Sanchez-O'Brien Minerals Corp. v. State
| Decision Date | 27 March 1986 |
| Docket Number | CA-CIV,SANCHEZ-O,No. 1,1 |
| Citation | 717 P.2d 937,149 Ariz. 258 |
| Parties | 'BRIEN MINERALS CORPORATION, Plaintiff-Appellee, Cross Appellant, v. STATE of Arizona, Arizona State Land Department, the Honorable Joe T. Fallini, State Land Commissioner, Robert Lane, Deputy State Land Commissioner; and Blake-Berry-Blake Corporation, a Texas corporation, Defendants-Appellants, Cross Appellees. 7442. |
| Court | Arizona Court of Appeals |
Robert K. Corbin, Atty. Gen. by Anthony B. Ching, Sol. Gen., Russell A. Kolsrud and Jon K. Wactor, Asst. Attys. Gen., Phoenix, for defendants-appellants, cross-appellees, State of Ariz.
Fennemore, Craig, von Ammon, Udall & Powers by Calvin H. Udall, Nancy L. Rowen, Phoenix, for defendant appellants, Blake-Berry-Blake.
This appeal involves the propriety of the State Land Department's leasing of state land for oil and gas exploration.
The facts are not in material dispute. In 1978 and 1979, appellee, Sanchez-O'Brien Mineral Corporation (Sanchez-O'Brien), acquired by assignment the non-competitive oil and gas lease rights to approximately 57,000 acres of state land. The leases at the time of acquisition by Sanchez-O'Brien were to expire in about three and one-half years. The annual rental under the leases was 25 cents per acre. These leases were acquired through John Karabees, an independent lease broker who was knowledgeable both as to the practices of the Land Department which administered the leases and the legislative action concerning oil and gas exploration in Arizona.
In particular, Karabees was aware of the "surrender and refile" procedure utilized by oil and gas lessees and acquiesced in by the Land Department. The "surrender and refile" procedure was designed to avoid the non-renewability of oil and gas leases and was based upon two statutory provisions. At the time Sanchez-O'Brien acquired these leases, non-competitive oil and gas leases for non-producing wells had non-renewable five year terms. However, A.R.S. § 27-562 specifically provides that a lessee can unilaterally surrender any part of the leased premises when the lessee no longer has any use for the surrendered property. Also A.R.S. § 27-555(A) provides that the first qualified applicant making a valid application for an oil and gas lease must be issued a lease without competitive bidding.
Thus, a lessee, relying upon the surrender privileges would immediately prior to the expiration of the five year term, surrender the lease and simultaneously file application for a new lease on the same land. Since the lessees controlled the timing of the surrender, they could always be the first applicants for the available lease land. Prior to April, 1980, the Land Department routinely issued new leases to existing lessees who "surrendered and refiled." A 1956 Arizona attorney general opinion, 56 Op.Att'y.Gen. 101 (1956), opined that the procedure was permissible.
One result of the "surrender and refile" procedure was to perpetuate a lessee's control of oil and gas exploration rights. Accordingly, other prospective lessees could only explore by purchasing existing lease rights, normally at a rate higher than that charged by the state. Sanchez-O'Brien paid $6 an acre for the assignment of the lease rights in dispute here.
In 1980, the Arizona legislature made three amendments to the oil and gas leasing laws which are relevant to this litigation. First, the minimum annual per acre rental was increased from 25 cents an acre to $1.00 an acre. Second, leases could be renewed for one additional term of five years. Third, the annual rental rate for the additional term was increased to $1.50 per acre. All of these amendments became effective August 1, 1980.
In June or July, 1980, Karabees contacted Sanchez-O'Brien concerning the "surrender and refile" procedure and the impending increase in lease rates to become effective August 1, 1980. However, about this same time, the Land Department began a review and reexamination of its "surrender and refile" procedure in light of the 1980 legislative amendments. Pursuant to that review, on July 9, 1980, the State Land Commissioner issued Instruction Memo No. 20 which instructed Land Department personnel that all new leases issued in connection with the "surrender and refile" procedure would be "in accordance with House Bill 2338 enacted April 21, 1980", that is, the new rental rates would apply. The memo further advised that lessees were to be informed that for a two week period, lessees would have the option of either withdrawing their surrender and refile applications or allowing them to be processed. Mr. Karabees was informed of this change in department policy and he so informed counsel for Sanchez-O'Brien.
