The Environmental Law360 100 showcases the 100 U.S.-based firms with the most environmental partners globally. Read the full article (subscription required) “The 100 Law Firms With the Most Environmental Partners” (Law360, New York (November 18, 2015).
The Legal Intelligencer
The Commonwealth Court recently rendered a decision in Lyons Borough v. Township of Maxatawny, 2015 Pa. Commw. LEXIS 310 (Pa. Commw. Ct. 2015), addressing the scope of a municipal governing body’s authority under the Pennsylvania Municipalities Planning Code to impose conditions on a developer’s final land development plan approval. The court’s decision in Lyons is an important development because it significantly restricts the type of conditions a municipality may impose on a final land development approval, finding several conditions routinely imposed by municipalities at that stage to be improper.
In Lyons, Apollo Point L.P. and Saucony Creek L.P. applied to the township of Maxatawny for preliminary land development approval to construct a 192-unit apartment complex on approximately 37.7 acres of land zoned for multi-family housing. The Township Board of Supervisors approved the landowners’ preliminary land development plan subject to 161 conditions relating to, among other things: (1) compliance with the stormwater management requirements under the township’s subdivision and land development ordinance (SALDO); (2) compliance with sanitary sewer and water distribution system requirements under the SALDO; (3) compliance with additional miscellaneous zoning ordinance and SALDO requirements, such as completion of a transportation impact study; and (4) securing necessary permits and approvals from the state and county, including permits and approvals from the county planning commission, the Pennsylvania Department of Environmental Protection, and the Pennsylvania Department of Transportation. Shortly thereafter, the board approved the landowners’ final land development plan, conditioned upon the landowners’ compliance with all of the outstanding conditions cited in the board’s preliminary plan approval.
Concerned with the landowners’ ability to comply with the requirements of the township’s SALDO and zoning ordinance, Lyons Borough, which is located adjacent to the township, and Lyons Borough Municipal Authority, which entered into an agreement with the landowners to accommodate sewage flow from the proposed development, appealed the board’s conditional final plan approval to the trial court. The borough and the borough municipal authority argued that the board erred in approving the final plan because the conditions attached to the landowners’ preliminary plan approval had not yet been satisfied and thus the final plan, as submitted, did not comply with the requirements of the township’s SALDO and zoning ordinance. Finding the borough and the borough municipal authority’s argument unpersuasive, the trial court affirmed the board’s decision, concluding that the board “correctly conditionally approved the final plan.”
The borough and the borough municipal authority appealed to the Commonwealth Court, which reversed. In doing so, the court first acknowledged that a municipal governing body is expressly authorized to condition approval of a final land development plan under Section 503(9) of the Municipalities Planning Code, which provides that:
“Subdivision and land development ordinances may include, but need not be limited to … provisions for the approval of a plat, whether preliminary or final, subject to conditions acceptable to the applicant and a procedure for the applicant’s acceptance or rejection of any conditions which may be imposed, including a provision that approval of a plat shall be rescinded automatically upon the applicant’s failure to accept or reject such conditions within such time limit as may be established by the governing ordinance.”
However, the court concluded that this authority is not without limit.
In examining the scope of a municipality’s authority under Section 503(9), the court distinguished a condition that requires a developer to secure necessary state and county permits and approvals from a condition that requires compliance with one or more provisions of the municipality’s SALDO or zoning ordinance. The court declared that the first type of condition is not, in fact, “a ‘condition’ that a municipality imposes, because [a municipality] has no discretion to change or waive [the state and county] requirements.” In contrast, the second type of condition is an appropriate condition for a municipality to impose, as a municipality has the discretion to change or waive its ordinances’ requirements.”
The court next examined at what stage of the land development approval process—preliminary or final—the imposition of the above-referenced conditions are appropriate. While conditions requiring a developer to secure necessary state and county permits and approvals are implicitly permissible at both the preliminary and final plan approval stages, the court found that a final plan can only be approved once a developer has complied fully with a municipality’s SALDO and zoning ordinance. Thus, conditions related to compliance with municipal ordinances are only appropriate at the preliminary plan approval stage. In reaching this conclusion, the court explained that by approving a final land development plan, a municipality is finding that “the developer has satisfied the [municipality’s] laws and there is nothing else for it to do.” This finding then triggers a developer or objector’s right to appeal the municipality’s approval if either believes that the municipality improperly exercised its discretion. If a municipality were permitted to carry over and impose on a final land development plan approval all of the conditions imposed on a preliminary plan approval related to ordinance compliance, a “final plan would not be final until some later date when the municipality determine[d] whether the conditions ha[d] been satisfied or not, which could be well after” a developer or objector’s statutorily prescribed time period to appeal had lapsed.
