State v. Flag-Redfern Oil Co.

852 S.W.2d 480, 118 Oil & Gas Rep. 107, 36 Tex. Sup. Ct. J. 929, 1993 Tex. LEXIS 61, 1993 WL 165322

• Court: Texas Supreme Court
• Decided: May 19, 1993
• Docket: D-0872, D-0874
• Status: Published

Opinions

OPINION ON MOTION FOR REHEARING

SPECTOR, Justice.

The Respondents’ motion for rehearing is overruled. The court’s opinion of March 3, 1993 is withdrawn, and the following is substituted therefor.

These two causes were submitted together because both involve the authority of the Texas General Land Office to determine contract rights under state mineral leases.¹ In each cause, the court of appeals affirmed a summary judgment granting declaratory relief on the ground that the Natural Resources Code does not authorize the General Land Office to adjudicate such contract rights. We conclude that the Texas Legislature, in enacting the relevant provisions of the Natural Resources Code, intended to authorize the General Land Office to interpret and apply contractual provisions in state mineral leases. We further conclude, however, that the relevant code provisions, insofar as they require lessees to prepay disputed amounts before contesting the agency’s determinations in court, are unconstitutional. We therefore affirm the judgments of the court of appeals in favor of the lessees, though on grounds other than those articulated by the courts below.

I.

The present disputes arise from recent statutory changes affecting the Texas Land Commissioner’s long-standing authority to conduct audits. Since 1919, Texas statutes have provided that the books, accounts, and other records of oil and gas lessees on state lands are subject to “inspection and examination” by certain state officers, including the Commissioner of the General Land Office.² In 1986, the Texas Legislature expanded on that provision by creating new procedures for the assessment, collection and redetermination of oil and gas royalties due to the State.³ See Tex.Nat.Res.Code § 52.135. As revised, the statute requires the Commissioner of the General Land Office to send a lessee an “audit billing notice” whenever the Commissioner determines, after inspection of the lessee’s records, that additional royalties are due. § 52.135(b). Upon receiving the billing notice, the lessee has thirty days in which to either pay the deficiency or request a hearing before the Commissioner for redetermination of the assessment. § 51.135(c).

The 1986 act also established a new mechanism for suits to protest deficiency assessments. See Tex.Nat.Res.Code § 52.-137. If a lessee who has received a deficiency assessment chooses to forego a hearing before the Commissioner, or is dissatisfied with an order issued by the Commissioner after a hearing, the lessee must pay the deficiency under protest within thirty days. § 52.137(a). The lessee then has ninety days to bring suit in Travis County to recover the payment. § 52.-137(c). Trial on the disputed issues is de novo, and the substantial evidence rule does not apply. § 52.137(e).

All four of the respondents are lessees facing deficiency assessments as a result of audits conducted by the General Land Office. In each case, the deficiency assessment is based largely on a determination that the lease involved is not a “market value” lease, so that royalties cannot be calculated on the basis of gross proceeds. To dispute that determination, each of the Lessees initially requested a hearing under section 52.135(c) of the Texas Natural Resources Code. Before the hearings were concluded, however, each of the Lessees filed suit challenging the authority of the General Land Office to make such a legal determination in the course of conducting an audit.

After filing suit, Rutherford Oil Corporation and others⁴ sought a temporary injunction to prevent the General Land Office from proceeding with the hearings under section 52.135(c). The trial court initially granted the temporary injunction, but later dissolved it. The court of appeals then ordered the trial court to reinstate the injunction, stating that the General Land Office had no authority to adjudicate lease rights. Rutherford Oil Corp. v. General Land Office, 776 S.W.2d 232 (Tex.App.—Austin 1989, no writ) ("Rutherford I”).

After Rutherford I, the trial court granted summary judgment for Rutherford on the grounds that sections 52.135 and 52.137 of the Texas Natural Resources Code do not permit the General Land Office to adjudicate contract rights under state mineral leases, and that the administrative hearings which the General Land Office proposed to hold would violate this holding. The trial court also denied the State’s cross-motion for summary judgment.

