Petro Mex, LLC v. United States ( 2023 )

In the United States Court of Federal Claims
No. 14-1024C
Filed: February 20, 2023
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PETRO MEX, LLC, *
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Plaintiff, *
v. *
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UNITED STATES, *
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Defendant. *
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Douglas J. Reynolds, The Reynolds Law Group, Durango, CO. With him was
Michelle Der Ohanesian, The Reynolds Law Group, Durango, CO.
Kara M. Westercamp, Trial Attorney, Commercial Litigation Branch, Civil Division,
United States Department of Justice, Washington, DC, for defendant. With her were
Allison Kidd-Miller, Trial Attorney, Commercial Litigation Branch, Tara K. Hogan,
Assistant Director, Commercial Litigation Branch; Patricia M. McCarthy, Director,
Commercial Litigation Branch, and Brian M. Boynton, Principal Deputy Attorney
General, Civil Division. Philip C. Lowe, Solicitor’s Office, United States Department of
the Interior, Lakewood, CO, of counsel.
OPINION
HORN, J.
In the above-captioned case, plaintiff Petro Mex, LLC (Petro Mex) filed its
complaint in the United States Court of Federal Claims alleging that defendant breached
its lease agreement for oil and gas mining. Plaintiff seeks more than $5,000,000.00 in
damages, including expectations damages, reliance damages, interest and fees.
Specifically, plaintiff “seeks damages for the approximately two-year period in which it
was prevented from producing and selling oil and gas and for damage to the wells on the
Lease that were caused by the extended shut-in period.” The above captioned case was
originally assigned to Judge Nancy B. Firestone. The above captioned case was
subsequently reassigned to Judge Robert H. Hodges, before ultimately being reassigned
to the undersigned. The undersigned held a trial on plaintiff’s breach of contract claims
and defendant’s offset claims.
FINDINGS OF FACT
The Garfield Lease
The parties have stipulated that “[e]ffective March 1, 1965, Celeste C. Grynberg
and the DOI [United States Department of Interior] entered into oil and gas lease number
COC-0124705A (Garfield Lease) on public land,” and “[t]hrough a series of assignments,
Petro Mex acquired record title to the Garfield Lease effective October 1, 2004. At all
times relevant to this case, Petro Mex was the owner and the operator of the Garfield
Lease.”1 (alterations in original). Additionally, the parties stipulated that “[a]t all times
relevant to this case, Jesus Villalobos was the owner and president of Petro Mex.” Mr.
Villalobos testified at trial that he is the sole owner of Petro Mex. Mr. Villalobos explained
that he founded Petro Mex
[b]ecause I get a chance to come into the -- since I’ve been in the oilfield
business all my life -- I used to have a friend that -- his name was John
Durham and he come over and talk to me to buy oil wells in Colorado. Well,
he’s trying to buy those wells, but he said he can’t come up with the money.
So he asked me if I can buy them. So that’s when I started Petro Mex.
(alteration added).
The Garfield Lease began with a series of “Lease Terms.” Section 1 of the Garfield
Lease states:
1 As noted by defendant, although there were also “references to Lease COC-088586
(Mesa Lease) and Lease COC-60770 (Esmerelda [sic] Lease) throughout the trial, the
Garfield Lease is the only lease at issue.” (alteration added). Plaintiff’s counsel stated at
the trial that the Mesa Lease “is not at issue in this matter for ownership reasons.” Plaintiff
did not contest defendant’s statement that the Esmeralda Lease is not at issue in this
case. The court notes that the Esmeralda Lease was referenced in a June 16, 2009 letter
to Petro Mex, discussed below. The June 16, 2009 letter stated, in part:
Lease COC-60770
The status of COC-60770 has been difficult to track for the past several
years. The Esmeralda 1-2 was spud on July 4, 2007 and a lease extension
was earned by drilling over the lease expiration date. As of today the well
has not been completed. In addition, the location for the Esmeralda 2-2 has
been built and Petro Mex will be responsible for restoration. The APD
[Application for Permit to Drill] for the 2-2 well has expired. We have
consulted with the Minerals Management Service and our State Office and
have determined that the subject lease terminated due to failure to pay the
lease yearly rental. Find attached a notice of the lease termination
(Enclosure 6).
(emphasis in original; alteration added).
2
SECTION 1. Rights of Lessee. — The lessee is granted the exclusive right
and privilege to drill for, mine, extract, remove, and dispose of all the oil and
gas deposits, except helium gas, in the lands leased, together with the right
to construct and maintain thereupon, all works, buildings, plants,
waterways, roads, telegraph or telephone lines, pipelines, reservoirs, tanks,
pumping stations, or other structures necessary to the full enjoyment
thereof, for a period of 10 years, and so long thereafter as oil or gas is
produced in paying quantities; subject to any unit agreement heretofore or
hereafter approved by the Secretary of the Interior, the provisions of said
agreement to govern the lands subject thereto where inconsistent with the
terms of the lease.
(capitalization and emphasis in original).
Section 2(g) of the Garfield Lease provides: “Statements, plats and reports.— At
such times and in such forms that the lessor may prescribe, to furnish detailed statements
showing the amounts and quality of all products removed and sold from the lease, the
proceeds therefrom and the amount used for production purposes or unavoidably lost[.]”
(alteration added; emphasis in original).2 Section 7 of the Garfield Lease provides:
SEC. 7. Proceedings in case of default. — If the lessee shall not comply
with any of the provisions of the act or the regulations thereunder or of the
lease, or make default in the performance or observance of any of the terms
hereof (except that of payment of annual rental which results in the
automatic termination of the lease), and such default shall continue for a
period of 30 days after service of written notice thereof by the lessor, this
lease may be cancelled by the Secretary of the Interior in accordance with
section 31 of the act, except that if this lease covers lands known to contain
2 Pursuant to the operative version of 43 C.F.R. § 3162.4-1(a) (2007) during the period at
issue in this litigation, an operator “shall keep accurate and complete records with respect
to all lease operations including, but not limited to, production facilities and equipment,
drilling, producing, redrilling, deepening, repairing, plugging back, and abandonment
operations, and other matters pertaining to operations.” Id. The current version provides:
(a) The operator must keep accurate and complete records with respect to:
(1) All lease operations, including, but not limited to, drilling, producing,
redrilling, repairing, plugging back, and abandonment operations;
(2) Production facilities and equipment (including schematic diagrams as
required by applicable orders and notices); and
(3) Determining and verifying the quantity, quality, and disposition of
production from or allocable to Federal or Indian leases (including source
records).
43 C.F.R. § 3162.4-1(a) (2022).
3
valuable deposits of oil or gas, the lease may be cancelled only by judicial
proceedings in the manner provided in section 31 of the act, but this
provision shall not be construed to prevent the exercise by the lessor of any
legal or equitable remedy which the lessor might otherwise have. Upon
cancellation of this lease, any casing material, or equipment determined by
the lessor to be necessary for use in plugging or preserving any well drilled
on the leased land shall become the property of the lessor. A waiver of any
particular cause of forfeiture shall not prevent the cancellation and forfeiture
of this lease for any other cause of forfeiture, or for the same cause
occurring at any other time.
(capitalization and emphasis in original).
After the “Lease Terms,” the Garfield Lease included an “OFFER TO LEASE AND
LEASE FOR OIL AND GAS,” (capitalization in original), from the Department of the
Interior (DOI), Bureau of Land Management (BLM), which stated:
The undersigned hereby offers to lease all or any of the lands described in
item 2 [meets and bounds description] that are available for lease, pursuant
and subject to the terms and provisions of the Act of February 25, 1920 (41
Stat. 437, 30 U.S.C. sec. 181),[3] as amended, hereinafter referred to as the
act, and to all reasonable regulations of the Secretary of the Interior now or
hereafter in force, when not inconsistent with any express and specific
provisions herein, which are made a part hereof.
(alterations added).
The parties stipulated that “[a]t all times relevant to this case, there have been
three operational natural gas wells on the Garfield Lease: Federal 15-9; 6-9-8-101; and
Government 5.”4 The parties further stipulated that “[t]he ‘minimum royalty’ for the Garfield
3 As noted in defendant’s post-trial brief:
The Mineral Leasing Act of 1920, ch. 65, 41 Stat. 437 (1920) (codified, as
amended, at 30 U.S.C. § 181 et seq.) (1981), authorizes and governs the
leasing of public lands, i.e., lands “owned by the United States,” for
developing deposits of certain minerals, including oil and gas. As the
principal administrator of the Mineral Leasing Act for onshore minerals
owned by the United States, Interior issues oil and gas leases authorizing
mineral exploration and development activities by private entities.
4The court notes that at trial, the parties and the witnesses did not refer to the names or
number of the wells operated by Petro Mex with consistency. By way of example, Linn
Wilson, a Petro Mex employee, had the following exchange with plaintiff’s counsel at trial:
Q. How many wells are on that lease?
4
lease was $1,080. The ‘royalty on production’ for the Garfield lease was 12.5 percent on
production removed or sold from the leased land.” The royalties were to be paid to the
lessor, the BLM.
In an exchange with plaintiff’s counsel, Mr. Villalobos testified at trial regarding the
operations of Petro Mex and its wells:
[Question by plaintiff’s counsel of record Douglas Reynolds] What is it that
Petro Mex does? What is the business that Petro Mex is in?
[Answer by Mr. Villalobos] Petro Mex owns leases in Colorado and now we
own leases in New Mexico and Utah right now.
Q. Okay. And you’re saying they own leases. You’re referring to oil and gas
leases, right?
A. That’s correct, yes, sir.
Q. And does Petro Mex operate those leases as well?
A. Yes, sir.
Q. Okay. And you were here for the testimony yesterday or at least you
observed the testimony from Mr. Wilson, Linn Wilson, yesterday, correct?
A. Yes.
Q. And are you familiar with the lease that we were discussing, the Garfield
lease?
A. Yes, sir.
Q. Okay. When did Petro Mex purchase that lease?
A. There is [sic] four wells on that lease.
Q. And what are those wells called? What are the names --
A. There is the 15-9, the 6-9, the Government 6, and the Government 5.
(alteration added). During Mr. Villalobos’ direct testimony in response to the question:
“You said that the lease -- the wells that were in place were the 15-9, the 6 and the 2.
Yesterday, we also heard discussion of a Government 5 well,” Mr. Villalobos confirmed:
“Yes, sir.” To add further confusion, in a April 1, 2009 letter to Petro Mex from the BLM,
discussed below, the BLM indicated: “There are five wells on the lease and all are
operated by Petro Mex, LLC,” “Federal 15-9 Government 9 Government 5 Government 6
Federal 6-9.”
5
A. 2003. 2002 or 2003.
Q. Okay. Well, you said that Petro Mex was formed in 2002 or 2003. Did
Petro Mex buy that lease essentially right after it was formed?
A. Yes. That’s the reason I formed Petro Mex.
Q. Was to buy that lease?
A. Yes, sir.
Q. And there’s another lease as well, right?
A. Yes, sir.
Q. In Colorado?
A. Garfield County and Mesa County.
Q. Okay. So there’s another lease that Petro Mex owned or operated and
that’s called the Mesa lease. Is that correct?
A. Yes, sir.
Q. Was there a third lease at that point in time as well?
A. Yeah, we had another lease in Section 2.
Q. Okay.
A. That was terminated.
Q. Okay. When you purchased the Garfield lease, was there a well already
in place on the lease?
A. Yeah, that was [sic] three wells in place already, yes.
Q. Okay. Which wells were in place?
A. The 15-9, the number 6 and then number 2.
Q. Okay. And were those wells productive when the lease was purchased?
A. The [sic] was making some gas, yes.
6
Q. Okay. Were they making enough gas to cover royalties and expenses?
A. Yes, but I had to lay 15 miles of pipeline to be able to produce more.
...
Q. Okay. You said that the lease -- the wells that were in place were the 15-
9, the 6 and the 2. Yesterday, we also heard discussion of a Government 5
well.
A. Yes, sir.
Q. Was that a well you drilled after you purchased the lease?
A. Already -- that well was already drilled. It wasn’t hooked up. So I have to
do -- redrill it and hook it up to the other system.
Q. Okay. Do those wells produce oil as well, Mr. Villalobos?
A. The only one that produce oil is the 15-9.
Q. Okay. And does it produce very much oil?
A. Not very much.
Q. It’s primarily a natural gas oil well?
A. Most -- gas, yes.
Q. Okay. What employee handled most of the day-to-day operations of the
wells back in 2007 and 2008?
A. Mr. Linn Wilson.
Q. Okay. Did you do much on a day-to-day basis with regard to those wells?
A. I was doing some of it. I do -- I was doing some work, and I didn’t do that
much paperwork because I don’t know how to do it.
(alterations added). Mr. Wilson, the Operations Manager of Petro Mex, testified at trial
that after 2005, the Garfield Lease was consistently productive.
Well Inspection and Notices of Incidents of Noncompliance
The parties agree that the “lease at issue in this matter was, at all times relevant
to this case, subject to the jurisdiction of BLM’s Grand Junction (Colorado) Field Office
7
(Field Office).” (capitalization in original). As noted by defendant: “Because all gas
produced from a Federal lease is subject to royalty payments, 30 C.F.R. §§ 1202.150(a),
(b)(1), operators must submit production reports in order to verify and calculate the royalty
payments due to the United States. 30 C.F.R. § 1210.101(a).” (internal reference
omitted). Related to the required reports for the Garfield Lease, a BLM employee Mr.
Robert Hartman, a petroleum engineer in the Field Office with the BLM, sent Petro Mex
a letter on March 14, 2007, which stated, in part:
Please refer to our letter dated August 11, 2006 that requested information
concerning wells operated by Petro-Mex. To date, none of the information
requested has been received. Petro-mex’s [sic] failure to provide this
information is an Incident of Non Compliance.
The following is an order of the authorized officer. In accordance with
43 CFR 3163.1(a), please submit the above indicated reports to this office
no later than twenty (20) days from the receipt of this letter to correct the
violations. If you fail to submit the required reports in the time specified, you
will be liable for an assessment of $250.00 under 43 CFR 3163.1(a)(2). For
clarity we repeat our request for information in the following bolded italicized
text.
We are lacking several reports for wells operated by Petro-Mex
Resources. The listed items cover different wells and areas of
concern.
Lease COC088586, Well 1-15-8-101, NW¼, NW¼ Section 15, T8S,
R101W
Lease COC0124705A, Well 6-9-8-101, SE¼ SW¼, Section 9, T8S,
R101W
Form 3160-5, Spud Notification: two copies due of written
confirmation of verbal spud notification. We have no record of the
spudding of these wells.
Form 3160-4, Well Completion Report and Log: two copies due within
30 days after well is completed (Onshore Order No. 1, Section VIII).
Geologic Logs: two copies due within 30 days after well is completed.
(43 CFR 3162.4-1b requires duplicate copies of all types of wire line
logs, sample logs, drilling time logs and other well surveys).
Lease COC0124705A, Well 5, SW¼ SW¼, Section 9, T8S, R101W
First Production Notification: Notification to the BLM is required within
5 days of first production. The COGCC website indicates the subject
8
well began producing in January 2006 after being shut in for several
years.
Form 3160-4, Well Completion Report and Log: two copies due within
30 days after well is completed (Onshore Order No. 1, Section VIII).
Please update status of recompletion as requested in your sundry of
August 2004 which involved pulling the existing casing and running
new strings.
Lease COC088586, Well 2, NW ¼ NW ¼, Section 15, T8S, R101W
First Production Notification: Notification to the BLM is required within
5 days of first production. The COGCC website indicates the subject
well began producing in July 2004 after being shut in for several years.
The Minerals Management Service is responsible for the collection of
production reports for all federal leases and agreements. Their
database shows that Petro-Mex has not reported for several years.
Please indicate in your response to this letter [sic] status in updating
the production reporting for all of the wells listed in Attachment 1.
(emphasis in original; alterations added). At the trial, defendant’s counsel and Mr.
Hartman had the following exchange about the March 14, 2007 letter at trial.
[Question by defendant’s counsel of record Kara Westercamp] [B]eneath
the first production notification, there is a reference to a Form 3160-4, Well
Completion Report and Log. Why were you asking for that?
[Answer by Mr. Hartman] I believe we did not have any record of that well
being completed. Again, I’m not sure if Petro Mex was the -- drilled the well
or not, but we didn’t have a copy of it, so I was just asking for that. And that’s
due within 30 days of the well being completed.
Q. And considering that there’s a reference to a sundry of August 2004, and
now we know we’re at least past August 2006, was that something that
Petro Mex should have provided?
A. Yes.
(alterations added).
Regarding the reference in the March 14, 2007 letter to the Minerals Management
Service, defendant’s counsel asked Mr. Hartman
just going to the last paragraph, a reference to MMS [Minerals Management
Service], and it looks like you state that their [Minerals Management Service]
9
database shows that Petro Mex has not reported for several years. Why --
why were you asking about -- about the MMS database?
A. Well, we were sort of shooting blind. We didn’t know for sure what was
going on. We didn’t have any production reports from Petro Mex, so we
were asking for them to update the MMS so that we would know more.
(alterations added).
Previous to the March 14, 2007 letter sent by Mr. Hartman, on November 30, 2006,
Edward Fancher, a petroleum engineering technician with the BLM, sent a letter to Petro
Mex indicating that Petro Mex’s “leases and wells have been selected by the Grand
Junction Field Office (GJFO) for a production inspection.” The testimony developed at
trial demonstrated that Mr. Fancher was the BLM employee who had the most direct
contact with Petro Mex and visited the site most often during the time period at issue in
this above captioned case.
The November 30, 2006 letter from Mr. Fancher continued:
In accordance with 43 CFR 3162.7-5(b)(6), you shall submit the following
documents to the GJFO by January 15, 2007:
1. (a) OGOR [Oil and Gas Operations Report] reports submitted to MMS
[Minerals Management Service5] for each well during the inspection times.
(b) Gas purchase statements, Quarterly Meter Calibration Reports,
Configuration Report, and Chart Integration Volume Statements (Daily
Chart Integration Audit Reports) for each well.
(c) Gas Chromatography Analysis showing BTU content and Specific
Gravity.
(d) Methods used to estimate volumes of gas Flared, Vented, or otherwise
Lost.
(d)[sic] Methods used to estimate volumes of gas Used on Lease; list
equipment on the lease that uses gas, by well location.
(e) Manufacturer’s MCF use rating of production equipment.
2. (a) Fluid Transporter
5 Defendant notes that “Interior reorganized the former MMS [Minerals Management
Service] in 2011, and the section relevant to gas production and royalty payments is now
called the Office of Natural Resources Revenue (ONRR).” (alteration added).
10
(b) Run tickets for oil sold, or water hauled for each facility.
(c) Tank number(s), tank size(s) and tank strapping for each storage
facilities.
(d) Daily pumper’s reports for period showing produced water and gas.
(h) [sic] Pipeline run statements for the period.
(alterations added). The November 30, 2006 letter concluded:
All documents shall be properly identified by federal case/lease and well
number and include the information requested above. Failure to comply with
these instructions may result in the issuance of a “Notice of Incident of
Noncompliance”. You have the right to request a review of these
instructions per 43 CFR 3165.3 and to appeal per 43 CFR 3165.4.
Mr. Fancher testified that, at that time, “[m]y primary job duties was [sic] production
accountability, which is production inspections, field inspections.” (alterations added).
direct examination with defendant’s counsel, Mr. Fancher had the following exchange:
[Q.] [W]hat is production accountability?
A. That’s comparing the two databases against each other for accuracy. It
also includes requesting documentation from the operator and comparing
that data with what they say they’ve produced and what they actually
reported that they produced.
Q. And what is the purpose of a production accountability inspection?
A. Just to ensure that everything that is harvested out of the -- the minerals
and stuff that is harvested, that we have some kind of accurate way of
tracking it.
Q. And why is it important that you be able to track production?
A. To make sure that it’s getting reported, of course, and then -- and then
the royalty concern that comes out of that, and that’s taken care of by the
ONRR [Office of Natural Resource Revenue] people.
Q. Okay. And you mentioned you used two databases when you do the
production accountability work. Could you tell us what those were, please?
A. Yes. One is our OGOR [Oil and Gas Operations Report] statements, our
oil and gas statements that we get from our AAFMS database, American
Automated Fluid -- Automatic Fluid Measurement System. And then I look
11
at, like, Colorado, their oil and gas website, and I would compare those
figures, what they reported there. They should be the same. If their [sic] not,
then we may ask the operator to send me a copy of their -- their reporting
to see where the difference is at.
(alterations added). Additionally, defendant’s counsel asked Mr. Fancher about “site
security:”
[Q.] could you tell us what the -- what are some of the major areas that you
are inspecting as part of site security?
A. We’re concerned with any bypasses around any gas meters, and we’re
also concerned about any sealing of oil tanks. So every tank has to have a
-- a seal. If it’s dealing with oil, it needs to be properly sealed, and site
security is how we would -- the activity we would be doing when we inspect
those things.
Q. Okay. And could you explain more about why you look for proper seals?
Why is that important?
A. Well, it affects the royalty income and the production accountability. If the
seals aren’t in place properly, then the fluids -- the oil, water, whatever --
can be removed from the location without anybody ever knowing where it
goes to, and we like to have an idea where all the production fluids go, water
and oil.
Q. Okay. And you said one of the other things that you inspect for during a
site security inspection is any bypasses around gas meters. What could that
-- if you found such a thing, what could that mean?
A. That would mean that the -- the operator could be filtering off gas, taking
the gas meter out of line and just totally going around it. So there would be
no measurement of that gas, and if that’s the case, then that would affect
royalty income.
Q. Okay. In addition to -- are there any inspections that you do in addition
to production accountability and site security inspections?
A. Yes. We also do, like, meter calibrations and chart verifications, which
they’re kind of similar in a way. If I’m doing a meter calibration, then I'm
witnessing someone calibrate the gas meter to ensure that it’s accurate
according to regulations, and if I’m doing a CV, is what we call the chart
verification, then we are looking to see how well the operator’s or the
mechanic’s electronics are doing as far as the accuracy of the meter.
(alteration added).
12
Regarding the November 30, 2006 letter from Mr. Fancher to Petro Mex,
defendant’s counsel asked Mr. Fancher, “why did you decide to request these particular
documents [referenced above, including the OGOR reports, the Quarterly Meter
Calibration reports, the Configuration reports gas purchase statements, the Daily Chart
Integration Audit reports, and the gas purchase statements] from Petro Mex?” (alteration
added) Mr. Fancher testified:
Well, I wanted to verify their -- their reporting. So the OGOR statements, I
wanted a copy of those. I wanted a copy of their gas purchase statements,
calibration reports, and I look through all these to ensure that the meters
are being calibrated when they’re supposed to be, the frequency they’re
calibrated, that the reporting is really flawless, you know, we want to make
sure they’re -- what they’re producing is what they’re reporting, and that
would include, like to see the gas chromatography, we like to know that,
too, for our calculations, and it’s not too often anybody flares or vents gas.
We don’t really particularly care for that very much, but if they did, I wanted
to verify all their records with that that I would get from MMS.
(alteration added). On March 1, 2007, Mr. Fancher contacted Linn Wilson at Petro Mex
about the November 30, 2006 letter and Mr. Fancher testified:
I called him to find out the status of their audit that I requested for the 2007,
and I -- I mentioned I gave an extension, but I still haven’t received anything.
So they had -- and we talked about -- I mentioned that the material -- he
said that the material was in Trudy [Grubilnick6]’s hands, that he’d call her,
6Mr. Wilson testified that Trudy Grubilnick was Petro Mex’s former bookkeeper. Plaintiff’s
counsel and Mr. Wilson had the following exchange at trial regarding Ms. Grubilnick:
[Q.] Is she [Ms. Grubilnick] still with Petro Mex?
A. No.
Q. Was she eventually terminated by Petro Mex?
A. Yes, she was.
Q. Do you remember when she was terminated?
A. I believe it was in 2008, but I’m not --I can’t remember exactly when.
Q. And do you know why she was terminated? Did you terminate her?
A. No, I did not. Jesus did.
13
so kind of like basically saying he didn’t really know what happened. Trudy
was supposed to take care of all that.
(alteration added). Defendant’s counsel subsequently asked Mr. Fancher: “So as of
7/3/2007, had Petro Mex provided the information that you had requested for the fiscal
year 2007 production accountability inspection?” to which Mr. Fancher testified: “No.” Mr.
Fancher testified that he followed up with Petro Mex in July 2007 about the missing
documents. In response to defendant’s counsel question at trial, “did Petro Mex provide
any explanation for its failure to give you the information you had requested?” Mr. Fancher
responded: “No.”
Mr. Fancher also testified about his authority as an inspector. Defendant’s counsel
and Mr. Fancher had the following exchange during his direct testimony:
[Q.] [A]s a petroleum engineer, technician, and an inspector, do you have
the authority to take enforcement actions against lessees and operators?
A. Yes, I do.
Q. Okay. I’d like to talk about the different enforcement actions that were
available to you in 2007 to 2010. What was the lowest level of enforcement
action that was possible for you to take if you found some problem during
an inspection?
Q. Okay. Do you know why she was terminated?
A. Because she was not filing the records and the reports as she should
have been, and the royalties was not getting paid.
(alterations added). Mr. Villalobos, on his direct testimony, clarified with plaintiff’s counsel
about the timeframe for Ms. Grubilnick’s employment with Petro Mex:
[Q.] Do you remember when you hired her?
A. Like 2007, 2006.
Q. Okay. And when did you terminate her?
A. I think that was at the end of 2007.
Q. Okay.
A. Or early 2008.
Q. Okay.
14
A. Well, if I found just a problem, that’s something that’s not characterized
as a violation of regulation, I would take a -- make a written order and have
that signed at that time by the authorized officer, which would be like the
building manager or whoever he designated, and I would pursue it that way.
That would be my first step, would be that written order in that particular
case.
Q. Okay. Is that a -- does BLM call that an order of an authorized officer?
A. Yes.
Q. Okay. And as a petroleum engineer/technician, were you an authorized
officer who could give such orders?
A. Yes. I could -- I could -- now we can’t sign them for sure. Back then, I
think they liked our -- our field office -- kind of a field office delegation for
those at that time.
Q. And could you give us an example of a situation when an order of the
authorized officer would be appropriate?
A. Say if there was a -- a lot of weeds, noxious weeds or something like that
growing or some rilling[7] off of the pad which would cause erosion. That
wold [sic] be a good reason to use a -- because it’s not really against the
regs could have -- to have that natural erosion happening, but to have it
corrected, we would have to use what -- some kind of instrument to
communicate that to the operator, and written orders would be used first.
Q. Okay. And earlier you drew a distinction between a problem and a
violation. So if you find a violation -- what does a violation mean to you?
A. A violation is something that’s specifically addressed in the on-shore
orders or the 43 CFRs, and with that -- or a violation of a condition of
approval or a violation of a written order, and I can issue a [sic] incident of
noncompliance and giving a date and request them to repair their fix to
make whatever change is necessary to be in compliance.
Q. Okay. And I noticed you said “written order.” Are you using that
interchangeably with “order of the authorized officer”?
A. Yes, yes. It is an interchangeable thing. You might consider one might
be a written form. I had a regular form in my database for written orders,
and we could do, like, one of those forms, or you can do a -- a letter form.
7Although not defined by Mr. Fancher at the trial, “rilling” refers to rill erosion, which can
occur if runoff water forms small channels as it concentrates down a slope.
15
(alterations added). Regarding different kinds of enforcement actions, Mr. Fancher
explained to defendant’s counsel at trial:
Q. If you found a violation on a lease, what was the lowest level of
enforcement action available to you?
A. I would write an incident of noncompliance.
Q. Okay. Is there anything that is less serious than an incident of
noncompliance?
A. Yes, there is. There’s some things that, according to the reg, doesn’t --
doesn’t have enough weight to be a major -- it’s a minor violation -- they
have two gravities, minor and major. A minor violation, the time to repair it -
- so like a -- a sign wasn’t correct, then I would write an incident of
noncompliance and have them correct their sign.
Q. And just -- I just want to make sure this doesn’t get confused, but I'm
asking about if there’s something lesser than an incident of noncompliance.
A. Oh, I’m sorry.
Q. And, if so, if you could tell us what that is, please.
A. That would be like -- less than that would be the written order of the
authorized officer. That would be -- yeah.
Q. Okay. Are there any kind of verbal warnings?
A. At that time, there was [sic] verbal warnings, but even a verbal warning
had to be documented, and a copy of the documented verbal warning would
have to be sent to the operator within 15 days.
Q. Could you give us -- well, did you ever issue any verbal warnings?
A. I have, yes.
Q. Could you give us a sense of the situation where a verbal warning might
be appropriate?
A. If I was on location, say, where an operator was or a hand or somebody
and, like, even the -- the sign, if I couldn’t read the sign correctly or a lease
number had changed perhaps and it was incorrect, then I would request
them to correct that sign, something they could possibly do immediately
right there.
16
Q. Okay. And I believe you explained, but I want to make sure we’ve got it
clear for the record, even though it’s called a verbal warning, was there still
an element in writing?
A. Oh, yes. Yes, everything had to be documented for the verbal warnings,
too.
Q. And now could you tell us about a minor incident of noncompliance?
We’re going to talk in more detail about incidences of noncompliance, but
could you just start out by telling generally what that is.
A. We have a -- a set of standards and regs put forward through CFRs
[Code of Federal Regulations] and the on-shore orders, and like I said, the
conditions of approval, if something is violated because it’s written down,
you know, and an incident of noncompliance would be the way to correct
that. It would be like the sign issue, could be a tank number, safety signs,
things like that.
Q. And what does the word “minor” mean in this context?
A. It means that it doesn’t quite have the gravity to be a major. So that would
be, like, does it really pose an immediate threat or adverse condition to
health and safety, for production accountability, for oil and gas safety, things
like that. I don’t know all the jargon for that.
...
[Q.] Could you describe for us, please, what a major incidence [sic] of
noncompliance?
A. A major incidence [sic] of noncompliance is something that would create
an adverse immediate danger to health and safety, starting something
without approval, something that would have an effect on really the health
and safety, production accountability, royalties, and there’s a couple more.
I don’t remember what they are.
Q. After a major incident of noncompliance, what is the next level of
enforcement action available to you?
A. Then that would be an assessment.
Q. What is an assessment?
A. An assessment for a major would be a -- a $500 fine per day until the
incident was corrected. It’s a little different than maybe a -- a minor, whereas
17
we -- if we need to make a reasonable effort to contact the producer, the
operator, and in doing that, then, we would close the initial incident of
noncompliance, issue the major incident of compliance with the
assessment. That would be the ongoing document at that time. And then
from there, then it would go obviously to civil penalties or. . .
Q. Okay. And could you give us an example of -- well, let me ask, in what
situations do you issue civil penalties? You’ve just described the escalation
from INCs [Incidents of Noncompliance] to assessments to civil penalties,
but are there ever times where you -- the civil penalty would be the first
enforcement action you took for some issue?
A. Not the first one, no. It always has to start at the lowest level, and then if
it’s not complied with, whatever the error was, then we would build on the -
- the assessment, and then from there, if they still refused to do it after a
certain time, then we would go on into the civil penalty aspect of it, and I
can’t really quote a lot of that. I don’t remember everything about that. It’s
just like you’ve really got to look at the directions behind it.
Q. Okay. After a -- so let me -- we talked about major incidents of
noncompliance and how those could go to assessments or civil penalties,
but let’s go back to major incidents of noncompliance now, and I want to
ask you, is there a next level of enforcement action available to you for a
violation, a next level higher than a major incident of noncompliance, other
than what we’ve already talked about?
A. Yes. There’s a -- there’s other avenues when you get to that level, too, I
suppose, to the civil penalties. Depending on the violation, it can go as far
as shutting in the operator, if there’s just continued noncompliance issues.
That’s – that’s one step. I could hire someone to -- go through the motions
of hiring somebody to complete the work, and they would be billed for it.
That doesn’t happen very often at all.
Q. And we’ll talk a lot more about shut-in orders but at this point, generally,
what is a shut-in order? What does it require of the operator?
A. It would require the operator to abide by the directions of the shut-in
order, which means he would need to potentially shut down their operation,
shuttering their wells and tanks and everything until whatever was corrected
that was outstanding.
Q. Okay. And, again, still focusing on that 2007 to 2010 time period, what
kind of discretion, if any, did you have as an inspector in deciding what kind
of enforcement action to take?
A. I had full discretion.
18
Q. And could you give us an example of a time where you might have to
make a decision between -- you might have to exercise that discretion
between different options?
A. Yeah. Sometimes when something is just not completed, not completed
right, you can’t communicate with the operator, we can’t get something fixed
that needs to be dealt with immediately, then -- or something to secure the
tanks, then -- then I have a discretion to halt their operation until they get in
compliance. Other issues like a serious leak or something could be a reason
to ask them to shut everything in, still followed up by the documentation.
(alterations added).
Between August 15, 2007 and May 29, 2008, Mr. Fancher inspected the wells at
Petro Mex’s site related to the Garfield Lease and issued a total of eleven Notices of
Incidents of Noncompliance. Seven of the Notices of Incidents of Noncompliance were
for minor violations, including ineffectively sealing sales valves, failing to identify storage
tanks by a unique number, a leaking bull plug, insufficient water storage pit and full steel
tank, and the failure to notify the Field Office prior to oil sales. Four of the Notices of
Incidents of Noncompliance were for major violations, for unsealed sales valves and for
an underground leak.
On August 15, 2007, Mr. Fancher inspected wells related to the Garfield Lease
and issued three Notices of Incidents of Noncompliance, all related to the Federal 15-9
well. Two of the Notices of Incidents of Noncompliance were for minor violations, Notice
of Incident of Noncompliance No. EF007056 was for the tank valves “ineffectively sealed
to minimum standards,” and Notice of Incident of Noncompliance No. EF007057 was for
the failure to clearly identify the storage tank by a unique number. The third Notice of
Incident of Noncompliance was for a major violation, Notice of Incident of Noncompliance
No. EF007055, which stated: “The sales valves on your tank found to be ineffectively
sealed to minimum standards. US GOV BLMI seal No. 0286 was placed on the the [sic]
sales valve. You must obtain prior approval to remove this seal. After approval, install
your seal to obtain compliance.” (capitalization in original; alteration added). Regarding
the Notices of Incidents of Noncompliance issued on August 15, 2007, the Operations
Manager of Petro Mex, Mr. Wilson, had the following exchange with plaintiff’s counsel:
[Q.] So do you have any recollection of what happened, what Petro Mex did
in response to these notices of incidents of noncompliance?
A. I am the one that fixed all of these incidents of noncompliance. On the
sales valve and the B&W valve, I bought what they call darts that go through
the locking mechanism of the valve, so you can put a seal on it, and that
way it can’t be tampered with. And on the third one, I had signs made and
installed on the production tank.
19
Q. Okay. Do you know if Petro Mex ever signed these violations and
returned the notice once the violations were corrected?
A. I believe I did. Yes.
Q. Okay. Did that always happen when you corrected an incident of
noncompliance, a notice of incident of noncompliance?
A. No. There could be instances where they were not signed.
Q. And were you ever -- maybe “punished” isn’t the right word. Did the field
office ever take action against Petro Mex for failing to actually return a
signed copy?
A. Not to my knowledge.
Q. Okay. So if you didn’t sign one of these, how would you usually let Mr.
Fancher know that the issue had been corrected?
A. I would call him on the phone and tell him that everything had been
corrected.
Q. Okay. Would he remind you to send in a signed copy or not?
A. No. Usually not.
Q. Did he ever indicate that it was necessary there would be some kind of
assessment or fine if you didn’t actually send a signed copy?
A. I don’t remember him ever saying that to me.
(alteration added).
On October 9, 2007, Mr. Fancher, inspected wells on the Garfield Lease and
issued two additional Notices of Incidents of Noncompliance for the Federal 15-9 well –
one minor violation and one major violation. Notice of Incident of Noncompliance No.
EF08004 was for the minor violation and stated: “Drain valves are ‘appropriate valves’
and shall be ‘effectively sealed’ using the dart system, during the production and sales
phases or combination of production and sales phases” by October 21, 2007. Notice of
Incident of Noncompliance No. EF08003 was the Notice of Incident of Noncompliance for
the major violation and stated: “Sales valves are ‘appropriate valves’ and shall be
‘effectively sealed’ using the dart system, during the production and sales phases or
combination of production and sales phases” by October 21, 2007. Regarding the two
Notices of Incidents of Noncompliance issued on October 9, 2007, Linn Wilson had the
following exchange with plaintiff’s counsel:
20
[Q.] Do you recognize these documents?
