Bailey v. Shell Western E&p Inc

• Decision Date: 16 June 2010
• Docket Number: No. 08-20313.,08-20313.
• Citation: 609 F.3d 710
• Parties: Gerald O. BAILEY, for himself and on behalf of United States of America, State of Colorado, and Montezuma County, Board of Commissioners; Montezuma County Colorado; United States of America; State of Colorado, Plaintiffs-Appellants,v.SHELL WESTERN E&P, INC., now known as SWEPI LP, doing business as Shell Western E&P, Kinder Morgan CO2 Company, LP, formerly known as Shell CO2 Company Ltd.; Shell Oil Company, Defendants-Appellees.United States of America; State of Colorado; Gerald O. Bailey; Harry Ptasynski, Plaintiff-Appellants,v.Kinder Morgan CO2 Company, LP, A Texas Limited Partnership; Richard Timothy Bradley, Defendants-Appellees.Harry Ptasynski, Plaintiff-Appellant,v.Kinder Morgan GP, Inc., Defendant-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

609 F.3d 710

Gerald O. BAILEY, for himself and on behalf of United States of America, State of Colorado, and Montezuma County, Board of Commissioners; Montezuma County Colorado; United States of America; State of Colorado, Plaintiffs-Appellants,

v.SHELL WESTERN E&P, INC., now known as SWEPI LP, doing business as Shell Western E&P, Kinder Morgan CO2 Company, LP, formerly known as Shell CO2 Company Ltd.; Shell Oil Company, Defendants-Appellees.

United States of America; State of Colorado; Gerald O. Bailey; Harry Ptasynski, Plaintiff-Appellants,

v.Kinder Morgan CO2 Company, LP, A Texas Limited Partnership; Richard Timothy Bradley, Defendants-Appellees.

Harry Ptasynski, Plaintiff-Appellant,

v.Kinder Morgan GP, Inc., Defendant-Appellee.

No. 08-20313.

United States Court of Appeals, Fifth Circuit.

June 16, 2010.

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Robert Bryan Perry, Plano, TX, Jennifer Heather Davidow, Vinson & Elkins, L.L.P., Houston, TX, for Plaintiff-Appellants.

Phillip Bruce Dye, Jr., Vinson & Elkins, L.L.P., Andrew McCollam, III, McCollam Law Firm, Houston, TX, for Shell Western Epinc., Kinder Morgan GP, Inc., Kinder Morgan CO2 Co., LP, Shell Oil Co., Bradley.

Peter M. Kelly, Moore & Kelly, PC, Houston, TX, for Ptasynski.

Appeal from the United States District Court for the Southern District of Texas.

Before JONES, Chief Judge, and GARZA and STEWART, Circuit Judges.

CARL E. STEWART, Circuit Judge:

In 1998, Shell Western E&P Inc. (“Shell”) sued Gerald Bailey in Texas state court for a declaration regarding the proper calculation method for royalties on carbon dioxide (“CO₂”) in the McElmo Dome. Bailey counterclaimed. In 2005, the case was removed to federal court in the Southern District of Texas. The District of Colorado then transferred a similar action Ptasynski v. Kinder Morgan G.P., Inc., to the Southern District of Texas, where it was consolidated with the Shell case. The district court granted summary judgment in favor of Shell, and Bailey and Ptasynski appealed. We AFFIRM.

I. FACTUAL BACKGROUND¹

In the 1970s, due to the rising costs of oil, petroleum companies began to investigate the use of CO₂ to increase oil output from older fields. They discovered that when CO₂ is injected under sufficient pressure into an older field, it mixes with oil underground, dislodging it from the surrounding rock and enhancing its recovery. This process is known as tertiary or enhanced oil recovery (“EOR”). Oil fields in West Texas were considered prime candidates for EOR.

The largest CO₂ field capable of supplying these West Texas fields was the McElmo Dome area, located in Montezuma and Dolores counties, Colorado. Together, Shell and Mobil Producing Texas & New Mexico Inc. (“MPTN”) owned 87% of the total working interest in the McElmo Dome area. Shell and MPTN believed that the abundant CO₂ reserves of the McElmo Dome area could be harvested more efficiently if the area was operated as a single unit. A partnership was formed to construct, own, and operate a 500-mile pipeline that would carry CO₂ from McElmo Dome to fields in West Texas.

Shell filed an application with the Colorado Oil & Gas Commission (“Commission”) to operate the McElmo Dome area as a single unit. The Commission preliminarily approved Shell's application, but required Shell to obtain the consent of 80% of the non-cost bearing royalty interest owners. In order to obtain such consent, Shell sent a package of materials to the royalty interest owners. The package included: 1) a brochure entitled “A Program for Unit Operations,” which was designed to provide an overview of the project; 2) the Unit Agreement for the proposed McElmo Dome Unit; and 3) a ratification form by which the royalty interest owners could manifest their assent to the Unit Agreement. The brochure contained information in the form of questions and answers. Among these was the following:

“Will the royalty owners of interest in this unit have to pay for the pipeline, transportation or injection of CO₂ in West Texas? No.”

Bailey and Ptasynski are both independent geologists with decades of experience in the oil and gas industry. Each holds overriding royalty interest in the McElmo Dome Unit, and each received Shell's package and signed and returned the ratification form. Ultimately, Shell obtained the consent of 92.5% of the total royalty interest. As a result, the McElmo Dome Unit became effective and production of CO₂ began in December 1983.

