Arbitration bill raises old concerns of fairness

EDITOR'S NOTE: THIS STORY WAS CORRECTED AT 10:52 A.M. FEB. 12 BECAUSE IT DROPPED THE LAST TWO PARAGRAPHS IN THE EDITING PROCESS.

When Delegate Terry Kilgore learned of the $24 million of natural-gas royalties stuck in state-run escrow accounts late last year, he set about devising a way to release them.

Most of the royalties in escrow – now $25 million – landed there because of a 20-year-old dispute over who owns the rights to coalbed methane gas, prompting a state regulatory board to hold the money until ownership is resolved. The only ways to collect such contested royalties require mineral owners to sue to prove their ownership or split the money with another party that claims it – options that are unacceptable to many people who can’t afford to hire a lawyer or don’t think they should have to.

“We have got to find some better way of getting those monies out of escrow,” Kilgore, a Gate City Republican, told a reporter in November. “I don’t think it was ever the intent of the General Assembly to have that kind of escrow account.”

Kilgore, along with Delegate Bud Phillips, D-Castlewood, and Sen. Philip Puckett, D-Lebanon, are backing legislation that would collectively put into law a 2004 Supreme Court of Virginia ruling that landowners who sever only coal retain the rights to coalbed methane; establish accounting standards for the administration of the escrow accounts; and create a mechanism to expedite the release of royalties from escrow.

Kilgore’s contribution is a system that would compel a court-appointed arbitrator to resolve a coalbed methane dispute within six months. In the past week, his bill sailed out of committee, won unanimous approval by the full House of Delegates and is being considered by the Senate.

But the bill has been met with criticism from a heterogeneous mix of critics who fear that the arbitration system would be exploited by large companies with legal muscle to flex.

Kilgore, who last week touted his bill’s progress in a news release as an “initial victory” for landowners, described it Thursday as a “work in progress” that “isn’t perfect.”

“I’m not saying this is the way it has to go,” he said. “I take no pride in authorship.”

The dispute over coalbed methane is generally a David-versus-Goliath affair between small-acreage landowners and large corporations that bought their coal. Not even Kilgore thinks the arbitration system would cure that asymmetry, but some say it has the potential to make it worse.

“I see them getting chewed up and spit out,” Peter Glubiak, a Richmond lawyer who won the 2004 Supreme Court ruling for landowners that severed only coal, said of the typical Southwest Virginia landowner who goes up against a coal company before an arbitrator.

“The problem I see is that if people have to hire lawyers, where are they going to get the money?” he said. “That’s the hitch. I would be very skeptical of Mr. and Mrs. Smith going in there unassisted against the coal company lawyers.”

Delegate Phillips said that latest version of Kilgore’s arbitration bill “gives me great concern.”

Phillips worries that some landowners might not receive notice that their royalties are being adjudicated, and might not understand the process even if they do. Worse still, he said, “A person could be brought into binding arbitration without his consent and may have to hire an attorney to help him and end up spending a tremendous amount in attorneys’ fees beyond what the value of the royalties would be.”

Kilgore’s bill would allow anyone with a claim to royalties in escrow – individual landowners or companies – to trigger the arbitration process by a simple request to the Virginia Gas and Oil Board. The board, in turn, would ask a circuit court judge to appoint an arbitrator who has extensive experience in mineral law, and who did not earn more than 10 percent of his income from one of the parties subject to arbitration in the three previous years.

Those criteria would dramatically reduce the field of possible arbitrators.

“You don’t see a lot of lawsuits filed on behalf of gas owners because there’s not many mineral attorneys out there to choose from,” said Catherine Jewell, a Bristol, Va., resident whose family owns mineral rights in Buchanan County. “Every mineral attorney has some sort of tie to a corporation,” she said, noting that she has had to travel to Roanoke to consult an attorney because she could not find one locally that did not have a conflict of interest.

Jewell likened an arbitration between landowners and corporate lawyers to “matching a well-trained pit bull against a Chihuahua,” and called it a “Christmas gift” to the coal industry. Even if the law and legal precedent favors landowners, they could still lose out, Jewell cautioned.

Noting that all the costs of arbitration would be shared evenly by the parties – willing or unwilling – a landowner with just $500 in escrow could end up in the red, Jewell said. The arbitrator would have “more power than a judge, because his ruling cannot be overturned.”

In theory, the arbitrator’s ruling can be overturned – but the standard to reverse a decision from binding arbitration is higher than for other civil judgments. Someone seeking to appeal would have to prove that the arbitrator acted corruptly or fraudulently, was partial to one party or exceeded his powers, according to state law.

Kilgore doesn’t believe that anyone will come out of arbitration in a worse position than before, but said he is open to alterations.

“I’m just trying to put the ball in play,” he said. “If somebody would come forward and tell me a better way, I’m open to it.”

Phillips hopes that if his legislation clarifying coalbed methane ownership becomes law, the Gas and Oil Board will cease escrowing those royalties and arbitration won’t be necessary.

But Jewell doesn’t think Phillips’ and Puckett’s twin bills go far enough.

“There is nothing to say, ‘Hey, board members, this is how you treat these applications,’” Jewell said of petitions that gas companies take before the board to drill gas wells. The applications contain a list of owners presumably in dispute over coalbed methane whose royalties should go into escrow.

The simplest way to clear coalbed methane royalties out of escrow, Jewell believes, would be to require gas companies to present to board members deeds showing individual mineral ownership in the tracts of land affected by a gas well, and then directly pay royalties to people who have clear rights to the gas. Companies have to research these deeds to assign ownership in the first place, Jewell said.

“We don’t need an arbitrator when the [gas company] has already done it, because [the company] assigns who owns what,” she said.

dgilbert@bristolnews.com | (276) 645-2558