Supreme Court rules in 70 Ranch mineral taxation case

“Our state legislators — of both parties — showed great foresight over the last 40 years in crafting the statutes requiring contribution to local governments impacted by oil and gas activities." 

-- Donald Ostrander, an attorney representing the owners of the 70 Ranch.

Two news outlets -- Colorado Politics and Law Week -- covered a recent Supreme Court decision concerning mineral rights and taxation. 

In a split decision, the court said mineral rights holders need not assent to inclusion in a special tax district. The case is Barrett Corp. v. Lembke. 

Here are the stories.

By Michael Karlik

Colorado Politics, Sept. 23, 2020

Although all surface property owners must consent to their inclusion in a special taxing district, there is no such legal protection for mineral rights holders or lessees, the state Supreme Court decided by 4-3 on Monday.

The “oil and gas industry does not like the fact that the Special District Act subjects them to taxation by special districts without their consent to inclusion within those districts,” wrote Justice Melissa Hart for the majority. Those “policy concerns, however, are better directed to the General Assembly than to this court.”

Robert Lembke and 70 Ranch LLC own 13,000 acres in Weld County named 70 Ranch. The company owns part of the subsurface mineral rights, but other parties lease the remaining rights for oil and gas wellheads.

In 2015, Lembke and 70 Ranch LLC decided to join the South Beebe Draw Metropolitan District for access to sanitation, sewer, water and storm drainage infrastructure. The petitioners gave proper legal notice which invited opponents to make their objections known. After a public hearing, the district approved the request to join and began taxing the lessees’ extraction activity.

The plaintiffs "could have negotiated this issue in their oil and gas leases," said David C. Walker, an attorney for the district during oral arguments before the court. "People negotiate for the payment of taxes with their lessor all the time. They didn't do so."

Those entities — Bill Barrett Corporation, Bonanza Creek Energy, Inc. and Noble Energy, Inc. — took Lembke, 70 Ranch LLC and the district to court. They argued that Colorado’s Special District Act requires “the fee owner or owners of one hundred percent of any real property capable of being served” by the taxing district to assent to being included. Because mineral rights were real property, they claimed, the inclusion of 70 Ranch in the district was noncompliant.

A district court judge concluded that the law did not apply to the extraction companies because mineral estates are not real property capable of being served by the various types of infrastructure from the district. A three-member panel of the Court of Appeals agreed with that determination.

Hart, in an examination of the Special District Act, noted numerous references to land “area,” tracts or parcels of property and “square feet of land.”

“The use of these terms — territory, area, boundaries, tract, parcel, and square feet — demonstrates,” she wrote,” that the law “sets forth procedures for expanding the surface area of a special district.”

However, the court’s majority believed the lower courts had fixated incorrectly on what property is “capable of being served” by the special district. Even if the subsurface mineral estates benefitted from the special district’s infrastructure, they still could not withhold their assent to taxation, Hart explained, simply because the law does not envision their participation.

“After a special district’s boundaries are expanded...the Special District Act provides that ‘all taxable property’ within those boundaries is subject to ad valorem taxation by the district,” the majority concluded. “This includes oil and gas leaseholds.”

Writing for Justices Brian D. Boatright and Carlos A. Samour, Jr., Justice Richard L. Gabriel criticized the majority for allowing a surface property owner to in effect opt in mineral estate owners to taxation without their consent.

“I perceive nothing...that would allow a fee owner of a surface estate to petition to include a third-party’s property interest in a special district. Nor do I read that statute as addressing how and when consent must be sought from third parties,” Gabriel wrote. 

The dissenting justices concluded that the Special District Act only spoke to the process for letting 70 Ranch join the district, and not collateral entities. The legality of the tax imposed was not a question on appeal, and both sides did not directly address it. During oral arguments, one of Lembke's attorneys suggested the taxation situation was similar to that of annexation, where the mineral rights are also subject to new regulations if surface land joins a municipality.

"We are pleased with the Colorado Supreme Court's well-reasoned opinion affirming that oil and gas leases by oil companies are properly included in the tax rolls of governmental public districts in which they operate," said Donald M. Ostrander, an attorney representing Lembke and 70 Ranch LLC.

"As the legislature has found in earlier years, the impact of oil and gas operations are felt at the surface at the well head, and on all roads and parks in the area.  The Court’s decision confirms decades of practice by fire, school and water districts that have historically relied on these income streams to provide valuable services to their citizens — services that are much needed to respond to the increasingly significant impact of oil and gas exploration."

Zachary A. Grey, an oil and gas attorney with Frascona, Joiner, Goodman and Greenstein, P.C., said he would not go so far as to label the decision taxation without representation, but he does see a "notion of unfairness when a lessee of the mineral interest is burdened by an ad valorem tax but not benefited by the services of the special district."

Grey predicted that oil and gas operators might go to the General Assembly, as Hart suggested, to ask for mineral rights holders to be subject the same consent requirement as surface property owners.

