Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca10-88-02889/USCOURTS-ca10-88-02889-0/pdf.json

Nature of Suit Code: 190
Nature of Suit: Other Contract Actions
Cause of Action: 

---

FILED 

IN THE UNITED STATES COURT OF APPEALS 

FOR THE TENTH CIRCUIT 

Uoired States Court of Appeals 

T"'nth Ci::cuir 

18-31, INC., a New Mexico corporation; ) 

JOHN MICHAEL FROST; MARIANNE KEOHANE ) 

FROST,[ Trustee for John Michael Frost; ) 

MARIANNE KEOHANE FROST; MARK JAMES FROST; ) 

TERESA ANN FROST; SUE SAUNDERS GRAHAM; ) 

IVERSON, INC., an Oklahoma corporation; ) 

INTERFIRST BANK, FT. WORTH, N.A., a ) 

national banking association, Trustee ) 

U/W/O S. J. Iverson; MARJORIE IVERSON; ) 

S. J. IVERSON, JR.; WENDELL WELCH IVERSON;) 

JEWELL D. IVERSON; UNITED NEW MEXICO ) 

TRUST CO., Successor Trustee of the ) 

Bernard Patrick Keohane Trust 12; ) 

PETER C. IVERSON; ALVIN M. IVERSON, ) 

Co-Executors of the Estate of Dorothy ) 

Claxton Monroe; PATSY ANN IVERSON PAGE; ) 

PHOEBE SHELTON; THE TOLES COMPANY, a ) 

New Mexico limited partnership doing ) 

business in Chaves County, New Mexico; ) 

MARIAN C. WELCH, INC., a New Mexico ) 

corporation; COMMERCE BANK OF KANSAS ) 

CITY, N.A., Domiciliary Foreign ) 

Personal Representative of the Estate ) 

of Elyse s. Patterson, ) 

Plaintiffs- Appellants, 

v. 

GAREL R. WESTALL; RICHARD BARTON, Trustee 

of Jack Mask Trust; STELLA MASK; JAMES T. 

JENNINGS; SANDRA SHANK; RAY WESTALL; 

FIRST ROSWELL COMPANY, LTD., 

Defendants-Appellees. 

ORDER AND JUDGMENT* 

) 

) 

) 

) 

) 

) 

) 

) 

) 

) 

) 

MAR 13 1990 

ROBERT L. HOECKER 

Clerk 

No. 88-2889 

(D. New Mexico) 

(D.C. No. CV-86-1212) 

Before MCKAY, MOORE and ANDERSON, Circuit Judges. 

* This order and judgment has no precedential value and shall 

not be cited, or used by any court within the Tenth Circuit, 

except for purposes of establishing the doctrines of the law of 

the case, res judicata, or collateral estoppel. 10th Cir. R. 

36.3. 

Appellate Case: 88-2889 Document: 01019966116 Date Filed: 03/13/1990 Page: 1 
18-31, Inc., et al. (hereinafter "18-31"), appeals from a 

summary judgment granted in favor of Garel R. Westall, et al. 

(hereinafter "Westall"). We reverse. 

43 C.F.R. S 3103.3-6 (1982) provided: 

"An agreement creating overriding royalties or payments 

out of production of oil, which, when added to overriding royalties or payments out of production previously 

created and to the royalty payable to the United States, 

aggregate in excess of 17.5 percent shall be deemed a 

violation of the terms of the lease unless such agreement expressly provides that the obligation to pay such 

excess overriding royalty or payments out of production 

of oil shall be suspended when the average production of 

oil per well per day averaged on the monthly basis is 15 

barrels or less." 

While this provision was in effect, 18-31 leased certain 

federal oil and gas drilling rights to Westall, in exchange for an 

overriding royalty. When added to the royalty payable to the 

United States, the royalties aggregated in excess of 17.5 percent. 

The six contracts each stated: 

"To the extent applicable, ••• the overriding royalty 

herein reserved is subject to being partially suspended 

in the event that production of oil is 15 barrels or 

less per well per day averaged on a monthly basis in 

accordance with the provisions of 43 CFR 3103." 

R. Vol. I, Doc. 3, Ex. 6 at 3, Ex. 7 at 2, Ex. 8 at 3, Ex. 9 at 3, 

Ex. 10 at 3, Ex. 11 at 3. 

