MEMORANDUM OPINION
THIS MATTER comes before the Court on: (i) Defendant ConocoPhillips Company’s Motion to Dismiss Plaintiffs’ First Amended Complaint for Underpayment of Oil and Gas Royalties, filed March 5, 2012 (Case No. CIV 12-0039 Doc. 11)(“CP MTD”); (ii) and Defendants WPX Energy Production, LLC and WPX Energy Rocky Mountain, LLC’s Motion to Dismiss Plaintiffs Second Amended Complaint for Underpayment of Oil and Gas Royalties, filed March 5, 2012 (Case No. CIV 12-0040 Doc. 18)(“WPX MTD”). Because the Plaintiffs named in the First Amended Complaint for Underpayment for Oil and Gas Royalties, filed in state court on December 5, 2011, filed in federal court on January 12, 2012 (Case No. CIV 12-0039 Doc. 1-1)(“FAC”) — James H. Anderson Living Trust (through James Anderson as trustee), Pritchett-Living Trust (through April Pritchett as trustee), Cynthia W. Sadler, Shirley L.- Scanlon Living Trust (through Shirley L. Scanlon, as trustee), and Robert Westfall — and the Plaintiffs named in the Second Amended Complaint, filed February 16, 2012 (Case No. CIV 12-0040 Doc. 10)(“SAC”) — James H. Anderson Living Trust (through James Anderson as trustee), Pritchett Living Trust (through April Pritchett as trustee), Cynthia W. Sadler, and Robert Westfall — are nearly identical and have made nearly identical allegations against the Defendants — ConocoPhillips Company, LLC, and WPX Energy Production, LLC, f/k/a WPX Energy San Juan LLC, Williams Production Company, LLC, and WPX Energy Rocky Mountain, LLC, fik/a Williams Production RMT Company, LLC — in both matters, and the Defendants have made nearly identical motions to dismiss the respective complaints against them, the Court will address both parties’ motions together in this Memorandum Opinion. Any differences in fact or law which exist between the two matters will be noted.
The Court held-a hearing on both motions to dismiss on June 19, 2012. The primary issues are: (i) whether the Plaintiffs have sufficiently alleged that the Defendants are in breach of the parties’ oil and gas leases; (ii) whether the Plaintiffs have stated a claim for fraud that can survive notwithstanding the parties’ contractual relationship; (iii) whether the Plaintiffs have sufficiently alleged that the Defendants breached the implied duty to market hydrocarbons as recognized by New Mexico.law; (iv) whether the Plaintiffs have alleged a plausible claim for relief under the New Mexico Proceeds Payment Act, N.M.S.A.1978, §§ 70-10-1 to 70-10-5 and the Oil. and Gas Conservation
FACTUAL BACKGROUND
This matter arises from a dispute over the royalty payments that the Defendants, producers of oil and gas in New Mexico and Colorado, and working interest holders on oil and gas leases belonging to the Plaintiffs, owe to the Plaintiffs, royalty interest holders on the leases.
*985 The San Juan Basin, one of the largest natural gas producing fields located in northwest New Mexico and southwest Colorado, was originally developed in the early 1950’s by El Paso Natural Gas Company____The natural gas produced in the San Juan Basin is conventional gas which contains methane (natural gas) and entrained natural gas liquids (“NGLs”), such as ethane and butane. In order to make the gas safe to enter the interstate pipeline, the NGLs must be removed from the gas stream.
Elliott Indus. Ltd. P’ship v. BP Am. Prod. Co.,
The Plaintiffs in this matter all own interests in hydrocarbons derived from wells in the States of New Mexico and Colorado. See FAC ¶¶ 1-7, at 1-2; SAC, ¶¶ 1-4, at 1-2. The Plaintiffs reside in the southwest, in the states of Utah (Anderson Living Trust), Colorado (Pritchett Living Trust), Texas (Sadler), and New Mexico (Scanlon Living Trust and Robert West-fall). See FAC ¶¶ 1-7, at 1-2; SAC ¶¶ 1-4, at 1-2. ConocoPhillips and WPX Energy Production, LLC, f/k/a WPX Energy San Juan LLC, Williams Production Company, LLC, and WPX Energy Rocky Mountain, LLC, f/k/a Williams Production RMT Company, LLC (“WPX”) are producers and vendors of conventional natural gas, originating from the Fruitland coal formation; coalbed methane (“CBM”) natural gas; and other petroleum hydrocarbons from wells in which the Defendants own lease-hold interests.
The Plaintiffs, or their predecessors, acquired their interests in the hydrocarbon revenues from the subject wells through executing oil and gas mining leases and/or permits to Defendants. See FAC ¶ 10, at 3; SAC ¶ 11, at 3. Under the leases, the Defendants owe the Plaintiffs a “duty to pay royalties on all hydrocarbons” for the value or price which the Defendants do or should receive from the “arm’s length” sale of the hydrocarbons. FAC ¶ 11, at 3; SACT12, at 3“4. The leases give the Plaintiffs a right to royalties in the “drip condensate,” a liquid product which is recovered during the Defendants’ oil and gas mining processes.
The Defendants have not credited the Plaintiffs with the revenue derived from the drip condensate. See FAC ¶ 27, at 9; SAC ¶ 29, at 9-10. Currently, the Defendants calculate the Plaintiffs’ royalty interests on the sale price received from the Defendants’ affiliated intermediaries for hydrocarbons from wells in which the Plaintiffs own royalty interests, mixed with hydrocarbons from other wells in which the Plaintiffs do not own royalty interests. See FAC ¶¶ 31-32, at 10-11; SAC ¶¶133-34, at 11. The Defendants’ affiliated intermediaries sell the hydrocarbons at a significant profit, a profit which the Defendants do not pass on to the Plaintiffs. See FAC ¶ 32, at 11; SAC ¶ 33, at 11. Additionally, the Defendants royalty payments, to the Plaintiffs have not been consistent. On “numerous instances,” the Defendants have waited longer than forty-five or even ninety days after receiving revenue from the Plaintiffs’ shares to pay the Plaintiffs their royalty interest. FAC ¶¶ 55-57, at 17; SAC ¶¶ 57-60, at 16-17.
The Defendants have not always disclosed to the Plaintiffs the gross volume of gas produced from the Plaintiffs’ wells, the gross revenue or value the Defendants obtain from the gross production of gas, and the extent of costs that are deducted from the Plaintiffs’ royalty payments. See FAC ¶ 36, at 12; SAC ¶ 38, at 12. One such cost which is deducted from the Plaintiffs’ royalty payments is the cost of rendering the natural gas and other hydrocarbons taken from the subject wells marketable. See FAC ¶49, at 14; SAC ¶51, at 15.
Many of the Defendants’ arguments for the Court to dismiss the Plaintiffs’ FAC and SAC are grounded in a theory that the parties’ contractual relationship, as defined by the Plaintiffs’ leases, precludes the Plaintiffs’ claims in tort. The parties also dispute whether the Plaintiffs may bring a claim alleging that the Defendants have violated the marketable condition rule. These core issues dominate the parties’ dispute. Many of the Defendants’ arguments overlap, and are applicable against numerous causes of action in the FAC and SAC.
1. The Plaintiffs’ First Cause of Action: Failure to Pay Royalty on Volumes of Hydrocarbons, Includiny Drip Condensate.
The Plaintiffs allege in their first cause of action that the Defendants’ continual failure to credit revenues from the value of the drip condensate is a breach of the Plaintiffs’ leases and a violation of state law. See FAC ¶ 27, at 9; SAC ¶ 29, at 9-10. In support of this claim, the Plaintiffs allege that the Defendants are the working interest holders of leases belonging to the Plaintiffs. See FAC ¶¶ 22-23, at 7-8; SAC ¶¶ 23-25, at 7-8. The Plaintiffs allege that the Defendants are in breach of the leases by failing to provide the Plaintiffs with a “certain fractional percentage of the revenue” derived from the value of the drip condensate. FAC ¶¶ 25, 27, at 9; SAC ¶¶ 27, 29, at 9-10. The Plaintiffs provide information identifying the leases at issue, including the name of the lessors, name of the lessees, the date of execution, and a description of each lease. See FAC ¶ 24, at 8; SAC ¶ 26, at 8-9.
The Defendants contend that the Plaintiffs have failed to sufficiently allege the
The Plaintiffs contend that their first cause of action is well within the required pleading standards of Ashcroft v. Iqbal,
The Plaintiffs also assert that there is no “alternative, lawful explanation” for the Defendants’ conduct, and, therefore, the Court has no basis to conclude that the Defendants’ conduct has a plausible, legal explanation. CP MTD Response at 7; WPX MTD Response at 7. The Plaintiffs assert that the Defendants’ denial of illegal conduct is “threadbare” and “conclusory.” CP MTD Response at 7; WPX MTD Response at 8. The Plaintiffs contend that the Court must accept as true that the Plaintiffs, and/or their predecessors, executed oil and gas mining leases and/or permits to the Defendants, and that the Defendants operate and/or are the leasehold owners of the subject wells from which oil and gas/hydrocarbons are produced and sold. See CP MTD Response at 8 (citing Arkalon Grazing Assoc. v. Chesapeake, No. CIV 09-1394-EFM,
The . Plaintiffs assert that the Defendants’ reliance on Elliott Indus, is misplaced. The Plaintiffs contend that, unlike the plaintiffs in Elliott Indus., who expressly disclaimed any breach-of-contract claim, the “cornerstone” of the Plaintiffs’ FAC and SAC is a breach of contract claim. CP MTD Response at 10 (citing Elliott Indus.,
The Defendants contend that the Plaintiffs have failed to demonstrate that they are parties to a relevant contract. See ConocoPhillips Company’s Reply Memo
ConocoPhillips contends that for two of leases listed in the FAC — which list the United States Land Office, Department of the Interior, and the State of New Mexico as lessors — “it is simply not plausible that those sovereigns assigned their royalty interest to a private party,” and, therefore, the Plaintiffs’ must own “something other than a royalty interest, such as an overriding royalty interest.” CP Reply at 2.
The Defendants also contend that the Plaintiffs cannot state a claim for breach of contract because they have not alleged any “terms of any payment obligations.” CP Reply at 3; WPX Reply at 3. The Defendants contend that the Plaintiffs’ statement that the Defendants must “pay a percentage of revenue from production to Plaintiffs ... calculated on arms-length transactions” is a legal conclusion. CP Reply at 3; WPX Reply at 3. The Defendants also assert that the allegations regarding sales to affiliated intermediaries does not make the Plaintiffs’ breach-of-contract claim more plausible. See CP Reply at 4; WPX Reply at 3. The Defendants assert that the “sale of production to affiliates is not in and of itself a breach of a payment obligation.” CP Reply at 4 (citing Garfield v. True Oil Co.,
2. The Plaintiffs’ Second Cause of Action: Fraud and Misstatement of Value of Gas and Affiliate Sales.
The Plaintiffs allege in their second cause of action that the Defendants have reaped “substantial, unjustified benefits and profits at Plaintiffs’ direct expense;” and the Defendants have “knowingly failed to disclose excessive and impermissible charges and reductions ... as well as the gross volume, value and type of all hydro.carbons produced, used, sold or traded” in violation of the Defendants’ statutory and common-law duty to report that production, and to “act in good faith and fair dealing.” FAC ¶¶35, 38, at 11-12; SAC ¶¶ 37, 40, at 12-13. ■
The Plaintiffs allege that the Defendants have a duty under the leases and state law to “pay royalties based on the value of the highest available price in an arms-length transaction of the products from the Plaintiffs’ wells.” FAC ¶ 30, at 10; SAC ¶32, at 11. In support of their claim, the Plaintiffs assert that the Defendants’ practice of calculating the Plaintiffs’ royalty payments on the sale to affiliated intermediaries of hydrocarbons from wells in which the Plaintiffs’ have ownership interests, mixed with hydrocarbons form wells in which the Plaintiffs do not have royalty interests, is “self-dealing.” FAC ¶¶ 30-34, at 10-11; SAC ¶¶ 32-36, at 11-12. The Plaintiffs state that the Defendants and their affiliates have “realized substantial profits from the resale of said hydrocarbons, to Plaintiffs’ detriment.” FAC ¶ 32, at 11; SAC ¶ 33, at 11. The Plaintiffs assert that this practice increases the “[l]egally assessable costs ... downstream of the wellhead” beyond .a reasonable level. FAC ¶ 34, at 11; SAC ¶ 36, at 11. The Plaintiffs allege that this practice is a breach of the “duties and covenants imposed upon ConocoPhillips by law, including good faith and fair dealing, by the Lease(s), covenants, and applicable spacing orders and/or unitization agreements and, as such, constitutes a continuing wrong.” FAC ¶ 35, at 11; SAC ¶ 37, at 12.
The Plaintiffs also allege, as part of their second cause of action, that Defendants knowingly “failed to disclose the gross volume and value and eharaeter/type of all hydrocarbons produced, processed, used, traded or sold from Plaintiffs’ wells.” FAC ¶ 37, at 12; SAC ¶ 39, at 12. The Plaintiffs allege that they have suffered damages as a result of the Defendants’ “false” monthly statements. FAC ¶ 37, at 12; SAC ¶ 39, at 12. Further, the Plaintiffs allege that the Defendants “intended for Plaintiffs to- rely upon” the monthly statements. FAC ¶ 38, at 12; SAC ¶ 40, at 13. The Plaintiffs argue that, by not disclosing the volume, value, and hydrocarbons produced with more particularity, the Defendants violated their duty to report and to act in good faith and fair dealing, constituting fraudulent concealment. See FAC ¶ 38, at 12; SAC ¶ 40, at 13.
Additionally, the Defendants assert that the Court must dismiss the Plaintiffs’ fraud claim because the Plaintiffs have not pled sufficient particular facts to establish the claim of fraud. See CP MTD at 7; WPX MTD at 6-7. Specifically, the Defendants argue that the Plaintiffs’ have not provided any facts which show that the Defendants knowingly made false representations to the Plaintiffs to induce them to act. See CP MTD at 7-8; WPX MTD at 7. The Defendants assert that the Plaintiffs’ allegation of fraud is conclusory, merely stating the cause of action, and therefore insufficient. See CP MTD at 7-8; WPX MTD at 7. With respect to Plaintiffs’ allegation that the Defendants had a duty to disclose certain information in the monthly statements, the Defendants argue that the Plaintiffs have not shown any contractual authority which imposes that duty on the Defendants. See CP MTD at 8; WPX MTD at 7. The Defendants also assert that New Mexico law does not impose on them a duty to disclose. See CP MTD at 8; WPX MTD at 7. The Defendants assert that the Plaintiffs have not shown that a fiduciary relationship exists between the parties and that, without a fiduciary relationship, New Mexico law does not impose a duty to disclose on a party. Rather, the Defendants assert that, under Cont’l Potash, Inc. v. Freeport-McMoran, Inc.,
Lastly, the Defendants assert that the Plaintiffs’ second cause of action fails to meet the pleading standards of rules 8(a)(1) and 9(b) of the Federal Rules of Civil Procedure. See CP MTD at 10; WPX MTD at 9. The Defendants assert that the Plaintiffs’ allegations of fraud are insufficient, because the Plaintiffs did not point to the lack of any specific facts that demonstrates the Defendants’ transactions with the affiliated intermediaries or any fact that identifies the affiliated intermediaries. See CP MTD at 10-11; WPX MTD at 9-10. The Defendants assert that, on the whole, the Plaintiffs’ second cause of action for fraud and misstatements fails to
The Plaintiffs contend that they have pleaded all of the elements of a fraud claim, with particularity, under New Mexico law:
that [the Defendants] misrepresent[ ] the volume and value of gas produced; that [they] know[ ] the volumes and values reflected on Plaintiffs’ check stubs are incorrect but [] state[] them anyway; [they] continue[ ] to mislead Plaintiffs as to the true volume value of the gas produced and uses on affiliate sale in order to decrease Plaintiffs’ share of revenues on the true values and volumes of produced hydrocarbons; and [they] continue[] reporting in this fashion to conceal the true amounts owed Plaintiffs.
CP MTD Response at 11 (citing Golden Cone Concepts, Inc. v. Villa Linda Mall, Ltd.,
The Plaintiffs further contend that the, Defendants’ reliance on Elliott Indus, for the assertion that the Plaintiffs’ contractual claims preclude their tort claims is inapposite, because the Tenth Circuit dismissed the plaintiffs’ tort claims in Elliott Indus, on the basis of the plaintiffs’ failure “to establish any contractual obligations owing the plaintiffs.” CP MTD Response at 11 (citing Elliott Indus.,
The Plaintiffs also contend that they have pleaded misstatements giving rise to a claim of fraud: (i) that the Defendants engaged - in self-dealing and non-arm’s-length transactions with their affiliates resulting in improper charges to the Plaintiffs; (ii) that the Defendants failed to disclose the gross volume of gas produced from the subject wells on the monthly statements; (iii) that the Defendants failed to disclose the gross revenue or value attributed to the gross production, and the reductions and/or costs to the Plaintiffs’ royalty payments from the sale to the affiliated intermediaries, on the monthly statements; and (iv) that the Defendants failed to disclose the “character/type of all hydrocarbons ‘produced, processed, used, traded or sold from Plaintiffs’ wells’ ” on the monthly statements. CP MTD Response at 11-12 (quoting FAC ¶¶ 36-37, at 12)(citing FAC ¶36, at 12); WPX MTD Response at 11 (quoting SAC ¶ 39, at 12)(citing SAC ¶¶ 38-39, at 11-12). The Plaintiffs assert that the FAC and SAC allege that the Defendants improperly calculated the amount of their royalty payments, and that the Defendants do not inform the Plaintiffs of the actual volume of oil and/or hydrocarbons produced from the subject wells. See CP MTD Response at 12 (citing Paiz v. State Farm Fire & Cas. Co.,
The Plaintiffs assert that the Defendants’ conduct is more than a breach of contract, but is also fraud, because the Defendants have intentionally, failed “to disclose pertinent information to Plaintiffs and provide false production volumes, values and improper costs when calculating Plaintiffs’ royalty with the intent to deceive Plaintiffs.” CP MTD Response at 12 (citing FAC ¶¶ 36-38, at 12); WPX MTD Response at 11-12 (citing SAC ¶ 38, at 12). The Plaintiffs assert that they have relied upon the Defendants’ representations to their detriment. See CP MTD Response at 12; WPX MTD Response at 12.
