Affairs of State

Catrett, Michael L

A Primer on Government Royalty Claims in Chapter 11 Cases

Royalty lease agreements with the government (such as in oil and gas production) are complex and, at times, confusing. Some lease operators will find themselves in bankruptcy due to royalty calculation disputes. Although the effect of 28 U.S.C. §2415 is fading, it is precisely the type of question that consumes large amounts of an attorney’s time in trying to resolve the dispute between the circuits. When faced with a challenge to royalty payments, the first step is to evaluate whether the royalty demand is time-barred under either 28 U.S.C. §2415 (six-year statute of limitations) or 30 U.S.C. §1724 (sevenyear statute of limitations):

1. Did the demand arise before or after Sept. 1,1996? For demands arising before this date, §2415 and its judicial interpretations apply. After this date, §1724 acts as an almost absolute bar (with possibly one exception) to any demand, whether for payment, accounting, calculation or administrative action.

2. Is the demand arising from production on Indian lands? If so, for production before the above date, §2415 and its judicial interpretations apply. After that date, a potential litigation position may lie in the notes to 30 U.S.C.S. §1701, which states that the 1996 statutory amendments do not apply to Indian lands but instead revert to §2415 and its interpretations.

3. Is the demand arising in a jurisdiction following Tenth Circuit law? The Tenth Circuit’s view of §2415 is essentially the same as the statutory wording of §1724, interpreting it as an absolute bar to any demand for payment, whether administrative or judicial. However, the Tenth Circuit did not state if they would extend this to include requests for accounting, recalculation, etc. for time-barred claims.

4. Is the demand arising in a jurisdiction following the law of the Fifth Circuit or the District of Columbia federal judicial district? The Fifth Circuit (and the District of Columbia district courts) interpret §2415 as only timebarring judicial actions, not administrative demands. Although not specifically addressed by the Fifth Circuit, the D.C. District Court seems to go one step further and considers judicial actions to enforce administrative demands as not falling under the time bar.

5. Is the claim arising during a bankruptcy proceeding? Proofs of claim are considered administrative actions, converted into judicial proceedings depending on the debtor’s response. Again, it appears that § 1724 would be an absolute bar to time-barred claims for post-Sept. 1, 1996, demands. The Tenth Circuit would preclude such claims arising under §2415. The D.C. Circuit (and possibly the Fifth Circuit) would look to see whether the proof of claim flowed naturally from an agency administrative action, or was a standalone claim with no prior administrative demands.

The new bankruptcy bill provides for expanded direct appeals to the circuit court of appeals for ( 1 ) a question of law where there is no controlling decision for the circuit court of appeals or Supreme Court; (2) where a question of law involves resolution of conflicting decisions; or (3) where a matter of public importance is involved.1 This may refresh increased litigation surrounding the §§2415 and 1724 questions.

Application to Bankruptcy

The §2415/1724 problem is a fairly niche area, and many may be asking of its fit into bankruptcy. Its application comes into any personal or business bankruptcy where there has been oil and gas production on federal lands. When the bankruptcy is filed, the government will file a proof of claim for unpaid royalties and counsel must investigate the source of those royalties as well as the time frame for the claim. This investigation may turn up an opportunity to object to the filed claim on behalf of your client, and a successful objection may be key to a viable repayment plan.

The voluntary bankruptcy filing is not by itself a contested proceeding, but rather “an umbrella under which numerous related lawsuits may be litigated.”2 The fundamental proceedings under the umbrella are either judicial (adversary proceedings initiated by complaint; application proceedings initiated by application; and contested matters initiated by motion),1 or administrative proceedings “designed to permit…a request…without the need for judicial action.”4 An objection can convert an administrative action into a judicial action.5

Most published case law deals with the government filing of a proof of claim as a waiver of its sovereign immunity against the debtor’s counterclaim to the government’s proof of claim.6 It could be argued that the treatment of a governmental response to a debtor’s counterclaim to the proof of claim may be afforded the same protection as a counterclaim under §2415(f), as it is the debtor that converts the administrative proof of claim into the judicial proceeding (adversary or contested matter), as opposed to an original action filed by the government. This would be similar to the logic found in Samedari1 discussed infra.

