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Nature of Suit Code: 890
Nature of Suit: Other Statutory Actions
Cause of Action: 

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Patrick Fisher 

Clerk 

UNITED STATES COURT OF APPEALS 

Office of the Clerk 

Byron White United States Courthouse 

1823 Stout Street 

Denver, co 80257 

February 21, 1995 

TO: ALL RECIPIENTS OF THE CAPTIONED OPINION 

RE: 92-6053, Woods v. Department of Interior 

Opinion on Rehearing En Bane filed February 9, 1995 

Please be advised of the following correction to the 

captioned opinion: 

Page 35 of the dissent filed by Judge Henry and 

attached to the decision is renumbered as page 34. 

Please make this correction to your copy. 

Very truly yours, 

Patrick Fisher, 

Clerk 

adcz~wJL~ Barbara Schermerhorn 

Deputy Clerk 

Appellate Case: 92-6053 Document: 01019280514 Date Filed: 02/21/1995 Page: 1 
PUBLISH 

FILED 

UDited States Court of Appeab 

UNITED STATES COURT OF APPEALS Tenth Circuit 

TENTH ciRcuiT rEs o s 1995 

WOODS PETROLEUM CORPORATION; 

RAYTEX RESOURCES INCORPORATED; 

MIDCON CENTRAL EXPLORATION 

COMPANY; MUSTANG PRODUCTION 

COMPANY, 

Plaintiffs-Appellants, 

v. 

DEPARTMENT OF INTERIOR; BUREAU 

OF INDIAN AFFAIRS; TIMOTHY NIBS; 

WISDOM A. NIBS, JR.; REGINALD 

R. NIBS; RONALD LEROY NIBS; 

ELAINE SHIRLEY NIBS MAYES; 

D'ANN NIBS; LOWELL NIBS; THEODORE 

RAYMOND NIBS; WISDOM NIBS, SR.; 

BRENDA TONIPS NIBS; MICHAEL NIBS; 

LEROY STONEROAD; VICTOR STONEROAD; 

SOLOMON STONEROAD; ELEANOR JOY 

STONEROAD; JOE HICKS; ANNA B. 

TWINS SPOTTEDWOLF; PATRICK B. 

SPOTTEDWOLF; LUCIAN M. TWINS; 

JOYCE M. TWINS; MINITA TWINS 

RUNNINGWATER; WESLEY ROBERT TWINS; 

LUCINDA AMELIA SWEETWATER; MARIAM 

MANN TWINS ; MCCLAIN H. TWINS , JR. ; 

MARION M. TWINS; MICHAEL WAYNE 

TWINS; TOMLINSON PROPERTIES, INC., 

Defendants-Appellees. 

ON REHEARING EN BANC 

PATRICK FISHER 

Clerk 

No. 92-6053 

Donald L. Kahl of Hall, Estill, Hardwick, Gable, Golden & Nelson, 

P.C., Tulsa, Oklahoma (Orval E. Jones, with him on the brief), for 

Plaintiffs-Appellants. 

Appellate Case: 92-6053 Document: 01019280514 Date Filed: 02/21/1995 Page: 2 
David C. Shilton, United States Department of Justice, Washington, 

D.C. (Lois J. Schiffer and Roger Clegg Acting Assistant Attorneys 

General, Gerald S. Fish, Dirk Snel and Robert L. Klarquist, United 

States Department of Justice, and Timothy D. Leonard, United 

States Attorney and M. Kent Anderson, Assistant United States 

Attorney, Oklahoma City, Oklahoma, with him on the brief), for 

Defendants-Appellees United States Department of the Interior and 

Bureau of Indian Affairs. 

Steven L. Barghols and Jay C. Jimerson of Mock, Schwabe, Waldo, . Elder, Reeves & Bryant, Oklahoma City, Oklahoma, on the brief, for 

Defendant-Appellee Tomlinson Properties, Inc. 

Amos E. Black, III of Black & Zynda, Anadarko, Oklahoma, on the 

brief, for Defendants-Appellees Anna Twins Spottedwolf, Eleanor 

Stoneroad, Victor Stoneroad, and Leroy Stoneroad. 

Before SEYMOUR, Chief Judge, LOGAN, MOORE, ANDERSON, TACHA, 

BALDOCK, BRORBY, EBEL, KELLY, and HENRY, Circuit Judges. 

EBEL, Circuit Judge. 

We granted the request for rehearing en bane in this case to 

clarify the Secretary of the Interior's authority under 25 U.S.C. 

§ 396 to disapprove a proposed oil and gas communitization 

agreement that include Indian-owned mineral interests. Woods 

Petroleum Corporation and other oil companies ("Woods Petroleum") 

commenced this action to challenge the Secretary's order rejecting 

a proposed agreement to communitize Indian and non-Indian mineral 

interests for oil and gas production in the Anadarko region of 

Oklahoma. The district court upheld the Secretary's order. A 

panel of this court reversed and remanded with instructions to 

reverse the Secretary's order and to approve the proposed 

communitization agreement. Woods Petroleum Corp. v. United States 

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Dep't of Interior, 18 F.3d 854 (lOth Cir. 1994). The United 

States Department of the Interior, Tomlinson Properties, Inc., and 

certain of the Indian· lessors petitioned for rehearing en bane on 

the grounds that our panel decision clashed with earlier Tenth 

Circuit authority. 

Today, we make explicit 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 communization 

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. Accordingly, we adhere to our panel 

decision's reversal of the district court order and we remand with 

instructions to approve the Woods Petroleum communitization 

agreement. 

I. Background 

Our panel opinion provides a full recitation of the factual 

background to this action, Woods Petroleum, 18 F.3d at 855-57, but 

we review the critical events and rulings to frame our analysis. 

In February 1977, the Indians named in this action leased their 

undivided interest in 117.5 net mineral acres in Custer County, 

Oklahoma to National Cooperative Refinery Association 

("National"). The three leases granted National an exclusive 

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right to drill for and extract all oil and gas underlying the land 

for a primary term of five years and "as much longer thereafter as 

oil and/or gas is produced in paying quantities."1 The Concho 

Agency Superintendent of the Bureau of Indian Affairs ("BIA"), an 

agency in the United States Department of Interior ("Interior"), 

approved the leases. Next, the BIA approved National's assignment 

of its interest in the leases to Woods Petroleum. 

On May 18, 1979, the Oklahoma Corporation Commission 

("Commission") established a 640-acre drilling and spacing unit 

that included this Indian land.2 On December 1, 1981, all working 

interest owners in the unit area executed a communitization 

1 The leases contain a "commence drilling" clause and a 

"consent to unitization" clause. The "commence drilling" clause 

provides that: 

If the lessee shall commence to drill a well within the term 

of this lease, the lessee shall have the right to drill such 

well to completion with reasonable diligence and if oil or 

gas, or either of them, be found in paying quantities, this 

lease shall continue and be in force with like effect as if 

such well had been completed within the term of years herein 

first mentioned. 

The "consent to unitization" clause states that: 

The parties hereto agree to subscribe to and abide by any 

agreement for the cooperative or unit development of the 

field or area, affecting the leased lands, or any pool 

thereof, if and when collectively adopted by a majority 

operating interest therein and approved by the Secretary of 

the Interior .... 

2 The Oklahoma Corporation Commission is authorized "to 

establish well spacing and drilling units of specified and 

approximately uniform size and shape covering any common source of 

supply ... of oil or gas within the State of Oklahoma." Okla. 

Stat. Ann. tit. 52, § 87.1(a) (West 1991). "The purpose, and 

usual effect, of pooling [i.e. designating spacing units] is to 

prevent the physical and economic waste that accompanies the 

drilling of unnecessary wells." Howard R. Williams and Charles J. 

Meyers, Oil and Gas Law, Vol. 6, § 901 at 3 (1993). 

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agreement, naming Woods Petroleum as the unit operator ("Woods 

Petroleum communitization agreement"). Communitization permits 

the development of several contiguous leaseholds as a single unit, 

so that "operations conducted anywhere within the unit area are 

deemed to occur on each lease within the communitized area and 

production anywhere within the unit is deemed to be produced from 

each tract within the unit." Kenai Oil & Gas, Inc. v. Dep't of 

the Interior, 671 F.2d 383, 384 (lOth Cir. 1982). 

Pursuant to the communitization agreement -- and six weeks 

prior to the expiration date of the leases -- Woods Petroleum 

commenced drilling the authorized well on a non-Indian tract 

within the unit on January 5, 1982. On February 17, 1982, also 

prior to the expiration of the Indian leases, Woods Petroleum 

submitted the communitization agreement to Interior for its 

approval. An approved communitization agreement, in conjunction 

with the "commence drilling" clause, would extend Woods 

Petroleum's leases beyond the primary term for as long as there is 

production in paying quantities. 

On April 12, 1982, the Anadarko Area Director of the BIA 

approved the proposed Woods Petroleum communitization agreement 

over the Indian lessors' objections. The Indian lessors had 

unsuccessfully argued that communitization was not in their 

economic best interest because the Secretary's disapproval of the 

agreement would trigger the expiration of the Indians' existing 

leases and facilitate the execution of more profitable leases. 

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On September 6, 1983, the Indians filed an administrative 

appeal to the Assistant Secretary of Interior.3 Notably, the 

Indians did not object to any particular provision in the 

communitization agreement. Instead, they simply argued that their 

mineral interests could easily be released "on a competitive bid 

basis and with a stroke of a pen a Communitization Agreement can 

be signed by the Area Director joining a validly leased Indian 

Allotments to the spacing Unit." 

To evaluate the Indians' appeal, the Deputy Assistant 

Secretary requested the BIA Area Director to prepare a "best 

interest assessment." The BIA's "best interest assessment" 

advised the Assistant Secretary to affirm the Area Director's 

approval of the Woods Petroleum communitization agreement for many 

reasons. First, the BIA opined that prevailing market conditions 

could stifle the separate development of the Indian interests 

under new leases and that the Oklahoma Corporation Commission may 

not approve independent production, transportation and sale of 

product.4 Second, the BIA noted that the Indians would forfeit 

nearly $400,000 in unit royalties currently held in escrow under 

the state-approved spacing unit in which production had already 

occurred. And finally, the BIA presciently anticipated that 

3 During the pendency of this appeal, Interior escrowed the 

unit royalties attributable to the Indian tracts under the stateordered spacing unit. 

