* This order and judgment is not binding precedent, except under the

doctrines of law of the case, res judicata, and col lateral estoppel. This court generally disfavors the citation of orders and judg ments; nevertheless, an order and judgment may be cited under the terms and condi tions of 10th Cir. R. 36.3. 

## F I L E D United States Court of Appeals Tenth Circuit 

### JUL 10 1998 

### PATRICK FISHER Clerk UNITED STATES COURT OF APPEALS

TENTH CIRCUIT

SHIRLEY DELGADO, individually and as Guardian for Erik Jason Elizondo, a minor; JUAN PABLO DELGADO, JR., a minor; ANTHONY DARREN DELGADO, a minor; SHIRLEY DELGADO, as Guardian Ad Litem for Jase Lee Trevino, a minor; JERRY SHAWN TREVINO; JOSEPHINE KAY TREVINO SALAZAR; JESSE SMITH TREVINO, JR.; BRENNA KETCHESHAWNO, Plaintiffs-Appellants, v. DEPARTMENT OF INTERIOR, Sued as United States of America ex rel; BUREAU OF INDIAN AFFAIRS, and Office of Hearings and Appeals; INTERIOR BOARD OF INDIAN APPEALS; VINTAGE PETROLEUM, INC., a Delaware Corporation, Defendants-Appellees. No. 97-6125 (D.C. No. 95-CV-262) (W.D. Okla.)

ORDER AND JUDGMENT *1 Ms. Delgado is guardian ad litem for all of the mi nor plaintiffs, four of

whom are also her children. She is a niece of the original lessor, Luther Namaso, and the eight remaining plaintiffs are his grandnie ces and grandnephews. Mr. Namaso devised his mineral interest to the grandnie ces and grandnephews, and made Ms. Delgado his residual legatee. Although sh e is a residual legatee and guardian ad litem, for simplicity we refer to the l ease as the Delgado lease. - 2 - Before BALDOCK , McKAY , and KELLY , Circuit Judges.

Plaintiffs-Appellants, to whom we collectively refe r as Delgado, 1 are lessors of a restricted Indian oil and gas lease, a nd seek review of a decision of the Secretary of the Interior (Secretary) denying t heir request to cancel the lease. The district court affirmed the Secretary’s decisio n. Our jurisdiction arises under 28 U.S.C. § 1291, and we affirm. The Delgado lease was executed by Delgado’s predece ssor in interest, Luther Namaso, in favor of William Austin in 1980. The lease was located on land received by allotment from the federal governm ent. The United States holds allotted land in trust for Indian owners, and has afiduciary duty to ensure that the land is managed for “the sole use and benefit of th e Indian allottees.” Poafpybitty v. Skelly Oil Co. , 390 U.S. 365, 368 (1968) (internal quotation mark s and citation omitted). Consequently the Secretary, acting throu gh the Bureau of Indian Affairs (BIA), must approve the terms of Indian min eral leases before they can go into effect. See 25 U.S.C. § 396. The Secretary has delegated to t he Bureau of Land Management (BLM) the responsibility for overse eing operation of Indian- 3 -

leases and ensuring compliance with their terms. T he Minerals Management Service (MMS) oversees the reporting of production, as well as calculation and payment of royalties for Indian oil and gas leases. See 25 C.F.R. §§ 212.4, 212.6 (1997). The BIA approved the Delgado lease. In 19 85 the lessee, William Austin, began production of both oil and natural ga s in paying quantities. Problems were discovered dating from the start of p roduction. Before drilling his first well, Austin had executed a comm unitization agreement which purported to commit Mr. Namaso’s eighty acres to a 160-acre spacing unit. The agreement would have allowed the owners of the adjo ining eighty acres, which had no producing wells, to participate equally in a ny royalty attributed to the communitized area. Although the agreement stated i t would become effective only upon approval of the Secretary, Austin did notsubmit the agreement to the BIA until early 1988. In the meantime the agreemen t had been submitted to the Oklahoma Corporation Commission, which issued an or der unitizing the ownership interests in the 160-acre spacing unit. Legal counsel for the designated operator of the wells then prepared a Division Orde r Title Opinion, dated November 5, 1985, indicating Mr. Namaso’s tract was communitized and any royalty should be shared equally with the owners of the other eighty acres. Austin relied on this division order and paid the royalty accordingly. In 1988 Austin assigned the lease to Vintage Petroleum, Inc., the current lessee and operator.- 4 -

