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Chiang v. Kempthorne

August 30, 2007


The opinion of the court was delivered by: Emmet G. Sullivan United States District Judge


Plaintiff John Chiang, California's State Controller, brings this case against the Department of the Interior in order to challenge several administrative decisions made by the department and its Minerals Management Service ("MMS").*fn1 The case is stayed in part due to ongoing administrative proceedings, but the parties have been allowed to proceed on two of plaintiff's claims, which relate to royalty collections and MMS Guidelines issued in 2002. Pending before the Court are the parties' cross-motions for partial summary judgment on these two claims. Upon consideration of the motions and supporting memoranda, the responses and replies thereto, the applicable law, and the entire record, the Court determines that the Court has jurisdiction over plaintiff's claims and that MMS's actions violate the Administrative Procedures Act ("APA"). Therefore, for the reasons stated herein, plaintiff's motion for summary judgment is GRANTED, and defendants' for summary judgment is DENIED.


I. Statutory Background

The Supreme Court recently issued a decision regarding MMS royalty collections, which helpfully describes the statutory scheme at issue here. See BP Am. Prod. Co. v. Burton, 127 S.Ct. 638, 641-42 (2006). "The Mineral Leasing Act of 1920(MLA) authorizes the Secretary of the Interior to lease public-domain lands to private parties for the production of oil and gas." Id. at 641 (citing 30 U.S.C. § 181 et seq.). MLA lessees are obligated to pay a royalty of at least 12.5 percent of the value of the production generated from the lease. Id.

In 1982, Congress enacted the Federal Oil and Gas Royalty Management Act ("FOGRMA") to address concerns regarding the accounting and collection of royalty payments. Id. (citing 30 U.S.C. § 1701 et seq.). Congress directed the Interior Department to "audit and reconcile, to the extent practicable, all current and past lease accounts for leases of oil or gas and take appropriate actions to make additional collections or refunds as warranted." Id. at 641-42 (citing 30 U.S.C. § 1711(c)(1)). These duties were assigned to the MMS. Id. at 642 (citing 30 C.F.R. § 201.100).

Under FOGRMA, lessees are responsible in the first instance for the calculation and payment of royalties. Id. (citing 30 U.S.C. § 1712(a)). MMS is authorized to audit those payments to determine whether royalties have been overpaid or underpaid. Id. (citing 30 U.S.C. §§ 1711(a),(c) and 30 C.F.R. §§ 206.150(c), 206.170(d)). If an audit suggests an underpayment, MMS sends the lessee a letter inquiring about the perceived deficiency. Id.

"If, after reviewing the lessee's response, MMS concludes that the lessee owes additional royalties, MMS issues an order requiring payment of the amount due." Id. The Attorney General can enforce these orders in federal court. Id. "An MMS payment order may be appealed, first to the Director of MMS and then to the Interior Board of Land Appeals ["IBLA"] or to an Assistant Secretary." Id. (citing 30 C.F.R. §§ 290.105, 290.108).

Congress supplemented this scheme by enacting the Federal Oil and Gas Royalty Simplification and Fairness Act of 1996 ("FOGRSFA"). Id. "FOGRSFA adopted a prospective 7-year statute of limitations for any 'judicial proceeding or demand' for royalties arising under a federal oil or gas lease." Id. (quoting 30 U.S.C. § 1724(b)(1)). This provision applies both to judicial actions and to MMS's administrative payment orders arising on or after September 1, 1996. Id. The provision does not apply to judicial proceedings or demands arising from leases of minerals other than oil or gas or for underpayments of royalties on pre-September 1, 1996, production. See id.

A lawsuit in court to recover royalties owed to the government on pre-September 1, 1996, production is covered by 28 U.S.C. § 2415(a), which sets out a general 6-year statute of limitations for government contract actions. Id. The issue in the Burton case was whether this general 6-year statute of limitations also governed MMS administrative payment orders concerning pre-September 1, 1996, production. Id. Prior to the Court's decision, there had been a split on this issue between the D.C. Circuit and Tenth Circuit. Id. at 643. After engaging in statutory analysis, the Court held that "the 6-year statute of limitations in § 2415(a) applies only to court actions and not to the administrative proceedings." Id. at 649.

Within this general scheme for royalty collection, states play a prominent role. First and foremost, Congress has directed that states receive 50% of the royalty income derived from onshore properties within their borders. 30 U.S.C. § 191. Second, states play a role in the scheme's enforcement process. The Interior Department is supposed to give auditing priority to certain lease accounts identified by states. Id. § 1711(c)(1). In addition, the Interior Department is authorized to delegate primary auditing authority to states for leases within their borders. Id. § 1735. States are also authorized to bring civil actions against a federal lessee for nonpayment of oil and gas royalties. Id. § 1734. Finally, states may participate with the Interior Department in the settlement of disputes over royalty obligations. Id. § 1724(i).

II. Procedural History

On October 15, 2002, the MMS Director issued the "Guidelines Regarding Statute of Limitations for Demands and Orders and Appeals Decisions for Federal Leases." Pl.'s Ex. 1 (hereinafter "2002 Guidelines"). The Guidelines announced a policy of extending the scope of the 7-year statute of limitations Congress enacted in 1996. Unlike the statutory provision, MMS elected to apply the 7-year statute of limitations to royalties (1) arising before September 1, 1996 as well as after that date; and (2) for leases for production of all minerals, not just oil and gas. Thus, MMS extended the statute of limitations to apply retroactively instead of only prospectively, and to apply to all leases, not just oil and gas leases. MMS stated that it would "not issue orders to pay or to perform," and would "grant appeals for periods more than 7 years before the date of MMS's order absent compelling circumstances." Id. at 2. These "compelling circumstances" mirror the exceptions to the Congressionally enacted statute of limitations. See 30 U.S.C. § 1724(d).

Notwithstanding Congress's explicit restrictions on the scope of its statute of limitations, MMS defended its position as being "in view of the legislative intent." Id. The only other stated justification for the policy is the last sentence: "Implementation of this guidance is consistent with and is supported by our efforts to complete our compliance processes within 3 years." Id. Besides the Congressional statute of ...

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