Crichton et al v. Augustus Energy Resources, L.L.C.

Filing 76

ORDER by Magistrate Judge Kristen L. Mix on 10/26/17. 60 Motion to Dismissis DENIED. (lgale, )

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLORADO
Civil Action No. 15-cv-00835-KLM
MELISSA CLARKE CRICHTON, and
CRISTY HEDGPETH, individually and on behalf of all others similarly situated,
Plaintiffs,
v.
AUGUSTUS ENERGY RESOURCES, L.L.C.,
Defendant.
_____________________________________________________________________
ORDER
_____________________________________________________________________
ENTERED BY MAGISTRATE JUDGE KRISTEN L. MIX
This matter is before the Court on Defendant’s Motion to Dismiss [#60]1 (the
“Motion”).

Plaintiffs filed a Memorandum in Opposition to the Motion [#62] (the

“Response”), and Defendant filed a Reply [#67]. Plaintiffs thereafter filed a Supplement to
the Memorandum in Opposition to the Motion [#68] (the “Supplement”), to which Defendant
filed a Response to the Supplement [#69] (the “Supplement Response”). The Court has
reviewed all briefing on the Motion [#60], the entire case file, and the applicable law, and
is sufficiently advised in the premises. For the reasons set forth below, the Motion [#60]
is DENIED.2

1

“[#60]” is an example of the convention the Court uses to identify the docket number
assigned to a specific paper by the Court’s case management and electronic case filing system
(CM/ECF). This convention is used throughout this Order.
2

The case has been referred to the undersigned for all purposes pursuant to
D.C.COLO.LCivR 72.2(d) and 28 U.S.C. § 636(c). See Order of Reference [#22].

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I. Background
Plaintiffs Melissa Clarke Crichton and Cristy Hedgpeth represent a class of similarly
situated persons pursuant to Fed. R. Civ. P. 23(b)(3), and filed this action in state court on
March 12, 2015. Compl. [#3] at 1. Defendant Augustus Energy, LLC is an oil and gas
production company that has paid Plaintiffs royalties on natural gas produced from wells
in Yuma County, Colorado. Motion [#60] at 2. Plaintiffs allege that Defendant has
improperly deducted costs from royalty payments due to Plaintiffs. Id. Specifically,
Plaintiffs contend that Defendant improperly imposed costs between the time that the gas
was produced from the wellhead and when the gas was rendered marketable. Id. at 3.
Therefore, Plaintiffs assert, Defendant has breached implied provisions of the royalty
agreement by “failing to properly calculate and pay royalties to the Plaintiffs and the Class
. . . .” Second Am. Compl. [#5] at 7. Plaintiffs seek an award of prejudgment interest on
all royalty underpayments arising from Defendant’s alleged improper method of royalty
calculation. Id. at 10.
The issue presented in the Motion [#60] is purely legal. Defendant seeks dismissal
of all claims pursuant to Fed. R. Civ. P. 12(b)(1) for lack of subject matter jurisdiction on the
basis that Plaintiffs failed to exhaust administrative remedies before the Colorado Oil and
Gas Conservation Commission (the “COGCC”) prior to filing this action. Motion [#60] at
1. In support of the Motion [#60], Defendant contends that because the underlying issue
of whether Defendant properly calculated and paid royalties is a question of fact, the
COGCC possessed jurisdiction over the claim and, therefore, Plaintiffs were required to
exhaust all administrative remedies. Id. at 2. Thus, Defendant contends, this Court lacks
subject matter jurisdiction over the dispute pursuant to Fed. R. Civ. P. 12(b)(1) and all
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claims must be dismissed as a matter of law. Id. In the Response [#62], Plaintiffs argue
that the underlying dispute is rooted in contract and, therefore, the

COGCC lacks

jurisdiction over the dispute. Response at 1. Due to the COGCC’s lack of jurisdiction over
the dispute, Plaintiffs assert, exhaustion before the COGCC was not required and their
claims must not be dismissed. Id.
II. Analysis
A.