A. Yes.
Q. Okay. Why don’t you tell us what these are.
A. It is telling me that the incident of noncompliance is sales valves are
appropriate valves and should be effectively sealed, using the dart system
during the production and sales phases or combination of production and
sales phases by the date indicated.
Q. Okay. So let’s back up here. Are these two different notices of incidents
of noncompliance than the ones we just looked at [the three Notices of
Incidents of Noncompliance issued on August 15, 2007]?
A. Yes, they are.
Q. When are these dated?
A. These are dated 10/9 of 2007.
Q. Okay. Are these the same violations that we just looked at in Exhibit 9
[Notices of Incidents of Noncompliance issued on August 15, 2007]?
A. They are the -- they are the same violation, just worded differently.
Q. Okay. So the sale [sic] valve violation on 10/9/07 was the same sales
valve violation from the previous exhibit?
A. Yes.
...
Q. So is that the same sales valve violation as the violation that was in Joint
Exhibit 9 [Notices of Incidents of Noncompliance issued on August 15,
2007]–
A. Yes.
Q. -- Mr. Wilson?
A. Yes.
21
Q. And then what is the violation in the second notice of incidents of
noncompliance in this exhibit [Joint Exhibit 10]? That would be trial page
32[8].
A. It is the drain valve.
Q. Okay.
A. And it says the same thing, that it has to be effectively sealed by the dart
system during production.
Q. So -- and, again, is that the same violation that was cited in the notice of
incidents of noncompliance in the previous exhibit, JX-9?
A. Yes.
Q. Okay. So those two had not been fixed by this point in time. Is that fair
to say?
A. That’s fair to say. Yes.
Q. Okay. And this is about two months later. Correct?
A. Yes.
Q. Okay. And are either one of these notices of incidents of noncompliance
signed by a BLM representative?
A. No.
Q. Okay. And did these come from Mr. Fancher as well?
A. Yes.
Q. Okay. And again on these, you did testify earlier that these violations
were eventually fixed. Correct?
A. Correct.
Q. And, again, do you know if you ever signed the violation and returned it
once it was corrected?
8 Each page of the joint trial exhibits was sequentially numbered, so plaintiff’s counsel’s
reference to “trial page 32,” was the 32nd page of the trial exhibits, and part of Joint Exhibit
10.
22
A. I feel confident that I did sign these and return them when it was fixed.
Q. Okay. Do you have any idea when it was fixed?
A. I cannot say with certainty what date.
Q. Do you know -- do you remember these violations from -- and I recognize
that this is from September of 2007. Do you remember these, Mr. Wilson?
A. I remember receiving a violation about the tank valves. Yes.
Q. Okay. Did Mr. Fancher ever give you a call about these?
A. I don’t recall if he did or not.
(alterations and footnote added).
The parties have stipulated that “[t]he Garfield Lease produced gas during the
months of January through May 2008, until it was shut-in on or around May 29, 2008
following inspection and re-inspection.” (alteration added). The joint stipulated facts stated
that “[a]s of April 2008, BLM records indicated that Petro Mex had not submitted any
production reports for the Garfield lease since July 2007,” and “[a]s of April 2008, BLM
records indicated that Petro Mex had not made any royalty payments on production from
the Garfield lease since July 2007.” (alterations added).
On April 25, 2008, Mr. Fancher inspected the wells on the Garfield Lease and
issued five additional Notices of Incidents of Noncompliance, all of which were delivered
to Petro Mex by certified mail. One Notice of Incident of Noncompliance, Notice of Incident
of Noncompliance No. EF08016, related to the Government 5 well and was a minor
violation for “a leaking bull plug.” The other four of the Notices of Incidents of
Noncompliance all related to the Federal 15-9 well. One of the Notices of Incidents of
Noncompliance, No. EF08017, was a major violation for “unsealed sales valves.” The
other three Notices of Incidents of Noncompliance were for minor violations. Notice of
Incident of Noncompliance No. EF08018, was a minor violation for “storage tanks lacking
clearly identifiable unique numbers;” Notice of Incident of Noncompliance No. EF08020,
was a minor violation for “insufficient water storage pit and full steel tank;” and Notice of
Incident of Noncompliance No. EF08021, was a minor violation for the “failure to notify
the Field Office prior to oil sales.”
The parties further stipulated: “Each Notice of Incidents of Noncompliance[9] had
text stating ‘WARNING’ and further stated that ‘[e]ach violation must be corrected within
9 The parties’ joint stipulations and filings are inconsistent in referring to the Notice of
Incident of Noncompliance. The court’s review of the BLM documents reveals similar
inconsistencies. The court refers to a single notice as a Notice of Incident of
Noncompliance and refers to multiple notices as Notices of Incidents of Noncompliance.
23
the prescribed time from receipt of this Notice and reported to the [BLM] office.’” (first
alteration added; footnote added; capitalization in original). The Notices of Incidents of
Noncompliance listed different dates for compliance, with compliance for all five Notices
to be completed by June 2, 2008.
On cross-examination, defendant’s counsel asked Mr. Villalobos about the Notices
of Incidents of Noncompliance:
[Q.] From that same 2007 to 2009 time frame, do you recall correcting some
of the violations on incidents of noncompliance?
A. I remember, yes.
Q. And so you would go -- once you corrected whatever was on the
incidents of noncompliance, you would go -- you would tell Linn Wilson that
you had fixed the violation, correct?
A. That’s correct. That what I do and then I told -- after that, Linn have to do
the paperwork or whatever he have to do. That’s his department.
Q. Right. And so you don’t know when Mr. Wilson would send that incidents
of noncompliance back to BLM, right?
A. No.
Q. And then when -- did you ever -- so was it Petro Mex’s policy, again
during that 2007 to 2009 time frame, to keep a copy of an incidents of
noncompliance or, I guess, to make a copy of it for the records?
A. I don’t know if they -- Linn [Wilson] or Susan [Wilson] or Trudy [Grubilnick]
keep copies. I don’t know that.
(alterations added). Regarding Notices of Incidents of Noncompliance, Mr. Villalobos also
testified “when it come in to paperwork, I’m not doing any paperwork. I don’t know how to
do it.” Similarly, on cross-examination, defendant’s counsel asked Mr. Wilson about Petro
Mex’s policies:
Q. Did Petro Mex have any policies on recordkeeping?
A. No.
Q. Did Petro Mex have any policy on how to handle important emails?
A. At that time, no.
The court, however, leaves quotations unchanged.
24
Q. Did Petro Mex have any policy on what to do following important phone
calls?
A. No. Not any policy. No.
Q. Did Petro Mex have any policy on how to address incidents of
noncompliance?
A. The only -- it wasn't really a policy. The only thing was as soon as you
got one, you needed to get it fixed as soon as possible.
Q. Did Petro Mex have a process for tracking whether it had corrected
violations from incidents of noncompliance?
A. No, not really. It was -- once we got them and we got them completed
and we signed them and sent it back, whenever they sent us one, we would
have two copies, one for us and one that we had to sign and send back to
the BLM. And I would try to put our copy in the well file.
In a May 16, 2008 memorandum to the Colorado BLM State Director, Mr. Hartman
noted that:
Petro-Mex has a history of failing to comply with Orders of the Authorized
Officer and Incidents of Non Compliance with resulting assessments being
issued. In the past two years this office has issued 31 incidents of non
compliance. Petro Mex’s failure to correct three of the INCs has resulted in
the assessments of $750. To date, one of the assessments has not been
paid and the corresponding INC [Incidents of Noncompliance] has not been
corrected. By the end of May we may be forced to proceed to civil penalties
for Petro Mex’s failure to correct these non compliance issues. Applicable
examples of the past and current non compliance issues include:
Failure to notify this office of oil sales per written request
Failure to provide tank gauging reports
Hydrocarbon accumulation on pits
Leaking well head equipment
Failure to provide adequate free board on produced water and
drilling reserve pits – Multiple incidents and one assessment
Inadequate sealing of oil sales tanks - multiple incidents and
one assessment
(alteration added).
The parties’ joint stipulated facts indicate that “[o]n May 27, 2008, Mr. Fancher re-
inspected the three wells on the Garfield Lease,” and “Mr. Fancher observed that Petro
25
Mex had not corrected any of the violations from the April 25, 2008 Notices of Incidents
of Noncompliance.”(alteration added). At trial, Mr. Fancher testified
on the 28th [of May 2008], I talked to a -- the office person there at Petro
Mex, her name was Susan [Wilson], that they had a gas leak at the number
5 pad, and there was an underground problem, and that it required
immediate attention. She said she would pass on the information to Jesus
[Villalobos] or Linn [Wilson]. I mentioned the leak on the wellhead and the
INC [Incidents of Noncompliance] that had not been complied with, such as
the oil tank sealing.
(alterations added). The parties have stipulated:
On May 29, 2008, Mr. Fancher issued a new Notice of Incidents of
Noncompliance, EF08025, for a “major violation” on the Government 5 well,
an underground leak. The notice directed Petro Mex to repair the leak by
May 31, 2008. The notice further stated that “[e]ach violation must be
corrected within the prescribed time from receipt of this Notice and reported
to the [Field] office.”
(all alterations in original; capitalization in original). Mr. Fancher explained at trial in his
direct examination:
On the 29th [of May 2008], I called to see if they had resolved the issue of
the leak. She [Susan Wilson] said that Linn [Wilson] told her that they had
been informed by someone else and that someone should be repairing it
today.
Q. Okay. Did you visit the Garfield lease again on May 29th, 2008?
A. Yes, we did, and I say ”we,” myself and Carroll Snyder went out on that,
and there was no activity being taken on -- on anything. There was no one
out there.
Q. Who is Carroll Snyder?
A. Carroll Snyder was a full performance petroleum engineer technician that
has since then retired.
Q. Okay. What did you discover on that visit to the lease on the 29th?
A. That the -- the gas was still leaking. There was [sic] no other compliance
issues corrected.
(alterations added).
26
Additionally, the parties have stipulated:
Also on May 29, 2008, Mr. Fancher issued EF08025SI, “Notice to Shut
Down Operation” (Shut In Order). The Shut In Order stated that Petro Mex
had 24 hours from oral notice being provided “on 5/28/2008 at 15:38 hr.” to
immediately “shut in all wells on this lease until all leaks are corrected and
all compliance issues are resolved.” The “WARNING” section in the Shut In
Order stated that “[o]perations are not to be resumed until permitted by the
authorized officer.” The Shut In Order stated “when violation is corrected,
sign this notice and return to” the Field Office. It also informed Petro Mex of
its review and appeal rights.
(alteration in original; capitalization in original).10 At the trial, defendant’s counsel asked
Mr. Fancher to discuss the meaning of some of the language in Petro Mex’s Shut-In
Order:
[Q.] Could you please -- under the Remarks section of the shut-in order,
could you please read the sentence following, “You are shut in.”
A. It says, “We are required to shut in all wells on this lease until all leaks
are corrected and all compliance issues are resolved.”
Q. I want to ask you about this language, “all compliance issues are
resolved.” You did not list the specific compliance issues here, did you?
A. No, I did not.
Q. Why did you use this language, “all compliance issues?”
A. Because I had compliance issues with Petro Mex and so did our surface
people and others in BLM. So I wanted to make sure all the INCs [Incidents
10 The “Remarks” section of Shut-In Order stated in full:
YOU ARE SHUTIN [sic]. You are required to shut in all well on [sic] this
lease until all leaks are corrected and all compliance issues are resolved.
This shutin [sic] shall be complied within 24 hours of our verbal notification
to you [sic] office personnel “Susan” on 5/29/2008 at 15:38 hr. When
necessary for compliance, or where continued operations could result in
immediate, substantial, and adverse impacts on public health and safety,
the environment [sic], production accountability, or royalty income, the
authorized officer may shut down operations. Immediate shut-in action may
be taken where continued operations could result in immediate, substantial,
and adverse impacts on public health and safety, the environment,
production accountability, or royalty income.
(capitalization in original; alterations added).
27
of Noncompliance] and letters that were out were addressed and corrected.
And there was a lot going on, so. . .
Q. Did compliance issues include the five incidents of noncompliance from
April 25th, 2008?
A. Yes.
Q. Was anything else included in all compliance issues?
A. There was surface -- the surface inspectors had issues with them, too.
There was some letters and documents like that, but I don’t remember
specifically what they were.
(first alteration added; ellipse in original). In response to the question, “[w]hat did you
intend the shut-in order to encompass?” Mr. Fancher answered: “They encompass
everything that -- all the production, all the valves, the tanks, the oil, the receipts,
everything, getting them fully in compliance and caught up with everything that I, at least,
had the authority to check on.” (alteration added). Mr. Fancher also testified at trial that
he could have issued a Shut-In Order, absent a leak:
[Q.] You said this was the first shut-in order that you had ever issued, right?
A. That is correct.
Q. How did you feel when you issued this shut-in order?
A. Well, I kind of felt kind of let down a little bit. I tried to work with Petro Mex
a lot and tried to get them on the right path of doing -- what to do with the
reporting and with the site security and everything. I think I bent over
backwards trying to get it straightened out. And then there was other issues
with the drilling and stuff like that and we worked with them painlessly on
that. So when this gas leak took out, the oil came up missing, no run tickets,
it was just pretty much, you know, just like -- they just like blew us off
basically is the way I felt. So I felt totally within my right and power to shut
them in and requesting information, getting them caught up fully to that point
anyway.
Q. Yesterday, you described the leak on the Government 5 well that led you
to go out to the lease on May 27th, 2008.
A. Yes.
Q. If the Government 5 well had not had that leak, would you have still
issued a shut-in order to Petro Mex?
28
A. Yes, yes. I was working on the shut-in order in that area because of the
missing oil, the reporting, site security. There was too many violations really
just on that one pad to just kind of lie -- just to forget it. You know, they just
wasn’t paying attention and I needed to get their attention and I was
planning a shut-in order to do that.
In his trial testimony, Mr. Fancher had a dialogue with defendant’s counsel to put
the decision to issue the Shut-In Order in context for the ongoing issues with Petro Mex.
Defendant’s counsel first asked, regarding May 14, 2008:
[Q.] Did you visit the lease that day?
A. Yes, I did.
Q. What did you discover?
A. I discovered that there was no compliance from Petro Mex and would
return -- and they would not return my calls. So I installed a BLM seal on
that valve, on the 15-9 valve from that tank.
Q. Okay. When did you next -- well, this was an in-person visit to the lease?
Yes, right?
A. Yes.
Q. Because you just said you installed a seal. When did you next visit the
Garfield lease?
A. According to these notes, I followed up again on 5/27, and there was no
change, except a new leak was called in to us by the public, and this was
on the -- the 5 pad or by the number 5 pad.
Q. Okay. And let me just stop you there because I want to ask you a little
bit more about that before we go on.
Did you personally observe that gas leak?
A. Yes. When I went out there, I did observe it.
Q. And what did you -- how did you -- how did you observe it? For example,
using your senses or -- how did you know there was a gas leak?
A. I knew there was a gas leak because I could hear it, and you can smell
gas because they have an odorizer that they put in it.
29
Q. And had Petro Mex corrected any of the April 25th, 2008, incidents of
noncompliance as of your May 27th visit?
A. No, they hadn’t.
Q. All right. What did you do as a result of the leak?
A. Well, then we had to think -- take everything into consideration. I
understood the field well enough to know --
Q. And I’m sorry, sir, but I'm just asking specifically for the leak.
A. Oh.
Q. So did you issue an incident of noncompliance, for example, for the leak?
A. I issued a -- a notice of shut-down, a shut-in order.
(alteration added). The parties have stipulated that “[i]n addition to the oral notice, a hard
copy of the Shut-In Order was delivered in person and by certified mail.” (alteration
added). At trial, defendant’s counsel and Mr. Fancher had the following exchange:
Q: [h]ow do you then notify an operator of a shut-in order?
A. We would immediately call him as soon as we could and try to get some
kind of communication to him, his office, or we would make a diligent effort
to ensure that he knows about it probably by telephone. And then we would
still send a written copy of the form to him.
Q. And how do you send those written copies?
A. Certified, return receipt.
Q. Have you ever issued a shut-in order that was verbal only without any
written confirmation?
A. No.
Q. Would you ever issue a shut-in order that was oral only without written
confirmation?
A. No.
Q. Why not?
A. There would be no documentation of it if I didn’t put it on paper and keep
-- keep tabs on it. It’s a serious matter, shutting somebody in, so it has to
30
be -- it has to be documented. It has to be in the -- in the well file as well as
the office database.
Q. What is an operator supposed to do upon receipt of a shut-in order?
A. They should immediately, you know, take the action that is prescribed in
it. In this case, it would be like fixing the leak and getting all the other
compliance issues that needed to be resolved.
The Shut-In Order also provided under “Review and Appeal Rights:”
A person contesting a violation shall request a State Director review of the
Incidents of Noncompliance. This request must be filed within 20 working
days of receipt of the Incidents of Noncompliance with the appropriate State
Director (see 43 CFR 3165.3). The State Director [sic] review decision may
be appealed to the Interior Board of Lands [sic] Appeals, 801 North Quincy
Street, Suite 300, Arlington VA 22203 (see 43 CFR 3165.4). Contact the
above listed Bureau of Land Management office for further information.
(alterations added).
Plaintiff’s counsel and Mr. Fancher had the following exchange on cross-
examination regarding the resolution of some of the Notices of Incidents of
Noncompliance that led to the Shut-In Order:
[Q.] [T]hat’s the notice of incident of noncompliance regarding the
underground leak on Government 5, right?
A. That’s correct.
Q. And that was the -- that was the violation that prompted the shut-in order.
Is that correct?
A. Yes.
Q. Okay. Do you know when that was corrected?
A. I think like May 30th.
Q. And, again, I’ll have you reference -- I’ll have you look back at the
interrogatory answers to refresh your memory for [Notice of Incident of
Noncompliance No.] 8025. Eight-zero-two-five, I should say.
A. [Notice of Incident of Noncompliance No.] 8025 was corrected on July
3rd, 2008.
...
31
Q. [Notice of Incident of Noncompliance No.] 8025, will you look at that
again and tell me what the interrogatory says about when that was
corrected?
A. It says it -- the violation was corrected by June 2rd [sic], 2008.
Q. So that was within three or four days of you issuing that notice, correct?
A. Yes, that’s correct.
Q. What’s your -- really quick, what’s your actual memory of that, of knowing
about them fixing that underground leak?
A. The only thing I remember would be we traveled out there to verify the
leak. We heard about it and we went out and checked it and went back to
see if there was any action taken on it. That was the 28th -- the 27th, 28th,
and 29th [of May 2008]. I think it was like the 30th, we actually -- there were
people out there pouring cement into a couple pipes trying to get it to stop
leaking.
Q. All right. So you actually observed the crew fixing that leak?
A. Yes.
Q. At least attempting to fix that leak?
A. Yeah, they -- and maybe it was on the 29th [of May 2008] that they fixed
it. You know, I don’t -- the exact day, I don’t -- I don’t -- you know, that’s a
little bit too far back.
(alterations added).
Regarding additional Notices of Incidents of Noncompliance issued by the BLM to
Petro Mex in April and May of 2008, plaintiff’s counsel and Mr. Fancher had the following
exchange at trial:
Q. There were six notices of incidents of noncompliance issued between
April 25th and May 27th [2008], correct?
A. Yes.
Q. And from the notes I just took, it looks like three of them were corrected
by July 1st, 2008, right? According to what you just told us.
A. Or at least closed by --
32
Q. Well, I’m talking about the ones that were actually corrected. You testified
that the bull plug was corrected on June 3rd, 2008.
A. Okay.
Q. The sales valve was collected on July 1st, 2008 -- corrected, correct?
A. Yes.
Q. And that’s when you observed Mr. Villalobos actually doing that.
A. Okay.
Q. Is that correct?
A. What’s the number on that?
Q. [Notice of Incident of Noncompliance No.] 8017.
A. Okay. Oh, yes, I -- it may have been corrected by that date, yes.
Q. But then you talked about how you saw Mr. Villalobos do that.
A. And is that --
Q. You had that meeting with him.
A. And that was the 1st of April --
Q. July 1st. It was July 1st.
A. I corrected it then, yeah. I put a seal on it, but he didn’t have the darts for
it.
Q. And then the underground leak was fixed on June 3rd, correct, [Notice
of Incident of Noncompliance No.] 8025?
A. [Notice of Incident of Noncompliance No.] 8025?
Q. Mm-hmm.
A. [Notice of Incident of Noncompliance No. 80] 25 was -- it was corrected
June 3rd, 2008.
Q. Okay. And then one of them was closed on July 1st, 2008, [Notice of
Incident of Noncompliance No.] 8021, correct?
33
A. It was not corrected. It was just closed on July 1st.
Q. Well, that’s what I said. It was closed on July 1st, 2008, right?
A. Oh, yes, closed.
Q. And no assessment was issued?
A. No, not at that time, no.
Q. And then the other two remaining were both closed on October 9th, 2009,
correct?
A. August 4th -- that’s. . .
Q. Again, you testified that [Notice of Incident of Noncompliance No.] 8018
was closed on October 9th, 2009. That’s the numbered storage tank.
A. Yes.
Q. And [Notice of Incident of Noncompliance No.] 8020 was closed on
October 9th, 2009. That was the full water tank.
A. Yes, we closed the INC [Incidents of Noncompliance] that day.
Q. Okay. So there were -- out of the six incidents, by the end of July 2008,
there were only two that were still outstanding?
...
A. Yes. Well, that wasn’t [sic] closed anyway.
Q. And that was the numbered storage tank and the water tank, correct?
A. Yes[.]
(alterations added).
The parties stipulated that “[o]n June 16, 2008, Mr. Fancher inspected the Garfield
lease. Mr. Fancher observed that the Garfield lease wells were ‘not producing because
of line pressure.’” (alteration added). The also parties stipulated that “[o]n July 1, 2008,
Mr. Fancher met with Mr. Villalobos at the Garfield lease. Mr. Fancher and Mr. Villalobos
‘talked about the oil and seal on the tank.’ Mr. Fancher found ‘no indication that the well
is on.’” (alterations added). Mr. Fancher’s “conversation record” for the July 1, 2008
meeting stated:
34
Carol Snyder and my self [sic] visited Jesus Villolabos [sic]. We talked about
the stains at the staging are [sic] and I told him they needed to be dealt with.
I recommended he call Christina Stark. We went to the 15-9 well and talked
about the oil and seal on the tank. He changed the seal with their seal. The
level is still @9.5’. There was no indication that the well is on. I told him he
needed to empty the water tank so it does not over flow. He said he would
call the water truck out to haul the water off. We discussed the letter Bob
[Robert Hartman] sent requesting the drilling reports and targeted the
cementing reports. He said that Trudy [Grubilnick] and Linn [Wilson] was
expose [sic] to have that together with the late reporting and be sending us
a copy. We talked about the bond issue. He is fully aware of the situation
there. Jesus was setting up a compressor on the private land location.
(alterations added). At trial, Mr. Wilson testified he called Mr. Fancher in July of 2008 to
discuss the April and May 2008 Notices of Incidents of Noncompliance. Mr. Wilson and
plaintiff’s counsel had the following exchange at trial:
[Q.] [D]id you place a phone call to the field office?
A. Yes.
Q. Will you tell me about that phone call, when you think it was and what
you -- who you talked to?
A. I called Ed Fancher and told him that all the incidents of noncompliance
had been repaired, and would he like to go out and do a reinspection. And
he told me, no, not at this time.
Q. When did you make that phone call to the best of your recollection?
A. It would have been right at the end of July [of 2008].
Q. Okay. Did you write anything down regarding that phone call? Do you
have any record of that?
A. No, I do not.
(alterations added). At trial, plaintiff’s counsel additionally asked Mr. Wilson, the
Operations Manager of Petro Mex: “To the best of your knowledge, were all of those --
were all of the issues from the April and May notices of incidents of noncompliance
resolved by the end of July?” Mr. Wilson testified: “I believe they was [sic]. Yes.” (alteration
added).
The joint stipulated facts reflect that “[i]n August 2008, Petro Mex resumed
production from the Garfield lease. The Garfield Lease produced gas during the months
of August, September, and October of 2008. Production from the Garfield Lease
35
decreased in late October 2008, and ceased completely beginning November 1, 2008.”
(alteration added; internal reference omitted). Mr. Villalobos testified at trial regarding
resuming production in August 2008, explaining in an exchange with plaintiff’s counsel:
Q. The wells produced -- you turned the wells back in August of 2008, right?
A. Yes.
Q. And to the best of your memory, did those wells produce in August and
September of 2008?
A. Yes.
Q. Did they produce in October of 2008?
A. I think they did, yes.
Q. You shut the wells back down at the end of October, correct?
A. Yes.
Q. Why was that?
A. I think that’s when they -- they send us the shut-in orders.
Q. Well, we talked about the shut-in order was in May of 2008, correct?
A. Yes.
Q. The written shut-in order?
A. Yes.
Q. So in October of 2008, why did you shut the wells back in?
A. That’s when Mr. Ed [Fancher] called me and he told me that I need to
shut the wells in again.
Q. Okay. So let’s talk about that. It’s your testimony that you received a call
from Mr. Fancher?
A. Yes.
Q. Okay. And what did Mr. Fancher tell you in that phone call?
36
A. I remember that morning he called me and said I got to shut those wells
in, all the wells in.
Q. So why did he tell you you needed to shut the wells in?
A. Well, he -- I asked him again why they need to shut them in. He say, I
don’t know, I got to -- he say, I’m the bad man, I got to give you the bad
news, and I got orders to tell you to shut them in. And I ask him again why.
I said, well -- I don’t know, he said. You got to shut them in.
...
Q. Okay. So what did you do once you got off the phone with Mr. Fancher?
A. I got off the phone and I called Linn [Wilson]. I say, I just got a call from
Mr. Ed [Fancher], they want us to shut in all the wells in. And I told Ed, why.
I keep fighting. I say, why.
Q. And did you instruct Mr. Wilson to go shut the wells in?
A. And I told -- he say, well, that’s what they want, I guess that’s what we
need to do. So I say, well, all right, shut them in.
Q. Okay. Did you remember getting -- did you ever get anything in writing
about this from Mr. Fancher or the field office?
A. I can’t remember.
(alterations added). Mr. Fancher, in response to defendant’s counsel’s question: “Did you
have a telephone call with Mr. Villalobos in October 2008 in which you told him the lease
was still shut in?” testified: “I don’t recall that conversation.”
Regarding the shut down in October 2008, Linn Wilson had the following exchange
with plaintiff’s counsel at trial:
Q. Why did you shut the wells back in in October?
A. Because Jesus [Villalobos] called me and told me that he had received a
phone call that we had to shut the wells back in, that we was on -- we was
still in the shut-in order.
And so i [sic] called Brian Gartner with Energy Transfer,[11] and asked him
if he could go out and shut the compressor down for me, and he said he
11Energy Transfer’s role was not defined at trial, however, from the testimony it appears
Energy Transfer may have purchased gas from Petro Mex and may have paid royalties.
Defendant’s counsel and Mr. Villalobos had the following exchange on cross-examination
37
would. And then that was -- I believe that was on a Friday, and he -- then I
went back up there on either Monday or Tuesday and took care of all the
block valves and the wellheads.
Q. Okay. Production was going pretty well in October before that, wasn’t it?
A. Yes, it was.
Q. Would there have been any other reason to shut down at the end of
October?
A. No.
Q. And we talked about how in August, it looked like you resumed
production around the 14th. Correct?
A. Correct.
Q. Why was that?
A. Because I had spoke to Ed Fancher and told him at the end of July that
all the incidents of noncompliance had been completed and did he want to
do a reinspection. And he said -- told me, no, not at this time.
Q. Okay.
at trial, with Mr. Villalobos’ answers as follows:
[T]he companies trying to buy the gas, they -- we got it -- they give us -- they
show us if we want to pay the royalties or they want to pay the royalties.
And that -- back then, they was paying the royalties for us, for Petro Mex.
Q. Do you recall the name of that company? Could that have been maybe
Energy Transfer or --
A. No, that was before the Energy Transfer. I know they used to have the
main office in Salt Lake City. I can’t remember the name of the company.
Q. And the company -- and whatever the company’s name was, they would
make Petro Mex’s royalty payments, but would they also do the production
reporting for Petro Mex?
A. No. They only take care of the royalty payments. That’s it.
Additionally, Joint Exhibit 33 reflected gas volume statements from Energy Transfer from
February 2008 to December 2008.
38
A. So my assumption was that we could turn everything back on.
Q. Did he tell you you could turn everything back on?
A. No, he did not.
Q. Did you ask him if you could turn everything back on?
A. No, I did not.
Q. Okay. So were you concerned about the shut-in order still being in place?
A. I was. When I found out about it in October, I was.
Q. But when you turned it on in August, when you resumed production in
August, were you concerned about the shut-in still being in place?
A. No.
Q. Why not?
A. Because we had completed all the incident [sic] of noncompliance.
(alterations added). On cross-examination, defendant’s counsel pressed Mr. Wilson
about restarting production in August 2008:
[Q.] Whose responsibility was it to sign and date, complete this shut-in
notice?
A. It could have been either one of us. Could have been myself or Jesus
Villalobos.
Q. Whose responsibility was it to mail it back to BLM?
A. Again, it could have been either one of us. Whoever signed it would have
usually take [sic] it and mail it back.
Q. Did you sign and return this form?
A. No, I did not.
Q. Okay. Earlier you testified that when you called Mr. Fancher at the end
of July, you did not tell him that Petro Mex was going to resume production.
Is that right?
39
A. No, I did not. I asked him if he wanted to reinspect the wells.
Q. And let me -- so did -- just to be clear, did you tell Mr. Fancher you were
going -- that Petro Mex was going to resume production during that --
A. No.
Q. Okay. -- end of July phone call?
A. No.
...
Q. [C]ould you look at the warning section, please. Do you see that?
A. Okay.
Q. Can you read the first sentence, please, under, Warning.
A. “Operations are not to be resumed until permitted by the authorized
officer.”
Q. Okay. And Petro Mex resumed production in August 2008.
A. Yes.
Q. And did -- Petro Mex did so without permission of the authorized officer.
Right?
A. Correct.
Q. Do you recall specifically when in August Petro Mex resumed
production?
A. I believe it was mid-August, around the 14th, 15th.
Q. And then Petro Mex shut down production again near the end of October
2008. Right?
A. Correct.
(alterations added). Mr. Wilson testified regarding the shutting down production again in
October 2008:
[A.] Looks like we was in full production up until the 25th of October, and
then it dropped off. I believe that’s when we shut the wells back in.
40
Q. Okay.
A. I had -- I called a guy to go shut in the -- shut down the compressor, but
the wells was still open at that time.
Q. Okay. Based on the numbers here, when do you think the compressor
was shut down?
A. I would say it was shut down on the 24th.
(alteration added).
Subsequent to the October 2008 shutdown, Mr. Fancher visited Petro Mex in 2009.
According to the joint stipulated facts:
On March 30, 2009, Mr. Fancher inspected the Garfield lease. Mr. Fancher
observed that one well had a health and safety violation, a pump jack present
without any guards, but he did not issue a Notice of Incidents of
Noncompliance for that violation. Mr. Fancher observed that a field
compressor he had observed in June 2008 was “now gone.” Mr. Fancher
“found that Petro Mex had sold gas during after [sic] the shut in.”
(alteration in original). Mr. Fancher’s notes, which were admitted as a joint exhibit at trial,
twice indicated: “We found that Petro Mex had sold gas during after [sic] the shut in. This
is on our plate.” (alteration added). On cross-examination regarding Mr. Fancher’s March
30, 2009 inspection of the Garfield Lease, plaintiff’s counsel asked:
[Q.] You did say on the first one you note that “We found that Petro Mex
had sold gas during and after the shut-in. This is on our plate.” What did you
mean by “this is on our plate?”
A. This is on our plate meaning this is something new that we had to deal
with that it came up. We’d have to investigate it and see when they started
and everything and that’s basically all I meant by it.
Q. So what happen -- what did you do? Did you do any investigating into
that question?
A. Well, I did the investigating as far as I could on the OGORs [Oil and Gas
Operations Report], the reported MMS website. I looked in Colorado’s
website also and seen that they had started and stopped. That’s really about
all I did, what I remember.
(alterations added). With defendant’s counsel, Mr. Fancher clarified the phrase “this is on
our plate”
41
meant that we had to research that and find out why they did that, why they
started production without -- without notifying us.
Q. And on what date was this?
A. This was on March 30th, 2009.
Q. Was this the first time that you learned that Petro Mex had produced
during the shut-in?
A. Yes, I think it is.
Q. Did you know in August 2008, at that time, did you have any knowledge
that Petro Mex was producing?
A. I don’t remember any knowledge of that. I’d have to look and see if I
made any notes anywhere.
Q. Okay. Do you know whether in September 2008 you had any knowledge
that Petro Mex was producing?
A. No, no, ma’am.
Q. Did you have any knowledge in October 2008 that Petro Mex was
producing from the Garfield lease during the shut-in?
A. No, ma’am.
According to the joint stipulated facts, subsequent to Mr. Fancher’s March 30, 2009
inspection,
[o]n April 1, 2009, Robert Hartman sent a letter to Petro Mex stating that
BLM’s records showed Petro Mex had “last produced in October 2008,” and
removal of the field compressor “eliminates the possibility of production from
the wells.” Mr. Hartman stated that BLM had determined that “the lease is
not capable of production in paying quantities.” In the April 1, 2009 letter,
Mr. Hartman cited 43 C.F.R. § 3107.2-2 and gave Petro Mex 60 days to
“restore production in paying quantities.” Mr. Hartman further stated that, “if
justification that the lease is capable of production in paying quantities is not
submitted within 60 days from receipt of this letter, the lease will
automatically terminate.” The letter was delivered to Petro Mex by both
regular mail and certified mail. Because the certified copy was returned
unclaimed, a third copy was hand delivered to Petro Mex’s office the week
of May 18, 2009.
42
(alteration added). At trial, Mr. Hartman, on direct examination explained:
This is a letter that’s commonly referred to as a 60-day letter but more
appropriately potential lease termination letter. And it’s telling the lessees
of a lease that they -- the BLM has reviewed the production and it appears
that the wells are no longer capable -- or the lease is no longer capable of
production.
Q. Okay.
A. And we ask -- yes.
Q. And I didn’t mean to cut you off there if I did, but how many such 60-day
letters have you issued in your career?
A. I don’t know, maybe 500. It’s one of our most common letters. It’s the
really only way that leases are terminated. They have -- the lessees, per the
regulations, are required to be given notification that, hey, this lease is in
danger, please respond.
Q. Okay. And in your experience, how do operators usually respond?
A. One of three ways. They’ll ignore it; or just -- yeah, they can ignore it,
which is an option. They’ll return the wells to production with proper
notification. Or those are the only real -- really two options.
Defendant’s counsel questioned Mr. Hartman about the language in the 60 day letter that
stated: “If justification that the lease is capable of production in paying quantities is not
submitted within 60 days from receipt of this letter, the lease will automatically terminate,”
and asked Mr. Hartman:
[Q.] [H]ow could Petro Mex have shown justification that the lease is
capable of production in paying quantities?
A. Well, I guess a couple ways. They could have put a compressor onsite
and produced the wells. Obviously if they were shut in at that time, they
would have had to eliminate that hurdle before that. The other option that
was suggested by Petro Mex in one of the meetings I guess we’re going to
talk about, but that idea of venting the gas to the atmosphere, doing what
we would call an absolute open flow testing of the wells, where gas is vented
to the atmosphere or measured and then vented to the atmosphere.
Q. And does that require special equipment to do the venting test?
A. It requires -- yes, special equipment, yes.
43
Q. And then have you ever issued a 60-day letter while an operator was
shut in?
A. No.
Q. And then do you recall when after [sic] you sent this letter if Petro Mex
contacted you?
A. I don’t remember contacting, but reading through the case file in the last
couple days indicated that we were contacted.
...
[Q.] Do you recall speaking with Petro Mex on May 5th, 2009?
A. I do not remember specifically, no.
Q. Okay. What about references to, like, the compressors being stolen and
this list of equipment? Was this necessary information for you to know?
A. It didn’t seem to be applicable to what our desire was to have the leases
paid or to get the leases back on production. No, it did not.
Q. Is there any reference in this letter about Petro Mex having any kind of
justification for returning the wells to production in paying quantities?
A. No. I don’t see any reference.
Q. Okay. And then there’s at the very bottom a reference to an MMS fine
and royalties, but to your understanding, does BLM have any involvement
with the MMS fine or royalties?
A. No, we do not.
Q. And then there’s also –
A. Not that I’m aware of, we don’t have any. Definitely not at the field office
level.
(alterations added).