In a separate proceeding in the same trial court, Flag-Redfern Oil Company sought relief similar to that sought by Rutherford. Just as in the Rutherford case, the trial court granted Flag-Red-fern’s motion for summary judgment and correspondingly denied the State’s cross-motion for summary judgment.

On appeal, the State asserted in both cases that sections 52.135 and 52.137 confer on the General Land Office full authority to interpret lease provisions in the course of conducting audits. The court of appeals rejected that argument in Rutherford II, 802 S.W.2d 65. Reasoning that “[o]nly courts are empowered to determine controverted property rights,” the court of appeals held that the term “audit” in section 52.135 “only contemplates an examination for accounting-type errors resulting in royalty deficiencies.” 802 S.W.2d at 68-69. For that reason, the court of appeals affirmed the summary judgment as to Rutherford. Id. at 69. Additionally, in a separate decision based on the reasoning of Rutherford II, the court of appeals summarily affirmed the trial court’s summary judgment as to Flag-Redfern. 852 S.W.2d 539.

II.

The State urges that the lower courts’ interpretation of section 52.135 is inconsistent with the legislature’s intent in enacting the 1986 amendments. We agree.

Nothing in section 52.135 expressly states that the General Land Office, in examining lessees’ records, is restricted to searching for “accounting-type errors.” On the contrary, the provisions added in 1986 indicate that the legislature fully expected the General Land Office to make legal determinations in the course of conducting its examinations. The new provisions require a lessee requesting a hearing to submit “[a] statement of grounds setting out in detail the lessee’s reasons for disagreement with such assessment and the factual and legal grounds on which the claim is based.” § 52.135(c) (emphasis added). If the legislature had intended the examination and hearing to focus solely on “accounting-type errors,” it would not have required the lessee to raise legal arguments in requesting a hearing. The statute also requires the Commissioner of the General Land Office, upon determining that additional royalties are due, to notify the lessee of the “reasons for such determination.” § 52.135(c). The reasons would require little explanation if the determination were based only on accounting errors.

The legislative history of the 1986 amendments supports the view urged by the State. According to the bill analysis that accompanied the amendments in the Senate, the General Land Office had already begun a “systematic audit program” before the 1986 amendments, and had issued deficiency assessments totalling more than $20 million. Suit had been filed, however, challenging the authority of the General Land Office to conduct such audits; so the legislature passed the amendments “to provide for an orderly resolution of the issues relating to these royalties and their payment to the state at the earliest possible date.” Senate Comm. on Finance, Bill Analysis, Tex.H.B. 32, 69th Leg., 3rd C.S. (1986). Thus, one apparent purpose of the 1986 amendments was to confirm a broad role for the Commissioner of the General Land Office in conducting audits and preparing deficiency assessments.

Considering the history and purpose and section 52.135, we conclude that the legislature cannot have intended to confine the Commissioner of the General Land Office to reviewing state mineral leases for “accounting-type errors.” Such an interpretation would accord the Commissioner no more authority than his office has had since the 1919 act making lessees’ records subject to inspection and examination. We decline to construe the act in a manner that would effectively thwart the legislature’s purpose in enacting the statute.

III.

The court of appeals based its reading of section 52.135 mainly on constitutional grounds: a broader interpretation of the Commissioner’s authority would render the statute unconstitutional, the court reasoned, because “[o]nly courts are empowered to determine controverted property rights.” 802 S.W.2d at 68. While we agree that only courts may render binding judgments in lease disputes, we disagree with the court of appeals’ application of that principle to this case.

The Texas Constitution divides the powers of government into three departments, and expressly provides that “no person, or collection of persons, being of one of these departments, shall exercise any power properly attached to either of the others,” except in certain specified instances. Tex. Const. art. II, § 1. Applying this provision, both the Rutherford I court and the Rutherford II court held that the State’s interpretation of section 52.135 would violate the separation of powers insofar as it would allow the General Land Office, an executive agency, to exercise a judicial function. Both courts based this view largely on this court’s decision in Board of Water Engineers v. McKnight, 111 Tex. 82, 229 S.W. 301 (1921), in which we held that “no power is more properly or certainly attached to the judicial department than that which determines controverted rights to property by means of binding judgments.” 229 S.W. at 304. Both courts also cited two cases involving the Railroad Commission’s authority to adjudicate disputes: Railroad Commission v. City of Austin, 524 S.W.2d 262, 267-68 (Tex.1975), and Magnolia Petroleum Co. v. Railroad Commission, 141 Tex. 96, 170 S.W.2d 189, 191 (1943). Id.