Fed. R. Civ. P. 12(b)(1) Motion to Dismiss
Pursuant to Fed. R. Civ. P. 12(b)(1), a party may assert a lack of subject matter

jurisdiction by motion as a defense. Before a federal court may assert subject matter
jurisdiction over a claim, a claimant must first exhaust all administrative remedies. Minor
v. Gunja, No. CIVA05CV01382PSFCBS, 2006 WL 1795128, at *6 (D. Colo. June 27, 2006).
“To survive a Rule 12(b)(1) motion, [p]laintiff must demonstrate total exhaustion. That is,
if each and every claim in the [c]omplaint is not exhausted through the administrative
remedy process, the entire [c]omplaint should be dismissed.” Id. (citing Ross v. Cty. of
Bernalillo, 365 F.3d 1181, 1184 (10th Cir. 2004)). In the present case, it is undisputed that
Plaintiffs did not assert their claims before the COGCC prior to filing this action. See
Motion [#60] at 1; Response [#62] at 4. Therefore, if the COGCC possessed jurisdiction
over Plaintiffs’ claims, as Defendant contends, Plaintiffs’ Second Amended Complaint [#5]
must be dismissed for failure to exhaust.
B.

COGCC Jurisdiction
Jurisdiction to adjudicate certain disputes is conferred upon the COGCC by the

Colorado Oil and Gas Conservation Act. See Colo. Rev. Stat. § 34–60–105. With respect

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to disputes arising from a contract, Colo. Rev. Stat. § 34–60–118.5(5.5) states:
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.
Thus, the COGCC is precluded from exercising jurisdiction over any controversy involving
a bona fide dispute regarding contract interpretation. Id.
In support of the Motion [#60], Defendant contends that “[d]etermining the proper
allocation of post-production costs does not require interpretation of the contract, but
instead requires a factual analysis about where production first became marketable.” Reply
[#67] at 4. Defendant relies principally on a Colorado Supreme Court case, asserting that
“[u]nder Rogers v. Westerman Farm Co., questions regarding marketability are issues of
fact . . . . Thus, in this case, determining the proper allocation of post-production costs does
not require the interpretation of disputed contractual terms . . . .” Motion [#60] at 9; Rogers
v. Westerman Farm Co., 29 P.3d 887 (Colo. 2001). In opposition, Plaintiffs contend that
Grynberg v. Colorado Oil and Gas Conservation Commission, 7 P.3d 1060 (Colo. App.
1999), “expressly holds that royalty owners who have a post-production cost contract
dispute with an oil and gas producer . . . are not required to exhaust their administrative
remedies with [the COGCC].” Response [#62] at 2.
In Rogers, gas was produced by an oil and gas developer from approximately two
hundred wells, and was sold either at the well site or at a connection to an interstate
pipeline. Id. at 891. The leases, referring to point of marketability, stated that royalties
would be paid based on gas values “at the well” or “at the mouth of the well.” Rogers, 29
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P.3d at 887. The court addressed whether these express terms in the oil and gas leases
were sufficiently clear to guide the cost allocations between parties. Id. The court
concluded that “[a]bsent express lease provisions addressing allocation of costs, the
lessee’s duty to market requires that the lessee bear the expenses incurred in obtaining a
marketable product.”

Id. at 906.

The court further held that “the determination of

marketability is a question of fact.” Id. at 905. Defendant relies principally upon this
“question of fact” language to contend that, because point of marketability is a
determination of fact, this is not a contract dispute for purposes of Colo. Rev. Stat. §
34–60–118.5(5.5), and is therefore within the jurisdiction of the COGCC. Motion [#60] at
10.
Plaintiffs, by contrast, rely on Grynberg to support their contention that the COGCC
lacked jurisdiction because this is fundamentally a contract dispute. In Grynberg, a dispute
arose between oil and gas developers and royalty owners of an interest in oil and gas
property. Grynberg, 7 P.3d at 1062. The royalty owners commenced an action to recover
royalties from the oil and gas developers and filed an action with the COGCC pursuant to
Colo. Rev. Stat. § 34–60–118.5 in order to have the COGCC determine the amount of
royalties owed to the royalty owners. Id. The COGCC determined, however, that “while
the pertinent statute authorized [the COGCC] to ensure timely payment to those legally
entitled to such payments, it lacked jurisdiction to adjudicate private disputes related to the
legality of specific deductions, which . . . would require [an interpretation of the instruments
that created the royalty interests].” Id. The Grynberg court further held that “the [COGCC]