The Plaintiffs concede that, as the Defendants allege, New Mexico has not recognized a fiduciary duty between mineral
The Plaintiffs assert, contrary to the Defendants’ allegations, that the Defendants’ sales to affiliated intermediaries constitutes fraud. The Plaintiffs contend that the Defendants’ sales to affiliated intermediaries, through which the Defendants “realize a higher value from the sale of hydrocarbons than what Defendant[s] report to Plaintiffs,” are fraudulent transactions, because the Defendants use “artificial, non-arm’s-length sales or transfers as the basis for its royalty payments .to Plaintiffs,” and because the Defendants do not share the “so-called ‘profits’ on its arm’s length sales with Plaintiffs.” CP MTD Response at 14 (citing FAC ¶¶ 31, 32, 34, at 10-11); WPX MTD Response at 13 (citing SAC ¶¶ 33, 34, 36, 37, at 11-12). The Plaintiffs assert that in Arkalon Grazing Assoc, v. Chesapeake, the United States District Court for the District of Kansas determined that plaintiffs had, in a similar suit, sufficiently alleged that the defendants’ calculation of royalty payments constituted fraudulent concealment. See CP MTD Response at 15; WPX MTD Response at 15. The Plaintiffs urge the Court to reach the same conclusion here as the district court did in Arkalon Grazing Assoc. v. Chesapeake. See CP MTD Response at 15; WPX MTD Response at 15.
The Defendants contend that the Plaintiffs’ allegations of fraud only restate their allegations for breach of contract, and, therefore, are legally insufficient under New Mexico law. See CP Reply at 7 (citing Isler v. Tex. Oil and Gas Corp.,
The Defendants contend, additionally, that even if a duty to disclose exists, the Plaintiffs’ allegations are too conclusory to state a claim for a breach of that duty. See CP Reply at 9; WPX Reply at 8. The Defendants assert that “nothing in Plaintiffs’ response shows that the complaint[s] meet[ ] the more stringent requirements of Rule 9(b) for pleading fraud,” as the Defendants contend that the Plaintiffs’ allegation of a method by which the Defendants may have underpaid royalties is insufficient to meet rule 9(b)’s requirements. CP Reply at 9 (citing United States ex rel. Schwartz v. Coastal Healthcare Group, Inc.,
3. The Plaintiffs’ Third Cause of Action: Breach of the Duty to Market Hydrocarbons.
The Plaintiffs’ third cause of action is based upon the allegation that the Defendants violated the terms of the leases by deducting from the Plaintiffs’ royalties the cost of rendering the hydrocarbons marketable. See FAC ¶¶46, 50, at 14, 15; SAC ¶¶ 47, 52, at 14, 15. The Plaintiffs contend that deducting such costs is a violation of the “mutual covenants and obligations contained in the Leases and/or under state law,” which impose a duty on the Defendants to “market condensate, natural gas, natural gas liquids and all other products derived from the hydrocarbons produced, in order to obtain the highest possible price advantage” for the Plaintiffs. FAC ¶¶ 42-43, at 13; SAC ¶¶ 44-45, at 14. The Plaintiffs assert that the Defendants, as lessees and. owners of working interests in the subject wells, have a duty to “render the natural gas and other hydrocarbons marketable at [their] own expense, and not at the expense of Plaintiffs and other non-cost bearing interest owners.” FAC ¶ 46, at 14; SAC ¶48, at 14.
The Defendants argue that the Plaintiffs have unsuccessfully attempted to state a claim for a breach of the “marketable condition rule” in the third cause of action. CP MTD at 12; WPX MTD at 11. WPX •asserts that the Plaintiffs’ claim can survive only if the duty to “not deduct costs incurred before a gas is in a marketable condition” and to not “deduct costs that are not actually incurred or are unreasonable” is implied into the language of the leases. WPX MTD at 11. WPX posits that New Mexico case law does not allow a court to imply a covenant in an oil and gas lease “except in the absence of any expressed” covenant on the subject. WPX MTD at 12 (citing Libby v. De Baca,
The Plaintiffs assert that the Defendants “again” confuse “the standard for pleading a claim with the standard for proving a claim.” CP MTD Response at 16 (emphasis in original); WPX MTD Response at 16 (same). The Plaintiffs contend that the FAC and SAC adequately allege that the Defendants have breached the implied duty to market through their allegations that the leases impose a duty on the Defendants to “market production to the mutual advantage of.both the lessee and Plaintiffs.” CP MTD Response at 16 (citing FAC ¶ 12, at 4); WPX MTD Response at 16 (citing SAC ¶¶ 44-45, at 14).
The Plaintiffs further contend that New Mexico law recognizes the duty to market hydrocarbons. See CP MTD Response at 18 (citing Davis v. Devon Energy Corp.,
The Plaintiffs assert that the Defendants falsely rely on Darr v. Eldridge, Libby v. DeBaca, and Elliott Indus, in arguing that they do not have a duty to render the hydrocarbons marketable at their own cost. The Plaintiffs assert that Libby v. DeBaca recognizes an implied
The Plaintiffs assert that “courts from around the nation have adopted the marketable condition rule or some version thereof.” CP MTD Response at 22-22 (citing Wallace B. Roderick Revocable Living Trust v. XTO Energy, Inc.,
The Defendants contend that the Plaintiffs have failed to allege a claim for breach of the' marketable condition rule. See CP Reply at 11; WPX Reply at 9. The Defendants assert, first, that the Plaintiffs allegations are insufficient to state a claim that the Defendants breached an implied duty to not deduct post-production costs incurred in rendering hydrocarbons marketable from the Plaintiffs’ royalty payments. The Defendants assert, second, that the Plaintiffs’ allegations that the marketable condition rule is implied in the leases is contrary to the Tenth Circuit’s holding in Elliott Indus. See CP Reply at 11; WPX Reply at 10-11.
The Defendants assert that the Plaintiffs must demonstrate that the leases are silent regarding the deduction of post-production costs, and that the parties intend to be bound by the marketable condition rule, as demonstrated by the leases’ terms. The Defendants assert that the Plaintiffs have failed on both fronts. The Defendants contend that the FAC and SAC are devoid of any factual allegations which would lead to a plausible conclusion that the leases are silent regarding the deduction of post-production costs, and that the parties intended to be bound by the marketable condition rule. See CP Reply at 12; WPX Reply at 10 (citing Cont’l Potash v. Freeport-McMoran, Inc.,
The Defendants also assert that New Mexico has not adopted the marketable condition rule as part of an implied duty to market. See CP Reply at 13 (citing Davis v. Devon Energy Corp.,
The Defendants contend that they have not misinterpreted or misapplied Creson v. Amoco Prod. Co., as the Plaintiffs assert. The Defendants argue that, just as in Creson v. Amoco Prod. Co. the Court of Appeals of New Mexico held that the gas
4. The Plaintiffs’ Fourth Cause of Action: Violation of the New Mexico Oil and Gas Proceeds Payment Act.
The Plaintiffs allege that the Defendants failed on “numerous instances” to make timely royalty payments to the Plaintiffs as required by New Mexico and Colorado statutes. FAC ¶¶ 55-57, at 16; SAC ¶¶ 57-59, at 16-17. See FAC at 16; SAC at 16. The Plaintiffs- state that the Proceeds Payment Act requires the Defendants to pay royalties within forty-five days of the end of the calendar month in which the Defendants receive payment for the Plaintiffs’ interests. See. FAC ¶55, at 16; SAC ¶ 57, at 16. The Plaintiffs also allege that Colo.Rev.Stat. § 34-60-118.5 imposes the same duty on the Defendants, but provides a ninety-day window for the Defendants to pay the Plaintiffs’ royalties. See FAC ¶ 56, at 16; SAC ¶ 58, at 16. The Plaintiffs assert that the Defendants have failed to meet both of these time limits on numerous occasions. See FAC ¶¶ 55-57, at 16; SAC ¶¶ 57-59, at 16-17.
The Defendants argue that the Court should dismiss the Plaintiffs’ fourth cause of action, because the statutes upon which the Plaintiffs rely do not support their allegations. See CP MTD at 20; WPX MTD at 22-23. The Defendants asserts that the Proceeds Payments Act provides only a derivative remedy and will not support a claim for relief absent evidence that a lessor breached an underlying agreement with an interest owner. See CP MTD at 20; WPX MTD at 25-26. WPX argues that, under Elliott Indus., the Plaintiffs must allege a “ ‘claim for underpayment of royalties or theory of liability ... independent of any claim under the Act itself.’ ” WPX MTD at 26 (quoting Elliott Indus.,
ConocoPhillips additionally argues that “[njothing in the Act suggests that the interest ‘penalty’ and attorneys’ fees provision apply to contractually-based claims by royalty owners contending payments previously received were incorrectly calculated under novel legal theories.” CP MTD
WPX also asserts that the Proceeds Payment Act does not extend relief to the Plaintiffs’ allegation of royalty underpayments. See WPX MTD at 22. Further, WPX asserts that the Proceeds Payment Act provides relief to a royalty owner only after the royalty owner has submitted to a royalty payor a division order “setting forth the royalty owner’s proper interests” in oil and gas proceeds, and the royalty payor withholds a royalty payment, as explained in N.M.S.A.1978, § 70-10-5. WPX MTD at 22. WPX asserts that, under N.M.S.A.1978, § 70-10-5, a royalty payor may withhold payment of oil-and-gas proceeds, and avoid interest, when: (i) “the payor believes in good faith that the payee does not have good and marketable title;” (ii) “the payor has received other information” questioning the payee’s asserted title to a royalty payment; (iii) the royalty owner has “failed or refused to execute a division or transfer order in favor of the payor;” or (iv) “the amount is less than $100.” WPX MTD at 23-24 (citing N.M.S.A.1978, § 70-10-5(A)-(D); Murdock v. Pure-Lively Energy 1981-A, Ltd.,
WPX asserts that the Plaintiffs’ allegations do not set forth a situation that the Proceeds Payment Act covers. WPX first contends that the Plaintiffs have not demonstrated that they hold an interest in oil and gas proceeds, the payment of which WPX has withheld. ConocoPhillips contends that the Plaintiffs have failed to identify any “specific interest” in an oil and gas proceed, or the “type of ‘proceeds’ or the ‘value’ to which their purported interests apply.” WPX MTD at 24-25 (quoting N.M.S.A.1978, § 70-10-2(B)). WPX argues that the Plaintiffs’ assertion of an ownership in “ ‘non-cost bearing interests’ ” is insufficient to qualify for relief under the Proceeds Payment Act, because it covers only those oil and gas proceeds described in N.M.S.A.1978, § 70-10-2(B). WPX MTD at 25 (quoting SAC ¶¶ 10, 23, at 3, 7). WPX also argues that the Plaintiffs do not qualify for relief under the Proceeds Payment Act.unless they demonstrate that WPX “has withheld royalty payments from them after having been furnished with a division or transfer order declaring Plaintiffs’ interest in the oil and gas proceeds,” in addition to the information N.M.S.A.1978, § 70-10-3.1 requires. WPX MTD at 25.
The Plaintiffs assert that they have sufficiently alleged that the Defendants are in breach of their contract and that they need
The Plaintiffs contend that WPX’s allegation that the Plaintiffs do not qualify for relief under the- Proceeds Payment Act because they have not alleged that WPX received a division or transfer order pursuant to N.M.S.A.1978, § 70-10-3.1 before failing to pay the Plaintiffs’ royalties fails for two reasons. First, the Plaintiffs contend that the Proceeds Payment Act does not predicate a party’s right to relief upon the party’s submission of a division or transfer order to a payor. Second, the Plaintiffs assert that the Proceeds Payment Act requires the producer, and not a royalty owner, to provide a division or transfer order. The Plaintiffs assert that their theory for relief under the Proceeds Payment Act is not predicated upon the allegation that the Defendants failed to make payment because a producer was “unaware of its interest or: mailing address.” WPX MTD Response at 23.
The Defendants contend that the Plaintiffs cannot bring a claim under the Proceeds Payment Act, because they have not alleged an independent claim for breach of contract. See CP Reply at 18 (citing Elliott Indus.,
WPX further asserts that the Proceeds Payment Act redresses only the withholding of royalty payments after a payor receives a division order setting forth an interest owner’s interest in oil and gas proceeds. See WPX Reply at 17 (“In other words, the harm which the Act is intended to protect against is the withholding by a royalty payor of oil-and-gas proceeds in violation of the law of division orders as codified in the Act.”). The Defendants contend that the Proceeds Payment Act imposes a penalty on a payor only if the payor withholds proceeds after the payor receives a “duly executed divi
5. The Plaintiffs’ Fifth Cause of Action: Bad Faith Breach of Contract.
The Plaintiffs’ fifth cause of action alleges that the Defendants have “continuously, maliciously and wrongfully withheld the benefits owed to Plaintiffs ... under the terms of the Leases.” FAC ¶ 61, at 17; SAC ¶ 63, at 17. The Plaintiffs allege that the Defendants breached their duty to make proper royalty payments, properly report production and sales values, and to act with good faith and fair dealing. See FAC ,¶ 61, at 17; SAC ¶ 63, at 17. The Plaintiffs .allege that the Defendants’ “breach of these contractual duties was continuous, intentional, unjustified, and further constitutes fraudulent concealment.” FAC ¶ 61, at 17; SAC ¶ 63,-at 17. The Plaintiffs allege they are entitled to punitive damages to recover from the Defendants’ bad faith breach of contract. See FAC ¶¶ 63-64, at 17; Second AC-Williams ¶¶ 64-65, at 17.
The Defendants assert, similar to their arguments against Plaintiffs’ second cause of action, that the Court must dismiss the Plaintiffs’ claim of bad-faith breach of contract, because the Plaintiffs are seeking tort remedies for the breach of a contractual duty. See CP MTD at 21-22; WPX MTD at 26-27. The Defendants argue that New Mexico case law precludes tort recovery for a breach-of-contract claim, save for instances where a fiduciary relationship exists between the parties. See CP MTD at 21-22 (citing Bourgeous v. Horizon Healthcare Corp.,
The Plaintiffs assert that they may recover for the Defendants’ bad faith breach of contract under New Mexico law if they prove that the Defendants acted with a “culpable state of mind.” CP MTD Response at 24 (citing Pub. Serv. Co. of N.M. v. Diamond D Constr. Co.,
The Defendants contend that the Plaintiffs have not attempted to distinguish or even address New Mexico case law which preclude a party from recovering in tort for the breach of a contract. See CP Reply at 19 (citing Bourgeous v. Horizon Healthcare Corp.; Sunnyland Farms, Inc. v. Gen. N.M. Elec. Coop.,
6. The Plaintiffs’ Sixth Cause of Action: Unjust Enrichment and Declaratory Relief.
In their sixth cause of action, the Plaintiffs allege that the Defendants’ method of paying the Plaintiffs’ royalties has unjustly enriched the Defendants, and the Plaintiffs assert that they are entitled to declaratory relief enjoining the Defendants’ current method royalty payments. See FAC ¶¶ 65-68, at 18; SAC ¶¶ 67-69, at 18. The Plaintiffs allege that they are entitled to restitutionary recovery and declaratory relief from the Defendants’ “contractual breach(es) and ... tortious conduct” described in the FAC and SAC. FAC ¶ 66, at 18; SAC ¶ 68, at 18. The Plaintiffs state that injunctive relief is necessary to avoid multiple suits against the Defendants, and the Plaintiffs request the Court to enjoin the- Defendants from their “current and historic payment methods and to order [the Defendants] to utilize a method of payment which results in Plaintiffs receiving an arm’s length value of their hydrocarbons, without reduction for1 unlawful costs or charges.” FAC ¶¶ 67-68, at 18; SAC ¶¶ 69-70, at 18-19. The Plaintiffs request that the Court issue a declaratory judgment “governing, restraining, and enjoining” the Defendants’ activities “relating to such production and payments to Plaintiffs and Class Members and reporting in monthly statements for all volumes of natural gas production, drip condensate and other hydrocarbons, as well as revenues, values/sales of said hydrocarbons in accordance with applicable state law.” FAC ¶ 74 at 19-20; SAC ¶ 76, at 20. The Plaintiffs also move the Court to fashion the declaratory judgment so as to “adjudicate and govern the future reporting of all production and imposition of any expenses or costs to Plaintiffs” incurred in the production and sale process of Plaintiffs’ hydrocarbon interests. FAC ¶ 75 at 20; SAC ¶ 77, at 20.
