Anderson Living Trust et al v. Energen Resources Corporation

Filing 232

MEMORANDUM OPINION AND ORDER by Chief District Judge William P. Johnson GRANTING 215 Motion for Summary Judgment on the Colorado Plaintiff's Fourth Claim for Relief and DENYING 230 Motion for Leave to File Proposed Sur Reply to Doc. 226. (mag)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW MEXICO
______________________________
THE ANDERSON LIVING TRUST f/k/a
THE JAMES H. ANDERSON LIVING
TRUST, et al.,
Plaintiffs,
v.

No. 13-CV-00909 WJ/CG

ENERGEN RESOURCES CORPORATION,
Defendant.
MEMORANDUM OPINION AND ORDER
THIS MATTER comes before the Court upon a Motion for Summary Judgment on the
Colorado Plaintiff’s Fourth Claim for Relief (Doc. 215), filed on February 28, 2019 by Defendant
Energen Resources Corporation (“Defendant” or “Energen”).
BACKGROUND
This case concerns the calculation and payment of royalties on natural gas produced from
wells located in northern New Mexico and southern Colorado within the geologic formation
known as the San Juan Basin. The New Mexico Plaintiffs (Anderson Living Trust, Pritchett Living
Trust and Neely-Robertson Revocable Family Trust) own interests only in wells located in New
Mexico. Plaintiff Tatum Living Trust (“Tatum Trust”) owns interests in wells located in Colorado.
Defendant Energen Resources Corporation (“Defendant” or “Energen”) is the owner and operator
of the natural gas wells on the oil and gas leases at issue in this lawsuit.
Most of the issues related to the claims in this case have been briefed and addressed by the
Court. Docs. 175, 177. Plaintiffs appealed the Court’s adverse rulings and the Tenth Circuit
Court of Appeals affirmed in part and reversed in part. See Anderson Living Tr. v. Energen Res.

Corp., 886 F.3d 826, 847 (10th Cir., Mar. 2, 2018).1 As a result of the Court’s rulings on claims
asserted by the other New Mexico Plaintiffs which have been affirmed by the Tenth Circuit, the
only remaining New Mexico Plaintiff is the Neely-Robertson Revocable Family Trust (“N-R
Trust”). See Doc. 194 at 3 & 5 (table); Doc. 198 at 4, 6.
In this motion, Defendant seeks dismissal of a claim for “Breach of the Duty to Market
Hydrocarbons—Colorado,” asserted by the sole Colorado Plaintiff in this case. See Sec. Am.
Compl. (“SAC”), Doc. 70 at ¶¶59-63. This particular claim has never been briefed by the parties
or otherwise addressed by the Court. See Doc. 207 at 5.2
DISCUSSION
In its Fourth Claim for Relief, Plaintiff Tatum Trust asserts that Energen failed to comply
with its obligation to bear all costs associated with placing the natural gas produced from the
subject wells located in the State of Colorado in marketable condition, according to the
“marketable condition rule” followed by Colorado. See Doc. 70 (SAC), ¶63. In Garman v.
Conoco, Inc., the Colorado Supreme Court held that, “absent an assignment provision to the
contrary,” all costs incurred to make the gas marketable must be borne entirely by the lessee and
are not deductible from royalty payments. 886 P.2d 653, 654 (Colo. 1994). This means that the
producer (or lessee) must bear the expenses incurred in order for the gas to reach marketable

