[CITE: DNR v. Mid-Central Production Corp., 14 CADDNAR 170 (2017)]
[VOLUME 14, PAGE 170]
[See Editor’s note at end of this document regarding change in the decision’s original format.]
Cause #: 16-153G
Administrative Law Judge: Jensen
Caption: DNR v. Mid-Central Production Corp
Attorneys: Boyko (DNR); pro se (Mid-Central)
Date: July 11, 2017
68. Permits numbered 39593, 39852, 44416, 46009, 50085, 51307, and 44749, issued to Mid-Central, are hereby revoked. (Hereafter these permits are identified as “the revoked permits.”)
69. The civil penalty assessed by the Department on February 7, 2017 is hereby affirmed.
70. The $2,500 cash bond posted by Mid-Central with respect to permit numbered 44749 is hereby ordered forfeited in accordance with Ind. Code § 14-34-6-5.
71. The Department may elect to plug and abandon the wells authorized by the revoked permits.
72. A statutory lien is foreclosed in favor of the Department with respect to the revoked permits on the casing and all equipment located on or removed from the well sites or upon the leasehold of the land upon which the wells are located and upon any crude oil stored on the well sites or recovered at the time the wells are plugged and abandoned.
73. If the Department elects to plug and abandon the wells associated with the revoked permits, Mid-Central remains liable for the costs of plugging and abandoning the wells.
74. If the Department elects to plug and abandon the wells associated with the revoked permits, its agents, employees, or contractors shall dispose of all casing and equipment located on or removed from the well sites and any crude oil stored on the well sites or recovered at the time the wells are plugged and abandoned. An inventory of the casing and all equipment and any crude oil shall be made, and the salvage or other reasonable market value of the casing, all equipment and any crude oil shall be applied as a credit to offset the actual costs incurred in plugging and abandoning the wells.
FINDINGS OF FACT AND CONCLUSIONS OF LAW
Procedural Background and Jurisdiction
1. On November 4, 2016, the Petitioner, Department of Natural Resources (Department) filed its “Complaint for the Issuance of an Order to Revoke Permits” (Complaint) naming Mid-Central Production Corporation (Mid-Central) as the Respondent.
2. Administrative Law Judge Sandra L. Jensen, was appointed to preside in accordance with Ind. Code § 14-10-2-2.
3. The Department’s Complaint asserted that Mid-Central is the holder of certain permits, identified by numbers 39593, 39852, 44416, 46009, 50085, and 51307 that authorize the drilling and operation of wells for oil and gas purposes in Gibson and Pike Counties in Indiana.
4. The Department’s Complaint further alleged that Mid-Central had refused to post bond on the identified permits following the Department’s determination that it had engaged in a pattern of violations that obligated the posting of such bond.
5. A prehearing conference was scheduled for and conducted on December 6, 2016, with Mid-Central appearing by its President, Winston Fullerton (Fullerton). Counsel, L. James Hanson, who had not entered a formal appearance also participated on behalf of Mid-Central. The Department appeared by counsel, Ihor Boyko, and Division of Oil and Gas, Assistant Director James AmRhein, and Natural Resource Science Manager, Beth Hernly.
6. Fullerton, on behalf of Mid-Central, stated during the prehearing conference that it had not engaged in a pattern of violations and would not post bond as was being required by the Department. It was agreed that the instant proceeding would be determined by an administrative hearing and a continuance was granted to allow Mid-Central to consult with Mr. Hanson regarding legal representation.
7. On December 19, 2016, Mr. Hanson advised the Commission that Fullerton had chosen to proceed without the assistance of counsel. From that date Fullerton has proceeded as the non-attorney representative of Mid-Central.
8. On January 2, 2017, Mid-Central sought to have the Department file a “bill of particulars” stating the exact bases for the Department’s determination that Mid-Central had engaged in a “pattern of violations”. The motion was granted during a status conference conducted on January 12, 2017.
