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Kenneth Hostler vs Davison County Drainage Commission

Posted by David Ganje - July 28th, 2020

This matter came before the court following plaintiff Kenneth Hostler’s motion for summary judgment filed through his attorney David Ganje.  A hearing was held on June 16, 2020, in the Davison County Courthouse and supplemental briefing was ordered and said briefs due on July 2, 2020. The attorney for the Davison County Drainage Commission, Jim Davies, appeared in person while attorney for Defendant John Millan, Gary Leistico and plaintiff’s attorney David Ganje appeared telephonically.  The court having now received and reviewed all briefs and heard the parties’ arguments now issues this memorandum decision.

FACTS AND ANALYSIS

Plaintiff brought this suit under SDCL § 46A-1 0A-35, alleging the Davison County Drainage Commission abused its discretion in granting a drainage permit to John Millan. The plan approved by the Commission would drain water onto plaintiff’s property through drain tile on Millan’s property. Plaintiff alleges the Commission received inadequate evidence to grant Millan the drainage permit and failed to make the proper findings prior to granting the permit.

The South Dakota Supreme Court has given the following standard for summary judgment:

Summary judgment is authorized “if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact, and that the moving party is entitled to judgment as a matter of law.” We will affirm only when there are no genuine issues of material fact and the legal questions have been correctly decided. All reasonable inferences drawn from the facts must be viewed in favor of the non-moving party. The burden is on the moving party to clearly show an absence of any genuine issue of material fact and an entitlement to judgment as a matter of law.

Discover Bank v. Stanley, 2008 SD 111,  · 16, 757 N. W.2d 756, 761 (internal citations omitted).

Unless an action by the Commission is quasi-judicial in nature, the standard of review of the Commission’s decision is an abuse of discretion standard. Carmody v. Lake County Board of Commissioners, 2020 SD 3, 16, 938 N.W .2d 433, 438. This case arises from the Commission ‘s granting of a drainage permit to Millan, which is not a quasi-judicial administrative action, meaning the court reviews the Commission’s decision to grant the permit under an abuse of discretion standard. See Carmody , 2020 SD 3,    29, 938 N .W.2d at 442 . Under this standard, the court ‘s “review is limited to ‘whether the [Board] acted unreasonably, arbitrarily, or … manifestly abused its discretion.” Carmody, 2020 SD 3,     30, 938 N.W.2d at 442 (quoting State o/ South Dakota, Dep ‘t of Game, Fish and Parks v. Troy Twp., 2017 SD 50, ii 17, 900 N.W.2d 840, 848). “The arbitrariness standard is narrow, and under that standard, a court is not to substitute its judgment for that of an agency.” Carmody, 2020 SD 3,    30, 938 N.W.2d at 442 (quoting Troy Twp., 2017 SD 50,  33, 900 N.W.2d at 852-53).

In enacting SDCL § 46A- I OA-20, the legislature gave the individual counties the power to enact ordinances and regulate drainage within their respective boundaries. That section states:

Official controls instituted by a board may include specific ordinances, resolutions, orders, regulations, or other such legal controls pertaining to other elements incorporated in a drainage plan, project, or area or establishing standards and procedures to be employed toward drainage management.  Any such ordinances, resolutions, regulations, or controls shall embody the basic principle that any rural land which drains onto other rural land has a right to continue such drainage if:

  1. The land receiving the drainage remains rural in character;
  2. The land being drained is used in a reasonable manner;
  3. The drainage creates no unreasonable hardship or injury to the owner of the land receiving the drainage;
  4. The drainage is natural and occurs by means of a natural water course or established water course;
  5. The owner of the land being drained does not substantially alter on a permanent basis the course of flow, the amount of flow, or the time of flow from that which would occur; and
  6. No other feasible alternative drainage system is available that will produce less harm without substantially greater cost to the owner of the land being drained.

Such provisions do not necessarily apply within municipalities, but if a municipality drains water onto rural lands lying outside the boundaries of the municipality, the municipality is subject to the above provisions, if adopted by the board.

