Free Published Opinion - District Court of Federal Claims - federal

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In the United States Court of Federal Claims
No. 99-550 L (into which has been consolidated No. 00-169 L) (E-Filed: September 21, 2006) _____________________________________ THE OSAGE TRIBE OF INDIANS OF OKLAHOMA, ) ) ) ) ) ) ) ) ) ) ) ) ) )

Plaintiff, v. THE UNITED STATES, Defendant. _____________________________________

Indian Trust Claim; Trial; Alleged Failure to Collect Payments Due Under Oil and Gas Leases; Alleged Failure to Invest Tribal Income in Accordance with Law; Act of June 28, 1906, ch. 3527, 34 Stat. 539; 25 U.S.C. § 161a; 25 U.S.C. § 162a(a).

Wilson K. Pipestem, Washington, DC, for plaintiff. Brett Burton, with whom were Sue Ellen Wooldridge, Assistant Attorney General, and Martin J. LaLonde, Kevin S. Webb, and Kevin J. Larsen, Environment & Natural Resources Division, U.S. Department of Justice, Washington, DC, for defendant.

OPINION HEWITT, Judge I. Background A. Overview of Claims and Trial

This case is before the court following trial on the allegations raised by plaintiff Osage Tribe of Indians of Oklahoma 1 (Osage Nation or Osage Tribe) that the United

The original complaint in this case was filed on August 2, 1999 by "The Osage Nation and/or Tribe of Indians of Oklahoma" and assigned case no. 99-550L by the court. Two

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States violated its duty as trustee of the Osage mineral estate by failing to collect all moneys due from Osage oil leases and to deposit and invest those moneys as required by statute and according to the fiduciary duty owed to the Osage Tribe. Plaintiff's claims were divided into two tranches with the first tranche (Tranche One) encompassing trust fund mismanagement claims within the parameters described by the United States Court of Appeals for the Federal Circuit in Shoshone Indian Tribe of the Wind River Reservation v. United States, 364 F.3d 1339, 1350-51 (Fed. Cir. 2004) (Shoshone). The second tranche (Tranche Two) encompasses all other claims. See Order of April 15, 2005 at 1 (filed in The Osage Nation and/or Tribe of Indians of Okla. v. United States, case no. 00-169L). Tranche One of the case is further limited to consideration of four oil and gas leases2 for the following five months: January 1976, May 1979, November 1980, February 1986, and July 1989. Id. The Osage Nation identified two trust fund mismanagement claims that it considered to be within the parameters set in Shoshone. First, plaintiff claims that "the United States, as trustee, has failed to collect payments due under the Tranche One [l]eases for the [T]ranche [O]ne months, including but not limited to, royalties on crude oil or natural gas that was produced by those leases during those months and late payment fees." Osage Nation's Statement of Trust Fund Mismanagement Claims for Tranche One (T1 Statement of Claims) 4-5. Plaintiff further claims that "[i]n the case of royalty payments, the United States, as trustee, failed to compute the royalty in the manner prescribed by the applicable lease provisions and regulations" and "failed to collect these [royalty] payments in a timely manner." Id. at 5. Plaintiff also claims that, by failing to collect the royalty payments due under the Tranche One leases, the United States deprived the Osage Nation of "late payment fees that are due under the Tranche One [l]eases and regulations for payments that were not collected in a timely manner." Id.

amendments of that complaint were filed under the name "The Osage Tribe of Indians of Oklahoma" in March and August of 2004. A separate suit was brought by "The Osage Nation and/or Tribe of Indians of Oklahoma" on March 31, 2000 and assigned case no. 00-169L. The cases were consolidated by the court on September 14, 2005 and the earlier-filed suit, case no. 99-550L, was designated the lead case. See Order of Sept. 14, 2005 at 1. As does plaintiff in its briefs, the court refers to plaintiff interchangeably as the Osage Tribe or the Osage Nation. The Order of April 15, 2005 in case no. 00-169L designated five leases and six months to be included in Tranche One. Those five leases are commonly known as the East Hardy Unit, the North Burbank Unit, the North Avant Unit, the Osage Hominy Unit, and the Stanley Stringer Unit. See Osage Nation's Statement of Trust Fund Mismanagement Claims for Tranche One (T1 Statement of Claims) 1. As a result of issues that arose during discovery, which the parties addressed in a pre-trial conference on February 16 and 17, 2006, one lease (the Stanley Stringer Unit) and one time period (the month of October 1990) were removed from Tranche One and transferred to Tranche Two. Order of February 22, 2006 at 2. The order of February 22, 2006 (like all orders of the court subsequent to September 14, 2005) was filed in case no. 99-550L.
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The second claim identified by plaintiff under Tranche One is that "[t]he United States, as trustee, failed to invest the income that it did collect . . . in the manner prescribed by law." Id. Plaintiff further alleges that the United States "failed to deposit funds in an interest bearing account within a reasonable time after it received the funds . . .[,] failed to invest to funds as required by law . . .[,] [and] failed to credit the Osage Nation with the full amount of investment income that the funds earned prior to the time the funds were disbursed to the beneficiaries of the trust." 3 Id. at 6. This action is founded on the alleged breach of duties assumed by the United States under the terms of an agreement between the Osage Tribe and the United States enacted into law in 1906.4 See Act of June 28, 1906, ch. 3527, 34 Stat. 539 (1906 Act). The 1906 Act, titled "An act for the division of the lands and funds of the Osage Indians in Oklahoma Territory, and for other purposes," provides, by section 2, "[t]hat all lands belonging to the Osage tribe . . . shall be divided among the members of said tribe" with minor exceptions for retaining small tracts primarily for administrative and educational facilities. 34 Stat. at 540. Section 3 of the 1906 Act reserved oil, gas, coal and other minerals to the Tribe for a period of twenty-five years and provides that "leases for all oil, gas, and other minerals . . . may be made by the Osage tribe of Indians through its tribal council, and with the approval of the Secretary of the Interior, and under such rules and regulations as he may prescribe." 34 Stat. at 543. This reservation of the mineral interests to the Tribe has been routinely extended over time,5 and it was made a reservation in perpetuity by the Act of October 21, 1978, Pub. L. No. 95-496, 92 Stat. 1660. Section 4 of the 1906 Act provides:

