Cotten Schmidt & Abbott, LLP announces opening of new firm offices

Cotten, Schmidt & Abbot, L.L.P. announces the expansion of its firm with the opening of new offices in The Woodlands/Houston, and in Corpus Christi.

CSA is also proud to welcome our newest partners:

Jonathan Hornblower also has joined the firm as Of Counsel in the Corpus Christi office.

The firm continues to build its practice with new associates:

Cotten Schmidt & Abbot in Corpus ChristiCSA’s new office in The Woodlands/Houston is located at:

25025 N. I-45
Suite 410
The Woodlands, TX 77380

Cotten Schmidt & Abbot in the Woodlands/Houston
The Corpus Christi office is located at:

711 N. Carancahua Street
Suite 1800
Corpus Christi. Texas 78401

The firm continues to maintain its offices in Fort Worth, Texas and New Orleans, Louisiana.

Eliminating Post-Production Costs in the Post-Hyder Oil and Gas Royalty Clause – Andrew D. Lewis

AndyLewis

It is well-established that royalties, by their very nature, are paid to the royalty owner without including production costs. Generally speaking, however, the costs that arise from the marketing, processing, and transportation of the oil or gas after it reaches the surface (generally described as post-production costs) are deducted from the amount that the oil and gas company uses to calculate royalty percentages before the royalty is calculated. As with any other contract, though, savvy landowners can certainly modify this by specifically contracting with the oil and gas company not to deduct post-production costs when calculating royalties. The key is that these landowners (and their lawyers) pay attention—and take advantage of—the use of traditional lease language to effectuate their intent.

Stock language used in oil and gas leases, including redundant and frequently unnecessary phrases and terms, has become the norm, and longstanding case law has set strong precedents for the interpretation of these commonplace phrases. Recently, in a high-profile Tarrant County case, Chesapeake Exploration, LLC v. Hyder, 14-0302, 2015 WL 3653446 (Tex. June 12, 2015), the Texas Supreme Court found the absence of such familiar language in an overriding royalty provision particularly problematic. In a lease between a prominent Fort Worth mineral owner and the Chesapeake oil and gas company, one provision called for “a perpetual, cost-free (except only its portion of production taxes) overriding royalty of five percent (5.0%) of gross production obtained” from certain wells.

This provision was one of three royalty provisions. The other two were undisputed: one called for a percentage of “the market value at the well” (the oil royalty) and the other called for a percentage of the “price actually received” by the lessee (the gas royalty). The Court found that both of these provisions were clear. The first allowed Chesapeake to deduct post-production costs from the oil proceeds, because the “market value at the well” was a well-established phrase that necessarily called for the deduction of post-production costs before the calculation.

The second did not allow Chesapeake to deduct post-production costs because the language was also clear as to its basis for calculation. The Court acknowledged that this type of royalty provision was an established, well-known form known as a “proceeds lease.” Accordingly, the Court held that the additional language included in the provision stating that it was “free and clear of all production and postproduction costs and expenses” was simply surplusage.

The disputed provision, however, did not use familiar language, and the Court was left to interpret the meaning of “cost-free” when used to describe a royalty taken from gross production. Ultimately, in a 5-4 decision, the majority determined that the overriding royalties were to be paid free of post-production costs.

Long before Hyder, the Texas Supreme Court had looked at a similar ambiguity in a lease, and its decision in that case became precedent for how Texas courts approached questions of interpretation of post-production language. In Heritage Res., Inc. v. NationsBank, 939 S.W.2d 118 (Tex. 1996), the lease provision at issue provided for royalties to be paid as a percentage of the market value at the well, provided, however, that there would be no deductions for post-production costs from the value of the lessor’s royalty. The Court ultimately held that the commonly-used terms “royalty” and “market value at the well” were clear as to what the royalty amount was calculated from, and that the post-production language was mere surplusage as a matter of law. It simply indicated that these costs could not be deducted from the calculated royalty, which had already been calculated with deductions for post-production costs.

