SDF, LLC v. ConocoPhillips Company et al
Filing
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MEMORANDUM OPINION AND ORDER by Magistrate Judge Karen B. Molzen granting in part and denying in part 37 Plaintiff's Motion to Compel No. 1 for Production of Documents. (KBM)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW MEXICO
SDF, L.L.C., a New Mexico Limited
Liability Company,
Plaintiff,
vs.
CIV 17-0720 RB/KBM
CONOCOPHILLIPS COMPANY
and HILCORP SAN JUAN, L.P.,
Defendants.
MEMORANDUM OPINION AND ORDER GRANTING IN PART
PLAINTIFF’S MOTION TO COMPEL
THIS MATTER comes before the Court on Plaintiff’s Motion to Compel No. 1 for
Production of Documents (Doc. 37), filed January 19, 2018. Having thoroughly reviewed
the parties’ submissions and all pertinent authority, the Court finds that Plaintiff’s Motion
is well taken in part.
I.
BACKGROUND
This case stems from a dispute regarding gas overriding royalties (“ORR”) and
the so-called “500 Mcf Clause” associated with San Juan Basin federal lease NM-03560
and federal lease NM-03521. The 500 Mcf Clause stipulates that the owner of the
royalties is entitled to payment of the ORR Interest (“ORRI”) only when the wells located
on the subject lease produce more than 500,000 cubic feet of gas per well per day.
In September 2012, Defendant ConocoPhillips (“COP”) notified Plaintiff SDF,
L.L.C. (“SDF”) that it would suspend its ORRI payments because gas production
associated with SDF’s lease was below that level. Despite this notification, however,
COP continued making ORRI payments to SDF until terminating those payments in May
2016.
SDF then sought an explanation for the termination of the ORRI payments. In an
October 14, 2016 e-mail, COP Division Order Analyst Ladonna Mitchell explained that
“[i]t was determined that the average daily production has been below 500 mcf/day
since 1957 . . . . Notice letters were sent to SDF, LLC on September 5, 2012 . . .
notifying them of COP[]’s intent to reduce the ORRI . . . . This was discovered during a
Land audit of the Exhibit B Schedules for each of the Federal Unit.” Doc. 1-1 at 2.
At issue on this motion to compel is Plaintiff’s Request for Production No. 3 which
seeks production of “the documents concerning and reflecting results of the Land audit
of the Exhibit B Schedules for each Federal Unit audited as stated in the Mitchell Email.”
Doc. 37-1 at 2. Defendants objected, but did state that they would “make available for
inspection the ‘Land audit’ file for the property that is the subject of Plaintiff’s claims in
this case.” Doc. 37-1 at 3. Plaintiff, however, seeks production of the entire Exhibit B
Audit, not just its individual land audit file.
Defendants assert that the referenced Exhibit B Audit “involved analyzing the
ownership schedules . . . of more than 20 federal units to confirm the accuracy of
COP’s working interest as stated on the schedules.” Doc. 42 at 2. As part of the audit,
COP learned of the 500 Mcf discrepancy related to SDF’s ORRI, but “COP believes that
other than this SDF issue, the Exhibit B Audit did not involve or otherwise implicate any
other 500 mcf clauses.” Doc. 42 at 3. Instead, Defendants explain that COP reviewed
500 Mcf Clauses in 2010-2012 (“the Royalty Review”). Doc. 42 at 2. Accordingly,
Plaintiff also now seeks production of documents reflecting the results of the Royalty
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Review. Doc. 44 at 4-5. Defendants object to these requests, arguing the information
sought is irrelevant and not proportional to the case.
II.
ANALYSIS
Under Federal Rule of Civil Procedure 26(b)(1), discoverable information is
anything non-privileged “that is relevant to any party’s claim or defense and proportional
to the needs of the case.” “[A] request for discovery should be considered relevant if
there is any possibility that the information sought may be relevant to the subject matter
of the action.” In re Vaughan Company, No. 12-cv-0817 WJ/SMV, 2014 WL 12787951,
at *2 (D.N.M Sept. 19, 2014) (citing Williams v. Bd. of Cnty. Comm’rs, 192 F.R.D. 698,
702 (D. Kan. 2000)). Proportionality is determined by considering “the importance of the
issue at stake in the action, the amount in controversy, the parties’ relative access to
relevant information, the parties’ resources, the importance of the discovery in resolving
the issues, and whether the burden or expense of the proposed discovery outweighs its
likely benefit.” Fed. R. Civ. P 26(b)(1). While the scope of discovery under Rule 26 is
broad, Gomez v. Martin Marietta Corp., 50 F.3d 1511, 1520 (10th Cir. 1995), discovery
is not meant to be a fishing expedition. McGee v. Hayes, 43 F. App’x 214, 216-17 (10th
Cir. 2002).
