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TOWN OF VESTAL TOWN BOARD PROCEEDING: BROOME COUNTY : STATE OF NEW YORK

IN THE MATTER OF THE TOWN OF VESTALS CONSIDERATION OF ADOPTING A MORATORIUM ON GAS DRILLING,

MEMORANDUM OF VESTAL GAS COALITION

TO THE TOWN BOARD OF THE TOWN OF VESTAL: This Memorandum is submitted by Robert H. Wedlake, Esq. of Hinman, Howard & Kattell, LLP, as legal counsel to the Vestal Gas Coalition. This Memorandum is designed specifically to serve as a response to the presentation made by Attorney David Slottje. Mr. Slottje made a presentation to the Town Board on January 23, 2012 advising the Town Board to pass a moratorium prohibiting gas drilling and gas development in the Town of Vestal.

PRESENTATION
First of all I would like to thank the Board for allowing me to make this presentation. I am currently a Partner with the Law Firm of Hinman, Howard & Kattell, LLP located in Binghamton, New York, I have been practicing law for thirty-four (34) years. My practice has included commercial litigation, the representation of business clients and real estate law. I have concentrated in the area of oil and gas law over the course of the last four (4) years. I have appeared in both federal and state courts throughout New York State including appearances in Appellate review at the Appellate Division in Albany and I have also argued before the New York State Court of Appeals.

My firm represents the Vestal Gas Coalition; for those of you not familiar with the Vestal Gas Coalition I can advise you that it has been in existence for about four (4) years. We currently have around 640 landowner or landowners families that belong to the Coalition representing approximately 860 properties in Vestal constituting approximately 11,600 acres. I believe that most of you realize that the goal of the Vestal Gas Coalition is to secure a gas lease for the Coalition Members with appropriate terms protective of our land and resources here in the Town of Vestal. I also represent four (4) other landowner coalitions in our area together with numerous other landowners. In short, I come to you not as a representative of the gas industry but as a representative of landowners throughout the Southern Tier area. Although I was not present at Mr. Slottjes presentation I have had an opportunity to view the video of his presentation and tonight I am going to focus specifically on the same points and areas addressed by Mr. Slottje and I am going to explain to you why accepting Mr. Slottjes arguments would not be in the best interest of the people of the Town of Vestal. Mr. Slottje urged you to pass a moratorium banning all gas drilling operations. Mr. Slottje wanted you to believe that you have the legal authority to pass a moratorium, and then later on (if you so decide) you can also legally pass a zoning ordinance prohibiting gas drilling in Vestal. In a nutshell, Mr. Slottjes argument is that you have the power under your home rule zoning authority to completely prohibit gas drilling activity in the Town. Mr. Slottje conceded that the Environmental Conservation Law (the ECL) prevents you from regulating gas drilling, but Mr. Slottjes argument is that a total prohibition is some how not regulation. So Mr. Slottje admits that the legal doctrine of preemption is stronger than and actually controls the legal doctrine of home rule
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zoning, but Mr. Slottjes argument is that because prohibition is supposedly not preempted, that you (and other town boards) have a right to use your home rule zoning power to zone out gas drilling. Tonight I will explain to you why Mr. Slottjes opinions are wrong and I will explain why any action by a town, whether the action is a moratorium temporarily prohibiting gas development or a permanent zoning ordinance prohibiting gas development is illegal under New York State law. There are several parts of New York State law that we must look at to determine whether or not a Town Board can either temporarily or permanently prohibit gas drilling, and if you do not consider all the areas affecting this issue you will not have a complete understanding of New York State law and you may (because of the lack of complete review and understanding) arrive at an erroneous conclusion with respect to a towns authority in gas development matters. Mr. Slottje, in his presentation to you, failed to fully review all the necessary parts of New York State law and in doing so he arrived at an erroneous conclusion in advising you that a Town Board has the authority to either temporarily (through a temporary moratorium) or permanently (through a permanent zoning ordinance) prohibit gas development. The part of New York State law Mr. Slottje overlooks is the doctrine of conflict preemption; remember, Mr. Slottje concedes that a town cannot regulate (through home rule zoning) gas drilling and Mr. Slottje therefore concedes that the doctrine of preemption trumps home rule zoning, but Mr. Slottje argues that the State has not preempted a total prohibition of gas drilling. I think that when you hear what the Law says about preemption that you will conclude that the State, in fact, has expressly preempted a towns right to prohibit gas drilling and even if there is some question in
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your mind about the express preemption, I feel that after you have considered what the Law says that you will have to conclude that Mr. Slottjes home rule zoning argument is unquestionably over ruled and trumped by the conflict preemption doctrine. Mr. Slottje also told you that judges, and in particular the New York State Court of Appeals (which as you recall is the highest court in New York State) have in cases similar to gas drilling adopted interpretations that supposedly support a towns right to use home rule zoning to prohibit gas drilling. I will explain to you how Mr. Slottjes statements about judges and the Court of Appeals were misleading and how Mr. Slottje did not provide you with a complete analysis about what judges and the Court of Appeals have done in the past. I mentioned a few minutes ago that there are several areas of the Law that we must look at in order to accurately analyze a towns authority to ban gas drilling. We can divide the areas into roughly three (3) different categories; the categories are all related but for purposes of analyzing this complex issue I think it is helpful to look at this issue as three (3) parts of a puzzle and when you put the parts together you have a complete answer as to a towns authority to prohibit gas drilling. I am going to call these three (3) pieces the following: 1. The source of a towns authority to pass laws, and, as I have already briefly discussed: 2. 3. Express preemption under the New York State law and Conflict (or inconsistent) preemption under New York State law.

