Wallace B. Roderick Irrevocable Living Trust v. Xto Energy, Inc., Case No. 08-1330-EFM-GEB
| Decision Date | 22 June 2016 |
| Docket Number | Case No. 08-1330-EFM-GEB |
| Parties | WALLACE B. RODERICK IRREVOCABLE LIVING TRUST, Amanda Roderick, Successor Trustee, on behalf of itself and all others similarly situated, Plaintiff, v. XTO ENERGY, INC., Defendant. |
| Court | U.S. District Court — District of Kansas |
Plaintiff Wallace B. Roderick Revocable Living Trust ("the Trust") owned natural gas wells that were operated by Defendant XTO Energy, Inc. ("XTO"). The Trust claims that it was underpaid in royalty fees by XTO. In what has been a long and complicated case, the parties finally seek to resolve the issue of who exactly is suing XTO. Is the Trust suing XTO in its individual capacity? Or is it suing XTO on behalf of a class of over 1,700 other royalty owners? In 2012, this Court certified a class of Kansas royalty owners represented by the Trust. XTO appealed that decision, and the Tenth Circuit vacated the order and remanded for further proceedings. Now before the Court is the Trust's second motion for class certification (Doc. 351), which XTO opposes. Contemporaneously, the Trust seeks summary judgment that every lease in the putative class contained certain implied duties—an issue critical to the Court's class- certification analysis. Because analysis of the leases is an essential factor in determining whether class certification is proper, the Court will also consider evidence and arguments contained in the Trust's accompanying motion for partial summary judgment (Doc. 353). For the reasons stated below, the Court denies the Trust's motion.
XTO is an oil and gas company that produces natural gas and its constituent products from wells. The Trust owns eight Kansas well which it leases to XTO and for which it receives royalty payments. The Trust claims that XTO has systematically underpaid royalties by deducting costs associated with placing gas and its constituent products in marketable condition.
A brief explanation of Kansas oil and gas law is required in order to understand the Trust's claim. Under Kansas law, oil and gas leases impose on the operator—XTO in this case—an implied duty to market the minerals produced.1 Corollary to this implied duty to market is the marketable condition rule,2 which "requires operators to make gas marketable at their own expense."3 These duties can be contractually disclaimed.4 If the duties were notdisclaimed in this case, XTO would have been required to make the raw gas marketable and to bear the accompanying costs. Steps taken to make raw gas marketable often include gathering, compression, dehydration, treatment, and processing ("GCDTP") services.5 But in other circumstances, gas may be marketable at the well.6
According to the Trust, all of the gas produced from its wells was subject to the following process. All of the raw gas came from low pressure wells and was saturated with water vapor when it emerged from the ground. From each individual well, raw gas was collected into a gathering line and comingled with raw gas from other wells and leases affiliated with XTO. Once in the gathering system, the gas was dehydrated and compressed. The gas would then travel through the gathering line to a processing plant, where natural gas liquids were extracted and the raw gas was transformed into residue gas of a pipeline quality. From there, the gas entered a "booster compressor" so that it could enter a major interstate transmission system.
XTO did not perform any of the above post-removal procedures. Instead, it sold the raw gas to third parties at the gathering system inlet, before any GCDTP services were performed. The price that these third parties paid for gas at the wellhead was based either on the purchaser's resale price or on an index price that reflected the sale of gas after it had been further processed. The third parties paid the index or resale price, less costs for gathering the gas. Royalty payments made to the Trust were based on XTO's contracts with these third parties.
The Trust argues that the gas was not in marketable condition when XTO sold the gas to the third parties. Instead, the Trust contends that XTO used these third party contracts to skirt the marketable condition rule. The Trust claims that the third parties paid XTO less for the gasbecause it required GCDTP services to be marketed. As a result, the Trust received smaller royalty payments for gas that was not in marketable condition. So the Trust argues that by selling raw gas at a price reduced by anticipated GCDTP costs, XTO was sharing with royalty owners those costs required to render the gas into marketable condition.
The Trust claims that it was not the only royalty owner that XTO underpaid. According to the Trust, over 1,700 royalty owners' gas was subject to the same extraction process and royalty payment system. The Trust moves to certify the following class:
This Court granted the Trust's first motion for class certification (Doc. 201). On appeal, the Tenth Circuit vacated that order and remanded for further proceedings. The Tenth Circuit directed this Court to rigorously analyze whether the Trust has affirmatively demonstrated that class certification is proper.7 Specifically, with regards to commonality and predominance, the Court is directed to consider the various leases involved and the point at which gas was marketable.8 Relevant law has developed since the Trust first sought class certification. InFawcett v. Oil Producers, Inc. of Kansas, the Kansas Supreme Court clarified the effect of the marketable condition rule and considered facts very similar to the instant case.9
Guided by the Tenth Circuit's direction and the recent developments in Kansas oil and gas law, the Court turns to the Trust's motion for class certification.
Class action certification is governed by Rule 23 of the Federal Rules of Civil Procedure. The Court has broad discretion in deciding whether to certify a class.10 Under Rule 23(a), the Trust must demonstrate that: (1) the class is so numerous that joinder of all members is impracticable (numerosity); (2) there is a question of law or fact common to the class (commonality); (3) the claims or defenses of the representative parties are typical of the claims or defenses of the class (typicality); and (4) the representative parties will fairly and adequately protect the interests of the class (adequacy). After meeting these requirements, the Trust must demonstrate that the proposed class action fits within one of the categories in Rule 23(b).
Here, the Trust seeks certification under Rule 23(b)(3), which requires that "questions of law or fact common to class members predominate over any questions affecting only individual members" and that a class action "is superior to other available methods for fairly and efficiently adjudicating the controversy." The requirements of Rule 23(b)(3) ensure that a class is sufficiently cohesive to warrant adjudication by representation.11 The predominance question asks whether common issues are more prevalent or important than non-common, individualissues.12 "[P]redominance may be destroyed if individualized issues will overwhelm those questions common to the class."13
The Tenth Circuit specifically directed this Court to determine whether the Trust satisfied the commonality requirement of Rule 23(a)(2) and the predominance requirement of Rule 23(b)(3).14
Under Rule 23(a)(2), the Trust must demonstrate that there are questions of fact or law common to the putative class. To satisfy this requirement, the Trust must show that the class members "have suffered the same injury."15 But "the mere raising of a common question" does not satisfy the commonality requirement.16 Instead, the claims must turn on a common contention "of such a nature that it is capable of classwide resolution."17
The Tenth Circuit directed this Court to consider two factors in analyzing commonality: (1) whether implied duties were common to every lease in the putative class; and (2) whether and to what extent marketability affects commonality.18 XTO challenges commonality on each of those grounds.
The Trust must demonstrate that the marketable condition rule was implied in every lease in the putative class.19 Additionally, the Trust contends that the implied duty of good faith and fair dealing was also common to the class.
The Tenth Circuit directed this Court to consider whether the Trust could affirmatively demonstrate that the marketable condition rule was implied in leases throughout the putative class.20 Under Kansas law, oil and gas leases impose on operators a duty to market the minerals produced.21 Corollary to this implied duty to market is the marketable condition rule.22 The marketable condition rule "requires operators to make gas marketable at their own expense."23 This implied duty can be contractually disclaimed with express language showing contrary intent.24 So at first glance, the issue seems simple: either the marketable condition rule was implied throughout the class, or it was disclaimed by some of the leases. But the parties disagree as to what conduct is actually required by the...
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