The parties agreed, and the court so ordered, to delete from Tranche One the trial of alleged breaches by the government of any fiduciary duty in regard to the treatment of Osage trust funds that have been segregated for disbursement. Order of March 22, 2006 at 2. The "disbursement lag issue," as it is referred to by the parties, will be considered under Tranche Two of the case. For additional background information, see Osage Tribe of Indians of Okla. v. United States, 68 Fed. Cl. 322, 323-24 (2005) (Osage 1) (finding that the Act of June 28, 1906, ch. 3572, 34 Stat. 539 (1906 Act) created a trust with respect to the management by the government of plaintiff's oil and gas interests). The Act of June 28, 1906, ch. 3572, 34 Stat. 539, was subsequently amended and modified. See Act of March 3, 1921, ch. 120, 41 Stat. 1249; Act of February 27, 1925, ch. 359, 43 Stat. 1008; Act of March 2, 1929, ch. 493, 45 Stat. 1478; Act of June 24, 1938, ch. 645, 52 Stat. 1034; Act of July 25, 1947, ch. 334, 61 Stat. 459; Act of June 15, 1950, ch. 248, 64 Stat. 215; Act of October 6, 1964, Pub. L. No. 88-632, 78 Stat. 1008; and Act of October 21, 1978, Pub. L. No. 95-496, 92 Stat. 1660.
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That all funds belonging to the Osage tribe, and all moneys due, and all moneys that may become due, or may hereafter be found to be due the said Osage tribe of Indians, shall be held in trust by the United States . . . . .... Second. That the royalty received from oil, gas, coal, and other mineral leases upon the lands for which selection and division are herein provided . . . shall be placed in the Treasury of the United States to the credit of the members of the Osage tribe of Indians as other moneys of said tribe are to be deposited under the provisions of this Act, and the same shall be distributed to the individual members of said Osage tribe according to the roll provided for herein, in the manner and at the same time that payments are made of interest or other moneys held in trust for the Osages by the United States . . . . 34 Stat. at 544 (emphasis added). The court, in Osage Tribe of Indians of Okla. v. United States, 68 Fed. Cl. 322 (2005) (Osage I), found that "the plain language of section 4 of the 1906 Act establishes fiduciary duties that include both the proper management of Osage funds on deposit with the Treasury and the proper accounting of `all moneys due, and all moneys that may become due,' 34 Stat. at 544, in accordance with the terms of the oil and gas leases." Osage I, 68 Fed. Cl. at 327. The proper accounting of royalty payments necessarily encompasses "verification that the royalty paid is the amount contractually owed under the terms of the lease." Id. at 328. The court declined at that time to determine the standard to which government should be held in carrying out its duty to invest Osage moneys under the 1906 Act and relevant investment statutes and ordered subsequent briefing "clarifying the specific legal grounds for [plaintiff's] investment claim against defendant." Id. at 335-36. The parties' briefs 6 informed the preparation of their respective pretrial memoranda. The issues raised in briefing are resolved in this Opinion in the light of the testimony presented and evidence admitted at trial.

The investment claim briefing included Plaintiff Osage Nation's Brief Clarifying Legal Bases for its Investment Claims; Defendant's Motion to Dismiss in Part, Plaintiff's Investment Claims as Set Forth in Plaintiff's Brief Clarifying Legal Bases for its Investment Claim; Plaintiff Osage Nation's Opposition to Defendant's Third Motion to Dismiss (Defendant's Motion to Dismiss); and Defendant's Brief in Reply to Plaintiff's Opposition to Defendant's Motion to Dismiss, in Part, Plaintiff's Investment Claims as Set Forth in Plaintiff's Brief Clarifying Legal Bases for its Investment Claims. As a result of the resolution of the issues by trial, Defendant's Motion to Dismiss is MOOT.
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The government's responsibility for management of the Osage mineral estate is implemented by the Bureau of Indian Affairs (the BIA) of the Department of the Interior (DOI) through the Osage Agency located in Pawhuska, Oklahoma. See Stipulations of Fact (Stip. of Fact) ¶ 1. The Osage Reservation encompasses all of present-day Osage County, located in northern Oklahoma, and covers approximately 1.47 million acres. Id. ¶ 2. The first oil and gas lease on the Osage Reservation was entered into in 1896 and the first completed well was drilled in 1897.7 Osage County ranks among the top two oilproducing counties in the United States. Trial Transcript (Tr.) 84:13-21 (Reineke). The regulations that guide the Osage Agency in managing oil and gas leasing and operations on Osage Reservation lands and the leases negotiated by the Tribe and approved by the Secretary of the Interior (the Secretary), provide, respectively, the regulatory and contractual framework within which plaintiff's challenges to defendant's execution of its fiduciary duty to collect "all moneys due" plaintiff as royalty payments arise. See T1 Statement of Claims 3-4. Plaintiff's royalty collection and investment claims were the focus of a ten-day trial during which the court heard testimony from seventeen witnesses 8 and admitted 168

C. H. Thorman & M. H. Hibpshman, Status of Mineral Resource Information for the Osage Indian Reservation, Oklahoma, BIA Administrative Report 47 at 2 (1979).
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7

For convenient reference, the name and a description of each witness follows:

Newell Barker (Trial Transcript (Tr.) 1110:5-1352:22) worked for the Osage Indian Agency (Agency) at the Bureau of Indian Affairs (BIA) as the chief of the minerals branch, beginning in 1974. Tr. 1117:3-17. In that capacity, he "was responsible to manage the mineral estate of the Osage Tribe of Indians, which consisted of about 1.5 million acres in Osage County." Tr. 1117:15-17. Mr. Barker supervised the leasing of the properties, the management of the properties (including lease inspections) the accounting of production, and income. Tr. 1117:18-21. Prior to joining the Osage Agency, Mr. Barker earned a bachelor's of science degree in petroleum engineering from Texas Tech in Lubbock, Texas in 1961, Tr. 1110:16-20 and attended courses in operation, engineering, and management throughout his career, Tr. 1110:23-1111:1. His employment history comprises the following: mud engineer at Permian Mud Service out of Odessa, Texas from 1961-1965, Tr. 1111:10-15, and at Magcobar in Venezuela from 1965 to 1972, Tr. 1112:11-14; operations manager at Thermodyne, Inc. in Oklahoma from 1972-1973, Tr. 1114:21-24; and senior petroleum engineer at Standard Oil Company in Ohio from 1973-1974, Tr. 1115:19-21. Mr. Barker became a licensed registered professional engineer in 1974, the same year that he joined the Osage Agency. Tr. 1116:151117:7. Jerri Jean Branstetter (Tr. 854:5-968:16) is a member of the Osage Nation and a headright owner, meaning that she receives a quarterly annuity from the mineral estate of Osage County. Tr. 854:18-855:11. From 1974 to 1980, Ms. Branstetter worked as an accountant technician at the Osage Agency. Tr. 860:21-861:9. Prior to that position, she served as a clerk in the credit
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department at Graves Jewelers in Tulsa, Oklahoma, Tr. 856:20-23, and as a cashier/bookkeeper with Family Loan and Thrift, Tr. 858:7-10. She then held positions with several other finance companies. Tr. 859:4-7. For the past nineteen years, she has worked at the DeConnor Correctional Center in Hominy, Oklahoma. Tr. 855:18-856:2. Rita Bratcher (Tr. 1764:1-1800:18) works for the Financial Management Service, a bureau of the U.S. Treasury Department. Tr. 1764:9-10. She is the director of the revenue collection group, and she is responsible "for three divisions of people who develop, operate and market various collection systems that the government has in place to move monies that are owed to the government into the Treasury's account as quickly as possible." Tr. 1764:13-18. Ms. Bratcher began working for the Treasury Department in 1971 in the Banking and Cash Management division. Tr. 1765:5-15. Gregory J. Chavarria (Tr. 1802:7-2048:14) was qualified by the court as an expert in accounting, particularly accounting related to tribal funds held in trust by the United States, including funds of the Osage Tribe. Tr. 1828:25-1829:3. He currently works for Chavarria, Dunn and Lamey, LC, an accounting firm located in Albuquerque, New Mexico. Tr. 1802:2023. Prior to this position, he worked at Arthur Anderson as a staff person, a senior auditor, and a manager. Tr. 1803:17-19. Throughout his time at Anderson, Mr. Chavarria was involved in engagements for BIA, specifically "reconciliation efforts regarding Tribal Trust Accounts." Tr. 1806:6-13. Melissa Currey (Tr. 2355:2-2430:16) is the superintendent for the Osage Agency. Tr. 2356:3-4. Since attaining this position in November 2004, Ms. Currey is "responsible for the management and oversight of the daily operations in relation to the Osage Mineral Estate[,] . . . the restricted land[,] and the daily activities that are involved in taking care of these items." Tr. 2356:6-14. Ms. Currey has worked for BIA for over twenty-one years, beginning as a clerk typist and continuing as a realty clerk, realty assistant, realty specialist, supervisory realty specialist, permanent supervisor for real estate services, and deputy superintendent for trust services before acquiring her current position. Tr. 2357:16-2362:6. Judi Hill (Tr. 1623:20-1754:9) was first employed by the Osage Agency in 1978 and served as a primary collection officer from 1981 to 1996. Tr. 1625:2-1626:5. She was transferred to the Pawnee Agency where she worked for five years before returning to the Osage Agency in June 2001 where she is employed as an accounting technician, which is her current title. Tr. 1626:7-1626:23. Charles Hurlburt (Tr. 972:8-1082:23) works as a supervisory petroleum engineer at the Osage Agency, a position he has held since April 1989. Tr. 972:14-21; Tr. 974:9. He first joined the Osage Agency in 1983. Tr. 972:16-18. He is a licensed professional engineer in Oklahoma. Tr. 972:23. He earned a bachelor of science degree in petroleum engineering from the University of Tulsa in Oklahoma in 1979. Tr. 973:8-14. Stephen Allen Jay (Tr. 437:25-686:22) was qualified by the court as an expert in auditing,
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analyzing financial statements and damage calculations. Tr. 465:17-20. He received bachelor's and master's degrees in accounting from Oklahoma State University. Tr. 438:9-11. He is a certified public accountant, licensed by Oklahoma, and he is accredited by Oklahoma in business evaluation. Tr. 438:16-19. After earning his master's degree and serving in the U.S. Army, Mr. Jay worked for Arthur Young & Company, an accounting firm, in Tulsa, Oklahoma, Tr. 439:22440:10; entered into a partnership and founded an accounting firm, Lohrey & Jay, Tr. 441:17-22; and formed his own accounting firm, Jay & Associates, P.C., Tr. 442:12-15, of which he is currently the managing shareholder. Charles Reynold Lundelius, Jr. (Tr. 2065:21-2297:13) was qualified by the court as an expert "on investment evaluation, including the determination of the prudence of investments and investment practices, financial analysis, including the calculations of rates of return, . . . accounting, auditing, and damages." Tr. 2083:7-15. He is currently senior managing director at FTI, where he leads the securities transactions services group. Tr. 2066:8-13. He received his bachelor of science degree in commerce from the University of Virginia in 1978 and his master's of business administration from Tulane University in Louisiana in 1980. Tr. 2066:18-2067:8. Soon afterwards, Mr. Lundelius, a certified accountant, worked for Arthur Young, an accounting firm in Houston, Texas, and then formed his own investment banking consulting firm. Tr. 2067:23-2068:24. After six years, he accepted an offer to serve as chief financial officer and chief investment officer for Unimark, a life and health insurance company based in Dallas, Texas. Tr. 2070:2-6. Mr. Lundelius then served in the following positions before his current employment with FTI: as a manager for Coopers & Lybrand, a Washington, D.C.-based accounting firm; as a senior manager for Deloitte & Touche, a national accounting firm; and, lastly, as a partner at Kroll, a Washington, D.C. accounting firm. Tr. 2072:8-2076:3. Stanley Ann Mattingly (Tr. 727:18-758:25) is a co-founder of the Osage Shareholders Association, an organization whose purpose "is to be a watchdog over the Osage Tribal Council and how [it] spend[s] the royalty money," as well as "to keep track" of the Osage Agency's activities. Tr. 729:13-20. She is a registered nurse who holds an associate's degree in nursing from Tulsa Junior College. Tr. 728:18-19. Ronnie Martin (Tr. 1362:2-1622:12) was qualified by the court as an expert in "oil . . . , oil royalty calculation, the verification of oil royalty paid, and oil royalty practices that have been further discussed" during trial. Tr. 1385:16-21. He is senior managing director for FTI Consulting (FTI) in Houston, Texas. Tr. 1362:11-13. He also is the practice leader for FTI's oil and gas services practice. Tr. 1365:20-22. Previously, he worked for Texaco for thirty-three years; his last position there was vice president of Texaco Exploration Producing, Inc. Tr. 1373:22-1374:7. At both companies, his duties are and were to help clients "analyze the claims relating to oil and gas issues, primarily valuation issues, particularly with respect to royalty and sometimes severance tax issues." Tr. 1367:17-20. He graduated from Mississippi State University in 1969 with a bachelor of science degree in mechanical engineering and is a member of the National Energy Services Association. Tr. 1364:6-15. Lucian Morrison (Tr. 2314:3-2351:15) is a consultant in a sole proprietorship, Lucian L.
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Morrison & Associates, where he consults "in the areas of trusts, estates, probate, trust companies, taxation, and the like." Tr. 2314:9-15. One of the trusts that he currently manages is the San Pedro Ranch Trust. Tr. 2319:12-14. He holds an accounting and law degree from the University of Texas at Austin, and he has "the industry equivalent of a master's degree from the Southwestern Graduate School of Banking at [Southern Methodist University] in Dallas[, Texas]." Tr. 2315:21-25. Jim Parris (Tr. 296:4-423:20) is a licensed accountant who presently works as a consultant for the Osage Tribe. Tr. 297:2; 303:1. After graduating from Oklahoma State University with a bachelor's degree in accounting in 1977, Tr. 296:6-12, Mr. Parris held the following positions: comptroller for the Osage Tribe, 1978 through 1979; partner at an accounting firm in Ponca City, Oklahoma, 1979 through 1980; auditor for a private company from 1981-1982; tribal auditor for the Osage Tribe from 1983-1985; chief of the branch of Trust Fund Accounting at BIA, 1985-1991; director of Office of Trust Fund Management at BIA, 1991-1995; solo practitioner, 1995-1996; consultant for KPMG, 1996-1998; accountant for REDW, a "large regional CPA firm that did a lot more tribal work," 1998-2000; consultant for Strategic World Management, 2000-2001; and, his current occupation, as a private consultant with the Tribes, which he began in 2001. Tr. 296:14-301:24. Daniel Reineke (Tr. 44:6-285:21), qualified by the court as plaintiff's expert on "oil royalty calculation and verification of royalty due," Tr. 58:24-59:2, is a registered petroleum engineer who manages his own company, Daniel Reineke, P.E, Tr. 44:17-22. He received a bachelor of science degree in petroleum engineering from Colorado School of Mines in 1975 and worked for Conoco in Texas as a drilling engineer immediately afterwards. Tr. 46:14-18. Mr. Reineke then became a division engineer for Same Dan, "a large independent oil company in Oklahoma City." Tr. 47:1-5. He left Same Dan in 1979 and worked as an independent consulting engineer for individual oil companies. Tr. 48:8-10. He is a registered professional engineer in Oklahoma. Tr. 48:22-23. Eugene Shawn Standing Bear (Tr. 759:18-796:11) worked at the Osage Tribal Museum in Pawhuska, Oklahoma from fall 1992 until summer 1997. Tr. 761:1-4. He began his employment there as a collections manager and then was appointed as director of the museum. Tr. 761:7-18. Mr. Standing Bear holds an associate of arts degree in art from Rogers State College. Tr. 760:6-13. George Tall Chief (Tr. 34:8-43:9) served as Principal Chief of the Osage Tribe and as President of the Osage Nation from 1982 to 1990. Tr. 36:25-37:8. He earned a bachelor of arts degree in education from Central State University in Edmond, Oklahoma and a master's degree in public school administration from Pacific University in Oregon. Tr. 35:14-18. Currently retired, Mr. Tall Chief's career comprised public education, specifically sports coach, history teacher, principal, and superintendent. Tr. 35:21-36:21. Toby Van Big Horse (Tr. 689:16-726:15) began working for the Osage Agency in the mineral department in 1982 as a gauger, officially known as a petroleum engineering technician.
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exhibits were admitted into evidence. The depositions of fourteen witnesses, including six Rule 30(b)(6) witnesses, were also admitted into evidence.9 The parties filed both pre-trial and post-trial briefing. B. Royalty Calculation and Collection - Overview of Regulatory History

