Free Post Trial Brief - District Court of Federal Claims - federal

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IN THE UNITED STATES COURT OF FEDERAL CLAIMS

) ) ) Plaintiff, ) ) ) ) v. ) ) THE UNITED STATES OF AMERICA, ) ) Defendant. ) __________________________________________)

THE OSAGE NATION AND/OR TRIBE OF INDIANS OF OKLAHOMA,

Electronically Filed May 4, 2006 Nos. 99-550 L & 00-169 L Judge Emily C. Hewitt

PLAINTIFF OSAGE NATION'S POST-TRIAL BRIEF [REDACTED VERSION]

WILSON K. PIPESTEM Pipestem Law Firm, P.C. 1333 New Hampshire Avenue, N.W. Washington, D.C. 20036 Telephone: (202) 419-3526 Fax: (202) 659-4931 [email protected] Attorney for Plaintiff Osage Nation

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TABLE OF CONTENTS INTRODUCTION ...........................................................................................................................1 BACKGROUND .............................................................................................................................1 A. B. The Osage Mineral Estate and the 1906 Act............................................................1 The Tranche One Leases and Applicable Regulations.............................................2

ARGUMENT...................................................................................................................................3 I. THIS COURT'S CONSIDERATION OF THE OSAGE NATION'S CLAIMS OF BREACH MUST BE GUIDED BY PRINCIPLES OF SUBSTANTIVE FEDERAL LAW..................................................................................................................3 A. The Applicable Statutes and Regulations Must "Be Construed Liberally in Favor of the Indians" ...............................................................................................3 The Breaches of Duty Alleged Here Must Be Evaluated Under the Strict Fiduciary Standard of Care That the United States Has Taken Upon Itself ­ Not "Mere Reasonableness" ....................................................................................4 The Plaintiff Is Entitled to Favorable Factual Inferences Where the Trustee Has Not Maintained Trust Records..........................................................................6

B.

C. II.

THE UNITED STATES FAILED TO COLLECT THE FULL ROYALTIES DUE FOR OIL PRODUCED FROM THE TRANCHE ONE LEASES IN THE TRANCHE ONE MONTHS................................................................................................7 A. The United States Failed to Collect Royalty Due Based on the Highest Offered Price by a Major Purchaser.........................................................................8 By Limiting Royalty Value to the Regulated Price Level at Which the Oil Was Sold, the United States Failed to Collect the Full Royalty Due During the Tranche One Months of January 1976, May 1979, and November 1980 ........12 1. Federal Law Established a System of Price Ceilings Applicable to Sales of Specified Categories of Crude Oil ...............................................12 Federal Crude Oil Price Controls Did Not Supersede the Osage Regulations Governing the Calculation of Royalty Value .........................13 The United States' Presentation at Trial Provides No Lawful Basis for Deviating from the Plain Terms of the Osage Royalty-Value Regulation ..................................................................................................16

B.

2.

3.

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C.

The United States Failed to Collect Royalty Based on the Highest Selling Price from a Lease When There Were Simultaneous Sales from the Same Lease ......................................................................................................................20 The United States Undercollected Royalties by Failing to Determine the "Actual Selling Price"............................................................................................22 The United States Failed to Determine the Correct Major Purchasers and the Correct Highest Posted Price of a Major Purchaser.........................................23 The United States Violated Its Own Regulations by Reducing the Calculated Highest Posted Prices Based on Gravity..............................................26 The United States Failed to Collect Royalties for the Full Volume of Oil Subject to Royalty from the Tranche One Leases in the Tranche One Months. ..................................................................................................................28 The United States Failed to Verify the Proper Royalty Rate .................................29 The United States Failed to Audit ..........................................................................30

D.

E.

F.

G.

H. I. III.

THE UNITED STATES BREACHED ITS DUTY TO INVEST PRUDENTLY THE TRANCHE ONE TRUST FUNDS IT COLLECTED ..............................................33 A. The United States Left an Unreasonably Large Proportion of Collected Funds in the Cash Account and Otherwise Underinvested Trust Moneys.............33 1. 2. 3. The United States Breached Its Fiduciary Duty to Invest Prudently .........33 Lundelius Effectively Concedes Breach for May 1979 .............................35 If Lundelius's "Actual" Rate Analysis Is Subjected to the Same Liquidity Constraints He Puts on His "Expected" Rates, His Methodology Shows Breach in Three Tranche One Months.....................36

B.

The United States Breached Its Fiduciary Duty by Unthinkingly Delaying Deposit of Royalty Payments.................................................................................40 1. Defendant Unreasonably Delayed Certification of a Federal Depository in Pawhuska, Causing Lost Interest ........................................40 The Osage Agency Had a Pervasive Deposit Lag Problem.......................41

2. IV.

THE OSAGE NATION IS ENTITLED TO AN AWARD OF DAMAGES TO REMEDY THE UNITED STATES' BREACHES OF TRUST.........................................43

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A.

General Principles of Damages Applicable Here...................................................43 1. 2. The Osage Nation Is Entitled to be Made Whole ......................................43 The Osage Nation Is Entitled to All Reasonable Inferences in Favor of Its Damages Estimates ................................................................44

B.

Categories of Damages to Which the Osage Nation is Entitled ............................46 1. 2. 3. 4. 5. Damages for Undercollection of Royalties................................................46 Late Fees for Royalty Payments the United States Failed to Collect ........48 Late Fees on Late Payments Identified by Lundelius and Chavarria ........49 Interest Lost Due to Mismanagement of Funds on Deposit ......................49 Interest Lost Due to Unreasonable Delays in Depositing Trust Funds..........................................................................................................49

CONCLUSION..............................................................................................................................50