In conclusion, when approving a land development plan submitted pursuant to a municipality’s SALDO and zoning ordinance, the law gives deference to a municipality’s interpretation of and findings related to compliance with the same. However, as evidenced by Lyons, this discretion is not unfettered. A municipality must be cognizant of the requirements over which it has discretion and control (e.g., compliance with the municipality’s SALDO and zoning ordinance) and focus its attention on ensuring compliance with those requirements prior to granting final plan approval. Otherwise, a municipality’s approval of a final land development plan is vulnerable to attack and reversal on appeal.
*Reprinted with permission from the 11/3/15 issue of The Legal Intelligencer. © 2015 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.
Employment Bulletin
A little-noticed provision in the recently-enacted federal budget permits the Occupational Safety and Health Administration (OSHA) to raise its monetary penalties – which have remained unchanged since 1990 – by nearly 80 percent.
The PIOGA Press
On October 14, the United States District Court for the Western District of Pennsylvania invalidated several sections of a Grant Township, Indiana County, local ordinance that was enacted in an attempt to prevent an oil and gas operator from operating an underground injection well that had been permitted by the United States Environmental Protection Agency (EPA). In Pennsylvania General Energy Company, L.L.C. v. Grant Township, Civil Action No. 14-209, 2015 U.S. Dist. LEXIS 139921 (W.D. Pa. Oct. 14, 2015), Pennsylvania General Energy Company, L.L.C. (PGE) filed a federal complaint against Grant Township to challenge the constitutionality, validity and enforceability of a self-described Community Bill of Rights Ordinance. Babst, Calland, Clements and Zomnir, P.C. in Pittsburgh represents PGE in this case.
The PIOGA Press
On September 14, the Commonwealth Court of Pennsylvania issued a much-anticipated ruling in Gorsline v. Board of Supervisors of Fairfield Township, 1735 C.D. 2014. The Commonwealth Court reversed a decision of the Lycoming County Court of Common Pleas which found that the development of an unconventional natural gas well pad in a residential and agricultural zoning district was not similar to and compatible with other uses in that zoning district. The decision in Gorsline addressed the compatibility of natural gas development in a zoning district consisting of mixed residential and agricultural uses. This ruling is significant because a considerable amount of natural gas development in the Commonwealth takes place in similarly situated zoning districts.
Employment Bulletin
Pittsburgh recently joined the wave of localities across the nation to pass a new sick leave law. The Paid Sick Days Act (the Ordinance) (found at http://apps. pittsburghpa.gov/co/Paid_Sick_Time_Legislation_Text.pdf), approved by the Pittsburgh City Council and signed into law by Mayor Bill Peduto in August 2015, requires all employers within the city to create and implement paid sick time policies for their part-time and full-time employees. Although a pending lawsuit threatens to nullify the law, Pittsburgh employers should begin now to familiarize themselves with the basic requirements of the Ordinance, which is anticipated to take effect in March of 2016.
The American Oil & Gas Reporter
HARRISBURG, PA.– Pennsylvania’s oil and gas industry is facing one of the most stringent regulatory environments in the country, energy leaders there suggest. And if present trends continue, the situation likely will worsen. Pennsylvania Independent Oil & Gas Association Chairman Gary Slagel comments that the commonwealth’s Department of Environmental Protection seems to respond to every complaint or concern it receives about the industry with new requirements or policies. The DEP appears to want to regulate all aspects of the industry, rather than allowing companies and industry groups to develop their own best practices, he says.
The PIOGA Press
The United States Environmental Protection Agency (EPA) recently released several proposals seeking to reduce greenhouse gas and other emissions from the oil and natural gas sector. EPA’s proposals are part of the Obama administration’s larger Climate Action Plan, a goal of which is to reduce methane emissions from the oil and gas industry by 40 to 45 percent from 2012 levels by 2025. EPA also stated that the proposals seek to protect public health by seeking to reduce emissions of volatile organic compounds (VOCs), a precursor to ground-level ozone formation. In addition to these emissions related measures, EPA also released a proposed rule intended to clarify single source determinations for entities within the oil and gas industry. Together, these proposals will likely affect a wide array of facilities within the industry, including natural gas well sites, processing plants, compressor stations and storage facilities.
The PIOGA Press
It is common for oil and gas leases in Pennsylvania to allow for the storage of natural gas. Pennsylvania case law regarding dual-purpose oil and gas leases, which grant both production rights and storage rights, is complex and provides very fact-specific holdings which may not be applicable to every dual-purpose lease. However, in this past year, two favorable decisions have been issued providing a better understanding of the status of such a lease that is held by storage operations alone.
The Legal Intelligencer
The mandated creation of a State Construction Notices Directory to track work on construction projects costing in excess of $1.5 million was one of the many changes made to the Pennsylvania Mechanic’s Lien Law in 2014. To accompany the new directory, the Pennsylvania Legislature also passed several new notice requirements to apply to these construction projects.