The government's duty to collect oil and gas royalty payments and to verify that the proper amounts have been paid is set out in the 1906 Act, as amended, the regulations established to implement its requirements, and in the terms of Osage oil and gas leases. See 1906 Act, §§ 3, 4, 12, 34 Stat. at 543-45; Osage I, 68 Fed. Cl. at 327; 25 C.F.R. § 226 (2005); see also Def.'s Post-Trial Brief (Def.'s Br. or Brief) 3; Def.'s Pretrial Memorandum of Contentions of Fact and Law (Def.'s Pretrial Mem.) 4; Plaintiff Osage Nation's Post-Trial Brief (Pl.'s Br. or Brief) 2. The 1906 Act assigns to DOI the responsibility for managing oil, gas and other mineral leases "under such rules and regulations as [the Secretary] may prescribe." 1906 Act § 3. DOI has issued regulations governing gas and oil leasing specific to the Osage Reservation 10 that have remained

Tr. 690:13-23. In 1985, he became a field representative, a title that was classified under "petroleum engineering technician." Tr. 693:17-22. Mr. Big Horse was promoted to the engineering section in 1997, a position that he held until 2005. Tr. 694:24-25; 695:7-8. He is now employed by the "Osage Nation[,] working in the Osage language preservation department." Tr. 690:5-6. Rule 30(b)(6) witnesses are designated by a party or non-party organization (public or private corporation, partnership, association, or governmental agency) following notice and subpoena of that organization to testify "as to matters known or reasonably available to the organization." Rules of the Court of Federal Claims (RCFC) 30(b)(6) (2006). The Bureau of Indian Affairs (BIA) established a comprehensive regulatory framework unique to the Osage Reservation for the management of Osage oil and gas leasing, commonly referred to as the Osage Regulations. During the periods covered by Tranche One, the Osage Regulations were codified initially under §183 of Title 25 of the Code of Federal Regulations (C.F.R.) and redesignated in 1982 as § 226 of the same title. Changes to the wording of specific regulations identified by the parties at trial and in their respective briefs were made in 1974, see 39 Fed. Reg. 22,254 (June 17, 1974), 1990; 55 Fed. Reg. 33,112 (Aug. 14, 1990), and in 1994, see 59 Fed. Reg. 22,104 (April 28, 1994). Unless otherwise specified, references to the Osage Regulations will use the current designation of 25 C.F.R. § 226, with a parenthetical providing the year the regulation went into effect (1974, 1990, or 1994), where relevant. The United States has also established regulations governing oil and gas leasing of other Indian lands it holds in trust. See, e.g., 25 C.F.R. Part 211: Leasing of Tribal Lands for Mineral Development; 25 C.F.R. Part 213: Leasing of Restricted Lands of Members of Five Civilized Tribes, Oklahoma, for Mining; 25 C.F.R. Part 227: Leasing of Certain Lands in Wind River Indian Reservation, Wyoming, for Oil and Gas Mining; see also Indian Mineral Leasing Act, ch.
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substantially consistent from those first issued to implement the 1906 Act to the present day. See Osage I, 68 Fed. Cl. at 332 & nn.11-12. Because the leases incorporate by reference the regulations, Joint Exhibits (JXs) 6, 7, 8, 10, 11, 12, 15, the regulations are the focus of the court's analysis of the collection duties of defendant as trustee.11 The parties urge sharply differing legal interpretations of several of the regulations governing the calculation of oil royalty payments. Oil royalty payments are based on three factors: royalty rate, volume of oil, and royalty value, and may be expressed by the formula: Royalty Due = Royalty Rate x Volume x Royalty Value. See Pl.'s Br. 2; Tr. 80:24-81:20 (Reineke); Def.'s Br. 3; Tr. 1390:9-15 (Martin). In briefing, the parties use different words to express the last element of the formula: plaintiff uses the term "royalty value" while defendant uses the term "royalty price." See Pl.'s Br. 2; Def.'s Br. 3. Because this element is itself the product of a calculation rather than an independent price term, the court uses the term "royalty value." Royalty rate is usually expressed as a fraction, such as 1/8 or 1/6, or as a percentage, 12 1/2% or 16 2/3%, respectively, of the value of production. See Stip. of Facts ¶ 8. Royalty rates were determined by the President of the United States until 1950. See 1906 Act § 3. After 1950, rates could be set by the Osage Tribal Council, subject to approval by the Secretary, Pub. L. No. 548, 64 Stat. 215 (1950). The method for determining royalty value is provided in the regulations and leases, with the value expressed in United States dollars and cents per barrel. See Stip. of Fact ¶ 8. In order to set the parties' arguments in context, the court provides an overview of the regulatory history. 1. 1912 Regulations and 1915 Regulations

