Now more than ever, it is important for organizations of all sizes to practice sound cybersecurity hygiene. And although cybersecurity is just one of many issues challenging company operations in response to the spread of COVID-19, it is an issue for which an ounce of prevention is worth a pound of cure.

The U.S. Federal Trade Commission (FTC) and the National Institute of Standards and Technology (NIST) recently issued guidance for information security when employees work remotely. The FTC guidance focuses on what employees can do, while the NIST guidance provides recommendations to organizations. Both are summarized below. But here are some steps to take now, to reiterate to employees the importance of staying safe online:

• Communicate with employees about the increased risk of cyberthreats when working from home.
• Offer practical tips like: Don’t open emails from senders you don’t know ; flag suspicious emails to your IT department; if you are asked to provide sensitive information, be sure the request is legitimate (for example by calling the sender to confirm).
• Consider conducting refresher training to remind employees about the company’s policies around information security.

The FTC guidance, in the form of a blog that can be accessed here, stresses good cybersecurity hygiene. Best practices mentioned in the guidance include:

• keeping software up to date (i.e., installing patches when made available);
• using strong, unique passwords;
• securing portable devices like laptops and mobile phones (including password-protection, locking after time out, and keeping the device physically secure);
• when working remotely with hardcopy versions of sensitive information, ensure that such materials are physically secured and disposed of appropriately (i.e., shredding).

The NIST guidance, accessible here, makes several recommendations from an organizational perspective, starting with the premise that all information security policies around teleworking should be based on the assumption that external environments contain hostile threats. By thinking in this way, organizations can implement measures to mitigate such threats instead of reacting in the event of an incident. The NIST guidance also recommends that companies:

• Develop telework security policies defining the permitted forms of remote access, the types of devices that can use each form of remote access, and the level of access each device will be granted.
• Ensure that remote access servers are secured effectively and configured to enforce telework security policies.
• Secure organization-controlled telework devices against common threats and maintain security regularly.

As employees become more isolated while working from home and for longer periods, the importance of communication grows. The key message for individuals is to be as vigilant, if not more, of tricksters operating on the internet, and for organizations, it is to tighten cybersecurity controls.

If you need assistance on these or other privacy issues, please don’t hesitate to contact Camila Tobon.

As of our client alert issued just last Thursday afternoon, only a few counties in Northern California and San Miguel County in Colorado had issued shelter-in-place orders.

What a difference a few days makes. As the COVID-19 pandemic and the number of deaths in the U.S. continue to skyrocket upward, by the end of today multiple states (including California, New York, New Jersey, Oregon, Pennsylvania, Michigan, Ohio, Louisiana, and Illinois) will have issued statewide shelter-in-place orders. Inevitably, as the dominoes fall, more states and local jurisdictions will follow throughout this week with similar orders.

Here in Colorado, Governor Polis issued a 50% statewide reduction in force order over the weekend on March 22, 2020, and the same day, CDPHE issued an order implementing the governor’s order. This afternoon, Denver issued a shelter-in-place order for Denver County.

As we noted in our alert last week, employees associated with the 16 categories of critical infrastructure and assets identified in Presidential Policy Directive 21 are typically excluded from these orders, but the orders vary considerably in their terms and require close scrutiny, particularly for businesses that operate across multiple jurisdictions with varying (and potentially no) orders in place. Late last week, CISA issued guidance on what constitutes critical infrastructure to assist states and local governments in developing national consistency.

At Davis Graham, we are busy at work analyzing the impacts of these orders on our clients’ businesses and helping our clients deal with multiple issues arising from these orders and the pandemic generally, including:

• How do we operate efficiently when the shelter-in-place orders are inconsistent across jurisdictions in which a client operates?

• What documentation do our clients’ employees need to identify their workforce as critical infrastructure employees?

• When is a declaration of force majeure justified under the circumstances of a pandemic declaration, disaster declaration, and shelter-in-place order?

• When does a positive COVID-19 test result constitute an OSHA-recordable injury?

If you need assistance on these or other issues, or simply want a copy of the most recent shelter-in-place orders impacting your operations, please don’t hesitate to contact a Davis Graham partner.

As we all collectively work on our planning and preparation to respond to the pandemic to keep our businesses, employees, friends, and families safe, we must all be aware of the potential for a shelter-in-place order, similar to the one currently in place in Northern California. Recently, San Miguel County in Southern Colorado issued its own shelter-in-place directive, the first county-wide shelter-in-place directive in Colorado.

Please note that the existing shelter-in-place orders exempt essential employees. The Northern California order states “individuals may leave their residence to provide any services or perform any work necessary to the operations and maintenance of ‘Essential Infrastructure,’ including, but not limited to, public works construction, construction of housing (in particular affordable housing or housing for individuals experiencing homelessness), airport operations, water, sewer, gas, electrical, oil refining, roads and highways, public transportation, solid waste collection and removal, internet, and telecommunications systems (including the provision of essential global, national, and local infrastructure for computing services, business infrastructure, communications, and web-based services), provided that they carry out those services or that work in compliance with Social Distancing Requirements as defined in this Section, to the extent possible.”

Similarly, the San Miguel Order exempts a large category of activities associated with “Essential Businesses” (See Order at page 7). Given the increasing likelihood that a shelter-in-place order will be issued by the federal government, please be aware that the following industries and key resources have assets and infrastructure that are considered “critical infrastructure” pursuant to Presidential Policy Directive 21 and will have some level of exemption.

These industries are:

1. Chemical
2. Commercial facilities
3. Communications
4. Critical manufacturing
5. Dams
6. Defense industrial base
7. Emergency services
8. Energy
9. Financial services
10. Food and agriculture
11. Government facilities
12. Healthcare and public health
13. Information technology
14. Nuclear reactors, materials, and waste
15. Transportation systems
16. Water and wastewater systems

Each of these industries (and other business sectors that support them) has a vital role to play in keeping the nation’s infrastructure functioning during a pandemic.

Despite the lack of coverage in the media, planning for a pandemic has been in the works for years, and industry sector planning guides are available. For example, the see Oil and Natural Gas Sub-Sector Pandemic Guideline here.

OSHA has been hard at work and has developed a guide for Preparing the Workplace for COVID-19, and that guide can be found here.

We at Davis Graham are here to help your business succeed and to keep our community and employees safe during these challenging times. Please feel free to reach out to us if we can assist in any way, from a safe distance of at least six feet away.

Please contact a Davis Graham partner if you have any questions or if we can assist you with any legal needs.

The California Attorney General’s Office issued a revised set of regulations
for the California Consumer Privacy Act (CCPA) on February 10, 2020, correcting an omission from the February 7, 2020 version. The changes are mostly clarifications, but some revised rules relating to consumer requests may require changes or updates to compliance procedures implemented before the law’s effective date of January 1, 2020. Below is a summary.

Are changes required to online privacy policies?
Probably not. A key feature of the initial draft was the requirement to tie the source of collection, purpose for use, and disclosure to third parties to each of the identified Personal Information (PI) categories in the CCPA. This led to disclosures in a chart format with separate columns for (1) the category of PI, (2) the source(s), (3) the purpose(s) of use, and (4) the category of third party to whom PI was disclosed/sold.

The revised regulations require only that the categories of PI disclosed/sold be tied to the category of third party to whom the PI was disclosed/sold, thus eliminating the need to tie the sources and purposes of use to each category. But leaving those disclosures would not be inconsistent with the revised requirements in the regulations and may even be helpful at the time of responding to a request to know the categories of PI collected. So, changes are not strictly necessary.