THE SOURCE OF TOWNS AUTHORITY TO PASS LAWS


Did you ever consider the source of the Town of Vestals authority to pass any local law? Well the answer is primarily found in our New York State Constitution. As a
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Town Board, you get your authority to enact laws from the State and you have to understand that the New York State Constitution does not give towns a broad general power to pass whatever law a Town Board may feel like enacting. In fact, under our State Constitution there is a limited scope of authority granted to towns, cities and other municipalities. Article IX Section 2(c)(ii) of our Constitution specifies that: Every local government shall have power to adopt and amend local laws not inconsistent with the provisions of this Constitution or any general law relating to the following subjects, whether or not they relate to the property, affairs or government of such local government, except to the extent that the Legislature shall restrict the adoption of such a local law relating to other than the property, affairs or government of such local government. This section means that a town cannot adopt or amend local laws that are inconsistent with the provisions of the New York State Constitution or inconsistent with laws passed by the New York State Legislature. The State giveth and the State can take away a towns authority to pass laws. Additionally, if a town is not specifically granted power to regulate a particular activity or if the power to regulate a particular activity is reserved or delegated by the New York State Legislature to the State, then the town will have no authority to enact a law, rule or regulation affecting that particular activity. Lets take a look at what the New York State Legislature has done with gas drilling. First of all, no where in the Constitution is there any direct authority given to a town to prohibit or otherwise regulate gas drilling. Secondly, there is no New York State law that has been passed by the New York State Legislature that grants any authority to a town to prohibit gas drilling. In fact the contrary is true.
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Specifically, as most of you know we have a section of New York State law called the Environmental Conservation Law. Article 23 of the Environmental Conservation Law deals extensively with gas drilling and gas development. Article 23 (with one minor exception) does not give a town any authority to enact or adopt local laws to regulate or prohibit gas drilling. Again, to the contrary Article 23 specifically reserves to the State the authority to deal with gas drilling and development and this reservation or preemption can be either by express language (express preemption) or by implicit language (conflict preemption).