198, 52 Stat. 347, (May 11, 1938) (exempting, by section 6, the Osage Reservation in Oklahoma from all sections but allowing, by section 5, delegation of the Secretary's authority to approve oil, gas and other mining leases to superintendents or other Indian Service officials). Leases are issued under authority of section 3 of the 1906 Act, 34 Stat. 543-44, and are subject to the current regulations at the time they are issued, see 25 C.F.R. § 226.5, and to all regulations thereafter enacted that do not "affect the term of the lease, rate of royalty, rental, or acreage unless agreed to by both parties and approved by the Superintendent." Id. Oil and gas leases must also be in a form prescribed by the Secretary of the Department of the Interior. 25 C.F.R. § 226.7.
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The first set of regulations issued after enactment of the 1906 Act calculated royalty payments by applying a fixed royalty rate to the gross proceeds from all oil sold from a given lease, with payment based on the higher of the actual market value (or selling price) or a minimum value established under the regulations. See Regulations to Govern the Leasing of Lands in the Osage Reservation, Okla., for Oil and Gas Mining Purposes, Department of the Interior, July 3, 1912 (1912 Regulations). The 1912 Regulations provided, in pertinent part, that (a) On oil the rate of royalty shall be sixteen and two-thirds percent (16 2/3%) of the gross proceeds of all oil produced from the leased premises and such royalty shall be paid in money, based on the actual market value, not less than the guaranteed minimum value of sixty (60) cents per barrel . . . . 1912 Regulations ¶ 20. All oil and gas lease payments, including royalties, were to be paid to the superintendent at the Osage Indian School at Pawhuska, Oklahoma (then the administrative site of the BIA's Osage Agency), id. ¶ 21, with payment of oil and gas royalties produced in one month to be made "on or before the twenty-fifth (25th) day of the month next succeeding," id. ¶ 22, the month of production. The lease forms used for all Osage oil and gas leasing repeated these provisions, see 1912 Regulations, Form B. Oil and Gas Mining Lease, Osage Reservation, Oklahoma ¶ 2, and also incorporated as terms of the lease all current and future Osage regulations, id. ¶ 9 ("This lease shall be subject to the regulations of the Secretary of the Interior, now or hereafter in force, relative to such leases, all of which regulations are made a part and condition of this lease . . . ."). The royalty calculation provisions in the 1912 Regulations had two notable shortcomings: first, "actual market value" was not a defined term and therefore raised the prospect of conflict should the price reported by the lessee fall below what the lessor or the Osage Agency might consider to be the market value at the time; and, second, by setting the floor price at a fixed value, the "guaranteed minimum" could not respond to market fluctuations over time without a formal change in the regulations. In 1915, DOI published new regulations that addressed these deficiencies by replacing the vague term "actual market price" with the term "actual selling price" received for oil from a lease, and by incorporating an objective market-based value tied to the regional oil market as a flexible mechanism for setting the floor price. See Regulations to Govern the Leasing of Lands in the Osage Reservation, Okla., for Oil and Gas Mining Purposes, Department of the Interior, August 26, 1915 (1915 Regulations). These changes were incorporated into Form B, the standard oil and gas lease form for the Osage Reservation, as follows: The lessee agrees to pay or cause to be paid to the superintendent of the Osage Indian Agency, at Pawhuska, Okla., for the lessor, as royalty, the sum of 16 2/3 per cent of the gross proceeds from sales after deducting the oil used for fuel in operating the lease, unless the Osage tribal council, with the
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approval of the Secretary of the Interior, shall elect to take the royalty in oil; payment to be made at time of sale or removal of the oil, except where payments are made on division orders,12 and settlement shall be based on the actual selling price, but at not less than the highest posted market price in the Mid-Continent oil field on the day of sale or removal . . . . 1915 Regulations, Form B. ¶ 2 (emphasis and footnote added). The 1915 Regulations furthered the objective of capturing the highest royalty for the Osage Tribe from the gross proceeds from sales, offset by the value of oil consumed in the process of production, by adding the refinement that payment would be based on the higher of either the selling price reported by the lessee or the highest price posted anywhere in the Mid-Continent oil field 13 on that day. Id. "Posted price" is a term of art with a specific meaning with deep historical roots in the oil industry. See Stip. of Fact ¶ 5 ("`Posted prices' are so named because in former times a prospective purchaser (usually a refiner) would tack a sheet to a post in a producing field stating how much it might be willing to pay for a crude oil or blend of oils of standardized quality (e.g. Oklahoma Sweet, West Texas Intermediate, Louisiana Light)."); Howard R. William & Charles J. Meyers, Manual of Oil and Gas Terms 856 (12th ed. 2003) (Williams & Meyers) (stating that, in the oil industry, posted price is "a written statement of crude petroleum prices circulated publicly among sellers and buyers of crude petroleum in a particular field in accordance with historic practices, and generally known by sellers and buyers within the field"). By selecting the MidContinent oil field as the geographic reference area, the BIA expressed an apparent intent to establish a broad regional basis for determining the market price of Osage oil. 2. 1974 Regulations

In April 1974, the BIA "proposed to completely revise Part 183 of . . . Title 25 of the Code of Federal Regulations." 39 Fed. Reg. 12,755 (April 8, 1974). The final regulations were published on June 21, 1974 with only minor changes and became effective on July 22, 1974. 39 Fed. Reg. 22,254 (June 21, 1974); 25 C.F.R. Part 183
12

A division order is a contract for the sale of oil between the purchaser and parties who own oil production interests. It establishes the proportions of interest and division of proceeds from the oil well among the existing owners and the prospective purchasers. Division orders generally do not change the terms of the lease and are terminable at will by either party. Howard R. Williams & Charles J. Meyers, Manual of Oil and Gas Terms 302 (12th ed. 2003) (Williams & Myers). The Mid-Continent oil field is a broad area encompassing hundreds of oil fields and deposits discovered in the late 1890s and early part of the twentieth century, initially in parts of eastern Kansas, Oklahoma (including the Bartlesville and Burbank fields on the Osage Reservation), and central Texas, and eventually including parts of Arkansas, New Mexico and Louisiana. See id. at 658.
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(1975) (1974 Regulations). Of particular significance to the issues raised at trial are changes in the method of determining royalty value and the addition of measures to verify the amount of royalty owed against the payment received by the Osage Agency. See 25 C.F.R. §§ 183.1, 183.11, 183.14. Under the 1974 Regulations, royalty payments are based on a new formula that retained the earlier provisions for calculating royalty on the higher of the posted price or actual selling price, but added a third term price that is "offered" that would capture the value of any premiums or bonuses offered for crude oil over the highest posted price in the geographic area of reference. See 25 C.F.R § 183.11(a)(2). The revised portion of the 1974 Regulations regarding the calculation of royalty due provided, in part, that [u]nless the Osage Tribal Council, with the approval of the Secretary, shall elect to take the royalty in kind, payment shall be made at the time of sale or removal of the oil, except where payments are made on division orders, and settlement shall be based on the actual selling price, or the highest posted or offered price by a major purchaser in the Kansas-Oklahoma area whichever is higher on the day of sale or removal. Where different prices are paid simultaneously for oil from a lease and the highest such price exceeds the higher of the aforementioned prices, then that price shall be the basis of royalty on all oil from said lease. Id. (emphasis added). Neither the notice of proposed rule change, 39 Fed. Reg. 12,755, nor the notice and publication of the final regulations, 39 Fed. Reg. 22,254, provided an explanation of the changes in the formula for royalty value or in the geographic reference area, or the addition of a sentence setting royalty value in the case of simultaneous sales at different prices from the same lease. The only purpose noted by the BIA in making the rule change was "to improve the management of the Osage oil and gas mineral estate." 39 Fed. Reg. at 22,254. The BIA also re-defined the geographic reference area as Kansas-Oklahoma. See 25 C.F.R. § 183.11(a)(2). The 1974 Regulations also restricted the highest posted price and offered price terms used to determine royalty value to those posted or offered by a "major purchaser" in the Kansas-Oklahoma area. See 25 C.F.R. § 183.11(a)(2). The 1974 Regulations defined major purchaser as "any one of the minimum number of purchasers taking 80 percent of the oil in the Kansas-Oklahoma area." 25 C.F.R. § 183.1(h). This change limited the number of purchasers the Osage Agency was required to monitor to determine the highest posted and offered price in the region and identified the principal parties who would influence crude oil market prices and the resulting royalty value to be used in calculating royalties for the Osage Tribe. The 1974 Regulations also established a reporting mechanism that provided the means for the Osage Agency to cross-check lessee reports of crude oil sales with
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purchasers' records of crude oil purchases from the same lease. See 25 C.F.R. §§ 183.13(b), 183.14(b). As to lessees, the 1974 Regulations required lessees "to furnish certified monthly reports by the 25th of each following month covering all operations, whether there has been production or not, indicating therein the total amount of oil, natural gas, casinghead gas, and other products subject to royalty payment." Id. As to purchasers, the BIA required purchasers for the first time to submit monthly statements for all oil and gas purchases made from an Osage lessee. Compare 25 C.F.R. § 183.14(b) ("Lessee shall require the purchaser of oil and/or gas . . . to furnish the Superintendent with a monthly statement of the gross barrels and/or gross Mcf 14 sold not later than the 15th day of each month which shall cover the preceding month.") (emphasis added), with 25 C.F.R. § 183.88(b) (1962) ("The lessee shall also authorize the pipeline company or the purchaser of oil to furnish the Superintendent with a monthly statement, not later than the 20th day of the following calendar month, of the gross barrels run as a common-carrier shipment or purchased from his lease or leases.") (emphasis added). Lessees could enter into division orders or sales contracts with a purchaser that called for the latter to make the royalty payment to the Osage Agency. See 25 C.F.R. § 183.14(a). The division order or sales contract, in that case, would "provide for the purchaser to make payment of royalty in accordance with [the lessee's] lease. Id. (emphasis added). Purchasers who entered into such agreements were, therefore, necessarily aware of the formula for establishing royalty value and calculating royalty payments, including the incorporation of "offered price" as a third term in the formula, along with "actual selling price" and "highest posted price." From the foregoing regulatory history, the court concludes that the BIA understood the regulations it promulgated in 1974 and that remained in effect until 1990 to require royalty payments to be based on the higher of (1) the actual selling price received by a lessee, or (2) the highest posted or offered price in the Kansas-Oklahoma area made by a major purchaser - even where that highest price was posted or offered by a purchaser who did not also buy crude oil from Osage lessees. 39 Fed. Reg. 22,254, 22,256. This regulatory framework was in effect for all of the five Tranche One months: January 1976, May 1979, November 1980, February 1986, and July 1989. 3. Regulations After the Tranche One Period