In response, Mr. Villalobos sent a letter to Mr. Hartman in May 2009, which stated,
in part:
44
Pursuant to our conversation on May 5th, 2009,[12] Petro-Mex LLC would be
willing to pay off what fines that have been levied against Petro-Mex_@12
½% of total production
...
Petro-Mex disagrees with the M.M.S. fine. The royalties have- been paid.
The paper work wasn’t filed on time. $150,000.00 is a little steep for 8
months of reports that wasn’t filed on time. The people in charge of filing
paperwork have been replaced.
(punctuation in original; footnote added)
As stipulated to by the parties:
On May 27, 2009, Mr. Villalobos and his friend, John Durham, met with Mr.
Hartman, Mr. Fancher, and David Lehmann from the Field Office. Mr.
Hartman documented the meeting in a June 16, 2009 letter to Petro Mex
that was signed by Catherine Robertson. Mr. Hartman summarized the
issues discussed at the May 27, 2009 meeting as including “royalty
payments, production reporting, increased bond amounts, past incidents of
non-compliance and lease status for the leases operated by Petro-Mex.” As
to the status of the lease, the letter stated that Petro Mex’s response “during
the meeting is that the lease is capable of production but without
compression the wells are not able to produce.” Petro Mex did not have a
compressor on the lease from May 2009 to August 2009. In the June 16,
2009 letter, the Field Office directed Petro Mex to provide a “written
response to explain the paying status” of the lease within 15 days. The Field
Office warned that “failure to provide adequate justification will result in
termination of the lease[].”[13]
At the May 27, 2009 meeting, Petro Mex and [sic] Field Office discussed
alternatives for demonstrating production. Petro Mex offered to perform
production testing by flow testing the wells, and either venting the gas to the
atmosphere or setting a compressor and selling the gas. As to royalties due
on production, which were the basis for the October 22, 2008 Notice of Civil
Penalty, the June 16, 2009 letter stated that Petro Mex remained
12 At trial, in response to the question, “so did you actually call Mr. Hartman after receiving
this letter?” Mr. Villalobos testified, “I don’t know. I think John [Durham] did. I didn’t call
Bob, no.” Mr. Villalobos testified, regarding the 2009 letter, “I told Linn [Wilson] to write it
up and I sign it. I don’t know who wrote it, Linn or Susan [Wilson] or Barbara [Sonnier]. I
don’t know who did.” (alterations added).
13 The June 16, 2009 letter stated: “Failure to provide adequate justification will result in
the termination of the leases,” referring to the Garfield Lease, as well as the Mesa Lease
and Esmerelda Lease. As noted above, the Mesa Lease and Esmerelda Lease are not
at issue in the above captioned case.
45
delinquent. Mr. Hartman acknowledged Petro Mex’s request to modify its
royalty amount “in order to pay off fines,” but explained that the Field Office
lacked authority to “modify lease terms such as royalty rates.” Mr. Hartman
explained the Field Office would forward Petro Mex’s request to the State
Office, “but at this time will not recommend approval.”
(first alteration in original; footnote added; internal references omitted). The June 16, 2009
letter to Petro Mex noted:
This office requested a bond increase from Petro Mex due to large liability
on your leases. Your history of non-compliance with on the ground
operations and apparent failure to report timely to the MMS led this office to
require this bond increase. Our letter was dated August 25, 2008 and asked
for a response from Petro Mex within 30 days of receipt of the letter. You
addressed this issue in our May 27 meeting indicating that Petro Mex was
unwilling or unable to provide this increase in bond amount. As noted above,
your May 20, 2009 letter requested an increase in royalties in order to pay
off fines. This office does not have the authority to modify lease terms such
as royalty rates. Your failure to keep current with royalty obligations gives
us no comfort that you will with future obligations. The failure to respond to
requests for well completion information, bond increase requests and lease
production data is also troubling. We will forward your request to our state
office for their review but at this time will not recommend approval.
The June 16, 2009 letter to Petro Mex also stated that
[y]our letter [undated letter from Petro Mex that was received by BLM on
May 20, 2009] stated that you disagree with the Mineral Management
Service fines and royalties had been paid. In our meeting you reiterated
that you were current with royalty payments. We have talked to MMS
personnel in Denver concerning royalties and fines that are due. It is our
understanding that minimum royalties may be current for the two producing
leases but the royalties that are due on production are not current. The
failure to pay production royalties is the basis for the penalties as outlined
in the Notice of Civil Penalty letter dated October 22, 2008.
(alterations added).
Regarding the June 16, 2009 letter to Petro Mex, the joint stipulated facts also
stated:
As to the bond, the letter stated that Petro Mex indicated it “was unwilling or
unable to provide” the required increase in the amount of its bond to
$100,000. BLM issued an “order of the authorized officer” to increase the
bond and directed Petro Mex to respond in writing to the August 25, 2008
letter within 20 days. BLM warned that failure to submit the required bond
46
“will” result in “an assessment of $250. . . and lease cancellation.” In the
June 16, 2009 letter, BLM issued an “order of the authorized officer”
directing that “[a]ll production is to remain shut in” on the Garfield lease “until
Petro-Mex satisfies the increased bond request and all fines are paid to
[MMS].” BLM warned that “[f]ailure to abide by this order will result in an
assessment of $250. . . and civil penalties.”
(alterations in original; internal references omitted). The parties further stipulated that
“[t]he June 16, 2009 letter informed Petro Mex of its appeal rights,” and “[t]he June 16,
2009 letter was delivered to Petro Mex by certified mail, first class mail, and hand
delivery.” Mr. Villalobos testified that Petro Mex did not appeal.
Regarding the May 27, 2009 meeting and June 16, 2009 letter, defendant’s
counsel asked Mr. Hartman
did Petro Mex ever -- when it comes to the paying status, did Petro Mex
ever ask permission from you to take any steps related to demonstrating an
ability to produce in paying quantities from the Garfield lease?
A. Not that I remember.
Q. Did the shut-in prevent Petro Mex from flow-testing the wells for
purposes of demonstrating ability to produce in paying quantities?
A. I think with the request -- I’m looking back, if they had requested it, we
probably could have gotten around that shut-in order to actually allow
testing, but as far as I know, they did not.
Q. So what do you mean by that? So gotten around the shut-in order, so --
A. We could have -- we could have worked -- worked with them with the
idea that -- two options. We could have extended the so-called 60-day letter
to additional time until things got straightened out on the INCs [Incidents of
Noncompliance], the shut-in orders, or we could have worked out the idea
of flow-testing versus installing compressors, but that 60 days obviously --
well, it’s not obvious here, but that 60 days is flexible as long as we’re
receiving feedback from the operator that they’re wanting to do something.
Q. And so when you say it’s flexible and could have extended it, why didn’t
you extend the 60-day letter?
A. It wasn’t apparent to me that they were actually interested in continuing
in responding to any of our information requests.
47
Petro Mex’s Bond
The parties have stipulated that
[p]rior to May 2008, Petro Mex’s bond requirement was $25,000. In April
2008, the Field Office’s field manager, Catherine Robertson, sent a
memorandum to the Colorado BLM State Director requesting an increased
bond from $25,000 to $100,000 for Petro Mex. Ms. Robertson stated that
the reasons for the requested increase in bond coverage included: (1) Petro
Mex’s “history of failing to comply” with orders and Notices of Incidents of
Noncompliance; and (2) the fact that Petro Mex was delinquent in its
production reporting. Ms. Robertson stated that the increased bond was
“required to reduce the liability” to the Government in the event the wells
were plugged and abandoned because the estimated cost per well was
$20,000.[14]
(alteration and footnote added; internal references omitted). At trial, Mr. Hartman testified
that he drafted the April 2008 memorandum for Ms. Robertson’s signature. Regarding the
April 2008 memorandum, defendant’s counsel and Mr. Hartman had the following
exchange:
[Q.] And then can you just generally explain what this memorandum is?
A. It’s a recommendation to the state director from the field office manager
saying that an operator has particular issues and that we believe that a bond
14The joint stipulated facts note that in Ms. Robertson’s April 2008 memorandum to the
Colorado BLM State Director requesting an increased bond for Petro Mex, “Petro Mex’s
wells were then in a ‘shut in or unapproved temporarily abandoned status.’ However,
none of Petro Mex’s wells were then in a ‘shut in or unapproved temporarily abandoned
status.’” Mr. Hartman had the following exchange with plaintiff’s counsel regarding the
Ms. Robertson’s phrasing that “none of Petro Mex’s wells were then in a ‘shut in or
unapproved temporarily abandoned status:’”
[Q]. Is it possible that that was an incorrect statement that the wells were
currently in a shut-in or an unapproved temporarily abandoned status.
A. Yes.
Q. So it’s certainly possible that in sending this memorandum to the state
director asking for the increased bond, you provided incorrect information.
A. With respect to the well status, maybe, yes.
(alteration added).
48
-- an increase to their bond should be required. And it lists our criteria of
why we believe it should be increased.
Q. Okay.
A. Yes.
Q. And then the first indent refers to -- and I think ties back to the
spreadsheet we just looked at, but refers to seven wells and all of them are
currently in a shut-in or unapproved temporarily abandoned status. And
even if that were not true, would you have still made a recommendation to
increase the bond?
A. Whether they were shut in or not?
Q. Yes.
A. Being the criteria? Yes. Nonproduction is a concern. It’s one of the criteria
for a bond increase. Yes.
Q. And then there’s a reference to the middle paragraph, which is the
indented paragraph, refers to a history of failing to comply with orders of the
authorized officer and incidents of noncompliance resulting in assessments
being issued. Why was that a reason for asking for an increase in bond
coverage?
A. It’s one of the -- on the -- let’s see, in the memo, the memo from
Washington. It’s one of the criteria that can be used to show a bond increase
is needed.
Q. And then can you explain why you have that third indented paragraph
and what the purpose of that was?
A. This is based on -- I believe it was based on conversations or emails from
MMS between me and one of the -- some MMS representative that there
were failures to pay royalty and failures to report production.
(alteration added). The parties have stipulated:
On May 15, 2008, the Colorado BLM State Director approved the bond
increase request and required Petro Mex to obtain a bond of $100,000. The
State Director gave Petro Mex 60 days from receipt of her letter to comply.
The State Director’s decision was delivered to Petro Mex by certified mail.
On August 25, 2008, Ms. Robertson notified Petro Mex that BLM had failed
to receive any response to the State Director’s order to increase its bond.
Ms. Robertson directed Petro Mex to provide the requested additional bond
49
amount within 30 days of receipt of her letter, and stated, “[t]his is an order
of the authorized officer.” Ms. Robertson’s letter was delivered to Petro Mex
by certified mail.
(internal reference omitted). The August 25, 2008 letter from Ms. Robertson stated, in
part:
Reference is to the attached letter from the Bureau of Land Management-
Colorado State Office that requested you provide an increase in bonding
amount for your oil and gas operations within Colorado. The letter requested
a response by 60 days of receipt of the letter. To date no response has been
received. As the May 15th letter indicates, this office has concerns on the
amount of liability that exists on Petro Mex Resources operated properties.
Your history of non compliance with on the ground operations and the
apparent failure to report timely to the Minerals Management Service led
this office to request this bond increase. Please provide the requested
additional bond amount as requested in the May 15, 2008 within 30 days of
receipt of this letter. This is an order of the authorized officer. If you fail to
submit the required reports in the time specified, you will be liable for an
assessment of $250.00 under 43 CFR 3163.1(a)(2) and possible lease
cancellation.
Regarding the increased bond, Mr. Villalobos testified in response to plaintiff’s
counsel’s question,
[w]hat about the bond? That hadn’t been posted yet, right [by October
2008], the increased bond?
A. No.
Q. How come you hadn’t posted the increased bond yet?
A. Because I was still fighting that. I keep arguing why they want that bond.
Q. Okay. Did you have revenue sufficient to post an increased bond yet?
A. I can’t remember, but I did have the money to --
Q. Okay.
A. -- take care of the bond.[15]
15The parties have stipulated that on January 12, 2010, “Petro Mex obtained the required
additional bond, which brought its total bond amount to $100,000.”
50
(alterations and footnote added).
Civil Penalty
The parties have jointly stipulated that
[o]n October 22, 2008, DOI’s Minerals Management Service (MMS) issued
a Notice of Civil Penalty to Petro Mex for “knowing/willful failure to pay
royalties and failure to comply with reporting requirements.” As a basis for
the Civil Penalty, the MMS found that Petro Mex had failed to pay royalties
on gas produced and sold on two leases, including the Garfield lease, for
sales months August 2007 through May 2008. As a basis for the Civil
Penalty, the MMS found that Petro Mex had failed to submit required form
MMS 2014, Report of Sales and Royalty Remittance, for the lease during
that same time period, August 2007 through May 2008. The Civil Penalty
that was assessed was three times the estimated royalty owed for the
delinquent periods, or $149,131.[16] This amount did not include the
royalties then due or interest. The invoice sent with the Notice of Civil
Penalty indicated the Civil Penalty was due by November 26, 2008.
(alteration added; internal references omitted). The October 22, 2008 Notice also
indicated
PM [Petro Mex] has also failed to submit forms MMS-2014. These reports
must be submitted monthly to MMS as required by 30 C.F.R. § 210.10. PM
is not being assessed penalties at this time for its failure to submit these
reports. However, penalties of as much as $500 per day per violation may
be assessed should MMS not receive the reports for the two leases and
sales months cited above within 20 days of receipt of this Notice. Such
penalties, provided for in 30 C.F.R. § 241.53, may be escalated to $5000
should the violations continue beyond 40 days of receipt.
(alteration added). Regarding royalty payments, on cross-examination with defendant’s
counsel, Mr. Villalobos had the following exchange:
16 The October 22, 2008 Notice explained that
[w]hile MMS has the authority to assess $ 10,000 a day for each of these
violation days. [sic] we are limiting that assessment to $100 per violation
per day. However, that amount would be $247,500. Accordingly, MMS is
limiting this penalty to three times the estimated royalty owed for the
delinquent periods, or $149,131. The penalty will continue to accrue at the
rate of $100.00.
(alterations added; emphasis in original; internal reference omitted).
51
[Q.] [W]e’re in 2007 through 2009. Production was not reported during the
period of time Petro Mex did not have a bookkeeper, right?
A. In 2007?
Q. So when Petro Mex did not have a bookkeeper, Petro Mex was not
reporting production, correct?
A. I believe that was 2008. Part of 2008, if I remember right.
(alteration added).
The BLM’s Decision to Terminate the Garfield Lease
After the October 22, 2008 Notice of Civil Penalty to Petro Mex, on July 21, 2009,
Mr. Hartman sent a memorandum to the State Director indicating that Petro Mex was
notified on April 1, 2009 “of the potential termination of the lease due to lack of paying
production.” The parties have stipulated: “Mr. Hartman went on to state that, ‘to date no
verbal or written intent to reestablish production on the lease has been received.’ Mr.
Hartman then stated that ‘it is recommended the lease terminate due to lack of
production.’” At trial, plaintiff’s counsel specifically asked Mr. Hartman about the line: “To
date, no verbal or written intent to reestablish production on the lease has been received,”
and asked him:
[Q.] Hadn’t they [Petro Mex] indicated a willingness to reestablish
production on the lease if you’d work with them?
A. Not in my mind. They were talking about venting. It was about their only
option that they gave me.
Q. Do you think this memo gives the impression that Petro Mex wasn’t even
talking to you guys?
A. That’s fair.
Q. It doesn’t really represent all the communications and the things that they
had said, does it?
A. No, it doesn’t.
Q. Missing a lot of context.
A. That’s correct.
(alterations added).
52
Petro Mex responded to Mr. Hartman on August 6, 2009, and as stipulated to by
the parties:
Petro Mex stated that at the May 27, 2009 meeting “production testing was
discussed. We stated that we could flow test the wells and vent the gas or
set a new compressor. To go to sales both plans were not acceptable.”
Petro Mex then stated that, “at this time Petro Mex can’t figure out a way to
test [the wells].” Petro Mex stated it was “investigating the MMS payment,”
and stated that “if any royalties have not been paid, they will be.” Petro Mex
stated that it was “currently working on the increase of the bond amount.”
Petro Mex confirmed “[t]he wells are still shut-in.”
(alterations in original). Mr. Hartman testified on direct examination with defendant’s
counsel:
[A.] My reaction [to Petro Mex’s response] was that there was -- and, then,
they -- at the bottom of the letter, they talk about -- well, we had discussed
flow testing and installation of compressor, and they made a statement that
-- that I guess that the BLM didn’t think that that was acceptable, and Petro
Mex couldn’t figure out a way to test them. And my reaction is I don’t think
it changed anything in regards to what -- where BLM was headed with
recommending the termination of the leases.
Q. Well, why not? Was it -- why not? Why didn’t it change anything?
A. There was really no plan here other than they said they didn’t know what
to do. That’s what I got out of this.
...
[Q.] was it your overall impression that this -- that this just wasn’t a solution
or an adequate response to the June 16th letter even?
A. I don’t think it was a valid response. What we were after -- what we were
after throughout the discussions and the letters was continuous production.
Q. Okay, so --
A. And I didn’t think this was an acceptable response.
In response to defendant’s counsel’s question, Mr. Hartman further testified:
Q. And so this letter, you at least received it August 6th, 2009, and you had
earlier made the recommendation to terminate the lease for nonproduction
on -- I believe that was August -- don’t let me get my dates wrong -- on July
21st, 2009, but after receiving this letter via fax, did you consider taking
back your recommendation for the -- the recommendation to terminate?
53
A. No, I did not. And I just -- and I didn’t see any viable solution that they
were proposing. They weren’t really voluntarily -- they weren’t proposing
anything that was going to fix it other than actual production. And I didn’t
even see that.
Q. Mm-hmm. Was there any further correspondence with Petro Mex after
this letter was faxed to you regarding the showing [sic] production of paying
quantities?
A. I don’t believe so.
Q. And so did the [BLM’s Colorado] state office eventually accept your
recommendation to terminate the lease?
A. I believe so. I believe the leases were terminated -- or attempted to be.
(alterations added). The joint stipulated facts stated that
[i]n an August 26, 2009 decision, BLM’s Colorado State Office terminated
the Garfield Lease. As grounds for the termination, the State Office
explained that “the Grand Junction Field Office has determined that this
lease was no longer capable of producing oil and gas in paying quantities
after October 1, 2008.” The State Office went on to state that “as no
evidence of new production has been received the lease terminated the
same date.”
(alteration added)
After the BLM’s August 26, 2009 decision, Petro Mex appealed the State Director’s
termination decision to the Interior Board of Land Appeals on September 18, 2009. On
September 27, 2010, the Interior Board of Land Appeals issued a decision, reversing the
decision to terminate the Garfield Lease. The Interior Board of Land Appeals noted that
Petro Mex repeatedly informed GJFO [Grand Junction Field Office] that it
would restore production from these leases if the May 2008 shut-in orders
were lifted, but GJFO refused to lift those orders. Thus, the issue here
presented is what effect, if any, those shut-in orders have on Petro Mex's
rights and obligation, under and pursuant to the MLA’s [Mineral Leasing Act
of 1920] third exception to lease termination.
(alterations added).17 The Interior Board of Land Appeals held
17The Interior Board of Land Appeals reference to the third exception comes from 43
C.F.R. § 3107.2-2, which states:
54
we reverse BLM’s decisions terminating these leases. Petro Mex
challenges the decisions on appeal as violative of its rights under the MLA’s
exceptions to lease termination. It claims GJFO erroneously determined
that the wells on these leases were not capable of producing in paying
quantities and compounded its error by failing to afford Petro Mex an
opportunity to be heard before an Administrative Law Judge on that issue.
Petro Mex also contends it was precluded by GJFO’s shut-in orders from
restoring production under the MLA’s third exception. Petro Mex raises
additional claims under the MLA’s other exceptions to automatic lease
termination, but in light of our resolution of this case, we need not address
them here.
Petro Mex contends GJFO erred in determining that these leases (and their
wells) were incapable of producing gas in paying quantities. BLM responds
by asserting that Petro Mex failed to provide “objective evidence that the
wells could produce gas in paying quantities” and failed to request State
Director Review of the June 2009 Order. It is uncontroverted that wells on
the leases at issue were producing natural gas in paying quantities when
they were again shut-in to comply with the GJFO orders in early October.
The only stated basis for GJFO determining these leases were not capable
of producing gas in paying quantities under 43 C.F.R. § 3107.2-2 was that
Petro Mex lacked field compressors necessary to deliver that gas to
purchasers. Although the parties disagree on whether these wells can
produce without compression, it is undisputed that if GJFO’s shut-in orders
were lifted, Petro Mex could install field compressors and return them to
producing status shortly thereafter.
There is no record evidence that the wells at issue were not “capable of
producing oil or gas in paying quantities” under the MLA’s third exception,
only that their production could not be sold without compression. The
legislative history makes clear that “actual production” is not necessary for
this exception to apply and that it is sufficient if a well has an “established
physical capability . . . to produce oil or gas in paying quantifies.” [sic]
American Resources Management Corp., 40 IBLA [195] 200 [(1979)]; see
discussion, supra. The adequacy of or necessity for surface facilities is
A lease which is in its extended term because of production in paying
quantities shall not terminate upon cessation of production if, within 60 days
thereafter, reworking or drilling operations on the leasehold are commenced
and are thereafter conducted with reasonable diligence during the period of
nonproduction. The 60-day period commences upon receipt of notification
from the authorized officer that the lease is not capable of production in
paying quantities
43 C.F.R. § 3107.2-2 (2022).
55
largely (if not totally) irrelevant in determining whether a well is capable of
producing oil or gas in paying quantifies. [sic] See 40 IBLA at 201.
...
We therefore conclude that GJFO erred in determining that these leases
(and their wells) were not capable of producing gas in paying quantities
under 43 C.F.R. § 3107.2-2 because they currently lack field compressors
and an ability to compress the gas produced for transport by pipeline. To
the extent those determinations were affirmed by BLM’s decision, they are
reversed and that decision is modified. See Coronado Oil. Co., 164 IBLA
[309,] 326 [(2005), aff’d, No. 05-CO-llJ (D. Wyo. Aug. 23, 2006), appeal
dismissed, No. 06-8083 (10th Cir. Sept. 14, 2007)].
(internal citations omitted; footnote omitted; alterations added). The Interior Board of Land
Appeals also indicated:
Petro Mex repeatedly represented that it would and could restore production
if the May 2008 shut-in orders were lifted; GJFO refused to lift its orders,
which were still in place when BLM terminated these leases on August 26,
2009. Although they state that all wells would remain shut-in until “all
compliance issues are resolved,” we interpret this language in the context
of the facts presented as referring to the violations identified by GJFO in its
NOICs [Notices of Incidents of Noncompliance] to Petro Mex.
...
GJFO erroneously refused to lift and required continuing compliance with
its May 2008 shut-in orders. The record shows Petro Mex could restore its
wells to producing status if those orders were lifted. Until GJFO lifts those
orders and gives notice to Petro Mex under 43 C.F.R. § 3107.2-3, BLM
cannot terminate these leases for nonproduction. If it intends to pursue
lease termination under 30 U.S.C. § 226(i), BLM must allow Petro Mex a
reasonable time in which to place its wells in a producing status after such
notice is given. Cf., Coronado Oil Co., 164 IBLA at 326. Simply stated, there
can be no termination of these leases by operation of law under the
circumstances of this case.
(internal citations omitted; alteration added).
In an October 27, 2010 letter, Mr. Fancher lifted the May 29, 2008 Shut-In Order.
The parties have stipulated that “Petro Mex resumed production in December 2010, and
the Garfield Lease thereafter produced gas,” and “[o]n March 1, 2011, BLM’s State
Director rescinded the recommendation to terminate the lease and return it to non-
terminable status.” (alteration added). Mr. Fancher, in a dialogue with defendant’s counsel
at trial, indicated:
56
This is a letter referring to the shut-in order. I wrote it and it was lifting the
shut-in order at that time. I wrote then that in light of the recent IBLA [Interior
Board of Land Appeals] decision, and I quoted the decision, that our most
recent meeting -- or in our most recent meeting, we discussed the
outstanding compliance issues. I have lifted -- enclosed a notice of
shutdown order of those two items.
Q. Okay. Previously, we looked at the language in the shut-in order
regarding the necessity of fixing all compliance issues. Do you recall that
discussion?
A. Yes.
Q. Okay. Had all compliance issues been corrected at the time you lifted
the shut-in order?
A. No, no, they had not.
Q. Given that not everything had been corrected, why did you lift the shut-
in order?
A. We felt that the two years had been gone by. In hindsight, I should have
insisted it remain until they did get everything corrected and did get all the
accountability issues corrected, but I chose to go ahead and let them, in
good faith, to start operating again.
...
Q. What part, if any, did the IBLA [Interior Board of Land Appeals] decision
play in your decision to lift the shut-in?
A. They remanded the decision back to the field office for nonproduction or
whatever. I don’t remember specifically what it stated.
(alterations added). In response to plaintiff’s counsel question, “what happened after the
decision of the Interior Board of Land Appeals?” Mr. Wilson testified “we got notice that
we could turn the wells back on, and we went and set a compressor, and we started
production again.”
Procedural History
Thereafter, Petro Mex filed its complaint in this court. As noted above, the case
was originally assigned to Judge Firestone, subsequently reassigned to Judge Hodges,
and ultimately reassigned to the undersigned. Plaintiff alleged in its complaint:
57
In granting the Leases, and pursuant to the provisions thereof, the United
States promised that the leaseholders, including Petro Mex, that they would
have the right to explore for, produce and sell oil and gas from the defined
parcels. Petro Mex relied upon such promises and obligations. In granting
the Leases, the United States agreed to comply with the terms of the Leases
and all applicable rules and regulations and to allow Petro Mex to explore
for, produce and sell oil and gas from the defined parcels provided that they
were not in material breach of the Lease and all applicable rules and
regulations, and to follow all applicable rules and regulations in managing
the Leases and Petro Mex’s performance under the Leases.
In its complaint, plaintiff contends:
The United States breached the Leases and its agreement with Petro Mex
by ordering Petro Mex to cease production on the Leases in October of
2008 when it had no valid contractual, statutory or regulatory grounds to do
so, and by refusing to allow production to resume once Petro Mex had
adequately demonstrated that there were no more remaining violations on
the Leases that constituted “immediate, substantial and adverse impacts on
public health and safety [or] the environment.” The United States breached
the Leases and its agreement with Petro Mex by attempting to terminate the
Leases on or about August 26, 2009 when it had no valid contractual,
statutory or regulatory grounds to do so. As a result of the breaches of the
Leases by the United States, Petro Mex has suffered damages, including
the loss of the full potential value of the Leases (including loss of profits),
loss of reasonable expectancy and reliance damages including the
expenses incurred in reliance upon the right to produce and sell oil and gas
from the Leases.
(alteration in original). For damages, plaintiff alleges:
As a result of the breaches of the Leases by the United States, Petro Mex
has suffered damages, including the loss of the full potential value of the
Leases (including loss of profits), loss of reasonable expectancy and
reliance damages including the expenses incurred in reliance upon the right
to produce and sell oil and gas from the Leases.
WHEREFORE, Petro Mex request [sic] that a judgment be entered against
the United States for the breach of the Leases awarding damages for the
loss of the full potential value of the Leases (including loss of profits), loss
of reasonable expectancy and reliance damages including the expenses
incurred in reliance upon the right to produce and sell oil and gas from the
Leases all in an amount exceeding five million dollars ($5,000,000.00)
exclusive of interest, costs and attorney fees and such other and further
relief as the Court deems just. Petro Mex also seeks an award of attorney
fees along with interest, costs and expenses of litigation.
58
(capitalization in original; alteration added).
In response to the complaint, defendant filed a motion to dismiss for lack of
jurisdiction, alleging that the facts giving rise to the alleged breaches occurred more than
six years before the filing of the complaint and, thus, the case was time-barred under the
statute of limitations set forth in 28 U.S.C. § 2501 (2012). Judge Firestone denied the
motion to dismiss on August 10, 2015, as discussed more fully below. See Petro Mex,
LLC v. United States, 122 Fed. Cl. 536, 540-41 (2015).
After the motion to dismiss was denied, Judge Firestone gave plaintiff the option
to file an amended complaint, however, on October 23, 2015, plaintiff file a notice
indicating the plaintiff would not file an amended complaint. Subsequently, the parties
engaged in discovery. Once discovery was complete, the case was reassigned to Judge
Hodges, and the parties filed cross-motions for summary judgment. Defendant argued
that a prior material breach committed by Petro Mex, specifically the failure to pay
royalties, provided the justification for the government’s alleged breach of attempting to
terminate the lease in August 2009. Judge Hodges, in a brief, unpublished opinion,
determined that
Defendant has not provided sufficient evidence or argument to show that it
is entitled to judgment as a matter of law on this issue. Its assertion that the
failure to pay royalties for a period of approximately nine months does not
establish a relationship with the alleged breach of termination for non-
production. In addition, the materiality of such an alleged breach is not clear
from the facts presented.
Plaintiff’s cross-motion for summary judgment argued that issue of whether the
government breached the lease is precluded by the Interior Board of Land Appeals’
decision, but Judge Hodges determined:
While decisions from the Interior Department Board can have preclusive
effects in this court, whether the Government committed a material breach
of contract was not fully litigated by the parties. The Board’s decision was
based on a narrow set of issues that did not ultimately decide whether a
breach of contract had occurred. In fact, the focus there was whether the
termination for non-production was proper, not whether either party
breached the contract, resulting in damages. The Board did not need to
determine whether the Government breached the lease to decide that the
termination was improper based on bureaucratic guidelines. The issues
presented here are not precluded by prior litigation; genuine issues of
material fact remain, and summary judgment based on issue preclusion
must therefore be denied.
(emphasis in original).
59
After Judge Hodges denied the cross-motions for summary judgment, the parties
attempted to engage in mediation to resolve the case. After the mediation was
unsuccessful, on September 11, 2020, the above captioned case was reassigned to the
undersigned. After a hearing with the parties, defendant filed a motion for leave to amend
its answer to “assert a new claim of offset pursuant to 31 U.S.C. § 3728(a), and to re-
open fact discovery for the limited purpose of updating gas production data from October
2016, through the present.” The court granted the defendant’s motion for leave to amend
the answer, and on December 11, 2020, defendant filed an amended answer to plaintiff’s
complaint which included a claim for offset, which alleges that, “as of September 14, 2020,
Petro Mex owes $330,205.58 to the United States for unpaid royalties, civil penalties,
interest, administrative fees, and Treasury collection fees.” On January 21, 2021, plaintiff
filed a response to the amended answer and claim for offset. The parties subsequently
undertook further discovery on the updated gas production data and prepared for, and
proceeded to, trial.
DISCUSSION
Statute of Limitations
Plaintiff’s complaint was filed October 22, 2014 and the case was initially assigned
to Judge Firestone. In lieu of an answer, defendant filed a motion to dismiss for lack of
jurisdiction alleging that the plaintiff’s claims were time-barred under the applicable statute
of limitations. As indicated above, the motion to dismiss was denied by Judge Firestone.
In its post-trial filings, defendant argues that “Petro Mex failed to prove any shut-in
related breach of contract,” and claims that “Petro Mex’s shut-in related breach claim is
barred by the statute of limitations.” Defendant argues that
[d]espite identifying October 2008 as the date of the United States’ first
alleged breach in both the parties’ pretrial statement of fact and issues,[18]
and in the introduction to its post-trial brief, Petro Mex briefs a different
question: whether the United States breached the lease by “continuation of
the May 29, 2008 shut-in order after the ‘immediate’ concern of the
underground leak had been resolved.” (capitalization altered). The answer
to that question is “no.” First, by Petro Mex’s own allegations, this breach
accrued before October 22, 2008 and is, therefore, outside the six-year
statute of limitations in 28 U.S.C. § 2501.
(internal citations omitted; alteration and footnote added). Plaintiff responds that “Petro
Mex does assert that the Government acted improperly when it failed to lift the Shut-In
18One of the joint issues of law filed by the parties in advance of the trial asked: “If the
Court finds that the Field Office orally ordered Petro Mex to cease production on the
Lease in October of 2008, whether that oral order was a partial breach of Section 1 of the
Lease.”
60
Order after the immediate safety issue or issues that led to the issuance of the order were
resolved, but this does not mean that Petro Mex’s claim accrued at that time.” As
referenced above, plaintiff’s complaint alleges: “The United States breached the Leases
and its agreement with Petro Mex by attempting to terminate the Leases on or about
August 26, 2009 when it had no valid contractual, statutory or regulatory grounds to do
so.”
Although the Tucker Act waives federal sovereign immunity in certain cases, and
grants this court jurisdiction to hear monetary claims against the government, including
military pay claims, this court’s jurisdiction is expressly limited by 28 U.S.C. § 2501, which
prescribes a six-year statute of limitations for filing claims arising under the Tucker Act’s
waiver of sovereign immunity. According to 28 U.S.C. § 2501:
Every claim of which the United States Court of Federal Claims has
jurisdiction shall be barred unless the petition thereon is filed within six years
after such claim first accrues. . . . A petition on the claim of a person under
legal disability or beyond the seas at the time the claim accrues may be filed
within three years after the disability ceases.
Id. “The six-year statute of limitations set forth in section 2501 is a jurisdictional
requirement for a suit in the Court of Federal Claims.” John R. Sand & Gravel Co. v.
United States, 457 F.3d 1345, 1354 (Fed. Cir.), reh’g en banc denied (Fed. Cir. 2006),
aff’d, 552 U.S. 130 (2008); see also Roseberry-Andrews v. United States, 144 Fed. Cl.
29, 33 (2019); Schnell v. United States, 115 Fed. Cl. 102, 104-5 (2014). The United States
Court of Appeals for the Federal Circuit has indicated that a claim accrues ““when all
events have occurred to fix the Government’s alleged liability, entitling the claimant to
demand payment and sue here for his money.”” Samish Indian Nation v. United States,
419 F.3d 1355, 1369 (Fed. Cir. 2005) (quoting Martinez v. United States, 333 F.3d 1295,
1303 (Fed. Cir. 2003), cert. denied, 540 U.S. 1177 (2004)); see also FloorPro, Inc. v.
United States, 680 F.3d 1377, 1381 (Fed. Cir. 2012); Martinez v. United States, 333 F.3d
at 1303 (“A cause of action cognizable in a Tucker Act suit accrues as soon as all events
have occurred that are necessary to enable the plaintiff to bring suit, i.e., when ‘all events
have occurred to fix the Government’s alleged liability, entitling the claimant to demand
payment and sue here for his money.’” (quoting Nager Elec. Co. v. United States, 177 Ct.
Cl. 234, 240, 368 F.2d 847, 851 (1966), motion denied, 184 Ct. Cl. 390, 396 F.2d 977(1968)) (emphasis in original); Mildenberger v. United States, 643 F.3d 938, 944–45 (Fed.
Cir. 2011); Hopland Band of Pomo Indians v. United States, 855 F.2d 1573, 1577 (Fed.
Cir. 1988); see also Eden Isle Marina, Inc. v. United States, 113 Fed. Cl. 372, 481 (2013);
Brizuela v. United States, 103 Fed. Cl. 635, 639, aff’d, 492 F. App’x 97 (Fed. Cir. 2012),
cert. denied, 133 S. Ct. 1645 (2013).
As summarized by the United States Court of Appeals for the Federal Circuit in
Holmes v. United States:
Section 2501 states that all claims that otherwise fall within the jurisdiction
of the Court of Federal Claims “shall be barred unless the petition thereon
is filed within six years after such claim first accrues.” 28 U.S.C. § 2501. A
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cause of action first accrues when all the events have occurred that fix the
alleged liability of the government and entitle the claimant to institute an
action. Ingrum v. United States, 560 F.3d 1311, 1314 (Fed. Cir. 2009).
Generally, “[i]n the case of a breach of a contract, a cause of action accrues
when the breach occurs.” Alder Terrace, Inc., v. United States, 161 F.3d
1372, 1377 (Fed. Cir. 1998) (quoting Mfrs. Aircraft Ass’n v. United States,
77 Ct. Cl. 481, 523, 1933 WL 1818 (1933)). Compliance with the statute of
limitations is a jurisdictional requirement. John R. Sand & Gravel Co. v.
United States, 552 U.S. 130, 133–34, 128 S. Ct. 750, 169 L. Ed. 2d 591(2008).
Holmes v. United States, 657 F.3d 1303, 1317 (Fed. Cir. 2011).
In addition, a Judge of the United States Court of Federal Claims has noted that:
It is well-established that a claim accrues under section 2501 “when ‘all
events have occurred to fix the Government's alleged liability, entitling the
claimant to demand payment and sue here for his money.’” Martinez v.
