Petition for Writ of Certiorari — Southern Union Co. v. Jicarilla Apache Tribe

s 6 _ 2 yd 5 Supreme Court, U.S.

FILED

AUG 13 1986

JOSEPH F. SPANIOL, JR.

IN THE CLERK

Suprenve Court of the United States

OCTOBER TERM, 1986

EXXON CORPORATION,

SOUTHERN UNION COMPANY,

UNICON PRODUCING COMPANY and

SOUTHLAND ROYALTY COMPANY,

‘ Petitioners,

JICARILLA APACHE TRIBE,

DONALD P. HODEL, Secretary of the

United States Department of the Interior,

and STATE OF NEW MEXICO,

Respondents.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE TENTH CIRCUIT

HAROLD L. HENSLEY, JR.*

HINKLE, Cox, EATON, COFFIELD

& HENSLEY

P.O. Box 10

Roswell, New Mexico 88201

(505) 622-6510

FRANK G. HARMON

BAKER & BOTTS

One Sheil Plaza

Houston, Texas 77002

(713) 229-1234

Counsel for Petitioner

Exxon Corporation

* Counsel of record

WILSON - Eres PRINTING Co., INC. - 789-0096 - WASHINGTON, D.C. 20001

QUESTIONS PRESENTED

1. Whether the Secretary of Interior has a special

fiduciary duty to interpret leases and pertinent regula-

tions so as to maximize immediate oil and gas royalties

to the Indian tribes, to the exclusion of all other con-

siderations, where no statute or regulation specifically

mandates such an obligation.

2. Whether a lower Federal Court can substitute its

discretion for that of the Secretary of the Interior as

to an established royalty accounting procedure, in con-

travention of the well-established standards for review

of agency action and in violation of the Separation of

Powers Doctrine.

3. Whether a new agency rule requiring dual account-

ing, which constitutes an abrupt departure from the Sec-

retary of the Interior’s prior interpretation of leases and

pertinent agency regulations, can have retroactive effect.

4. Whether a lessee of an Indian oil and gas lease

issued pursuant to the Indian Mineral Leasing Act of

1938 can be held liable in money damages for an under-

payment of royalties based solely on an alleged breach

of a fiduciary duty by the Secretary of the Interior to the

lessor Indian tribe.

(i)

ii

LIST OF PARTIES

The caption contains the names of all parties to the

proceedings before the United States Court of Appeais

for the Tenth Circuit.

Petitioner, Exxon Corporation, is a corporation or-

ganized under the laws of the State of New Jersey,

whose principal place of business is in Delaware.

Exxon Corporation’s affiliates and partially owned

subsidiaries are listed in Appendix “A” attached to

Exxon’s Application for Extension of Time to File Pe-

tition for Writ of Certiorari to the United States Court

of Appeals for the Tenth Circuit, which was filed in this

Court on July 8, 1986.

LET ere Ss

TABLE OF CONTENTS

ob) 8) Bg 2 |) 4. vy |

iis cocinainisehsAsasdinesthceseicnaranioonnponssns is

STATEMENT OF THE CASE

REASONS FOR GRANTING THE WRIT

E

Il.

Ill.

In establishing a specific fiduciary duty on the

part of the Secretary to always maximize royal-

ties payable to the Indians, the Tenth Circuit

fails to recognize the United States Supreme

Court’s mandate in Mitchell IJ that the contours

of any fiduciary duty be clearly established by a

Page

ee 6, 7, 8, 9, 10

The Tenth Circuit’s application of the principles

set forth in Mitchell I and Mitchell II substan-

tially and materially differ from the application

given the same principles by the United States

SEE Ae 10, 11, 12, 13

The Tenth Circuit’s standard of review of the

Secretary’s actions, which, to the exclusion of all

other considerations, looks only at whether or

not the Secretary maximized immediate royal-

ties to the Indians, is contrary to the standard

of review set forth in 5 U.S.C. § 706(2) (A), the

standard of review enunciated by the United

States Supreme Court in Udall v. Tallman and

that enunciated in other Circuit Court cases.......

(iii)

13, 14,

15, 16

iv

TABLE OF CONTENTS—Continued

Page

IV. The Tenth Circuit’s standard of review which

considers only whether or not the Secretary max-

imized immediate royalties to the Indians should

either be reversed or clarified because of its im-

portance in the management of both public lands

and Indian lands, and because it is inconsistent

with the Secretary’s long-standing interpreta-

tion of the pertinent regulations —...................... 17, 12

V. The Tenth Circuit’s affirmation of the District

Court’s mandate requiring the Secretary to ap-

ply dual accounting, both prospectively and retro-

actively, violates the well-established rule enun-

ciated in various Circuit Courts that such a

change should have only prospective effect........ 18, 19,

20, 21

VI. The Tenth Circuit’s affirmation of the District

Court’s review of the Secretary’s action with

respect to Petitioner Exxon, absent any admin-

istrative record with a reasoned analysis as to

why dual accounting should or should not be

applied to Petitioner Exxon, violates well-

established principles of administrative law ...... 21, 22,

23

VII. The Tenth Circuit has enunciated a standard of

review which allows a court to substitute its dis-

cretion for that of an administrative agency in

violation of the separation of powers doctrine.... 23, 24,

25, 26

VIII. The Tenth Circuit’s decision to afford the Tribe

a remedy against innocent lessees as a result of

an alleged breach cf trust by the Secretary is in

direct conflict with the United States Supreme

Court decision in Nevada v. United States ......... 26, 27

IX. The Tenth Circuit’s decision to impose liability

upon innocent third parties is in direct conflict

with a long-standing principle of equity which

has been specifically recognized by this Court

and other Circuit Courts of Appeal ................ 27, 28, 29

CONCLUBION .....0000c000.is- eee 29

V

TABLE OF AUTHORITIES

CASES: Page

Atchison, T. & S.F. R. Co. v. Wichita Board of

yo Me ae | ek | ee ree 22

American Surety Co. '\v. First National Bank, 141

ee! Ls | Seenepnenet emeeentn, eam p NONE 28

Badderton v. Frances, 432 U.S. 416 (1977) ............. 14

Baker v. United States, 613 F.2d 224 (9th Cir.

1980), cert. denied, 449 U.S. 932 (1980) \......0.... 15

Blackfeet and Gros Ventre Tribes of Indians v.

United States, 32 Ind. Cl. Comm. 65 (1973).... 11

Buccaneer Point Estates, Inc. v. U.S., 729 F.2d

BET CRG Tes Te sicecirsoescnet es. 20

Burlington Truck Lines, Inc. v. United States, 371

ce saa Seen ea ee eee ner ene 24

Chevron, U.S.A., Inc. v. Natural Resourses Defense

Council, Ine., 104 S.Ct. 2778, 52 USLW 4845

AIUD licaasstd = urcigan side aomeeadesameeroniieieinnis deranmen ts 24, 25

Commissioner v. Idaho Power Co., 418 U.S. 1

IIIS i cochngiiccrenaokisens cobant oun larnlanlihseemiinee cee eat 13

Continental Oil Co. v. United States, 184 F.2d 802

ee et i akcia nce oe ead .. 15, 20

International Union, United Automobile, Aero-

space & Agricultural Implement Workers of

America v. Brock, 785 F.2d 237 (D.C. Cir.

SIED chicks tv cibesisaistinnta-gksoeintcemacs aie an 20, 21

Investment Co. Institute v. Camp, 401 U.S. 617

DIED sais ndideneciccedsiheeconbinitninid aes ae ae 15

Matter of Quantum Development Corp., 534 F.2d

Ce CU ic Fe ince nsviseccsenniceptnsanteendcnitincictonns 28

McDonald v. Watt, 653 F.2d 1035 (5th Cir. 1981).. 20

Melluzzo v. Watt, 674 F.2d 819 (9th Cir. 1982) .... 15

Montana v. Blackfeet Tribe of Indians, 471 U.S.