The Defendants argue that the Plaintiffs’ claim for unjust enrichment and declaratory relief are improper. Similar to the Defendants’ arguments against the Plaintiffs’ claim for bad-faith breach of contract, the Defendants assert that “the Tenth Circuit ... does not recognize unjust enrichment claims where the same parties have an express contract.” CP MTD at 25 (citing Elliott Indus., 407 F.3d
The Defendants also argue that the Court should dismiss the Plaintiffs’ claim for declaratory relief, because the Plaintiffs’ claims for relief are non-specific and their requested relief is impermissible under the Declaratory Judgment Act. See CP MTD at 27; WPX MTD at 29. First, the Defendants assert that the Plaintiffs’ request for a declaratory judgment does not identify the legal rights and obligations that the Plaintiffs wish the Court to declare, and, thus, fails to state a claim for relief under the Declaratory Judgment Act, 28 U.S.C. § 2201 (2005). See CP MTD at 27; WPX MTD at 29. Additionally, the Defendants argue that the Plaintiffs are asking the Court to grant “coercive” relief in their request, because the Plaintiffs move the Court to “govern,” “restrain,” “enjoin,” “report,” and “adjudicate” the Defendants’ actions. CP MTD at 27-29; WPX MTD at 29. ConocoPhillips further asserts that the Plaintiffs’ request for a declaratory judgment is redundant, because the Plaintiffs are asking the Court to declare contractual rights, which the Court will resolve when deciding the Plaintiffs’ contractual allegations. See CP MTD at 28-29. ConocoPhillips also argues that the Court should dismiss- the Plaintiffs’ request for declaratory relief, because the Court’s adjudication of the Plaintiffs’ contractual claims provides an adequate, alternative remedy to the Plaintiffs. See CP MTD at 28-29 (citing State Farm Fire & Cas. Co. v. Mhoon,
The Plaintiffs concede that their claims are “grounded in breach of contract,” but contend nonetheless that they may pursue “an equitable claim at 'this juncture.” CP MTD Response at 25; WPX MTD Response at 24. The Plaintiffs assert that, if the Court determines that the parties are not in privity of contract, the Court may determine that the Plaintiffs may prevail on their “alternative .claim for unjust enrichment [ ] against the Defendant.” CP MTD Response at 25; WPX MTD Response at 24-25. The Plaintiffs assert that Elliott Indus, does not support the Defendants’ contention that they may not proceed on an unjust enrichment theory for claims grounded in a contract, because the Tenth Circuit was reviewing the district court’s ruling on a motion for summary judgment and not on a motion to dismiss. See CP MTD Response at 25; WPX MTD Response at 25.
The Plaintiffs also assert that their claim for declaratory relief is not redundant to their breach-of-contract claims, ber cause, even if the Court finds that the Defendants have breached the leases, the Defendants may still “continue to breach the lease agreement, and send false monthly reports,” without a declaratory judgment. CP MTD Response at 25-26; WPX MTD Response at 25. The Plaintiffs assert that their requested relief is “precisely the type of situation that the Federal Declaratory Judgment Act ... is intended to remedy.” CP MTD Response at 26; WPX MTD Response at 25. The Plaintiffs assert that their request for declaratory relief in the FAC and SAC are sufficiently specific to survive a motion to dismiss. See • CP MTD Response at 26 (citing FAC ¶¶ 68, 74-75, at 18-20); WPX MTD, Response at 26 (citing SAC ¶¶ 70, 76-77, at 19-20). The Plaintiffs contend that the Defendants have cited to no authority which would support their request for the Court to dismiss their request for
The Defendants note that the Plaintiffs concede that their claims for unjust enrichment are “ ‘grounded in breach of contract’ ” and assert that the Plaintiffs have argued in a conclusory manner that New Mexico law does not preclude them from seeking an equitable remedy for the Defendants’ alleged breach. CP Reply at 20 (citing CP MTD Response at 25); WPX Reply at 20 (citing WPX MTD Response at 24). The Defendants also assert that the Plaintiffs have not pled unjust enrichment in the alternative, as they allege. See CP Reply at 20 (citing CP MTD Response at 25 n. 5; FAC ¶ 66, at 18); WPX Reply at 20; (citing WPX MTD Response at 25 n. 5; SAC ¶ 68, at 18). Regarding the Plaintiffs’ request for declaratory relief, the Defendants assert that the Plaintiffs have not refuted their reasons for dismissing the request and assert that declaratory relief is inappropriate, because the Court will resolve the parties’ contractual obligations on the Plaintiffs’ breach-of-contract claims. See CP Reply at 21-22; WPX Reply at 21-22.
7. . The Plaintiffs’ Seventh Cause of Action: Conversion.
Last, the Plaintiffs allege that the Defendants have “exercised, and [are] exercising unlawful dominion and control over said proceeds otherwise payable to Plaintiffs, and have willfully and intentionally and unlawfully converted same to their own use and benefit.” FAC ¶ 70, at 19; SAC ¶ 72, at 19. The Plaintiffs allege that the Defendants’ conversion of the Plaintiffs’ proceeds has damaged them, and the Plaintiffs allege that, the Defendants’ conversion was and is “malicious, oppressive and/or committed recklessly with wanton disregard for the rights of the Plaintiffs.” FAC ¶ 72, at 19; SAC ¶ 74, at 19.
The Defendants assert similar arguments against the Plaintiffs conversion allegation as against the Plaintiffs’ second, fifth, and sixth causes of action. See CP MTD at 30-31; WPX MTD at 31-32. The Defendants argue that the law does not provide a cause of action for conversion where the only allegation is that a party has withheld payments contractually owed, as the Plaintiffs allege here. See CP MTD at 30-31; WPX MTD at 32. WPX also asserts that the Plaintiffs’ cause of action for conversion is “duplicative of their first cause of action for failure to pay royalties on volumes of hydrocarbons.” WPX MTD at 31-32. WPX argues that the “existence of a contractual relationship ... covering the same subject matter” as the conversion claim bars the Plaintiffs’ seventh cause of action. WPX MTD at 31 (citing Isler v. Tex. Oil & Gas Corp.,
The. Plaintiffs ■ admit that their seventh cause of action is “inartfully pleaded,” but contend that their claim of conversion is grounded in the Defendants’ “wrongful conversion of hydrocarbons in the form of fuel gas and retention of the monies earned from the sale of such fuel gas, as indicated in multiple paragraphs” in the FAC and SAC. CP MTD Response at 28; WPX MTD Response at 27-28. The Plaintiffs contend that they have alleged that the Defendants derive drip condensate from the subject wells but do not pay the Plaintiffs for the value of the drip condensate, which the Plaintiffs assert is
The Defendants contend that the Plaintiffs have entirely ignored their argument that “there can be no tort action to recover money owed under a contract.” CP Reply at 23; WPX Reply at 23. The Defendants assert that the Plaintiffs are not suing for the conversion of their share of hydrocarbons and are, based upon the FAC and SAC, suing for conversion of money. See CP Reply at 23 (citing FAC ¶¶ 70-72, at 19); WPX Reply at 23 (citing SAC ¶¶ 72-73, at 19). The Defendants also assert that, even if the Plaintiffs are suing for the alleged conversion of hydrocarbons, this allegation is nothing more than a “breach of contract claim, and Plaintiffs cannot recover in tort for breach of contract.” CP reply at 23-24; WPX Reply at 23.
8. The Plaintiffs’ Class Action Allegations.
The Plaintiffs file their suit as a class action under N.M.R.A. CIV 1-023 (2011), on behalf of themselves and as “representatives of ... all other owners of ‘non-cost bearing’ interest in the subject wells.” FAC ¶ 12, at 4; SAC ¶ 13, at 4. The Plaintiffs allege, on information and belief, that the absent class members total more than 1,000 non-cost-bearing interest owners throughout New Mexico, Colorado, and numerous other states. See FAC ¶ 13, at 4; SAC ¶ 14, at 4. The Plaintiffs allege that joinder of “all or even a majority of the Class herein is impracticable, if not impossible.” See FAC ¶ 13, at 4; SAC ¶ 14, at 4. The Plaintiffs state that their “individual loss and potential recovery is and will be” so small as to preclude them from bringing their claims individually, and, thus, the only way for them to litigate their claims is as a class action. FAC ¶ 14, at 5; SAC ¶ 15, at 5. The Plaintiffs further state that separate actions would create a risk of inconsistent adjudications, or would result in adjudications that are “dispositive of the interests of the other Class Members” and thus be an impediment to the ability of all class members to protect their interests. FAC ¶ 15 at 5; SAC ¶ 16, at 5. The Plaintiffs allege that “substantial questions of law and fact” are common to their claims against the Defendants, only varying with respect to the “quantum or amount of interest owned by each [c]lass [m]ember.” FAC ¶ 16 at 5; SAC ¶17 at 5-6. The named Plaintiffs allege that their claims are typical of the claims of each of the class members’, having derived their claims from “identical facts which demonstrate improper conduct on the part of [the Defendants] and damages incurred by the [c]lass [m]embers.” FACT 17 at 5-6; SAC ¶ 18 at 6. The Plaintiffs state that they will “fairly and adequately protect and represent the interest of the” class and individual class members, and state that a “class action is superior to multiple individual lawsuits for the fair and efficient adjudication of the matters alleged herein,” because common questions of law and fact predominate over individual questions of the class members. FAC ¶ 18-19, at 6; SAC ¶ 19-20, at 6.
The Defendants assert that the Plaintiffs’ claims are “insufficient to support a class action.” CP MTD at 31; WPX MTD at 32. The Defendants assert that the FAC and SAC do not comply with pleading standards of rule 8(a), or those that the Supreme Court of the United States articulated in Wal-Mart Stores, Inc. v. Dukes, -U.S.-,
The Plaintiffs contend that Wal-Mart Stores, Inc. v. Dukes is “factually dissimilar, inapposite, and therefore inapplicable to the allegations in this case.” CP MTD Response at 29; WPX MTD Response at 28. The Plaintiffs contend that, unlike the plaintiffs in Wal-Mart Stores, Inc. v. Dukes, which could not meet the commonality requirement, because they could not allege a “ ‘companywide discriminatory pay and promotion policy,’ ” the Plaintiffs’ have alleged that the Defendants committed a systematic wrong of failing to “accurately report, value, calculate and pay royalty on produced hydrocarbons.” CP MTD Response at 29 (quoting Wal-Mart Stores, Inc. v. Dukes,
The Defendants assert that they are not requesting the Court to dismiss the Plaintiffs’ class-action allegations because they will “ ‘ultimately be denied in this case,’ ” but rather because the Plaintiffs have “failed under Rule 8(a) to state a claim for class relief.” CP Reply' at 24 (quoting CP MTD Response at 28); WPX Reply at 23 (quoting WPX MTD Response at 28). The Defendants contend that the Plaintiffs have not demonstrated that their class allegations rise above conclusory recitations of rule 23’s requirements. The Defendants. also assert that the authorities upon
9. The Court’s Hearing on June 19, 2012.
The Court held a hearing on the CP MTD and WPX MTD on June 19, 2012. See Transcript of Hearing (taken June 19, 2012), filed July 5, 2012 (Case No. CIV 12-0039 Doc. 39); Transcript of Hearing (taken June 19, 2012), filed July 5, 2012 (Case No. CIV 12-0040 Doc. 54) (“Tr.”). Because the Plaintiffs have filed near-identical complaints against ConocoPhillips and, in a separate matter, WPX, the Court invited the Defendants to present their arguments in support of the CP MTD and WPX MTD together at the hearing. See Tr. at 3:8-18 (Court). Both sets of Defendants agreed to so do. See Tr. at 3:19-20 (Berge); see id. at 3:22-24 (Campbell).
The Defendants asserted that all of the Plaintiffs’ causes of action in the FAC and SAC “suffer from the same deficiencies!:] ... being long on conclusory statements and short on actual specificity.” Tr. at 5:18-6:10 (Campbell). The Plaintiffs contended that they have “alleged specific causes of action based centrally around breach of contract that entitle the plaintiffs to relief once proven with the facts that we will elicit.” Tr. at 9:23-10:1 (Brickell).
Turning to the Defendants’ request that the Court dismiss the Plaintiffs’ first cause of action for breach of contract, the Defendants contended that the FAC and the SAC completely lack factual specificity regarding the nature, scope, and import of the parties’ contractual relationship. See Tr. at 10:14-23 (Campbell). The Defendants pointed out that, in paragraph 24 of the FAC, the Plaintiffs list four leases and asserted that the named Plaintiffs are not the named parties on the leases. See Tr. at 10:24-11:2 (Campbell). ConocoPhillips conceded, however, that it is currently making royalty payments to the named Plaintiffs. See Tr. at 11:3-8 (Court, Campbell). The Defendants asserted, nonetheless, that the Plaintiffs have failed to point to a specific contractual term that the Defendants have breached. See Tr. at 11:12-16 (Campbell). The Defendants contended that the oil-and-gas lease referenced in paragraph 24 of the FAC, which lists the United States Land Office, Department of the Interior as the lessor, cannot entitle a plaintiff to a royalty interest. See Tr. at 11:20-25 (Campbell). The Defendants asserted that they need to know whether the Plaintiffs hold royalty interests or overriding interests, but the Court countered that, if the Defendants are paying a royalty to the Plaintiffs, then the Defendants must know what type of interest the Plaintiffs own, which Defendants conceded is true. See Tr. at 12:7-18 (Campbell, Court). The Defendants contended however, that, without the Plaintiffs’ reference to “specific terms in the contract which we are alleged to have breached,” they cannot structure a response. Tr. at 12:22-13:11 (Campbell). The Defendants conceded that, if the Plaintiffs informed them of the specific nature of their interests, “it’s possible that they will have nudged their Count 1 breach of contract claim across the line between conceivable and plausible.” Tr. at 13:12-18 (Campbell). The Defendants stated they would also like to know how the Plaintiffs acquired interests in the leases. See Tr. at 13:25-14:4 (Berge).
The Plaintiffs contended that the Defendants have access to the title opinions for the Plaintiffs’ ownership interests, any division orders, and any previous title opinions. See Tr. at 16:9-20, (Brickell). The Plaintiffs contended that they do not have any of those items, but that the Defendants “are always going to be in possession of all of the information” necessary to prove the Plaintiffs’ case. Tr. at 16:21-24 (Brickell). The Plaintiffs contended that the leases normally do not contain more than one royalty clause and that the Defendants have the instruments creating each of the Plaintiffs’ interests. See Tr. at 17:6-20 (Brickell). The Plaintiffs asserted that “there is no doubt to anyone in the room here they know which provision in the lease provides for royalty and what it says.” Tr. at 17:21-25 (Brickell). The Plaintiffs explained that the leases listing the United Sates Land Office, Department of the Interior, and the State of New Mexico, as lessors, are leases in which the Plaintiffs own overriding interests. See Tr. at 19:6-12 (Court, Brickell). The Plaintiffs explained that the royalty clauses are not identical in each of the Plaintiffs’ leases, but that the exact language does not matter, because the Plaintiffs allege in the first cause of action that the Defendants have breached each of the leases by not paying the Plaintiffs for the value of drip condensate derived from the subject wells. See Tr. at 18:22-21:12 (Brickell).
Regarding the Defendants’ assertion that the Plaintiffs should have provided facts regarding the sales to affiliated intermediaries, the Plaintiffs stated that they .do not “know exactly who the affiliates are.” Tr. at 23:1-2 (Brickell). The Plaintiffs contended, however, that they would request the intermediaries’ gas purchase contracts in discovery. See Tr. at 23:3-7 (Brickell).
The Defendants conceded that, given that they possess the lease contracts, if the Plaintiffs áre alleging that the Defendants breached the royalty clause, the Plaintiffs’ breach of contract claim does not lack specificity. See Tr. at 23:14-20 (Campbell)(“[W]e know whether these individual plaintiffs are royalty owners or overriding royalty owners.... If it is the plaintiffs’ statement that it is the royalty clause ... that has been breached ... then, arguably, we have all we need.... ”). The Plaintiffs stated that the royalty clause, in some instances, includes the term “drip condensate” or “oil removed by mechanical means,” and that the clause which the Defendants are breaching in the overriding interests is in the “assignment creating the override and specifying the exact percentage or decimal interest in production.” Tr. at 23:24-24:7 (Brickell). The Plaintiffs stated that the Defendants have all of the instruments in question in then-land file. See Tr. at 24:7-9 (Brickell). The Plaintiffs stated that they do not want to be “hamstrung” by alleging that the Defendants are breaching only the royalty clause, and asserted that, because the issue is before the Court on a motion to
The Court stated that it is inclined to find that the Plaintiffs have alleged a plausible claim for breach of contract, given that the Plaintiffs have identified the contracts at issue and the provisions allegedly breached. See Tr. at 27:9-14 (Court).
Turning to the Plaintiffs’ second cause of action for fraud, the Defendants contended that, under Elliott Indus., the Plaintiffs must demonstrate that the tort damages which they seek do not conflict with the contractual remedies available to the Plaintiffs. See Tr. at 27:22-28:2 (Campbell). The Defendants asserted that, under Elliott Indus, and Isler v. Tex. Oil and Gas Corp., the Plaintiffs may not seek tort damages for the breach of a contract. See Tr. at 28:3-7 (Campbell). The Defendants asserted that the same problem infects the Plaintiffs’ second, fifth, and seventh causes of action. See Tr. at 28:8-10 (Campbell).
The Defendants further asserted that the Plaintiffs fail to meet rule 9(b)’s heightened pleading standard. See Tr. at 28:14-22 (Campbell). The Defendants asserted that transactions with affiliated intermediaries do not, alone, constitute fraud. See Tr. at 28:23-29:2 (Campbell). Regarding the Plaintiffs’ assertion that the Defendants committed fraud by omission, the Defendants contended that, under Confl Potash, Inc. v. Freeport-McMoran, Inc., breách of an implied covenant of good faith and fair dealing soünds in contract, not tort, and that, because the Defendants do not owe fiduciary duties to the Plaintiffs, the Defendants have no duty to disclose information to the Plaintiffs:- See Tr. at 29:3-11 (Campbell). The Defendants contended that, in the Tenth Circuit, royalty payors do not owe fiduciary duties to royalty payees. See Tr. at 29:12-15 (Campbell).