However, time-barred claims from post-09/01/96 production are unambiguous in that §1724(b)(l) is explicit in precluding action regarding time-barred obligations,8 which more than likely prohibits the filing of proofs of claim for time-barred obligations unless the production is from Indian lands, also discussed infra.

The Statutory Envelope

28 U.S.C. §2415 and 30 U.S.C. §1724 address time limitations on governmental royalty demands. section 2415(a) sets the six-year statute of limitations against actions by the United States or its agencies based on contract, while §2415(f) allows assertion of counterclaims. Time-barred counter-claims from the same transaction or occurrence are allowed, while timebarred counterclaims not arising from the same transaction or occurrence are limited to amounts not exceeding the claim against the government. Finally, §2415(i) provides additional protection (or possibly limitations)9 by allowing time-barred claims only as administrative offsets.

FOGRMA10 (Federal oil and Gas Royalty Management Act), 30 U.S.C. §§17010 -1757 is a later statute addressing time limitations. Typically, judicially discussed sections relative to §2415 are §§1713(b) and 1724(b).u section 1713(b) sets a six-year records retention requirement (previously generally handled under the individual mineral leases), while §1724(b) sets a seven-year statute of limitations for oil and gas royalty production from federal lands after Sept. 1,1996.12 These apply to royalty underpayment demands (excluding fraud), as well as any other agency demands such as audits, document request and recalculation requests.13

The quirk in §1724 is whether it applies to production from Indian lands under federal management. The notes following the 1996 amendments state that these amendments do not apply to Indian lands and the law reverts to §2415, with the applicable version being the one in effect the day before the enactment of the 1996 revisions.14 This could effectively revive the §2415 statute-of-limitations dispute for some production, although the note has not yet been discussed in any case or administrative law to date.

The Fifth Circuit Rule

In 1994, the Fifth Circuit applied the prior Supreme Court ruling in Bowen15 to governmental mineral lease royalty disputes in Phillips v. Babbitt}6 The Fifth Circuit construed “action for money damages” as “a suit in court seeking compensatory damages.”17 No filed complaint means no “action for money damages.”18 A judicial remedy requiring one party to pay money to another does not necessarily characterize the money amount as “money damages.”19 Money damages are normally compensatory relief,20 contrasted to the disputed MMS orders which are statements of moneys owed under contract, falling outside of §241521 as more akin to a series of corrected invoices, rather than judicial action.

The Tenth Circuit History: The Phillips cases

From 1991-93, the Tenth Circuit heard three cases: Phillips I,22 Phillips /T23 and Phillips 7//.24 In Phillips I, a DOI/MMS 1988 administrative order requested lease records on 32 leases for 1980-86 under the lease terms. Phillips argued that the cause of action accrued at the time the royalty payment was due, precluding the records request under §2415.25 The court ruled that §2415 only barred reimbursement requests, not records, and if they still had the records, they must be produced. Phillips IPb was similar, but the documents retention was imposed by FOGRMA rather than lease terms.27 Again, the district court held similarly28 and supported upon appeal. However, in the appeals opinion dicta, the Tenth Circuit indicated that untimely requests for royalty underpayments may be precluded.29

Phillips III30 litigated the question of when the statute of limitations begins to run.31 The district court held that any request for underpaid royalties must be made within six years of when the royalty is due,32 but was reversed by the Tenth Circuit, holding that the six-year statute of limitations could be tolled upon the timely initiation of an audit with the following instructions:33

1. The critical factor is the date the government should have reasonably known of the breach (royalty underpayment).

2. The district court must examine each case to determine first, if the facts to trigger the claim either were not known, or could not reasonably have been known without an audit, and second, whether “the audit was completed within a reasonable time after discovery of the deficiency royalty payment.