Although the new notice procedure is not anticipated to go into effect earlier than December 2016, members of the Pennsylvania construction industry should begin now to familiarize themselves with the changes to the Lien Law to determine how to change their business practices to meet the requirements. Other states’ laws and precedent can be a useful tool in helping owners, subcontractors and their lawyers jumpstart this process. Specifically, the 2014 amendments make Pennsylvania’s mechanic’s lien procedure similar to Ohio, as both the new notice-of-commencement and notice-of-furnishing filings have been required in Ohio for years.
The Anticipated Directory
In October 2014, Act No. 142 was enacted, amending the Pennsylvania Mechanic’s Lien Law, 49 P.S. Section 1101 et seq., and creating a more structured notice procedure for owners and subcontractors to follow. Specifically, the act permits the following four types of filings within the directory: (1) notice of commencement; (2) notice of furnishing; (3) notice of completion; and (4) notice of nonpayment.
A notice of commencement will be filed by an owner prior to the start of construction and must contain: (1) the full name, address and email address of the contractor; (2) the full name and location of the searchable project; (3) the county in which the searchable project is located; (4) a “legal description” of the property, including the tax identification number of each parcel included in the searchable project; (5) the full name, address and email address of the searchable project owner of record; (6) if applicable, the full name, address and email address of a surety for the performance and payment bonds and the bond numbers; and (7) the “unique identifying number” assigned the notice pursuant to Section 501.1(e)(1).
A notice of furnishing must be filed by a first- or second-tier subcontractor or supplier within 45 days after first performing work at the job site or first providing materials to the job site, containing: (1) a general description of the labor or materials furnished; (2) the full name and address of the person supplying the services; (3) the full name and address of the person who contracted for the services; and (4) a description sufficient to identify the searchable project.
Ohio’s system employs a notice method involving a notice of commencement filed by the owner and a notice of furnishing served by subcontractors and material suppliers. In Ohio, an owner’s “substantial compliance” with the notice-of-commencement requirements is considered to “trigger” the subcontractor or material suppliers’ obligation to file a notice of furnishing, as in Jim Morgan Electric v. Smith, 684 N.E.2d 117 (Ohio C.P. 1996). Likewise, under the Pennsylvania notice amendment, “a subcontractor that performs work or services or provides material in furtherance of a searchable project shall comply with the following if a notice of commencement has been filed and posted in accordance with Subsection (a).” Owners, subcontractors and material suppliers alike can gain insight from Ohio courts’ interpretations of the statutory requirements for these notices.
For example, in Linworth Lumber v. Z.L.H., 802 N.E.2d 736, 742 (Ohio C.P. 2003), aff’d, 2003 Ohio 4190, P24 (Ohio App. Ct. Aug. 4, 2003), an Ohio trial court held that a subcontractor is excused from the notice-of-furnishing requirement if the owner fails to include information in the notice of commencement that is both statutorily mandated and necessary for the subcontractor to complete service of the notice of furnishing. The court discounted the significance of the owner’s omission of the date the owner first executed a contract and various other details, and held that the inclusion of the name and address of the property owner and original contractor in the notice of commencement was sufficient. The Ohio Court of Appeals affirmed on the basis that the owner’s notice of commencement substantially complied with the Ohio lien statutes.
In contrast, the court in Clinton Electrical & Plumbing Supply v. Airline Professionals Association, Local 1224, 2006 Ohio 1274 (Ohio App. Ct. Mar. 20, 2006), excused a subcontractor from filing a notice of furnishing when the owner abbreviated its name in its notice of commencement. The court held that by filing its notice of commencement under the name “APA Teamsters Local 1224,” instead of “Airline Professionals Association, Teamsters Local 1224,” the owner did not substantially comply with the requirements of the Ohio lien statutes.
The determinative fact in Clinton was that the owner’s mistake prevented the correct indexing of the notice of commencement under the owner’s proper name, and therefore a search of the owner’s name failed to show the existence of the notice of commencement. The court also refused to interpret the Ohio lien statutes as placing a burden on the lien claimant to prove that it was prejudiced by the defect in the notice of commencement before excusing the lien claimant’s failure to file the notice of furnishing.
Notably, Ohio’s requirements for its notice of commencement are to ensure accuracy in a search of the property indexes so that a subcontractor may be informed of an owner’s notice of commencement and may correspondingly file a notice of furnishing to protect its lien rights, as in RN Building Materials v. C.R. Huffer Roofing & Sheetmetal, 683 N.E.2d 884 (Ohio C.P. 1997). Pennsylvania’s anticipated Internetbased directory, on the other hand, may eliminate some of the potential indexing risks in Ohio’s system because the notice amendment provides that the notice of commencement must be searchable by the owner’s name, contractor’s name, the property address, and the notice’s unique identifying number. Ohio has no central database for these notices. Instead, the notices are filed with the office of the county recorder where the property is located. Thus, a mistake in the owner’s name alone would not necessarily prevent a subcontractor from locating the notice of commencement by other means under Pennsylvania’s anticipated directory.