9. The Department filed “Petitioner DNR’s More Definite Statement” on January 27, 2017.
10. On February 27, 2017, the Department filed a motion for leave to amend the Complaint for the reason that during the pendency of the instant proceeding the Department had issued to Mid-Central a Notice of Violation and Penalty Assessment following Mid-Central’s failure to pay annual well fees. The motion was granted and the Department filed its “Amended Complaint for the Issuance of an Order to Revoke Permits and Forfeit Cash Bond” (Amended Complaint).
11. The Department’s Amended Complaint included all of the allegations contained within its Complaint filed on November 4, 2016 and additionally sought revocation of an additional permit, permit numbered 44749. The Department maintained with respect to permit number 44749 that Mid-Central had posted the bond as required but Mid-Central had, since that time, failed to pay the required annual well fee.
12. Mid-Central and the Department timely filed witness and exhibit lists on February 18, 2017 and February 28, 2017, respectively.
13. A final status conference was conducted on March 16, 2017 and the administrative hearing was scheduled for and subsequently conducted on April 25, 2017.
14. The Department is the administrative agency responsible for the regulation of wells for oil and gas purposes under Ind. Code §§ 14-37 and 312 IAC 16.
15. The Commission is the “ultimate authority” for the Department relating to matters governed by Ind. Code 14-37 and 312 IAC 16. Ind. Code § 4-21.5-1-15; 312 IAC 3-1-2.
16. The Commission has jurisdiction over the subject matter and the parties to the instant proceeding.
17. The Commission must conduct this proceeding de novo. Daniel v. Johnston & Fultz Excavating (Vinyl Seawall), 12 CADDNAR 317 (2011), citing Burke’s Vinyl Seawalls & Reynolds v. DNR at 346 applying DNR v. United Refuse Co., Inc., 615 N.E.2d 100 (Ind. 1993).
Findings of Fact
18. James B. AmRhein (AmRhein) is an Assistant Director for the Department’s Division of Oil and Gas who has been responsible for the enforcement and permitting program for 27 years. Testimony of AmRhein. In that capacity, AmRhein is responsible to ensure that enforcement actions are taken consistently and in accordance with law and that permits are fully reviewed and issued timely. Id. AmRhein is also a custodian of the Department’s records relating to oil and gas permitting and enforcement. Id.
19. The evidence is uncontested that Fullerton is the President of Mid-Central and has acted as the representative of Mid-Central in all dealings with the Department and throughout this proceeding before the Commission.
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20. On August 19, 2015 a “Notice of Amended Complaint and Final Order of the Natural Resources Commission” was entered in Department of Natural Resources v. Mid-Central Production Corp. (hereafter referred to as “Mid-Central I”) under Administrative Cause Number 15-049. Testimony of AmRhein, Exhibit C.
21. The final order issued in Mid-Central I adopted a settlement agreement that established deadlines for Mid-Central to bring wells associated with four permits into regulatory compliance by specified deadlines. (Hereafter the settlement agreement adopted by the Commission in Mid-Central I is referred to as the “Mid-Central I Final Order”). The first well was to be compliant by December 1, 2015, the second by May 31, 2016, the third by December 1, 2016, and the fourth by May 31, 2017. Testimony of AmRhein & Fullerton, Exhibit C. Under the terms of the Mid-Central I Final Order, Mid-Central retained control over the order in which the wells would be brought into regulatory compliance. Testimony of AmRhein, Exhibit C. The Mid-Central I Final Order also clearly defined the term “regulatory compliance”. Exhibit C.
22. The Mid-Central I Final Order further specified as follows:
2. In the event Respondent Mid-Central fails to abate the violations for any well and also obtain a release from the Division for any well as required by any deadline date established in paragraph 1 above, then:
(a) The permit for the corresponding well and any other remaining wells with unabated violations shall be deemed revoked without further administrative or judicial review which Respondent hereby expressly waives;
23. The evidence is uncontested that under the Mid-Central I Final Order one well was brought into regulatory compliance by plugging and abandonment. Testimony of Fullerton & AmRhein.