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TABLE OF AUTHORITIES FEDERAL CASES Albuquerque Indian Rights v. Lujan, 930 F.2d 49 (D.C. Cir. 1991) ................................................4 Bigelow v. RKO Radio Pictures, Inc., 327 U.S. 251 (1946) ............................................................6 Blackman v. Hustler Magazine, Inc., 800 F.2d 1160 (D.C. Cir. 1986) ......................................6, 13 Confederated Tribes of the Warm Springs Reservation v. United States, 248 F.3d 1365 (Fed. Cir. 2001) .................................................................................................6, 7, 37, 44 County of Oneida v. Oneida Indian Nation, 470 U.S. 226 (1985)...................................................3 Fletcher v. United States, 116 F.3d 1315 (10th Cir. 1997)...............................................................2 HRI, Inc. v. EPA, 198 F.3d 1224 (10th Cir. 2000)............................................................................3 Jicarilla Apache Tribe v. Supron Energy Corp., 728 F.2d 1555 (10th Cir. 1984)......................4, 28 Liss v. Smith, 991 F. Supp. 278 (S.D.N.Y. 1998) ..........................................................................49 Minnesota Chippewa Tribe v. United States, 14 Cl. Ct. 116 (1987) ................................................5 Montana v. Blackfeet Tribe of Indians, 471 U.S. 759 (1985) ..........................................3, 4, 10, 28 In re Morgan, 106 B.R. 573 (Bankr. E.D. Ark. 1989) .....................................................................7 Osage Tribe of Indians v. United States, 68 Fed. Cl. 322 (2005)........................................... passim Pennzoil Exploration & Prod. Co. v. Lujan, 928 F.2d 1139 (Temp. Emer. Ct. App. 1991) ........................................................................................................................................18 Placid Oil Co. v. FPC, 483 F.2d 880 (5th Cir. 1973).....................................................................20 Pueblo of Laguna v. United States, 60 Fed. Cl. 133 (2004).............................................................7 Ramah Navajo Chapter v. Lujan, 112 F.3d 1455 (10th Cir. 1997) ..................................................4 Seminole Nation v. United States, 316 U.S. 286 (1942) ..................................................................5 Shapiro, Bernstein & Co. v. Remington Records, Inc., 265 F.2d 263 (2d Cir. 1959).......................6 Shoshone Indian Tribe of the Wind River Reservation v. United States, 364 F.3d 1339 (Fed. Cir. 2004) ...............................................................................................5, 44, 45, 46 Sowell v. Natural Gas Pipeline Co., 789 F.2d 1151 (5th Cir. 1986) ........................................15, 16 United States v. Mason, 412 U.S. 391 (1973) ..........................................................................2, 4, 5 United States v. Mitchell, 463 U.S. 206 (1983)................................................................................5 STATE CASE Howell v. Texaco, Inc., 112 P.3d 1154 (Ok. 2004) .........................................................................23 STATUTES 30 U.S.C. § 1711(c) (2003)............................................................................................................31 iv

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42 U.S.C. § 7194(a) .......................................................................................................................19 Act of June 28, 1906, Chapter 3572, 34 Stat. 539 .................................................................1, 2, 44 Emergency Petroleum Allocation Act, Pub. L. No. 93-159, 87 Stat. 627.............................. passim Energy Conservation and Production Act, Pub. L. No. 94-385, 90 Stat. 1125 ..............................13 Energy Policy and Conservation Act, Pub. L. No. 94-163, 89 Stat. 871 .......................................13 REGULATORY MATERIALS 10 C.F.R. § 205.55(b)(2) (1975) ....................................................................................................20 10 C.F.R. § 210.32(b) (1975) .........................................................................................................12 10 C.F.R. § 212.54 (1977)..............................................................................................................13 10 C.F.R. § 212.72 (1975)..............................................................................................................12 10 C.F.R. §§ 212.73, 212.74 (1975)...............................................................................................12 10 C.F.R. § 212.74 (1977)..............................................................................................................13 25 C.F.R. Part 183............................................................................................................................3 25 C.F.R. § 183.11(a) ............................................................................................................. passim 25 C.F.R. § 183.11(c) .....................................................................................................................49 25 C.F.R. § 183.13(a).................................................................................................................8, 49 25 C.F.R. § 183.14(a).......................................................................................................................3 25 C.F.R. § 183.1(h).......................................................................................................................24 39 Fed. Reg. 22,254-62 (1974) ..................................................................................................3, 15 41 Fed. Reg. 4931, 4940 (1976) ....................................................................................................13 47 Fed. Reg. 13,326 .........................................................................................................................3 46 Fed. Reg. 9909 (1981) ..............................................................................................................13 Okie Crude Co. v. Muskogee Area Director, 23 IBIA 174 (1993).................................................10 OTHER AUTHORITY Cohen's Handbook of Federal Indian Law § 13.H (1982) ..............................................................6 Galvin, "Developing an Oil and Gas Jurisprudence in Michigan," 7 Wayne L. Rev. 403, 425 n.99 (1961), cited in 3 Williams & Meyers Oil and Gas Law § 644.................................14 Restatement (Second) of Trusts (1959) ............................................................................................6 Restatement (Third) of Trusts, (1992) ....................................................................................5, 6, 46 William F. Fletcher, Scott on Trusts (4th ed. 1987) ........................................................................5

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INTRODUCTION In 1906, in connection with its controversial decision to override the objections of the Osage Nation and allot the surface estate of the Osage Reservation, the United States named itself as the trustee of the Osage Mineral Estate, which includes extensive oil and gas resources. As trustee, the United States assumed the duty to collect all royalties due on the production and sale of oil and gas from the Osage Mineral Estate, verify the accuracy and completeness of those collections, and prudently invest the royalties it did receive for the benefit of the Osage Nation. To perform those duties, the United States created a small bureaucracy, replete with its own regulations and a plethora of procedures and forms. At trial the evidence showed that, despite this bureaucratic structure, the United States breached its trust obligations by failing to follow key provisions of its own regulations, verify the collection of the full royalty due, and prudently manage the funds received. As a result of the United States' breach of its trust duties, the Osage Nation has been damaged and thus seeks to be made whole through a money judgment from this Court. BACKGROUND A. The Osage Mineral Estate and the 1906 Act

The Osage came to reside on their current reservation in northern Oklahoma as a result of forced migrations. See Osage Tribe of Indians v. United States, 68 Fed. Cl. 322, 323 (2005); Tr. 39:18-41:15 (Tallchief). The reservation covers roughly 1.47 million acres, and its boundaries are co-extensive with present-day Osage County. Stipulation of Facts ("Stip.") ¶ 2 (filed Mar. 29, 2006). The Osage Reservation sits on one of the most productive domestic crude oil reservoirs in the nation. Tr. 84:9-21 (Reineke). In 1906 Congress allotted most of the reservation surface rights to individual Osages, and reserved the underlying mineral estate to the Osage Nation. Act of June 28, 1906, Chapter 3572,

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34 Stat. 539.1 The 1906 Act required the creation of a tribal membership roll and gave each person on it an "individual share" ­ called a "headright" ­ "of the income derived from the minerals located on the land." United States v. Mason, 412 U.S. 391, 393 (1973); see Fletcher v. United States, 116 F.3d 1315, 1319 (10th Cir. 1997). Under the Act, "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 . . . ." 1906 Act § 4, 34 Stat. at 544. In essence, the 1906 Act requires that the United States manage the mineral estate and the proceeds derived therefrom as trustee for the benefit the Osage Tribe. Osage Tribe, 68 Fed. Cl. at 330; see also 1906 Act § 3, 34 Stat. at 543. The Osage Agency, which administers the Osage Mineral Estate, is part of the Department of the Interior ("Interior"), Bureau of Indian Affairs ("BIA"), and is located in Pawhuska, Oklahoma, on the Osage Reservation. Stip. ¶ 1. B. The Tranche One Leases and Applicable Regulations

Plaintiff's Tranche One claims cover four leases (North Burbank, North Avant, Osage Hominy, and East Hardy) and five months (January 1976, May 1979, November 1980, February 1986, and July 1989). Order at 1 (Apr. 15, 2005) (modified by Order of Feb. 22, 2006). Except for Osage Hominy, the Tranche One Leases are oil leases. Plaintiff's Tranche One claims relate solely to oil royalties. Each Tranche One Lease specifies how to compute the monthly royalty payment. The computation involves three elements ­ royalty rate, volume, and value ­ and can be expressed as a formula: Royalty = Royalty Rate x Royalty Volume x Royalty Value. The Tranche One Leases

Congress has amended the 1906 Act. See Osage Tribe, 68 Fed. Cl. at 324 n.2. As used herein, the term "1906 Act" refers to the 1906 Act as amended, unless specified otherwise.