The Court inquired whether the Defendants understand Elliott Indus, to preclude the Plaintiffs from bringing a fraud claim based upon the Defendants’ alleged breach of a contract. See Tr. at 29:21-25 (Court). The Defendants stated that they understand Elliott Indus, to hold that a party may not bring a fraud claim based upon the same conduct as a breach-of-contract claim. See Tr. at 30:1-5 (Campbell). The Defendants asserted that, if all the Plaintiffs assert is that the Defendants breached a contract, then the Plaintiffs may not, under Elliott Indus., bring a claim for conversion or bad-faith breach of contract. See Tr. at 30:10-15 (Campbell).
The Defendants also asserted that, apart from 9(b)’s heightened pleading standards, the Plaintiffs’ allegations in the second cause of action, even if true, do not allege a claim of -fraud. See Tr. at 30:18-24
The Plaintiffs asserted that Elliott Indus. does not govern their claim for fraud, because unlike the plaintiffs in Elliott Indus., the Plaintiffs have not dismissed their breach-of-contract claims. See Tr. at 31:15-22 (Brickell). The Court inquired whether the Plaintiffs agreed that Elliott Indus, requires them to allege their claim for fraud separately from the facts necessary to support their breach-of-contract claim, and the Plaintiffs stated they agree. See Tr. at 31:24-32:7 (Court, Plaintiffs). The Plaintiffs asserted, however, that they understood Elliott Indus, to hold that, “without the ... breach of contract claim, then the fraud claim cannot he, because that was the essence of the relationship between the parties.” Tr. at 32:9-13 (Brickell). The Court stated that it understood Elliott Indus, to hold that a party cannot use the same set of facts to allege both a breach-of-contract and tort claim. See Tr. at 32:14-25 (Court). The Plaintiffs asserted that, under New Mexico law, a fraud claim may arise from a contractual relationship, as long as the fraud claim is based upon independent activity. See Tr. at 33:1-6 (Brickell). The Plaintiffs asserted that, if they can allege a “fraudulent context in the context of this contractual relationship, we can recover punitive damages in addition to the actual damages.” Tr. at 33:7-14 (Brickell).
The Plaintiffs contended that they have adequately alleged a claim for fraud, by alleging that the Defendants withheld information in the 'monthly check stubs, check stubs upon which the Plaintiffs have relied to their detriment. See Tr. at 33:15-24 (Brickell). The Plaintiffs asserted that once the Defendants choose to speak to them, they incurred a duty to speak accurately. See Tr. at 34:4-10 (citing R.A. Peck, Inc. v. Liberty Fed. Sav. Bank). The Plaintiffs asserted that they allege in the FAC and in the SAC that the monthly statements do not include the value of the drip condensate, which renders the monthly statements fraudulent, because the Defendants purport to include the total value of the oil-and-gas'proceeds in the monthly statements. See Tr. at 34:11-25 (Brickell). The Plaintiffs asserted that their allegations of fraud in the FAC and SAC are consistent with New Mexico’s Uniform Jury Instruction 13-633, which recites the elements of fraud. See Tr. at 35:1-19 (Brickell). The Plaintiffs contended that, in Jessen v. Nat’l Excess Ins. Co., the Supreme Court of New Mexico found that a plaintiff was entitled to punitive damages for a defendant’s breach of a contract, because the defendants’ breach was “malicious, fraudulent, oppressive, or committed with wanton disregard for plaintiffs rights.” Tr. at 34:20-35:2 (Brickell). The Plaintiffs contended that they have pleaded sufficient allegations of fraud to put the Defendants on notice of their claims. See Tr. at 36:5-24 (Brickell).
The Court inquired how the Plaintiffs relied upon the monthly statements in any way that would separate the Plaintiffs’ fraud claims from their breach-of-contract claims. See Tr. at 37:1-5 (Court). The Plaintiffs contended that the Defendants are not including all of the post-production reductions in the monthly statements. See Tr. at 37:6-14 (Brickell). The Plaintiffs asserted that the Defendants’ disclosure of some, but not all, of the deductions causes them to believe that the reductions “must be reasonable, [and] ... lawful.” Tr. at 37:15-25 (Brickell).
The Court inquired how the Plaintiffs’ damages for the Defendants’ omissions
The Court stated that the Plaintiffs’ allegation of fraud seems to be sufficiently specific, but that the determination whether to dismiss the claim is dependent upon whether the Plaintiffs legally may allege fraud based upon the facts in the FAC and in the SAC. See Tr. at 40:3-10 (Court). The Defendants contended that, under Elliott Indus. and Isler v. Tex. Oil and Gas Corp., the facts set forth in the FAC and in the SAC cannot give rise to a claim of fraud. See Tr. at 40:15-16 (Campbell). The Defendants asserted further that the Plaintiffs have pointed to no clause in the leases which requires them to send out accurate monthly statements. See Tr. at 41:10-11 (Campbell). The Court inquired whether the absence of such a provision in the lease supports the Plaintiffs’ claim for fraud under Elliott Indus, and Isler v. Tex. Oil and Gas Corp., and the Defendants contended that the Plaintiffs are still alleging only that the Defendant breached the contract and failed to disclose that they breached the contract, which does not support their allegation of fraud under Tenth Circuit law. See Tr. at 41:12-42:8 (Court, Campbell). The Defendants contended that, in Elliott Indus., the Tenth Circuit held that “ ‘[n]o tort duty can be imposed on a party where that party’s same duties and rights are specifically defined by contract,’ ” which the Defendants assert means that the parties’ contractual relationship precludes the Plaintiffs’ claim for fraud. Tr. at 46:10-13 (Berge)(quoting Elliott Indus.,
The Plaintiffs contended that the leases do not require the Defendants to send out monthly statements, and, therefore, the leases define the Defendants’ duty regarding monthly statements, rather than the Tenth Circuit’s ruling in Elliott Indus. See Tr. at 47:3-20 (Brickell). The Defendants countered, however, that the plaintiffs in Elliott Indus, made exactly the same allegation — that the defendants’ failure to disclose certain reductions in monthly statements amounted to fraud. See Tr. at 48:18-419:9 (Campbell). The Defendants asserted that the Plaintiffs’ failure to link the duty to disclose to a contractual term is the same fatal flaw which the plaintiffs made in Elliott Indus., and, therefore, the Court should dismiss the Plaintiffs’ allegations of fraud. See Tr. at 49:10-17(Campbell).
Turning to the Plaintiffs’ third cause of action — that the Defendants have breached a duty to market hydrocarbons, the Defendants asserted that the marketable condition rule runs afoul of the “history of the industry in the San Juan Basin and in the country.” Tr. at 50:2-3 (Campbell). The Defendants contended that the “vast majority of states,” including Texas and New Mexico, have rejected the marketable condition rule. Tr. at 50:9-51:3 (Campbell). The Defendants asserted that the Tenth Circuit rejected the same theory of a violation of the marketable condition rule
The Plaintiffs countered that the Defendants’ assertion that New Mexico choose not to adopt the marketable condition rule is not consistent with the Supreme Court’s decision in Davis v. Devon Energy Corp., because the Supreme Court remanded the case to the district court for an adjudication on the merits. See Tr. at 53:20-24 (Brickell). The Plaintiffs asserted that whether the Supreme Court of New Mexico will adopt the marketable condition rule is still an open question, because the Supreme Court of New Mexico did not reject the rule in Davis v. Devon Energy Corp. See Tr. at 54:15-55:13 (Brickell). The Plaintiffs asserted that Creson v. Amoco Prod. Co. is inapplicable, because the parties in that case stipulated that the gas was marketable at the wellhead, and on that basis, the Tenth Circuit explained, in Elliott Indus., that “expenses that may be imposed that enhance the value of that gas to the royalty share might be proportionately borne by the royalty side.” Tr. at 55:14-22 (Brickell). The Plaintiffs contended that they have not stipulated that the oil and gas from the subject wells is marketable at the wellhead, and, therefore, that aspect of Elliott Indus.’s holding does not bind their claims. See Tr. at 55:23-56:2 (Brickell). The Plaintiffs asserted that the Defendants are attempting to characterize the Supreme Court of New Mexico’s decision in Davis v. Devon Energy Corp. as “wrong,” but that the Court must follow New Mexico’s law as the Supreme Court of New Mexico announced it. Tr. at 56:11-16 (Brickell). The Plaintiffs contended that, in Davis v. Devon Energy Corp., the Supreme Court of New Mexico did not disturb the district court’s finding of an implied duty to market hydrocarbons. See Tr. at 56:17-23 (Brickell).
The Plaintiffs stated that they do not agree that the Tenth Circuit construed New Mexico law, in Elliott Indus., to not follow the marketable condition rule. See Tr. at 57:16-21 (Court, Brickell). The Plaintiffs contended that the Tenth Circuit did not rule on the existence of an implied duty to' market hydrocarbons in Elliott Indus, because the plaintiffs had expressly dropped their breach-of-contract claims. See Tr. at 58:3-13 (Brickell).
The Defendants countered that the Tenth Circuit addressed precisely the posture of the Plaintiffs’ claims in Elliott Indus., when the Tenth Circuit found that “ ‘[t]his conception of the implied duty to market finds no support within New Mexico case law.’ ” Tr. at 59:5-15 (Campbell)(quoting Elliott Indus.,
The Court stated that it will study Elliott Indus, in further detail regarding the Plaintiffs’ claims for fraud and breach of an implied duty to market hydrocarbons. See Tr. at 62:4-7 (Court). The Court stated, however, that it understands .Elliott Indus, to interpret New Mexico law as not adopting the marketable condition rule, and is inclined to grant the CP MTD and WPX MTD regarding the Plaintiffs’ third cause of action. See Tr. at 62:12-25 (Court). The Plaintiffs urged the Court to examine Creson v. Amoco Prod. Co., because, they asserted, the Tenth Circuit relied on that case in Elliott Indus., but in that case, the parties stipulated that the oil and gas was marketable at the wellhead, therefore distinguishing their FAC and SAC from the Tenth Circuit’s holding in Elliott Indus. See Tr. at 63:6-16 (Brickell). The Court responded that it is “stuck with Elliott,'” notwithstanding factual distinctions between the Plaintiffs’ claims and the claims in Creson v. Amoco Prod. Co. See Tr. at 64:2-12 (Court, Brickell). The Plaintiffs also asserted that their third cause of action is not limited to a violation of an implied duty to market hydrocarbons, but that they have also alleged that the Defendants underpaid them for their royalty interests by deducting more than the reasonable or actual expenses from the royalty payments. See Tr. at 64:13-21 (Brickell); id. at 65:1-18 (Brickell)(citing FAC ¶¶ 51-51, at 15). The Plaintiffs requested that the Court grant them leave to file an amended complaint to more fully state their claim for underpayment if the Court dismisses their third cause of action. See Tr. at 65:19-25 (Brickell). The Defendants countered that, in Elliott Indus., the Tenth Circuit rejected a claim that a payor deducted more than actual or reasonable costs from royalty payments, and asserted that any similar claim for underpayment may be alleged only under a breach-of-contract theory, and not under an implied duty to market. See Tr. at 66:5-14 (Campbell).
Turning to the Plaintiffs’ fourth cause of action — the Defendants’ alleged violation of the Proceeds Payment Act — the Defendants asserted that their challenge is on “strictly legal grounds.” Tr. at 66:22-25 (Court, Campbell). The Defendants asserted that Elliott Indus, clearly holds that a claim under the Proceeds Payment Act is not an independent cause of action. See Tr. at 67:1-8 (Campbell). The Defendants asserted that the Plaintiffs may prevail under the Proceeds Payment Act only if they can allege “facts intended to be encompassed within the harm and injury sought to be protected by the statute.” Tr. at 67:13-22 (Campbell). The Defendants asserted that the Proceeds Payment Act is intended only to redress the harm a party suffers when a “royalty payor having received royalty payment — having received a signed division order withholds a payee’s royalty payments for more than the statutorily period.” Tr. at 68:12-19 (Campbell). The Defendants contended that the Plaintiffs’ allegation that the Defendants failed to accurately calculate their royalty payments is not redressable injury under the Proceeds Payment Act. See Tr. at 68:23-69:8 (Campbell).
The Plaintiffs asserted that they are not alleging a cause of action under the Proceeds Payment Act alone, but, rather, are alleging that the Defendants’ failure to pay
The Court stated that it is inclined to find that the statement “ ‘to make payment’ ” in N.M.S.A.1978, § 70-10-5 “is going to include making an underpayment,” and, therefore, is inclined to deny the Defendants’ request to dismiss the Plaintiffs’ fourth cause of action. Tr. at 73:8-14 (Court)(quoting N.M.S.A.1978, § 70-10-5). The Court noted that any other construction of the statute may be unreasonable, because a payor could avoid a penalty by making a miniscule payment. See Tr. at 73:11-13 (Court). The Defendants asserted that the Legislature did not intend to impose an eighteen-percent penalty when a payor miscalculates a payment. See Tr. at 73:21-25 (Campbell).
Turning to the Plaintiffs’ fifth cause of action — for bad-faith breach of contract— the Defendants asserted that the claim is barred for three reasons. See Tr. at 73:3-8 (Campbell). The Defendants asserted EUiott Indus, and Isler v. Tex. Oil and Gas Corp. “preclude absorption of tort claims and tort remedies in a contract case like this one.” Tr. at 73:9-12 (Campbell). The Defendants further asserted that the New Mexico law regarding the implied covenant of good faith and fair dealing sounds in contract, and not in tort, and, therefore, the Plaintiffs cannot allege a separate claim seeking tort remedies absent a fiduciary relationship between the parties. See Tr. at 73:13-19 (Campbell)(citing Bourgeous v. Horizon Healthcare Corp.). Last, the Defendants contended that the Plaintiffs have not established that the Defendants owe them fiduciary duties, and that the Tenth Circuit construes New Mexico law to not impose fiduciary duties between royalty owners, and the holders of oil-and-gas leases. See Tr. at 74:20-25 (Campbell). The Defendants contended that the Plaintiffs base their bad-faith breach-of-eon-tract claim upon the supposed existence of a fiduciary relationship between the parties, which, the Defendants assert, the Tenth Circuit does not recognize. See Tr. at 76:1-5 (Berge). The Defendants asserted that the Plaintiffs have mischaracterized their fifth cause of action by asserting that they are seeking punitive damages, and not tort remedies, for the Defendants’ alleged breach of contract; the Defendants ■ contended that whether
The Court asked the Plaintiffs how their bad-faith breach-of-contract claim is separate from their breach-of-contract claim. See Tr. at 76:11-16; id. at 76:22-24 (Court). The Court stated that an implied covenant of good faith and fair dealing usually covers actions which the contract does not expressly govern, which does not appear to be the case with the leases. See Tr. at 77:1-13 (Court). The Plaintiffs asserted that, under Cont’l Potash, Inc. v. Freeport-McMoran, Inc., an overriding royalty interest may have a remedy through alleging a breach of the implied duty of good faith and fair dealing, notwithstanding that other covenants will not be implied into their leases. Tr. at 77:14-21 (Brickell). The Court countered that the holding of Cont’l Potash, Inc. v. Freeport-McMoran, Inc. seem apposite to the Plaintiffs’ allegations, because they base the Defendants’ alleged underpayments on contractual provisions. See Tr. at 77:22-78:4 (Court). The Plaintiffs asserted that the Defendants’ are “intentionally underpaying and intentionally defeating the purpose of the contract.... [T]hey’re intentionally misrepresenting the volumes and values of the hydrocarbons produced to further their ability to pay correctly.” Tr. at 78:5-11 (Brickell). The Plaintiffs contended that this constitutes bad faith. See Tr. at 78:5-11 (Brickell). The Plaintiffs asserted that the Defendants’ bad faith will give them the possibility of punitive damages, which, they stated, are not available with a breach-of-contract claim alone. See Tr. at 78:17-21 (Court, Brickell). The Plaintiffs contended that, under Cont’l Potash, Inc. v. Freeport-McMoran, Inc., they need not demonstrate the breach of fiduciary duties to receive punitive damages for the Defendants’ breach of the leases, because New Mexico law “imposes the duty of good faith and fair dealing upon the parties in performance and enforcement of the contract.” Tr. at 78:25-79:10 (Brickell). The Plaintiffs asserted that the fifth cause of action protects the overriding royalty interests owners specifically, because the Defendants’ bad faith precludes them from asserting that “there’s no implied covenant protecting override owner[s].” Tr. at 79:11-22 (Brickell). The Plaintiffs asserted that the Defendants’ legal contentions with the fifth cause of action are suited for a motion for summary judgment, but not a motion to dismiss, because the Plaintiffs have adequately alleged that the Defendants’ willful and malicious conduct constitutes bad-faith breach of contract. See Tr. at 79:23-80:7 (Brickell).
