ALJDEC decisions subject to certification as final

23-T030-LAN · State Land Department · 2023-09-27

IN THE OFFICE OF ADMINISTRATIVE HEARINGS

IN THE MATTER OF ORDER FOR LEASE CANCELLATION ORDER NO. 086-2022/2023 FOR MINERAL LEASE NO. 11-004158-00-00 FOR THE STATE LAND DESCRIBED THEREIN.

LESSEE: DAVID PENNEY

No. 23-T030-LAN

ADMINISTRATIVE LAW JUDGE

DECISION

HEARING: July 24, 2023, with further hearing on September 8, 2023

APPEARANCES: Assistant Attorney General Sarah Hicks represented the Arizona State Land Department. Assistant Attorney General David Jacobs was present. Lessee David Penney appeared on his own behalf.

Witnesses: David Haag, Keri Williams, Alexis Eberlin

ADMINISTRATIVE LAW JUDGE: Sondra J. Vanella

FINDINGS OF FACT

Procedural History

On June 23, 2023 the Arizona State Land Department (“Department”) issued a Notice of Hearing setting the above-captioned matter for hearing on July 24, 2023, at 9:00 a.m., before the Office of Administrative Hearings in Phoenix, Arizona.

The Notice of Hearing provides that the hearing was to consider evidence concerning whether cancellation of Mineral Lease No. 11-004158-00 by Commissioner Order No. 086-2022/2023 should be reconsidered based on Lessee David Penney’s (“Mr. Penney”) appeal of the cancellation of the Lease.

The hearing of this matter convened on July 24, 2023, at 9:00 a.m. Assistant Attorneys General Sarah Hicks and David Jacobs represented the Department. Mr. Penney appeared on his own behalf. During Mr. Penney’s opening statement, he requested a continuance of the hearing in order to afford him the opportunity to retain counsel. The Administrative Law Judge found good cause to continue the hearing and the matter was set for further hearing on September 8, 2023, at 1:00 p.m.

On the date of further hearing, Ms. Hicks represented the Department and called witnesses David Haag, the Department’s Mineral Section Manager, and Keri Williams, the Department’s Program Compliance Auditor. Mr. Penney appeared on his own behalf and called witness, Alexis Eberlin.

Mr. Penney has held a mineral lease with the Department for approximately 40 years. The most recent lease, which is the subject of the instant proceeding, is for the term February 9, 2011, through February 8, 2031, and covers 33.75 acres in Portions of Section 12, Township 9 South, Range 20 East Graham County, Arizona. The Lease authorizes Mr. Penney to mine fire agate.

On November 29, 2022, the Department issued to Mr. Penney a “Notice of Default and Right to Cure (Lease Violation) (“Default Notice”).”

The Default Notice shows that the Department had determined that Mr. Penney violated Articles 5, 6, 12, and 19 of the Lease. The Default Notice further indicates that Mr. Penney had previously been in violation of his Lease for failing to provide production reports from January 2012 through February 2019, and although the issue was cured prior to the Department approving a revised Lease on August 5, 2019, Mr. Penney thereafter, once again, ceased providing production reports as required by Article 5.6 of the Lease. The Default Notice states that Mr. Penney had not submitted production reports from March 2019 through September 2022. In order to cure the Default, the Department provided Mr. Penney the opportunity to submit all missing production reports within sixty (60) days of the Default Notice.

The Default Notice further stated that Mr. Penny was in default for failing meet the insurance requirements contained in Article 19 of the Lease, since March 15, 2020, and that Mr. Penney was required to provide a certificate of insurance to the Department within sixty (60) days of the Default Notice, to maintain insurance for the term of the Lease, and that if Mr. Penney failed to do so, the Lease would be subject to immediate cancellation.

The Default Notice further stated that Mr. Penny was in default for failing to comply with Article 6 of the Lease by allowing public access to the leased land and charging for the time it took to collect fire agate from the leased land. The Default Notice stated that such access and use by the public violates the use restrictions of Article 6 of the Lease. The Default Notice contained a YouTube link illustrating this alleged violation. The Default Notice further ordered that within sixty (60) days, Mr. Penney must report and pay royalties on the fire agate and other minerals taken by the public from the leased land, and that pursuant to Article 5.10 of the Lease, penalties and interest may be imposed.

The Default Notice further stated that during an onside visit on April 20, 2022, the Department discovered trash, including a “used drug needle,” on the leased land, in violation of Article 12 of the Lease.