United States, 333 F.3d 1295, 1303 (Fed. Cir. 2003) (en banc), cert. denied,
540 U.S. 1177, 124 S. Ct. 1404, 158 L. Ed. 2d 76 (2004) (quoting Nager
Elec. Co. v. United States, 368 F.2d 847, 851 (Ct. Cl. 1966)); see also
Samish [Indian Nation v. United States], 419 F.3d [1355,] 1369 [(2005)].
Because, as noted, this requirement is jurisdictional, plaintiff bears the
burden of demonstrating that its claims were timely. See Alder Terrace, Inc.
v. United States, 161 F.3d 1372, 1377 (Fed. Cir. 1998); Entines v. United
States, 39 Fed. Cl. 673, 678 (1997), aff’d, 185 F.3d 881 (Fed. Cir.), cert.
denied, 526 U.S. 1117, 119 S. Ct. 1766, 143 L. Ed. 2d 796 (1999); see also
John R. Sand & Gravel Co. v. United States, 457 F.3d 1345, 1362 (Fed. Cir.
2006) (Newman, J., dissenting); Reynolds v. Army & Air Force Exch. Serv.,
846 F.2d 746, 748 (Fed. Cir. 1988).
Parkwood Assocs. Ltd. P’ship v. United States, 97 Fed. Cl. 809, 813-14 (2011), aff’d, 465
F. App’x 952 (Fed. Cir. 2012); see also Mgmt. & Training Corp. v. United States, 137 Fed.
Cl. 780, 783 (2018); Klamath Tribe Claims Comm. v. United States, 97 Fed. Cl. 203, 209
(2011) (citing Alder Terrace, Inc. v. United States, 161 F.3d 1372, 1377 (Fed. Cir. 1998)).
Accrual of a claim is “‘determined under an objective standard’” and plaintiff does
not have to possess actual knowledge of all the relevant facts in order for a cause of
action to accrue. FloorPro, Inc. v. United States, 680 F.3d at 1381 (quoting Fallini v.
United States, 56 F.3d 1378, 1380 (Fed. Cir. 1995), cert. denied, 517 U.S. 1243 (1996)).
Plaintiff does not need to be aware of all relevant facts for a cause of action to accrue,
the statute of limitations begins running once they are aware of sufficient facts to know
that they have been wronged. See Osborn v. United States, 47 Fed. Cl. 224, 233 (2000).
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The Federal Circuit in Holmes offered further explanation, writing,
the “accrual of a claim against the United States is suspended, for purposes
of 28 U.S.C. § 2501, until the claimant knew or should have known that the
claim existed.” Id. [Holmes v. United States, 92 Fed. Cl. 311,] 319 (quoting
Young v. United States, 529 F.3d 1380, 1384 (Fed. Cir. 2008)). For the
accrual suspension rule to apply, the plaintiff “must either show that the
defendant has concealed its acts with the result that plaintiff was unaware
of their existence or it must show that its injury was ‘inherently unknowable’
at the accrual date.” Young, 529 F.3d at 1384 (quoting Martinez v. United
States, 333 F.3d 1295, 1319 (Fed. Cir. 2003) (en banc)).
Holmes v. United States, 657 F.3d at 1317 (footnotes omitted).
Plaintiff’s October 22, 2014 complaint alleges that
[o]n May 27, 2008, inspections of certain wells on the Leases were again
conducted by GJFO [Grand Junction Field Office] personnel. The
inspections found that the violations cited during the April 25, 2008
inspections had not been rectified and found an additional major violation
on the Government 5 well. In addition, the inspection of the Federal 2 well
on the Mesa Lease found a major violation at that well. As a result of the
foregoing violations, on May 27, 2008 the GJFO ordered all of the wells on
both Leases to be shut-in “until all leaks are corrected and all compliance
issues are resolved.” Petro Mex immediately complied with this order and
shut all of the wells in. Petro Mex corrected all of the major and minor
violations that had been cited on the Leases by the GJFO pursuant to the
April 25, 2008 and May 27, 2008 inspections by the end of June, 2008.
Petro Mex advised the GJFO of this fact and resumed production from the
wells on the Leases in August of 2008. In October of 2008, the GJFO
advised Petro Mex that the May 27, 2008 shut-in orders on the Leases had
not been lifted and should still be in effect. The GJFO ordered Petro Mex
to halt the resumed production from the wells until the order was lifted.
Petro Mex complied with this order and halted production from the wells on
or about October 31, 2008. ln the months following the October 2008 order,
Petro Mex repeatedly asked the GJFO what it needed to do to have the
May 27, 2008 shut-in order lifted, but they received nothing but vague,
inconsistent and uncertain instructions or directions on how to do so.
(alterations added). Plaintiff’s October 22, 2014 complaint also alleges that
[t]he United States breached the Leases and its agreement with Petro Mex
by ordering Petro Mex to cease production on the Leases in October of
2008 when it had no valid contractual, statutory or regulatory grounds to do
so, and by refusing to allow production to resume once Petro Mex had
adequately demonstrated that there were no more remaining violations on
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the Leases that constituted “immediate, substantial and adverse impacts on
public health and safety [or] the environment.” The United States breached
the Leases and its agreement with Petro Mex by attempting to terminate the
Leases on or about August 26, 2009 when it had no valid contractual,
statutory or regulatory grounds to do so. As a result of the breaches of the
Leases by the United States, Petro Mex has suffered damages, including
the loss of the full potential value of the Leases (including loss of profits),
loss of reasonable expectancy and reliance damages including the
expenses incurred in reliance upon the right to produce and sell oil and gas
from the Leases.
(second alteration in original).
In response to the August 22, 2014 complaint, defendant, on February 20, 2015,
filed a motion to dismiss before Judge Firestone alleging “Petro Mex was on inquiry notice
of a potential breach of contract action when it claimed that it had resolved the
noncompliance issues, informed the BLM of this fact, and resumed production on the
leases by August of 2008,” and “[a]ll of the events fixing the Government’s alleged liability
had occurred by this point.” (alteration added). According to defendant, therefore, “Petro
Mex knew or should have known it had a potential breach of contract claim once it
allegedly had resolved the noncompliance issues, but BLM did not permit it [Petro Mex]
to resume production.” (alteration added).
As reflected above, while assigned the case earlier, Judge Firestone had denied
defendant’s February 20, 2015 motion to dismiss on August 10, 2015. Judge Firestone
first noted that
[a]ccording to the government, Petro Mex’s claim accrued on or before
August 2008—but no later than October 1, 2008—because the only
potential breach by the BLM was its failure to lift the shut-in orders after
Petro Mex alleges that it had remedied its noncompliance and so notified
the BLM. The government argues that only one shut-in order was imposed,
so the BLM’s reinforcement of that order could not be a separate breach.
Additionally, the government states that it is unclear whether the alleged
phone call instructing plaintiff to continue the shut-in order actually occurred,
as it contends that the BLM does not make such requests without confirming
it in writing. Further, the government argues that the decision to terminate
Petro Mex's leases in 2009 does not give rise to a separate breach claim
because Petro Mex’s failure to produce stems from the BLM’s same failure
to lift the shut-in orders in August 2008.
In response, Petro Mex argues that its complaint was timely filed because
the government has mischaracterized its claims and that, when properly
construed, the breach of contract claims were timely filed. First, Petro Mex
argues that it is asserting a breach based on the BLM s decision in late
October 2008 to order Petro Mex to stop production after the violations were
corrected. Petro Mex has filed an affidavit asserting a breach based on a
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late October 2008 BLM phone call in which Petro Mex claims it was
instructed by the BLM to stop the production it had resumed in August 2008.
Second, Petro Mex argues that the BLM’s August 2009 termination
decisions also breached the leases because, as the IBLA [Interior Board of
Land Appeals] determined, they were legally wrongful. Petro Mex asserts
that the breaches associated with termination of the Leases do not relate
back to the original shut-in orders issued in May 2008 or to BLM’s actions
taken in October 2008. Rather, Petro Mex claims that the termination
decisions are separate from the shut-in orders because BLM based the
terminations of the Leases on new compliance issues that were identified
in 2009 involving the compressor and certain fines and a bond allegedly
owed by Petro Mex.
Petro Mex, LLC v. United States, 122 Fed. Cl. at 540–41 (alterations added). Although
denying the motion to dismiss, Judge Firestone’s decision indicated that she assumed,
for purposes of the motion to dismiss, and prior to the trial before the undersigned and
further development of the facts in the case, she was considering that plaintiff has stated
a valid claim for breach of contract, and based on that assumption, the claims were timely
filed. Judge Firestone held:
The court finds that plaintiff’s breach of contract claims are not barred by
the statute of limitations for two main reasons. First, while the government
argues that the breach alleged by plaintiff cannot be an actual breach, the
government has not moved to dismiss for failure to state a claim. At this
stage of the proceeding, the court must take plaintiff’s alleged breach claims
at face value. See Ashcroft [v. Iqbal], 556 U.S. [662,] 678, 129 S. Ct. 1937[(2009)] (citing [Bell Atl. Corp. v.] Twombly, 550 U.S. [544,] 555–56, 127 S.
Ct. 1955 [(2007)]). As such, regardless of whether plaintiff has stated a valid
claim for breach of contract, the court’s task at this juncture is to determine
whether, assuming plaintiff has stated a valid claim for breach of contract,
the claims were timely filed. Accordingly, the court rejects the government’s
motion to dismiss based on the statute of limitations because the breach
alleged by plaintiff occurred within 6 years of filing the complaint. Plaintiff
does not challenge the BLM’s failure to timely respond to a request to lift
the shut-in order in August 2008, as the government contends. Rather,
plaintiff alleges that the BLM wrongfully told or ordered Petro Mex to shut-
in during a phone call in late October 2008 after the violations on the Leases
were allegedly corrected. While the evidence of the alleged date of the
phone call, sometime after October 22, 2008, comes from plaintiff’s
employees, the date and the occurrence of the phone call have not been
disputed by the government. While government argues that it has not been
able to confirm that any phone call was made, the undisputed evidence
presented before the court indicates that, for the purpose of determining
whether the statute of limitations has run, Petro Mex was told to stop
production on either October 24 or 25, 2008. Accordingly, the breach claim
based on the October shut-in is therefore timely filed. If, after discovery, the
65
evidence establishes that there was no phone call, plaintiff's breach claim
will fail on the merits.
Petro Mex, LLC v. United States, 122 Fed. Cl. at 541 (footnote omitted; alterations added).
At the time of Judge Firestone’s 2015 decision, Judge Firestone did not have the benefit
of the full trial record, including the trial exhibits and trial testimony, developed after the
case was transferred, and Judge Firestone accepted as true the claims in plaintiff’s
complaint for the purposes of the motion to dismiss, she was considering at the time.
Subsequent to Judge Firestone’s decision in 2015, as detailed above in the lengthy
findings of fact, the parties filed joint stipulated facts, filed numerous exhibits and took
extensive testimony from witnesses. As discussed below, in the court’s breach analysis,
the defendant argued “[a]lthough Mr. Villalobos testified that the call occurred, his
testimony has been inconsistent, and is unsupported by any contemporaneous record.”
Before the undersigned, after the trial record was closed, defendant, in its post-
trial brief, again raised the statute of limitations issue and argues “Petro Mex’s shut-in
related breach claim is barred by the statute of limitations.” In her opinion, when she
denied defendant’s earlier motion to dismiss, Judge Firestone had indicated further
evidence should be reviewed in order to evaluate the breach issues and any impact on
the statute of limitations. Therefore, in order to evaluate if the parties’ claims were within
the statute of limitations in this court, consistent with Judge Firestone’s earlier opinion,
see Petro Mex, LLC v. United States, 122 Fed. Cl. 536, the parties conducted discovery
and the court held a trial, in order to hear testimony from both plaintiff and government
witnesses and to weigh the credibility of trial testimony before reaching a decision on all
the issues.
After the trial before the undersigned, defendant argues:
Petro Mex alleges that it had a right to have the shut-in order lifted
“presumably as early as June 3, 2008, when the underground leak on the
Government 5 [well] was fixed,” Pl. Post-Tr. Br. at 41, and no later than July
2008, id. at 34-35. Thus, Petro Mex itself places accrual of its claim at
between three and nearly five months outside the statute of limitations.
(alteration in original). Defendant argues: “Now that the record has been fully developed
through trial, Petro Mex has settled on a theory, and that theory rests upon a single
event—failure to lift the shut-in in July 2008—and its continuing negative effects.”
Defendant also points to plaintiff’s argument in its post-trial brief which states: “The
Government’s continuation of the May, 29 2008 Shut-In Order after the ‘immediate’
concern of the underground leak had been resolved was not permitted by the applicable
legal authorities and violated Petro Mex’s right to produce oil and gas from the Lease.”
Plaintiff contends,
Petro Mex does not dispute the Government’s finding from April, 25 [sic]
2008 that it was in violation of certain regulations with regard to the Lease
at that time, such that Mr. Fancher was justified in citing them and issuing
66
the April 2008 Notices. But it must be remembered that of those five notices,
only one was for a major violation; the remainder were all minor violations.
Similarly, Petro Mex does not dispute the Government’s finding from May
27, 2008 that there was a serious and major safety violation on the Lease
that justified not only the issuance of the May 27, 2008 Notice, but also the
Shut-In Order. There is little question that the “underground leak” that was
observed on that day [May 27, 2008] constituted an “Act of Noncompliance”
that was subject to the remedies set forth in 43 C.F.R. § 3163.1. Specifically,
the underground leak without question constituted a situation where
“continued operations could result in immediate, substantial, and adverse
impacts on public health and safety, the environment, production
accountability, or royalty income,” such that it was justified to take
“immediate shut-in action” under 43 C.F.R. § 3163.1(a)(3). However, once
the immediate situation of the underground leak was addressed, the
Government was not justified or authorized under the applicable regulations
to maintain or keep the Shut-In Order in place for the purpose of gaining
compliance with other, non-immediate prior violations. And later, the
Government was also not authorized to maintain or keep the Shut-In Order
in place for the purpose of gaining compliance with other, non-related
compliance issues that arose after the issuance of the Shut-In Order. In
doing so, the Government unduly interfered with Petro Mex’s right to
produce oil and gas and breached its obligations under the Lease.
(alterations added). Plaintiff argues “it is clear that once the issue that justified the taking
of ‘immediate shut-in action’ On [sic] May 29, 2008 (the underground leak) had been
resolved and the Government was aware of such, the Government had an obligation to
lift the Shut-In Order.” (alteration added). Turning to the testimony at trial, plaintiff
indicates:
Mr. Fancher testified at trial that he actually observed a crew on the Lease
repairing the underground leak within days of the Shut In Order being fixed.
However, despite having observed the leak being fixed and presumably
being satisfied with the effort that was made to fix it (he made no attempt to
inspect or check the leak when he visited the 15-9 well with Mr. Villalobos
on July 1, 2008), when asked at trial if he had considered the Shut-In Order
to still be in place on August 1, 2008, almost two months later, he stated
that he did “because not everything was corrected at that time.” As was
demonstrated at trial, the only issues that were still outstanding by that time
were EF08018 (unnumbered storage tank) and EF08020 (insufficient water
storage pit and full tank). Neither issue justified the continuance of the Shut-
In Order.
(internal references omitted). Therefore, plaintiff concludes:
Given the foregoing, it is clear that Petro Mex had a right to have the Shut-
In Order lifted and to re-establish production on the Lease sometime during
67
the summer of 2008, presumably as soon as June 3, 2008 when the
underground leak on the Government 5 was fixed. The Government does
not deny that it was aware that this violation (as well as any other safety
violations) was fixed by the end of July 2009 [sic]. Further, Mr. Wilson
testified that he advised Mr. Fancher near the end of July that Petro Mex
had remedied all of the outstanding violations and that Mr. Fancher had
declined an offer to reinspect the wells to verify. However, regardless of
whether this call happened or not (Mr. Fancher has denied receiving the
call but admitted to not conducting further inspections), it cannot be disputed
that the Government had actual knowledge that the issue justifying the
“immediate” shut-in action had been resolved. Based upon this, and upon
the fact that the Lease provided Petro Mex with the “right and privilege to
drill for, mine, extract, remove, and dispose of . . . oil and gas deposits” from
the Lease, provided it was in compliance with the applicable regulations,
Petro Mex was legally justified in re-starting production from the Lease in
August of 2008 as it did.
(internal references omitted; alteration added).
At the closing argument, plaintiff’s counsel argued:
Trial testimony and exhibits established that three of the five notices of
incidents of noncompliance that were issued pursuant to the April 25
inspections were all either resolved or closed by July 1st of 2008. More
importantly, trial testimony also established that the violation that led to the
issuance of the shut-in order, which was the underground leak, was also
resolved or fixed by June 2nd, 2008. That meant that at the end of July
2008, only two of the six notices of incidents of noncompliance that were
issued against Petro Mex in April and May of 2008 may have remained
outstanding. These are for an unnumbered storage tank on one well and an
insufficient water storage pit and pool tank on another. Lynn[19] Wilson,
Operations Manager for Petro Mex in 2008, testified that by the end of July
of 2008, they believed that all of the outstanding issues for the notices of
incidents of noncompliance had been resolved. At that time, he placed a
call to Mr. Fancher and advised him of the foregoing, asking Mr. Fancher if
he wished to conduct a reinspection of the wells. According to Mr. Wilson,
Mr. Fancher told him he did not intend to conduct such a reinspection.
Pursuant to this conversation and based on his prior experience with the
Field Office, Mr. Wilson believed that Petro Mex was therefore entitled to
resume production on the leases, as he believed that the issues justifying
the immediate order were resolved. He explained that Petro Mex’s prior
experience with the Field Office, and with Mr. Fancher, in particular, was
that formal written notices and approvals were often not required to be
19Although the trial transcript occasionally refers to Mr. Wilson as “Lynn Wilson,” Mr.
Wilson’s first name is “Linn.”
68
delivered or received and that informal verbal approvals were common.
Pursuant to this, Petro Mex resumed production on the lease and produced
gas on the lease from August of 2008 until the end of October of 2008.
(alteration added). As demonstrated by the quotations above, plaintiff did not identify a
specific date by which that all events occurred necessary to enable the plaintiff to bring
suit occurred.
Defendant now argues, based on the facts as developed at trial, through the trial
exhibits and trial testimony, as well as the arguments in plaintiff’s post-trial brief and at
closing argument, “Petro Mex alleges that it had a right to have the shut-in order lifted
‘presumably as early as June 3, 2008, when the underground leak on the Government 5
[well] was fixed,’ and no later than July 2008,” and argue that “Petro Mex itself places
accrual of its claim at between three and nearly five months outside the statute of
limitations” when it subsequently filed its complaint on October 22, 2014. (internal
references omitted; alteration in defendant’s post-trial brief). Plaintiff’s post-trial brief
specifically states that “it is clear that Petro Mex had a right to have the Shut-In Order
lifted and to re-establish production on the Lease sometime during the summer of 2008,
presumably as soon as June 3, 2008 when the underground leak on the Government 5
was fixed.”
As noted above, plaintiff’s counsel and Mr. Fancher had the following exchange at
trial regarding the resolution of some of the Notices of Incidents of Noncompliance that
led to the Shut-In Order:
[Q.] [T]hat’s the notice of incident of noncompliance regarding the
underground leak on Government 5, right?
A. That’s correct.
Q. And that was the -- that was the violation that prompted the shut-in order.
Is that correct?
A. Yes.
Q. Okay. Do you know when that was corrected?
A. I think like May 30th.
Q. And, again, I’ll have you reference -- I’ll have you look back at the
interrogatory answers to refresh your memory for [Notice of Incident of
Noncompliance No.] 8025. Eight-zero-two-five, I should say.
A. 8025 was corrected on July 3rd, 2008.
69
...
Q. [Notice of Incident of Noncompliance No.] 8025, will you look at that
again and tell me what the interrogatory says about when that was
corrected?
A. It says it -- the violation was corrected by June 2rd [sic], 2008.
Q. So that was within three or four days of you issuing that notice, correct?
A. Yes, that’s correct.
Q. What’s your -- really quick, what’s your actual memory of that, of knowing
about them fixing that underground leak?
A. The only thing I remember would be we traveled out there to verify the
leak. We heard about it and we went out and checked it and went back to
see if there was any action taken on it. That was the 28th -- the 27th, 28th,
and 29th [of May 2008]. I think it was like the 30th, we actually -- there were
people out there pouring cement into a couple pipes trying to get it to stop
leaking.
Q. All right. So you actually observed the crew fixing that leak?
A. Yes.
Q. At least attempting to fix that leak?
A. Yeah, they -- and maybe it was on the 29th [of May 2008] that they fixed
it. You know, I don’t -- the exact day, I don’t -- I don’t -- you know, that’s a
little bit too far back.
(alterations added).
Plaintiff contends that “Petro Mex’s claims did not accrue until it received actual
notice in October of 2008 that the Government had not lifted the May 29 Shut-In Order,
therefore those claims were brought within the time allowed by the statute of limitations.”
Plaintiff also argues “Petro Mex does assert that the Government acted improperly when
it failed to lift the Shut-In Order after the immediate safety issue or issues that led to the
issuance of the order were resolved, but this does not mean that Petro Mex’s claim
accrued at that time.” Petro Mex contends that
the evidence presented at trial demonstrated Petro Mex did not believe,
based on past practice of the field office, that it was necessary to receive
formal notice of the lifting of a shut-in order before resuming production and
it erroneously, but in good faith, believed that the shut-in order had in fact
70
been lifted by August of 2008 when it resumed production. Linn Wilson
testified that he had contacted the Field Office in late July of 2008, advised
them that the issues had been resolved on the lease and asked if another
inspection was required to verify.
According to plaintiff,
[w]hen the Field Office indicated another inspection was not necessary,
Petro Mex took this to mean that the issues were resolved and the shut-in
order was constructively lifted meaning production could be resumed. This
impression was based on past practices of the Field Office where formal
practices or requirements were frequently eschewed.
(alteration added). Therefore, plaintiff argues:
Petro Mex had no idea that the shut-in order had not, in fact, been lifted until
they were ordered to halt production two months later after October 22,
2008. Petro Mex does not dispute that the Government knew that the shut-
in order had not been lifted, but that does not show that Petro Mex had
knowledge of such prior to October 22, 2008.
(emphasis in original). Plaintiff continues: “In this matter, it cannot be shown that Petro
Mex had any idea, or even any reason to suspect, that the Government considered the
Shut-In Order to still be in effect once the violations had been corrected as it was perfectly
reasonable for Petro Mex to believe that it had instead been lifted. Petro Mex, therefore,
had no notice, inquiry or otherwise, that they were still prohibited from producing.”
As noted above, the accrual of a claim is “‘determined under an objective
standard’” and plaintiff does not have to possess actual knowledge of all the relevant facts
in order for a cause of action to accrue. See FloorPro, Inc. v. United States, 680 F.3d at
1381 (quoting Fallini v. United States, 56 F.3d at 1380). Furthermore as articulated by the
United States Court of Appeals for the Federal Circuit,
[a]ccording to the accrual suspension rule, “the accrual of a claim against
the United States is suspended, for purposes of 28 U.S.C. § 2501, until the
claimant knew or should have known that the claim existed.” Id. [Martinez
v. United States, 333 F.3d 1295, 1319 (Fed. Cir. 2003)] To achieve such
suspension the plaintiff “must either show that the defendant has concealed
its acts with the result that plaintiff was unaware of their existence or it must
show that its injury was ‘inherently unknowable’ at the accrual date.” Id.(quoting Welcker v. United States, 752 F.2d 1577, 1580 (Fed. Cir. 1985)).
Young v. United States, 529 F.3d 1380, 1384 (Fed. Cir. 2008) (alterations added).
Defendant argues Petro Mex offered “no evidence that the Field Office attempted to
conceal the fact that the shut-in order was still in place,” “[n]or was the fact that the shut-
in order was still in place ‘inherently unknowable.’” As described above, the parties
stipulated:
71
Also on May 29, 2008, Mr. Fancher issued EF08025SI, “Notice to Shut
Down Operation” (Shut In Order). The Shut In Order stated that Petro Mex
had 24 hours from oral notice being provided “on 5/28/2008 at 15:38 hr.” to
immediately “shut in all wells on this lease until all leaks are corrected and
all compliance issues are resolved.” The “WARNING” section in the Shut In
Order stated that “[o]perations are not to be resumed until permitted by the
authorized officer.” The Shut In Order stated “when violation is corrected,
sign this notice and return to” the Field Office. It also informed Petro Mex of
its review and appeal rights.
(alteration in original; capitalization in original). Plaintiff does not argue that Mr. Fancher,
as the authorized officer permitted operations to begin again, nor that anyone from Petro
Mex signed the notice and returned it to the BLM. As indicated above, when discussing
shutting down wells in October 2008, Mr. Wilson testified:
Q. Why did you shut the wells back in in October?
A. Because Jesus [Villalobos] called me and told me that he had received a
phone call that we had to shut the wells back in, that we was on -- we was
still in the shut-in order.
And so i [sic] called Brian Gartner with Energy Transfer, and asked him if
he could go out and shut the compressor down for me, and he said he
would. And then that was -- I believe that was on a Friday, and he -- then I
went back up there on either Monday or Tuesday and took care of all the
block valves and the wellheads.
Q. Okay. Production was going pretty well in October before that, wasn’t it?
A. Yes, it was.
Q. Would there have been any other reason to shut down at the end of
October?
A. No.
Q. And we talked about how in August, it looked like you resumed
production around the 14th. Correct?
A. Correct.
Q. Why was that?
72
A. Because I had spoke to Ed Fancher and told him at the end of July that
all the incidents of noncompliance had been completed and did he want to
do a reinspection. And he said -- told me, no, not at this time.
Q. Okay.
A. So my assumption was that we could turn everything back on.
Q. Did he tell you you could turn everything back on?
A. No, he did not.
Q. Did you ask him if you could turn everything back on?
A. No, I did not.
Q. Okay. So were you concerned about the shut-in order still being in place?
A. I was. When I found out about it in October, I was.
Q. But when you turned it on in August, when you resumed production in
August, were you concerned about the shut-in still being in place?
A. No.
Q. Why not?
A. Because we had completed all the incident of noncompliance.
(alterations added). On cross-examination, defendant’s counsel pressed Mr. Wilson
about restarting production in August 2008:
[Q.] Whose responsibility was it to sign and date, complete this shut-in
notice?
A. It could have been either one of us. Could have been myself or Jesus
Villalobos.
Q. Whose responsibility was it to mail it back to BLM?
A. Again, it could have been either one of us. Whoever signed it would have
usually take it [sic] and mail it back.
Q. Did you sign and return this form?
A. No, I did not.
73
Q. Okay. Earlier you testified that when you called Mr. Fancher at the end
of July, you did not tell him that Petro Mex was going to resume production.
Is that right?
A. No, I did not. I asked him if he wanted to reinspect the wells.
Q. And let me -- so did -- just to be clear, did you tell Mr. Fancher you were
going -- that Petro Mex was going to resume production during that --
A. No.
Q. Okay. -- end of July phone call?
A. No.
(alterations added). Additionally, defendant’s counsel asked Mr. Wilson about Mr.
Hartman’s March 14, 2007 letter to Petro Mex:
Q. [C]ould you look at the warning section, please. Do you see that?
A. Okay.
Q. Can you read the first sentence, please, under, Warning.
A. “Operations are not to be resumed until permitted by the authorized
officer.”
Q. Okay. And Petro Mex resumed production in August 2008.
A. Yes.
Q. And did -- Petro Mex did so without permission of the authorized officer.
Right?
A. Correct.
Q. Do you recall specifically when in August Petro Mex resumed
production?
A. I believe it was mid-August, around the 14th, 15th.
Q. And then Petro Mex shut down production again near the end of October
2008. Right?
A. Correct.
74
Therefore, no evidence was introduced at trial that Petro Mex was unaware of the Shut-
In Order, or that the BLM had permitted operations of the wells to begin again.
Defendant also argues
[a]pplying an objective standard, FloorPro, Inc., 680 F.3d at 1381, any
reasonably prudent lease operator should have known that the shut-in order
was still in place. At a minimum, a reasonably prudent operator in Petro
Mex’s position would have been on inquiry notice that it was at least
possible the shut-in order was still in place. Mr. Villalobos’s testimony that
he “assumed” Petro Mex could resume production in August 2008, only
reinforces this conclusion. Petro Mex, having stuck its head in the sand and
failed to inquire whether the shut-in order was still in place, cannot now rely
upon that failure to save its claim from the statute of limitations.
(internal reference omitted; alteration added). Plaintiff also cites to the FloorPro decision
to argue that “accrual occurs when the events constituting a breach occur and when the
non-breaching party knows or should have known of their existence. See FloorPro, Inc.
v. United States, 680 F.3d at 1381 (quoting Goodrich v. United States, 434 F.3d 1329,
1333 (Fed. Cir. 2006)).” (emphasis in original). Relying on FloorPro, plaintiff argues “Petro
Mex maintains the position that it was not aware of and had no reason to know of the
Government’s failure to lift the Shut-In Order until it was notified of such after October 22,
2008. As a result, the claim did not accrue until such date and the claim was brought
within the applicable statute of limitations period.” (capitalization in original). The facts in
the FloorPro case do not assist Petro Mex. The facts in FloorPro, as summarized by the
Federal Circuit, are as follows:
On February 6, 2002, the United States Navy awarded Contract No.
N62467–02–M–2013 to G.M. & W. Construction Corporation (“GM & W”)
for the installation of floor coating in several warehouse bays at a military
base. GM & W subsequently entered into a subcontracting agreement with
FloorPro, pursuant to which FloorPro agreed to perform the floor-coating
work for a sum of $37,500.00. FloorPro completed the work on February
27, 2002, and promptly submitted an invoice to GM & W.
On March 8, 2002, the Navy informed GM & W that the floor-coating work
had been completed satisfactorily. On April 17, 2002, FloorPro contacted
the Navy’s contracting officer, stating that it had not been paid by GM & W.
The contracting officer then contacted GM & W to inquire why FloorPro had
not been paid for the floor-coating work. GM & W informed the contracting
officer that there were several claims pending against it, and that it was not
sure whether any funds that the Navy directly deposited into its bank
account would be available to pay FloorPro. Accordingly, on April 22, 2002,
the Navy and GM & W entered into a contract modification (“Modification
P00001”), which provided that the Defense Finance and Accounting Service
75
(“DFAS”) would not pay GM & W directly, as required by the original
contract, but would instead pay for the floor-coating work by issuing a hard-
copy, two-party check payable to GM & W and FloorPro. Modification
P00001 further provided that the Navy would mail the check directly to
FloorPro. Notwithstanding Modification P00001, on July 17, 2002, the
DFAS paid GM & W directly by an electronic fund transfer to its bank
account. On July 18, 2002, the contracting officer informed FloorPro that
DFAS had “ignored” Modification P00001 and “did not issue the two-party
check as [Modification P00001] had directed.” FloorPro responded by
sending a letter, dated July 23, 2002, asking the contracting officer “[w]hat
exactly is being done by [the Navy] to process a payment to us for our
work?” On August 9, 2002, Captain B.M. Scott, a Navy acting commander,
sent FloorPro a letter confirming that the government had paid GM & W in
full on the contract. Scott asserted that “[a]s the Government does not
possess privity of contract with FloorPro, Inc., or any other subcontractor,”
payment to GM & W had “fulfill[ed] the extent of the Government’s
obligations” under the contract.
FloorPro, Inc. v. United States, 680 F.3d at 1379 (capitalization and alterations in original).
The Federal Circuit in FloorPro explained the lengthy appeal process and noted:
On October 2, 2009, FloorPro filed suit against the government in the Court
of Federal Claims. The government moved for summary judgment, arguing
that FloorPro’s claim was time-barred because it was filed more than six
years after it first accrued. In response, FloorPro argued that its claim did
not accrue until October 5, 2004, “at which time the Navy filed a brief at the
[ASBCA] contending that FloorPro had no enforceable rights under
[Modification P00001].”
Id. at 1380 (alterations in original). The Federal Circuit in FloorPro determined:
FloorPro’s cause of action accrued when the government breached
Modification P00001 by making payment directly to GM & W, rather than
sending a two-party check to FloorPro as the modification required. See
Franconia Assocs. v. United States, 536 U.S. 129, 141, 122 S. Ct. 1993,
153 L. Ed. 2d 132 (2002) (explaining that claims seeking damages for
breach of contract generally accrue at the time of the breach); Kinsey v.
United States, 852 F.2d 556, 557 (Fed. Cir. 1988) (emphasizing that a
cause of action for breach of a government contract generally accrues when
payment is due but wrongfully withheld). FloorPro became aware of the
breach no later than August 9, 2002, when the Navy informed FloorPro that:
(1) it had paid GM & W directly for the floor-coating work; (2) it believed that
it had fulfilled the extent of its contract obligations; and (3) FloorPro’s only
recourse was to seek payment “from GM & W through the civil court
system.” Thus, no later than August 2002, FloorPro knew not only that the
Navy had paid GM & W directly, but that the government believed that it
76
had fulfilled all of its obligations under the contract and would not make any
payment to FloorPro. At this point, FloorPro had “a complete and present
cause of action,” Bay Area Laundry & Dry Cleaning Pension Trust Fund v.
Ferbar Corp., 522 U.S. 192, 201, 118 S. Ct. 542, 139 L. Ed. 2d 553 (1997)
(citations and internal quotation marks omitted), and all events necessary
to fix the alleged liability of the government for the failure to comply with
Modification P00001 had occurred. Because FloorPro did not file its
complaint in the Court of Federal Claims until October 2, 2009, more than
six years after its claim accrued, its action is time-barred.
FloorPro argues that its cause of action did not accrue until October 5, 2004,
when the government filed its brief in the ASBCA proceedings. It asserts
that while it “knew that the Government had paid GM & W directly in violation
of Modification P00001, the Government did not repudiate the terms of the
modification” until the government filed its brief with the ASBCA. We do not
find this reasoning persuasive. FloorPro knew long before the government
filed its brief in the ASBCA proceedings that the government had
“repudiate[d]” Modification P00001. As noted above, the Navy’s August
2002 letter stated that it had fulfilled all of its obligations under the contract
by making payment directly to GM & W and that FloorPro’s only recourse
was to seek payment “from GM & W through the civil court system.” This
letter was an unequivocal refusal to pay FloorPro under the terms of
Modification P00001, which required the Navy to issue a hard-copy, two-
party check payable to both GM & W and FloorPro and to send the check
to FloorPro.
FloorPro, Inc. v. United States, 680 F.3d at 1381-82 (alterations in original). The facts in
FloorPro, as indicated above, are different than the facts in the above captioned case,
specifically the payment method by the government to plaintiff FloorPro has no analog to
anything in the above captioned case Furthermore, in FloorPro there was a modification
to the contract, which is not present in the above captioned case.
In addition, Petro Mex argues
[i]n this matter, it cannot be shown that Petro Mex had any idea, or even
any reason to suspect, that the Government considered the Shut-In Order
to still be in effect once the violations had been corrected as it was perfectly
reasonable for Petro Mex to believe that it had instead been lifted. Petro
Mex, therefore, had no notice, inquiry or otherwise, that they were still
prohibited from producing.
At the trial, on cross-examination with defendant’s counsel, Mr. Villalobos claimed that he
had permission to re-open the wells:
77
[Q.] Mr. Villalobos, now in terms of time, we’re still in August 2008. But just
to confirm, you knew that when Petro Mex resumed production in August
2008, it did not have permission to do so, correct?
A. We didn’t have it in writing permission, but like I said, I talked to Ed
[Fancher] before and he told me that as soon as I had all the INCs
[Incidences of Noncompliance] done, we could turn production back on or
the wells on.
...
Q. Okay, all right. So, Mr. Villalobos, now do you recall testifying this
morning that Mr. Fancher called -- allegedly called and reminded you that
the shut-in order was still in effect?
A. I didn’t remember. He called me and reminded me that. But we talk about
it, even in that meeting.
Q. Okay. And I’m just -- and do you recall when Mr. Fancher called you?
A. I can’t remember what date exactly.
Q. Do you remember what month?
A. I think it was back in August if I remember right.
Q. Okay. And so when -- and when Mr. Fancher allegedly called you, you
testified this morning that it was to shut the wells in the Garfield lease back
in. Is that correct?
A. Yes.
Q. And isn’t it true that you have no contemporary records of that call?
A. Yes.
Q. And you also testified that you did not try and get any phone company
records, correct?
A. Well, I tried -- I tried to get the records from Altell. Back then, they used
to be Altell. And then Altell sold to AT&T and that was a nightmare. But I did
talk two or three times trying to get the phone records and they said they
might take a year to get them. So I give up. I didn’t get nothing.