Vintage continued Austin’s royalty division practic e when it took over the lease. In March, 1988, the BIA rejected the proposed commu nitization because it was not in Mr. Namaso’s best interest. Vintage propose d a second communitization agreement, which the BIA rejected in September, 198 8. One month later Vintage reported the underpayment problem to the BIA, and b egan paying Mr. Namaso the full twenty-percent royalty as well as repaying his overdue royalties. The BIA began investigating the underpayments to determine how much Austin and Vintage owed. The Area BIA Director referred the m atter to the MMS for audit. During a well inspection in September, 1989, the BL M discovered bypass piping on both wells which if connected would allowgas to bypass the meters. The BLM told Vintage this was a major violation, is sued a verbal incident of noncompliance (INC), and instructed Vintage to imme diately remove the bypass pipes. Three days later the BLM issued a written I NC and made another inspection, which revealed the bypass pipes had alr eady been removed. Several months before his death in 1990, Mr. Namaso informed the BIA that his own investigation showed he had been underpaid in excess of $575,000 in royalties; based on this and the meter bypass violation, he requested an audit, collection of underpayments, and cancellation of th e lease. The letter was transmitted to the MMS for use in its on-going audi t. That audit ultimately found royalty violations in three areas, and resulted in the recovery from Austin and- 5 -

Vintage of $1,023,502.27 in underpaid royalties andinterest penalties. The first royalty violation involved improper volum e allocation, referring to the invalid communitization agreement and consequent underpayment of royalties by one half. The MMS issued separate demand letter s to Austin and Vintage for the amount of the underpayments. After receiving f ull payment from both companies, the MMS assessed interest penalties agai nst both Austin and Vintage, who paid the penalties in full. The second area of royalty violations arose from a failure to perform dual accounting. MMS regulations provide that when hydr ocarbons are sold to an affiliate of the seller, valuation must be calculat ed under two different methods, and royalties paid based on the higher valuation. The MMS determined that both Austin and Vintage underpaid royalties because of their failure to perform dual accounting. Austin and Vintage paid the amounts MM S assessed them for this violation, with interest. The third royalty violation was based on problems i n the reporting of condensate sales. Although Austin appeared to have been systematically underpaying royalties based on these sales, Vintage had discovered its problems in this area and adjusted its system for separating and marketing condensate before the MMS audit. Both Austin and Vintage repa id royalties for condensate to MMS’s satisfaction.- 6 -

In response to Mr. Namaso’s cancellation request, the BIA requested reports from BLM and MMS as to whether the violatio ns of the lease and regulations warranted cancellation. The MMS respon ded with a memorandum concluding that the past royalty violations did notmerit cancellation because “it was not an uncommon practice for payors to calculat e and pay royalties based on a proposed communitization agreement, pending appro val by the Bureau of Indian Affairs and Bureau of Land Management. In most ins tances,” the memorandum continued, “proposed communitization agreements wer e approved and royalty payments based on the proposed agreement would repr esent the most accurate royalty basis.” I Aplt. App. at 297 (doc. FF). Tw o further considerations made Vintage and Austin less culpable, according to the MMS. First, Vintage and Austin were relying on a Division Order Title Opini on, on which other unrelated royalty payors also relied, and which in turn was b ased upon an Oklahoma state order unitizing the 160 acres and mandating a fiftypercent lease allocation. Second, “it is not uncommon for MMS and royalty pay ors to have different interpretations on ‘dual accounting’ valuation requ irements. The MMS audits often result in additional royalty payments when ‘d ual accounting’ analyses are performed.” Id. at 298. The MMS found no evidence of fraudulent a ccounting practices or criminal wrongdoing, and consequently recommended the lease not be canceled.- 7 -

The MMS also conducted a valuation known as a “majo r portion analysis” to determine whether Delgado was receiving royaltie s below the fair market value, and, if so, whether cancellation of the Delg ado lease was appropriate. The analysis concluded:

Based on all indications of market value that we ca n locate, we conclude that Indian royalty lessors for the Delgad o lease are receiving compensation for gas production that equals or exce eds the fair market value of other gas production in the same area. Ou r analyses can identify no pricing discrepancies that would warrant lease c ancellation. Based on our review and knowledge of the Indian lea sing regulations, lease cancellation may actually cause the Indian lessors financial harm. . . . Any new operator, or the Indi an mineral owners, should they desire to take over operation of the lease, mu st negotiate a gas sales contract and would probably receive a price much cl oser to the spot-market price than the price currently being paid to the In dian lessors. II Aplt. App. at 451. The BLM recommended, based on its oversight of the lease operations, that the lease not be canceled. It reported that it had inspected the lease nine times between 1986 and 1992, and had issued only one INC. It concluded the bypass piping did not warrant cancellation because, among other things, (1) it was promptly removed, even before the written INC was i ssued; (2) “[i]t appeared the bypass was being used only to allow the operator to calibrate the meters without shutting in the wells;” and (3) comparison of the v olume of gas reported to the MMS and the volume reported to the Oklahoma Tax Com mission showed variations “not in excess of normal,” indicating “t hat gas was not regularly- 8 -

bypassing the meter.” Id. at 320. Delgado points out that this comparison w as done after the bypass pipe was removed, so it indic ates nothing about how much gas may have bypassed the meter during the time the piping was installed. MMS described in some detail an operator’s arguably leg itimate reasons for using bypass piping, including the damage that could resu lt from shutting in a well. It added that operations on the Delgado lease were gen erally clean, and that the lease had recently been used for training BIA perso nnel in proper lease operation.
See id. With the major portion analysis and reports from th e BLM and MMS, the cancellation request was ripe for decision. The Ar ea BIA Director allowed the parties to present evidence and brief the issues (agrant of process not required under its regulations) and issued its final opinionin February, 1994. It held cancellation was not mandated by the relevant regul ations, and concluded cancellation would not be in Delgado’s best interes t. Delgado appealed to the Interior Board of Indian Appeals (IBIA), and after further briefing the IBIA affirmed the lower decision in a thorough written o pinion. See VII Aplt. App. at
1876-94. Delgado argues the Secretary’s decision not to canc el the lease (1) violated her constitutional property and contractual rights (2) was ultra vires and erroneous, and (3) was arbitrary and capricious.- 9 -

In reviewing the Secretary’s action we accord no particular deference to the district court. See Mount Emmons Mining Co. v. Babbitt , 117 F.3d 1167, 1170 (10th Cir. 1997). We stand in the same posture with respect to the agency as did the district court, applying the APA’s standards go verning judicial review directly to the Secretary’s decision. See Valley Camp of Utah, Inc. v. Babbitt , 24 F.3d 1263, 1267 (10th Cir. 1994). Those standards, in r elevant part, allow us to “set aside agency action, findings, and conclusions foun d to be—(A) arbitrary, capricious, an abuse of discretion, or otherwise no t in accordance with law; [or] (B) contrary to constitutional right, power, privil ege, or immunity . . . .” 5 U.S.C. § 706(2). Delgado rests her constitutional argument on the du e process clause of the Fifth Amendment, but nowhere in her brief mentions the elements of a procedural due process claim. Those elements are: (1) the existence of a recognized liberty or property interest, and (2) fa ilure to receive the process that is due. See Mathews v. Eldridge , 424 U.S. 319, 332–35 (1976). Instead of arguing that the process she received was constitut ionally lacking, Delgado argues the Secretary’s action was, on its merits, unreason able. In addition to this failure to state a due process argument, Delgado failed ade quately to raise the issue before the Secretary. Moreover, she has no property interest in canceling the lease, and in any case received superabundant proce ss from the Secretary. The- 10 -

constitutional argument is meritless and fails to trigger a more searching standard of review than we would otherwise employ. See Jones v. Department of Health and Human Servs. , 941 F.2d 1529, 1533 (11th Cir. 1991) (holding mer e allegation of due process violation by agency is insufficient to raise a constitutional claim). Although Delgado repeatedly asserts the Secretary’s decision was ultra vires, that term does not provide a basis for us to set aside agency action. We will construe the argument as one that the agency d etermination was “otherwise not in accordance with law.” 5 U.S.C. § 706(2). Delgado’s primary argument is that the Secretary wa s without authority for its action because it failed to follow its own regu lation. She further argues that the applicable regulation is unambiguous and the co urt should give effect to its plain meaning. The regulation provided as follows:

A lease will be canceled by the Secretary of the In terior for good cause upon application of the lessor or lessee, or if at any time the Secretary is satisfied that the provisions of the l ease or of any regulations heretofor or hereafter prescribed have been violate d. 25 C.F.R. § 212.23(a) (1994). Delgado’s position is that the Secretary is require d under this regulation to cancel a lease whenever it finds any violation has occurred. Delgado points to the plain language of the regulation, particularly to t he words, “A lease will be canceled by the Secretary . . . if at any time the Secretary is satisfied that the provisions of the lease or of any regulations . . . have been violated,” id.2 Certain language in the IBIA decision suggests a m ore rigid,

nondiscretionary rule: “when a violation of a lease of Indian oil and/or gas properties has been cured and not repeated, the vio lation may not serve as the basis for lease cancellation.” VII Aplt. App. at 1 894. Although we, along with - 11 - (emphasis added), and attempts to apply a Chevronanalysis to our review. See Chevron U.S.A. Inc. v. Natural Resources Defense Co uncil , 467 U.S. 837 (1984). Delgado argues that under the first prong of Chevro nthe court should hold the regulation is unambiguous and should give effect to its plain meaning. Chevron , alas, is inapplicable. Chevronapplies when a regulation is challenged on the ground that it is inconsistent with a governing statute. Delgado does not challenge § 212.23(a); on the contrary, she stakes her case on it. When interpreting its own regulation, an agency is entit led to exercise even broader discretion than it may under the second prong of Ch evron . See Valley Camp , 24 F.3d at 1267. The Secretary’s interpretation of § 212.23(a) is “controlling unless plainly erroneous or inconsistent with the regulati on.” Auer v. Robbins , 117 S. Ct. 905, 911 (1997) (internal quotation marks and c itation omitted); see Udall v. Tallman , 380 U.S. 1, 16-17 (1965). The Secretary determined that under § 212.23(a), th e BIA is not required to cancel a lease whenever the lease terms or regulations are violated. Instead, it retains disc retion to review the circumstances surrounding a violation(s) and determ ine whether cancellation is warranted, taking into consideratio n, interalia , the trust responsibility to act in the best interest of the I ndian landowner(s). VII Aplt. App. at 1885-86. 2the district court, can foresee situations in whichapplying such a bright-line rule

might be an abuse of discretion, we can affirm the Secretary’s interpretation because it is evident that in this case he did weig h the circumstances and apply his discretion. - 12 - The Secretary’s interpretation is permissible for s everal reasons. In Poafpybittythe Supreme Court rejected the interpretation Delg ado attempts to impose on § 212.23(a). Construing language identic al to that before us, the Court wrote, “The regulations do empower the Secretary to cancel a lease . . . . However, there is no justification for concluding that the severe sanction of cancellation of the lease is the only relief for al l breaches of the lease terms or for any failure to pay royalties.” Poafpybitty , 390 U.S. at 374 (citation omitted). Although this could end the matter, other reasons l end support to the Secretary’s interpretation. Disallowing the Secretary discreti on in canceling leases would entail nearly absurd results. Under Delgado’s inte rpretation, the slightest violation—even a de minimis underpayment of royalti es—would require cancellation. Furthermore, Delgado’s interpretatio n would force the Secretary into conflict with his fiduciary duty to act at all times in the best interest of the Indian lessor. As the Supreme Court noted in Poafp ybitty , “Both the lessor and the lessee may wish to resolve their disagreement b y the payment of damages and not by the cancellation of a basically satisfactory lease.” Poafpybitty , 390 U.S. at 374. Yet a strict rule of cancellation for every v iolation would deny the lessor- 13 -