Are changes required to consumer request procedures?
Maybe. Many changes further clarify already established procedures. However, the changes relating to responding to requests for deletion, requests to know the categories of PI, and requests to opt-out may require changes to procedures, as described below.

Timing. The regulations clarify that the confirmation of receipt is due 10 business
days from receipt of the request and the full response is due 45 calendar
days from receipt of the request.

Deletion. Several changes were made regarding requests for deletion. First, the two-step process for deletion – whereby the consumer would first request, then confirm the request before deletion – is now permissive instead of mandatory. The practical effect is that if a business is willing and able to honor a request for deletion (for an email address from a marketing list, for example) it can do so without requesting a separate confirmation of the request.

Second, a business no longer needs to communicate how it complied with the request (as in whether it erased, deidentified, or aggregated the PI). Instead, the business must simply inform the consumer whether or not it complied with the request.

Third, whereas before a business had to convert a request for deletion to a request to opt-out of sale if the business could not verify the individual’s identity, it is now required only to offer that option to the consumer. Presumably, if there is no sale, then a business does not have to act on requests for deletion it cannot confirm identity for.

Last, the revised regulations clarify that a business may keep a record of requests for deletion to ensure the PI remains deleted from the business’s records.

Access or Request to Know Specific Pieces of PI. In responding to a request for access, a business does not have to search for PI if: (a) the business does not maintain the PI in a searchable or reasonably accessible format; (b) the business maintains the PI solely for legal or compliance purposes; (c) the business does not sell PI and does not use it for any commercial purpose; and (d) the business describes to the consumer the categories of records that may contain PI it did not search because it meets these conditions. This differs from the initial version of the regulations, which contained a vague standard allowing businesses to deny requests for access where there was a substantial, articulable, and unreasonable risk to the security of PI, the consumer’s account with the business, or the security of the business’s systems or networks. That standard was replaced with conditions (a)-(d) above.

The revised regulations also include “unique biometric data generated from measurements or technical analysis of human characteristics” in the list of data elements that cannot be disclosed in response to a request to know. The other data elements include social security, driver’s license, and government-issued identification numbers; financial account number; health insurance or medical identification number; account password; and security question and answer. This change brings the provision in line with the PI data elements in the California breach notification statute.

Requests to Know the Categories of PI. The manner of presenting information in response to this request was modified. Whereas before the information provided had to be tied to the category of PI, now the only linking required is between the categories of PI disclosed/sold and the categories of third parties to whom disclosed/sold. An explanatory chart follows.

October 2019 Draft Regulations	February 2020 Draft Regulations
For each identified category of PI:	The categories of PI collected in the preceding 12 months
The categories of sources	The categories of sources
The business or commercial purpose for collection	The business or commercial purpose for collection or sale
The categories of third parties to whom the business sold or disclosed PI	The categories of PI sold in the preceding 12 months, and for each, the category of third parties to whom sold
The business or commercial purpose for selling/disclosing PI	The categories of PI disclosed for a business purpose in the preceding 12 months, and for each, the category of third parties to whom disclosed

These modifications may require changes to the way information is presented to consumers in response to a request to know the categories of PI.

Requests to Opt Out of Sale. The rules no longer require businesses to communicate requests to opt out of sale to all those third parties to whom PI was sold in the prior 90 days. Instead, the requests must be communicated to the third parties to whom PI was sold after the consumer’s request was received but before it was acted upon.

Requests received by Service Providers. Service providers are no longer required to provide consumers with information on how to submit requests directly to the business on whose behalf the service provider processes the PI. Instead, a service provider that receives a request to know or to delete may either act on the request or inform the consumer that the request cannot be acted upon because it was sent to a service provider.

Do businesses still have to provide an online web form for consumers to submit requests?
The revised regulations provide that businesses operating exclusively online need provide only an email address for consumers to submit requests. This follows the CCPA’s text and eliminates a requirement in the earlier draft regulations for businesses with a website to offer a web form for submitting requests. But if a web form is provided, the business can still provide it, besides the email address.

What changed in the regulations regarding service providers?
A major point of clarification in the October 2019 version of the draft regulations was the statement that service providers could collect PI on a business’s behalf. This clarification remains, but the revised regulations include limitations on what service providers can do with the PI. Specifically, a service provider is prohibited from retaining, using, or disclosing PI obtained while providing services except:

• To perform the services specified in the written contract with the business;
• To retain or employ a subcontractor, where the subcontractor meets the requirements for a service provider;
• For internal use by the service provider to:
  • Build or improve the quality of its services,
  • provided that the use does not include building or modifying household or consumer profiles or cleaning or augmenting data from another source;

• To detect data security incidents, or protect against fraudulent or illegal activity; or
• For purposes of:
  • Compliance with federal, state, or local laws,
  • Compliance with a civil, criminal, or regulatory inquiry, investigation, subpoena, or summons by federal, state, or local authorities,
  • Cooperation with law enforcement agencies concerning conduct or activity that the service provider reasonably and in good faith believes may violate federal, state, or local law, and
  • Exercising or defending legal claims.

While the conditions outlined above are generally broad, they do impose limitations on service providers’ use of PI that are arguably stricter than the limitations in the statute itself. Recall that the statute allows service providers to use PI received from a business “for the specific purpose of performing the services specified in the contract [with the business] or as otherwise permitted by [the CCPA].” This last phrase was read to allow service providers to use PI for any business purpose enumerated in the statute, which included a list that was broader than the limitations in the revised regulations.

If a service provider is using client data for a business purpose other than building or improving the quality of its services or for detection of security incidents, fraud, or illegal activity, those processing activities merit further review to determine whether they would follow the limitations in the regulations.

What do the regulations say about employee data?
The revised regulations state, in the definitions, that the collection of employment-related information, including to administer employee benefits, is considered a business purpose. The revised regulations also clarify that, in terms of providing notice, a “Do Not Sell” link is not required in the employee notice and the notice may include a link to, or copy of, the business’s policy for job applicants, employees, or contractors, rather than the website privacy policy. These clarifications give businesses greater direction on providing notice to employees and comfort regarding employee data handling as consistent with the business purposes defined in the CCPA.

What other changes are helpful from a business’s perspective?
The revised CCPA regulations include several other changes that are helpful from a business perspective. They are:

• The definition of household was narrowed so only those individuals residing at the same address who share a common device or the same service provided by the business are considered a household. Before, anyone occupying a single dwelling was considered a household.
• The regulations clarify that collecting IP address alone, without linking it to a particular consumer or household, would not constitute Personal Information.
• Under the prior version, a business would need to get the consumer’s consent to use PI for a purpose other than those communicated in the privacy policy. The revised version is more consistent with guidance from the Federal Trade Commission, requiring consent only if the new purpose is materially different than what was previously disclosed.
• The revised regulations allow sale of personal information with consumer consent absent a “Do Not Sell” link. The initial version included a prohibition on sale absent the link. Now, if a business receives the consumer’s consent, it can sell data even if it does not have the link on its website.
• The 2020 draft clarifies that data on archive or backup systems subject to a request to delete need not be targeted for deletion unless the system is restored to an active system or next accessed or used for a sale, disclosure, or commercial purpose. Thus, accessing an archive or backup system for internal controls would not require targeting for deletion following a consumer request.
• The revised regulations shield certain household information from requests for access. Where a household does not have a password protected account with the business, a business does not have to comply with a request for specific pieces of PI unless all of the consumers in the household jointly make the request, the business individually verifies the identity of each member, and the business verifies that each individual making the request is currently a member of the household.

What are the next steps for the regulations?

