Depew Gillen Rathbun & McInteer

A general practice law firm in Wichita, Kansas

Rathbun Recognized in Best Lawyers in America

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Randy Rathbun has been recognized in the 24th edition of Best Lawyers in America in two separate areas of practice. He was named “Lawyer of the Year” in Wichita Employment Law for his work in representing employees in wrongful discharge, wrongful discharge, FMLA and pregnancy discrimination cases.

Additionally, Rathbun was named to Best Lawyers in America for the 22nd straight year in Environmental Litigation for his work representing landowners, farmers and environmental groups in pollution claims.

Best Lawyers 2018 Lawyer of the Year, Environmental Law

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Charles C. Steincamp has once again been recognized as Best Lawyers’ 2018 Wichita Environmental Law “Lawyer of the Year”. This is the fourth time he has received this honor. The award is based on the consensus opinion of leading lawyers about the professional abilities of their colleagues within the same geographical area and legal practice area.

Why Doesn’t My Title Insurance Commitment Cover Minerals and What Can I Do to Fix it?

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Many purchasers of real estate find themselves searching for answers to these very questions. Virtually all title commitments and insurance policies exclude coverage of oil, gas, and other minerals as a matter of ordinary course. Anyone who’s reviewed an industry-standard ALTA title commitment has noticed that minerals are a standard exception from coverage. But why?

The reason is the Kansas Marketable Record Title Act, found at Chapter 58, Article 34 of the Kansas Statutes, K.S.A. 58-3401, et seq. Originally passed and signed into law in 1973, the Act’s purpose is to “attack the curse of the hidden ancient interests in land,” according to the Uniform Law Commission that drafted the uniform law that Kansas’s Act is modeled from. In Kansas real property law, interests in land can continue to exist for long periods of time—even permanently. Some property interests are disclosed in public land records, but some are not. Before the Marketable Record Title Act, this fact of life posed quite a quandary for buyers of land—how far back should a title search go to identify any possible interest that may exist in the land that might affect marketable title?

Under the Act, ancient interests in land that nobody presently asserts are extinguished so as not to create a cloud on title to the land. The word “ancient” may be a bit misleading; the Act really extinguishes interests that are older than 25 years from the date the purchaser takes title. So when you hire a title company to write a title commitment on a parcel of land you want to buy, the title company searches title records going back only 25 years, rather than all the way back to the beginning of the records. This saves the title company—and ultimately the buyer—a bundle of time and money.

Nothing in life is free, not even the conveniences provided by the Marketable Record Title Act. The Act doesn’t apply to all types of ancient property interests. One type of property interest than can’t be extinguished by the Act are severed mineral interests. No matter how old a severed mineral interest is, or how long ago anybody presently asserted ownership of it, a present-day buyer of the land will take subject to the interest. That’s why title companies don’t insure title to minerals—because to do so would require them to search title going all the way back to the grant from the United States federal government.

Most buyers of land have no idea whether they are truly buying all of the minerals in, on, or under the land because their title policy won’t cover them. It’s not uncommon to encounter landowners who are dismayed to later learn their interest is subject to a third-party mineral owner. There is a solution, however. Title companies will usually remove the standard exception from coverage for minerals if the buyer provides a title opinion from a licensed Kansas real estate attorney covering the mineral estate in the land. Obtaining a mineral title opinion prior to closing on the purchase of a piece of real estate is the only way to truly ensure that you are buying all of the mineral interests in the property.

Getting a lawyer’s title opinion on a piece of property has other benefits, too. For instance, it can cover other types of property interests that aren’t covered by the Marketable Record Title Act, such as easements (or right-of-way) as well as remainder and reversionary interests. The only way to know about these kinds of interests is to look for them in the public land records, which typically stretch back to the late 1800’s in Kansas. By examining only the last 25 years of records, as title companies do, it’s possible to miss ancient interests that the Act won’t take care of.

Buyers of land in Kansas should consider hiring a licensed and qualified Kansas real estate lawyer to examine title to the land as a supplement to the title insurance commitment.

Joseph A. Schremmer
joe@depewgillen.com

May 2017
Depew Gillen Rathbun & McInteer, LC

This article is based on hypothetical facts and is issued for general informational purposes only. It is not intended to be construed or used as legal advice.

