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Kunneman Properties LLC v. Marathon Oil Co.

United States District Court, N.D. Oklahoma

September 24, 2019

KUNNEMAN PROPERTIES, LLC, on behalf of itself and all others similarly situated, Plaintiff,
MARATHON OIL COMPANY, including affiliated predecessors and affiliated successors, Defendant.



         This matter comes before the court on the Motion to Dismiss [Doc. 21] of defendant Marathon Oil Company. For the reasons set forth below, the motion is granted in part and denied in part.

         I. Background

         This is a dispute regarding the alleged underpayment, late payment, or non-payment of royalties and oil and gas production proceeds from gas-producing wells operated by defendant Marathon Oil Company. Plaintiff Kunneman Properties, LLC owns royalty interests in Marathon-operated wells and purports to bring this action on behalf of itself and others similarly situated, although class certification issues pursuant to Fed.R.Civ.P. 23(c) are not yet at issue. Plaintiff’s Original Class Action Complaint (“Complaint”), the operative pleading in this matter, includes allegations with respect to two separate classes: (1) Class I, defined to include all persons who own or owned minerals in Oklahoma subject to an oil and gas lease from September 1, 2011 to present wherein Marathon improperly reduced royalty payments by charging the owners for the cost of marketing, gathering, compressing, dehydrating, treating, processing, or transporting hydrocarbons produced, and (2) Class II, defined to include all persons or entities who received untimely payments from defendant or its designee for oil and gas proceeds from Oklahoma wells, and whose payments did not include interest required by statute.

         With respect to Class I, the Complaint includes the following claims: (1) breach of lease, (2) breach of fiduciary duty; (3) fraud; (4) deceit; (5) constructive fraud; and (6) tortious breach of lease. Class II claims are: (1) breach of statutory obligation to pay interest; (2) fraud; (3) accounting and disgorgement; and (4) injunctive relief. Defendant seeks dismissal of all claims pursuant to Fed.R.Civ.P. 12(b)(6). See [Doc. 21].[1]

         II. Motion to Dismiss Standard

         Federal Rule of Civil Procedure 12(b)(6) permits a court to dismiss a claim that “fail[s] to state a claim upon which relief can be granted.” “To survive a motion to dismiss under Rule 12(b)(6), a plaintiff must plead sufficient factual allegations ‘to state a claim to relief that is plausible on its face.’” Brokers’ Choice of Am., Inc. v. NBC Universal, Inc., 861 F.3d 1081, 1104 (10th Cir. 2017) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). “A claim is facially plausible ‘when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.’” Id. (quoting Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)). “Mere ‘labels and conclusions’ and ‘a formulaic recitation of the elements of a cause of action’ are insufficient.” Estate of Lockett ex rel. Lockett v. Fallin, 841 F.3d 1098, 1107 (10th Cir. 2016) (quoting Twombly, 550 U.S. at 555). The court accepts as true all factual allegations, but the tenet is inapplicable to legal conclusions. Iqbal, 556 U.S. at 678. “Dismissal is appropriate if the law simply affords no relief.” Commonwealth Prop. Advocates, LLC v. Mortg. Elec. Registration Sys., Inc., 680 F.3d 1194, 1202 (10th Cir. 2011). A putative class action complaint is properly dismissed if the named plaintiff’s claims fail to state a plausible claim for relief. See Robey v. Shapiro, Marianos & Cejda, L.L.C., 434 F.3d 1208, 1213 (10th Cir. 2006).

         III. Analysis

         As previously stated, plaintiff seeks certification of two separate classes and asserts claims specific to each class. The court first considers the claims related to the improper reduction of royalties brought on behalf of Class I.

         A. Class I Claims

         Plaintiff purports to assert the following claims on behalf of Class I: breach of lease; breach of fiduciary duty; fraud; deceit; constructive fraud; and tortious breach of lease. The court separately considers each claim.

         1. Breach of Lease

         Defendant alleges that plaintiff fails to state a plausible claim for breach of lease because plaintiff does not identify, describe, reference, or attach the applicable oil and gas lease(s). Citing two decisions by the U.S. District Court for the Western District of Oklahoma, defendant contends that Oklahoma courts have “repeatedly required” named plaintiffs in royalty underpayment cases to specifically allege the pertinent lease provision(s) to satisfy Rule 12(b)(6) or, alternatively, to attach a copy the lease(s) to the pleading. See [Doc. 21, pp. 22-23 (citing Hitch Enters., Inc. v. Cimarex Energy Co., 859 F.Supp.2d 1249 (W.D. Okla. 2012); Chieftain Royalty Co. v. Dominion Okla. Tex. Expl. & Prod., Inc., No. CIV-11-344-R, 2011 WL 9527717 (W.D. Okla. July 14, 2011))].