Turning to the Plaintiffs’ sixth cause of action for unjust enrichment, the Defendants contend that, under Elliott Indus., “ ‘[t]he presence of a contract bars a.claim for unjust enrichment.’ ” Tr. at 81:2-9 (Campbell)(quoting Elliott hidus.,
The Plaintiffs asserted the Elliott Indus. does not bind their FAC and SAC, because, unlike the plaintiffs in Elliott Indus., they have not dropped their breach-of-contract claims. See Tr. at 85:14-18 (Brickell). The Plaintiffs conceded that quasi-contract remedies are not available when an express contract regulates parties’ conduct, but the Plaintiffs stated that they are bringing their claims for equitable relief in case their express breach-of-contract claims fail. See Tr. at 86:1-12 (Court, Brickell). The Court countered that if the Plaintiffs’ breach-of-contract claims fail, then they have no basis to allege that the Defendants breached a separate duty, because, just as in Elliott Indus., their claim for underpayment is grounded in the contractual duties arising from the leases. See Tr. at 86:13-18 (Court). The Plaintiffs corrected themselves and stated that they are bringing the equitable claims in case “the damages as may be proven under the breach of contract ... fail to adequately compensate the parties.” Tr. at 86:19-23 (Brickell). The Plaintiffs further stated that they do not believe that Elliott Indus, would preclude their allegations of unjust enrichment, particularly if the Court determines that no covenants may be implied into the overriding royalty owners’ contracts. See Tr. at 87:12-88:4 (Brickell). The Plaintiffs conceded that their FAC and SAC could have been worded better, but asserted that they have still satisfied the notice and plausibility requirements necessary to survive a motion to dismiss. See Tr. at 88:5-10 (Brickell).
The Plaintiffs asserted that the Court’s resolution of their breach-of-contract claims does not obviate their need for declaratory judgment, “because, unlike the cases cited by the defendants here, ... this is an ongoing relationship.” Tr. at 88:11-21 (Brickell). The Plaintiffs contended that the cases in which courts have determined that declaratory and injunctive relief is unavailable, because of the resolution of contractual disputes, do not contemplate that the parties’ contractual relationship may'be ongoing beyond the courts’ adjudication. See Tr. at 88:18-89:4 (Brickell).
The Defendants asserted that, as long as the Plaintiffs are alleging a breach of a contract, under Elliott Indus, they cannot seek equitable relief. See Tr. at 89:14-20 (Campbell).
The Court stated that it is inclined to “think Elliott precludes any sort of unjust enrichment based on the contract,” as the Plaintiffs’ only tort cause of action is the allegation of fraud, which is also based on the parties’ contractual relationship in the leases. Tr. at 90:21-91:2 (Court). The Court stated that it is inclined to find that declaratory relief is available to declare the parties’- ongoing rights. See Tr. at 91:3-6 (Court). .
Turning to the Plaintiffs’ seventh cause of action, conversion, the Defendants asserted that the Court has two legal reasons to dismiss the claim. See Tr. at 91:8-9 (Campbell). The Defendants contended that, under Elliott Indus. and Isler v. Tex. Oil and Gas Corp., the Plaintiffs may not seek a tort remedy for the conversion because the Plaintiffs’ conversion claim essentially alleges that the Defendants breached a contract. See Tr. at 91:8-14 (Campbell). The Defendants also asserted
The Plaintiffs conceded that they did not artfully plead their seventh cause of action. See Tr. at 93:17-20 (Brickell). The Plaintiffs asserted, however, they are alleging that the Defendants converted the Plaintiffs’ share of hydrocarbons. See Tr. at 93:21-94:1 (Brickell). The Plaintiffs also asserted that, under Murdock v. Pure-Lively Energy 1981-A, Ltd., New Mexico law recognizes a cause of action for the conversion of money. See Tr. at 94:2-16 (Brickell)(citing Murdock v. Pure-Lively Energy 1981-A, Ltd.,
Turning to the Defendants’ request that the Court dismiss the Plaintiffs’ class-action allegations, the Court stated that its inclination is that the Supreme Court’s holdings in Ashcroft v. Iqbal and Bell Atl. Corp. v. Twombly do not apply to class-action allegations. See Tr. at 96:24-95:6 (Court). The Defendants asserted that the United States District Court for the Eastern District of New Jersey has applied Ashcroft v. Iqbal and Bell Atl. Corp. v. Twombly to class-action allegations. See Tr. at 97:8-11 (Campbell)(citing Nicholas v. CMRE Fin. Serv.; Smith v. Lyons, Doughty & Veldhuius, P.C.). The Defendants contended that the Plaintiffs have done nothing more than recite rule 23 of the Federal Rules of Civil Procedure in their class-action allegations, and that, in the Defendants’ opinion, the contracts at issue are “many and varied in substance and obligation,” and, therefore, the Plaintiffs must allege facts with more specificity to demonstrate that a class action is proper. Tr. at 97:12-98:5 (Campbell). The Defendants conceded that they have not found a previous opinion from the Court regarding the applicability of Ashcroft v. Iqbal and Bell Atl. Corp. v. Twombly to class-action allegations, but asserted nonetheless “that the pleading requirements of those two cases should in fact, be applied to class-action cases, because, otherwise, we are totally in the dark as to the underpinning factual assertions.” Tr. at 98:18-25 (Campbell).
The Plaintiffs asserted that, contrary to the Defendants’ contention that Ashcroft v. Iqbal and Bell Atl. Corp. v. Twombly should apply to class-action allegations, class-action allegations are not independent causes of .action such that the Supreme Court’s precedent regarding the sufficiency of a complaint under rule 8(a) should apply. See Tr. at 99:13-19 (Brickell). ,The Plaintiffs contended, moreover, that their class-action allegations in the FAC and in the SAC are sufficient to put the Defendants on notice of their allegations and survive a motion to dismiss. See Tr. at 99:20-100:5 (Brickell). The Plaintiffs asserted that the Defendants’ characterization of the contracts at issue as many and varied is a defense to class-action certification, and is not a theory upon which
The Court pointed the parties to its decision in Isengard v. N.M. Pub. Educ. Dep’t., No. CIV 08-0300 JB/RLP,
The Court granted the parties permission to file supplemental briefing regarding -the interplay of Elliott Indus, and Davis v. Devon Energy Corp., but expressed its concern that regardless whether the Tenth Circuit misinterpreted New Mexico law, Elliott Indus, binds the Court’s holding. See Tr. at 107:22-108:20 (Court).
10. The Parties’ Supplemental Briefs.
The Plaintiffs filed identical briefs in both matters addressing their theory that Elliott Indus, does not “preclude the plaintiffs’ claim for breach of the implied duty to market.” Letter from Turner W. Branch to the Court at 1, re: Anderson Living Trust, et al. v. ConocoPhillips Company, LLC, U.S. Dist. Court Case NO. CV-12-0039-JB/KM (dated June 29, 2012), filed June 29, 2012 (No. CIV 12-0039 Doc. 36); Letter from Turner W. Branch to the Court at 1, re: Anderson Living, Trust, et al. v. ConocoPhillips Company, LLC, U.S. Dist. Court Case NO. CV 12-0040-JB/LFG (dated June 29, 2012), filed June 29, 2012 (No. CIV 12-0040 Doc. 51)(collectively, “Plaintiffs’ First Supp.”). The Plaintiffs assert that the Tenth Circuit’s statement that plaintiffs’ “concept of the implied duty to market finds no support with New Mexico case law because the express terms of the royalty obligations direct the royalty to be paid on the value of gas ‘at the well,’ ” was dicta and based upon two factually dissimilar cases. Plaintiffs’ First Supp: at 2 (quoting Elliott Indus.,
WPX contends that the Tenth Circuit’s analysis in Elliott Indus, binds the Court unless or until the Supreme Court of New Mexico issues an intervening decision on the issue. See Letter from Bradford C. Berge to the Court at 1, re: Anderson Living Trust, et al. v. WPX Energy Prod. LLC, et al. D.N.M. Case No. CV-12-00040 JB/LFG (dated July 13, 2012), filed July 13, 2012 (No. CIV 12-0040 JB/LFG Doc. 56)(“WPX Supp.”)(citing Kokins v. Teleflex, Inc.,
Conoco-Phillips similarly contends that the Plaintiffs’ First Supp. “ignores the breadth of the Tenth Circuit’s holdings in Elliott.” Letter from Michael Campbell to the Court at 2, re: Anderson Living Trust, et al. v. ConocoPhillips Company, D.N.M. Case No. 12-CV-00039 JB/KBM (dated July 13, 2012, at 2), filed July 13, 2012 (Case No. CIV 12-0039 Doc. 41)(“CP Supp.”). ConocoPhillips contends that the Tenth Circuit rejected the plaintiffs’ assertion of an implied marketable condition rule apart from the plaintiffs’ failure to allege a breach-of-contract claim. See CP Supp. at 2 (citing Elliott Indus.,
LAW REGARDING RULE 12(b)(6)
Rule 12(b)(6) authorizes a court to dismiss a complaint for “failure to state a claim upon which relief can be granted.” Fed.R.Civ.P. 12(b)(6). “The nature of a Rule 12(b)(6) motion tests the sufficiency of the allegations within the four corners of the complaint after taking those allegations as true.” Mobley v. McCormick,
A complaint need not set forth detailed factual allegations, yet a “pleading that offers labels and conclusions or a formulaic recitation of the elements of a cause of action” is insufficient. Ashcroft v. Iqbal,
To survive a motion to dismiss, a plaintiffs complaint must contain sufficient facts that, if assumed to be true, state a claim to relief that is plausible on its face. See Bell Atl. Corp. v. Twombly,
“[Plausibility” in this context must refer to the scope of the allegations in a complaint: if they are so general that they encompass a wide swath of conduct,*1022 much of it innocent, then the plaintiffs “have not nudged their claims across the line from conceivable to plausible.” The allegations must be enough that, if assumed to be true, the plaintiff plausibly (not just speculatively) has a claim for relief.
Robbins v. Oklahoma,
LAW REGARDING OIL AND GAS LEASES
Oil and gas léases are construed “like any other contracts.” Elliott Indus.,
In 2005, in Elliott Indus., the Tenth Circuit addressed various obligations that oil-and-gas lessors owe the royalty interest owners on their leases. The plaintiffs in Elliott Indus, were royalty owners who sued ConocoPhillips, the working interest owner to collect additional royalties. The production subject to the plaintiffs’ claim in Elliott Indus, was conventional gas. As product, it contained NGLs that are removed from the gas through processing before the residue is generally acceptable for transportation on interstate pipeline transmission systems. See
1. The Implied Duty to Market and the Marketable Condition Rule.
The Tenth Circuit determined that the district court properly granted ConocoPhillips summary judgment on the plaintiffs’ allegation that ConocoPhillips’ royalty payment practices violated the implied duty to market. The plaintiffs alleged that ConocoPhillips was obligated under the implied duty to market to pay royalties based upon the best price reasonably available for the gas-and-oil products, and not the actual price minus allegedly “excessive” cost deductions.
The Tenth Circuit also noted that it could not imply a duty to market in fact into the royalty provisions in the plaintiffs’ leases, because the royalty provisions expressly covered how ConocoPhillips was to calculate the plaintiffs’ royalty payments.. See
From the time of the Tenth Circuit’s decision in Elliott Indus., the Supreme Court of New Mexico has, twice, expressly declined to'decide whether a marketable condition rule is implied as a matter of law in oil and gas leases. In Davis v. Devon Energy Corp., the issue before the Supreme Court of New Mexico was whether a state district court properly denied certification of a class alleging that defendant gas producers underpaid the plaintiffs’ royalties by improperly deducting the cost of rendering the gas marketable. See
In ConocoPhillips v. Lyons, the issue before the Supreme Court of New Mexico was whether ConocoPhillips properly calculated the State of New Mexico’s royalty payments as required under the statutes creating New Mexico’s leases. See
entitled to deduct all costs that are incurred subsequent to production, including those necessary to transport the gas to a downstream market and those costs, such as dehydrating, treating, and processing the gas, that are necessary to make the gas saleable in that market or that increase the value of the gas.
New Mexico also alleged that ConocoPhillips’ calculation of royalty payments breached the implied covenant to market. New Mexico asserted that the implied covenant to market required ConocoPhillips to “place the gas in a marketable condition and requires that the expenses incurred in obtaining a marketable product ... be borne by Lessees.”
Initially, the Proceeds Payment Act is indisputably only a derivative remedy that the New Mexico Legislature provided to oil and gas owners. It will not lie absent demonstration of lessor/payors’ breach of an underlying agreement with, or duty to, an interest owner. See Elliott Indus.,
The Proceeds Payment Act provides a specific time frame in which lessees on oil- and-gas wells must pay royalty interest owners for proceeds the lessees receive:
The oil and gas proceeds derived from the sale of production from any well producing oil, gas or related hydrocarbons in New Mexico shall be paid to all persons legally entitled to such payments, commencing not later than six months after the first day of the month following the date of first sale and thereafter not later than forty-five days after the end of the calendar month within which payment is received by payor for production unless other periods or arrangements are provided for in a valid contract with the person entitled to such proceeds.
N.M.S.A.1978, § 70-10-3. Payors who fail to make payments within § 70-10-3’s required time frame incur eighteen-percent interest on the “unpaid balance due,” unless one of the four exceptions in N.M.S.A. 1978, § 70-10-5 applies:
A. the payor fails to make payment in good-faith reliance upon a title opinion by a licensed New Mexico attorney making objection to the lack of good and marketable title of record in the party claiming entitlement to payment and furnishes a copy thereof to such party for curative action required thereby;
B. the payor receives information that in his good-faith judgment brings into question the entitlement of the person claiming the right to the payment to receive the payment or that has rendered the marketable title of record unmarketable or that may expose the pay- or to the risk of multiple liability or liability to third parties if the payment is made;
C. the total amount of oil and gas proceeds in the possession of the payor owed to the owner of the oil and gas proceeds making claim to payment is less than one hundred dollars ($100) at the end of any month; or
D. the party entitled to payment has failed or refused to execute a reasonable division or transfer order acknowledging the proper interest to which he claims to be entitled and setting forth a mailing address to which payment may be directed.
N.M.S.A.1978, § 70-10-5. Additionally, a payor does not incur eighteen-percent interest on unpaid balances if the payor, “the party who undertakes to distribute oil and gas proceeds to the parties entitled thereto,” N.M.S.A.1978, § 70-10-2, has not received from the operator or lessee arranging for the sale of oil and gas “the name, the address, and the percentage of interest of each person to whom payment is to be made, as well as proof of marketable title” to the oil and gas to be sold, N.M.S.A.1978,
NEW MEXICO LAW REGARDING BREACH-OF-CONTRACT CLAIMS
A contract is a legally enforceable promise that must consist of an offer, an acceptance, consideration, and mutual assent. See N.M.R.A., Civ. UJI 13-801. A person may breach a contract by failing to perform a contractual obligation when the performance is required, unless that performance is otherwise excused. See N.M.R.A., Civ. UJI 13-822. Incomplete performance is a breach of contract. See Cochrell v. Hiatt,
[A] complaint on breach of contract must allege: (1) the existence of a valid and binding contract; (2) the plaintiffs compliance with the contract and his performance of the obligations under it; (3) a general averment of the performance of any condition precedent; and (4) damages suffered as a result of defendant’s breach.
McCasland v. Prather,
Applying these principles in Armijo v. N.M. Dep’t of Transp., the Court found that a plaintiffs’ allegations failed to state a claim for breach of contract. See No. CIV. 08-0336 JB/ACT,
Additionally, in spite of the general bar on punitive damages for breach-of-contract cases, the Supreme Court of New Mexico has recognized that punitive dam
If you find that _(name of party making claim for punitive damages ) should recover compensation for damages, and if you further find that the conduct of .............(name of party whose conduct gives rise to a claim for punitive damages) was [malicious], [reckless], [wanton], [oppressive], or [fraudulent], then you may award punitive damages.
N.M.R.A., Civ. UJI13-861.
RELEVANT NEW MEXICO LAW REGARDING THE IMPLIED COVENANT OF GOOD FAITH AND FAIR DEALING
“Whether express or not, every contract imposes upon the parties a duty of good faith and fair dealing in its performance and enforcement.” Watson Truck & Supply Co., Inc. v. Males,
“Generally, in the absence of an express provision on the subject, a contract contains an implied covenant of good faith and fair dealing between the parties. Under the implied covenant of good faith and fair dealing, courts can award damages against a party to a contract whose actions undercut another party’s rights or benefits under the contract.*1032 Our Supreme Court has nevertheless refused to apply this implied covenant to override an express at-will termination provision in an integrated, written contract.”
Elliott Indus.,
New Mexico has recognized that a cause of action for breach of the covenant of good faith and fair dealing sounds in contract. See Bourgeous v. Horizon Healthcare Corp.,
The Supreme Court of New Mexico has indicated that “the duty to not act in bad faith or deal unfairly” imposed by an implied covenant of good faith and fear dealing within a contract “becomes part of the contract and the remedy for its breach is on the contract itself.” Bourgeous v. Horizon Healthcare Corp.,
The Supreme Court of New Mexico has noted that it does “not recognize a cause of action for breach of an implied covenant of good faith and fair dealing in an at-will employment relationship.” Melnick v. State Farm Mut. Auto. Ins. Co.,
RELEVANT NEW MEXICO LAW REGARDING THE INTERRELATION OF TORT, QUASI-CONTRACT, AND CONTRACT CLAIMS
In Elliott Indus., the Tenth Circuit held that, under New Mexico law, “the existence of any tort liability cannot conflict with contractual duties between the parties.”
Additionally, the Tenth Circuit has explained that the “hornbook rule [is] that quasi-contractual remedies ... are not to be created when an enforceable express contract regulates the relations if the parties with respect to the disputed issue.” Elliott Indus.,
Section 2201 of Title 28 of the United States Code provides that:
In a case of actual controversy within its jurisdiction, except with respect to Federal taxes other than actions brought under section 7428 of the Internal Revenue Code of 1986, a proceeding under section 505 or 1146 of title 11, or in any civil action involving an antidumping or countervailing duty proceeding regarding a class or kind of merchandise of a free trade area country (as defined in section 516A(f)(10) of the Tariff Act of 1930), as determined by the administering authority, any court of the United States, upon the filing of an appropriate pleading, may declare the rights and other legal relations of any interested party seeking such declaration, whether or not further relief is or could be sought. Any such declaration shall have the force and effect of a final judgment or decree and shall be renewable as such.
