For those engaged in farming, it is important to plan for the preservation of the farm real estate so that it may be farmed by both current generation farmers and next generation farmers.

For those not actively engaged in farming, it is nevertheless a valuable, income-producing asset that often has emotional and historical meaning as well.

The challenge in either case is to continue the “family” ownership of the farm real estate in a flexible environment.

If parents own the farm real estate, and then transfer it during life or at death to children, as joint owners, the real estate is at risk.  Any joint owner can force the sale of the real estate, as can a creditor of a joint owner or possibly a former spouse of a joint owner.  And joint ownership is just awkward from a management standpoint.

Placing title to farm real estate in an Irrevocable Trust is a possibility, and is occasionally the right choice; but there is a substantial loss of flexibility in the ownership and management of the real estate.

The better choice is often a Limited Partnership or a Limited Liability Company.  These “business entities” are similar.  Each is a vehicle that can be used to centralize the title to the farm real estate; to provide for succession of the ownership interests in the business entity; to provide for centralized management of the farm real estate; to prevent any individual owner or his or her creditors or former spouses from causing the sale of the real estate; and to assure that the real estate continues to be leased to the current and next generation farmers in the family so long as they are farming.  Both of these business entities also provide protection from unlimited liability for injury to person or damage to property that can arise from the ownership of the farm real estate.

The Limited Partnership and the LLC can be designed to fit the objectives of each individual planning situation.  These entities are also relatively income tax neutral in that the entities can be formed and dissolved without income tax consequences.  They can also be used in conjunction with trusts to accomplish even more asset protection.

If you or your family owns farm real estate, you and your family members may wish to consider forming a Limited Partnership or a Limited Liability Company to own the real estate to plan for future ownership, management, and preservation of the farm real estate.

Author: John P. Broadhead (bio)

Phone: 812.452.3577

Email: jbroadhead@bamberger.com

Author: Lindsay B. Schmitt (bio)

Phone: 812.452.3570

Email: lschmitt@bamberger.com

To start, let us be clear that what the borrower legitimately wants to accomplish is not the suppression of information about the environmental condition of the property.  What he does want to create, however, is the ability to deal with any environmental issues prior to making a public disclosure of them to a lender or any other party.  Keep in mind that in certain circumstances, the lender has an affirmative obligation to report the existence of environmental problems to the applicable regulatory authorities.  Further, once an environmental report is created, its contents can easily be discovered in the course of enforcement proceedings or civil litigation.

Fortunately, the law recognizes what is called the “attorney work product privilege.”  This privilege, which is similar to the attorney/client privilege, protects information developed by an attorney in the course of representation regarding an actual or potential claim unless, and until, it is disclosed by the attorney with the consent of the client.  Accordingly, if the borrower engages counsel to assist it relative to environmental issues that may exist with the property and the attorney orders the environmental survey work, it is generally covered by the privilege until such time disclosure is made.

While initially, a lender may feel a bit out of control in a process they ordinarily direct, using borrower’s counsel to secure the needed environmental survey is not at cross purposes with the lender’s interests.  The environmental survey work can certainly be ordered from a survey company on the lender’s approved list if one exists.  Additionally, a reliance letter, carefully crafted by counsel to meet the particular circumstances, may be obtained at a later date to allow the borrower and the bank to rely on the survey.  The benefit to the borrower is that if problems are disclosed, the proposed transaction can be abandoned or remedial work undertaken prior to making a public disclosure about the existence of the environmental problem.  This gives the borrower much more flexibility in dealing with the environmental issues on a time frame and in such a manner as may be suited to the borrower’s need and still be performed within applicable legal requirements.

Note, this work product privilege cannot be established after the order is placed for the environmental work.  To recap, it is established by a two step process.  First, counsel is engaged to assist with environmental issues related to the real estate.  The second step is for the law firm to hire the assessment firm to perform the survey for the law firm rather than the client or bank.  A reliance letter can extend the use of the survey to the client and the lender once the client is ready to make the results public.

Author: Terry G. Farmer (bio)

Phone: 812.452.3543

Email: tfarmer@bamberger.com

In Cimarron Oil Corp. v. Howard Energy Corp. a landowner signed an oil and gas lease in 1976 and then signed a coalbed gas lease involving the same tract of real estate in 2001.  There was controversy as to who had the right to recover the coalbed methane gas.  The Indiana Court of Appeals ultimately determined that the coalbed methane was a part of the coalbed and because it was not specifically referenced in the 1976 oil and gas lease, it was not reasonable to presume such coalbed methane was included in the 1976 lease.  Therefore, the lessee under the 2001 lease was deemed to have the right to recover the coalbed methane.

While natural gas prices have decreased significantly, the production of coalbed methane will likely continue to occur. Indiana landowners should understand that when they grant the right to another to mine coal in and underlying their real estate, such grant may also mean they are granting the right to recover coalbed methane.  For questions respecting natural gas and other mineral issues, contact a member of Bamberger’s Agriculture or Real Estate Sections.