         In Dominion Oklahoma, the court dismissed a claim for “breach of lease” because plaintiff “failed to identify, describe, reference in any way or attach to their pleading as exhibit(s) any oil and gas lease(s) that they claim the Defendants have breached, and have failed to include sufficient allegations concerning the terms of the alleged lease(s).” Dominion Okla. Tex. Expl. & Prod., Inc., 2011 WL 9527717, at *2. The court concluded Rule 12(b)(6) requires a plaintiff in a royalty case to “identify or describe their individual leases in which Defendant . . . is the lessee . . . or attach copies thereof” and, further, to “describe the royalty terms thereof so as to raise the existence of leases between the individual Plaintiffs and Defendant . . . and alleged breach by Defendant of the implied duty to market and thus Plaintiffs’ right to relief beyond the speculative level.” Id. (emphasis added) (citing Hall v. Witteman, 584 F.3d 859, 863 (10th Cir. 2009)); see also Hitch Enters., Inc., 859 F.Supp.2d at 1257 (emphasis added) (“[T]he Court finds based upon Chieftain Royalty that the allegations in the first amended complaint with regard to the identity of the leases that the defendants allegedly breached do not satisfy the pleadings requirements of Twombly and Iqbal.”).

         Dominion Oklahoma and Hitch are distinguishable. Unlike in those cases, plaintiff identifies the applicable leases: oil and gas leases dated January 26, 1973 (recorded at Book 469, Pages 143-144 in the Kingfisher County, Oklahoma records), and June 19, 2014 (recorded at Book 2721, Pages 220-222 in the Kingfisher County, Oklahoma records). [Doc. 2, ¶ 4]. Thus, plaintiff’s allegations raise the existence of leases between plaintiff and defendant beyond the speculative level. Further, the Complaint includes allegations that the leases “include implied covenants requiring [defendant] to prepare the gas and its constituent parts for market at [defendant’s] sole cost” and that “[t]he leases also place upon [defendant] the obligation to properly account for and pay royalty interests to royalty owners under the mutual benefit rule and good faith and fair dealing.” [Id. ¶ 62]. In cases subsequent to Dominion Oklahoma and Hitch, other Oklahoma federal courts have concluded that similar allegations sufficiently identified the royalty terms of the leases to satisfy Rule 12(b)(6). See Harris v. Chevron U.S.A., Inc., No. CIV-15-94-C, 2015 WL 3746989, at *2 (W.D. Okla. June 15, 2015); Cecil v. BP Am. Prod. Co., No. CIV-16-410-RAW, 2017 WL 2987174, at *3 (E.D. Okla. Mar. 20, 2017). These more recent, factually analogous cases are persuasive, and the court concludes that plaintiff has sufficiently alleged the relevant lease language. Finally, the Complaint includes allegations from which the court may infer that defendant breached its royalty obligations under the leases, including specific averments regarding royalty payments for residue gas, natural gas liquids (NGLs), drip condensate, and helium, liquid nitrogen, and other products.[2] [Doc. 2, ¶ 54]. Thus, the Complaint includes sufficient factual allegations to plausibly state the existence and breach of the lease agreements.[3]

         Defendant next argues that plaintiff’s breach of lease claim must be dismissed because plaintiff fails to include any facts as to the “marketable condition” of the gas on which it received payments.[4] However, defendant provides the court no authority requiring facts as to the marketability of the gas in order to survive a motion to dismiss. Rather, defendant relies on principles of law articulated in the context of motions for class certification, a proceeding with entirely separate substantive and procedural considerations. See, e.g., Chieftain Royalty Co. v. XTO Energy, Inc., 528 F. App’x 938, 943 (10th Cir. 2013). Defendant’s motion to dismiss with respect to this issue may be denied for this reason alone. Finally, the Complaint includes allegations from which the court may reasonably infer that the gas at issue requires gathering, compression, dehydration, treatment, and processing (“GCDTP”) to be made marketable. See [Doc. 2, ¶ 19 (“The members of Class I own royalty interests in wells that produce gas and constituents that are transformed into marketable products and sold into the established commercial markets for those products.”) (emphasis added)]. To the extent that the relevant gas did not require GCDTP services to made marketable, the Complaint alleges that Marathon underpays those “for whom defendant is legally entitled to deduct post-production Midstream Service Costs, by taking excessive deductions under Midstream Services Contracts that allow excessive monopoly charges for GCDTP services.” [Id. ¶ 55]. Accordingly, the Complaint includes allegations with respect to marketability.[5] Thus, defendant’s motion to dismiss the breach of lease claim is denied.[6]