24. The Department did not consider that Mid-Central’s plugging of the first well to be strictly compliant with the terms of the Mid-Central I Final Order, but there is no evidence that the Department took further enforcement action against Mid-Central with respect to the noted lack of compliance. It is reasonably concluded from the evidence that Mid-Central and the Department disagreed about the completion date of the plugging and abandonment of the well because cement failed to reach the surface by three feet. Fullerton believed the plugging was sufficient without the additional cement while the Department would not release the NOV on the well until the remaining cement was in place to the surface of the well, which did not occur until after the December 1, 2015 deadline stated in the Mid-Central I Final Order.
25. Mid-Central did not abate violations associated with a second well by the second deadline of May 31, 2016 as required by the Mid-Central I Final Order. Testimony of AmRhein & Fullerton, Exhibit E. In fact, a second well had not been brought into regulatory compliance by November 4, 2016, when the Department initiated the instant proceeding. Exhibit E.
26. Mid-Central clearly failed to comply with the terms of the Mid-Central I Final Order.
27. According to Fullerton, the second well that was to be plugged under the settlement agreement was bent over when a farmer hit it with a sprayer. Testimony of Fullerton. Mid-Central was to receive $10,000 in insurance proceeds to plug or repair the well but negotiations between Mid-Central’s insurance provider and the farmer or the farmer’s insurance provider “drug it out and drug it out.” Id. This well was also located over one-quarter mile off the road and wet conditions prevented the well from being plugged. Id.
28. The insurance settlement, when received, would have provided sufficient financial resources to address the regulatory compliance of two wells. Testimony of Fullerton. However, by the time the insurance proceeds became available, the Department had “come after the wells on the other side of the road.” Id.
29. Because the Mid-Central I Final Order allowed Mid-Central complete control over the order in which the wells would be addressed, Mid-Central could have brought any one of the three remaining wells into compliance before the second deadline of May 31, 2016 while awaiting resolution of the insurance claim. In fact, the settlement agreement expressly recognized that the violations associated with one of the wells could not be addressed due to litigation relating to the insurance claim Fullerton described. Exhibit C. The evidence does not support a conclusion that the pending insurance claim and related litigation prevented Mid-Central from complying with the terms of the settlement agreement.
30. In a letter dated June 8, 2016, the Department notified Mid-Central that “the second deadline date has passed with no additional work having been completed, and pursuant to the settlement agreement, permits 38744, 44985 and 47800 are hereby revoked.” Exhibit E.
31. Revocation of permits numbered 38744, 44985, and 47800 without further proceedings under Ind. Code §§ 4-21.5 was contemplated by the Mid-Central I Final Order. See Finding 22 and Exhibit C.
32. Following the revocation of permits numbered 38744, 44985, and 47800, on July 20, 2016, the Department notified Mid-Central of its determination that Mid-Central had engaged in a pattern of violations that necessitated Mid-Central to post bond on all of its remaining permitted wells within 30 days. Testimony of AmRhein, Exhibit B.
33. On July 20, 2016, Mid-Central held seven permits, numbered 39593, 39852, 44416, 46009, 50085, 51307, and 44749. Testimony of AmRhein, Exhibits A-1 through A-7.
34. After receiving the Department’s July 20, 2016 letter, Mid-Central posted a $2,500 cash bond for permit numbered 44749 through a check dated August 30, 2017. Testimony of Fullerton & AmRhein, Exhibit B-1. Mid-Central has refused to comply with the Department’s requirement to post bond on its remaining six permits. Testimony of Fullerton and AmRhein.
35. According to AmRhein, Fullerton explained that of the seven wells for which he held permits only the well associated with permit numbered 44749 was worth posting bond. AmRhein inferred from the conversation that the wells associated with the remaining six permits were of no value to Mid-Central and for this reason Mid-Central posted bond only with respect to the one permit. Testimony of AmRhein.