The comment period closes on February 25, 2020. A final draft is expected shortly thereafter. The final draft must then undergo review by the Office of Administrative Law before formal adoption by the Secretary of State. This process will take at least 30 working days after the final draft of the rules and supporting documentation are published.

If you have questions on the revised regulations, or the CCPA, please contact Camila Tobón at camila.tobon@davisgraham.com
or 303-892-7467.

The year 2020 is bringing several new employment law changes. Below is a summary of key employment law trends and new legislation to consider in 2020.

DOL Defines Joint Employment/Independent Contractor Status
Effective March 16, 2020, a new final rule from the U.S. Department of Labor (DOL) may limit the scope of joint employment liability for wage and hour matters and lead to fewer employers being considered “joint employers” under the Fair Labor Standards Act (FLSA). Overall, this is good news for employers.

Generally, a joint employer relationship is characterized by two or more companies that exercise some degree of control and supervision over the work or working conditions of the same individual. Where parties are found to be “joint employers,” both companies—including the company that is not the actual employer—will incur many of the employment-related obligations that an actual employer would owe to its employees.

The DOL’s new rule discusses the following four-factor balancing test to determine whether an entity is an “employer”:

1. Does the alleged employer hire or fire?

• The employer must have actual exercise of control—not just the “power” to hire or fire.

2. Does the alleged employer supervise and control the employee’s work schedule or conditions of employment to a substantial degree?

• This is not limited to day-to-day supervision.

3. Does the alleged employer determine the employee’s rate and method of payment?

• The DOL states that an entity requiring suppliers to pay its workers a minimum hourly wage higher than the federal minimum wage will not be considered a joint employer; a simple wage floor does not equate to control over how and how much a supplier should pay its employees.

4. Does the alleged employer maintain the employee’s employment records?

• Satisfaction of this factor alone will not establish joint employment. Further, the DOL clarified that records maintained by the potential employer regarding compliance with contractual agreements will not be considered “employment records.”

Once effective, this new rule will provide additional clarification and support to businesses/employers that have some joint employment exposure. Employers should examine their policies, procedures, and practices to see how they fit into the balancing test.

EEOC and the NLRB Revise Their Prior Anti-Arbitration Policies
On December 17, 2019, the U.S. Equal Employment Opportunity Commission (EEOC) rescinded its “Policy Statement on Mandatory Binding Arbitration of Employment Discrimination Disputes as a Condition of Employment.” This is also good news for employers. This policy had asserted, “The use of unilaterally imposed agreements mandating binding arbitration of employment discrimination disputes as a condition of employment harms both the individual civil rights claimant and the public interest in eradicating discrimination.” The Commission announced that it made this decision in light of recent U.S. Supreme Court decisions holding that “agreements to arbitrate employment-related disputes are enforceable under the Federal Arbitration Act for disputes between employers and employees.” The EEOC noted, however, that its rescission does not limit the Commission’s ability, or the ability of anyone else, to challenge the enforceability of an arbitration agreement.

Further, the National Labor Relations Board (NLRB) announced in its decision, Case No. 06-CA-143062, United Parcel Service, Inc., and Robert C. Atkinson, Jr., that it will return to a more employer-friendly standard in determining whether to defer to an arbitrator’s resolution of grievances alleging illegal disciplinary or firing practices under the National Labor Relations Act (NLRA). Under this standard, the NLRB will defer to the arbitrator’s decision where: (1) the arbitral proceedings appear to have been fair and regular; (2) all parties have agreed to be bound; (3) the arbitrator considered the unfair labor practice issue; and (4) the arbitrator’s decision is not clearly repugnant to the NLRA.

The recent positions of the EEOC and NLRB are consistent with recent U.S. Supreme Court cases favoring arbitration.

DOL Amends FLSA Regulations
Effective January 1, 2020, the DOL changed many of its regulations of the Fair Labor Standards Act (FLSA). The most publicized change was the increase to the salary basis test. As background, in order to properly classify an employee as overtime exempt under the FLSA, the employee must meet a minimum salary threshold (i.e., the salary basis test) and establish the types of responsibilities and knowledge required (i.e., the duties test).

Under the new rule, the salary basis requirement increases from $455 per week (or $23,660 per year) to $684 per week (or $35,568 per year). The revised rules further permit employers to count nondiscretionary bonuses and incentive payments (including commissions) paid at least annually, to satisfy up to 10% of the standard salary basis test.

In addition, the rule increases the minimum annual salary for highly compensated employees (who, because they fall into this category, are subject to minimal duty test requirements) to $107,432 (up from $100,000).

The DOL estimates that an additional 1.2 million workers will be entitled to minimum wage and overtime pay as a result of the increase to the standard salary threshold, and that over 100,000 workers will be entitled to overtime pay as a result of the increase to the highly compensated employee compensation threshold.

National Minimum Wage Increase
Beginning January 1, 2020, federal contractors must pay covered workers at least $10.80 per hour. The DOL also gave notice that beginning January 1, 2020, covered tipped employees performing work on or in connection with covered contracts must be paid a cash wage of at least $7.55 per hour.

Effective January 1, 2020 (or soon thereafter), the minimum wage increased (or will increase) in 26 states and several municipalities, such as Arizona: $12 an hour (Flagstaff: $13 an hour); Colorado: $12 an hour (Denver: $12.85 an hour); California: $13 an hour if the employer has 26 or more employees and $12 an hour for 25 or fewer employees (special rates in various municipalities throughout the state); and Washington: $13.50 an hour.

Therefore, companies should be mindful of these changes and update their payroll, policies, and posters accordingly.

Colorado Overtime & Minimum Pay Standards Order
The Colorado Overtime and Minimum Pay Standards (COMPS) Order (Wage Order No. 36) was finalized on January 22, 2020 and will go into effect on March 1, 2020. The most notable provisions in COMPS are an increase to the salary threshold for overtime exemptions and an expansion of the minimum wage order’s coverage to all private employers.

The initial draft of the Order proposed a minimum exempt salary threshold of $42,500, beginning on July 1, 2020, but the finalized version will instead delay and limit the increase to $40,500 on January 1, 2021. As explained above, the new federal exempt salary threshold, effective January 1, 2020, is $35,568, and the new state rules keep the wage threshold at the current federal level for 2020. COMPS will increase the threshold by $4,500 in 2022 and then $5,000 every year after that until it reaches $55,000 in 2024 (after which it will be adjusted by the same consumer price index as is the Colorado minimum wage).

Additionally, whereas Colorado’s Minimum Wage Order previously restricted coverage to four specific industries—retail and service; food and beverage; commercial support service; and health and medical industry—COMPS will presumptively apply to workers in all industries, with limited statutory exceptions.

Colorado Wage Payment Law
Effective January 1, 2020, the Colorado Wage Payment Act provides that an employer (which is defined the same as in the FLSA but also includes foreign labor contractors, migratory field labor contractors, and crew leaders) commits “wage theft,” a felony, if the employer willfully refuses to pay wages or other forms of compensation to its employees. The Act also defines intentionally paying a wage less than the minimum wage as theft, which is a felony when the theft is of an amount greater than $2,000.

Previously, the Act exempted employers from criminal penalties when the employer was unable to pay wages or compensation because of a Chapter 7 bankruptcy action or another court action resulting in the employer having limited control over his or her assets. The Act has removed this exemption.

Colorado Wage Protection Act Rule
The Colorado Wage Protection Act Rule was also amended in December of 2019 by the Colorado Department of Labor and Employment in response to the Colorado Court of Appeals Decision, Nieto v. Clark’s Market, Inc., June 27, 2019, which held that a vacation policy where employees forfeited earned vacation pay if they did not comply with company policy did not violate the Colorado Wage Claim Act (CWCA). Rule 2.15, CCR 1103-7, clarifies that although employers may cap “at a year’s worth of vacation pay” employees’ vacation time may not be forfeited.

