Davis v. Devon Energy Corp.

• Decision Date: 15 September 2009
• Docket Number: No. 30,957.,No. 30,956.,No. 30,958.,30,956.,30,957.,30,958.
• Citation: 2009 NMSC 048,218 P.3d 75
• Parties: F. Ferrell DAVIS, Plaintiff-Petitioner and Cross-Respondent, v. DEVON ENERGY CORPORATION, et al., Defendants-Respondents and Cross-Petitioners. Phillis Ideal and Collins Partners, Ltd., a Texas limited partnership, Plaintiffs-Petitioners and Cross-Respondents, v. BP America Production Company, Defendant-Respondent and Cross-Petitioner. Smith Family, L.L.C., for itself and all others similarly situated, Plaintiff-Petitioner and Cross-Respondent, v. Conocophillips Company, a Delaware corporation, Defendant-Respondent and Cross-Petitioner.
• Court: New Mexico Supreme Court

218 P.3d 75

2009 NMSC 048

F. Ferrell DAVIS, Plaintiff-Petitioner and Cross-Respondent, v. DEVON ENERGY CORPORATION, et al., Defendants-Respondents and Cross-Petitioners.

Phillis Ideal and Collins Partners, Ltd., a Texas limited partnership, Plaintiffs-Petitioners and Cross-Respondents, v. BP America Production Company, Defendant-Respondent and Cross-Petitioner.

Smith Family, L.L.C., for itself and all others similarly situated, Plaintiff-Petitioner and Cross-Respondent, v. Conocophillips Company, a Delaware corporation, Defendant-Respondent and Cross-Petitioner.

No. 30,956.

No. 30,957.

No. 30,958.

Supreme Court of New Mexico.

September 15, 2009.

Peifer, Hanson & Mullins, P.A., Charles R. Peifer, Robert E. Hanson, Matthew R. Hoyt, Eaves & Mendenhall, P.A., John M. Eaves, Sutin, Thayer & Browne, P.C., Derek V. Larson, Albuquerque, NM, Mary E. Walta, P.C., Mary E. Walta, Santa Fe, NM, for Petitioners and Cross-Respondents.

Montgomery & Andrews, P.A., Sarah M. Singleton, Sharon T. Shaheen, Holland & Hart, L.L.P., Michael H. Feldewert, Mark F. Sheridan, Michael O. Campbell, Robert J. Sutphin, Jr., Kristina E. Martinez, Santa Fe, NM, Holland & Hart, L.L.P., Scott S. Barker, Denver, CO, for Respondents and Cross-Petitioners.

OPINION

CHÁVEZ, Chief Justice.

{1} In these consolidated class actions, Plaintiff royalty owners allege on behalf of themselves and those similarly situated that Defendant gas producers have improperly deducted from Plaintiffs' royalty payments the costs of making coalbed methane (CBM) gas "marketable." Plaintiffs claim that despite the differing language in the various royalty agreements, Defendants in every case have breached an implied covenant prohibiting Defendants from deducting the costs of gathering, treating, and otherwise making the CBM gas marketable once it has been produced.

{2} Presented with Plaintiffs' motions to certify these classes, the district court concluded that Defendants' consistent treatment of class members by uniformly deducting certain costs from their royalties was sufficient to certify each class for declaratory and injunctive relief under Rule 1-023(B)(2) NMRA. However, the district court denied certification for monetary damages under Rule 1-023(B)(3), concluding that individualized inquiries into the many and various royalty agreements, as required by Continental Potash, Inc. v. Freeport-McMoran, Inc., 115 N.M. 690, 858 P.2d 66 (1993) and Mark V, Inc. v. Mellekas, 114 N.M. 778, 845 P.2d 1232 (1993), predominated over the common issues of law and fact. We affirm the district court's certification of these three classes under Rule 1-023(B)(2). However, we conclude that the district court's reliance on Continental Potash and Mark V as necessary to its determination of whether the implied covenant to make CBM gas marketable may be implied in each agreement was misplaced. We therefore reverse the district court's denial of class certification under Rule 1-023(B)(3) and remand to the district court.

I. CLASS ACTION CONTEXT

{3} We granted this interlocutory appeal to review the district court's certification orders under Rule 1-023(B)(2) and (B)(3).¹ These rules provide, in pertinent part:

B. Class actions maintainable. An action may be maintained as a class action if the prerequisites of Paragraph A of this rule are satisfied, and in addition:

. . .

(2) the party opposing the class has acted or refused to act on grounds generally applicable to the class, thereby making appropriate final injunctive relief or corresponding declaratory relief with respect to the class as a whole; or

(3) the court finds that the questions of law or fact common to the members of the class predominate over any questions affecting only individual members, and that a class action is superior to other available methods for the fair and efficient adjudication of the controversy.

