Bp Am. Prod. Co. v. Patterson

Decision Date31 October 2011
Docket NumberNo. 10SC214.,10SC214.
Citation263 P.3d 103
PartiesBP AMERICA PRODUCTION COMPANY, f/k/a Amoco Production Company, Petitionerv.David PATTERSON, Philip McCoy, William Schaefer, and Beverly Schaefer, Respondents.
CourtColorado Supreme Court

OPINION TEXT STARTS HERE

Wheeler Trigg O'Donnell LLP, Scott S. Barker, Denver, Colorado, Holland & Hart LLP, Rachel A. Yates, Greenwood Village, Colorado, Attorneys for Petitioner.Law Offices of George A. Barton, P.C., George A. Barton, Kansas City, MO, Charles Carpenter, Denver, Colorado, Attorneys for Respondents.Justice MARTINEZ delivered the Opinion of the Court.

In December 2003, Plaintiffs filed a class action, alleging that BP America Production Company (BP), formerly known as Amoco Production Company (Amoco), improperly deducted postproduction costs from royalty payments due between January 1, 1986 and December 1, 1997 (the “Class Time Period”). To toll the applicable six-year statute of limitations, Plaintiffs claimed that BP fraudulently concealed the material facts which gave rise to their claims.

The trial court entered an order certifying the class, and the court of appeals affirmed in Patterson v. BP America Production Co., 240 P.3d 456 (Colo.App.2010). BP then sought certiorari review in this court. BP challenges two aspects of the order certifying the class. First, BP argues that proof of fraudulent concealment is inherently individualized and, therefore, is not amenable to resolution on a class basis. Accordingly, BP urges us to conclude that the trial court abused its discretion in determining, for the purposes of C.R.C.P. 23(b)(3), that common issues predominated over individual issues. Alternatively, BP argues that the Class Time Period is overly broad and, as a result, includes members who had no costs deducted under the netback methodology. BP thus argues that the trial court erroneously certified a class that encompasses individuals who suffered no damages. We do not agree with either argument and thus affirm the court of appeals' decision holding that ignorance and reliance may be inferred from circumstantial evidence common to the class and that the trial court did not abuse its discretion in certifying the class.

I. Facts and Procedure

In the early 1970s, Plaintiffs entered into lease agreements with Amoco that obligated Amoco to pay them royalties for natural gas extracted from their wells located in either Adams or Weld Counties. Each of the Plaintiffs also signed Oil and Gas Division Orders and Oil and Gas Transfer Orders.

At the time most of the Plaintiffs signed royalty agreements, gas prices were federally regulated. Accordingly, Plaintiffs were paid either the maximum lawful price or the amount set forth in the agreements. None of the royalty agreements expressly permitted Amoco to deduct a proportionate share of the costs incurred to make the gas marketable.

On December 19, 2003, Plaintiffs filed a complaint alleging that BP, the successor in interest to Amoco, underpaid royalties under the leases between January 1986 and December 1997 by using a netback methodology as opposed to the percentage of sale method provided for in the leases. Plaintiffs alleged that in the 1980s, as the natural gas market was being deregulated, BP gradually started using a netback methodology to calculate royalty payments. Under the netback methodology, BP deducted a proportionate share of the post-production costs incurred to make the gas marketable, such as the costs of gathering, dehydration, compression, transportation, fuel, treatment, and processing. Plaintiffs claimed, however, that BP did not disclose its use of the netback methodology. Instead, Plaintiffs claimed that BP consistently and uniformly represented to Plaintiffs that royalty payments were being calculated based on the gross volume of natural gas sold multiplied by the actual price.

In support of these claims, Plaintiffs presented substantial evidence regarding BP's communications with class members. For example, in monthly Royalty Reports sent to Plaintiffs with their royalty checks, BP represented that royalties were being paid based on the total value received by BP, less deductions only for production taxes. Similarly, in Royalty Brochures periodically sent to Plaintiffs, BP failed to disclose that it was deducting post-production costs. Plaintiffs also presented evidence that BP appointed a committee in 1990 to review the format of the Royalty Reports provided to Plaintiffs each month. The committee unanimously recommended that BP disclose the fact that it was deducting gathering, compression, transportation, and other marketing costs from Plaintiffs' monthly royalty payments. The committee acknowledged, however, that such full disclosure would increase the risk of litigation, and in particular, claims against BP to limit its right to deduct costs. BP's management ultimately rejected the proposal and refused to disclose BP's use of the netback methodology. Plaintiffs alleged that they remained unaware of BP's deductions until they were sued in 2003 by Kerr–McGee. 1 Two months later, Plaintiffs filed the present action and moved for class certification.

