Anderson Living Trust v. WPX Energy Prod., LLC

• Decision Date: 16 May 2014
• Docket Number: No. CIV 12–0040 JB/KBM.,CIV 12–0040 JB/KBM.
• Citation: 27 F.Supp.3d 1188
• Parties: The ANDERSON LIVING TRUST f/k/a The James H. Anderson Living Trust; The Prichett Living Trust; Cynthia W. Sadler and Robert Westfall, Plaintiffs, v. WPX ENERGY PRODUCTION, LLC f/k/a WPX Energy San Juan, LLC; Williams Production Company, LLC and WPX Energy Rocky Mountain, LLC f/k/a Williams Production RMT Company, LLC, Defendants.
• Court: U.S. District Court — District of New Mexico

27 F.Supp.3d 1188

The ANDERSON LIVING TRUST f/k/a The James H. Anderson Living Trust; The Prichett Living Trust; Cynthia W. Sadler and Robert Westfall, Plaintiffs

v.WPX ENERGY PRODUCTION, LLC f/k/a WPX Energy San Juan, LLC; Williams Production Company, LLC and WPX Energy Rocky Mountain, LLC f/k/a Williams Production RMT Company, LLC, Defendants.

No. CIV 12–0040 JB/KBM.

United States District Court, D. New Mexico.

Filed May 16, 2014.

Stan Koop, Stan Koop, PLLC, Bradley D. Brickell, Brickell & Associates, P.C., Norman, OK, Stephen R. McNamara, Brian Inbody, McNamara, Inbody & Parrish, PLLC, Tulsa, OK, Karen Aubrey, Law Office of Karen Aubrey, Santa Fe, NM, Brian K. Branch, The Law Office of Brian K. Branch, Turner W. Branch, Cynthia Zedalis, Branch Law Firm, Albuquerque, NM, for Plaintiffs.

Sarah Gillett, Dustin L. Perry, Hall Estill Hardwick P.C., Tulsa, OK, Christopher A. Chrisman, Holland & Hart LLP, Denver, CO, Mark F. Sheridan, Bradford C. Berge, Robert J. Sutphin, John C. Anderson, Holland & Hart LLP, Santa Fe, NM, for Defendants.

MEMORANDUM OPINION AND ORDER

JAMES O. BROWNING, District Judge.

THIS MATTER comes before the Court on the Defendants' Motion to Dismiss Claims in Plaintiffs' Fourth Amended Complaint, filed October 18, 2013 (Doc. 145)(“MTD”). The Court held a hearing on February 21, 2014. The primary issues are: (i) whether the Court should convert the MTD into a motion for summary judgment, and whether it should consider check stubs attached by the Defendants or deposition transcripts and miscellaneous exhibits attached by the Plaintiffs in ruling on the MTD; (ii) whether the Court should dismiss the first, second, fifth, eleventh, and twelfth claims in the Plaintiffs' Fourth Amended Complaint for Underpayment of Oil and Gas Royalties, filed September 27, 2013 (Doc. 129)(“FAC”), pursuant to New Mexico's statutes of limitations, to the extent that those claims cover conduct that occurred more than four to six years before the lawsuit's filing, i.e., should the Court cut off damages incurred before four to six years ago on those claims; and (iii) whether the Court should dismiss Plaintiffs' twelfth claim, breach of the implied covenant to market, on the ground that it is not recognized under New Mexico law. The Court will not convert the MTD into a motion for summary judgment, but will consider the check stubs, because they are documents referenced in the FAC, they are central to the Plaintiffs claims, and the parties do no dispute their authenticity; it will not consider the Plaintiffs' deposition transcripts and exhibits, because they were produced in litigation. The Court will not dismiss any claim, in whole or in part, on limitations grounds, because the Plaintiffs have alleged facts that might reasonably establish that the discovery rule delayed the accrual of the statutes of limitations. The Court will, however, dismiss the twelfth cause of action, because the United States Court of Appeals for the Tenth Circuit has held that the theory underpinning the claim—the marketable condition rule—has no basis in New Mexico law. The Court will also dismiss the ninth cause of action without prejudice for failure to plead with particularity pursuant to the heightened pleading requirement of rule 9(b) of the Federal Rules of Civil Procedure ; it will also dismiss the tenth cause of action with prejudice, because it is not an independent claim upon which relief can be granted, but rather an attempt to recite facts to establish two tolling doctrines.

FACTUAL BACKGROUND

This matter arises from a dispute over the royalty payments that the Defendants, producers of oil and gas in New Mexico and Colorado, and working interest holders on oil and gas leases belonging to the Plaintiffs, owe to the Plaintiffs, royalty interest holders on the leases.

The San Juan Basin, one of the largest natural gas producing fields located in northwest New Mexico and southwest Colorado, was originally developed in the early 1950's by El Paso Natural Gas Company.... The natural gas produced in the San Juan Basin is conventional gas which contains methane (natural gas) and entrained natural gas liquids (“NGLs”), such as ethane and butane. In order to make the gas safe to enter the interstate pipeline, the NGLs must be removed from the gas stream.

Elliott Indus. LP v. BP Am. Prod. Co., 407 F.3d 1091, 1099 (10th Cir.2005). As this matter comes before the Court on a Motion to Dismiss, the Court will assume that all facts in the FAC are true. See Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) (stating that, to survive a motion to dismiss, “[f]actual allegations must be enough to raise a right to relief above the speculative level ... on the assumption that all the allegations in the complaint are true (even if doubtful in fact)”).

