Reese v. Bp Exploration (alaska) Inc.

• Decision Date: 29 June 2011
• Docket Number: No. 10–35128.,10–35128.
• Citation: 643 F.3d 681
• Parties: Claude A. REESE, individually and on behalf of all others similarly situated, Plaintiff–Appellee,v.BP EXPLORATION (ALASKA) INC., Defendant–Appellant.
• Court: U.S. Court of Appeals — Ninth Circuit

643 F.3d 681

11 Cal. Daily Op. Serv. 8090

2011 Daily Journal D.A.R. 9778

Claude A. REESE, individually and on behalf of all others similarly situated, Plaintiff–Appellee,

v.BP EXPLORATION (ALASKA) INC., Defendant–Appellant.

No. 10–35128.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted March 7, 2011.Filed June 29, 2011.

Richard C. Pepperman II, of Sullivan & Cromwell LLP, New York, NY, Diane L. McGimsey of Sullivan & Cromwell LLP, Los Angeles, CA, and David C. Lundsgaard of Graham & Dunn P.C., Seattle, WA, for defendant-appellant BP Exploration (Alaska) Inc.Thomas A. Dubbs and Javier Bleichman of Labaton Sucharow LLP, New York, NY, and Robert D. Stewart and Timothy M. Moran of Kipling Law Group PLLC of Seattle, WA, for plaintiff-appellee Claude A. Reese.Appeal from the United States District Court for the Western District of Washington, Marsha J. Pechman, District Judge, Presiding. D.C. No. 2:08–cv–01008–MJP.Before: M. MARGARET McKEOWN, RAYMOND C. FISHER, and RONALD M. GOULD, Circuit Judges.

OPINION

GOULD, Circuit Judge:

BP Exploration (Alaska) Inc. (“BPXA”) appeals the district court's order granting in part and denying in part BPXA's motion to dismiss a securities fraud action filed against it by Claude A. Reese (“Reese”) on behalf of a class of purchasers of BP p.l.c. shares. On an interlocutory appeal, which was accepted by our court, BPXA asserts that Reese's surviving claims do not state a claim, warranting dismissal under Federal Rule of Civil Procedure 12(b)(6), because he has pled neither an actionable misrepresentation made by or attributable to BPXA nor sufficient evidence of scienter. Reese, in turn, urges that we affirm the district court on the issues certified for interlocutory appeal and that we reverse part of the district court's order granting partial dismissal of his claims, or, alternatively, that we vacate the order granting interlocutory appeal.

We have jurisdiction pursuant to 28 U.S.C. § 1292(b). We hold that BPXA's breach of a contractual promise of specific future conduct, even though the contract is filed in conjunction with U.S. Securities and Exchange Commission (“SEC”) reporting requirements, was not a sufficient foundation for a securities fraud action. We decline Reese's invitation to review other issues that were not certified for interlocutory appeal. In light of our conclusion that breached contractual obligations do not constitute misrepresentations by BPXA that are actionable under the securities laws, we need not reach the issue of scienter.

I

This suit follows BPXA's temporary shut-down of its pipelines and oil production in Prudhoe Bay, Alaska, upon its discovery on August 6, 2006, of a leak in a pipeline located in its Prudhoe Bay Eastern Operating Area. The leak was found shortly after BPXA's discovery, on March 2, 2006, of a large spill of more than 200,000 gallons of oil that had leaked from another pipeline in the Western Operating Area of Prudhoe Bay. Both leaks resulted in substantial part from internal corrosion, caused by bacterial colonies that had formed inside BPXA's pipelines due to the presence of sediment and low-flow conditions. BPXA pled guilty on October 24, 2007, to a single count of violating the Clean Water Act, 33 U.S.C. §§ 1319(c)(1), 1321(b)(3), for the negligent discharge of a harmful quantity of oil to a water of the United States. In its plea agreement, BPXA said that it believed that corrosion of its pipelines was a low probability but admitted that it was aware of sediment buildup before the spills and failed to “pig” ¹ the pipelines or take other necessary action to prevent the leaks.

A

Asserting claims arising under Sections 10(b), 18, and 20(a) of the Securities and Exchange Act as amended, 15 U.S.C. §§ 78b(b), 78r, and 78t(a), and Rule 10b–5 thereunder, 17 C.F.R. § 240.10b–5, Reese brings a class action against BP p.l.c.; its subsidiaries BP America, Inc. and BPXA; and four corporate officers (“Defendants”) on behalf of all persons who acquired BP p.l.c. ordinary shares or American Depository Receipts (“ADRs”) during the period of March 31, 2005 through August 4, 2006 (“class period”).² Reese's consolidated class action complaint ³ alleges that, as a consequence of the leaks and the shutdown of BPXA's operations in Prudhoe Bay, BP p.l.c.'s stock price fell, and investors lost billions of dollars in market capitalization. According to Reese, the August 2006 leak occurred despite BPXA's reassurances to investors that the corrosion leading to the earlier leak was an anomaly and that BPXA was taking necessary precautions to avoid another accident. The suit alleges that Defendants knew about corrosion in the Prudhoe Bay pipelines but did not take corrective action or disclose “the foreseeable risk” that BPXA would need to curtail its oil production as a result. Reese claims to have suffered economic loss and damages as a result of purchasing overpriced shares of BP p.l.c., in reliance on Defendants' misleading statements and omissions about BPXA's Prudhoe Bay operations.

