Who Goes First? What Happens When Two Federal Mineral Lessees Clash Over The Same Acreage

Posted on February 7, 2018 by Tom Sansonetti

In January, the Wyoming Supreme Court declined to play umpire in a dispute between two federal mineral lessees. The decision merely defers an issue of first impression: what rules apply when competing mineral lessees occupy the same leasehold?

The Berenergy Corporation produces oil from several sites in Wyoming’s mineral rich northeast corner. Berenergy obtained its oil leases from the Department of the Interior’s Bureau of Land Management in the 1960s. Berenergy’s nine wells are spaced laterally on an east-west axis.

Peabody Powder River Mining extracts coal from several mines in the same area. Peabody also obtained its coal leases from the BLM, but in the 1970s. Peabody plans to mine the coal in a south to north direction for the next forty years.

Peabody’s mine is now within a mile of Berenergy’s wells. Peabody offered to pay Berenergy the fair market value of its wells. In response, Berenergy demanded a sizeable multiple of the appraisal value of the wells in order to get out of Peabody’s way. Not surprisingly, the parties could not reach an agreement and litigation ensued.

First, Berenergy sued Peabody in Wyoming state court claiming that its earlier-issued leases gave it priority on a “first in time is first in right” theory. Berenergy sought to require Peabody to mine around its wells if Peabody was unwilling to pay up.

Next, Peabody sued Berenergy in Wyoming federal court claiming that since both parties were federal mineral lessees with a common BLM lessor, the decision on priority should be made by a federal judge based on a doctrine of accommodation. Peabody argued that factors such as the number of jobs at stake, the amount of royalties paid to the government, the value of the respective minerals, and the ability to maximize production of both minerals should be used to decide if Peabody could mine through Berenergy’s wells or be made to mine around the wells. The latter decision would require Peabody to leave the bypassed coal in place forever as the mine proceeds in its northerly direction.

The Obama-era BLM declined to take a stance as to which lessee should prevail. Even though the BLM was a common lessor, the federal government declined to intervene or be impleaded as an indispensable party in either lawsuit.

In June 2014, the federal district judge remanded the case to the state district court for resolution under state law while dismissing the federal action for lack of federal question jurisdiction.

Following a weeklong bench trial, the state district judge, while acknowledging that the case was without precedent and one of first impression, issued an order in October 2016 rejecting Berenergy’s “first in time” argument and utilizing the doctrine of accommodation. The court’s ruling would allow Peabody to mine through if it paid Berenergy the full appraised value of its wells. Berenergy appealed the order to the Wyoming Supreme Court.

On January 4, 2018 the Wyoming Supreme Court vacated the state district judge’s order, declaring that there was no state law that applied to two federal mineral lessees in conflict with one another. Berenergy Corp. v. BTU Western Resources, Inc., 2018 WY 2, 408 P.3d 396 (Wyo. 2018).

The Court noted that the Berenergy wells had been valued at less than a million dollars while Peabody’s mining of the coal in question would create many jobs and generate tax revenues that dwarfed the revenues produced from Berenergy’s aged and nearly depleted wells.

But the Court stated that it was the BLM’s duty to resolve the conflicts between its two lessees.  Thus, the Court remanded the case to the state district court judge with instructions to dismiss the case unless the BLM agreed to be joined as a party.

By the end of 2018, the coal pit wall will contact the first of Berenergy’s oil wells. Peabody plans to pull the drilling pipe and store it for future use along with all of the associated oil field equipment. The well hole would be plugged as Peabody’s huge drag lines mine through the area.

No doubt temporary restraining orders will then abound. But where will they be filed? The federal district court has already decreed that the conflict is not a federal issue. As of January 4th, the Wyoming state district courts have been instructed to stay out of the conflict since state law does not apply.

So who does get to go first? Will the Trump-era BLM decide to get involved? And if so, under what rules? Stay tuned.

Contracting for Original and Renewal of Pipeline Right-of-Ways on Tribal and Allottee Lands

Posted on February 24, 2016 by Tom Sansonetti

The Department of the Interior’s Bureau of Indian Affairs (BIA) has promulgated new regulations involving the original procurement and renewal of Right-of-Ways (ROW) on tribal and allottee lands which take effect on March 22, 2016. These new rules will replace those in place since 1947, creating a series of significant problems. This post lists the problems and suggests a legislative solution.