3. The “district courts should not view a failure to exercise reasonable diligence, inconvenience or even some hardship on the part of government as grounds for tolling the limitations period.”

4. The district courts should also look to FOGRMA, 30U.S.C. §1713(b),asa guideline for considering reasonableness. Failure of the government to initiate an audit within six years of records generation is a per se unreasonable delay.

Although not explicitly stated, the fourth point in Phillips HI appeared to overrule Phillips I and Phillips II to the extent that those opinions appeared to uphold government requests for records generated past the six-year mark if the lessee still has those records.

The OXY cases

The Tenth Circuit approached the §2415 issue again in 2000, with cases centered on disputed royalties on 1980-88 production that had been previously audited and approved several times, but a 1996 retroactive change in the method of the royalty calculation triggered the disputes.34 The district court entered judgment in favor of the plaintiffs, relying on Phillips III,35 but MMS appealed, and a Tenth Circuit panel opinion held that the lower court had improperly distinguished between “dicta” and the actual “holding”36 in Phillips III. This was later overturned by an en bane hearing. The overturned panel opinion, if left to stand, would have left the clear body of law similar to the above outlined in the Phillips cases.

The overturning en bane opinion was parsed word by word, and in some ways it was confusing by the Tenth Circuit’s own admission of no congressional statutory intent to apply §2415 to MMS administrative royalty demands.37 They lifted the four phrases of §2415: (1) “every action,” (2) “founded on contract,”38 (3) “money damages” and (4) “except as otherwise provided.” In looking at the analysis of “every action,” the Tenth Circuit cited United States v. Hanover Insurance Co.39 to support their position, yet read only the words but not the context of the circuit’s opinion (despite subsequently quoting the applicable opinion section40). The very next paragraph of the Hanover opinion following the Tenth Circuit quoted sections stated “[ujnlike the express exception for offsets [referring to §§2415(f) and 2415(i)], Congress did not include an exception to §2415(a) for coercive agency actions predicated upon an otherwise time-barred claim, and we decline the government’s invitation to judicially legislate one.”41 Congress recognized the need for administrative offsets, but placed limits on how offsets could be used, particularly if time-barred.

In regards to money damages, the Tenth Circuit rejected the Fifth Circuit’s analysis of Bowen as “neither binding nor persuasive,”42 and briefly distinguished royalty disputes from Medicaid reimbursement disputes as the former stemming from the underlying contract, and the latter from the underlying statute,43 but without a specific analysis of the underlying statutes.44

In summary, the current state of the Tenth Circuit §2415 law for pre-1996 federal oil and gas production royalty disputes is all actions and administrative orders (or requests) falling outside of the six-year statute of limitations period are prohibited. This is consistent with the general prohibition against any demands or actions in the current 30 U.S.C. 1724, enacted in 1996.

D.C. District Court

The D.C. District Court twice weighed in on the §2415 royalty issue in published opinions: Fina oil and Chemical Co. v. Norton45 in 2002, and Amoco Production Co. v. Baca46 in 2003. In Fina, the court applied §2415 to actions filed by the government and not to actions brought by a private party (Fina),41 siding with the Tenth Circuit in applying §2415(a) to administrative as well as judicial actions.48 The limitations period could be tolled during the administrative audit period.49

Later, in Amoco Production Co. v. Baca,50 the same court rejected the Tenth Circuit position using Samedan oil Corp. v. Deer,51 which paralleled the Fifth Circuit opinion in Phillips. The D.C. Court asked (1) are money damages different from specific monetary relief,52 (2) is an agency order an “action for money damages,53 (3) if §2415 does not apply to agency orders, do subsequent judicial actions to enforce agency orders also exempt,54 and (4) if §2415 does apply to an agency’s judicial action to enforce an order, would it also apply to an agency counterclaim arising out of the same transaction or occurrence?55

The D.C. Court decided that royalty payments are not compensatory or money damages, but were required under the lease terms.56 They also rejected the Ninth and Eleventh Circuit opinions holding that §2415 barred government actions to recovery on notes and deficiency debts.57 Then taking one step further, they extended the inapplicability of §2415 to administrative actions and resultant judicial actions,58 leaving open the possibility of a future holding allowing a §2415 time limitations bar to judicial actions if there was no tolling.59

The result was that the D.C. Court supported and elaborated the Fifth Circuit’s Phillips, stating:

1. §2415(a) does not apply to administrative actions.