On July 22, 1980, a meeting was held between counsel for Sanchez-O'Brien, counsel for the Land Department, the assistant commissioner and a land department employee. At that meeting, Sanchez-O'Brien was informed that if it surrendered its leases, they would be renewed only at the new $1.00 per acre rate. Sanchez-O'Brien maintained that since the new law was not effective until August 1, 1980, the new rates could not be imposed prior to that date. On July 24, 1980, Sanchez-O'Brien surrendered its leases with a demand for immediate action. On July 31, 1980, the Land Department informed Sanchez-O'Brien that the new leases would only be issued upon payment of the $1.00 per acre rate, and extended to Sanchez-O'Brien the option of withdrawing its surrender application.
On August 9, 1980, counsel for Sanchez-O'Brien demanded that the department immediately process its surrender application and reissue new leases "in accordance with the law that existed at the time applications were made." In the meantime, appellant Blake-Berry-Blake Corporation (Blake) became aware that Sanchez-O'Brien had surrendered its leases and that new leases had not been issued. Therefore, on August 5, 1980, Blake filed applications for leases on the property and tendered $1.00 per acre for the first year rental. The department then notified Sanchez-O'Brien that Blake had filed application for leases on the property and inquired whether it would pay $1.00 per acre for the leases. Sanchez-O'Brien replied that it would not. On August 29, 1980, a decision and order rejecting the Sanchez-O'Brien lease applications was entered. The department subsequently issued leases to the acreage to Blake.
On September 17, 1980, Sanchez-O'Brien filed suit in superior court for a trial de novo under the Administrative Review Act to declare the action of the Land Department void, to require the Land Department to issue leases to Sanchez-O'Brien at the 25 cent per acre rate, and to allow attorney's fees against the state pursuant to A.R.S. § 12-348. The trial court granted this relief and both Blake and the Land Department have appealed. Sanchez-O'Brien has cross-appealed from the trial court's denial of its requested relief that the term of the Sanchez-O'Brien lease begin at the time this litigation is terminated.
The State Land Department by its appeal contends:
(1) that Sanchez-O'Brien failed to exhaust administrative remedies and thus the trial court lacked jurisdiction to grant the relief requested;
(2) that the Land Department had discretion to postpone the effective date of new leases for oil and gas exploration; and
(3) that the trial court erred in awarding attorney's fees under A.R.S. § 12-348.
Blake also makes the same contentions (except the attorney's fees issue), and in addition argues:
(1) that the "surrender and refile" procedure of the Department was illegal; and
(2) that the trial court's awarding of leases to Sanchez-O'Brien at the 25 cent rate was in violation of the Enabling Act and therefore unconstitutional.
We turn first to the contention that Sanchez-O'Brien failed to exhaust administrative remedies, and thus the trial court should have foregone jurisdiction. The parties agree that the validity of this argument turns on whether the decision of the Land Department in rejecting Sanchez-O'Brien's application for new leases was a "contested case" within the meaning of Land Department Regulation A.C.R.R. R12-5-03(H) and A.R.S. § 41-1001(2). 1 This is so because A.C.R.R. R12-5-03(A) only requires a rehearing or review of a decision of the department in a "contested case." 2 A companion argument also urged is that Sanchez-O'Brien should have requested a hearing on the application for leases under Land Department Regulation A.C.R.R. R12-05-01(R) 3, and this failure also results in not exhausting administrative remedies. There is no question that if a hearing and review process is provided to parties before an administrative agency, failure to utilize that process precludes judicial review. Herzberg v. David, 27 Ariz.App. 418, 555 P.2d 677 (1976); Campbell v. Chatwin, 102 Ariz. 251, 428 P.2d 108 (1967). Of necessity, however, as both A.R.S. § 41-1001(2) and A.C.R.R. R12-05-01(H) recognize, some sort of hearing procedure must be required by law (either by statute or regulation) before the principle of exhaustion of remedies is applicable. The question then simply becomes whether a hearing is required for any applicant whose application for a non-competitive oil and gas lease is being considered. Both the state and Blake argue that A.C.R.R. R12-5-01(R) () supplies that requirement. We disagree.
The regulation by its terms contemplates a pre-decisional procedure for activating the hearing request ("when any matter is at issue before the Commission for decision, upon timely application"). The rules provide no notice to anyone that the Commission is contemplating any action on any lease application in order that a "timely" request for hearing can be given. This rule by its own terms is inapplicable to...
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