The government attempted to support its arguments about the interpretation of the regulations in effect during the Tranche One period by invoking regulations adopted and a regulatory interpretation issued by the DOI Board of Indian Appeals (IBIA) after the Tranche One period. Therefore, the court reviews these developments in this overview. a. 1990 Regulations

14

The court understands "Mcf" to mean one thousand cubic feet. See Williams & Meyers
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The regulations 15 were further modified in 1990, see 55 Fed. Reg. 33,112 (Aug. 14, 1990) (1990 Regulations). The proposed revisions to 25 C.F.R. § 226 were published in the Federal Register for public comment on October 16, 1987. See 52 Fed. Reg. 38,608 (October 16, 1987). The stated purpose of the proposed rule change was "to strengthen the management of the Osage Mineral Estate by the Bureau of Indian Affairs and the Osage Tribal Council and to provide economic relief to oil lessees imposed by 25 C.F.R. § 226.11(a)(2)." Id. The BIA explained that the proposed changes "will alleviate the necessity for many of the oil lessees to pay the Osage Tribe more for its royalty oil than paid by crude oil purchasers" and that, while the change "may reduce the tribal income[,]" it could also "curtail the plugging of marginal wells" and "be cost effective to the Tribe." Id. The 1990 Regulations reduced the geographic reference area from "the KansasOklahoma area" to Osage County Oklahoma. See 25 C.F.R. §§ 226.1(h), 226.11(a)(2) (1991). The 1990 Regulations also changed somewhat the wording of the formula for royalty value but retained the three elements in the 1974 Regulations for establishing royalty value: selling price, offered price, and posted price. The new regulations stated, in part, that [u]nless the Osage Tribal Council, with approval of the Secretary, shall elect to take the royalty in kind, payment is owing at the time of sale or removal of the oil, except where payments are made on division orders, and settlement shall be based on the highest of the bona fide selling price, posted or offered price by a major purchaser (as defined in s 226.1(h)) in Osage County, Oklahoma, who purchases production from Osage oil leases. 25 C.F.R. § 226.11(a)(2) (emphasis added). Under the new definition, "[m]ajor purchaser means any one of the minimum number of purchasers taking 95% of the oil in Osage County, Oklahoma." 25 C.F.R. § 226.1(h). The new definition of major purchaser also included a provision that removed crude oil transfers or sales between affiliates and other forms of related businesses from the calculation of who was considered a major purchaser. Id. ("Any oil purchased by a purchaser from itself, its subsidiaries, partnerships, associations, or other corporations in which it has a financial or management interest shall be excluded from the determination of a major purchaser.").16

The regulations organized under Part 183 of Title 25 of the Code of Federal Regulations were re-designated as § 226 in 1982 as part of a realignment of subject areas in Chapter I of Title 25 without any substantive change in the individual regulations. See 47 Fed. Reg. 13,326 (Mar. 30, 1982); see also supra n.8. In contrast to the rapid increase in crude oil prices that was taking place as the 1974 Regulations were being formulated, by 1987, when the 1990 Regulations that became the rule
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When the 1990 Regulations were proposed in 1987, the BIA stated that [c]urrently over 95 percent of the purchase of oil in Osage County, Oklahoma, is by three companies, each of which qualifies as a "major purchaser" as defined under the [1974] regulations; therefore, any price increase they would contemplate would increase the "highest posted price" under either the [1974 Regulations] or proposed section. 55 Fed. Reg. 33,112. By "chang[ing] the definition of `major purchaser' to include only those companies purchasing oil in Osage County," the BIA maintained that lessees would be "reliev[ed] . . . from paying a higher price for royalty oil than they could receive." Id. This would occur, for example, if a purchaser qualified as one of the major purchasers based on its regional purchases offered a higher posted price or bonus for oil purchased outside of Osage County than was offered by any major purchaser for oil sold by Osage County lessees. 55 Fed. Reg. 33,113 (explaining that current regulations use the highest price posted in the region, even if the purchaser does not buy oil in Osage County). While the BIA acknowledged that 95% of Osage oil was purchased by only three companies, the BIA explained the increase under the 1990 regulations in percentage of purchases required to constitute the major purchaser group from 80% to 95% as "provid[ing] a vehicle to increase the number of purchasers to qualify as `major purchasers.'" Id. at 33,112. The change of the geographic reference area from the Kansas-Oklahoma area in the 1974 regulations to Osage County, Oklahoma in the 1990 Regulations generated a high degree of opposition when it was proposed. Ninety-three comments were received on the changes proposed to 25 C.F.R. § 226.11(a)(2)17 alone, all but one objecting to the change; the next highest number of comments generated about a specific regulation was three. 55 Fed. Reg. 33,113. The narrative provided by the BIA in its review of the comments and its statement of the purpose and meaning of the proposed changes states why the BIA disregarded the unfavorable comments. Ninety-three comments were received on this section. The commenters objected to basing the highest posted price by a major purchaser (as defined changes were proposed, oil prices were in free-fall. Defendant's witness Charles Hurlburt testified that "roughly from 1983 to 1986 . . ., the oil price was fairly constant, somewhere between $25 and $30 per barrel. . . . In `87 or in late `86 perhaps the price began to fall and was very volatile for a few years. It fell all the way down to about $9 or $10 per barrel." Tr. 1055:716. The numbering of the proposed and final rule notices differed from the numbering in the codification. The proposed and final rule published in the Federal Register as § 226.12(a)(2) was codified at 25 C.F.R. § 226.11(a)(2) (emphasis added). See 52 Fed. Reg. 38,608, 33,609; 55 Fed. Reg. 33,112, 33,113.
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in § 226.1(h)) in Osage County, Oklahoma, rather than Kansas-Oklahoma area, stating that such change would reduce the Osage tribal income. One commenter thought that the change would be beneficial. Under the current regulations, if the "major purchaser" setting the highest posted price does business in the Kansas-Oklahoma area but does not purchase oil in Osage County, Oklahoma, the Osage County, Oklahoma, lessees would be required to pay royalty based on a price higher than the highest price the lessees could possibly receive. The revision of this section can prevent this from happening. This could have a beneficial effect on the exploration and development of oil leases. The comments are, therefore, not accepted. 55 Fed. Reg. 33,113. Despite the opposition, the BIA thus believed the rule change could have a beneficial effect. The BIA acknowledged that the change could result in decreased royalty payments to the Tribe, see 52 Fed. Reg. 38,608 ("This may reduce the tribal income; however, such action may curtail the plugging of marginal wells."), but asserted that the change was justified by the need to "alleviate the economic hardship placed on the oil lessees," 52 Fed. Reg. 38,608, and by the potential for future exploration and development of oil leases, 55 Fed. Reg. 33113. b. 1993 Regulations and Okie Crude Co.