(alterations added). The plaintiff produced no credible evidence that Petro Mex inquired
about the status of the Shut-In Order or received permission from Mr. Fancher to lift the
Shut-In Order. The court agrees with defendant that a reasonably prudent operator should
78
have communicated with the BLM to determine if the Shut-In Order was still in place. See
FloorPro, Inc. v. United States, 680 F.3d at 1381. Plaintiff cannot now rely on the failure
to inquire as a basis to bring its claims within the statute of limitations.
Additionally, defendant argues “[a]lthough Petro Mex complains that this breach
continued through lease termination in August 2009, it makes no effort in its brief to
demonstrate how that might bring its claim within the statute of limitations. Nor could it.
The continuing claim doctrine does not apply.”20 Plaintiff responds that
Petro Mex asserts, and has always asserted, that the specific action
constituting a breach of the lease was the actual unauthorized termination
of the lease on or about August 26, 2009. While the original failure to lift the
Shut-In Order in June of 2008 began a series of actions that ultimately led
to the Government’s decision to terminate the lease, that particular action
was, in fact, an “independent and distinct event” that can be found to have
its own “associated damages.”
(quoting Brown Park Estates-Fairfield Dev. Co. v. United States, 127 F.3d 1449, 1456
(Fed. Cir. 1997)).
The Federal Circuit case of Tamerlane, Ltd. v. United States, 550 F.3d 1135,
explained the continuing claims doctrine, as follows:
This doctrine applies where a plaintiff’s claim is “inherently susceptible to
being broken down into a series of independent and distinct events or
wrongs, each having its own associated damages.” Brown Park Estates-
Fairfield Dev. Co. v. United States, 127 F.3d 1449, 1456 (Fed. Cir. 1997).
The doctrine allows “later arising claims even if the statute of limitations has
lapsed for earlier events.” Tamerlane II, 80 Fed. Cl. [724,] 736 [(2008)]
(quoting Ariadne Fin. Servs. Pty. Ltd. v. United States, 133 F.3d 874, 879
(Fed. Cir. 1998)).
Tamerlane, Ltd. v. United States, 550 F.3d at 1145 (footnote omitted). In Wells v. United
States, 420 F.3d 1343, the United States Court of Appeals for the Federal Circuit
articulated the requirements for qualifying for the continuing claims doctrine, as follows:
“In order for the continuing claim doctrine to apply, the plaintiff’s claim must
be inherently susceptible to being broken down into a series of independent
and distinct events or wrongs, each having its own associated damages. . . .
However, a claim based upon a single distinct event, which may have
continued ill effects later on, is not a continuing claim.”
Id. at 1345 (omission in original) (quoting Brown Park Estates-Fairfield Dev. Co. v. United
20 The court notes that the parties refer to the doctrine as both the “continuing claims
doctrine” and the “continuing claim doctrine.” Unless the phrase is used in a quotation,
this Opinion adopts the phase the “continuing claims doctrine.”
79
States, 127 F.3d at 1456). In Tamerlane, borrowers brought an action against the
government for breach of Farmers Home Administration loan contracts, the Federal
Circuit found that:
In this case, Appellants appear to improperly conflate the government’s
breach of the original loan agreements with the use restrictions that arose
from the incentive loan agreements. That is, there is no second opportunity
for breach of the original agreements just because the incentive agreements
contain time-limited use restrictions. As the Court of Federal Claims
correctly found, there was a single agreement that was breached on a single
occasion, which does not allow any sort of “continuing claims” to be brought
under the prevailing law of this Circuit.
Tamerlane, Ltd. v. United States, 550 F.3d at 1146 (emphasis in original). The Tamerlane
court then compared the facts in Tamerlane to the circumstances presented in Ariadne
Financial Services Pty. Ltd. v. United States, 133 F.3d 874 (Fed. Cir. 1998):
This situation is analogous to that in Ariadne, where we were confronted
with a plaintiff who sought compensation from the government for
repudiation of a contract that promised continuing performance into the
future. [Ariadne Fin. Servs. Pty. Ltd. v. United States,] 133 F.3d at 879. In
finding that a single statutory repudiation made clear the government’s
intent to reject the terms of the contracts, we held that each subsequent
denial of the promised contractual benefits did not give rise to a separate
cause of action, and found that the continuing claims doctrine did not permit
the plaintiff to obtain a second limitations period where the limitations period
on the original breach had already expired. Id.Tamerlane, Ltd. v. United States, 550 F.3d at 1146 n.17 (alteration added); see also
Wagstaff v. United States, 105 Fed. Cl. 99, 112 (2012) (“The continuing claims doctrine
does ‘not apply to a claim based on a single distinct event which has ill effects that
continue to accumulate over time.’” (quoting Ariadne Fin. Servs. Pty. Ltd. v. United States,
133 F.3d at 879)).
Petro Mex contends that
[t]he Government’s entire argument on the statute of limitations ultimately
fails because, in contrast to what the Government proposes, Petro Mex’s
claims do not rest upon a single event. While Petro Mex asserts that the
failure to lift the Shut-In Order was improper and, at least consequentially,
began a series of events that ultimately led to the Government’s breaches,
Petro Mex’s claims are centered on those subsequent independent events:
The October order to shut down operations and the August 26, 2009
termination of the lease. Just because those events flowed from the refusal
to lift the Shut-In Order does not mean that they were not independent,
distinct events.
80
(capitalization in original; alteration added). Plaintiff’s initial post-trial brief, however,
argued
the evidence presented at trial made it clear that the continuation of the
Shut-In Order for the period from April to August of 2009, the period of
nonproduction that eventually led to the termination of the Lease, was also
based on non-immediate issues. The exhibits and trial testimony made clear
that at that point the issues that were keeping the Shut-In Order in place
were the Bond Increase and the Civil Penalty.
(emphasis added). Plaintiff also argued:
The Government may attempt to argue that the post June 16, 2009 shut-in
of the Garfield Lease was authorized because the June 16, 2009 letter from
the GJFO to Petro Mex constituted a “new” shut-in order. This argument is
without merit. While it is true that the portion of the letter that directs Petro
Mex to keep production shut-in on the Lease until the Bond Increase and
Civil Penalty are satisfied states that it is an “order of the authorized officer,”
it also states that the production is to “remain shut in,” indicating that the
order is simply a continuation of the original Shut In Order. Mr. Hartman also
stated in his trial testimony that when he wrote the letter, he considered the
shut-in order to be a continuation of the original Shut In Order and not a
“new” shut-in order. But even if this were not the case, any purported “new”
shut-in order issued by the June 16, 2009 letter under 43 C.F.R.
§ 3163.1(a)(3) for the purpose of ensuring compliance with the Bond
Increase or the Civil Penalty would have been invalid because (a) the issues
were not immediate threats so as to support “immediate shut-in action” and
(b) no “due notice, in writing” was provided prior to its issuance. Given the
foregoing, it is clear that Petro Mex had a right to have the Shut-In Order
lifted and to re-establish production on the Lease sometime during the
summer of 2008, presumably as soon as June 3, 2008 when the
underground leak on the Government 5 was fixed. The Government does
not deny that it was aware that this violation (as well as any other safety
violations) was fixed by the end of July 2009. Further, Mr. Wilson testified
that he advised Mr. Fancher near the end of July that Petro Mex had
remedied all of the outstanding violations and that Mr. Fancher had declined
an offer to reinspect the wells to verify. However, regardless of whether this
call happened or not (Mr. Fancher has denied receiving the call but admitted
to not conducting further inspections), it cannot be disputed that the
Government had actual knowledge that the issue justifying the “immediate”
shut-in action had been resolved. Based upon this, and upon the fact that
the Lease provided Petro Mex with the “right and privilege to drill for, mine,
extract, remove, and dispose of . . . oil and gas deposits” from the Lease,
provided it was in compliance with the applicable regulations, Petro Mex
81
was legally justified in re-starting production from the Lease in August of
2008 as it did.
(internal reference omitted; omission in original). As referenced above, plaintiff’s post-trial
reply brief stated:
Petro Mex asserts, and has always asserted, that the specific action
constituting a breach of the lease was the actual unauthorized termination
of the lease on or about August 26, 2009. While the original failure to lift the
Shut-In Order in June of 2008 began a series of actions that ultimately led
to the Government’s decision to terminate the lease, that particular action
was, in fact, an “independent and distinct event” that can be found to have
its own “associated damages.”
Plaintiff, however, does not elaborate on why the Shut-In Order is distinct from the
ultimate decision to terminate the Garfield Lease. In response, defendant argues plaintiff’s
claim that the termination was not an “independent and distinct event” as alleged by
plaintiff. Defendant states that
the Field Office’s alleged breach, by failing to lift the shut-in order in June or
July 2008 once it knew the underground leak was fixed, was “a single
distinct event.” The Field Office then terminated the lease on the basis that
Petro Mex could not show production in paying quantities because it was
shut-in. Placed in such a “Catch-22” situation, as a result, the later lease
termination in August 2009 flows back to the alleged failure of the Field
Office to lift the shut-in order, and is not a separate breach.
(emphasis in original). Furthermore, defendant notes,
Petro Mex itself has inextricably linked the Field Office’s request to restore
production in paying quantities, and resulting lease termination, with the
initial failure to lift the shut-in order. The Field Office did not lift the shut-in
order after the underground leak was fixed, which prevented Petro Mex from
producing any natural gas.
Defendant argues: “Now that the record has been fully developed through trial, Petro Mex
has settled on a theory, and that theory rests upon a single event—failure to lift the shut-
in in June or July 2008—and its continuing negative effects.” The court agrees with
defendant that the continuing claims doctrine does not apply to the facts of this case, as
there was a “series of independent and distinct events or wrongs, each having its own
associated damages.” Brown Park Estates-Fairfield Dev. Co. v. United States, 127 F.3d
at 1456. As discussed below, plaintiff also has not demonstrated that the BLM issued a
separated order to stop production of Petro Mex’s wells in October 2008, as plaintiff
previously alleged before Judge Firestone and Judge Hodges.
82
Therefore, as determined in the findings of facts, and consistent with the testimony
at trial, as well as the arguments in the parties’ post-trial briefs, Petro Mex resolved the
underground leak in June 2008, and defendant appears to have been aware that the leak
was fixed by site visits and notification from Petro Mex employees. Plaintiff argues in its
post-trial brief,
once the immediate situation of the underground leak was addressed, the
Government was not justified or authorized under the applicable regulations
to maintain or keep the Shut-In Order in place for the purpose of gaining
compliance with other, non-immediate prior violations. And later, the
Government was also not authorized to maintain or keep the Shut-In Order
in place for the purpose of gaining compliance with other, non-related
compliance issues that arose after the issuance of the Shut-In Order. In
doing so, the Government unduly interfered with Petro Mex’s right to
produce oil and gas and breached its obligations under the Lease.
Petro Mex, however, did not inquire if the Shut-In Order was still in place. Additionally,
Petro Mex resumed production under the Garfield Lease, without informing Mr. Fancher
or the BLM, and without permission to do so, produced oil between August 2008 and
October 2008. As noted by defendant, “[d]uring these months of production, Petro Mex
was aware that it could not operate the wells until an authorized officer gave it permission
and also that Petro Mex had never asked for written authorization to resume production.”
(alteration added). Under the objective standard for notice of the accrual of claims, see
FloorPro, Inc. v. United States, 680 F.3d at 1381, plaintiff was on notice that its claim
accrued prior to August 2008, and not, as plaintiff’s argues, in October of 2008.
Furthermore, as analyzed below, plaintiff also has not demonstrated that the BLM issued
a separated order to stop production of Petro Mex’s wells in October 2008. Therefore,
based on the facts developed at trial, plaintiff’s claims were filed outside the applicable
six year statute of limitations when plaintiff filed its complaint on October 22, 2014. See
John R. Sand & Gravel Co. v. United States, 457 F.3d at 1354. Petro Mex’s claims are
barred by the statute of limitations.
Breach
To be complete, and for the benefit of the parties’ efforts and participation in the
trial which was held, and to address all the issues in the case, included those addressed
in both Judge Firestone’s earlier opinion on the motion to dismiss, see Petro Mex, LLC v.
United States, 122 Fed. Cl. 536, and Judge Hodges’ earlier, unreported opinion on the
cross-motions for summary judgment, the court addresses the case, including the breach
allegations raised by the plaintiff, and the burden of proof plaintiff bears to prove a breach
of contract. Contract claims against the United States are governed by the Tucker Act,
which grants jurisdiction to this court as follows:
The United States Court of Federal Claims shall have jurisdiction to render
judgment upon any claim against the United States founded either upon the
Constitution, or any Act of Congress or any regulation of an executive
83
department, or upon any express or implied contract with the United States,
or for liquidated or unliquidated damages in cases not sounding in tort.
28 U.S.C. § 1491(a)(1) (2018). As interpreted by the United States Supreme Court, the
Tucker Act waives sovereign immunity to allow jurisdiction over claims against the United
States (1) founded on an express or implied contract with the United States, (2) seeking
a refund from a prior payment made to the government, or (3) based on federal
constitutional, statutory, or regulatory law mandating compensation by the federal
government for damages sustained. See United States v. Navajo Nation, 556 U.S. 287,
289–90 (2009); Me. Cmty. Health Options v. United States, 140 S. Ct. 1308, 1327–28
(2020); United States v. Mitchell, 463 U.S. 206, 215 (1983); see also Sanford Health Plan
v. United States, 969 F.3d 1370, 1378 (Fed. Cir. 2020); Alvarado Hosp., LLC v. Price,
868 F.3d 983, 991 (Fed. Cir. 2017); Greenlee Cnty., Ariz. v. United States, 487 F.3d 871,
875 (Fed. Cir.), reh’g and reh’g en banc denied (Fed. Cir. 2007), cert. denied, 552 U.S.
1142 (2008); Palmer v. United States, 168 F.3d 1310, 1314 (Fed. Cir. 1999); Gulley v.
United States, 150 Fed. Cl. 405, 411 (2020); Kuntz v. United States, 141 Fed. Cl. 713,
717 (2019). To invoke the jurisdiction of the United States Court of Federal Claims for
breach of contract claims, plaintiff “must show that either an express or implied-in-fact
contract underlies [their] claim.” Trauma Serv. Grp. v. United States, 104 F.3d 1321, 1325
(Fed. Cir. 1997). If plaintiff’s complaint “alleges that an express and, in the alternative, an
implied-in-fact contract underlies its claim,” “[t]his allegation suffices to confer subject
matter jurisdiction in the Court of Federal Claims.” Trauma Serv. Grp. v. United States,
104 F.3d at 1324–25 (alteration added) (citing Gould, Inc. v. United States, 67 F.3d 925,
929 (Fed. Cir. 1995)). The parties have stipulated that “[t]hrough a series of assignments,
Petro Mex acquired record title to the Garfield Lease effective October 1, 2004. At all
times relevant to this case, Petro Mex was the owner and the operator of the Garfield
Lease.” Therefore, there is no dispute between the parties that Petro Mex had a contract
with the government during the relevant period of time in the above captioned case.
In its post-trial brief,
Petro Mex asserts that the Government breached that obligation or duty
when it (a) prevented Petro Mex from producing oil and natural gas on the
Lease in October of 2008, even though Petro Mex had demonstrated that
there were no continuing violations on the Lease that posed a threat of
“immediate, substantial and adverse impacts on public health and safety,
the environment, production accountability, or royalty income” and (2)
terminated the Lease on or about August 26, 2009 when it had no valid
contractual, statutory or regulatory grounds to do so.
In order “[t]o recover for breach of contract, a party must allege and establish: (1)
a valid contract between the parties, (2) an obligation or duty arising out of the contract,
(3) a breach of that duty, and (4) damages caused by the breach.” San Carlos Irr. &
Drainage Dist. v. United States, 877 F.2d 957, 959 (Fed. Cir.), reh’g denied (Fed. Cir.
1989); see also Sunrez Corp. v. United States, 157 Fed. Cl. 640, 649 (2022); Hous. Auth.
of Slidell v. United States, 149 Fed. Cl. 614, 626 (2020); Shell Oil v. United States, 130
84
Fed. Cl. 8, 34 (2017) (quoting San Carlos Irr. & Drainage Dist. v. United States, 877 F.2d
at 959), aff’d, 896 F.3d 1299 (Fed. Cir. 2018); “‘The plaintiff or party alleging the breach
has the burden of proof on all of its breach of contract claims.’” Stockton E. Water Dist. v.
United States, 583 F.3d 1344, 1360 (Fed. Cir. 2009) (quoting 23 RICHARD A. LORD,
WILLISTON ON CONTRACTS § 63:14 (4th ed. 1999)), reh’g granted in part, 638 F.3d 781(Fed. Cir. 2011); see also Beard v. United States, 125 Fed. Cl. 148, 157 (2016) (“To
prevail on a breach-of-contract claim, the plaintiff bears the burden of proving: (1) the
existence of a valid contract between the parties; (2) a duty arising from the contract; (3)
a breach in duty; and (4) damages caused by the breach.” (internal quotation marks and
citations omitted)).
As noted above, there is no dispute that a valid contract existed between the
parties. Regarding defendant’s obligations or duties arising out of the contract, the first
section of the Garfield Lease provides:
SECTION 1. Rights of Lessee. — The lessee is granted the exclusive right
and privilege to drill for, mine, extract, remove, and dispose of all the oil and
gas deposits, except helium gas, in the lands leased, together with the right
to construct and maintain thereupon, all works, buildings, plants,
waterways, roads, telegraph or telephone lines, pipelines, reservoirs, tanks,
pumping stations, or other structures necessary to the full enjoyment
thereof, for a period of 10 years, and so long thereafter as oil or gas is
produced in paying quantities; subject to any unit agreement heretofore or
hereafter approved by the Secretary of the Interior, the provisions of said
agreement to govern the lands subject thereto where inconsistent with the
terms of the lease.
(capitalization and emphasis in original). Therefore, as indicated by plaintiff,
there can be little question that, absent some limitation provided for in the
Lease, the statutes or the applicable regulations that allows the Government
to limit or halt the exercise of such right, the Government has an obligation
and/or duty to allow to allow [sic] Petro Mex to ”extract, remove, and dispose
of” the oil and natural gas deposits on the Lease without interference.
(capitalization in original; alteration added). The court agrees with Petro Mex’s
characterization of the defendant’s obligations or duties arising out of the contract.
Therefore, for plaintiff to succeed on the merits in this case, plaintiff must demonstrate a
breach of that agreement by the government.
Plaintiff argues that the “[g]overnment breached its duty to allow Petro Mex to
extract, remove and sell oil and natural gas from the Garfield Lease in 2008 and 2009.”
(alteration added). More specifically, plaintiff first argues “[t]he government’s continuation
of the May, 29 2008 Shut-In Order after the ‘immediate’ concern of the underground leak
had been resolved was not permitted by the applicable legal authorities and violated Petro
Mex’s right to produce oil and gas from the Lease.” (alteration added). As noted above,
plaintiff concedes that “Petro Mex does not dispute the Government’s finding from April,
85
25 2008 [sic] that it was in violation of certain regulations with regard to the Lease at that
time, such that Mr. Fancher was justified in citing them and issuing the April 2008
Notices.” (alteration added). In addition, as noted in plaintiff’s post-trial brief:
Petro Mex does not dispute the Government’s finding from May 27, 2008
that there was a serious and major safety violation on the Lease that
justified not only the issuance of the May 27, 2008 Notice, but also the Shut-
In Order. There is little question that the “underground leak” that was
observed on that day [May 27, 2008] constituted an “Act of Noncompliance”
that was subject to the remedies set forth in 43 C.F.R. § 3163.1.
(alteration added). Plaintiff argues:
However, once the immediate situation of the underground leak was
addressed, the Government was not justified or authorized under the
applicable regulations to maintain or keep the Shut-In Order in place for the
purpose of gaining compliance with other, non-immediate prior violations.
And later, the Government was also not authorized to maintain or keep the
Shut-In Order in place for the purpose of gaining compliance with other,
non-related compliance issues that arose after the issuance of the Shut-In
Order. In doing so, the Government unduly interfered with Petro Mex’s right
to produce oil and gas and breached its obligations under the Lease.
The operative language of 43 C.F.R. § 3163.1 (2022) provides:
(a) Whenever any person fails or refuses to comply with the regulations in
this part, the terms of any lease or permit, or the requirements of any notice
or order, the authorized officer shall notify that person in writing of the
violation or default.
(1) For major violations, the authorized officer may also subject the person
to an assessment of $1,000 per violation, per inspection.
(2) For minor violations, the authorized officer may also subject the person
to an assessment of $250 per violation, per inspection.
(3) When necessary for compliance, or where operations have been
commenced without approval, or where continued operations could result
in immediate, substantial, and adverse impacts on public health and safety,
the environment, production accountability, or royalty income, the
authorized officer may shut down operations. Immediate shut-in action may
be taken where operations are initiated and conducted without prior
approval, or where continued operations could result in immediate,
substantial, and adverse impacts on public health and safety, the
environment, production accountability, or royalty income. Shut-in actions
for other situations may be taken only after due notice, in writing, has been
given;
(4) When necessary for compliance, the authorized officer may enter upon
a lease and perform, or have performed, at the sole risk and expense of the
86
operator, operations that the operator fails to perform when directed in
writing by the authorized officer. Appropriate charges shall include the
actual cost of performance, plus an additional 25 percent of such amount to
compensate the United States for administrative costs. The operator shall
be provided with a reasonable period of time either to take corrective action
or to show why the lease should not be entered;
(5) Continued noncompliance may subject the lease to cancellation and
forfeiture under the bond. The operator shall be provided with a reasonable
period of time either to take corrective action or to show why the lease
should not be recommended for cancellation;
(6) Where actual loss or damage has occurred as a result of the operator’s
noncompliance, the actual amount of such loss or damage shall be charged
to the operator.
43 C.F.R. § 3163.1. Plaintiff argues, given the language of the regulation,
[a]pplying the terms of 43 C.F.R. § 3163.1(a)(3) to the circumstances of May
29, 2008 on the Lease, it is clear that the issuance of the Shut-In Order was
an “immediate shut-in action” that could only be authorized pursuant to
concerns that “continued operations could result in immediate, substantial,
and adverse impacts on public health and safety, the environment
production accountability, or royalty income.” This clearly would apply to the
underground leak, that all parties agree constituted a substantial safety
hazard. However, 43 C.F.R. § 3163.1(a)(3) did not provide the authority for
the Government to take “immediate shut-in action” and issue an immediate
shut-in-order to resolve the additional compliance issues outstanding from
the April 2008 Notices unless such issues also created a threat of
“immediate, substantial, and adverse impacts on public health and safety,
the environment, production accountability, or royalty income.” To the
extent that the Government wished to shut-in Petro Mex for, as Mr. Fancher
put it “all the continued noncompliance that was still outstanding,” unless
that noncompliance created a threat that justified immediate action under
43 C.F.R. § 3163.1(a)(3), the Government was first required to provide
Petro Mex with “due notice, in writing” that such action was to be taken.
(emphasis in original; alteration added). Therefore, plaintiff argues, “[g]iven the foregoing,
it is clear that once the issue that justified the taking of ‘immediate shut-in action’ [sic] On
May 29, 2008 (the underground leak) had been resolved and the Government was aware
of such, the Government had an obligation to lift the Shut-In Order.” (alterations added).
In its post-trial brief, plaintiff maintains
Mr. Fancher testified at trial that he actually observed a crew on the Lease
repairing the underground leak within days of the Shut In Order being fixed.
However, despite having observed the leak being fixed and presumably
being satisfied with the effort that was made to fix it (he made no attempt to
inspect or check the leak when he visited the 15-9 well with Mr. Villalobos on
87
July 1, 2008, when asked at trial if he had considered the Shut-In Order to
still be in place on August 1, 2008, almost two months later, he stated that
he did “because not everything was corrected at that time.” As was
demonstrated at trial, the only issues that were still outstanding by that time
were EF08018 (unnumbered storage tank) and EF08020 (insufficient water
storage pit and full tank). Neither issue justified the continuance of the Shut-
In Order.
(internal references omitted).
In response, defendant argues, “[p]erhaps recognizing the weaknesses in its
evidence of an alleged October 2008 shut-in, Petro Mex instead devotes the bulk of its
argument to attempting to demonstrate that the Field Office violated the regulation
governing shut-in orders. First, Petro Mex raises a notice issue.” (alteration added).
Defendant contends:
Pursuant to 43 C.F.R. § 3163.1(a)(3), the Field Office can impose an
“immediate” shut-in order without advance notice for a violation that “could
result in immediate, substantial, and adverse impacts on public health and
safety, the environment, production accountability, or royalty income.” Petro
Mex concedes that the underground leak was such a violation. Pl. Post-Tr.
Br. at 37. But it contends that none of the other violations or compliance
issues covered by the shut-in order met this standard and, therefore, they
could not be “rolled into” the shut-in order absent separate “due notice, in
writing.” Id. As demonstrated below, Petro Mex is wrong that the
underground leak was the only violation or compliance issue meeting the
standard for immediate shut-in. But even if Petro Mex were correct, the
Court still should reject its notice argument.
(emphasis in original).
Defendant continues: “As an initial matter, Petro Mex failed to raise this notice
argument until the post-trial brief. Petro Mex did not identify this issue in the complaint,
its summary judgment briefing, or the pretrial statement of facts and law,” and therefore,
defendant argues, “[t]he Court should find the argument waived.” (internal references
omitted). As discussed in more depth regarding the issue of prior material breaches
below, because the issue was raised in plaintiff’s post-trial brief, defendant had an
opportunity to challenge plaintiff’s arguments regarding notice in its post-trial briefs and
at the closing argument, the court does not find that plaintiff has waived its arguments on
this issue. There was also extensive trial testimony about the Shut-In Order. Moreover,
although cited in the context of quoting the Interior Board of Land Appeals’ decision,
plaintiff’s complaint nevertheless refers to the specific FAR provision, 43 C.F.R. §
3163.1(a)(3), and alleges:
In its decision reversing and remanding the decision of the BLM to terminate
the Leases, the IBLA [Interior Board of Land Appeals] panel stated that the
88
noncompliance issues that the BLM used to justify its October, 2008 shut-
in order (the failure to post the increased reclamation bond and to pay or
contest an MMS civil penalty) “may well be significant, but neither of these
violations could justify the taking of immediate action under 43 C.F.R.
§ 3163.1(a)(3).” The panel also stated that “we do not believe an order to
avoid ‘immediate, substantial and adverse impacts on public health and
safety [or] the environment’ under 43 C.F.R. § 3163.1(a)(3) can be
continued simply because a minor violation or other compliance concern
arises or comes to light.” Finally, the panel stated that the foregoing meant
that the GJFO “erred by refusing to lift its shut-in orders” and then keeping
production shut-in on the Leases until the bond was posted and all fines
were paid to the MMS.
(second alteration in original).
As noted above, the language of 43 C.F.R. § 3163.1(a)(3) provides:
When necessary for compliance, or where operations have been
commenced without approval, or where continued operations could result
in immediate, substantial, and adverse impacts on public health and safety,
the environment, production accountability, or royalty income, the
authorized officer may shut down operations. Immediate shut-in action may
be taken where operations are initiated and conducted without prior
approval, or where continued operations could result in immediate,
substantial, and adverse impacts on public health and safety, the
environment, production accountability, or royalty income. Shut-in actions
for other situations may be taken only after due notice, in writing, has been
given.
Id.Defendant argues that
[t]he more natural and reasonable reading of the regulation is that when, as
here, the Field Office has a basis for an immediate shut-in, the Field Office
may include in its shut-in order all existing bases for shutting in the lease,
including those that, standing alone, might otherwise have required
advance notice. In short, when the Field Office is required to shut in a lease
to stop an immediate threat, it only makes sense that the Field Office may
include in that same order any additional, then-existing bases for shut-in
action, because the Field Office has broad discretion in determining how to
require compliance with Interior’s regulations.
(alteration added). At the trial, defendant’s counsel asked Mr. Fancher to discuss the
meaning of some of the language in the Shut-In Order:
[Q.] Could you please -- under the Remarks section of the shut-in order,
could you please read the sentence following, “You are shut in.”
89
A. It says, “We are required to shut in all wells on this lease until all leaks
are corrected and all compliance issues are resolved.”
Q. I want to ask you about this language, “all compliance issues are
resolved.” You did not list the specific compliance issues here, did you?
A. No, I did not.
Q. Why did you use this language, “all compliance issues?”
A. Because I had compliance issues with Petro Mex and so did our surface
people and others in BLM. So I wanted to make sure all the INCs [Incidents
of Noncompliance] and letters that were out were addressed and corrected.
And there was a lot going on, so. . .
Q. Did compliance issues include the five incidents of noncompliance from
April 25th, 2008?
A. Yes.
Q. Was anything else included in all compliance issues?
A. There was surface -- the surface inspectors had issues with them, too.
There was some letters and documents like that, but I don’t remember
specifically what they were.
(ellipse in original; alteration added). In response to the question, “[w]hat did you intend
the shut-in order to encompass?” Mr. Fancher answered: “They encompass everything
that -- all the production, all the valves, the tanks, the oil, the receipts, everything, getting
them fully in compliance and caught up with everything that I, at least, had the authority
to check on.” Mr. Fancher also reflected on his decision when issuing the Shut-In Order
at trial in an exchange with defendant’s counsel:
[Q.] You said this was the first shut-in order that you had ever issued, right?
A. That is correct.
Q. How did you feel when you issued this shut-in order?
A. Well, I kind of felt kind of let down a little bit. I tried to work with Petro Mex
a lot and tried to get them on the right path of doing -- what to do with the
reporting and with the site security and everything. I think I bent over
backwards trying to get it straightened out. And then there was other issues
with the drilling and stuff like that and we worked with them painlessly on
that. So when this gas leak took out, the oil came up missing, no run tickets,
it was just pretty much, you know, just like -- they just like blew us off
90
basically is the way I felt. So I felt totally within my right and power to shut
them in and requesting information, getting them caught up fully to that point
anyway.
Q. Yesterday, you described the leak on the Government 5 well that led you
to go out to the lease on May 27th, 2008.
A. Yes.
Q. If the Government 5 well had not had that leak, would you have still
issued a shut-in order to Petro Mex?
A. Yes, yes. I was working on the shut-in order in that area because of the
missing oil, the reporting, site security. There was too many violations really
just on that one pad to just kind of lie -- just to forget it. You know, they just
wasn’t paying attention and I needed to get their attention and I was
planning a shut-in order to do that.
(alteration added).
Although agreeing that Mr. Fancher had the authority to issue the Shut-In Order
for the underground leak, plaintiff argues any other violation that continued to shut down
Petro Mex’s oil and gas wells required additional notice. The regulation at issue, 43 C.F.R.
§ 3163.1(a)(3), does not directly address a situation such as the one presented in this
case, in which multiple violations exist simultaneously, including ones that involve
“immediate, substantial, and adverse impacts on public health and safety.” Id. The
regulation at regulation at issue, 43 C.F.R. § 3163.1a, however, does provide the BLM
with discretion in determining appropriate action:
(a) Whenever any person fails or refuses to comply with the regulations in
this part, the terms of any lease or permit, or the requirements of any notice
or order, the authorized officer shall notify that person in writing of the
violation or default.
(1) For major violations, the authorized officer may also subject the person
to an assessment of $1,000 per violation, per inspection.
(2) For minor violations, the authorized officer may also subject the person
to an assessment of $250 per violation, per inspection.
(3) When necessary for compliance, or where operations have been
commenced without approval, or where continued operations could result
in immediate, substantial, and adverse impacts on public health and safety,
the environment, production accountability, or royalty income, the
authorized officer may shut down operations. Immediate shut-in action may
be taken where operations are initiated and conducted without prior
approval, or where continued operations could result in immediate,
substantial, and adverse impacts on public health and safety, the
environment, production accountability, or royalty income. Shut-in actions
91
for other situations may be taken only after due notice, in writing, has been
given;
(4) When necessary for compliance, the authorized officer may enter upon
a lease and perform, or have performed, at the sole risk and expense of the
operator, operations that the operator fails to perform when directed in
writing by the authorized officer. Appropriate charges shall include the
actual cost of performance, plus an additional 25 percent of such amount to
compensate the United States for administrative costs. The operator shall
be provided with a reasonable period of time either to take corrective action
or to show why the lease should not be entered;
(5) Continued noncompliance may subject the lease to cancellation and
forfeiture under the bond. The operator shall be provided with a reasonable
period of time either to take corrective action or to show why the lease
should not be recommended for cancellation;
(6) Where actual loss or damage has occurred as a result of the operator’s
noncompliance, the actual amount of such loss or damage shall be charged
to the operator.
43 C.F.R. § 3163.1(a) (emphasis added). Although not specifically addressed in the
regulation, based on the absence of specific language in the regulation regarding
separate notices and based on Mr. Fancher’s testimony at trial regarding the Shut-In
Order to include all violations over which he had authority, and the BLM’s discretion to
determine how to enforce violations, see Blancett v. U.S. Bureau of Land Mgmt., 2006
WL 696050, at *9 (D.D.C. Mar. 20, 2006), the court finds that the BLM was not required
to provide separate notice for each of the violations that were occurring at the time the
Shut-In Order was issued.
Defendant further argues that
[e]ven if Mr. Fancher had issued the multiple notices Petro Mex contends
were required, Petro Mex agrees that it still would have been immediately
shut-in on May 28, 2008 for the underground leak. Then, during the time
that it was working to repair the leak, Petro Mex could have argued to the
Field Office that its compliance issues did not warrant a shut-in.
(alteration added). The Shut-In Order also provided under “Review and Appeal Rights:”
A person contesting a violation shall request a State Director review of the
Incidents of Noncompliance. This request must be filed within 20 working
days of receipt of the Incidents of Noncompliance with the appropriate State
Director (see 43 CFR 3165.3). The State Director [sic] review decision may
be appealed to the Interior Board of Lands [sic] Appeals, 801 North Quincy
Street, Suite 300, Arlington VA 22203 (see 43 CFR 3165.4). Contact the
above listed Bureau of Land Management office for further information.
92
(alterations added). Plaintiff did not introduce evidence at trial that Petro Mex requested
review by the Colorado BLM State Director or filed an appeal with the Interior Board of
Land Appeals.
Additionally, defendant argues if notice was required, “Petro Mex fails to
demonstrate how violation of the notice provision would be a violation of the lease.” For
support defendant cites Nutt v. United States. In Nutt, the court explained, by way of
background,
Plaintiffs Gary Nutt and Howard and Maretta Smithson (collectively referred
to as “plaintiffs”) operate farms in Castro County, Texas. Plaintiffs had
outstanding loan agreements with the Farmers Home Administration (the
“FmHA”), an agency of the United States Department of Agriculture, at the
time the events that give rise to these claims occurred. The FmHA grants
farm operating loans to eligible borrowers who are unable to obtain
reasonable financing elsewhere. 7 C.F.R. § 1941 (1983). The FmHA also
makes “emergency loans” and various debt servicing options available to
farmers, while administering the various loans, grants, and assistance
programs under regulations promulgated by the Secretary of the
Department of Agriculture. Loans are made to an eligible borrower only after
the FmHA determines that the borrower’s plan of operation has a
reasonable chance of success.
Nutt v. United States, 12 Cl. Ct. 345, 347 (1987), aff’d sub nom. Smithson v. United
States, 847 F.2d 791 (Fed. Cir. 1988). The Judge in Nutt noted that
the Smithsons claim that the FmHA’s delays in processing and finally
approving their loan application caused them to suffer economic losses.
They argue that the FmHA owed them a contractual duty to process their
application in a timely fashion. They cite 7 C.F.R. § 1910.6(a) (1983), which
describes the sequence of events that should occur after an applicant has
been deemed eligible for a loan. The Smithsons assert that the process
described by the regulation became a contractual obligation of the FmHA
to process applications “promptly” according to the process because the
regulations were incorporated into their security agreement by section IV.
E. of the agreement, which, again, reads: “This agreement is subject to the
present regulations of the Secured Party and to its future regulations not
inconsistent with the express provisions hereof.”
The Smithsons argue that this contract term incorporated all applicable
regulations into the contract as affirmative obligations of the Government.
Although this contract language is nearly identical to the contract provision
in Dahl [Dahl v. United States, 695 F.2d 1373 (Fed. Cir. 1982)], the opinion
in Dahl cannot be read as broadly as the Smithsons advocate. Had the
FmHA intended to convert its FmHA regulatory duties into contractual
obligations, it could have employed the language it used in Pettersen
93
[Pettersen v. United States, 10 Cl. Ct. 194, 199, aff’d, 807 F.2d 993 (Fed.
Cir. 1986)], i.e., that the parties “agree to comply with the terms and
conditions [including various regulations] specified in the Appendix to this
contract.” 10 Cl. Ct. at 198. Or, the FmHA could have drafted the term to
state simply that the parties agreed to comply with all applicable regulations.