4 The BIA explained that three wells had been drilled in the 

spacing unit, all on non-Indian tracts, but only one well was 

profitable. The profitable well was farthest away from the Indian 

tracts, whereas the two unprofitable wells were adjacent to the 

Indian tracts. Based on these production results, the BIA could 

give no assurance that a profitable well could be located on the 

Indian tracts. 

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rejection of the communitization agreement could invite protracted 

litigation. 

After receiving the BIA's recommendation, the Assistant 

Secretary solicited comments from both the Indians and Woods 

Petroleum. Again, the Indians expressed their desire to be able 

to release their mineral interests for a bonus exceeding $400,000 

and then to "be immediately joined with the 640 acre spacing by a 

Communitization Agreement." Notwithstanding the BIA's 

recommendation, the Assistant Secretary reversed the BIA Area 

Director's approval of the Woods Petroleum communitization 

agreement on May 15, 1986. The Assistant Secretary did not 

challenge the appropriateness of the communitization agreement as 

establishing a proper geological and economic unit. Instead, the 

Assistant Secretary focused on the underlying Indian leases and 

concluded that it would be in the Indians' best interest to allow 

the Woods Petroleum leases to expire so that the Indians could 

enter into new leases with Defendant-Appellee Tomlinson 

Properties, Inc. ("Tomlinson"), who was willing to pay the Indians 

a $400,000 bonus. The Assistant Secretary did not address the 

BIA's specific rationales in support of communitization and thus 

did not analyze the factors enumerated in the BIA guidelines. 

Relying exclusively on Tomlinson's bonus offer, the Assistant 

Secretary disapproved the Woods Petroleum communitization 

agreement and issued an order declaring that the Woods Petroleum 

leases had expired for failure to drill, produce, or communitize 

during the primary term. 

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On the heels of the Assistant Secretary's order, the Indians 

promptly released their interest in the 117.5 net mineral acre 

estate to Tomlinson for a $400,000 bonus. The BIA Area Director's 

approved the new leases on May 23, 1986. Pursuant to the Area 

Director's approval, the Indian interests were reinserted in the 

640-acre state spacing unit. Tomlinson next drafted a 

communitization agreement that was, in all material respects, 

identical to the Woods Petroleum communitization agreement 

("Tomlinson communitization agreement"). Not only did the 

Tomlinson communitization agreement apply to the same spacing 

unit, but it was postdated to take effect as of September 1, 1982 

-- thereby enabling the Indian lessors to obtain unit revenues 

retroactive to the time of first production four years earlier 

from the first unit well drilled on the spacing unit covered by 

the Woods Petroleum communitization agreement. On September 22, 

1986, the Assistant Secretary approved the new Tomlinson 

communitization agreement. 

On July 28, 1986, Woods Petroleum commenced this action under 

the Administrative Procedure Act ("APA"), 5 U.S.C. § 701 et seq., 

in the United States District Court for the Western District of 

Oklahoma, against Interior, the BIA, the Indian lessors, and 

Tomlinson. Woods Petroleum alleged that the Assistant Secretary's 

rejection of the Woods Petroleum communitization agreement was 

arbitrary and capricious and thus should be vacated. 

Additionally, Woods Petroleum sought an order declaring its 1977 

leases superior to the Tomlinson leases. In the alternative, 

Woods Petroleum argued that if the court upholds the Tomlinson 

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communitization agreement, Woods Petroleum was entitled to a 

refund of all proceeds of unit production paid to the Indians 

under the 1977 leases. 

The district court upheld the Assistant Secretary's order 

rejecting the Woods' communitization agreement as a valid exercise 

.of discretion, and subsequently ruled that the Indian mineral 

interests would be treated as part of the unit from the date of 

first production, and thus the Indians were entitled to unit 

royalties back to 1982. 

Woods Petroleum timely filed its appeal and we reversed and 

remanded with instructions to reinstate the BIA's order approving 

the Woods Petroleum communitization agreement and to declare void 

the Tomlinson lease and the Tomlinson communitization agreement. 

Woods Petroleum, 18 F.3d at 860. The panel concluded that "the 

sole reason behind the Secretary's r~jection of the [Woods 

Petroleum] communitization agreement was to provide a pretext for 

the ulterior motive of enabling the Indian lessors to acquire an 

additional bonus payment from a new potential contracting party." 

Id. at 859. "[T]o reject a communitization agreement for that 

purpose, and then to accept essentially an identical 

communitization agreement, particularly while permitting 

retroactive benefits to inure to the Indian lessors, constitutes 

arbitrary and capricious conduct and cannot stand." Id. at 859-

60. Our analysis followed quite closely the law previously 

established in Cotton Petroleum Co~. v. United States Dep't of 

Interior, 870 F.2d 1515 (lOth Cir. 1989). 

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On April 21, 1994, the government filed a petition for 

rehearing with suggestion for en bane consideration, arguing that 

Woods Petroleum and Cotton Petroleum are inconsistent, at least in 

philosophy, with Kenai, 671 F.2d at 386-88, and Cheyenne-Arapaho 

Tribes of Oklahoma v. United States, 966 F.2d 583 (lOth Cir. 

1992), cert. denied, 113 S. Ct. 1642 (1993), and 113 S. Ct. 1643 

(1993). The government's petition stated that the alleged 

disparities in these opinions cast a cloud of uncertainty over the 

factors that Interior may consider in approving or rejecting 

future communitization agreements involving Indian lessors. 

We granted the petition for en bane consideration to clarify 

the Secretary's authority to approve and reject communitization 

agreements. In so doing, we adhere to the legal principles 

articulated in our panel decision, Cotton Petroleum, Kenai, and 

Cheyenne-Arapaho. 

II. Discussion 

Under the Administrative Procedure Act, we may set aside an 

agency decision that is "arbitrary, capricious, an abuse of 

discretion, or otherwise not in accordance with the law." 5 

u.s.c. § 706(2) (A); Cotton Petroleum, 870 F.2d at 1525. An agency 

decision may be arbitrary and capricious if it fails to consider 

important relevant factors. Motor Vehicle Mfrs. Ass'n v. State 

Farm Mut. Auto. Ins., 463 U.S. 29, 42-43 (1983); Cotton Petroleum, 

870 F.2d at 1525-26. Alternatively, the decision is arbitrary and 

capricious if there is no "rational connection between the facts 

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found and the choice made." Bowman Transp .. Inc. v. Arkansas-Best 

Freight Sys .. Inc., 419 u.s. 281, 285 (1974). 

Congress has empowered the Secretary of the Interior with an 

important supervisory role over oil and gas communitization 

agreements involving Indian mineral interests. See Indian Mineral 

Leasing Act of 1938, 25 U.S.C. § 396a et seq. Pursuant to 25 

U.S.C. § 396d, the Secretary has the discretion to approve or 

prescribe a "reasonable cooperative unit." 

All operations under any oil, gas, or other mineral 

lease issued pursuant to the terms of sections 396a to 

396g of this title or any other Act affecting restricted 

Indian lands shall be subject to the rules and 

regulations promulgated by the Secretary of the 

Interior. In the discretion of 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 of oil or gas from land 

covered by such lease. 

Id.; see also 25 C.F.R. §§ 211.21(b) (governing tribal lands) & 

212.24(c) (governing allotted lands) .5 Thus, inclusion of Indian 

mineral interests in a cooperative plan, including a state-ordered 

spacing unit, requires the Secretary's approval. 

5 Section 211.21(b) provides: 

All such leases shall be subject to any cooperative 

or unit development plan affecting the leased lands that 

may be required by the Secretary of the Interior, but no 

lease shall be included in any cooperative or unit plan 

without prior approval of the Secretary of the Interior 

and consent of the Indian tribe affected. 

Section 212.24(c) provides: 

All leases issued pursuant to the regulations in 

this part shall be subject to a co-operative or unit 

development plan affecting the leased lands if and when 

required by the Secretary of the Interior. 

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To guide the Secretary's evaluation of a proposed 

comrnunitization agreement involving Indian mineral interests, the 

BIA promulgated guidelines in 1982 that identify three critical 

factors: (1) whether the long term economic effects of the 

proposed agreement are in.the Indian lessor's best interest; (2) 

whether the engineering and technical aspects of the agreement 

adequately protect the Indian lessors; and (3) whether the lessee 

has complied with the terms of the lease in all respects prior to 

its expiration date. Cotton Petroleum, 870 F.2d at 1518 (quoting 

the BIA Guidelines) . The first two of these factors require the 

Secretary to focus on the comrnunitization agreement, and the third 

factor simply asks if the lessee is in default under the existing 

lease. 

In evaluating the Secretary's actions, we must keep in mind 

that the Secretary and his delegates act as the Indians' fiduciary 

and thus must represent the Indians' best interests. CheyenneArapaho, 966 F.2d at 588-89; Cotton Petroleum, 870 F.2d at 1524; 

Kenai, 671 F.2d at 386. The power to manage and regulate Indian 

mineral interests carries with it the duty to act as a trustee for 

the benefit of the Indian landowners. Jicarilla Apache Tribe v. 

Supron Energy Co£g., 728 F.2d 1555, 1563-65 (lOth Cir. 1984) 

(Seymour, J., concurring in part and dissenting in part), reh'g en 

bane, 782 F.2d 855 (lOth Cir.) (adopting dissenting opinion), 

modified, 793 F.2d 1171, 479 U.S. 970 (1986). Yet, as with any 

trustee-beneficiary relationship, the Secretary's fiduciary duty 

to the Indians under § 396d is not boundless and cannot be 

exercised in a manner that exceeds or flouts the authorizing 

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statute and regulations. When the Secretary deviates from firmly 

established procedures, or exceeds the limits of his fiduciary 

duty, we have found an abuse of discretion and have reversed the 

Secretary. 

For example, we have consistently admonished the Secretary to 

analyze all relevant factors and have reversed rulings that either 

disregarded certain factors or treated one factor as 

determinative. In Kenai, the lessee alleged that the Secretary's 

rejection of a communitization agreement constituted an abuse of 

discretion because the Secretary refused to confine his analysis 

to production and conservation matters. Kenai, 671 F.2d at 387. 

We eschewed the lessee's restrictive approach and upheld the 

Secretary's ruling because he properly considered "all relevant 

factors," including the Indian lessors' economic best interests. 