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does not have jurisdiction to interpret any royalty agreement to determine the propriety of
disputed post-production deductions.” Id. at 1063.
The leases at issue in this matter are silent regarding post-wellhead cost allocations.
Order Granting Motion for Class Certification [#56] at 9. Pursuant to Colorado law, an
“implied covenant to market” applies to all leases that are silent with respect to the
allocation of production costs. Gagnon v. Merit Energy Co., LLC, No. 14-cv-832-WJMKLM, 2015 WL 9489609 (D. Colo. Dec. 30, 2015) (quoting Rogers v. Westerman Farm Co.,
29 P.3d 887, 902 (Colo. 2001)). Functionally, an implied covenant to market “obligates the
lessee to incur those post-production costs necessary to place gas in a condition
acceptable for market.” Rogers, 29 P.3d at 902. However, the “condition acceptable for
market” is not universally defined under Colorado law, and varies among leases. Gagnon,
14-cv-832-WJM-KLM, at 4.

For each lease, “[t]he determination of whether gas is

marketable is a question of fact.” Rogers, 29 P.3d at 906. Indeed, the Tenth Circuit has
recognized that point of marketability can vary between all gas produced at all wells.
Gagnon, 14-cv-832-WJM-KLM, at 4 (citing Wallace B. Roderick Revocable Living Trust
v. XTO Energy, Inc., 725 F.3d 1213, 1219 (10th Cir. 2013)). Therefore, because Plaintiffs’
leases are silent regarding post-production wellhead deductions, the leases at issue in this
action contain implied covenants to market and the point of marketability of the gas
produced by Defendant is a question of fact with respect to each specific lease.
Defendant asserts that Grynberg does not provide a sufficient basis to defeat the
Motion [#60]. Motion [#60] at 6; Reply [#67] at 5. Specifically, Defendant states that
“Grynberg did not hold that the COGCC lacks jurisdiction to find facts and apply them to

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undisputed terms of a contract.”3 Id. The Court agrees with this proposition. Indeed, the
Grynberg court merely held that “[u]nder [Colo. Rev. Stat. § 34–60–118.5] . . . the [COGCC]
does not have jurisdiction to interpret any royalty agreement to determine the propriety of
disputed post-production deductions.” Grynberg v. Colo. Oil and Gas Conservation Com’n,
7 P.3d 1060 (Colo. App. 1999). However, the Court disagrees with Defendant’s apparent
extension of the proposition, which concludes that the COGCC must exercise jurisdiction
over all disputes that involve factual inquiries. The Court further disagrees that the terms
of the lease are undisputed in this controversy, as this matter centers on a contested
interpretation of the implied contractual term “point of marketability,” which arises under the
implied covenant to market within the disputed leases.
Although the point of marketability is a question of fact pursuant to Rogers, this