Instead, the language that was included is far more susceptible to an
interpretation that the terms and obligations of the contract would be both
construed according to present regulations and subject to changes in the
regulations not inconsistent with the contract’s express provisions. Viewed
in this way, the contract establishes the FmHA’s regulations as a backdrop
to, and occasional modifier of, express contractual obligations.
It is unreasonable to infer that the FmHA meant to obligate itself in
wholesale fashion to comply with each FmHA regulation or risk breach of
contract damages. Absent both an en masse incorporation of regulations
and express or implied contractual promises by the FmHA to evaluate loan
applications according to some time schedule, the Smithsons’ breach claim
based on timeliness must fail.
Nutt v. United States, 12 Cl. Ct. at 353 (footnote omitted; alterations added).21 Based on
the holding in Nutt, defendant contends, if regulations like 43 C.F.R. § 3163.1 “were
contractual promises, then the plaintiff could, as Petro Mex has attempted to do here,
‘choose among a multitude of regulations as to which he could claim a contract breach.’”
(quoting Nutt v. United States, 12 Cl. Ct. at 353). Therefore, defendant argues, “language
like that found in Petro Mex’s lease, which references ‘all reasonable regulations of the
Secretary of the Interior now or hereafter in force,’ cannot be read to mean that the Field
Office obligated itself in wholesale fashion to comply with each and every agency
regulation or risk breach of contract damages.” (internal citation omitted).22
21 One of plaintiffs’ arguments in Nutt was that the “FmHA failed to make or insure loans
or advances (or subordination loans for plaintiff Nutt), to plaintiffs on a timely basis.” Nutt
v. United States, 12 Cl. Ct. at 349.
22 Defendant clarifies its position, as follows:
This is not to say that the Field Office has permission to violate its
regulations. Rather, regulatory violations in the day-to-day administration of
a lease are subject to challenge under the Administrative Procedure Act
(APA), which allows the district court to compel the agency to comply with
the regulations. Nutt, 12 Cl. Ct. at 350. But in the context of contract claims,
where the United States is subject to money damages, review “is more
limited and subject to very stringent requirements.” Id. at 350-51. A
“formidable standard” applies to ensure that the Government will be held to
have obligated itself in contract only where that promise is express and
clear, so as to leave no ambiguity” that the United States has agreed to
waive its sovereign immunity.
94
In response, Petro Mex argues:
Nutt/Smithson is distinguishable from this matter. To begin with,
Nutt/Smithson involved a completely different type of contract than the oil
and gas lease at issue in this matter. Nutt/Smithson involved loan and
security agreements between eligible farmers and the Farmers Home
Administration, not leases whereby the contracting party was granted, by
the Government, an explicit and “exclusive right and privilege to drill for,
mine, extract, remove and dispose of all the oil and gas deposits, except
helium gas, in the lands leased.” Id. at 347 compared to JX1. In this matter,
however, the Government has made an explicit promise, through the lease,
to allow Petro Mex to remove hydrocarbons from the leased lands, only
subject to “the terms and provisions of the act of February 25, 1920 (41 Stat.
437, 30 U.S.C. sec 181) as amended, hereinafter referred to as the act, and
all reasonable regulations of the Secretary of the Interior now or hereafter
in force.” JX1/2. To this end, and as the court in Nutt explained, breach of
contract claims can be had against the Government for regulatory violations
only where it can be shown that the Government “obligated itself in contract
only upon a showing of an express or implied-in-fact agreement to do so.”
Id. at 351.
Petro Mex argues that, unlike in Nutt, that is the case in this matter where
the Government explicitly granted Petro Mex the right, and thus obligated
itself to allow Petro Mex to, remove hydrocarbons from the leased property
as long as there existed no regulatory grounds for the Government to halt
such production. It is important for the Court to remember that the central
point or purpose of the lease at issue in this matter was to allow for the
removal of oil and gas from the leased property by the owner or operator of
the lease, and that halting that ability and stopping an owner or operator
from doing so strikes at the very central promise made by the Government
in selling the lease to the owner or operator. The promise to allow
production is the fundamental agreement at the heart of the lease, and the
Government’s commitment to allow such, subject to its own regulations, is
equally fundamental. This surely meets the “formidable standard” discussed
by the court in Nutt whereby a promise in a contract must be express and
clear for it to be actionable by the contracting party.
The court agrees with the defendant that the United States Court of Federal Claims has
jurisdiction over contract claims, and notes that the violation of a regulation can result in
a breach of contract, see, e.g., United States v. Winstar Corp., 518 U.S. 839 (1996), and
similar subsequent cases.
95
Petro Mex, however, does not clarify or analyze why the situation in the above captioned
case “surely meets the ‘formidable standard’ discussed by the court in Nutt.” Instead,
plaintiff generally alleges that
[t]he circumstances here do not involve the Field Office imposing simple
fines or assessments for operational violations; instead, the Field Office
actually misused the regulations to actually halt production on the lease and
then subsequently keep production halted for over a year resulting in the
termination of the lease. Such a violation is actionable under breach of
contract principles.
(alteration added). Defendant responds: “Petro Mex simply assumes that any misstep by
the Field Office in its application of the rules and regulations constitutes a violation of the
lease. It does not.” Without more specificity and argument supported by statutes,
regulations or caselaw, Petro Mex has not demonstrated a nexus between the alleged
failure to provide notice for violations other than the underground leak and the breach of
the Garfield Lease agreement by the government.
Relatedly, defendant also argues:
Petro Mex’s allegations regarding the regulatory scheme for imposing and
continuing the May 2008 shut-in order are exactly the kind of complaints
that the APA [Administrative Procedure Act] was designed to address. And
Petro Mex could have, but did not, seek review of the Field Office’s orders
under that standard at any time between July 2008, when it alleges the shut-
in order should have been lifted, and August 2009, when the lease was
terminated.
(alteration added). As referenced above, defendant acknowledges “[t]his is not to say that
the Field Office has permission to violate its regulations. Rather, regulatory violations in
the day-to-day administration of a lease are subject to challenge under the Administrative
Procedure Act (APA), which allows the district court to compel the agency to comply with
the regulations.” Moreover, as indicated above, Petro Mex argued in its post-trial filings
that
43 C.F.R. § 3163.1(a)(3) did not provide the authority for the Government
to take “immediate shut-in action” and issue an immediate shut-in-order to
resolve the additional compliance issues outstanding from the April 2008
Notices unless such issues also created a threat of “immediate, substantial,
and adverse impacts on public health and safety, the environment,
production accountability, or royalty income.”
(emphasis in original).
To the extent that plaintiff challenges the general application of the notice
requirement in the BLM’s administrative procedures, the United States Court of Federal
96
Claims lacks jurisdiction over violations of APA claims. See Martinez v. United States,
333 F.3d 1295, 1313 (Fed. Cir. 2003) (“[T]he Court of Federal Claims lacks APA
jurisdiction.” (citing Murphy v. United States, 993 F.2d 871, 874 (Fed. Cir. 1993) (“[T]he
Claims Court has no authority to invoke the APA.”)), cert. denied, 540 U.S. 1177 (2004);
see also Boeing Co. v. United States, 162 Fed. Cl. 78, 84 (2022) (“This court does not
have jurisdiction to review the validity of regulations pursuant to the Administrative
Procedure Act (APA).”); Albino v. United States, 104 Fed. Cl. 801, 815 (2012) (citing
Martinez v. United States, 333 F.3d at 1303, 1314). As such, the “Federal district courts—
not the Court of Federal Claims—are the proper fora for APA actions.” Stroughter v.
United States, 89 Fed. Cl. 755, 762–63 (2009) (citing 5 U.S.C. § 703 (2006); Lion Raisins,
Inc. v. United States, 416 F.3d 1356, 1370 n.11 (Fed. Cir. 2005)); see also Crocker v.
United States, 125 F.3d 1475, 1476 (Fed. Cir. 1997) (affirming the United States Court of
Federal Claims holding “that it lacks the general federal question jurisdiction of the district
courts, which would allow it to review the agency’s actions and to grant relief pursuant to
the Administrative Procedure Act, 5 U.S.C. § § 701-706 (1994)”); HCIC Enters., LLC v.
United States, 147 Fed. Cl. 118, 126 (2020) (quoting Stroughter v. United States, 89 Fed.
Cl. at 763 (“The APA does not authorize an award of money damages, 5 U.S.C. § 702(providing for judicial review of actions ‘seeking relief other than money damages’) and,
in any event, it is well-established that ‘[f]ederal district courts—not the Court of Federal
Claims—are the proper fora for APA actions.’”)); Allen v. United States, 140 Fed. Cl. 550,
563 (2018) (citing Stroughter v. United States, 89 Fed. Cl. at 763); Amber Res. Co. v.
United States, 68 Fed. Cl. 535, 544 (2005), aff’d, 538 F.3d 1358 (Fed. Cir.), reh’g and
reh’g en banc denied (Fed. Cir. 2008) (“In the absence of a contrary statute, a challenge
to administrative discretion can only be reviewed in district court pursuant to the APA.”).
Therefore, to the extent plaintiff is challenging the existing regulatory notice requirement,
as it applies to the Shut-In Order, plaintiff’s challenges cannot be raised in this court.
The plaintiff also contends in its post-trial brief in this court that
even though it is strongly denied by the Government, it is only logical to
conclude that Petro Mex shut down production from the Lease in October
of 2008 pursuant to some kind of direction or order from the GJFO [Grand
Junction Field Office] to do so. Mr. Villalobos testified at trial that he ordered
Mr. Wilson to stop production at that time because he received a call from
Mr. Fancher ordering Petro Mex to do so.
(alteration added). Petro Mex contends:
It is hard to imagine any other reason that Mr. Villalobos would make that
call to Mr. Wilson other than the truth that was asserted, that he was
contacted by the GJFO. But the strongest reason to believe that the GJFO
issued some kind of order or direction to halt production from the Lease is
because, absent such an order or direction, Petro Mex had no other reason
to do so. It is undisputed that during August, September and October of
2008, the Lease was productive. In fact, production from the wells in
October of 2008 was particularly strong. But despite this, and despite losing
several months of revenue from the Lease in June and July of 2008, Petro
97
Mex indisputably shut-in the Lease on or around October 24 or 25, 2008.
When asked if there was any other reason Petro Mex would have to shut-
in the wells, Mr. Wilson said simply “no.” Mr. Villalobos, when asked the
same question, stated “there’s no reason to shut them in.”
(emphasis in original; internal references omitted). Defendant responds that “[a]lthough
Mr. Villalobos testified that the call occurred, his testimony has been inconsistent, and is
unsupported by any contemporaneous record.” (alteration added).
At the trial, on cross-examination with defendant’s counsel, Mr. Villalobos claimed
that he had permission to re-open the wells:
[Q.] Mr. Villalobos, now in terms of time, we’re still in August 2008. But just
to confirm, you knew that when Petro Mex resumed production in August
2008, it did not have permission to do so, correct?
A. We didn’t have it in writing permission, but like I said, I talked to Ed
[Fancher] before and he told me that as soon as I had all the INCs [Incidents
of Noncompliance] done, we could turn production back on or the wells on.
...
Q. Okay, all right. So, Mr. Villalobos, now do you recall testifying this
morning that Mr. Fancher called -- allegedly called and reminded you that
the shut-in order was still in effect?
A. I didn’t remember. He called me and reminded me that. But we talk about
it, even in that meeting.
Q. Okay. And I’m just -- and do you recall when Mr. Fancher called you?
A. I can’t remember what date exactly.
Q. Do you remember what month?
A. I think it was back in August if I remember right.
Q. Okay. And so when -- and when Mr. Fancher allegedly called you, you
testified this morning that it was to shut the wells in the Garfield lease back
in. Is that correct?
A. Yes.
Q. And isn’t it true that you have no contemporary records of that call?
A. Yes.
98
Q. And you also testified that you did not try and get any phone company
records, correct?
A. Well, I tried -- I tried to get the records from Altell. Back then, they used
to be Altell. And then Altell sold to AT&T and that was a nightmare. But I did
talk two or three times trying to get the phone records and they said they
might take a year to get them. So I give up. I didn’t get nothing.
(alterations added).
At trial Mr. Fancher testified regarding the October 2008 timeframe with
defendant’s counsel:
A. I discovered that Petro Mex had sold gas during -- like right after the shut-
in and so then that became something we had to deal with.
Q. The last sentence of your entry here says, “This is on our plate.” Do you
see that?
A. I see that. I mean, that’s something that we had to deal with, yes, ma’am.
Q. Okay. And you may have just anticipated my question there, but what
did you mean by that?
A. I meant that we had to research that and find out why they did that, why
they started production without -- without notifying us.
Q. And on what date was this?
A. This was on March 30th, 2009.
Q. Was this the first time that you learned that Petro Mex had produced
during the shut-in?
A. Yes, I think it is.
Q. Did you know in August 2008, at that time, did you have any knowledge
that Petro Mex was producing?
A. I don’t remember any knowledge of that. I’d have to look and see if I
made any notes anywhere.
Q. Okay. Do you know whether in September 2008 you had any knowledge
that Petro Mex was producing?
A. No, no, ma’am.
99
Q. Did you have any knowledge in October 2008 that Petro Mex was
producing from the Garfield lease during the shut-in?
A. No, ma’am.
Q. Did you have a telephone call with Mr. Villalobos in October 2008 in
which you told him the lease was still shut in?
A. I don’t recall that conversation.
Q. Do you recall having such a conversation at all?
A. No, ma’am.
...
Q. Did you look through your records to gather up all your paperwork about
the telephone conversations that you did have records of?
A. Yes, yes, we did. I went through all the files, all the conversation records,
part of the files, all my notes in my computer, and I didn’t find any at all.
Notwithstanding Mr. Fancher’s testimony at trial, in its post-trial brief, Petro Mex
argues “the Government has provided no alternative theory as to why Petro Mex would
shut-in an otherwise productive lease.” Plaintiff speculates that
it seems reasonable to postulate that what happened in this situation was
that Mr. Hartman in fact did discover that Petro Mex had resumed
production in mid to late October and did in fact take action to have that
production halted. This simple scenario would fully explain and support Mr.
Villalobos’s assertion regarding the October 2008 phone call from the GJFO
containing the order or direction to halt production.
(emphasis in original; internal references omitted). At trial, Mr. Hartman testified on cross-
examination with plaintiff’s counsel:
[Q.] This exhibit [Joint Exhibit 9] has a set of notices of incident of
noncompliance that Mr. Fancher issued in August of 2007 against Petro
Mex or on Petro Mex. I’m not sure of the right phrase to use there. Do you
see that?
A. Yes.
Q. Okay. Do you know if Mr. Fancher brought these [Notices of Incidents of
Noncompliance] to your attention when he issued them in August of 2007?
100
A. He normally wouldn’t, and I don’t remember -- remember these, no.
Q. So it wasn’t a normal practice for Mr. Fancher to let you know when he
issued an incident of noncompliance against an operator?
A. That’s correct.
Q. Okay. And I think you testified you didn’t really have any supervisory
authority over him, right?
A. That’s correct.
Q. I’m going to ask you to look at the next exhibit, which is Exhibit 10, Joint
Exhibit 10, which is trial page 31 and 32.
A. I see them.
Q. And I’ll submit to you that this is a set of incidents of noncompliance that
Mr. Fancher issued against Petro Mex in October of 2007. Do you see that?
A. Yes.
Q. Okay. Do you remember if Mr. Fancher brought these to your attention
at all? At the time.
A. I don’t believe he did. I don’t remember them.
Q. Okay. Again, it wouldn’t have been normal practice for him to let you
know about every INC [Incidents of Noncompliance] he issued?
A. That’s correct.
(alterations added). Regarding the Shut-In Order, defendant’s counsel and Mr. Hartman
had the following exchange on direct examination:
[Q.] [W]ere you aware that Mr. Fancher issued a shut-in order on the
Garfield lease in May 2008?
A. Yes, I was.
Q. All right. What was your understanding of why he issued that shutdown
-- shut-in order?
A. If I remember correctly -- excuse me -- there were issues with seals --
tank seals and I believe a leaking pipeline or leaky well head.
101
Q. All right. And then did Mr. Fancher consult with you before he issued the
order?
A. No. We talked about it, but his authority is completely different than what
I’m allowed to do. You know, there’s schooling and there are classes on
enforcement. I never attended and I was always -- anyway, PETs
[petroleum engineering technicians] did their own -- did their own stuff.
Q. So when you say you talked about it with him, was it more just general -
- I mean, him asking your advice, or he wasn’t asking your permission or
anything -- or authority, was he?
A. No. No, I don’t have any authority in those matters.
Q. Okay. Were you ever aware that Petro Mex had resumed production
after Mr. Fancher had issued the shut-in order?
A. I believe he became aware of it, that they had started producing, but I’m
not sure how we -- how he became aware of it. It was later in -- I believe in
later that year.
Q. Was it possible, too, that would you have ever ordered Mr. Fancher to
order Petro Mex to shut in the wells again if they had been producing?
A. No, that’s not me -- that’s not my bailiwick, to tell inspectors what to do.
(alterations added).
Defendant responds to plaintiff’s theories regarding Mr. Fancher’s testimony and
Mr. Hartman’s testimony by arguing, “[n]ot only is Petro Mex’s theory based upon pure
speculation, but it also is contrary to the established facts. It contradicts the testimony
from Mr. Hartman and Mr. Fancher and it also overlooks the fact that Petro Mex was not
reporting its production during the shut-in. Rather, it was producing without the Field
Office’s knowledge.” (emphasis in original; alteration added). Furthermore, defendant
claims that “[r]ather than carry its burden of proof, Petro Mex attempts to shift its burden
onto the United States.” (alteration added). The court agrees that the burden is on plaintiff,
and not on defendant, to prove the alleged breach. See Stockton E. Water Dist. v. United
States, 583 F.3d at 1360.
Even though it is not the government’s burden to prove the alleged breach, the
defendant nevertheless in its post-trial brief, addressed plaintiff contention that “the
Government has provided no alternative theory as to why Petro Mex would shut-in an
otherwise productive lease,” by suggesting that
102
the more likely explanation for Petro Mex’s cessation[23] of production in
October 2008 is that Petro Mex knew the lease was shut-in, decided to
produce anyway, and did not report its production or pay royalties because
doing so would have put the Field Office on notice that Petro Mex was
violating the shut-in order. But, upon receipt of the Civil Penalty and MMS’s
October 22, 2008 bill for $149,131, Mr. Villalobos likely realized that Petro
Mex could get in further serious trouble for producing during the shut-in, and
stopped.
(internal reference omitted; footnote added).
The court finds that the parties have sparred with each other relying on speculation
about the cause of the cessation of production in October 2008. The parties offered
conflicting testimony at trial, even about basic factual matters, such as did or did not Mr.
Fancher call Mr. Villalobos in October 2008. Given Mr. Fancher’s testimony that the Petro
Mex Shut-In Order, issued May 29, 2008, was the first Shut-in Order he ever issued, and
given his testimony and practice regarding documentation, numerous examples of which
were included as joint exhibits to the trial record before the court, the court finds it less
credible that Mr. Fancher would have directed Petro Mex to shut down the wells with only
a verbal instruction over the telephone, without subsequently providing a written Shut-In
Order to Petro Mex and to the BLM files.24 As referenced above, there is, however, no
record of a written Shut-In Order issued by Mr. Fancher in October 2008 in the record.
Based on the record before the court, including the testimony at the trial, the court finds
that plaintiff has not met its burden to prove the BLM ordered a shut down in October
2008.
23 The court notes that the trial testimony and the post-trial briefing refer to cessation of
production. The term is included in both 30 U.S.C. § 226(i) and 43 C.F.R. § 3107.2-2. See
30 U.S.C. § 226(i) (“No lease issued under this section which is subject to termination
because of cessation of production shall be terminated for this cause so long as reworking
or drilling operations which were commenced on the land prior to or within sixty days after
cessation of production are conducted thereon with reasonable diligence, or so long as
oil or gas is produced in paying quantities as a result of such operations.”); see also 43
C.F.R. § 3107.2-2 (“A lease which is in its extended term because of production in paying
quantities shall not terminate upon cessation of production if, within 60 days thereafter,
reworking or drilling operations on the leasehold are commenced and are thereafter
conducted with reasonable diligence during the period of nonproduction.”). Mr. Hartman’s
April 1, 2009 letter to Petro Mex also referred to the cessation of production including a
reference to 43 C.F.R. § 3107.2-2.
24The court notes that in denying the defendant’s “motion to dismiss based on the statute
of limitations because the breach alleged by plaintiff occurred within 6 years of filing the
complaint,” Judge Firestone specifically cautioned: “If, after discovery, the evidence
establishes that there was no phone call, plaintiff's breach claim will fail on the merits.”
Petro Mex, LLC v. United States, 122 Fed. Cl. at 541.
103
Separately, plaintiff alleges that “the government’s termination of the Lease in
August of 2009 was not permitted by the applicable legal authorities because the Lease
had wells that were capable of production and Petro Mex was not provided a ‘reasonable
time’ in which to resume production before termination.” Petro Mex contends that
[i]t wanted to resume production to avoid termination but was prevented
from doing so by the BLM’s unauthorized order. Regardless, it cannot be
found that any period of time that is granted to reestablish production,
however long or short, can be considered to be a “reasonable time” to do
so where a parties’ ability to comply with such order is then simultaneously
being blocked by a legally unauthorized shut-in order issued by the same
entity that granted the period of time. Under the circumstances, the GJFO
failed to comply with the requirement that they provide a “reasonable time”
to reestablish production on the Lease prior to termination. Therefore, the
termination was unlawful and violated Petro Mex’s rights under the Lease.
(emphasis in original; alteration added). In its post-trial reply brief, plaintiff argues given
the “intractable position that the Field Office took regarding the continuation of the, by
then illegitimate, Shut-In Order, and the fact that the Field Office actively prevented Petro
Mex from resuming production based upon such, Petro Mex was never given a
‘reasonable time’ to place the lease back into production.”
The statute at 30 U.S.C. § 226(i), “Termination,” provides:
No lease issued under this section which is subject to termination because
of cessation of production shall be terminated for this cause so long as
reworking or drilling operations which were commenced on the land prior to
or within sixty days after cessation of production are conducted thereon with
reasonable diligence, or so long as oil or gas is produced in paying
quantities as a result of such operations. No lease issued under this section
shall expire because operations or production is suspended under any
order, or with the consent, of the Secretary. No lease issued under this
section covering lands on which there is a well capable of producing oil or
gas in paying quantities shall expire because the lessee fails to produce the
same unless the lessee is allowed a reasonable time, which shall be not
less than sixty days after notice by registered or certified mail, within which
to place such well in producing status or unless, after such status is
established, production is discontinued on the leased premises without
permission granted by the Secretary under the provisions of this chapter.
30 U.S.C. § 226(i) (2018). There are two relevant implementing regulations to 30 U.S.C.
§ 226. First, 43 C.F.R. § 3107.2-2 provides:
A lease which is in its extended term because of production in paying
quantities shall not terminate upon cessation of production if, within 60 days
thereafter, reworking or drilling operations on the leasehold are commenced
and are thereafter conducted with reasonable diligence during the period of
nonproduction. The 60-day period commences upon receipt of notification
104
from the authorized officer that the lease is not capable of production in
paying quantities.
43 C.F.R. § 3107.2-2 (2022). Second, 43 C.F.R. § 3107.2-3 provides:
No lease for lands on which there is a well capable of producing oil or gas
in paying quantities shall expire because the lessee fails to produce the
same, unless the lessee fails to place the lease in production within a period
of not less than 60 days as specified by the authorized officer after receipt
of notice by certified mail from the authorized officer to do so. Such
production shall be continued unless and until suspension of production is
granted by the authorized officer.
43 C.F.R. § 3107.2-3 (2022).
Plaintiff argues that “[i]n this matter, there is little question that the Garfield Lease
contained wells that were capable of production at the time that the April 1, 2009 letter
was delivered to Petro Mex from the GJFO [Grand Junction Field Office],” and “[i]t is
undisputed that the Lease had several wells that, prior to being shut-in, had a
demonstrated and established ‘physical capability’ to produce oil and gas in paying
quantities.” (alterations added). Therefore, plaintiff contends that “any non-production
issue on the Lease should have been governed by the third exception contained in 30
U.S.C. § 226(i), for leases where production has stopped on a lease having wells that are
capable of production.” As cited above, the joint stipulated facts provided that
[o]n May 27, 2009, Mr. Villalobos and his friend, John Durham, met with Mr.
Hartman, Mr. Fancher, and David Lehmann from the Field Office. Mr.
Hartman documented the meeting in a June 16, 2009 letter to Petro Mex
that was signed by Catherine Robertson. Mr. Hartman summarized the
issues discussed at the May 27, 2009 meeting as including “royalty
payments, production reporting, increased bond amounts, past incidents of
non-compliance and lease status for the leases operated by Petro-Mex.” As
to the status of the lease, the letter stated that Petro Mex’s response “during
the meeting is that the lease is capable of production but without
compression the wells are not able to produce.” Petro Mex did not have a
compressor on the lease from May 2009 to August 2009. In the June 16,
2009 letter, the Field Office directed Petro Mex to provide a “written
response to explain the paying status” of the lease within 15 days. The Field
Office warned that “failure to provide adequate justification will result in
termination of the lease[].”[25]
At the May 27, 2009 meeting, Petro Mex and [sic] Field Office discussed
alternatives for demonstrating production. Petro Mex offered to perform
25 As noted above the June 16, 2009 letter stated: “Failure to provide adequate
justification will result in the termination of the leases,” referring to the Garfield Lease, as
well as the Mesa Lease and Esmerelda Lease.
105
production testing by flow testing the wells, and either venting the gas to the
atmosphere or setting a compressor and selling the gas. As to royalties due
on production, which were the basis for the October 22, 2008 Notice of Civil
Penalty, the June 16, 2009 letter stated that Petro Mex remained
delinquent. Mr. Hartman acknowledged Petro Mex’s request to modify its
royalty amount “in order to pay off fines,” but explained that the Field Office
lacked authority to “modify lease terms such as royalty rates.”
(second alteration in original; footnote added; internal references omitted).
The court notes that pursuant to 43 C.F.R. § 3107.2-3, after notice from Mr.
Hartman, Petro Mex was required “to place the lease in production within a period of not
less than 60 days as specified by the authorized officer after receipt of notice by certified
mail from the authorized officer to do so.” 43 C.F.R. § 3107.2-3. As described above, Mr.
Hartman’s April 1, 2009 letter to Petro Mex providing notice, which stated in full:
Dear Sirs,
Our records indicate Federal lease COC0124705A last produced in October
2008. There are five wells on the lease and all are operated by Petro Mex,
LLC. All of the wells are located in T8S, Rl0W in Garfield County, CO.
Federal 15-9 Government 9 Government 5 Government 6 Federal 6-9
A field inspection in March 2009 found that the field compressor had been
removed which eliminates the possibility of production from the wells.
We have determined that the lease is not capable of production in paying
quantities. Under 43 CFR 3107.2-2, a lease which is in it its extended term
because of production in paying quantities shall not terminate upon
cessation of production if, within 60 days thereafter, reworking or drilling
operations are commenced on the leasehold and are conducted with
reasonable diligence during the period of nonproduction. You are allowed
60 days from the receipt of this letter to restore production in paying
quantities to the leasehold.
If justification that the lease is capable of production in paying quantities is
not submitted within 60 days from receipt of this letter, the lease will
automatically terminate.
If you have any questions, please contact me at (970) 244-3041.
Sincerely,
Bob Hartman
106
Petroleum Engineer
The court notes that Mr. Hartman’s April 1, 2009 letter cited to the regulation at 43
C.F.R. § 3107.2-2, instead of 43 C.F.R. § 3107.2-3, which the court believes would have
been the proper regulation to include in the April 1, 2009 letter. Nonetheless, the court
does not believe Mr. Hartman’s citation to 43 C.F.R. § 3107.2-2, instead of on 43 C.F.R.
§ 3107.2-3 changes the court’s analysis, as both regulations establish a 60 day timeframe
requiring the lessee to resume production after receiving the letter from the BLM, as 43
C.F.R. § 3107.2-2 provides “within 60 days thereafter,” and 43 C.F.R. § 3107.2-3 provides
“within a period of not less than 60 days.” Compare C.F.R. § 3107.2-2, with 43 C.F.R.
§ 3107.2-3. The regulation at 43 C.F.R. § 3107.2-2 provides:
A lease which is in its extended term because of production in paying
quantities shall not terminate upon cessation of production if, within 60 days
thereafter, reworking or drilling operations on the leasehold are commenced
and are thereafter conducted with reasonable diligence during the period of
nonproduction. The 60-day period commences upon receipt of notification
from the authorized officer that the lease is not capable of production in
paying quantities,
and 43 C.F.R. § 3107.2-3 provides:
No lease for lands on which there is a well capable of producing oil or gas
in paying quantities shall expire because the lessee fails to produce the
same, unless the lessee fails to place the lease in production within a period
of not less than 60 days as specified by the authorized officer after receipt
of notice by certified mail from the authorized officer to do so. Such
production shall be continued unless and until suspension of production is
granted by the authorized officer.
See 43 C.F.R. § 3107.2-2; 43 C.F.R. § 3107.2-3 (emphasis added).
Moreover, the requirements of 43 C.F.R. § 3107.2-3 required Petro Mex to “place
the lease in production within a period of not less than 60 days as specified by the
authorized officer after receipt of notice by certified mail from the authorized officer to do
so,” which is consistent with the instructions in Mr. Hartman’s April 1, 2009 letter to Petro
Mex, providing plaintiff “60 days from the receipt of this letter to restore production in
paying quantities to the leasehold.”26
26Mr. Hartman had the following exchange on direct examination with defendant’s
counsel:
[Q.] [T]here’s a reference to the next paragraph: “We have determined that
the lease is not capable of production in paying quantities.” And that
appears to be somewhat a term of art, but what is production in paying
quantities?
107
Under either 43 C.F.R. § 3107.2-2 or 43 C.F.R. § 3107.2-3, the court would still be
required to determine if Petro Mex was producing under the terms of the Lease and if
Petro Mex did so within the 60 day timeframe after being notified by Mr. Hartman. As
noted above, during his trial testimony, Mr. Hartman explained the April 1, 2009 letter he
sent to Petro Mex as follows:
This is a letter that’s commonly referred to as a 60-day letter but more
appropriately potential lease termination letter. And it’s telling the lessees
of a lease that they -- the BLM has reviewed the production and it appears
that the wells are no longer capable -- or the lease is no longer capable of
production.
Q. Okay.
A. And we ask -- yes.
Q. And I didn’t mean to cut you off there if I did, but how many such 60-day
letters have you issued in your career?
A. I don’t know, maybe 500. It’s one of our most common letters. It’s the
really only way that leases are terminated. They have -- the lessees, per the
regulations, are required to be given notification that, hey, this lease is in
danger, please respond.
Q. Okay. And in your experience, how do operators usually respond?
A. One of three ways. They’ll ignore it; or just -- yeah, they can ignore it,
which is an option. They’ll return the wells to production with proper
notification. Or those are the only real -- really two options.
Defendant’s counsel questioned Mr. Hartman about the language in the 60 day letter that
stated: “If justification that the lease is capable of production in paying quantities is not
submitted within 60 days from receipt of this letter, the lease will automatically terminate,”
and asked Mr. Hartman:
[Q.] [H]ow could Petro Mex have shown justification that the lease is
capable of production in paying quantities?
A. The definition of that is that a lease has to produce enough gas to pay
for the operational cost, the monthly operational cost, and pay for the -- the
associated royalties or overriding royalties that are associated with that
lease with a -- with some kind of profit.
(alterations added).
108
A. Well, I guess a couple ways. They could have put a compressor onsite
and produced the wells. Obviously if they were shut in at that time, they
would have had to eliminate that hurdle before that. The other option that
was suggested by Petro Mex in one of the meetings I guess we’re going to
talk about, but that idea of venting the gas to the atmosphere, doing what
we would call an absolute open flow testing of the wells, where gas is vented
to the atmosphere or measured and then vented to the atmosphere.
(alterations added).
Between April 1, 2009 and June 16, 2009, Petro Mex and BLM exchanged
numerous letters. In May 2009, in response to the 60 day letter, Mr. Villalobos, on behalf
of Petro Mex, sent a letter to Mr. Hartman, which stated, in part:
Pursuant to our conversation on May 5th, 2009,[27] Petro-Mex LLC would be
willing to pay off what fines that have been levied against Petro-Mex_@12
½% of total production
...
Petro-Mex disagrees with the M.M.S. fine. The royalties have- been paid.
The paper work wasn’t filed on time. $150,000.00 is a little steep for 8
months of reports that wasn’t filed on time. The people in charge of filing
paperwork have been replaced.
(punctuation in original; alteration added). Additionally, Mr. Hartman discussed Petro
Mex’s response to the 60 day letter with defendant’s counsel at trial.
[Q.] [D]o you recall when after [sic] you sent this letter if Petro Mex contacted
you?
A. I don’t remember contacting, but reading through the case file in the last
couple days indicated that we were contacted.
Q. Okay. And that actually takes me to if you go to JX 39 [Joint Exhibit 39],
and at trial page 110, and this is a letter -- it’s a typed letter from Petro Mex,
and it -- and whose handwriting is that up near the top?
A. That’s my handwriting, showing the lease number and how we received
it.
27 As noted above, during Mr. Villalobos’ trial testimony, in response to the question, “so
did you actually call Mr. Hartman after receiving this letter?” Mr. Villalobos testified, “I
don’t know. I think John [Durham] did. I didn’t call Bob, no.” (alteration added). Mr.
Villalobos testified, regarding the 2009 letter, “I told Linn [Wilson] to write it up and I sign
it. I don’t know who wrote it, Linn or Susan [Wilson] or Barbara [Sonnier]. I don’t know
who did.” (all alterations added).
109
Q. And --
A. It was sent certified and received on May 20th, the letter was.
Q. Okay. And then in the first paragraph, it refers to a conversation on May
5th, 2009. Do you recall speaking with Petro Mex on May 5th, 2009?
A. I do not remember specifically, no.
Q. Okay. What about references to, like, the compressors being stolen and
this list of equipment? Was this necessary information for you to know?
A. It didn’t seem to be applicable to what our desire was to have the leases
paid or to get the leases back on production. No, it did not.
Q. Is there any reference in this letter about Petro Mex having any kind of
justification for returning the wells to production in paying quantities?
A. No. I don’t see any reference.
Q. Okay. And then there’s at the very bottom a reference to an MMS fine
and royalties, but to your understanding, does BLM have any involvement
with the MMS fine or royalties?
A. No, we do not.
Q. And then there’s also –
A. Not that I’m aware of, we don’t have any. Definitely not at the field office
level.
(alterations added).
As described above, the parties have stipulated:
On May 27, 2009, Mr. Villalobos and his friend, John Durham, met with Mr.
Hartman, Mr. Fancher, and David Lehmann from the Field Office. Mr.
Hartman documented the meeting in a June 16, 2009 letter to Petro Mex
that was signed by Catherine Robertson.
The June 16, 2009 letter from Ms. Robertson began:
Dear Mr. Villalobos,
110
Reference is to your undated letter that was received in this office on May
20, 2009. This letter stated that Petro-Mex would be willing to pay 12.5% of
total production in order to pay fines that had been levied against your
company. The letter listed equipment with their values that had been “lost”.
You state that Franks Oil Field Service has had to file bankruptcy due to
uncollected invoices and that Petro-Mex disagrees with the M.M.S fine as
“the royalties have been paid”. A copy of your letter is attached. On May 27,
2009 a meeting was held in this office to discuss these issues. Those
attending were you and John Durham with Petro-Mex and Bob Hartman,
David Lehmann and Ed Fancher with the BLM. Issues discussed were
royalty payments, production reporting, increased bond amounts, past
incidents of non-compliance and lease status for the leases operated by
Petro-Mex.
The parties also stipulated:
As to the status of the lease, the letter stated that Petro Mex’s response
“during the meeting is that the lease is capable of production but without
compression the wells are not able to produce.” Petro Mex did not have a
compressor on the lease from May 2009 to August 2009. In the June 16,
2009 letter, the Field Office directed Petro Mex to provide a “written
response to explain the paying status” of the lease within 15 days. The Field
Office warned that “failure to provide adequate justification will result in
termination of the lease[].”