A reading of these cases should also not relieve an owner of a sense of duty to file a full and accurate notice of commencement. Unlike Ohio’s lien statutes, the notice amendment does not use the word “substantial” in connection to the required content of the notice of commencement. As such, Pennsylvania courts may decide to always require strict compliance with these requirements, similar to Ohio courts’ treatment of the notice-of-furnishing requirements, as in Carey Electric v. ABF Freight Systems, C.A. Case No. 17335. T.C. Case No. 97-7764 (Ohio App. Ct. Aug. 13, 1999).
Similarly, subcontractors and material suppliers should never presume absolution of their obligation to comply with the act’s notice-of-furnishing requirements merely because they know the owner was not perfectly compliant with the act. An example from Ohio case law of the irreversible consequences of a subcontractor’s untimely filing of its notice of furnishing is Jim Morgan Electric, in which the court held that a subcontractor’s failure to file its notice of furnishing until 48 days after the last day it performed work on the project precluded the filing of a lien altogether. The court further held that the owner’s failure to post the notice of commencement at the project site and to include the date on which the owner first contracted with an original contractor in the notice of commencement, as required by the statute, did not excuse the subcontractor from timely serving its notice of furnishing. Unlike in Clinton, these omissions by the owner did not rise to the level of it failing to “substantially” comply with the notice-of-commencement requirements.
Given the similarity between the Pennsylvania lien law amendments and the current Ohio lien law, at this time Ohio case law provides the best guidance available for the construction industry as parties try to predict how the Pennsylvania lien law amendments will be interpreted. Specifically, the Ohio decisions serve as a useful warning of the potential pitfalls involved with Pennsylvania’s new notice requirements, and illustrate the importance of conforming business practices early on to ensure compliance with these notice requirements.
D. Matthew Jameson III is a shareholder of Babst Calland and serves as the current chair of the firm’s construction services group. He has significant experience in all aspects of construction law, including construction bid protests, construction contract review and drafting, and prosecuting and defending construction payment disputes, including bond and mechanic’s lien issues.
Esther Soria Mignanelli is an associate at the firm who concentrates her practice in the areas of construction and commercial litigation.
PIOGA Press
This article highlights an excerpt of the recently published 2015 Babst Calland Report – Appalachian Basin Oil and Gas Industry: Rising to the Challenge, Legal and Regulatory Perspective for Producers and Midstream Operators.
With a large number of regulatory and legal issues unresolved for the industry, litigation will remain part of the landscape. Industry will continue to be required to litigate interpretations of statutes and rules by federal and state regulators and environmental groups—with, we hope, favorable outcomes such as in Citizens for Pennsylvania’s Future v. Ultra Resources, Inc. Industry will also continue to face issues related to the validity of leases and royalty payments. Finally, property owner claims of both personal injury and property impact from oil and gas development activities will continue, fueled by claims of groundwater contamination and adverse health effects of shale development.
Federal court refuses to aggregate compressor stations, dismisses Clean Air Act Citizens’ suit alleging violation of new source review
In a highly-anticipated decision, the U.S. District Court for the Middle District of Pennsylvania granted a motion for summary judgment in favor of a Pennsylvania natural gas operator in an air aggregation case filed by a citizens group. The decision was issued on February 23 in Citizens for Pennsylvania’s Future, and is the latest development in the debate over single source determinations. The court agreed with the permitting decisions made by Department of Environmental Protection that the compressor stations at issue were not located on adjacent properties and thus should not be treated as a single source of emissions. The court disagreed with the Citizens for Pennsylvania’s Future’s (PennFuture) argument that the compressor stations were functionally interrelated and, therefore, should be aggregated as a single source. While the court left some room for the consideration of functional relationships in making single source determinations, it determined that such a case would need to have unique facts that are outside the normal configurations of pipelines and compressor stations contemplated by DEP.
Developments in science and in litigation provide opportunities and challenges for defense of water contamination and nuisance claims
The industry continues to be faced with claims from property owners of temporary or permanent drinking well water contamination from drilling and fracturing activities. Groundwater in the Marcellus region frequently contains methane and elevated levels of constituents such as total dissolved solids, barium, strontium, chloride, sodium, iron, manganese and others. In litigation, the property owner plaintiffs are required to prove through expert testimony that the contaminants in their well water were caused by the gas development activities and were not pre-existing natural conditions. As the industry widens the area of pre-drill testing, many of these suits can be avoided or, if filed, easily defended. Additionally, the ability to use isotopic testing to determine the source of methane found in water wells is an added tool at the industry’s disposal to defeat such claims.
