Rodenfels v. PDC Energy, Inc.
ORDER. ORDERED that PDC Energy's Motion to Dismiss or, in the Alternative, to Stay Pending an Appraisal [Docket No. 16] is DENIED. Signed by Judge Philip A. Brimmer on 03/30/17. (jhawk, )
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLORADO
Judge Philip A. Brimmer
Civil Action No. 16-cv-00251-PAB-STV
CHRISTOPHER J. RODENFELS, as Trustee of the Christopher J. Rodenfels 2000
Revocable Trust established May 10, 2000,
PDC ENERGY (fka Petroleum Development Corporation), a Delaware corporation,
This matter is before the Court on PDC Energy’s Motion to Dismiss or, in the
Alternative, to Stay Pending an Appraisal [Docket No. 16]. The Court has jurisdiction
pursuant to 28 U.S.C. § 1332.
This case concerns a general partner’s buyout of the limited partners’ interests in
oil and gas partnerships and the fiduciary duty claim by one of the limited partners that
his interest was grossly undervalued. Docket No. 1.
Defendant PDC Energy is a “domestic independent natural gas and crude oil
company” that owns and operates natural gas and crude oil properties in the Colorado
region. Docket No. 1 at 2, ¶ 1. In 2004 and 2005, def endant formed oil and gas limited
The following facts are drawn from plaintiff’s complaint, Docket No. 1, and are
assumed to be true for the purposes of this order. See Alvarado v. KOB-TV, LLC, 493
F.3d 1210, 1215 (10th Cir. 2007).
partnerships under West Virginia law. Docket No. 1 at 6, ¶ 12. The Christopher J.
Rodenfels 2000 Revocable Trust owned four such limited partnerships, and plaintiff
Christopher J. Rodenfels sues on its behalf as trustee. Id. at 2, ¶ 1. Defendant was the
sole managing general partner of these partnerships. Id. at 6-7, ¶ 13. In this capacity,
defendant acquired the right to explore and develop oil and gas properties, including
rights in the Wattenberg Field in Colorado, and transferred those rights to the limited
partnerships. Id. at 7, ¶ 14.
In 2010, defendant began the process of buying out the limited partners. Docket
No. 1 at 9, ¶ 22. In October 2010 and February 2011, defendant issued proxy
statements to the limited partnerships stating that it planned to buy out their interests
and transition to a “more traditional exploration and production company model.” Id. at
10, ¶ 23. The proposed transaction, upon approval, would cash out the limited partners
and merge the limited partnerships’ assets into a special-purpose subsidiary of PDC
Energy. Id., ¶ 24. Defendant acknowledged in the proxy statements that it had a
conflict between its interests and the interests of the limited partners with respect to the
transaction because it owed conflicting duties to its own shareholders and the limited
partners. Id. at 11, ¶ 28. Accordingly, defendant formed a special committee2 that
contracted with an investment banker to draft a fairness opinion regarding the
transaction. Id. Because the transaction involved a merger, the partnership agreement
required that a majority of the limited partners approve the transaction. Id. at 12, ¶ 30.
The partnership agreements provided that, in the event of such a merger, limited
The special committee was made up of four non-employee members of
defendant’s board of directors. Docket No. 1 at 11, ¶ 28.
partners who voted against the merger would be allowed to elect to receive a continuing
interest in the surviving entity or a pro rata share of the partnerships appraised assets.
Id. However, the proxies used for the merger provided for the elimination of the right to
acquire an interest in the continuing entity. Id. This also required majority approval. Id.
at 8, ¶ 20.
The proxies contained an estimation of the value of the partnerships’ proved and
unproved oil and gas reserves. Id. at 13-14, ¶ 34. Defendant used the estimate of a
petroleum engineering consulting firm to value the proved reserves. Id. Defendant
valued the unproved reserves at $10,000 per drilling location. Id. Plaintiff voted against
the transaction, but a majority of the limited partners approved the mergers. Docket
No. 1 at 16-17, ¶¶ 38, 41-42; Docket No. 16 at 3.