Before the trial court could rule on the motion for class certification, BP moved for partial summary judgment, arguing that many of Plaintiffs' claims were barred by the six-year statute of limitations. The trial court granted BP's motion and held that Plaintiffs' claims were time-barred. The court of appeals reversed in Patterson v. BP America Production Co., on the grounds that Plaintiffs' claims did not accrue until the date they discovered or should have discovered that BP breached the royalty agreements. 159 P.3d 634 (Colo.App.2006), rev'd, 185 P.3d 811 (Colo.2008). The court of appeals also rejected BP's argument that the Division and Transfer Orders, signed by each Plaintiff, provided them with actual notice of BP's use of the netback methodology. Id. at 640. Finally, the court of appeals held that there was a genuine issue of material fact regarding Plaintiffs' fraudulent concealment claim because Plaintiffs had presented “substantial evidence” in support of their claim that BP fraudulently concealed its use of the netback methodology. Id. at 641.

In BP America Production Co. v. Patterson, we reversed the court of appeals and held that Plaintiffs' claims accrued on the date their royalties became due. 185 P.3d 811, 815 (Colo.2008). However, we left untouched the court of appeals' ruling that an issue of fact remained regarding whether the statute of limitations had been equitably tolled by BP's allegedly fraudulent concealment of its use of the netback methodology. Id.

On remand, Plaintiffs filed a renewed motion for class certification. The trial court held an evidentiary hearing on the motion. The court found that Plaintiffs had satisfied all of the requirements of C.R.C.P. 23(a) and (b)(3) and issued an order certifying the class.2 First, the court determined that the class was defined with sufficient precision to ascertain whether or not a particular individual is a member of the class. In support of this determination, the trial court found that Plaintiffs would be able to submit a comprehensive damages analysis for each Plaintiff for the entire Class Time Period from January 1986 to December 1997.

The trial court also determined that common issues predominated over individual issues for the purposes of C.R.C.P. 23(b)(3). Central to this determination was the disputed issue of whether Plaintiffs could establish a class-wide theory of proving the elements of their fraudulent concealment claim. BP conceded that three elements of Plaintiffs' fraudulent concealment claim—BP's concealment of the improper post-production cost deductions, BP's knowledge that such facts were being concealed from the Plaintiffs, and BP's intention that the concealment be acted upon by the Plaintiffs—could be proved with class-wide evidence. BP, however, argued that the trial court would have to analyze the individual conduct of each class member to determine whether Plaintiffs had established three elements to toll the statute of limitations, namely, that each Plaintiff was ignorant of BP's concealment of its use of the netback methodology, that each Plaintiff's actions in reliance on the concealment resulted in damages, and that each Plaintiff was unable to discover the concealment. In response, Plaintiffs argued that they could prove these elements with circumstantial evidence common to the class.

The trial court explained that it is well-established in Colorado that the ignorance and reliance elements of fraudulent concealment may be inferred from circumstantial evidence. The trial court further noted that other jurisdictions also have held that the reliance element of fraudulent concealment may be inferred where there is sufficient evidence to demonstrate improper concealment of a material fact. The trial court then found that a jury could reasonably infer from the common evidence in the case that the Plaintiffs were ignorant of BP's use of the netback methodology and relied on BP's concealment of its use of that methodology.

The trial court found unpersuasive BP's argument that there would be individual issues pertaining to Plaintiffs' ignorance of BP's use of the netback methodology and reliance on BP's concealment of the netback methodology. BP had presented various individual correspondences where certain Plaintiffs contested BP's use of the netback methodology. The trial court, however, explained that these correspondences merely demonstrated that Plaintiffs disagreed with BP's proposal to use the netback methodology, not that Plaintiffs actually knew that BP was using that methodology. In fact, instead of communicating its use of the netback methodology to Plaintiffs, the trial court found that BP never disclosed its deductions of post-production costs in common communications with Plaintiffs, such as the Royalty Reports and Royalty...

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