McCall v. Chesapeake Energy Corp. et al
Filing
62
OPINION AND ORDER re: 52 MOTION to Dismiss (Notice of Motion to Dismiss Plainitiff's Amended Class Action Complaint) filed by Chesapeake Louisiana, LP, Aubrey K. McClendon, Chesapeake Exploration, LLC, Chesapeake Energy Corp., Chesapeake Investments, LP, Chesapeake Appalachia, LLC. The Defendants' 4/8/2011 motion to dismiss is granted. The Clerk of Court shall enter judgment for the Defendants and close this action. (Signed by Judge Denise L. Cote on 9/13/2011) (ft)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
-------------------------------------- X
:
MARY LINDA MCCALL, on behalf of
:
herself and others similarly situated, :
:
Plaintiff,
:
:
-v:
:
CHESAPEAKE ENERGY CORP., et al.,
:
:
Defendants.
:
:
-------------------------------------- X
APPEARANCES:
For plaintiff:
Joe R. Whatley, JR.
Whatley, Drake & Kallas, LLC
1540 Broadway, 37th Floor
New York, NY 10036
David B. McCall
Tom C. McCall
The McCall Firm
2600 Via Fortuna, Suite 200
Austin, TX 78746
Britton D. Monts
Heather E. Bridgers
The Monts Firm
The Frost Bank Building
401 Congress Ave. Suite 1540
Austin, TX 78701
Richard E. Norman
Crowley Norman LLP
Three Riverway, Suite 1775
Houston, TX 77056
For the Chesapeake Defendants:
Brett D. Jaffe
Daniel Hershel Tabak
Lawrence Thomas Gresser
1
10 Civ. 8897 (DLC)
OPINION AND ORDER
Cohen & Gresser, LLP
800 Third Avenue 21st, Floor
New York, NY 10022
Jesse R. Pierce
Chad Newton
Jesse R. Pierce & Associates, P.C.
4203 Montrose Boulevard
Houston, TX 77006
For the Bank Defendants:
Stephanie J. Goldstein
Gregg L Weiner
Fried, Frank, Harris, Shriver & Jacobson
One New York Plaza
New York, NY 10004
DENISE COTE, District Judge:
Plaintiff Mary Linda McCall (‘McCall”) brought this
purported class action against the defendants 1 (“Defendants”) on
November 24, 2010.
In the amended complaint filed on March 18,
2011 (“Complaint”), McCall alleged claims for breach of
contract, conversion, civil conspiracy to commit conversion, and
accounting. 2
The Defendants filed a motion to dismiss the
1
The defendants are: Chesapeake Energy Corp.; Chesapeake
Exploration, LLC; Chesapeake Louisiana, LP; Chesapeake
Investments, LP; Chesapeake Appalachia, LLC; Aubrey K. McClendon
(collectively, the “Chesapeake Defendants”); MS Tela, LLC; MS
Permian, LLC; Morgan Stanley; Obsidian Natural Gas Trust; Wells
Fargo Delaware Trust Company, NA; Barclays Capital, Inc.;
Argonaut VPP, LLC; GS Loan Partners; Sooner Gas Trust; Wells
Fargo & Company; Wells Fargo Securities, LLC; Falcon VPP LP; TW
Investors LLC; Blue Devil Trust; DB Energy Trading LLC; and High
Plains Gas Trust (collectively, the “Bank Defendants”).
2
The Complaint also lists claims for fraudulent concealment
and civil conspiracy to commit fraudulent concealment, but
McCall conceded that these claims were “not asserted as an
2
Complaint on April 8, 2011.
May 13.
The motion was fully submitted on
For the following reasons, the motion to dismiss is
granted.
BACKGROUND
The following facts are taken from the plaintiff’s
complaint unless otherwise noted, and assumed to be true for the
purposes of this motion.
LaFaro v. New York Cardiothoracic
Group, PLLC, 570 F.3d 471, 475 (2d Cir. 2009).
McCall is a non-
operating working interest owner 3 in several wells (the “McCall
Wells”) located in Beckham County, Oklahoma and operated by a
non-defendant affiliate of the Chesapeake Defendants, identified
by the Defendants as Chesapeake Operating LLC (“Chesapeake
Operating”).
McCall has an interest in these wells as a party
independent claim for relief” but rather pled to counter a
possible statute of limitations defense. The Defendants did not
assert a statute of limitations defense in their motion to
dismiss, nor is it relied upon in this Opinion in dismissing all
other claims. Therefore, these claims are also dismissed.
3
A working interest is
[a]n interest in a mineral property that entitles the
owner of that interest to all or a share of the
mineral production from the property; the working
interest owner bears the costs of exploration,
development, and operation of the property, and, in
return, is entitled to a share of the mineral
production from the property or of the proceeds
therefrom.
Dernick Resources, Inc. v. Wilstein, 312 S.W.3d 864, 868
n.3 (Tex. App. 2009).
