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Maralex Resources, Inc. v. Colorado Oil and Gas Conservation Commission

Court of Appeals of Colorado, First Division

March 22, 2018

Maralex Resources, Inc., a Colorado corporation; A.M. O'Hare; and Mary C. O'Hare, Plaintiffs-Appellants,
Colorado Oil and Gas Conservation Commission, Defendant-Appellee.

          Court of Appeals No. 17CA0051 City and County of Denver District Court No. 14CV34759 Honorable John W. Madden, IV, Judge

          Announced March 22, 2018 Abadie Schill, P.C., William E. Zimsky, Durango, Colorado, for Plaintiffs-Appellants

          Cynthia H. Coffman, Attorney General, Jake Matter, Senior Assistant Attorney General, David A. Beckstrom, Assistant Attorney General, Denver, Colorado, for Defendant-Appellee


          TAUBMAN JUDGE.

         ¶ 1 In this appeal of an administrative agency decision, plaintiffs, Maralex Resources, Inc. (Maralex), A.M. O'Hare (O'Hare), and Mary C. O'Hare, appeal the district court's order affirming an order finding violation (OFV) issued by defendant, the Colorado Oil and Gas Conservation Commission (COGCC). On appeal, Maralex and the O'Hares contend that a COGCC rule permitting random, warrantless searches of oil and gas properties violates the United States and Colorado Constitutions. As a matter of first impression, we conclude that the COGCC rule is constitutional because it permits searches falling within the administrative search exception to the warrant requirement. To the extent the O'Hares separately challenge the constitutionality of the rule, we similarly reject their challenge.

         ¶ 2 Maralex also appeals the district court's order enforcing COGCC's findings that it violated several rules at two of its oil and gas locations. Because we agree with Maralex that one of COGCC's findings was arbitrary and capricious in one respect, we reverse the district court's order in part and affirm in part.

         I. Background

         A. Facts

         ¶ 3 In a prehearing statement submitted to the COGCC, the parties stipulated to the following facts.

         ¶ 4 O'Hare was the president of Maralex, a Colorado corporation licensed to conduct oil and gas operations in the state. Maralex operated over 200 oil wells in Colorado. As relevant here, Maralex was the operator of three producing wells in southwest Colorado - Katie Eileen 34-7-35 2A (Katie Eileen 2A), Katie Eileen 34-7-35 2 (Katie Eileen 2), and Katie Eileen 34-7-35 3 (Katie Eileen 3).[1] The wells were located on the O'Hares' ranch, and the O'Hares owned both the surface and mineral rights, though they leased a mineral interest to Maralex beginning in 1995.

         ¶ 5 The wells were located on two separate oil and gas locations.[2]Katie Eileen 2A was located on a western location, while Katie Eileen 2 and 3 were located on an eastern location. The Katie Eileen 2 well was completed in 1996, and the Katie Eileen 3 well was completed in 2007.

         ¶ 6 Additionally, there were two pits on the eastern location adjacent to the Katie Eileen 2 and 3 wells.[3] One pit was unlined, and the other had a partially torn liner. The O'Hares used those pits as stock ponds for their cattle.

         ¶ 7 In the afternoon of March 20, 2014, a COGCC field inspection supervisor contacted a local Maralex office and requested access to the Katie Eileen wells to conduct a routine inspection. Maralex employees informed the inspection supervisor that the properties were protected by locked gates and, because O'Hare was out of town, they could not permit access that day. The inspection supervisor agreed to delay the inspection for a day, provided that Maralex contact him "oil-field early" - meaning, according to industry custom, at 6:00 a.m. - the next day.

         ¶ 8 At 9:30 a.m. the following morning, not having heard from Maralex, the inspection supervisor issued a notice of alleged violation based on Maralex's failure to provide access to the wells. There was no communication between Maralex and the inspection supervisor until mid-morning, when O'Hare called the inspection supervisor.