There has been some confusion as to the true meaning and extent of the Hyder ruling and its relationship with Heritage. In both cases, the courts wrestled with the use of specific terms and whether additional or unfamiliar language was simply surplusage and therefore either redundant or meaningless. It may simply be that Hyder represents the other side of Heritage. Heritage exemplified the Court’s interpretation of lease language when familiar language is present. Hyder, on the other hand, represents the scenario when a provision departs from the familiar in an attempt to fashion a particular result. In the Court’s opinion in Hyder, the majority was careful to point out that Heritage’s only real holding was that “the effect of a lease is governed by a fair reading of its text,” and that the parties’ attempt to disclaim Heritage did not circumvent this basic rule. Accordingly, Heritage was simply not applicable to Hyder.

In the end, the Hyder Court was simply forced to make an interpretation of contract language. The use of the phrase “market value at the well,” which the Heritage ruling turned on, was absent from the disputed overriding royalty provision in Hyder, and this ultimately forced a 5-4 decision and an interpretation that may not have been consistent with the intentions of the parties. The Court had no trouble reading the established language in the oil royalty and gas royalty provisions. It struggled, however, when it encountered the parties’ attempts to fashion their own language.

Heritage ultimately remains precedential in its interpretations of lease language within the contexts of royalty provisions. Hyder did not do away with those interpretations. If anything, it ultimately highlighted the importance of using recognized language if one wants to effectuate a specific result. Terms and phrases such as “market value at the well”, “royalty”, and “amount received” have specific meaning within the oil and gas world. The royalty owner who wants to fashion his own provision and avoid being saddled with post-production costs would be wise to approach the lease with long-established language rather than attempt to create something new.

CSA Paralegal Heeds the Texas State Bar Paralegal Division’s Call to Give Back

Mary WintermoteMary Wintermote, a paralegal in the Fort Worth office, recently began a two-year elected term as Director of the Paralegal Division of the State Bar of Texas for District 3 which spans 13 counties encompassing approximately 150 members.

As Director, some of Mary’s duties involve development of pro bono and volunteer involvement. Recently, Mary and her District partnered with the Tarrant County Young Lawyers Association to raise $1,500.00 for the 100 Homes for 100 Veterans in 100 Days Campaign through the Tarrant County Homeless Coalition.

Mary and her leadership team were also successful in organizing a webinar for District members which, in September, will train paralegals to serve as Volunteer Online Facilitators for TexasLawHelp.   As a result of the District’s initiative, the volunteer training mechanism is being made available to educate paralegals across Texas. TexasLawHelp, a program of the Texas Legal Services Center, provides free, reliable legal information to low-income Texans by utilizing technology, specifically the Internet, to enhance and expand the delivery of legal aid. With a call to “give back” made during the Paralegal Division Annual Meeting, Mary is taking the bull by the horns and incorporating an element of giving back in each of the District 3 events.

Two CSA Partners Serve on Prestigious Mahon Inn of Court

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Partner Brian Esenwein was selected to be on the Mahon Inn of Court beginning in 2015.   He joins Partner Rick Disney who has been a member of the Inn since 2012.  This year Disney was selected to be on the three person Mahon Inn Executive Committee to serve along with Judge Charles Bleil and Justice Lee Gabriel.

Disney is also scheduled to be on a panel of lawyers who served as law clerks for Judge Eldon Mahon who will present a program on September 8 discussing ethical lessons learned from Judge Mahon.

 

CSA Opens New Houston Office and Welcomes Two New Partners

Cotten Schmidt & Abbott, LLP is pleased to announce the expansion of its firm with the opening of a new office in Houston, Texas, and the addition of two new partners. Joining the firm and bringing with them immense trial expertise are partners Rick Simses and Paul Lavelle.
Richard-Simses

Mr. Simses focuses his practice primarily on litigation in admiralty, products liability, employment, environmental, commercial, and toxic torts.

Paul-M_-Lavelle

Mr. Lavelle has extensive trial experience in the areas of products liability, admiralty/maritime, construction, environmental law, insurance and general civil litigation.

CSA’s new office is located at 2002 Timberloch Place, Suite 200, in The Woodlands, Texas, 77380.