Colorado Equal Pay for Equal Work Act
The Colorado Equal Pay for Equal Work Act, effective January 21, 2021, falls in line with similar state laws throughout the country. It contains pay equity and pay transparency provisions, a salary history ban, and requirements that employers provide notice of promotional opportunities and position wage rates. It also provides an incentive to employers that conduct proactive self-audits of compensation practices. The main provisions are summarized below:

• The Act prohibits all employers employing Colorado employees from discriminating in wages among employees based on sex (which also includes gender identity) or sex in combination with another protected status, unless differences are based upon seniority, merit, geographic location, a system that measures earning by quantity or quality of production, education/travel/experience if reasonably related to work in question, or travel.
• The Act also contains pay transparency requirements by prohibiting employers from preventing employees from discussing their own compensation information with others and prohibiting employees from doing so by requiring them to sign a waiver.
• Salary history inquiries are also prohibited under the Act. Employers may not seek the wage history of a prospective employee, rely on the wage history of a prospective employee to determine a wage rate, or discriminate or retaliate against a prospective employee for failing to disclose wage history.
• The Act also contains unique notice requirements, which require that employers make reasonable efforts to announce, post, or make known all opportunities for promotion to current employees on the same calendar day AND require that employers disclose in each job opening posting the compensation or compensation range.
• There are also recordkeeping requirements and the Act mandates that employers maintain records of job descriptions and the wage rate history of each employee for the duration of employment plus two years after the end of employment.
• An applicant or employee who believes an employer has violated the pay equity section of the Act has two years to bring a lawsuit, and there is no requirement to file a charge with the Colorado Civil Rights Division. Each time an employee receives a paycheck with a discriminatory wage rate, a new violation occurs for purposes of the two-year statute of limitations. An aggrieved employee may obtain relief for a back-pay period not to exceed three years.
• Employers may also be liable for the differences between what the employee was paid and what the employee would have been paid if there was no violation, plus an equal amount as liquidated damages. However, liquidated damages may be avoided if the employer can demonstrate good faith and reasonable grounds for believing there was no violation. Good faith can be shown if the employer, within two years prior to the lawsuit being filed, completed a thorough and comprehensive pay audit of its workforce, with the specific goal of identifying and remedying unlawful pay disparities.
• For violations of the job-posting portion of the Act, employees may file a written complaint with the director of the Colorado Department of Labor within one year of learning of the violation. If the DOL determines that a violation occurred, an employer may be subject to fines between $500 and $10,000 per violation.
• In addition, if an employee demonstrates a violation of the posting requirements of the Act, the court may order appropriate relief, including a rebuttable presumption that any records the employer was required, but failed to keep, contained information favorable to the employee’s claim. An employee may also be entitled to a jury instruction that failure to keep records can be considered evidence that the violation was not made in good faith.

In short, the Act creates significant new risks and responsibilities for employers. While the new requirements do not take effect until January 1, 2021, Colorado employers should consider reviewing their pay policies, postings, and practices with both Human Resources and employment law counsel.

The Employment & Labor Group of Davis Graham & Stubbs LLP works to assist and advise clients on virtually every aspect of the employment relationship. Please contact Lana Rupprecht or Katie Brown if you would like to further discuss these updates.

The Committee on Foreign Investment in the United States (CFIUS) is an interagency body of the federal government that is tasked with the oversight of inbound foreign investment involving U.S. businesses. For decades, CFIUS has been exercising its statutory authority under the Defense Production Act of 1950 to review and investigate transactions that would result in a foreign party gaining control of a U.S. business and occasionally making recommendations to the president of the United States to block, and even unwind, transactions that are deemed to present unresolvable national security concerns.

On January 17, 2020, the U.S. Department of the Treasury published new regulations (to take effect on February 13, 2020), which dramatically expand the scope of CFIUS’s jurisdiction, for the first time covering: (i) non-controlling investments in U.S. businesses engaged in “critical technology” and “critical infrastructure,” as well as those that handle large amounts of personal data of U.S. citizens (so called “TID” businesses), and (ii) foreign acquisition, by purchase, lease, or concession, of real estate that is located near military installations. The regulations also create a number of mandatory filing obligations under what has historically been a voluntary disclosure system.

The implications of the new regulations will be far reaching, as they now cover a wide range of investment activity that was previously exempt from review. Early stage advanced manufacturing and technology companies that are seeking foreign financing will have to be especially mindful of the rights and privileges they are willing to grant their investors, and natural resources companies operating on public lands in the western U.S. will have to pay close attention to the proximity of their assets to sensitive government facilities.

For more information about how these new regulations could affect your company, please contact Joel Benson or Almira Moronne.

On January 23, 2020, the Environmental Protection Agency and the Department of the Army, Corps of Engineers (collectively referred to as the “Agencies”) finalized the long-anticipated Navigable Waters Protection Rule (“2020 Rule”) to define “waters of the United States” regulated under the Clean Water Act (“CWA” or “Act”). The CWA establishes the basic structure for regulating discharges of pollutants into the nation’s “navigable waters,” which is vaguely defined in the Act as “waters of the United States, including the territorial seas.” This definition has proved difficult to apply to the myriad of different types of water bodies within U.S. jurisdiction, resulting in numerous judicial and administrative efforts to determine the scope of the CWA. The 2020 Rule is the final step in the Trump administration’s plan to replace the Obama administration’s definition of “waters of the United States” set forth in the 2015 Clean Water Rule (“2015 Rule”). To complete the first step, on October 22, 2019, the Agencies published the final rule to repeal the 2015 Rule (“Repeal Rule”) and returned to the pre-existing 1986 rule and subsequent agency guidance documents. The Repeal Rule became effective on December 23, 2019, although it has already been challenged in numerous actions filed in federal court.

The 2020 Rule redefines the nature and scope of the waterbodies that the Agencies have authority to regulate under the CWA. As instructed by Executive Order 13778 (February 28, 2017), the Agencies generally modeled the 2020 Rule on the four-justice plurality opinion authored by Justice Antonin Scalia in Rapanos v. United States, 547 U.S. 715 (2006), rather than the “significant nexus test” approach described in Justice Anthony Kennedy’s concurring opinion in that case. In addition to the 2020 Rule itself, the Agencies released numerous fact sheets and supporting documents, including an overview of the 2020 Rule and the manner in which the Agencies intend to implement the 2020 Rule. The Agencies also intend to hold a public webcast on the 2020 Rule on February 13, 2020.

Several of the key divergences from the 2015 Rule include:

• The four categories of waters that will be federally regulated under the 2020 Rule are: (1) the territorial seas and traditional navigable waters; (2) perennial and intermittent tributaries to those waters; (3) lakes and ponds, and impoundments of jurisdictional waters; and (4) wetlands that are adjacent to jurisdictional waters (other than waters that are themselves wetlands).

• By contrast, the 2015 Rule defined eight categories as waters of the U.S., incorporating significantly more waters into the definition of “waters of the United States” than will be covered by the 2020 Rule. Particularly relevant in the westernmost states, certain ephemeral streams and other ephemeral features, including some prairie potholes and western vernal pools, were regulated under the 2015 Rule. Ephemeral features are specifically excluded from the 2020 Rule’s definition.