         ¶ 9 The exact content of the March 21 phone call was disputed, but the conversation was apparently heated and arguably culminated in O'Hare threatening the inspection supervisor. O'Hare emailed the inspection supervisor later that day offering to allow the inspection supervisor access to the wells the following Monday morning. However, he also wrote that, had the inspection supervisor attempted to enter the property in spite of the locked gates, he would have been at risk of being shot because the O'Hares' children had been instructed to shoot trespassers. O'Hare added:

If your purpose is truly to inspect the locations for adherence to the COGCC rules and regulations then bring your notepad on Monday and you can write up all the deficiencies you find and we will address them to the best of our ability as soon as we can. If your intention is to run roughshod over our Constitutional rights then you should be prepared for a fight because I will defend my rights and my family to the death! Any questions?

         ¶ 10 COGCC then sought an administrative search warrant authorizing entry to and inspection of the western and eastern locations, which was granted by the La Plata County District Court. On March 27, 2014, the COGCC executed that warrant.

         B. COGCC's Inspections and Order

         ¶ 11 During the initial March 27 inspection, COGCC staff noted several rules violations, including, as relevant here, improperly stored equipment at the Katie Eileen 2A well and unclosed pits at the Katie Eileen 2 and 3 wells, one of which contained improperly stored drill cuttings.[4]

         ¶ 12 About two weeks later, COGCC staff conducted a follow-up inspection of the wells. That inspection revealed that the previously observed violations were ongoing. Additionally, a COGCC environmental protection specialist collected soil samples from the pits adjacent to the Katie Eileen 2 and 3 wells. Those soil samples showed levels of various contaminants that exceeded COGCC rules.

         ¶ 13 Based on the inspections of the Katie Eileen wells, COGCC issued Maralex multiple notices of alleged violations during June and August of 2014. Challenging these notices, Maralex requested an administrative hearing. COGCC held a hearing at which various COGCC and Maralex employees testified. Following the hearing, COGCC issued an OFV, concluding that Maralex had violated several rules, including, as relevant here, Rules 204, 603.f, 905(a), and 907(a)(1). See Dep't of Nat. Res. Rule 204, 2 Code Colo. Regs. 404-1; Dep't of Nat. Res. Rule 603.f, 2 Code Colo. Regs. 404-1; Dep't of Nat. Res. Rule 905(a), 2 Code Colo. Regs. 404-1; Dep't of Nat. Res. Rule 907(a)(1), 2 Code Colo. Regs. 404-1. In total, Maralex was assessed a penalty of $94, 000 for the violations.

         C. The District Court's Order

         ¶ 14 Maralex and the O'Hares sought judicial review of COGCC's order. They raised constitutional challenges to COGCC's rule permitting warrantless inspections of oil and gas locations and sought injunctive and declaratory relief. The O'Hares (but not Maralex) raised a separate constitutional challenge to the inspection rule based on their status as surface owners. Maralex (but not the O'Hares) also challenged COGCC's determination of rules violations in the OFV.

         ¶ 15 In a thorough and well-reasoned order, the district court denied Maralex and the O'Hares declaratory and injunctive relief, concluding that COGCC's inspection rule did not violate either the United States or Colorado Constitution. Similarly, the district court concluded that the O'Hares' constitutional rights were not violated. The district court also affirmed the OFV in full, finding that all the violations were supported by competent evidence in the agency's record.

         II. Constitutionality of Rule 204

         ¶ 16 Maralex and the O'Hares argue that COGCC "lacks statutory authority" to conduct unannounced, warrantless searches of oil and gas locations. Although they do not characterize it as such, we construe this claim as a facial challenge to the constitutionality of Rule 204, which permits authorized COGCC staff "the right at all reasonable times to go upon and inspect any oil or gas properties." Dep't of Nat. Res. Rule 204, 2 Code Colo. Regs. 404-1; see City of Los Angeles v. Patel, 576 U.S.___, ___, 135 S.Ct. 2443, 2449 (2015) ("[F]acial challenges under the Fourth Amendment are not categorically barred or especially disfavored."). We conclude that Rule 204 passes constitutional muster.

         A. Standard of Review

         ¶ 17 Because it is a question of law, we review the constitutionality of an agency rule de novo. See Indep. Inst. v. ...

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