S.D. Codified Laws § 46A-1 0A-20. In accordance with this statute, Davison County has enacted its own drainage ordinance. Section 2.03 of the Drainage Ordinance of Davison County states:

Prior to the commencement of work, drainage permits are required for, but not l limited to the following:

  1. Construction or installation of a new surface (open ditch) or closed drain (tile).
  2. Any draining or filling, in whole or in part, of a pond, wetland, or lake.
  3. Construction of any lateral drain to a current legal drain.
  4. Modification of any permitted drainage with the intent of deepening or widening any drainage channel, increasing the size of any drainage tile, or extending, altering, or rerouting the drainage work in any way.
  5. Improvements to a drainage district or a coordinated drainage area which were not included in the original plans.
  6. Any drainage work completed inside municipality boundaries which will drain into the county.

Davison County Drainage Ordinance § 2.03. Section 2.05 of the Draining Ordinance of Davison County states:

At a minimum, the following factors shall be considered in evaluating the impact of a proposed drainage project:

  1. Flood hazard zones.
  2. Erosion potential.
  3. Water quality and supply.
  4. Agricultural production.
  5. Environmental quality.
  6. Aesthetics.
  7. Fish and wildlife values.
  8. Considerations of downstream landowners and the potential adverse effect thereon including consideration of the following criteria:
    • Uncontrolled drainage into receiving watercourses which do not have sufficient capacity to handle the adverse effect.
    • Whether drainage is accomplished by reasonably improving and aiding the normal and natural system of drainage according to its reasonable carrying capacity, or in the absence of a practical natural drain, a reasonable artificial drain system is adopted.
    • The amount of water proposed to be drained.
    • The design and other physical aspects of the drain.
    • The impact of sustained flows.

Davison County Drainage Ordinance § 2.05.

In this case, while § 2.05 of the Davison County Drainage Ordinance requires the Commission to evaluate the plan ‘s impact on “Fish and wildlife values, “there is no evidence in the record to indicate the Commission considered such values prior to granting the permit. In fact, the presence of a federal wildlife easement on Millan’s land was not made part of the permit application and was not presented to the Commission at the hearing.

Millan argues that the presence of the federal wildlife easement on one of his properties does not render his permit for the proposed plan invalid because its presence simply means he will be placing less drain tile than what was approved by the Commission. However, this argument overlooks the Davison County ordinance which requires a permit for “Modification of any permitted drainage with the intent of deepening or widening any drainage channel, increasing the size of any drainage tile, or extending, altering, or rerouting the drainage work in any way.” Davison County Drainage Ordinance § 2.03(4). There is no language the court can find which states the Commission approves a maximum amount of drain tile and the laying of any amount of tile fewer than the maxim um does not require a new permit. Certainly, placing less drain tile than outlined on the plan approved by the Commission would constitute a modification of the pem1itted drainage by “altering…the drainage work in any way.”

Millan presented an application that lacked called-for information regarding the standards and conditions required to be considered by the Commission in evaluating a drain tile project.

Millan did not include the elevations of the inlet and outlet locations in his application, nor was this information presented at the hearing or incorporated in the Commission’s findings or decision. The application is silent where it requests “Elevation change from the inlet to the outlet (feet).” (Certified Application, Exhibit A at pgs. 4-5). The application did not show the destination for the water up to one mile, nor did it depict all of the inlet locations.

No data was presented at the hearing about the capacity of plaintiff s land or Dry Run Creek to handle the flow of the proposed water drainage. The application did not provide evidence concerning the volume of water the project drains. While this court makes no finding as to whether the permit should be granted upon reapplication, it is instructive for the Commission  in so determining, that according to the Supreme Court, “it is impermissible  for a dominant landowner to collect surface waters, and then cast them upon the servient estate in ‘unusual or unnatural quantities.”‘ Rumpzav. Zubke, 2017 SD 49,  12, 900 N.W.2d 601, 605 (quoting Winter/on v. Elverson, 389 N.W.2d 633, 635 (S.D. 1986)). “This is true even if the total volume of water remains the same.” Id. “Surface water cannot be gathered together and cast in a body on the property of the lower owner as to affect that neighbor ‘s land in some other way than the way in which it has been affected.” Id. (quoting Feistner v. Swenson, 368 N.W .2d 621, 623 (S.D. 1985)).