Id. at 386-87. Likewise, in Cotton Petroleum, we reversed the 

Secretary's rejection of a communitization agreement, in part, 

because "the Secretary failed to discuss or analyze all of the 

relevant factors required in reaching his decision, mandated under 

his guidelines." Cotton Petroleum, 870 F.2d at 1525-26. And more 

recently in Cheyenne-Arapaho, we held that the Secretary abused 

his discretion by approving a communitization agreement without 

first considering relevant economic factors. Cheyenne-Arapaho, 

966 F.2d at 589-91.6 

As the Secretary's clearly articulated factors in the BIA 

guidelines make clear, the issue before the Secretary is whether 

6 Moreover, the Secretary's mere perfunctory recitation of one 

or more relevant factors does not constitute adequate 

consideration. Cotton Petroleum, 870 F.2d at 1525-26. 

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the communitization agreement should be approved, and it is not 

whether the underlying leases, which previously had been approved 

by the Secretary, were a good deal or bad deal with the benefit of 

hindsight. When the Secretary first disapproved the 

communitization agreement for the sole purpose of causing the 

underlying leases to terminate, and then immediately thereafter 

approved an identical communitization agreement for the new 

leases, it is obvious that the Secretary was not really evaluating 

the communitization agreement at all. Rather, he was using his 

power in an arbitrary way to disapprove the communitization 

agreement as a mere vehicle to cause the underlying leases to 

terminate. 

In Cotton Petroleum, the record demonstrated that the 

Secretary did not reject the proposed communitization agreement 

because the proposed unitization agreement was detrimental to the 

Indian lessors. Rather, the sole reason behind the Secretary's 

disapproval was to facilitate the expiration of the original lease 

and thus to permit the Indian lessors to acquire a new bonus 

payment from a new lessee, who eagerly offered an additional 

premium because drilling had already commenced in the spacing 

unit. Cotton Petroleum, 870 F.2d at 1527. With the Indian's more 

lucrative lease in hand, the Secretary turned around and approved 

the identical communitization agreement, ordered inclusion of the 

Indian tract in the same spacing unit, and awarded retroactive 

benefits under the original agreement. Id. We reversed because 

"[i]nstead of evaluating the communitization agreement on its 

merits, the Secretary used its rejection as a triggering event to 

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cause the termination of a separate instrument, the lease." Id. 

at 1528.7 

We found no such duplicitous evaluation of a communitization 

plan in Kenai. In Kenai, the Secretary simply concluded that 

communitization was economically unsatisfactory for the Indians 

given the likelihood of increased revenues under a new lease. 

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. Kenai, 671 F.2d at 387. In 

contrast to the actions of the Secretary in the instant case and 

in Cotton Petroleum, the Secretary in Kenai did not take 

inconsistent and arbitrary positions with regard to 

communitization.8 

Similarly, there is nothing in our opinion in CheyenneArapaho suggesting that the Secretary could take inconsistent 

7 In essence, the Secretary's actions in Cotton Petroleum 

permitted the Indians to take a fresh look at the value of their 

mineral interests while neither incurring additional expense nor 

heightened risk. 

That the Secretary awarded retroactive benefits under the 

communitization agreement provided further evidence of the 

fairness of the original agreement and the inconsistency -- and 

hence arbitrariness -- of the Secretary's action. Cotton 

Petroleum, 870 F.2d at 1527. 

8 Our opinion in Cotton Petroleum underscored this crucial 

distinction to Kenai: 

[In Kenai] , the Secretary . . . was not taking inconsistent 

positions as to whether the Indian lessor was in or out of 

the communitization unit. Rather, the Secretary in Kenai 

refused to approve the communitization agreement for any 

purpose. We were not faced there with a situation where the 

Secretary was seeking simultaneously to free the Indian 

lessor from the burdens of the communitization agreement 

while retaining for the Indians its benefits. 

Cotton Petroleum, 870 F.2d at 1528 n.4. 

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positions on a communitization agreement merely to allow Indians 

the opportunity to release their land on more attractive terms. 

To the contrary, we simply held there that the Secretary breached 

his fiduciary duty to the Indians by approving communitization 

without considering the economic impact to Indian mineral interest 

. owners if their tracts were de-spaced. Cheyenne-Arapaho, 966 F.2d 

at 590-91. Communitization in Cheyenne-Arapaho involved only 

Indian land, and wells had already been drilled on several of the 

Indian leases. The issue was only whether the Secretary should 

have considered the economic consequences of new leases as 

contrasted to the communitized development of the Indian land, and 

we held that the Secretary should have considered all factors. 

Thus, Kenai, Cotton Petroleum, and Cheyenne-Arapaho define 

certain boundaries for the Secretary's supervisory authority under 

25 U.S.C. § 396d and his fiduciary duty to Indian mineral 

interests. As a threshold matter, we have consistently adhered to 

the principle that the Secretary must analyze all relevant factors 

articulated in the 1982 BIA guidelines in judging the propriety of 

a proposed communitization agreement. Further, the Secretary's 

task under § 396d is to provide a bona-fide evaluation of the 

communitization plan, not to use that evaluation as a mere vehicle 

to achieve an ulterior objective otherwise unattainable. Cf. 

United Nuclear Corp. v. United States, 912 F.2d 1432, 1438 (Fed. 

Cir. 1990) (holding that the Secretary's refusal to approve a 

mining plan submitted by a mining company that had been awarded 

leases on Indian reservation constituted a taking under the Fifth 

Amendment, rather than a proper exercise of fiduciary duty, 

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because, in part, the Secretary's action was "an attempt to enable 

the Tribe to exact additional money from a company with whom it 

had a valid contract"). This is not to say that the Secretary may 

not reject a communitization agreement either because an analysis 

of all relevant factors fairly leads to the conclusion that the 

particular agreement is not advantageous to the Indians, or 

because the Secretary determines that it is in the Indian lessor's 

best interests to forego communitization altogether. However, it 

is to say that the process of evaluating a communitization 

agreement is not a sham process but rather must be exercised in 

good faith, and the Secretary may not act arbitrarily and 

inconsistently in exercising his approval powers. 

The Secretary acknowledges that the sole purpose behind his 

disapproval of the Woods Petroleum communitization agreement was 

to enable the Indian lessors to enter into more profitable leases 

with Tomlinson. Sweeping aside the BIA guideline factors, which 

his delegate had concluded pointed strongly in favor of approving 

the Woods Petroleum agreement, the Secretary mimicked the wrongful 

actions in Cotton Petroleum by: (1) rejecting one communitization 

agreement for the sole purpose of allowing a valid lease to expire 

and to be replaced by a more lucrative lease; and then (2) 

including the Indian mineral interests in the same state-ordered 

spacing unit under an identical communitization agreement, and 

awarding retroactive royalties generated by the unit. The 

Secretary found no factor intrinsic to the Woods Petroleum 

communitization agreement that merited disapproval. Indeed, the 

Secretary ignored the relevant communitization factors spelled out 

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in the 1982 BIA guidelines, namely the long-term economic effects 

of the communitization agreement, the conservation and technical 

aspects of the agreement, and whether the lessee complied with the 

lease terms. Cotton Petroleum, 870 F.2d at 1518. 

An additional factor that separates Cheyenne-Arapaho and 

Kenai from the instant case and Cotton Petroleum is that the 

Indian mineral interests in Cheyenne-Arapaho and Kenai had not 

been placed in a state-ordered spacing unit at the time the 

lessees presented the proposed communitization agreement to the 

Secretary for his approval. Here, as in Cotton Petroleum, the 

Oklahoma Corporation Commission had already approved a 640-acre 

drilling and spacing unit, signifying that the Indian mineral 

interests were situated within a common source of supply. 

Because the Secretary must approve any state-ordered spacing 

unit that includes Indian mineral interests, 25 C.F.R. 

§ 212.24(c), the Oklahoma Corporation Commission's spacing order 

does not protect the Indian mineral owners until the Secretary 

approves the plan. Absent a communitization agreement, Indian 

owners of tracts adjacent to a producing well may have no right to 

share in the revenues generated by that well, even if oil and gas 

has been drained from their property. Thus, both here and in 

Cotton Petroleum -- where the only producing wells were off Indian 

land -- the Secretary's rejection of the communitization agreement 

risked forfeiture of the Indian mineral owners' right to share 

unit revenues generated from the producing wells on non-Indian 

tracts within the unit and jeopardized the independent development 

of the Indian tracts. The Secretary sought to avert these adverse 

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ramifications in the instant case and in Cotton Petroleum by 

promptly approving new communitization agreements and awarding the 

Indian mineral owners royalties retroactive to the date of first 

production in the unit. In so doing, however, the Secretary 

merely demonstrated the arbitrariness of his action in 

disapproving the communitization agreement.9 

Having concluded that the Secretary acted arbitrarily and 

abused his discretion, we next consider the appropriate remedy. 

Under the APA, a reviewing court must rely on the administrative 

record to assess the validity of the agency action. Camp v. 

Pitts, 411 U.S. 138, 142 (1973) (per curiam). When the agency has 

failed to explain adequately the rationale underlying its action, 

and "further explanation is necessary to a proper assessment of 

the agency's decision," the court should ordinarily remand for 

9 Further, the Secretary's order in the instant case appears 

improperly to have penalized Woods Petroleum for waiting "until 

the eleventh hour to submit a Communitization Agreement for 

approval." Aplt. App. at 132. The Secretary noted that Woods 

Petroleum failed to commence drilling on the Indian land during 

the primary term of the lease, and thus "voluntarily assumed the 

risk not only that the Department might not act on the Agreement 

prior to the expiration of the leases, but that the Agreement 

might be disapproved." Id. However, the record establishes that 

Woods Petroleum submitted a fully-executed communitization 

agreement to the Secretary, and had drilled a well in the stateordered spacing unit, before the primary terms of the original 

1977 leases were due to expire. Indeed, we explained in Cotton 

Petroleum that submission of a communitization agreement to 

Interior prior to the expiration of the lease's primary term 

constitutes timely filing. Cotton Petroleum, 870 F.2d at 1523. 

Neither 25 U.S.C. § 396d nor the regulations promulgated 

thereunder specify time restrictions for the Secretary's review of 

a proposed communitization agreement. It is not unusual in oil 

and gas production for a lessee to drill the qualifying well, or 

execute a spacing unit agreement, near the end of the primary term 

of the lease. For instance, the lessee in Cotton Petroleum 

commenced drilling in the unit eighteen days prior to the 

expiration of the lease, whereas drilling commenced fifty-one days 

prior to the lease expiration date in the instant case. 

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further proceedings. Id. at 143. As we explained in our panel 

opinion, "[i]f the only deficiency in the Secretary's actions were 

an inadequate analysis and discussion of all relevant factors [in 

the BIA guidelines]," remand would be appropriate in light of 

Camp. Woods Petroleum, 18 F.3d at 859. 

