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Archive for the ‘Seizure of Collateral’ Category

South Dakota’s Approach To Condemnation

Posted on: December 2nd, 2016
by David Ganje

The use of eminent domain (condemnation) is a modern legal problem. Condemnation is the taking of property for a public and in some cases a private interest. Condemnation is a legally sanctioned sword. My argument in this article is not that eminent domain as a concept is wrong. My argument is that in its present state, as a legal vehicle attempting to provide fairness, eminent domain is a lemon in need of repair on both sides. This law allows a governmental body – and a private business – to convert privately owned land to another use, often over the objections of the landowner. Traditionally in a legal taking a landowner receives “market value” for the land taken. This often includes money for reduction in agriculture output or for the loss of other productive use of the land.

While eminent domain makes sense under a public utility easement paradigm, how does this process apply when a pipeline easement on a landowner’s property is the “transportation vehicle” for a commodity? How does one calculate “fair market value” when millions of dollars’ worth of product are flowing across privately-held land? Candidate Trump said, “I want the Keystone pipeline, but the people of the United States should be given a piece, a significant piece of the profits.” South Dakota law does not take this into consideration. Condemnation of one’s land involves forced negotiation required by law, and sometimes involuntary litigation. Is a one-time payment for an easement fair compensation? Is the condemnor (developer or government agency) required to provide its plan of work and operations to the condemnee (property owner) so the owner can evaluate this information? This would create a fairer playing field in negotiations. South Dakota law does not provide for this. Should the landowner be granted his expenses and attorney’s fees in a trial and for an appeal if the final award given is greater than the last ‘offer’ made by the condemnor? Or if a mistrial is called which is not the fault of the landowner? South Dakota law does not provide for this. Is the condemnor required to provide written disclosure of its calculations and basis for a proposed offer for the property? South Dakota law does not provide for this. In a federal condemnation, even if a landowner does not formally answer the condemnation lawsuit the landowner may still present evidence of the value of his land and may participate in the distribution of awarded monies. South Dakota law does not provide for this.

The law of condemnation brings out a curious inconsistency in the character of the state. South Dakota is a strong property-rights and individual-rights state. Aside from the important and unique relationships of Indian reservations to the state and to the federal government, private property in South Dakota is a hallowed right. State laws are vigilant in protecting one’s real estate and other property from intrusion, reduction in value as well as protecting the right to use the property for any lawful purposes. The state Constitution, like the federal, directs that, “Private property shall not be taken for public use, or damaged, without just compensation. . .”

Thus we get to my puzzlement. South Dakota has done very little to modernize eminent domain laws. This is not a case of the emperor having no clothes. This is a case of the emperor having no vision. The takeaway is that state leaders have no appetite for changing the status quo.

In modern vernacular ‘trending’ means that which is currently popular in social media, however in common English it means that which is changing or developing in a certain direction. The word ‘trending’ applies to the painfully slow but observable changes in the law of eminent domain. Unfortunately these changes are not coming from South Dakota political leaders. The state’s recent passage of a voluntary mediation statute for condemnation cases does nothing to address the substantive changes needed.A national trend has started toward balancing the sacrifices a property owner makes when business or government does its eminent domain dance. Courts, and over time other state legislatures, will continue to correct the ills of eminent domain when it is used as a legal sword. South Dakota must cultivate a fairer system for the taking of property.

Workouts and Turnarounds before Bankruptcies – 2016

Posted on: August 24th, 2016
by David Ganje

Current bankruptcies are not foreign to the oil patch when the inevitable economic cycles in oil and gas show bankruptcy numbers increasing in the Bakken. There have been two significant prior economic down-cycles in my career that have caused a spike in bankruptcy filings. When I taught bankruptcy law I used a medical analogy: I told the young scholars that bankruptcy filing is akin to surgery, and surgery should always be treated as the last option. In the medical field, a reasonable first option is an antibiotic. Here, the antibiotic is a ‘workout’ or a ‘turnaround,’ each of which are bankruptcy alternatives. These alternatives have value and should be attempted by both creditors and debtors as a viable option, not just a throwaway line. I have successfully represented debtors and creditors in turnarounds and workouts. Resolving “stressed-business” issues out of court makes sense when the option is there.