, 85 LE2d 753, 105 S. Ct. (| 9

Morris v. Andrus, 593 F.2d 851 (9th Cir. 1978).... 15

Morton v. Ruiz, 415 U.S. 199 (1974) 2.00000... 18, 29

Motor Vehicle Manufacturer’s Assoc. v. State

Farm Mutual, 463 U.S. 29 (1983)... 21, 3

Mountain States Telephone & Telegraph v. Pueblo

of Santa Ana, 472 U.S. ——, 86 L.Ed.2d 168,

105 S.Ct. RRNA preerern neste oa 8 Ree ances 14

vi

TABLE OF AUTHORITIES—Continued

Page

Nance v. Environmental Protection Agency, 645

*& & Ft Re.) TRE Keen eres mires 12

Navajo Tribe of Indians v. United States, 9 Cl. Ct.

SE? sirencinresntekssdescanmapidaaaie natal a es uedibess a, 17

Navajo Tribe of Indians v. United States, 9 Cl. Ct.

BN II secciusiicstinsanictrmseccebad saimatcognetdpusto data eaeea alias 10, 11

Navajo Tribe v. United States, 610 F.2d 766 (Ct.

SU MD ition Sites cath colic bleatgl he accel) eres ata 11

Nevada v. United States, 463 U.S. 110 (1983) ......8, 26, 27

Pan American Petroleum Corp. v. Udall, 192 F.

SOU WHE CPA) BINED woccecssscsccossockscanseteccdeixiensvare 17

Public Service Commission v. Havemeyer, 296 U.S.

| RE RE a ear ete i Git SEs eset nara 24

Ramstad v. Hodel, 756 F.2d 1279 (9th Cir. 1985)... 15

Retail, Wholesale & Department Store Union v.

NLRB, 466 F.2d 280 (D.C. Cir. 1972)........000....... 20

Schlude v. Commissioner, 372 U.S. 128 (1963).... 10, 27

Securities and Exchange Commissioner v. Chenery

+. me is | Rs |: | eneaueeneS: 20, 23, 24, 26

Seminole Nation v. United States, 316 U.S. 286

IE sctthiis Succi vnsadicesncaninitnadaean a eee eae 28

Stewart Capital Corp. v. Andrus, 701 F.2d 846

ff A. Remar ernGge eee U Rtn Res 20

Supron Energy Corp., et al., 46 IBLA 181 (March

i, MI adios ieieeoacsolnnesspinadigticela eae eee ee 19, 20, 21

Udall v. Tallman, 380 U.S. 1 (1965) ..........0000..... 18, 14, 24

United States v. Coleman, 390 U.S. 599 (1968)... 18

United States v. Dann, 470 U.S. ——, 84 L.Ed. 2d

28, 106 S.Ct. tS ay eine da 28

United States v. Hopkins, 427 U.S. 123 (1976)... 13

United States v. Mason, 412 U.S. 391 (1973)........ 11

United States v. Mitchell, 445 U.S. 535 (1980)... 6,7

United States v. Mitchell, 229 Cl. Ct. 9, 664 F.2d

5 ET OT MI Pe SVN 10

United States v. Mitchell, 463 U.S. 206 (1983) _..6, 7, 8, 10

United States v. New York Telegraph Co., 326

is St. | nen skeen: imine 24

United States v. Ohio Oil Co., 163 F.2d 633 (10th

be | ENO ARE orca le! 16

vii

TABLE OF AUTHORITIES—Continued

Page

Wilkinson v. United States, 365 U.S. 399 (1961).... 10, 27

Yankton Sioux Tribe v. United States, 623 F.2d

SE Ns Me, A re ccicotmciiesisa ni sevnconnsesasnainsancanniicahe 12

STATUTES AND REGULATIONS:

© UBS, © TG CID CID oscsncsiescvevcecdicsetscnseeccces 13, 23

SEU S.C.S. © BOG (IGG) oc osnnscccccsencnesensccssseceeees 2, 3, 7, 27

Bie Tee PS Ee) nee eee ene \ 7,8

- Bee Fee Fy. Sy) Fel +) SR eenennnnneeeS 25

, Bie Fam % Oo) "ah ) Sener n nnn nine Ss nEennEn 2

, Bik Tak 4S 2S: y 5 UR re pr Ormnan anion ranDrEn = 3

pe fee BG! 2 By; nena Pina 25

, so & Bh: Fs _ * emneennnrnnrenercne nme 18, 25

Ge Bis ee CED once cccnssccccacevcwertcceennajepesnests 18, 25

LEGISLATIVE HISTORY:

H.R. Rep. No. 1872, 75th Cong., 3rd Sess. (1938) ..... 9

S. Rep. No. 2, 75th Cong., 3rd Sess. (1938) ............... 9

S. Rep. No. 3, 75th Cong., 3rd Sess. (1938) ............... 9

OTHER AUTHORITIES:

Bogert, Trusts & Trustees, § 901 (2d ed. rev.

TE ial aie cledabigie 27

F. Cohen, Cohen’s Handbook of Federal Indian

ee Rs oer cauanisimaineninekandonnes 9, 25

ar tr ia Scecmuiabin 28

Restatement (Second) of Trusts § 326 (1959)... 28

U.S. Office of Indian Affairs, Regulations and In-

structions for Officers in Charge of Forests on

Indian Reservations 4 (1911) ..................0...00..0.... 8

IN THE

Supreme Court of the United States

OCTOBER TERM, 1986

No. —-——

EXXON CORPORATION

SOUTHERN UNION COMPANY,

UNICON PRODUCING COMPANY and

SOUTHI.AND ROYALTY COMPANY,

. Petitioners,

JICARILLA APACHE TRIBE,

DONALD P. HODEL, Secretary of the

United States Department of the Interior,

and STATE OF NEW MEXICco,

Respondents.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE TENTH CIRCUIT

Petitioner Exxon Corporation respectfully prays that

a writ of certiorari issue to review the judgment and

opinion of the United States Court of Appeals for the

Tenth Circuit on Rehearing E'n Banc entered on January

23, 1986, and supplemented on June 18, 1986.

OPINIONS BELOW

The en banc opinion of the Court of Appeals for the

Tenth Circuit, filed January 23, 1986, is reported at 782

F.2d 855, and is reproduced in the Joint Appendix (“Jt.

App.’”) hereto.’ (Jt. App. la-14a). The June 18, 1986

1A Joint Appendix has been filed on behalf of Petitioner Exxon

Corporation, Unicon Producing Company and Southland Royalty

Corapany.

2

supplement to the en bane opinion is not yet reported,

but is reproduced in the Joint Appendix. (Jt. App. 18a-

19a). The en bance opinion adopted the dissenting opinion

of Judge Seymour in the three judge pane! opinion of the

Court of Appeals for the Tenth Circuit, filed February

24, 1984, reported at 728 F.2d 1555 (10th Cir. 1984),

which is reproduced in Petitioners’ Joint Appendix (Jt.

App. 22a-66a), along with the opinion of the District

Court for the District of New Mexico, reported in 479

F.Supp. 5386 (D.N.M. 1979). (Jt. App. 104a-137a).

JURISDICTION

The per curiam opinion and judgment of the Court of

Appeals for the Tenth Circuit on Rehearing En Banc

was entered on January 23, 1986. Petitioner Exxon filed

a timely Petition for Rehearing on February 6, 1986,

which Petition was denied on April 15, 1986. On July 8,

1986, Associate Justice Byron White signed an order ex-

tending the time for filing this petition for certiorari to

and including August 13, 1986. This Court’s jurisdiction

is invoked under 28 U.S.C.S. § 1254(1) (1982).

STATUTES AND REGULATIONS INVOLVED

25 U.S.C.S. §§ 396a-g (1983) (Indian Mineral Leasing

Act of 1938) (Jt. App. 200a) ; 25 C.F.R. §§ 211.1-211.30

(1985) (Jt. App. 214a) ; 30 C.F.R. §§ 221.1-221.80 (1981)

(Jt. App. 238a).

STATEMENT OF THE CASE

This action was commenced in May, 1975, by the

Jicarilla Apache Tribe (the “Tribe’) against the Peti-

tioner Exxon Corporation (“Exxon’’), and others,’ includ-

2 The other natural gas producers, who are also Petitioners in

this case, are Unicon Producing Company (“Unicon”), formerly

Supron Energy Corporation (“Supron”), formerly Southern Union

Production Company (“SUPC’’), and Southland Royalty Company

(“Southland”), formerly Aztec Oil and Gas Co. (‘Aztec’), here-

inafter collectively referred to as “the other Producer Defendants”.

