Naylor Farms, Inc. v. Chaparral Energy, LLC
923 F.3d 779
10th Cir.2019Background
- Chaparral Energy operates ~2,500 Oklahoma wells; Naylor Farms (royalty owners) sued alleging Chaparral improperly deducted gas-treatment (GCDTP) costs from royalties in violation of the implied duty of marketability (IDM).
- Theory: Chaparral sold unprocessed gas to midstream processors at/near the wellhead (wellhead sale), received net proceeds after processors performed GCDTP services and deducted costs, and paid royalties on those net proceeds.
- Naylor Farms moved to certify a class of similarly situated royalty owners under Fed. R. Civ. P. 23; district court certified a class limited to leases containing the ‘‘Mittelstaedt Clauses.’'
- Chaparral appealed, arguing (1) marketability requires individualized well-by-well analysis (defeating commonality/predominance), (2) lease-language variations create individualized issues, and (3) no uniform payment methodology exists for classwide damages.
- The Tenth Circuit reviewed Oklahoma law (predicting how the Oklahoma Supreme Court would rule), found Pummill and other state appellate decisions persuasive, and affirmed the district court’s certification order.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether marketability is a common question susceptible to classwide proof | Naylor: marketability can be resolved classwide because evidence shows all class gas required at least one GCDTP service before sale into pipeline market | Chaparral: marketability is fact-intensive and depends on gas quality at each well, requiring well-by-well analysis | Held: Common; under facts here a jury could determine marketability with classwide expert proof (district court not abused its discretion) |
| Whether variations in lease language defeat commonality/predominance | Naylor: limited class to leases with Mittelstaedt-like royalty clauses; charted leases to show uniform clause classwide | Chaparral: leases differ; some off-lease costs and multiple royalty clauses require individualized interpretation and extrinsic evidence | Held: Court properly relied on the lease-chart and precedent holding Mittelstaedt Clauses do not negate IDM; Chaparral waived or inadequately briefed extrinsic-evidence arguments |
| Whether lack of a uniform payment methodology defeats certification | Naylor: expert presented a damages model calculable on classwide basis; damages issues do not defeat predominance | Chaparral: no uniform methodology; individualized damages inquiries will predominate | Held: Existence of classwide damages model and ability to create subclasses or manage damages shows predominance satisfied; damages alone do not defeat certification |
| Role of midstream contracts (good faith of wellhead sales) | Naylor: midstream arrangements do not change IDM analysis for certified claims | Chaparral: variations in midstream contracts and good-faith sales mean individualized inquiries on whether Chaparral circumvented IDM | Held: District court excluded fraud claim; good-faith of midstream deals not shown to be relevant to certified claims; argument inadequately developed on appeal |
Key Cases Cited
- Mittelstaedt v. Santa Fe Minerals, Inc., 954 P.2d 1203 (Okla. 1998) (establishes Oklahoma implied duty of marketability and distinguishes costs to make unmarketable gas marketable from costs to enhance already marketable gas)
- Pummill v. Hancock Expl. LLC, 419 P.3d 1268 (Okla. Civ. App. 2018) (marketability may be answered by looking to the market in which the operator participated; gas not marketable until acceptable for pipeline delivery)
- Whisenant v. Strat Land Expl. Co., 429 P.3d 703 (Okla. Civ. App. 2018) (marketability can be a case-by-case inquiry; gas quality may require individualized review in some cases)
- Wal–Mart Stores, Inc. v. Dukes, 564 U.S. 338 (2011) (commonality requires that a common contention be capable of classwide resolution)
- Tyson Foods, Inc. v. Bouaphakeo, 136 S. Ct. 1036 (2016) (distinguishes common questions amenable to generalized proof from individual questions requiring varied evidence)
- Roderick Revocable Living Tr. v. XTO Energy, Inc., 725 F.3d 1213 (10th Cir. 2013) (guidance on using lease-classification charts to support commonality and manage lease-variation issues)