• In addition, many wetlands that would have been regulated under the 2015 Rule as waters located within specified distances of jurisdictional waters will no longer be regulated because they are not physically “adjacent” to other jurisdictional waters as required by the 2020 Rule. “Adjacent wetlands” are now defined as “wetlands that abut or have a direct hydrological surface
  connection to other waters of the United States in a typical year.” This includes wetlands separated from jurisdictional waters only by a natural berm, bank, dune, or other similar natural feature but not other wetlands. A “typical year” is based on a rolling 30-year period and is the subject of an agency fact sheet.

• There are 12 categories of exclusions in the 2020 Rule. As noted, ephemeral features that flow only in direct response to precipitation, including ephemeral streams, swales, gullies, rills, and pools, are now excluded from the definition of “waters of the United States.” Diffuse stormwater runoff and directional sheet flow over upland are now also excluded. Some of the 2020 Rule exclusions were also exclusions in the 2015 Rule, including groundwater, certain waste treatment systems, artificially irrigated areas, artificial lakes and ponds in dry land, and previously converted cropland.

The 2020 Rule will go into effect 60 days after it is published in the Federal Register.

The Environmental Group of Davis Graham & Stubbs LLP works to ensure compliance, minimize potential exposure to environmental liability, and win cases when litigation arises. Please contact Zach Miller, Mave Gasaway, Andrea Bronson, or Kate Sanford if you would like to discuss these developments further or other water quality matters of concern to your company.

Three recent air quality developments will have a significant impact on regional oil and gas facilities: (1) the Colorado Air Quality Control Commission’s (“AQCC”) December 2019 rulemaking effort; (2) an expanded Environmental Protection Agency (“EPA”) Clean Air Act Audit Program for existing owners of oil and gas facilities; and (3) the EPA’s reclassification of Colorado’s Denver Metro/North Front Range ozone nonattainment area to Serious nonattainment. Each of these developments is addressed more specifically below, with links to relevant documents.

Colorado Air Quality Control Commission’s Rulemaking Effort

On December 19, 2019, the AQCC completed a rulemaking effort that significantly revised AQCC’s Regulation Numbers 3 and 7. The changes to the regulations are primarily aimed at achieving emission reductions from Colorado’s oil and gas industry. The AQCC’s amended regulations follow several months of stakeholder input and the approved changes largely track an initial proposal from the Air Pollution Control Division (“Division”).

Most notably, AQCC reorganized Regulation Number 7 and added several additional air pollution control, operational, and recordkeeping requirements effecting upstream oil and gas sources.

• The statewide storage tank control threshold was lowered to 2 tons per year (“tpy”).
• Air pollution controls are now required at storage tank truck loadout facilities. Specifically, an upstream oil and gas facility that has truck loadout throughput of more than 5,000 barrels per year must control truck loadout emissions.
• Oil and gas facilities now must submit an annual emission inventory of VOC, NOx, CO, methane, and ethane. Although the emissions inventory is subject to additional refinement and clarification in the coming months, recordkeeping requirements begin in July 2020 and the first emissions inventory report is due to the Division in January 2021.
• Leak detection and repair (“LDAR”) inspection frequencies were increased based on proximity to “Occupied Areas” as defined by Regulation 7. The exact implications of this new requirement are not yet entirely clear, but based on the draft regulatory language, well production facilities located within 1,000 feet of an Occupied Area must conduct alternate instrument monitoring method (“AIMM”) inspections on an increased frequency. Specifically, facilities with emissions greater than 12 tpy must conduct monthly LDAR inspections and facilities with emissions greater than 2 tpy andless than 12 tpy must conduct quarterly inspections. This change was proposed by a group of local communities and the AQCC’s adoption of the proposal was unexpected, not only because the Division did not support the alternate proposal, but also because the proposal’s language did not create clear or obvious compliance standards.
• LDAR frequency was increased state-wide for (1) semi-annual AIMM inspections of components at natural gas compressor stations with VOC emissions greater than 0 tpy and less than 12 tpy, and (2) Semi-annual AIMM inspections of components at well production facilities with VOC emissions equal to or less than 2 tpy and greater than 12 tpy.
• The AQCC promulgated a new comprehensive regulatory program for the natural gas transmission and storage segment. The program aims to reduce emissions from the transmission segment through an iterative performance-based program. The program requires operators to reduce methane emissions by meeting annual emissions intensity targets by using company specific best management practices (“BMPs”).
• The Commission adopted a requirement to employ storage tank measurement systems to determine the quantity of the liquid at well production facilities, natural gas compressor stations, and natural gas processing plants constructed on or after May 1, 2020. Accordingly, any facilities that are constructed after January 1, 2021, must have storage tank management systems in place that determine both quality and the quantity of the liquid. This requirement also applies to storage tanks at existing well production facilities, natural gas compressor stations, and natural gas processing plants that are modified by adding storage tanks.

The AQCC also changed several sections of Regulation Number 3 in the recent rulemaking. Of note, in an effort to clarify applicable regulatory deadlines, the AQCC revised the definition of Commencement of Operation for oil and gas well production facilities.

The final regulatory language is expected to be published in Colorado Register in January 2020 and become effective in February 2020.

The AQCC is expected to hold another significant oil and gas rulemaking hearing in late 2020. During the hearing, rule topics are expected to include regulation of preproduction emissions, zero bleed pneumatic controllers, increased LDAR repair time frames for facilities near occupied areas, and continuous methane emissions monitoring.

EPA’s Expanded Clear Air Act Audit Program for Oil & Gas Facilities

On December 19, 2019, EPA temporarily expanded its Clean Air Act audit program for oil and natural gas exploration and production facilities. The program is now available to current owners of upstream oil and natural gas facilities who voluntarily initiate a self-audit to identify, correct, and self-disclose Clean Air Act violations within the next twelve months. Note however, the program is not available if the EPA or a state has already discovered Clean Air Act noncompliance at oil and natural gas production facilities that an owner/operator proposes to audit under this Program, e.g., a notice of violation has been issued or there is an ongoing enforcement action or active investigation for violations at a facility.

Existing owners choosing to participate in the program must enter into the Existing Owner Program Agreement Template with EPA found here. A key component of the Agreement Template is that participating owners must assess storage tank battery vapor control system design. This design assessment is not necessarily otherwise required in all jurisdictions and thus compliance with the design assessment may be expensive for some owners and may require installation of various facility upgrades, in order to ensure the facility is properly designed. The Agreement Template also requires ongoing disclosures and updates to EPA during the course of the self-audit. However, in exchange, pursuant to the terms of the Agreement Template, the EPA will not impose civil penalties for violations that are discovered, corrected, and disclosed through the self-audit and the owner will not be subject to future enforcement action by the EPA as to the disclosed violations.

EPA’s Reclassification of Colorado’s Denver Metro/North Front Range Ozone Nonattainment Area to Serious Nonattainment

On December 26, 2019, the EPA reclassified the Denver Metro/North Front Range ozone nonattainment area (“Denver Area”) from Moderate to Serious nonattainment under the Clean Air Act.[1] In August 2019, based on an evaluation of air quality data collected from 2015 to 2017, EPA determined that the Denver Area did not meet the 2008 ozone national ambient air quality standards (“NAAQS”) within the relevant attainment timeframe and proposed that the Denver Area be reclassified to Serious nonattainment for ozone. After accepting public comment, the EPA issued its final redesignation of the Denver area as Serious nonattainment. The redesignation will become effective on January 27, 2020.

EPA’s action to reclassify the Denver Area requires Colorado to revise its State Implementation Plan, known as a SIP, in order to attain the 2008 ozone NAAQS and adopt new categories of controls, or reasonably available control technologies, on emissions sources. Colorado must submit SIP revisions to EPA by July 20, 2021.