         2. Breach of Fiduciary Duty

         Defendant argues that plaintiff’s breach of fiduciary duty claim should be dismissed because plaintiff fails to allege facts that plausibly demonstrate that defendant underpaid royalties and therefore breached its fiduciary duty to plaintiff. In opposition, plaintiff points to the allegations of paragraphs sixty-six through seventy and contends that those paragraphs sufficiently assert the existence of a fiduciary duty based on unitization orders by the Oklahoma Corporation Commission (“OCC”) pursuant to 52 Okla. Stat. Ann. §§ 287.1-287.15 and/or 52 Okla. Stat. Ann. § 87.1. However, plaintiff’s characterization of its allegations is overbroad. Paragraphs sixty-six through seventy allege that Class I members have interests in Oklahoma wells that have been united under 52 Okla. Stat. §§ 287.1-287.15 and/or 52 Okla. Stat. § 87.1, giving rise to a fiduciary duty. The Complaint includes no allegations that plaintiff owns a royalty interest subject to a unitization order of the OCC. See Harris, 2015 WL 3746989, at *3; cf. Morrison ex rel. Haar Family Trust v. Anadarko Petroleum Corp., No. CIV-10-135-M, 2010 WL 2721397, at *2 (W.D. Okla. July 6, 2010); Hitch Enters., Inc., 859 F.Supp.2d at 1262-63. It is well-established under Oklahoma law that the mere existence of an oil and gas lease does not give rise to a fiduciary duty. 52 Okla. Stat. § 902(2); Krug v. Helmerich & Payne, Inc., 320 P.3d 1012, 1018 (Okla. 2013) (“A royalty lease alone does not create a fiduciary duty.”). An exception exists for royalty owners and lessees that are parties to a unitization order. Krug, 320 P.3d at 1018 (“A unit operator in a unitized section owes a fiduciary duty to the royalty owners and lessees who are parties to the unitization agreement or order creating the unit. The duty is not created by the lease agreement but rather by the unitization order and agreement.”). Plaintiff does not allege that it owns property subject to a unitization order or agreement and therefore fails to state a plausible claim for breach of fiduciary duty on its own behalf. Thus, dismissal of the breach of fiduciary duty claim is appropriate. See Hitch Enters., Inc., 859 F.Supp.2d at 1257 n.4 (“At this stage of the litigation, each named plaintiff must plead its own cause of action. . . . Thus, each plaintiff must meet its own procedural burden under Rule 12(b)(6) and the pleading standards of Twombly and Iqbal.”).[7]

         3. Fraud, Deceit, and Constructive Fraud

         Plaintiff asserts claims for fraud, deceit, and constructive fraud. Although numbered as separate “counts” the supportive allegations for each claim are presented together and therefore the court collectively considers the fraud, deceit, and constructive fraud claims. See [Doc. 2, ¶¶ 73-85]; see also Croslin v. Enerlex, Inc., 308 P.3d 1041, 1045 (Okla. 2013) (“This Court has often said that fraud is a generic term embracing the multifarious means which human ingenuity can devise so one can get advantage over another by false suggestion or suppression of the truth.”).

         Under Oklahoma law, an actionable claim for fraud or deceit requires plaintiff to establish the following elements: “1) a false material misrepresentation, 2) made as a positive assertion which is either known to be false or is made recklessly without knowledge of the truth, 3) with the intention that it be acted upon, and 4) which is relied on by the other party to his (or her) own detriment.” Bowman v. Presley, 212 P.3d 1210, 1218 (Okla. 2009). Constructive fraud, on the other hand, is “the concealment of material facts which one is bound under the circumstances to disclose.” Bankers Tr. Co. v. Brown, 107 P.3d 609, 613 (Okla.Civ.App. 2004) (quoting Varn v. Maloney, 516 P.2d ...

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