36. The permits relevant to this proceeding were issued to Mid-Central on the following dates:
a. Permit numbered 39593 was issued/transferred on April 1, 1993;
b. Permit numbered 39852 was issued on October 17, 2006;
c. Permit numbered 44416 was issued on October 15, 2001;
d. Permit numbered 46009 was issued on February 12, 2008;
e. Permit numbered 50085 was issued on November 10, 1992;
f. Permit numbered 51307 was issued on August 18, 1997; and
g. Permit numbered 44749 was issued on December 1, 1993.
37. The Department initiated Mid-Central I on May 1, 2015 to revoke permits numbered 38744 and 44985, for which Mid-Central had received Notices of Violation (NOV) on October 7, 2014 and February 9, 2015, respectively, and had failed to take corrective action or seek administrative review. Exhibit C.
38. While NOVs associated with permits numbered 38744 and 44985 were outstanding, the Department issued Mid-Central an additional NOV on permit numbered 47800 on March 9, 2015. Exhibit D-2a. Mid-Central did not seek administrative review of the NOV and as of August 19, 2015, when the Mid-Central I Final Order was entered, had not corrected the violations. Exhibit C.
39. While NOVs associated with permits numbered 38744, 44985, and 47800 and while Mid-Central I was pending before the Commission, the Department issued Mid-Central a fourth NOV involving permit numbered 47737. Exhibit D-1a. Mid-Central did not seek administrative review of the NOV and as of August 19, 2015, when the Mid-Central I Final Order was entered, had not addressed the violations. Exhibit C.
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40. Between August 19, 2015, when the Commission issued the Mid-Central I Final Order, and November 4, 2016, when the Department initiated the instant proceeding, Mid-Central had continued in its failure to comply with the Mid-Central I Final Order.
41. On February 7, 2017, the Department issued Mid-Central an additional NOV and Penalty Assessment for the reason that Mid-Central had not paid the required annual well fee for each of its seven permits. Exhibit F.
42. In his testimony, Fullerton questioned why the Department would expect the payment of annual well fees associated with permits that are the subject of a pending complaint for revocation. However, on February 7, 2017, permit numbered 44749, for which Mid-Central had posted bond, was not subject to the Department’s Complaint for revocation filed on November 4, 2016.
43. After Mid-Central’s continued failure to pay the annual well fees for permit number 44749 combined with Mid-Centrals continued failure to respond to the Department’s other numerous NOVs the Department sought revocation of permit numbered 44749 through its Amended Complaint filed on March 22, 2017.
44. Because the cash bond posted with respect to permit numbered 44749 was submitted to the Department on August 30, 2016, which was 10 days after the Department’s deadline of August 20, 2016, Fullerton maintains that the Department should have returned the check without tendering it for payment. Testimony of Fullerton. Fullerton maintains that the Department remains obligated to return the $2,500 bond and testified, “If I don’t get it back I’m going to show you what a nasty son-of-a-bitch I can be.” Id.
45. The Department characterizes a “pattern of violations” as “essentially a repetition, a history, a behavior. Essentially you can expect an outcome based on previous behavior.” Testimony of AmRhein. AmRhein noted that Mid-Central had failed to comply with he Mid-Central I Final Order noting that even if one well was eventually plugged, Mid-Central “still didn’t comply with the other three deadline dates.” Id. According to AmRhein, “once a permit has been revoked” and there is a “full blown pattern that he is not going to comply with our rules and regulations. That’s when we take our action to order posting of bonds and revocations.” Id.
46. Fullerton testified that he has removed all equipment associated with Mid-Central’s permits at issue in this proceeding to prevent the Department from obtaining a lien on that equipment. Fullerton’s testimony supports AmRhein’s characterization that Mid-Central has operated without due regard for the laws and regulations governing the production of oil and gas as prescribed at Ind. Code §§ 14-37 and 312 IAC 16.
47. Bond posted on a permit is returned when a well for oil and gas purposes is plugged and abandoned in accordance with law, or the permit is transferred to another operator. Testimony of AmRhein.