Author: Lindsay B. Schmitt (bio)

Phone: 812.452.3570

Email: lschmitt@bamberger.com

The statute defines “use” broadly.  It includes activities apart from actual production of minerals, such as the payment of taxes by the mineral interest owner on the mineral interest.

If the severed mineral interest has not been used by the mineral interest owner, the mineral interest may nevertheless preserve the interest by filing a “statement of claim” in the county recorder’s office within the twenty (20)-year period.  The requirements for the statement of claim are set out in the Dormant Mineral Law.

If a surface owner wishes to assert a lapse of a mineral interest, the surface owner generally has three options.  First, the surface owner can approach the mineral interest owner and negotiate a “quit-claim” or conveyance of any ownership claim of the such mineral interest owner.  Second, the surface owner can follow the notice of lapse procedure under the Dormant Mineral Law, which generally requires publication of the notice in the newspaper, written notice to the mineral interest owner, and the recording of an affidavit concerning the notice in the county recorder’s office.  Third, the surface owner can file a suit against the severed mineral interest owner to “quiet title” to the mineral interest.

If the terms of a quit-claim of the ownership cannot be agreed upon by the parties, in most cases the surface owner’s best option for establishing title to the mineral interest is to file a quiet title action.  A court’s judgment that the mineral interest has lapsed is final and clear.  The drawback to simply following the notice of lapse procedure is that it only provides evidence of a claim to the mineral interest.  It is not conclusive proof of a lapse even after the claim is put of record in the county recorder’s office.  The mineral interest owner may nonetheless challenge the surface owner’s claim.  Of course a quiet title suit, like any lawsuit, can be contentious and expensive if the mineral owner aggressively defends the suit.  Some surface owners prefer to use the notice of claim procedure to simply put the world on notice of their claim to the mineral interest, even though it may not definitively establish ownership.

This complimentary seminar will be held on Wednesday, February 1st from 7-9pm at the Red Wagon Restaurant in Poseyville, IN.  Refreshments will be provided.  If you’d like to attend this informative seminar, please RSVP by Wednesday, January 25, 2012, by calling 812.452.3567 or email us at rsvp@bamberger.com.

Author: Kim Jewell (bio)
Phone: 812.452.3588
email: kjewell@bamberger.com

SPCC applicability depends on many considerations and will likely include an evaluation of: total “oil” storage volume capacity, container types and sizes, and specific locations of “oil” storage; exempt storage and exempt substances; and the lay of the land .  As you might guess from all the “oil” quotes, the definition of oil for SPCC is broad: ”oil of any kind or in any form including, but not
limited to, petroleum, fuel oil, sludge, oil refuse, and oil mixed with wastes other than dredged spoil and oily mixtures.” The definition covers non-petroleum oils, synthetic oils, animal fats, oils and greases and vegetable oils. One exemption is clear, EPA has carved out certain milk and milk products storage from SPCC.  The term ”Waters of the U.S.” is also broader than one might
expect.  The legal definition is subject to interpretation based on Supreme Court rulings, regulations and technical guidance.

SPCC guidance, checklists and other forms have been developed by both the EPA and your local Farm Bureau to help farmers understand the regulatory analysis and compliance steps. Some
operators, especially those with an oil storage capacity of 10,000 gallons or more are finding it helpful to engage an environmental professional early in the process.  With this extension, farmers will have more time to determine if SPCC applies to operations, and if necessary, develop, certify, and implement the plan required by the SPCC rule.

Author: Jamie B. Dameron (bio)
Phone: 317.464.1591
Email: jdameron@bamberger.com

Why?  Indiana Code provides that an “owner or operator” must plug and abandon an oil or gas well that (1) is completed as a nonproductive well; (2) ceases to produce oil or natural gas; or (3) is no longer operated for the purpose for which the well is permitted.

“Owner” is defined as a person who has the right to drill into and produce from a pool and to appropriate the oil and gas produced from the pool.  Therefore, if you own land and own the minerals that lie under the land, you are an “owner” under Indiana law unless the the property is subject to a valid oil and gas lease or unless the ownership of the minerals is severed from the surface of the land.  This is the case regardless of whether or not you were actively involved in the operation of the exploration and the sinking of the well.

Fortunately for landowners, the Indiana Department of Natural Resources’ Division of Oil and Gas has historically operated under a policy that does not require landowners to bear the responsibility for plugging and abandoning wells.  The Division only pursues the actual operators and lessees in its efforts to require the plugging and abandonment of oil and gas wells in Indiana.

However, landowners should bear in mind that this is only policy.  The law remains the same.  If you have the right to explore and develop oil and gas on you property, you may also have the duty to plug and abandon any wells on the property.  Consider this in negotiation and consideration of any oil and gas lease.