Plaintiff alleges that the proxy statements contained material misrepresentations
that undervalued the limited partnership units. Docket No. 1 at 19-20. Plaintif f claims
that defendant “knew at the time the proxies in question were solicited that infill wells
and horizontal wells would substantially increase the volume of oil and gas that each
Partnership could produce.” Docket No. 1 at 9, ¶ 21; see also id. at 15, ¶ 37 (“[T]he
estimated value of the reserves accessible by infill wells and by horizontal drilling using
assumptions about production, commodity prices and costs that are similar to those
that were used to value the proved reserves were known to PDC and should have been
disclosed in the proxy statements.”). Plaintiff also claims that defendant knew that new
extraction technologies such as horizontal drilling and fracking made the drilling rights
more valuable, but “failed to disclose its own high valuation of these assets.” Id. at 18,
¶ 46; see also id. at 14, ¶ 35 (“These reserve valuations . . . failed to take into account
technological developments that PDC itself had publicly touted as likely to give rise to
substantially increased revenues: infill drilling and enhanced recovery from horizontal
drilling in the Wattenberg Field in Colorado.”). Plaintiff alleges that defendant breached
the fiduciary duty it owed as the managing general partner by making material
misrepresentations about the value of the limited partnerships’ assets. Id. at 19, ¶ 52. 3
Plaintiff joined a class action lawsuit in the U.S. District Court for the Central
District of California against defendant under its previous name, captioned Schulein v.
Petroleum Dev. Corp., Case No. 8:11-cv-01891-AG-AN. Docket No. 16 at 7. 4 Schulein
Plaintiff alleges that defendant improperly:
(a.) Failed to disclose that PDC planned to refracture each partnership’s
existing vertical wells, which was projected by [the petroleum engineering
consulting firm] to generate sufficient additional cash flows for each
Partnership . . . ;
(b.) Failed to properly value the limited partnership units in light of new
drilling techniques, including horizontal drilling and fracking;
(c.) Failed to disclose to the limited partners the increase in value of their
units due to the new techniques (drilling and fracking);
(d.) Failed to properly value limited partnerships units in light of the
change in regulations that doubled the number of wells permitted;
(e.) Failed to disclose to the limited partners the increase in value of their
units due to the change in local regulations that more than doubled the
number of wells permitted [in the Wattenberg Field];
(f.) Commissioned an appraisal report that failed to take into account the
value of the new drilling techniques and change in regulation; and
(g.) Assigned an arbitrary value of $10,000 per well when it had in
possession data that showed the Partnerships’ assets had much greater
Docket No. 1 at 19-20, ¶ 52.
Plaintiff also initiated an appraisal action in W est Virginia state court, but later
successfully moved to dismiss that action. Docket No. 16 at 4, 7.
included both federal securities class action claims and breach of fiduciary duty claims
that were based on allegations similar to this case. Schulein v. Petroleum Dev. Corp.,
2012 WL 12884851, at *4 (C.D. Cal. June 25, 2012). T he defendants in Schulein
moved to dismiss the federal securities claims and the breach of fiduciary duty claims.
Id. at *7. In the alternative, the defendants requested a stay, id., which the court
denied. Id. at *6. The defendants settled the class action for $37 million. Docket No. 1
at 5, ¶ 9.
Plaintiff opted out of the class action settlement in Schulein and, on February 2,
2016, filed the present suit to pursue his breach of fiduciary duty claim. Docket No. 1 at
10.5 On May 2, 2016, defendant moved to dismiss or stay this action in favor of an
appraisal. Docket No. 16. Defendant argues that, under the West Virginia law that
governs the transaction at issue, appraisal is the exclusive remedy for an investor who
claims the consideration for a merger was insufficient. Docket No. 16 at 9 (citing W.
Va. Code § 31D-13-1302). Defendant admits that this law provides an exception to the
exclusive appraisal remedy where the merger was “procured as a result of fraud or
material misrepresentation,” W. Va. Code § 31D-13-1302(d)(2), but argues that plaintiff
has failed to plead the proxy statements were fraudulent or contained a material
misrepresentation. Docket No. 16 at 9. Specifically, defendant argues that plaintiff
“does not allege any false statement by PDC at all.” Id. If dismissal is denied,
defendant argues that the Court should nonetheless stay this proceeding in favor of an
The court in Schulein subsequently ruled that the individual breach of fiduciary
duty claims brought by class members that opted out of the settlement would need to
be brought in a separate action. Schulein, Docket Nos. 313-14.
appraisal proceeding in the interests of judicial economy because, by doing so, “the
burden on PDC and the Court will be reduced.” Id. at 11.