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Defendant cites a number of cases seeking to distinguish Grynberg from the present
factual circumstances. First, Defendant cites Grant Bros. Ranch, LLC v. Antero Res. Piceance
Corp., No. 15CA2063, 2016 WL 7009139 (Colo. App. Dec. 1, 2016) as supportive of its position that
the COGCC possesses jurisdiction over this dispute. Reply [#67] at 6. However, Grant Bros. dealt
with a complete absence of a contract, and therefore the court rejected claims that COGCC lacked
jurisdiction per Grynberg. Grant Bros., No. 15CA2063, 2016 WL 7009139 at *5 (Colo. App. Dec.
1, 2016) (“Here, there is no contract; thus, there is no contract dispute.”). However, the implied
contractual terms present in this case, although implied, are nonetheless contractual terms. See
Evergreen Highlands Ass’n v. West, 73 P.3d 1, 3 (Colo. 2003). Defendant next cites Lindauer v.
Williams Prod. RMT Co., 318 P.3d 378 (Colo. App. 2016). Reply [#67] at 6-7. Lindauer held that
an operator’s reasonable costs of transporting gas to downstream markets were deductible from
royalty payments. Lindauer, 318 P.3d at 378. However, Lindauer did not address COGCC
jurisdiction with respect to determinations of marketability, but instead addressed additional costs
beyond an undisputed point of marketability. It is therefore not inconsistent with Grynberg with
respect to COGCC jurisdiction. Defendant next cites Atlantic Richfield Co. v. Farm Credit Bank of
Wichita, 226 F.3d 1138 (10th Cir. 2000), as supporting COGCC jurisdiction. Reply [#67] at 7.
However, Atlantic Richfield is entirely consistent with Grynberg, as it noted that “[Colo. Rev. Stat.§
34–60–118.5] demonstrates the General Assembly’s intent to grant the [COGCC] jurisdiction only
over actions for the timely payment of proceeds and not over disputes with respect to the legal
entitlements to proceeds under the terms of a specific royalty agreement.” Atlantic Richfield, 226
F.3d at 1157.

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dispute is contractual in nature. Defendant’s duty to market arises from the implied duty
to market that applies in this matter, as well as in all other oil and gas leases in Colorado.
See Rogers, 29 P.3d at 902. The Restatement (3d) of Property (Servitudes) provides that
“[a] ‘covenant’ is a contract, an agreement, a promise, or a species of express contract.
The word ‘covenant’ means to enter into a formal agreement, to bind onself in contract, and
to make a stipulation . . . .” RESTATEMENT (THIRD) OF PROP: SERVITUDES § 1.1 (AM. LAW.
INST. 1999).4 Courts must construe covenants as a whole based upon their underlying
purpose, but will enforce a covenant as written if clear on its face.” Evergreen Highlands
Ass’n v. West, 73 P.3d 1, 3 (Colo. 2003).

Here, the parties dispute the point of

marketability of the gas, which arises as a result of the implied covenant to market. At the
very least, “point of marketability” is an undefined concept relating to obligations arising
under the oil and gas lease between Plaintiffs and Defendant. Defendant seemingly argues
that because the point of marketability is a question of fact, that this dispute must be
removed, per se, from the realm of contract. However, contractual disputes often center
on questions of fact. See Lake Durango Water Co., Inc. v. Pub. Utils. Com’n of State of
Colo., 67 P.3d 12 (Colo. 2003) (“Whether a party has performed its obligations under a
contract or breached is a question of fact.”); see also May v. Interstate Moving & Storage
Co., 739 F.2d 521 (10th Cir. 1984) (“Once it has been determined that a contract is

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The Colorado Supreme Court, United States District Court for the District of Colorado, and
the Tenth Circuit Court of Appeals rely on The Restatement (3d) of Property. See Lobato v. Taylor,
71 P.3d 938 (Colo. 2002); see also Fairhurst Family Ass’n, LLC v. United States Forest Serv.,
Dep’t. of Agric., 172 F. Supp. 2d 1228 (D. Colo. 2001); In re Luna, 406 F.3d 1192 (10th Cir. 2005).

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ambiguous and that its construction depends on extrinsic facts and circumstances, the
terms of the contract become questions of fact and are for the trier of fact . . . .”); Dorman
v. Petrol Aspen, Inc., 914 P.2d 909 (Colo. 1996) (“Once a contract is adjudged to be
ambiguous, meaning of the ambiguous term is a question of fact to be determined in the
same manner . . . as other questions of fact.”).