The Tenth Circuit Court of Appeals affirmed this Court’s rulings regarding: (1) the marketable condition rule and
the New Mexico Natural Gas Processors Tax Act; (2) summary judgment granted to Defendant with respect to the
Anderson and Pritchett Trusts’ fuel gas claims; and (3) the Court’s denial of Plaintiffs’ motion to certify the
marketable condition rule to the New Mexico Supreme Court. However, the Tenth Circuit reversed summary
judgment with respect to (1) the Neely-Robertson and Tatum Living Trust’s fuel gas claims and (2) the NeelyRobertson Trust’s claim under the New Mexico Oil and Gas Proceeds Payments Act. All the claims of Plaintiffs
Pritchett
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Tatum Trust also alleges underpayment of royalties under Colorado law for gas used as fuel (“fuel gas” claim);
underpayment of royalties on drip condensate; and improper deduction from royalties of the Trust’s share of tax
under the New Mexico Natural Gas Processors’ Tax, NMSA 1978, §§7-33-1 to 7-33-2. See SAC, Doc. 70, Counts
I, II & VII. Parties will address what remains of these claims in connection with a renewed motion for class
certification. See Doc. 212 at 2-3. Defendant’s motion is directed solely to Count IV which asserts a Breach of
Duty to Market Hydrocarbons.
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condition. See Cont’l Potash, Inc. v. Freeport-McMoran, Inc., 115 N.M. 690 (1993); Rogers v.
Westerman Farm Co., 29 P.3d 887 (Colo. 2001) (the implied duty to market obligates a producer
to bear “the expense of getting the product to a marketable condition and location”). In this case,
the Tatum Trust lease expressly addresses the allocation of post-production costs between the
Tatum Trust and Energen:
Lessor shall not bear, directly or indirectly, any production or post-production
cost or expenses, including without limitation, cost or expenses for storing,
separating, dehydrating, transporting, compressing, treating, gathering, or
otherwise rendering marketable or marketing the Products, and no deduction or
reduction shall be made for any such costs and expenses in computing any
payment, or the basis upon which any payment is, to be made to Lessor pursuant
to clauses (a), (b) or (c).
Doc. 215-1 (Ex. A, for leases dated Dec. 15, 2000 and Dec. 1, 2003). In addition, the Tenth Circuit
recognized that the Tatum Trust leases expressly provide for the allocation of post-production
costs and royalties on volumes of gas and liquids not sold by Energen, such as gas used as fuel
(Plaintiff’s fuel gas claims) and drip condensate. Doc. 177 at 4; see Anderson Living Trust, 886
F.3d at 848:
Colorado prohibits oil and gas well operators like Energen from deducting from
the royalty payment the costs necessary to render the gas marketable, unless the
lease provides otherwise. See Garman, 886 P.2d at 653–54, 659–60. These leases
do not provide otherwise; in fact, they explicitly prohibit Energen from
deducting post-production costs from the Trust's royalty.
Anderson Living Trust, 886 F.3d at 848 (emphasis added).3
Plaintiff’s Fourth Cause of Action refers to the lease provisions, See Doc. 70 at 60 (“Under
the terms of the oil and gas leases and other documents creating the Plaintiffs’ interest. . . Energen

The Tenth Circuit’s reference to post-production costs was made in the context of Plaintiff’s fuel gas claim, in
which Plaintiff alleged that Defendant did not pay royalties to Plaintiff for gas from the leased land that was used as
fuel. The Tenth Circuit reversed the district court’s grant of summary judgment to Defendant on this claim,
disagreeing with the district court’s interpretation of the royalty provisions as they concerned Defendant’s use of gas
as fuel. 886 F.3d at 852.
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has a duty and covenant to market production to the mutual advantage of [the parties]”). It asks
the Court to find that “Energen owes an implied duty to market under the terms of the subject
Colorado leases” to Plaintiffs. Doc. 70, ¶63.
I.

Parties’ Positions
Defendant contends that the implied duty to market has no bearing on the proper

calculation of royalties paid to the Tatum Trust because the leases contain express language which
allocates post-production costs to Energen, and this language eliminates the need for Plaintiff to
rely on the “marketable condition rule.” As a result, Plaintiff has no grounds to pursue a claim for
breach of the implied duty to market under Colorado law.
Plaintiff contends that the Court should not dismiss Plaintiff’s Fourth Cause of Action
because it invokes both Defendant’s express obligations under the lease provisions as well as its
implied duty under the marketable condition rule and because it is directed to Energen’s failure to
fulfill its obligations under its implied duty under the rule rather than the express terms of the lease
provisions. Doc. 220 at 6.
II.