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define all three elements of the formula and incorporate subsequently adopted regulations. E.g., PX751-0119 (Osage Hominy Lease); PX751-0049 (North Burbank Lease). In 1974, Interior adopted the regulations applicable to the Tranche One Months.2 39 Fed. Reg. 22,254-62. The regulations made the lessee responsible for the accurate measurement of all crude oil produced from a lease on the Osage Mineral Estate. 25 C.F.R. § 183.11(a). Lessees owed royalties on all crude oil produced from the Tranche One Leases, with the exception of oil used as fuel to develop and operate the lease from which the oil was produced. See id. §§ 183.11(a), 183.14(a). In addition, the regulations gave the Osage Agency broad authority to prevent waste, including the loss of crude oil subject to royalty. Id. § 183.37. ARGUMENT I. THIS COURT'S CONSIDERATION OF THE OSAGE NATION'S CLAIMS OF BREACH MUST BE GUIDED BY PRINCIPLES OF SUBSTANTIVE FEDERAL LAW A. The Applicable Statutes and Regulations Must "Be Construed Liberally in Favor of the Indians"

In construing the applicable statutes and regulations, the Court must adhere to "[t]he canons of construction applicable in Indian law," which "are rooted in the unique trust relationship between the United States and the Indians." County of Oneida v. Oneida Indian Nation, 470 U.S. 226, 247 (1985). "[S]tatutes are to be construed liberally in favor of the Indians, with ambiguous provisions interpreted to their benefit . . . ." Montana v. Blackfeet Tribe of Indians, 471 U.S. 759, 766 (1985). Further, the United States' "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." HRI, Inc. v. EPA, Originally codified at 25 C.F.R. Part 183, the regulations were recodified without substantive change in 1982 at 25 C.F.R. Part 226. 47 Fed. Reg. 13,326. To avoid confusion, this brief cites Part 183 only.
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198 F.3d 1224, 1245 (10th Cir. 2000). Thus, the Blackfeet Tribe canon precludes the deference that might otherwise be accorded to an administrative agency's statutory and regulatory interpretations. See, e.g., Ramah Navajo Chapter v. Lujan, 112 F.3d 1455, 1461-62 (10th Cir. 1997); Albuquerque Indian Rights v. Lujan, 930 F.2d 49, 59 (D.C. Cir. 1991). "When the Secretary is acting in his fiduciary role . . . and is faced with a decision for which there is more than one `reasonable' choice as that term is used in administrative law, he must choose the alternative that is in the best interest of the Indian tribe." Jicarilla Apache Tribe v. Supron Energy Corp., 728 F.2d 1555, 1567 (10th Cir. 1984) (Seymour, J., concurring in part and dissenting in part), adopted as majority opinion as modified en banc, 782 F.2d 855 (10th Cir. 1986). "`If there is any doubt, the interpretation [of regulations] should be made liberally in favor of the Indians for whose protection these provisions were promulgated.'" Id. (quoting Jicarilla Apache Tribe v. Andrus, 687 F.2d 1324, 1332 (10th Cir. 1982)). B. The Breaches of Duty Alleged Here Must Be Evaluated Under the Strict Fiduciary Standard of Care That the United States Has Taken Upon Itself ­ Not "Mere Reasonableness"

"[T]he plain language of . . . the 1906 Act establishes fiduciary duties." Osage Tribe, 68 Fed. Cl. at 327. "There is no doubt that the United States serves in a fiduciary capacity with respect to [the Osage] Indians and that, as such, it is duty bound to exercise great care in administering its trust." Mason, 412 U.S. at 398 (emphasis added). The "standard of duty for the United States as trustee for Indians is not mere `reasonableness' but the highest fiduciary standards." Minnesota Chippewa Tribe v. United States, 14 Cl. Ct. 116, 130 (1987) (citing Yankton Sioux Tribe v. United States, 623 F.2d 159, 163 (Ct. Cl. 1980)) (emphasis added). The United States as trustee takes on "the most exacting fiduciary standards" of responsibility because it "has charged itself with moral obligations of the highest responsibility and trust." Seminole Nation v. United States, 316 U.S. 286, 297 (1942). 4

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In evaluating claims of breach, the Supreme Court has "emphasized `the distinctive obligation of trust incumbent upon the Government in its dealings with these dependent and sometimes exploited people.'" United States v. Mitchell, 463 U.S. 206, 226 (1983) (quoting Seminole Nation, 316 U.S. at 296) (emphasis added). "The Indian Tribes, as domestic dependent nations, were subjected to the imposition of the trustee-beneficiary relationship and have become reliant upon their trustee to carry out trustee responsibilities." Shoshone Indian Tribe of the Wind River Reservation v. United States, 364 F.3d 1339, 1348 (Fed. Cir. 2004) (citing Mitchell, 463 U.S. at 225). Because the 1906 Act expressly makes the United States a trustee over the Osage Mineral Estate, sources including Scott on Trusts, the Restatement of Trusts, and judicial decisions provide appropriate standards against which to evaluate whether the United States has fulfilled its fiduciary duties. Mason, 412 U.S. at 398; Tr. 2118:15-2119:5, 2252:9-2254:4 (Lundelius); DX2695-0007 (Lundelius Expert Report). The United States owes the Osage Tribe a duty of unswerving loyalty in the management of the Mineral Estate. "The most fundamental duty owed by a trustee to the beneficiaries of the trust is the duty of loyalty," requiring it "to administer the trust solely in [their] interest." William F. Fletcher, Scott on Trusts, § 170 at 311 (4th ed. 1987); accord Restatement (Third) of Trusts, § 170(1) at 193 (1992). A "trustee is under a duty to the beneficiaries not to be influenced by the interest of any third person or by motives other than the accomplishment of the purposes of the trust." Id. § 170 cmt. q at 201. The United States must put the Tribe's interests ahead of its own and do what is best for the trust, not what is most convenient for itself. Its "interest must yield to that of the beneficiaries." Scott on Trusts, § 170.25 at 436. As a corollary of the duty of loyalty, the United States may not allow a particular governmental policy to take precedence over its fiduciary duties. Thus, "the principal goal of the