Unicon, Supron and Southland are each filing their own separate

petition.

3

ing the Secretary of the Interior (the “Secretary’”) pur-

suant to 28 U.S.C.S. § 1862 (1977). The subject matter of

this case involves oil and gas leases located on the Jicarilla

Apache Reservation (the ‘“Reservation”) in Northwest

New Mexico, issued since 1950 pursuant to the Indian

Mineral Leasing Act of 1938 (“IMLA”), 25 U.S.CS.

§ 396a-g (1983). In accordance with the IMLA and the

lease terms, the determination of royalties are expressly

subject to the rules and regulations promulgated by the

Secretary. 25 U.S.C.S. § 396d. Petitioner Exxon Corpora-

tion (“Exxon”) is a lessee under one of said leases

(“Indian Leases’’).

This controversy concerns the liability of Exxon and

other natural gas producers for the alleged underpayment

of royalties of natural gas production from 1970 to the

present. At all times material hereto, the natural gas

produced had been sold at the wellhead by Exxon and the

ether producers to Southern Union Company ([“Southern

Union”, formerly Southern Union Gas Company]. The

natural gas is transported from the wellhead by Southern

Union to the Lybrook Plant located near the Reservation,

where entrained liquids such as butane, propane and

natural gasoline are extracted from the gas stream and

sold by the plant operator who retains the proceeds from

the sale of the liquids. Exxon has never owned any in-

terest in the Lybrook Plant and has never received any

revenues from the sale of extracted liquids from the plant

owner. At all times, Exxon was regularly billed for

royalties by the USGS and its successor based on com-

putations made in accordance with the Secretary’s con-

struction of the lease terms, regulations and accounting

procedures.

The Tribe’s Complaint alleged that Exxon and the

other Producer Defendants had failed to properly pay

royalties based on the “value” of the natural gas pro-

duced from oil and gas leases on the Reservation which

had been issued in the early 1950’s pursuant to the

4

IMLA. More specifically, the Tribe’s claim was that

Petitioner Exxon and the other Producer Lc fendants had

not rendered a “dual accounting” by valuing the produced

natural gas for royalty purposes based upon the higher

of the BTU adjusted wellhead price as compared with

the net realization price method which takes into account

the value of liquid by-products and residue dry gas

extracted from the gas stream by the Lybrook Plant.

Exxon denied the material allegations of the Tribe’s

Complaint, as amended, and alleged, inter alia, that there

had not been a hearing or administrative determination

by the Secretary as to the existence or non-existence of

any claimed lease violations, including any underpayment

of royalties to the Tribe.

The District Court entered judgment on November 5,

1979, holding that the Secretary had breached his fiduci-

ary duty by not requiring Exxon and the other Producer

Defendants to dually account, notwithstanding their non-

ownership in the gas processing plant or the receipt of

any revenue from the extracted by-products at the plant.®

Damages were assessed against Exxon for underpayment

of royalties based upon the difference between the net

realization method of accounting and the BTU adjusted

method which the Secretary had historically determined

was appropriate.

On appeal,* a majority of a three-judge panel of the

Court of Appeals reversed the District Court’s judgment

Only Supron owned by Lybrook Plant for a short period of

time between 1974-76, during which time the Secretary billed

Supron for royalty based on the net realization method which in-

cluded the value of extracted by-products for royalty value purposes.

* The Secretary elected not to appeal the District Court’s require-

ment of dual accounting for Producer Defendants who owned no

interest in Extraction Plants and received no revenue from ex-

tracted by-products. Rather, the Secretary argued that it had inde-

pendently exercised its administrative discretion to require all

lessees to dually account for Indian royalties. As pointed cut in

LEA AO et te a = RA

5

on February 24, 1984, as to the obligation of Exxon and

the other Producer Defendants to dually account, holding

that the lease provisions and the regulations were clear

and had been construed by the Secretary from 1950 to

1979, without exception and without variation, to require

dual accounting only in instances where the lessee owned

the processing plant or received additional revenue from

the by-products extracted at the plant. 728 F.2d at 1558

(Jt. App. 24a). The three-judge panel further held that

there was no abuse of discretion by the Secretary in de-

termining the royalty which had in fact been billed to

and paid by Exxon and the other Producer Defendants

and that there was no indication of any action by the

Secretary in the record which could be characterized as

arbitrary or capricious. 728 F.2d 1560 (Jt. App. 29a).

Ultimately, the three-judge panel concluded that there

was “no basis for the trial court’s determination as to

fiduciary standards.” 728 F.2d at 1560. (Jt. App. 30a).

On rehearing, the Court of Appeals issued an en banc.

opinion on January 23, 1986, wherein it reversed the

panel decision and adopted the dissenting opinion of

Judge Seymour who had emphasized, without comment,

that “the Secretary has adopted the view that interpret-

ing the royalty terms to require dual accounting by the

Jicarilla’s lessees is reasonable” and “in accoordance, so

far as it goes, with the trial court’s holding” 728 F.2d

at 1566 (Jt. App. 48a). In fact, the Secretary’s change

in interpretation was compelled by the District Court’s

Order (Jt. App. 189a) and was not voluntary at all.

Petitioner Exxon seeks review of the en banc opinion and

judgment of the Tenth Circuit.

Judge Seth’s dissenting opinion in the Court of Appeals en banc

decision, filed January 23, 1986, the leases involved in this action

are the only Indian or public land leases in the country where dual

accounting is required by the Secretary for non-plant owner lessees.

(Jt. App. 12a-13a) In addition, the Secretary’s recently pro-

posed regulations do not require dua! accounting as ordered by the

en banc decision of the Court of Appeals. (Jt. App. 357a, 370a-374a).

6

REASONS FOR GRANTING THE WRIT

I. In establishing a specific fiduciary duty on the part

of the Secretary to always maximize royalties payable

te the Indi#ss, the Tenth Circuit fails to recognize the

United Staiws Supreme Court’s mandate in Mitchell Il

that the contours of any fiduciary duty be clearly

established by a statute or regulation.

The Tenth Circuit, sitting en banc, found that the Sec-

retary breached his fiduciary duty to the Tribe because

the Secretary did not interpret the oil and gas leases and

pertinent regulations so as to maximize immediate royal-

ties for the Tribe. 728 F.2d at 1569 (Jt. App. at 48a).

The Tenth Circuit relies on United States v. Mitchell,

463 U.S. 206(1983) [Mitchell IT] but incorrectly applies

the principles of Mitchell IT and possibly misconstrues the

holding of Mitchell II.

Mitchell II holds that there is no context specific fi-

duciary duty to the Indians absent a statute or regula-

tion which clearly establishes the fiduciary duty and

“define[s] the contours” of the fiduciary responsibilitie:

applicable to the particular situation {emphasis added].

Id. at 224. Contrary to Mitchell II, the Tenth Circuit im-

posed a special fiduciary duty upon the Secretary to in-

terpret the lease and regulations so as to maximize im-

mediate royalties to the Tribe without pointing to any

statute or regulation which specifically defines the con-

tours of the fiduciary duty as requiring an immediate

maximization of royalties.

Prior to Mitchell II, this Court in United States v.

Mitchell, 445 U.S. 5385 (1980) [Mitchell 1], held that the

General Allotment Act created only a limited trust re-

lationship between the United States and individual In-

dian allottees, which did not impose any duty upon the

government to manage timber resources. Id. at 542.

In Mitchell II, on the other hand, the Supreme Court

held that certain other statutes did establish a fiduciary

7

responsibility on the part of the United States to manage

Indian timber resources. Mitchell II, supra at 225. The

Court stated that “a fiduciary relationship necessarily

arises when the Government assumes such elaborate con-

trol over forests and property belonging to Indians.”

Id. The Court described the Secretary’s role in the sale

of timber from Indian lands as “pervasive.” Jd. at 219.