"If you open the door to this sort of taxation without consent through the process, then where does that sort of rationale end?" he said in summarizing their argument. "I see both sides and it's something that's best left for the debate floor of the legislature."

The case is Barrett Corp. v. Lembke.


Here is the story from Law Week:



LAW WEEK COLORADO Sept. 21, 2020

The Colorado Supreme Court on  Sept. 14 ruled in a 4-3 decision that  while all owners of surface property  must assent to inclusion in a special  tax district, the assent of owners or lessees of subsurface mineral estates is  not required. 

In doing so, the majority affirmed  the decision of the Court of Appeals. However, the three dissenting justices  said the majority didn’t answer the  question before the court and echoed  concerns from oil and gas leaseholders about the due process rights of mineral rights owners.  

In 2015, the owners of 70 Ranch in Weld County successfully petitioned  for the 13,000-acre tract to be included  in the South Beebe Draw Metropolitan  

District, which provides sanitation and  other services. After the property’s in clusion, the district began taxing the  leaseholders of subsurface mineral  rights for the oil and gas produced at  

their wellheads on the property. Leaseholders Bill Barrett Corpora tion, Bonanza Creek Energy and Noble  Energy sued 70 Ranch and the district,  arguing their mineral interests could  not be included in the special district  because neither they nor the owners of  the mineral rights consented to inclusion, which they said was required by  the state’s Special District Act. One of the questions before the  court was whether the Special District  Act permits inclusion of “real property”  into a special district when inclusion occurred without notice or consent by  the property owners and the property  can’t be served by the district.  

“The answer to this question is ‘no,’  but that does not save Lessees here,”  states the majority opinion written by  Justice Melissa Hart.

The majority concluded that subsurface estates are not  the “real property” contemplated by the  act’s procedures for including territory  in a special district, pointing to the act’s  use of words such as “territory,” “area,”  “boundaries” and “tract” to show the  procedures are only concerned with  surface property. 

But in a dissent joined by Justices Brian Boatright and Carlos Samour,  ustice Richard Gabriel said the majority misinterpreted the question it purported to answer.  

“The question does not ask us to  decide whether the surface owner’s real  property may be joined into a special  district without notice to and the consent of those with interests in subsubface severed mineral estates,” states the  dissent. “No one contests that point.”

“The question asks us to consider  whether the subsurface estates may  be joined into a special taxing district  without notice and consent,” Gabriel  wrote, adding the subsurface estates  are the “real property” in question, not  the surface interests.  

By answering a question “of its own derivation,” Gabriel said, the majority concluded the owners of 70 Ranch  could, by joining their own surface in terests into the district, effectively join  the mineral interest owners into the  district, subjecting them to taxation. Allowing one property owner to in clude the property of another within a  special district without notice or con sent could, Gabriel said, “implicate significant due process concerns” because  it might mean one property is taxed to  fund facilities for other property owners. 

“Subsurface minerals or mineral  rights have long been recognized by Colorado courts and in Colorado law  as a real property right,” said attorney  Cindy Bargell, who filed an amicus brief  on behalf of the Colorado Alliance of Mineral and Royalty Owners in support of the oil and gas industry leaseholders. 

“The reason CAMRO weighed in is  because the case does have far-reach ing impacts,” she said, adding the decision affects not just operators but  all mineral rights owners, from retired  school teachers to pensioners who rely on royalty income. “This is taxing those royalty payments in a manner that,from our perspective, isn’t fair basedon a statutory interpretation that raises serious constitutional issues,” she added, referring to the lack of due process.

The majority noted that under theSpecial District Act, “all taxable property,” including oil and gas leaseholds for wellheads located within the district’s boundaries, is subject to ad valorem taxation by the district.

"And, of course, it is this aspect of the Special District Act to which Lessees most object,” states Hart’s majority opinion, “but this section of the Act has not been challenged here and we do not opine on it.”

In its brief, CAMRO had raised con cerns about the proliferation of special districts and their reliance on oil and gas revenue. “These policy concerns, however, are better directed to the General Assembly than to this court,” said the majority.

“We are pleased with the Colorado Supreme Court’s well-reasoned opinion affirming that oil and gas leases by oil companies are properly included in the tax rolls of governmental public districts in which they operate,” Donald Ostrander, an attorney representing the owners of 70 Ranch,
said in a statement.

“As the legislature has found in earlier years, the impact of oil and gas operations are felt at the surface at the well head, and on all roads and parks in the area,” Ostrander said. “The Court's decision confirms decades of practice by fire, school and water districts that have historically relied on these income streams to provide valuable services to their citizens — services that are much needed to respond to the increasingly significant impact of oil and gas exploration.”

“Our state legislators — of both parties — showed great foresight over the last 40 years in crafting the statutes requiring contribution to local governments impacted by oil and gas activities."