EXPRESS PREEMPTION
I will first talk about express preemption. The legal concept of preemption is not an easy concept to completely understand. In order to fully understand the express preemption concept you have to keep in mind that (as I just discussed) a town only has authority to pass local laws in the areas where the State says that the town can do so and that a town cannot adopt or amend local laws in subject matter areas reserved to the State by the Legislature. So lets take a look at what the New York State Legislature has specifically done with respect to gas drilling. As I have already discussed, we have to go to Article 23 of the Environmental Conservation Law. Section 23-0301 of the ECL sets forth the legislative purpose and policy objectives of New York State. This section reads as follows: It is hereby declared to be in the public interest to regulate the development, production and utilization of natural resources of oil and gas in this state in such a manner as will prevent waste; to authorize and to provide for the operation and development of oil and gas properties in such a manner that a greater ultimate recovery of oil and gas may be had, and that the correlative rights of all owners and the rights of all persons including landowners and the general public
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may be fully protected, and to provide in similar fashion for the underground storage of gas, the solution mining of salt and geothermal, stratigraphic and brine disposal wells. Consequently, it is the policy of this State to regulate the development, production and utilization and to authorize and to provide for the operation and development of oil and gas properties. Therefore, arguably, it is the State policy to facilitate and not prohibit gas development. Mr. Slottze disagrees with this proposition but I submit to you that the complete prohibition of gas drilling does not, from any perspective, conform or coincide with regulating the development, production and utilization of natural gas. I should add for you if you are confused over the term of correlative rights (as mentioned in the policy objectives) that this term refers to a landowners right to harvest or develop the natural gas and oil lying underneath a landowners property and to protect the landowner from a gas company or from someone else taking the landowners natural gas without compensation, and a moratorium clearly restricts a landowners correlative rights by denying a landowner the right to enjoy the landowners natural resources and this concept -- protecting a landowners correlative rights, is totally contrary or in conflict with a prohibition of gas development. So I think we have to keep in mind the stated New York State policy of regulating, producing and utilizing natural gas when we analyze Mr. Slottjes arguments that a town has a right to pass a prohibition against gas development. You might ask yourself, if it is State policy to protect a landowners right to harvest his/her natural gas and to authorize and to provide for the operation, development and utilization of natural gas how can a towns prohibition against gas drilling ever be considered to be

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consistent with the State policy? But this inconsistency point is really also a part of conflict preemption which I will talk about in a few minutes. We next have to look to the specific section of the ECL that talks about the authority reserved (preempted by) to the State. Section 23-0303(2) provides The provisions of this article shall supersede all local laws or ordinances relating to the regulation of the oil, gas and solution mining industries; but shall not supersede local government jurisdiction over local roads or the rights of local governments under the Real Property Tax Law. As we know, it is Mr. Slottjes argument that this language, while prohibiting a town from regulating gas drilling, does not prohibit a town from banning gas drilling altogether. However, what Mr. Slottje is either unaware of or ignores is that a complete prohibition against gas drilling does amount to a regulation because of the nature of gas drilling. That is, the gas that lies underneath New York State does not follow town boundary lines and in order to prevent wasting gas and to provide for a greater ultimate recovery and utilization of gas (three of the policy objectives set forth in New York States Legislative Policy Statement) there is no question that gas companies will have to have the ability to locate drilling units without regard to town line boundaries. Therefore, to the extent that one town prohibits gas drilling while the town next door does not will definitely result in the town prohibiting gas drilling effectively regulating the statewide gas development resource. When you understand this concept you can see that a town moratorium is a regulation of gas drilling and as such is expressly preempted by Section 23-0303(2) of the ECL. Mr. Slottje also told you that the Court of Appeals, in similar cases, has interpreted other preemption statutes in such a fashion as to give towns authority to prohibit other activities by using the towns zoning authority. However, when you take a
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close look at the other similar cases and when you take a closer look at New York State law you have to conclude that Mr. Slottje is incorrect in his position. Specifically, Mr. Slottje referred to the Environmental Conservation Law that relates to mining of sand and gravel. Section 23-2703(2)(b) of the ECL pertains to the extractive mining business (like sand and gravel). This section provides: For the purposes stated herein, this title shall supersede all other state and local laws relating to the extractive mining industry; provided, however, that nothing in this title shall be construed to prevent any local government from enacting or enforcing local zoning ordinances or laws which determine permissible uses in zoning districts. It is pretty obvious that when you read this language that the State Legislature, with sand and gravel mining meant to preserve a towns right to zone out sand and gravel mining. You have to ask yourself, if the State Legislature was so clear with sand and gravel mining why, if the Legislature wanted to give towns the right to prohibit gas drilling, didnt the Legislature provide similar language in the gas drilling section? Additionally, the fact that Section 23-0303(2) specifically recites that towns are not superseded with jurisdiction over their local roads shows that the Legislature wanted to reserve to towns jurisdiction over their roads, and had the Legislature intended to carve out a towns ability to also prohibit drilling it makes more than a little sense that the Legislature would have included language stating not only was there no preemption over local roads but also no preemption over a local governments zoning home rule authority. As we go through this legal analysis, you have to keep in mind as I have previously explained that preemption trumps home rule zoning. We can look to other New York State law with respect to this carve-out issue. The case of Weingarten v. Bd. of Trustees of the NYC Teachers Retirement System,
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98 N.Y.2d 575, states that Where the Legislature lists exceptions in a statute, items not specifically referenced are deemed to have been intentionally excluded. Additionally, Section 240 of New York Statutes states that: The maxim expressio unius est exclusio alterius is applied in the construction of the statutes, so that where a law expressly describes a particular act, thing or person to which it shall apply, an irrefutable inference must be drawn that what is omitted or not included was intended to be omitted or excluded. Although New York State Courts have not had a case where a town has completely prohibited gas drilling, New York State has had a case where a town passed a local law regulating gas drilling by requiring the payment of a $2,500.00 compliance bond and a permit fee for gas wells (the case of Matter of Envirogas, Inc. v. Town of Kiantone, 112 Misc.2d 432, affd 89 A.D.2d 1056, lv. den. 58 N.Y.2d 602). In Envirogas the Court held that: The mere fact that a State regulates a certain area of business does not automatically pre-empt all local legislation which applies to that enterprise but where a State law expressly states that its purpose is to supersede all local ordinances then the local government is precluded from legislating on the same subject unless it has received clear and explicit authority to the contrary. (See also the Court of Appeals case of Robin v. Inc. Village of Hempstead, 30 N.Y.2d 347 stating that where State policy is expressed to preempt a field, a municipality lacks authority to deal with a matter unless it is specifically empowered so to do in terms clear and explicit.) As I discussed above with sand and gravel mining, the Legislature did give towns clear and explicit authority to zone out mining but the same is not true with gas drilling nowhere is clear and explicit home rule zoning authority granted. The Court in the Envirogas case concluded that Section 23-0303(2) expressly preempted not only inconsistent town legislation but also any municipal law which
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purported to regulate gas and oil well drilling operation unless the local law related to local roads or local real property taxes. The Envirogas case was appealed to the Appellate Division and affirmed in the Appellate Division and, the Court of Appeals denied the towns application to have the case considered by the Court of Appeals which means that the Decision written by the lower Court Judge stands as New York State Law. Consequently, it is clear under New York State Law that the States gas development preemption trumps a towns zoning home rule power.

