Harry R. Carlile Trust v. Cotton Petroleum Corp.
| Decision Date | 22 April 1986 |
| Docket Number | No. 61112,61112 |
| Parties | HARRY R. CARLILE TRUST, Zelda Arthurs, Trustee, Plaintiff-Appellee, v. COTTON PETROLEUM CORPORATION, a Corporation, Defendant-Appellant, and Oklahoma Corporation Commission, Intervenor-Appellant. |
| Court | Oklahoma Supreme Court |
Gordon F. Brown, Scott D. Boughton, Brown and Lockhart, Oklahoma City, for appellant Cotton Petroleum Corp.
Gretchen Hoover, Deputy Gen. Counsel, Leslie Wilson Pepper, Asst. Gen. Counsel, Oklahoma City, for appellant Oklahoma Corp.
Cleeta John Rogers, Oklahoma City, for appellee.
This appeal presents for our decision four questions dealing with the standards of adequate notice for Corporation Commission spacing proceedings: Is the Corporation Commission called upon to act in an adjudicative capacity when its statutory power is invoked to establish a drilling and spacing unit? In Corporation Commission proceedings to establish a drilling and spacing unit, is notice to interested persons subject to the minimum standards of fairness exacted by the Due Process Clause? Do the standards of due process, announced by this court in Cravens v. Corporation Commission, 1 govern when non-producing mineral interests alone are sought to be embraced within a spacing unit? Should the teaching of Cravens be applied retroactively to include only Carlile (the victorious quiet-title plaintiff below), or purely prospectively to affect those spacing units comprised of non-producing leaseholds which will be formed by orders promulgated after the effective date of today's pronouncement? While we answer the first three questions in the affirmative, in response to the fourth question we hold that (a) today's pronouncement is to apply prospectively to spacing units which will be formed by Commission orders made after the effective date of this opinion, (b) all spacing orders made by the Commission prior to this opinion's effective date herein shall be left unaffected by the notice standards pronounced today, but (c) orders yet to be made in proceedings presently pending before the Commission and those in cases now on direct appeal, in which areas under production are sought to be, or were, comprised within a spacing unit, shall be regarded as governed by notice standards of Cravens and (d) the district courts may treat as facially invalid all agency spacing and drilling orders issued after the effective date of this opinion which do not comply with the notice standards pronounced herein.
In 1974 a party not involved in this lawsuit brought an application to the Corporation Commission [Commission] to create several 640-acre drilling and spacing units for gas and gas condensate produced from formations underlying various sections of land in Caddo County. The property here in contention was included within one of the new units to be formed. It consisted of a tract of land then owned in fee simple by the predecessors in title of the plaintiffs, Harry R. Carlile Trust by Zelda Arthurs, trustee [Carlile].
In compliance with the legislative requirements then in force 2 and pursuant to its own statute-implementing rule, 3 the Commission gave notice of hearing on the spacing application solely by publication in Oklahoma and Caddo counties. No other notice relative to the hearing was ever sent to, or received by, Carlile's predecessors in title. The Commission heard the application and issued its order creating a 640-acre drilling and spacing unit which included the Carlile tract. According to the record, no oil and gas was being produced from this section of land immediately before and at the time the Commission hearing was commenced.
In 1978 Carlile's predecessors in title 4 executed an oil-and-gas lease that was subsequently assigned to Cotton Petroleum Corporation [Cotton]. All bonus and delay rentals due under this lease were timely paid. Cotton commenced drilling operations on the unit created by the spacing order and completed the well within the primary term of the lease. Its location was outside the area included in the lease but within the spacing unit established by the 1974 order.
Some eight years after formation of the spacing unit, Carlile brought in 1982 this quiet-title suit against Cotton. The 1978 lease constituted the only interest Cotton claimed in the Carlile property and the sole cloud Carlile sought to remove from its title. By stipulation of the parties the complete record of the spacing proceedings was incorporated into the evidentiary material tendered with the motion for summary judgment. This record clearly confirms that the Commission attempted no service other than by publication. Because no actual notice had been given to its predecessors in title, Carlile claimed the 1974 order was facially invalid. Based on the due process notice standards announced in Cravens, 5 the trial court declared that, because publication notice alone was insufficient to invest the Commission with adjudicative cognizance, the 1974 spacing order was facially ineffective. After Carlile had recovered summary judgment, Cotton appealed and Carlile moved here for an order requiring Cotton to post an undertaking in the form of a "supersedeas bond." The motion met with this court's adverse disposition. 6
THE DISTRICT COURT MAY WITHHOLD LEGAL RECOGNITION FROM A
By its collateral attack Carlile attempted to avoid the legal effect of the 1974 spacing order. A collateral attack may not be launched on a Commission order that is facially invulnerable. 7 The district court's power to inquire into the validity of Commission orders is legally limited to ascertaining, from an inspection of the face of the proceedings, 8 if the Commission had jurisdiction to issue the order. 9 A Commission order is deemed facially invalid only when the face of the record reveals the absence of at least one of these three requisite elements of agency jurisdiction--i.e., (1) jurisdiction over the parties, (2) jurisdiction over the subject matter, or (3) jurisdictional power to issue the specific order in question. 10
The applicability of due process standards of notice to proceedings for the formation of drilling and spacing units turns on whether the Commission's authority to space calls for an exercise of its adjudicative or rulemaking function. An agency's authority to make rules is clearly distinguishable from that of adjudication. Rulemaking includes the power to adopt rules and regulations of general application--both substantive and procedural--which are legislative in nature, operate prospectively and have general application. 11 Orders of an administrative body are adjudicative in character. They apply to named persons or specific situations and have immediate rather than future operation. 12
The Commission acts in a legislative capacity when it exercises its rulemaking powers to prevent waste and to protect correlative rights, but not when it attempts to apply these rules. The application of rules to the facts found constitutes an exercise of an adjudicative function. 13 When acting in its legislative capacity, the Commission may always amend its rules and regulations to prevent waste and to protect rights of mineral owners. 14 But because orders are adjudicative in character, they may not be amended absent a showing of changed conditions. 15 The same adjudication/rulemaking dichotomy governs the process of determining whether, under the Administrative Procedures Act [APA], 16 an act of the Commission constitutes a rule subject to the Act's requirement or an order which is free from those requirements. While the Commission is not generally subject to the provisions of the APA--except the section which mandates that state agencies with rulemaking powers file copies of their rules and regulations 17--settled law follows the APA standards by excluding from the requirement of filing all those Commission actions that are truly adjudicative in character. 18
Three distinct legal issues and consequences are implicated in a proceeding to establish spacing units: (1) an area of the common source of supply must be determined and its boundaries identified; (2) royalties within the established unit stand pooled as a result of the unit's formation; and (3) a restriction on the freedom to drill must be imposed. 19 Because spacing clearly calls for a factual finding and affects the proprietary incidents of the mineral estate of every owner sought to be brought within the new unit, we conclude that a quest for the formation of a drilling and spacing unit calls for adjudication rather than rulemaking.
When the Commission acts in an adjudicative capacity it functions much like a court. The general norms of law which govern the quality of notice that must be given in proceedings conducted by judicial tribunals apply with like force and effect to the Commission. 20 The minimum norms of federal and state due process hence must govern the standards of notice to be given in spacing proceedings. 21
THE CRAVENS STANDARDS OF NOTICE MUST GOVERN
IN PROCEEDINGS FOR FORMATION OF A DRILLING
AND SPACING UNIT TO BE COMPRISED OF
Because significant property interests are affected when the formation of a drilling and spacing unit is sought, interest owners are constitutionally entitled to notice which is reasonably calculated to apprise them of proceedings to be conducted.
The statutory norm presently in force provides that the Commission give notice of its spacing proceedings solely by publication. 22 In Cravens 23 we held that this statutorily-prescribed notice form is inadequate--vis-a-vis holders of...
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