Thus, although Rogers held that

marketability is a question of fact, the factual inquiry regarding when a gas product became
“marketable” is fundamentally an interpretation of an undefined contractual term affecting
each party’s obligations under the disputed lease agreement. Because the COGCC may
not resolve bona fide disputes regarding contract interpretation pursuant to Colo. Rev. Stat.
§ 34–60–118.5(5.5), and this dispute arises out of an undefined contractual term, the Court
concludes that the COGCC lacked jurisdiction over the claim and Plaintiffs were not
required to exhaust COGCC remedies prior to filing a judicial action.
C.

“Futility” of Exhaustion
Lastly, the Court turns to Defendant’s argument that exhaustion is nonetheless

required because the COGCC did not make the initial determination that this dispute is
beyond its jurisdiction. Defendant asserts that “[t]he COGCC must make the determination
in the first instance regarding the existence of a bona fide [contract] dispute.” Motion [#60]
at 8. Defendant supports this proposition by highlighting language in Colo. Rev. Stat. §
34–60–118.5(5.5), stating that “[b]efore hearing the merits of any proceeding regarding
payments 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
. . . . “ Id. (quoting Colo. Rev. Stat. § 34–60–118.5(5.5)). Defendant argues, therefore,

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that Plaintiffs must now exhaust any claims before the COGCC, because the COGCC did
not make the preliminary determination that this dispute arose under contract principles
pursuant to Colo. Rev. Stat. § 34–60–118.5(5.5). Plaintiffs, by contrast, assert that bringing
their claims to the COGCC is not necessary because their efforts would have been futile.
Although Colo. Rev. Stat. § 34–60–118.5(5.5) states that the COGCC must make
a determination of whether a bona fide contract dispute exists prior to exercising jurisdiction
over a dispute, the statute does not require that disputes may be filed in district court only
after a COGCC determination that the dispute is contractual in nature. The Court therefore
disagrees with Defendant’s interpretation of Colo. Rev. Stat. § 34–60–118.5(5.5) and finds
that Plaintiffs properly filed this action in this Court without first seeking a COGCC
determination. Furthermore, as Plaintiffs assert in the Response [#62], exhaustion before
the COGCC would likely have been futile. See Response [#62] at 17. Pursuant to
Colorado law, futility is an exception to the exhaustion doctrine. See State v. Golden’s
Concrete Co., 962 P.2d 919, 923 (Colo. 1998). The exception states that exhaustion is
unnecessary when “it is clear beyond a reasonable doubt that further administrative review
by the agency would be futile because the agency will not provide the relief requested.”
City & Cty. of Denver v. United Air Lines, Inc., 8 P.3d 1206, 1214 (Colo. 2000) (quoting
Golden’s, 962 P.2d at 923). Exhaustion before the COGCC was likely futile “beyond a
reasonable doubt” because, as discussed above, this matter concerns a contractual
dispute. Futility is further supported by a May 2017 COGCC administrative order, which
was included as Exhibit 17 attached to Plaintiffs’ Supplement [#68]. See In the Matter of
the Payment of Proceeds from the Production of Oil and Gas as Established by Section 34-

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60-118.5, C.R.S., Wattenberg Field, Weld County, Colorado, Docket No. 170300096
(2017). In the order, the COGCC declined jurisdiction over a dispute regarding whether a
gas producer had sold gas without paying royalties to royalty interest holder. Id. In support
of its position, the COGCC cited to Grynberg v. Colorado Oil and Gas Conservation
Commission, 7 P.3d 1060 (Colo. App. 1999), and concluded that the question regarding
lack of payment was rooted in contract and therefore beyond the jurisdiction of the
COGCC. Id. Accordingly, exhaustion by Plaintiffs was likely futile “beyond a reasonable
doubt,” as case law, as well as recent COGCC administrative orders, support Plaintiffs’
position that this dispute is rooted in contract and is beyond the jurisdiction of the COGCC.
III. Conclusion
For the foregoing reasons,
IT IS HEREBY ORDERED that the Motion [#60] is DENIED.

Dated: October 26, 2017

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