a. Relevance
Defendants believe that the Exhibit B Audit did not involve review of any 500 Mcf
Clauses, other than in relation to SDF’s ORRI. Rather, Defendants assert the Exhibit B
Audit involved analyzing COP’s ownership schedules. While Plaintiff requests all
documents concerning and reflecting the Exhibit B Audit results for every Federal Unit, it
makes clear in its Motion to Compel that the only relevant information is audit results
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specifically related to 500 Mcf Clauses. See, e.g., Doc. 37 at 6 (“[H]ow the royalty
accounting has been consistent, or inconsistent, among owners whose instruments
contain the 500 Mcf Clause goes to the heart of enforceability.” (emphasis added));
Doc. 44 at 6 (“[D]isclosure of all defendants’ files regarding the Exhibit B audit and the
Royalty Review as they involve the 500 Mcf Clause is particularly critical to a resolution
of this dispute . . . .” (emphasis added)). Therefore, documents of results from the
Exhibit B Audit not related to 500 Mcf Clauses are not relevant, and Defendants do not
have to produce them.
However, both the results of the Exhibit B Audit and the Royalty Review, insofar
as they relate to 500 Mcf Clauses, are relevant to Plaintiff’s claim of breach of the
implied covenant of good faith and fair dealing. “[T]he implied covenant of good faith
and fair dealing helps insure that both parties receive the benefit of their respective
bargains. The covenant acts to protect the parties to the contract by prohibiting one
party from obstructing the other party's benefit, whether that benefit is express or
implied.” Sanders v. FedEx Ground Package Sys., 2008-NMSC-040, ¶ 10, 188 P.3d
1200. Better said, the covenant protects the spirit of the deal.
For Plaintiff to establish there has been a breach of the covenant, it is necessary
to determine the initial intent behind the 500 Mcf Clause.1 Here, the ORRI assignments
were entered in to by predecessors in interest on both sides. Plaintiff correctly points out
that it will be difficult, if not impossible, to locate the original parties. The Exhibit B Audit
Plaintiff contends that the 500 Mcf Clauses are “common in federal lease overriding royalty
instruments made in the San Juan Basin in the 1950’s” and were never intended to be enforced.
Rather, the clause “was included in overrides on federal leases solely for the purpose of
obtaining BLM approval. . . . A 1950’s federal regulation sought to limit the extent of overriding
royalty on federal leases. 43 C.F.R. § 192.83.” Doc. 37 at 3. That regulation’s limitation, as it
applied to gas, was eliminated in 1959. Id.
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and the Royalty Review results that show how Mcf Clauses have historically been
enforced, and thereby indicative of a course of conduct, may assist in interpreting the
original intent behind identical Mcf Clauses.
Further, the results are relevant to Plaintiff’s breach of contract claim. Other
district courts have held that extrinsic evidence is relevant in insurance disputes to
prove the meaning of an ambiguous policy provision when “such information may show
that identical language has been afforded various interpretations by the insurer . . . .”
Phillips v. Clark County School Dist., No. 2:10-cv-02068-GMN-GWF, 2012 WL 135705,
at *5 (D. Nev. Jan. 18, 2012) (citing Nestle Foods Corp. v. Aetna Cas. & Sur. Co., 135
F.R.D. 101, 106-017 (D.N.J. 1990) (quotations omitted)). Similarly here, COP’s
treatment of identical Mcf Clauses is relevant to interpreting that provision in this case.
b. Proportionality
When relevance is not readily apparent, the burden of demonstrating relevancy
rests on the party seeking discovery. In re Vaughan Company, 2014 WL 1278951, at *2
(citing Williams, 192 F.R.D. at 705). The party resisting discovery then “has the burden
of showing undue burden or expense.” Benavidez v. Sandia Nat’l Labs., 319 F.R.D.
696, 719 (D.N.M. 2017) (citing Fed. R. Civ. P. 26(b)(1) advisory committee’s notes to
2015 amendment). Such burden can be met by showing the request is overly broad or
that the burden and expense outweighs its likely benefit. Fed. R. Civ. P. 26(b)(1).
As discussed above, Plaintiff has met its burden to establish relevancy. However,
Defendants advance no grounds nor make any effort to demonstrate that the burden or
expense is out of proportion to the needs of the case. Therefore, this Court finds that
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the results of the Exhibit B Audit and Royalty Review regarding 500 Mcf Clauses are
both relevant and proportionate and therefore discoverable.
Wherefore,
IT IS HEREBY ORDERED that Plaintiff SDF’s Motion to Compel No.1 for
Production of Documents is granted in part. No later than April 20, 2018, Defendants
are to supplement their discovery responses to Plaintiff SDF’s Request for Production
No. 3 to include Royalty Review and any Exhibit B Audit documents concerning 500 Mcf
Clauses. In all other respects, the motion to compel is denied.
_______________________________________
UNITED STATES MAGISTRATE JUDGE
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