However, remand for further explanation would be fruitless in 

this case because the Secretary has unequivocally explained his 

action as intended to facilitate the expiration of the Woods 

PetroleUm lease and the Indian's receipt of a bonus payment from 

Tomlinson. With respect to the propriety of the Woods Petroleum 

communitization agreement, neither the Secretary nor the Indian 

lessors has ever identified any deficiencies, and the Secretary's 

approval of the identical Tomlinson communitization agreement is 

tantamount to an approval of the reasonableness of the Woods 

Petroleum communitization agreement. In fact, the BIA Area 

Director's "best interest assessment," properly analyzed through 

the lens of the 1982 BIA guidelines, recommended approval of the 

Woods Petroleum communitization agreement. Because this 

recommendation provides a full recitation of the relevant factors, 

and no parties object to the substance of the BIA's evaluation of 

the communitization agreement, we conclude that the BIA Area 

Director's approval of the Woods Petroleum communitization 

agreement should be upheld. 

III. Conclusion 

For the foregoing reasons, we REVERSE the district court's 

order and REMAND with instructions to reverse the Secretary's 

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order, to reinstate the BIA Area Director's approval of the Woods 

Petroleum comrnunitization agreement, to declare that the Woods 

Petroleum leases have not expired, and to declare void both the 

Tomlinson comrnunitization agreement and the Tomlinson leases. 

Finally, we direct the court to conduct an accounting of all funds 

involved, including bonuses, with distribution and/or return to 

follow as if the Area Director's approval of the Woods Petroleum 

comrnunitization agreement had been timely adopted and AFFIRMED. 

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92-6053 Woods v. Department of Interior 

HENRY, Circuit Judge, dissenting, with whom SEYMOUR, Chief Circuit 

Judge, joins: 

Acknowledging the Secretary of the Interior's fiduciary 

obligations, the majority overturns a decision that resulted in 

the negotiation of more lucrative leases on behalf of Indian 

mineral owners. I find the majority's reasoning inconsistent with 

both the paramount obligation of trust that our government owes to 

its indigenous peoples and with the great deference that we 

generally afford to agency decisions. By imposing requirements on 

the Secretary that we have not required of other agencies, the 

majority undermines the generally established standard of review 

for administrative decisions. The majority opinion also does not 

resolve the conflict in our prior cases regarding the Secretary's 

evaluation of communitization agreements. Therefore, I must 

respectfully dissent. 

As the majority notes, we may overturn an agency's decision 

only if it is "arbitrary, capricious, an abuse of discretion, or 

otherwise not in accordance with law." 5 U.S.C. § 706(2) (A). The 

Supreme Court has explained this narrow standard of review as 

follows: 

Normally, an agency rule would be arbitrary 

and capricious if the agency has relied on 

factors which Congress has not intended it to 

consider, entirely failed to consider an 

important aspect of the problem, offered an 

explanation for its decision that runs counter 

to the evidence before the agency, or is so 

implausible that it could not be ascribed to a 

difference in view or the product of agency 

expertise. 

1 

Appellate Case: 92-6053 Document: 01019280514 Date Filed: 02/21/1995 Page: 23 
Motor Vehicle Mfrs. Ass'n v. State Farm Mut. Auto. Ins. Co., 463 

u.s. 29, 43 (1983). 

In my judgment, in disapproving the Woods communitization 

agreement, the Assistant Secretary made a reasoned decision to 

which we should defer. I base this conclusion on an examination 

.of the Secretary's fiduciary obligations to Indian mineral owners, 

our prior decisions regarding the evaluation of communitization 

agreements governing tribal and allotted lands, and the record of 

the Interior Department proceedings, which reflects extensive 

efforts by the Assistant Secretary to obtain and review relevant 

facts and law. 

A. The Secretary's Fiduciary Obligations 

In its dealings with Indian peoples, the federal government 

"has charged itself with moral obligations of the highest 

responsibility and trust." Seminole Nation v. United States, 316 

U.S. 286, 297 (1942). As a result, the relationship between the 

Indians and the federal government "is marked by peculiar and 

cardinal distinctions which exist nowhere else" and "resembles 

that of a ward to his guardian." Cherokee Nation v. Georgia, 30 

U.S. (5 Pet.) 1, 16-17 (1831). See generally Jicarilla Apache 

Tribe v. Supron Energy Co~., 728 F.2d 1555, 1563 (lOth Cir. 1984) 

(Seymour, J., dissenting) (discussing Secretary of the Interior's 

fiduciary obligations to Indian mineral owners) , dissenting 

opinion adopted as majority opinion as modified, 782 F.2d 855 

(lOth Cir.) (en bane), cert. denied, 479 u.s. 970 (1986); Stephen 

L. Pevar, The Rights of Indians and Tribes 26-36 (2d ed. 1992). 

2 

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In addition to this general trust relationship, there are 

"other, context-specific trust relationships of varying depth and 

responsibility" that arise in particular areas of federal 

government regulation involving Indian people. Jicarilla, 728 

F.2d at 1563. One scholar has observed that "the more specific 

the obligation, the higher the duty of care." Pevar, supra, at 

28. 

In Jicarilla, we examined the federal government's role in 

the leasing of minerals located on land owned by an Indian tribe. 

After considering the provisions of the Indian Mineral Leasing 

Act, 25 U.S.C. §§ 396a-396g, accompanying regulations, and the 

Act's legislative history, we concluded that Congress intended for 

the Secretary of the Interior to act as a fiduciary for Indian 

mineral owners. We found that "[t]he evident purpose of the 

statute is to ensure that Indian tribes receive the maximum 

benefit from mineral deposits on their lands through leasing." 

Jicarilla, 728 F.2d at 1565. We further noted that the 

regulations enacted pursuant to the Indian Mineral Leasing Act 

repeatedly stress that the Secretary "must act in the best 

interests of the tribes." Id. We deemed it significant that the 

Act was passed because, "'it [was] not believed that the present 

law [was] adequate to give the Indians the greatest return from 

their property.'" Id. (quoting Senate Report No. 985, at 2 

(1937); House Report No. 1872, at 2 (1938)). 

The fiduciary obligation we outlined in Jicarilla informs 

courts' assessments of particular statutes and regulations. As a 

result, whenever doubt or ambiguity exists in the applicable 

3 

Appellate Case: 92-6053 Document: 01019280514 Date Filed: 02/21/1995 Page: 25 
statutory and regulatory provisions, "such doubt is resolved in 

favor of the tribes." Jicarilla, 728 F.2d at 1563 (citing Bryan 

v. Itasca County, 426 U.S. 373, 392 (1976)). The Secretary's 

fiduciary responsibilities also limit the range of regulatory 

decisions that he or she may make: 

When the Secretary is acting in his fiduciary 

role rather than solely as a regulator and is 

faced with a decision for which there is more 

than one "reasonable" choice as that term is 

used in administrative law, he must choose the 

alternative that is in the best interests of 

the Indian tribe. In short, he cannot escape 

his role as trustee by donning the mantle of 

administrator . . . . 

Id., at 1567 (emphasis added). 

These principles of fiduciary responsibility apply to the 

instant case. Like the statutes and regulations that we analyzed 

in Jicarilla, the statute that quite specifically governs the 

leasing of allotted Indian lands, 25 U.S.C. § 396, vests broad 

discretion in the Secretary of the Interior. Enacted in 1909, the 

statute authorizes the Secretary to execute mining leases for any 

term of years that he deems advisable. It states that the 

Secretary may "perform any and all acts and make such rules and 

regulations as may be necessary for the purpose of carrying the 

provisions of this section into full force and effect." 25 U.S.C. 

§ 396. In addition, the statute expressly grants the Secretary 

the right to "reject all bids whenever in his judgment the 

interests of the Indians will be served by so doing, and to 

readvertise such lease for sale." Id. 

The legislative history of 25 U.S.C. § 396 is instructive. 

As originally drafted, the statute authorized the leasing of 

4 

Appellate Case: 92-6053 Document: 01019280514 Date Filed: 02/21/1995 Page: 26 
allotted lands without restrictions. However, the Secretary of 

the Interior objected to the absence of restrictions, observing 

that "[e]xperience has shown that this is unjust to the Indians, 

as the inrush of prospective miners is always prejudicial to the 

Indians' interests, and, in justice to them, the Department should 

not recommend favorable action on any bill that would render them 

insecure in their homes." H.R. Rep. No. 1225, 60th Cong., 1st 

Sess. 2 (1908). The bill was then amended to address the 

Secretary's concerns. Id. The Federal Circuit has concluded 

that, in enacting 25 U.S.C. § 396, "Congress was much interested 

in having [the] Interior [Department] oversee the leasing of the 

Indian lands so as to prevent exploitation of and prejudice to the 

Indians' interest, or injustice to them." Pawnee v. United 

States, 830 F.2d 187, 189 n.2 (Fed. Cir. 1987), cert. denied, 486 

u.s. 1032 (1988) (citing H.R. Rep. No. 1225, 60th Cong., 1st Sess. 

1-2 (1908)). 

The statute authorizing the Secretary to approve 

communitization agreements on allotted and tribal lands, 25 u.s.c. 

§ 396d, was enacted with a similar purpose. Section 396d is part 

of the Indian Mineral Leasing Act, which we examined in Jicarilla 

and which Congress passed in order "to achieve uniformity in 

tribal leasing matters; to increase Indian authority in granting 

leases; and to protect the Indians' economic return on their 

property." Assiniboine & Sioux Tribes v. Board of Oil & Gas 

Conservation, 792 F.2d 782, 796 (9th Cir. 1986). Section 396d 

gives the Secretary and his or her delegates broad discretion to 

approve or disapprove comrnunitization agreements governing leases 

5 

Appellate Case: 92-6053 Document: 01019280514 Date Filed: 02/21/1995 Page: 27 
of Indian land. Kenai Oil & Gas. Inc. v. Department of the 

Interior, 671 F.2d 383, 386 (lOth Cir. 1982). An accompanying 

regulation, 25 C.F.R. § 212.24(c), provides that leases of 

allotted lands "shall be subject to a cooperative unit or 

development plan affecting the leased lands if and when required 

by the Secretary of the Interior." Like 25 U.S.C. § 396d, Section 

212.24(c) places no limits on the Secretary's discretion in 

assessing communitization agreements. However, it is part of the 

general regulatory framework governing the leasing of Indian lands 

that requires the Secretary and his or her delegates to act in the 

best interests of Indian mineral owners. See Jicarilla, 728 F.2d 

at 1565. 

