Phillips Petroleum Co. v. Lujan

• Decision Date: 02 September 1993
• Docket Number: No. 92-5136,92-5136
• Citation: 4 F.3d 858
• Parties: PHILLIPS PETROLEUM COMPANY, a corporation, Plaintiff-Appellee, v. Manuel LUJAN, Jr., Secretary of Interior; Kenneth M. Moyers, Chief, Royalty Compliance Division; Nick L. Kelly, Area Manager, Dallas Regional Compliance Office, Minerals Management Service; United States Department of the Interior; The Mineral Management Service, Defendants-Appellants. Amoco Production Company; Anadarko Petroleum Corporation; Chevron U.S.A. Inc.; Exxon Company; Fina Oil and Chemical Company; Marathon Oil Company; Mobil Exploration & Producing U.S., Inc.; Pennzoil Company; Shell Oil Company; Texaco Inc., Amici Curiae.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 858

4 F.3d 858

PHILLIPS PETROLEUM COMPANY, a corporation, Plaintiff-Appellee, v. Manuel LUJAN, Jr., Secretary of Interior; Kenneth M Moyers, Chief, Royalty Compliance Division; Nick L. Kelly Area Manager, Dallas Regional Compliance Office, Minerals Management Service; United States Department of the Interior; The Mineral Management Service, Defendants-Appellants Amoco Production Company; Anadarko Petroleum Corporation Chevron U.S.A. Inc.; Exxon Company; Fina Oil and Chemical Company; Marathon Oil Company; Mobil Exploration & Producing U.S., Inc.; Pennzoil Company; Shell Oil Company; Texaco Inc., Amici Curiae.

No. 92-5136.

United States Court of Appeals, Tenth Circuit.

Sept. 2, 1993.

T.L. Cubbage II of Brown McCarroll & Oaks Hartline, Dallas, TX (L.K. Smith and Paul E. Swain III, Boone, Smith, Davis, Hurst & Dickman, Tulsa, OK, with him, on the briefs), for plaintiff-appellee.

Robert L. Klarquist, Dept. of Justice, Vicki A. O'Meara, Acting Asst. Atty. Gen., Washington, DC, and Kathleen Bliss Adams, Asst. U.S. Atty., Tulsa, OK, Gerald S. Fish and Martin W. Matzen, Dept. of Justice, Peter J. Schaumberg and Geoffrey Heath, Dept. of the Interior, Washington, DC, for defendants-appellants.

Charles L. Kaiser and Scott W. Hardt of Davis, Graham & Stubbs, Denver, CO, for amici curiae.

Before BRORBY, Circuit Judge, McWILLIAMS, Senior Circuit Judge, and BROWN, ^* Senior District Judge.

BRORBY, Circuit Judge.

The central issue raised in this appeal is at what point should the statute of limitations commence to run in an action by the government to recover underpaid royalties from an oil and gas lease.

The significant facts were stipulated by the parties. Briefly summarized, the appellee, Phillips Petroleum Co. (Phillips) is a lessee of an oil and gas lease on certain allotted Indian lands in Oklahoma. The Department of the Interior (DOI) is responsible for administering such leases and the Minerals Management Service of the DOI collects royalty payments from lessees in return for the right to extract oil and gas from the leased properties. See Phillips Petroleum Co. v. Lujan, 963 F.2d 1380, 1382 (10th Cir.1992). During the months of July-September 1983, Phillips unintentionally underpaid its royalties, thereby breaching its lease. Less than six years after this breach, the government, acting on behalf of the lessor, audited Phillips' production records and discovered the error. The government advised Phillips of the error and thereafter ordered Phillips to remit the unpaid royalties amounting to $2,969.95. The government's order was issued on September 26, 1989 (hereinafter referred to as the September order).

Phillips filed suit against the government to enjoin it from enforcing the order. Phillips alleged the applicable six-year statute of limitations, 28 U.S.C. Sec. 2415(a), barred the government from collecting the unpaid royalties. The district court granted Phillips motion for summary judgment, holding that the royalties owed for the July 1983 production month were due on August 31, 1983, and the six-year statute of limitations had expired prior to the government's September order.

The court further found that when the government issued the September order, the six-year period had not yet expired for the August and September 1983 production months, and that under 28 U.S.C. Sec. 2415(a), the September order was a final administrative order allowing the government one year from the date of such order to file a claim against Phillips. The district court held, however, that the government's August and September claims were time-barred as well because no action or counterclaim was filed within the one-year time frame.

The government raises two issues on appeal. First, it claims a cause of action for unpaid royalties under 28 U.S.C. Sec. 2415(a) does not accrue until an audit is completed. Second, the government asserts the statute of limitations is tolled pursuant to 28 U.S.C. Sec. 2416(c) until such time as the government timely completes an audit. As this is an appeal from a summary judgment order, our standard of review is de novo. Phillips Petroleum, 963 F.2d at 1384.

