KC RESOURCES, INC. v. USA

Filing 19

UNREPORTED OPINION granting 12 Motion to Dismiss - Rule 12(b)(1) and (6). The Clerk is directed to enter judgment. Signed by Judge Edward J. Damich. (jm) Copy to parties.

In the United States Court of Federal Claims
No. 13-393C
(Filed: April 9, 2014)
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KC RESOURCES, INC.,
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Plaintiff,
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v.
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THE UNITED STATES,
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Defendant.
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OPINION AND ORDER
Plaintiff, KC Resources, Inc. (“KCR”), brings this action alleging that the United
States (the “Government”) is liable to KCR for both an uncompensated taking and for an
alleged breach of contract. The Government has moved for dismissal under Rules of the
Court of Federal Claims (“RCFC”) 12(b)(1) or, in the alternative, RCFC 12(b)(6).
After review of the pending motion and associated briefing, the Court concludes
that it is unnecessary to reach the Government’s arguments under RCFC 12(b)(6).
Rather, the Court finds that it lacks jurisdiction over KCR’s Complaint. Hence, the
Government’s motion is granted under RCFC 12(b)(1).
I.

Background
a. Regulatory Background

This case is generally about gas drilling on public lands. The key issue in the
pending motion revolves around the legal status and relationship of the parties with
respect to these drilling activities, which are governed by statute and regulations
promulgated by the Bureau of Land Management (“BLM”). It is therefore useful to
begin with a brief recitation of the relevant statutory and regulatory framework.
The Mineral Leasing Act of 1920 (the “Act”), ch. 65, 41 Stat. 437 (1920)
(codified, as amended, at 30 U.S.C. § 181 et seq.) (1981), authorizes the leasing of public
lands, i.e. lands “owned by the United States,” for the purpose of developing deposits of
minerals, oil and gas. Pursuant to the Act, BLM issues oil and gas leases authorizing
exploration and development activities by private entities. As stated, it also promulgates
regulations relating to such leasing activities. Under the regulations, a “lessee” is defined
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as the “entity holding record title in a lease issued by the United States.” 43 C.F.R. §
3100.0-5(i). “Record title means a lessee’s interest in a lease.” 43 C.F.R. § 3100.0-5(c).
This interest “includes the obligation to pay rent, and the rights to assign and relinquish
the lease.” Id.
In contrast to a lessee, an “operator” is an “entity, including, but not limited to,
the lessee or operating rights owner, who … is responsible under the terms and
conditions of the lease for the operations conducted on the leased lands or portions
thereof.” 43 C.F.R. §3100.0-5(a). “[O]perating rights” are severable from record title
interest, 43 C.F.R. §3100.0-5(c), meaning that they are merely one stick of the proverbial
property rights bundle.
The regulations also distinguish between “assignments” of all or a portion of
interests from “subleases,” which refer to a “transfer of non-record title interest in a lease,
i.e., a transfer of operating rights is normally a sublease.” 43 C.F.R. § 3100.0-5(e). Such
a transfer of operating rights “is a subsidiary arrangement between the lessee (sublessor)
and the sublessee … [which] does not … affect the relationship imposed by a lease
between the lessee(s) and the United States.” Id.
b. The Lease, Operator Rights and Basis for the Dispute
On September 1, 1950, BLM executed a lease with A.R. Davis (the “Lease”) for
certain public lands in Colorado. See Compl. Ex. 1. Through a series of assignments, the
rights of the lessees were acquired by British Petroleum America Production Company
(“BP”) and Pioneer Natural Resources USA, Inc. (“Pioneer”). Gov’t Ex. A at 1.
On May 24, 2002, KCR obtained operator rights under the Lease. Compl. at ¶ 8.
At all relevant times, there were two gas wells (referred to herein as AR Davis # 1 and
AR Davis # 2; collectively, the “Wells”) on the Lease property. Id. at ¶ 9. On January
30, 2008, the Government sent two letters (the “January 30 Letters”) to KCR which
stated that the Wells had not been producing in paying quantities1 since 1988 and 2003,
respectively. See Compl. Ex. 2. As a result, the January 30 Letters directed KCR to do
one of the following:
(1) Return the wells to production, in paying quantities;
(2) Submit supporting documentation if KCR believed the wells were capable
of producing in paying quantities; or
(3) Submit a Notice of Intent to Abandon with plugging procedures for the
wells.