WHEN A CORPORATION MAKES SENSE FOR ENTREPRENEURS

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Clark and Lois moved to Wichita, the Air Capital of the World, to work among other leaders in aerospace and for Clark to be closer to his stepparents. Lois has two patents on a holographic simulator at the forefront of interactive, virtual reality technology. Clark owns a patent on a tactile sensor technology that provides a sense of touch when interacting with switches and controls in a holographic image. They also are adapting this system for use in overriding failed switches or components in cockpits during flight and are working with a major manufacturer to introduce this safety technology on its next generation of jets. What form of business makes sense for this super duo?

Clark, “Lois and I would like to formally combine our ideas in a company, and we want our personal assets shielded from what happens in the business.”

Lois, “I have some money from a golden parachute to invest in our company, but, of course, we don’t expect to make money for a while. We expect to operate at a loss for at least a year.  We aren’t quite ready to seek venture capital, but will need to do so.”

Clark, “And, at some point, Lois and I would like to go public.”

At first, it appears that an S corporation is the form of business that will best serve Clark and Lois.  Here’s why.

An S corporation is an excellent shield against personal liability. It also is well-suited for any business that will be seeking outside capital, if such funding is not imminent and the founders, like Clark and Lois, would personally like to take advantage of the early anticipated losses of the business.

A corporation provides a “corporate veil” or shield against personal liability for activities conducted by the corporation. So long as all corporate formalities have been complied with, the shareholders of the corporation, Clark and Lois, will only be liable for the debts, obligations and liabilities of the corporation up to the amount of their respective investments.

There are two primary types of corporations: an S corporation and a C corporation. They are called S corporations and C corporations because they are bound by the rules and regulations of Subchapter S or Subchapter C of the Internal Revenue Code. An S corporation refers to an eligible business that is formed as a corporation under state law and elects to be taxed at the ownership level like a partnership.

One of the differences between a C corporation and other structures, such as an S corporation, is in the way they are taxed. Unlike an S corporation that does not tax the business directly, C corporations are required to pay both federal and state taxes at the entity level. While other structures like the S corporation only mandate that shareholders or interest holders pay taxes on any profits they receive, C corporations face the possibility of being double-taxed since both the business and the owners must pay taxes on profits.

An eligible business can elect to become an S corporation by submitting Form 2553 “Election by a Small Business Corporation” to the IRS. Since an S corporation is a “pass through” entity, i.e., profits and losses of the corporation pass through to the individual shareholders, Clark and Lois can each account for their pro rata share of income, deduction, loss and credit. The S corporation structure will allow Clark and Lois to write off their early losses.

Another advantage of an S corporation is that it can establish a salary or bonus for its stockholder-employees, and they would only pay Social Security and Medicare taxes on such salary or bonus.  The caveat is that the salary or bonus must be reasonable and not too low for the job performed. If the salary or bonus is too low, the “dividends” may be treated as salary or bonus and the IRS may assess penalties on the underpayment of taxes.

An additional perk of an S corporation is that non-wage income earned in such a “pass through” business is not currently subject to income tax at the state level in Kansas. More money for Clark and Lois.

Lois, “What form of corporation is best to attract venture capital, and eventually go public?”

A C corporation is well-suited to attract venture capital, especially if the exit strategy is an initial public offering or IPO. It is wise to perform due diligence on prospective funds.  Get to know their key personnel and expectations and requirements up front.  From a tax perspective, certain venture capital funds avoid investing in “pass through” entities such as S corporations because the pass-through mechanism may require the fund to report losses to the fund’s investors, or may require the fund’s foreign investors to file U.S. tax returns. Under an S corporation, all shareholders must be U.S. citizens like Lois, or residents, like Clark. In addition, an S corporation cannot have more than 100 shareholders and can only have one class of stock. These features are not attractive to raising capital, especially if a venture capital fund would want preferred stock in return for their investment.  On the other hand, some angel investors or family offices may prefer to invest in “pass through” entities for the reasons set forth in the prior paragraphs.