28 U.S.C. § 2201(a). The Supreme Court, in Maryland Cas. Co. v. Pac. Coal & Oil Co.,
The Tenth Circuit has stated that a district court should consider the following factors when deciding whether to entertain a request for declaratory relief:
whether a declaratory action would settle the controversy; [2] whether it would serve a useful purpose in clarifying the legal relations at issue; [3] whether the declaratory remedy is being used merely for the purpose of procedural fencing or to provide an arena for a race to res judicata; [4] whether use of a declaratory action would increase friction between our federal and state courts and improperly encroach upon state jurisdiction; and [5] whether there is an alternative remedy which is better or more effective.
ANALYSIS
The Court will grant in part and deny in part the CP MTD and WPX MTD. The Plaintiffs have sufficiently alleged that they are in a contractual relationship with the Defendants and that the Defendants’ conduct breaches their royalty payment obligations under the parties leases. The Court will, therefore, deny the Defendants’ request to dismiss the Plaintiffs’ first cause of action. Additionally, the Plaintiffs have sufficiently alleged that the Defendants’ breach was done in bad faith, a claim for which they may recover punitive damages. The Court will not, therefore, dismiss the Plaintiffs’ fifth cause of action, because the Plaintiffs may bring a claim alleging bad-faith breach of contract as part of the parties’ contractual relationship. The Court will dismiss the Plaintiffs’ second cause of action in part. The Court determines that the Plaintiffs have sufficiently alleged that the Defendants’ royalty payment and reporting practices breach the Defendants’ duty, in contract, to effectuate the terms of the leases in good faith and fair dealing. The Court will not dismiss the Plaintiffs’ second cause of action alleging a breach of the duty of good faith and fair dealing, in contract. On the other hand, the Plaintiffs may not bring a standalone claim in tort alleging a breach of a duty that the leases cover; therefore, to the extent that the Defendants’ payment and reporting practices alleged in the second cause of action do not violate a duty of good faith and fair dealing in effectuating the terms of the leases, the Plaintiffs’ second cause of action fails to state a claim for relief. The Plaintiffs have failed to demonstrate that the Defendants owe the Plaintiffs a fiduciary duty independent of the rights and obligations outlined in the leases.
The Court will dismiss the Plaintiffs’ third cause of action for the breach of the duty to market hydrocarbons. ' The Plaintiffs allege that the Defendants breached the duty to market hydrocarbons by passing-the cost of rendering the hydrocarbons marketable on to the Plaintiffs — a violation of the marketable condition rule — and by calculating the Plaintiffs’ royalty payments based on the Defendants’ sale of hydrocarbons to affiliated intermediaries. The Plaintiffs specifically allege that this conduct violates the terms of the leases and New Mexico law. New Mexico-law, as the Tenth Circuit last construed it, does not recognize the marketable condition rule as part of the implied duty to market. Additionally, the Tenth Circuit’s interpretation of the implied duty to market under New Mexico law does not make the Defendants’ alleged sale of hydrocarbons to affiliated intermediaries or deduction of post-production costs from the Plaintiffs’ royalty payments unlawful. The Court, therefore, will dismiss the Plaintiffs’ third cause of action.
The Plaintiffs may proceed on their fourth cause of action, alleging a violation of the Proceeds Payment Act. The statute’s plain language covers the Plaintiffs’ claims for royalty underpayment. Additionally, the plain language does not require the Plaintiffs to provide the Defendants with a division order before then-rights under -the Proceeds Payment Act are initiated. On the other hand, to the extent the Plaintiffs are alleging that the Defendants’ payment practices violates Colo.Rev.Stat. § 34-60-118.5, that statute
The Plaintiffs may not proceed in tort or equity because of the Defendants’ breach of duties that the parties’ leases impose on them. The leases, as the Plaintiffs allege, govern the Defendants’ royalty payment obligations. The Plaintiffs may not, therefore, allege that the same actions that breach the terms of the leases constitute unjust enrichment and conversion. The Court, therefore, will dismiss the Plaintiffs’ sixth cause of action for unjust enrichment and their seventh cause of action for conversion. Neither may the Court award the Plaintiffs an injunction against the Defendants, because the Plaintiffs allege only that the Defendants’ conduct will cause them monetary harm, and monetary harm is not irreparable. On the other hand, the Court may award the Plaintiffs a declaratory judgment declaring the parties’ obligations under the leases, because the Court may award a declaratory judgment notwithstanding that a contract remedy is another available remedy.
Finally, the Court will not apply the Supreme Court’s holdings in Ashcroft v. Iqbal and Bell Atl. Corp. v. Twombly to dismiss the Plaintiffs’ class-action allegations. First, the Plaintiffs’ class-action allegations do not purport to state a claim for relief, but, rather, put the parties and the Court on notice of the Plaintiffs’ chosen procedural method for litigating this case. The Defendants have not provided the Court with, and the Court has not found, binding precedent that requires the Court to apply Ashcroft v. Iqbal and Bell Atl. Corp. v. Twombly to the Plaintiffs’ class-action allegations. Second, even if the Court were to apply those holdings to the Plaintiffs’ class-action allegations, the Plaintiffs’ assertion that they may bring this case as a class action would, at this stage, succeed.
I. THE PLAINTIFFS HAVE SUFFICIENTLY ALLEGED THAT THE DEFENDANTS ARE IN BREACH OF THE PARTIES’ LEASES.
The Plaintiffs assert that the Defendants have breached the terms of their leases by failing to credit their royalty payments with the proceeds which the Defendants receive from the sale of drip condensate derived from the subject wells. See FAC ¶¶ 25, 27, at 9; SAC ¶¶ 27, 29, at 9-10. The Defendants contend in their motions to dismiss that the Plaintiffs have failed to demonstrate that they are parties to the leases listed in the FAC and SAC, and have failed to allege the specific contractual term breached. See CP MTD at 3-5; WPX MTD at 3-5. The Plaintiffs contend that these allegations are baseless, because the Defendants maintain files on the Plaintiffs’ leases and are sending royalty payments to the Plaintiffs every month. See CP MTD Response at 5; WPX MTD Response at 6. At the hearing, the Defendants conceded that they possess the leases at issue and that the Plaintiffs’ assertion that the Defendants are in breach of the royalty clauses of the leases is likely sufficiently specific to survive a motion to dismiss. . See Tr. at 23:14-20 (Campbell). The Plaintiffs note that they are alleging that Defendants are in breach of the royalty clause in each lease, which includes the entire paragraph in which the royalty clauses are contained. See Tr. at 25:2-14 (Brickell).
Under New Mexico law,
a complaint on breach of contract must allege: (1) the existence of a valid and*1037 binding contract; (2) the plaintiffs compliance with the contract and his performance of the obligations under it; (3) a general averment of the performance of any condition precedent; and (4) damages suffered as a result of defendant’s breach.
McCasland v. Prather,
II. THE PLAINTIFFS MAY PROCEED ON THEIR CLAIMS THAT THE DEFENDANTS VIOLATED A DUTY OF GOOD FAITH AND FAIR DEALING IN CONTRACT, BUT THE LEASES PRECLUDE THE PLAINTIFFS’ CLAIMS SOUNDING IN TORT.
The Plaintiffs bring two causes of action which appear to sound in tort as well as contract. For their second cause of action, the Plaintiffs contend that the Defendants’ calculation of the royalty payments based on sales to affiliated intermediaries, and the Defendants’ failure to disclose the full volume of hydrocarbons derived from the subject wells and all of the deductions from the royalty payments, constitutes fraud. See FAC ¶¶ 29-40, at 10-13; SAC ¶¶ 31-42, at 10-13. The Plaintiffs also allege, however, that the same conduct is a breach of the leases’ terms and violates the Defendants’ duty of good faith and fair dealing. See FAC ¶30, at 10; id. ¶¶35-36, 38 at 11-12;. SAC ¶32, at 11; id. ¶¶ 37-38, 40, at 12-13. In their seventh cause of action, the Plaintiffs assert that the Defendants’ “retention of the monies and profits resulting from the sale of Plaintiffs’ hydrocarbons” is conversion. FAC ¶ 70, at 19; SAC ¶ 72, at 19.
The Plaintiffs may not bring claims in tort that conflict with the parties’ contractual duties as the parties’ leases define those obligations. The Court concludes, therefore, that the parties’ contractual duties, as the leases - define those obligations, preclude the Plaintiffs’ causes of action that sound in tort and arise from the same set of facts and allege the same wrongful conduct as the Plaintiffs’ allegations of a breach of contract. On the other hand, the Plaintiffs’ second cause of action alleges that the Defendants’ conduct violates the Defendants’ duty of good faith and fair dealing to effectuate the leases’
A. THE PLAINTIFFS HAVE SUFFICIENTLY ALLEGED THAT THE DEFENDANTS VIOLATED THEIR DUTY TO EFFECTUATE THE TERMS OF THE LEASES IN GOOD FAITH AND WITH FAIR DEALING.
The Plaintiffs allege in their second cause of action that the Defendants have committed fraud, and violated their duty of good faith and fair dealing, by failing to disclosé the gross volume of hydrocarbons produced from the ' subject wells, the gross revenue or value from that gross production, and all the reductions, deductions, and costs calculated into the Plaintiffs’ royalty payments, and by basing the Plaintiffs’ royalty payments upon non-arm’s-length sales to affiliated intermediaries. See FAC ¶¶ 29-40, at 10-13; SAC ¶¶ 31-42, at 10-13. The Defendants contend that the Plaintiffs’ second cause of action sounds in tort and that Elliott Indus. precludes the Plaintiffs from alleging a claim for fraud, because the -Plaintiffs have not explained how the allegation of fraud is - not in conflict with the parties’ contractual duties. See CP MTD at 6-7; WPX MTD at 6. The Defendants contend that they cannot be liable in tort to the Plaintiffs absent fiduciary duties in favor of the Plaintiffs and that New Mexico law does not impose fiduciary duties on lessees to mineral leases. The Defendants contend, moreover, that New Mexico law does not impose a duty to disclose on working interest owners of mineral leases. See CP MTD at 9; WPX MTD at 8.
Under New Mexico law, “[w]hether express or not, every contract imposes upon the parties a duty of good faith and fair dealing in its performance and enforcement. ... Broadly stated, the covenant requires that neither party do anything which will deprive the other of the benefits of the agreement.” Watson Truck & Supply Co. v. Males,
Much of the Plaintiffs’ discussion of their second cause of action indicates that they believe the Defendants’ conduct was and is tortious. See, e.g., Tr. at 34:21-35:4 (Brickell)(stating that the second cause of action sufficiently alleges a theory of fraud and citing to the New Mexico Uniform Jury Instructions for fraud). The Plaintiffs carefully, although perhaps not artfully, allege in their FAC and in the SAC, and assert at the hearing, that their second cause of action is tied to their contractual claims, and to the Defendants’ duty of good faith and fair dealing. See Tr. at 33:11-14 (Brickell)(“[I]f we can prove ... fraudulent conduct in the context of this contractual relationship, we can recover punitive damages in addition to the actual damages.”). Indeed, the second cause of action alerts the Court that the Plaintiffs’ theory for relief is, in part, that the Defendants’ conduct breached their duty of good
The Plaintiffs contend that Elliott Indus. does not apply to their second cause of action, because, unlike the plaintiffs in Elliott Indus., the Plaintiffs have not disclaimed the parties’ leases. See CP MTD Response at 11; WXP MTD Response at 11. The Defendants are correct that, in Elliott Indus., the Tenth Circuit affirmed the district court’s dismissal of the plaintiffs’ fraud claim. The district court dismissed the plaintiffs fraud claim, because the parties’ contracts did not impose a duty to disclose, the plaintiffs failed to demonstrate detrimental reliance, and, additionally, the district court concluded that the defendants’ failure to pay royalties was a “breach of no duty other than one created by contract.”
A more recent decision from the Tenth Circuit is instructive regarding the Plaintiffs’ ability to proceed on their second cause of action. In Abraham v. BP Am. Prod. Co., a class of landowners brought an action against a natural hydrocarbons production company, alleging, among other claims, that the company’s failure to disclose the components óf its netback method deprived the landowners of the benefits of their contracts, in violation of the company’s duty of good faith and fair dealing.
Similarly, Elliott Indus, does not preclude the Plaintiffs’ second cause of action. Here, the Plaintiffs have alleged that the Defendants’ failure to disclose the full amount of deductions from their royalty payments and the gross volume of hydrocarbons produced from the subject wells breaches the Defendants’ duty to act in good faith and fair dealing. See FAC ¶¶ 37-38, at 12 (asserting that the ConocoPhillips’ “failure to disclose this information was done willfully and in knowing violation of the ... covenant of good faith and fair dealing....”); SAC ¶¶39-40, at 12-13 (same, with respect to WPX). Elliott Indus, does not foreclose the Plaintiffs from making this allegation of a failure to disclose, as a breach of the Defendants’ duty of good faith and fair dealing in effectuating the terms of the leases. Further, Elliott Indus, does not preclude the Plaintiffs’ allegation that the Defendants’ sale of hydrocarbons to affiliated intermediaries is in “complete contravention of the duties and covenants imposed upon [the Defendants] by law, including good faith and fair dealing, [and] by the Lease(s).” FAC ¶ 35, at 11; SAC ¶ 37, at 12. Just as the landowners in Abraham v. BP Am. Prod. Co. asserted that the company’s conduct breached their duty of good faith and fair dealing necessary to
Finally, the Plaintiffs have made sufficient allegations to survive a motion to dismiss that, the Defendants’ conduct plausibly breached their duty of good faith and fair dealing. Accepting as true all of the Plaintiffs’ allegations in the second cause of action, and construing those allegations in the light most favorable to the Plaintiffs, the Plaintiffs have plausibly alleged that the Defendants’ conduct would deprive the Plaintiffs of the benefits of their leases, and that the Defendants’ conduct described in the second cause of action was done in bad faith. See Smith v. United States,
B. THE PARTIES’ CONTRACTUAL RELATIONSHIP PRECLUDES THE PLAINTIFFS’ CLAIMS IN TORT.
The Defendants request that the Court dismiss the Plaintiffs’ second and seventh causes of action, asserting that the Plaintiffs’ claims of fraud and conversion sounds exclusively in tort, and the parties’ leases preclude the Plaintiffs from alleging a claim for tort based upon conduct defined in the parties’ leases. See Tr. at 28:3-7 (Campbell). The Defendants also assert that the Plaintiffs’ allegations in tort are insufficient to state a claim for relief, because the Plaintiffs have not pled that the Defendants owe the Plaintiff fiduciary duties, the breach of which would make the Defendants liable in tort. See CP MTD at 9; WPX MTD at 8. The Defendants contend that, under New Mexico law, the parties’ leases do not impose fiduciary duties on the Defendants. See Tr. at 74:20-24 (Campbell)(citing Heimann v. Kinder-Morgan CO2 Co.)
In Isler v. Tex. Oil and Gas Corp., the Tenth Circuit held that a contract that specifically defines the parties’ rights and duties precludes any extracontractual tort duty regarding the contract’s subject. matter. See
Moreover, although the lessee’s duty of good faith requires that it take the lessor’s interest into account in exercising its powers under the unitization clause, the lessee need not subordinate its interest entirely to those of the lessor. See Elliott v. Davis,553 S.W.2d 223 , 226-27 (Tex.Civ.App.1977). Thus, although the lessee’s good faith duty has at times' been referred to as fiduciary, such standard is altogether too strict. See Amoco Prod. Co. v. Jacobs,746 F.2d 1394 , 1398-99 (10th Cir.1984); Vela v. Pennzoil Producing Co.,723 S.W.2d 199 , 206 (Tex.App.1986).
Amoco Prod. Co. v. Heimann,
The Court determines that the Plaintiffs may allege that the Defendants’ conduct described in their second cause of action breached the Defendants’ duty of good faith and fair dealing. If further litigation reveals that the Defendants’ conduct described in the second cause of action does not breach a duty of good faith and fair dealing or a duty the leases impose, then the Plaintiffs may not resort to tort law to hold the Defendants liable for what would, in- such instance, necessarily be an extra-contractual duty. See Isler v. Tex. Oil & Gas Corp.,
Although the Court concludes that the Plaintiffs’ second cause of action states a claim for a breach of the duty of good faith and fair dealing, if discovery reveals that the Defendants’ conduct does not breach the leases or preclude the Plaintiffs from receiving their benefits promised in the leases, the Plaintiffs may not seek to hold the Defendants liable in tort for the same conduct. In Isler v. Tex. Oil & Gas Corp., the Tenth Circuit held that the plaintiffs may not proceed on a tort theory of liability against a defendant for conduct that the parties had agreed, in contract, would not be a breach of the defendant’s duties. See
Similarly, the Plaintiffs’ seventh cause of action alleges “precisely the same facts as those” set forth in the Plaintiffs’ allegations of breach of contract.
III. THE PLAINTIFFS HAVE SUFFICIENTLY ALLEGED THAT THE DEFENDANTS BREACHED THE LEASES, AND THEIR DUTY OF GOOD FAITH AND FAIR DEALING, IN BAD FAITH.
