasonable costs,” beyond actual duplication costs, could lead to a situation where costs for the same type of records request could vary dramatically from one governmental entity to the next due solely to the efficiency of the entity’s employees.  Also, the first party to request information will bear the entire cost of a record request, while subsequent parties requesting that same information will pay only limited duplication costs.  The majority notes these concerns are policy concerns that only the Wyoming Legislature can correct by amending the Act.

Cheyenne Newspapers, Inc. is interesting not only because it showcases a rare instance of disagreement on the Wyoming Supreme Court, but also because it touches on several issues of recent import including: (i) use of personal email for official government business; (ii) restrictions on access to government records, whether intentional or unintentional; and (iii) how laws may need to adapt to a world where records are increasingly being kept in electronic formats.  The full text of the opinion can be found on the Wyoming Supreme Court’s website at http://www.courts.state.wy.us/Supreme/Opinions.


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Lessees and Operators Beware

In Pennaco Energy Inc. v. KD Company LLC, 2015 WL 7758324 (Wyo.) (“Pennaco I”), the Wyoming Supreme Court recently confirmed a precedent that subjects lessees and operators to liability for successors’ acts and failures under surface use agreements. At issue was the continued liability of Pennaco for obligations contained in a surface use agreement (“SUA”) entered into by Pennaco and the lessor. Under the terms of the SUA, Pennaco was obligated to make annual payments to the lessor and to reclaim the surface after wells are plugged and abandoned. Pennaco, having fulfilled all of its obligations while holding the lands subject to the SUA, assigned the lands and rights under the SUA to a successor, who then defaulted on these obligations and ultimately declared bankruptcy. In this suit to impose liability on Pennaco for its successor’s failures, the parties took widely different approaches as to what law should control obligations imposed in a SUA.

Using a colorful analogy, Pennaco likened its obligations to that of a football being passed from the quarterback to the receiver. Once Pennaco, as the quarterback, passed its obligations to its successor, KD Company, the successor held the obligations as the receiver would hold the football. Pennaco grounded its argument in property law, reasoning that its obligations were covenants running with the land, just as the SUA expressly provided that the benefits or rights received by Pennaco were covenants running with the mineral lease. In property law, covenants running with the land are obligations which are connected with an interest in land so that future owners of the interest will also have to fulfill them. Conversely, when an entity no longer owns the interest, that entity also no longer owes the obligation because it is connected with the interest, not the entity. Thus, once Pennaco assigned its lease and SUA interests to KD Company, under well-established property principles, Pennaco was no longer liable for these obligations.

In equally colorful language, KD Company likened the obligation imposed on Pennaco to a communicable disease. Just because Pennaco, the carrier of a disease, passed the disease to KD Company did not mean that Pennaco was cured. KD Company argued that established principles of contract law, rather than property law, controlled the issue. It reasoned that rights can be freely divested absent a contractual provision to the contrary, but a duty or obligation can only be divested with the approval of the party to whom the duty is owed. Thus, Pennaco would only be relieved of its contractual obligations if the SUA expressly released Pennaco from further liability upon assignment, or if Pennaco obtained a “novation” (the substitution of a new agreement for an old agreement, which could be in the form of an agreement with the surface owner to release Pennaco from those obligations). Because Pennaco had no such relief in this case, KD Company argued that Pennaco would still be liable under the SUA pursuant to contract law.

The Wyoming Supreme Court agreed with KD Company’s contract law approach, despite significant evidence that the obligations were intended to be covenants running with the land, including language that these covenants would run with the surface ownership. Instead, the Court reasoned that if the parties intended that the obligations, as well as rights, of the parties were to be covenants running with the land, they should have included language expressly stating that the obligations, like the rights, were also covenants running with the mineral estate. Thus, the Court held that while Pennaco’s rights ended upon assignment, its obligations continued because they were not covenants running with the mineral estate, and there was no express provision in the SUA relieving Pennaco of liability upon assignment.

Interestingly, the Court added a caution in dicta (authoritative language but not binding) in footnote 4, which reads in full: “By this analysis we do not determine that a clause stating Pennaco’s obligations were ‘covenants running with’ its mineral leases would have indicated intent that Pennaco was no longer responsible after assignment of the leases and agreements. An exculpatory clause must expressly terminate the assignor’s obligations upon assignment.” Emphasis added. With this language, the Court cautioned lessees and operators that they should not rely solely on the rules of property law to relieve them of liability in a SUA. Instead, they should insert express exculpatory language in the SUA to make it clear that they will be relieved of future liability after transferring their interest.

The Wyoming Supreme Court heard arguments in a related case on December 16, 2015 (“Pennaco II”). Pennaco has described Pennaco II, in its appellate brief, as presenting “the same/similar issue—under a different surface use agreement—as that presented” in Pennaco I. Prior to the argument in Pennaco II, Pennaco filed a motion for rehearing of Pennaco I. Pennaco therefore focused its oral argument in Pennaco II on why the Court’s decision in Pennaco I was wrong.

In response to questions from the judges, Pennaco also tried to distinguish the two cases by pointing to additional language in the Pennaco II SUA stating that the rights were covenants running with the land. However, one justice pointedly asked whether Pennaco believes that the surface owner knew and intended that Pennaco would be able to develop the minerals but then assign the lease and SUA shortly before the obligation to reclaim came due and thereby pass on the obligation. The facts of the case brought this concern to the forefront because Pennaco had given the surface owner assurances about reclamation in writing three weeks before assigning the lease and SUA to a small company that declared bankruptcy before reclaiming the surface. Thus, it appears likely that the outcome in Pennaco II will be the same as in Pennaco I. Pennaco could not point to any language in this SUA that relieves it of its obligations after the assignment, and the Court did not seem inclined to believe that the surface owner intended the SUA to allow Pennaco to do so.

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