At the May 27, 2009 meeting, Petro Mex and [sic] Field Office discussed
alternatives for demonstrating production. Petro Mex offered to perform
production testing by flow testing the wells, and either venting the gas to the
atmosphere or setting a compressor and selling the gas. As to royalties due
on production, which were the basis for the October 22, 2008 Notice of Civil
Penalty, the June 16, 2009 letter stated that Petro Mex remained
delinquent. Mr. Hartman acknowledged Petro Mex’s request to modify its
royalty amount “in order to pay off fines,” but explained that the Field Office
lacked authority to “modify lease terms such as royalty rates.”
(first alteration in original; internal reference omitted). The June 16, 2009 letter to Petro
Mex, which was admitted as a joint exhibit at trial, stated:
This office requested a bond increase from Petro Mex due to large liability
on your leases. Your history of non-compliance with on the ground
operations and apparent failure to report timely to the MMS led this office to
require this bond increase. Our letter was dated August 25, 2008 and asked
for a response from Petro Mex within 30 days of receipt of the letter. You
addressed this issue in our May 27 meeting indicating that Petro Mex was
unwilling or unable to provide this increase in bond amount. As noted above,
your May 20, 2009 letter requested an increase in royalties in order to pay
111
off fines. This office does not have the authority to modify lease terms such
as royalty rates. Your failure to keep current with royalty obligations gives
us no comfort that you will with future obligations. The failure to respond to
requests for well completion information, bond increase requests and lease
production data is also troubling. We will forward your request to our state
office for their review but at this time will not recommend approval.
The June 16, 2009 letter continued:
Your letter [undated letter from Petro Mex that was received by BLM on
May 20, 2009] stated that you disagree with the Mineral Management
Service fines and royalties had been paid. In our meeting you reiterated
that you were current with royalty payments. We have talked to MMS
personnel in Denver concerning royalties and fines that are due. It is our
understanding that minimum royalties may be current for the two producing
leases but the royalties that are due on production are not current. The
failure to pay production royalties is the basis for the penalties as outlined
in the Notice of Civil Penalty letter dated October 22, 2008.
(alteration added).
Regarding the June 16, 2009 letter to Petro Mex, the joint stipulated facts also
stated:
As to the bond, the letter stated that Petro Mex indicated it “was unwilling or
unable to provide” the required increase in the amount of its bond to
$100,000. BLM issued an “order of the authorized officer” to increase the
bond and directed Petro Mex to respond in writing to the August 25, 2008
letter within 20 days. BLM warned that failure to submit the required bond
“will” result in “an assessment of $250. . . and lease cancellation.” In the
June 16, 2009 letter, BLM issued an “order of the authorized officer”
directing that “[a]ll production is to remain shut in” on the Garfield lease “until
Petro-Mex satisfies the increased bond request and all fines are paid to
[MMS].” BLM warned that “[f]ailure to abide by this order will result in an
assessment of $250. . . and civil penalties.”
(alterations in original; internal references omitted).28 The parties further stipulated that
“[t]he June 16, 2009 letter informed Petro Mex of its appeal rights,” and “[t]he June 16,
28The original language of Joint Exhibit 44 states: “All production is to remain shut in on
leases COC-0124705A and COC-088586 until Petro-Mex satisfies the increased bond
request and all fines are paid to Mineral Management Service This is an order of the
authorized officer. Failure to abide by this order will result in an assessment of $250.00
under 43 CFR 3163.1(a)(2) and civil penalties.”
112
2009 letter was delivered to Petro Mex by certified mail, first class mail, and hand
delivery.” Mr. Villalobos testified that Petro Mex did not appeal.
Regarding the May 27, 2009 meeting and June 16, 2009 letter, defendant’s
counsel had the following exchange with Mr. Hartman:
[Q.] [D]id Petro Mex ever -- when it comes to the paying status, did Petro
Mex ever ask permission from you to take any steps related to
demonstrating an ability to produce in paying quantities from the Garfield
lease?
A. Not that I remember.
Q. Did the shut-in prevent Petro Mex from flow-testing the wells for
purposes of demonstrating ability to produce in paying quantities?
A. I think with the request -- I’m looking back, if they had requested it, we
probably could have gotten around that shut-in order to actually allow
testing, but as far as I know, they did not.
Q. So what do you mean by that? So gotten around the shut-in order, so --
A. We could have -- we could have worked -- worked with them with the
idea that -- two options. We could have extended the so-called 60-day letter
to additional time until things got straightened out on the INCs [Incidents of
Noncompliance], the shut-in orders, or we could have worked out the idea
of flow-testing versus installing compressors, but that 60 days obviously --
well, it’s not obvious here, but that 60 days is flexible as long as we’re
receiving feedback from the operator that they’re wanting to do something.
Q. And so when you say it’s flexible and could have extended it, why didn’t
you extend the 60-day letter?
A. It wasn’t apparent to me that they were actually interested in continuing
in responding to any of our information requests.
(alterations added).
According to the joint stipulated facts,
[o]n July 21, 2009, Mr. Hartman sent a memorandum to the [Colorado BLM]
State Director stating that on April 1, 2008,[29] [sic] Petro Mex was notified
“of the potential termination of the lease due to lack of paying production.”
29The July 21, 2009 memorandum identified the date of the letter as April 1, 2009, not
April 1, 2008.
113
Mr. Hartman went on to state that, “to date no verbal or written intent to
reestablish production on the lease has been received.” Mr. Hartman then
stated that “it is recommended the lease terminate due to lack of
production.”
(alterations and footnote added). The memorandum stated in full:
Memorandum
To: State Director (CO-922)
From: Petroleum Engineer, Grand Junction Field
Office
Subject: Last Oil and Gas Production – COC-0124705A
Last Production Date: October 2008
By a letter dated April 1, 2009, Petro-Mex Resources, operator and lessee
on the subject lease, was notified of the potential termination of the lease
due to a lack of paying production. The lessee was notified by certified mail,
a copy sent by first class mail and another copy delivered by BLM law
enforcement personnel. The certified mail letter was not accepted and was
returned as unclaimed. Assuming a 5 day mail delivery timeframe effective
notification of the lessee is on April 6, 2009. A follow up letter dated June
16, 2009 provided additional information and additional time. To date no
verbal or written intent to reestablish production on the lease has been
received.
It is recommended the lease terminate due to lack of production. Please
notify lessee of your decision.
Regarding the line “[t]o date, no verbal or written intent to reestablish production on the
lease has been received,” plaintiff’s counsel and Mr. Hartman had the following exchange:
[Q.] Hadn’t they [Petro Mex] indicated a willingness to reestablish
production on the lease if you’d work with them?
A. Not in my mind. They were talking about venting. It was about their only
option that they gave me.
Q. Do you think this memo gives the impression that Petro Mex wasn’t even
talking to you guys?
A. That’s fair.
Q. It doesn’t really represent all the communications and the things that they
had said, does it?
A. No, it doesn’t.
114
Q. Missing a lot of context.
A. That’s correct.
(alteration added). At trial, Mr. Hartman and defendant’s counsel also had the following
exchange:
A. This is a recommendation to the state office to essentially terminate the
lease. It explains what we did, when we did it, and who we notified. And
based on the previous -- or our 60-day letter, no -- no valid response was
received, and we recommended the lease be terminated.
Q. And so you say at the end of that first paragraph, “To date no verbal or
written intent to reestablish production on the lease has been received.” Do
you see that?
A. Yes.
Q. And so had you attempted to -- I mean, did you have an obligation to call
Petro Mex, just to see what they wanted to do with the lease?
A. No, I don’t -- I didn’t have any. I thought we had done what we could.
According to the joint stipulated facts:
Petro Mex stated that at the May 27, 2009 meeting “production testing was
discussed. We stated that we could flow test the wells and vent the gas or
set a new compressor. To go to sales both plans were not acceptable.”
Petro Mex then stated that, “at this time Petro Mex can’t figure out a way to
test [the wells].” Petro Mex stated it was “investigating the MMS payment,”
and stated that “if any royalties have not been paid, they will be.” Petro Mex
stated that it was “currently working on the increase of the bond amount.”
Petro Mex confirmed “[t]he wells are still shut-in.”
(alterations in original). Mr. Hartman further testified that
My reaction [to Petro Mex’s response] was that there was -- and, then, they
-- at the bottom of the letter, they talk about -- well, we had discussed flow
testing and installation of compressor, and they made a statement that --
that I guess that the BLM didn’t think that that was acceptable, and Petro
Mex couldn’t figure out a way to test them. And my reaction is I don’t think
it changed anything in regards to what -- where BLM was headed with
recommending the termination of the leases.
Q. Well, why not? Was it -- why not? Why didn’t it change anything?
115
A. There was really no plan here other than they said they didn’t know what
to do. That’s what I got out of this.
...
[Q.] was it your overall impression that this -- that this just wasn’t a solution
or an adequate response to the June 16th letter even?
A. I don’t think it was a valid response. What we were after -- what we were
after throughout the discussions and the letters was continuous production.
Q. Okay, so --
A. And I didn’t think this was an acceptable response.
(alterations added). On direct examination with defendant’s counsel, Mr. Hartman had the
following exchange:
Q. And so this letter, you at least received it August 6th, 2009, and you had
earlier made the recommendation to terminate the lease for nonproduction
on -- I believe that was August -- don’t let me get my dates wrong -- on July
21st, 2009, but after receiving this letter via fax, did you consider taking
back your recommendation for the -- the recommendation to terminate?
A. No, I did not. And I just -- and I didn’t see any viable solution that they
were proposing. They weren’t really voluntarily -- they weren’t proposing
anything that was going to fix it other than actual production. And I didn’t
even see that.
Q. Mm-hmm. was there any further correspondence with Petro Mex after
this letter was faxed to you regarding the showing [sic] production of paying
quantities?
A. I don’t believe so.
Q. And so did the [BLM’s Colorado] state office eventually accept your
recommendation to terminate the lease?
A. I believe so. I believe the leases were terminated -- or attempted to be.
(alterations added). The parties jointly stipulated:
ln an August 26, 2009 decision, BLM’s Colorado State Office terminated the
Garfield Lease. As grounds for the termination, the State Office explained
that “the Grand Junction Field Office has determined that this lease was no
longer capable of producing oil and gas in paying quantities after October
1, 2008.” The State Office went on to state that “as no evidence of new
production has been received the lease terminated the same date.”
116
Defendant, reflecting on the above timeline, claims:
From the original 60-Day Letter sent on April 1, 2009 (and assuming five
days for delivery, or to April 6, 2009), Mr. Hartman had patiently given Petro
Mex 107 days to provide justification that the lease was capable of
production in paying quantities before recommending that the lease
terminate due to lack of production. The goal of the Field Office is to have
productive wells, not to have wells sit idle for months on end, and that goal
was met when Mr. Hartman finally recommended termination after 107
days; see 43 C.F.R. § 3162.7–1(a) (“The operator shall put into marketable
condition, if economically feasible, all oil, other hydrocarbons, gas, and
sulphur produced from the leased land.”) (emphasis added). Moreover, the
State Office did not issue the decision terminating the lease until August 26,
2009, on the basis that the “lease was no longer capable of producing oil or
gas in paying quantities after October 1, 2008. As no evidence of new
production has been received the least terminated the same date.” Thus,
Petro Mex had received a total of 143 days to demonstrate production in
paying quantities, well beyond the 60 days required by the regulations.
(emphasis in original; internal references omitted). Defendant also notes that “Petro Mex
never defines what it considers would have been a ‘reasonable time’ to restore
production.”
Plaintiff contends that
Petro Mex’s position on this question is the same as that of the IBLA [Interior
Board of Land Appeals] opinion: That the clock providing a “reasonable
time” to begin production could not even begin to start ticking until the Field
Office lifted the Shut-In Order and provided Petro Mex with a legitimate
opportunity to actually do what was being demanded of them, restore active
production from the lease.
Plaintiff references the September 27, 2010 Interior Board of Land Appeals decision
reversing the decision to terminate the Garfield Lease. As noted above, the Interior Board
of Land Appeals held:
Petro Mex repeatedly represented that it would and could restore production
if the May 2008 shut-in orders were lifted; GJFO [Grand Junction Field
Office] refused to lift its orders, which were still in place when BLM
terminated these leases on August 26, 2009. Although they state that all
wells would remain shut-in until “all compliance issues are resolved,” we
interpret this language in the context of the facts presented as referring to
the violations identified by GJFO in its NOICs [Notices of Incidents of
Noncompliance] to Petro Mex.
117
...
GJFO erroneously refused to lift and required continuing compliance with
its May 2008 shut-in orders. The record shows Petro Mex could restore its
wells to producing status if those orders were lifted. Until GJFO lifts those
orders and gives notice to Petro Mex under 43 C.F.R. § 3107.2-3, BLM
cannot terminate these leases for nonproduction. If it intends to pursue
lease termination under 30 U.S.C. § 226(i), BLM must allow Petro Mex a
reasonable time in which to place its wells in a producing status after such
notice is given. Cf, Coronado Oil Co., 164 IBLA at 326. Simply stated, there
can be no termination of these leases by operation of law under the
circumstances of this case.
(internal citations omitted; alterations added). Although Petro Mex cites to and tries to rely
on the reasoning of the Interior Board of Land Appeals decision in its submission, as
defendant correctly notes:
Petro Mex largely adopts the reasoning of the IBLA [Interior Board of Land
Appeal], in that it was unlawful for BLM to terminate the lease (in the manner
that it did with termination, versus cancellation) because the shut-in order
prevented production. But with respect to this breach of contract claim,
Petro Mex alleges that the Field Office referred to the wrong regulation in
the 60-Day Letter and further argues that the Field Office should have given
it “reasonable time” to re-establish production.
(alteration added; emphasis in original; internal reference omitted). Defendant noted that
Mr. Hartman testified at trial in the above captioned case that the BLM provided Petro
Mex 107 days to provide the justification that the Garfield Lease was capable of
production in paying quantities before recommending that the Garfield Lease be
terminated. Defendant argues that, at the time the Garfield Lease was terminated, “Petro
Mex had received a total of 143 days to demonstrate production in paying quantities, well
beyond the 60 days required by the regulations.” (emphasis in original; internal citations
omitted). Defendant also emphasizes that Petro Mex never asked the BLM’s permission
“to take any steps related to demonstrating an ability to produce in paying quantities from
the Garfield lease.”
Plaintiff challenges the government’s arguments and the credibility of Mr. Hartman.
Plaintiff claims that
[t]o make this argument, they rely heavily on the trial testimony of Robert
Hartman who testified (according to the Government) that “he did not
remember Petro Mex ever asking permission to take any steps related to
demonstrating an ability to produce in paying quantities, and he thought that
‘if they had requested it, we probably could have gotten around that shut-in
order to actually allow testing, but as far as [he] knew, they did not.’” The
Government additionally argues, again based on Mr. Hartman’s testimony,
118
that he would have “worked with” Petro Mex to allow them to demonstrate
production, that the deadlines were “flexible,” and, ultimately, that it was
Petro Mex that was unwilling to prove that the wells were in fact productive.
Based upon the available documentation from that time period and Mr.
Hartman’s prior statements, this testimony regarding the purported
“flexibility” of the Field Office cannot be considered credible.
(internal references omitted; second alteration in original). As quoted above, the court
finds Mr. Hartman’s testimony with defendant’s counsel regarding the May 27, 2009
meeting and June 16, 2009 letter credible. Mr. Hartman and defendant’s counsel had the
following exchange:
[Q.] [D]id Petro Mex ever -- when it comes to the paying status, did Petro
Mex ever ask permission from you to take any steps related to
demonstrating an ability to produce in paying quantities from the Garfield
lease?
A. Not that I remember.
Q. Did the shut-in prevent Petro Mex from flow-testing the wells for
purposes of demonstrating ability to produce in paying quantities?
A. I think with the request -- I’m looking back, if they had requested it, we
probably could have gotten around that shut-in order to actually allow
testing, but as far as I know, they did not.
Q. So what do you mean by that? So gotten around the shut-in order, so --
A. We could have -- we could have worked -- worked with them with the
idea that -- two options. We could have extended the so-called 60-day letter
to additional time until things got straightened out on the INCs [Incidents of
Noncompliance], the shut-in orders, or we could have worked out the idea
of flow-testing versus installing compressors, but that 60 days obviously --
well, it’s not obvious here, but that 60 days is flexible as long as we’re
receiving feedback from the operator that they’re wanting to do something.
Q. And so when you say it’s flexible and could have extended it, why didn’t
you extend the 60-day letter?
A. It wasn’t apparent to me that they were actually interested in continuing
in responding to any of our information requests.
(alterations added).
After carefully considering the testimony at trial, as well as reviewing the exhibits
in the record, the court disagrees with plaintiff’s assertions that Mr. Hartman’s “testimony
119
regarding the purported ‘flexibility’ of the Field Office cannot be considered credible.” The
numerous quotations from the trial record included above, as well as the joint exhibits
introduced in the record, demonstrate continuing efforts by the BLM, including by Mr.
Hartman, to try and give Petro Mex sufficient time to resolve plaintiff’s myriad,
outstanding, documented issues. The numerous attempts by BLM to work with Petro Mex
and the length of time the BLM allowed Petro Mex to try to resolve its issues speaks to
the flexibility by the agency, as well as that Petro Mex’s failure to respond to
communications from the agency regarding issues at plaintiff’s wells paints a different
picture. The parties’ joint stipulated facts reflect that on April 1, 2009, “Robert Hartman
sent a letter to Petro Mex stating that BLM’s records showed Petro Mex had ‘last produced
in October 2008,’ and removal of the field compressor ‘eliminates the possibility of
production from the wells.’” The April 1, 2009 letter to Petro Mex gave Petro Mex 60 days
to “restore production in paying quantities.” After that time, on May 27, 2009, Mr.
Villalobos and John Durham met with Mr. Hartman, Mr. Fancher, and David Lehmann
from the Field Office. After the meeting, the meeting was memorialized in a June 16, 2009
letter from the Field Office. The joint stipulated facts provide: “In the June 16, 2009 letter,
the Field Office directed Petro Mex to provide a ‘written response to explain the paying
status’ of the lease within 15 days. The Field Office warned that ‘failure to provide
adequate justification will result in termination of the lease[].’” (alteration in original). Mr.
Hartman testified that on July 16, 2009, well past the 15 days after Petro Mex received
the June 16, 2009 letter, he drafted a memorandum which was a “recommendation to the
state office to essentially terminate the lease. It explains what we did, when we did it, and
who we notified. And based on the previous -- or our 60-day letter, no -- no valid response
was received, and we recommended the lease be terminated.” As noted above, Mr.
Hartman and defendant’s counsel had the following exchange:
Q. And so you say at the end of that first paragraph, “To date no verbal or
written intent to reestablish production on the lease has been received.” Do
you see that?
A. Yes.
Q. And so had you attempted to -- I mean, did you have an obligation to call
Petro Mex, just to see what they wanted to do with the lease?
A. No, I don’t -- I didn’t have any. I thought we had done what we could.
Finally, the amount of time that elapsed between the determination that the
Garfield Lease was no longer capable of production on October 1, 2008 and the decision
to terminate the Garfield Lease on August 26, 2009, was 143 days, which suggests that
the BLM was not attempting to terminate the Lease immediately after the 60 days, but
was willing to give Petro Mex time to attempt to demonstrate that the Lease was capable
of production.
This is not to say that the BLM and Mr. Hartman handled everything perfectly in
this case. As noted above, the court believes Mr. Hartman’s correspondence with Petro
120
Mex should have referenced C.F.R. § 3107.2-3, instead of 43 C.F.R. § 3107.2-2.
Defendant argues the distinction between the regulations
splits hairs, as both of the regulations seek the end goal of the operator
returning a lease to production in paying quantities within 60 days. See 43
C.F.R. §§ 3107.2-2, 3107.2-3. Moreover, Petro Mex’s argument improperly
seeks to inject a question of Mr. Hartman’s subjective state of mind into the
breach of contract analysis, suggesting the Field Office could somehow
breach the lease even if it did everything right, but did so merely
“accidentally.”
(emphasis in original). Although not determinative in the above captioned case, the court
believes it is important for agencies and agency representatives to use the correct
regulations when communicating with public, especially in situations like in this case when
the termination of the plaintiff’s interest was at stake.
Furthermore, Mr. Hartman was not at all times a model of professionalism as it
related to his working relationship with Petro Mex. During the trial, defendant counsel’s
had Mr. Hartman review an email with the subject line: “Petro Mess.”
[Q.] I do have to ask, the subject Says Petro Mess. Is there a reason why
you put Petro Mess instead of Petro Mex?
A. It’s probably a sign of my frustration with dealing with Petro Mex at the
time. Carol [Snyder] had been out. I believe she was responsible for Petro
Mex at the time, and she was -- she was having -- she had some concerns
about their responsiveness, I believe, and I think that’s when we may have
started the bond review, or just a review of the well status of their wells.
(alterations added). Mr. Hartman had the following exchange on cross-examination with
plaintiff’s counsel:
[Q.] [Y]ou testified here, and you put in the subject line Petro Mess.
A. Yes.
Q. And I think you -- I think you told Ms. Westercamp [defendant’s counsel
of record] that that was not a typo, for lack of a better term.
A. That’s correct.
Q. Were you already frustrated with Petro Mex at this point in time?
A. I may have been frustrated. I think the inspectors were also frustrated.
Q. Was Ms. Snyder expressing frustration to you with him -- with them?
121
A. If I remember correctly, yes, but it was my -- it was my deal there to call
them.
Q. So it was kind of just a joke, or --
A. I considered it at the time funny, but not right now.
(alterations added).
Furthermore, defendant’s counsel and Mr. Villalobos had the following exchange
on cross-examination at trial regarding Mr. Hartman:
[Q]. [B]ut why did you get the impression that Mr. Hartman didn’t like you?
A. Because the first thing, that since the day one, when I bought this
property, I send men to do the paperwork, and he testified that Mr. -- one of
the guys -- I can’t say exactly which one it was, but I believe that it was Bob,
he asked Linn if he was U.S. citizen. So I -- from that day one, I feel that I
been discriminated until yesterday, because I -- I got a part owner right next
to my property, and you know who that is, that’s Walter Fees, and they
never, never INC [incidents of noncompliance] him like they do to me. He is
a white man. So I feel I been discriminated whole time.
(alterations added).
Although troubled by the email reference to “Petro Mess” and Mr. Villalobos’
heartfelt testimony about his experience with Mr. Hartman, nevertheless, the court finds
Mr. Hartman credible in his testimony that the BLM provided Petro Mex a lengthy amount
of time to try and resolve all open issues with the Garfield Lease and, further, that Mr.
Hartman and the BLM would have been willing to work with Petro Mex if Petro Mex had
made any efforts to resolve the outstanding, identified problems that the government had
observed with respect to the Garfield Lease. The identified violations during the time
periods at issue on the Garfield Lease, both minor and major, were real as testified to at
trial, and even some admitted to by Petro Mex personnel. In addition, the government’s
view of the violations at Petro Mex’s wells were documented in the trial record. Moreover,
the government identified the issues of production of the wells in correspondence with
Petro Mex well in advance of the termination of the Garfield Lease. Based on the record
before the court, including the testimony at trial, plaintiff has failed to demonstrate that
Petro Mex did not receive reasonable allowances from the government, including a
reasonable amount of time to resolve the issues with the Garfield Lease under the
relevant statutes and regulations. In sum, the testimony and exhibits in the trial record,
when read in conjunction with the operative statutes and regulations, do not demonstrate
that the government breached plaintiff’s Garfield Lease.
122
Prior Material Breach
Even if plaintiff could have demonstrated its claims were timely and could have
demonstrated that the government had committed a breach, defendant alleges that “Petro
Mex committed more than one prior material breach, which individually and collectively
excused any subsequent breach by the United States.” Specifically, defendant argues
“Petro Mex materially breached the Lease by failing to report and pay royalties on
production, and failing to pay the resulting civil penalty,” “Petro Mex materially breached
the Lease by refusing to increase its bond, as ordered,” and “Petro Mex materially
breached the Lease by removing hydrocarbons while the Lease was shut-in. . . .”
Therefore, defendant argues, “[t]he Court should not consider this affirmative defense on
the merits, but reject it as having been waived. See Strategic Housing Fin. Corp., 87 Fed.
Cl. at 189.” (alteration added). Plaintiff concedes:
For the record, Petro Mex does not contest the Government’s assertion that
Petro Mex breached the lease by failing to report and pay royalties on
production or pay the resulting civil penalty. Petro Mex also does not contest
the Government’s assertion that Petro Mex, at least initially, breached the
lease by failing to increase its reclamation bond when demand was
made.[30]
(footnote added).
Defendant also argues that plaintiff’s claim of waiver is an affirmative defense, and
“Petro Mex did not identify waiver as an affirmative defense until now, long after discovery
has closed and the opportunity to elicit testimony at trial has passed.” Defendant does
note, however, that the issue of prior material breach was included in the parties’ jointly
submitted March 26, 2021 joint issues of fact and law filed close to the time of trial. In its
post-trial brief, and in response to defendant’s prior material breach arguments, plaintiff
claims:
Petro Mex asserts that any prior material breach of the Lease by Petro Mex
did not excuse the Government from performing its own obligations under
the Lease because the Government took no steps and made no effort to
cancel the Lease for such breaches at the time, instead electing to continue
the Lease. Pursuant to such election, the Government waived any right. . . .
Joint Issue of Law number 8 prepared for trial by plaintiff and defendant, stated in
its entirety:
30 In its post-trial brief, plaintiff contends: “Petro Mex does not concede that it breached
the lease by removing hydrocarbons from the lease between August and October of 2008
for reasons already stated in its Post-Trial Brief and above. However, given the other two
breaches, this particular breach is likely irrelevant to the Court’s analysis of the prior
material breach issue.”
123
8. Whether Petro Mex’s actions or omissions, alone or in combination,
constituted a prior material breach of the Lease providing grounds to excuse
any subsequent breach by the United States, including:
a. Whether Petro Mex’s actions or omissions relating to production and
royalty reporting, payment of royalties on production, or payment of a Civil
Penalty breached § 2(d) of the Lease or any applicable statute, rule, or
regulation.
b. Whether Petro Mex’s actions or omissions relating to bonding
requirements breached § 2(a) of the Lease or any applicable statute, rule,
or regulation.
c. Whether Petro Mex’s resumption of production in August 2008 or at any
date thereafter breached the Lease or any applicable statute, rule, or
regulation.
Regarding prior material breach, the United States Court of Appeals for the Federal
Circuit stated:
We have held that “through its continued performance of the contract, the
government [may waive] any claim for prior material breach.” Barron
[Bancshares, Inc. v. United States], 366 F.3d [1360], 1383 [(Fed. Cir.
2004)]; see also Westfed Holdings, Inc. v. United States, 407 F.3d 1352,
1360 (Fed. Cir. 2005) (“A party to a contract may waive the breach of an
agreement by the continued acceptance of performance by the breaching
party without reservation of rights.”); cf. Old Stone Corp. v. United States,
450 F.3d 1360, 1371 n. 6 (Fed. Cir. 2006) (discussing differences between
doctrines of waiver and election). We have also stated in this context that
“[w]aiver is an affirmative defense, as to which the breaching party bears
the burden of proof.” Westfed, 407 F.3d at 1360.
Long Island Sav. Bank, FSB v. United States, 503 F.3d 1234, 1252 (Fed. Cir. 2007)
(second, third, and fourth alterations added); see also Hahnenkamm, LLC v. United
States, 147 Fed. Cl. 383, 389 (2020).
In its post-trial reply brief, plaintiff indicates:
Petro Mex agrees that, at least for the purpose of establishing what party
has the burden of proof for establishing the waiver of possible claims for
prior material breach, waiver is an affirmative defense. See Long Island
Sav. Bank, FSB v. United States, 503 F.3d 1234, 1252 (Fed. Cir. 2007)
(“We have also stated in this context that ‘[w]aiver is an affirmative defense,
as to which the breaching party bears the burden of proof.’” (quoting
Westfed Holdings, Inc. v. United States, 407 F.3d 1352, 1360 (Fed. Cir.
2005)). However, this does not mean that a party necessarily must
specifically identify this particular affirmative defense to an affirmative
defense at any particular point in a matter or deem the waiver argument
waived, and the case cited by the Government for this proposition, Strategic
Housing Fin. Corp., 87 Fed. Cl. 183, 189 (2009) does not state as much.
124
The court agrees with plaintiff that the holding in the Strategic Housing decision,
cited in defendant’s post-trial brief referenced above, does not provide that the failure to
raise an affirmative defense at a particular time constitutes waiver. As indicated by a
Judge of this court in Strategic Housing,
plaintiff never presented its “black box” discussion during prior briefing and
withheld doing so until after the court rendered a decision that was adverse
to plaintiff. In fact, plaintiff concedes that it raises this “black box” discussion
in its motion to amend for the first time. See Mot. 5 (indicating that this
discussion constitutes “additional background”). “[A]n argument made for
the first time in a motion for reconsideration comes too late, and is ordinarily
deemed waived and not preserved for appeal.” Bluebonnet Sav. Bank, F.
S.B. v. United States, 466 F.3d 1349, 1361 (Fed. Cir. 2006); see also United
States v. Ford Motor Co., 463 F.3d 1267, 1277 (Fed. Cir. 2006) (explaining
that “[a]rguments raised for the first time in a reply brief are not properly
before this court” and that “[i]t is unfair to consider an argument to which the
government has been given no opportunity to respond”); Norman v. United
States, 429 F.3d 1081, 1091 n. 5 (Fed. Cir. 2005) (adhering to the rule that
arguments raised for the first time in a reply brief are not properly before the
court); Novosteel SA v. United States, 284 F.3d 1261, 1274 (Fed. Cir. 2002)
(stating that raising an issue “for the first time in a reply brief does not
suffice; reply briefs reply to arguments made in the response brief-they do
not provide the moving party with a new opportunity to present yet another
issue for the court's consideration”); Goulding v. United States, 929 F.2d
329, 333 (7th Cir. 1991) (indicating that arguments presented post-trial and
post-decisional briefing are deemed waived because they should have
been made “at a much earlier stage in these proceedings”); Ironclad/EEI v.
United States, 78 Fed. Cl. 351, 358 (2007) (noting that “under the law of this
circuit, arguments not presented in a party’s principal brief to the court are
typically deemed to have been waived” and explaining that “courts are
constrained to find, ‘[a]s a matter of litigation fairness and procedure,’ that
arguments not addressed in moving briefs have been waived” (quoting
Novosteel SA, 284 F.3d at 1274 (alteration in original))). Furthermore,
plaintiff has not indicated that any evidence that may support its “black box”
discussion was unavailable to it at the time the parties engaged in briefing
related to defendant’s motion to dismiss. In fact, at no point in its motion to
amend does plaintiff assert that previously unavailable evidence is now
available. Just as a motion for reconsideration should not be based upon
evidence that was readily available at the time the motion was heard,
Seldovia Native Ass’n, 36 Fed. Cl. [593,] 594 [(1996)], so, too, should
plaintiff not be permitted in a motion to amend to rely upon readily available
evidence that it did not present previously. The court therefore declines to
consider this discussion and any evidence in support thereof.
Strategic Hous. Fin. Corp. of Travis Cnty. v. United States, 87 Fed. Cl. 183, 189–90 (2009)
(footnote omitted; emphasis in original; alterations added). As described by the Judge in
125
Strategic Housing, the Strategic Housing plaintiff did not raise its arguments during
briefing and waited until an adverse ruling, and many of the cases cited in Strategic
Housing focus on instances in which a party raised an issue in a reply brief and with no
further opportunity to respond. As noted by plaintiff,
[h]owever, such is not the case with Petro Mex’s waiver argument in this
matter. Petro Mex made this argument proactively in its Post-Trial Brief and
prior to the Court making its decision and the Government has been given
ample opportunity to respond. In addition, the waiver issue is not one where
specific discovery on the question would have likely changed the argument.
(alteration added).
As reflected above, defendant was able to address plaintiff’s waiver argument in
its post-trial brief, and was able to speak to the waiver issue at the closing argument and
in the defendant’s supplemental brief filed after the closing argument. The court agrees
with Petro Mex that plaintiff may address the defendant’s waiver claims regarding prior
material breach. As conceded by plaintiff, however, plaintiff bears the burden of proving
its affirmative defense.
In plaintiff’s post-trial brief, Petro Mex argues that defendant has waived any
argument for prior material breach because of the government’s failure to cancel the
Garfield Lease at an earlier time. Plaintiff, quoting extensively from the 1976 case of Cities
Services Helex, Inc. v. United States, 543 F.2d 1313, 211 Ct. Cl. 222 (1976), argues
prior authority establishes that the doctrine only applies where the claiming
party uses such a breach as grounds to end the contract in question. . . .
A material breach does not automatically and ipso facto end
a contract. It merely gives the injured party the right to end the
agreement; the injured party can choose between canceling
the contract and continuing it. If he decides to close the
contract and so conducts himself, both parties are relieved of
their further obligations and the injured party is entitled to
damages to the end of the contract term (to put him in the
position he would have occupied if the contract had been
completed). If he elects instead to continue the contract, the
obligations of both parties remain in force and the injured party
may retain only a claim for damages for partial breach.
(quoting Cities Serv. Helex, Inc. v. United States, 543 F.2d at 1313, 211 Ct. Cl. at 234–
35) (citations omitted; omission in original). In Cities Service Helex, Inc. v. United States,
however, the United States Court of Claims conducted a fact based examination of the
conduct of the parties after the breach and determined, “we have here much more than
mere continuance of performance by the injured party, leaving it open to the defaulter
whether or not to continue its own performance. Both plaintiffs set out to force the
126
Government to perform fully, and instituted suit in the District Court for that very purpose.”
Id. at 1316. The court determined that
Plaintiffs’ course of action in response to the Russell termination caused (i)
the Government’s continued performance of the contracts despite its own
decision to terminate, (ii) the Government’s payment of the full contract
price for more than a year after the termination was to have taken effect,
and (iii) the Government’s repetition for the Morton termination of the steps
needed to terminate the contract. The plaintiffs accepted the benefits
accruing from their chosen course of action and did not suggest to the
Government, until long after the Morton termination, that they would hold
the Government liable to the end of the contract term for material breaches
occurring prior to that termination. It would be inequitable to allow the
plaintiffs to say now that the contracts were no longer in force in February-
April 1973.
Cities Serv. Helex, Inc. v. United States, 543 F.2d at 1317, 211 Ct. Cl. at 240-41 (footnotes
omitted). This court finds the facts developed at trial in the above captioned case are
distinct from the facts presented in Cities Service Helex.
Petro Mex also cites to the United States Court of Appeals for the Federal Circuit’s
decision in Barron Bancshares, Inc. v. United States, 366 F.3d 1360 (Fed. Cir. 2004) and
the United States Court of Federal Claims decision in First Heights Bank, FSB v. United
States, 51 Fed. Cl. 659 (2001), aff’d, 422 F.3d 1311 (Fed. Cir. 2005) to claim:
In a situation where the “injured party” elects to continue the contract in the
face of a breach, or simply engages in “conduct indicating an intention to
continue the contract” it waives the right to assert that such breach
discharges any obligation to perform under the contract. First Heights Bank,
FSB, 51 Fed. Cl. at 663. The Federal Circuit Court of Appeals applied this
rule to a prior material breach claim by the Government in Barron
Bancshares, Inc. v. U.S., 366 F.3d 1360, 1383 (Fed. Cir. 2004) where it
stated that “in order to preserve its claim of a prior material breach giving
rise to the right to terminate the contract, the government had to treat
[plaintiff] as if it had breached the contract.” Instead, the Court found that
where the Government continued performance of the contract despite the
apparent breach (in that case, by making agreed upon assistance
payments), “the government waived its right to treat Barron’s actions as
having terminated the contract.”
(alteration in plaintiff’s brief). In Barron Bancshares, Inc. v. United States, the Federal
Circuit noted, “[i]n this Winstar-related case,”
Barron County Federal Savings & Loan (“Barron County”), an ailing thrift
located in Barron, Wisconsin, reported insolvency on May 31, 1985. In
response, the Chicago office of the FHLBB decided to recapitalize Barron
County by converting it from a mutual association to a stock association and
127
by selling its stock. After soliciting bids, the Bank Board selected the
Investors to acquire the stock of the reformed thrift, renamed Monycor. The
transaction was recorded in five documents: three Bank Board Resolutions,
an Assistance Agreement, and a Forbearance Letter.
Barron Bancshares, Inc. v. United States, 366 F.3d at 1365 (internal citations omitted).
