PATTERSON v. BP America Prod. Co.

• Decision Date: 18 February 2010
• Docket Number: No. 09CA1943.,09CA1943.
• Citation: 240 P.3d 456
• Parties: David PATTERSON, Philip McCoy, William Schaefer, and Beverly Schaefer, Plaintiffs-Appellees, v. BP AMERICA PRODUCTION COMPANY, f/k/a Amoco Production Company, Defendant-Appellant.
• Court: Colorado Court of Appeals

240 P.3d 456

David PATTERSON, Philip McCoy, William Schaefer, and Beverly Schaefer, Plaintiffs-Appellees,

v.BP AMERICA PRODUCTION COMPANY, f/k/a Amoco Production Company, Defendant-Appellant.

No. 09CA1943.

Colorado Court of Appeals,Div. A.

Feb. 18, 2010.

COPYRIGHT MATERIAL OMITTED.

COPYRIGHT MATERIAL OMITTED.

Law Offices of George A. Barton, P.C., George A. Barton, Kansas City, Missouri; Charles Carpenter, Denver, Colorado, for Plaintiffs-Appellees.

Holland & Hart LLP, Scott S. Barker, Danielle R. Voorhees, Denver, Colorado; Holland & Hart LLP, Rachel A. Yates, Greenwood Village, Colorado, for Defendant-Appellant.

Opinion by Judge GABRIEL.

In this dispute over deductions of postproduction costs from royalty payments, defendant, BP America Production Company (BP), formerly known as Amoco Production Company (Amoco), appeals the district court's order certifying a class of approximately 4,000 royalty owners who entered into leases or royalty agreements with BP or its predecessors entitling them to royalty payments on natural gas produced and sold by BP or its predecessors from wells located in Adams or Weld Counties (the Owners). Because we conclude that the district court did not abuse its discretion in certifying the class, we affirm.

I. Background

In the early 1970s, the named plaintiffs or their predecessors in interest (Named Plaintiffs) entered into lease or overriding royalty agreements under which Amoco, as a party to or assignee of such agreements, had the right to explore for oil and gas within a specified area in either Adams or Weld Counties, in exchange for royalty payments. None of these agreements expressly permitted the deduction from the royalty payments of the costs of making the gas marketable after its extraction, including the costs of transporting the gas from the well heads to its final sale location.

Each of the Named Plaintiffs also signed Oil and Gas Division Orders and Oil and Gas Transfer Orders (Division and Transfer Orders). These Orders provided:

Settlements for gas shall be based on the net proceeds at the wells, after deducting a fair and reasonable charge for compressing and making it merchantable and for transporting if the gas is sold off the property. Where gas is sold subject to regulation by the Federal Power Commission [or, in one of the Division and Transfer Orders, the Federal Energy Regulatory Commission] or other governmental authority, the price applicable to such sale approved by order of such authority shall be used to determine the net proceeds at the wells.

At the time most of the Named Plaintiffs signed these Orders, gas prices were federally regulated, and therefore, the Named Plaintiffs were paid at either the maximum lawful price or the price specified by contract. The process of deregulation began in the 1980s, and as wells were deregulated, Amoco began to employ a so-called netback method of calculating royalty payments. Under this method, Amoco deducted a proportionate share of the costs incurred to make the gas marketable before paying royalties to the Owners. The royalty checks sent to the Named Plaintiffs, however, did not disclose that such costs were being deducted from their royalty payments. In fact, the Named Plaintiffs presented evidence that they were unaware of these cost deductions until litigation was initiated by Kerr-McGee, a successor in interest to Amoco and BP, seeking to clarify the propriety of making such deductions.

In 2003, the Named Plaintiffs filed a complaint against BP alleging, among other things, that BP had breached the royalty agreements with the Named Plaintiffs by making these cost deductions. The Named Plaintiffs later moved to certify a class of similarly situated royalty owners. BP then moved for partial summary judgment, arguing that many of the Named Plaintiffs' claims were barred by the six-year statute of limitations. The district court did not rule on the Named Plaintiffs' motion for class certification but granted BP's motion for partial summary judgment. The Named Plaintiffs then appealed to a division of this court.