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Department of the Interior in Indian oil and other mineral resource management is not to further federal energy policies, but rather to assist Indian landowners in deriving maximum economic benefit from their resources consistent with sound conservation practices." Cohen's Handbook of Federal Indian Law § 13.H (1982) (citing Federal Leasing and Disposal Policies: Hearings Pursuant to S. Res. 45, A National Fuels and Energy Policy Study Before the Senate Comm. on Interior and Insular Affairs, 92d Cong., 2d Sess., 652-53 (1972)). C. The Plaintiff Is Entitled to Favorable Factual Inferences Where the Trustee Has Not Maintained Trust Records

A trustee has a fundamental duty to keep proper records and accounts of the trust. Restatement (Second) of Trusts, § 172 cmt. a (1959). When a trustee has failed to do so, "all doubts will be resolved against him and not in his favor." Confederated Tribes of the Warm Springs Reservation v. United States, 248 F.3d 1365, 1373 (Fed. Cir. 2001) (citing Scott on Trusts § 172) (emphasis added). "If the trustee fails in his duty to keep accurate records, `all the inconvenience of the confusion' should be `thrown upon the party who produces it.'" Blackman v. Hustler Magazine, Inc., 800 F.2d 1160, 1164 n.10 (D.C. Cir. 1986) (quoting Shapiro, Bernstein & Co. v. Remington Records, Inc., 265 F.2d 263, 271 (2d Cir. 1959)) (emphasis added). That principle is rooted in "[t]he most elementary conceptions of justice and public policy," which require that "the wrongdoer shall bear the risk of the uncertainty which his own wrong has created." Bigelow v. RKO Radio Pictures, Inc., 327 U.S. 251, 265 (1946). "[W]hen the United States fails to preserve documents in its fiduciary role to a tribe," a finding of bad faith is unnecessary to establish liability when the United States has "inadvertently destroyed or otherwise lost documents critical to the determination of liability or damages." Pueblo of Laguna v. United States, 60 Fed. Cl. 133, 139 n.11 (2004). If the trustee fails to keep

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proper records, "obviously he cannot be permitted to gain any possible advantage" from that failure. In re Morgan, 106 B.R. 573, 582 (Bankr. E.D. Ark. 1989). In the context of a breach of trust, a beneficiary is entitled to recover damages for the improper management of the trust's investment assets. In determining the amount of damages for a breach of the trustee's fiduciary duty with regard to investments of the trust property, courts attempt to place the beneficiary in the position in which it would have been absent a breach. Confederated Tribes, 248 F.3d at 1371. "There is no threshold minimum of loss that [must be proven] before being entitled to an award. Even if the damages are minimal, the [plaintiffs are] entitled to recover whatever damages they can prove." Id. at 1373. II. THE UNITED STATES FAILED TO COLLECT THE FULL ROYALTIES DUE FOR OIL PRODUCED FROM THE TRANCHE ONE LEASES IN THE TRANCHE ONE MONTHS The evidence at trial showed that the United States breached its 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." Osage Tribe, 68 Fed. Cl. at 328. The specifics of the United States' royalty-calculation and collection duties are set forth in the Osage Regulations: Lessee shall pay or cause to be paid to the Superintendent, as royalty, the sum of 16-2/3 percent [or other rate as specified in the lease] of the gross proceeds from sales after deducting the oil used by Lessee for development and operation purposes on the lease. .... [S]ettlement shall be based on the actual selling price, or the highest posted or offered price by a major purchaser in the KansasOklahoma 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.

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25 C.F.R. § 183.11(a) & (a)(2) (1975). "Major purchaser" is defined as "any one of the minimum number of purchasers taking 80 percent of the oil in the Kansas-Oklahoma area." Id. § 183.1(h). Thus, under the regulations, Royalty Value is not limited to the market value of the oil produced from the lease but rather is based on the highest of a range of values throughout Kansas and Oklahoma. See Tr. 100:5-13 (Reineke).3 A. The United States Failed to Collect Royalty Due Based on the Highest Offered Price by a Major Purchaser

The terms of the Osage Regulations are unambiguous: if a "major purchaser in the Kansas-Oklahoma area" has an "offered price" for crude oil "on the day of sale or removal" that is higher than either the "actual selling price" or the "highest posted . . . price by a major purchaser in the Kansas-Oklahoma area," that "offered price" sets the royalty value for all oil sold on the Osage Reservation on that day. Id. § 183.11 (a)(2). Moreover, that is how Osage Agency employees, past and current, understood the offered-price provision to operate. Tr. 1059:5-13, 1071:5-25 (Hurlburt); Tr. 1299:14-16 (Barker). They also understood that any contract price by a major purchaser would constitute an offered price, including where that price included a bonus above the posted price. Id. The Chief of the Minerals Branch of the Osage Agency during the Tranche One period testified that, even if a bonus were paid for unique reasons (for example, the particular quality or available volume of oil or the oil's proximity to a refinery), the bonus price would set the royalty floor for all Osage Reservation lessees. Tr. 1296:9-1298:15 (Barker).

The regulations direct the lessee to pay the royalty due on oil sold in a given month by the 25th day of the following month. 25 C.F.R. § 183.13(a). Although the purchaser of the crude oil may remit the royalty payment on behalf of the lessee, the lessee remains liable for the royalty payment. Id. § 183.14(a); see also Tr. 81:23-82:3 (Reineke).

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Notwithstanding the Osage Agency's understanding of the regulation's requirements, it made no systematic effort to identify offered prices by major purchasers. The head of the Royalty Accounting Division of the Minerals Branch from 1976 to 1980 confirmed that the Agency did not check for offered prices at all. JX001, Core Dep. at 88:12-89:18. Similarly, the United States' Rule 30(b)(6) witness on royalty collection procedures did not know of any procedures to identify offered prices. JX001, Revard 30(b)(6) Dep. at 45:6-9. The Agency enforced this aspect of the Royalty-Value regulation only when it happened to become aware of bonuses or other "highest" offered prices. See DX2334-0001 (after hearing about bonus by one major purchaser, Osage Agency sends letter seeking to collect additional royalties from lessees). Plaintiff's royalty expert concluded that the Osage Agency's failure to enforce the offered-price provision resulted in royalty underpayments during all of the Tranche One months.4 Tr. 214:5-217:15, 231:16-233:15 (Reineke); PX751-0642 & 0645 (offered-price underpayments). This determination was based on an examination of prices paid by major purchasers on just the Osage Reservation alone (not the larger two-state area specified in the regulations) and thus undoubtedly understates the underpayments. Based on the data he found, Reineke determined that, by not actively enforcing the offered-price provision, the United States failed to collect at least $85,053.50 in royalties on the Tranche One Leases during the Tranche One Months. Tr. 207:11-217:15; PX751-0642. The United States did not contest Reineke's calculation. In fact, the United States' royalty expert

Reineke's offered-price analysis for July 1989 used a non-Osage contract with Total Petroleum as the highest offered price for that month. His analysis (PX752-0642, 0645) shows, however, that the highest offered price in July 1989 for any Tranche One Lease was paid by Koch Oil, indisputably a major purchaser (Tr. 204:7-205:24 (Reineke)), on the Osage Hominy.