Several years later, S 3103.3-6 was replaced with the following regulation: 

"An agreement creating overriding royalties or payments 

out of the production of oil or gas which, when added to 

overriding royalties or payments out of production 

previously created and to the royalty payable to the 

United States, aggregate in excess of 17.5% may be 

suspended by the Secretary [of the Interior] at any time 

upon a determination that the excess constitutes a 

burden on lease operations •••• " 

-2-

Appellate Case: 88-2889 Document: 01019966116 Date Filed: 03/13/1990 Page: 2 
43 C.F.R. S 3103.3-3 (1983). 1 

When the average monthly production on the leases dropped 

below fifteen barrels per well per day, Westall unilaterally 

suspended the payment of that portion of 18-3l's overriding 

royalty which aggregated in excess of 17.5 percent of production 

under some of the contracts. See R. Vol. I, Doc. 3, Ex. 12 at 2, 

Ex. 13 at 2, Ex. 14 at 2. There was no determination by the 

Secretary that "the excess constitute[d] a burden on lease 

operations." Westall continued to pay the entire royalty under 

the remaining contracts. 

18-31 then sued in order to recover those royalties which had 

been suspended, on the theory that under the new regulation a 

Secretarial determination of burden was required before royalties 

could be suspended. Westall filed a counterclaim for the amount 

of the excess paid pursuant to those contracts where it did not 

partially suspend payment. On cross-motions for summary judgment, 

the district court granted summary judgment in favor of Westall on 

both 18-3l's claim and Westall's counterclaim. See R. Vol. II at 

SO. As there are no disputed factual questions, our review of the 

summary judgment is de novo. McKenzie v. Mercy Hospital, 854 F.2d 

365, 367 (10th Cir. 1988). 

We hold that, while S 3103.3-3 was in effect, Westall was not 

entitled to suspend the excess overriding royalty payments absent 

a finding by the Secretary of the Interior of a burden on the 

lease operations. The new section did not merely supplement the 

1 The regulation has since been deleted altogether. See 53 

Fed. Reg. 17,340, 17,344 (1988). 

-3-

Appellate Case: 88-2889 Document: 01019966116 Date Filed: 03/13/1990 Page: 3 
existing (in S 3103.3-6) limitation on overriding royalties; it 

replaced it. See 48 Fed. Reg. 33,648, 33,662 (1983); Rocky 

Mountain Mineral Law Found., Law of Federal Oil and Gas Leases 

S 10.04[1)[a][ii], at 10-41 (1989). The two provisions were not 

mutually exclusive. The new provision could have been enacted 

without deleting the old provision, but that was not done. 

Instead, as the Bureau of Land Management recognized, the old 

regulation, which was a prospective determination that such royalties burdened lease operations whenever production fell below 

fifteen barrels per day per well, see 47 Fed. Reg. 28,550, 28,551 

(1982), was altered to defer that decision so that the Secretary 

could "consider changing economic and operation conditions in making a decision on suspension," 48 Fed. Reg. 33,648, 33,653 (1983). 

The two regulations were intended to apply to the same leases. 

Indeed, the Department of the Interior, whose interpretation 

of the regulation is entitled to great deference, United States v. 

Larionoff, 431 U.S. 864, 872 (1977); City of Aurora v. Hunt, 749 

F.2d 1457, 1461-62 (10th Cir. 1984), applied S 3103.3-3 to overriding royalties which were created prior to the enactment of that 

regulation. See Wood, Mcshane & Thomas, 99 I.B.L.A. 132, [1987) 

Fed. Oil & Gas Serv. (Gower) 85 (1987). Because S 3103.3-3 

"define[d] the conditions necessary for suspension of overriding 

royalty interests[, the] proper course of action" for Westall to 

have taken was to apply for a finding of burden, rather than to 

suspend unilaterally. Id. at 135. 

Any unilateral suspensions which commenced or continued after 

the effective date of S 3103.3-3 were improper. 18-31 1 s motion 

-4-

Appellate Case: 88-2889 Document: 01019966116 Date Filed: 03/13/1990 Page: 4 
for summary judgment should have been granted, and Westall's 

should have been denied. For the same reasons, Westall's counterclaim should have been denied. 

The judgment of the district court is REVERSED and REMANDED 

for further proceedings consistent with this opinion. 

ENTERED FOR THE COURT 

Stephen H. Anderson 

Circuit Judge 

-5-

Appellate Case: 88-2889 Document: 01019966116 Date Filed: 03/13/1990 Page: 5