Financial restructuring and workouts involve working closely with a business’s creditors to create, or ‘workout,’ a plan (often a written contract) to restructure business debts while allowing the business to remain viable. This process allows the business entity to negotiate its debts in a way that retains profitability without involving the court system. This is not as difficult as it might sound – creditors often share the same objective of returning a financially stressed business to good financial health in order to ensure their debts are paid.

A ‘turnaround’ is a separate process from a workout. It may also use the availability of restructuring and workouts, but a turnaround has several other components. A turnaround will generally restructure operational aspects of the business. This may be the solution when the problem lies deeper in the company than lack of cash flow. Where a creditor will not restructure the debts owed to it, a turnaround will be utilized to find alternative financing or new ownership. Another possibility in a turnaround is the sale of ownership or a portion of ownership, which can provide liquidity at the expense of a change of control of the business.

If the company’s goal is to continue in business, particularly under current ownership, then a creditor or a lender workout should be considered. If new ownership, or a sale of the business in whole or in part, is an acceptable outcome so long as the business is preserved as a going concern, a turnaround can be considered as well.

The process of financial restructuring and negotiating a workout with business creditors is something that should be considered to avoid the expenses and bureaucracy related to a bankruptcy proceeding. The chapter 11 bankruptcy reorganization process is expensive and time consuming. The goal of business turnarounds or financial restructuring is to provide a cost effective approach by way of a ‘non judicial/non bankruptcy’ business reorganization, to restructure business debts.
Courtship and finances have something closely in common: timing is everything. When a business is in a stressed situation, neither the business nor its creditors should go in stand-by mode. Negotiations should begin immediately. In both the workout and turnaround, all parties must agree to the terms; both are matters of serious negotiation to be done with all deliberate speed. Bankruptcy proceedings are not the only way to save a business – sometimes a well-prescribed antibiotic can halt the damage and let the healing begin.

Is the Trump Option Available In SD For Condemnation?

Posted on: February 13th, 2016
by David Ganje

Is the Trump Option Available In SD For Condemnation?

Eminent domain is one of the toughest and most controversial legal powers available to a government, but the South Dakota legislature has so far failed to manage it properly. Eminent domain allows a governmental body to convert privately owned land to another use, often over the objections of the current landowner. The Donald Trump Option is the right of a private party to use eminent domain.  This is done by developers, pipeline companies and hotel builders alike. This process is commonly known as a ‘taking’ or ‘condemning the land.’ There are rules, of course. A landowner must be paid “just compensation” for the condemnation of his land. Further, the land that is to be taken may only be taken to further a beneficial public use.

The ability to exercise eminent domain is so powerful that it almost always remains the final legal option. The use of eminent domain is not solely limited to governments. Private parties as well as corporations may exercise the immense power of eminent domain. For example, South Dakota law states that “Any person may exercise the right of eminent domain…to acquire as a public use any property or other rights necessary for application of water to beneficial uses.” Private parties as well as corporations may exercise the immense power of eminent domain.

The law allows a private party to manage water rights by a taking. The statute states, “except as otherwise provided…no person may appropriate the waters of this state for any purpose without first obtaining a permit to do so.” The power of eminent domain may used if the taker puts water to a beneficial use. For this reason, a party may not successfully exercise eminent domain without first having a water permit.

This right to take comes into play when a party seeks access to land he doesn’t own in order to access water. What is a beneficial use? South Dakota law is intentionally vague on this subject. It says beneficial use is the use of water “that is reasonable and useful and beneficial to the appropriator, and at the same time is consistent with the interests of the public.” For courts, this is a balancing test, as opposed to a concrete definition. The question in eminent domain cases, then, is whether or not a proposed use of water fits this vague legislative definition of ‘beneficial use.’ The Supreme Court has implied that it can. As a result, eminent domain cases involving water can span an enormous berth of cases, with those claiming eminent domain seeking water for everything from irrigation to oil extraction.