Litigation also continues to be filed by property owners claiming loss of use and enjoyment of their properties and diminution of property value due to air emissions, noise and/or dust from gas development activities. Because air emissions are often not conducive to pre- and postsampling, it can be more difficult to show that the present conditions are an increase over baseline. Medical monitoring claims are frequently included in both suits involving alleged water contamination and suits based on alleged air emissions. Many of the medical monitoring claims are abandoned by plaintiffs before trial or are dismissed by the court because plaintiffs cannot come forward with the required expert testimony to prove such claims. Courts have consistently held that in order to prove a claim for medical monitoring all of the below elements must be proven through expert testimony: (1) exposure greater than normal background levels; (2) to a proven hazardous substance; (3) caused by the defendant’s negligence; (4) as a proximate result of the exposure, plaintiff has a significantly increased risk of contracting a serious latent disease; (5) a monitoring procedure exists that makes the early detection of the disease possible; (6) the prescribed monitoring regime is different from that normally recommended in the absence of the exposure; and (7) the prescribed monitoring regime is reasonably necessary according to contemporary scientific principles.
There is a growing proliferation of questionable scientific and medical articles being published attempting to link air emissions to various medical conditions, ranging from commonly occurring respiratory conditions and nosebleeds to birth defects. It will be important for counsel defending these claims to be able to critically analyze these articles through use of reliable and well-qualified experts and preclude the admission of the unreliable science through the use of Daubert motions.
The defense of these suits has also been strengthened by the refusal of courts to allow plaintiffs to bring strict liability claims, finding as a matter of law that unconventional gas drilling is not an ultra-hazardous activity. As a result, plaintiffs are required to prove negligence. Proof that negligent operations resulted in the alleged water contamination or air emissions requires that plaintiffs retain more experts.
Lease busting—attempts to void or renegotiate terms of existing leases
Royalty owners who signed leases for signing bonuses, royalty rates or other terms that are not as favorable as those currently being offered in their area for new leases continue to look for ways to void the leases or the extension or renewal of the leases.
Lease renegotiation by litigation. Many leases obtained during the early cycle of the Marcellus and Utica boom contain renewal or extension clauses giving the lessee the option to extend the primary term, typically five years, for an additional five-year term, upon notice and payment of the same signing bonus as was paid when the lease was initially obtained. Royalty owners who missed the top of the market or have top lease offers claim the renewal option cannot be extended unless they are paid the current market value for signing bonuses and increased royalty rates, in effect renegotiating the terms of the lease. The royalty owners’ attorneys also frequently claim the landman procuring the lease fraudulently induced the royalty owner to sign by misrepresenting the renewal or extension clause, or falsely asserting that the option could not be exercised without renegotiating the financial terms of the lease. So far, the lessees have generally prevailed in the Appalachian Basin because the courts have held the renewal or extension clause is clear and unambiguous, and does not require the renegotiation of terms or the payment of a bonus at current market rates. Nevertheless, these cases require vigorous defense to avoid a negative outcome or undue delay.
Another group of court decisions in Ohio has rejected claims by royalty owners that older lease forms gave lessees too much discretion in determining when the primary term may be extended, thereby creating an unlawful lease in perpetuity. The Ohio Supreme Court has accepted one such case for review, which may result in a change in previously settled case law in Ohio on the validity of commonly used lease language. Defense of these cases requires the filing of motions at the earliest stage to obtain a judicial declaration on the clear and unambiguous terms of the lease to avoid, where possible, costly discovery and litigation. If the court does not dismiss the case or render judgment for lessors at the outset, further defense of the cases can be complicated by the fact the landman who procured the lease may no longer be working for the lessee and/or has no specific recollection of any communications with the royalty owners.
Challenges to held by production leases – duties of diligent development
Royalty owners who have leases held by production by conventional wells envy the financial success of lessors enjoying the fruits of lucrative new lease signing bonuses and increased royalty rates associated with shale development. Their attorneys continue to look for ways to void the leases or force drilling of exploratory or development wells based on claims of breach of the express or implied duty to diligently develop.