One of the most notable impacts of the reclassification to Serious nonattainment is that within the Denver Area the air quality “major source” threshold lowers from the potential to emit (“PTE”) 100 tpy to 50 tpy of volatile organic compound (“VOC”) or oxides of nitrogen (“NOx”) emissions (precursors to ozone). This means that more oil and gas facilities in the Denver Area may be classified as “major sources” and will be subject to significantly more stringent, costly, and burdensome construction and/or operating permitting requirements. For example, new facilities that have the potential to emit between 50 and 100 tpy of VOCs previously would have been considered true or synthetic minor sources not subject to Non-Attainment New Source Review (“NANSR”) review, now will now be considered major sources and will be required to apply for and obtain a NANSR permit before construction. Additionally, existing sources with a potential to emit above 50 tpy of VOCs are also now required to submit a Title V application within 12 months of the effective date of the redesignation—January 27, 2021.

More sources will also be subject to Lowest Achievable Emission Rate (“LAER”), emission requirements, the most stringent emission limitation under the Clean Air Act which requires evaluation of the lowest achievable emission rate for the source, regardless of cost. Lastly, more sources will also be required to obtain emission offsets for new emissions of criteria pollutants at ratio of 1.2:1. Generally, this means that if a new source is expected to result in 50 tpy of VOC emissions, the applicant must identify 60 tpy in emission offsets elsewhere. Many affected sources were not subject to these requirements under the Moderate classification.

If Colorado continues to fail to attain the NAAQS by the applicable deadline or make reasonable further progress toward attainment, then the Denver Metro/North Front Range ozone nonattainment area may be again reclassified from Serious to Severe. As a Severe nonattainment area, the major source threshold will further drop from 50 tons per year PTE to 25 tons per year PTE. Major sources in a Severe area must obtain emission offsets for new emissions of criteria pollutants at ratio of 1.3:1. Finally, SIPs for severe ozone nonattainment areas must include sanction provisions, such as an emission fee on each major source off VOC emissions, to be collected by the state if the area misses its attainment deadline.

The Environmental Group of Davis Graham & Stubbs LLP handles air quality regulatory, transactional, and litigation matters for its clients in the oil & gas and other industry sectors. Please contact Randy Dann, Will Marshall, Shalyn Kettering, or Kate Sanford if you would like to discuss these three developments further, or other air quality matters of concern to your company.

[1]
The nonattainment area includes Boulder, Denver, Jefferson, Douglas, Broomfield, Adams, and Arapahoe Counties and parts of Larimer and Weld Counties.

The Public Utilities Commission (PUC) published a Notice of Proposed Rulemaking to amend its Rules Regulating Pipeline Operators and Gas Pipeline Safety (“Pipeline Safety Rules”). The Notice recommends significant proposed changes to the Pipeline Safety Rules and moving the Rules from their present location within the Gas Utilities and Pipeline Operator Rules at 4 Code of Colorado Regulations (CCR), 723-4, to a new, standalone Part 11, 4 CCR, 723-11. The PUC’s notice of the proposed rules states that, overall, the proposal is for “rule revisions that significantly alter and aim to improve upon pipeline safety oversight, both substantively and administratively, at the Commission.”

Broadly speaking, the proposed rules, available here, attempt to make the process around pipeline safety more public, clear, and transparent. For example, the proposed rules would require all filed reports to be publicly available and all Notices of Proposed Violation, Notices of Action, pleadings, and decisions to be filed publicly. The proposed rules also provide a revised methodology for calculating civil penalties in an effort to provide clarity to both operators and the public. Relatedly, the rules envision pared-down discretion for the Chief of Pipeline Safety and an increased procedural and oversight role for the PUC Commissioners.

The scope of the proposed rules includes all gas public utilities, all municipal or quasi-municipal corporations, transporting natural gas or providing natural gas services, all operators of master meter systems, and all operators of pipelines transporting gas in intrastate commerce. The last category includes gas gathering operators although certain provisions are tailored to the location and size of the gathering systems involved. A typographical error in the proposed rules included interstate pipelines within the scope. The federal government is the enforcement authority for interstate pipelines.

The purpose of the rules is to enforce and administer, in cooperation with the United States Department of Transportation, Pipeline Hazardous Materials Safety Administration (PHMSA), the provisions of the Natural Gas Pipeline Safety Act.

The proposed rules include updates for technical accuracy, recent changes in federal law, and general clarity. The Commission’s notice requested that stakeholders review the proposed technical updates and processes and comment on proposed revisions, clarity, or efficiencies.

Though the proposed rules aim to make pipeline safety information more transparent and publicly available than what exists under the current rules, there is some concern that such a wholesale rewrite of the rules was not preceded by a robust stakeholder process. The Notice invites stakeholders to continue to raise both rule and statutory considerations as well as statutory recommendations.

The proposed rules also solicit comments on a number of other matters: (1) whether additional rule considerations are necessary, (2) whether additional reporting or support, including mapping or other reporting considerations, should be provided in addition to, or as encompassed in, reports already provided; (3) whether, and to what extent, current and supplemental report filings should be publicly available, or if confidential protections are appropriate; and (4) whether to permit certain direction from the Chief of Pipeline Safety through the Commission’s website or other means that can be updated as needed.

In two other notable changes, the PUC first proposes a fee assessment in order to fund additional inspection staff and additional staff collaboration with other state and federal agencies that oversee pipeline safety. For gas distribution pipeline operators, the proposed fee would be per number of customers served. For gas gathering operators, the proposed fee would be per mile of pipeline as submitted on the operator’s annual report.

Second, the proposed rules include requirements specific to small operators, and the Notice specifically solicits comments from these small operator stakeholders regarding the staff’s proposed approach and seeks recommendations on improvements for the efficient and effective regulation of this operator group.

Written comments are requested by January 17, 2020. The Commission encourages commenters to file through the Commission’s E-Filing system at:

https://www.dora.state.co.us/pls/efi/EFI.homepage.

A filer must be registered to use the E-Filing system. Click on “Filer Registration” on the E-Filing homepage to register. All comments filed in the E-Filing System will be publicly available (without registration) by typing the proceeding number in the search box on the homepage. The proceeding number is: 19R-0703GPS. Responsive comments are requested on or before January 31, 2020. An administrative law judge will hold a hearing on the proposed rules at 9:00 a.m. on February 10, 2020 at the PUC’s offices, which are located at 1560 Broadway, Suite 250, Denver, Colorado. Interested persons may provide oral comments at the public hearing unless the ALJ deems oral presentations unnecessary.

Davis Graham & Stubbs LLP’s attorneys have experience with regulatory proceedings affecting the oil and gas sector and frequently represents clients in related rulemakings. Please contact Judy Matlock, John Jacus, or Shalyn Kettering for further discussion on this upcoming rulemaking.

In an Order issued on September 30, 2019, the United States Bankruptcy Court for the District of Colorado, construing Utah law, held that a Gas Gathering and Processing Agreement and a Salt Water Disposal Agreement each constituted covenants that run with the land and could not be extinguished through a Section 363 bankruptcy sale.[1]
In the Order, the bankruptcy court expressly distinguished the recent In re Sabine Oil & Gas Corp.
decision[2]
that sent shockwaves through the upstream and midstream segments of the oil and gas industry. As the first reported decision to test Sabine, this Order provides upstream and midstream companies as well as oil and gas and bankruptcy practitioners authority in contrast to Sabine that a midstream agreement which purports to burden hydrocarbon reserves or other real property (as opposed to simply burdening severed minerals) may be binding on successors in interest even after a “free and clear” bankruptcy sale.