1) Majority Consent of Life Estate Heirs is Needed for ROW to be Granted or Renewed

The new rules limit the length of a ROW to 20 years. The ROWs are not subject to state or local laws, and the new rules impose consent and approval requirements that do not appear in the current regulations. Under the current law, voluntary agreements could be struck between tribes, allottees, and a company, so long as the BIA Regional Director approved the deal. The BIA would approve if a majority of the allottee landowners consented and the amounts of money paid for the ROW were not less than the fair market value (FMV) of the allotment parcel. Under the new rules, however, the company must obtain a majority consent for the original ROW or renewal thereof, not only from the living life estate allottees, but from their heirs as well. This presents a huge obstacle, as companies will now have to find each of the heirs and then attempt to bargain with them individually. Under the current rules, if agreement could not be reached, then the company was free to use a 1907 statute to condemn the allottee land but never the tribal land.

2) Life Estate Holders Can Withdraw Previously Granted Consents

In two separate New Mexico ROW cases involving Western Refining’s pipeline and Public Service of New Mexico’s (PNM) overhead wires, the companies both originally obtained the written consent of a majority of the life estate holders who were paid fair market value for their consent. However, upon the BIA Regional Director finding a lack of a majority of heirs consenting, certain life estate holders informed the BIA that they were “unconsenting” in order to hold out for better compensation, even though they had cashed the original checks. Because the BIA allowed the holdouts’ action of “unconsenting” to stand, the companies lost their majority consent of life estate holders. Attorneys for the life estate holders are now suing PNM for trespass in federal court in Albuquerque.

3) Fair Market Value Has Become a Floor in Negotiations Rather Than an Appraisal Standard

Since the 1947 statute came into existence, the fair market value (FMV), as determined by BIA-qualified appraisers, of the allotment acreage to be crossed by the pipeline served as the negotiation basis between the company and individual allottees. The allottees, knowing that their land could be condemned under the 1907 statute dealing with ROWs, often bargained for a payment that was two or three times FMV. However, under the new regulations, FMV is a starting point, non-binding and irrelevant to an allottee who believes that the sky is the limit when dealing with large corporations.

4) The Condemnation Alternative is Under Attack Due to Tribal Ownership of Undivided Interests in Allotments

In the Public Service of New Mexico federal district court litigation, PNM sued the allottees of several allotments under the New Mexico condemnation statutes after failing to obtain the consent of a majority of life estate heirs for a 20-year renewal. The federal judge dismissed the condemnation lawsuit, because recently deceased allottees left their interests to the Navajo Nation. Even though those interests amounted to less than 1% of the entire allotment, the court labeled that interest tribal land, recognized the Navajo Nation’s sovereign immunity from suit, declared the Navajo Nation an indispensable party, and dismissed the lawsuit. PNM is appealing the dismissal to the Tenth Circuit. Without the ability to condemn, pipelines will be left only with choice of either paying ransom under the 1947 statute or facing allottee trespass actions.

Western Refining has also filed a condemnation suit against the unconsenting allottees under the New Mexico condemnation statutes. The case is before a different judge than the PNM case and is currently stayed pending a decision from the Interior Board of Indian Appeals on the majority consent of heirs issue.

The best solution to the four problems above requires the active involvement of the Legislative Branch.

Utilizing its plenary authority concerning tribal issues, Congress should pass amendments to the 1907 and 1947 statutes or create new legislation supplanting the current law that:

  1. Eliminates the need for heirs to consent
  2. Eliminates the ability of consenters to unconsent once consideration is paid
  3. Re-establishes the sufficiency of fair market value as the basis for the compensation to be paid
  4. Guarantees the right of pipeline owners to condemn allottee land regardless of partial tribal ownership

Nothing less than the free flow of energy-oriented interstate commerce is at stake. 

California Appellate Decision Could Impact Railroad–Underground Pipeline Relationships Nationwide

Posted on March 3, 2015 by Tom Sansonetti

On January 21, 2015 the California Supreme Court declined to hear an appeal from a lower appellate court, thus leaving in place a decision with the potential to impact the longstanding relationship between the nation’s railroads and pipeline companies concerning payment for use of congressionally granted right-of-ways that date from the 19th Century.