Vertical formation and abandonment claims. Courts throughout the Appalachian Basin generally recognize an implied duty to diligently develop in the absence of an express provision in the lease disclaiming implied covenants. The question becomes whether the failure to drill unconventional shale wells on a lease held by conventional production can result in the abandonment of those formations that are not currently producing. These vertical abandonment claims generally have not been successful as the plain and unambiguous terms of the lease do not support a claim of partial abandonment of a lease. An Ohio court has recently rejected such a claim based upon the language of the lease. Operators should nevertheless be wary of attempts by lessors to obtain a judicial declaration that the prudent operator standard requires the development of all formations. Such claims seem to ebb and flow with the commodity price of gas (i.e., they are less viable when the price of gas is low) and are difficult to prove. Nevertheless, it is an area disgruntled royalty owners and their counsel continue to analyze to determine if a lucrative payday awaits.
Dual purpose leases. Similarly, litigation continues over socalled “dual purpose” leases that provide that the lease is held past its primary term by the production of oil or gas, or the use of the premises for the storage of gas or the protection of stored gas in the general vicinity of the lease. Royalty owners who are not receiving any significant payments for leases being held by storage of gas or protection of stored gas have initiated litigation seeking to declare that the dual purpose lease is “divisible” and the formations that are capable of production without disturbing the storage field have been abandoned. Royalty owners are willing to concede that the storage reservoirs and necessary horizontal and vertical protective zones remain subject to the lease, but are seeking to terminate the lease as to the shale bearing formations. So far, the courts in Pennsylvania and Ohio have generally held that the dual purpose leases are plain and unambiguous and clearly state that the leases are held by production “or” storage of gas. In West Virginia, however, a recent ruling in the United States District Court for the Northern District of West Virginia has held otherwise, and is in the process of appeal to the Fourth Circuit Court of Appeals.
Royalty litigation
Litigation continues over the method of computing and paying royalties.
Post-production costs. With the significant decrease in the price of gas, disgruntled royalty owners continue to argue that the post-production cost deductions in their checks are resulting in improper reduction of revenue. They are looking for avenues to avoid or reduce such deductions. Courts in West Virginia have held that a lessee may not deduct post-production costs unless the lease specifically and in detail so states, and have identified the specific post-production costs that may be deducted and how they may be calculated. Nevertheless, questions continue regarding obligations to pay on the volume of gas produced at the wellhead. A recent ruling by the United States District Court for the Southern District of West Virginia held that where the lease calls for payment on the “gas sold” the deduction for lost and unaccounted for gas incurred prior to the point of sale is not a prohibited deduction.
In Pennsylvania, the decision in Kilmer v. Elexco Land Servs., Inc. seemed to settle that the deduction of post-production costs was allowed under most leases, but litigation continues. A March 5 jury verdict in favor of landowners in a class action case challenging the deduction of certain interstate pipeline expenses and marketing fees incurred downstream from the point of sale may encourage additional litigation challenging complicated royalty payment practices. Class action royalty cases also continue to be filed based on claims of fraud, collusion, and other tort claims challenging post-production cost deductions and seeking to narrow the holding in Kilmer.
Royalty on natural gas liquids. The royalty calculation process is even more complicated for production in the wet gas regions. Older leases typically contemplate the calculation of payment of the royalty “at the wellhead,” but the development of the infrastructure and technology to segregate and sell far downstream of the wellhead the components of wet gas has resulted in various practices among producers on how to calculate royalty on natural gas liquids.
Courts do not favor affiliated party transactions. One thing is clear: courts in the Appalachian Basin have been very skeptical of any post-production cost deductions or sales that relate to charges by affiliated marketing or gathering companies. The courts generally have held that affiliated transactions should be ignored as not constituting fair market, arm’s length transactions. The question then becomes, how far down the gathering and transportation value stream must an operator absorb the post-production costs before a court will hold, under the terms of the lease, that the lessor is obligated to share prorata post-production costs. ■
The 2015 Babst Calland Report was compiled and written by the attorneys of Babst Calland’s Energy and Natural Resources Group and provides legal insights into Marcellus and Utica shale issues, challenges and recent developments facing producers and midstream operators in the Appalachian Basin. For more information regarding litigation challenges facing the oil and gas industry, contact Kathy K. Condo at 412-394-5453 or kcondo@babstcalland.com, or Timothy M. Miller at 681-265- 1361 or tmiller@babstcalland.com. A full copy of the report is available by writing to info@babstcalland.com.
The Legal Intelligencer
With a growing number of townships, boroughs and cities experiencing fiscal challenges, many municipalities have increased or are considering increasing their fees related to the administration of their zoning, subdivision and land development, and related ordinances as a means of generating additional revenue.
On one hand, it certainly is prudent for municipalities to examine and, where appropriate, to increase their fees to cover their actual administrative costs. However, they need to proceed cautiously when doing so. If the fees are not reasonably commensurate with the cost of services performed, they will be viewed as a “back-door tax” and be subject to legal challenge.
The Municipalities Planning Code, 53 P.S. Section 10101 et seq., which establishes the framework for zoning and land use regulation in Pennsylvania, expressly authorizes municipalities to charge fees in an amount sufficient to offset the costs borne by a municipality in processing and administering applications.