Legal Standard
Summary judgment is appropriate when there are no genuinely disputed issues of material

fact and, viewing the record in the light most favorable to the non-moving party, the movant is
entitled to judgment as a matter of law. Bruner v. Baker, 506 F.3d 1021, 1025 (10th Cir. 2007);
Boling v. Romer, 101 F.3d 1336, 1338 (10th Cir. 1996). Once the party moving for summary
judgment properly supports its motion, it is incumbent on the non-moving party to respond with
some showing of an issue of genuine material fact. Allen v. Denver Pub. Sch. Bd., 928 F.2d 978
(10th Cir. 1991), overruled on other grounds by Kendrick v. Penske Transp. Svcs., 220 F.3d 1220,
1228 (10th Cir. 2000). The non-moving party may not rest on averments in its pleadings, but

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instead must establish specific triable issues. Gonzales v. Miller Cas. Ins. Co. of Texas, 923 F.2d
1417 (10th Cir. 1991). The mere existence of some alleged, immaterial factual dispute between
the parties will not defeat an otherwise properly supported motion for summary judgment.
Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (1986).
The issue here is whether, based on certain language in the Tatum Trust, Plaintiff’s Fourth
Cause of Action can survive summary judgment. The parties do not dispute the specific lease
language at issue and so there are no disputed material facts—only the legal outcome. See Rummel
v. Lexington Ins. Co., 123 N.M. 752, 759 (1997) (summary judgment is appropriate where no facts
are in dispute, but only the legal significance of the facts); Benns v. Continental Cas., Co., 982
F.2d 461, 462 (10th Cir. 1993) (when facts are undisputed, all that remains is a question of law for
the court) (insurance context).
III.

Analysis
It is undisputed that the Tatum Trust lease expressly provides for the allocation of post-

production costs between the Tatum Trust and Energen. Nevertheless, Plaintiff suggests that
Energen also has other “implied” duties under the marketable condition rule, and that the rule still
applies as set forth in the Fourth Cause of Action because the lease language fails to define when
and where the gas is marketable. Plaintiff contends that the implied duty to market under the
“marketable condition rule” must take over where the Tatum Trust lease language is silent.
Gas is marketable when it is in the physical condition where it is acceptable to be bought
and sold in a commercial market place and in the location of a commercial marketplace.” Clough
v. Williams Prod. RMT Co., 179 P.3d 32 (Colo. 2007) citing Rogers at 905. The point at which the
product becomes marketable is a critical one. See Clough v. Williams Prod. RMT Co., 179 P.3d
32, 37 (Colo. App. 2007) (when and where gas is marketable is “critical” to resolving issue of

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whether producer could satisfy burden of justifying its cost deductions from royalty payments)
(citing Rogers, 29 P.3d 887). Plaintiff observes, for example, that because the leases fail to define
when and where the gas is marketable, Energen is claiming that it can deduct taxes and fuel gas it
uses. If Energen claims that Tatum Trust’s gas is marketable prior to the imposition of these taxes,
then Tatum Trust (rather than Energen) would have to bear those costs; that is, the earlier the
product is deemed to be marketable, the more distance Energen can keep between itself and the
imposition of post-production costs.
The Tatum Trust lease language allocates all post-production costs to the lessee (here,
Energen), but it is silent about exactly how the point of marketability is determined. However,
there is no need for lease language to specifically address that issue, because the determination of
marketability is a question of fact, to be resolved by a fact finder. Rogers, 29 P.3d at 906; see also
Clough v. Williams Prod. RMT Co., 179 P.3d 32, 38 (Colo. App. 2007) (whether gas is marketable
is a question of fact, and the determination of when gas is marketable is driven by the commercial
realties of the marketplace) (citing Rogers, 29 P.3d 887). The question of whether Energen has
made improper or unreasonable deductions for post-production costs is one for the fact finder at
trial.
In the First, Second and Seventh Causes of Action, Plaintiff alleges that Defendant
deducted unreasonable costs from royalty payments (post-production costs). See Doc. 198 at 7 &
9; see also Doc. 199 at 1. Parties have jointly agreed that Tatum Trust’s specific underpayment
claims are based on the following:
(1) the alleged improper deduction of post-production costs, including the deduction of
the cost of the New Mexico Natural Gas Processors Tax (“NGPT”);
(2) the alleged failure to pay royalties on gas used as fuel; and
(3) the alleged failure to pay royalties on drip condensate.
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Doc. 211 at 2 at C(1); see also Doc. 212 at 2.4
Plaintiff is concerned that the lease provision that shifts post-production costs and expenses
to Energen permits Defendant to arbitrarily define when and where the gas is marketable and for
this reason, Plaintiff argues that the Fourth Cause of Action takes up where the express language
of the lease leaves off. However, Plaintiff’s concern is unwarranted because at trial, the fact finder
will determine whether Defendant has made unreasonable or improper post-production
deductions. See Rogers, 29 P.3d at 905-06, 908 (fact finder should determine what condition gas
is first marketable, and whether post-production costs were necessary to make the gas marketable).
The fact finder’s inquiry will be based on the lease provision (which incorporates the marketable
condition rule) rather than on a separately alleged claim of a breach of an “implied” duty to
market)—which makes the Fourth Cause of Action unnecessary and superfluous.
The Court’s conclusion here is supported by the relevant case law. In adopting the
marketable condition rule, the Colorado Supreme Court “relied on the ‘implied covenant to
market’ contained in every oil and gas lease. Garman, 886 P.2d at 653–55; Lindauer v. Williams
Prod. RMT Co., 381 P.3d 378, 379 (Colo. Ct. App. 2016) (implied duty to market “obligates the
lessee to engage in marketing efforts which ‘would be reasonably expected of all operators of
ordinary prudence, having regard to the interests of both lessor and lessee’”). An “implied
covenant to market” is implicated only when “there are no express provisions contemplating
allocation of costs with respect to royalty calculations.” Rogers, 29 P.3d at 906 (holding implied
duty is inapplicable to royalty payments where there are “express lease provisions addressing

