W&T Offshore, Inc. v. Bernhardt

• Decision Date: 23 December 2019
• Docket Number: No. 18-30876,18-30876
• Citation: 946 F.3d 227
• Parties: W & T OFFSHORE, INCORPORATED, Plaintiff – Appellant – Cross-Appellee v. David BERNHARDT, Secretary, U.S. Department of the Interior; Gregory J. Gould, Director, Office of Natural Resources Revenue, U.S. Department of the Interior, Defendants – Appellees – Cross-Appellants
• Court: U.S. Court of Appeals — Fifth Circuit

946 F.3d 227

W & T OFFSHORE, INCORPORATED, Plaintiff – Appellant – Cross-Appellee

v.David BERNHARDT, Secretary, U.S. Department of the Interior; Gregory J. Gould, Director, Office of Natural Resources Revenue, U.S. Department of the Interior, Defendants – Appellees – Cross-Appellants

No. 18-30876

United States Court of Appeals, Fifth Circuit.

FILED December 23, 2019

Jonathan Andrew Hunter, Sarah Yvette Dicharry, Jones Walker, L.L.P., New Orleans, LA, for Plaintiff-Appellant Cross-Appellee.

Michael Thomas Gray, U.S. Department of Justice, U.S. Army Corps of Engineers, Jacksonville, FL, for Defendants-Appellees Cross-Appellants.

Before CLEMENT, ELROD, and DUNCAN, Circuit Judges.

JENNIFER WALKER ELROD, Circuit Judge:

This is an oil and gas royalty case concerning orders to pay issued by the Department of the Interior to W&T, a company that operated natural gas deposits leased from the federal government, in order to resolve volumetric gas delivery imbalances. The parties each appeal the district court’s partial grant of each other’s motions for summary judgment. We conclude that the Department of the Interior permissibly required resolution of delivery imbalances via cash payment, but that it improperly promulgated a substantive rule without subjecting it to notice and comment. We also hold that the Department of the Interior should have credited all W&T’s deliveries under the doctrine of equitable recoupment. We therefore AFFIRM in part, REVERSE in part, and REMAND for proceedings consistent with this opinion.

I.

W&T operated offshore natural gas deposits leased from the federal government. The Department of the Interior leased the deposits, pursuant to its authority under the Outer Continental Shelf Lands Act ("OCSLA"), 43 U.S.C. §§ 1331 – 1356b, in exchange for a monthly royalty payment. See 43 U.S.C. § 1337(a)(1)(A) ; 30 U.S.C. § 1724(c)(2). The OCSLA gives the Department of the Interior discretion to require royalties "in amount or value of the production saved, removed, or sold"—i.e., payment in kind or payment in cash. 43 U.S.C. § 1337(a)(1)(A) (emphasis added).

Several decades ago, the Department of the Interior began a pilot program that expanded the number of leases for which it required payment in kind, and W&T’s leases were included in that program. As both parties point out, "[n]atural gas markets are complex," and operators like W&T routinely struggled to "deliver the exact volume of gas actually owed." Some months, W&T delivered too much gas; other months, too little. As the pilot program progressed, the Department of the Interior sometimes issued delivery shortfall guidance in the form of "Dear Operator" letters. These letters gave industry entities like W&T instructions and options for remedying underdelivered royalties: for instance, one typical letter advised operators to make up shortfalls with additional gas deliveries "within 120 days of the end of the production month" in question, or—failing that—to deliver the additional gas on a mutually-agreeable schedule or make a cash payment.

In October 2008, the Department of the Interior elected to begin requiring payment in cash from W&T. It subsequently shuttered the payment-in-kind pilot program altogether. In 2010, having determined that W&T’s underdeliveries had exceeded its overdeliveries during its participation in the pilot program, the Department of the Interior issued orders requiring W&T to make up the cumulative shortfall with a final cash payment.¹ The orders superseded all previous "Dear Operator" letters. The period over which W&T’s delivery imbalances were calculated ran backwards from October 2008 to February 2003, past which point the Department of the Interior reasoned the statute of limitations barred any inquiry. See 30 U.S.C. § 1724(b)(1). The Department of the Interior also provided its methodology for calculating the amount due: multiplying the amount underdelivered in each month by the contract sales price it would have collected in each month had the proper amount of gas been delivered.

W&T appealed the orders to the Director of the Office of Natural Resources Revenue, who denied the appeal. See W&T Offshore, Inc. , 184 IBLA 272, 305 (2014). W&T then appealed that denial to the Interior Board of Land Appeals ("IBLA"), which affirmed. See id. at 305–06. W&T proceeded to file a request for judicial review of the IBLA decision in the district court. See W&T Offshore, Inc. v. Jewell , No. 14-cv-2449, 2018 WL 2437677, at *1 (W.D. La. Feb. 23, 2018) ; see also 43 U.S.C. § 1349(b) ; 5 U.S.C. § 704. There, the parties eventually filed cross-motions for summary judgment.

On the issues relevant to this appeal, W&T argued first that the "or" in the phrase "amount or value," 43 U.S.C. § 1337(a)(1)(A), precluded the Department of the Interior from requiring make-up cash payments for past months in which it had originally required payment in kind. Second, W&T argued that the Department of the Interior’s decision to require retroactive payment-in-cash royalties—and its methodology for doing so—created a new substantive rule that should have been subject to notice and comment under the Administrative Procedure Act ("APA"), 5 U.S.C. §§ 552, 553. Third, W&T argued that the Department of the Interior was obligated to comply with the valuation regulations set out in 30 C.F.R. part 1206, which generally value gas at the price the lessee receives, rather than at the Department of the Interior’s contract sales price. Fourth, W&T argued that the Department of the Interior should have credited its overdeliveries prior to February 2003, despite the statute of limitations in 30 U.S.C. § 1724.

The district court partially granted and partially denied the parties’ cross-motions for summary judgment.² On the statutory interpretation issue, applying the framework set out in Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc. , 467 U.S. 837, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984), the district court determined that the statutory text was ambiguous and deferred to the Department of the Interior’s interpretation: that nothing in the statute bars the Department of the Interior from switching its election from payment in kind to payment in cash. As to the APA, the district court concluded that the Department of the Interior’s orders were "grounded in and logically justified by the specific statutory text," making them mere interpretive rules for which notice and comment is not required. The district court also rejected W&T’s claim that the Department of the Interior used the wrong valuation methodology, reasoning that the regulations W&T pointed to applied only to royalties "owed in value in the first place—not [to] the valuation of underdeliveries of royalties in kind." Finally, the district court agreed with W&T that the Department of the Interior should have credited W&T’s previous overdeliveries because "[a]s a purely defensive procedure, [equitable recoupment] is available to defendant so long as plaintiff’s claim survives—even though an affirmative action by defendant is barred by limitations." Distrib. Servs., Ltd. v. Eddie Parker Interests, Inc. , 897 F.2d 811, 812 (5th Cir. 1990).

As a result, the district court partially granted and partially denied the parties’ cross-motions for summary judgment, resulting in a final judgment vacating the orders to pay and remanding them to the Department of the Interior for re-issuance consistent with the court’s rulings. The parties appealed. W&T challenges the district court’s Chevron , APA, and valuation rulings, and the Department of the Interior challenges its equitable recoupment ruling. The arguments will be considered in turn.

II.

The court "review[s] de novo a grant of summary judgment, applying the same legal standards that the district court applied." Kerr-McGee Oil & Gas Corp. v. U.S. Dep’t of Interior , 554 F.3d 1082, 1084 (5th Cir. 2009). Summary judgment is appropriate "if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a). When cross-motions for summary judgment have been ruled upon, "we review each party’s motion independently, viewing the evidence and inferences in the light most favorable to the nonmoving party." Green v. Life Ins. Co. of N. Am. , 754 F.3d 324, 329 (5th Cir. 2014) (quoting Duval v. N. Assurance Co. of Am. , 722 F.3d 300, 303 (5th Cir. 2013) ).

III.

We begin by considering whether the Department of the Interior exceeded its statutory authority by changing its election from payment in kind to payment in cash for overdue royalties. W&T argues that the statutory text permitting the Department of the Interior to require monthly royalties "in amount or value of the production saved, removed, or sold," 43 U.S.C. § 1337(a)(1)(A), evinces a "disjunctive" choice in that once the Department of the Interior requires payment in kind for a given month, it cannot later require payment in cash to resolve the outstanding balance for that month. The Department of the Interior does not dispute that the choice is "disjunctive" in some sense—i.e., that it cannot require operators to pay the amount due twice over, once in kind and once in cash. Instead, the Department of the Interior argues that the two methods of payment are not mutually exclusive, and therefore that it can change its election between payment types for a given monthly obligation until the full value has been paid. The district court concluded that the statute was ambiguous and deferred to the Department of the Interior’s interpretation. We agree.

Chevron supplies the familiar two-step framework for judicial review of an agency’s interpretation of its statutory authority:

First, always, is the question whether Congress has directly spoken to the precise question at issue. If the intent of Congress is clear, that is the end of the matter .... If, however ... the statute is silent or ambiguous with respect to the specific issue,

...