A TOWN IMPOSED MORATORIUM IS ALSO VOID BECAUSE OF CONFLICT PREEMPTION


A local town law can also be invalid on the grounds of conflict preemption and this is an area Mr. Slottje has ignored. As cited above, the New York State Constitution provides that the legislative power of a town is limited to the extent that the legislature shall restrict the adoption of such a local law. The Court of Appeals, in the case of People v. DeJesus (54 N.Y.2d 465) stated (at page 468): [T]he fount of the police power is the sovereign state. The Court went on to state that the police power can be exercised by a municipality only when and to the degree it has been delegated such lawmaking authority. Remember, your zoning authority is part of this police power. Under this doctrine of conflict preemption, a local government . may not exercise its police power by adopting a local law inconsistent with constitutional or general law (see the case of New York State Club Assn., 69 N.Y.2d at 217). The Court went on to explain that: The legislative intent to preempt need not be express. It is enough that the Legislature has impliedly evinced its desire to do so and that desire may be inferred from a declaration of State policy by the Legislature or from the legislative enactment of a
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comprehensive and detailed regulatory scheme in a particular area. (see also the case of Frew Run Gravel Products, Inc. v. Town of Carroll 71 N.Y.2d 126 at page 133 upholding a local law only after determining that the local law would not conflict with or frustrate the States purpose). Accordingly, an express and direct conflict need not be present. Inconsistency can be sufficient and can exist when a local law prohibits what would have been permissible under State law or imposes prerequisite additional restrictions on rights under State law, so as to inhibit the operation of the States general laws (emphasis added) (New York State Club Assn. and Consolidated Edison Co. v. Town of Redhook 60 N.Y.2d 99 at page 108). See also the case of Jacyn Manufacturing Corp. v. County of Suffolk, 71 N.Y.2d 91 at page 97. As I have already discussed, Article 23 of the ECL states that the policy of the State is to protect landowners correlative rights and facilitate gas development so as to prevent waste and to authorize and provide for the operation, development and utilization of oil and gas properties, and clearly Article 23 sets forth a comprehensive regulatory framework designed to regulate gas companies with respect to gas development in the State. Accordingly, I submit to you that given the States policy and the States comprehensive regulatory framework, that it is impossible to conclude that a towns moratorium on gas development is not inconsistent with New York States stated development policy and with New York States regulatory laws as encompassed in Article 23 of the Environmental Conservation Law. This conclusion is also supported by New York States past experience. In the 1960s and 1970s prior to the enactment of Article 23s comprehensive regulatory program, local municipalities were exercising regulatory authority over gas
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development. The result was an inconsistent patchwork of laws and ordinances which significantly inhibited the harvesting of New York States natural gas resources. To now allow towns to prohibit gas development would defeat the purpose of the uniform Statewide provisions of ECL Article 23 and therefore the unescapable conclusion is that a local town moratorium is prohibited by the doctrine of conflict preemption.