The Plaintiffs allege in their fifth cause of action that the Defendants have “continuously, maliciously and wrongfully withheld the benefits owed to” them under the terms of the leases. FAC ¶ 61, at 17; SAC ¶ 63, at 17. The Plaintiffs assert that they are entitled to punitive damages for the Defendants’ bad faith breach of the leases. See FAC ¶¶ 63-64, at 27; SAC ¶¶ 64-65, at 17. The Defendants contend that the parties’ contractual relationship, precludes the Plaintiffs from alleging a claim for bad faith, because, the Defendants assert, the Plaintiffs’ fifth cause of action sounds in tort and not in contract. See CP MTD at 21-22; WPX MTD at 26-27. The Defendants contend that they do not owe fiduciary duties to the Plaintiffs, and, therefore, the Plaintiffs may not bring a claim in tort arising from the Defendants’ alleged breach of the leases. See CP MTD at 22-23; WPX MTD at 26. The Plaintiffs assert that they may bring a claim alleging that the Defendants breached the leases in bad faith, notwithstanding the contractual relationship between the parties. See Tr. at 79:23-80:7 (Brickell). They also assert that their claim for bad faith breach of contract allows them to seek punitive damages, which are not available for the Defendants’ alleged breach of contract alone. See Tr. at 78:17-21 (Court, Brickell).
The Plaintiffs’ fifth cause of action sounds in contract and not in tort. Although the Defendants adamantly maintain that the Plaintiffs are attempting to bring a claim in tort for the Defendants’ alleged breach of the parties’ leases, the Plaintiffs have stated that they are not attempting to secure a double recovery from the Defendants’ conduct, and they need not allege a fiduciary relationship to allege that the Defendants breached the leases in bad faith. See Tr. at 78:22-25 (Court, Brickell)(the Plaintiffs informing the Court that their claim for bad faith breach of contract does not require the existence of a fiduciary relationship). The allegations in the Plaintiffs’ FAC and SAC further demonstrate that they are not seeking to allege a claim in tort; the Plaintiffs allege that the Defendants have themselves,
and/or by and through [their] affiliates, ... continuously, maliciously and wrongfully withheld the benefits owed to Plaintiffs and the Class under the terms of the Leases.... Said duties include proper payment of royalties and proper reporting of production and sales values and acting in good faith and fair dealing.*1046 [The Defendants’] breach of these contractual duties was continuous, intentional, and unjustified and further constitutes fraudulent concealment.
FAC ¶ 61, at 17; SAC ¶ 63, at 17. Construing all reasonable inferences in the Plaintiffs’ favor, as the Court must on a motion to dismiss, the Plaintiffs’ fifth cause of action is not divorced from the Plaintiffs’ breach of contract; rather, the Plaintiffs allege, in their first cause of action, that the Defendants have breached the leases, and, in their fifth cause of action, that this breach was done in bad faith. The Defendants’ contention that the Plaintiffs’ allegation cannot lie without the presence of a fiduciary duty may be based upon the Defendants’ position that the Plaintiffs have not sufficiently alleged a breach of contract claim. As the Court has determined that the Plaintiffs have sufficiently alleged a claim for breach of contract, the Plaintiffs need not demonstrate a fiduciary relationship to further allege that the Defendants breached the leases in bad faith.
■ [23] Additionally, the Plaintiffs’ fifth cause of action states a claim for bad-faith breach of contract sufficient to survive a motion to disiniss. New Mexico recognizes that, although punitive damages are not normally available for a breach of contract, a plaintiff-may recover punitive damages when a defendant’s breach was “malicious, fraudulent, oppressive, or committed recklessly with a wanton disregard for the plaintiffs rights.” Romero v. Mervyn’s,
IV. NEW MEXICO LAW DOES NOT RECOGNIZE THE PLAINTIFFS’ CLAIM FOR A BREACH OF THE IMPLIED DUTY TO MARKET HYDROCARBONS.
The Plaintiffs assert that the Defendants’ practice of deducting the cost of rendering the hydrocarbons marketable from the Plaintiffs’ royalty payments and using non-arm’s length transactions to calculate the Plaintiffs’ royalty payments violates: (i) the terms of the leases; and (ii) the Defendants’ duties under New Mexico law. See FAC ¶¶ 41-53, at 13-16; SAC ¶¶ 43-55, at 13-16. The Defendants present two defenses to these allegations: (i) that the Plaintiffs have not sufficiently alleged that the Defendants breached covenants implied in fact into the leases, see CP MTD at 17-18; WPX MTD at 12-13; and (ii) that the Plaintiffs are alleging a breach of the marketable condition rule, which the Tenth Circuit has held is not implied at law into the leases, see CP Reply at 11; WPX Reply at 10-11. The Plaintiffs assert that whether the Supreme
Initially, construing all reasonable inferences in the Plaintiffs’ favor, the Court cannot conclude that the Plaintiffs are alleging in their third cause of action the breach of a duty implied in fact. Under New Mexico law, the analysis whether a defendant has breached an implied-in-fact covenant in a contract requires two steps. First, a court must analyze “the express terms of an agreement to determine if they conflict with the provisions of a purported implied covenant.” Davis v. Devon Energy Corp.,
[w]hen it is clear ... from the relevant parts of the contract taken together and considered with the facts and circumstances surrounding the execution of the agreement, that the obligation in question was within the contemplation of the parties or was necessary to effect their intention, then such obligation may be implied and enforced.
Davis v. Devon Energy Corp.,
Second, the Tenth Circuit’s decision in Elliott Indus, precludes the Plaintiffs’ allegation that the Defendants have breached the marketable condition rule. In Elliott Indus., the Tenth Circuit expressly stated that a “conception of the implied duty to market” as requiring oil and gas lessees to “bear the burden of all costs incurred to put the gas in a marketable condition including the cost of removing the NGLs from the gas .... finds no support within New Mexico law.”
First, that the Plaintiffs have put their leases at issue in this case does not provide them a safety-hatch from the Tenth Circuit’s explanations of New Mexico law in Elliott Indus. The Tenth Circuit stated in Elliott Indus., that a construction of the implied duty to market that would require lessees to bear all post-production costs “finds no support within New Mexico case law.”
Additionally, the Defendants correctly point out that the Tenth Circuit’s statements in Elliott Indus, bind the Court, unless and until the Supreme Court of New Mexico adopts a different stance. See WPX Supp. at 1. As the Tenth Circuit has explained, “when a panel of this Court has rendered a decision interpreting state law, that interpretation is binding on district courts in this circuit, and on subsequent panels of this Court, unless an intervening decision of the state’s highest court has resolved the issue.” Wankier v. Croum Equip. Corp.,
Finally, the Plaintiffs’ attempt to factually distinguish their case from the cases upon which the Tenth Circuit relied' in Elliott Indus, is not helpful to their claims. In Elliott Indus., the Tenth Circuit discussed Creson v. Amoco Prod. Co., which the Plaintiffs contend is factually dissimilar to their case. See Elliott Indus.,
V. THE PLAINTIFFS HAVE STATED A CLAIM FOR RELIEF UNDER THE PROCEEDS PAYMENT ACT.
The Plaintiffs contend, in their fourth cause of action, that the Defendants have failed to make timely royalty payments as required by the Proceeds Payment Act and Colo.Rev.Stat. § 34-60-118.5. See FAC ¶¶ 55-57, at 16; SAC ¶¶ 57-59, at 16-17. The Defendants assert, initially, that the. Plaintiffs may bring an action under the Proceeds Payment Act only as deriva-, tive of a contractual relationship between the parties, and, the Defendants assert, because the Plaintiffs have failed to establish the existence of an enforceable contract between the parties, the Plaintiffs’ fourth cause of action fails to state a claim for relief. See CP MTD at 20; WPX MTD at 22-23. ConocoPhillips also asserts that the Proceeds Payment Act does not apply to claims of royalty underpayment. See CP MTD at 20-21. WPX further asserts that a royalty owner receives relief under the Proceeds Payment Act only after providing the interest owner with a division order, as described in N.M.S.A.1978, § 70-10-3.1. See WPX MTD at 22-24. The
When construing a New Mexico statute,.the court’s “guiding principle is to determine and give effect to legislative intent.” N.M. Indus. Energy Consumers v. N.M. Pub. Regulation Comm’n,
The Tenth Circuit stated in Elliott Indus.: “A claim for underpayment of royalties may very well fall within the provisions of the Payment Act.” Elliott Indus.,
oil and gas proceeds derived from the sale of production from any well producing oil, gas or related hydrocarbon in New Mexico ... not later than six months after the first day of the month following the date of first sale and thereafter not later than forty-five days after the end of the calendar month within which payment is received by payor for production____
N.M.S.A.1978, § 70-10-3. Additionally, the Proceeds Payment Act defines “oil and gas proceeds” as “all payments derived from oil and gas production from any well located in New Mexico, whether royalty interest, overriding royalty interest, production payment interest or working interest....” N.M.S.A.1978, § 70-10-2. Nothing in these sections, the act generally, or New Mexico or Tenth Circuit law, limits the definition of “proceeds” to exclude underpayments. Additionally, the Proceeds Payment Act provides that interest shall accrue only on the “unpaid balance due,” which connotes that a payor’s interest liability may vary depending whether the
Additionally, the plain meaning of the Proceeds Payment Act’s provisions regarding division orders does not require the Plaintiffs to furnish the Defendants with division orders before proceeding under the Act. Although N.M.S.A.1978, § 70-10-5 allows that a payor will not be held liable for late payments if the payor has not been furnished with a “division or transfer order that will set forth the proper interest to which the interest owner is entitled, as well as the mailing address to which payment may be directed,” the same section requires a “payor” to provide the division order to each “interest owner,” and not vice-versa. N.M.S.A.1978, § 70-10-3.1(B) (“The payor shall make a diligent effort to furnish each interest owner with a reasonable division or transfer order----”). Accordingly, the Plaintiffs, as interest owners,, cannot be faulted for the Defendants’ failure to provide them with division orders setting forth their interests. Another inapplicable exception to N.M.S.A.1978, § 70-10-5’s penalties occurs when an interest owner “has failed or refused to execute a reasonable division or transfer order acknowledging the proper interest to which he claims to be entitled and setting forth a mailing address.... ” N.M.S.A. 1978, § 70-10-5(D). The Defendants make no allegation that the Plaintiffs failed or refused to execute a reasonable division or transfer order. Additionally, as WPX has pointed out, the New Mexico Legislature adopted the “common law” of division orders when it implemented the Proceeds Payment Act. See WPX MTD at 22-24 (citing Murdock v. Pure-Lively Energy 1981-A Ltd.,
On the other hand, the Tenth Circuit has concluded that federal courts within this Circuit do not have jurisdiction over a party’s allegations of a violation of Colo. Rev.Stat. § 34-60-118.5. As part of the Oil and Gas Conversation Act, Colo.Rev.Stat. § 34-60-118.5 provides that:
payments of proceeds derived from the sale of oil, gas, or associated products shall be paid by a payer to a payee commencing not later than six months after the end of the month in which production is first sold. Thereafter, such payments shall be made on a monthly basis not later than sixty days for oil and ninety days for gas and associated products following the end of the calendar month in which subsequent production is sold. Payments may be made annually if the aggregate sum due a payee for twelve consecutive months is one hundred dollars or less.
Colo. Rev. State §§ 34-60-101; 34-60-118.5(2)(a). Additionally, the Oil and Gas Conservation Act provides that the oil-and-gas conservation commission
has jurisdiction over all persons and property, public and private, necessary to enforce the provisions of this article, and has the power to make and enforce rules, regulations, and orders pursuant to this article, and to do whatever may reasonably be necessary to carry out the provisions of this article. Any delegation of authority to any other state officer, board, or commission to administer any other laws of this state relating to the conservation of oil or gas, or either of them, is hereby rescinded and withdrawn and such authority is unqualifiedly conferred upon the commission, as provided in this section. Any person, or-the attorney general on behalf of the state, may apply for any hearing before the commission, or the commission may initiate proceedings upon any question relating to the administration of this article, and jurisdiction is conferred upon the commission to hear and determine the same and enter its rule, regulation, or order with respect thereto.
Colo.Rev.Stat. § 34-60-105(1). The Tenth Circuit has interpreted the Oil and Gas Conservation Act to preclude federal district court jurisdiction over suits asserting injuries under the Act. In Atl Richfield Co. v. Farm Credit Bank of Wichita,
“Section 34-60-118.5 does not create an entitlement to proceeds; it presumes the existence of such an entitlement and imposes deadlines for the payment to those legally entitled to receive payment. The statute demonstrates the General Assembly’s intent to grant to the Commission jurisdiction only over actions for the timely payment of proceeds and not over.disputes with respect to the legal entitlement to proceeds under the terms of a specific royalty agreement.”
Atl. Richfield Co. v. Farm Credit Bank of Wichita,
“Before hearing the merits of any proceeding, regarding payment of proceeds pursuant to this section, the oil and gas conservation commission shall determine whether a bona fide dispute exists regarding the interpretation of a contract defining the rights and obligations of the payor and payee. If the commission ■finds that such a dispute exists, the commission shall decline jurisdiction over the dispute and the parties may seek resolution of the matter in district court.”
Grynberg v. Colo. Oil & Gas Conservation Comm’n,
In light of these statements regarding Colorado law, the Tenth Circuit held, in Atl. Richfield Co. v. Farm Credit Bank of Wichita, that a federal district court cannot enforce the Oil and Gas Conservation Act’s provisions regarding late payments on a party in federal court. See
Because the Tenth Circuit has held that a federal district court does not have jurisdiction to enforce Colo.Rev.Stat. § 34-60-118.5, the Court cannot entertain the Plaintiffs’ allegations under that statute in this case. This tension does not preclude the Court from determining the Defendants’ royalty obligations under the leases, although the Court cannot enforce Colo. Rev.Stat. § 34-60-118.5’s interest provisions on any unpaid royalties for which the Defendants may be liable. Accordingly, the Court dismisses the Plaintiffs’ fourth cause of action in part. The Plaintiffs may proceed under the Proceeds Payment Act, but may not proceed under the Oil and Gas Conservation Act in this forum.
VI. THE PLAINTIFFS MAY PROCEED ON THEIR CLAIMS FOR DECLARATORY RELIEF TO PROSCRIBE THE DEFENDANTS’ FUTURE CONDUCT, BUT THEY MAY NOT SEEK EQUITABLE RELIEF FOR THE DEFENDANTS’ PAST BREACH OF CONTRACT.
In their sixth cause of action, the Plaintiffs request the Court to remedy the Defendants’ alleged unjust enrichment and to award equitable relief in the form of a
First, the parties’ leases preclude the Plaintiffs from alleging a claim for unjust enrichment. As the Tenth Circuit explained, in Elliott Indus., the “hornbook rule [is] that quasi-contractual remedies ... are not to be created when an enforceable express contract regulates the relations if the parties with respect to the disputed issue.” Elliott Indus.,
On the other hand, the Court may award the Plaintiffs declaratory relief for the Defendants’ alleged breach of contract, and the Plaintiffs have made sufficient allegations to support a plausible claim for declaratory relief. As the Court has previously explained, a “ ‘declaratory judgment is meant to define the legal rights and obligations of the parties in anticipation of some future conduct, not simply proclaim liability from a past act.’ ” Copar Pumice Co., Inc. v. Morris,
whether a declaratory action would settle the controversy; [2] whether it would serve a useful purpose in clarifying the legal relations at issue; [3] whether the declaratory remedy is being used merely for the purpose of procedural fencing or to provide an arena for a race to res judicata; [4] whether use of a declaratory action would increase friction between our federal and state courts and improperly encroach upon state jurisdiction; and [5] whether there is an alternative remedy which is better or more effective.
The Court will not, however, allow the Plaintiffs to seek injunctive relief from the Defendants’ conduct, because they have not demonstrated that they will suffer irreparable harm from the Defendants’ conduct.
To obtain a permanent injunction, the party requesting such relief bears the burden of showing: “(1) actual success on the merits; (2) irreparable harm unless the injunction is issued; (3) the threatened injury outweighs the harm that the injunction may cause the opposing party; and (4) the injunction, if issued, will not adversely affect the public interest.” Fisher v. Oklahoma Health Care Auth.,335 F.3d 1175 , 1180 (10th Cir.2003) (citations omitted).
Williamson v. Sena, No. CIV 04-0537 JB/ LFG,
The Court will dismiss the Plaintiffs’ sixth cause of action in part. The Plaintiffs may seek declaratory relief to declare the Defendants’ future obligations to the Plaintiffs. The Plaintiffs may not seek equitable relief in the form of either unjust enrichment or injunctive relief to remedy the harm that the Defendants’ alleged breach of contract caused.
VII. THE COURT WILL NOT DISMISS THE PLAINTIFFS’ CLASS-ACTION ALLEGATIONS.
The Defendants request the Court to dismiss the Plaintiffs’ class-action allegations as fading to state a claim for relief under rule 8(a). See CP MTD at 31; WPX MTD at 32. The Defendants contend that the Plaintiffs have only restated rule 23(a)’s requirements in their class-action allegations, and have failed to “allege even a single question of law of fact that purportedly is common to the class and the named plaintiffs.” CP MTD at 33; WPX MTD at 33. The Plaintiffs assert that they have stated a plausible claim for relief by alleging that the Defendants systematically failed to “accurately report, value, calculate and pay royalty on produced hydrocarbons.” CP MTD Response at 29; WPX MTD Response at 28-29.