A. Failure to State a Claim
The Court’s function on a Rule 12(b)(6) motion for failure to state a claim upon
which relief can be granted is not to weigh potential evidence that the parties might
present at trial, but to assess whether the plaintiff’s complaint alone is sufficient to
plausibly state a claim. Fed. R. Civ. P. 12(b)(6); see also Dubbs v. Head Start, Inc.,
336 F.3d 1194, 1201 (10th Cir. 2003). In doing so, the Court “must accept all the wellpleaded allegations of the complaint as true and must construe them in the light most
favorable to the plaintiff.” Alvarado, 493 F.3d at 1215 (quotation marks and citation
omitted). At the same time, however, a court need not accept conclusory allegations.
Moffett v. Halliburton Energy Servs., Inc., 291 F.3d 1227, 1232 (10th Cir. 2002).
The parties agree that whether plaintiff’s exclusive remedy is an appraisal is
controlled by W. Va. Code § 31D-13-1302(d). Docket No. 16 at 9; Docket No. 25 at 10.
Section 1302(d) provides that a “shareholder entitled to appraisal rights under this
article may not challenge a completed corporate action for which appraisal rights are
available unless the corporate action: . . . (2) W as procured as a result of fraud or
material misrepresentation.” This statute was enacted in 2002 and no reported
decisions have interpreted the statute since it was enacted. West Virginia Business
Corporation Act, 2002 W. Va. 2nd Ex. Sess., ch. 25 (S.B. 2004), eff. Oct. 1, 2002.
Before the new statute was enacted, dissenting shareholder rights in West
Virginia were codified at § 31-1-123. The text of the statute did not explicitly provide
that appraisal was the exclusive remedy for shareholders or provide any exceptions to
the appraisal remedy. Matter of Fair Value of Shares of Bank of Ripley, 399 S.E.2d
678, 686-88 (W. Va. 1990) (quoting text of W. Va. Code § 31-1-123 (1966)) (“Bank of
Ripley”). Nonetheless, the Supreme Court of Appeals of West Virginia, based on the
law of other states, recognized appraisal as the exclusive remedy for dissenting
shareholders with exceptions in cases of “fraud, unfairness, or illegality.” Id. at 682; see
also Persinger v. Carmazzi, 441 S.E.2d 646, 654 (W . Va. 1994) (quoting same). The
court also recognized that “dissenter’s rights statutes are construed favorably toward
the shareholder.” Bank of Ripley, 399 S.E.2d at 682. As such, these statutes are
“given a reasonable construction rather than a rigid and technical one” and “[d]oubts
arising from a lack of precision or accuracy in the statute should, where possible, be
resolved in favor of the dissenting shareholder.” Id.
Defendant argues that plaintiff has failed to state a claim for fraud or material
misrepresentation and therefore his claims must be dismissed because appraisal is his
exclusive remedy. Docket No. 16 at 8. While plaintiff admits that he does not plead a
claim for fraud, he argues that the allegedly false statements regarding the value of the
limited partnership units are sufficient to state a claim for “material misrepresentation.”
Docket No. 25 at 9. Defendant argues that its estimates of value are only opinions, not
actionable misrepresentations. Docket No. 26 at 5. The question is whether, under W.
Va. Code § 31D-13-1302(d), the complaint pleads a “material misrepresentation” such
that plaintiff fits within that exception to the appraisal remedy.
Misleading value estimates are actionable as misrepresentations in the securities
context even when they are based on opinion or are subject to uncertainty. In
particular, where the defendant has estimated the value of a property higher than it
discloses, such a value estimate is actionable. Lynch v. Vickers Energy Corp., 383
A.2d 278, 281 (Del. 1977) (“And when, as here, management was in possession of two
estimates from responsible sources one using a ‘floor’ approach defining value in terms
of its lowest worth, and the other a more ‘optimistic’ or ceiling approach defining value
in terms of its highest worth it is our opinion that complete candor required disclosure of
both estimates.”). Here, plaintiff alleges that “valuations in the proxy statements sent to
the limited partners failed to take into account technological developments that PDC
itself had publicly touted as likely to give rise to substantially increased revenues: infill
drilling and enhanced recovery from horizontal drilling in the Wattenberg Field in
Colorado.” Docket No. 1 at 14, ¶ 35. Instead, plaintif f alleges defendant assigned “an
arbitrary value of $10,000 per drilling location for the infill wells, and failed to disclose its
own high valuation” of those wells and potential horizontal wells. Id. at 18, ¶ 46.
