No. 94-1858
In The Supreme Court of The United States
OCTOBER TERM, 1995
ANNA TWINS SPOTTEDWOLF, ET AL., PETITIONERS
v.
WOODS PETROLEUM CORP., ET AL.
ON PETITION FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE TENTH CIRCUIT
BRIEF FOR THE
DEPARTMENT OF THE INTERIOR
IN OPPOSITION
DREW S. DAYS, III
Solicitor General
LOIS J. SCHIFFER
Assistant Attorney General
ROBERT L. KLARQUIST
DAVID C. SHILTON
Attorneys
Department of Justice
Washington, D.C. 20530
(202)514-2217
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QUESTION PRESENTED
Whether, in exercising his authority to approve or
disapprove proposed agreements to communitize oil
and gas leases affecting Indian lands, the Secretary of
the Interior may reject a proposed agreement on the
ground that it would extend an expiring lease and,
thereby, preclude the Indian lessor from obtaining a
higher return from a new lease in an improved
market.
(I)
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TABLE OF CONTENTS
Opinions below. . . . 1
Jurisdiction. . . . . 1
Statement . . . . 2
Argument . . . . 10
Conclusion . . . . 13
TABLE OF AUTHORITIES          Page
Cheyenne-Arapaho Tribes of Oklahoma v. United States,
966 F.2d 583 (lOth Cir. 1992), cert. denied, 113 S. Ct.
1642 and 1643 (1993) . . . . 8
Cotton Petroleum Corn v. United States Dep'tof
Interior, 870 F.2d 1515(10th Cir.1989) . . . .5, 7, 8
Kenai Oil & Gas, Inc. v. Department of Interior,
671 F.2d 383(10th Cir. 1982) . . . . 2, 4, 5, 6, 8
Wisniewski v. United States, 353 U.S.  901(1957) . . . . 12
Woods Petroleum Corp. v. United States Dep't of
Interior, 18 F.3d 854 (10th Cir. 1994) . . . . 8
Statutes and regulation
Administrative Procedure Act, 5 U.S.C. 701 et seq. . . . 7
Indian Mineral Leasing Act of 1938, 25 U.S.C.
396a-396g . . . . 2
25 U.S.C. 396d . . . . 2
25 C. F. R. 212.24(b) . . . . 2
 Miscellaneous:
Cristyn Eddy, Survey, Land and Natural Resources,
71 Denv. U. L. Rev. 1017(1994) . . . . 2
 (III)
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In the Supreme Court of the United States
  OCTOBER TERM, 1995
        No. 94-1858
ANNA TWINS SPOTTEDWOLF, ET AL., PETITIONERS
                  v.
   WOODS PETROLEUM CORP., ET AL.
ON PETITION FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
    FOR THE TENTH CIRCUIT
   BRIEF FOR THE
DEPARTMENT OF THE INTERIOR
   IN OPPOSITION
      OPINIONS BELOW
The opinion of the court of appeals (Pet. App. 4-1 to
496) is reported at 47 F.3d 1032. The opinion of the
district court (Pet. App. 2-1 to 2-18) is unreported.
   JURISDICTION
The judgment of the court of appeals was entered on
February 9, 1995. The petition for a writ of certiorari
was filed on May 10, 1995. The jurisdiction of this
Court is invoked under 28 U.S.C. 1254(1).
(1)
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  2
       STATEMENT
Under the Indian Mineral Leasing Act of 1938,
25 U.S.C. 396a-396g, the Secretary of the Interior is
responsible for supervising the leasing of minerals
located on lands allotted to Indians. As relevant here,
the Act provides_ that all oil and gas communitization
agreements that encompass restricted Indian lands
must be approved by the Secretary or his designate.
Section 396d of the Act provides in pertinent part:
In the discretion of the said Secretary, any lease
for oil or gas issued under the provisions of
sections 396a to 396g of this title shall be made
subject to the terms of any reasonable cooperative
unit or other plan approved or prescribed by said
Secretary prior or subsequent to the issuance of
any such lease which involves the development or
production of oil or gas from land covered by such
lease.