Accordingly, in deciding whether to approve or disapprove 

communitization agreements governing allotted lands such as those 

at issue here, the Secretary must act as a fiduciary for Indian 

mineral owners, guided by the same exacting standards that we 

outlined in Jicarilla. See Pawnee, 830 F.2d at 190. In 

exercising this duty to the Indian owners, "[n]ot honesty alone, 

but the punctilio of an honor the most sensitive, is then the 

standard of behavior." Seminole Nation, 316 U.S. at 297 n.12 

(quoting Meinhard v. Salmon, 164 N.E. 545 (N.Y. 1928) (Cardozo, 

J.)). That fiduciary duty of utter loyalty, combined with our 

narrow standard of review, should guide our analysis of the 

Assistant Secretary's decision to disapprove the Woods 

communitization agreement. 

6 

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B. Kenai. Cheyenne-Arapaho. and Cotton Petroleum 

We have discussed the Secretary's obligation in evaluating 

communitization agreements affecting leases of tribal and allotted 

lands in several prior cases: Cheyenne-Arapaho Tribes v. United 

States, 966 F.2d 583 (lOth Cir. 1992), cert. denied. 113 S. Ct. 

1642, and 113 S. Ct. 1643 (1993); Cotton Petroleum Corp. v. 

Department of the Interior, 870 F.2d 1515 (lOth Cir. 1989); and 

Kenai, supra, 671 F.2d 383. The majority reads those decisions as 

establishing a uniform body of law that provides that, in 

assessing a communitization agreement, the Secretary must consider 

all the relevant factors and may not treat one factor as 

determinative. I agree that we have consistently directed the 

Secretary to consider all the relevant factors. However, I 

believe that our cases are in conflict as to whether particular 

factors may be determinative. An examination of our prior 

decisions illustrates this conflict. 

In Kenai, we held that the Secretary's designate, the 

Superintendent of the Bureau of Indian Affairs (BIA) , did not 

abuse his discretion when he refused to approve a communitization 

agreement that, if approved, would have extended the terms of 

several mineral leases of restricted Indian land. We reviewed 

testimony from the Superintendent, who had stated that he reached 

his decision because he had determined that the subject tracts 

could be re-leased for higher royalty payments and bonuses if the 

original leases were not extended by the proposed communitization 

agreement. Noting that the Secretary and his delegates had a duty 

to maximize lease revenues for the Indian mineral owners, we found 

7 

Appellate Case: 92-6053 Document: 01019280514 Date Filed: 02/21/1995 Page: 29 
that Interior Department officials had no obligation to approve a 

plan that did not serve the best interests of the Indian owners 

and that they acted within their discretion "in refusing to 

approve an economically unsatisfactory plan." Kenai, 671 F.2d at 

387. 

In Cheyenne-Arapaho, we applied Kenai and found that the 

Secretary and his delegates breached their fiduciary obligation by 

approving a communitization agreement governing mineral leases in 

Custer County, Oklahoma. In arguing that the Interior Department 

had satisfied its obligations to the Cheyenne-Arapaho Tribe by 

approving the subject agreement, the Secretary maintained that 

disapproval would create a risk that new leases could not be 

negotiated and that retaliatory litigation might be brought by 

lessees whose interests were terminated by disapproval of the 

agreement. We rejected that explanation, characterizing it as an 

argument for "across-the-board" approval of communitization 

agreements that was inconsistent with the required policy of 

maximizing tribal revenues. Cheyenne-Arapaho, 966 F.2d at 590-91. 

Because the market for oil and gas leases in Custer County, 

Oklahoma in the early 1980s was extremely favorable for mineral 

owners, we held that the Secretary and his delegates abused their 

discretion by declining to consider the market value and 

marketability of leases that could have been negotiated for the 

tribe if the subject communitization agreement had been 

disapproved so that more profitable leases could have been 

negotiated. 

8 

Appellate Case: 92-6053 Document: 01019280514 Date Filed: 02/21/1995 Page: 30 
In Cotton Petroleum, decided after Kenai but before CheyenneArapaho, we described the Secretary's obligations in evaluating 

communization agreements somewhat differently. We reversed an 

Interior Department decision regarding a proposed comrnunitization 

agreement finding that, "[o]n the totality of the record before 

us," the decision constituted an abuse of discretion. Cotton 

Petroleum, 870 F.2d at 1529. The decision in Cotton Petroleum 

concerned a proposed comrnunitization agreement that was submitted 

shortly before a mineral lease of a restricted Indian allotment 

was scheduled to expire. Just as in Kenai and Cheyenne-Arapaho, 

one effect of the proposed agreement was to extend the terms of 

underlying leases. An Area Director of the BIA approved the 

agreement, but an Assistant Secretary (rendering a final decision 

for the Interior Department) reversed the Area Director's decision 

and disapproved the agreement. 

In particular, the Assistant Secretary found that approval of 

the agreement was not in the best interests of an Indian mineral 

owner. However, after disapproving the subject agreement, the 

Assistant Secretary proceeded to include the subject tract within 

the unit established by the comrnunitization agreement and to rule 

that the Indian mineral owner was entitled to royalties under the 

terms of the very comrnunitization agreement that he had 

disapproved. Id. at 1520-21, 1527. 

In reversing the Assistant Secretary's decision, we noted the 

inconsistency of disapproving the comrnunitization agreement for 

purposes of allowing the subject lease to terminate so that a new, 

more lucrative lease could be negotiated, and then including the 

9 

Appellate Case: 92-6053 Document: 01019280514 Date Filed: 02/21/1995 Page: 31 
subject tract in a unit and awarding royalties under the same 

partially rejected agreement. See id. at 1527 ("To reject the 

communitization agreement and then immediately to affirm it and to 

award the . . . appellees retroactive benefits under it exposes 

the arbitrary and capricious nature of the Secretary's action."). 

We also observed that the Assistant Secretary's decision was 

inconsistent with the Department's treatment of other Indian 

lessors in the same unit area. Specifically, the Area Director of 

the BIA had unequivocally approved the same communitization 

agreement as to other Indian leases within the same proposed unit. 

We found no adequate and reasoned explanation in the record of the 

differing treatment afforded similarly situated Indian lessors. 

Id. 

However, in addition to these factors, we based our reversal 

of the Assistant Secretary's decision in Cotton Petroleum on 

reasoning that I find inconsistent with Kenai and CheyenneArapaho. In particular, we criticized the Assistant Secretary for 

failing to evaluate the communitization agreement "on its merits" 

and for using his decision partially disapproving the proposed 

agreement as "a triggering event to cause the termination of a 

separate instrument, the lease." Id. at 1528. Compare Kenai, 671 

F.2d at 386 (affirming disapproval of communitization agreement on 

the basis of its effect on the underlying leases) . 

Finally, in Cotton Petroleum, as the majority notes, we found 

that the Assistant Secretary had failed to consider the following 

relevant factors in reaching his decision: (1) whether the longterm economic effects of the proposed communitization agreement 

10 

Appellate Case: 92-6053 Document: 01019280514 Date Filed: 02/21/1995 Page: 32 
served the best interests of the Indian lessors; (2) whether the 

geological and engineering aspects of the agreement furthered 

those interests; and (3) whether the lessee had complied with the 

terms of the lease, including commencing drilling operations 

within the proposed unit prior to the expiration of the Indian 

leases. Cotton Petroleum, 870 F.2d at 1518, 1525. These factors, 

we explained, were set forth in the BIA guidelines (promulgated in 

response to our Kenai decision) regarding the evaluation of 

communitization agreements. We focused on the Assistant 

Secretary's final written decision, observing that he did not 

discuss the guideline factors and made no effort to explain his 

failure to do so. Id. at 1526. 

C. Communitization Agreements and Underlying Leases 

In light of these prior decisions, we are presented with 

contrasting principles to apply. Kenai holds that the Secretary 

may disapprove a particular communitization agreement in order to 

allow underlying leases to expire and new, more profitable leases 

to be negotiated. Cheyenne-Arapaho finds that the Secretary 

breached his fiduciary obligation to Indian mineral interest 

owners by failing to consider the economic benefit that they 

would obtain through the disapproval of a particular 

communitization agreement. Our conclusion in Cheyenne-Arapaho 

that the Secretary breached his fiduciary duty is based on the 

principle that the Secretary could have properly decided to 

disapprove the communitization agreement for the specific purpose 

of allowing new, more profitable leases to be negotiated. In 

11 

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contrast, Cotton Petroleum declares that it is improper for the 

Secretary to base a decision regarding a comrnunitization 

agreement on its effect on an underlying lease. 

Finding this case analogous to Cotton Petroleum, the majority 

concludes that, in a particular circumstance, it is improper for 

the Secretary to disapprove a comrnunitization agreement on the 

basis of the agreement's effect on underlying leases. According 

to the majority, the Secretary acts arbitrarily and capriciously 

and abuses his or her discretion when he or she disapproves a 

specific agreement in order to allow Indian mineral owners to 

negotiate more profitable leases and then subsequently approves a 

second comrnunitization agreement that establishes the same unit 

area as the agreement that he has previously rejected. In so 

holding, I believe that the majority reads Cotton Petroleum too 

expansively and implicitly rejects important principles set forth 

in Kenai and Cheyenne-Arapaho, thereby transforming the Secretary 

into something less than a fiduciary for the Indian mineral 

owners and our review of Interior Department decisions into 

something more than a search for arbitrary and capricious action. 

For several reasons, I find the reasoning of Kenai and CheyenneArapaho more convincing on this issue, and I think it should 

apply. 

First, nothing in the applicable statutes and regulations 

prevents the Secretary from considering the manner in which a 

proposed comrnunitization agreement impacts upon underlying 

leases. A plain reading of 25 U.S.C § 396 gives the Secretary 

broad discretion to perform "any and all acts" and to make all 

12 

Appellate Case: 92-6053 Document: 01019280514 Date Filed: 02/21/1995 Page: 34 
such rules and regulations that are necessary to carrying out its 

provisions. Similarly, the terms of 25 U.S.C. § 396d and 25 

C.F.R. § 212.24(c) place no constraints on the Secretary's 

discretion. 