The hearings contemplated by section 52.135 are markedly different from those disapproved in the cited cases. In McKnight, an irrigation company had instituted a proceeding before the Board of Water Engineers “for the determination of the relative rights of various claimants to the waters of the Pecos River.” 229 S.W. at 301. The Board itself had no interest in the proceedings; it was actually adjudicating the relative rights of private parties. The same distinction applies to City of Austin and Magnolia Petroleum Co.: both involved adjudications of disputes between private parties. See City of Austin, 524 S.W.2d at 268; Magnolia Petroleum Co., 170 S.W.2d at 191.

In the present case, the State is a party to the disputed leases; and as a lessor, the State may reassess its rights under the lease as a matter of course. See Anderson v. Robison, 111 Tex. 402, 406-07, 229 S.W. 459, 460 (1921) (“[W]hen the state becomes a party to a contract with a citizen, the same law applies to it as under like conditions governs the contracts of individuals.”). Section 52.135 merely allows a lessee to participate in the State’s reassessment of its rights. A hearing under section 52.135 is thus no different, in principle, from routine decision-making by any ordinary lessor.

To the extent that section 52.135 merely allows the State to reassess its position with regard to state mineral leases, rather than to subject participants to binding judgments, we hold that the statute does not offend article II, section 1 of the Texas Constitution. See Fristoe v. Blum, 92 Tex. 76, 85, 45 S.W. 998, 1002 (1898).⁵

IV.

The Lessees complain, however, that hearings under section 52.135 do result in binding judgments, because judicial review is unavailable until the lessee pays the disputed amount in full. See § 52.137(a). This prepayment requirement, the Lessees assert, violates their constitutional rights of access to the courts.⁶ We agree.

Article I, section 13 of the Texas Constitution provides in part that “[a]ll courts shall be open, and every person for an injury done him, in his lands, goods, person or reputation, shall have remedy by due course of law.” This provision “specifically guarantees all litigants the right to redress their grievances — to use a popular and correct phrase, the right to their day in court.” LeCroy v. Hanlon, 713 S.W.2d 335, 341 (Tex.1986). Because access to the courts is a “substantial right,” id,., we have construed the open courts provision to guarantee access to the courts unimpeded by unreasonable financial barriers. Thus, the legislature cannot impose filing fees to support the state’s general revenue, id. at 342; nor can it require prepayment of administrative penalties as a prerequisite to judicial review. Texas Ass’n of Business v. Texas Air Control Bd., 852 S.W.2d 440 (Tex.1993).

The legislative history of section 52.-137(c) indicates that the State’s only interest in the prepayment requirement is its financial interest in immediate access to disputed royalty payments. See House Research Organization, Bill Analysis, Tex. H.B. 32, 69th Leg. (1986) (“The state would gain by having access to the royalty payments immediately, without having to wait two or three years for a lessee to exhaust judicial remedies.”). Of course, a similar financial interest could be asserted in defense of any financial impediment to judicial review, including filing fees like those struck down in LeCroy v. Hanlon, 713 S.W.2d at 342.

We conclude that the prepayment requirement of section 52.137, like the filing fees at issue in LeCroy, constitutes an unreasonable interference with access to the courts. Under these circumstances, the open courts provision prohibits the State from conditioning judicial relief on prepayment of the sums in dispute.

y.

To the extent that the term “adjudication” implies a binding determination, we agree with the courts below that the General Land Office is not authorized to “adjudicate” controverted property rights. But we disagree with the suggestion that the hearings contemplated by the General Land Office under section 52.135 exceed its constitutional and statutory authority. We hold, instead, that section 52.135 of the Texas Natural Resources Code authorizes the Commissioner of the General Land Office to conduct full-scale audits, encompassing legal as well as factual determinations, and to hold hearings for the redetermination of deficiency assessments.