25 U.S.C. 396d. Interior Department regulations pro-
mulgated pursuant to the Act, 25 C.F.R. 212.24(b),
similarly provide that a communitization agreement
that affects Indian mineral rights is not effective
without the prior approval of the Secretary. This
case concerns the grounds on which the Secretary
may disapprove such an agreement.
___________________(footnotes)
1 Under a "communitization agreement," owners of small
tracts of land agree that each owner will benefit from a well
drilled anywhere within the communitization unit in pro-
portion to the amount of land that the owner contributed to the
unit. See, e.g., Kenai  Oil & Gas, Inc. v. Department of Interior,
671 F.2d 383, 384 (lOth Cir. 1982); Cristyn Eddy, Survey, Land
and Natural Resources, 71 Denv. U. L. Rev, 1017, 1018 n.10
(1994).
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1. In February 1977, the Superintendent of the
Concho Agency of the Bureau of Indian Affairs (BIA)
in the Department of the Interior approved three oil
and gas leases between the successors in interest to
Walking Woman (deceased), as lessors, and the
National Cooperative Refinery Association (National)
as lessee. Pet. App. 2-3 to 24. Each of the leases had
a primary term of five years and provided that it
would remain in force "as much longer thereafter as
oil and/or gas is produced in paying quantities." Id. at
4-6. All three leases contained a "commence drilling
clause," which stated that if the lessee commenced
drilling of a well within the primary term, the term
would be extended, provided that the lessee completed
the well with reasonable diligence, and oil or gas was
found in paying quantities. Id. at 4-6 & n.1. A section
of each lease addressed communitization agreements.
That section provided that the parties would abide by
"any agreement for the cooperative or unit
development of the field or area, * * if and when
collectively adopted by a majority operating interest
therein and approved by the Secretary of the
Interior."  ibid. The BIA subsequently approved
National's assignment of the leases to respondents.
Id. at 47.
2. The primary terms of the leases were to expire
on February 25 and 28, 1982, unless extended by
production or communitization. On January 5, 1982,
despondent Woods Petroleum Corporation (Woods)
commenced drilling of a well on non-Indian lands in
the area, and circulated to the other working-interest
owners in the area a proposed communitization  agree-
ment. In conjunction with the "commence drilling
clause" and the ongoing drilling, the communitization
clause, if put into effect, would have extended the
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4
terms of the 1977 leases. After obtaining the approval
of the majority of working-interest owners, Woods
submitted  the  agreement  to the  Minerals
Management Service of the Department, which
recommended approval. Pet. App. 2-5 to 2-6,4-7.
The proposed agreement was transmitted to the
BIA's Anadarko office on February 22, 1982. On the
same day, several Indian owners of mineral interests
on the leased property delivered objections to the
BIA. They maintained that, in light of improved
market conditions, it would be in their best interest
for the BIA to reject the proposed communitization
agreement and allow the leases to expire so that they
could negotiate new leases on better terms. Pet. App.
2-6 to 2-7. Nevertheless, on April 12, 1982, the Acting
Area Director approved the communitization agree-
ment submitted by Woods. On September 10, 1982,
Woods completed its well on non-Indian lands. Id. at
2-7.
 The Indian mineral owners filed an administrative
appeal from the Acting Area Director's decision.
During the pendency of the administrative appeal, the
Oklahoma Corporation Commission authorized Woods
to drill two more wells on non-Indian land within the
proposed communitization unit. Royalties from the
production of those wells were held in escrow by the
Department of the Interior during the appeal. Pet.
App. 2-7 to 2-8,4-9 n.3, 4-10 n.4.
3. While the Department was reviewing the
communitization agreement, the court of appeals
issued an opinion in a case raising similar issues,
Kenai Oil & Gas, Inc. v. Department of Interior, 671
F.2d 383 (lOth Cir. 1982). In Kenai, the court upheld
the Department's refusal to approve communitization
of several Indian oil and gas leases, where the refusal
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5
was based on the fact that "the leases, which had
remained unproductive for nearly ten years, could
be released for higher royalty payments and
bonuses." Id. at 387. The Kenai court emphasized
the Secretary's fiduciary duty to "maximize [Indian]
lease revenues," and the absence in the relevant
statute and regulations of any provision precluding
the Secretary, in disapproving an agreement, from
relying on the economic value of re-leasing oppor-
tunities. Id. at 386.. The court, moreover, expressly
rejected the lessee's claim that the Secretary was
limited to considering matters of conservation and
production in deciding whether to approve a com-
munitization agreement. Id. at 387.