The distinction between the statutory framework which

did create a fiduciary obligation on the part of the Secre-

tary to manage Indian timber resources in Mitchell II,

and the statutory framework which did not create such

an obligation in Mitchell I, was the degree of control over

Indian timber resources granted to the government by

each of the two different sets of statutes.

The Secretary exercises far less control over oil and

gas resources on Indian lands than he does over timber

resources. Wherers the Secretary has total control over

the management of unallotted Indian timber resources,

25 U.S.C.S. § 406(a) (1983), he exercises only super-

visory and regulatory control over Indian management of

unallotted Indian oil and gas resources. 25 U.S.C.S.

§ 396a et seg. (1983).

Unlike the “pervasive” control exercised by the Secre-

tary in managing timber resources, Indians exercise sig-

nificant control over the management and exploitation of

their oil and gas resources. The leasing of unallotted

Indian lands for mining purposes, including oil and gas,

is initiated by the tribal council or other authorized

spokesman for the Indians. 25 U.S.C.S. § 396a. While

leases are subject to approval by the Secretary, id., fol-

lowing the initial decision to grant oil and gas leases,

the Indians retain a significant role in making and su-

pervising such leases. Although leases are generally sold

according to standard procedures prescribed by the Sec-

retary for public lands in general, a lease may be made

by private negotiations with the consent of the tribal

council or other governing tribal authorities. 25 U.S.C.S.

§ 396b.

8

Furthermore, the Court in Mitchell II was able to

point to specific statutes and regulations which defined

the contours of the Secretary’s duty to the Tribe in

managing timber resources. For example, the Court

pointed to $8 of the 1910 Act, as amended, which “ex-

pressly mandates that sales of timber from Indian trust

lands be based upon the Secretary’s consideration of the

‘needs and best interests of the Indian owner and his

heirs’ and that proceeds from such sale be paid to own-

ers ‘or disposed of for their benefit,’ and that the govern-

ment has specifically recognized its duties in ‘managing

the Indian forests so as to obtain the greatest revenue

for the Indians consistent with a proper protection and

improvement of the forests.’” Mitchell II, supra at 220,

citing 25 U.S.C.S. § 406(a) and U.S. Office of Indian Af-

fairs, Regulations and Instructions for Officers in Charge

of Forests on Indian Reservations 4 (1911). No such

statutes or regulations exist which require the Secretary

to interpret regulations such as 30 C.F.R. § 221.50 (1981),

a regulation which applies to calculating royalties on all

public lands, not just Indian lands,° in such a way as to

maximize immediate royalties to the Indians to the ex-

clusion of other lessors. In Nevada v. United States, 463

U.S. 110 (1983), this court specifically held:

The government does not “compromise” its obliga-

tion to one interest that Congress obliges it to repre-

sent by the mere fact that it simultaneously performs

another task for another interest that Congress has

obliged it by statute to do.

530 C.F.R. Part 221 (Jt. App. 238a) applies to all public lands,

not just Indian lands, yet the Tenth Circuit interprets 30 C.F.R.

§ 221.50 as requiring the Secretary to choose the accounting method

which maximizes immediate royalties to the Indians, 728 F.2d at

1568 (Jt. App. 47a-48a), in effect discriminating against non-

Indian lessors. As Judge Seth noted in his dissent to the per

curiam opinion, “these are the only Indian or public lands in the

country where dual accounting is required.” 782 F.2d at 861 (Jt.

App. 18a).

—— eo

9

Id. at 128. Indeed, the Secretary must consider all of his

obligations, not just those that solely benefit the Indians

as the Tenth Circuit now holds.

In Montana v. Blackfeet Tribe of Indians, 471 USS.

, 85 L.Ed.2d 753, 105 S.Ct. (1985), this Court

delineated the three goals of the 1938 Mineral Leasing

Act as follows:

As the Court of Appeals recognized, Congress had

three major goals in adopting the 1938 Act: (i) to

achieve “uniformity so far as practicable of the law

relating to the leasing of tribal lands for mining

purposes,” S. Rep. 2; HR. Rep. 1872, 75th Cong. 3rd

Sess., 1 (1938); (ii) to “bring all mineral leasing

matters in harmony with the Indian Reorganization

Act,” S. Rep. 3; HR. Rep. No. 1872, supra, at .

and (iii) to ensure that Indians receive “the greatest

return from their property.” S. Rep. 2; HR. Rep.

No. 1872, supra, at . 85 L.Ed.2d at 760 n. 5.

Id. 85 L.Ed.2d at 760, n. 5. The Tenth Circuit’s en bane

decision does not advance any of the above-referenced

goals. Firstly, no uniformity is established since the

Jicarilla Apache Reservation is the only tribal land where

dual accounting is imposed on all lessees. See Judge

Seth’s dissent, 782 F.2d at 861 (Jt. App. 12a). Secondly,

the decision does not tend to “bring all mineral leasing

matters in harmony with the Indian Reorganization Act.”

Congress passed the Indian Reorganization Act to facil-

itate the Indians’ ability to compete in the private busi-

ness world. F. Cohen, Handbook of Federal Indian Law,

325 (1982 ed.). The Tenth Circuit’s en banc opinion actu-

ally places the Tribe at a competitive disadvantage. See

discussion of same infra at Part VII. Thirdly, the Tenth

Circuit’s en bane decision does not insure that Indians

receive “the greatest return from their property.” Con-

sidering only the short-term maximization of revenue does

not necessarily insure long-term maximization of revenue.

See discussion of same infra at Part II. Indeed, the legis-

lative history does not impose a duty upon the Secretary

10

to interpret the leases and regulations as requiring short-

term royalty maximization, to the exclusion of all other

considerations. Before such a duty is required, Mitchell

IT requires that Congress “clearly establish” such a duty.

Id., 463 U.S. at 225.

Since a grant of certiorari is appropriate in cases in

which a Court of Appeals has misconstrued, misapplied

or misconceived an applicable Supreme Court opinion, it

it appropriate in this case in light of the Tenth Circuit’s

misconception and misapplication of the principles in

Mitcheli II. See, Schlude v. Commisisoner, 372 U.S. 128,

130 (1963), and Wilkinson v. United States, 365 US.

399, 401 (1961).

II. The Tenth Circuit’s application of the principles set

forth in Mitchell I and Mitchell II substantially and

materially differ from the application given the same

principles by the United States Claims Court.

In Navajo Tribe of Indians v. United States, 9 Cl. Ct.

336 (1986), the Court of Claims reiterated the standards

set forth by it in United States v. Mitchell, 229 Ci. Ct.

9, 664 F.2d 265 (1981), whereby the Secretary’s actions

were to be judged by

[t]he normal standards for government fiduciaries

were their actions in good faith and within the realm

of their acceptable discretion, or were they arbitrary,

capricious, an abuse of discretion, or contrary to

law?

Id., 664 F.2d at 274. The Court equated the “prudent

man standard”, essentially a “negligence standard’’, to

the “arbitrary and capricious” standard as the proper

standard for reviewing the Secretary’s actions:

Defendant’s conduct relative to this claim should

be measured generally by the standard applicable to

private trustees. In managing the trust, a trustee is

required to use “the care, skill, prudence and dili-

gence of an ordinarily prudent man engaged in

11

similar business affairs and with objectives similar

to those of the trust in question” [citation omitted].

Essentially, this is a negligence standard. Under the

circumstances of this claim, the Court would reach

the same result using an arbitrary and capricious

standard [emphasis added].

Navajo Tribe of Indians, supra at 390. This Court ap-

plied the same principle in United States v. Mason, 412

U.S. 391 (1973), holding that a private fiduciary and,

consequently, the government when acting as an Indian

trustee, must exercise such care and skill as a man of

ordinary prudence would exercise in dealing with his

own property. Id. 412 U.S. at 398.

The Claims Court in Navajo Tribe of Indians, supra,

further held that while the government is generally held

subject to a fiduciary duty in its management of In-

dian property, “the United States does not have a gen-

eral obligation to maximize income from tribual re-

sources [emphasis added]. Jd. at 412. The Court cited

an earlier case, Navajo Tribe v. United States, 610 F.2d

766 (Ct. Cl. 1979), in which the Court held:

There is no general obligation, as distinct from an

express obligation imposed by statute, agreement,

or the iike, for the government to make the plain-

tiff’s property productive...