Estate Planning for Women – by Anna H. Patterson

Anna H. Patterson

Approximately 55 percent of American women do not have a Will – not to mention the ancillary documents that go along with one (think Powers of Attorney and Directives to Physicians).

Women are instinctively responsible, nurturing caretakers. We’ll do whatever it takes to ensure our loved ones remain comfortable and secure. We do our best to eat healthy, get exercise, keep things in order, and yet when it comes down to the thing that matters most – planning for our family’s future in the event that we’re unable to be there ourselves – we are dropping the ball.

Below are three obvious, but often forgotten, reasons to sit down with a lawyer and let him or her help you navigate the legal landscape to document your intentions. Understanding your options and the legal means by which you can plan for your family’s future is both freeing and empowering. It’s never too early, but there’s a chance that if you continue to put it off it could be too late.

• Reason No. 1: Because you can’t take it with you.

We spend a lifetime accumulating treasures, some purely sentimental, others of some value. Personally, I don’t want the State of Texas to dictate who gets my grandmother’s ring, or even her ceramic bowls for that matter. Without responsible planning in a Will or other legally valid codicil to a Will, the State will dispose of your property and I can assure you it won’t be disposed of in the way you’d want. See Tex. Est. Code § 201 for the rules on intestate distribution.

• Reason No. 2: Because you need those ancillary documents, no matter how old you are.

o Directives to Physicians (aka “Living Wills”)

Contrary to common belief, Directives to Physicians should be of concern to younger women. Yes, even you, Ms. “Thirty and Thriving.” In fact, the three reported cases discussing Living Wills involve women under the age of 30 who, because of a car wreck or other tragedy, ended up in a persistent vegetative state. See Bush v. Schiavo, 885 So. 2d 321 (Fla. 2004); Cruzan v. Dir., Missouri Dep’t of Health, 497 U.S. 261, 110 S. Ct. 2841 (1990); and In re Quinlan, 355 A.2d 647 (N.J. 1976). Although it may seem uncomfortable, sitting down with a lawyer and understanding this important document and its implications for end of life care will help to avoid family feuds and save your loved ones that additional heartbreak should the unthinkable ever happen.

o Declaration of Appointment of Guardian

Keep in mind that a Will only takes effect upon your death. And while you can, and should, use your Will to make your intentions known as to whom should serve as guardian(s) of your children upon your death, one important question remains: Who will take care of your children in the event you become incapacitated and are unable to care for them on your own? Enter the Declaration of Appointment of Guardian. Save your family the drama and execute one of these now should you need it down the road. Keep in mind, however, that a Declaration of Appointment of Guardian will not eliminate the need to go to court to have a guardian appointed. It will, however, make your intentions clear and the proceedings will be much easier on all parties involved.

• Reason No. 3: Because even if you fall within the $5.43MM mark ($10.86MM if you’re married) to qualify for the federal estate tax exemption (lucky you!), strong reasons remain for creating a trust.

Trusts can safeguard your assets and provide for your care if you can no longer handle your affairs. They can also hold money for minors, prevent funds from being eroded by spendthrift family members and protect assets from former spouses and creditors.

Contact our office for all of your estate planning needs. Basic will packages, together with all ancillary documents, start at $800. Anna H. Patterson; apatterson@csa-lawfirm.com

Recent Landmark U.S. Supreme Court Ruling Regarding Same-Sex Marriages

On June 26, 2015, the United States Supreme Court issued a landmark ruling ordering all states to recognize same-sex marriages. The full opinion is found here.

CSA handles all facets of family law, including new issues that will now arise in light of this recent U.S. Supreme Court ruling. Partner Brenda Ferguson Hasenzahl has recently co-authored an article, as shown below, regarding the recent Texas Supreme Court case of DeLeon vs. Perry, which discusses the legal issues and arguments behind the issue pending before the Texas Supreme Court as to same-sex marriages, and how that case was affected by the recent U.S. Supreme Court ruling. Contact our office for all of your family law needs.

