Running Foxes Petroleum, Inc v. Nighthawk Production LLC

Filing 102

OPINION AND ORDER overruling 99 Objections and adopting 94 Report and Recommendation by Chief Judge Marcia S. Krieger on 12/23/15. 59 Motion to Dismiss First Amended Complaint is denied in part and granted in part, 98 Objections are sustained, and 68 Motion to Compel Production of Title Opinions is granted. (dkals, )

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLORADO
Chief Judge Marcia S. Krieger
Civil Action No. 14-cv-01466-MSK-MJW
RUNNING FOXES PETROLEUM, INC.,
Plaintiff,
v.
NIGHTHAWK PRODUCTION LLC,
Defendant.
OPINION AND ORDER ADOPTING RECOMMENDATION,
GRANTING IN PART AND DENYING IN PART MOTION TO DISMISS, AND
REVERSING AND VACATING ORDER ON MOTION TO COMPEL PRODUCTION
THIS MATTER comes before the Court on the Defendant Nighthawk Production LLC’s
Motion to Dismiss First Amended Complaint (#59), the Plaintiff Running Foxes Petroleum,
Inc.’s Response (#75), and the Defendant’s Reply (#79). The Magistrate Judge issued a Report
and Recommendation (#94) that the motion be denied. The Defendant filed timely Objections
(#99) to the Recommendation, and the Plaintiff filed a Response (#101).
Also before the Court are the Plaintiff’s Objections (#98) to the Magistrate Judge’s
September 8, 2015 Opinion and Order (#94, 95) denying its Motion to Compel Production of
Title Opinions (#68), and the Defendant’s Response (#100) to the Objections.
I. Background
The following facts are derived from the allegations set forth in the Amended Complaint
(#58). Over the course of several years, the Plaintiff Running Foxes Petroleum, Inc. and the
Defendant Nighthawk Production LLC entered into a series of contracts pertaining to oil and gas
operations on land in Colorado. As relevant here, in 2007, the parties entered into a joint

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operating agreement for the Middle Mist Project (the Middle Mist JOA), an oil and gas
development project in Washington and Lincoln Counties. The Middle Mist JOA governed the
parties’ obligations to one another with respect to several jointly owned oil and gas leases. The
agreement also required any party who acquired “a renewal or replacement” oil and gas lease
located within the agreement area to offer to the other party the right to acquire their
proportionate share of such lease.
One of the leases subject to the Middle Mist JOA was known as the Knutson Bottom
Lease. The Plaintiff initially acquired a 100% working interest in this lease. Subsequently,
through a series of assignments, the Plaintiff assigned portions of its working interest in the lease
to the Defendant. The Plaintiff alleges, however, that in a document known as Assignment No.3,
it retained for itself an overriding royalty interest in the Knutson Bottom Lease and in any
“extension, renewal, or substitute lease.”
Later, the Defendant acquired a new lease, known as the Knutson Top Lease, which
covered some of the same lands as the Knutson Bottom Lease. The Defendant did not give
Plaintiff sufficient notice of new lease or an opportunity to purchase a proportionate share of the
lease. The Defendant also has not paid the Plaintiff any proceeds from oil produced on lands
covered by the Knutson Top Lease.
The Plaintiff alleges that the Defendant breached the Middle Mist JOA by failing to give
proper notice or an opportunity to purchase. The Plaintiff also alleges that the Defendant
breached the implied covenant of good faith and fair dealing in the Middle Mist JOA by
intentionally choosing not to drill on lands covered by the Knutson Bottom Lease, allowing that
lease to expire, and then acquiring the Knutson Top Lease solely for the purpose of avoiding
having to pay the Plaintiff royalty proceeds. Finally, the Plaintiff alleges that it owns an

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overriding royalty interest in the Knutson Top Lease because it is an “extension, renewal, or
substitute lease” under the terms of Assignment No. 3.
II. Standard of Review
When a magistrate judge issues a recommendation on a dispositive motion, the parties
may file specific, written objections within fourteen days after being served with a copy of the
recommendation. 28 U.S.C. § 636(b)(1); Fed. R. Civ. P. 72(b). Here, the Defendant filed timely
Objections to the Report and Recommendation on the Motion to Dismiss. The Court therefore
reviews the Defendant’s Motion to Dismiss de novo. U.S. v. One Parcel of Real Prop. Known as
2121 E. 30th St., 73 F.3d 1057, 1060 (10th Cir. 1996).
Under Fed. R. Civ. P. 72(a), the Court reviews a magistrate judge’s ruling on nondispositive motions under the “clearly erroneous or contrary to law” standard. 28 U.S.C. §
636(b)(1)(A); Hutchinson v. Pfeil, 105 F.3d 562, 56 (10th Cir. 1997); Ariza v. U.S. West
Communications, Inc., 167 F.R.D. 131, 133 (D.Colo. 1996). Accordingly, the Plaintiff’s
Objections to the Magistrate Judge’s Order denying its Motion to Compel Production will be
overruled unless the Court finds that the Magistrate Judge abused his discretion or, if after
viewing the record as a whole, the Court is left with a “definite and firm conviction that a
mistake has been made.” Ariza, 167 F.R.D. at 133 (citing Ocelot Oil Corp. v. Sparrow Indus.,
847 F.2d 1458, 1464 (10th Cir. 1988)).
III. Analysis
A. Motion to Dismiss
The Complaint (#5), as originally filed, asserted claims for (1) breach of contract for
failure to notify the Plaintiff of the Knutson Top Lease as required by the Middle Mist JOA; (2)
breach of the implied covenant of good faith and fair dealing in the Middle Mist JOA for not