POTENTIAL LITIGATION RESULTING FROM PASSING A MORATORIUM


Mr. Slottje advised you to pass a moratorium now, before the DEC issues drilling permits. Mr. Slottje stated that passing a moratorium will preserve the Towns right to later on pass an ordinance prohibiting gas drilling and that passing the moratorium now contains very little risk to the Town. Mr. Slottje was leading you to believe that your only risk at this point (in passing a moratorium) would be the risk of being sued in the same manner as the Town of Dryden and the Town of Middlefield being sued by a gas company or landowner to simply declare the moratorium as illegal. Mr. Slottje stated that you likely could find some attorney to represent the Town on a pro bono bases and that the Town would therefore have little risk of other damages as a result of imposing a moratorium at this point in time. Mr. Slottje explained that waiting to impose a moratorium until after Marcellus permits are issued would invite a claim for damage by gas companies (or landowners involved in a drilling unit) which presumably could be very costly to the Town if the New York State Courts later determine that Town-imposed moratoriums are illegal. Obviously, Mr. Slottje, in his presentation, implicitly recognizes that his theory that Article 23 of the ECL does not stop a town from prohibiting gas drilling (but only

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prevents a town from regulating gas drilling), may not succeed and that the New York State Courts may hold town bans to be illegal. Mr. Slottjes argument that you are not now faced with significant risks in imposing a moratorium is wrong. Passing a moratorium now (even though permits have not been issued) carries with it the following not insignificant risks: The first risk is a lawsuit by a gas company that holds leases in the Town of Vestal. It is a matter of public record that there are currently existing dozens and dozens of previously signed gas leases in the Town. There have been estimates that over one fifth of the Towns total acreage is currently under lease. Many of these leases were signed years ago and many of these leases are coming close to their expiration dates. Some of these leases that are going to expire over the course of the next year or two contain options to renew where the gas company has a right to renew the lease by making an additional rental payment to the land owner to secure an extension of any where from three (3) to five (5) years. There are other leases coming up for expiration that do not have an option to renew clause and if a gas company does not start production within the primary term the gas company will lose the lease. If you pass a moratorium now, and if New York State starts issuing gas permits later this year and, if after that in a year or two it is determined by the courts that town moratoriums are illegal, you are opening yourself up to potentially enormous lawsuits by those gas companies that could have obtained DEC permits but lost their leases or could not renew their leases because of the Towns moratorium. Remember, starting in 2008 and 2009 gas companies were paying thousands of dollars an acre to secure
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leases and the potential damages to the Town of Vestal associated with these kinds of lawsuits could be astronomical and it is my understanding that even if a town has insurance coverage that it is unlikely that these damage claims would be covered by the towns insurance policies. Further, this kind of lawsuit is a lot more dangerous than some theoretical taking lawsuit: a gas companys claim for damages in the situation I just described (they got their permit but could not drill and lost their lease because of an illegal town law) will be very specific (the amount they paid for their leases) and not nebulous or speculative. In addition to the risk of the lawsuit by the gas companies the Town would also run the risk of a lawsuit by landowners. Once again, it is very probable that if the Town passes a moratorium now and if the DEC approves permits later this year and then in a year or two the courts hold town moratoriums invalid, that there are going to be some landowners who will sue the town for lost renewal bonuses, for lost sign-on bonuses and possibly also for the loss of the landowners ability to harvest or develop the landowners mineral rights. Mr. Slottje argued to you that landowners may not have a damage claim because a moratorium would not constitute a taking of the landowners property because the landowner still has a right to use his or her property in some other permitted fashion. What Mr. Slottje either overlooked or forgot about are the potential gas company claims I just mentioned and the lost renewal bonus cases and the fact that we have some situations in the Town of Vestal where an individual or company only owns the subsurface mineral rights and does not have any surface ownership. In these cases, the only thing that the subsurface owner can utilize his or her property for is mineral development. Therefore, clearly an illegal moratorium would constitute a taking and