48. The Department has not returned the bond posted by Mid-Central with respect to permit numbered 44749 because Mid-Central has not properly plugged and abandoned the well authorized by the permit or transferred the permit to another operator. Testimony of AmRhein.
Conclusions of Law
49. The permits at issue grant the authority to drill or deepen a well for oil and gas purposes, which is an activity regulated by the Department in accordance with Ind. Code §§ 14-37 and 312 IAC 16.
50. An “operator” of an oil and gas well is a person who is issued a permit under Ind. Code §§ 14-37 or is engaged in activity for which a permit under Ind. Code §§ 14-37 is necessary. 312 IAC 16-1-38. Mid-Central is an “operator.”
51. An “owner” of an oil and gas well is “a person who has the right to drill into and produce from a pool and appropriate oil and gas produced from the pool for (1) the person or others; or (2) the person and others.” Ind. Code 312 IAC 16-1-39. Mid-Central is also an “owner.”
52. Bond for an oil and gas permit in force after June 30, 1988 is controlled by Ind. Code § 14-37-1-1.
53. “A person who has demonstrated a pattern of violation under this article within the previous two (2) years” is obligated to post bond in addition to annual well fees required by Ind. Code § 14-37-5 and 312 IAC 16-3.5. Ind. Code § 14-37-6-1, 312 IAC 16-4-1(a)(2).
54. With respect to the Department’s July 20, 2016 requirement that Mid-Central post bond for its remaining permits, the period of time relevant for consideration is from July 20, 2014 until July 20, 2016.
55. What constitutes a pattern of violations is at the heart of this determination.
56. A “pattern” is defined as “a reliable sample of traits, acts, tendencies, or other observable characteristics of a person, group or institution.” https://www.merriam-webster.com/dictionary/pattern.
57. The Commission has previously considered actions constituting a “pattern of violations” in a variety of contexts. The Commission affirmed the Department’s revocation of a permit based upon the existence of a “pattern of violations” following the Department’s issuance of five notices of violation within nine months along with three failed settlement agreements. Black Gold Assoc. v. DNR, 5 CADDNAR 30, (1988). The Commission has concluded that a “pattern of violations” occurred when a timber buyer failed to pay landowners for timber harvested and failed to maintain adequate bond to aid in compensating the landowners’ losses. DNR v. Bruce Barnes, d/b/a Barnes Firewood & Logging, 8 CADDNAR 152, (2000). Finally, the issuance of multiple NOVs combined with failures to pay civil penalties was deemed a “pattern of willful violations” in Mid-States Oil Co. v. DNR, 5 CADDNAR 110, (1990). These decisions are instructive.
58. The evidence of violations established in this case between July 20, 2014 and July 20, 2016 is best summarized as follows:
a. Mid-Central was issued NOVs on October 7, 2014, February 9, 2015 and March 9, 2015 that were not abated by Mid-Central and for which Mid-Central did not seek administrative review.
b. The Department filed its complaint in Mid-Central I on May 1, 2015.
c. On May 19, 2015, Mid-Central was issued a fourth NOV.
d. As of August 19, 2015 Mid-Central had not corrected the NOVs issued on October 7, 2014, February 9, 2015, March 9, 2015 or May 19, 2015.
e. On August 19, 2015 Mid-Central and the Department entered into an settlement agreement addressing all four of the currently outstanding NOVs, which was adopted as the Commission’s final order in Mid-Central I.
f. Mid-Central failed to comply with the terms of the Mid-Central I Final Order resulting in revocation of three permits on June 8, 2016.
g. Mid-Central was notified to post bond for each of its remaining permits on July 20, 2016.
59. After being notified of the requirement to post bond, Mid-Central continued with its complete noncompliance with Ind. Code §§ 14-37, particularly Ind. Code § 14-37-8-1(a), by failing to plug the seven wells authorized by permits numbered 39593, 39852, 44416, 46009, 50085, 51307, and 44749 after intentionally removing all equipment thereby rendering the wells incapable of producing oil or natural gas or being operated for the purpose intended by the permits. Ind. Code § 14-37-8-1(a) requires Mid-Central to “plug and abandon a well that…ceases to produce oil or natural gas; or is no longer operated for the purpose for which the well is permitted.”