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The January 30 Letters define “paying quantities” as “production of oil and gas of
sufficient value to exceed direct operating costs and the costs of lease rentals, or
minimum royalty, on a sustained basis.” See Compl. Ex. 2.
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See Compl. Ex. 2. KCR, believing that it was not obligated to do anything since it
believed the Wells were already producing in paying quantities, did nothing in response
to the letters. See Compl. ¶¶ 14-15.
On April 2, 2008, BLM sent to KCR two Notices of Incident of Noncompliance
(“INC”), one for each of the Wells, informing KCR that it had failed to comply with the
January 30 Letters. See Compl. Ex. 3 (letters referencing the two INCs). Again on May
15, 2008, BLM issued a second set of INCs for KCR’s failure to comply with the prior
INCs. Shortly thereafter, on June 17, 2008, BLM sent KCR two “Initial Notice[s] of
Proposed Civil Penalties” which were followed on July 2, 2008, by two “Second
Notice[s] of Proposed Civil Penalties.” Id.
On July 31, 2008, BLM sent two additional letters entitled “Final Notice[s] of
Proposed Civil Penalties” resulting from KCR’s failure to comply with the numerous
previous notices. Compl. Ex. 3. These Final Notices informed KCR that civil penalties
could be levied and that cancellation proceedings could be initiated. Id. The Final
Notices informed KCR that it could request an Administrative Review and explained the
process for doing so. Id.
Instead of following the instructions in the Final Notices, KCR opted to email
BLM on August 6, 2008, and explain that it believed that the Lease – not the Wells – was
producing in paying quantities. Compl. Ex. 4. BLM responded two days later,
explaining that it was not contesting the production status of the entire Lease, but only of
the Wells. Compl. Ex. 5. BLM also stated that there were no records supporting KCR’s
assertion of production in paying quantities and that site inspections supporting the
finding that the Wells were not producing in paying quantities. Id.
On October 15, 2008, KCR sent a follow-up email. Compl. Ex. 6. In this email,
KCR admitted that the records on which BLM had based its decision did show that the
Wells were not producing in paying quantities, but asserted that the information
contained in those records was incorrect. Id. KCR alleges that this email is evidence that
the Wells had been producing in paying quantities since 2007, but the attached Exhibit
does not contain any documents in support of the assertions made in the email.
In April 2009, the Government contacted KCR and informed KCR that its email
communications with BLM were invalid, see Compl. at ¶ 25, presumably because they
were not filed in accord with the instructions provided by the BLM. KCR was also
informed that penalties would be assessed against it and that the Wells had to be plugged
and abandoned. The Government also demanded that BP, the primary lessee, plug the
Wells. Id. at ¶ 26.
On September 17, 2009, BLM received notices from BP seeking BLM approval
for BP’s plan to plug the Wells. Gov’t Ex. D at 1-6, 13-18. The notices were approved,
with conditions not relevant here. On December 5, 2009, the AR Davis # 1 well was
plugged, and on December 14, 2009, the AR Davis # 2 well was plugged.

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c. Procedural History

KCR brought the instant action on June 12, 2013. In its Complaint, KCR alleges
that the Government is liable to it for a taking under the Fifth Amendment and that the
Government is liable to KCR for breach of contract. On October 28, 2013, the
Government timely filed the pending motion to dismiss. Briefing was completed on
January 8, 2014.
II.

