What’s On Their Minds: Are Oil and Gas Rights Marital or Separate Property In A Divorce? James P. Kuhn v. Kelly L. Kuhn n/k/a Cottle.

Update: On July 14, 2015, the Supreme Court of Ohio dismissed this case as improvidently accepted.  Read more about that here.

On May 5, 2015, the Supreme Court of Ohio heard oral argument in the case of James P. Kuhn v. Kelly L. Kuhn n/k/a Cottle, 2014-0601.  At issue in this case is whether a signing bonus for oil and gas rights associated with a piece of property separately owned by one spouse before the marriage, but acquired after the marriage, constitutes marital property subject to division in a divorce.

Case Background

In April 2001, Appellant James Kuhn bought an undeveloped tract of land in Guernsey County for $30,000. Mineral rights were included in the sale of the property. After a down payment of $6,000, Kuhn mortgaged the rest for $24,000. In March of 2002, he refinanced, in order to build a house on the property. After the refinancing, Kuhn’s mortgage liability was $136,000. In June 2006, Kuhn executed a home equity line of credit for $25,000 in order to consolidate credit card debt.

Prior to her marriage to James Kuhn, Appellee Kelly Cottle paid off nearly $100,000 of Kuhn’s debts. The couple married in May 2007, and ultimately satisfied the remaining mortgage during the marriage. Both parties contributed financially to improvements on the property. At no time during the marriage, however, was a deed executed transferring any interest in the property to Cottle.

In the spring of 2011, energy companies became interested in obtaining oil and gas rights in Eastern and Southeastern Ohio. Kuhn and Cottle participated together in meetings about this in their area. Cottle testified that she spent time and money in the negotiation of a deal for the oil and gas rights of the property, including spending marital funds to obtain legal advice. In October 2011, the couple jointly signed a lease of the oil and gas rights with Gulfport Energy Corporation. In exchange for these oil and gas rights, Kuhn and Cottle received a $121,285 signing bonus, and a 20% royalty interest on production of gas and oil from the property.

The signing bonus was received as a check issued to both parties in February 2012. Kuhn and Cottle separated shortly after depositing the check in a joint bank account, and in March 2012 Kuhn filed for divorce.

Through agreement, Kuhn and Cottle disposed of all property issues in the divorce except for the disposition and/or division of the $121,285 signing bonus and rights of future royalties from the oil and gas lease. The Magistrate found both were Kuhn’s separate property, because there were no documents giving Cottle an interest in the property, and no transmutation of the separate property had occurred through Cottle’s various payments, since those payments had been traced and reimbursed to her. Finally, the Magistrate rejected Cottle’s argument that she was entitled to an interest in the oil and gas bonus and/or royalties because of her activities in helping to procure the lease. The full amount of the signing bonus and all future royalties were awarded solely to Kuhn. The trial court approved the Magistrate’s findings, and entered a final order granting the divorce.

On appeal, the Fifth District Court of Appeals issued a split decision, with two judges voting to reverse on the signing bonus, and all the judges affirming the trial court’s decision to award future royalties solely to Kuhn. Judges Sheila Farmer and Roger Wise found the signing bonus to be marital property like any other income generated during the marriage, which should be divided equally. Judge Scott Gwin dissented on this point, agreeing with the trial court that the signing bonus is passive income under R.C. 3105.171(B)(4), and thus solely Kuhn’s separate property.

All three judges found, however, that the future royalties were Kuhn’s separate property. In a separate concurrence on this point, Judge Wise noted that it was arguable that Kuhn’s agreement in writing on the lease effectively made Cottle a co-lessor, which could be evidence of transmutation of the future revenue stream into marital property, but concluded that the trial court’s finding of separate property on that issue did not constitute an abuse of discretion.

Read the oral argument preview of the case here.

At Oral Argument

Arguing Counsel

Stephanie L. Mitchell, Tribbie, Scott, Plummer & Padden, Cambridge, for Appellant James F. Kuhn

Robert Roe Fox, Leiby Hanna Rasnick Towne Evanchan Palmisano & Hobson, LLC, Akron, for Appellee Kelly L. Cottle

Kuhn’s Argument

Only the issue of the oil and gas lease is of general interest here; the rest is a fairly routine set of property issues, governed by Ohio’s equitable distribution statute and the trial court’s discretion.  The magistrate and the trial court got it right in this case—the signing bonus was passive income, flowing from Kuhn’s separate property, acquired before the marriage, and no transmutation of that property had occurred. The appeals court majority was incorrect in finding the signing bonus to be marital property. The judge who concurred separately was also incorrect in his suggestion that by including his then-wife on the lease, Kuhn intended to make her a party to that lease.  That was not at all the case—her presence and signature were required by the leasing company, but that in no way created a separate property interest in her. And yet by giving Cottle half of the signing bonus, the appeals court has nearly held exactly that, which is incorrect, and that would create bad precedent. The lease belongs solely to Kuhn. And the appeals court made its finding about the signing bonus with no indication of any abuse of discretion below, which is required to reverse the trial court.

Cottle’s Argument

This is just a routine property division case, with a novel topic, which probably garnered more interest than justified because of the oil and gas lease.  But the court of appeals got it right that the lease was marital property.  Given all the work she did in helping to get this lease, a strong argument can be made that Cottle should have gotten 73.5% of the signing bonus, not just half.  The court of appeals correctly characterized the signing bonus as income received during the marriage, and implicitly recognized it as marital property. It could also be characterized as marital property because it is active income, or because of the conduct of the parties in the acquisition of the lease.