Missing from the application and not presented at the hearing in front of the Commission were those requirements designed to protect the interests of the surrounding landowners. If it is Millan’s intention to install 315,000 feet of drain tile intended solely to remove surface water onto servient lands, the application should provide all the hydrological evidence called for in the application, which must be presented to the Commission for its consideration. to protect the interests of all property owners in the area.

Therefore, because the Commission did not consider evidence on all the factors which the Davison County Drainage Ordinance requires be considered prior to granting a drainage pennit, the Commission abused its discretion in granting the permit. Also, Millan has not submitted a new application for a drainage permit and this is required under § 2.03 because placing less drain tile would not be in conformity with the plan the Commission approved.

Upon the filing of a new application for a drainage permit by Millan, the Commission should now have notice of the presence of the federal wildlife easement and should also consider all other factors which it is required to consider under its own drainage ordinance and state law.

CONCLUSION

Plaintiffs motion for summary judgment is granted. Parties are invited to submit any findings they determine necessary under the rules of procedure, and the prevailing party shall submit an order incorporating this opinion and granting the motion.

Dated this 28th day of July 2020.

By the COURT: Hon. Patrick T. Smith, First Circuit Court Judge, State of South Dakota

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Bankruptcy in the Bakken

Posted by David Ganje - July 21st, 2020

Oil and gas producers and suppliers hit with lower prices, oversupply of their product and the pandemic have been filing bankruptcy petitions at historically high levels. The filing numbers for April through June of this year are almost twice the fling numbers of the first quarter of 2020.

Whiting Petroleum, a big producer in the Bakken, filed for Chapter 11 in April and Chesapeake in June. They will not be alone on the bankruptcy docket. 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 students came into the class carrying that attitude. One should keep in mind even if a liquidation bankruptcy case is filed, unless there is an abandonment of the wells, oil and gas production often continues. The particular chapter of the bankruptcy code filing, state property law, as well as state and federal regulations all affect a bankruptcy case. You have as many facets to a bankruptcy case as there are facets on a movie star’s wedding ring.

In this piece I discuss the impact of a bankruptcy filing on the typical lessor (usually property owner) and royalty holder. First let us review a couple of things to watch for. 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 nonpayment of royalties is also a red flag. Do not panic if a bankruptcy filing occurs. A lessor and royalty holder should put his energy into keeping good paperwork and records. This will make a bankruptcy experience somewhat more 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 give 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 typical landlord and tenant sense, in North Dakota, an oil and gas lease is treated under bankruptcy law as an “unexpired lease.”

Many operators who file for bankruptcy are in arrears on royalty payments. A recent North Dakota law 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 claim the lien. With good records and timely filing and recording, mineral interest owners can gain a secured position in a bankruptcy proceeding. This increases a royalty holder’s chances of a recovery because secured creditors are paid before unsecured creditors.

In a reorganization bankruptcy, the filing debtor must either assume (agree to be obligated under) or reject an unexpired oil and gas lease as is. A debtor may not accept only the favorable parts of a lease. If the oil and gas lease is assumed and not in default, the royalty holder in assured under the law that the terms of the lease are to be followed. If an oil and gas 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. However, the bankruptcy court must approve any assumption of a lease. A bankruptcy 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 accept or reject an oil and gas lease within a specified time.

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. Following a bankruptcy filing, a royalty holder or lessor may find themselves with the new option of leasing to a different producer who bought the assets of the bankrupt debtor. Sometimes good. Sometimes bad. Another way this could happen is if a producer is in default of the lease agreement. Under North Dakota law 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. When I look at a good number of leases that owners, farmers and ranchers bring in I do not often find such a clause. But the clause gives the lessor more control regarding cancellation.