Navajo Tribe of Indians, supra, 9 Ct. Cl. at 412, citing

619 F.2d at 768.

In the 1986 Navajo case, the Court also noted that the

same rule was followed by the Indian Claims Commis-

sion in Blackfeet and Gros Ventre Tribes of Indians.

v. United States, 32 Ind. Cl. Comm. 65, 77 (1973), in

which the Commission held that there was no general

law that requires the government to administer Indian

lands for profit at all. Navajo Tribe of Indians, supra,

9 Ct. Cl. at 412, footnote 73.

12

In Navajo Tribe of Indians v. United States, 9 Ct. Cl.

227 (1985), the Claims Court recognized that immediate

revenue maximation may conflict with the goal of long

term maximation of return on the Indian resources.

The Claims Court held that it was within the Secretary’s

discretion to fail to charge rental fees for prospecting for

minerals on tribal lands, since charging rental fees

merely to prospect would have discouraged mineral pros-

pecting and thereby reduced the net return on Indian

mineral resources. Id. at 242. Similarly, the Claims

Court in Yankton Sioux Tribe v. United States, 623 F.2d

159 (Ct. Cl. 1980), held that mere evidence that the

trustee received less than market value for trust prop-

erty, without more, does not even establish negligence

or other breach on the part of the trustee. Jd. at 164.

Furthermore, the fiduciary’s performance of his duties

rust be evaluated at the time he acted, rather than judg-

ing the ideal course of action with the benefit of hind-

sight. Navajo Tribe of Indians, supra, 9 Ct. Cl. at 261;

accord Nance v. Environmental Protection Agency, 645

F.2d 701, 711 (9th Cir. 1981).

In the present case, the Tenth Circuit simply states

that the Secretary failed to fulfill his fiduciary obliga-

tions by failing to interpret the leases and pertinent

regulations so as to maximize immediate royalty income

for the Tribe. 728 F.2d at 1569 (Jt. App. 48a). The

Tenth Circuit does not state the standard by which the

fiduciary conduct of the Secretary was judged, nor does

it make any attempt to evaluate the Secretary’s conduct

in the context of the time at which the Secretary acted. |

The Tenth Circuit’s refusal to apply the prudent man

standard in judging the Secretary’s conduct, and its ‘

finding that the Secretary had a positive duty to inter-

pret the leases and regulations so as to maximize immedi-

ate royalties to the Tribe, absent a specific regulation or

statute requiring such a duty, conflicts with the prece-

dent established by the Court of Claims, and is proper

——_

13

for review by this Court. See, United States v. Hopkins,

427 U.S. 123, 124, 49 L.Ed.2d 361, 96 S.Ct. 2588 (1976) ;

Commissioner v. Idaho Power Co., 418 U.S. 1, 41 L.Ed.2d

535, 94 S8.Ct. 2757 (1974).

Ill. The Tenth Circuit’s standard of review of the Secre-

tary’s actions, which, to the exclusion of all other

considerations, looks only at whether or not the Sec-

retary maximized immediate royalties to the Indians,

is contrary to the standard of review set forth in 5

U.S.C.S. § 706(2)(A), the standard of review enunciated

by the United States Supreme Court in Udall v. Tall-

man and that enunciated in other Circuit Court cases.

Congress has declared that a court may set aside

agency action only upon a finding that the action is

“arbitrary, capricious, an abuse of discretion, or other-

wise not in accordance with law.” 5 U.S.C.S. § 706(2)

(A). While this statement in and of itself is not that

illuminating, Supreme Court cases and Circuit Court

cases clearly articulate the proper standard of review.

For example, this Court, in Udall v. Tallman, 380 U.S. 1

(1965), discussed at length the standard for reviewing

the Secretary’s interpretation of statutes and regulations.

Specifically, this Court held:

When faced with a problem of statutory construc-

tion, this Court shows great deference to the in-

terpretations given the statute by officers or agents

charged with its administration. ‘To sustain the

Commission’s application of this statutory term, we

need not find that its construction is the only reason-

able one, or even that it is the result we would have

reached had the question arisen in the first instance

in judicial proceedings. [citations omitted]

When the consruction of an administrative regula-

tion rather than a statute is in issue, deference is

even more clearly in order. . . . [The] ultimate

criterion is the administrative interpretation, which

becomes of controlling weight, unless it is plainly

erroneous, or inconsistent with the regulation’

[citation omitted] [emphasis added].

14

Id. at 16. The Supreme Court in Udall, supra, put great

emphasis on the fact that the regulation at issue had

been given a consistent construction by the Secretary or

a long period of time:

If not the only reasonable construction of the Act, it

is at least an admissible one. It therefor comes

within the rule that the practical construction given

to an Act of Congress, fairly susceptible of different

constructions, by those charged with the duty of

executing it is entitled to great respect and, if acted

upon for a number of years, wili not be disturbed

except for cogent reasons [emphasis added].

Id. at 18.

The facts in the instant case are similar to those in

Udall in that: (1) the Secretary’s construction of the

regulations and leases was reasonable, as is conceded

by the Tenth Circuit, 728 F.2d at 1569 (Jt. App. 48a),

(2) the construction was consistent for approximately 25

years, 728 F.2d at 1558 (Jt. App. 24a), and (3) the |

Secretary’s construction was relied upon by lessees |

throughout that period. Applying the principles of this

Court in Udall, the Secretary’s construction of the leases

and regulations should have been upheld.

As this Court stated in Badderton v. Frances, 432

U.S. 416 (1977), when Congress entrusts the head of an

administrative agency the primary responsibility for in-

terpreting statutory terms, the reviewing court is not

free to set aside that agency’s actions simply because the

court would have interpreted the statute in a different

manner. Id. at 425. More recently, in Mountain States

Telephone & Telegraph Co. v. Pueblo of Santa Ana, 472

US. , 86 L.Ed.2d 168, 105 S.Ct. (1985), this

Court held that the Secretary’s long accepted interpreta-

tion of Section 17 of the Pueblo Lands Act, 43 Stat. 636

(1924), was “entitled to very great respect.” Id. 86 L.Ed.

2d at 182. The Secretary’s interpretation was upheld

despite the dissent’s argument that “when faced with two

SG eae aera mee are ao erence a iat oe arene

15

such conflicting interpretations, courts must resolve am-

biguities in favor of preserving Indian rights and safe-

guards.” Jd. 86 L.Ed.2d at 197, n. 66. The Tenth Cir-

cuit’s en bane opinion adopts a similar argument of

Judge Seymour.

The Ninth Circuit in Continental Oil Co. v. United

States, 184 F.2d 802 (9th Cir. 1950) specifically recog-

nized the realm of discretion accorded the Secretary of

the Interior when he has been granted the power to fix

the value of gas for royalty purposes. Jd. at 821. Spe-

cifically, the Court held:

[The Secretary of the Interior’s] determination is

valid in the absence of fraud or mistakes so gross

as to imply bad faith.

Id.

In Morris v. Andrus, 593 F.2d 851 (9th Cir. 1978),

the Ninth Circuit pointed out that the district court in

that case correctly noted that courts “give great weight

to any reasonable construction of a regulatory statute

adopted by the agency charged with the enforcement of

that statute,” quoting Investment Co. Institute v. Camp,

401 U.S. 617, 626-27 (1971). Morris, supra at 853. In-

deed, the Ninth Circuit has consistently held that in re-

viewing decisions of the Secretary, the court exercises

a limited standard of review and cannot merely substitute

its judgment for that of the Secretary. Melluzzo v. Watt,

674 «2d 819, 820 (9th Cir. 1982). Baker v. United

States, 613 F.2d 224, 226 (9th Cir. 1980), cert denied,

449 U.S. 932 (1980). Rather, “great deference is shown

to an administrative agency’s interpretation of the law

which it is charged with administering.” Ramstad v.

Hodel, 756 F.2d 1279 (9th Cir. 1985).

In-light of the Tenth Circuit’s finding that “the Secre-

tary’s construction of the royalty regulation is reason-

able” (Jt. App. 48a), and its refusal to accept that

construction, the Tenth Circuit employs a standard of

16

review in direct conflict with Supreme Court cases and

other Circuit Court cases that have discussed the stand-

ard for reviewing the Secretary’s actions.