On May 8, 2023, the Department issued an Order for Lease Cancellation to Mr. Penney cancelling his Lease because it found that he had not cured the deficiencies set forth in the Default Notice. Mr. Penney filed a timely appeal.

Hearing Evidence

Section 5.6 of the Lease sets forth the following:

Production Reports Starting with the commencement date of this Lease, Lessee shall submit a monthly production report to Lessor on or before the 15th of the following month. Reports shall be submitted for all months, including months with no or negative production, and include documentation when required.

David Haag, the Department’s Manager of the Minerals Section, testified in detail regarding the Default Notice. Mr. Haag explained production reports and that they are due on the 15th of every month, and further explained the way in which payment amounts are calculated. Mr. Haag testified that Mr. Penney did not previously submit production reports from 2012 until 2019, until after the expiration of the right to cure in the previous Default Notice. Regarding the Default Notice in this matter, Mr. Haag testified that Mr. Penney did not submit any production reports from 2019 through January 2023, and they were submitted by text after the deadline in the Default Notice. Further, only one of the late submitted production reports was notarized as required. There were dozens of production reports dated from March 2019 through July 2023, and the only one that was notarized is the one dated January 2023. Mr. Haag further testified that since February 2023, Mr. Penney has submitted timely production reports, however, none of them contain the required notarization. The provisions of the Lease itself do not require the production reports to be notarized, however, the Department’s form for production reports requires notarization.

Section 19.3A of the Lease sets forth the following in pertinent part:

Minimum Scope and Limits of Insurance Lessee shall procure and maintain until such time as all obligations under the terms of this Lease are met, insurance against claims for injury to persons or damage to property which may arise from or in connection with the Lease . . .

Lessee shall provide coverage with limits of liability not less than those stated below.

Mr. Haag testified that Mr. Penney’s Certificates of Insurance were not timely submitted to the Department, had expired prior to the Department receiving them, and that the Department has not received any new Certificates of Insurance to date. Further, the Department requires a five million dollar policy and Mr. Penney’s previous policy was for three million dollars.

Keri Williams, Program Compliance Auditor for the Department, testified that her responsibilities include reviewing leases for compliance with insurance requirements. In June 2023, Ms. Williams reviewed Mr. Penney’s Lease and the documentation he submitted and determined that from March 15, 2021, through March 15, 2022, Mr. Penney had insufficient insurance, as the policy was for three million dollars, not the required five million dollar limit, and he did not provide the required endorsement forms. Ms. Williams testified that there was no umbrella policy listed, and therefore, the limits fell below the requirements. Further, Mr. Penney’s Certificate of Insurance is not in compliance because it is in the name of Penney’s Gemstones and the name on the Certificate of Insurance must match the name on the Lease, which is David Penney. Ms. Williams further testified that the Department emailed Mr. Penney twice and called him to advise that his policy was expiring.

Sections 6.1 and 6.2 of the Lease sets forth the following:

Purpose The Leased Land is leased to the Lessee for the purpose of mineral extraction and for uses related thereto and no other use. This Lease confers the right to extract, process and ship minerals, mineral compounds, and mineral aggregates from the Leased Land within planes drawn vertically downward through the exterior boundary lines thereof.

Consistent with Mine Operating Plan Any use of the Leased Land must be performed in a manner consistent with the approved Mine Operating Plan as required under the provisions of Article 21.

Section 5.1 of the Lease sets forth the following:

Royalty Rate Lessee shall pay Lessor a royalty fee equal to 6% of the Gross Value for all fire agate produced from the Leased Land subject to such adjustments as may be permitted by the terms of this Lease.

Mr. Haag testified that it is a liability to the State for the public to be granted access to the leased land as mining is inherently dangerous. Mr. Haag testified that in the YouTube video that the Department viewed, it depicted children close to a conveyor belt. Mr. Haag further testified that there were no production reports and that Mr. Penney did not pay royalties on the fire agate or any other minerals taken by the public from the leased land. Mr. Haag testified that the Department relies on production reports in order to bill its lessees.

On April 21, 2023, Mr. Penney paid a royalty payment of $1,500.00 to the Department.

Section 12.1 of the Lease sets forth the following:

Lessee Waste Lessee shall not cause, nor grant permission to another to cause, any waste (destruction, misuse, alteration, or neglect) in or upon the Leased Land. This provision does not apply to activities authorized by this Lease that are subject to the reclamation and environmental requirements of this Lease.

Mr. Haag testified that during a site visit on April 20, 2022, significant amounts of trash were observed on the leased land. Mr. Haag testified that Mr. Penney cured the waste issue as confirmed by a site visit on July 2, 2023.