On appeal, the parties agreed that the six-year statute of limitations applied, but they disagreed as to the applicable accrual statute. The Named Plaintiffs argued that section 13-80-108(6), C.R.S.2009, applied and that their claims accrued when they became aware of BP's alleged breach of their lease agreements, which was in November and December 2003. BP countered that section 13-80-108(4), C.R.S.2009, was the appropriate accrual statute and that the Named Plaintiffs' claims therefore accrued on the various dates on which BP allegedly underpaid royalties, which last occurred in January 1998. In the alternative, BP argued that even if section 13-80-108(6) applied, the Named Plaintiffs' causes of action had accrued when they signed the Division and Transfer Orders, which stated that BP would be employing the netback method of accounting after natural gas was deregulated. Thus, BP contended, even under the Named Plaintiffs' theory of accrual, their claims were still time barred. The Named Plaintiffs replied that BP had actively concealed the relevant and material facts that would have alerted them to the change in accounting methodology. Thus, they asserted, the statute of limitations had been equitably tolled.

The division agreed with the Named Plaintiffs and reversed the district court's order granting partial summary judgment to BP. Patterson v. BP America Production Co., 159 P.3d 634, 639-41 (Colo.App.2006), rev'd, 185 P.3d 811 (Colo.2008). The division first held that section 13-80-108(6) applied. Id. at 639. Accordingly, it concluded that the Named Plaintiffs' claims did not accrue until they discovered, or should have discovered by the exercise of reasonable diligence, that BP breached their royalty agreements. See § 13-80-108(6). The division then rejected BP's alternative argument that summary judgment was proper even if section 13-80-108(6) applied. Specifically, the division held that the information contained in the Division and Transfer Orders was insufficient to provide the Named Plaintiffs with actual notice of the use of the netback method. Patterson, 159 P.3d at 640. The division stated that “the terms of the gas covenant could have provided the Royalty Owners with actual notice of BP's use of the netback method only if BP subsequently notified them of the federal deregulation and its intent to begin using the netback method,” which did not occur. Id. Finally, the division held that there were disputed issues of fact as to whether the Owners should have known of the netback methodology based on the Division and Transfer Orders and whether BP's alleged conduct equitably tolled the statute of limitations, thereby precluding the entry of summary judgment. Id. at 640-41.

Our supreme court granted certiorari and reversed the division's determination as to the proper accrual statute. Specifically, the court held that section 13-80-108(4) applied and that, therefore, the Named Plaintiffs' claims accrued on the date their royalties became due, not the date on which they discovered the alleged breach of contract. BP America Production Co. v. Patterson, 185 P.3d 811, 815 (Colo.2008). The court thus reversed that part of the division's determination and remanded the case. Id. The court, however, did not disturb the division's determination that there was a fact question as to whether the statute of limitations had been equitably tolled by BP's alleged fraudulent concealment of its use of the netback method. Id.

The Named Plaintiffs then filed a renewed motion for class certification with the district court. They defined the proposed class as:

All persons and entities to whom BP and its predecessors paid royalties or overriding royalties (collectively, “royalties”) on natural gas, including natural gas liquids extracted therefrom after it is severed from the wellhead (“natural gas”), produced from wells located in Weld or Adams Counties in Colorado between January 1, 1986, and December 1, 1997 pursuant to leases or overriding royalty agreements which do not expressly authorize the deduction of costs incurred to market such gas after it is severed from the wellhead in the calculation of royalties (collectively, “Royalty Agreements”). The defined Class excludes: (a) the United States of America; (b) Anadarko Petroleum Corporation (“Anadarko”), formerly known as Union Pacific Resources Corporation, and its affiliates; (c) Kerr-McGee Onshore, Inc. (“Kerr-McGee”), formerly known as Kerr-McGee Rocky Mountain Corporation and formerly known as HS Resources, Inc., and Kerr-McGee's affiliates; and (d) the State of Colorado.

The district court held an evidentiary hearing on the issue of class certification. The evidence presented included (1) affidavits from the Named Plaintiffs asserting that BP never provided information to them that postproduction costs were being deducted from their royalty payments and that they had no knowledge of how BP calculated the royalties paid other than what was in the royalty reports; (2) copies of brochures sent to the Owners purporting to explain the royalty checks but not referencing any postproduction cost deductions; (3) internal Amoco communications recommending a change to the format of the royalty checks to indicate clearly the postproduction deductions being taken, but warning of the potential for increased litigation if Amoco were to make that change; and (4) deposition testimony from a former Amoco employee confirming that the recommendation to change the format of the royalty checks was not adopted and that the deductions were not disclosed in the royalty checks.

Thereafter, the district court issued a lengthy order analyzing the evidence presented and finding by a preponderance of the evidence that the Named Plaintiffs had met their burden to establish the requirements for class certification pursuant to C.R.C.P. 23. The district court...