The Defendants have cited to no binding authority that would require the Court to apply Ashcroft v. Iqbal or Bell Atl. Corp. v. Twombly to the Plaintiffs’ class-action allegations. See CP MTD at 31; WPX MTD at 32-33. Although the Defendants cite to the Supreme Court’s decision in Wal-Mart Stores, Inc. v. Dukes for the proposition that the Plaintiffs’ class-action allegations cannot survive a motion to dismiss, that case is procedurally and factually dissimilar. In Wal-Mart Stores, Inc. v. Dukes, the issue before the Supreme Court was whether the lower courts had properly granted certification to a class of female Wal-Mart employees alleging that “a strong and uniform ‘corporate culture’ permits bias against women to infect, perhaps subconsciously, the discretionary decisionmaking of each of one Wal-Mart’s thousands of managers,” thereby discriminating against “every woman at the company.”
“In determining the propriety of a class action, the question is not whether the plaintiff or plaintiffs have stated a cause of action or will prevail on the merits, but rather whether the requirements of Rule 23 are met.” Anderson v. City of Albuquerque,690 F.2d 796 , 799 (10th Cir.1982). See Vallario v. Vandehey,554 F.3d 1259 , 1267 (10th Cir.2009) (‘We, of course, adhere to the principle that class certification does not depend on the merits of a suit.”).
In re Thornburg Mortg., Inc. Sec. Litig.,
Additionally, even if the Court were to apply Ashcroft v. Iqbal and Bell Atl. Corp. v. Twombly to the Plaintiffs’ class-action allegations, the Court would likely deny the Defendants’ motion to dismiss these portions of the FAC and of the SAC. The Plaintiffs allege that the class represents at least 1,000 members, that their individual losses are so small that individual litigation is impracticable, that a common question of law and fact regarding the Defendants’ payment practices required under the leases dominates the class-wide allegations, and that the Plaintiffs will fairly and adequately represent the interests of the individual class members. See FAC ¶¶ 12-19, at 4-5; SAC ¶¶ 13-20, at 4-5.
A defendant has a difficult burden when attacking class allegations via a motion to dismiss. A motion to dismiss admits all facts well pleaded. The reasonable inferences which may be drawn from the pleadings are taken as true for the purposes of the motion. Furthermore, a reviewing court should interpret the facts alleged in the complaint in the light most favorable to the plaintiff. Additionally, the complaint should not be dismissed unless the pleadings disclose that no set of facts could be proved that will entitle the plaintiff to relief.
Conte et ah, supra, § 13:46, at 449. Construing all reasonable inferences in the Plaintiffs’ favor, it is plausible that the Defendants have breached a duty, either imposed under the terms of the leases or through the covenant of good faith and fair dealing, to calculate the Plaintiffs’ royalty payments based on arm’s-length transactions and without deducting post-produc
The Court, therefore, will grant the CP MTD and WPX MTD in part and deny in part. The Plaintiffs have stated a plausible claim for breach of contract, and the Court will not dismiss the Plaintiffs’ first cause of action. The Plaintiffs have also plausibly alleged that the Defendants’ reporting and royalty calculation conduct breaches the Defendants’ duty of good faith and fair dealing, implied at law into every contract in New Mexico. The Court will not, therefore, dismiss the Plaintiffs’ second cause of action as a claim for a breach of the duty of good faith and fair dealing, in contract. The Court dismisses the Plaintiffs’ second cause of action to the extent it asserts a stand-alone claim of fraud in tort. The Court similarly dismisses the Plaintiffs’ seventh cause of action, because the parties’ leases preclude the Plaintiffs from recovering in tort for the breach of a duty that the leases cover. The Court will dismiss the Plaintiffs’ third cause of action, because New Mexico law does not recognize that the Defendants’ conduct alleged therein breaches the Defendants’ implied duty to market hydrocarbons. The Court will dismiss the Plaintiffs’ fourth cause of action in part. The Plaintiffs may proceed on their theory that the Defendants have failed to make timely payments as the Proceeds Payment Act requires, but may not proceed, before the Court, under Colorado’s Oil and Gas Conservation Act. The Court will not dismiss the Plaintiffs’ fifth cause of action, because the Plaintiffs’ have sufficiently alleged that the Defendants plausibly breached their duties under the leases, and the covenant of good faith and fair dealing, in bad faith. The Court will dismiss the Plaintiffs’ sixth cause of action in part. The Plaintiffs may not recover in equity for conduct that allegedly breaches the parties’ leases; the Court, therefore, dismisses the Plaintiffs’ claim for unjust enrichment. The Court also dismisses the Plaintiffs’ claim for injunctive relief, because the Plaintiffs have alleged that the Defendants’ conduct will cause them only monetary harm, a harm that is not irreparable. The Plaintiffs may seek a declaratory judgment proscribing the Defendants’ future conduct under the leases. Last, the Court will not dismiss
IT IS ORDERED that Defendant ConoeoPhillips Company’s Motion to Dismiss Plaintiffs’ First Amended Complaint for Underpayment of Oil and Gas Royalties, filed March 5, 2012 (Case No. CIV 12-0039 Doc. 11), and Defendants WPX Energy Production, LLC and WPX Energy Rocky Mountain, LLC’s Motion to Dismiss Plaintiffs Second Amended Complaint for Underpayment of Oil and Gas Royalties, filed March 5, 2012 (Case No. CIV 12-0040 Doc. 18), are granted in part and denied in part. The Court: (i) does not dismiss the Plaintiffs’ first cause of action for the failure to pay royalty on volumes of hydrocarbons, including drip condensate; (ii) does not dismiss Plaintiffs’ second cause of action to the extent that it alleges a breach of the duty of good faith and fair dealing, but dismisses the second cause of action to the extent it asserts a claim in tort for fraud and misstatement of the value of gas and affiliate sales; (iii) dismisses the Plaintiffs’ third cause of action for breach of the duty to market hydrocarbons; (iv) dismisses the Plaintiffs’ fourth cause of action to the extent it seeks the Court to apply Colorado’s Oil and Gas Conservation Act, but does not dismiss Plaintiffs’ allegations based on the Proceeds Payment Act; (v) does not dismiss the Plaintiffs’ fifth cause of action for bad faith breach of contract; (vi) dismisses the Plaintiffs’ sixth cause of action for unjust enrichment and to the extent the Plaintiffs are requesting injunctive relief, but does not dismiss the Plaintiffs’ request for declaratory relief; (vii) dismisses the Plaintiffs’ seventh cause of action for conversion; and (viii) does not dismiss the Plaintiffs’ class-action allegations.
. On March 29, 2013, the Court entered an Order in both cases stating that it grants in part and denies in part Defendant ConocoPhillips Company's Motion to Dismiss Plaintiffs’ First Amended Complaint for Underpayment of Oil and Gas Royalties, filed March 5, 2012 (Case No. CIV 12-0039 Doc. 11), and Defendants WPX Energy Production, LLC and WPX Energy Rocky Mountain, LLC’s Motion to Dismiss Plaintiff's Second Amended Complaint for Underpayment of Oil and Gas Royalties, filed March 5, 2012 (Case No. CIV 12-0040 Doc. 18). See Order, filed March 29, 2013 (Case No. CIV 12-0039 Doc. 73); Order, filed March 29, 2013 (Case No. CIV 12-0040 Doc. 94)(collectively, "Orders”). The Court stated that it would “at a later date issue an opinion more fully detailing its rationale for this decision.” Orders at 2 n. 1. This Memorandum Opinion is the promised opinion.
. "Conventional natural gas” differs from "unconventional natural gas” in the manner, ease and cost associated with extracting the resources. Conventional & Unconventional, Canadian Association of Petroleum Producers, http://www.capp.ca/CANADAINDUSTRY/ NATURALGAS/CONVENTIONALUNCONVENTIONAL/Pages/default.aspx (last visited Apr. 24, 2012). Conventional natural gas is produced from “relatively highly porous and permeable sandstone or carbone geologic formations.” Natural Gas: A Primer, Natural Resources Canada, (last modified Jan. 18, 2011), http://www.nrcan.gc.ca/ energy/sources/naturalgas/ 1233# conventional. Unconventional natural gas is produced from "coal seams ( ... CBM), low permeability rocks ..., or shale...." Id.
The Fruitland Coal formation is "one of the most prolific sources of U.S. coalbed methane reserves.” Mesa Royalty Trust: Topics: San Juan Basin Fruitland Coal Drilling, wilcinvest (April 24, 2013, 11:14 AM EDT), http://www. wikinvest.com/stock/Mesa_Royalty_ Trust_-MTR./San_Juan_Basin_Fruitland_CoalDrilling.
CBM natural gas is natural gas extracted from coal beds. Coalbed Methane, Wikipedia (Apr. 23, 2013), http://en.wikipedia.org/wiki/ CoalbecLmethane.
. The Plaintiffs exclude from the FAC and SAC "any claims previously asserted in prior cases in which such claims were determined by final judgment and/or settled by final order approving settlement at the time of this filing between the parties hereto, inclusive of putative Class Members.” FAC ¶ 20, at 6; SAC ¶ 21, at 6-7. The Plaintiffs also exclude from the proposed class definition all “interests owned by any federal, state or municipal governmental bodies, as well as any interest held in trust by the federal government for any Indian tribe or organization.” FAC ¶ 20, at 6; SAC ¶ 21, at 6-7.
. Drip condensate is a "high-grade liquid which is sold like oil, that comes off of the production....” Transcript of Hearing at 20:10-15 (taken July 5, 2012)(Doc. 54)(Bric-kell). Drip condensate is a "very valuable commodity.” Id. at 20:24-25 (Brickell). The Department of Interior has defined drip condensate as:
any condensate recovered downstream of the facility measurement point without resorting to processing. Drip condensate includes condensate recovered as a result of its becoming a liquid during the transportation of the gas removed from the lease or recovered at the inlet of a gas processing plant by mechanical means, often referred to as scrubber condensate.
64 F.R. 43506-01.
. The Plaintiffs list the following leases in the FAC:
Lessor: M.L. Faverino and Mary Faverino, husband and wife John R. Anderson and Georgia Faye Anderson, husband and wife
Lessee: C.H. Nye
Book/Page: Book 130 Page 248
Date: December 9, 1947
Description: E/2 NW/4, Section 26-29N-10W
Lessor: United States Land Office, Dept, of the Interior
Lessee: Dr. J.F. Day
Serial No: 047039
Date: October 13, 1923
Description: S/2 Section 7, S/2 Section 8, Sections 17, 18, and 20 Township 28N, Range 10W
Lessor: State of New Mexico
Lessee: L.N. Hagood
Serial No: NM 012641
Date: July 1, 1951
Description: Section 26-31N-8W Section 35-31N-8W
In addition, Plaintiff Robert Westfall is the owner of an undivided 82/306.47 mineral interest in and to 306.47 contiguous acres located in Section 4 and 9, T29N, R6W, Rio Arriba County, New Mexico, which is subject to a valid and existing oil and gas lease dated March 19, 1947, by and between Jose Pablo Gomez and Mathilde A. Gomez, his wife, to Chas. W. McCarty, filed of record in the office of the County Clerk of Rio Arriba County at Book 3 Oil & Gas, Page 154.
FAC ¶ 24, at 8-9. The Plaintiffs list the following leases in the SAC:
Lessor: William H. McCarty and Lupe B. McCarty, husband and wife
Lessee: Frank H. Denman
Date: June 19, 1947
Book/Page: Book 3 Page 243-244
Description: N/2 NW/4 and SE/4 NW/4 Section 14-29-N-5W
NE/2 NE/4 Section 15-29N-5W
Lessor: Juan D. Montoya and Aleja M. Montoya, husband and wife
Lessee: Chas. W. McCarty
Date: December 16, 1946
Book/Page: Book 3 Page 133
Description: SE/4 NW/4, SW/4 NE/4, NW/4 SE/4 AND SE/4 SW/4 less 32 acres deeded to Mrs. Emilio Garcia at Book 21 page 94, Section 34-29N-5W
Lessor: Wallace B. Horn and Cora B. Horn, husband and wife
*988 Lessee: A.L. Duff, Jr.
Date: April 16, 1946
Book/Page: Book3 Page 119-120
Description: SW/4 SE/4 Section 30-29N-5W W/2 NE/4, SE/4 NE/4, SE/4 NW/4 and N/2 SW/4 Section 31-29N-5W In addition, Plaintiff Robert Westfall is the owner of an undivided 82.306.47 mineral interest in and to 306.47 contiguous acres located in Section 4 and 9, T29N, R6W, Rio Arriba County, New Mexico, which is subject to a valid and existing oil and gas lease dated March 19, 1947, by and between Jose Pablo Gomez and Mathilde A. Gomez, his wife, to Chas. W. McCarty, filed of record in the office-of the County Clerk of Rio Arriba County at Book 3 Oil & Gas, Page 154.
SAC ¶ 26, at 8-9.
. In the CP MTD Response, the Plaintiffs refer to FAC ¶ 12 for the assertion that the FAC alleges that the Defendants have a "duty and covenant to market production to the' mutual advantage, of both the lessee and Plaintiffs." CP MTD at 16. This allegation, however, is in paragraph 42 of the FAC. Compare FAC ¶ 12, at 4, with FAC ¶ 42, at 13.
. Although the Court is bound by the Tenth Circuit’s interpretation of New Mexico law, the Court is not convinced that the Elliott Indus.’ plaintiffs’ "conception of the implied duty to market finds no support within New Mexico case law.”
The Court believes that, if and when the Supreme Court of New Mexico determines that the existence of the marketable condition rule is ripe for review, it will find that the rule is included in oil-and-gas contracts as part of the implied duty to market. Colorado, Wyoming, Kansas, and . Oklahoma have all adopted a version of the marketable condition rule. The Supreme Court of Colorado announced its adoption of the marketable condition rule in Garman v. Conoco, Inc.,
The Supreme Court of Kansas based its formulation of the marketable condition rule on Colorado’s. In Kansas, the rule currently requires a lessee of an oil-and-gas lease to "bear the entire expense of producing the gas at the wellhead pursuant to the terms of the oil and gas lease. Additionally, the lessee must bear the entire cost of putting the gas in condition to be sold pursuant to the court-made 'marketable condition rule.’ ", Coulter v. Anadarlco Petroleum Corp.,
Kansas’ interpretation of the marketable condition rule which allows lessees to share the cost of transportation to the market with lessors may be vulnerable to attack. The Supreme Court of Kansas recognized, in Coulter v. Anadarlco Petroleum Corp., that the Supreme Court of Colorado's decision in Rogers v. Westerman Farm Co.,
Similarly, the Supreme Court of Oklahoma’s adoption of the marketable condition rule is based upon the bargaining power of oil-and-gas lessees and lessors. In Wood v. TXO Prod. Corp., the Supreme Court of Oklahoma explained that ”[p]art of the mineral owner’s decision whether to lease or to become a working interest owner is based upon the costs involved,” and, when an interest owner agrees to a relinquish operating rights and lease a well in exchange for a royalty interest, as a lessor, the interest owner has no power to control post-production costs.
Texas, on the other hand, has not adopted the marketable condition rule, but, rather, interprets oil-and-gas leases more strictly in accordance with their terms. The first case in Texas to discuss a marketable condition rule was Danciger Oil & Refineries v. Hamill Drilling Co., in which the Supreme, Court of Texas interpreted a royalty clause which stated that payments were to be made out of “all the oil, gas, casinghead gas, and other minerals produced, saved and marketed at the prevailing market price paid by major companies in the Gulf Coastal area from the properties.”
The Court believes that, when the Supreme Court of New Mexico determines the existence of the marketable condition rule is ripe for review, it will find the reasoning of Colorado, Kansas, Oklahoma, and Wyoming more persuasive than that of Texas. Like Kansas and Colorado, which construe oil-and-gas leases against the lessees, the Supreme Court of New Mexico has established a "rule that an oil and gas lease is to be construed most strongly against the lessee.” Greer v. Salmon,
A critique of the marketable condition rule is that it necessarily turns on questions of fact, which the Supreme Court of Colorado recognized in Rogers v. Westerman Farm Co., because, whether a buyer is willing to purchase a product, and at what point, will vary from case to case. See Rogers v. Westerman Farm Co.,
. The Court notes that the Court of Appeals of New Mexico has held that a "contractual relationship ... does not foreclose a claim for unjust enrichment.” Starko, Inc. v. Presbyterian Health Plan, Inc.,
. The Tenth Circuit has explained the meaning of a "netback method," and its implication, for royalty payments on oil-and-gas leases:
As we noted in Elliott Industries LIP. v. BP America Production Co.,407 F.3d 1091 -(10th Cir.2005), gas produced from the San Juan Basin contains methane (natural gas) and entrained natural gas liquids (NGLs). In order to market the gas into the interstate pipeline, the NGLs must be removed from the gas stream; producers transport unprocessed gas from the wellhead to a processing facility, where the gas is processed into component parts. In order to determine the market value of the unprocessed gas at the well, producers sell refined natural gas and NGLs at the tailgate of the processing plant (i.e., after processing) to establish a base sales amount, and deduct from that amount costs for transportation, processing, etc. This is called a "netback” or "workback” method, and it is widely accepted as the best means for estimating the market value of gas at the well where no such market exists. If a market exists, however — if entities buy and sell unrefined gas at the wells — evidence of comparable wellhead sales is the best possible evidence for analyzing market value at the well.
Abraham v. BP Am. Prod. Co.,
. All classes must satisfy the prerequisites under rule 23(a) for certification:
(a) Prerequisites. One or more members of a class may sue or be sued as representative parties on behalf of all members only if:
(1) the class is so numerous that joinder of all members is impracticable;
(2) there are questions of law or fact common to the class;
(3) the claims or defenses of the representative parties are typical of the claims or defenses of the class; and
(4) the representative parties will fairly and adequately protect the interests of the class.
Fed.R.Civ.P. 23(a).