There is irony in too much of what the South Dakota legislature does. Counties and municipalities are forbidden from using eminent domain for the benefit of a private party. Yet the field is wide open for private parties to use eminent domain for a private party’s benefit.

Whether it is a taking to obtain water rights or land for a pipeline, the matter of ‘just compensation’ to be given to the landowner is paramount. I have advocated in prior blog articles the need to revisit the matter of just compensation. This issue applies to a government or private taking.  The ‘valuation process’ should be changed.  The SD Supreme Court has stated that the state legislature has the authority to create the method of compensation in a condemnation proceeding.  The State Constitution is interestingly stronger from a landowner’s perspective than is the US Constitution on the issue of eminent domain.

State Senator Monroe, or his speechwriter, state that that my argument (and that of 5 states and counting as of 2012) is wrongheaded. He has stated, “We have well established legal mechanisms to compensate property owners and treat them fairly.”  Good negotiations by a landowner may result in more favorable compensation. But the playing field should be level between the land taker, who has the power of the law to take, and the landowner.  Senator Monroe’s refusal to look at the issue is a belittlement of efforts to protect property rights.

I do not know whether the Senator has had a pipeline run through his property under an eminent domain proceeding. A taking is not a normal market transaction because the landowner has no choice.  A landowner can’t walk away from the table. The legal process of taking private property is just as important as the right to free speech, freedom of religion and the protection against unreasonable search and seizures.

There are several problems with South Dakotan condemnation law. The law should be revised to include written disclosures following the requirements of Wyoming law. Wyoming law provides new rights for landowners in all condemnation proceedings, whether initiated by the government or private parties. SD law should require that the taker show the details of the proposed project plan and the written basis behind any compensation offer. An additional provision that should be changed is the legal taking procedure. Currently the procedure does not allow the landowner the recovery of all of his court costs, appraisal costs, expert witness fees and attorney’s fees even in the event he should prevail in the case. This forces landowners to fear spending money defending their own land, something that a citizen should never have to do. SD law should provide that a landowner is entitled to an award of all court costs, appraisal costs, expert witness fees and attorney’s fees if the taker failed to negotiate in good faith, or if the compensation awarded by the court or jury exceeds the amount of money offered by the taker to the landowner. Until then, the playing field will remain skewed in favor of takers.

David Ganje. David Ganje of Ganje Law Offices practices in the area of natural resources, environmental and commercial law in South Dakota and North Dakota. The website is Lexenergy.net

Bankruptcy in the Bakken

Posted on: January 11th, 2016
by David Ganje

Bankruptcy in the Bakken

Oil and gas production is a result of two basic factors: economics and technology. Economics means the costs of production and distribution. The price of oil is an essential element of the economics of production. One economic risk is bankruptcy. A bankruptcy filing, however, is not the same as a “funeral.” People believe what they want to believe. When I taught bankruptcy law, one of the harder things to get across to the students was the fact that a bankruptcy filing is not automatically “the end.” Nevertheless, several of the law students still came into the class carrying that attitude. One should keep in mind that even if a liquidation bankruptcy case is filed, production in the final analysis often continues. The particular chapter of the bankruptcy code filing, North Dakota property law, as well as state and federal regulations all affect a bankruptcy case. There are as many facets to a bankruptcy case as there are facets on a movie star’s wedding ring, however, in this article I will discuss basically the impact of a bankruptcy filing on the typical lessor and royalty holder.

First let us review a couple of things to watch for concerning a possible bankruptcy filing. If you are the lessor or royalty holder and think a producer may be a bankruptcy candidate, there are steps that can be taken. Your attorney can access the so-called watch list as well as access public records for delisted public companies. And a slow, or no, payment of royalties is also a red flag. But do not panic if a bankruptcy filing occurs. The royalty holder should put his energy into keeping good paperwork and records. This will make a bankruptcy experience tolerable.