The Plaintiffs in this matter all own interests in hydrocarbons derived from wells in the States of New Mexico and Colorado. See FAC ¶¶ 1–7, at 2–3. The Plaintiffs reside in the southwestern part of the United States of America, specifically, in the states of Utah (Anderson Living Trust), Colorado (Pritchett Living Trust), Texas (Sadler), and New Mexico (Scanlon Living Trust and Robert Westfall). See FAC ¶¶ 1–7, at 2–3. Defendants WPX Energy Production, LLC, f/k/a WPX Energy San Juan LLC, Williams Production Company, LLC, and WPX Energy Rocky Mountain, LLC, f/k/a Williams Production RMT Company, LLC (“WPX”) are producers and vendors of conventional natural gas, originating from the Fruitland coal formation; of coalbed methane (“CBM”) natural gas; and of other petroleum hydrocarbons from wells in which the Defendants own lease-hold interests.¹ See FAC ¶ 9, at 4. “Plaintiffs each own a non-cost bearing interest in the revenues derived from the production and sale of hydrocarbons pursuant to the terms of oil and gas leases owned or partially owned by” the Defendants in the “subject wells,” save for Scanlon Living Trust, which owns no interest in WPX lease-hold interests. FAC ¶ 10, at 4. The “subject wells” are “all wells in the States of New Mexico and Colorado in which [the Defendants own] all or a portion of the oil and gas leases under which non-cost bearing, royalty and/or overriding royalty payments are/were owed, and which produce or produced hydrocarbons.” FAC ¶ 11, at 4. The Plaintiffs bring this action as a class against the Defendants on behalf of all owners of “non-cost bearing” royalty interests in the subject wells.² FAC ¶ 13, at 6.

The Plaintiffs, or their predecessors, acquired their interests in the hydrocarbon revenues from the subject wells through executing oil-and-gas mining leases or permits with the Defendants. See FAC ¶ 11, at 4. All the leases were executed between October 17, 1945, and October 6, 1948, see FAC ¶ 26, at 10–12, meaning that the most recent lease was executed over sixty-three years before the Plaintiffs filed this lawsuit, see First Amended Complaint for Underpayment of Oil and Gas Royalties, filed in state court on December 5, 2011, filed in federal court on January 12, 2012 (Doc. 1–1). Under the leases, the Defendants owe the Plaintiffs a “duty to pay royalties on all hydrocarbons” for the value or price which the Defendants do or should receive from the “arm's length” sale of the hydrocarbons. FAC ¶ 12, at 5. The leases give the Plaintiffs a right to royalties in the “drip condensate,” a liquid product which is recovered during the Defendants' oil and gas mining processes.³ FAC ¶ 28, at 12–13.

The leases do not provide for the Defendants to calculate the Plaintiffs' royalty payments using the average sale price of a mixture of hydrocarbons from wells in which the Plaintiffs own a royalty interest and other wells in which the Plaintiffs do not own royalty interests. See FAC ¶ 12, at 5–6.

The Defendants have not credited the Plaintiffs with the revenue derived from the drip condensate. See FAC ¶ 29, at 13. Currently, the Defendants calculate the Plaintiffs' royalty interests on the sale price received from the Defendants' affiliated intermediaries for hydrocarbons from wells in which the Plaintiffs own royalty interests, mixed with hydrocarbons from other wells in which the Plaintiffs do not own royalty interests. See FAC ¶¶ 33–34, at 14. The Defendants' affiliated intermediaries sell the hydrocarbons at a significant profit, a profit which the Defendants do not pass on to the Plaintiffs. See FAC ¶ 33, at 14. Additionally, the Defendants' royalty payments to the Plaintiffs have not been consistent. On “numerous instances,” the Defendants have waited longer than forty-five or even ninety days after receiving revenue from the Plaintiffs' shares to pay the Plaintiffs their royalty interest. FAC ¶¶ 57–60, at 20–21.

The Defendants have not always disclosed to the Plaintiffs the gross volume of gas produced from the Plaintiffs' wells, the gross revenue or value the Defendants obtain from the gross production of gas, and the extent of costs that are deducted from the Plaintiffs' royalty payments. See FAC ¶ 38, at 15–16. One such cost that is deducted from the Plaintiffs' royalty payments is the cost of rendering marketable the natural gas and other hydrocarbons taken from the subject wells. See FAC ¶ 51, at 18.

PROCEDURAL BACKGROUND

The Plaintiffs assert nine causes of action that are either new to the FAC or have survived dismissal, see Memorandum Opinion, filed June 28, 2013 (Doc. 108) (“Memo. Opinion”), and are carried over from previous iterations of the complaint: (i) the first cause of action, “failure to pay royalty on volumes of hydrocarbons, including drip condensate,” FAC ¶¶ 22–30, at 10–13 (title case omitted); (ii) the second cause of action, “breach of the duty of good faith and fair dealing,” FAC ¶¶ 31–42, at 14–17 (title case omitted); (iii) the fourth cause of action, “violation of the New Mexico Oil and Gas Proceeds Payment Act” N.M. Stat. Ann. §§ 70–10–1 to –6 (“NMOGPPA”), a pre-existing claim, and “interest due under Colorado law,” a...