When Alpha Coal entered bankruptcy court in August 2015, Deputy Campbell County Attorney Carol Seeger’s thoughts went to the $19 million in mineral property taxes she knew the coal giant owed her county.
“That’s a lot of money,” she said. She realized the county would need legal representation in the out-of-state proceedings.
As Alpha went into bankruptcy court, Seeger knew the company could seek to write off the large sum owed to Campbell County. To protect its interests, the county hired an attorney in West Virginia, where the bankruptcy proceedings were occurring.
“They had borrowed a lot of money,” she said, “and so there were these huge creditors out there.”
Soon enough, she got the notice she had been worried about — Alpha was contemplating selling its assets “free and clear” of the county’s tax lien.
Her office needed to make sure powerful creditors didn’t duck the taxes owed Campbell County while selling off the assets needed to repay their loans, Seeger said.
The county’s vulnerability sprung at least in part from a loophole in Wyoming law that puts private creditors’ ahead of counties seeking unpaid property taxes.
Campbell County lawmakers Rep. Erik Barlow, and Sen. Ogden Driskill want to close the loophole and help prevent counties losing property taxes to the maneuvering of mineral companies. They sponsored HB242 to do so.
The bill passed the House 54-6 but is stuck in the Senate, where President Eli Bebout says he opposes it. The measure also faces strong opposition from Wyoming bankers.
If the bill dies, as similar efforts have in the past, mineral-producing Wyoming counties will continue to risk losing property taxes that mostly go to schools. Campbell County has engaged in court proceedings on various occasions to try and collect on the mineral industry.
When it emerged from bankruptcy, Alpha Coal split into two companies. Offshoot Contura Energy purchased Wyoming mines formerly operated by Alpha. Contura did indeed try to acquire them free of the county’s tax lien, Seeger said.
Campbell County’s representative in bankruptcy court secured an agreement that Contura would pay the tax debt in annual installments over five years. “Whether or not we’ll get the money I don’t know,” Seeger said.
Campbell County Commissioner Mark Christensen believes that mineral companies and their lenders should operate under the same rules that apply to other businesses and individuals. When someone sells a house, either the seller or the buyer will have to pay any outstanding property taxes. If a person takes out a bank loan to buy a house, then goes bankrupt, property taxes owed on the house would take priority to any claims from the bank trying to recoup its loan.
“If you buy a building that the person hasn’t paid the taxes on, you know that the taxes need to be paid,” Christensen said.
With mineral companies, the tax lien does not have priority over the bank loan. If a company defaults on a loan and goes bankrupt, the bank takes what it’s owed first. If there’s enough left after the bank is paid, then the county gets its tax money. If not, the tax lien effectively is wiped out.
Thus far, the loophole for mineral production has not cost the state a huge sum of money like that potentially risked by Alpha Coal’s bankruptcy, Christensen said. Nor does Seeger think that HB242’s passage would make mineral-producing counties’ claim on property taxes ironclad. But she does think it would help.
“The bigger issue is [that] the potential is there to lose very, very large dollar amounts,” she said.
Mineral property tax revenues go first to the county in which they are collected. Three-fourths of the total goes to schools, Seeger said. Under Wyoming’s tax distribution system, the tax collections benefit more than just the county of origin, and are spread throughout the state. While local governments in mineral producing counties collect the taxes, the benefit is spread throughout Wyoming’s struggling school system.
If the stalled bill does not get through a committee and come up for consideration by the full Senate by Feb. 24, it will die. The Senate will not convene until 2 p.m. today, leaving only three days to meet that deadline.
It may not matter. Bebout, an oil and gas operator, said he opposes the bill and probably won’t assign it to a committee.
While HB242 isn’t a perfect fix, Seeger said, it will make it harder for companies to dodge their tax responsibilities.
“It is a tool in the tool chest,” she said. “Not only to help me, but it would be a defense against a company having yet another tool in their toolbox to try and transfer property without paying their taxes.”