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agreed that Reineke's analysis is consistent with the Osage Agency's definition of offered price. Tr. 1555:3-1556:16 (Martin). The United States responds to this undisputed evidence by advancing an internally inconsistent position. The United States argues that the offered-price regulation, despite its being "crystal clear," was misunderstood and "misapplied" by the Osage Agency. Tr. 1278:13, 1283:24-1284:2 (Stmt. of U.S. Counsel). The United States apparently believes that, by walking this semantic tightrope, it can reach the destination it seeks ­ the interpretation of "offered price" in Okie Crude Co. v. Muskogee Area Director, 23 IBIA 174 (1993). But the Okie Crude decision rests on the premise that the regulations are ambiguous and require interpretation. 23 IBIA at 180. To rely on Okie Crude, therefore, the United States must argue ambiguity and contest the regulation's plain meaning. That, however, contradicts its position that the regulation is "crystal clear," clashes with the Osage Agency's consistent understanding of that "clear" meaning, and ultimately is self-defeating under the Blackfeet Tribe canon. In any event, the Okie Crude decision is not persuasive. The panel in Okie Crude reasoned that, because under contract law an offer is purportedly personal to the offeree, an offered price cannot be used to set royalty value for any lessee other than the one to whom the offer was made. 23 IBIA at 181. But it does not follow from the law of offer and acceptance that an offer to a third party is unable to serve as a measure of market value. Moreover, the Okie Crude definition of offered price would render the term "actual selling price" surplusage. Because no rational seller would refuse the highest offered price, actual selling price and highest offered price would merge under the Okie Crude approach. See Tr. 1413:14-24 (Martin). At trial, the United States tried to develop two factual defenses on the offered-price issue. First, the United States elicited testimony suggesting that it would have been impossible to have

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determined all of the offered prices in Kansas and Oklahoma. E.g., Tr. 1223:18-1225:15 (Barker); Tr. 1407:11-1408:10, 1410:25-1413:13 (Martin). But that excuse rings hollow when the evidence noted above shows that the Osage Agency made no attempt to identify offered prices unless such information fell into its lap. In any event, having written the regulation in question, the United States as trustee cannot excuse itself from complying with the regulation's unambiguous requirements, to the detriment of the trust beneficiaries, on the ground that those requirements were simply too difficult to meet. Second, the United States elicited testimony that applying the offered-price provision according to its plain terms would have chilled production and been unfair to Osage lessees. E.g., Tr. 1290:13-20 (Barker); 1065:2-7 (Hurlburt).5 To the extent that such concerns existed at the time, they were relevant only to whether the regulations should be changed, not an excuse for unilaterally refusing to enforce them. Moreover, neither BIA nor Interior conducted any contemporaneous written analysis of the economic impact on lessees or production of enforcing the offered-price provision. Tr. 1339:19-1340:14 (Barker). Thus, the testimony elicited by the United States represents nothing more than unsubstantiated, post hoc rationalizations that provide no justification for failing to follow the express terms of the regulations.

Osage Agency witnesses Barker and Hulburt repeatedly emphasized the importance of avoiding complaints by and unfairness to the lessees. E.g., Tr. 1065:2-7 (Hurlburt); Tr. 1339:221340:1 (Barker). But it is the trust beneficiaries, not the lessees, to whom the Osage Agency owes a duty of loyalty.

5

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B.

By Limiting Royalty Value to the Regulated Price Level at Which the Oil Was Sold, the United States Failed to Collect the Full Royalty Due During the Tranche One Months of January 1976, May 1979, and November 1980 1. Federal Law Established a System of Price Ceilings Applicable to Sales of Specified Categories of Crude Oil

From 1973 through January 1981, crude oil sales prices were subject to a complex federal program of controls. For present purposes, however, only the basics need be understood.6 In November 1973, Congress enacted the Emergency Petroleum Allocation Act ("EPAA"), Pub. L. No. 93-159, 87 Stat. 627, directing the President to issue regulations governing the allocation and pricing of crude oil and most petroleum products. In January 1974, the Federal Energy Office (later the Federal Energy Administration and then the Department of Energy) issued regulations establishing a two-tiered pricing structure for sales of crude oil. 10 C.F.R. §§ 212.73, 212.74 (1975). Production from a property that was less than or equal to a specified historical production level was considered "old" oil and had to be sold at the controlled price.7 During the early part of the program, "new" oil ­ that is, production in excess of the property's historical level ­ was exempt from price controls and could be sold at uncontrolled (or free-market) prices. Another category of exempt oil was production from stripper-well leases ­ which were defined as "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), 87 Stat. at 632; 10 C.F.R. § 210.32(b) (1975). For Osage lessees, the exemption was significant because "probably a majority" of the production from the reservation was "stripper oil." Tr. 1228:21-1229:4 (Barker).

The federal crude oil price regulations were discussed at trial. Tr. 225:11-226:9 (Reineke); Tr. 1449:6-1451:12 (Martin). See also JX001, Fox Dep. at 51-54. 7 The regulations defined a "property" as "the right which arises from a lease or from a fee interest to produce domestic crude petroleum." 10 C.F.R. § 212.72 (1975).

6

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In December 1975 Congress enacted the Energy Policy and Conservation Act ("EPCA"), Pub. L. No. 94-163, 89 Stat. 871. Pursuant to the EPCA, the Federal Energy Administration eliminated the exemptions for new oil and stripper-well oil and instead subjected them to an "upper-tier" price limit. 41 Fed. Reg. 4931, 4940 (1976); 10 C.F.R. § 212.74 (1977). In August 1976, however, Congress passed the Energy Conservation and Production Act ("ECPA"), Pub. L. No. 94-385, 90 Stat. 1125, which amended the EPAA to reinstate the stripper-well exemption. See ECPA § 121, 90 Stat. 1133; 10 C.F. R. § 212.54 (1977). In sum, during the federal price-control program, crude oil was generally sold at one of three price levels: lower tier (old oil), upper tier (new oil), and exempt (stripper well and other specified types of oil). Thus, on the same day, oil produced from the same region, county, lease, or even the same well could be sold at different prices depending on its regulatory classification.8 2. Federal Crude Oil Price Controls Did Not Supersede the Osage Regulations Governing the Calculation of Royalty Value