In the absence of specific statutory or regulatory 

limitations, the Secretary's discretion is controlled_by the 

fiduciary obligation that governs the leasing of Indian mineral 

interests. It cannot be disputed that this fiduciary obligation 

has an economic component. See Jicarilla, 728 F.2d at 1568 

("[T]he purpose of the Indian Mineral Leasing Act is to ensure 

that Indian tribes receive the maximum benefit from mineral 

deposits on their lands, . and we should construe regulations 

enacted under this Act in light of this purpose.") (emphasis 

added); Kenai, 671 F.2d at 386 ("As a fiduciary for the Indians, 

the Secretary is responsible for overseeing the economic 

interests of Indian lessors, and has a duty to maximize lease 

revenues.") (emphasis added) (citation omitted). Indeed, a 

damages remedy is available to Indian owners when the federal 

government breaches its fiduciary obligations. See United States 

v. Mitchell, 463 U.S. 206, 228 (1983). The Supreme Court has 

stated that "[i]t would be anomalous to conclude that these 

enactments [establishing a fiduciary relationship] create a right 

to the value of certain resources when the Secretary lives up to 

his duties, but no right to the value of the resources if the 

Secretary's duties are not performed." Id. at 227. Of course, 

the economic exploitation of the land and resources of Indian 

peoples has permeated our history, making the need for exacting 

13 

Appellate Case: 92-6053 Document: 01019280514 Date Filed: 02/21/1995 Page: 35 
fiduciary standards all the more urgent. See generally United 

States v. Michigan, 471 F. Supp. 192 (W.D. Mich. 1979) 

(discussing Indian removal policy), remanded on other grounds, 

623 F.2d 448 (6th Cir. 1980). Chronicling the history of 

Indians in Oklahoma, Dr. Angie Debo has described an "orgy of 

exploitation" that is "almost beyond belief." Angie Debo, And 

Still the Waters Run vii (1st ed. 1940). Dr. Debo notes, "Within 

a generation, these Indians, who had owned and governed a region 

greater in area and potential wealth than many an American state, 

were almost stripped of their holdings and were rescued from 

starvation only through public charity." Id. Over the last 

twenty-five years, partly in response to the work of Dr. Debo and 

other scholars, the President and Congress have repeatedly 

recognized this exploitation and have taken laudable steps to 

prevent it. See Pevar, supra, at 8-11. 

In light of the broad authority granted by 25 U.S.C. § 396, 

25 U.S.C. § 396d, and 25 C.F.R. § 212.24(c), and in light of the 

Secretary's overriding fiduciary obligation, I see no reason why 

the Secretary should be prevented from considering the effect of 

a communitization agreement on underlying leases. As this case 

illustrates, the economic effect of the continuation or 

expiration of a lease is often substantial. Lessees such as 

Woods and Tomlinson no doubt seek communitization in part because 

of the effect that it will have on underlying leases. To bar the 

Secretary from considering this effect on behalf of the Indian 

lessors prevents him from assessing an important factor that 

14 

Appellate Case: 92-6053 Document: 01019280514 Date Filed: 02/21/1995 Page: 36 
directly impacts on the economic welfare of those whom he has the 

highest duty to protect. 

Contrary to the majority's suggestion that it is 

"duplicitous" for the Secretary to base a decision regarding a 

particular agreement on the manner in which it affects an 

underlying lease, maj. op. at 15, I view that effect as one of 

several consequences of this kind of agreement that the Secretary 

ought to consider. Agreements such as the ones proposed by Woods 

and Tomlinson extend the terms of leases that contain "commence 

drilling" clauses by stipulating that: 

the actual drilling, completion, continued 

operation or production of a well or wells for 

communitized substances on the communitized 

area shall be construed and considered as the 

actual drilling, completing, continued 

operation or production from each and all of 

the lands within and comprising said 

communitized area. 

Applts. App. at 3-4. I do not understand why this kind of clause 

(which often has tremendous economic consequences for all the 

parties) should be insulated from the Secretary's fiduciary 

scrutiny when he reviews an agreement. 

Nor do I see any contractual impediments to the Secretary's 

consideration of how a communitization agreement affects an 

underlying lease. The leases at issue contain a clause that 

states that the parties "agree to subscribe to and abide by any 

agreement for the cooperative or unit development of the field or 

area, affecting the leased lands, or any pool thereof, if and when 

collectively adopted by a majority operating interest therein and 

approved by the Secreta:r:y of the Interior." Applts. App. at 79, 

83. (emphasis added). Thus, the leases in no way establish a 

15 

Appellate Case: 92-6053 Document: 01019280514 Date Filed: 02/21/1995 Page: 37 
right to communitization or to the continuation of their primary 

terms through the approval of a communitization agreement. They 

expressly commit the decision regarding approval of a particular 

agreement to the discretion of the Secretary, and they do not 

purport to limit his exercise of discretion. 

Moreover, in this case, contrary to the panel opinion's 

suggestion, neither the Assistant Secretary nor the Indian mineral 

owners sought to "rescind or escape a contract." Woods Petroleum 

Co~. v. Department of the Interior, 18 F.3d 854, 859 (lOth Cir. 

1994). The leases here at issue had primary terms of five years. 

During that time, Woods and the other lessees had the right to 

drill on the subject allotted tracts or submit a communitization 

agreement to the Secretary. Nothing in the record indicates the 

Secretary or the Indian mineral owners sought to prevent the 

lessees from exercising their contractual right to drill for 

minerals. The fact that Woods never drilled a well on the subject 

tracts, only began to drill a well on an adjacent tract some six 

weeks prior to the end of the primary terms of the leases, and did 

not tender a completely executed communitization agreement to the 

BIA until eight days before the end of those primary terms cannot 

be attributed to any contractual breach by Interior Department 

officials or the Indian mineral owners. See maj. op. at 5; 

Applts. App. at 77, 80-81, 84 (primary terms expired on February 

25, 1982). In such a situation, disapproval of the Woods 

agreement on the basis of its effect on the underlying leases was 

a decision that the leases permitted; there was no escape or 

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rescission of a contractual obligation by either the Assistant 

Secretary or the Indian mineral owners. 

In addition, in my opinion, the requirement that the 

Secretary consider all the relevant factors in assessing 

communitization agreements does not prevent her or him from basing 

a decision on the effect that a particular agreement has on 

underlying leases. To be sure, in reversing the Secretary's 

decisions, both Cotton Petroleum and the majority rely on the 

BIA's post-Kenai guidelines concerning the evaluation of 

communitization agreements. However, although those guidelines 

direct BIA directors and superintendents to consider certain 

factors and to issue written explanations of their conclusions, 

they do not purport to suggest what weight must given to each 

factor. Thus, if a particular agreement is determined to-be 

geologically and technically warranted but not in the best 

economic interests of the Indian lessors, the guidelines are 

silent as to whether the Secretary and his or her delegates should 

rely on the factors that support approval of the agreement or the 

factors that suggest that it should be disapproved. The weighing 

of the factors is a matter that the guidelines leave to the 

discretion of Interior Department officials, who must act in 

accordance with their fiduciary obligation to Indian mineral 

owners. In my judgment, as long as the record of Interior 

Department proceedings indicates that the Secretary and his or her 

delegates considered the guideline factors, they may certainly 

determine that one of those factors (such as the economic benefits 

that the Indian owners would obtain from the negotiation of new 

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Appellate Case: 92-6053 Document: 01019280514 Date Filed: 02/21/1995 Page: 39 
leases) outweighs the others and should be dispositive as to 

whether a particular agreement is approved or disapproved. 

Finally, I am unconvinced by the majority's conclusion that 

the Secretary's approval of a second communitization agreement 

establishing the same unit area as a previously rejected agreement 

signifies that it was improper for the Secretary to have based the 

disapproval of the first agreement on its effect on underlying 

leases. In so holding, the majority essentially concludes that 

although the Secretary should consider the economic effects of 

communitization generally, see maj. op. at 17, he or she is barred 

from considering the substantial economic effect of a decision to 

approve or disapprove a specific agreement at a particular time I 

discern nothing in the Indian Mineral Leasing Act, accompanying 

regulations, or federal law concerning the Secretary's fiduciary 

duties that so limits his or her discretion. 

D. The Assistant SecretakY'S Consideration of the Relevant 

Factors in this Case 

In addition to concluding that it was improper for the 

Assistant Secretary to base his decision regarding the approval or 

disapproval of the subject communitization agreement on the effect 

of that agreement on underlying leases, the majority finds that 

the Assistant Secretary did not consider the relevant factors. I 

disagree with that conclusion as well. 

As the majority notes, after the Indian lessors appealed the 

BIA Area Director's initial approval of the Woods communitization 

agreement to the Office of the Secretary, the Deputy Assistant 

Secretary requested a "best-interest assessment" from the 

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• 

Department's Branch of Energy and Minerals Assistance. Applts. 

App. at 112-14. In its written report, the Energy and Minerals 

Branch analyzed the various consequences that might result from 

the approval or disapproval of the Woods communitization 

agreement. The report favored approval of the agreement, 

concluding that if the agreement was approved, the Indian lessors 

would "immediately receive" $384,675.74 in accrued royalties and 

interest from production from the unit well. Id. at 114. 

Contrary to the majority's characterization, the report did not 

find that, if the Woods communitization agreement was disapproved, 

the Indian mineral owners would "forfeit" these royalties. Maj. 

op. at 7. Instead, the report noted that there might be some 

question as to who was entitled to the escrowed funds. See 

Applts. App. at 114 (noting that, if the Woods agreement was 

disapproved,"[t]he Indian mineral interests will no longer be 

considered under lease to Woods" and that "[t)his raises the issue 

of who should receive the royalties currently in escrow"). The 

report also stated that if the Woods agreement was not approved, 

the prospect of re-leasing the Indian tracts was "not very good" 

and "even if a large bonus were received, the prospect of 

receiving future royalties from production is not guaranteed." 

Applts. App. at 117. 

The Deputy Assistant Secretary then appropriately, and in my 

view necessarily, invited the Indian mineral owners and Woods to 

respond to this report. Indeed, because there is no indication 

that the Indian owners were notified of the Corporation Commission 

proceedings, the Interior Department proceedings may have been the 

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only chance for these Indian owners to be heard regarding their 

position as to the proper development of their mineral interests. 

The Indian owners filed a response disputing the report's 

conclusions. They challenged the conclusion that future leasing 

prospects were "not very good," stating, "There does exist a 

potential lessee who is willing to lease the mineral interests of 

the Indian owners and pay bonus monies in excess of $400,000.00." 

Applts. App. at 119. They added: 

The potential lessee is fully aware of any 

possible litigation occurring in the Federal 

Courts and the Secretary may rest assured that 

a valid oil and gas mining lease will be 

entered into by and between the potential 

lessee and the Indian mineral owners 

immediately upon the disapproval of the 

Communitization Agreement and the invalid 

leases with Woods Petroleum Company. 

