Diehl v. SWN Prod. Co.
| Decision Date | 03 April 2020 |
| Docket Number | CIVIL ACTION NO. 3:19-CV-1303 |
| Parties | ROBERT W. DIEHL, JR., and MELANIE L. DIEHL, Plaintiffs, v. SWN PRODUCTION COMPANY, LLC, Defendant. |
| Court | U.S. District Court — Middle District of Pennsylvania |
(JUDGE MARIANI)
Here the Court considers Defendant SWN Production Company, LLC's Motion to Dismiss the Amended Complaint (Doc. 9). The above-captioned matter is a diversity action brought by Robert W. Diehl, Jr., and Melanie Diehl ("Plaintiffs") against SWN Production Company, LLC ("SWN" "Defendant") regarding an oil and gas lease between the parties. As set out in the Amended Complaint (Doc. 8), Plaintiffs assert three counts based on "Breach of Contract - Implied Covenant to Market Hydrocarbons" (Counts I-III), a count for "Breach of Contract - Implied Covenant to Develop Hydrocarbons" (Count IV), a count for "Declaratory Relief" (Count V), and a count for "Quiet Title" (Count VI). (Doc. 8 at 7-21.) With the pending motion, Defendant seeks dismissal of the entire Amended Complaint with prejudice pursuant to Federal Rule of Civil Procedure 12(b)(6). (Doc. 9 at 1; Doc. 9-2 at 1.) For the reasons that follow, the Court will deny Defendant's motion in part and grant it in part.
Plaintiffs own approximately 160.94 acres in Oakland Township, Susquehanna County, Pennsylvania ("Subject Property") which was leased to Cabot Oil & Gas Corporation ("Cabot") on October 25, 2007. (Doc. 8 ¶¶ 3-4.) The Lease was assigned from Cabot to Southwestern Energy Production Company ("Southwestern") on November 17, 2011. (Doc. 8 ¶ 6.) Southwestern converted to SWN and is the sole lessee and working interest holder in the Lease. (Doc. 8 ¶¶ 8-9.)
The Lease had a primary term of five years, with an option to extend for five additional years by paying $100.00 per acre, and remains in force "as long thereafter as oil or gas is produced, or considered produced under the terms of this lease, in paying quantities from the premises or from land pooled therewith[.]"1 (Doc. 8-1, Am. Compl., Ex.A, ¶¶ 2, 13.) Should production occur, SPC must pay Plaintiffs royalties based on the "amount realized from the sale of the gas at the well," and SPC is expressly permitted to deduct post-production expenses incurred downstream from the wellhead.2 (Id. ¶ 3.) In addition to actual production, oil or gas is "considered produced" if the lessee pays a "shut-in royalty" of $1.00/acre/year. (Id. ¶ 4.) Further, should lessee fail to make a required payment, the Lease does not terminate; the lessor simply is entitled to a "correcting payment or tender with interest at the rate of eight (8%) annum[.]" (Id.)
On September 11, 2012, Southwestern exercised its option to extend the Lease. (Doc. 8 ¶ 7.) Accordingly, the Lease's primary term ended on October 25, 2017. (Doc. 8-3.) Portions of the Subject Property were placed into the Walker Diehl North Gas Unit and the Walker Diehl South Gas Unit (collectively, the "Units"). (Docs. 8-4, 8-5.) The Unitsencompass 1,376.097 acres and each unit has one operational well producing natural gas from the Marcellus Shale formation. (Doc. 8 ¶¶ 13-15.)
Plaintiffs' factual recitation also contains the following averments:
SWN sells gas from the Units where it enters interstate pipelines and not at the wellhead. [ECF Doc. 8-6]. The prices SWN receives have been less than published index prices on the leg of the Tennessee Gas Pipeline which is believed to traverse through Susquehanna County - the location of the nearest interstate pipeline to the Subject Property. [ECF Doc. 8 at ¶ 32]. It is believed that SWN sells to an affiliate at the interstate pipeline rather than attempt to market the gas itself to other buyers for greater value. [ECF Doc. 8 at ¶ 54]. In addition to depressed pricing, the Diehls' royalties are significantly reduced by deductions taken by SWN. [ECF Doc. 8-8]. Given the low prices and high costs, it is averred that the Lease is not producing hydrocarbons in paying quantities. [ECF Doc. 8 at ¶ 98].
(Doc. 13 at 8.)
A complaint must be dismissed under Federal Rule of Civil Procedure 12(b)(6) if it does not allege "enough facts to state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S. Ct. 1955, 167 L. Ed. 2d 929 (2007). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S. Ct. 1937, 173 L. Ed. 2d 868 (2009).