2. §2415(a) does not apply to government-filed judicial actions to recover past royalty payments flowing from timely-filed administrative actions.

3. §2415(a) does not apply to government counterclaims filed in response to lessee actions seeking to overturn administrative orders and rulings.

4. §2415(a) tolls the statute of limitations during the administrative appeals process until a year after final administrative decision.

5. §2415(i) limits governmental recovery on time-barred claims to the filing of counterclaims, precluding coercive agency action such as was found in Hanover.

6. FOGRMA, through its amendments, precludes application of §2415 to royalty claims for production past its Sept. 1, 1996, effective date. 300 RSupp. at 17.

Although still a judicial morass, the following questions can be used as guideposts in developing an appropriate, fact-specific strategy:

1. Did the demand arise from production before or after Sept. 1,1996?

2. Is the demand from production from federal or Indian lands?

3. Is the controlling jurisdiction one that is more likely to follow the Tenth Circuit, or the Fifth Circuit/District of Columbia?

4. Is the demand flowing from an administrative proceeding, a counterclaim, administrative offset or a stand-alone judicial action?

Clearly, such a complex issue involving a split of the circuits is difficult to present in a limited format. Readers desiring a more comprehensive analysis are invited to contact the author for the full text analysis of the original paper.

1 S.256, 109th Cong. §1233 (2005).

2 In re BiP Enter. Inc., 67 B.R. 179, FN[4], citing Weintraub, B. and Resnick, A., Bankruptcy Law Manual, 1)6.04, 6-7.

3 First Carolina Fin. Corp. v. Tr. of Estate of Caron (In re Caron), 50 B.R. 27, 30 (N.B. Ga. 1984).

4 Id.

5 In re Tomczak, 2000 WL 33728176, 2 (E.D. Pa. 2000).

6 see, generally, cases interpreting 28 U.S.C. §106, which deals with the waiver of sovereign immunity by the governmental filing of a proof of claim.

7 1995 WL 431307, 7 (D. D.C. 1995).

8 30 U.S.C.S. §1724(1 ((A), (B) (1995 Supp.).

9 United States v. Hanover Ins. Co., 82 F.3d 1052,1055 (Fed. Cir. 1996); Samedan oil Corp. v. Deer, 1995 WL 431307,9 (D. D.C. 1995).

10 30 U.S.C.S. §1701 (Short title) (Supp. 1995) for the version prior to 1996 (Federal oil and Gas Royalty Management Act of 1982). The later version containing the revised §1724 statute of limitations is known as the “Federal oil and Gas Royalty Simplification and Fairness Act of 1996.” General practice in the court opinions appears to be use of the more commonly known FOGRMA regardless of the statute version being discussed.

11 30 U.S.C.S. §1724 (Supp. 1995) also contains other provisions not presented here.

12 OXY USA Inc. v. BaMn, 268 F.3d 1001, 1009 (10th Cir. 2001). see, also, 30 U.S.C.S. §1701 (Supp. 1995), History; Ancillary Laws and Directives: Applicability of Act Aug. 13, 1996: “[T]his Act…shall apply with respect to the production of oil and gas after the first day of the month following the date of the enactment of this Act.”

13 20 U.S.C.S. §1724(b)(1) (Supp. 1995).

14 30 U.S.C.S. §1701 (Supp. 1995), History; Ancillary Laws and Directives, Other provisions: Indian lands; applicability of Aug. 13, 1996, amendments.