The Indian mineral owners also maintained that, if the Woods 

agreement was disapproved such that new leases could be 

negotiated, they would seek to join their mineral interests to the 

rest of Section 17 of Custer County through a subsequent 

communitization agreement. They argued that under such an 

agreement they would be entitled to a proportional share of the 

revenues from the unit wells from the date of first production and 

cited a decision, Samedan Oil Corp. v. Cotton Petroleum Co~., 466 

F. Supp. 521, 525 (W.D. Okla. 1978), which upheld a 

communitization agreement governing Indian land that had been 

given retroactive effect to the date of first production. Applts. 

App. at 122. 

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.. 

Finally, the Indian owners argued that, under principles 

established in several oil and gas decisions, the disapproval of 

the Woods agreement also entitled them (as owners of unleased 

tracts) to working interest revenues from the date of first 

production in Section 17. Under this theory, the Indian owners 

estimated that they would be entitled to approximately $1,920,000. 

Applts. App. at 119, 123-24. Woods filed a response agreeing with 

the report of the Energy and Minerals Branch and disputing the 

analysis of the Indian mineral owners. Applts. App. at 126-27. 

These documents from the administrative proceedings 

demonstrate that, at the time that the Assistant Secretary issued 

his final decision in May of 1986, there was conflicting evidence 

before him as to whether approval of the Woods agreement was in 

the best interests of the Indian mineral owners. The submissions 

from the Energy and Minerals Branch of the BIA and from the Indian 

mineral owners establish that reasonable arguments could be made 

both in support of and in opposition to the Woods communitization 

agreement. However, in light of the majority's characterization 

of the disapproval of the Woods agreement as an unreasonable, 

arbitrary, and capricious act, it should be noted that the report 

of the Energy and Minerals Branch (which recommended approval of 

the agreement) turned out to be incorrect about one important 

factor: just as the Indian mineral interest owners reported, a 

new lessee was available and did pay a $400,000 bonus to lease the 

subject allotted tracts. In any event, in his final decision for 

the Interior Department, although the Assistant Secretary referred 

to the initial recommendation of the Department's Minerals 

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~ 

Management Service that the unit proposed by the Woods agreement 

was economically and geologically proper, he found that the 

$400,000 bonus that the Indian lessors could obtain if new leases 

were negotiated made disapproval of the agreement in their best 

economic interest. 

As to this particular finding of the Assistant Secretary, my 

disagreement with the majority concerns the application of the 

requirement that agency officials must consider the relevant 

factors. Following Cotton Petroleum, the majority focuses on the 

Interior Department's final written decision and seems to require 

an item-by-item discussion of each factor articulated in the BIA 

guidelines. If that is what the relevant factors requirement 

entails, then I would agree that the Assistant Secretary did not 

satisfy it here. In particular, his May 1986 decision does not 

discuss one of the BIA factors at all: the lessees' compliance 

with the terms of the underlying leases. In addition, aside from 

a brief reference to the Minerals Management Service's conclusion 

that the proposed unit was geologically and economically proper, 

the decision does not discuss geological, engineering, and 

technical aspects of the agreement. 

However, in my opinion, the applicable law does not and 

should not require the official to itemize "each and every factor 

discarded as well as the factors taken into account in order to 

reach a reasoned decision." Cotton Petroleum, 870 F.2d at 1531 

(McKay, J., dissenting). In fact, the decisions on which the 

majority relies distinguish between an agency's duty to consider 

factors in making a decision and its duty to articulate the 

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reasons for a particular decision. As to the first of these 

duties, a court may examine the entire administrative record in 

order to determine whether the relevant factors have been 

considered. See Citizens to Preserve Overton Park v. Volpe, 401 

U.S. 402, 416 (1971); cf. United States v. Morgano, ___ F.3d. 

, Nos. 92-1828, 92-1829, 92-2069, 92-2144, 92-2224, 1994 WL 

559518, at *11 (7th Cir. Oct. 13, 1994) ("Because the statutes and 

Guidelines only mandate the sentencing court to 'consider' the 

relevant factors, the district court is under no obligation to 

enter specific findings as to each factor. The record must merely 

indicate the court considered the statutory factors, in general, 

in arriving at the fine."). 

In contrast, the agency's duty to articulate its reasoning 

applies to its final decision. In order to satisfy this duty, an 

agency need only provide "a satisfactory explanation for its 

action including 'a rational connection between the facts found 

and the choice made.'" Motor Vehicle Mfrs. Ass'n, 463 U.S. at 43 

(quoting Burlington Truck Lines v. United States, 371 U.S. 156, 

168 (1962)). Under this requirement, a court may uphold a 

decision "of less than ideal clarity if the agency's path may 

reasonably be discerned." Bowman Transp. I Inc. I v. Arkansas-Best 

Freight Sys.l Inc., 419 U.S. 281, 286 (1974). 

I believe that the majority errs in requiring the final 

decision-maker to engage in a factor-by-factor discussion of each 

relevant factor regarding the evaluation of a communitization 

agreement. Significantly, in Kenai, the only case in our 

communitization trilogy in which we affirmed an Interior 

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• 

Department decision regarding a communitization agreement and the 

first of these cases in which we applied the relevant factors 

requirement to agency evaluations of such agreements, we did not 

require such a factor-by-factor discussion. Instead, we deemed 

sufficient the BIA Superintendent's testimony that the leases 

underlying the proposed agreement could be renegotiated for higher 

royalty payments and bonuses if the agreement was disapproved. 

Kenai, 671 F.2d at 387.1 

In this case, the best-interest analysis requested by the 

Deputy Assistant Secretary, the responses to that analysis from 

the Indian mineral owners and Woods, and the Assistant Secretary's 

explanation of the grounds for his decision clearly demonstrate 

that the Interior Department considered the relevant factors in 

making its final decision. Indeed, a review of the report of the 

Energy and Minerals Branch, which the Deputy Assistant Secretary 

specifically requested in order to assist in the decision 

regarding the Woods communitization agreement, indicates that a 

wide variety of factors were considered and discussed, including: 

1 Moreover, the language of the BIA guidelines does not support 

the majority's requirement that the Interior Department's final 

decision-maker must engage in a factor-by-factor discussion in the 

document that sets forth his decision. The guidelines simply 

require that a written statement discussing the listed factors be 

prepared by the final decision-maker's subordinates--BrA Area 

Directors and Superintendents. As to the final decision reached 

by the Interior Department after an Area Director's or 

Superintendent's decision is appealed, the guidelines are silent 

as to the level of specificity with which the responsible agency 

official must discuss the various factors. Applts. App. at 93-94. 

I do not believe that the majority sufficiently explains the basis 

for extending the requirement to discuss specific factors beyond 

what the BIA guidelines require, particularly when the required 

factor-by-factor analysis has been conducted by a subordinate BIA 

official and is contained in the record that the final agency 

decision-maker reviews. 

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the market for negotiating new leases if the Woods agreement was 

disapproved, drainage of the allotted tracts from unit wells, the 

amount of royalties that the Indian owners would receive from the 

proposed unit, the possibility of litigation, and the amount of 

production from wells drilled within the proposed unit. Applts. 

App. at 114-17. Moreover, the Indian lessors' response to this 

report (which the Deputy Assistant Secretary also requested) 

discusses many of these same factors. Id. at 118-25. 

Although the Assistant Secretary did not discuss many of 

these specific factors in his final May 1986 decision, I simply do 

not think that he was required to do so. Moreover, the discretion 

as to whether to approve the agreement was his and not his 

subordinate's, and as long as he gave a reasoned explanation of 

his decision, he was free to disagree with the conclusions reached 

in the report of the Energy and Minerals Branch of the BIA. By 

explaining, after thorough review, that he deemed it to be in the 

best interests of the Indian owners to disapprove the Woods 

agreement and to allow negotiation of new leases and the payment 

of a $400,000 bonus, I find that he sufficiently articulated a 

reasoned basis for his decision that was not arbitrary, 

capricious, or an abuse of discretion. The majority's decision to 

the contrary bodes ill for our future review of administrative . 

decisions, for it suggests that agencies may be required to engage 

in factor-by-factor discussions not required by their own 

guidelines or by our prior cases. 

Moreover, in my judgment, the record evinces the kind of 

comprehensive scrutiny that modern federal Indian policy requires. 

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Acting pursuant to a statute (25 U.S.C. § 396d) passed, in part, 

to increase Indian authority over mineral leases and protect 

Indians' economic return on their property, Assiniboine & Sioux 

Tribes, 792 F.2d at 796, the Assistant Secretary reached a 

decision that comports with those aims. 

E. Other Indications of Unreasonableness 

The majority also focuses on two other elements of the 

Assistant Secretary's decision that it finds unreasonable, 

arbitrary, and capricious. First, the majority notes that after 

disapproving the Woods communitization agreement in May 1986, the 

Assistant Secretary approved an "identical" communitization 

agreement submitted by the new lessee of the Indian tracts, 

Tomlinson Properties, Inc., in September 1986. Maj. op. at 18. 

Moreover, the majority notes, the Assistant Secretary made the 

Tomlinson agreement retroactive to September 1982, the date of 

first production in section 17 of Custer County. In my judgment, 

neither of these decisions regarding the Tomlinson agreement 

renders the Assistant Secretary's actions unreasonable, arbitrary, 

or capricious. 

In finding that approval of the Tomlinson communitization 

agreement indicates that the Secretary acted improperly in 

assessing the Woods agreement, I think that the majority ignores 

the applicable regulations, the BIA guidelines, and the 

Secretary's fiduciary obligations. 25 U.S.C. § 396d, 25 C.F.R. § 

212.24(c), and the BIA regulations focus on decisions as to 

particular agreements and plans. The decision that § 396d and § 

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• 

212.24(c) authorize the Secretary to make, and for which the BIA 

has established guidelines, concerns whether a specific agreement 

or plan is in the best interests of the Indian lessors. As the 

district court observed, the decision is not whether the tracts in 

question should ever be cornrnunitized, but whether a particular 

agreement or plan should be approved. Applts. App. at 326. 

In this case, although the Woods agreement and the Tomlinson 

agreement both organized the same tracts into a unit, they had 

different economic effects. The Woods agreement, if approved, 

would have extended lease nos. 14-20-205-7048, 14-20-205-7049, and 

14-20-205-7050. In contrast, the Tomlinson agreement was 

submitted after the Woods leases had expired and after the subject 

allotted tracts had been re-leased for a substantial bonus. In 

treating these two agreements differently, the Assistant Secretary 

did what his fiduciary responsibilities, Kenai, and CheyenneArapaho authorize him to do: he considered the economic aspects 

of particular agreements in making his decision. To say, as the 

majority does, that the Woods agreement and the Tomlinson 

agreement were "identical," is to ignore their differing effects 

on the very individuals whose interests should be a touchstone to 

both the Secretary's and this court's analysis. 

