Abraham v. BP Am. Prod. Co.

• Decision Date: 18 July 2012
• Docket Number: 11–2126.,Nos. 11–2113,s. 11–2113
• Citation: 685 F.3d 1196,83 Fed.R.Serv.3d 1
• Parties: Stephen J. ABRAHAM; Michael C. Abraham, Individually and as Trustee of the Mike C. Abraham Trust; D.A. Abraham, LLC; Elizabeth Witten; Christine Mason, as Co–Trustee for the Andrew Witten Trust, Elizabeth Witten Trust and Judith Witten Trust, on behalf of themselves and others similarly situated, Plaintiffs–Appellees/Cross–Appellants, v. BP AMERICA PRODUCTION COMPANY, Defendant–Appellant/Cross–Appellee.
• Court: U.S. Court of Appeals — Tenth Circuit

685 F.3d 1196

83 Fed.R.Serv.3d 1

Stephen J. ABRAHAM; Michael C. Abraham, Individually and as Trustee of the Mike C. Abraham Trust; D.A. Abraham, LLC; Elizabeth Witten; Christine Mason, as Co–Trustee for the Andrew Witten Trust, Elizabeth Witten Trust and Judith Witten Trust, on behalf of themselves and others similarly situated, Plaintiffs–Appellees/Cross–Appellants,

v.BP AMERICA PRODUCTION COMPANY, Defendant–Appellant/Cross–Appellee.

Nos. 11–2113, 11–2126.

United States Court of Appeals,Tenth Circuit.

July 18, 2012.

J.E. Gallegos and Michael Condon, Gallegos Law Firm, P.C., Santa Fe, NM (Thomas A. Graves, McKool Smith, P.C., Dallas, TX, with them on the briefs), for Plaintiffs–Appellees/Cross–Appellants.

Scott S. Barker, Wheeler, Trigg, O'Donnell, LLP, Denver, CO (Marcy G. Glenn and Christopher A. Chrisman, Holland & Hart LLP, Denver, CO, and Michael H. Feldewert, Kristina E. Martinez, and Adam G. Rankin, Holland & Hart LLP, Santa Fe, NM, with him on the briefs), for Defendants–Appellants/Cross–Appellees.

Before KELLY, MURPHY, and HARTZ, Circuit Judges.

KELLY, Circuit Judge.

In this underpayment of royalty case, Defendant–Appellant and Cross–Appellee, BP America Production Company (“BP”), appeals from a judgment based upon a jury verdict in favor of Plaintiffs–Appellees and Cross–Appellants, a certified class of royalty and overriding royalty owners (“the class”). The judgment includes $9,740,973 in damages for failure to pay royalties consistent with the underlying leases and $3,443,372.40 in prejudgment interest (calculated at 15%). 3 R. 800.¹ The district court granted summary judgment in favor of BP on the class's punitive damages claim, 2 R. 494–95, and refused to instruct on an alleged breach of the implied covenant of good faith and fair dealing, 9 R. 1333–35, which is part of the class's cross-appeal. The district court had jurisdiction to hear the case under the Class Action Fairness Act, 28 U.S.C. § 1332(d)(2). We have jurisdiction under 28 U.S.C. § 1291 and we reverse and remand for a new trial.

Background

This appeal is part of the most recent action in an ongoing conflict in New Mexico's San Juan Basin. The class alleged that BP breached two types of royalty contracts, one a “market-value” lease and the other a “same-as-fed” lease. “Market-value” leases are contracts under which royalty owners are entitled to be paid based on the market value of unprocessed gas as it emerges from the ground (“at the well”). “Same-as-fed” leases are contracts under which royalty owners are entitled to be paid on the same basis as the federal government, which means that royalty payments must be calculated using a comprehensive scheme of federal regulations.

As we noted in Elliott Industries L.P. v. BP America Production Co., 407 F.3d 1091 (10th Cir.2005), gas produced from the San Juan Basin contains methane (natural gas) and entrained natural gas liquids (NGLs). In order to market the gas into the interstate pipeline, the NGLs must be removed from the gas stream; producers transport unprocessed gas from the wellhead to a processing facility, where the gas is processed into component parts. In order to determine the market value of the unprocessed gas at the well, producers sell refined natural gas and NGLs at the tailgate of the processing plant (i.e., after processing) to establish a base sales amount, and deduct from that amount costs for transportation, processing, etc. This is called a “netback” or “workback” method, and it is widely accepted as the best means for estimating the market value of gas at the well where no such market exists. If a market exists, however—if entities buy and sell unrefined gas at the wells—evidence of comparable wellhead sales is the best possible evidence for analyzing market value at the well.

In the present case, the class takes issue with two aspects of BP's netback method for market-value-at-the-well contracts: its sales price for NGLs at the tailgate and its processing cost. Specifically, the class complains that BP sells refined NGLs at the tailgate of the processing plant to an affiliate company at a discount (called an “affiliate transfer price”), and that BP, as co-owner of the plant, deducts an inflated processing fee. BP's theory of the case is that there is a market for gas at the well in the San Juan Basin, and that its netback method resulted in royalty payments in line with market values.