When venture capital funding is imminent, Clark and Lois can convert the S corporation to a C corporation by terminating the S election, with tax ramifications of course. Unlike an S corporation, a C corporation may have an unlimited number of shareholders and different classes of stock. The flexibility to issue different classes of stock facilitates raising capital by making a broad range of financial instruments accessible, including preferred stock, warrants, convertible notes and subordinated debt.

Robert J. Vincze
robert@depewgillen.com

March 2017
Depew Gillen Rathbun & McInteer, LC

 

This article is based on hypothetical facts and is issued for general informational purposes only.  It is not intended to be construed or used as legal advice.

KANSAS MINERAL LAPSE ACT: SWORD OR SHIELD?

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Title to real estate includes title to the surface of the land as well as to the oil, gas, and other minerals located under the surface, often called the “mineral estate.” Title to the minerals may be separated from or “severed from” title to the surface, so that, for example, John Smith may own 100% of the surface of Blackacre but transfer, or convey, to his brother, Bob Smith, 100% of the minerals under Blackacre. Both John and Bob may possess, convey, and pass to their heirs or devisees under a will all or a portion of their interest in Blackacre to other persons. The result, which is not uncommon in Kansas, may be that title to the mineral interest in Blackacre is owned by numerous individuals with each owning a relatively small fractional amount of the total minerals.

In most respects, John Smith’s title to the surface of Blackacre and Bob Smith’s title to the minerals in Blackacre are equivalent property rights in the eyes of the law. However, Kansas, like many other states, has adopted a dormant mineral act, also known as a mineral lapse act, which can have the effect of extinguishing Bob’s title to the mineral estate in Blackacre (and rejoin the mineral estate with the surface estate) if he fails to “use” his mineral interest.

The Kansas Mineral Lapse Act (K.S.A. §§ 55-1601 to 55-1607) is designed to identify the owners of severed mineral interests and incentivize them to “use” their mineral interests. Under the Act, if an owner of a severed mineral interest has not used the mineral interest for a continuous period of 20 years or more, the owner of the surface estate may, after giving notice to the severed mineral interest owner, extinguish the severed mineral interest and reunite the interest with the surface estate.

For severed mineral interest owners, and owners of surface estates subject to severed mineral interests, it is important to understand what constitutes “use” of the mineral interest under the Kansas Mineral Lapse Act. For severed mineral interest owners, this knowledge is key to avoiding lapse and loss of their mineral interest. For owners of a surface estate subject to severed mineral interests, knowledge of what constitutes use of a severed mineral interest may come in handy should the owner one day wish to extinguish the severed mineral interests and reunite them with his or her interest in the surface. Under the Kansas Mineral Lapse Act, a mineral interest is considered to be used when:

(1) Any minerals (including oil or gas) are produced from the property;

(2) Operations are being conducted on the property for the injection, withdrawal, storage, or disposal of water, gas, or other fluid substances;

(3) Rentals or royalties are being paid by the owner of the severed mineral interest to the owner of the severed surface estate for the purpose of delaying or enjoying the use of the mineral rights;

(4) The property is unitized or pooled for oil or gas production purposes with other property that is being used under this definition;

(5) In the case of coal or other solid minerals, there is production from a common vein or seam by the owners of the severed mineral interests, or

(6) Taxes are being paid on the severed mineral interest by the owner. In counties that separately tax severed minerals, “using” a severed mineral interest is as simple as paying annual property taxes on it.

To attempt to extinguish Bob Smith’s severed mineral estate and reunite it with his surface estate in Blackacre, in our example, John Smith would have to give notice to Bob that Bob’s mineral interest has lapsed for nonuse. This requires that John publish notice of the lapse in a newspaper of general circulation in the county where Blackacre is located and, if he knows Bob’s address, by mailing a copy of the notice by restricted mail to Bob within 10 days after publication of the notice in the county newspaper. For 60 days following publication of the notice in the county newspaper, Bob may file a statement of claim in the office of the Register of Deeds of the county where Blackacre is located preserving his mineral interest. If Bob files a statement of claim, his mineral interest will remain valid for at least another 20 years.

If, however, Bob fails to file a statement of claim during the 60-day period, then, under the Mineral Lapse Act, the severed mineral interest reverts to the owner of the surface estate—John in our example. John Smith would therefore take title to the severed mineral interests and would own both the surface and the mineral estates of Blackacre. John must then file a quiet title action in the district court of the county where Blackacre is located to quiet his title to the mineral interest against any claim of Bob in order to obtain marketable title to the mineral interest.