Legal Standard

A motion brought pursuant to RCFC 12(b)(1) challenges the Court’s subject
matter jurisdiction. See RCFC 12(b)(1). This Court’s jurisdiction is carefully delineated.
Absent congressional consent to entertain suits against the United States, this Court does
not possess jurisdiction. United States v. Testan, 424 U.S. 392, 399 (1976). Such
consent, a waiver of sovereign immunity, must be expressly stated and cannot be implied.
INS v. St. Cyr, 533 U.S. 289, 299 n. 10 (2001).
Once challenged, the plaintiff bears the burden of establishing subject matter
jurisdiction. Alder Terrace, Inc. v. United States, 161 F.3d 1372, 1377 (Fed. Cir. 1998)
(citing McNutt v. Gen. Motors Acceptance Corp., 298 U.S. 178, 189 (1936)). The
plaintiff must produce preponderant evidence in support of its claim of jurisdiction.
Reynolds v. Army & Air Force Exch. Serv., 846 F.2d 746, 748 (Fed. Cir. 1988). In ruling
upon a motion to dismiss under RCFC 12(b)(1), the Court must presume all undisputed
factual allegations in the Complaint to be true and must resolve all reasonable inferences
in favor of the plaintiff. Scheuer v. Rhodes, 416 U.S. 232, 236 (1974).
The Court may look to evidence outside of the pleadings in order to ascertain the
propriety of its exercise of jurisdiction over a case. Rocovich v. United States, 933 F.2d
991, 994 (Fed. Cir. 1991), aff’d in relevant part, Martinez v. United States, 281 F.3d
1376 (Fed. Cir. 2002). If jurisdiction is lacking, the Court must dismiss the action.
RCFC 12(h)(3).
III.

Discussion
a. Standing

The Government asserts that KCR lacks standing to bring either of its counts
against the United States. Standing is jurisdictional, see Hoopa Valley Tribe v. United
States, 597 F.3d 1278, 1283 (Fed. Cir. 2010), and the burden to prove standing therefore
lies with KCR. See Lujan v. Defenders of Wildlife, 504 U.S. 555, 561 (1992). Because
the Government challenges both Counts in KCR’s Complaint for lack of standing, the
burden on both issues lies with KCR.
Although this Court is not an Article III court, it applies the same constitutional
standing requirements as its Article III sisters. Glass v. United States, 258 F.3d 1349,
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1355-56 (Fed. Cir. 2001). A showing of standing requires the plaintiff to demonstrate
that “(1) it has suffered an ‘injury in fact’ that is (a) concrete and particularized and (b)
actual or imminent, not conjectural or hypothetical; (2) the injury is fairly traceable to the
challenged action of the defendant; and (3) it is likely, as opposed to merely speculative,
that the injury will be redressed by a favorable disposition.” Friends of the Earth, Inc. v.
Laidlaw Envtl. Servs., Inc., 528 U.S. 167, 180-81 (2000) (citing Lujan, 504 U.S. at 56061).
b. KCR Lacks Standing With Respect to its Takings Claim
The Government argues that KCR lacks standing to bring a takings claim because
it was not the operator at the time the Wells were plugged. To this end, it emphasizes
that a cognizable takings claim accrues only to the owner of a property right interest at
the time a taking occurs. See CRV Enterprises, Inc. v. United States, 626 F.3d 1241,
1249 (Fed. Cir. 2010) (“It is well established that ‘only persons with a valid property
interest at the time of the taking are entitled to compensation.’”) (quoting Wyatt v. United
States, 271 F.3d 1090, 1096 (Fed. Cir. 2001)) (emphasis added); see also United States v.
Dow, 357 U.S. 17, 20-21 (1958 (A takings claimant “can only prevail if the ‘taking’
occurred while he was the owner. For it is undisputed that ‘(since) compensation is due
at the time of taking, the owner at that time, not the owner at an earlier or later date,
receives the payment.’”) (quoting Danforth v. United States, 308 U.S. 271, 284 (1939)).
The Government argues that KCR abandoned its status as operator prior to the plugging
of the Wells, and thus was not an owner at the time the taking occurred.
KCR, in its response, does not argue that it had not in fact relinquished its
operator status prior to the taking. Instead, it argues that in an administrative appeal,
BLM—notably, applying BLM’s own regulations—found that it was still the operator
because KCR had not filed any notice of a change in operator status with BLM. KCR
Resp. at 6. Hence, the last operator of record in BLM’s files was KCR.
As the Government argues in its reply, BLM’s decision is entirely irrelevant to the
issue now before the Court. The administrative appeal revolved around the process of
reclaiming the surface after the Wells were plugged, and KCR was attempting to avoid
any liability as to that issue. See 43 C.F.R. §3162.5-1(b) (BLM regulation stating that,
upon conclusion of operations, “the operator shall reclaim the disturbed surface in a
manner approved or reasonably prescribed by the authorized officer.”). Under its own
regulations, BLM still considers KCR the operator because KCR is the last operator
recorded in writing; that does not mean that it was still the operator on the date of taking.
Notably, KCR’s stance in the administrative appeal is directly contrary to the
position it now takes. The Government has provided the Court with a highly relevant
filing submitted by KCR in the administrative appeal wherein KCR alleged that it was
not the operator at the time of plugging. In this administrative action, KCR actually
submitted evidence that it had relinquished its operator status. This evidence, which the
Court may consider, is dispositive as to KCR’s takings claim: KCR had relinquished any
rights it had on September 1, 2009, several months prior to the date that the Wells were
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plugged (and the “taking” accrued). Thus, KCR has not suffered an “injury in fact,” as
required by Lujan, because it abandoned any interest it had in the property at issue.
c. The Court Lacks Jurisdiction Over KCR’s Contract Claim
The Government challenges this Court’s jurisdiction over KCR’s breach of
contract claim for lack of privity. It asserts that KCR has no privity of contract with the
Government, and thus lacks standing. See Gov’t Mot. at 17 (citing First Hartford Corp.
Pension Plan & Trust v. United States, 194 F.3d 1279, 1289 (Fed. Cir. 1999)). KCR
does not put forth much effort in substantively countering the Government’s privity
argument, but argues more strenuously that it should be allowed to amend its complaint
to cure the jurisdictional deficiency by adding BP as a necessary party. In its reply, the
Government argues that even if privity could be established by the addition of BP to the
case, amending the Complaint would prove futile because KCR had abandoned its rights
as an operator.
The Court agrees with KCR that its privity defect could be cured by the addition
of BP to this case, since BP itself is in privity of contract with the Government. See
Devon Energy Corp. v. United States, 45 Fed.Cl. 519, 531 (1999) (Margolis, J.). That
said, this fact alone is insufficient to salvage KCR’s suit because as the Government
argues, KCR’s link to this case exists only as an operator under the Lease and, as
discussed above, KCR had ceased operations at the Wells several months prior to
plugging. Even if it cured the privity defect by amending its Complaint to include BP as
a necessary party, KCR would still lack standing as it suffered no injury due to the
plugging because, at the time of plugging, KCR was nothing more than a disinterested
third party.
IV.

