by Kit F. Pettit, Esq.
As development of the Marcellus, Utica and other shale formations continues throughout the Appalachian Basin, believe it or not, there have been occurrences of people refusing to accept or cash checks in connection with oil and gas leases. As you would guess, these payments or checks that are being refused are not the lucrative lease bonus or production royalty payments associated with the Marcellus and Utica shales, but they are most often nominal payments related to “old leases” under which shallow formations are being produced or gas is being stored underground. The lessor often believes that an “old lease” should not cover or hold its deep gas rights and decides that it is in their best interest not to accept or cash the small checks. Under certain but limited circumstances, that may be the prudent decision but is not the focus of this article.
By a lessor electing not to accept or cash gas storage or shallow well production royalty payments, the operator is left with various accounting and administrative issues created by these checks that are not cashed or returned as “undeliverable”. As the lessor is establishing its position, the operator must determine how it can minimize it’s administrative burden while complying with the law.
Pennsylvania has a statute that requires the holder of abandoned or unclaimed property to report and remit such property after the expiration of the “holding period” or “dormancy period”. 72 P.S. §§ 1301.1 – 1301.29, Disposition of Abandoned and Unclaimed Property. The abandoned and unclaimed property is considered to be subject to the custody and control of the Commonwealth. In Pennsylvania, the holding or dormancy period for most all abandoned property is five years. The Pennsylvania Dormancy Matrix lists the holding period for “mineral proceeds/royalties” and “accounts payable” as five years.
It is important for an operator to be aware that reporting obligations with respect to abandoned or unclaimed property are generally governed by the laws of the state of the legal owner’s last known address. Property for residents of other states should be reported to the state of the owner’s last known address as the unclaimed property is deemed to be subject to the custody and control of the jurisdiction where the property owner is located.
A check for the storage of natural gas under the surface of the owner’s property that has been issued but not cashed is considered “unclaimed property” under the Pennsylvania statute if a period of five years has elapsed since the date of issue. If checks for storage are being returned and there has been no contact from the payee for a period of five years, these checks would also be considered to be unclaimed property under Pennsylvania law. The same general rules apply for production royalty payments that are issued and not cashed or otherwise returned as undeliverable.
At the end of the five year period, the holder, i.e., the gas company, is required by law to transfer the abandoned or unclaimed property to the Pennsylvania Treasury Department. There are certain reporting procedures that must be followed which include a report and remittance of the unclaimed property by April 15th of the year following the expiration of the dormancy period. If the holder is a first time filer, a request to enter into the Treasury’s Voluntary Disclosure Agreement program should be submitted which would allow the holder to submit reports and abandoned property that are otherwise considered delinquent without incurring the applicable penalties and interest associated with the failure to report and remit. Under the Treasury’s Voluntary Disclosure Agreement program, the holder is required to review a minimum of ten years of records to enroll but is permitted to go back to the start of it’s business if so desired.
The current law in Pennsylvania does not require holders to perform due diligence prior to reporting unclaimed property, however, “reasonable efforts to locate the owner are encouraged”. During the holding period, the unclaimed property should be accounted for and/or held in a separate account (escrow) so the holder can demonstrate that the funds were deducted from its general ledger account. It is good practice to document each attempt at delivery of the payment(s) and to retain copies of any such letters and checks. There is no statutory requirement for records retention under this scenario but the Treasury Department recommends retaining records for no less than ten years after submitting a report and remittance. There is no bright-line rule or statutory requirement with respect to how many times a periodic royalty or storage rights payment must be sent to the intended recipient before the holder may stop issuing the checks. So long as the holder has a written policy that follows the spirit and intent of the law, it is acceptable to stop cutting and mailing checks and relieve oneself of the accounting and administrative headaches associate with this scenario so long as the funds (amount of each check) are accounted for within the holder’s accounting records. It is also important to be aware that the holder can request an early remittance for unclaimed or abandoned property and have the five year dormancy period waived. The Treasury Department will not accept any early remittances inside of twelve months.
Enrollment into the Treasury’s Voluntary Disclosure Agreement program will allow the holder to clean up multiple years of unclaimed checks or payments. It is important for the lessor or landowner to know that the mere refusal to accept or cash payments from a lessee does not in and of itself invalidate a prior lease agreement. If the checks stop arriving, it is possible that the gas company has exercised its rights under the Pennsylvania Abandoned and Unclaimed Property Act and your lease is still in full force and effect.
For further information on this subject, please contact Kit F. Pettit of the Bernstein-Burkley, P.C. Business Law Group.