Brenda Hasenzahl head shot

A Summary of De Leon vs. Perry
Authored By: Brenda Ferguson Hasenzahl and Lauren Gaydos Duffer

As everyone is now aware, on June 26, 2015, the Supreme Court issued a landmark ruling in which it declared same-sex marriages to be recognized as legal in all 50 states. At the time of this ruling, the Texas case of De Leon vs. Perry had been pending before the U.S. Court of Appeals for the Fifth Circuit in which the Plaintiffs sued the State of Texas challenging Texas’ marriage law. More specifically, Plaintiffs’ argued that the state’s constitutional ban on same-sex marriage and related statutes contained in the Texas Family Code violate their Federal Constitutional rights. The purpose of this article is to provide a brief background of the law on a state and federal level, the legal trend across the United States, and to provide a summary of the legal theories presented by the attorneys for Plaintiffs and the State of Texas during their respective oral arguments.

In 1996, the federal government enacted the Defense of Marriage Act (“DOMA”), allowing states to refuse to recognize same-sex marriages granted under the laws of other states. Nearly a decade later, Texas followed suit by amending Article 1, Section 32 of the Texas Constitution to specifically ban same-sex marriage by defining marriage as “the union of one man and one woman.” However, in 2013, DOMA was declared unconstitutional in the U.S. Supreme Court’s historical decision in United States v. Windsor. In this case, Edith Windsor was the widow and sole executor of the estate of her late female spouse, Thea Spyer. Edith and Thea were married in Canada in 2007, and then moved to New York. Upon her death, Thea left her estate to Edith, but the IRS ruled that that a surviving “spouse” only applied to marriages between a man and a woman, and over $350,000.00 of estate taxes were imposed to Edith. Had their marriage been recognized as a ‘legal’ marriage in the eyes of the federal government, the entire estate would have qualified for a marital exemption, and no taxes would be owed. The Court ruled DOMA was unconstitutional under the due process guarantees of the 5th Amendment, and ordered the federal government to issue a tax refund, including interest. However, United States v. Windsor limited its ruling, and did not address whether other benefits previously awarded solely to heterosexual couples, such as social security benefits and veteran benefits, should also be granted to same-sex couples. Further, the United States v. Windsor failed to address whether or not a state can refuse to recognize valid civil marriages of a same-sex couple who were wed in another state.
As of June 2015 (just prior to the Supreme Court’s ruling), same-sex marriage was legal in 37 states and the District of Columbia. Texas was one of 13 states that had a ban on same-sex marriage; however several states with that ban were awaiting federal court rulings as to the constitutionality of those laws.

As to the De Leon case, 4 Plaintiffs filed suit in U.S. District Court for the Western District of Texas on October 28, 2013. The 4 Plaintiffs consisted of two same-sex couples; the first was an unmarried male couple of 18 years who reside in Plano and who wished to marry in-state. The second couple included lead Plaintiff Cleopatra De Leon, a U.S. Air Force veteran. She and her partner Nicole were legally married in Massachusetts in 2009 (a state that recognized same-sex marriage), and wanted Texas to recognize their marriage. Cleopatra and Nicole have a young son (conceived with assisted reproduction technology), and Nicole just gave birth to a second child, using the same assisted reproduction technology and sperm donor as their first child. The lead Defendant was Rick Perry, sued in his capacity as Governor.

On February 26, 2014, Judge Orlando Garcia ruled in favor of the Plaintiffs, and anticipating an appeal by the Defendants, placed a stay on his order until an appeal was filed and it would be reviewed by the 5th Circuit Court. In reaching his ruling, he cited the language of Windsor, and also emphasized that the current ban causes discrimination to children of same-sex marriage as it denies those children “the protections and stability they would enjoy if their parents could marry.” Given the history of Texas as a conservative state, Judge Garcia’s ruling was a surprise to many.