As to this issue, I also do not believe that Cotton Petroleum 

supports the majority's reasoning. In that case, the Assistant 

Secretary disapproved a proposed cornrnunitization agreement in one 

respect (so that the underlying lease would expire) and then 

approved the same agreement so that the Indian mineral owner could 

participate in the proposed unit. In the instant case, the 

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Assistant Secretary did not simultaneously approve and disapprove 

the Woods agreement or the Tomlinson agreement. Rather, he 

evaluated the two agreements differently because of their 

contrasting economic effects on the Indian owners. 

Finally, I do not find the Assistant Secretary's decision 

giving the Tomlinson agreement retroactive effect to be arbitrary, 

capricious, or unreasonable. Upon the disapproval of the Woods , 

communitization agreement, the subject allotted tracts became 

unleased for the period from February 1982 (the end of their 

primary terms) until the execution of the Tomlinson leases in May 

1986. However, several wells had been completed on adjacent 

tracts, and in its report to the Assistant Secretary, the Energy 

and Minerals Branch found that the allotted tracts at issue here 

were subject to drainage. Applts. App. at 114. By giving the 

Tomlinson agreement retroactive effect, the Assistant Secretary 

allowed the Indian owners to participate in production from wells 

that, according to the record before him, had drained oil and gas 

reserves from their allotted tracts. 

Rather than "demonstrating the arbitrariness of his action," 

maj. op. at 19, the decision giving the Tomlinson agreement 

retroactive effect is one that is frequently made in analogous 

circumstances by officials responsible for regulating oil and gas 

production. See. e.g., Shearn v. Ward Petroleum Corp., 808 F. 

Supp. 1530, 1534 (W.D. Okla. 1992); Texaco. Inc. v. Industrial 

Comm'n, 448 N.W.2d 621 (N.D. 1989); Roberts v. Funk Exploration. 

Inc., 764 P.2d 147 (Okla. 1988); Bennion v. Utah State Bd. of Oil. 

Gas. & Mining, 675 P.2d 1135, 1142 (Utah 1983); Ward v. 

28 

Appellate Case: 92-6053 Document: 01019280514 Date Filed: 02/21/1995 Page: 50 
Corporation Comm'n, 501 P.2d 503 (Okla. 1972). In deciding 

whether to make a particular agreement or order retroactive, the 

focus is often on whether it is equitable to afford mineral owners 

that benefit. See, e.g., Roberts, 764 P.2d at 148; Bennion, 675 

P.2d at 1142. In turn, that inquiry requires an examination of 

whether there were other means available to the mineral owners to 

mine their interests during the period covered by the proposed 

agreement or order. Thus, if a spacing or pooling order prevented 

mineral owners from mining their interests themselves and if 

ongoing production on adjacent tracts has subjected their 

resources to drainage, courts have found it equitable to allow 

those owners to reap the benefits of production on adjacent tracts 

by means of a retroactive unitization agreement or order. See, 

~. Bennion, 675 P.2d at 1142; Ward, 501 P.2d at 507. On the 

other hand, if there were no legal impediments to the owners' 

mining of their own interests during the disputed period, then 

courts have refused to make agreements and orders retroactive. 

See, e.g., Cowling v. Board of Oil, Gas, & Mining, 830 P.2d 220 

(Utah 1991) . 

For example, in Roberts, 764 P.2d at 148, the Supreme Court 

of Oklahoma held that the Oklahoma Corporation Commission acted 

properly by giving a spacing order retroactive effect in order to 

protect the correlative rights of certain royalty interest owners. 

The court noted that there had been protracted proceedings before 

the Corporation Commission prior to the entry of the order and 

that the royalty owners' tracts had been subject to drainage from 

the date of first production in the unit. Id. 

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In this case, from the initial approval of the Woods 

agreement in April 1982 until the agreement's final disapproval in 

May 1986, the Woods agreement and the underlying leases that it 

extended vested the right to develop the subject tracts 

exclusively in the working interest owners. Applts. App. at 3, 

.77, 81. Thus, by operation of the Woods agreement, the Indian 

owners were prevented from developing their own tracts 

independently. Moreover, from the commencement of the BIA's 

initial evaluation in 1982 (prior to the date of first production 

in the proposed unit) , the Indian mineral owners consistently 

opposed the Woods agreement. Accordingly, just as in Roberts and 

analogous cases, affording the Tomlinson agreement retroactive 

effect was not an arbitrary, capricious, or unreasonable way for 

the Assistant Secretary to allow the Indian owners the benefits of 

production that the Energy and Minerals Branch had found to be 

derived, in part, from the mining of their interests through wells 

on adjacent tracts. 

F. Guidance for the Secretary 

We granted rehearing in this case to clarify the standards 

under which the Secretary should evaluate communitization 

agreements governing leases on Indian land. I do not believe that 

the majority's decision provides the necessary clarification. 

The majority's holding is fact-specific. It concludes that 

the Secretary acts arbitrarily and abuses his discretion when he: 

(1) disapproves a communitization agreement for the sole purpose 

of allowing underlying leases to expire and new leases to be 

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negotiated, (2) approves a communitization agreement for the newly 

negotiated leases that establishes the same unit area as the 

previously rejected agreement, and (3) allows Indian lessors to 

collect royalties retroactively to the date of first production. 

However, the majority reaches this conclusion without reversing or 

expressly limiting Kenai or Cheyenne-Arapaho. Thus, in approving 

or disapproving communitization agreements, the Secretary 

presumably still has a duty to act as a fiduciary for the Indian 

mineral owners, to maximize their lease revenues, and to consider 

the benefits that may be obtained by the Indian owners if a 

communitization agreement is disapproved and new leases are 

negotiated. 

In light of the majority's holding, the Secretary is now in a 

precarious position. If he is presented with a communitization 

agreement that operates to extend underlying leases, he must still 

consider whether it would be more beneficial to the Indian owners 

to allow the leases to expire and to negotiate new leases. If he 

does not consider the market value and marketability of new 

leases, he breaches his fiduciary duty under Cheyenne-Arapaho and 

the federal law that establishes his obligations to Indian mineral 

owners. However, if he determines that disapproval of the 

agreement and the negotiation of new leases is in the best 

interests of the Indian owners, ·then he may have acted 

unreasonably and arbitrarily under the majority's holding here. 

Moreover, under the majority's reasoning, whether the Secretary's 

disapproval of a communitization agreement is unreasonable and 

arbitrary depends on a course of events that follows his initial 

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decision and that the Secretary may not be able to predict. Thus, 

according to the majority, if a communitization agreement is 

disapproved, new leases are negotiated, and a new communitization 

agreement establishing the same unit area as the rejected 

agreement is submitted to the Secretary, his approval of the 

second agreement makes his disapproval of the first one 

unreasonable. However, if the Secretary disapproves an agreement 

and new leases are negotiated but, for reasons that the Secretary 

may not been aware of at the time of the disapproval, a new 

communitization agreement is not submitted (or a substantially 

different communitization agreement is submitted), then the 

disapproval of the first agreement apparently would pass the 

majority's reasonableness test. To make the reasonableness of the 

Secretary's decision dependent on future events deprives him 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. 

The need for such objective standards is illustrated by the 

history of this case. For over twelve years, beginning with the 

objections to the Woods communitization agreement that the Indian 

owners first submitted to the Anadarko Area Director of the BIA, 

the parties have contested the issue of whether the Secretary and 

his delegates should approve the Woods communitization agreement. 

Until the matter is finally resolved, lessees such as Woods and 

Tomlinson remain uncertain of their rights under the various 

mineral leases that they have negotiated. Royalty funds to which 

the Indian mineral owners are entitled remain in escrow, and 

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Interior Department officials are caught between their fiduciary 

responsibilities to the Indian owners and limitations on those 

duties imposed by Cotton Petroleum and this case. By failing to 

offer the necessary guidance to the Secretary and those affected 

by his decisions, the majority's ruling leaves all of the 

interested parties uncertain as to their rights and 

responsibilities. I fear that more tortuous litigation will 

result. 

G. Conclusion 

By requiring the Secretary to engage in a point-by-point 

analysis in which he must apparently afford all relevant factors 

equal weight when he evaluates a communitization agreement, the 

majority deprives him of the discretion to consider his primary 

duty--the economic protection of Indian mineral owners. By 

significantly limiting the Secretary's ability to base his 

decision as to a particular communitization agreement on its 

effect on underlying leases, the majority greatly diminishes the 

Secretary's ability to protect his charge. By failing to 

recognize the primary importance of protecting the economic rights 

of Indians, the court lets other mechanistic factors deprive the 

owners of these minerals of thousands of dollars. By secondguessing every aspect of the Secretary's judgment, the court 

undermines the generally established standard of review for 

administrative decisions, requiring of the Secretary a detailed 

analysis that we do not require of other agencies. Finally, by 

holding that the Assistant Secretary lacked the discretion to 

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disapprove an eleventh-hour communitization agreement, submitted a 

few days before the primary terms of the underlying leases 

expired, the court deprives the Indian mineral owners of a 

$400,000 bonus. 

Where, as here: (1) the Secretary receives a communitization 

.agreement near the end of the primary term of a lease; (2) there 

is no evidence that Interior Department officials or the Indian 

mineral owners have prevented the lessees either from drilling on 

the subject tracts during the lease's primary terms or from 

submitting a communitization agreement earlier in that primary 

term; (3) the Secretary receives evidence and arguments from all 

affected parties as to whether to approve or disapprove the 

proposed agreement; and (4) there is a finding that the Indian 

tracts have been subject to drainage from drilling on adjacent 

tracts during the period in which the Secretary's decision on 

whether to approve a particular agreement is pending, it is 

certainly not an abuse of discretion for the Secretary to 

disapprove the proposed communitization agreement so that the 

Indian mineral owners may negotiate a more profitable series of 

leases. In this situation, it is also not an abuse of discretion 

for the Secretary to approve a second communitization agreement 

governing the newly negotiated, more profitable leases and to give 

that second communitization agreement retroactive effect so that 

the Indian owners may receive their proportionate share of 

minerals drained from their allotted tracts. 

I would therefore affirm the decisions of the Assistant 

Secretary and the district court. 

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