During the price-control period, the Osage Agency, when calculating Royalty Value, admittedly ignored posted and offered prices of major purchasers in Kansas and Oklahoma and same-lease prices if those prices exceeded the federal ceilings applicable to the particular oil subject to royalty. Tr. 841:18-24 (U.S. Opening); Tr. 1316:16-1317:12 (Barker); Stip. ¶ 13. For price-controlled oil, the Osage Agency limited Royalty Value to the actual (regulated) sales prices reported by the purchasers and lessees. Tr. 1230:19-1231:1 (Barker); Stip. ¶ 13. That approach was inconsistent with the terms of the Royalty-Value regulation, which directed the Agency to calculate Royalty Value based on the "highest" of actual, posted, offered, or same-lease prices. 25 C.F.R.§ 183.11(a)(2). The regulation's only limitation was that the On January 28, 1981, President Reagan terminated federal controls on crude oil. See "Decontrol of Crude Oil and Refined Petroleum Products," 46 Fed. Reg. 9909 (1981).
8

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posted and offered prices be ones of a "major purchaser." Nothing in the regulation tied the Royalty Value calculation to federal price controls, other regulations, or any other factor. The EPAA contained no language modifying or superseding the Osage Regulations. The EPAA authorized the issuance of federal regulations governing crude oil selling prices. It said nothing about modifying lease or regulatory terms establishing royalty-calculation methodologies. Moreover, the EPAA contained a specific preemption provision, but it displaced only (a) conflicting provisions of "any program for the allocation of crude oil, residual fuel oil, or any refined petroleum product established by any State or local government" and (b) the antitrust laws in specified situations. EPAA § 6(b), (c)(4), 87 Stat. 633. On the topic of royalties, the EPAA and its implementing regulations were silent. Because the EPAA itself does not modify the plain terms of the Osage Regulations, there is only one other potential source for limiting Royalty Value to regulated price ceilings ­ the language of the Osage leases and Regulations themselves. In fact, some non-Osage oil and gas lease forms do expressly provide that, in the event of price controls, royalty value will be capped at regulated levels. For example, as early as 1961, one such lease form provided: "If the price of any substance is regulated by any governmental agency, the value of such substance, for the purpose of computing royalty hereunder, shall not be in excess of the price fixed by such regulation." Galvin, "Developing an Oil and Gas Jurisprudence in Michigan," 7 Wayne L. Rev. 403, 425 n.99 (1961), cited in 3 Williams & Meyers Oil and Gas Law § 644.11 (rev. ed. 2004). The Osage leases and Regulations, by contrast, contain no such limitation even though the Regulations were adopted in June 1974, after the EPAA's enactment. See 39 Fed. Reg. 22,254 (1974). Had the drafters of the Osage Regulations intended to cap Royalty Value at regulated levels, they could have incorporated such a limitation in the regulations. Rather, the drafters

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adopted Royalty-Value language comparable to that at issue in Sowell v. Natural Gas Pipeline Co., 789 F.2d 1151 (5th Cir. 1986). In Sowell the lease language based Royalty Value on "the average market price . . . that is paid for gas in Carson, Hutchinson, Potter, Moore, Graf, and Wheeler Counties, Texas." 789 F.2d at 1154. The court rejected application of the maximum regulated price for royalty-calculation purposes. Finding the royalty clause "unambiguous," the court held that "[t]he mathematical universe for computing the average is gas sales in the six[] counties. There is absolutely no contractual limiting of that universe to gas that is physically or legally comparable to what is produced on the [lease]." Id. at 1155 (emphasis added). The court distinguished numerous cases where the leases in question required computation of "market value" or "market value at the well" of the gas actually produced. "The critical distinction, the one on which the district court [correctly] relied, is that every market value lease to which we have been referred requires the royalty to be based on the market price or market value of the gas produced from the lessor's land. In contrast, the [contract in question] refers to the average market price of gas in a six-county area." Id. (emphases added). The 1974 Osage Royalty-Value definition is indistinguishable from the corresponding lease language in Sowell. That definition prescribed a formula under which four values were to be compared, and two of those values were not keyed to the market value of the oil being sold or the price of comparable oil produced on the Osage Reservation. Rather, they looked to prices for oil, without regard to its physical or legal characteristics or classification, available throughout a

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defined geographic area that extended beyond the lease boundaries.9 Consistent with Sowell's reasoning, it follows that, under the operative language of the Osage Regulations, federally mandated price ceilings do not here limit Royalty Value. 3. The United States' Presentation at Trial Provides No Lawful Basis for Deviating from the Plain Terms of the Osage Royalty-Value Regulation

At trial, the United States argued that the Royalty-Value regulation should be construed to avoid encompassing "unregulated prices that the lessees could not obtain." Tr. 841:23-24 (U.S. Opening). That argument is a variation of a theme running throughout the United States' case ­ namely, that the regulation should never be interpreted to base royalties on prices that were unavailable to the lessees. But that reading of the regulation is incompatible with not only its plain terms but also the consistent understanding of the legal and non-legal staff in the field charged with its implementation. Tr. 1059:5-13, 1071:5-25 (Hurlburt); Tr. 1275:2-22, 1301:6-24, 1323:19-24 (Barker). They understood that the regulation, by its terms, based Royalty Value on prices that were often unavailable to Osage lessees. For example, the regulations expressly required that the Osage Agency take into account the highest posted and offered prices by major purchasers throughout all of Kansas and Oklahoma. Many of the posted and offered prices in distant parts of Oklahoma and Kansas would have been inaccessible to the Osage Reservation lessees, but that did not mean that such prices could be ignored given the terms of the regulation. Indeed, the former Chief of the Minerals Branch testified about an instance when the Osage Agency used a posted price to set

As explained at trial, the Royalty-Value provision of the Osage Regulations is atypical. Unlike the usual oil lease, the regulation here did not tie Royalty Value solely to the actual selling price of oil produced from the lease at issue or to the market value of oil of like kind or quality. Tr. 99:10-100:13 (Reineke).

9

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Royalty Value even though it was not available to Osage lessees. Tr. 1205:2-1206:1 (Barker). Thus, the United States' "unavailable-to-the-lessee" theory is flawed and cannot support the existence of an implicit regulatory limitation capping Royalty Value at the federal price ceilings. At trial, the United States elicited testimony, that, during the period of controls, "federal law" prohibited the use of "unregulated price to determine the royalty amount owed to the tribe" and that the federal price "regulations stated" "how the agency would have computed royalties." Tr. 1316:16-1317:5, 1317:17-20 (Barker). The witness, however, cited no specific provision of a federal statute or regulation that would support those assertions ­ and understandably so. As explained above, the federal price-control statutes and regulations addressed selling prices only; they said nothing about royalty calculation. Moreover, this witness' testimony on the requirements of federal law is unaccompanied by any evidence that, during the relevant time period, a federal agency engaged in a legal analysis of (a) whether price controls modified the terms of the Osage Regulations governing Royalty Value and, if so, (b) whether requiring the Osage Nation to shoulder the economic burden of federal energy policy was consistent with the United States' obligations as trustee.

