Anderson Living Trust v. Energen Resources Corp.
879 F.3d 1088
10th Cir.2018Background
- Energen operated wells in the San Juan Basin and paid royalties to several trusts (Anderson, Pritchett, N-R, Tatum); some wells are in New Mexico, some in Colorado.
- Energen sells processed gas at processors’ plants and uses third-party processors; it deducts a pro rata share of post-production costs (including processor taxes and in-kind fuel gas) from royalties using the netback (workback) method.
- Trusts sued, asserting (a) the implied covenant to market includes the marketable condition rule (prohibiting deduction of post-production costs), (b) Energen improperly passed the New Mexico natural gas processors tax to royalty owners, (c) Energen failed to pay royalties on gas used as fuel, and (d) Energen failed to pay statutory interest on royalty funds held in suspense.
- District court dismissed the marketable condition claim and entered summary judgment for Energen on other claims; Trusts appealed. The Tenth Circuit reviews de novo.
- The Tenth Circuit affirmed dismissal of the marketable condition theory and the processors-tax challenge, affirmed summary judgment for two trusts on fuel-gas, but reversed on (i) fuel-gas claims for the N‑R and Tatum Trusts and (ii) the N‑R Trust’s statutory interest claim, remanding for further proceedings.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether New Mexico recognizes the marketable condition rule as part of the implied duty to market | Marketable condition rule is implied and bars deduction of post-production costs from royalties | New Mexico law (and prior Tenth Circuit precedent) does not support marketable condition rule; netback method properly deducts post-production costs | Rejected: Tenth Circuit follows Elliott and holds New Mexico has not adopted the marketable condition rule for these leases; dismissal affirmed |
| Whether Energen may pass the New Mexico natural gas processors tax to royalty owners | Statutory amendment shifted liability to processors and therefore prevents passing tax to royalty owners | Statute only shifts state’s collection target; contracts may allocate processor costs downstream | Rejected: Energen may pass the processors tax through via contract/netback; summary judgment for Energen affirmed |
| Whether royalties are owed on gas used as fuel (fuel gas) | Trusts: leases require royalty on produced or off-lease used gas; fuel gas used off-lease triggers royalty | Energen: fuel gas is a deductible in‑kind post-production cost or covered by free‑use clauses | Mixed: Affirmed for Anderson/Pritchett (no royalty due under their lease language and free‑use reading); reversed for N‑R (lease requires royalty on all produced gas; remand for valuation) and reversed for Tatum (Colorado leases bar deducting post‑production costs and free‑use limited to on‑lease; remand) |
| Whether statutory interest is owed on royalties held in suspense for title resolution | Trusts: §70‑10‑4 entitles interest owners to interest on suspended funds | Energen: contends issue not preserved/paid | Reversed: N.M. law (First Baptist) entitles N‑R Trust to statutory interest; remand to determine whether interest was paid |
Key Cases Cited
- Elliott Indus. Ltd. P’ship v. BP Am. Prod. Co., 407 F.3d 1091 (10th Cir.) (rejects marketable condition rule application in New Mexico context)
- Davis v. Devon Energy Corp., 218 P.3d 75 (N.M. 2009) (recognizes implied duty to market as duty implied by law but did not decide marketable condition rule)
- ConocoPhillips Co. v. Lyons, 299 P.3d 844 (N.M. 2012) (interprets free‑use clauses and allows netback deductions under certain lease language)
- Exxon Corp. v. Eagerton, 462 U.S. 176 (Supreme Court) (statutory exemption for royalty owners does not preclude contractual cost‑shifting absent explicit prohibition)
- Freeland v. Sun Oil Co., 277 F.2d 154 (5th Cir.) (explains deducting post‑production costs when reconstructing wellhead value)
- Garman v. Conoco, Inc., 886 P.2d 652 (Colo. 1994) (Colorado applies marketable condition rule when lease is silent)
- First Baptist Church of Roswell v. Yates Petroleum Corp., 345 P.3d 310 (N.M. 2015) (statutory interpretation: interest owners entitled to interest on suspended royalty funds)