Of the six House members who voted against the bill, several share backgrounds in business and banking. Representatives Dan Furphy (R, HD-14, Laramie) and Mark Kinner (R, HD-29, Sheridan) are both retired bankers. Rep. Joe MacGuire (R, HD-35, Casper) works as a business broker, buying and selling companies. Other no votes came from Rep. Jim Blackburn (R, HD-42, Cheyenne) retired from the real estate industry, Rep. Debbie Bovee (D, HD-36, Casper) is a retired school teacher, and Rep. Chuck Gray (R, HD-57, Casper), who works in the radio business.
Sen. Ogden Driskill (R, SD-1, Devils Tower) described the bill as “widely hated” by both bankers and oil-and-gas operators. If passed, “it’ll change the way that they secure oil wells and oil business, there’s no doubt,” he said.
“The real losers in this are schools,” Rep. Eric Barlow (R, HD-3, Gillette) said. He wants to see the loophole closed so oil-and-gas companies can’t fail and then walk away from their debts to the state. “There are folks who don’t want [the bill] heard,” he said, and he plans to speak with Bebout to understand his opposition.
Bankers oppose legislation
Bankers do not support the bill because it would make lending more difficult and change the nature of existing loans, said Michael Geesey with the Wyoming Bankers Association. Changing the statute would devalue the collateral a bank has on a loan, he said, since banks generally recoup their loans by selling off the assets of a mineral company if it defaults. If the bill passes, the property taxes would come off the top, leaving potentially less money for the banks to collect.
It’s difficult for banks to see if a mineral company owes taxes when considering them for a loan, he said.
The problem, Geesey said, is that unlike mineral severance taxes, which are paid monthly when the coal, oil or gas is removed from the ground, “ad valorem” mineral property taxes are calculated based on production over the course of the year, and paid once annually. Ad valorem taxes are based on the assessed value of the minerals in a company’s holdings.
Responsible companies put money away as they go, but less responsible ones let the ad valorem tax debt build up, Geesey said.
Until the county files a lien on the ad valorem taxes, the bank considering a loan is not aware of the debt, Geesey said.
Both Christensen and Seeger disagreed. “Go on Campbell County’s website right now,” Christensen said. “Type a company name in the property search and you can see anyone who owes money.”
Taxes owed are public record, Seeger said. If a bank makes a loan without checking to see whether the borrower owes taxes, the bank hasn’t done its due diligence. “All you have to do is pick up the phone and call the Campbell County Treasurer’s Office,” she said.
Geesey said HB242 passed the House easily because lawmakers were swayed by arguments of lost revenue to schools. Many members weren’t aware of what he called the unintended consequences for oil-and-gas producers, he said. Such a bill wouldn’t affect big operators, he said, despite the difficulties Campbell County had with Alpha Coal. Instead, it would affect smaller companies that need bank loans to expand.
Given the state’s revenue situation, the move could wind up being counterproductive, Geesey said. If the bill passes, there will be fewer loans and Wyoming will see both production and taxes decline.
“If I loan money to someone and they put in 10 pump jacks, guess what happens to your taxes,” he said.
Bebout agrees with the bankers’ arguments. As a result, he said he’s “probably not” going to assign the bill to a committee. Those concerned about the tax loophole should bring a better bill, he said.
The bill makes it too difficult for oil and gas companies to get loans, all to deal with “an isolated situation in Campbell County,” he said.
Lawsuits show the danger
In 2013, several oil-and-gas operators sued Campbell, Crook and Converse counties over tax liens. An oil-and-gas operator called Wildfire Partners, which owed roughly $340,000 to the counties, according to Christensen, defaulted on a loan from TriPower Resources. TriPower then assumed control of Wildfire.
When the counties tried to collect on the taxes Wildfire owed, TriPower sued. In Campbell County District Court, TriPower successfully argued that it had not inherited Wildfire’s tax debts when it took over the company. It’s interest in the company through the defaulted loan trumped the counties’ tax liens, the court ruled.
