S Bar B Ranch v. Omimex Canada
Filing
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ORDER denying 35 Motion to Certify Class; granting 38 Defendant's Motion for Summary Judgment. The Clerk Shall Enter Judgment in Favor of Defendant. Signed by Judge Richard F. Cebull on 4/29/2013. (EMA)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MONTANA
BILLINGS DIVISION
S BAR B RANCH, a Montana
Corporation,
)
)
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Plaintiff,
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v.
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)
OMIMEX CANADA, LTD.,
)
a Delaware Corporation,
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Defendant.
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___________________________________ )
Cause No. CV-10-112-BLG-RFC
ORDER
Introduction
On March 20, 2013, the Court held a hearing on Plaintiff S Bar B Ranch
Inc.’s (S Bar B) Motion to Certify Class (Doc. 35). At that hearing, the parties
agreed that the Court ought to decide Defendant Omimex Canada, Ltd.’s
(Omimex) Motion for Summary Judgment on Statute of Limitations and Laches
(Doc. 38) before deciding the certification motion. The Court finds Omimex’s
argument availing on the statute of limitations issue and therefore need reach
neither the issue of laches nor certification.
1
S Bar B admits that the entire case is governed by a narrow legal issue.
Namely, whether the Montana Supreme Court case of Montana Power Co. v.
Kravik, 179 Mont. 87, 586 P.2d 298, 303 (1978) adopts the “at the well rule” in
allowing a lessee to deduct post-production costs prior to calculating royalty. S
Bar B states that if the Court were to apply that approach “the class will lose.” See
Reply at 6. As discussed infra, that issue also becomes relevant in determining
whether S Bar B’s claims are barred by the statute of limitations.
Factual Background
S Bar B is a gas royalty interest owner in Chinook, MT. S Bar B is a lessor
in certain oil and gas lease agreements with Omimex. S Bar B alleges that
Omimex cheated it (and other putative class members) out of millions of dollars in
royalty payments because of certain unreported post-production withholdings
which S Bar B argues present an artificial wellhead price to calculate the royalty
payment.1 These charges are for gathering, compressing and transporting the gas
to market. Most of the gathering, compression and processing systems are coowned by Omimex and a company called J.K. Petroleum.
1
The wellhead price consists of Omimex entering into a gas sales agreement with the
purchaser. The sales agreement states that it sells the gas to a marketing company at the
wellhead. The negotiated wellhead price is based on the daily gas price index for the area less a
small margin discount for the purchaser, less post-production charges. Royalty owners have no
say in post-production charges.
2
S Bar B has identified at least 1,217 leases which comprise Omimex’s
Montana operations. While the leases fall into four categories with different
terms, none specifically authorize withholding of any deductions from the royalty
payment. Nothing in the royalty statement to lessors delineates the postproduction deductions which are calculated in Omimex’s sole discretion. The
royalty statement includes an “Other Deduction Amount” which was left blank.
In its motion for summary judgment, Omimex argues that S Bar B’s claims
are barred by the statute of limitations and laches because it was aware of its
claims by virtue of another class action lawsuit (Devon Litigation) in which S Bar
B was a class member.
Jack Davies, president of of S Bar B, was the director of the Montana Land
and Mineral Owners Association (MLMOA) from 1997-2002. During that time,
he became concerned about undisclosed deductions from royalty check statements,
including post-production deductions being improperly taken from royalty checks.
In 2001, he lobbied the Montana legislature to encourage legislation requiring full
disclosure of deductions. Eventually, the MLMOA entered into a lawsuit against
Devon Energy which both parties agree is “remarkably similar” to the present
litigation. S Bar B was a class member in the Devon Litigation.
3
Interestingly, the attorneys in the Devon litigation are the same in the
present case. In the Devon litigation, the MLMOA moved for class certification
which was opposed by Devon. Before the Reply brief was filed, MLMOA filed a
notice that the parties had tentatively settled. See MLMOA v. Devon Energy Inc.,
05-30-RKS (Doc. No. 100). Devon opposed class certification on all grounds
during the “litigation phase” of the case but, before the court ruled, stipulated to
the adequacy of the plaintiffs to represent the class for purposes of settlement. See
Doc. 110, p4, FN 1.
Legal Standard
Summary judgment is appropriate “if the movant shows that there is no
genuine dispute as to any material fact and the movant is entitled to judgment as a
matter of law.” Fed.R.Civ.P. 56(a). The movant bears the initial responsibility of
informing the Court of the basis for its motion, and identifying those portions of
“the pleadings, depositions, answers to interrogatories, and admissions on file,
together with the affidavits, if any, which it believes demonstrate the absence of a
genuine issue of material fact.” Celotex Corp. v. Catrett, 477 U.S. 317, 323
(1986). Material facts are those which may affect the outcome of the case.