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given the past prices and potential prices for subsurface rights (thousands of dollars an acre) the potential damages to the Town of Vestal are not insignificant. I have conducted an informal survey with other law offices in our area and I know for a fact that there have been a number of mineral estates created in the Town of Vestal where the ownership of the surface and the subsurface are separate and therefore this potential risk is not something that I have dreamed up but is a real possibility that could come back to haunt the Town of Vestal if these town moratoriums are found to be illegal. Therefore, I would submit to you despite what Mr. Slottje told you, there is an enormous litigation risk to the Town of Vestal in the Town now passing a moratorium and I submit to you that the Town should weigh the potential catastrophic damages that the Town may suffer through litigation with what would happen if the Town waits to see the outcome of the Dryden and Middlefield cases. I think there is one small area where I agree with Mr. Slottje: that is, if permits are issued by the DEC and a town then imposes a moratorium and if the courts later determine that town moratoriums are illegal that liability for damages against a town (that imposed a moratorium) would be more easily obtained by gas companies and landowners. Mr. Slottje stated that in this instance that the town would either have to grandfather in the permitted wells or be prepared to compensate the gas company and landowners for what likely will be millions of dollars in damages. However, I would point out to you that the DEC has publicly stated that when it starts issuing permits that it will only issue permits on a very limited bases. That is, the DEC has stated that it may only issue State wide up to seventy-five (75) permits in the first year after the moratorium is lifted and will only increase that amount slightly in the
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second year after the moratorium is lifted. Therefore, it is highly unlikely that there will be anything more than a handful of wells permitted in the Town of Vestal within the first year of the lifting of the moratorium. Although no on knows exactly when the moratorium will be lifted it appears that the moratorium will not be lifted for at least a couple of more months and may not even be lifted this year. Therefore, it is highly unlikely that there will be more than a handful of permitted wells within the Town of Vestal within the next eighteen (18) months and it is my recollection and Mr. Slottje acknowledged that the Dryden and Middlefield cases will probably wind their way through the various appeals within approximately the same time frame. In other words, in approximately eighteen (18) months we should know whether or not town moratoriums are legal or not and if the courts sustain the legality of town moratoriums you would only likely have to grandfather in a handful of wells and you would be able to implement your moratorium for other than the handful of wells. In closing I would like you to note that I have not even discussed all of the positive attributes of having gas development in the Town of Vestal including the absolute certainty of the Town receiving hundreds of thousands of dollars if not millions of dollars from the ad valorem tax payable by the gas well operators. I am sure that all of you have heard most of the arguments for and against gas drilling and I do not have the time tonight to advocate to you my position that the positive attributes of gas drilling outweigh the negative attributes but I would point out to you that the Town and that the school district stand to gain hundreds of thousands of dollars and even millions of dollars from the ad valorem tax if responsible gas drilling moves forward. In conclusion, Mr. Slottjes argument that prohibiting is not the same as regulating is not likely to succeed in court and there is a not insignificant risk that the
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towns that have passed moratoriums will be exposed to significant damage lawsuits by both gas companies and landowners and I submit to you that the prudent course of action would be to refrain from implementing any moratorium as suggested by Mr. Slottje. Dated: February 20, 2012 Binghamton, New York Respectfully submitted, ___________________________________ Robert H. Wedlake, Esq. HINMAN, HOWARD & KATTELL, LLP Office and Post Office Address 700 Security Mutual Building 80 Exchange Street P.O. Box 5250 Binghamton, New York 13902-5250 [Telephone: (607) 723-5341]

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