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Chieftain Royalty Company v. Qep Energy Energy Company

March 16, 2012



This matter comes before the Court on the Motion for Class Certification, filed by Plaintiff, Chieftain Royalty Company. Defendant QEP Energy Company responded to the motion. The Court conducted a hearing on January 30, 2012, and after considering the parties' oral and written submissions, including their supplemental authorities, the Court finds as follows.

Plaintiff owns mineral rights in Oklahoma gas wells where Defendant serves as operator, or from which Defendant, as non-operator, separately marketed production. Plaintiff alleges Defendant used its position as operator or marketing working interest owner to (1) secretly underpay royalty due to royalty owners, including deducting direct and indirect fees for marketing, gathering compression, dehydration, processing, treatment; (2) not pay royalty on wellhead gas used off the lease premises or in the manufacture of products; and (3) not pay royalty on condensate that dropped out of the gas stream. Plaintiff seeks damages and injunctive relief based on claims of: (1) breach of contract; (2) tortious breach of contract; (3) breach of fiduciary or quasi-fiduciary duty; (4) fraud, actual and constructive, and deceit; (5) conversion; (6) conspiracy; and (7) accounting. The Court previously granted Defendant judgment on the pleadings with regard to Plaintiff's claims of tortious breach of contract and conversion. Plaintiff advocates for certification of a class with regard to all of its claims. Defendant concedes that class treatment might be appropriate on some level, but argues that the state-wide class sought by Plaintiff is inappropriate*fn1 and that not all claims are appropriate for class treatment.

As the party seeking class certification, Plaintiff has "a strict burden of proof" to establish that the putative class meets the requirements of Rule 23. Trevizo v. Adams, 455 F.3d 1155, 1162 (10th Cir. 2006)(citing Reed v. Bowen, 849 F.2d 1307, 1309 (10th Cir. 1988)). Plaintiff must first satisfy the four prerequisites of Rule 23(a) by showing that: (1) the class is so numerous that joinder of all members is impracticable; (2) questions of law or fact are common to the class; (3) Plaintiff's claims or defenses are typical of the claims or defenses of the class; and (4) Plaintiff will fairly and adequately protect the interests of the class. Fed.R.Civ.P. 23(a). These requirements are more commonly known as numerosity, commonality, typicality, and adequacy of representation. If the requirements of Rule 23(a) are met, Plaintiff must then show that its case fits within one of the categories described in Rule 23(b), in this case Rule 23(b)(3).

In its motion for certification Plaintiff proposed the class be defined as follows: All non-excluded persons or entities who are or were royalty owners in Oklahoma wells where QEP Energy Company, including its predecessors, successors and affiliates, is or was the operator (or, as a non-operator, QEP separately marketed gas). This Class Claims relate only to payment for gas and its constituents (helium, residue gas, natural gas liquids, nitrogen and condensate) produced from the wells. The Class does not include overriding royalty owners or other owners who derive their interest through the oil and gas leasee.

The persons or entities excluded from the Class are (1) agencies, departments or instrumentalities of the United States of America and the State of Oklahoma; (2) publicly traded oil and gas exploration companies and their affiliates; (3) persons or entities that Plaintiffs' counsel is, or may be prohibited from representing under Rule 1.7 of the Oklahoma Rules of Professional Conduct; (4) members of the class certified in Naylor Farms v. Anadarko OGC Co., No. CIV-08-668-R, 2009 U.S. Dist. LEXIS 127516 (W.D.Okla. Aug. 26, 2009), but only to the extent of their respective royalty interests in wells operated by QEP in Beaver and Texas counties, Oklahoma; and (5) members of the class certified in Bridenstine v. Kaiser Francis, Case No. CJ-2001-1, District Court of Texas County, Oklahoma CIV APP, Case No. 97,117 (unpublished) August 22, 2003, cert. denied, June 26, 2006, Okla. Sup. Ct., Case No. DF-01569, but only to the extent of their respective royalty interests in wells connected to the Beaver Gathering System in Beaver and Texas counties, Oklahoma.


According to Plaintiff's expert, Barbara Ley, Defendant QEP's pay deck information for a recent month indicated payments to in excess of 5000 royalty owners.*fn2 The fact of such a large number does not itself provide a basis for certification. Rex v. Owens ex rel. State of Okla., 585 F.2d 432, 436 (10th Cir. 1978). Rather, Plaintiff must establish "that the class is so numerous as to make joinder impracticable." Trevizo v. Adams, 455 F.3d 1155, 1162 (10th Cir. 2006). Defendant does not challenge Plaintiff's allegations as to numerosity, and the Court finds that 5,000 royalty owners, even if it becomes necessary to carve out some royalty owners specifically excluded from the class, is a sufficiently large number such that joinder of each member would be impracticable.