In Document 212, the Court reiterated the parties’ understanding of Tatum Trust’s royalty underpayment claims,
although the improper deduction of post-production costs was limited to the deduction of the cost of the NGPT tax.
Doc. 212 at 2. However, that part of the royalty underpayment claim which alleges an improper deduction of postproduction costs includes the deduction of the cost of the NGPT tax, and is not limited to the NGPT tax—as it is
correctly reflected in the parties’ joint position on the claim. See Doc. 211 at 2 at (C(1)).
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allocation of costs”); Garman v. Conoco, Inc., 886 P.2d 653, 654 (Colo. 1994) (applying the
implied duty to market after holding that the royalty agreement was “silent with respect to the
allocation of post-production costs”). The duty or covenant to market need not be an implied one
where the duty is expressly provided for in the lease language. Because the Tatum Trust lease
contains an express provision assigning the burden of post-production costs to the lessor, there is
no need at all for Plaintiff to assert a claim charging Defendant with a failure to carry out an
“implied duty.”
A separate cause of action based on a breach of implied duty is not only unnecessary where
a lease contains an express provision, but it may also conflict with agreements that parties may
have bargained for. See Grossman v. Columbine Medical Group, Inc., 12 P.3d 269, 271 (Colo.
App. 1999) (implied duty “may not contradict terms or conditions for which the parties have
bargained”; Genova v. Banner Health, 734 F.3d 1095, 1103 (10th Cir. 2013) (holding implied duty
under Colorado law “never insinuates itself in the first place in ways and places that undo the
parties’ expressly bargained-for rights”).
V.

Plaintiff’s Proposed Surreply
Just prior to the Court’s filing of this decision, Plaintiff requested leave to file a

surreply, Doc. 230.

The Court has reviewed the proposed submission (Ex. 1), and is not

persuaded that it changes the Court’s ruling in any way. Plaintiff argues that because the
terms in the Tatum lease do not contradict the implied duty to market as it exists under
Colorado law, the Fourth Cause of Action should survive. However, Defendant’s motion
and accompanying arguments were not premised on a position that the lease terms were
inconsistent with Colorado’s marketability rule, but rather whether a separate cause of
action for violation of an implied duty is appropriate and necessary, given that the lease

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expressly states the lessor’s duty of marketability. Therefore, the Court finds that the
proposed surreply is unhelpful and there is no reason to proceed with further briefing on the
matter. For this reason, denies Plaintiff’s request to file a surreply.
Therefore, for the above reasons, the Court finds that Plaintiff’s Fourth Cause of Action
for a breach of implied duty to market is superfluous and unnecessary in light of the express
language in the Tatum Trust lease, the existence of which is undisputed by the parties.
Accordingly, Plaintiff has no claim for a breach of implied duty to market so Defendant is entitled
to summary judgment on this claim.
IT IS SO ORDERED.

_________________________________________
CHIEF UNITED STATES DISTRICT JUDGE

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