The Bureau of Indian Affairs proposed a further regulatory change in November 1993 that would remove the "offered price" term from the calculation of royalty value. See 58 Fed. Reg. 59,142 (Nov. 5, 1993) ("The purpose of this proposed rule is to amend 25 C.F.R. [§] 226.11(a)(2) to eliminate premium, bonus, or other like payments from consideration in the calculation of the royalty price or crude oil in Osage County."). The proposed § 226.11(a)(2), as amended, provided that (2) Unless the Osage Tribal Council, with approval of the Secretary, shall elect to take the royalty in kind, payment is owing at the time of sale or removal of the oil, except where payments are made on division orders, and settlement shall be based on the actual selling price, but at not less than the highest posted price by a major purchaser (as defined in [25 C.F.R.] § 226.1(h)) in Osage County, Oklahoma, who purchases production from Osage oil leases. 58 Fed. Reg. 59,142. The BIA acknowledged that its long-standing interpretation of the royalty value formula in 25 C.F.R. § 226.11(a)(2) was that an offered price made and paid to a lessee anywhere in the mandated geographic reference area was to be used for calculating royalty value for all lessees on the Osage Reservation. See 58 Fed. Reg. 59, 142. In its explanation of the proposed change, the BIA indicated that it was motivated by

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complaints made by some lessees that the rule as applied was discouraging some purchasers from paying bonuses: The existing regulation was the subject of administrative appeals by numerous oil producers over the meaning of: "and settlement shall be based on the highest of the bona fide selling price, posted or offered price by a major purchaser (as defined in Sec. 226.1(h)) in Osage County, Oklahoma, who purchases production from Osage oil leases." The Bureau of Indian Affairs has interpreted that language to mean that when a higher price is offered and paid for crude oil in Osage County, that price shall be used for royalty computation for all oil of the same quality sold in the County. However, there is reason to believe that this interpretation has discouraged purchasers from offering bonus prices. 58 Fed. Reg. 59,142 (emphasis added). The explanation of the proposed rule change also cites the conclusion of the Interior Board of Indian Appeals (IBIA) in Okie Crude Co. v. Muscogee Area Director, Bureau of Indian Affairs, 23 IBIA 174 (1993) that "the current regulations require a producer to pay royalty on the highest price available to it, whether or not it actually receives that price. Prices not available to a producer would not be used to calculate royalties due from that producer." 58 Fed. Reg. 59,142. The rule change would therefore "eliminate the language that caused the differences in interpretation that led to the appeals to the IBIA." Id. The BIA acknowledged that oil producers sought the rule change and stated that the BIA had determined that the proposed change "would remove the existing disincentive to purchasers to remain in Osage County resulting from bonus payments paid to some producers but not all." Id. The BIA concluded that the ability of producers to receive bonuses without paying royalty to the Osage Tribe on the bonus payment "would increase mineral activity in the Osage mineral estate." Id. The final 1993 Regulations were published on April 28, 1994 in the form proposed. See 59 Fed. Reg. 22,104 (Apr. 28, 1994) (amending 25 C.F.R. § 226.11(a)(2)). C. Price Controls

An additional source of disagreement between the parties is the price control regime implemented following the embargo by the Organization of Oil Producing Countries on oil sales to countries that had supported Israel in the Arab-Israeli war of October 1973. As a result of the embargo, oil prices that had earlier been in decline quadrupled, with economic ramifications for both the oil industry and the national economy. See Dep't of Energy Stripper Well Exemption Litig., Energy Reserves Group, Inc. v. Dep't of Energy, 690 F.2d 1375, 1380 (Temp. Emer. Ct. App. 1982) (DOE Stripper Well Litigation); Energy Information Administration, Dep't of Energy, Petroleum Chronology of Events 1970-2000, May 2002,

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http//www.eia.doe.gov/pub/oil_gas/petroleum/analysis_publications/chronology/petroleum chronology2000.htm (last visited September 21, 2006). The United States responded in part by enacting the Emergency Petroleum Allocation Act (EPAA) and subsequent amendments. EPAA, Pub. L. No. 93-159, 87 Stat. 627 (1973) (codified at 15 U.S.C. §§ 751-760(h)), repealed by Pub. L. No. 94-163, tit. IV § 461 (Dec. 22, 1975). Through a national emergency program of price and supply regulations, Congress sought to reduce the adverse economic effects of disruptions of domestic oil and petroleum supplies and to provide incentives for expanded production under price controls. EPAA § 2(a)-(b), 15 U.S.C. § 751(a)-(b)(1976); see also Def.'s Pretrial Mem. 59-62; Air Transp. Ass'n of America v. Fed. Energy Office, 382 F. Supp. 437, 440-41 (D.D.C. 1974) (noting that Congress explained the necessity for the EPAA as based on "[f]indings of an impending energy crisis and possibly deleterious effects resulting therefrom"). Section four of the EPAA required the President to promulgate regulations within fifteen days of the enactment of the EPAA governing the allocation and pricing of petroleum products, including crude oil, residual fuel oil, and refined petroleum products. EPAA § 4(a). The regulations were to become effective no later than fifteen days following their promulgation by the President and were to apply "to all crude oil, residual fuel oil, and refined petroleum products produced in or imported into the United States." Id. The regulations were to "specify (or prescribe a manner for determining) prices of crude oil at the producer level" unless the President found­and reported the basis of the finding to Congress­that allocation at a given level was not necessary to accomplish the EPAA's objectives. EPAA § 4(e)(1) (emphasis added). Congress made an exception from the mandatory price controls for crude oil from stripper well leases, that is, leases whose average daily production of crude oil during the preceding year was under ten barrels per well. EPAA § 4(e)(2)(a); see also DOE Stripper Well Litig., 690 F.2d at 1380-81 (reviewing the history of the stripper well exemption and legislative history of the EPAA definition of stripper well). Specifically, the EPAA provided that "[t]he regulations promulgated under subsection (a) of this section shall not apply to the first sale of crude oil produced in the United States from any lease whose average daily production of crude oil for the preceding calendar year does not exceed ten barrels per well." EPAA §4(e)(2)(a). II. Alleged Failures to Collect Moneys Due Under Leases A. Standard of Care Applicable to the Government as Fiduciary in the Collection of Royalties