Plaintiff must next establish commonality, which Defendant contends it has failed to do, citing to the standard set forth in Wal-mart v. Dukes, --- U.S. ---, 131 S.Ct. 2541, 251 (2011). Defendant contends Dukes raised the threshold for commonality analysis, and that Plaintiff cannot meet this heightened standard.

Commonality requires the plaintiff to demonstrate that the class members "have suffered the same injury," [General Telephone Company] v. Falcon, [457 U.S. 147, ] 157, 102 S.Ct. 2364. [The] common contention, moreover, must be of such a nature that it is capable of classwide resolution-which means that determination of its truth or falsity will resolve an issue that is central to the validity of each one of the claims in one stroke.

Dukes, --- U.S. ---, 131 S.Ct. at 2551. Defendant contends that Plaintiff cannot properly rely on pre-Dukes cases, because those cases generally do not focus on the requisite common answer issue required by the Supreme Court in Dukes. Defendant further contends that Oklahoma law requires an individualized examination on the issue of marketability, i.e. with regard to different types of costs, and therefore, there is no "one-size-fits all answer" to the issues raised in this case. Response to Motion to Certify, p 9.

Considering Plaintiff's claims in turn, the Court concludes that certification is appropriate for certain claims, because there are common questions with common answers, and inappropriate for other claims. The Court begins with Plaintiff's breach of contract claim. The evidence establishes that Plaintiff is a lessor and Defendant has succeeded to the interest of the original lessee in at least one well, and as a result, Defendant pays Plaintiff royalty. The evidence further establishes that Defendant generally utilizes the same formula in calculating payments to royalty owners, regardless of lease language regarding deductions. For percentage of proceeds sales contracts, Defendant contends that title to the gas is transferred to the buyer at the wellhead, and Defendant pays royalty in accordance with the POP contract, on the full amount received from the buyer when the gas is resold at the tailpipe. Although Defendant denies it takes deductions, there is no dispute that royalty owners' payments are calculated as a percentage of the amount received by the Defendant under the POP rather than on the gross sales price of the gas at the tailpipe. See Naylor Farms, Case No. 08-668 Doc. 220 (W.D.Okla. Aug. 24, 2011)("A lessee may certainly hire or pay a third party to process the gas . . . [h]owever, the costs of such processing are not chargeable to the royalty interest if the processes are necessary to make the gas marketable. . . .").*fn3 The common question here, as in prior cases certified by the Court is whether Defendant either took inappropriate deductions or sold gas at a lesser price to a midstream company in exchange for the processing thereof and paid royalty on the net value of the gas rather than its gross value. Although ultimately the Court may determine sub-classes are necessary or desirable to assist in management of the class, the mere fact of differences in the gas and the actual marketing arrangements for any particular well or wells does not preclude class certification on the basis of commonality. The common question will yield common answers; whether Defendant took deductions or otherwise passed processing costs on to royalty owners, and did Defendant do so inappropriately. Accordingly, the Court finds Plaintiff's breach of contract claim is subject to certification.*fn4

The same holds true with regard to Plaintiff's claims for breach of fiduciary or quasi-fiduciary duty. The parties are well aware of the Court's extant decisions regarding the existence of the fiduciary duty of an operator to the lessors in a well.*fn5 Again, although there will be subclasses, divided by Defendant's role as operator or non-operator selling production, within the appropriate subclass the common question, i.e., did Defendant breach a fiduciary duty, will have a common answer because the parties in the subclasses will stand in the same positions relative to one another. Defendant was either a fiduciary by virtue of its operator status or not a fiduciary because it was not an operator and was merely selling production. Additionally, the allegations of underpayment of royalty extend across the class, regardless of whether any particular member of the class had a contractual relationship with the Defendant, because to the extent payment into a royalty pool for any royalty owner was at a lesser amount than mandated by a lease and/or Oklahoma law, the entire pool and all participants in the pool would have been paid less than the amount to which they were entitled. Accordingly, Plaintiff's motion to certify is granted with regard to its breach of fiduciary duty claim.

Plaintiff also pled a claim for fraud. The Court has previously declined to certify claims of fraud with regard to the alleged underpayment of oil and gas royalty. See Naylor Farms v. Anadarko OGC Co., Case No. CIV-08-668-R, Hill v. Marathon Oil Co., Case No. Civ-08-37-R, and Hill v. Kaiser-Francis Oil Co., Case No. CIV-09-07-R. The Court's prior decisions were premised on the element of reliance, because a Plaintiff seeking to recover under a theory of fraud in Oklahoma must establish individual reliance. In response to the Court's orders in prior cases and ...

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