In response to Kenai, the Department issued
general guidelines governing the approval of com-
munitization agreements? The guidelines state that
the Secretary has discretion to approve or disapprove
communitization agreements based on a deter-
mination whether approval would be in the best in-
terests of the Indian lessor. In making that deter-
mination, the Department is directed to consider: (a)
whether the long-term economic effects of the agree-
ment are in the best interest of the Indian lessor; (b)
whether, in the judgment of the Interior Depart-
ment's Minerals Management Service, engineering
and technical aspects of the agreement protect the
interests of the Indian lessor; and (c) whether the
lessee has complied with the terms of the lease. See
Pet. App. 4-20.
 ___________________(footnotes)
2 Those unpublished guidelines are set out in pertinent part
in Cotton Petroleum Corp. v. United States Dep' t of Interior,
870 F.2d 1515, 1517-1518 (lOth Cir. 1989).
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4. In the instant case, the Deputy Assistant
Secretary for Indian Affairs, before whom the
Indians' administrative appeal was pending, requested
that the Anadarko Area Director provide further
information regarding the best interests of the Indian
lessors, including prospects for new leases on the
land. The Area Director expressed the opinion that
approval of the agreement was in the best interests
of the lessors. Pet. App. 4-11 to 4-12. The Area
Director's analysis was predicated on the assumption
that the subject tracts could not profitably be re-
leased. See I C.A. App. 117 ("under the present
market and economic conditions, the prospect of
releasing * * * is not very good"). The Deputy
Assistant Secretary circulated that analysis for
comment by Woods and the Indian lessors. The Indian
lessors' response pointed out that the Area Director's
analysis rested on an incorrect factual assumption,
because there did in fact exist a potential lessee who
was willing to lease the Indian lessors' mineral
interests on more lucrative terms. Id. at 119.
On May 15, 1986, the Assistant Secretary for Indian
Affairs issued his decision, concluding that the Area
Director had not acted in the best interests of the
Indians in approving communitization, Pet. App. 1-1
to 1-22. Rejecting Woods' claim that disapproval of
the agreement would "discourage investors" and
"drive away" prospective lessees, the Assistant
Secretary noted that a potential lessee (petitioner
Tomlinson Properties, Inc.) had offered to pay more
than $400,000 in bonuses for new leases on the three
tracts. Id. at 1-9 to 1-10, 4-12. Observing that Kenai
held that the Department has a "duty to maximize
[Indian] lease revenues," see 671 F.2d at 386, the
Assistant Secretary concluded that expiration of the
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7
1977 leases, in light of the definite prospect of new,
more lucrative leases, was in the Indians' best
interests. Pet. App. 1-10 to 1-11. Accordingly, the
Assistant Secretary disapproved Woods' communi-
tization agreement and issued an order declaring that
respondents' leases had expired for failure to drill,
produce, or communitize during the primary terms.
Id. at 4-12. Soon thereafter, the Indian lessors and
petitioner Tomlinson entered into new leases, which
provided for more than $400,000 in bonuses. The
Department approved those leases. Tomlinson then
submitted a new communitization  agreement,
retroactive to September 1, 1982, which was approved
by BIA's Area Director on September 22, 1986. Id. at
2-10 to 2-11,4-12 to 4-13.
5. On July 28, 1986, Woods filed this action under
the Administrative Procedure Act, 5 U.S.C. 701 et
seq., seeking to have the Department's decision set
aside. On February 22, 1988, the district court upheld
the Department's rejection of communitization (Pet.
App. 2-1 to 2-18), relying principally on Kenai. See
id. at 2-15.