Mr. Haag testified that the Department is seeking cancellation of the Lease due to increased liability for the State, Mr. Penney’s Lease history, and because the Department “needs to know the land is secure,” and that it is properly insured.

Mr. Penney testified that it was difficult for him to provide his production reports because he was in Tucson and Quartzsite at gem shows and that the bank only had time to notarize one of the reports. Mr. Penney testified that he “made a lot of attempts” and “did his very best, but could not get them in because of the way the system is set up.” Mr. Penney asserted that previously, production reports were only required to be filed yearly, not monthly, and that he mailed them in. Because there were so many, Mr. Penney wanted to send them electronically. Mr. Penney testified that he understands what is required regarding the production reports and “would be glad to do them and notarize each month, including zero production reports.”

Mr. Penney denied that he ever allowed the public on the Leased Land and has fenced the property to keep the public off of the land. Mr. Penney testified that “no kids were ever in danger at the mine.” Mr. Penney blamed the adjoining rancher for cutting the fence down and opening the gate. Mr. Penney also testified that all of his workers are certified in mine safety. Mr. Penney argued that other State land allows access to the public.

Mr. Penney testified that he has never has issues over the forty years he has leased the land and that his operation is simple and safe.

Mr. Penney testified that he now understands the insurance requirement, however, asserted that it is difficult to obtain a five million dollar policy for an individual. Mr. Penney testified that he always had insurance and never had to use it.

Mr. Penney testified that the improvements he has made to the land are assets to the area, not a liability. Mr. Penney asserted that none of the violations were intentional. Mr. Penney testified that there are eight (8) years remaining on the Lease and that he would like to assign it to a family member, as it is his life’s work, and he has raised his children there.

Alexis Eberlin testified that she has worked for Mr. Penney since 2014, that the Leased Land is not unsafe, and that safety protocols are in place.

CONCLUSIONS OF LAW

The Department bears the burden of persuasion.

The standard of proof an all issues in this matter is that of a preponderance of the evidence. A preponderance of the evidence is “[e]vidence which is of greater weight or more convincing than the evidence which is offered in opposition to it; that is, evidence which as a whole shows that the fact sought to be proved is more probable than not.”

Pursuant to A.R.S. § 37-289(A)(1), before a Lease is canceled, the Department shall provide a Notice of Default to the Lessee setting forth “the specific nature of any default and [the] right to cure any curable default.” Because Mr. Penney’s Lease was in place for more than ten (10) years, Mr. Penney was provided sixty (60) days from receipt of the Default Notice to cure any curable default as provided for in A.R.S. § 37-289(A)(3).

Pursuant to A.R.S. § 37-289(B), “[i]f the default is not cured within the applicable time period, the commissioner may make an order canceling the lease. . . .” and “the lessee shall be permitted to remove the lessee's improvements at any time within sixty days after the date of cancellation.”

The preponderance of the evidence shows that notwithstanding the cleaning of the trash and the royalty payment of $1,500.00 on April 21, 2023, Mr. Penney did not cure all of the curable defaults, as he does not have the insurance required by the terms of the Lease, he failed to provide timely production reports, despite the fact that he had failed to do so for a previous period of time (January 2012 through February 2019), and Mr. Penney failed to provide adequate information concerning why the public was allowed to access the land and how such access will be prevented in the future.

Because Mr. Penney has not cured the Default Notice, the Department has authority to cancel the Lease under A.R.S. § 37-289(B).

Considering the facts and circumstances of this matter, the Department’s decision to cancel the Lease is appropriate.

ORDER

IT IS ORDERED that David Penney’s appeal is dismissed.

IT IS FURTHER ORDERED that Commissioner Order No. 086-2022/2023 cancelling Mineral Lease No. 11-004158-00 is affirmed.

In the event of certification of the Administrative Law Judge Decision by the Director of the Office of Administrative Hearings, the effective date of the Order will be forty (40) days from the date of that certification.

-54864001

001

-137160-45720000Done this day, September 27, 2023.

/s/ Sondra J. Vanella

Administrative Law Judge

Transmitted by either mail, e-mail, or facsimile to:

Lisa Atkins

State Land Commissioner

State Land Department

1616 W. Adams Street

Phoenix, Arizona 85007

David L. Penney

P.O. Box 312

Beaver, UT 84713

[email redacted]

Sarah Hicks

David Jacobs

Assistant Attorneys General

Land & Natural Resources Section

2005 North Central Avenue

Phoenix, AZ 85004-1592

[email redacted]

By: OAH Staff