As you can see, the Kansas Mineral Lapse Act may be a trap for the unwary severed mineral interest owner in Kansas. The Act may also be a tool for a surface owner who wishes to reunite severed minerals with his or her surface estate. Sometimes this is the only way the land may be leased and developed for oil and gas purposes. Owners of real estate in Kansas should remain vigilant about the use or nonuse of severed mineral interests, and are strongly encouraged to contact qualified Kansas real estate legal counsel if and when issues of nonuse and mineral lapse arise.

Joseph A. Schremmer
joe@depewgillen.com

February 2017
Depew Gillen Rathbun & McInteer, LC

This article is based on hypothetical facts and is issued for general informational purposes only. It is not intended to be construed or used as legal advice.

The Challenges of a Successful Age Discrimination Case

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Friends of mine who know I represent employees in discrimination cases often ask me about age discrimination in the Kansas courts and how I prove these cases. Frankly, it is not easy.

Age discrimination cases arise under a federal act, the Age Discrimination in Employment Act, also referred to as the ADEA. Although these cases can be filed in state court, they are almost always removed to federal court because employers and their counsel are well aware of the hostile lens through which the federal courts view employment cases. Age discrimination cases can be removed from state court to federal court because they involve a “federal question.”

What does an older worker (the plaintiff) have to show if he or she believes they are the victim of age discrimination? The jury in Kansas is required to find the following elements to rule in favor of the employee in an age discrimination claim:
1. The plaintiff was an employee of the defendant employer
2. The plaintiff was forty or more years old at the time of his discharge;
3. The plaintiff’s employment was terminated; and
4. The plaintiff would not have been terminated but for his/her age. The plaintiff has the burden of proof to prove all of these elements by a “preponderance of the evidence,” which simply means more believable than not.

Obviously, an age discrimination rises and falls on the 4th element: whether an employee would not have been terminated but for his age. How do I go about proving this? There are two kinds of evidence that can be used to prove age discrimination: direct and circumstantial. Direct evidence is direct proof of a fact, such as testimony of an eyewitness. The best example of this is the plaintiff’s boss saying: “Bob, you are just getting too old to do sanding. Shouldn’t you be enjoying your life in an easy chair?” This type of evidence rarely comes along because most employers are well-trained to hide such feelings. Circumstantial evidence, on the other hand, is indirect evidence that leads a juror to believe that age discrimination took place. The best description of circumstantial evidence I ever heard was by one on my heroes, Federal Judge Frank Theis, who was appointed by President Johnson and passed away in 1998.  In one of my first trials in federal court back in the 1980’s, Judge Theis (an avid outdoorsman) used this story to describe circumstantial evidence:
Imagine you are out rabbit hunting early one December morning. It is a beautiful winter morning and a fresh blanket of snow covers the ground. You come across a set of tracks which any hunter worth his salt instantly recognizes as rabbit. In the fresh snow, you follow the tracks to a hollowed out log. Now, you didn’t actually see the rabbit hop into the log, but you know that rabbit is in the hollow log. How? Because the tracks go to the hollow log and do not come out. That, folks, is circumstantial evidence.

The task in age discrimination is proving that age is the “but for” reason for an older worker’s discharge. The employer always has a plethora of reasons about why my client was fired–none of which ever has anything to do with age. The attorney representing the older worker must take on these reasons and show they are pretextual. That, is age discrimination in a nutshell.

Randall K. Rathbun
randy@depewgillen.com

January 2017
Depew Gillen Rathbun & McInteer, LC

This article is based on hypothetical facts and is issued for general informational purposes only. It is not intended to be construed or used as legal advice.

New partner!

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Depew Gillen Rathbun & McInteer LC Announces New Partner
Wichita KS, January 1, 2017 – We are pleased to announce that Joseph A. Schremmer is now a partner in our firm. Joining our firm in 2015, Joe continues to focus on oil and gas, environmental, and business law. He represents clients across a variety of industries in administrative proceedings, litigation, and business and real estate transactions.