this option. Even worse, assuming the violation wa s a de minimis underpayment, the Secretary would be forced to cancel the lease e ven if in the circumstances cancellation would deprive the lessor of tens or po ssibly hundreds of thousands of dollars in royalties. Considering the “substantial deference” we owe to the Secretary, we cannot require him to engage in such absurdity, nor will we set aside an interpretation that reasonably harmonizes his duties. Thomas Jefferson Univ. v. Shalala , 512 U.S. 504, 512 (1994). Delgado argues the Secretary’s interpretation is in consistent with the Federal Oil and Gas Royalty Management Act, 30 U.S. C. §§ 1701–57 (FOGRMA), which provides the Secretary “should aggr essively carry out his trust responsibility in the administration of Indian oil and gas.” Id. § 1701(a)(4). FOGRMA also states a purpose of cracking down on th e nonpayment of Indian oil and gas royalties. See id. § 1701(b)(3). To carry out these purposes, FOGRMA expands the remedies at the Secretary’s disposal byproviding monetary penalties for late payment or nonpayment of royalties and oth er violations. FOGRMA is careful not to alter the Secretary’s preexisting au thority to cancel leases. The statute nowhere mentions cancellation or the circum stances in which it should be used. See id. § 1753(a) (“The penalties and authorities providedin this chapter are supplemental to, and not in derogation of, any penalties or authorities contained in any other provision of law.”). The fa ct that FOGRMA gives the3 FOGRMA’s legislative history confirms our analysis. That history

indicates Congress viewed cancellation as a “severe penalty” which “may” be used if “failures to pay royalties are flagrant and persistent.” H.R. Rep. No. 97- 859, at 18 (1982), reprinted in1982 U.S.C.C.A.N. 4268, 4272. Congress concluded “that the Secretary needed authority to i mpose more appropriate and flexible penalties against lessees . . . .” Id. at 18-19. - 14 - Secretary additional remedies for Indian lease viol ations indicates quite strongly that cancellation cannot be the only appropriate re medy. Instead of supporting Delgado’s argument, FOGRMA undercuts it. Delgado’s view of mandatory cancellation for lease violations would render FOGRMA’s extensive scheme of more flexible remedies void. 3 Delgado also argues that the Secretary’s decision w as arbitrary and capricious. Our review under this standard is narr ow, and we may not substitute our judgment for that of the agency. See Motor Vehicle Mfrs. Ass’n v. State
Farm Mut. Auto Ins. Co. , 463 U.S. 29, 43 (1983). “‘[T]he agency need only demonstrate that it considered relevant factors andalternatives after a full ventilation of issues and that the choice it made w as reasonable based on that consideration.’” Lodge Tower Condo. Ass’n v. Lodge Properties, Inc. , 85 F.3d 476, 477 (10th Cir. 1996) (quoting Mount Evans Co. v. Madigan , 14 F.3d 1444, 1453 (10th Cir. 1994)). Delgado takes issue with the agency’s factual findi ng that the bypass pipe was in place on the wells for only a short time. S he claims this finding was- 15 -

clearly erroneous, and the IBIA’s decision was arbi trary and capricious because it failed to consider evidence she presented. The IBI A decision indicates the agency properly weighed the evidence, including what Delga do presented, and arrived at a conclusion well supported by evidence. See VII Aplt. App. at 1888. We cannot say its finding was clear error. Delgado also claims the Secretary was bound to canc el the lease under the lease’s own terms, and it was arbitrary and caprici ous for him to fail to do so. However the lease is written in even more discretio nary language than the regulation. The lease provides that “[w]hen, in th e opinion of the Secretary” there has been a violation of any of the terms of t he lease, the Secretary “shall have the rightat any time after 30 days notice to the lessee, sp ecifying the terms and conditions violated, and after hearing . . . to declare this lease null and void . . . .” VII Aplt. App. at 1849 (emphasis added). T his provision gives the Secretary the power to cancel; it does not require him to do so. We conclude the Secretary adequately considered all relevant facts and articulated a rational connection between those facts and its decision. D elgado’s remaining

contentions are without merit.
AFFIRMED. Entered for the Court- 16 - Paul J. Kelly, Jr. Circuit Judge