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drilling on lands covered by the Knutson Bottom Lease; (3) “specific performance” of the
Defendant’s obligation under the Middle Mist JOA to offer the Plaintiff a share in the Knutson
Top Lease; (4) declaratory relief in the form of a judgment declaring that Plaintiff holds an
interest in the Knutson Top Lease and ordering the Defendant to pay proceeds on that interest;
(5) breach of fiduciary duty for failing to give notice of the Knutson Top Lease and failing to
drill on lands covered by the Knutson Bottom Lease; and (6) an accounting of all proceeds of
production that Defendant has received from the Knutson Top Lease.
The Defendant moved to dismiss the claims under Fed. R. Civ. P. 12(b)(6). On March
12, 2015, the Court issued an Order (#56) granting in part and denying in part the motion to
dismiss. As to the substantive claims, the Court found that the Complaint sufficiently pled
claims for breach of contract and breach of the implied covenant of good faith and fair dealing,
but that it had not sufficiently pled a claim for breach of fiduciary duty. Specifically, the Court
found that the Complaint did not allege a fiduciary relationship between the parties or that the
Defendant breached a duty separate from its contractual duties. The Court granted the Plaintiff
“14 days leave to amend the Complaint to cure the pleading deficiencies identified herein.”
Thereafter, on March 27, 2015, the Plaintiff filed the Amended Complaint (#58).
Although the Amended Complaint does not significantly change the factual allegations, it asserts
slightly different claims for relief. The Amended Complaint no longer asserts a claim for breach
of fiduciary duty. Instead, it asserts a second claim for breach of the implied covenant of good
faith and fair dealing. This new claim, in substance, is premised on the allegation that in
Assignment No. 3, the Plaintiff retained an overriding royalty interest in the Knutson Bottom
Lease and any “extension, renewal, or substitute lease.” (The clause providing for continuation
of the overriding royalty interest is referred to as an “anti-washout clause.”) The claim alleges

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that the Plaintiff owns an overriding royalty interest in the Knutson Top Lease by virtue of the
anti-washout clause in Assignment No. 3 and that the Defendant breached the duty of good faith
and fair dealing by not paying the Plaintiff any proceeds on such interest.
The Defendant now moves to dismiss the Amended Complaint. The Defendant argues
that the Plaintiff exceeded the Court’s March 12, 2015 Order granting leave to amend because it
did not amend the fiduciary duty claim and instead added an entirely new claim for relief without
otherwise filing a proper motion to amend.
Court finds that the March 12, 2015 Order can reasonably be understood as granting an
opportunity to the Plaintiff to save the breach of fiduciary duty claim, if possible. The Court
granted leave to “cure the pleading deficiencies identified” in the Order, the only deficiencies
being those associated with the breach of fiduciary duty claim. In the Amended Complaint, the
Plaintiff makes no attempt to save the breach of fiduciary duty claim and instead inserts a new
claim for relief. The Court notes that the Amended Complaint was filed long after the
September 11, 2014 deadline for amendment established by the Scheduling Order (#31), and at
no time prior to the deadline did the Plaintiff give any notice of its intent nor make any request to
amend the Complaint in order to assert a new legal theory for recovery. To amend after the
deadline, the Plaintiff typically would be required to satisfy a two-part test under Fed. R. Civ. P.
16(b) and 15(a).
However, as noted, the Amended Complaint does not make significant changes to the
factual allegations as set forth in the original Complaint. Instead, the new claim for relief
appears to simply assert a new legal theory. And, the allegations to support it are generally the
same as those supporting the Plaintiff’s original claim for a declaratory judgment that it owns an
interest in the Knutson Top Lease (the Court reads that claim broadly to mean both a working