Conclusion

In sum, even though KCR lacks privity with the Government under its current
Complaint, amendment would prove futile as KCR was not an operator at the time that
the Wells were plugged. Thus, it has no standing to bring either Count in its Complaint
before this Court: it owned no property rights in the Wells (operator or otherwise) at the
time the Wells were plugged, such that it possessed no property rights subject to taking.
Likewise, KCR’s abandonment of its operator status effectively revoked any rights under
the Lease, which required that the Wells produce in paying quantities.
In practical effect, everything that happened in this case is the result of KCR’s
lackadaisical treatment of BLM’s numerous letters and notices. Rather than informing
BLM that it believed that the Wells were producing in paying quantities as instructed in
the several iterations of the letters, KCR opted to pretend like nothing was happening and
hope that if it ignored BLM’s letters, all of KCR’s problems would go away.2 Further

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In this regard, the Court notes that KCR’s inaction effectively severed the link between
BLM’s actions and whatever harm KCR may have suffered. In legal terms, the alleged
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exacerbating the situation, KCR opted to abandon its status as operator—and all rights
appurtenant thereto—prior to the alleged taking.
For the foregoing reasons, the Court concludes that KCR lacks standing to bring
its taking claim because it abandoned its rights in the Wells before the alleged taking
occurred. Likewise, as currently pled, KCR also lacks privity of contract with the
Government. Even if KCR amended its Complaint, however, such amendment would
prove futile as once again, KCR had abandoned its status as operator of the Wells. For
these reasons, the Government’s motion to dismiss is GRANTED and KCR’s Complaint
is dismissed. The Clerk is directed to enter judgment accordingly.

s/ Edward J. Damich
EDWARD J. DAMICH
Judge

injury is no longer “fairly traceable” to the Government’s actions, see Friends of Earth,
528 U.S. at 180-81, but to KCR’s actions alone.
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