The counties appealed to the Wyoming Supreme Court, but before the case was heard TriPower paid the tax debt. Christensen said the company did so because it was trying to sell Wildfire’s properties to a third owner, and wanted to eliminate the legal uncertainty.
Along with the TriPower incident, Seeger named two other tax disputes that have stuck in her memory. An oil and gas operator called High Energy owed $146,000 to Campbell County, but a bank collecting on a loan when the company defaulted successfully argued it didn’t have to pay the tax, she said.
Then there was Storm Cat Energy Corp, which filed for bankruptcy in 2008. That company owed approximately $7.5 million in ad valorem taxes, Seeger said. When the company emerged from bankruptcy, its reorganization plan included an agreement that it would pay taxes to Campbell County in five years, once it had gotten its feet back under it by engaging in the coal bed methane boom. But the company ended up back in bankruptcy court, having paid roughly $1 million of its accumulated tax debt.
Seeger doesn’t know what will happen with Storm Cat now. The bankruptcy proceedings are ongoing in Colorado, where Campbell County has hired a lawyer, just as it did in the Alpha Coal bankruptcy. Like Alpha Coal, Seeger said Storm Cat wants to sell its assets “free and clear of liens and encumbrances,” which includes the millions still owed Campbell County.
“I don’t think people appreciate how hard it is to collect ad valorem taxes from oil and gas companies if they choose not to pay it,” she said.
Many say ad valorem should be paid like severance taxes
One fix would be changing laws to collect ad valorem taxes similarly to mineral severance taxes. Both Geesey and Bebout said they would be amenable to that solution. Geesey said it would make it easier for both banks and counties to avoid a mess when a mineral company goes bankrupt.
Collecting mineral severance taxes isn’t a huge problem for the state, said Craig Grenvik, administrator of the Mineral Tax Division at the Wyoming Department of Revenue. The mineral severance tax is imposed by the state and assessed when a mineral is severed from the earth and sold.
Mineral severance taxes are collected on a monthly basis, Grenvik said, which means there is less money at risk for the state when a company fails. That’s not to say it doesn’t happen. Grenvik estimates the state has failed to collect $1.9 million in severance taxes since 2012, usually when a company goes under from one month to the next. It’s not a meaningless number, but when compared to the roughly $3.2 billion Grenvik said was collected during that same period it’s not a significant portion.
“That delay [in collecting ad valorem taxes] really has cost the counties quite a bit of money,” he said.
It would not be difficult for the state and counties to collect ad valorem taxes monthly, like severance taxes; “It’s a matter of ironing out the administration of it,” Grenvik said.
A bill in the 2016 budget session would have made just that change, requiring ad valorem taxes due monthly, the same as a severance tax. The bill was crafted over the course of two years by the mineral tax force, put together by Gov. Matt Mead. The group was a coalition that included representatives from the mineral extraction industries, along with lawmakers, county government representatives and Cheyenne attorney Larry Wolfe.
At first, Seeger said there was widespread support for the bill, but at the end, the coalition dissolved. Coal companies said they pay their taxes on time, and shouldn’t be included. This occurred, of course, before Alpha Coal failed.
Seeger said that generally Campbell County does have an easier time collecting ad valorem taxes from the coal industry, as assets are concentrated in four big companies and the ownership does not shuffle the way it does in the oil-and-gas business.
Peabody and Arch Coal, both of which also went into bankruptcy over the last several years, have paid the ad valorem taxes they owed, she said.
After coal dropped its support of the 2016 legislation, other mineral industries followed. “Then trona said ‘well we want out,’” Seeger said, “then oil and gas said ‘well why should we be in?’”
The bill was introduced to the House during the 2016 budget session, but was eventually withdrawn by the Revenue Committee.
The Legislature eventually must decide whether the state should forgive tax debt, and if so, to whom and under what circumstances, Seeger said. As long as loopholes exist, companies will seek to use them, she said.
“If the average Joe has to pay their taxes on their mobile home then I don’t know why in the world we’re carving an exception out for mineral companies.”