Having provided an estimate of the value, it is potentially misleading for defendant to
withhold its own higher estimate of the value when attempting to purchase the interests
of the limited partners, to whom it owed a fiduciary duty. “If management believed that
one estimate was more accurate or realistic than another, it was free to endorse that
estimate and to explain the reason for doing so; but full disclosure . . . was a
prerequisite.” Lynch, 383 A.2d at 281. Even if the valuation provided in the proxies
was merely an opinion, the Supreme Court has “held that such statements may be
actionable if they misstate the opinions or belief held, or, in the case of statements of
reasons, the actual motivation for the speaker’s actions, and are false or misleading
with respect to the underlying subject matter they address.” Fait v. Regions Fin. Corp.,
655 F.3d 105, 111 (2d Cir. 2011) (citing Virginia Bankshares, Inc. v. Sandberg, 501
U.S. 1083, 1091-96 (1991)) (emphasis in original). Plaintiff sufficiently alleges that the
proxies misstated the opinions or beliefs held by defendant by alleging facts from which
one could infer that defendant believed the assets were more valuable than it disclosed
in the proxies. Docket No. 1 at 14, 18 ¶¶ 35, 46.
Defendant next argues that any failure to disclose the value of the unproved
reserves cannot be material and therefore does not trigger the appraisal exceptions to
§ 1302. Docket No. 26 at 5 (citing Slater v. A.G. Edwards & Sons, Inc., 719 F.3d 1190
(10th Cir. 2013), and McDonald v. Kinder-Morgan, Inc., 287 F.3d 992 (10th Cir. 2002)).
Defendant also argues that incomplete statements are not actionable as
misrepresentations. Docket No. 26 at 6 (citing Brody v. Transitional Hospitals Corp.,
280 F.3d 997, 1006 (9th Cir. 2002)).
The Court disagrees. “[A] duty to disclose arises only where both the statement
made is material, and the omitted fact is material to the statement in that it alters the
meaning of the statement.” McDonald, 287 F.3d at 998 (quoting In re Boston Tech.,
Inc. Sec. Litig., 8 F. Supp. 2d 43, 53 (D. Mass. 1998)) (alterations in original). Applying
this framework here, the proxy statement estimated the value of the proved and
unproved reserves. Docket No. 1 at 13-14, ¶ 34. That estimation was material
because it would have influenced the limited partners’ decision about whether to
approve the buyout. See Slater, 719 F.3d at 1197 (“A statement is material only if a
reasonable investor would consider it important in determining whether to buy or sell
stock.” (internal quotation marks omitted)). The alleged omissions by defendant were in
turn material to the valuation statement. For example, plaintiff alleges that for one of
the limited partnerships,
the limited partners were paid approximately $13.2 million for their limited
partnership units. That partnership had 44 vertical wells at the start of
2010. If 32 infill wells and eight Niobrara horizontal wells were included in
the estimated value of the assets held by [the limited partnership], the
value of the reserves would be more than $100 million, using the SEC’s
10% present value discount rate.
Docket No. 1 at 15, ¶ 36. Assuming, as the Court must, that plaintiff’s allegations are
true, disclosure of defendant’s alleged knowledge of such extraction technology’s
feasibility would have “significantly altered the total mix of information made available”
to the limited partners. Basic, Inc. v. Levinson, 485 U.S. 224, 232 (1988) (internal
quotation marks omitted). Likewise, if defendant estimated that the limited partnership
units were more valuable than it disclosed in the proxy statements, as alleged, such
information is something a reasonable limited partner would consider in deciding how to
vote, and therefore is material. See TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438,
The Supreme Court of Appeals of West Virginia has yet to address the limits of
the term “material misrepresentation” in the securities context since the adoption of W.