6. While the appeal of this case was pending, the
court of appeals issued opinions in two other cases,
taking seemingly conflicting approaches to the ques-
tion whether the Department may reject communi-
tization on the grounds at issue here. In Cotton
Petroleum Corp. v. United States Dep't of Interior,
870 F.2d 1515 (lOth Cir. 1989), the Department had
rejected a proposed communitization agreement sub-
mitted at the end of a lease's primary term, so that
the Indian lessor could take advantage of the improved
market for leases in the Anadarko area. The district
court found that the Department's action was
consistent with Kenai, but the court of appeals
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8
reversed, holding that the Secretary acted arbitrarily
and capriciously when he "refused to approve an
otherwise fair and proper communitization agreement.
for the sole purpose of causing the underlying lease
* * * to expire." Id. at 1528.
Subsequently, a different panel of the court of
appeals held that the Department had breached its
fiduciary duty to a Tribe by approving commun-
itization without fully considering the possibility
that allowing old leases to lapse might lead to more
lucrative new leases. In Cheyenne-Arapaho Tribes
of Oklahoma v. United  States, 966 F.2d 583 (lOth Cir.
1992), cert. denied, 113 S. Ct. 1642 and 1643 (1993),
the court repeated Kenai's admonition that the
Secretary has a fiduciary "duty to maximize lease
revenues." 966 F.2d at 589 (quoting Kenai, 671 F.2d
at 386). The Secretary had concluded in Cheyenne-
Arapaho that disapproval of the proposed agreements
would not have been in the Tribe's economic interest
because "it was unlikely that new leases would have
been negotiated." 966 F.2d at 590. The Cheyenne-
Arapaho court found, however, that the Secretary
"was not free to conclude, without some consideration
of the present market conditions, that new leases
would be as difficult to negotiate as they would have
been in pre-boom times." Id. at 591. The court there-
fore concluded that the "Secretary and his delegates
breached their fiduciary responsibilities to the Tribe
by failing to consider the market conditions in the
Anadarko Area during the 1980's." Ibid.
7. On March 7, 1994, a panel of the Tenth Circuit
reversed the district court's decision in this case.
Woods Petroleum Corp. v. United States Dep't of
Interior, 18 F.3d 854. The panel, relying on Cotton
Petroleum, held that it was arbitrary and capricious
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9
for the Department to reject communitization for the
purpose of allowing the Indian lessors to benefit from
the booming market for natural gas in the Anadarko
area.  The Department, the Indian allottees, and
Tomlinson filed petitions for rehearing with
suggestions of rehearing en bane, citing the conflict
between the panel decision and Cotton Petroleum, on
the one hand, and Cheyenne-Arapaho and Kenai, on
the other. The full court granted rehearing en bane.
8. The en bane court reached essentially the same
result as the panel, with two judges dissenting. Pet.
App. 4-1 to 4-96. The majority held that it was an
abuse of discretion for the Secretary to reject a
communitization agreement "for the sole purpose of
causing the expiration of a valid Indian mineral lease
and allowing the Indian lessors to enter into a new,
more lucrative, lease," where the Secretary then
"approves essentially the identical communization
[sic] agreement, with the new lessee * * * simply
substituted for the old lessee." Id. at 4-5; see gen-
erally id. at 4-17 to 4-36.
The court distinguished Kenai on the grounds that
there, "productive wells had been drilled directly on
the Indian land and there was no suggestion that the
new lease would be pooled with neighboring tracts"
i.e., the Secretary did not disapprove the proposed
communitization agreement with the intention of
approving an essentially identical agreement under a
new lease.  Pet. App. 4-25 to 4-26.  The court
distinguished Cheyenne-Arapaho on the ground that
communitization in that case "involved only Indian
land, and wells had already been drilled on several of
the Indian leases." Id. at 4-27. Cheyenne-Arapaho,
the majority concluded, held simply that the
Secretary should have considered the economic value
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10
of new leases, based on changed market conditions.
Ibid.
 Judge Henry, joined by Chief Judge Seymour,
dissented, concluding that the Secretary's action in
this case was consistent with his fiduciary duty to
protect the Indian lessors' economic interests. Pet.
App. 4-36 to 4-96.  The dissenters asserted that
nothing in the relevant statute or regulations pre-
vents the Secretary from considering the manner in
which a proposed communitization agreement may
affect underlying leases. Id. at 4-43 to 4-45. They also
believed that, by making the validity of the
Secretary's approval or disapproval of a communi-
tization agreement dependent on the existence and
disposition of subsequent agreements, the majority's
reasoning "deprives [the Secretary] of objective
standards that might offer him some guidance as to
whether he is making a proper decision at the time he
is required to make it." Id. at 4-92.