To plead a private damages action for violation of § 10(b) and Rule 10b–5, a plaintiff must allege: (1) a material misrepresentation (or omission), (2) made with scienter, (3) on which plaintiff relied, (4) that proximately caused (5) economic loss, (6) in connection with the purchase or sale of a security. Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 341–42, 125 S.Ct. 1627, 161 L.Ed.2d 577 (2005). Only the first two elements are at issue in this appeal.

(1)

Reese's complaint lists many statements that he alleges are actionable material misrepresentations or omissions attributable to Defendants for the purposes of a securities fraud action. These statements include three remarks allegedly made by defendant Maureen Johnson, BPXA's Senior Vice President of the Greater Prudhoe Bay Unit, about the conditions of BPXA's pipelines during the class period. Reese also alleges that BPXA made false and misleading statements through the public SEC filings of the BP Prudhoe Bay Royalty Trust (“Trust”).

The Trust is a Delaware business trust that was created for the purpose of distributing a Royalty Interest derived from oil production at Prudhoe Bay to purchasers of Trust units, which are traded on the New York Stock Exchange. The Trust was established in 1989 pursuant to the BP Prudhoe Bay Royalty Trust Agreement (“Trust Agreement”), entered into by BPXA and The Standard Oil Company (“Standard Oil”) with trustees The Bank of New York and F. James Hutchinson. The Trust Agreement provides, in relevant part:

Section 4.05—Information to be Supplied by [BPXA]. [BPXA] shall provide to the Trustee on a timely basis upon request such information not known or otherwise available to the Trustee concerning the Royalty Interest ... as shall be necessary to permit the Trustee to comply with respect to the Trust with the reporting obligations of the Trust pursuant to the Securities Exchange Act of 1934, as amended, the requirements of any stock exchange on which the Units are listed and this Agreement and for any other reasonable purpose of the Trust.

* * *

Section 6.01.—General Authority ... [BPXA] and the Trustee are hereby authorized to make and shall be responsible for all filings on behalf of the Trust with the Securities and Exchange Commission [as legally required].

When the Trust was created, BPXA and Standard Oil also executed an Overriding Royalty Conveyance agreement (“ORC Agreement”) to govern the details of the Royalty Interest that the Trust was to distribute. Through the ORC Agreement, BPXA granted Standard Oil the right to receive the Royalty Interest, which included a share of each day's production from Prudhoe Bay. Standard Oil then conveyed that interest to the Trust pursuant to the Trust Agreement.

As part of the ORC Agreement, BPXA contracted to operate Prudhoe Bay according to a “Prudent Operator Standard.” Namely, BPXA agreed to “conduct and carry on the development, exploration, production, maintenance and operation of [Prudhoe Bay] with reasonable and prudent business judgment, in accordance with ... good oil and gas field practices, as a reasonable and prudent operator....”

During each quarter of the class period, the Trust attached to its SEC filings both the ORC Agreement, with its “Prudent Operator Standard” provision, and the Trust Agreement, with its discussion of BPXA's role in the Trust's SEC filings. Relying on the premise that these agreements should be read together, Reese asserts that “the Trust Agreement establishes that the Royalty Trust's filings with the SEC constitute statements made by BPXA” and that the Trust's repeated filing of the ORC Agreement with the SEC “represented to the public” that BPXA was maintaining its contractual obligation to operate in accordance with the Prudent Operator Standard. Reese's complaint further alleges that “at the time of these filings, the statements that BPXA was abiding by the Prudent Operator Standard were materially false and misleading” because Defendants did not disclose, among other things, that the pipelines at Prudhoe Bay were under-inspected, under-maintained, and subject to a severe risk of corrosion-related failure; that BP had been warned that its pipelines were severely corroded; and that BP had not taken corrective action despite warnings.

(2)

As regards scienter, Reese claims that BPXA “had actual knowledge of the misrepresentations and omissions of material fact [alleged], or acted with deliberate disregard for the truth” in failing to ascertain and disclose them, “for the purpose and effect of concealing Defendants' operations and business affairs from the investing public, thereby supporting the artificially inflated price of BP [p.l.c.]'s ordinary shares and ADRs.” As evidence purportedly raising a strong inference of BPXA's state of mind,⁴ Reese's complaint relies on, among other things, BPXA's entry of a guilty plea in a criminal case for its violation of the Clean...