The Fifth Circuit heard oral arguments on January 9, 2015 in New Orleans, Louisiana. Arguing for the state, Texas solicitor Jonathan Mitchell argued that same-sex marriage was an issue for the electorate, and not the judiciary, to decide. Much of the state’s argument was based on the theory of “responsible procreation” – which states Texas has a legitimate state interest in encouraging opposite-sex couples to procreate. The argument included the opinion that marriage was a subsidy, referring to numerous financial and legal benefits that the state provides to married couples, and the state is entitled to reserve this subsidy for relationships that are more likely to advance the state’s interest in reducing out-of-wedlock births. Consequently, there is no incentive in allowing homosexuals to wed, because their sexual activity cannot produce children. Lead counsel for the Plaintiffs, Neel Lane of the Akin Gump law firm, pointed out that the “responsible procreation” argument has already been rejected by the 10th and 4th Circuit Courts. He argued that his clients were asking for their 14th Amendment rights to be enforced, and posed the question “if marriage is good for children, why deny marriage to same sex couples with children?”

Exactly one week after oral arguments concluded, the United States Supreme Court announced it would hear same-sex marriage cases for four other states (KY, MI, OH and TN) during the Spring of 2015. As such, the Fifth Circuit appeared to wait to rule in De Leon until the U.S. Supreme Court would make a ruling, and the Supreme Court’s June 26, 2015 ruling clearly states that same-sex couples across the nation have a legal right to marry each other. This ruling will have a significant impact on family law, probate law, and nearly every other practice of law.

Independent Contractors & Section 530 of the Revenue Act of 1978

Fort Worth Partner Rick Disney recently prevailed in a hearing with the Internal Revenue Service Appeals Office. The client had consistently treated its workers as independent contractors; however, in an audit the IRS agent said that the workers had to be reclassified as employees.
Determining whether a worker is an employee or independent contractor under the 20 point common law test can be difficult, even in the best of circumstances. Happily, there is a shortcut created by Section 530 of the Revenue Act of 1978. Section 530 is a safe harbor provisions that can prevent the IRS from retroactively reclassifying workers as employees. To get the benefit of Section 530, the taxpayer must show that it has:
1. consistently treated the workers as independent contractors;
2. completed Forms 1099 for each worker who made over $600.00 per year; and
3. had a reasonable basis for treating the workers as independent contractors.
Reasonable basis includes: 1. judicial or administrative precedent; 2. prior audit of the tax payer; 3. a significant portion of the industry treats similar workers as independent contractors; and 4. reliance on a professional accountant or attorney.
Only one of these items need be proven to constitute reasonable basis.
If the taxpayer makes a prima facie showing that it is entitled to Section 530 relief, the Internal Revenue Manual provides that the IRS has the burden of proving that Section 530 does not apply. It is very unusual for the government to ever have the burden of proof in a civil tax case.
It is always preferable to win the battle without having to wage a prolonged war. Section 530 provides such a shortcut in the appropriate circumstances. Additional information can be found in IRS Publication 1976.

7 Things You May Not Know About Federal Taxes, But Should (part 2 of 2)

4. Cash Transactions

Any person or entity that receives more than $10,000.00 in cash from one transaction is required to fill out a Form 8300 to the IRS. If you bill a customer $12,000.00 and received two cash payments of $6,000.00 each, you are still required to submit the Form 8300.
Cash includes currency, cashier’s checks, money orders, bank drafts, and traveler’s checks.
If you deposit more than $10,000.00 in cash in the bank, the bank is required to submit a currency transaction report to the IRS. One who attempts to avoid the reporting requirement by splitting the deposit into separate deposits, each under $10,000.00, has committed a felony and the cash involved is subject to forfeiture to the United States.

5. Levy and Garnishment

Assume you receive an IRS garnishment on an employee’s wages. Can you fire that employee? No, that is specifically prohibited by federal law.
If your employee claims that he does not owe the IRS, can you, as the employer, refuse to comply with the wage garnishment? No. If you do so, the company is liable for the amount garnished plus a 50% penalty.

6. Barter

There is nothing illegal about exchanging goods or services with someone in return for other goods or services. However, the amounts received are required to be treated as income by both parties.

7. Forgiveness of Debt is Income

Assume that you have a customer who has refused to pay you. Assume further that pursuing that customer is not worth the cost and the effort. One option is to write the customer telling them that you have forgiven the debt and include a copy of a Form 1099 you are sending to the IRS. The amount forgiven will be treated by the IRS as income to the customer and he will have to pay taxes on that amount.