Our class action certification rules mirror the federal rules. See Ferrell v. Allstate Ins. Co., 2008-NMSC-042, ¶ 7, 144 N.M. 405, 188 P.3d 1156 (noting that "we may seek guidance from federal law applying the rule"). As the rule's text makes clear, one significant difference between (B)(2) and (B)(3) actions is that (B)(2) classes, unlike those certified under (B)(3), "have no requirement that the common questions predominate over individual questions, or that the class action be superior to other available methods for the fair and efficient adjudication of the controversy." 2 Alba Conte & Herbert B. Newberg, Newberg on Class Actions § 4:11, at 62 (4th ed.2002). Instead, (B)(2) certification requires only that the defendant "has acted or refused to act on grounds generally applicable to the class," Rule 1-023(B)(2), such that "final relief of an injunctive nature or of a corresponding declaratory nature[] settl[es] the legality of the behavior with respect to the class as a whole[.]" Fed. R.Civ.P. 23 advisory committee note to subdivision (b)(2). The predominancy and superiority requirements "are applicable only for Rule 23(b)(3) class actions." Conte & Newberg, supra § 4:11 at 62.

{4} For the purpose of our review, we accept as true all well-pled factual allegations from Plaintiffs' complaints. See Armijo v. Wal-Mart Stores, Inc., 2007-NMCA-120, ¶ 23, 142 N.M. 557, 168 P.3d 129 (at the certification stage, "the court accept[s] Plaintiffs' factual allegations about the merits as true and decline[s] to examine evidence proffered by Defendants that dispute[s] such allegations"). Class certification is not the appropriate time to decide the merits of the case, Ferrell, 2008-NMSC-042, ¶ 2 n. 1, because "`[i]n determining the propriety of a class action, the question is not whether the plaintiff or plaintiffs have stated a cause of action or will prevail on the merits, but rather whether the requirements of Rule 23 are met.'" Eisen v. Carlisle & Jacquelin, 417 U.S. 156, 178, 94 S.Ct. 2140, 40 L.Ed.2d 732 (1974) (quoting Miller v. Mackey Int'l, 452 F.2d 424, 427 (5th Cir.1971)); see also Ferrell, 2008-NMSC-042, ¶ 7 (noting that our "current class action rule mirrors the federal rule upon which it is based. Thus, we may seek guidance from federal law applying the rule." (citations omitted)). These principles do not mean that the courts should "blindly accept any conclusory allegations which parrot Rule [1-0]23 [NMRA] requirements." Armijo, 2007-NMCA-120, ¶ 23 (internal quotation marks and citation omitted). Rather, the court should "engage in a rigorous analysis to determine whether Plaintiffs satisfied the requirements of Rule 1-023." Id.

II. BACKGROUND

{5} Defendants are energy companies that either own or have owned working interests in various leases, units, and wells that produce CBM gas from the Fruitland coal formation of New Mexico's San Juan Basin. Plaintiffs seek to represent classes of hundreds of individuals and entities that own thousands of royalty interests and overriding royalty interests (collectively, "royalties") in Defendants' CBM gas production. Plaintiffs allege that the CBM gas produced from the Fruitland formation cannot be sold until it has been gathered, compressed, dehydrated, and otherwise treated to remove impurities such as carbon dioxide and water. Whether those costs may be deducted from Plaintiffs' royalties is the focus of the parties' dispute.

{6} Plaintiffs offer a number of theories purporting to grant them relief. Each claim, however, is founded upon the allegation that Defendants have breached the royalty agreements by deducting from their royalty payments the costs of making the CBM gas "marketable." They contend that under the implied covenant to market CBM gas, recognized by this Court in Darr v. Eldridge, 66 N.M. 260, 263, 346 P.2d 1041, 1044 (1959), Defendants have an implied duty to make CBM gas a "marketable product" such that the costs of gathering, compressing, dehydrating, and otherwise treating the CBM gas before it is sold in the interstate market may not be passed on to the royalty owners. This new covenant has been called the "first-marketable product rule," see, e.g., Rogers v. Westerman Farm Co., 29 P.3d 887, 904 (Colo. 2001) (en banc), as well as the "marketable condition rule." See, e.g., Devon Energy Corp. v. Kempthorne, 551 F.3d 1030, 1036-37 (D.C.Cir.2008). Plaintiffs' requested relief includes a declaratory judgment, a permanent injunction, and money damages. Defendants deny any wrongdoing.

{7} The district court consolidated these three cases for the purposes of discovery and class certification. In each case, Plaintiffs moved to certify a class of royalty owners under both Rule 1-023(B)(2) and (B)(3), and Defendants opposed certification. At the heart of the parties' dispute was whether the many royalty instruments are sufficiently similar in relevant respects to merit class certification. Defendants argued that even if the marketable condition rule applies in New Mexico, each owner's contract must be independently reviewed, along with extrinsic evidence relevant to each party's intention, to determine if that covenant appears in each agreement. Therefore, Defendants contended that because the royalty language in many contracts is different, litigating these claims on a class-wide basis would be unmanageable under any provision of Rule 1-023. Plaintiffs argued that the agreements are sufficiently similar to warrant class certification because none expressly permitted the deductions of the costs necessary to make the CBM gas "marketable." Plaintiffs also argued that Defendants' uniform treatment of Plaintiffs in deducting those costs is sufficient to certify the class.

{8} In three similar memorandum opinions and corresponding orders, the district court found that in all three cases, there exist variations in the language of the royalty instruments that could affect whether the costs of removing the impurities could be deducted from Plaintiffs' royalties. However, the district court also found that despite these differences in the written...