IN THE MATTER TO GOVERN OPERATIONS IN THE                                 )                     CAUSE NO. 1

BLUE GRAVEL FIELD, MOFFAT COUNTY, COLORADO                            )                     ORDER NO. 1-73




                        This cause came on for hearing before the Commission at 8:30 a.m. on October 21, 1997, in Suite 801, the Chancery Building, 1120 Lincoln Street, Denver, Colorado, pursuant to an application filed in accordance with §34-60-118.5, C.R.S. by Marilyn B. Bateman and R.K. Cramer, (collectively the “Applicants”).  The Applicants have requested that the Commission issue an order determining and awarding proceeds, interest and attorney's fees attributable to overriding royalty interests Applicants own in various wells located in Blue Gravel Field, Moffat County, Colorado.  The Application states that Jack J. Grynberg, Jack Grynberg & Associates, Grynberg Petroleum Company and Celeste C. Grynberg have failed to timely and properly pay the proceeds attributable to the Applicants’ overriding royalty interests.  Specifically, the Applicants seek a full accounting of all proceeds and permissible deductions attributable to the overriding royalty interests and full payment of all proceeds and interest thereon.




                        The Commission finds as follows:


                        1.  That Marilyn B. Bateman and R.K. Cramer, as applicants herein, are interested parties in the subject matter of the above‑referenced hearing.


                        2.  That Jack J. Grynberg (“Grynberg”), as protestant herein, is an interested party in the subject matter of the above-referenced hearing.


                        3.  On November 25, 1996, Marilyn B. Bateman and R.K. Cramer, through counsel,  filed  an application with the Commission pursuant to §34-60-118.5, C.R.S., (the “Application”), seeking an order to determine the proceeds, interest and attorney's fees due the Applicants from production attributable to Applicants’ overriding royalty interests in certain wells located in the Blue Gravel Field, Moffat County, Colorado described on Exhibit “A” attached hereto and made a part hereof (the “Blue Gravel Wells”).


                        4.  The Applicants claimed that Jack J. Grynberg, Jack Grynberg & Associates, Grynberg Petroleum Company and Celeste C. Grynberg have failed to timely and properly tender proceeds attributed to Applicants’ overriding royalty interest in the Blue Gravel Wells.  Specifically, the Applicants requested that the Grynbergs provide a full accounting of all proceeds and permissible deductions attributable to the overriding royalty interests and payment of proceeds and interest.


                        5.  On December 31, 1996, Grynberg filed with the Commission a protest and intervention to the Application.


                        6.  On January 3, 1997, the Applicants submitted a written request to continue the Application on a month-to-month basis while Applicants gathered data.  The Secretary declined continuing the matter month-to-month, and instead granted the Applicants’ request for continuance to the April hearing pursuant to Rule 506 of the Rules and Regulations of the Oil and Gas Conservation Commission (the “Rules”).


                        7.  By letter dated March 11, 1997, the Applicants requested a continuance to the April hearing.


                        8.  At the March 19, 1997, hearing the Commission considered evidence and arguments of both parties and found good cause pursuant to Rule 506 to continue the matter.  After polling counsel on availability for potential hearing dates and reviewing the data provided, the Commission set the matter for the October hearing.


                        9.  By Order No. 1-67 dated May 9, 1997, effective April 21, 1997,  the Commission denied Grynberg’s pro se motion to reconsider hearing date.


                        10.  By Order dated  September 23, 1997,  the Commission ordered Grynberg to produce certain non-privileged documents in response to the Subpoena Duces Tecum issued by the Commission on April  21, 1997.


                        11.  The Applicants have filed with Arapahoe County District Court an action seeking similar relief, 95 CV 2246, Division 5 (the “Civil Matter”).  By Order dated April 16, 1997, the District Court Judge stayed further discovery in the Civil Matter pending resolution of the Application filed before the Commission.


Motion to Recuse Commissioner Williams


                        12.  On September 12, 1997, the Applicants filed a motion to recuse Commissioner Marla Williams because Commissioner Williams “represented Mr. Grynberg in the past and because her law firm presently represents Mr. Grynberg’s interests . . . .”   