Even though the appeals court did not use the magic words “abuse of discretion” in reversing the trial court on the signing bonus issue, that is clearly what it meant, because it knew the correct law to apply.

What Was On Their Minds

Why They Were Hearing the Case

Should this case be improv’d, asked Justice Pfeifer? Following up, Chief Justice O’Connor, asked, what if the court were to improv it and  just say it is not to be cited, commenting that would mean it wouldn’t have the far-reaching effect appellant was worried about. “The facts dictate the outcome of this case—we tie it up, put it in a box and nobody touches it again,” she said, ominously for the appellant.

Does this case have any future application, asked Justice Lanzinger? Is there anything for the court to write on?

The Signing Bonus

How should this be characterized, exactly, asked Justice O’Donnell? It wouldn’t carry with it any interest in the realty, would it? It’s just an extra payment as an inducement to sign?

Marital versus Separate Property

Should the court write that a lease entered into during the marriage, doesn’t belong to the couple, but it runs with the land, asked Justice O’Neill? Should the court tell the wife here the lease she signed isn’t hers? Did the appeals court ever make a determination that this lease has somehow become marital property by virtue of the actions of the parties during the coverture of marriage?

Is this marital or separate property, asked Justice O’Donnell, in several different ways. Did the court ever decide that issue?

Active Versus Passive Income

Is the legal issue for us to decide whether this is active or passive income, asked Justice O’Donnell? Isn’t that just a routine determination for a trial court?

Equitable Division of Property

Didn’t the trial court think it had discretion in regard to the signing bonus, asked Justice Pfeifer? Aren’t the rules and statutes just supposed to help the court reach a reasonable outcome? With domestic relations we are talking about equity and fairness—didn’t the appeals court just look at this and conclude that what the trial court did just wasn’t reasonable or fair?

Significance of Wife’s Signature on the Lease

If you’re married you can’t do much of anything involving real estate without both signatures, can you, asked Justice Pfeifer?

While the appeals court found the wife was entitled to half the signing bonus, it didn’t say she was entitled to the lease, did it, asked Chief Justice O’Connor, in a key observation.

Wasn’t the wife’s signature required because of her dower interest, asked Justice Lanzinger, commenting that Kuhn’s third proposed proposition of law, that a spouse’s signature procured solely to acknowledge a dower interest does not create an ownership interest in the non-owner spouse may be the subject of general applicability in this case.  If the property had been jointly owned, or the wife had an actual interest transferred by deed, we’d have a whole different story? (Absolutely, conceded Kuhn’s lawyer)

Wife’s Role in Getting the Lease

Her participation was in negotiating and agreeing to the lease and the bonus, asked Justice Pfeifer?

Was the wife’s role in helping acquire this lease disputed, asked Justice O’Donnell? (answer: no)

Royalty Checks

How would these have been drawn if the couple hadn’t gotten divorced, asked Justice Pfeifer?

If the wife is entitled to half the signing bonus, wouldn’t she also be entitled to half the future royalties, asked Justice O’Neill?

How it Looks from the Bleachers

To Professor Bettman

Like an improv, or a win for Cottle.  The court of appeals decision in the case was written in a confusing way, and during argument both Chief Justice O’Connor and Justice O’Neill got confused once each, in questioning counsel. There also seemed to be confusion at the high court about whether the lease and signing bonus were the same or different. And the appeals court clearly could have been clearer about its abuse-of-discretion standard of review, in reversing on the signing bonus.  The case may well get kicked as just a routine case of equitable distribution, not one of general interest.

I think the simplest way to dispose of this case on the merits would be to find that the signing bonus—which is just some extra cash– came into being through the joint effort of the parties during the marriage, and is thus marital property, subject to division—essentially the holding of the appeals court majority, minus the dicta by Judge Wise.   I don’t think the court even needs to analyze whether it is active or passive income.  I think Cottle might have had a decent shot at getting more than half of the signing bonus, especially since she got no royalties, but I don’t know where that was argued other than in her Supreme Court brief—clearly not the place to originate that argument.

I also found it puzzling that there wasn’t a cross appeal on the royalties issue.  Justice O’Neill seemed to think so, asking whether it followed that if Cottle were entitled to half the signing bonus, she would also be entitled to half the future royalties, as well.  Cottle’s lawyer did a lot of talking around that issue, but said nothing.  In fact, he kept overtalking and referencing “stipulations below” –at times seeming to try and distract the justices from some hard questions they asked.

As for the effect of Cottle’s signature on the lease, an issue that seemed of particular interest to Justice Lanzinger, I don’t know that that issue is even before the court. There was no actual finding by the appeals court majority that Cottle’s signature on the oil and gas lease entitled her to some kind of separate interest in the marital residence, or otherwise created a property interest in her.

Speaking about the equity in equitable distribution that Justice Pfeifer addressed, Cottle seemed to put more into the marital property than she got out, and missed some issues she could have appealed.  But, if there never are any future royalties here, this will be much ado about nothing.

 

 

 

This entry was posted in Family Law, Property, What's On Their Minds? and tagged , , . Bookmark the permalink.