Background

Badlands Energy, Inc., f/k/a Gasco Energy Inc., and certain related entities that owned and operated oil and gas assets in Utah (collectively, “Badlands”) filed for Chapter 11 bankruptcy in 2017. As part of the bankruptcy proceedings, Badlands auctioned and sold its oil and gas assets pursuant to Section 363 of the Bankruptcy Code. Following the auction, the bankruptcy court entered a “free and clear” sale order authorizing Badlands to sell a portion of its oil and gas assets known as the “Riverbend Assets” to Wapiti Utah, LLC (“Wapiti”).

Monarch Midstream, LLC (“Monarch”) owns and operates a gas gathering and salt water disposal system which services the Riverbend Assets. In 2010, Monarch acquired the then existing portions of this midstream infrastructure from Badlands, and in connection with the acquisition, Badlands and Monarch entered into a Gas Gathering and Processing Agreement (the “GGPA”) and an Agreement for Disposal of Salt Water (the “SWDA”). Under the terms of the GGPA, Badlands as Producer, dedicated and committed “. . . all Gas reserves in and under, and all Gas owned by Producer and produced from . . .” the leases and lands owned by Badlands within a defined geographic area (the “AMI”), whether now owned or thereafter acquired. The term of the GGPA runs until March 2025, and as to any wells connected to the gathering system, the GGPA would remain in effect so long thereafter as such wells were capable of producing in commercial quantities. Under the GGPA, Badlands was required to deliver a certain minimum volume of gas to Monarch each calendar quarter or else pay Monarch certain shortfall payments as liquidated damages.

Under the SWDA, Badlands committed to deliver all water requiring disposal from its operations within the AMI to Monarch’s disposal facilities. Both the GGPA and SWDA expressly stated that the dedication and commitment of gas or water, respectively, was a covenant running with the land.

As part of the Section 363 sale proceedings, Badlands rejected the GGPA and SWDA and therefore they were not assumed by, or assigned to, Wapiti. Monarch objected to the sale and filed an adversary proceeding seeking a declaratory judgment that the GGPA and SWDA could not be rejected because they constitute covenants running with the land. Monarch also asserted a breach of contract claim for $1.2 million in pre-petition fees due under the GGPA and SWDA. Pursuant to the Sale Order, Wapiti agreed to purchase the Riverbend Assets subject to the outcome of this adversary proceeding—provided, however, that if the bankruptcy court determined in the adversary proceeding that the Riverbend Assets could not be sold free and clear of the GGPA and SWDA, then such agreements would be deemed to be Permitted Encumbrances under the Asset Purchase Agreement and Wapiti, as buyer, would be responsible for the obligations under those agreements.[3]

Covenant Analysis Under Utah Law

Although the GGPA and SWDA are governed by Colorado law, the bankruptcy court ruled that, because property interests are created and defined by the law of the state in which the property is located, Utah law governed the determination of whether the GGPA and SWDA constitute covenants that run with the land.[4]

Applying Utah law, the bankruptcy court held that GGPA and SWDA are, in fact, covenants that run with the land. In order for a covenant to run with the land, it must possess four elements: (1) it must “touch and concern” the land, (2) the covenanting parties must intend for it to run with the land, (3) there must be privity of estate, and (4) the covenant must be in writing.[5]
Both the GGPA and SWDA are in writing, so the bankruptcy court focused its analysis on the other three elements.

Quoting extensively from Flying Diamond, the bankruptcy court held that the test for the “touch and concern” element does not require a physical effect upon the land but instead asks simply “ . . . whether a covenant enhances the land’s value [on the benefit side], and for the burden side, whether it diminishes the land’s value.”[6]
Moreover, all that must be shown is that the covenant “ . . . be of such character that its performance or nonperformance will so affect the use, value, or enjoyment of the land itself that it must be regarded as an integral part of the property.”[7]
The bankruptcy court found that the “touch and concern” element was met since the dedication and commitments in the GGPA and SWDA directly affect the Producer’s use and enjoyment of the leases and lands covered thereby. Furthermore, the purpose of the commercial terms of the GGPA and SWDA are to compensate Monarch for the cost and expense of installing and operating the gathering and disposal systems which are located on the producer’s lands and leases and connected to the producer’s wells.

In determining that the GGPA and SWDA touch and concern the land, the bankruptcy court distinguished Sabine. The bankruptcy court reasoned that the gas dedication in question in Sabine
covered all gas and condensate that were produced and saved from wells located within a defined geographic area. Since under Texas law extracted minerals are personal property—not real property—the Sabine court held that the “touch and concern” element was not met. Under Utah law, extracted minerals are also considered to be personal property and not real property. However, the bankruptcy court noted that the term “dedicated reserves” was broadly defined in the GGPA as “the interest of Producer in all Gas reserves in and under, and all Gas owned by Producer and produced or delivered from” the leases and other lands within the AMI.[8]
Since the dedication and commitment under the GGPA covered the gas reserves, not merely the produced gas, the bankruptcy court held that the dedication did in fact cover a real property interest. In addition, the bankruptcy court held that, unlike under Texas law in Sabine, a conveyance of real property is not required under Utah law to meet the “touch and concern” element in any event.[9]

In discussing the intent element, the bankruptcy court cited Flying Diamond
for the proposition that “an express statement in the document creating the covenant that the parties intend to create a covenant running with the land is usually dispositive of the intent issue.”[10]
Since both the GGPA and SWDA, along with the Memorandum of the GGPA, contain several express statements to that effect, the bankruptcy court held that the intent element was met. Interestingly, the Memorandum of the GGPA was never filed in the county records in the counties where the Riverbend Assets were located, and Wapiti argued that the failure to record the Memorandum was evidence that the parties did not intend for the GGPA to be a covenant that runs with the land. The bankruptcy court rejected that argument, noting that failure to record the Memorandum merely implicates notice, not intent, and there was no dispute that Wapiti had actual notice of the GGPA.[11]

Regarding the privity element, the bankruptcy court noted that traditionally, there are three types of privity: (1) vertical, (2) mutual, and (3) horizontal. Under Flying Diamond, vertical privity “arises when the person presently claiming the benefit, or being subject to the burden, is a successor to the estate of the original person so benefited or burdened.”[12]
The bankruptcy court held that vertical privity clearly exists in this case, since by its acquisition of the Riverbend Assets, Wapiti is the successor to Badlands as an original party to the GGPA and SWDA.[13]

Mutual privity exists when the parties have a continuing and simultaneous interest in the same property. However, the bankruptcy court observed that Utah has never adopted the requirement that mutual privity be shown, and that the Utah Supreme Court has noted that with respect to privity, substance should prevail over form.[14]
Although the bankruptcy court acknowledged that the fact scenario in Badlands “. . . is not identical to the traditional paradigm . . . [which] involves a property owner reserving by covenant, either for itself or another beneficiary, a certain interest out of the conveyance of the property burdened by the covenant . . .” the bankruptcy court concluded that the simultaneous interests of producer and gatherer in the lands and leases within the AMI satisfies mutual privity to the extent it is required under Utah law.[15]

“Horizontal privity exists when the original covenanting parties create a covenant in connection with a simultaneous conveyance of an estate.”[16]
Wapiti argued that, under Sabine, horizontal privity requires “. . . conveyance of an interest in property that itself is being burdened with the relevant covenant.” Since neither the GGPA nor the SWDA convey any real property interest in the mineral estate to Monarch, but rather conveyed only easements burdening the surface estate, Wapiti argued that horizontal privity was not met.[17]
However, the bankruptcy court held that, unlike Sabine, the commitment and dedication under the GGPA burdening the gas reserves, the conveyance of the then existing gathering and disposal infrastructure from Badlands to Monarch in connection with the execution of the GGPA and SWDA, and the grant of easements under the GGPA and SWDA each constitute a conveyance of real property, which all simultaneously burden the same leases and lands within the AMI.