Prior to July 1 of this year, Indiana Code provided that all information related to earnings, income, profits, losses, or expenditures given to an assessing official is confidential.  This confidential information included earnings, income, profits, losses, and expenditures related to production of oil and gas.  This oil and gas production information is—and continues to be—reported to the assessing officials on a form called a Form G&O-1 by the purchaser of the mineral.  This form aids the assessor in determining the total taxes due and owing on producing oil and gas leases.  The form includes information concerning a lease’s percentages of ownership and productivity.  It also includes the names and addresses of those with an interest in the leasehold.  Prior to July 1, the G&O-1 was a confidential document not subject to disclosure to the general public.  It is no longer confidential.

The problem with the general prohibition against disclosure of financial information relating to production of an oil and gas lease was that it made it very difficult for potential tax sale purchasers to measure the value of such interest.  Unlike surface real estate, the value and production potential of an oil and gas lease are difficult to determinate without information that is usually unavailable to the public.  While a city lot to be sold at tax sale can be visually inspected and appraised prior to the sale, a potential purchaser of an oil and gas interest usually does not have that luxury.  The critical information needed for valuing an interest– production history and future production potential– is rarely available to the public.  Many potential tax sale purchasers are unwilling to take such an uncalculated risk.

The result is that counties inSouthwestern Indianaoften had difficulty in disposing of oil and gas interests on which taxes were delinquent.  The interests remain unproductive, which means that they did not generate income for producers or property taxes for the public.

Presumably, the new law relaxing the confidentiality of this information was passed to resolve this problem.  It provides,

“Confidential information concerning an oil or gas interest . . . may be disclosed by an assessing official if the interest has been listed on the delinquent property tax list . . . and is not otherwise removed from the property tax sale . . . .  A person who establishes that the person may bid on an oil or gas interest in the context of a property tax sale may request from an assessing official all information necessary to properly identify and determine the value of the gas or oil interest that is the subject of the property tax sale. The information that may be disclosed includes the following:

(1) Lease information.

(2) The type of property interest being sold.

(3) The applicable percentage interest and the allocation of the applicable percentage interest among the owners of the oil or gas interest (including the names and addresses of all owners).”

The apparent purpose of this new law was to lift the prohibition against disclosure as it relates to oil and gas interests on the delinquent tax list.  It was not intended for the release of information concerning earnings, income, profits, losses, and expenditures for other oil and gas interests.  Those owners current on their property taxes arising from their oil and gas interests should remain protected from the disclosure of such information.

As practical matter, the new law creates an immediate problem for assessing officials.  Interests in oil and gas leases are almost always fractionalized.  Multiple individuals or businesses often undivided interests in an oil and gas lease.  The Form O&G-1 contains information related not only to those interested holders in a lease with delinquent taxes, but every other interest holder as well.  How does an assessing official make a disclosure of earnings, income, profits, losses and expenditures for an oil and gas interest on the delinquent tax list, while protecting the same information for the remaining fractional interests that are not on such list?

As of August 22, based on its interpretation of the Indiana Public Access Counselor’s Advisory Opinion dated August 17, 2011, the Indiana Department of Local Government Finance Assessment Division Director has taken the position that assessing officials must turn over all of the information contained in the Form O&G-1—including production information, names and addresses of interest holders, and applicable percentages of ownership.  This complete disclosure must be made upon request if any of the interest holders on the lease has delinquent taxes related to that lease.

This means that if a person owns a fractional interest in an oil and gas lease along with 50 other interest holders, and just one of those interest holders fails to make timely payment of taxes, any information contained in the Form O&G-1 is available for public consumption—including your percentage of ownership, the production figures of the lease, and the person’s name and address.

The new law makes valuable information available to oil and gas producers and prospective tax sale purchasers.  If craftily used, it can also provide a competitive advantage to oil and gas prospectors in the area who can analyze and apply this information.  Presumably, more oil and gas leasehold interests will be purchased at tax sales by eager producers who will generate income and property taxes.

But the drawbacks are considerable.  Assessing officials are already being inundated with requests for volumes of O&G-1 forms, creating an administrative burden and expense for the counties.  But more importantly, the new law severely erodes the privacy that a person had in his or her financial information in an oil and gas lease.

A PACA trust is a nonsegregated “floating” trust composed of all perishable agricultural commodities received by a dealer in all transactions and all inventories of food or other products derived from perishable agricultural commodities and any receivables or proceeds from the sale of such commodities or products.  The dealer receiving the commodities must hold the trust for the benefit of any unpaid seller of the commodity until the seller has received full payment owing in connection with the transaction by the buyer. 

There are certain notice requirements that a seller must provide to the dealer in  order  to  preserve  the  seller’s  benefits  under the PACA   trust.     However,   when    the    statute   and regulations are properly complied with, the seller’s interest will generally trump liens of other creditors, including secured lenders.  Aside from produce dealers, PACA liens are also typically applicable to grocery operations and also to large restaurant operations.

Author: Laura A. Scott (bio)
Phone: 812.452.3557
email: lscott@bamberger.com