ANALYSIS

1. Accrual of Government's Right of Action Under 28 U.S.C.

Sec. 2415(a)

The parties agree that 28 U.S.C. Sec. 2415(a) is the applicable statute for determining when the government must commence its action to collect the royalty underpayment. Section 2415(a) states in relevant part as follows:

Subject to the provisions of section 2416 of this title ... every action for money damages brought by the United States ... or agency thereof which is founded upon any contract ... shall be barred unless the complaint is filed within six years after the right of action accrues or within one year after final decisions have been rendered in applicable administrative proceedings required by contract or by law, whichever is later. ¹

The government contends its right of action accrues when it completes an audit. To support its contention, the government cites several cases involving the Medicare system, including United States v. Hughes House Nursing Home, Inc., 710 F.2d 891, 894 (1st Cir.1983); United States v. Pisani, 646 F.2d 83, 89 (3d Cir.1981); United States v. Gravette Manor Homes, Inc., 642 F.2d 231, 234 (8th Cir.1981); and United States v. Withrow, 593 F.2d 802, 806 (7th Cir.1979). These cases stand for the general proposition that when 28 U.S.C. Sec. 2415(a) is applied in the Medicare context, a right of action is deemed to accrue when a final determination of liability is made. We find this precedent unpersuasive, however, as we do not believe the Medicare program is analogous to the government's program concerning federal and Indian oil and gas leases.

The Medicare scheme is governed by a series of regulations premised on the fact that medical providers will be advanced funds periodically to cover their estimated costs and that adjustments must be made later when the actual cost of the services to be reimbursed are determined. See Hughes House Nursing Home, 710 F.2d at 893 (discussing the Medicare regulation scheme); Gravette Manor Homes, 642 F.2d at 233 (same). For this reason, "the government's cause of action [in the Medicare context] accrue[s] when, under its regulations, it [becomes] entitled to demand its money." Hughes Nursing Home, 710 F.2d at 894 (emphasis added). The government is not entitled to a refund during the interim when payments are made because the actual costs of the provider are still being incurred.

In contrast, the oil and gas lease involved in this litigation is located on restricted Indian allotted land and governed by 25 U.S.C. Sec. 396 and the Federal Oil and Gas Royalty Management Act, 30 U.S.C. Secs. 1701-1757 (1988) (FOGRMA). These laws do not establish a regulatory scheme similar to that found in the Medicare cases. Under the statutory scheme applicable to this case, audits are not mandatory and are conducted only "to the extent practicable." 30 U.S.C. Sec. 1711(c)(1). Moreover, unlike in the Medicare program, FOGRMA does not require estimated royalty payments followed by subsequent retroactive adjustments.

Since we find the Medicare line of cases inapplicable to federal oil and gas leases, we look to the ordinary usage of the term "accrues." Generally, "a cause of action 'accrues' when 'it comes into existence.' " FDIC v. Belli, 981 F.2d 838, 840 (5th Cir.1993) (quoting United States v. Lindsay, 346 U.S. 568, 569, 74 S.Ct. 287, 288, 98 L.Ed. 300 (1954)). In other words, "[u]nder federal law governing statutes of limitations, a cause of action accrues when all events necessary to state a claim have occurred." Chevron U.S.A., Inc. v. United States, 923 F.2d 830, 834 (Fed.Cir.), cert. denied, --- U.S. ----, 112 S.Ct. 167, 116 L.Ed.2d 131 (1991). Along similar lines, the Supreme Court, in interpreting the Portal-to-Portal Act, said "[a] cause of action is created when there is a breach of duty owed the plaintiff. It is that breach of duty, not its discovery, that normally is controlling." ² Unexcelled Chemical Corp. v. United States, 345 U.S. 59, 65, 73 S.Ct. 580, 583, 97 L.Ed. 821 (1953). Applying this law to the facts of the case, we hold the government's right of action accrued on the date the contract was breached, which was the date the royalties were due and payable. ³ It is upon that date that Phillips breached a duty owed the government under the contract and the events necessary to the government's claim had occurred.

2. Tolling of the Limitations Period Under 28 U.S.C. Sec.

2416(c)

The government's second claim is that under 28 U.S.C. Sec. 2416(c), the statute of limitations was tolled until the government completed its audit. The six-year statute of limitations is expressly subject to Sec. 2416(c) which states, in relevant part, that

[f]or the purpose of computing the limitations periods established in section 2415, there shall be excluded all periods during which ... facts material to the right of action are not known and reasonably could not be known by an official of the United States.

Section 2416(c) essentially excludes from the six-year limitation period those periods of time when the government: (1) did not know the facts material to its right of action; and (2) reasonably could not have known of the facts material to its right of action. The parties agree the government did not know of the underpayment of the royalty until the audit was completed and thus the first statutory requirement to extend the limitation period was satisfied. The government focuses upon the second requirement by asserting it could not have known about the underpayment until it completed the audit.

The resolution of this issue is one of statutory interpretation. In interpreting a statute, our initial inquiry begins with the language of the statute and if that language is clear, we give effect to its meaning. United States v. Ron Pair Enters., Inc., 489 U.S. 235, 241, 109 S.Ct. 1026, 1030, 103...