SDF, LLC v. ConocoPhillips Company
1:17-cv-00720
| D.N.M. | Mar 6, 2018Background
- SDF, a New Mexico LLC, owns a 7/32 royalty interest in federal oil and gas leases and received payments from ConocoPhillips (COP) since 1990.
- In May 2016 COP stopped paying, claiming it was only obligated to pay when average production exceeded 500 Mcf per well per day; COP later sold the lease interest to Hilcorp, which adopted the same position.
- SDF sued in state court seeking declaratory relief and alleging breach of contract and a novel claim labeled "illegal recoupment" after defendants withheld payments (self-help) rather than obtaining a judicial ruling first.
- Defendants removed to federal court and moved to dismiss the illegal recoupment claim under Rule 12(b)(6).
- The core legal question: whether New Mexico recognizes an independent cause of action for "illegal recoupment" when a party invokes equitable recoupment defensively or withholds payments without prior judicial approval.
- The court concluded recognizing such a cause of action would undercut New Mexico's established equitable recoupment doctrine and be duplicative of existing contract and declaratory claims, and therefore dismissed SDF’s illegal recoupment claim.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether New Mexico recognizes an independent tort/cause of action for "illegal recoupment" when a party withholds payments (self-help) | SDF: withholding payments without court permission is wrongful and creates a standalone illegal recoupment claim, and statutory law prohibits self-help | Defs: no separate cause exists; equitable recoupment is a defensive doctrine permitting self-help in appropriate cases and cannot be expanded into an affirmative claim | Court: No independent cause; recognizing one would eviscerate equitable recoupment and be duplicative, so dismissal granted |
| Whether equitable recoupment requires contractual authorization or prior judicial approval before withholding | SDF: recoupment must be contractually authorized and self-help is barred by statute | Defs: equitable recoupment can operate without express contractual authorization and has been applied where party withheld payments | Court: Equitable recoupment need not be contractually authorized and has survived self-help in prior cases; statute argument is circular and unpersuasive |
| Whether the Oil and Gas Proceeds Payment Act bars equitable recoupment or self-help withholding | SDF: the Act requires timely payments and thus prohibits withholding | Defs: entitlement under the Act depends on whether recoupment defense succeeds, so the Act does not foreclose recoupment | Court: Statute does not independently nullify equitable recoupment; SDF’s argument is circular |
| Whether the illegal recoupment claim is duplicative of breach of contract/declaratory claims | SDF: asserts illegal recoupment as distinct wrong | Defs: claim merely repeats existing contract and declaratory claims | Court: Duplicative; New Mexico would not create repetitive cause of action; dismissal appropriate |
Key Cases Cited
- Crown, Cork & Seal Co., Inc. v. Parker, 462 U.S. 345 (Sup. Ct.) (purpose of statutes of limitations discussed)
- City of Carlsbad v. Grace, 966 P.2d 1178 (N.M. Ct. App.) (recognizes equitable recoupment as defensive doctrine; permits self-help contextually)
- SCO Grp., Inc. v. Int'l Bus. Machs. Corp., 879 F.3d 1062 (10th Cir.) (federal courts should be cautious expanding state law; predict highest court’s likely ruling)
- Chavez v. Chenoweth, 553 P.2d 703 (N.M.) (courts decline to recognize new causes of action that merely duplicate existing claims)