The Tenth Circuit, too, prior to its current decision,

has held, in accordance with the Supreme Court and

other Circuit Court decisions, that a court cannot substi-

tute its discretion for that of the Secretary. United

States v. Ohio Oil Co., 163 F.2d 633 (10th Cir. 1947).

In Ohio Oil Co., the oil and gas leases executed by the

United States under the Mineral Leasing Act authorized

the Secretary to determine the reasonable minimum value

of royalty oil. Id. at 641. The Court held:

The trial court did not base its findings of arbi-

trariness on the record adduced before the Secre-

tary, but conducted an independent hearing for the

purpose of determining for itself the reasonable

value of the oil in question. We do not think the

trial court was at liberty to disregard or ignore the

factual basis upon which the Secretary proceeded,

nor was it at liberty to substitute its concept of

value for that of the Secretary. We should remember

that the contract authorized the Secretary, not the

Court, to determine the reasonable minimum value

of the royalty oil. [emphasis added].

Id. As in Ohio Oil Co., the leases in our case also au-

thorized the Secretary to determine the amount of royalty

to be paid on the leases. (Jt. App. 379a).

The fact that the Tenth Circuit in this case made a

specific finding that the Secretary of the Interior’s action

was reasonable based upon the regulations, but yet sub-

stituted its discretion for that of the Secretary, creates a

departure from the usual course of judicial proceedings

and this Court’s power of supervision is called upon

pursuant to Supreme Court Rule 17.1(a).

17

IV. The Tenth Circuit’s standard of review which considers

only whether or not the Secretary maximized immedi-

ate royalties to the Indians should either be reversed

or clarified because of its importance in the manage-

ment of both public lands and Indian lands, and be-

cause it is inconsistent with the Secretary’s long-

standing interpretation of the pertinent regulations.

The Claims Court has recognized that an immediate

revenue maximization may conflict with the goal of long

term maximization of return on the Indian’s resources.

Navajo Tribe of Indians v. United States, 9 C.Ct. 227,

242 (1985). See discussion of same supra at Part 2.

Similarly, the District Court of California, in Pan Amer-

ican Petroleum Corp. v. Udall, 192 F.Supp. 626 (D.Cal.

1961), held that it was wrong for the Secretary to

require an oil and gas lessee adjacent to an Indian reser-

vation to pay the Indian/lessors compensatory royalties

in an amount based on 100% of the production of the

lessees’ wells. Id. at 629. The Court held that the Secre-

tary’s actions were arbitrary and capricious even though

the Secretary had chosen the alternative that maximized

the immediate profits to the Indians because the Secre-

tary did so at the expense of the adjoining lessees. Jd. at

629-630.

Congress has granted the Secretary the power to prom-

ulgate the regulations relating to leases on Indian lands.

25 U.S.C.S. § 396d. Clearly, the Tenth Circuit is not the

proper body to make a decision as to what is in the best

interest of the Indian tribes. The Tenth Circuit does not

have the data or expertise to make decisions reserved for

the Secretary by Congress. Congress passed the Indian

Reorganization Act to enhance the ability of the Indian

tribes to do business in their loca] communities by in-

creasing the confidence of private parties doing business

with an Indian tribe. F. Cohen, Cohen’s Handbook of

Federal Indian Law, 325-326 (1982 ed.). The Tenth Cir-

cuit’s decision declares that the Secretary must, in all

cases, act to maximize royalties for the Tribe, without re-

18

gard to any other considerations, when resolving disputes

involving, or making rules governing, tribal business.

728 F.2d at 1566-1567 (Jt. App. 42a, 44a). This stand-

ard necessarily increases the risk perceived by a party

doing business with an Indian tribe. If the Tenth Cir-

cuit’s decision is allowed to stand, the relationship be-

tween the Indian tribes and third parties doing business

with the Indian tribes will be jeopardized. Since the

Tenth Circuit’s decision is of utmost importance to the

utilization of the public lands, it is proper for this Court

to grant this Petition for Writ of Certiorari. See, United

States v. Coleman, 390 U.S. 599, 601 (1968).

Another reason this case is important for considera-

tion by this Court is that from 1950 to 1979, the Secre-

tary construed the pertinent lease provisions and regula-

tions as requiring “dual accounting” not by all lessees,

but only in instances where the lessee had an interest in

gas processing plants, or received additional compensa-

tion for the sale of “wet” gas. 728 F.2d at 1558 (Jt.

App. 24a). Since the Tenth Circuit’s decision below is

inconsistent with the well-established construction given

the pertinent regulations for almost 25 years by the ad-

ministrative agent charged with their enforcement, this

Court’s grant of Petitioner’s writ of Certiorari is appro-

priate. See, Morton v. Ruiz, 415 US. 199, 201-202

(1974).

V. The Tenth Circuit’s affirmation of the District Court’s

mandate requiring the Secretary to apply dual account-

ing, both prospectively and retroactively, violates the

well-established rule enunciated in various Circuit

Courts that such a change should have only prospec-

tive effect.

The Tenth Circuit affirmed the District Court’s Order

compelling the Secretary to effect, retroactively, an in-

terpretation of both 25 C.F.R. § 211.13 and 30 C.F.R.

§ 221.50, as well as the leases, contrary to the interpreta-

tion given to the leases and regulations by the Secretary

19

for approximately 25 years. 479 F. Supp. 549-551 (Jt.

App. 126a-1381a). The Secretary’s change in policy neces-

sarily embraces royalty accounting procedures for all oil

and gas producers holding leases on the Reservation, in-

cluding Petitioner Exxon’s herein.

The District Court’s decision in this case prompted the

Secretary to issue its Order compelling dual accounting,

both retroactively and prospectively, as to all producers

on the Reservation, whether owners of processing plants

or not. (Jt. App. 139a). Due to the new interpretation

of the leases and regulations mandated by the District

Court, all oil and gas producers holding leases on the

Reservation are now subject to dual accounting even if

the lessee owns no interest in a processing plant.

Although the Tenth Circuit places substantial reliance

on the Secretary’s ostensible “change of mind”, 728 F.2d

at 1566 (Jt. App. 48a), it is clear that it was the Dis-

trict Court’s mandate that prompted the Secretary’s

change in policy. As Judge Seth in his dissent to the

en bane decision issued by the Tenth Circuit notes, the

Secretary’s change in policy was anything but voluntary.

As Judge Seth states in his dissent to the en banc opin-

ion:

Again, there is no administrative record to support

such a change. The conclusion must be reached that

the change was not an administrative change but

was brought about by the trial court’s order.

782 F.2d at 861 (Jt. App. 12a-18a).

Also, the Associate Solicitor’s letter of July 20, 1981

points out the involuntary nature of the change as does

the IBLA opinion rendered in Supron Energy Corp. et al,

46 IBLA 181 (March 21, 1980) ,° which states:

[w]e would be constrained to affirm the Area Super-

visor’s decision in view of the interim holding of the

*This administrative appeal involved only the obligation of

Supron to dually account for royalties during the short period of

time that it owned the Lybrook Plant.

20

United States District Court for the District of New

Mexico . . ., which inter alia, orders Supron to

utilize the dual accounting system.

(Jt. App. 194a).

The Ninth Circuit in Continental Oil Co., supra, a

case directly on point, specifically recognized that when

a court mandates a change in the Secretary’s method of

computing royalties, at a higher price, such a change

should have prospective operation only. Jd., 184 F.2d at

821. Similarly, in McDonald v. Watt, 653 F.2d 1035 (5th

Cir. 1981), the Fifth Circuit held that the Secretary’s

change in interpretation of regulations relating to oil and

gas lease applicants constituted a new rule established

through an adjudication. Id. at 1042. The Fifth Circuit,

however, held that since the old rule had been reasonably

relied upon, the new rule should be given prospective

effect only. Jd. It was an abuse of discretion for the Sec-

retary to apply the new rule to those who were not

parties to the administrative adjudication establishing

the new rule. Id. Accord, Retail, Wholesale & Depart-

ment Store Union v. NLRB, 466 F.2d 380 (D.C. Cir.