David Ganje practices law in the area of natural resources, environmental and commercial law with Ganje Law Office. His website is Lexenergy.net.

David L Ganje
Ganje Law Offices
Web: lexenergy.net

605 385 0330

davidganje@ganjelaw.com

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Pennington County has a Missing Link

Posted by David Ganje - June 11th, 2020

Pennington County has no surface water drainage ordinance.  Land-use experts tell you that zoning law is created to protect the health, safety and welfare of the citizens of the county or community. I look at water surface water drainage law as protecting the health, safety and welfare of the land and the people who own and use the land.  Good surface drainage rules will also preserve the value of the land if properly employed.  What is man-made surface drainage?  Man-made surface drainage is a drainage project done by digging ditches, dredging, creating channels or using drain tile.

Pennington County does have floodplain ordinances, storm water ordinances and special construction rules affecting drainage on or in designated floodplain areas.  These rules also deal with construction and relocation of roadways. These are specialized rules.  And the rules do not cover the whole of the county. Pennington County is 2700 mi.²   That’s half the size of the state of Connecticut, but most of the people in Pennington County are more pleasing than a good number of people I have met from Connecticut. In mixed rural and urban counties, including Pennington County, landowners sometimes employ water retention techniques to minimize runoff.

When considering surface water drainage law I recognize that South Dakota has established state statutes and well respected case law which addresses some of the principles of surface drainage rights, duties and responsibilities.  This state- wide law however does not have the beneficial effect of home rule.  And the state-wide law does not come close to perfection. No set of laws do.

What’s the missing link in Pennington County?  No home rule overseeing surface drainage issues.  I will list advantages of a home rule meaning an ordinance dealing with countywide drainage.  Most county drainage ordinances in South Dakota include the obligation of the party who wishes to create a new drainage system project to advise the affected landowners downstream.  In other words, before a drainage permit is considered by the county, the affected landowners are notified of the possibility of more water coming down the pike.  That advance notification requirement is not found, by way of example, in state law.  County drainage ordinances also often provide for written consent agreements.  These are so-called written waivers given in writing by landowners who may be servient landowners or who are otherwise affected by a new drainage project.  A provision in an ordinance encouraging cooperation among landowners before a drainage project is started encourages peace.  That’s a good thing – I have handled water disputes in which the sheriff was involved.  This consent provision is also not found in state law.  I also find typical South Dakota surface drainage ordinance requirements include notification in advance to affected landowners.  And not just to the immediate neighbor who may be the adjoining neighbor but to those who may be affected for a distance of 1/2 to 1 mile. This makes sense. This allows an effected landowner to participate in a public permit application process. Advanced notice and participation provides a more balanced picture to a board deciding a surface drainage permit application. Another advantage of a local ordinance is the requirement that the project design and other physical characteristics of the drainage proposal be disclosed to the county.  This is a missing link in a reasonable chain.  A surface drainage ordinance gives a good amount of environmental project decision making to local government.  If the ideal is to allow more local control of decisions affecting local property a missing link can be added.

In surface water there are two categories of landowners or so called two categories of land.  Land is put in classes. This is a legal form of profiling. There are them what gives and them what gets.  Them what gives:  Dominant estate – Any parcel of real property, usually at a higher elevation, which holds a common law or statutory legal right to drain water onto other real property.   Them what gets:  Servient estate – Any parcel of real property, usually at a lower elevation, which is subject to a legal right allowing a dominant estate to drain water onto the lower parcel, that is the so-called servient estate.

David Ganje practices law in the area of natural resources, environmental and commercial law with Ganje Law Office. His website is Lexenergy.net.

David L Ganje
Ganje Law Offices
Web: lexenergy.net

605 385 0330

davidganje@ganjelaw.com

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Is COVID-19 a legal defense?

Posted by David Ganje - May 27th, 2020

Man imposes his laws upon man. James Madison tells us that laws should not be overly voluminous or overly incoherent. Good luck on that score. I used to carry around the written U.S. tax code in law school for our tax class. I figured carrying around the tax code was good enough such that I did not feel compelled to take any other exercise. That was back before laptops when law codes were written on heavy papyrus rolls.

