Oil Giant Asks Texas Justices to Reject County’s Demand for Taxes

Kinder Morgan, one of the world’s largest oil drilling and pipeline companies, claims a West Texas county suing it for millions in taxes lacks standing.

An oil pumpjack is pictured near Imperial, Texas. (Courthouse News photo/Travis Bubenik)

(CN) — Kinder Morgan asked the Texas Supreme Court on Thursday to dismiss a lawsuit brought by a West Texas county that claims it owes more than $283 million in taxes on its oil and gas holdings in the county.

The Houston-based company is the largest taxpayer in Scurry County, population 19,000, where in the county seat of Snyder some of the largest employers besides Kinder are Walmart and the Texas Department of Criminal Justice, which has a prison four miles west of town.

After Kinder Morgan protested the local appraisal district’s $662.67 million valuation of its oil and gas reserves in the county, and only paid half of its more than $3 million tax bill for the properties, the county banded together with three other taxing units – the Snyder Independent School District, the Scurry County Junior College District and the Scurry County Hospital District – and hired Dallas attorney Brent Lemon in March 2018 to investigate whether Kinder was being truthful about the extent of its mineral holdings.

They hired Lemon on a contingency-fee basis, agreeing to pay him 20% of any tax payments he recovered from Kinder.

Challenging the chief appraiser’s valuation of Kinder’s reserves, Lemon appealed to an appraisal review board, which rejected claims some of Kinder’s reserves had been excluded from the tax rolls.

Lemon then sued Kinder on behalf of the county and the other taxing entities. He claims Kinder underpaid its taxes from 2013 to 2019.

In a motion to dismiss, Kinder claimed the Texas Citizens Participation Act, an Anti-SLAPP statute, should protect it from the litigation because the taxing entities were basing their claims on its free speech in the form of documents it provided to the appraisal district to help it put a value on their property.

The trial court denied the motion, as did the Texas 11th Court of Appeals in Eastland.

Kinder made a new standing argument in a petition for review it filed with the Texas Supreme Court.

It claimed Lemon lacked standing to represent Scurry County and its fellow taxing entities because his contract is a “contingent-fee, tax-ferret engagement” not allowed under Texas law.

According to Kinder, Lemon is a tax ferret because he made his own valuation of property already on the rolls, then tried to convince the appraisal district to adopt these values because he stands to get 20% of any recovery.

“Asserting that already-appraised mineral property should be re-appraised because it was undervalued is a century-old tax ferret tactic,” Kinder states in a brief to the high court.

Appearing remotely before the Texas Supreme Court on Wednesday, Lemon took issue with Kinder’s ferret characterization. He said the taxing units had their own evidence of fraud from a 2014 investigation of Kinder’s holdings by two other law firms.

Those firms sent a letter to Kinder in November 2014 stating, “There is strong evidence that Kinder Morgan routinely reported higher valuations to the investment community and Department of Energy than those filed with the local appraisal districts.”
They said it appeared Kinder had either overstated its assets’ value to investors and federal regulators or understated them for the Scurry County Appraisal District and invited Kinder to discuss this in a meeting.

Kinder refused to meet. In a March 2015 letter from its counsel at Vinson Elkins it said, “Kinder Morgan has always provided the taxing authorities and/or their designated representatives with any production, reserve, or other data that they have requested in connection with the appraisal process.”

Kinder’s counsel, Michael Heidler of Vinson Elkins in Austin, cited a statement from Stephen Campbell, who he said had 15 years of experience appraising oil and gas properties. Scurry County hired Campbell’s employer to appraise Kinder Morgan’s mineral assets and Campbell assessed production and revenue data Kinder provided to the Texas Railroad Commission, which contrary to its name regulates oil drilling in the state.

“Campbell…said he’s not aware of any fraud being committed,” Heidler told the high court. “He also said it would be really easy to badly overstate the value of these old oil and gas interests to someone who has plugged in numbers from public filings without understanding the rates of decline and the high capital costs required to maintain production.”

Justice Eva Guzman asked Heidler if these types of contingency-fee agreements are typical for attorneys hired in cases like this.

“Typical, no,” Heidler said. “Years ago there was a big problem with contingent-fee tax ferrets. The courts and state legislatures largely shut that down. We’ve seen recently a resurgence of these. So that’s what we are worried about in this case is a little cottage industry starting that would go after the oil and gas companies like we’re seeing the taxing units do here.”

He said the Texas Tax Code only allows taxing units to hire attorneys to collect tax bills that have been sent to a taxpayer and gone unpaid.

Heidler also pressed Kinder’s claims that dismissal is appropriate under the Texas Citizens Participation Act.

Kinder argues the trial court erred in holding dismissal was not warranted because it had not beat the 60-day deadline to file the motion after the taxing authorities served it with their lawsuit.

The company claims it should get an extension because the taxing entities waited until filing their second amended complaint to allege Kinder had made misrepresentations to the government in the appraisal process.

Heidler said the 60-day clock for Texas Citizens Participation Act claims does not start until such a fraud allegation is made.

Addressing the tax-ferret question, Justice Brett Busby asked Heidler if there would still be a jurisdiction problem if Scurry County and the other taxing entities had hired another attorney to sue Kinder after Lemon did the investigation.

“Yes, it’s a ratification problem…They don’t have authority to hire a tax ferret and then hire another firm to come in and finish the work,” Heidler said.

The nine Texas Supreme Court justices did not indicate when or how they would rule on the case.

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