Va. Code § 31D-13-1302 in 2002. However, in other contexts, the Supreme Court of
Appeals of West Virginia has long recognized that the omission of information can
constitute a material misrepresentation. In Bender v. Metro. Life Ins. Co., the court held
that an insured’s failure to list all of her prior surgical procedures in response to a
question on an insurance application was a material misrepresentation that rendered
the policy unenforceable. 185 S.E. 907, 908 (W . Va. 1936); see also Muzelak v. King
Defendant’s argument that it had no obligation to disclose the information is
similarly unavailing. Here, plaintiff alleges that defendant “‘affirmatively create[d] an
impression of a state of affairs that differ[ed] in a material way from the one that actually
exist[ed].’” Schulein, 2012 WL 12884851, at *6 (quoting Brody, 280 F.3d at 1006)
(alterations in original). As such, plaintiff has sufficiently alleged misleading omissions.
See Virginia Bankshares, Inc., 501 U.S. at 1098 (finding materially misleading
statements where the directors failed to disclose “evidence of a higher book value than
the directors conceded” in the solicitation).
The Court finds that plaintiff has sufficiently pleaded “material
misrepresentations” by defendant within the meaning of § 1302. In particular, plaintiff
pleads that defendant’s awareness of and omission from the proxy statements of the
regulatory changes and new drilling technologies made defendant’s valuation of the
limited partnership units materially false. Docket No. 1 at 14-15, 17-18, ¶¶ 35-37, 4448. Accordingly, the Court will not dismiss plaintiff’s breach of fiduciary duty claim
based on § 1302.
Chevrolet, Inc., 368 S.E.2d 710, 714 (W . Va. 1988) (affirming a used car dealer’s failure
to disclose a car’s service history was a material misrepresentation sufficient to support
a punitive damages instruction). Further, the court has recognized that, in the context
of real estate transactions, “the test for determining the materiality of a fact in
transactions of this nature is whether that fact substantially affects the value of the
property.” Darrisaw v. Old Colony Realty Co., 501 S.E.2d 187, 192 (W . Va. 1997)
(internal quotation marks omitted). Here, the alleged omissions would have
substantially impacted the value of the limited partnerships. See Docket No. 1 at 15,
B. Request for a Stay
The power to stay proceedings comes from courts’ inherent power to control the
disposition of cases. Landis v. N. Am. Co., 299 U.S. 248, 254 (1936); United
Steelworkers of Am. v. Or. Steel Mills, Inc., 322 F.3d 1222, 1227 (10th Cir. 2003) (citing
Landis). In considering whether to stay a pending action, courts in this district weigh
the “(1) potential prejudice to the nonmoving party; (2) hardship and inequity to the
moving party if the action is not stayed; and (3) the judicial resources that would be
saved by avoiding duplicative litigation.” Franklin v. Merck & Co., Inc., No. 06-cv02164-WYD-BNB, 2007 WL 188264, at *2 (D. Colo. Jan. 24, 2007); see also SBM Site
Servs., LLC v. Garrett, No. 10-cv-00385-WJM-BNB, 2012 WL 975878, at *2 (D. Colo.
March 22, 2012); Lilak v. Pfizer Corp., Inc., No. 08-cv-02439-CMA-KLM, 2008 WL
4924632, at *2 (D. Colo. Nov. 13, 2008).
Given the Court’s denial of defendant’s motion to dismiss, defendant has not
shown that an appraisal would be dispositive and that, as a result, judicial economy
would be served by staying this case. As noted in another case from this district, while
an appraisal “might allow the parties to determine potential damages with greater
accuracy, the Court does not find this mere possibility sufficient to impose a stay.”
Bellco Credit Union v. United States, No. 08-cv-01071-CMA-KMT, 2009 WL 189954, at
*4 (D. Colo. Jan. 27, 2009). Thus, the Court finds that defendant has failed to articulate
a basis on which this Court should exercise its inherent power to stay this proceeding.
For the foregoing reasons, it is
ORDERED that PDC Energy’s Motion to Dismiss or, in the Alternative, to Stay
Pending an Appraisal [Docket No. 16] is DENIED.
DATED March 30, 2017.
BY THE COURT:
s/Philip A. Brimmer
PHILIP A. BRIMMER
United States District Judge
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