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interest and an overriding royalty interest). The new claim clarifies that the source of the
Plaintiff’s overriding royalty interest is Assignment No. 3 and that it seeks payment on such
interest. Under these circumstances, the Court denies the Motion to Dismiss the Amended
Complaint in so far as it clarifies factual allegations with regard to the claims as asserted in the
original Complaint. The Motion to Dismiss is granted, however, as to the newly stated claim for
breach of the duty of good faith and fair dealing because no showing has been made pursuant to
Fed. R. Civ. P. 16(b) and 15(a). Accordingly, the Court overrules the Defendant’s Objections
and adopts the Report and Recommendation. The Motion to Dismiss is granted in part and
denied in part.
B. Motion to Compel Production
During discovery, the Plaintiff requested that the Defendant produce all documents
related to the titles of the Knutson Top Lease, including title opinions. The Defendant withheld
three title opinions related to the Knutson Top Lease on the basis that they were protected by the
attorney-client privilege. According to the Defendant, the opinions were prepared by outside
counsel for the purpose of giving legal advice regarding the title of lands covered by the Knutson
Top Lease.
Thereafter, the Plaintiff moved to compel (#68) the Defendant to produce the title
opinions. The Plaintiff did not dispute that the opinions were privileged when they were given to
the Defendant, but it argues that the Defendant impliedly waived the privilege as to at least two
of the opinions because the Defendant voluntarily disclosed the opinions to a third-party, Plains
Marketing, L.P. (“Plains”), during the course of conducting business.
The Defendant does not dispute that two of the title opinions were sent to Plains.
However, relying on Alliance Const. Solutions, Inc. v. Dep’t of Corr., 54 P.3d 861 (Colo. 2002),

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the Defendant argued that its disclosure does not waive the privilege because “[i]t is well settled
that confidential and privileged communications shared with a party’s independent contractor
remain protected under Colorado law.” According to the Defendant, Plains was its “independent
contractor” responsible for purchasing the Defendant’s oil and also for “ensuring [the
Defendant’s] compliance with its legal and contractual obligations through the payment of
royalties and taxes owed from [the Defendant’s] oil production.” The Defendant therefore
argued that the title opinions were privileged.
On referral, the Magistrate Judge determined that although the title opinions were
relevant under Rule 26(b)(1), they were privileged under the test set forth in Alliance. The
Plaintiff filed Objections (#98) to the Magistrate Judge’s Order, arguing that the Magistrate
Judge misapplied the law with regard to waiver of the attorney-client privilege.
Federal Rule of Civil Procedure 26(b)(1) requires production of nonprivileged material
relevant to a party’s claims or defenses. When, as here, the Court’s subject matter jurisdiction is
premised on diversity under 28 U.S.C. § 1332, the Court must apply Colorado’s law governing
the attorney-client privilege. See Fed. R. Evid. 501.
Under Colorado law, the attorney-client privilege applies to confidential matters
communicated by or to the client in the course of obtaining counsel, advice, or direction with
respect to the client’s rights or obligations. People v. Trujillo, 144 P.3d 539, 542 (Colo. 2006).
Colorado has codified the privilege in C.R.S. § 13-90-107(1)(b), which provides that “an
attorney shall not be examined without the consent of his client as to any communication made
by the client to him or his advice given thereon in the course of professional employment . . . .”
The privilege applies only to statements made “in circumstances giving rise to a reasonable
expectation that the statements will be treated as confidential.” Wesp v. Everson, 33 P.3d 191,

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197 (Colo. 2001). Whether the privilege applies must be determined with respect to each
specific communication. Id.
The attorney-client privilege is not absolute. The privilege is held by the client, who may
waive the privilege, either expressly or impliedly. Id.; see also People v. Trujillo, 144 P.3d 539,
543 (Colo. 2006). “To prove an implied waiver, there must be evidence showing that the
privilege holder, by words or conduct, has impliedly forsaken his claim of confidentiality with
respect to the communication in question.” Wesp, 33 P.3d at 198. A client may impliedly waive
the attorney-client privilege by placing the privileged communication at issue or by disclosing
the privileged information to a third party. Trujillo, 144 P.3d at 543. The burden of establishing
that a waiver occurred is on the party seeking to overcome the privilege. Wesp, 33 P.3d at 198.
In Alliance, the Colorado Supreme Court addressed whether communications between a
governmental entity’s independent contractor and the entity’s counsel are protected by the
attorney-client privilege. See Alliance Const. Solutions, Inc. v. Dep’t of Corr., 54 P.3d 861, 862
(Colo. 2002). The defendant in that case, the Colorado Department of Corrections (DOC),
contracted with the plaintiff to construct a new prison, but ultimately terminated the contract.
The plaintiff sued, alleging wrongful termination. Later, the plaintiff sought to discover
communications made between the DOC’s legal counsel and its independent contractor. The
independent contractor had been hired by the DOC to serve as project manager for the prison
construction project, which was the subject of the underlying litigation. See id. at 863-64. The
Colorado Supreme Court analogized the situation to one where communications are made in the
corporate context (between employees and counsel), and it emphasized that the purpose of the
privilege is to protect communications made to the attorney in order for him or her to provide
sound legal advice. See id. at 865-66. The court reasoned that when an independent contractor