15 Bown v. Massachusetts, 487 U.S. 879 (1988).

16 Phillips v. BaIMIt, 1994 WL 484506 (5th CIr. 1994).

17 W.at1.

18 Id.

19 Id., citing 487 U.S. at 893.

20 Id., citing 487 U.S. at 897.

21 W.

22 Phillips Petroleum Co. v. Lujan, 951 F.2d 257 (10th Cir. 1991).

23 Phillips Petroleum Co. v. Lujan, 963 F.2d 1380 (10th Cir. 1992).

24 Phillips Petroleum Co. v. Lujan, 4 F.3d 858 (10th Cir. 1993).

25 951 F.2d at 259.

26 963 F.2d at 1380.

27 963 F.2d at 1382. FOGRMA embodies a number of requirements including responsibilities for the secretary in auditing and reconciling, lessee records and reports retention, and actions for the collection of royalties.

28 Id. at 1383-84. The district court also held that FOGRMA (30 U.S.C. §1713(b)) did not require specific leases to be stated in the demand letter in order to extend the document retention period, and the Paperwork Reduction Act was not violated as it specifically exempts MMS (government) royalty audit and investigation activities.

29 a. at 1386.

30 4 F.3d 858.

31 Id. at 860.

32 Id. at 859-60.

33 Id. at 862-64.

34 OXY USA Inc. v. Babbitt, 230 F.3d 1178, 1182 (10th Cir. 2000). The change was from a basis using the posted crude price to using Alaskan North Slope crude price.

35 Id. at 1183.

36 Id. at 1187.

37 OXY USA Inc. v. Babbitt, 268 F.3d 1001, 1001 (10th Cir. 2001). FN1 states “the 1991 amendments to [FOGRMA]…make clear that 28 U.S.C. does not apply to such claims,” but still the Tenth Circuit continued that “additional royalties for oil and gas produced from federal leases prior to Sept. 1,1996, continue to present live controversies governed by our holding here.”

38 Id. at 1007, citing Katch v. Cisneros, 16 F.3d 1204, 1209 (Fed. Cir. 1994), and “sovereign and jurisdictional questions;” Transohio Sav. Bank v. Director, Office of Thrift Supervision, 967 F.2d 598, 609 (D.C. Cir. 1992).

39 Id. at 1006.

40 Id., quoting 82 F.3d 1052, 1055.

41 82F.3d at 1055.

42 268F.3d at 1008.

43 Id.

44 Id., referring to United States v. Alvarado, 5 F.3d 1425, 1428 (11th Cir. 1993).

45 Fina oil and Chem. Co. v. Norton, 209 F.Supp. 2d 246 (D. D.C. 2002).

46 AmocoProd. Co. v. Baca, 300 F.Supp. 2d. 1 (D. D.C. 2003).

47 Id. at 258.

48 Id. at FN12, referring to 268 F.3d 1001.

49 Id., citing Marathon oil Co. v. Babbitt, 938 F.Supp. 575, 578-79 (D. Alaska 1996).

50 AmocoProd. Co. v. Baca, 300 F.Supp. 2d. 1 (D. D.C. 2003).

51 Samedan oil Corp. v. Deer, 1995 WL 431307 (D. D.C. 1995).

52 Id. at 5.

53 Id. at 6-7.

54 Id. at 6.

55 Id. at 7.

56 Id. at 5.

57 Id. at 6.

58 Id.

59 209 F.Supp.2d at FN[12], referring to 268 F.3d 1001 (10th Cir. 2001) for the proposition that §2415 would bar administrative claims filed after the six-year statute of limitations, but an administrative claim timely filed would toll the statute of limitations during the administrative proceedings period, in turn, dung 938 F.Supp. 575 at 578-79.

Written by:

Michael L Catrett

Marjorie Payne Britt PC; Houston

About the Author

Mike Catrett practices bankruptcy law with the firm ofMarjorie Pay ne Brin, P.C. in Houston, Texas.

Copyright American Bankruptcy Institute Mar 2006

Provided by ProQuest Information and Learning Company. All rights Reserved