A lessee may still challenge the State’s determinations in the manner prescribed in section 52.137. Independent of the prepayment requirement, section 52.137 requires a lessee challenging a deficiency assessment to submit a written protest to the Commissioner of the General Land Office within thirty days. § 52.137(a). The lessee may then bring suit in Travis County within ninety days after the date of the protest or the date of the commissioner’s final order following a hearing, whichever is later. § 52.137(a). A lessee who fore-goes these procedures, and simply refuses to pay a deficiency assessment, risks fore-feiture of its rights under the lease. See § 52.176. These requirements, we hold, do not unreasonably restrict lessees’ right of access to the courts. See Gutierrez v. Lee, 812 S.W.2d 388, 393 (Tex.App.—El Paso 1991, writ denied) (three-month limitations period did not violate the open courts provision). Nor do these requirements convert the agency’s assessment and reassessment process into a binding adjudication for constitutional purposes. See Beyer v. Employees Retirement Sys., 808 S.W.2d 622, 627 (Tex.App.—Austin 1991, writ denied).⁷ However, because the prepayment requirement of section 52.137(a) offends the open courts provision, Tex. Const. art. I, § 13, the lessee need not make a protest payment before bringing suit.

For the reasons stated, we affirm the judgments of the court of appeals.

1 . The issue in this case is the same one recognized, though not resolved, in General Land Office v. OXY U.S.A., Inc., 789 S.W.2d 569 (Tex.1990). In that case, we dismissed the State’s direct appeal as moot because the plaintiff, OXY, had taken a non-suit.

2 .The original act stated in part:

The books and accounts, the receipts and discharges of all lines, tanks, pools and meters, and all contracts and other records pertaining to the production, transportation, sale and marketing of the oil and gas shall at all times be subject to inspection and examination by the Commissioner of the General Land Office, the Attorney General, the Governor, or the representative of either.

Act of July 21, 1919, ch. 19, § 6, 1919 Tex.Gen. Laws 51, 53. The current language is nearly identical. See Tex.Nat.Res.Code § 52.135.

3 . Act of Sept. 17, 1986, ch. 5, 1986 Tex.Gen.Laws 4.

4 . Rutherford Oil and Conoco jointly hold two leases, and filed suit together. The trial court subsequently consolidated their suit with a suit filed by Ladd Petroleum. Unless otherwise indicated, references to Rutherford refer to all three lessees.

5 . "It is said that the power conferred upon the commissioner of the land office is judicial; but, in our opinion, the act is no more judicial when performed by the commissioner of the general land office on behalf of the state than it would be if done by an individual vendor or his agent."

6 . The Lessees urged this view, along with a number of other constitutional arguments, as alternative grounds for summary judgment. In both cases, the trial court confined its ruling to the grounds concerning statutory construction.

Ordinarily, when a trial court has specified the ground on which it was granting summary judgment, we must remand the cause to allow the trial court to rule on the remaining grounds. See City of Houston v. Clear Creek Basin Auth., 589 S.W.2d 671, 675-77 (Tex.1979); cf. Rogers v. Ricane Enters., Inc., 772 S.W.2d 76, 79 (Tex.1989) (when summary judgment order does not specify ground for ruling, summary judgment will be affirmed on any meritorious theory advanced). Here, though, the statutory construction issue is intertwined with constitutional issues: the viability of the State’s suggested interpretation depends on whether its determinations under section 52.135 would be binding, which depends in turn on the enforceability of the prepayment requirement. We address the constitutional issues here only to the extent necessary to construe the statutes.

7 . "An administrative agency is not a ‘court’ and its contested case proceedings are not lawsuits, no matter that agency adjudications are sometimes referred to loosely as being ‘judicial’ in nature. Agency adjudications do not reflect an exercise of the judicial power assigned to the 'courts' of the State in Tex. Const.Ann. art. V, § 1 (Supp.1991); they are simply executive measures taken in the administration of statutory provisions.”