1972); SEC v. Chenery Corp., 332 U.S. 194 (1947).

The Tenth Circuit itself held in Stewart Capital Corp.

v. Andrus, 701 F.2d 846 (10th Cir. 1983), that where

a new rule is established by the Secretary and constitutes

an abrupt departure from a well-established practice,

such a rule should only have prospective effect. Id. at

848. This is particularly true where a party against

whom the new rule is applied relied extensively on the

former rule. Jd. Indeed, reliance seems to be the all

important factor in determining that a new rule should

only have prospective effect. Buccaneer Point Estates,

Inc. v. U.S., 729 F.2d 1297, 1299 (11th Cir. 1984). As

the District of Columbia Circuit recently stated:

[A]n agency may not impose liability retroactively

when the individual has acted in accordance with the

agency’s own announced interpretation of the statute.

21

International Union, United Automobile, Aerospace &

Agricultural Implement Workers of America v. Brock,

783 F.2d 237, 248 (D.C. Cir. 1986).

It is undisputed that for approximately 25 years the

Secretary required that lessees who did not own process-

ing plants should accourit for royalties based only upon

the BTU method of accounting. 728 F.2d at 1558 (Jt.

App. 24a). When the Secretary, in accordance with the

District Court’s mandate, began to apply the dual account-

ing method to lessees who did not operate processing

plants, the Secretary significantly departed from his pre-

vious practice. This retroactive application of a new rule,

despite reliance by Petitioner Exxon on the old rule for

many years, violates the well-established rule that such

a change should only have prospective application.

VI. The Tenth Circuit’s affirmation of the District Court’s

review of the Secretary’s action with respect to Peti-

tioner Exxon, absent any administrative record with a

reasoned analysis as to why dual accounting should

or should not be applied to Petitioner Exxon, violates

well-established principles of administrative law.

When the Secretary began requiring all lessees on the

Reservation to pay royalties based upon the dual account-

ing method, there was no administrative record docu-

menting the reasons for such a change. See Judge Seth’s

dissent. 782 F.2d at 861 (Jt. App. 12a-13a). Later, there

was an administrative adjudication which determined that

Supron, during the time period it owned an interest in

the Lybrook Plant, was subject to dual accounting. Su-

pron Energy Corporation, et al., 46 IBLA 181 (March

21, 1980). See footnote 6 above. There is no adminis-

trative record which a court can review to determine

whether the agency abused its discretion with respect to

the other non-plant owner lessees, including Petitioner

Exxon.

In Motor Vehicle Manufacturer’s Assoc. v. State Farm

Mutual, 463 U.S. 29 (1983), this Court invalidated such

22

agency action reasoning that an agency may not change

a settled course of behavior without cogently explaining

why it has departed from its normal procedure:

There are no findings and no analysis here to justify

the choice made, no indication of the basis on which

the [agency] exercised its expert discretion. We are

not prepared to, and the Administrative Procedure

Act will not permit us to, accept such .. . practice

. . . Expert discretion is the lifeblood of the ad-

ministrative process, but, “unless we make the re-

quirements for administrative action strict and

demanding, expertise, the strength of the modern

Government, can become a monster which rules with

no practical limits on its discretion.” [Citation omit-

ted] [emphasis added].

Id. at 48. This Court further held that:

A “settled course of behavior embodies the agency’s

informed judgment that, by pursuing that course,

it will carry out the policies committed to it by Con-

gress. There is then, at least, a presumption that

those policies will be carried out best if the settled

rule is adhered to. Atchison, T. & S.F. R. Co. v.

Wichita Board of Trade, 412 U.S. 800, 807-808 (1973).

Accordingly, an agency changing its course by re-

scinding a rule is obligated to supply a reasoned

analysis for the change beyond that which may be

required when an agency does not act in the first

instance [emphasis added].

Id. at 41-42.

As Judge Seth stated in his dissent to the Tenth Cir-

cuit’s en banc opinion:

If the Secretary independently came to a decision to

require dual accounting and to so change the long

construction of the lease and regulations it was

necessary for him to articulate the reasons for the

change.

782 F.2d 855 (Jt. App. 12a-13a). Since there is no ad-

ministrative record for review by a court with respect

eA a CURD RA ey el taka BERN ad on wanna toe

23

to Petitioner Exxon, the Tenth Circuit’s review of the

District Court’s mandate requiring the Secretary to apply

dual accounting to all lessees on the Reservation, retro-

actively and prospectively, constitutes a dramatic depar-

ture from well-established administrative law principles.

Hence, the District Court’s review of the Secretary’s ac-

tion with respect to Petitioner Exxon, absent any admin-

istrative record with a reasoned analysis as to why dual

accounting should or should not be applied to Petitioner

Exxon, should not be allowed to stand.

VII. The Tenth Circuit has enunciated a standard of review

which allows a court to substitute its discretion for

that of an administrative agency in violation of the

separation of powers doctrine.

In the present case, neither of the lower courts has

made a finding that the Secretary of the Interior acted

arbitrarily or capriciously or otherwise in violation of 5

U.S.C.S. § 706(2) (A). 728 F.2d at 1558 (Jt. App. 25a).

In fact, the Tenth Circuit specifically found that the Sec-

retary’s decision with regard to accounting of royalt’ ;

was reasonable. 728 F.2d at 1569 (Jt. App. 48a). % e

District Court, nevertheless, substituted its discretion for

that of the Secretary in direct violation of 5 U.S.CS.

§ 706(2) (A).

In Securities and Exchange Commission v. Chenery

Corporation, 332 U.S. 194 (1947) [Chenery II}, this

Court held that:

[A] simple but fundamental rule of administrative

law ...is... that a reviewing court, in dealing

with a determination or judgment which an adminis-

trative agency alone is authorized to make, must

judge the propriety of such action solely on the

grounds invoked by the agency. If those grounds are

inadequate or improper, the court is powerless to

affirm the administrative action by substituting what

it considers to be a more adequate or proper basis.

To do so would propel the court into the domain

24

which Congress has set aside exclusively for the

administrative agency [emphasis added].

Id. at 196. Accord, Burlington Truck Lines, Inc. 2.

United States, 371 U.S. 156, 169 (1962). Indeed, when

Congress provides a specific mechanism for a court to

review agencies decisions, and the court reviews an

agency’s decision without adhering to the mechanism pro-

vided by Congress, the separation of powers doctrine

upon which our government is founded is threatened.

In Public Service Commission v. Havemeyer, 296 U.S.

506 (1936), this Court warned a lower court that it is

not to substitute its own views for that of an agency

because, in so doing, this court is performing legislative,

executive, and administrative functions. Jd. at 517-518.

Additionally, this Court has held that for a court to

upset an accounting order, the accounting method being

employed must be “so entirely at odds with the funda-

mental principles of correct accounting . . . as to be the

expression of a whim rather than an exercise of judg-

ment.” United States v. New York Telegraph Co., 326

U.S. 688 (1944).

The lower courts and the Department of the Interior

were both established by Congress, and Congress has

provided a specific mechanism pursuant to which courts

may review an agency’s actions upon a determination

that those actions are arbitrary and capricious. 5 U.S.C.S.

§ 706(2) (A). If the action of the agency is within an

area which Congress has entrusted to the agency, a court

may not set aside a decision of the agency because it

would have reached a different result, nor is the court

empowered to do so. As this Court stated in Chevron,

U.S.A., Inc. v. Natural Resources Defense Council, Inc.,

104 S.Ct. 2778, 52 USLW 4845 (1984), citing both

Chenery II, supra and Udall v. Tallman, supra:

If the intent of Congress is clear, that is the end of

the matter; for the court, as well as the agency, must

give effect to the unambiguously expressed intent of

Congress. Jf, however, the court determines Con-

25

gress has not directly addressed the precise question

at issue, the court does not simply impose its own

construction on the statute, as would be necessary in

the absence of an administrative interpretation.

Rather, if the statute is silent or ambiguous with

respect to the specific issue, the question for the court

is whether the agency’s answer is based on a per-

missible construction of the statute [emphasis added].