 ARGUMENT
We agree with the dissenting judges below (Pet.
App. 4-55) that the Tenth Circuit's decisions in
Cotton Petroleum and the instant case on the one
hand, and Kenai and Cheyenne-Arapaho on the
other, present "contrasting principles" regarding the
Secretary's obligations under the Indian Mineral
Leasing Act. Nonetheless, because the holding in
this case is narrow, and because the potential conflict
is limited to the Tenth Circuit, further review is not
warranted.
Because the Tenth Circuit did not overrule or limit
its prior decisions in Kenai and Cheyenne-Arapaho,
the Secretary must continue to consider the eco-
nomic benefit that Indian lessors would obtain by
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disapproval of a proposed communitization agreement
and re-leasing under improved market conditions.
Pet. App. 4-55.  At the same time, however, the
Secretary's rejection of a communitization agree-
ment based on that consideration will not be valid
under the majority's reasoning if the parties sub-
sequently submit, and the Secretary approves, a
similar agreement that covers the Indian lessor and a
new lessee. As the dissenting judges noted below
(Pet. App. 4-90), by making the validity of the
Secretary's action dependent on subsequent events
that are frequently beyond his ability to predict, the
court's ruling places the Secretary in a "precarious
position" where improved market conditions make the
prospect of re-leasing attractive.
Although, in our view, the court of appeals' rea-
soning is flawed, its precise holding in this case is
narrow. The court held that
the Secretary acts arbitrarily and abuses his
discretion under 396d when he (1) rejects a
proposed communitization agreement for the sole
purpose of causing the expiration of a valid Indian
mineral lease and allowing the Indian lessors to
enter into a new, more lucrative, lease, and then
(2) approves essentially the identical communi-
tization agreement, with the new lessee of the
Indian lands simply substituted for the old lessee,
and permits the Indian lessors to collect royalties
retroactively to the date of first production under
the original unit plan.
Pet. App. 4-4 to 4-5. Cf. id. at 4-89 (Henry, J., dis-
senting) (characterizing the majority's holding as
"fact-specific"). The decision below therefore appears
to leave the Secretary free to disapprove a communi-
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12
tization agreement based on all relevant factors,
including the benefit to Indian lessors of a new lease,
where he does not subsequently approve a similar
communitization agreement under the new lease. Id.
at 4-25 to 426. Contrary to petitioners' contention
(Pet. 9), the decision will not in most cases prevent
the Secretary from considering, and acting to protect,
the economic interests of Indian lessors.
To date, the issue presented in this case has arisen
only in the Tenth Circuit.  Indeed, three of the
four Tenth Circuit cases that have addressed this
question (Cotton Petroleum, Cheyenne -Arapaho, and
the instant case) arose from the same natural gas
boom market that existed in the Anadarko, Oklahoma,
area in the early 1980s. The arguable existence of an
intra-circuit conflict regarding the Secretary's
obligations under those market conditions does not
warrant this Court's review. See, e.g., Wisniewski
v. United States, 353 U.S. 901, 902 (1957) ("It is
primarily the task of a Court of Appeals to reconcile
its internal difficulties.").
Finally, petitioners contend (Pet. 10) that the court
of appeals' decision "conflict[s] with applicable de-
cisions of this Court." Petitioners fail, however, to
identify any particular decision of this Court with
which they believe the instant case is in conflict. The
dissenting opinion below, on which petitioners rely
(ibid.), argues only that the majority erred in
applying this Court's administrative law decisions to
the facts of this case. See, e.g., Pet. App. 4-76 to 4-77.
That argument, though correct in our view, does not
warrant this Court's plenary consideration.
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CONCLUSION
The petition for a writ of certiorari should be
denied.
Respectfully submitted.
DREW S. DAYS, III
Solicitor General
LOIS J. SCHIFFER
Assistant Attorney General
ROBERT L. KLARQUIST
DAVID C. SHILTON
Attorneys
July 1995