                        13.  On September 18, 1997, Grynberg filed a Response to Applicants’ Motion to Recuse Commissioner Marla Williams stating that Commissioner Williams has not represented Grynberg in litigation, but instead has represented a party opposing Grynberg in an unrelated litigation matter.  The Response also stated that Commissioner Williams’ law firm represents Kinross Aginskoe Gold Company, LLC, a company in which Grynberg’s children’s trusts own an interest with Celeste Grynberg as the sole trustee.


                        14.  On September 26, 1997, Applicants filed a Reply in Support of the Applicants’ Motion to Recuse.


                        15.  The matter of Commissioner Williams’ recusal was fully briefed and considered by the Commission at the October 20 hearing.  The Commission’s conclusions are set forth below.


Prehearing Conference and Prehearing Order


                        16.  On October 9, 1997, Chairman Heinle conducted a prehearing conference attended by Applicant R.K. Cramer and Brad Okerland, Applicants’ counsel John K. Shunk, Gynberg’s counsel Phillip D. Barber and Lisa A. Lee, Technical Secretary and Manager of Environmental Affairs for the Commission, Tricia Beaver and Cynthia McNeill from the Attorney General’s Office.  The parties resolved procedural issues, identified controverted legal issues and determined the time necessary  for legal argument and factual testimony.  Commissioner Heinle set the Commission’s October  docket to hear legal argument on the controverted legal issues.   Because the October docket was full the parties agreed, after client consultation, to take up the evidentiary matters at the November hearing. Chairman Heinle instructed the parties to submit a Hearing Order to document the Prehearing Conference.


                        17.  On October 15, 1997, the parties submitted a joint Hearing Management Order identifying the following controverted legal issues for briefing and argument to the full Commission at the October hearing:


            A.  Whether Commissioner Marla Williams must be recused from participation in this matter.


            B.  Whether, and to what extent, the Commission has jurisdiction to decide legal and factual issues in this matter.


            C.  Whether  § 34-60-115, C.R.S.  limits the scope of this hearing to proceeds accruing after August 1, 1995.


            D.  Whether Respondent Celeste C. Grynberg should be relieved of any liability for payment of proceeds to Applicants in this matter.


                        18.  On October 20, 1997, the Commission heard oral argument from counsel on whether Commissioner Williams should be recused and whether the Commission can properly exercise jurisdiction over Applicants’ claims pursuant to the statutory authority granted in § 34-60-118.5, C.R.S., Payment of Proceeds.


                        19.  At the October 20, 1997, hearing the Commission allowed testimony of Mr. Kenneth Wonstolen, a member of the legislative committee that drafted section 118.5.  Mr. Wonstolen offered testimony pursuant to Rule 510.  He made statements under oath and was subject to cross-examination.  




Motion to Recuse Commissioner Williams


                        20.  Rule 516. provides as pertinent:


A conflict of interest exists in circumstances where a Commissioner has a personal or financial interest that prejudices that Commissioner’s ability to participate objectively in an official act.  A Commissioner shall disclose the basis for a potential conflict of interest to the Commission and others in attendance at the hearing before any discussion begins or as soon thereafter as the conflict is perceived. . . . In response to an assertion of a conflict of interest, a Commissioner may withdraw.  If the Commissioner does not agree to withdraw, the other Commissioners, after discussion and comments from any member of the public, shall vote on whether a conflict of interest exists.  Such vote shall be binding on the Commissioner disclosing the conflict.


                        21.  The Standards of Conduct for Commission members contained in § 24-18-108.5 (2), C.R.S., state:


A member of a board, commission, council, or committee who receives no compensation other than a per diem allowance or necessary and reasonable expenses shall not perform an official act which may have a direct economic benefit on a business or other undertaking in which such member has a direct or substantial financial interest.


                        22.  Commissioner Williams is an attorney licensed to practice in the state of Colorado and subject to the Colorado Rules of Professional Conduct,  including Rule 1.7, Conflict of Interest: General Rule.  Rule 1.7 of the Rules of Professional Conduct prohibits lawyers from representing clients with directly adverse interests or when the lawyer’s representation may be materially limited by responsibilities to another client, the lawyer’s own interests or a third parties. 