Property rights created by an oil and gas lease are treated differently in the various states. In North Dakota, the oil and gas lease gives the lessor a real property interest with real property rights. According to the 1986 North Dakota Supreme Court case Nantt v. Puckett Energy Company, “[o]il and gas leases are interests in real property” and have been considered such since 1951. Although an oil and gas lease is not a lease in a landlord and tenant sense, in North Dakota, an operating lease is treated under bankruptcy law as an “unexpired lease.” In Van Sickles v. Hallmark & Associates, a 2013 case, the North Dakota Supreme Court decided that an oil and gas lease in a bankruptcy case must comply with the requirements set forth in section 365 of the bankruptcy code.

Many operators who file bankruptcy are in arrears on royalty payments. A new law goes into effect at the end of February in North Dakota that allows a royalty holder to file a security lien when the royalty has not been paid when due. The royalty owner must file the lien with the state and record the lien in the county where the well is located within 90 days of production to have a lien. With good records and timely filing and recording, mineral interest owners can gain a secured position in a bankruptcy proceeding. This greatly increases a royalty holder’s chances of a full recovery because secured creditors are paid before unsecured creditors.

In bankruptcy, the debtor must either assume or reject an unexpired lease of the debtor. A debtor may not accept only the favorable parts of an executory contract. If the lease is assumed and not in default, the royalty holder can rest easy, because an oil and gas lease must be assumed in full. The royalty owner will continue to reap the benefits of the contract. If the lease is in default, the debtor must cure the default in order to keep the lease. Therefore, if a bankrupt debtor is delinquent on royalty payments, the debtor must pay the back royalties if they want to assume the lease. Either way, the royalty owner gets paid, at least eventually. However, the bankruptcy court must approve any assumption of a lease. In this circumstances, the court will look to whether the lease is a valuable asset to the debtor and whether its preservation is sufficiently important. A royalty holder or lessor may also request that the court order the debtor to decide whether to assume or reject the lease within a specified period of time. A bankruptcy court can rule that preventing further delay with respect to assumption or rejection is in the best interest of all the parties.

Following a bankruptcy, a royalty holder or lessor may find themselves with the new option of leasing to a different producer. If a debtor elects to reject an oil and gas lease, the lease is no longer valid and the mineral interest is again available on the open market. Another way this could happen is if a producer is in default of the lease agreement. The North Dakota legislature states in N.D.C.C. Sec. 47-16-39.1 that the obligation to pay royalties is “of the essence” in an oil and gas lease and that breach of the obligation “may constitute grounds for cancellation of the lease.” If a mineral owner shows a bankruptcy court that equity requires it, the court may cancel the contract and the mineral owner may then lease to another party. In addition to the statute, some lease agreements contain a provision allowing a landowner to terminate the lease under certain conditions. This avoids the equity power of the court in favor of contract language regarding cancellation. If the terms of the lease are breached in this way, a landowner may be able to terminate the existing lease and sign a lease with another producer.

Equipment Lease Legal Rights VS Security Interest Claims

Posted on: June 16th, 2014
by David Ganje

State of New York

Supreme Court, Appellate Division

Third Judicial Department

95778

________________________________

CIT TECHNOLOGY FINANCING

SERVICES, INC., Formerly

Known as NEWCOURT LEASING

CORPORATION,

Respondent,

v

TRICYCLE ENTERPRISES, INC.,          MEMORANDUM AND ORDER

et al.,

Defendants,

and

CAYUGA MILLWORK, INC., et al.,

Appellants.

 

Calendar Date:  October 21, 2004

Before:  Mercure, J.P., Crew III, Mugglin, Rose and

Lahtinen, JJ.

__________

Richard P. Ruswick, Ithaca, for appellants.

Ganje Law Office, Albany (David L. Ganje of counsel), for

respondent.

 __________

Rose, J.

 

(1) Appeal from an order of the Supreme Court (Relihan Jr.,

J.), entered September 30, 2003 in Tompkins County, which, inter

alia, granted plaintiff’s motion for an order of seizure and

replevin, and (2) motion to dismiss appeal.