In Osage I, the court concluded that under the 1906 Act, "the defendant, as trustee, has a specific duty to verify that `all moneys due' under the terms of the mineral leases were in fact paid to the government and deposited to the account of the trust beneficiary."
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68 Fed. Cl. at 328. In discharging its trust duty, the United States is held to a strict fiduciary standard and is to take "all appropriate measures for protecting and advancing" the Tribe's interests. United States v. Creek Nation, 295 U.S. 103, 109-10 (1935); see Shoshone Indian Tribe v. United States, 364 F.3d 1339, 1348 (2004) ("Because of its treaty and statutory obligations to tribal nations, the United States must be held to the `most exacting fiduciary standards' in its relationship with the Indian beneficiaries" (quoting Coast Indian Cmty. v. United States, 550 F.2d 639, 652 (Ct. Cl. 1977))). In United States v. Mason, 412 U.S. 391 (1973), the Supreme Court states that when "the United States serves in a fiduciary capacity with respect to . . . Indians . . . , it is duty bound to exercise great care in administering its trust." 412 U.S. at 398 (citing Seminole Nation v. United States, 316 U.S. 286, 296-97 (1942)). Plaintiff argues that, "[i]n construing the applicable statutes and regulations, the [c]ourt must adhere to `[t]he canons of construction applicable in Indian law,'" Pl.'s Br. 3 (quoting County of Oneida v. Oneida Indian Nation, 470 U.S. 226, 247 (1985)), which hold that "`statutes are to be construed liberally in favor of the Indians, with ambiguous provisions interpreted to their benefit,'" id. (quoting Montana v. Blackfeet Tribe of Indians, 471 U.S. 759, 766 (1985)), and that the "trust relationship and its application to all federal agencies that may deal with Indians necessarily requires the application of a similar canon of construction to the interpretation of federal regulations," id. (quoting HRI, Inc. v. EPA, 198 F.3d 1224, 1245 (10th Cir. 2000)). The United States proposes that, "[t]o the extent the statutory and regulatory language is silent . . . , the [c]ourt should apply a reasonableness standard to determine whether there has been a breach." Def.'s Br. 4. For plaintiff, "[t]he `standard of duty for the United States . . . is not mere "reasonableness" but the highest fiduciary standards.'" Pl.'s Br. 4 (quoting Minn. Chippewa Tribe v. United States, 14 Cl. Ct. 116, 130 (1987)) (emphasis omitted). In Osage I, the court found that "[i]t is clear that the government has taken on not only the principal, but the sole, responsibility for managing lease revenues." 68 Fed. Cl. at 332-33. The unique trust responsibility involved in defendant's management of the Osage mineral estate and the Osage royalty income requires the trustee to exercise a standard of care beyond "mere reasonableness." See Minn. Chippewa Tribe, 14 Cl. Ct. at 130 (finding the reasonableness standard, judged by the "arbitrary and capricious" test, was not applicable in a case involving the management of Indian funds raised from land sales). The United States established a comprehensive regulatory structure for managing oil and gas leases and "is to consider its strict fiduciary obligation when interpreting regulations" that it developed for that purpose. HRI, Inc., 198 F.3d at 1246. Defendant has the responsibility properly to construe the legal framework that sets out its trust duties. Defendant's failure to interpret accurately its trust duties, when such failure results in a loss of revenue to the Osage Tribe, is deemed a breach of defendant's trust duties. In carrying out its trust duties, in accordance with law properly interpreted,
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defendant will be held responsible for exercising the care and skill that a trustee would exercise in the discharge of its responsibilities under exacting fiduciary standards. Shoshone, 364 F.3d at 1348. In cases where defendant, in discharging its responsibilities properly construed, put in place procedures to carry out those responsibilities, the court evaluates whether the procedures were reasonably calculated to result in compliance with the 1974 Regulations. B. Whether the Osage Agency Properly Interpreted the Regulations Establishing Royalty Value Offered Price

1.

Defendant argues that, because the term "offered price" is not defined in the regulations, it should be "deemed to have its ordinarily understood meaning." Def.'s Br. 7 (citing, inter alia, Perrin v. United States, 444 U.S. 37, 42 (1979); Demko v. United States, 44 Fed. Cl. 83, 87 (1999)). The court agrees that this well-established canon of statutory construction is applicable here. See, e.g., Fed. Deposit Ins. Corp. v. Meyer, 510 U.S. 471, 476 (1994) (FDIC v. Meyer) (citing Smith v. United States, 508 U.S. 223, 228 (1993) (noting that in the absence of a statutory definition, "we construe a statutory term in accordance with its ordinary or natural meaning")). The court also agrees with defendant that "[i]n contrast to a `posted price,' an `offered price' need not be made in writing or to all producers." Def.'s Br. 7. Under the 1974 Regulations, the term "offered price" was introduced as a means of capturing the market value represented by bonus or premium payments that were offered to some but not all producers by a major purchaser over the posted price. This interpretation was fully supported in the evidence at trial. See Defendant's Exhibit (DX) 2334-1 (letter from the Osage Agency notifying purchasers that, under the 1974 Regulations, "[i]f your company hasn't met the highest offered price for stripper oil, the oil lessees . . . are liable for additional royalty due on the difference between the price paid by your company and that paid by the major purchasers . . . who have offered a higher price in the Kansas-Oklahoma area"); Tr. 1296:23-1297:18 (Barker).
18

The "ordinarily understood meaning" of offered price was made clear by the BIA in 1994 when it stated that the purpose of the removal of the offered price term from the royalty value formula in the amendment of 25 C.F.R. § 226.11(a)(2) was "to eliminate premium, bonus, or other like payments from consideration in the calculation of the royalty price for crude oil in Osage County, Oklahoma." 59 Fed. Reg. 22,104 (emphasis added); see also Tr. 1059:1-13 (Hurlburt) (describing offered price as a bonus and explaining that under the royalty value calculation formula, "if a major purchaser offered a bonus to one lease or to a number of leases, it would have the same effect as if the major purchaser had published a higher price").
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Defendant attempted to jettison its own line of argument (supporting the ordinarily understood meaning of the term) and sought to impose a narrow definition of "offered price" by focusing solely on the meaning of the word "offer" within the context of mutual assent in contract law. See Def.'s Br. 7. According to defendant, "an `offered price' is the price presented to a producer by a willing buyer for a given quantity and quality of crude oil. It sets the basis for royalty only as to those lessees to whom the offer was extended." Id. (citing Black's Law Dictionary 746 (6th ed. 1991); Restatement (Second) of Contracts, §§ 24, 52, 29 cmt. a (1981)) (emphasis added). Defendant does not explain any logical connection between its restrictive understanding of an offer under contract law and the use of an offered price, paid to a producer by a purchaser, as an indicator of market price in the calculation of royalty value; defendant simply asserts the existence of such a relationship. Id. (asserting that an offer "sets the basis for royalty"). Defendant's argument is based on the reasoning in Okie Crude Co. v. Muscogee Area D