                        23.  Commissioner Williams disclosed her contacts with Grynberg as follows:


            A.  Commissioner Williams was adverse to Grynberg in a litigation settled last year.


            B.  Commissioner Williams’ law firm represents the principals of a limited liability company owned, in part, by trusts created for the benefit of the Grynberg children and managed by Celeste Gynberg.   Commissioner Williams performs no work on behalf of the trusts and has no involvement through her law firm with the trusts.


                        24.  Commissioner Williams stated that she has no relationship with Grynberg nor is she involved with any work that her law firm conducts on behalf of entities connected with Grynberg.  


                        25.  Commissioner Williams stated she believed that she could participate objectively in the hearing.


                        26.  The Commission considered Commissioner Williams’ contacts with Grynberg and concluded that no direct relationship existed between the parties, and that Commissioner Williams will derive no personal benefit from any Commission ruling in this hearing.  The Commission also considered the value of Commissioner Williams' expertise in deciding complex legal issues.


                        27.  After deliberation the Commission voted unanimously to deny the Applicants' motion to recuse Commissioner Williams.


Commission Subject Matter Jurisdiction Over Contested Issues


                        28.  The Applicants filed the Application pursuant to § 34-60-118.5, C.R.S., Payment of proceeds, seeking a Commission order directing Grynberg to:


            A.  account to the applicants for all proceeds (e.g. monies, property, credits or other economic benefits) received by Grynberg from the marketing of Oil and Gas from the Subject Lease and Subject Lands;


            B.  account to the Applicants for all Permissible Deductions;


            C.  deliver to Applicant Cramer, on a monthly basis, a cash payment equal to two percent (2.0%) of the gross proceeds from the marketing of Oil and Gas produced from the Subject Lease and Subject Lands, less permissible deductions (the “Net Proceeds”);


            D.  deliver to Applicant Bateman, on a monthly basis, a cash payment equal to one half percent (0.5%) of the Net Proceeds; and to


            E.  pay to Applicants interest and penalties on delinquent or unpaid Net Proceeds payments as required under § 34-60-118.5, C.R.S.


                        29.  In addition to an order establishing proceeds due, the Applicants requested in the Prehearing Order that the Commission enter an order determining and establishing future monthly payments, including increases in payments of proceeds from successful litigation brought by Jack J. Gynberg against K.N. Energy.


                        30.  The General Assembly adopted § 34-60-118.5, C.R.S. in 1989 amending the Oil and Gas Conservation Act to provide the Commission with the authority to order Payors, as defined by statute, to make timely payments of proceeds from oil and gas operations to Payees, as defined by statute.


                        31.  Section 118.5 was enacted in response to “problems that some individuals ha[d] had in the past number of years receiving their royalty payments on time in a regular manner.”  Testimony by Representative Jerkey on House Bill 1113 before the House Agricultural Committee January 25, 1989 (hereinafter “Agricultural Hearings”).  The statute requires that Payors make proceeds payments no later than six months after the end of the month in which production is first sold.  § 34-60-118.5 (2), C.R.S.  The statute is intended to prevent unscrupulous operators from delaying  the payment of proceeds and wrongfully withholding or using funds that are attributable to a Payee’s interest. Testimony of Representative Jerkey at Agricultural Hearings.


                        32.  Section 118.5 defines Payee as any “person or persons legally entitled to payment from proceeds derived from the sale of oil, gas or associated productions from a well in Colorado.”  § 34-60-118.5(1)(b), C.R.S. (emphasis supplied).


                        33.  The statute allows for the suspension of payment deadlines under certain limited circumstances including the Payee’s failure to confirm in writing its fractional interest; reasonable doubt by the Payor of the Payee’s identity; questions whether title is clear; or where litigation would affect the distribution of payments to a Payee. § 34-60-118.5(3)(a), C.R.S.