60. The evidence sufficiently establishes Mid-Central’s disregard for Ind. Code §§ 14-37 and 312 IAC 16 such that the Department was justified in requiring Mid-Central to post bond for its remaining permits numbered 39593, 39852, 44416, 46009, 50085, 51307, and 44749.
61. Failure by Mid-Central to post bond for permits numbered 39593, 39852, 44416, 46009, 50085, and 51307 under these circumstances constitutes a violation of Ind. Code § 14-37-6-1.
62. In accordance with Ind. Code 14-37-13-1(2), a permit may be revoked if the owner or operator has violated Ind. Code §§ 14-37.
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63. Mid-Central’s failure and continued refusal to post bond as required by the Department with respect to permits numbered 39593, 39852, 44416, 46009, 50085, and 51307 provides a sufficient basis for revocation of those permits.
64. Mid-Central has further failed to pay the annual well fee prescribed by Ind. Code § 14-37-5-1 with respect to each of the seven permits, particularly permit numbered 44749, which action serves as evidence of Mid-Central’s continued pattern of violations.
65. As a violation of Ind. Code §§ 14-37, Mid-Central’s failure to pay the annual well fee with respect to each of the seven permits presents additional sufficient grounds for the revocation of the permits, particularly permit numbered 44749.
66. Fullerton has demanded the Department return the $2,500 bond posted with respect to permit numbered 44749 because it was posted by Mid-Central 10 days after the August 20, 2016 deadline provided by the Department. Mid-Central’s contentions with respect to the forfeiture of the bond are self-serving. Had the Department rejected the cash bond because it was submitted 10 days late and proceeded with an effort to revoke permit numbered 44749 in its Complaint filed November 4, 2016, Fullerton would undoubtedly use as his defense to the revocation of that permit the fact that he substantially complied with the Department’s requirement that Mid-Central post a bond for that permit. Instead, by posting the bond Mid-Central received benefit of having permit numbered 44749 in compliance with Ind. Code §§ 14-37 and 312 IAC 16, which is evidenced by the fact that the Department did not seek revocation of that permit in its Complaint filed November 4, 2016. However, consistent with Mid-Central’s ongoing disregard for laws and regulations governing the production of oil and gas, it chose to ignore its responsibility to pay annual well fees no later than February 1, 2017. Ind. Code § 14-37-5-1. Refusing to comply with this requirement placed permit numbered 44749 into noncompliance and subjected the permit to revocation through the Department’s Amended Complaint. The fault for the forfeiture of the $2,500 bond posted by Mid-Central for permit numbered 44749 lies solely upon Mid-Central.
67. Ind. Code § 14-37-6-5 states,
Sec. 5. The director shall order forfeiture of a bond or alternative security provided under this chapter when a permit is revoked under IC 14-37-13.
[EDITOR’S NOTE: The original format of the Administrative Law Judge’s Findings of Fact, Conclusions of Law, and Final Order has been modified to correspond with CADDNAR format. The Final Order, Paragraphs 68 through 74, has been relocated to the “Final Order” section at the beginning of this document.]
 Mid-Central sought administrative review before the Commission of the Notice of Violation and Penalty Assessment issued by the Department in Mid-Central Production Corporation v. Department of Natural Resources, Administrative Cause Number 17-018G. The parties agreed to combine the presentation of evidence for both proceedings through one administrative hearing.
 Findings of fact that may be construed as conclusions of law and conclusions of law that may be construed as findings of fact are so deemed.
 If a witness is shown as being quoted in these Findings, the statement is as nearly verbatim as could be determined by the administrative law judge. If a transcript is subsequently prepared that indicates different wording, the transcript shall be considered the official record and a quotation here as paraphrasing of witness testimony.
 The ALJ might speculate that without benefit of the insurance proceeds Mid-Central was not financially able to plug any additional wells.