PRIVILEGED MATERIAL REDACTED

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PX682-0013. In Pennzoil Exploration & Prod. Co. v. Lujan, 928 F.2d 1139, 1144 (Temp. Emer. Ct. App. 1991), the court also concluded that neither the EPAA, the regulations promulgated thereunder, nor the statute's policies trumped Interior's regulations for calculating royalties on federal oil leases. Accordingly, the testimony elicited by the United States must be rejected as a post hoc, and erroneous, justification for the Osage Agency's failure to follow the plain terms of its regulations. The United States also elicited testimony on this issue from its royalty expert. He defended his assumption that price controls limited Royalty Value by citing (a) a 1977 FEA brochure, (b) "Texaco's practice" during price controls, and (c) conversations with a former Texaco employee (Fox) and a former Minerals Management Service ("MMS") employee (Dial). Tr. 1414:21-1418:14 (Martin); DX2675-0107. None of those items is probative of the unregulated price issue. The cited FEA brochure was "not intended to provide legal interpretation of applicable regulations" or "expert" advice on their meaning. Tr. 1571:16-1572:7 (Martin); DX2675-0108. Moreover, as the brochure makes clear, the FEA regulations "are applicable to buying and selling" and are silent on the calculation of royalties. DX2675-0110; accord Tr. 1572:13-19, 1573:5-8 (Martin). Texaco's "practice" and the recollections of the former Texaco employee show only that the company took a position consistent with its own economic self-interest in minimizing its royalty obligations. No evidence was presented to show that the position was the product of a thorough and objective legal analysis of the relationship of federal price controls to the trust duties mandated by the 1906 Act and the Osage Regulations. See Tr. 1574:18-1575:11 (Martin). Similarly, the information received from the former MMS employee reflected his experience with that agency and its predecessor (U.S. Geological Survey), not the Osage Agency,

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and he offered no opinion on "what the Osage regulations meant in this context." Tr. 1573:131574:11 (Martin). Moreover, the federal leases that MMS administers base royalties on (a) prices paid for sales of like-quality oil or (b) the gross proceeds derived from the sale of the oil in question. JX001, Dial Dep. at 100:7-101:7, 104:4-106:7, 115:2-116:2. That approach differs substantially from the Osage Royalty-Value methodology. Finally, the United States elicited testimony that using unregulated prices to establish Royalty Value would have "wiped out numerous lessees." Tr. 1318:6-7 (Barker). But that assertion was not supported by even a shred of economic analysis ­ whether created contemporaneously during the Tranche One Months or later through expert testimony. The United States' duty was to enforce the regulations as written or to amend them if such enforcement would not have been in the best interest of the Osage Nation. What the United States could not do was what it did here ­ fail to enforce the terms of the regulations based on the personal, unsubstantiated views of Osage Agency staff. Moreover, had the Osage Agency acted as a prudent trustee and analyzed the available alternatives, it would have realized that any concerns about lessees could have been addressed, without depriving the trust beneficiaries of revenues to which they were entitled under the regulations. The EPAA authorized the granting of "adjustments" to the price regulations. EPAA § 4(c)(3), 87 Stat. at 631; see also 42 U.S.C. § 7194(a) (DOE authorized to grant "adjustments" to "prevent special hardship, inequity, or unfair distribution of burdens"). Accordingly, FEA adopted rules authorizing the granting of exception relief to individual companies "to alleviate or prevent serious hardship or gross inequity." 10 C.F.R. § 205.55(b)(2) (1975).

PRIVILEGED MATERIAL REDACTED

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PRIVILEGED MATERIAL REDACTED

PX682-0011. See also Placid Oil Co. v. FPC, 483 F.2d 880, 911 (5th Cir. 1973) ( "If, as subsequent events develop, the producers are put in a bind by their royalty obligations, they may certainly petition [price regulators] for individualized relief."). To the extent that enforcement of the terms of the Osage Regulation may have resulted in hardships or inequities for the lessees, the availability of exception relief eliminated any conflict that might otherwise have existed between the Osage Regulations and the objectives of the EPAA. Plaintiff's expert, Mr. Reineke, calculated the royalties that would have been due had the highest posted or offered prices been applied without regard to the regulated price level at which the oil was sold. Under this analysis, the royalties due under the highest posted price analysis are $173,596.23 (PX751-0644; Tr. 235:14-23), and the royalties due for the highest offered price are $245,529.75 (PX751-0645; Tr. 233:6-15). The United States did not rebut or otherwise challenge those calculations. C. The United States Failed to Collect Royalty Based on the Highest Selling Price from a Lease When There Were Simultaneous Sales from the Same Lease

The Osage Regulations provided that, in the event that different prices were paid in simultaneous sales of oil from the same lease, the highest of those prices was to be used as the Royalty Value if it exceeded the other values set forth in 25 C.F.R. § 183.11(a)(2) (i.e., actual selling price and highest posted or offered price). This provision required the Osage Agency to keep track of the date of sales from each lease and, where simultaneous sales occurred, to compare the selling prices. The Osage Agency, however, had no system for engaging in those activities. Tr. 236:21-24 (Reineke).

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Plaintiff's expert identified four instances in which oil from the same lease was sold at two different prices in the same month. Tr. 236:21-237:4 (Reineke); PX751-0029-30. For example, the Osage Hominy May 1979 Oil Run Statement indicates that, from the nonwaterflood portion of the lease, 1600.63 barrels of oil were sold at some point in May for $13.555 per barrel; 2175.27 barrels were sold on May 1 for $5.92 per barrel; and 9464.71 barrels were sold on May 2 for $6.00 per barrel. PX751-0226.*10 That Oil Run Statement indicates that, from the waterflood portion of the lease, 4280.98 barrels of oil were sold on May 1 for $19.25 a barrel and 18626.78 barrels of oil were sold on May 2 for $19.33 per barrel. PX7510237.* Even though different prices were paid for oil sold from the same lease on the same day, the Agency failed to apply the highest simultaneous sales price to all sales on that day. PX7510642. Reineke calculated that the total resulting underpayment for the four identified months is $108,244.19. Tr. 237:15-238:1; PX751-0030. The United States offered no evidence to rebut Reineke's methodology or calculations. Instead, it tried to explain away the simultaneous sales issue by claiming that such prices were solely a product of federal price controls. Tr. 1291:2-1293:18 (Barker). But, as already explained, the federal price-control program did not nullify the requirements of the Osage Regulations, particularly the simultaneous sales provision, which was added to the regulations after the EPAA's enactment. Moreover, because the United States made no attempt during any of the Tranche One period to track simultaneous sales, Tr. 236:21-24 (Reineke), the Barker testimony is nothing more than after-the-fact conjecture. It does not establish that differential simultaneous selling prices occurred only during the period of federal controls.

10

Refer to Stipulation of the Parties Regarding Duplicate Exhibits (filed May 4, 2006).

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D.