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). A dispute as to a
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material fact is genuine if there is sufficient evidence for a reasonable fact-finder
to return a verdict for the nonmoving party. Id.
Statute of Limitations
Mont Code Ann. § 27–2–203 provides that:
The period prescribed for the commencement of an action for relief
on the ground of fraud or mistake is within 2 years, the cause of
action in such case not to be deemed to have accrued until the
discovery by the aggrieved party of the facts constituting the fraud or
mistake.
“As a general rule, the statute of limitations for actions based on fraud
begins to run when the fraud occurs, unless the facts forming the basis for the
alleged fraud are, by their nature, concealed, or the defendant takes affirmative
action to prevent the plaintiff from discovering the injury.” Osterman v. Sears,
Roebuck & Co. 318 Mont. 342, 350 (Mont. 2003) citing Cartwright v. Equitable
Life Assurance Soc'y (1996), 276 Mont. 1, 17, 914 P.2d 976, 986. A party
asserting fraud is put on “inquiry notice” when he could discover the other parties
misdeed through ordinary diligence. Id. (Citations omitted). “Mere ignorance of
the facts will not suffice to toll the statute of limitations.” Id. quoting Holman v.
Hansen (1989), 237 Mont. 198, 202, 773 P.2d 1200, 1203.
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Omimex argues that S Bar B had knowledge sufficient to put it on inquiry
notice of its claim as early as 1997. To this end, Omimex points to S Bar B’s
lobbying activities with the MLMOA and prior similar litigation in which S Bar B
was a class member. Omimex points out that under Mont Code Ann. § 82-2-101,
S Bar B had a statutory right to an accounting during the limitations period and
offers no explanation why it did not timely do so.
S Bar B counters that the discovery rule and fraudulent concealment should
toll the statute of limitations. In order to determine if Omimex’s calculation of
royalty payments was concealed or self-concealing, the Court is compelled to
address the overarching issue of whether Omimex had a duty to disclose certain
post-production costs which is the crux of S bar B’s claims. In other words, if
under Montana law, Omimex was entitled to deduct post-production costs prior to
calculating the royalty there could be no concealment and the statute of limitations
would not be tolled by the discovery rule.
I.
At the Well Rule v. Marketable Products Rule
In the briefing on class certification S Bar B states in no uncertain terms that
a single legal issue controls the outcome of this case. Namely, whether the
Montana Supreme Court case of Montana Power Co. v. Kravik, 179 Mont. 87,
586 P.2d 298, 303 (1978) adopts the “at the well rule” in allowing a lessee to
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deduct post-production costs prior to calculating royalty. S Bar B states that if the
Court were to apply that rule “the class will lose.” See Doc. 59 at 6. S Bar B
advocates for application of the “first marketable product” approach under which
the lessees are required to bear all costs to place natural gas in a marketable
condition.
In Kravik the Montana Supreme Court stated that, “[w]here no market exists
in the field, in the absence of unlawful combination or suppression of price,
royalty may be computed upon receipts from the marketing outlet for the products,
less the costs and expenses of marketing and transportation.” Montana Power
Co. v. Kravik, 179 Mont. 87, 586 P.2d 298, 303 (1978) (citations omitted)
(Emphasis supplied).
Other courts have read Kravik to adopt the “at the well rule.” In Rummel v.
Altamont Oil and Gas, Inc., Montana Ninth Judicial District, DV-07-64 (2010),
Judge McKinnon (now Montana Supreme Court Justice McKinnon) addressed the
calculation of royalty payments in a summary judgment order. The parties agreed
that the amount of royalty depends on the market price. Id. at 4. Judge McKinnon
found Kravik to be controlling authority and that the Montana Supreme Court
adopted the “at the well rule” as opposed to the marketable product approach. Id.
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at 6. Judge McKinnon explains that the marketable product rule, which requires
lessees to absorb post-production costs, is the minority approach. Id.