Bailey and Ptasynski have been receiving royalties from the McElmo Dome Unit production since 1984. Such royalties were based on the CO₂'s value at the “tailgate” of the McElmo Dome plant, before being transported via pipeline to West Texas. Shell determined this value by subtracting the cost of transportation from the delivered sales price.

II. PROCEDURAL HISTORY

The parties have a long and tortured history of litigation over payment of royalties flowing from the McElmo Dome.

A. Previous Cases1. Class Actions

In 1996, the CO₂ Coalition-seventy owners of varying interests in McElmo Dome-brought a putative class action against Shell, Kinder Morgan, Mobil, and Cortez Pipeline in Colorado federal district court. In 2000, three other class actions were filed in that court by classes of (a) land owners, (b) royalty owners, and (c) non-operating working interest owners. In September 2001, the four cases were settled. Ninety-six percent of the royalty interest owners joined in the settlement.

Both Bailey and Ptasynski declined to join in the settlement, instead filing cases in the Northern District of Texas in 1997.

2. Bailey I

Bailey sued Shell in 1997, asserting state law claims and one federal claim: that the 1099 tax forms Shell sent them were fraudulent and violated 26 U.S.C. § 7434. Bailey v. Shell Western E&P, Inc., No. 3-97-0518-R, 1998 WL 185520, at *1 (N.D.Tex. Apr. 14, 1998). The district court held the tax claim was not viable and dismissed it with prejudice. Id. at *3. The district court declined to exercise supplemental jurisdiction over the state law claims. Id. This Court affirmed. Bailey v. Shell Western E&P, Inc., 170 F.3d 184, 1999 WL 46967 (5th Cir.1999).

3. Ptasynski I

Ptasynski sued Shell and Mobil on the same theories as Bailey, also in 1997. The district court dismissed the tax fraud and fraudulent concealment claims on summary judgment. Ptasynski v. Shell Western E&P, Inc., No. 3:97-CV-1208-R, 1999 WL 423022, at *8 (N.D.Tex. June 16, 1999). After a bench trial, the court ruled for the defendants on all but the negligent misrepresentation and declaratory judgment claims. This Court rendered judgment entirely for the defendants. Ptasynski I, 2002 WL 32881277, at *14.

B. This Case1. The Original Declaratory Action

This lawsuit began in 1998 as a declaratory judgment action in state court in Harris County, Texas. Shell sued Bailey for a declaration that it had been paying royalties properly. Bailey asserted state law counterclaims, including breach of contract, fraud, and breach of fiduciary duty. By March 2001, the state court had resolved all issues by summary judgment in favor of Shell except the fraud-based counterclaims.

Meanwhile, other cases about McElmo Dome CO₂ royalties were pending against Shell in the statutory probate court of Denton County, Texas. In March 2001, the probate judge took this case under section 5B of the Texas Probate Code. In August 2002, the Texas Supreme Court held the transfer was void and returned the case to Harris County. In re SWEPI, L.P., 85 S.W.3d 800 (Tex.2002). The case was then abated until March 2004.

In June 2004, Bailey filed his Eighth Amended Counterclaims in this case, alleging False Claims Act (“FCA”) claims substantively identical to those he asserted in a lawsuit filed in Colorado in April 2004 (the “First Colorado Lawsuit”). The Eighth Amended Counterclaims were filed under seal. The state court unsealed the Eighth Amended Counterclaims in November 2004, after the government declined to intervene.

On March 24, 2005, Bailey removed the declaratory judgment action from state court to the Federal District Court for the Southern District of Texas.

2. The First Colorado Lawsuit

In April 2004, Bailey and Ptasynski filed the First Colorado Lawsuit in the Federal District Court for the District of Colorado, a sealed action about the same royalty issues at issue in Texas state court. They asserted individual claims and qui tam FCA claims for the United States and allegedly for Colorado and Montezuma County, Colorado. The case remained sealed until April 2005.

In May 2005, the Colorado district court ordered the First Colorado Lawsuit transferred to the Southern District of Texas. United States v. Kinder Morgan Co., No. 04-CV-00716-WDM, 2005 WL 3157998, at *3 (D.Colo. Nov. 21, 2005). After the Colorado court's transfer of the First Colorado Lawsuit to Texas, Bailey and Ptasynski, in December 2005, petitioned for mandamus in the Tenth Circuit. Ptasynski v. Kinder Morgan G.P., Inc., 220 Fed.Appx. 876 (10th Cir.2007). Mandamus and certiorari were denied.

3. Proceedings in the Southern District of Texas

Upon removing the declaratory judgment action from state court to the Southern District of Texas in March 2005, Bailey filed under seal an ex parte motion to transfer venue to Colorado. The district court did not transfer the case, instead ordering Bailey to move to transfer the year-old First Colorado Lawsuit to Texas.

Bailey then petitioned the Fifth Circuit for mandamus based on the district court's refusal to transfer this case to Colorado. This Court summarily denied mandamus; the Supreme Court denied certiorari. In July 2005, Bailey and Ptasynski also unsuccessfully sought an anti-suit injunction in the First Colorado Lawsuit, trying to shut down this Texas case.

Once the First Colorado Lawsuit's transfer was final, Ptasynski tried to voluntarily dismiss his claims without prejudice. The district court declined to dismiss the...