Id., 52 USLW at 4847. Since neither 30 C.F.R. 221.50

nor 25 C.F.R. 211.13 specifically requires the Secretary to

maximize immediate royalty to the Indians, nor has Con-

gress clearly expressed this intention, the Secretary’s in-

terpretation should stand in light of the Tenth Circuit’s

finding that the Secretary’s interpretation was reasonable.

728 F.2d at 1555 (Jt. App. 48a).

The Jicarilla Apache Tribe is itself organized pursuant

to Congressional statute. 25 U.S.C.S. §§ 476-479 (1983).

In passing this Act, Congress intended to allow the tribes

a certain amount of freedom to enter and compete in the

private business world. F. Cohen, Cohen’s Handbook of

Federal Indian Law, 325 (1982 Ed.). This Congressional

purpose was hindered by the fact that creditors were re-

luctant to deal with tribes in the fear that tribal sovereign

immunity would prevent the enforcement of contracts. Jd.

To resolve this problem, Congress authorized the tribes to

organize into separate entities. One, a political governing

body to exercise the powers of self-government pursuant

to §16 of the Indian Reorganization Act and two, a

tribal corporation to engage in business transactions pur-

suant to §17 of the same Act. Id. Likewise, Congress

determined that the Secretary had the expertise to decide

matters concerning the Indians. 43 U.S.C.S. § 1457

(1981). Nevertheless, the Tenth Circuit, in adopting

Judge Seymour’s opinion in the District Court, ueter-

mined that “given two reasonable interpretations, Inte-

rior’s trust responsibilities required it to apply whichever

accounting method [BTU or net realization] yields the

Tribe the greatest royalty.” 728 F.2d at 1555 (Jt. App.

26

48a). This determination was made after a determina-

tion that the Secretary’s own interpretation of the regu-

lation was reasonable. Jd.

The majority of the Tenth Circuit made no attempt to

deal with the complexities which the Secretary may have

faced in interpreting the regulations, but simply substi-

tuted its discretion for that of the Secretary. For ex-

ample, if the Secretary had, as the majority now requires,

required dual accounting of all lessees, this may have

discouraged potential lessees without any interest in a

gas processing plant from buying oil and gas leases on

the Reservation. This, in turn, might have decreased

competition in bidding for oil and gas leases, and thereby

reduced the price of such leases, lowering the net returns

to the Tribe on their oil and gas resources. Furthermore,

if the Secretary had required dual accounting of all

lessees only on tribal lands, as the District Court has

ordered, this would have made neighboring public lands

more attractive than the Reservation to lessees.

By substituting its discretion for that of the Secretary,

and by requiring that the Secretary consider only whether

or not his interpretation maximized immediate royalties

to the Indians, the Tenth Circuit violated the separa-

aration of powers doctrine as enunciated by this Court in

Chenery II, supra, and this Court’s grant of Petitioner’s

Writ is appropriate.

VIII. The Tenth Circuit’s decision to afford the Tribe a

remedy against innocent lessees as a result of an

alleged breach of trust by the Secretary is in direct

conflict with the United States Supreme Court deci-

sion in Nevada v. United States.

In Nevada v. United States, 463 U.S. 110 (1983), the

Supreme Court determined that where the government

breaches its fiduciary duty to an Indian tribe, the tribe’s

sole remedy lies against the government. Jd. at 144, Note

16. In Nevada, the United States and Paiute tribe in-

ci ie Hes Ri tin Saha

~ Anca ss 2 has

27

stituted a water rights claim against certain third par-

ties, claiming that an earlier decision regarding the

water rights should be invalidated as the United States

had breached its fiduciary duty to the tribe during the

prior litigation. In the relevant portion of the opinion,

the Supreme Court held:

If in carrying out their role as representatives, the

Government violated its obligations to the Tribe,

then the Tribe’s remedy is against the Government,

not against third parties.

Id.

Clearly, Petitioner Exxon is a third party within the

meaning of Nevada and therefore the claim against it is

improper. Although the Tenth Circuit uses Nevada in its

analysis of the liability issue, it completely misconstrues

Nevada by allowing the imposition of liability against

Petitioner Exxon which is predicated solely on the Sec-

retary’s alleged breach of his fiduciary duty to the Tribe.

479 F. Supp. at 549 (Jt. App. 126a-127a).

This Court’s grant of Petitioner’s Writ of Certiorari

is proper since the Tenth Circuit has misconstrued the

Supreme Court’s holding in Nevada. See, Schlude, supra,

372 U.S. at 180; Wilkinson, supra, 365 U.S. at 401.

IX. The Tenth Circuit’s decision to impose liability upon

innocent third parties is in direct conflict with a long-

standing principle of equity which has been specifically

recognized by this Court and other Circuit Courts of

Appeal.

The Tenth Circuit’s decision is in direct conflict with

the long-standing principle of equity regarding the lia-

bility of a third party who is involved in a breach of

trust. Regarding a third party’s liability for a breach of

a fiduciary with whom he is dealing, the question is al-

ways ‘“‘whether he had actual knowledge that a breach

was being committed .. .” Bogert, Trusts & Trustees

§ 901, 262 (2d ed. rev. 1982). Both the Third Circuit and

28

Fourth Circuit have recognized that a third party must

know that a fiduciary is breaching his trust in his deal-

ings with the third party in order for that third party

to be liable to the beneficiary for the breach of trust.

Matter of Quantum Development Corp., 534 F.2d 582,

540 (8rd Cir. 1975); American Surety Co. v. First Na-

tional Bank, 141 F.2d 411, 413 (4th Cir. 1944). See also

Restatement (Second) of Trusts § 326 (1959).

This long-standing rule of equity has been expressly

applied by this Court to fiduciary dealings between the

Federal Government and Indian tribes. See Seminole

Nation v. United States, 316 U.S. 286, 295 (1942);

United States v. Dann, 470 U.S. , 84 L.Ed.2d 28, 36,

106 S.Ct. (1985). In the instant case, the District

Court made no finding that Petitioner or any of the

lessees knew of the Government’s breach of its fiduciary

duty, and in fact found that:

If the Secretary has breached its fiduciary duty [to

the Tribe] .. . then the Defendants have in fact

breached the terms of the lease, albeit through no

apparent fault of their own. [emphasis added]

479 F. Supp. at 549 (Jt. App. 126a-127a).

The Tenth Circuit’s holding not only violates notions

of justice and fair play by holding an innocent party

liable for the acts of a wrong-doer, it also defeats one

of the most important policies behind the use of fiduci-

aries. Fiduciaries are used by a variety of persons and

entities to represent that person or entity in its dealings

with third parties regarding defined interests or proper-

ties. The appointment of a fiduciary is usually a practi-

cal matter of convenience. The trustee is directed to ad-

minister the interests in order to substitute its sup-

posedly superior judgment for that of the beneficiary.

89 C.J.S. Trusts § 9, 721 (1955). In return, third per-

sons who deal with a fiduciary demand some certainty

that the fiduciary’s acts wi’ be binding upon the bene-

ficiary with respect to that third party.

29

Absent a showing of Petitioner’s knowledge of the Sec-

retary’s alleged breach of fiduciary duty, Petitioner has

done rothing to breach the lease and should not be liable.

The Tenth Circuit’s decision is in direct conflict with

the long-standing principle of equity and the Tribe’s

sole remedy should lie against its fiduciary, the Secre-

tary. Since the Tenth Circuit’s decision jeopardlizes the

relationship between third party lessees dealing with In-

dian lands via the Secretary, this Court’s supervision

and direction is proper. See, Morton v. Ruiz, supra, 415

US. at 201-202.

CONCLUSION

For the foregoing reasons, a writ of certiorari should

issue to review the en banc judgment and opinion of the

Tenth Circuit.

Respectfully submitted,

HAROLD L. HENSLEY, JR.*

HINKLE, Cox, EATON, COFFIELD

& HENSLEY

P.O. Box 10

Roswell, New Mexico 88201

(505) 622-6510

FRANK G. HARMON

BAKER & BOTTS

One Shell Plaza

Houston, Texas 77002

(713) 229-1234

Counsel for Petitioner

Exxon Corporation

* Counsel of record