Under contract law an unplanned event is sometimes called an ‘act of God.’ An act of God or what is also called a ‘force majeure event’ is a situation beyond the control of the parties to a negotiated contract. The act of God may prevent completion of the contract. And importantly, an act of God may be grounds for cancellation of the contract. An act of God clause is the adult business version of the dog ate my homework.

How should an unplanned event be written into terms of the contract? In contract writing an event that is not a part of the contract obligation but affects the ability to complete the agreement is a so-called an act of God. Such clauses are a man-made road map showing what to do because of an unplanned event. This type of clause is a little bit like putting the genie back in the bottle after it has been out on the town partying too much. One can find act of God clauses in general sale contracts, livestock purchase agreements, wind energy agreements, right-of-way agreements, easements, oil and gas leases and general construction contracts.

What are these contract-written “events” which will excuse a party from completing a contact? There are as many possible act of God events as man can devise in his mischievous little mind. An act of God event is simply whatever the agreed upon contract says it is. This is man-made law. Here is an example of an actual act of God term in a contract: “The term ‘force majeure’ shall be Acts of God, strikes, lockouts, or other industrial disturbances, acts of the public enemy, wars, blockades, riots, epidemics, lightning, earthquakes, explosions, accidents or repairs to machinery or pipes, delays of carriers, inability to obtain materials or rights of way on reasonable terms, acts of public authorities, or any other causes. . . not within the control of the [contracting party] and which by the exercise of due diligence [the contracting party] is unable to overcome.” Looking at this long contract clause, I will provide the reader with a few comments. First, it is written by someone rushing a bunch of ideas into a single clause. It is too broad and shot-gunny. The clause is not clearly understandable and needs focus. And this contract clause was written by a lawyer who has not thought about or experienced a tornado, flood or a debilitating blizzard.

No question. An act of God clause is one of several underappreciated stepsisters (that’s an East River expression) when parties and their attorneys are drafting a contract. Usually contracting parties give attention to ‘The Money’ or to the conditions of contract performance, not realizing that an act of God event can cause equal if not greater trouble for the parties in the future. How quickly money throws one off the scent. It’s the old story of greed outstripping prudence. The scope of an act of God clause depends on the type of contact, so pay attention my honorable readers. Do not avoid common sense in the early stages when negotiating and drafting any agreement. Otherwise an uninsured accident is just over the next hill. An act of God is a peril outside of man’s control, so the extent to which it can be provided for in a contract, all the better.

An act of God has been defined in South Dakota as “any accident, due directly and exclusively to natural causes without human intervention, which by no amount of foresight, pains, or care, reasonably to have been expected, could have been prevented” While the definition of act of God is broad enough to cover any number of events courts have developed patterns of rulings to establish what are not acts of God. Economic downturns have not recognized by courts in many states as acts of God. Determining whether a pandemic or viral outbreak may be an act of God may depend on defined ‘events’ which excuse obligations under the written terms of an agreement or contract. A meatpacking plant overrun by the virus may qualify as an act of God which excuses performance. An act of God is not defined in black and white law. Such is the existence of man.

David Ganje practices law in the area of natural resources, environmental and commercial law with Ganje Law Office. His website is Lexenergy.net.

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A Whole New Rodeo – The Economy

Posted by David Ganje - May 8th, 2020

I provide the reader with an opinion piece discussing legal problems the business and ag world now face. I have seen this rodeo before. I have ridden the bronco. It hurts when you fall.  (I prefer falling off of a motorcycle — the drop is less severe).

Don’t kid yourself. Don’t act like the coronavirus effect on the region’s economy is something that will just pass. Yes, it will pass. But it will take a damn long time to pass. Further, this will be a depression, and one not known by history because of the intricate modern phenomenon of government regulations which are indelibly integrated into every aspect of the business and agricultural world.