As a result, the bankruptcy court concluded that all of the four elements were met and therefore that the GGPA and SWDA were covenants that run with the land comprising the Riverbend Assets.

Bankruptcy Law Analysis

Turning to application of the Bankruptcy Code, the bankruptcy court next held that covenants that run with the land, such as the GGPA and SWDA, are not “an interest” of which the Riverbend Assets could be sold free and clear of under Section 363(f).[18]
Under Utah law, the nature of a covenant that runs with the land is such that is must be regarded as an integral part of the property and binding upon successive owners of the burdened or benefitted land. Therefore, the GGPA and SWDA “. . . are part of the bundle of sticks that Wapiti acquired when it purchased the Riverbend Assets, and they are not subject to elimination utilizing Section 363(f).”[19]
Accordingly, Section 363(f)(1) cannot be relied on to enable Wapiti to acquire the Riverbend Assets free and clear of the GGPA and SWDA since it is not permitted by “applicable nonbankruptcy law” (i.e., Utah law). Section 363(f)(5) cannot be relied on either because “. . . Monarch could not be compelled . . . to accept money satisfaction of such interest because the interests of Monarch are part of the Riverbend Assets themselves.”[20]

Similarly, the bankruptcy court held that, because the GGPA and SWDA are covenants that run with the land under Utah law, they cannot be rejected under Section 365. Here, the bankruptcy court relied on Sabine in ruling that, under Section 365, “. . . it is not possible for a debtor to reject a covenant that runs with the land since such a covenant creates a property interest that is not extinguished through bankruptcy.”[21]

Not every aspect of the GGPA and SWDA survived the bankruptcy sale, however. Monarch sought to hold Wapiti liable for more than $1.2 million in fees incurred pre-petition under the GGPA and SWDA. The bankruptcy court disagreed. Assumption of executory contracts and the requirement to pay any attendant cure costs under such contracts are purely creatures of Section 365. Because Section 365 is not applicable to the GGPA and SWDA, there was no mechanism to require Wapiti to pay those prepetition amounts. Thus, a subsequent owner of land burdened by a real covenant takes subject to the covenant but is not liable for his predecessor’s breach.[22]
In other words, “while a covenant may run with the land, damages arising from broken covenants do not.” Accordingly, the bankruptcy court held that Monarch’s $1.2 million claim for pre-petition default is an unsecured claim against the bankruptcy estate for which Wapiti is not liable.[23]

Conclusion

Given the stakes at issue, the bankruptcy court’s decision will likely be appealed. Depressed commodity prices and other economic factors impacting the oil and gas industry are likely to result in additional oil and gas operators filing for bankruptcy. Debtors will continue to argue that these sorts of midstream agreements are simply executory contracts that do not create property interests that burden their assets; meanwhile, midstream providers will continue to argue that the obligations under the agreements do run with the land and that any conveyance will be subject to these covenants. Clearly, this issue will continue to arise and be further litigated.

While the bankruptcy court did not directly reject Sabine, this decision provides upstream and midstream companies as well as oil and gas and bankruptcy practitioners authority in contrast to Sabine that a midstream agreement which purports to burden hydrocarbon reserves or other real property (as opposed to simply burdening severed minerals) may be binding on successors in interest even after a “free and clear” bankruptcy sale.

If you have any questions relating to this decision or how it may affect your business, please contact Lamont Larsen, Chris Richardson, or Kyler Burgi.

Lamont Larsen

Mr. Larsen is a partner and the head of the Energy Group at Davis Graham & Stubbs LLP. His practice focuses on upstream and midstream transactional matters for the oil and gas industry. In particular, in recent years he has assisted several clients in acquiring oil and gas assets out of bankruptcy in Chapter 11 Section 363 auctions. He is licensed to practice in Colorado, Utah, Wyoming, North Dakota and Texas.

Chris Richardson

Mr. Richardson is a partner in the Finance & Acquisitions Department of Davis Graham & Stubbs LLP. His practice has an emphasis on mergers, acquisitions and corporate financing and restructuring work. Mr. Richardson has worked with secured and unsecured creditors, debtors, and creditors’ committees in numerous Chapter 11 proceedings. He has assisted clients and debtors in buying and selling companies out of Chapter 11, as well as reorganizing or liquidating debtor companies. He has also represented purchasers of oil and gas assets in Chapter 11 Section 363 auctions in bankruptcy proceeding in Wyoming, Colorado, Utah, North Dakota, and Delaware.

Kyler Burgi

Mr. Burgi is an associate in the Trial Department of Davis Graham & Stubbs LLP. His practice focuses primarily on complex commercial litigation, and bankruptcy & creditors’ rights.

[1] Monarch Midstream, LLC v. Badlands Production Co., f/k/a Gasco Production Co., Badlands Energy, Inc., f/k/a Gasco Energy, Inc., and Wapiti Utah, LLC, f/k/a Wapiti Newco, LLC (In re Badlands Energy, Inc.), United States Bankruptcy Court for the District of Colorado, Adv. Proc. No. 17-01429-KHT (hereafter, “Monarch v. Wapiti”).

[2] In re Sabine Oil & Gas Corp., 547 B.R. 66 (Bankr. S.D.N.Y. 2016); affirmed in In re Sabine Oil & Gas Corp., 567 B.R. 869 (S.D.N.Y. 2017) and In re Sabine Oil & Gas Corp., 734 Fed.Appx. 64 (2nd Cir. 2018).

[3]
See Order (A) Approving the Asset Purchase Agreement Between Debtor Badlands Production Company and Wapiti Utah, L.L.C.,(B) Authorizing the Sale of Substantially All of the Debtor’s Assets Free and Clear of All Liens, Claims, Encumbrances and Interests, (C) Authorizing the Assumption and Assignment of Contracts, and (D) Granting Related Relief, Docket No. 223, para. 39, In re Badlands Energy, Inc., et. al. Case No. 17-17465-KHT.

[4] Monarch v. Wapiti at 11.

[5] Id. at 12 (citing Flying Diamond Oil Corp. v. Newton Sheep Co., 776 P.2d 618, 624 (Utah 1989)).

[6] Id at 13.

[7] Id.

[8] Id. at 15 (emphasis in original)

[9] Id. at 14-15.

[10] Id. at 16.

[11] Id. at 17.

[12] Flying Diamond at 628.

[13] Monarch v. Wapiti at 17-18.

[14] Id. at 18-19.

[15] Id. at 20.

[16] Flying Diamond at 628.

[17] Monarch v. Wapiti at 21.

[18]
Section 363 (f)(1) states that a debtor may sell property free and clear of an interest only if “applicable nonbankruptcy law permits sale of such property free and clear of such interest.”

[19] Monarch v. Wapiti at 22.

[20] Id. at 22-23.

[21] Id. at 23; Sabine, 567 B.R. 869, 874.

[22]
In a somewhat curious provision, at the bottom of page 24 of the opinion, the bankruptcy court states that Wapiti took the Riverbend Assets free and clear of Monarch’s pre-petition claim because Monarch “could be compelled, in a legal or equitable proceeding, to accept money satisfaction of such interest.” Monarch v. Wapiti at 24. On page 22, the bankruptcy court held that Section 363 (f)(5) could not be used with respect to the covenant itself though apparently it can be used for claims that arise out of failure to comply with the covenant.

[23] Monarch v. Wapiti at 23-24.