Joseph A. Schremmer
Depew Gillen Rathbun & McInteer, LC
8301 East 21st Street North, Suite 450 | Wichita, KS 67206-2936
316.262.4000 | joe@depewgillen.com
www.depewgillen.com

Estate Planning not “One Size Fits All”

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When it comes to wills, there’s one thing for certain: you won’t be around when yours is read! One way to avoid unintended consequences for your surviving loved ones is to make the best thought-out last will and testament or trust that you can.

“I tell folks that I think they do a service to their family when they do estate planning,” Kimberly Vining, an attorney at Depew & Gillen in Wichita, Kan., said. “It potentially makes their family’s lives easier and simpler, whether that’s with a will or trust or other method.”

For many people, the process starts with a visit to a lawyer. Vining’s first step is to sit down with her client, learn all the important facts of their situation and how they wish their assets to be taken care of after death. “You get to know the client, what their concerns are and what’s driving them to see you,” Vining, who’s been in practice 11 years, said. “When I know what their situation is and what their goals are, I draw up a draft of their document, send it to them and answer any further questions. It’s their plan so you want to make sure they understand it. That’s important before signing it.”

Vining said a number of factors prompt people to make wills or trusts. It may be the birth of a child to a young couple who want to name a guardian in case the worst should happen. It may be someone who owns a business and wants to make sure its assets are looked after in a similar situation. Often, it’s someone whose parent has died and who has been through the experience — good or bad — of seeing that parent’s estate settled. “They’ll say ‘That worked well’ or ‘Oh my gosh, I don’t want my kids to go through that,'” Vining said. “A lot of times the kids maybe never had a conversation with mom or dad about what they owned.”

When people have complex business interests, out-of-state property, a blended family or family members with special needs, the need for a will or trust becomes even more critical.

Vining has seen both sides of the equation. In addition to writing wills and trusts for clients, she helps administer estates. “Working on the administration side really allows me to see the value of it,” she said. “You see how things play out.”

Online will services exist, but if a person has any questions about the process, it’s certainly more reassuring to deal with a professional trained and experienced in the law than a simple online FAQ. “I think that’s a huge disadvantage, not getting questions answered, or not knowing which questions to ask,” Vining said. “To me, one of the most critical components is the education side of it.” By law, online will services contain disclaimers that they cannot offer legal advice. And while those online services offer fill-in-the-blank forms, Vining notes that estate planning is “not one size fits all.”

Even riskier is the decision — and it is a decision — to make no will at all, which leaves your assets to be disposed of according to the dictates of state law. “Some people think estate planning is only for the wealthy,” Vining said. She assures them it is not.

Vining urges people who want to make a will or trust to ask friends and family if they can recommend a lawyer. “A referral is a good way if they’ve had a positive experience. Do your homework and find a lawyer who has that knowledge and experience.”

Kim Vining, Attorney
Kim@depewgillen.com
December 16, 2016

OIL AND GAS OPERATORS PREPARE TO ANSWER CLEAN AIR ACT METHANE INFORMATION COLLECTION REQUESTS (ICR)

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Under the authority of the Clean Air Act, the United States Environmental Protection Agency (EPA) is poised to send information collection requests, called “ICRs,” to thousands of oil and gas operators in Kansas and across the country. ICRs are a tool the EPA can use under the Clean Air Act to obtain information from individuals and organizations for the purpose of developing new air emissions standards and regulations. EPA has stated the purpose of this ICR is to gather information in order to eventually promulgate new air regulations limiting emissions of methane gas from existing oil and gas facilities. Oil and gas facilities include wells, compressors, separators, sweeteners, storage tanks, and pneumatic controls and pumps. Operators can expect to receive the first of these new ICRs before the end of 2016.

EPA has identified the operators who will receive the first part of this new ICR on its website, available at https://oilandgasicr.rti.org. There are two parts to this ICR. Part I is called the operator survey. It requires an inventory of all oil and gas facilities as well as the number of wells, separators, storage tanks, and compressors at each facility. Part I must be completed and submitted to EPA within 30 days of receiving it.