The momentous decision in Union Pacific Railroad vs. Santa Fe Pacific Pipeline, Inc. was announced by a unanimous three judge panel from the Court of Appeal of the State of California’s Second Appellate District on November 5, 2014.  The ruling overturned a Los Angeles County trial court judge’s award of $10 million for back rent, plus interest due to the Union Pacific Railroad from the Santa Fe Pacific Pipeline Company.

The pipeline company’s successful appeal centered on narrowing the scope of what pre-1871 grants from Congress to railroad companies included.  The appellate court agreed with the pipeline company that the proverbial “bundle of sticks” of property rights granted by Congress only included uses related to “railroad purposes.”  Oil and gas pipelines buried alongside the tracks were deemed not to be a railroad purpose, as petroleum pipelines were not even conceived of at the time the grants were issued, and had no link or relationship with the daily running of a railroad.

As a result of the appellate court’s holding, the true recipient of the pipeline rental payments was declared to be the United States government as represented by the Department of the Interior’s Bureau of Land Management.  The right-of-way at issue was 2014 miles in length, touched five states and was being renewed for a period of ten years.  Since the pipeline company had been making its rental payments to the railroad for several decades, the possibility looms of the United States, who was not a party to the lawsuit, seeking retroactive application of the ruling to the millions of dollars previously paid to the United Pacific Railroad.

It is anticipated that the railroad will file a petition to grant certiorari with the United States Supreme Court by its April 21, 2015 deadline.  If the Union Pacific Railroad is unsuccessful in either getting certiorari granted or in the subsequent appeal itself, then one could envision other pipeline companies, fiber optic companies and other non-railroad oriented users of the many railroad right-of-ways across the entire country seeking to suspend and not renew rent payments to railroads with pre-1871 grants.  Consequently, the United States government could end up with an unanticipated sizeable new income stream to help fill the nation’s coffers.

Beware the Specter of Debarment

Posted on May 8, 2014 by Tom Sansonetti

Debarment is the process whereby the federal government can permanently prevent a company from doing business with the federal government or suspend a company from doing business with the federal government for a period of years.  The debarment process has been available for decades to the United States to be used against companies or persons whom the government believes are untrustworthy. For instance, removal from EPA’s list of violating facilities requires agency evaluation of corporate attitude. But the Obama Administration has broadened the scope of the process to potentially ensnare many an unsuspecting entity.

The debarment process as it currently exists has resulted in the following scenarios:

A. An oil company in the Rocky Mountain region settled a regulatory violation with the Department of the Interior’s Bureau of Land Management and as part of the agreement paid a substantial seven figure fine and adopted new procedures designed to prevent a reoccurrence of the violation and a two-year period of probation.  Imagine the surprise of the company’s managers and in-house lawyers when eighteen months after the settlement was executed, they received a Notice of Debarment for a three-year period preventing the use of their federal leases requiring new permits.

B. A wind farm owner that was convicted for killing bald eagles discovered that the company could not sell future electricity production to a federal facility.

C. An oil and gas company that pleaded guilty to a Clean Water Act spill faced debarment from being able to bid on federal oil and gas leases for five years.

Companies or persons found to be in violation of civil or criminal statutes or departmental regulations are subject to debarment.  While in egregious cases debarments can be perpetual, most debarments are for a period of three to nine years.  Debarments do not affect a company’s current government contracts, but do affect renewals of those contracts or the need for new permits on federal lands.  The debarments are company-wide.  Consequently, the above-mentioned wind farm owner also could not sell its electricity produced from its coal fired power plants to federal facilities.

Debarment proceedings are administered by the various Offices of Debarment, located within each cabinet department, with the closest responsibility for enforcing the law that was violated.  Thus, the Department of the Interior’s Office of Debarment (staffed by the Inspector General’s personnel) handles violations of fish and wildlife, public lands and Indian law.  Environmental Protection Agency lawyers in the grants and debarment program handle debarment proceedings authorized by Section 508 of the Clean Water Act or Section 306 of the Clean Air Act.

Upon the entry of a federal court judgment or consent decree a representative of the Department of Justice, often an Assistant United States Attorney, forwards the document to the appropriate cabinet department’s Office of Debarment.  The government deems debarment proceedings to be separate from the underlying litigation.  Agreements to avoid debarment may not be a condition of any plea bargain or consent decree.  Adverse outcomes after executive branch debarment hearings may be appealed to a federal district court under deferential Administrative Procedures Act standards.