In Bice v. Petro-Hunt, L.L.C., 768 N.W.2d 496 (N.D. 2009), the North
Dakota Supreme Court cited Kravik in finding that Montana had followed the
majority of jurisdictions and adopted “at the well rule.” Id. at 501.2
In Emery Resource Holdings, LLC v. Coastal Plains Energy, Inc. Slip Copy,
2012 WL 1085718 (D.Utah,2012), a Federal District Court in Utah addressed the
question of who should incur the costs of making otherwise unmarketable gas into
a marketable product. Id. at 7. Emery cites Kravik as holding that the
market price is understood to mean the current market price being paid for gas at
the well where it is produced. Id. at 8. Magistrate Judge Warner explained the
majority approach which provides that “any costs incurred by the lessee after the
[gas] reaches the wellhead, whether to improve the quality of the [gas] or to
2
In Bice the North Dakota Supreme Court explained, “[T]he ‘at the well’ rule, allowing a
lessee to deduct post-production costs prior to calculating royalty, is the majority rule. [citations
omitted] The three major oil and gas producing states, Louisiana, Mississippi and Texas follow
the ‘at the well’ rule. Babin v. First Energy Corp., 96 1232, p. 2 (La.App. 1 Cir. 3/27/97); 693
So.2d 813, 815; Heritage Res., Inc. v. NationsBank, 939 S.W.2d 118, 122 (Tex.1996); Piney
Woods Country Life Sch. v. Shell Oil Co., 726 F.2d 225 (5th Cir.1984) (interpreting Mississippi
law). Other states also following the ‘at the well’ rule include California, Kentucky, Montana and
New Mexico. Elliott Indus. Ltd. P'ship v. BP America Prod. Co., 407 F.3d 1091, 1109–10
(C.A.10, 2005); Atlantic Richfield Co. v. State, 214 Cal.App.3d 533, 262 Cal.Rptr. 683, 688
(1989); Montana Power Co. v. Kravik, 179 Mont. 87, 586 P.2d 298, 303 (1978); Reed v.
Hackworth, 287 S.W.2d 912, 913 (Ky.1956).” Id.
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transport it to a market where it may be sold may be deducted before the royalty is
calculated.” Id. (quoting Bice, 768 N.W.2d at 501).
S Bar B does not directly cite Kravik or its progeny in its response to the
summary judgment motion but in the certification briefing argues that these cases
are simply wrong and that Kravik does not adopt the “at the well rule.” Instead, S
Bar B cites to treatises and argues that the marketable products rule is the better
reasoned approach. S Bar B provides no compelling authority or argument
suggesting Montana has not adopted the “at the well rule.”
Additionally, the acts of the Montana Legislature undermines S Bar B’s
position that certain post-production costs were improperly withheld. As Omimex
points out, in 2005 the Montana legislature enacted HB 43 which concerns
charges assessed against the oil and gas royalty owner. See Mont. Code Ann. §
82-10-104. The original draft of HB 43 provided the following language:
(2) In addition to the information required in subsection (1), a gas
producer paying royalties to a royalty owner shall, at the time of
payment, specify by line item every charge assessed against the
royalty owner, describe how the assessment is calculated, and list the
name of the beneficiary of the assessment. Line items may include but
are not limited to charges and assessments for:
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(a) production and pumping;
(b) gathering;
(c) transporting;
(d) treatment;
(e) specific itemized service charges; and
(f) any other assessments unique to the circumstance.
See Mont. HB 43, 59th Leg. Reg. Sess. 1-2 (Jan. 10, 2005). However, subsection
(2) (a)-(f) was ultimately stricken.
The legislative intent behind striking the foregoing language further buttress
Omimex’s argument that, under Montana law, it was entitled to deduct certain
post-production costs and complied with its statutory reporting obligations.
Conclusion
Regardless of whether the marketable product rule is the better reasoned
approach or gaining popularity, the Court can not ignore Kravik and its progeny.
The Court finds that in view of the above cited authority the Montana Supreme
Court has indeed adopted the majority “at the well rule” in calculating royalty
payments. As S Bar B admits, this dooms their claims.3 Omimex had no duty to
3
In its Reply Brief in Support of Motion for Certification, S Bar B admits that resolution
of “ this single legal issue will resolve this entire lawsuit in one stoke.” Doc. 59, p. 9.
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set forth post-production deductions before calculating the royalty. Consequently,
the discovery rule is inapplicable and the Court finds that S Bar B’s fraud claims
are time barred by the applicable statute of limitations. For obvious reasons S Bar
B’s contract claims are also destroyed by the “at the well rule” adopted by the
Montana Supreme Court. No genuine material issue of fact exist–Omimex is
entitled to Judgment as a matter of law.
Now therefore it is hereby Ordered:
1. Omimex’s Motion for Summary Judgment (Doc. 38) is GRANTED.
2. S Bar B’s Motion for Class Certification (Doc. 35) is DENIED as moot.
3. The Clerk of Court shall enter judgment in favor of Defendant.
Dated this 29th Day of April, 2013.
/s/ Richard F. Cebull___________
RICHARD F. CEBULL
SENIOR U. S. DISTRICT JUDGE
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