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is, in all relevant aspects, the functional equivalent of an employee, it makes little sense to create
a formal distinction between an employee and an independent contractor. See id. at 869. Thus,
the court held that there are circumstances when the attorney-client privilege protects
communications between a governmental entity’s independent contractor and the entity’s
counsel. See id. To determine whether the privilege applies, the court adopted a four-part test.
First, “the information-giver must be an employee, agent, or independent contractor with a
significant relationship not only to the governmental entity but also to the transaction that is the
subject of the governmental entity’s need for legal services.” Id. If the party seeking protection
satisfies the first part of the test, it must then show three additional elements: (i) it must show
that the communication was made for the purpose of seeking or providing legal assistance; (ii)
the party must show that the subject matter of the communication was within the scope of the
duties provided to the entity by its employee, agent, or independent contractor, and (iii) the party
must show that the communication was treated as confidential and only disseminated to those
persons with a specific need to know its contents. Id. 869-70.
The Court understands the Defendant to rely on Alliance for the proposition that the
attorney-client privilege protects communications it made with Plains, its independent contractor,
and therefore the title opinions it gave to Plains. The Court has some doubt that Plains was an
independent contractor of the Defendant and thus whether the Alliance test is applicable for that
reason. Assuming, without deciding, that Plains is indeed an independent contractor, the Court
finds that the Defendant has failed to establish that the communication at issue here (the giving
of the title opinions to Plains) is protected by the attorney-client privilege.
The factual scenario here fundamentally differs from that addressed in Alliance. In
Alliance, the independent contractor (agent of the governmental entity) gave information to the

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attorney for the governmental entity. The question presented was whether the communications
between the independent contractor and the attorney for the governmental entity were as
protected as conversations between the governmental entity and its attorney would have been.
In this case, however, there are no communications between Plains and the Defendant’s lawyer.
Whatever business the Defendant had with its attorney resulted in the title opinions. The
Defendant’s transfer of those opinions to Plains had nothing to do with its representation by its
attorney in preparing them. Indeed, the Defendant sent the opinions to Plains simply for the
business purpose of having Plains distribute the appropriate royalty amounts. There is no
showing that Plains acted as the Defendant’s agent in dealing with Defendant’s attorney. Thus,
Alliance is inapplicable.
The Court therefore turns to the issue of waiver. The Plaintiff does not dispute that the
title opinions were privileged communications between the Defendant and its attorney. Instead it
contends that the Defendant waived the privilege when it disseminated the opinions to Plains.
The Court agrees1. The Defendant was the privilege holder, but waived such privilege when it
disseminated the title opinions to Plains, a third-party. The Court therefore reverses and vacates
the Magistrate Judge’s September 8, 2015 Order denying the Plaintiff’s Motion to Compel
Production of Title Opinions.

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The Court recognizes that in Colorado there is an exception to the general rule of waiver. The
common interest doctrine provides that communications shared with third persons who have a
common legal interest with respect to the subject matter thereof will be deemed neither a breach
nor a waiver of the confidentiality surrounding the attorney-client privilege. See Black v.
Southwestern Water Conservation Dist., 74 P.3d 462, 469 (Colo. App. 2003). The privilege will
applies only to communications given in confidence and that are intended and reasonably
believed to be part of an on-going and joint effort to set up a common legal strategy. Id.
However, the Defendant has not made any argument or presented any evidence with regard to
the common interest doctrine. The Court therefore declines to express any opinion as to its
applicability.
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IV. Conclusion
For the forgoing reasons, the Court OVERRULES the Defendant’s Objections (#99) and
ADOPTS the Report and Recommendation (#94), as explained in this Order. The Defendant’s
Motion to Dismiss First Amended Complaint (#59) is DENIED, in part, and GRANTED, in
part.
Further, the Plaintiff’s Objections (#98) to the Magistrate Judge’s September 8, 2015
Order denying the Plaintiff’s Motion to Compel Production of Title Opinions are SUSTAINED.
The Order (#95) is reversed and vacated. The Plaintiff’s Motion to Compel Production of Title
Opinions (#68) is GRANTED. Within the next 14 days, the Defendants are ordered to disclose
to the Plaintiff the two title opinions that were provided to Plains. Should the Plaintiff wish to
file a supplemental response to the pending Motion for Summary Judgment, it may move for
such relief no later than 21 days after receipt of the documents.
Dated this 23rd day of December, 2015.
BY THE COURT:

Marcia S. Krieger
Chief United States District Judge

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