The United States Undercollected Royalties by Failing to Determine the "Actual Selling Price"

Under the Osage Regulations, the oil's "actual selling price" is one of the items that the Agency must consider in calculating Royalty Value. There is no dispute that the actual selling price can be determined only by examining the underlying sales contract. Tr. 78:17-79:4 (Reineke); Tr. 1332:13-1333:2 (Barker); Tr. 2334:22-2336:4 (Morrison). This step is necessary to verify that the full consideration for the oil is reported as the sale price, because buyers and sellers often agree to enter side arrangements or to characterize portions of the sales price as something other than consideration for the oil itself. Tr. 139:12-140:13 (Reineke). A sales contract found in the Agency's files is illustrative. PX026. In that contract the parties agreed to treat a portion of the sales price as "further consideration" for the right to buy the oil and for other "services rendered" and to pay that additional consideration by separate check. PX0260003; Tr. 139:12-144:9 (Reineke). Notwithstanding the need to review sales contracts, it is undisputed that the Osage Agency did not do so. Tr. 1170:2-16 (Barker); Tr. 1078:18-21 (Hurlburt). At trial, the United States royalty expert suggested that review of the underlying sales contracts was unnecessary because the lessees and the purchasers had opposing economic interests, which ensured that the separate reports they filed reflected the full consideration paid. See Tr. 1521:21-1522:12, 1606:11-1607:10 (Martin). This testimony was unconvincing. First, the lessee's report and the purchaser's statement may not tell the full story if, as was the case with PX026, the parties have agreed to pay some portion of the consideration by "separate check." Tr. 143:19 (Reineke). Second, the "opposing economic interests" may be absent if the transaction is between corporate affiliates. In that case there is the incentive and opportunity for the affiliates to structure the internal transfer to minimize royalty and severance tax obligations

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and increase overall corporate profits. See Tr. 67:2-68:5 (Reineke); see also Howell v. Texaco, Inc., 112 P.3d 1154, 1158 (Ok. 2004) ("The royalty owners' check stubs did not show that Texaco was deducting a cost for marketing and a profit allowance from the royalty payments. At no time did Texaco disclose to the plaintiffs that it was calculating royalty payments based on its intracompany contract."). In the case of interaffiliate transactions, the lessee and the purchaser answer to a single parent that seeks to maximize the corporation's profits. Tr. 1607:11-1610:3 (Martin). Third, even where the lessee and the purchaser are unrelated, they can mutually benefit by structuring the transaction to depress royalty and severance tax liability and to share in the savings. E.g. PX026; Tr. 142:17-144:9 (Reineke). The Osage Agency's failure to collect, review, and preserve sales contracts violated its fiduciary duties and deprived the Tribe of its full royalty. E. The United States Failed to Determine the Correct Major Purchasers and the Correct Highest Posted Price of a Major Purchaser

The Osage Agency did not correctly identify the major purchasers, a necessary predicate for selecting the highest posted price. The major-purchaser component of the Osage Regulations required the agency to identify the fewest number of oil purchasers that collectively purchased 80% of all oil sold in the Kansas-Oklahoma area during the month of production. 25 C.F.R. § 183.1(h). Thus, the Agency had to identify, for the relevant month, (1) all purchasers of crude oil in Kansas and Oklahoma, (2) the amounts each purchased in the two states, and (3) the total volume of oil purchased in the two states. Tr. 106:22-107:8 (Reineke); PX751-0017 (Reineke Expert Report); Tr. 1436:17-1437:7 (Martin); see also DX0878. For the first three Tranche One Months (January 1976, May 1979, and November 1980), the Osage Agency did not follow the regulatory requirements for identifying major purchasers. Tr. 146:24-152:18 (Reineke). The Chief of the Royalty Accounting Section during that time

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testified that the Agency did not collect detailed oil purchase data but merely reviewed posted price bulletins from some large purchasers on the Osage Reservation. JX001, Core Dep. at 41:13-43:2. An employee in the Royalty Accounting Section during that same time frame testified that the Agency "just kind of knew" who the major purchasers were. Tr. 938:3-10 (Branstetter). Moreover, as the United States' oil expert (Martin) confirmed, there are no records of any sort indicating that the Agency conducted a major-purchaser analysis for the first three Tranche One Months.11 Tr. 1446:12-18. In the absence of any documentary evidence reflecting a contemporaneous major purchaser analysis, and because the data needed to perform such an analysis is unavailable, both parties' royalty experts developed similar proxies for the analysis, which are based on all the highest daily prices posted in Kansas and Oklahoma. Tr. 1446:19-1447:9 (Martin); Tr. 217:16219:14 (Reineke). Based on those proxies, the experts agreed that the United States had failed to collect the full royalty due under a highest posted price analysis for the Tranche One Months of May 1979 and November 1980. PX751-0643 (Reineke Expert Report); DX2675-0016, 0098 (Martin Expert Report).

The former Chief of the Minerals Branch, which included the Royalty Accounting Section, testified generally that the procedures summarized in DX0886, a document dated April 4, 1986, were followed in earlier years. Tr. 1208:4-22 (Barker). But that generalized testimony does not override the direct and specific testimony of the two individuals (Core and Branstetter) who actually prepared the posted price letters sent to lessees during the earlier time period. Moreover, the former Minerals Branch Chief was unable to identify any specific employee involved in the determination he claimed was performed. Tr. 1333:8-1334:2. In addition, his testimony contradicts the plain language of DX0886, which states that the described procedures "will be the policy for selecting the highest posted price." (Emphasis added.) The former Chief's attempted to explain away the document's repeated use of the future tense by insisting that the use of "will be" throughout the document should be understood to mean "will continue to be." Tr. 1337:1-16. But that explanation is simply not credible in light of the Core and Branstetter testimony and the absence of any documentary evidence that any such procedures existed before the late 1980s.

11

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For February 1986 and July 1989, the United States' royalty expert (Martin) relied on certain documents for the proposition that the Osage Agency did conduct an actual major purchaser analysis for those two Tranche One Months. Tr. 1443:14-1446:11 (Martin); PX7510517-18; DX2345.* But those documents show only that the United States failed to perform the major-purchaser analysis correctly. As an initial matter, the documents use data from incorrect months. The alleged majorpurchaser analysis for February 1986, PX751-0517-18, uses data from December 1985, and the one for July 1989, DX2345, uses Oklahoma data from February 1989 and Kansas data from April 1989. Moreover, the Osage Agency used an incomplete list of purchasers for its February 1986 analysis. Data reported by Petroleum Information, based on records of the Oklahoma Tax Commission, show that the Osage Agency considered only 55 of the 63 oil companies who purchased oil in Oklahoma in December 1985. Tr. 167:11-168:24 (Reineke); PX751-0503-16. In addition, based on data from Petroleum Information and DOE's Energy Information Administration, Reineke determined that the Osage Agency's analysis for both months failed to account for significant volume in the two-state area. Tr. 154:25-159:12. For February 1986, the volume shortfall was approximately 11%. Tr. 154:7-159:12. For July 1989, it was 9.2% (even after being updated