Specifically, the MPC authorizes municipalities to charge fees related to: (1) processing applications and reviewing plans filed under a subdivision and land-development ordinance, including fees to cover the “reasonable and necessary charges by [a] municipality’s professional consultants for review and report thereon”; (2) administering a zoning ordinance; and (3) conducting hearings before the zoning hearing board, including fees to cover the “compensation for the secretary and members of the zoning hearing board, notice and advertising costs and necessary administrative overhead connected with the hearing.”
A municipality’s authority to charge land-use permitting fees, however, is not without limitation. It is a well-settled principle of Pennsylvania law that these fees must be reasonable and commensurate with the cost of the services performed by the municipality. A party wishing to challenge a fee has at least two options.
First, a zoning or subdivision and land-development ordinance fee can be contested by filing a validity challenge with the municipality’s zoning hearing board. Second, an individual or corporation may file a verified claim under Pennsylvania’s Local Tax Collection Law, 72 P.S. Section 5511.1 et seq., for a refund of any payment, plus interest, within three years of making the same. Regardless of the manner in which a fee is challenged, the challengers bear the burden of proving that the fee is unreasonable or excessive, as in Talley v. Commonwealth, 553 A.2d 518, 520 (Pa. Commw. Ct. 1989), and Martin Media v. Hempfield Township Zoning Hearing Board, 671 A.2d 1211, 1215 (Pa. Commw. Ct. 1996).
Although there is no statutory or judicially established bright-line limit imposed on zoning and land-userelated fees, lawsuits challenging the excessive nature of such fees are not foreign to Pennsylvania courts.
For example, the Pennsylvania courts addressed the reasonableness of a municipality’s building permit fees in Skepton v. Borough of Wilson, 755 A.2d 1267, aff’d 755 A.2d 1267 (Pa. 2000). There, a group of contractors hired to build a new high school challenged building permit fees totaling approximately $88,000 and $22,000 as excessive. The fees were calculated based upon each contractor’s bid or contract price. In an attempt to justify the fees, the municipality argued that the fees were necessary to offset the expense of regulating, inspecting, enforcing and administering oversight or control of the construction project. However, the municipality’s documented expenses incurred in overseeing the construction project totaled only $1,234, or approximately 1 percent of the fees imposed. In light of this documentary evidence, the trial court, emphasizing that the challenged building permit fees were grossly disproportionate to any costs incurred by the municipality and imposed primarily for the purpose of raising revenue, ordered the municipality to fully refund the fees.
On appeal, the Commonwealth Court affirmed the trial court’s order with respect to the illegal nature of the fees. However, it reversed the trial court’s order concerning the contractors’ rights to a refund, explaining that “because the contractors had included the relevant fee expenditures in their bids and had been reimbursed this amount by the school district, the contractors had suffered no injury.”
Acknowledging that the municipality’s building permit fees were unreasonable and excessive, the Pennsylvania Supreme Court granted allocatur to solely review the issue of whether a municipality must refund the excessive, and thus illegal, permit fees to the contractors.
Finding the Commonwealth Court’s analysis at odds with the plain and unambiguous language of the Local Tax Collection Law, the court reversed, holding that “a taxpayer that establishes that it is entitled to a refund of monies paid to a political subdivision to which that entity was not legally entitled, is to receive a refund, regardless of whether the taxpayer was able to pass on the costs of the illegally collected taxes.”
Similarly, in Martin Media, the Commonwealth Court addressed a challenge to an annual license fee on billboards. There, a media company, which owned and maintained 62 billboards located within Hempfield Township, challenged the township’s annual $100 per billboard license fee, which was imposed by the township to confirm a sign’s continued status as a lawful use, on the basis that the fee was grossly excessive and bore no reasonable relationship to the township’s costs of regulating billboards.
Following a hearing, the zoning hearing board upheld the license fee and, on appeal therefrom, the trial court affirmed. The Commonwealth Court, however, reversed. In doing so, the court emphasized that the township failed to produce proper proof of many of its costs, such as logs maintained by its officers of the time spent performing inspections, and concluded that because the license fee was disproportionate to the township’s actual service costs, it constituted an illegal, revenue-producing tax.
Skepton and Martin Media represent only a sampling of the excessive-fee-related lawsuits decided by the Pennsylvania courts. A comprehensive review of the case law on excessive fees indicates that municipalities should take caution when implementing any of the following fee structures:
· Fees based on square footage or construction costs. Fees based on the size of a structure or the estimated cost of construction are particularly susceptible to challenge because a municipality’s administrative costs associated with processing and regulating a project likely will not increase at the same rate as a project’s size or cost.
· Fees charged per temporary structure. Temporary structure fees have become an issue with the growth of the oil and gas industry across Pennsylvania because oil and gas extraction companies often utilize temporary trailers at well sites. Similar to fees based on square footage or cost of construction, permit fees imposed on a per-structure basis may escalate quickly, while the municipality’s related administrative costs remain fairly constant.
· Annual fees. Flat-rate fees charged on an annual basis, such as the annual $100 per billboard license fee in Martin Media, are susceptible to challenge on the basis that a municipality’s regulatory administrative costs are likely higher during the first year of regulation than subsequent years. Consequently, an applicant may be charged a fee disproportionate to the municipality’s costs associated with administering or regulating a project or structure after the project or structure is substantially completed. Where annual inspections or other ongoing administration is necessary, a municipality must determine whether its administrative costs will decrease after the first year and adjust its fees accordingly.
· Large, nonrefundable fees. Large, nonrefundable fees are problematic because any money remaining after all administrative costs are paid will constitute illegal tax revenue. Therefore, if a municipality wishes to charge a large, upfront fee for a specific type of hearing, it should consider refunding any portion of the fee remaining at the conclusion of the hearing. In summary, a municipality should proceed cautiously when considering increases to its current zoning and land-use-related fee structure, and closely examine the actual costs incurred in administering the regulations in question before acting. Failure to do so can prove to be costly, and could place the municipality at risk of costly litigation and ultimately an order requiring it to refund the fees, plus interest.
Blaine A. Lucas is a shareholder, and Krista-Ann M. Staley and Alyssa E. Golfieri are associates, in the public-sector services and energy and natural resources groups of Babst Calland. Lucas coordinates the firm’s representation of energy clients on land use and other local regulatory matters. He also teaches land use law at the University of Pittsburgh School of Law. Staley focuses her practice on representation of energy clients on land use and other local regulatory matters. Golfieri focuses her practice on zoning, subdivision, land development, taxation, real estate, code enforcement, public bidding and contracting matters.
*Reprinted with permission from the 7/7/15 issue of The Legal Intelligencer. © 2015 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.
Employment Bulletin
Less than one month after the United States Supreme Court issued its landmark decision legalizing gay marriage nationwide, the U.S. Equal Employment Opportunity Commission (EEOC) issued a controversial interpretation in Complainant v. Anthony Foxx, Secretary, Department of Transportation (Federal Aviation Administration) in which it found that Title VII of the Civil Rights Act of 1964 prohibits discrimination based on an individual’s sexual orientation. The EEOC’s decision is a significant development in the law because it rejected several previous courts of appeals decisions holding that Title VII does not prohibit discrimination based upon sexual orientation. In this case, a supervisory air traffic control specialist with the Department of Transportation’s Federal Aviation Administration (FAA) filed an Equal Employment Opportunity (EEO) complaint alleging that the FAA subjected him to discrimination on the basis of sex. Specifically, the complainant alleged that he was discriminated against when he was denied a permanent position as a front line manager because he is gay. The EEO complaint was initially dismissed on timeliness grounds. The complainant appealed the dismissal to the EEOC, which reversed, concluding that the complainant’s allegations of discrimination on the basis of his sexual orientation stated a claim of discrimination on the basis of sex within the meaning of Title VII, and that such claim was timely. In light of its conclusion, the EEOC remanded the case for a decision on the merits.
The State Journal
With a growing team of attorneys and client base, Babst Calland has moved to a new location at BB&T Square in Charleston, WV’s downtown business district.
“Our team of West Virginia attorneys welcomes the move to BB&T Square in the center of our beautiful downtown district,” said Steven Green, shareholder and energy attorney at Babst Calland. “The new space will accommodate our continued growth while enabling our entire staff to better serve current and new clients.”
Babst Calland opened its Charleston office in 2011, initially serving clients in the growing natural gas market in West Virginia and the Appalachian Basin. The office has grown steadily since then, and last year added a team of senior West Virginia attorneys in lateral moves from two other local firms. The firm focuses on representing clients through a multi-disciplinary team approach with attorneys in key practice areas, including energy and natural resources, environmental, employment and labor, business services, title, litigation, land use, and construction law.
The firm has more than 30 attorneys admitted to practice in West Virginia who have been serving the natural gas, coal and other industries for many years.
Its new Charleston office is located at 300 Summers St., Suite 1000.
Babst Calland also has offices in Pittsburgh and State College, PA., as well as Canton, Oh and Sewell, N.J.
Pittsburgh Tribune Review
In a depressed natural gas market in which every dollar counts for drillers, Jay Hammond tries to help people make deals efficiently.
The attorney joined Downtown Pittsburgh-based Babst Calland last month and advises energy companies on transactions including leasing, joint venture agreements, and mergers and acquisitions.