Those of you old enough will remember how long it took to get out of the 1980s ag recession. I have seen and worked in two recessions in my career — and this one is bigger and quite distinct from either of those. Start now to plan. Start now to deal with the complicated financial problems in the ag and ranch world. They are here.

A modern economy is not simple. It is an admixture of market stupidity, unresponsive government programs, bad banking regulations and management, and overall misjudgments by most everyone. Government won’t bail out the problem. Government might help some, but it is not the remedy. Government can’t foresee, can’t plan, can’t address and can’t correctly manage.

I know, I have also worked for government.

So let’s start our review. Consider that when I use the term ‘business’ it means those in business whether ranchers, farmers, suppliers, service providers, manufacturers, banks and financial institutions. All of these I have represented in my career. When I taught bankruptcy law, I used a medical analogy:  I told the aspiring legal scholars that a bankruptcy filing is akin to surgery. Surgery should always be treated as the last option.

In the medical field, a reasonable first option might be 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” 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 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.

David Ganje practices law in the area of natural resources, environmental and commercial law with Ganje Law Office. His website is Lexenergy.net.

David L Ganje
Ganje Law Offices
Web: lexenergy.net

605 385 0330

davidganje@ganjelaw.com

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Commercial law issues in times of a financial crisis

Posted by David Ganje - April 14th, 2020

I present the reader with a short discussion on legal problems the business and ag world now faces. I have seen this rodeo before.  I have ridden the bronco.  It hurts when you fall.  (I prefer falling off of a motorcycle – the drop is less severe)  Don’t kid yourself. Don’t act like the coronavirus effect on the region’s economy is something that will just pass.  Yes, it will pass.  But it will take a damn long time to pass.  Further, this will be a depression, and one not known by history because of the intricate modern phenomenon of government regulations which are indelibly integrated into every aspect of the business and agricultural world.   Those of you old enough will remember how long it took to get out of the 80s ag recession.  I have seen and worked in two recessions in my career.  And this one is bigger and quite distinct from either of those.  Start now to plan. Start now to deal with the complicated financial problems in the ag and ranch world.  They are here.  A modern economy is not simple.  It is an admixture of market stupidity, unresponsive government programs, bad banking regulations and management, and overall misjudgments by most everyone. Government won’t bail out the problem.  Government might help some, but it is not the remedy.  Government can’t foresee, can’t plan, can’t address and can’t correctly manage.  I know, I have also worked for government.

So let’s start our review.  Consider that when I use the term business it means those in business whether ranchers, farmers, suppliers, manufacturers, the oil and gas industry, service providers and financial institutions.  All of whom I have represented in my career.  When I taught bankruptcy law I used a medical analogy: I told the young legal scholars that a bankruptcy filing is akin to surgery.  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 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.

David Ganje practices law in the area of natural resources, environmental and commercial law with Ganje Law Office. His website is Lexenergy.net.

David L Ganje
Ganje Law Offices
Web: lexenergy.net

605 385 0330

davidganje@ganjelaw.com

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Property Rights and Water Rights

Posted by David Ganje - April 9th, 2020

Website: lexenergy.net
Phone: 605-385-0330
Fax: 605-385-0330
davidganje@ganjelaw.com

DAVID L. GANJE
ATTORNEY AT LAW
GANJE LAW OFFICES
17220 N Boswell Blvd
Suite 130L
Sun City, AZ 85372

______________________________________________________________________________

March 27th, 2020

Via Mail and Email

Chairperson
Davison County Drainage Board                                 
200 E. 4th Ave.
Mitchell, SD 57301-2631

Davison County Planning and Zoning Administrator    (via email)

Davison County Auditor    (via email for distribution to parties in interest)

RE: John Millan Permit (Parcel) Number: 03000-10361-301-00, 03000-10361-292-00, 03000-10361-303-00, and 03000-10361-304-00

Dear Chairperson, members of the Davison County Drainage Board and other interested parties:

  1. By way of introduction I represent Kenneth Hostler of 39872 252nd St, Mt. Vernon, SD 57363 with regard to a pending drain tile permit application filed with Davison County by an applicant described in the permit application as follows  “Name: Millan, John  Address: 25563 406th Ave. Mitchell, SD 57301” with a date of February 27th, 2020.  My client owns affected land described as the southeast Quarter of Section 19 Range 61 West in Davison County South Dakota.  The Drainage Board held a hearing on the application on March 17th, 2020.  Upon information received, the Board made a tentative, non-final decision to grant the permit. As of now, the Board’s informal decision to grant the permit has not been formalized.
  2. My client’s property and legal rights are prejudiced by the described drainage project application. I respectfully report to the Drainage Board and Davison County that the formal granting of this drain tile permit application would be an error of law. The permit should not be granted.
  3. The Board and interested parties should be aware of legal problems and issues with the permit application and the Board’s process regarding the application and hearing, even though I have yet to be favored with information that I requested from the county on this matter.  This letter is not intended as an exhaustive discussion of the problems and legal issues.
  4. The hearing on the Millan drainage project, including its process, denied my client due process under the South Dakota and United States Constitutions.
  5. The applicant did not provide information, data, analysis and facts on the matters listed below, which are all legally required by both due process of law and by the plain language of the Davison County Drainage Ordinance. 
  6. The below requirements at a. through h. were not in the application and were not discussed at the hearing by the applicant and the Board.  Further, the Board’s findings and decision did not consider the following relevant, required information, analysis,  data and facts:
  • a. Flood hazard zones
  • b. Erosion potential
  • c. Water quality and supply
  • d. Agricultural production 
  • e. Environmental quality 
  • f. Aesthetics
  • g. Fish and Wildlife values
  • h. Considerations of downstream landowners and the potential for adverse effect thereon including consideration of the following criteria:
  • i. Uncontrolled drainage into receiving watercourses which do not have sufficient capacity to handle the additional flow and quantity of water shall be considered to have an adverse effect.
  • ii. Whether drainage is accomplished by reasonably improving and aiding the normal and natural system of drainage according to its reasonable carrying capacity, or in the absence of a practical natural drain, a reasonable artificial drain system is adopted.
  • iii. The amount of water proposed to be drained.
  • iv. The design and other physical aspects of the drain.
  • v. The impact of sustained flows.
  1. The project, as planned, will cause surface water to flow in unnatural quantities over and onto my client’s property to reach Dry Run Creek. The application states the outlet distributes collected water from lengthy drain tile, which then “flows into Dry Run Creek.”  The proposal is to have the water flow over and onto my client’s property and then into the described creek, Dry Run Creek, which is on my client’s real property.
  2. The location of the outlet just south of my client’s real property will result in excessive and unnatural distributions of surface water onto my client’s agricultural lands, which are used for crop production, given the total linear feet of drain tile proposed in the application.
  3. The application provides the following representations regarding the project: Length of Solid Drain (Feet) is I5,000; the Length of Perforated Drain (Feet) is 300,000 and with a Total Length of all Drain (Feet) of 315,000. The application contains no adequate disclosure of the amount of water to be drained. The applicant’s response to the county’s required “Explanation of Drain Design” states that it is to “Improve farm ground to increase yields.”  These limited representations do not provide enough information from which a reasonable person could make a decision concerning the drain tile permit application.  And among other deficiencies, the application does not explain how the applicant’s project would comply with drain tile industry standards.
  4. County officials considering granting a permit for land-use under the Davison County Comprehensive Plan are to rely upon scientific and technical sources in evaluating the proposed use.  That was not done in this matter.
  5. The ambiguity of the project as described by the applicant prevented the Board from analyzing its potential impact. For example, the project has an “outlet into [1] unnamed intermittent stream which goes into SD DOT ROW and north across interstate into [2] unnamed intermittent stream which outlets in NE ¼ of Sec 30[.]” This can be read as to mean the first unnamed intermittent stream carries surface water directly into the second intermittent stream. Or it can be read to mean the first intermittent stream goes through the interstate and into the SD ROW, which then channelizes water towards and into the second intermittent stream. A reasonable person cannot make an informed decision from this information.
  6. Upon information and belief the named applicant, John Millan, is not the legal owner of the real properties proposed to be tiled in the application.  An approval of a permit under these circumstances indicates a failure of due diligence in analyzing the tile drainage project and the pending application.  It also indicates that an incomplete and inadequate application has been submitted the Board.
  7. The Board acted arbitrarily in preliminarily granting the permit before considering the factors it was required by law to review. The project if approved will cast unreasonable quantities of water onto my client’s property.
  8. The comments and discussion contained in this letter should not be construed as a waiver of any additional claims or issues of my client not stated.  Nothing in this letter operates as a waiver or release of my client’s legal rights, remedies, powers or privileges including the right to assert other claims.  My client reserves all legal and equitable rights in full with respect to this matter.

