Arbitration Considerations

Just what is arbitration and how does it differ from court proceedings?  Generally speaking, both court proceedings and arbitration proceedings are adversarial processes in which a third party (or parties, in the case of a jury trial) is asked to settle a dispute.   In both court and arbitration, an award of some kind will be issued to the prevailing party.  Courts issue final judgments against parties that usually require them to take some action (i.e. pay damages).  These judgments carry the full weight of the law and must be followed by the parties.  Similarly, the award issued via arbitration proceedings is also legally binding on the parties.  That is, the results from an arbitration proceeding carry no less weight than results from a courtroom proceeding.  Because of this, it is essential that arbitration proceedings be taken very seriously.One advantage of arbitration is that the third party arbitrator (also known as "the neutral") typically has some personal expertise in the dispute's subject matter.  Oil and gas arbitration is no exception: neutrals often have a background including extensive oil and gas experience.  It is therefore in a person's best interest to prepare for arbitration proceedings with the appropriate guidance and expertise.  Our attorneys' knowledge of oil and gas law is well-known.  Perhaps less well-known is our arbitration experience.  At proceedings in which specialized knowledge often influences the outcome, it helps to have knowledgeable attorneys at your side.  Contact us today if you need representation in an oil and gas arbitration proceeding.

Hydraulic Fracturing Law Seminar

The folks at the National Business Institute have asked me to speak about oil and gas leasing at a seminar in early April.  The seminar title is Hydraulic Fracturing Law, and it promises to feature a number of interesting and valuable presentations on energy-related topics such as land valuations, regulatory challenges, as well as environmental concerns.  I will be discussing the basic structure of an oil and gas lease from the perspective of both the landowner and the energy company.  I will also discuss current litigation issues with respect to oil and gas leases, and offer insight about where these trends might lead.The event is scheduled for April 10, in Cleveland and April 11, in Akron.  For more details, or to register, please see NBI's website for the event.

Big Tax Changes for 2013

At year end Congress enacted the American Taxpayer Relief Act of 2012 (HR 8), which avoided a plunge over the so-called “fiscal cliff.” That supposed cataclysm would have resulted from a combination of the sunset of the Bush 2001 tax cuts and the automatic government spending cuts negotiated last summer in return for an extension of the federal debt ceiling. The 2001 law freed nearly half of American taxpayers from the need to pay income taxes (although not payroll taxes). Moreover, the law meant that over 30% of taxpayers, in addition to paying no income taxes, were receiving a transfer payment from Uncle Sam in the form of the Earned Income Tax Credit.  Failure to continue the Bush tax regime (as tweaked in late 2010) would have caused a spike in income tax rates for nearly everyone.HR 8 maintains income tax rates for most taxpayers, while raising rates on the wealthiest ones.  New taxes under the new “Obama Care” health law also arrive in 2013.   How does the American Taxpayer Relief Act affect the average estate plan?  Each person's estate is different, but the main points are as follows:For individuals:

• Unemployment benefits for the long-term unemployed have been extended for one year.
• Persons earning over $400,000 ($450,000 for couples) will be taxed at the Clinton-era maximum rate of 39.6%.
• Rates for individuals earning less than that amount stay the same.
• The tax on dividends and interest increases to 20% for those individuals earning over $400,000 ($450,000 for couples), while remaining at the 15% level for individuals earning less.
• Inflation since the passage of the Alternate Minimum Tax was about to make the vast majority of taxpayers earning between $100,000 and $200,000 subject to the tax. The new tax law shields the middle class from the AMT, keeping income levels subject to the tax at the level of a dozen years ago. An inflation adjustment will keep taxpayers from being arbitrarily pushed in front of the tax gun in the future.
• The Earned Income Tax Credit, the child-care tax credit and the college tuition credit were extended for five years.
• The temporary reduction from 6.2% to 4.2% in the Social Security payroll tax was NOT extended.
• For upper income taxpayers the limit on itemized deductions (3% reduction) for income in excess of $300,000 for couples filing jointly ($250,000 for singles) has been reinstated; additionally, such taxpayers will suffer a phase-out of their personal exemptions.
• The exemption for gift, estate and generation-skipping transfer taxes has been made permanent at the $5 million level and indexed for inflation.
• The tax rate for estate and gift transfers in excess of $5 million has increased from 35% to 40%.

For businesses:

• The Section 179 investment tax credit, which allows businesses to expense investments up to $500,000 in machinery and equipment (as well as investments in certain vehicles and software) was extended to years 2012 and 2013. (Certain limitations apply.)
• The research and development tax credit was extended through 2013.
• The right to depreciate Qualified Leasehold Improvements, Qualified Restaurant Property and Qualified Retail property over 15 years was extended through 2013.

Additional changes to the Tax Code may well flow from the forthcoming negotiations concerning an increase in the federal debt ceiling.  We will try to provide a regular series of updates as the budget negotiations themselves unfold.  It may be that there are forthcoming changes to the tax code that may affect your estate plan.  Contact one of our experienced estate planning attorneys today if you have questions about how tax changes might affect your estate planning goals.

Oil and Gas Update - December 2012

Since my last update in July, I have perceived a trend of a southward movement of the Utica play. Thereis presently a good deal of leasing activity in Belmont, Harrison, Noble and Guernsey Counties. Wordis that some of the best wells to date have been drilled in that area. Certainly, Carroll County andColumbiana Counties are seeing large numbers of wells drilled, but leasing there is not as active as itonce was; companies are primarily focused on filling in planned drilling units and not much interested intaking random leases. The basic attitude seems to be – ‘don’t call us, we’ll call you if we need you.’ Inareas where there is a single company with a dominant lease position, lease prices are actually trendingdownward as there is little competition for leasing.The far western and far northern areas of the play have seen some bad drilling results that arelikely to stall rapid development until the boundaries and characteristics of the Utica shale arebetter understood. For the time being, most companies are likely to stick tight to what is believedto be the narrow “wet gas” window of the play – the low hanging fruit. For a map, click here.I am presently spending a good deal of my time dealing with older leases or old mineral reservations,in an attempt to clean up title in favor of my landowner clients. This sometimes requires litigation. Icurrently have cases pending in courts from the top of the play (Trumbull County) all the way down tothe southern part of the play (Monroe County).