The Federal Circuit in Barron Bancshares further indicated that
[i]n the Court of Federal Claims, the government argued that Plaintiffs were
precluded from recovering damages based upon the doctrine of prior
material breach. Barron Bancshares, 53 Fed. Cl. at 321. Under that
doctrine, when a party to a contract is sued for breach, it may defend on the
ground that there existed a legal excuse for its nonperformance at the time
of the alleged breach. Coll. Point Boat Corp. v. United States, 267 U.S. 12,
15, 45 S. Ct. 199, 69 L. Ed. 490 (1925). Faced with two parties to a contract,
each of whom claims breach by the other, courts will “often . . . impose
liability on the party that committed the first material breach.” E. Allen
Farnsworth, Farnsworth on Contracts § 8.15, at 439 (1990); see also
Christopher Vill., L.P. v. United States, 360 F.3d 1319, 1334 (Fed. Cir.
2004). According to the Restatement, the doctrine of prior material breach
is
based on the principle that where performances are to be
exchanged under an exchange of promises, each party is
entitled to the assurance that he will not be called upon to
perform his remaining duties . . . if there has already been an
uncured material failure of performance by the other party.
Restatement (Second) of Contracts § 237 cmt. b (1981); see also
Christopher Vill., 360 F.3d at 1334. The government asserted in the Court
of Federal Claims that the Investors committed a prior material breach of
contract by failing to operate Monycor in the manner represented in the
application they submitted for the thrift’s acquisition. Barron Bancshares, 53
Fed. Cl. at 321.
Barron Bancshares, Inc. v. United States, 366 F.3d at 1380–81 (alteration added;
omission in original). The Federal Circuit determined:
On the one hand, the government claims that “investor plaintiffs almost
immediately implemented a practice of reckless lending,” Barron
Bancshares, 53 Fed. Cl. at 321; yet on the other, it nevertheless continued
to make its assistance payments for the full five years. In order to preserve
its claim of a prior material breach giving rise to the right to terminate the
contract, the government had to treat Barron as if it had breached the
contract. See 14 Williston on Contracts § 43:15 (4th ed. 2000) (explaining
that faced with a material breach by the other party to a contract, one has
the choice “to continue to perform under the contract or to cease to perform,
128
and conduct indicating an intention to continue the contract . . . in effect
waiv[es] the right to assert that the breach discharged any obligation to
perform”); Cities Serv. Helex, 543 F.2d at 1313–14 (discussing four
approaches to the question of whether a party’s conduct precludes it from
asserting prior material breach as a defense); First Heights Bank, FSB v.
United States, 51 Fed. Cl. 659, 663–64 (2001) (explaining the rule set forth
in Cities Serv. Helex). It did not do that. We conclude that the government
waived its right to treat Barron’s actions as having terminated the contract.
Barron Bancshares, Inc. v. United States, 366 F.3d at 1383 (alteration and omission in
original).
Similarly, in First Heights Bank, FSB v. United States, a Judge of the United States
Court of Federal Claims, noted, like the Federal Circuit in Barron Bancshares, “[p]ending
in this Winstar-related case,”
plaintiffs here, First Heights Bank, FSB, Pulte Diversified Companies, Inc.,
and Pulte Corporation, (collectively “Pulte”) allege having entered into an
assistance agreement (“Assistance Agreement”) with the Federal Savings
and Loan Insurance Corporation (“FSLIC”) and the Federal Home Loan
Bank Board (“FHLBB”) in 1988 in connection with plaintiffs’ acquisition of a
package of several failing thrifts marketed by the FSLIC and the FHLBB as
part of the FSLIC and FHLBB’s Southwest Plan.
First Heights Bank, FSB v. United States, 51 Fed. Cl. at 661 (footnote omitted). The Judge
indicated that
Pulte disagreed with the FSLIC and its successor, the Federal Deposit
Insurance Corporation (“FDIC”), in regard to the sharing of covered asset
loss benefits derived from adjustments to the bad debt reserve.
Documentation submitted by the parties as attachments to supplemental
briefing on the Government’s prior material breach argument indicates that
this dispute became acute in mid–1993. Despite this dispute, however, on
September 30, 1994, the FDIC, “in accordance with Section 32(a) of the
[September 9, 1988] Assistance Agreement,” loaned Pulte $127 million and
that Pulte executed a note promising to repay the FDIC this amount plus
interest.
First Heights Bank, FSB v. United States, 51 Fed. Cl. at 662 (footnote omitted; alteration
in original). During the litigation in this court in First Heights Bank, the government
asserted “that the doctrine of prior material breach bars plaintiffs from recovering on their
claim that enactment of the Guarini legislation[31] constituted a breach of the Assistance
Agreement.” Id. at 663 (footnote added). The Judge in First Heights Bank explained:
31 According to the Judge of the United States Court of Federal Claims in Centex Corp.
v. United States:
129
We return, therefore, to the four approaches outlined in Cities Service
Helex. Under any of the four approaches, defendant is precluded from
avoiding liability in this case under the prior material breach doctrine.
Certainly, under the strict approach, the FDIC's willingness to extend a $127
million loan to plaintiffs in 1994 indicates an “intent to continue the contract.”
Additionally, there is no evidence indicating that the FDIC was “reserving”
its right to claim a material breach and thereby end the contract; to the
contrary, the 1994 loan is evidence that the FDIC, in fact, wanted the
contract to continue. Consequently, under the modified approach,
defendant is precluded from asserting prior material breach.
First Heights Bank, FSB v. United States, 51 Fed. Cl. at 665. Both Barron Bancshares,
Inc. v. United States, and First Heights Bank, FSB v. United States adopt an approach
similar to the approach taken by the Federal Circuit in Cities Services Helex, Inc. v. United
States, as both cases developed a fact based examination of the conduct of the parties
after the breach and in both instances the United States was the non-breaching party and
the United States did not reserve the right to claim breach.
Defendant argues that the above captioned case “stands in stark contrast to the
examples upon which Petro Mex relies,” and contends that
the [Grand Junction] Field Office repeatedly reserved its rights, warning
Petro Mex of the consequences of continued failure to remedy its breaches;
clearly signaled the materiality of Petro Mex’s breaches by refusing to let
Petro Mex perform unless and until it cured those breaches; escalated its
responses to Petro Mex’s breaches over time; and eventually discontinued
performance altogether.
(emphasis in original; alteration added).
For example, defendant argues that “the Field Office did not waive but escalated,
its response to Petro Mex’s failure to report production and pay royalties.” As described
In February 1992, the House Ways and Means Committee reported out
Representative Guarini's legislation eliminating the deduction for covered
asset losses. The Committee Reports specifically mentioned the 1988
FSLIC [Federal Savings and Loan Insurance Corporation]-assisted
transactions and pointed to the RTC [Resolution Trust Corporation] Report
and the Treasury Report for support for their conclusions. Congress passed
the Guarini legislation as § 13224 of the Omnibus Budget Reconciliation Act
of 1993, which became law when the President signed it on August 10,
1993.
Centex Corp. v. United States, 49 Fed. Cl. 691, 706–07 (2001) (footnote omitted;
alterations added); see also Temple-Inland, Inc. v. United States, 59 Fed. Cl. 550, 558
(2004).
130
above, beginning as far back as 2006, Mr. Fancher sent Petro Mex a letter on November
30, 2006, indicating that Petro Mex’s “leases and wells have been selected by the Grand
Junction Field Office (GJFO) for a production inspection.” Addressing the November 30,
2006 letter to Petro Mex regarding a production inspection, defendant’s counsel asked
Mr. Fancher, “why did you decide to request these particular documents from Petro Mex?”
Mr. Fancher testified:
Well, I wanted to verify their -- their reporting. So the OGOR [Oil and Gas
Operations Report] statements, I wanted a copy of those. I wanted a copy
of their gas purchase statements, calibration reports, and I look through all
these to ensure that the meters are being calibrated when they’re supposed
to be, the frequency they’re calibrated, that the reporting is really flawless,
you know, we want to make sure they’re -- what they’re producing is what
they’re reporting, and that would include, like to see the gas
chromatography, we like to know that, too, for our calculations, and it’s not
too often anybody flares or vents gas. We don’t really particularly care for
that very much, but if they did, I wanted to verify all their records with that
that I would get from MMS [Minerals Management Service].
(alterations added). On March 1, 2007, Mr. Fancher followed up with Mr. Wilson at Petro
Mex about the November 30, 2006 letter and Mr. Fancher testified:
I called him to find out the status of their audit that I requested for the 2007,
and I -- I mentioned I gave an extension, but I still haven’t received anything.
So they had -- and we talked about -- I mentioned that the material -- he
said that the material was in Trudy [Grubilnick]’s hands, that he’d call her,
so kind of like basically saying he didn’t really know what happened. Trudy
was supposed to take care of all that.
(alteration added). Defendant’s counsel subsequently asked Mr. Fancher: “So as of
7/3/2007, had Petro Mex provided the information that you had requested for the fiscal
year 2007 production accountability inspection?” to which Mr. Fancher testified: “No.”
Separately from Mr. Fancher, Mr. Hartman escalated the government’s response
to Petro Mex failure to report on production in a March 14, 2007 letter, which stated, in
part:
Please refer to our letter dated August 11, 2006 that requested information
concerning wells operated by Petro-Mex. To date, none of the information
requested has been received. Petro-mex’s [sic] failure to provide this
information is an Incident of Non Compliance.
The following is an order of the authorized officer. In accordance with
43 CFR 3163.1(a), please submit the above indicated reports to this office
no later than twenty (20) days from the receipt of this letter to correct the
violations. If you fail to submit the required reports in the time specified, you
131
will be liable for an assessment of $250.00 under 43 CFR 3163.1(a)(2). For
clarity we repeat our request for information in the following bolded italicized
text.
We are lacking several reports for wells operated by Petro-Mex
Resources. The listed items cover different wells and areas of
concern.
Lease COC088586, Well 1-15-8-101, NW¼, NW¼ Section 15, T8S,
R101W
Lease COC0124705A, Well 6-9-8-101, SE¼ SW¼, Section 9, T8S,
R101W
Form 3160-5, Spud Notification: two copies due of written
confirmation of verbal spud notification. We have no record of the
spudding of these wells.
Form 3160-4, Well Completion Report and Log: two copies due within
30 days after well is completed (Onshore Order No. 1, Section VIII).
Geologic Logs: two copies due within 30 days after well is completed.
(43 CFR 3162.4-1b requires duplicate copies of all types of wire line
logs, sample logs, drilling time logs and other well surveys).
Lease COC0124705A, Well 5, SW¼ SW¼, Section 9, T8S, R101W
First Production Notification: Notification to the BLM is required within
5 days of first production. The COGCC website indicates the subject
well began producing in January 2006 after being shut in for several
years.
Form 3160-4, Well Completion Report and Log: two copies due within
30 days after well is completed (Onshore Order No. 1, Section VIII).
Please update status of recompletion as requested in your sundry of
August 2004 which involved pulling the existing casing and running
new strings.
Lease COC088586, Well 2, NW ¼ NW ¼, Section 15, T8S, R101W
First Production Notification: Notification to the BLM is required within
5 days of first production. The COGCC website indicates the subject
well began producing in July 2004 after being shut in for several years.
The Minerals Management Service is responsible for the collection of
production reports for all federal leases and agreements. Their
database shows that Petro-Mex has not reported for several years.
132
Please indicate in your response to this letter [sic] status in updating
the production reporting for all of the wells listed in Attachment 1.
(emphasis in original; alterations added).
Defendant’s counsel asked Mr. Hartman about the March 14, 2007 letter at trial
and he explained that
A. I believe we did not have any record of that well being completed. Again,
I’m not sure if Petro Mex was the -- drilled the well or not, but we didn’t have
a copy of it, so I was just asking for that. And that’s due within 30 days of
the well being completed.
Q. And considering that there’s a reference to a sundry[32] of August 2004,
and now we know we’re at least past August 2006, was that something that
Petro Mex should have provided?
A. Yes.
(footnote added). The government has demonstrated continued efforts to get the required
production reports and royalties from Petro Mex. In the face of non-compliance, the
government repeatedly requested the information, and failing that, informed Petro Mex of
a timeline to fix the violations. Additionally, the government documented that if Petro Mex
32 Mr. Villalobos discussed sundry with defendant’s counsel during cross-examination:
Q. Are you familiar with that term “sundry notices?”
A. Yes. Yes.
Q. And what is that?
A. That’s -- after we get the -- if it was a leak or was a well head leak or line
blow up, after we finish, then we have to call -- you can call or you can -- if
BLM send us a notice, then we have to send it back after we fix the INC.
Q. Are sundry notices different than incidents of noncompliance?
A. I believe it’s different, yes.
On direct examination, Mr. Fancher explained that after operator drills a well,
they have to give us a subsequent report. They call it a sundry notice. There
is the depths and all the pertinent information that engineers like to look at.
The cementing reports to make sure they use the right volumes so we could
back calculate if we wasn’t out there to find out if they did that procedure
correctly.
133
did not provide the information or, at a minimum a timeframe to resolve the outstanding
issues, assessments would be issued by the government.
Similarly, regarding defendant’s argument that “the Field Office did not waive, but
escalated, its response to Petro Mex’s failure to increase its bond, the court indicated
above that the parties stipulated:
Prior to May 2008, Petro Mex’s bond requirement was $25,000. In April
2008, the Field Office’s field manager, Catherine Robertson, sent a
memorandum to the Colorado BLM State Director requesting an increased
bond from $25,000 to $100,000 for Petro Mex. Ms. Robertson stated that
the reasons for the requested increase in bond coverage included: (1) Petro
Mex’s “history of failing to comply” with orders and Notices of Incidents of
Noncompliance; and (2) the fact that Petro Mex was delinquent in its
production reporting. Ms. Robertson stated that the increased bond was
“required to reduce the liability” to the Government in the event the wells
were plugged and abandoned because the estimated cost per well was
$20,000.
(alteration added; internal references omitted). At trial, defendant’s counsel and Mr.
Hartman had the following exchange regarding a memorandum written by the Grand
Junction Field Office’s field manager, Catherine Robertson:
[Q.] And then can you just generally explain what this memorandum is?
A. It’s a recommendation to the state director from the field office manager
saying that an operator has particular issues and that we believe that a bond
-- an increase to their bond should be required. And it lists our criteria of
why we believe it should be increased.
Q. Okay.
A. Yes.
Q. And then the first indent refers to -- and I think ties back to the
spreadsheet we just looked at, but refers to seven wells and all of them are
currently in a shut-in or unapproved temporarily abandoned status. And
even if that were not true, would you have still made a recommendation to
increase the bond?
A. Whether they were shut in or not?
Q. Yes.
A. Being the criteria? Yes. Nonproduction is a concern. It’s one of the criteria
for a bond increase. Yes.
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Q. And then there’s a reference to the middle paragraph, which is the
indented paragraph, refers to a history of failing to comply with orders of the
authorized officer and incidents of noncompliance resulting in assessments
being issued. Why was that a reason for asking for an increase in bond
coverage?
A. It’s one of the -- on the -- let’s see, in the memo, the memo from
Washington. It’s one of the criteria that can be used to show a bond increase
is needed.
Q. And then can you explain why you have that third indented paragraph
and what the purpose of that was?
A. This is based on -- I believe it was based on conversations or emails from
MMS between me and one of the -- some MMS representative that there
were failures to pay royalty and failures to report production.
(alteration added).
Additionally, the court noted that the parties have stipulated:
On May 15, 2008, the Colorado BLM State Director approved the bond
increase request and required Petro Mex to obtain a bond of $100,000. The
State Director gave Petro Mex 60 days from receipt of her letter to comply.
The State Director’s decision was delivered to Petro Mex by certified mail.
On August 25, 2008, Ms. Robertson notified Petro Mex that BLM had failed
to receive any response to the State Director’s order to increase its bond.
Ms. Robertson directed Petro Mex to provide the requested additional bond
amount within 30 days of receipt of her letter, and stated, “[t]his is an order
of the authorized officer.”
(internal references omitted). The August 25, 2008 letter from Ms. Robertson stated, in
part:
Reference is to the attached letter from the Bureau of Land Management-
Colorado State Office that requested you provide an increase in bonding
amount for your oil and gas operations within Colorado. The letter requested
a response by 60 days of receipt of the letter. To date no response has been
received. As the May 15th letter indicates, this office has concerns on the
amount of liability that exists on Petro Mex Resources operated properties.
Your history of non compliance with on the ground operations and the
apparent failure to report timely to the Minerals Management Service led
this office to request this bond increase. Please provide the requested
additional bond amount as requested in the May 15, 2008 within 30 days of
receipt of this letter. This is an order of the authorized officer. If you fail to
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submit the required reports in the time specified, you will be liable for an
assessment of $250.00 under 43 CFR 3163.1(a)(2) and possible lease
cancellation.
The government’s response to plaintiff’s failure to not increase Petro Mex’s bond was not
to ignore the issue or continue with contract performance with the same bond amount,
but to increase the bond amount and set possible assessments for the failure to comply.
In both instances, for the request for production and the bond issue, the government did
not waive any rights to claim a breach, as the government continued to make clear that
there would be consequences for failure to comply and then the government increased
its efforts to ensure compliance from Petro Mex.
Petro Mex also contends,
[i]n this matter, it is clear that any prior material breach of the Lease by Petro
Mex did not allow or justify the Government’s breaches. To begin with, the
Government’s remedy for any prior material breach would have been to
cancel the Lease pursuant to 43 C.F.R. § 3108.3(b), not to effectively invent
or construct a termination scenario based on nonproduction. However, at
no point in 2008 or 2009 did the Government ever serve notice on Petro
Mex that it intended to initiate cancellation proceedings or actually initiate
such proceedings.[33] And the Government’s failure to do this indicates that,
faced with the knowledge of Petro Mex’s breaches, the Government elected
to continue the Lease as opposed to exercise its right to seek cancellation.
In electing to continue the Lease, the government waived its right to treat
Petro Mex’s actions as having terminated the contract.
(alterations added).
Plaintiff argues that “cancellation of a lease by the Government for non-compliance
is governed by 30 U.S.C. § 188, and requires judicial proceedings where the lease
contains a well capable of production of oil or gas in paying quantities.” “Failure to comply
with provisions of lease,” 30 U.S.C. § 188 (2018), provides:
(a) Forfeiture
Except as otherwise herein provided, any lease issued under the provisions
of this chapter may be forfeited and canceled by an appropriate proceeding
33 The court notes cancellation is separate from termination. As indicated in the joint
stipulated facts, and as referenced above:
In an August 26, 2009 decision, BLM’s Colorado State Office terminated the
Garfield Lease. As grounds for the termination, the State Office explained
that “the Grand Junction Field Office has determined that this lease was no
longer capable of producing oil and gas in paying quantities after October
1, 2008.”
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in the United States district court for the district in which the property, or
some part thereof, is located whenever the lessee fails to comply with any
of the provisions of this chapter, of the lease, or of the general regulations
promulgated under this chapter and in force at the date of the lease; and
the lease may provide for resort to appropriate methods for the settlement
of disputes or for remedies for breach of specified conditions thereof.
(b) Cancellation
Any lease issued after August 21, 1935, under the provisions of section 226
of this title shall be subject to cancellation by the Secretary of the Interior
after 30 days notice upon the failure of the lessee to comply with any of the
provisions of the lease, unless or until the leasehold contains a well capable
of production of oil or gas in paying quantities, or the lease is committed to
an approved cooperative or unit plan or communitization agreement under
section 226(m) of this title which contains a well capable of production of
unitized substances in paying quantities. Such notice in advance of
cancellation shall be sent the lease owner by registered letter directed to
the lease owner's record post-office address, and in case such letter shall
be returned as undelivered, such notice shall also be posted for a period of
thirty days in the United States land office for the district in which the land
covered by such lease is situated, or in the event that there is no district
land office for such district, then in the post office nearest such land.
Notwithstanding the provisions of this section, however, upon failure of a
lessee to pay rental on or before the anniversary date of the lease, for any
lease on which there is no well capable of producing oil or gas in paying
quantities, the lease shall automatically terminate by operation of law:
Provided, however, That when the time for payment falls upon any day in
which the proper office for payment is not open, payment may be received
the next official working day and shall be considered as timely made:
Provided, That if the rental payment due under a lease is paid on or before
the anniversary date but either (1) the amount of the payment has been or
is hereafter deficient and the deficiency is nominal, as determined by the
Secretary by regulation, or (2) the payment was calculated in accordance
with the acreage figure stated in the lease, or in any decision affecting the
lease, or made in accordance with a bill or decision which has been
rendered by him and such figure, bill, or decision is found to be in error
resulting in a deficiency, such lease shall not automatically terminate unless
(1) a new lease had been issued prior to May 12, 1970, or (2) the lessee
fails to pay the deficiency within the period prescribed in a notice of
deficiency sent to him by the Secretary.
30 U.S.C. § 188 (emphasis in original). The regulation regarding cancellation of oil and
gas leases, 43 C.F.R. § 3108.3, in effect at the time periods relevant to this case,
indicates:
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(a) Whenever the lessee fails to comply with any of the provisions of the
law, the regulations issued thereunder, or the lease, the lease may be
canceled by the Secretary, if the leasehold does not contain a well capable
of production of oil or gas in paying quantities, or if the lease is not
committed to an approved cooperative or unit plan or communitization
agreement that contains a well capable of production of unitized substances
in paying quantities. The lease may be canceled only after notice to the
lessee in accordance with section 31(b) of the Act and only if default
continues for the period prescribed in that section after service of 30 days
notice of failure to comply.
(b) Whenever the lessee fails to comply with any of the provisions of the
law, the regulations issued thereunder, or the lease, and if the leasehold
contains a well capable of production of oil or gas in paying quantities, or if
the lease is committed to an approved cooperative or unit plan or
communitization agreement that contains a well capable of production of
unitized substances in paying quantities, the lease may be canceled only
by judicial proceedings in the manner provided by section 31(a) of the Act.
(c) If any interest in any lease is owned or controlled, directly or indirectly,
by means of stock or otherwise, in violation of any of the provisions of the
act, the lease may be canceled, or the interest so owned may be forfeited,
or the person so owning or controlling the interest may be compelled to
dispose of the interest, only by judicial proceedings in the manner provided
by section 27(h)(1) of the Act.
(d) Leases shall be subject to cancellation if improperly issued.
43 C.F.R. § 3108.3. The plaintiff also points to the language of the Garfield Lease, which,
as quoted above at Section 7, provides:
SEC. 7. Proceedings in case of default. — If the lessee shall not comply
with any of the provisions of the act or the regulations thereunder or of the
lease, or make default in the performance or observance of any of the terms
hereof (except that of payment of annual rental which results in the
automatic termination of the lease), and such default shall continue for a
period of 30 days after service of written notice thereof by the lessor, this
lease may be cancelled by the Secretary of the Interior in accordance with
section 31 of the act, except that if this lease covers lands known to contain
valuable deposits of oil or gas, the lease may be cancelled only by judicial
proceedings in the manner provided in section 31 of the act, but this
provision shall not be construed to prevent the exercise by the lessor of any
legal or equitable remedy which the lessor might otherwise have. Upon
cancellation of this lease, any casing material, or equipment determined by
the lessor to be necessary for use in plugging or preserving any well drilled
on the leased land shall become the property of the lessor. A waiver of any
particular cause of forfeiture shall not prevent the cancellation and forfeiture
of this lease for any other cause of forfeiture, or for the same cause
occurring at any other time.
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(capitalization and emphasis in original). Although allowing for judicial proceedings
pursuant to 30 U.S.C. § 188, the Garfield Lease specifically provides that Section 7 of the
Garfield Lease “shall not be construed to prevent the exercise by the lessor of any legal
or equitable remedy which the lessor might otherwise have.”
Plaintiff contends that “any prior material breach of the Lease by Petro Mex did not
excuse the government’s performance of its own obligations under the Lease because
the government never moved to end the Lease as a result of such breach through
cancellation proceedings.” Defendant responds that “Federal Circuit precedent precludes
Petro Mex’s argument that because the Field Office could have instituted judicial
proceedings to cancel the lease as a result of Petro Mex’s breaches, cancellation was the
exclusive remedy and the common law defense of prior material breach is unavailable.”
For support, defendant cites to Laguna Construction Co. v. Carter, 828 F.3d 1364 (Fed.
Cir. 2016), in which the Federal Circuit held:
Prior material breach is a federal common law defense asserted when a
party breaches a contract after another party has already breached the
same contract. Christopher Village [L.P. v. United States], 360 F.3d [1319,]
1334 [(Fed Cir. 2004)]. We have held that it can bar a contractor's breach
claim against the government, even if the government's later-occurring
breach happened without knowledge of the first breach. See id. In
Christopher Village, as a result of a criminal investigation, a plea agreement
was entered establishing that the contractor was involved in a fraudulent
insurance scheme that resulted in false claims for rent being submitted to
the government. Id. at 1325. Based on that admitted fraudulent conduct, the
Court of Federal Claims granted summary judgment to the government,
finding that Christopher Village had committed a prior material breach that
excused the government's alleged subsequent breach. Id. at 1326.
We affirmed, holding that when “a party to a contract . . . is sued for its
breach [it] may ordinarily defend on the ground that there existed, at the
time [of the breach], a legal excuse for nonperformance.” Id. at 1334 (citing
Coll. Point Boat Corp. v. United States, 267 U.S. 12, 15, 45 S. Ct. 199, 69
L. Ed. 490 (1925)); see also Joseph Morton, 757 F.2d at 1279; K&R Eng’g
Co., Inc. v. United States, 616 F.2d 469, 475 (Ct. Cl. 1980). We found that
Christopher Village had materially breached the contract by submitting false
data and was under common control with the guilty affiliated company. 360
F.3d at 1334–36. Therefore, its prior breach excused the government's
subsequent breach. Id. at 1336.
Laguna attempts to distinguish Christopher Village by arguing that it did not
involve a CDA [Contract Disputes Act] contract and that the CDA displaces
the common law prior material breach rule. Nothing in the CDA suggests
that Congress intended to displace this federal common law defense, nor is
there any sound reason to do so.
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Laguna Constr. Co. v. Carter, 828 F.3d at 1369 (first, second, third, and seventh
alterations added). The Federal Circuit concluded that
we do not find persuasive Laguna’s invocation of the termination and Anti-
Kickback clauses. These clauses provide alternatives to address Laguna’s
fraud, but, as we have concluded, they do not foreclose application of the
common law defense of prior material breach. The government could have
chosen to terminate the contract for default or sought remedies under the
Anti-Kickback Act, but it was not required to do so. Rather, as we held in
Christopher Village and J.E.T.S., the government may use the prior material
breach doctrine to defeat a contractor’s breach claim.
Laguna Constr. Co., Inc. v. Carter, 828 F.3d at 1371.
Plaintiff responds that the Laguna Construction decision
is distinguishable because the court did not, in the section of the case cited
by the Government, address the possible issue of waiver. In fact, the court
in Laguna Construction did address the possible waiver issue later in the
opinion and only found that waiver did not apply in that particular case
because the contractor was unable to show that the Government had actual
knowledge of the prior breach and continued the contract. The clear
implication of this analysis is that if it were in fact shown that the
Government did have knowledge of a breach, it would likely have been
precluded from then sitting on its hands and doing nothing about the breach
and such action would have waived the prior material breach defense.
(internal reference omitted).34 The court notes that the Federal Circuit, in turning to the
waiver issue in Laguna Construction, explained:
34 Petro Mex characterizes the government’s position regarding prior material breach as
“the Government can face no consequences if it does nothing in the face of a breach and
simply wait for the contractor to finish performing, but then refuse to comply with its
obligations. Such a result would clearly be inequitable.” The court notes the United States
Court of Federal Claims is a court of law, not a court of equity. See United States v.
Tohono O'Odham Nation, 563 U.S. 307, 313, 131 S. Ct. 1723, 1729, 179 L. Ed. 2d 723(2011) (The United States Court of Federal Claims “has no general power to provide
equitable relief against the Government or its officers.”); Massie v. United States, 226
F.3d 1318, 1321 (Fed. Cir. 2000) (“Except in strictly limited circumstances, see 28 U.S.C.
§ 1491(b)(2), there is no provision in the Tucker Act authorizing the Court of Federal
Claims to order equitable relief” (citing United States v. King, 395 U.S. 1, 4 (1969) (“cases
seeking relief other than money damages from the Court of Claims have never been
‘within its jurisdiction’”) and Placeway Construction Corp. v. United States, 920 F.2d 903,
906 (Fed. Cir. 1990))).
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Laguna also contends that the government knew of the kickback scheme
as early as January 2008, but continued to perform the contract until 2015,
thereby waiving the prior material breach defense. This alleged “continued
performance” included paying approximately $3.5 million in July 2012 for
incurred costs and auditing Laguna’s cost statements. In light of the facts of
this case, we do not find these arguments persuasive. A waiver is “an
intentional relinquishment or abandonment of a known right.” Massie v.
United States, 166 F.3d 1184, 1190 n.** [35] (Fed. Cir. 1999) (internal
quotation marks and citation omitted). It was reasonable for the government
to invoke the prior material breach rule after Mr. Christiansen entered a
guilty plea in July 2013. Therefore, prior to this date, the government did not
have a “known right” that would have invoked the prior material breach rule.
In addition, after Laguna completed the physical work in 2010, the
government's sole acts comprised conducting audits and making cost
reimbursements. We disagree with Laguna’s contention that it relied on
these acts to its detriment by performing final accounting and audit tasks. It
is clear that Laguna would have performed these tasks even if the
government had terminated the contract. Therefore, the government did not
waive its right to invoke the prior material breach rule.
Laguna Constr. Co., Inc. v. Carter, 828 F.3d at 1372 (internal reference omitted; alteration
added). Although Petro Mex claims “if it were in fact shown that the Government did have
knowledge of a breach, it would likely have been precluded from then sitting on its hands
and doing nothing about the breach and such action would have waived the prior material
breach defense,” defendant argues “because Petro Mex did not report or pay royalties on
its production during the shut-in, Interior did not discover that Petro Mex had violated the
shut-in order until more than six months later, on March 30, 2009.” Additionally, the court
notes, as indicated above, Mr. Fancher testified at trial: regarding the October 2008
timeframe with defendant’s counsel:
A. I discovered that Petro Mex had sold gas during -- like right after the shut-
in and so then that became something we had to deal with.
Q. The last sentence of your entry here says, “This is on our plate.” Do you
see that?
A. I see that. I mean, that’s something that we had to deal with, yes, ma’am.
Q. Okay. And you may have just anticipated my question there, but what
did you mean by that?
A. I meant that we had to research that and find out why they did that, why
they started production without -- without notifying us.
35 Asterisks appear as quoted in the Federal Circuit’s decision in Laguna Construction.
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Q. And on what date was this?
A. This was on March 30th, 2009.
Q. Was this the first time that you learned that Petro Mex had produced
during the shut-in?
A. Yes, I think it is.
Q. Did you know in August 2008, at that time, did you have any knowledge
that Petro Mex was producing?
A. I don’t remember any knowledge of that. I’d have to look and see if I
made any notes anywhere.
Q. Okay. Do you know whether in September 2008 you had any knowledge
that Petro Mex was producing?
A. No, no, ma’am.
Q. Did you have any knowledge in October 2008 that Petro Mex was
producing from the Garfield lease during the shut-in?
A. No, ma’am.
Turning to the language of the Garfield Lease at Section 7 which set the terms of
default provides in relevant part:
If the lessee shall not comply with any of the provisions of the act or the
regulations thereunder or of the lease, or make default in the performance
or observance of any of the terms hereof (except that of payment of annual
rental which results in the automatic termination of the lease), and such
default shall continue for a period of 30 days after service of written notice
thereof by the lessor, this lease may be cancelled by the Secretary of the
Interior in accordance with section 31 of the act, except that if this lease
covers lands known to contain valuable deposits of oil or gas, the lease may
be cancelled only by judicial proceedings in the manner provided in section
31 of the act, but this provision shall not be construed to prevent the
exercise by the lessor of any legal or equitable remedy which the lessor
might otherwise have.
As explained above, although providing for judicial proceedings pursuant to 30 U.S.C.
§ 188, the Garfield Lease specifically provides that Section 7 of the Garfield Lease “shall
not be construed to prevent the exercise by the lessor of any legal or equitable remedy
which the lessor might otherwise have.” The court agrees with defendant that the BLM
“could have chosen to cancel Petro Mex’s lease, but it was not required to do so,” echoing
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the holding of Laguna Construction under the facts of this case.
Therefore, Petro Mex has not met its burden to prove that the government waived
any prior material breaches. As plaintiff has already conceded, “Petro Mex breached the
lease by failing to report and pay royalties on production or pay the resulting civil penalty,”
and that Petro Mex “breached the lease by failing to increase its reclamation bond when
demand was made.” Even if defendant breached the Garfield Lease, which the court does
not conclude, defendant’s breach would be excused by Petro Mex’s prior material
breaches.
As determined above, was on notice that its claim had accrued prior to August
2008, and outside the six year statute of limitations. In addition, plaintiff did not meet its
burden to prove a breach of the Garfield Lease by the government, and, furthermore,
plaintiff did not demonstrate that the termination of the Garfield Lease was not permitted
by the applicable legal authorities or that plaintiff was not afforded a reasonable amount
of time in which to resume production before termination.
Offset
As indicated in defendant’s amended answer, defendant raised a claim for offset,
which alleges that, “as of September 14, 2020, Petro Mex owes $330,205.58 to the United
States for unpaid royalties, civil penalties, interest, administrative fees, and Treasury
collection fees.” Defendant alleges that “[t]he Court has jurisdiction over this offset
pursuant to 28 U.S.C. §§ 1503 and 2508.”
Under existing United States Court of Appeals for the Federal Circuit precedent
28 U.S.C. §§ 1503 and 2508 provide the court with jurisdiction if the
government brings such a claim as a counterclaim. 28 U.S.C. §§ 1503, 2508
(1994); Cont’l Mgmt., Inc. v. United States, 208 Ct. Cl. 501, 527 F.2d 613,
616 n. 2 (1975) (stating that under § 1503 “the Government may set up a
counterclaim even though . . . it states a claim of a type (e.g. tort) of which
[the Court of Claims] would not have jurisdiction if sought to be maintained
by a plaintiff”) (citing Cherry Cotton Mills, Inc. v. United States, 327 U.S.
536, 105 Ct. Cl. 824, 66 S. Ct. 729, 90 L. Ed. 835 (1946)); Cherry Cotton
Mills, 327 U.S. at 539, 66 S. Ct. 729 (stating that the purpose of the
predecessor to § 1503 “was to permit the government, when sued in the
Court of Claims, to have determined in a single suit all questions which
involved mutual obligations between the government and a claimant against
it”); Daff v. United States, 78 F.3d 1566, 1570 & n. 5 (Fed. Cir. 1996)
(allowing the government to counterclaim under §§ 1503 and 2508 for
unliquidated progress payments); see also BLH, Inc. v. United States, 13
Cl. Ct. 265, 275 (1987) (“Although [the Claims Court] does not generally
have jurisdiction over implied-in-law contracts, an exception exists for
counterclaims for money damages asserted by the government.” (citing §
1503 and Cherry Cotton Mills) (internal citation omitted)). Thus, the Court
143
of Federal Claims did have jurisdiction to hear the government's
counterclaims.
Barrett Ref. Corp. v. United States, 242 F.3d 1055, 1062–63 (Fed. Cir. 2001). Therefore,
the court has jurisdiction pursuant to 28 U.S.C. § 1503 (2018) and 28 U.S.C. § 2508(2018) to consider defendant’s claim for offset. Based on the above determination that
plaintiff’s claims are barred by the statute of limitations and the conclusion that plaintiff
has not demonstrated breach, plaintiff has not demonstrated liability, and consequently,
plaintiff has not demonstrated an entitlement to damages in this case. As noted 31 U.S.C.
§ 3728(a) (2018): “The Secretary of the Treasury shall withhold paying that part of a
judgment against the United States Government presented to the Secretary that is equal
to a debt the plaintiff owes the Government.” As there is no judgement against the United
States as a result of plaintiff’s lawsuit, there is no amount for the Treasury to offset.
Therefore, as there is no award to plaintiff that is subject to an offset, defendant’s claim
for offset is MOOT.
CONCLUSION
As determined above, under the objective standard for notice of the accrual of
claims, plaintiff was on notice that any claims accrued prior to August 2008, thus plaintiff’s
claims are outside the applicable six year statute of limitations which barred plaintiff from
proceeding with its claims this court. Furthermore, plaintiff failed to demonstrate that Petro
Mex did not receive a reasonable amount of time to resolve the issues with the Garfield
Lease under the relevant statutes and regulations. Plaintiff has failed to prove that the
government breached plaintiff’s Garfield Lease. Additionally, plaintiff did not establish that
the government had committed a prior material breach of the Garfield Lease. Because
plaintiff did not recover damages in the above captioned case, defendant’s claim for offset
is moot. The Clerk of the Court shall enter JUDGMENT consistent with this Opinion.
IT IS SO ORDERED.
s/Marian Blank Horn
MARIAN BLANK HORN
Judge
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