                                                                                 Sincerely,

                                                                                David L Ganje

Cc: to applicant

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A Court Looks At Problematic Leases

Posted by David Ganje - March 19th, 2020

A well-known lyricist wrote these words: “When logic and proportion have fallen sloppy dead and the white knight is talking backwards.”

I suspect the lyricist did not have leases in mind as she wrote the words. But I take her advice as spot-on when you consider the subject of leases discussed in this opinion piece.

The South Dakota Supreme Court recently decided a quite messy ranch lease case. A ranch lease is a commercial lease. A commercial lease is a  ranch lease. The two are one animal, one species and one thing inseparable.

Those writing and negotiating a ranch lease tend to disregard the wisdom found in the language of a commercial lease. There is little ingenuity and care practiced in the leasing business.

For me the court’s ranch lease decision was deja vu all over again. I’ve seen too many problematic agriculture, farm and commercial leases in my two or three years on this good earth. History repeats itself. It’s easier to follow a pattern from the past when writing and negotiating a lease rather than spending the time and money to get it right.

My comments in this column affect commercial leases, agricultural leases and ranch leases all the same.

Matters related to how a lease will succeed or fail were one of the weaknesses of the written leases in the ranch lease case. As the court discussed the background, it was clear the leases in question did not fully address the lessors and lessees anticipated relationship with a grazing association and with a potential grazing permit. 

No written guidelines were provided in the leases for navigating with a grazing association, or for how a party might obtain a grazing permit. Fraud and deceit claims were also asserted in the litigation.

This trouble could have been avoided by the writing of what I call a legal road map with a legend to the legal map. In legal parlance the leases should have included complete representations and warranties. These are also called “reps and warranties” to insiders in the legal industry.

A representation is a statement in a lease about particular facts, given by the party as true and correct, and given to induce the other party to enter into a lease. A warranty is a promise to legally back up the harmed party if the representation presented in a lease fails or is false.

Representations and warranties allow the parties to allocate responsibility for risks between the lessor and lessee. Typical representations might be a promise that there is no legal condemnation of the property pending, or that there are no disputes or litigation pending or threatened concerning the use and operations of or on the property. Representations and warranties can act in conjunction with due diligence by the prospective lessee. 

Don’t lease property or buy property in the dark. You might run into something you can’t handle.

What do reps and warranties do? They put on the table the legal authority of the lessor to lease the property and importantly these terms govern the use and maintenance of the property during the lease.

A lessor usually wants to lease the property on an “as-is” basis or with limited representations and warranties. This approach eliminates promises about the condition of the property and about the uses to which the lessee may use the property. 

The as-is approach lets the lessor minimize its risk, and reduce any claims in litigation. A lessee on the other hand should want a complete a set of representations and warranties in order to avoid risk, ensure certainty of the nature of the property, and reduce any need for clarifying or enforcing litigation.

No one should rely completely on reps and warranties. Due diligence is still in order. Use your head, not your eagerness to do a deal. It easier to get to a destination with a road map than with my inscrutable intuition.

The lyrics of Grace Slick again provide us with a lesson:  “Remember what the dormouse said; feed your head, feed your head.”

Attorney David Ganje practices in the area of natural resources, environmental and commercial law. His website is  Lexenergy.net

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