Title Defects

Before a landowner will be paid a signing bonus for executing an oil and gas lease, the Lessee needs to make sure that the person who signed the lease is the person who owns the oil and gas underneath the subject property.   To know for sure, the energy company has to spend a good amount of time doing research at the local courthouse.   There, they search through old deed books and try to determine if any prior owner to the land had reserved the oil and gas rights.  If another person reserved the oil and gas rights, then that party is, by law, the only person entitled to enter into the oil and gas lease.  In this case, the landowner who just signed the lease and was expecting a nice bonus payment would not be entitled to it.  This unhappy landowner has a title defect.This situation is not uncommon.  Given that the energy company pays sizable signing bonuses, it makes sense that they take their time to make sure they are paying the right person.  The basic idea - from the energy company's perspective - is this: am I 100% certain that the people who have legal rights to these minerals have given me permission to extract them?  The last thing they want is to drill a well and later find that they haven't obtained the proper person's permission to do so.  Aside from mineral reservations, there are other defects in title that might make an energy company nervous about issuing a signing bonus.  These can range from gaps in title, prior oil and gas leases, active wells, as well as probate issues.   Most title defects are easily cured, and our oil and gas attorneys are thoroughly experienced in curing them.  Other title defects can be more complicated, and can require some clever lawyering.  Has an energy company notified you that a title defect is preventing you from obtaining an oil and gas lease?  Call us to set up an appointment, and our attorneys will help determine what's stopping you from entering into an oil and gas lease. 

Arbitration

Before the recent interest in eastern Ohio's utica shale, gas leases were written a little differently.  One big difference between the leases of old and the new leases has to do with how the Lessor (the landowner) and Lessee (the energy company) settle disputes.  Where old leases didn't quite restrict the methods by which the parties could settle their disputes, new leases can include some pretty strict language that make landowners follow specific procedures for addressing their concerns.Arbitration clauses have become common in oil and gas leases here in Ohio.  The leases that include such language usually require the landowner to have their concerns addressed by a neutral arbitrator rather than a judge or jury. Because most folks (and most attorneys) prefer to avoid lengthy litigation and court costs, arbitration can be an attractive alternative to quickly and efficiently settle claims between parties, though you need to be careful in drafting your arbitration clause.  We have significant experience in oil and gas matters and in representing clients in arbitration proceedings.If you have questions about how arbitration might affect your oil and gas lease, please contact us today.  For your benefit, a sample arbitration agreement follows.

Any dispute arising out of this agreement shall be settled through binding arbitration.  Either party may initiate an arbitration proceeding by notifying the other party in writing. The parties shall agree thereafter upon a single person to act as arbitrator; said person to be selected within 20 days after written notice is served.  In the event the parties cannot agree upon a single arbitrator, each party shall immediately select an arbitrator and the two so chosen shall promptly select a third.  The place of arbitration shall be ________________ and the laws of the State of ________________ shall govern the proceedings. The procedures to be followed by the arbitrator(s) and the parties shall be those prescribed in the Commercial Rules of the American Arbitration Association, although the AAA shall not administer the arbitration proceeding.  The arbitrator(s) and the parties shall take reasonable action to conclude the arbitration within 90 days after the initial written notice is served.  Judgment upon the award rendered by the arbitrator (or a majority of the arbitrators if more than one serves) may be entered in any Court having jurisdiction thereof.  The arbitrator(s) shall have the authority, but not be required, to assess costs and/or attorneys fees against the losing party.

The "Fiscal Cliff" and Estate Planning

Many of our clients want to know how the expiration of the Bush tax cuts will affect their estate plans. This event, the so-called “fiscal cliff,” can have far-reaching implications for certain wealthier individuals and calls for immediate, careful review of tax planning. At the time this article is written, estates valued less than $5.12 million are exempt from the 35% federal estate tax. However, if Congress takes no action by the end of this year, those numbers change significantly. The rate slated to take effect in 2013 increases to 55% for all estates valued at more than $1 million. It goes without saying that without action by Congress, there will be a significant increase in the number of individuals who will be exposed to the stunning 55% tax bite. This huge boost in tax rates, combined with a greatly lowered tax threshold compels clients to consider taking steps this year to deal with the threatened tax attack.Next year the federal gift tax rates also increase to 55%. The good news is that for the remainder of 2012 an individual can remove from his or her estate up to $5.12 million by gifting. Thus, clients with family businesses, large retirement nest eggs or substantial real estate holdings should consider transferring assets to the next generation in the few months remaining in 2012. The ability to make such large, tax-free gifts may never happen again in our lifetimes.Our attorneys are experienced in wealth and business transfer planning. We note that it is possible to transfer business interests in such a way as to maintain control in the older generation. If you have questions for our attorneys about how the fiscal cliff and the expiration of the Bush-era tax will affect your estate plan, please contact us today.

Atty. Eric Johnson Gives Speech at Covelli Centre

Late in 2011, I was asked to give a speech at the first annual Youngstown Ohio Utica & Natural Gas Conference & Expo, held at the Covelli Centre in downtown Youngstown.  Our friends over at the Youngstown/Warren Chamber of Commerce were kind enough to record the bulk of my presentation.  It is viewable below: