Shell Oil Co. v. Babbitt
| Decision Date | 13 March 1996 |
| Docket Number | Civil Action No. 95-492 MMS. |
| Citation | 920 F. Supp. 559 |
| Parties | SHELL OIL COMPANY, Plaintiff, v. Bruce BABBITT and The U.S. Department of the Interior, Defendants. |
| Court | U.S. District Court — District of Delaware |
Samuel A. Nolan, Robert W. Whetzel and Frederick L. Cottrell, III of Richards, Layton & Finger, Wilmington, Delaware (L. Joe Leggette and Jackson & Kelly, Washington, DC, of counsel), for plaintiff.
Patricia Hannigan, Assistant United States Attorney, Department of Justice, Wilmington, Delaware; Lois Schiffer, Assistant Attorney General, Department of Justice, Washington, DC; Michael J. Robinson, United States Department of Natural Resources Division, Washington, DC (Peter Schaumberg and Sarah L. Inderbitzin, United States Department of the Interior, Washington, DC (of counsel), for defendants.
Gregg E. Wilson, Deputy Attorney General, Department of Justice, Wilmington, Delaware Lee Ellen Helfrich and Dina R. Lassow of Lobel, Novins & Lamont, Washington, DC (of counsel), for Controller of the State of California (amicus).
Plaintiff Shell Oil Company ("Shell" or "Shell Oil") has filed suit against defendants Bruce Babbitt, as Secretary of the Department of the Interior, and the Department of the Interior (collectively "the Government" or "defendants"), seeking review of a decision issued by the Department of the Interior's Minerals Management Service ("MMS") dated April 3, 1990. Docket Item ("D.I.") 1 at ¶ 1. The MMS order requires Shell's disclosure of documents involving Shell's purchase and resale of certain crude oil. D.I. 8, Exhibit ("Exh.") 1. The oil in question was produced in California on land leased by Shell Western Exploration & Production Inc., ("Shell Exploration"), a Shell-owned subsidiary. Id.; D.I. 8 at Exh. 2. Shell has requested declaratory and injunctive relief that the defendants are not entitled to the documents at issue, that the MMS order be vacated, and that Shell is entitled to relief on the merits of its dispute with the Government. D.I. 1 at ¶ 9.
Defendants have moved under 28 U.S.C. § 1406(a)1 and Fed.R.Civ.P. 12(b)(3)2 to dismiss or transfer this action on the ground that venue in the District of Delaware is improper. D.I. 6. Judicial review of this matter is undertaken pursuant to the Administrative Procedure Act, 5 U.S.C. § 702; jurisdiction is founded upon 28 U.S.C. § 1331. For the reasons stated below, the Court will deny defendants' motion to dismiss or transfer for improper venue.
Although the motion pending before the Court centers on the federal venue statute, recital of a few background facts, essentially undisputed, is necessary to provide some context for disposition of the venue issue. Plaintiff Shell Oil is a corporation incorporated under the laws of the State of Delaware; its principal place of business is Houston, Texas. D.I. 1, ¶ 2. During the period from January 1, 1985 through December 31, 1988, Shell Exploration, an entity not a party to this action, produced crude oil from land in California leased from the United States. D.I. 8, Exh. 2. As lessee, Shell Exploration was the designated payor of royalties to the United States on the oil under the Mineral Lands Act. See 30 U.S.C. § 226(c) ().
The royalties paid to the federal government by Shell Exploration were based on a specific percentage, i.e., 12½%, of the "value of the production" of the crude oil removed from the land and sold under the leases. See id. (). This rate of "value of production" is also set forth in regulations promulgated by the Secretary of the Interior for royalty valuations on oil produced under federal leases. See 30 U.S.C. § 189 (). Under these regulations, the "value of production" can never be less than the "gross proceeds" accruing to Shell Exploration from the disposition of the oil, see 30 C.F.R. § 206.103 (1987), 30 C.F.R. §§ 206.102(h) (1988); "gross proceeds" are equal to the total consideration accruing to Shell Exploration for the disposition of the oil produced under the leases, see 30 C.F.R. § 206.101 (1988).
After producing the crude oil, Shell Exploration sold it to its corporate parent, Shell Oil, pursuant to a purchase and sales agreement dated January 1, 1985. D.I. 8, Exh. 2. The purchase and sales agreement between Shell Exploration and Shell Oil permitted Shell Oil to establish a market price for the crude oil purchased based upon the average prices posted by its competitors for the purchase of oil from producers. D.I. 1, ¶ 8b; D.I. 7 at 6-7. Shell subsequently sold at least some of the oil to unrelated third parties. D.I. 8, Exh. 2.
By authority delegated under the Federal Oil and Gas Royalty Management Act of 1982, 30 U.S.C. § 1735, the Controller's Office of the State of California audited Shell Exploration's royalty payments under the federal leases for the period January 1, 1985 through December 31, 1988. D.I. 8 at 2. The California Controller's office reported its findings to the Department of the Interior's MMS. That report concluded that the initial sale of oil from the oil producer, Shell Exploration, to the marketer, Shell Oil, was a nonarm's length transfer between two corporate affiliates. D.I. 7, Exh. 4. Because the federal royalty valuation occurred at the point of this inter-affiliate transfer, the Controller's office recommended that it would be necessary to look to a subsequent arm's length sale of the oil to unrelated third parties to establish the "gross proceeds" for royalty purposes. Id.
On April 3, 1990, the MMS issued an order stating that because the inter-affiliate sale was not viewed as an arm's-length transaction, the measure of the "value of production" should be based on the subsequent sale of that oil by Shell to third parties. D.I. 8, Exh. 1. The order required that the third party arm's-length purchase price would then be compared with the non-arm's-length contract prices to ensure proper valuation and thus proper payment of royalties to the United States. Id. Shell Oil was directed to provide access to its documents evidencing its arm's-length sales of the oil produced under the federal leases. Id.
Shell Oil appealed the Order to the Director of the MMS. The appeal was denied on March 1, 1991. D.I. 8, Exh. 2. Shell then sought review of the Director's decision before the Interior Board of Land Appeals, which, on August 1, 1994, reversed the Director's Decision and held that the MMS could not seek production of the records in question. D.I. 8, Exh. 3. Subsequently, the MMS petitioned for reconsideration, and on May 11, 1995, the Interior Board of Land Appeals reversed itself and affirmed the Director's decision ordering Shell Oil's production of documents. D.I. 8, Exh. 4.
After its petition for reconsideration was denied, Shell Oil filed its complaint in this action, alleging that the Department of the Interior's decision and "its refusal to reconsider that decision are arbitrary and capricious, violate the Department's regulations, exceed the Department's power under the Federal Oil and Gas Royalty Management Act (30 U.S.C. § 1701 et seq.), and are not in accordance with law in violation of the Administrative Procedure Act (5 U.S.C. § 706)." D.I. 1 at ¶ 9. Shell Oil seeks to deny access to the records relating to its disposition of the crude oil, arguing that the transaction between Shell Exploration and Shell Oil constituted the point of royalty computation. D.I. 1 at ¶ 8f. Shell Oil maintains that the Department of the Interior should accept the terms of the agreement between Shell Exploration and itself as the appropriate measure of valuation for federal royalty purposes.
In filing the instant action, Shell Oil has also alleged that, pursuant to 28 U.S.C. § 1391(e)(3), venue is proper in the District of Delaware. Shell avers that because it is a Delaware corporation, and no real property is involved in the action, venue is proper in Delaware. Defendants argue that real property is involved in this action, citing the Government's "reserved royalty interest" in the California oil leases as its real property interest. According to the Government, because real property is involved, venue lies outside of Delaware, either where the defendants reside, section 1391(a)(1), or where the events that gave rise to this action took place, section 1391(a)(2).
The narrow issue before the Court is whether real property is involved in this action within the meaning of the federal venue statute. That statute provides:
A civil action in which a defendant is an officer or employee of the United States or any agency thereof acting in his official capacity ..., may, except as otherwise provided by law, be brought in any judicial district in which (1) a defendant in the action resides, (2) a substantial part of the events or omissions giving rise to the claim occurred, or a substantial part of the property that is the subject of the action is situated, or (3) the plaintiff resides if no real property is involved in the action....
28 U.S.C. § 1391(e). Several courts, including this Court, have previously touched on this question with respect to oil and gas leases; a survey of case law authority as well as the legislative history of the statute is instructive.
The legislative intent behind section 1391(e) has been set forth previously by this Court in Santa Fe Int'l Corp. v. Watt, 580 F.Supp. 27, 29 (D.Del.1984):
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Shell Oil Co. v. Babbitt
...The Secretary of the Interior unsuccessfully sought to have the suit dismissed or transferred on venue grounds. Shell Oil Co. v. Babbitt, 920 F.Supp. 559 (D.Del.1996). The government then filed a counterclaim seeking enforcement of the MMS order. After both parties moved for summary judgmen......