"While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, a plaintiff's obligation to provide the grounds of his entitlement to relief requires more than labels and conclusions, and a formulaic recitation of theelements of a cause of action will not do." Twombly, 550 U.S. at 555 (internal citations, alterations, and quotations marks omitted). A court "take[s] as true all the factual allegations in the Complaint and the reasonable inferences that can be drawn from those facts, but . . . disregard[s] legal conclusions and threadbare recitals of the elements of a cause of action, supported by mere conclusory statements." Ethypharm S.A. France v. Abbott Labs., 707 F.3d 223, 231 n.14 (3d Cir. 2013) (internal citation, alteration, and quotation marks omitted). Thus, "the presumption of truth attaches only to those allegations for which there is sufficient 'factual matter' to render them 'plausible on [their] face.'" Schuchardt v. President of the U.S., 839 F.3d 336, 347 (3d Cir. 2016) (alteration in original) (quoting Iqbal, 556 U.S. at 679). "Conclusory assertions of fact and legal conclusions are not entitled to the same presumption." Id.
"Although the plausibility standard 'does not impose a probability requirement,' it does require a pleading to show 'more than a sheer possibility that a defendant has acted unlawfully.'" Connelly v. Lane Constr. Corp., 809 F.3d 780, 786 (3d Cir. 2016) (internal citation omitted) (first quoting Twombly, 550 U.S. at 556; then quoting Iqbal, 556 U.S. at 678). "The plausibility determination is 'a context-specific task that requires the reviewing court to draw on its judicial experience and common sense.'" Id. at 786-87 (quoting Iqbal, 556 U.S. 679).
The Third Circuit Court of Appeals has identified the following three-step inquiry as appropriate to determine the sufficiency of a complaint pursuant to Twombly and Iqbal:
First, the court must take note of the elements a plaintiff must plead to state a claim. Second, the court should identify allegations that, because they are no more than conclusions, are not entitled to the assumption of truth. Finally, where there are well-pleaded factual allegations, a court should assume their veracity and then determine whether they plausibly give rise to an entitlement for relief.
Burtch v. Milberg Factors, Inc., 662 F.3d 212, 221 (3d Cir.2011); see also Connelly v. Steel Valley Sch. Dist., 706 F.3d 209, 212 (3d Cir. 2013); Santiago v. Warminster Twp., 629 F.3d 121, 130 (3d Cir.2010).
Even "if a complaint is subject to Rule 12(b)(6) dismissal, a district court must permit a curative amendment unless such an amendment would be inequitable or futile." Phillips v. Cty. of Allegheny, 515 F.3d 224, 245 (3d Cir. 2008).
Defendant asserts that the Court should dismiss all counts contained in Plaintiffs' Amended Complaint (Doc. 8) because Plaintiffs have failed to state a claim as a matter of law on their four breach of contract claims based on the implied covenant to market and implied covenant to reasonably develop (Counts I-IV) and Counts V and VI are derivative of the breach of contract claims. (Doc. 9 ¶¶ 13-15.) As discussed below, Plaintiffs maintain that each claim is sufficiently supported and Counts V and VI are not derivative of the breach of contract claims.
Defendant contends that Plaintiffs' implied duty to market claims fail both because they lack factual support and because Plaintiffs are attempting to substitute their business judgment for that of SWN.3 (Doc. 11 at 17.) Plaintiffs respond that they have pled substantial facts to support their claims in Counts I, II, and III. (Doc. 13 at 18.) The Court concludes that Defendant has not satisfied its burden of showing that Plaintiffs have not pled sufficient facts to satisfy the plausibility standard as applied to their implied duty to market claims.
As a threshold matter, Defendant does not concede that an implied duty to market exists under Pennsylvania law. (Doc. 11 at 17 n.5.) However, Defendant states that it will not dispute the existence of the duty here. (Id.) Rather, Defendant notes that "[a]lthough the Pennsylvania Supreme Court has not recognized an implied duty to market, federal courts in Pennsylvania have identified such a duty." (Id. at 17-18 (citing Chambers v. Chesapeake Appalachia, LLC, 359 F.Supp.3d 268, 279 (M.D. Pa. 2019)).) Chambers stated the following:
Pennsylvania recognizes [an "implied duty to market,"] which requires a lessee operating under a proceeds lease "to market the gas found 'but only at a reasonable profit[,]' taking into consideration 'the distance to market, the expense of marketing, and everything of that kind.'"4Canfield [v. Santoil USA Onshore Props., Civ. A. No. 3:16-CV-85,] 2017 WL 1078184, at *22 [M.D. Pa.Mar. 22, 2017] (quoting Iams v. Carnegie Nat. Gas Co., 194 Pa. 72, 45 A. 54, 54 (1899)). Texas imposes a similar duty on lessees. See, e.g., Union Pac. Res. Grp., Inc. v. Hankins, 111 S.W.3d 69, 72 (Tex. 2003) (...
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