                        34.  Section 118.5 further provides that the Commission has exclusive jurisdiction to determine:


The date on which payment of proceeds is due a payee under section (2) of this section;


The existence or nonexistence of an occurrence pursuant to subsection (3) which would justifiably cause a delay in payment; and


The amount of the proceeds plus interest, if any due a payee by a payor.  § 34-60-118.5 (5)(a)-(c), C.R.S. 


                        35.  In 1994, the Colorado Supreme Court decided Garman v. Conoco Inc., 886 P.2d 652 (Colo. 1994) in response to a certified question from the Federal District Court which asked when an overriding royalty interest owner must bear its proportionate share of post-production costs expended to  process oil and gas if the instrument creating the interest is silent on this issue.  Garman, 886 P.2d at 653. 


                        36.  The Garman decision has resulted in a proliferation of lawsuits brought by payees asking courts to review and determine whether operators have been  properly deducting post-production costs.   Similar suits have been filed with the Commission under section 118.5 asking the Commission to determine whether deductions are proper under lease agreements, operating agreements or other private party contracts governing the legal rights between operating and non-operating mineral interest owners.


                        37.  Historically, the Commission has interpreted its statutory authority to include the regulation of oil and gas to protect against resource waste, to protect correlative rights and to protect the public health safety and welfare in oil and gas operations.  § 34-60-102, C.R.S.  The Commission has not interpreted this authority to grant the Commission authority to decide private party contractual  disputes.


                        38.  While the Commission recognizes that ensuring timely payment of proceeds falls within its jurisdiction, that obligation is limited to those instances when the Payee is legally entitled to the proceeds.   When a dispute regarding the propriety of deductions arises it requires interpretation of the contract(s) creating the interest.  This determination may also require the application of  principles relating to marketability set forth in GarmanGarman, 886 P.2d at 559.


                        39.  The nature of this dispute first will first require a determination of permissible deductions applicable to Applicants’ overriding royalty interests, involving an interpretation of the instruments creating the interest(s).


                        40.  Because section 118.5 is intended to ensure timely payment of proceeds due to payees who are legally entitled to payment, and does not create in the Commission authority to adjudicate private disputes related to the legality of specific deductions, the Commission will not exercise jurisdiction over the Application.


                        41.  The Applicants’ request for a determination of their entitlement to proceeds attributable to potential settlement of collateral litigation falls outside of the scope of section 118.5, and the Commission has no jurisdiction to adjudicate this portion of the Applicants’ claim.


                        42.  The Commission’s resolution of its subject matter jurisdiction moots the remaining legal issues regarding the applicability of  § 34-60-115, C.R.S. to the Application, and the related issue of whether Celeste Grynberg is a proper party to the Application.


                        43.  If the legal entitlement to proceeds is resolved through a stipulation of the parties or by order of the Court the Commission may then properly exercise its jurisdiction under section 118.5, provided the remaining statutory prerequisites have been met.




                        NOW, THEREFORE, the Colorado Oil and Gas Conservation Commission hereby enters an order dismissing without prejudice the application of Marilyn B. Bateman and R.K. Cramer, to determine and award proceeds, interest and attorney's fees due the Applicants for production attributable to the overriding royalty interests due from Jack J. Grynberg, Jack Grynberg & Associates, Grynberg Petroleum Company and Celeste C. Grynberg ("Grynbergs") for various wells located in Blue Gravel Field, Moffat County, because the jurisdictional prerequisites of §34-60-118.5(5)(c), C.R.S. have not been met.


                        IT IS FURTHER ORDERED that the provisions contained in the above order shall become effective on the date the order is entered.


                        IT IS FURTHER ORDERED, that the Commission expressly reserves its right, after notice and hearing, to alter, amend or repeal any and/or all of the above orders.


                        ENTERED this                  day of November 1997.


                                                                        OIL AND GAS CONSERVATION COMMISSION

                                                                             OF THE STATE OF COLORADO





                                                                                 Patricia C. Beaver, Secretary

Dated at Suite 801

1120 Lincoln Street

Denver, Colorado  80203

November 20, 1997




Order 1-73 dated November 20, 1997



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