Part II is the detailed facility survey. It will go to operators of selected oil and gas facilities that, in EPA’s opinion, constitute a representative sample of the domestic United States oil and gas industry. Any facility that is selected to receive Part II will be exempted from having to complete Part I. Part II is much more detailed and demanding than Part I. It requires a wide variety of specific information, including for example, equipment counts and measurement data. Part II must be completed and submitted to EPA within 120 days of receiving it. Both Parts I and II are available for viewing on EPA’s website, available at https://www.epa.gov/controlling-air-pollution-oil-and-natural-gas-industry/oil-and-gas-industry-information-requests.

Failure to respond to an ICR, which is sometimes also called a Section 114 letter, could carry penalties under the Clean Air Act of up to $93,750 per day of violation. Obviously, oil and gas operators face significant liability for failure to properly respond to these ICRs. The counsel of an experienced oil and gas environmental lawyer may prove helpful in answering the ICR.

Joseph Schremmer

November 21, 2016

joe@depewgillen.com

LLC – WHEN DOES A LIMITED LIABILITY COMPANY MAKE SENSE?

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Bob, a handy entrepreneur, plans to renovate condominiums, townhomes, and small apartment complexes with the help of a friend, Monet, who inherited a lot of money. They plan to flip some and rent some. Bob and Monet have heard that it is a good idea to form a company to protect them from outside claims, but are not sure if they should incorporate.

Bob states, “I don’t want a lot of paperwork and meetings. I want to get things done. For now, the business will just be the two of us.”

Monet adds, “I have a lot of money and want to protect it. Bob is the builder, I just want to put in cash and have Bob show me the money.”

Bob, “Yeah, I will scout the properties and do all of the work, but Monet will put up the cash to buy the condos and stuff, at least at first.”

It appears that a limited liability company or series limited liability company is the form of business that will best serve Bob and Monet. Here’s why.

A limited liability company (LLC) protects the owners against personal liability like a corporation. As a separate entity, the LLC will shield Bob and Monet from personal liability from outside claims stemming from business they do in the LLC. Unless they do something wild and crazy, they only will be liable for the debts and obligations of the LLC up to the amount of their respective investments in the LLC. Unless Monet offers a personal guarantee, only the money she invests in the LLC will be at risk.

And, unlike a corporation that is taxed at the corporate entity and shareholder levels, in an LLC, income taxes are only levied at the individual owner’s level as in a partnership. This “pass-through” tax treatment also will allow them to write off losses. Another perk of an LLC is that non-wage income earned in a “pass through” business like an LLC is not currently subject to income tax at the state level in Kansas. More money for Bob and Monet.

Remember, Bob doesn’t want to get bogged down with a lot of formalities. Since the activities of an LLC are governed by an operating agreement, you don’t need a lot of meetings, votes and resolutions to get business done. In an LLC, you can make management of the business simple and flexible in the operating agreement.

While Bob is hustling, Monet is simply looking for a return on her cash. In an LLC, ownership and profits interests can be different. For putting up the cash, Monet wants to own 60% of the LLC, but has agreed that since Bob will be doing all of the work, that he will get 75% of the profits. In an LLC, you can split ownership 60%-40% and profits 25%-75% (or any other ratio).

Since Bob and Monet plan to collect rent, a form of passive income, they are better off with an LLC than an S corporation. An S corporation is a form of corporation that allows for that favorable pass-through tax treatment like an LLC or partnership, but an S corporation may not have passive income that exceeds 25% of its gross receipts in 3 consecutive years, or it will be subject to taxation at the corporate level too. They don’t want double taxation.

Monet, “Hey, what about that Series LLC?”

Bob and Monet plan to make a number of real estate investments, so it may be a good idea to isolate the liabilities of certain projects in separate LLCs. A series LLC may reduce the expense of forming, maintaining, and administering multiple LLCs. In its operating agreement, an LLC may establish one or more series of members, managers or interests having separate rights and duties with respect to specified property. The organizational documents can provide for each series to have limited liability so that the debts and liabilities of a particular series will only be enforceable against the assets of such series. A claim arising out of any property should not allow a claimant to reach the assets of any other series.

Robert J. Vincze

October 21, 2016
robert@depewgillen.com
Depew Gillen Rathbun & McInteer, LC
depewgillen.com

This article is based on hypothetical facts and is issued for general informational purposes only. It is not intended to be construed or used as legal advice.