Both parties moved for summary judgment. BP argued that, because it could demonstrate that a market existed for gas at the well and because its royalty payments fell within a range of market values, it satisfied its contractual obligations as a matter of law. 1 R. 95–131. The class, meanwhile, argued that, because BP used a netback method to calculate royalty payments and because that netback method was flawed, BP had breached its contractual obligation as a matter of law. 1 R. 167–83. Neither party succeeded, and the breach of contract matter was tried to a jury. As noted, the class also claimed breach of an implied covenant of good faith and fair dealing and sought punitive damages, but the district court rejected both claims. 2 R. 494–95, 9 R. 1333–35. BP also unsuccessfully moved in limine to prohibit the class from introducing evidence regarding the royalty practices of ConocoPhillips (“COP”), a major producer in the San Juan Basin and co-owner of the processing plant with BP. 2 R. 497–506, 3 R. 623–24.

In cross-appeals, both BP and the class argue that they were entitled to judgment as a matter of law. BP also appeals the district court's admission of COP's royalty practices (“the COP evidence”) and the district court's award of prejudgment interest, and the class cross-appeals the district court's rejection of its claims relating to the implied covenant of good faith and fair dealing and punitive damages.

Discussion

We develop additional facts as needed to address each issue decided on appeal.

A. Judgment as a Matter of Law for Market–Value Leases

Judgment as a matter of law is warranted only where the evidence points but one way and is not susceptible to reasonable inferences in favor of the opposing party. Jones v. United Parcel Serv., Inc., 674 F.3d 1187, 1195 (10th Cir.2012); Fed.R.Civ.P. 50(a)(1). Neither party is entitled to judgment as a matter of law based on the evidence in this record. BP presented evidence that there was a market value for unprocessed gas at the well in the San Juan Basin, 9 R. 1093 (BP's expert testified that “there is a market for purchase and sale of unprocessed gas at the well ... in the San Juan Basin”), but the class presented evidence that no such market exists, id. at 365–68 (class's expert testified that she was not aware of any sales of unprocessed gas in the San Juan Basin), 392–94 (same expert reiterated that “sales” identified by BP's expert were not sales “at the well,” but rather were title transfers with corresponding payments calculated using a netback method, and that BP's methodology for demonstrating a market at the well was flawed).

Similarly, the class presented evidence that BP's netback method included an unreasonable processing cost, id. at 568–70 (class's expert testified that BP incurred a cost of roughly 2.7 cents/gallon to process gas between January 2007 and January 2010 but deducted roughly 22.9 cents/gallon as a processing cost during that same period), 654 (same expert explained that BP continued to charge a 25% NGLs processing fee after at least one other plant switched to a 14% NGLs processing fee), but BP presented evidence that its processing fee was established based on market norms, id. at 982–85 (BP employee explained that she conducted a market analysis before suggesting that BP charge a 25% NGLs processing fee starting January 1, 2007). The class also presented evidence that BP inappropriately sold NGLs at a discounted price to a BP affiliate company, id. at 397–98 (class's expert testified that BP should be using non-affiliate sales prices, rather than affiliate transfer prices, and shorted the class by the difference between the affiliate transfer price and a non-affiliate sales price), 561 (second expert testified that a third-party, arm's-length sale price for NGLs would be “quite a bit higher than” BP's affiliate transfer price), 565 (second expert testified that the average difference between a third-party sale price and BP's affiliate transfer price was 3.9 cents/gallon over a 48–month period), but BP challenged that testimony on cross-examination, id. at 604 (class's expert admitted that he had not factored in a transportation cost between the San Juan Basin, where BP sold NGLs at an affiliate transfer price, and a location near the southeast corner of New Mexico, where the expert analyzed third-party sales prices). Disputed issues of material fact on both issues preclude judgment as a matter of law in favor of either party. Jones, 674 F.3d at 1195.

B. Judgment as a Matter of Law for Same–as–Fed Leases

BP moved for judgment as a matter of law at the close of the class's evidence on its same-as-fed breach of contract claim. 9 R. 965–68. Specifically, BP argued that the class had not presented any evidence that BP paid the class any differently than it paid the federal government, or that BP paid the federal government incorrectly. Id. The district court denied the motion, finding BP's use of affiliate transfer prices in paying the federal government might give rise to a valid claim for same-as-fed leases. Id. at 968–69.

The class did not offer any evidence to support its same-as-fed claim. Based on the evidence presented at trial, there was no way for a jury to determine that BP underpaid its same-as-fed royalty holders, and the issue never should have gone to the jury. BP is entitled to judgment as a matter of law on the class's same-as-fed breach of contract claims. Henry v. Storey, 658 F.3d 1235, 1237–38 (10th Cir.2011) (judgment as a matter of law is appropriate if, after a...