 

This action involves competing claims to certain machinery that was the subject of a lease agreement between plaintiff’s predecessor in interest as lessor and defendant Tricycle Enterprises, Inc. as lessee.  Following Tricycle’s default, its vice president, defendant Jack Roscoe, took possession of the subject machinery in satisfaction of a secured debt and used the

machinery in his newly incorporated business, defendant Cayuga Millwork, Inc., without making any payments to plaintiff. Plaintiff then commenced this action seeking to recover the

unpaid rent and possession of the machinery.  In response, Roscoe asserted that his claim to the machinery as a creditor with a perfected security interest is superior to plaintiff’s claim because the lease agreement here is really a disguised security agreement giving plaintiff nothing more than an unperfected security interest.  Finding the agreement to be a true lease rather than a secured transfer of ownership, Supreme Court granted plaintiff’s motion for summary judgment, awarded a money judgment in the amount of the unpaid rent and issued an order of seizure for the machinery.  Roscoe and Cayuga Millwork (hereinafter collectively referred to as defendants) now appeal.

This appeal has not, as plaintiff argues, been rendered moot by the fact that the machinery has been seized and sold to a third party.  An appeal will not be considered moot if “the rights of the parties will be directly affected by the determination of the appeal and the interest of the parties is an immediate consequence of the judgment” (Matter of Hearst Corp. v

Clyne, 50 NY2d 707, 714 [1980]).  Here, if Supreme Court’s order were reversed, defendants could be entitled to damages or restitution (see CPLR 5015 [d]; 5523; Charles A. Gaetano Constr. v Citizens Devs. of Oneonta, 223 AD2d 866, 867 [1996]; Albany Sav. Bank v All Advantages Limousine Serv., 154 AD2d 759, 761 [1989]).

Turning to the merits, defendants contend that the agreement provides that Tricycle would have the option to purchase the machinery for nominal consideration at the conclusion of its five-year term, creating a security interest under UCC 1-201 (37) (a) (iv).  Defendants argue that the “10% of Total Cash Price” provided as the amount of the consideration in the agreement’s purchase option is nominal compared to the anticipated remaining market value of the machinery at the end of the lease term.  They calculate the remaining market value to be $50,508.  While the agreement sets the purchase option price at 10% of total cash price, however, it does not define total cash price.  We find that this term should be read to mean the total of all payments to be made over the five-year term of the lease.  Accordingly, the purchase option price would be 10% of $152,736 or $15,274, which is approximately 30% of the machinery’s remaining market value.

Because the agreement here provides that it is to be governed by the laws of Massachusetts, we are guided by that state’s case law interpreting Mass Gen Law Ann, ch 106, § 1-201 (37), which mirrors UCC 1-201 (37).  The Massachusetts courts have recognized a “rule of thumb” that a purchase option price in excess of 25% of the market value of the goods at the end of the lease term is not nominal consideration under UCC 1-201 (37) (see Marine Midland Bank, NA v Moran, 1994 Mass App Div 167, 171 [1994], citing Matter of Access Equip., 62 BR 642, 646 [D Mass 1986]). Accordingly, we conclude that plaintiff retained an economically significant reversionary interest in the machinery, the option price of 30% of that remaining value here is more than nominal and, thus, the agreement was a true lease rather than a security agreement (see Carlson v Giachetti, 35 Mass App Ct 57, 62-64 [1993]; Marine Midland Bank, NA v Moran, supra at 169; see also Matter of APB Online, 259 BR 812, 818 [2001]; cf. Rocky Riv. Condo Corp. v Federal Deposit Ins. Corp., 855 F Supp 489, 492 [D Mass 1994] [option to purchase for $1]; Breeden v Hit Publs., 2001 Mass App Div 11, 11-13 [2000] [option to purchase for $1]).

 

ORDERED that the motion is denied, without costs.

 

ORDERED that the order is affirmed, with costs.

 

 

ENTER:

Michael J. Novack

Clerk of the Court