3
to joint operating agreements (“JOAs”). 4
In the Complaint,
McCall alleges that she is a party to “at least two” JOAs, and
she does not deny that the two JOAs which the Defendants
identified are the relevant ones in this action (the “McCall
Well JOAs”).
The McCall Well JOAs are dated July 2, 1973 and
April 5, 1979.
Certain Chesapeake Defendants are parties to
other JOAs to which members of the purported class (the
“Purported Class”) are parties (together with the McCall Well
JOAs, the “Purported Class JOAs”).
A JOA controls the relationship between co-tenants in a
mineral property.
The Purported Class JOAs are all based on a
form document known as the AAPL Model Form Operating Agreement,
which has been widely used for decades.
Pursuant to the
Purported Class JOAs, the working interest owners have joint
ownership of the unproduced oil, gas and mineral reserves in the
ground.
The clauses McCall alleges are most relevant to the claims
of the Purported Class are identical in each of the Purported
Class JOAs.
These clauses identify the proportional interests
of the parties to the JOA (“Interests of the Parties Clause”),
4
An Oklahoma court found that Chesapeake Operating was the
Operator in at least one of these JOAs. McCall v. Chesapeake
Energy Corp, et al., 164 P.3d 1120, 1122 (Okla. Civ. App. 2007).
McCall, making no distinctions among Chesapeake Defendants in
her opposition brief (just as she employs group pleading in her
Complaint), refuses to specify which Chesapeake entity is the
Operator under the McCall Well JOAs.
4
prevent a working interest owner from selling or assigning only
a portion of its interest (“Maintenance of Uniform Ownership
Interest Clause”), require that any interests created subsequent
to the execution of the JOA shall be made subject to the JOA
(“Subsequently Created Interest Clause”), and prevent a working
interest owner from dividing its interests (“Waiver of Rights to
Partition Clause”).
McCall acknowledges that the Purported
Class JOAs allow a working interest owner to sell or assign the
entirety of its interests under a particular JOA.
Three of the Chesapeake Defendants, Chesapeake Investments,
LP (“Chesapeake Investments”), Chesapeake Exploration, LLC
(“Chesapeake Exploration”) and Aubrey McClendon (“McClendon”),
the Chairman and CEO of Chesapeake Energy Corporation
(“Chesapeake Energy”), have entered into ten volumetric
production payment transactions (“VPPs”) with certain of the
Bank Defendants since December 31, 2007.
These VPPs (the
“Purported Class VPPs”) are identically structured. 5
Chesapeake
has an interest in the minerals at issue in each of the
Purported Class VPPs, but it does not have sole ownership;
members of the Purported Class are also working interest owners
of the minerals at issue.
McCall purports to represent all
5
McCall’s allegations about the effect of the Purported
Class VPPs on her interests and the interests of the Purported
Class are legal conclusions, which need not be accepted as true.
Ashcroft v. Iqbal, --- U.S. ---, 129 S. Ct. 1937, 1949 (2009).
These will be discussed below.
5
these working interest owners with interests in wells that are
subject to one of the Purported Class VPPs.
Some of the Bank Defendants “originate” and/or “market” the
Purported Class VPPs.
Through the Purported Class VPPs, oil and
gas is sold to certain Bank Defendants, and Chesapeake
Investments later buys back these resources.
Chesapeake
delivers the gas and oil to the participating Bank Defendants
free of costs.
Defendants concede that three of the ten Purported Class
VPPs concern Chesapeake Investment’s interests in the McCall
Wells.
These are:
1) a VPP dated January 31, 2008 between McClendon,
Chesapeake Investments and TW Investors, LLC (“TW
Investors VPP”);
2) a VPP dated August 1, 2008 between Chesapeake Exploration
and Sooner Gas Trust (“Sooner VPP”); and
3) a VPP dated August 21, 2008 between McClendon, Chesapeake
Investments and Blue Devil Trust (“Blue Devil VPP”).
McCall argues that certain Bank Defendants are receiving
deliveries from her wells through as many as five VPPs.
The
Complaint identifies which five VPPs are connected to wells in
Oklahoma, where the McCall Wells are located.
In addition to
the ones identified by the Defendants, these are:
1) a VPP dated
Exploration
2) a VPP dated
High Plains
6
December 31, 2008 between Chesapeake
and Argonaut VPP, LLC (“Argonaut VPP”); and
May 2008 between Chesapeake Exploration and
Gas Trust (“High Plains VPP”) 6
Although the property exhibits attached to the Argonaut VPP
6
(collectively, the “McCall Well VPPs”).
McCall alleges that the
Bank Defendants that entered into the VPPs with the Chesapeake
Defendants are “nominal entities existing on paper only and
exist only as conduits for the banks to ‘loan’ money to for the
purpose of funding the VPP transactions.”
McCall alleges that, as a result of the Purported Class
VPPs, and pursuant to the Purported Class JOAs, McCall and the
Purported Class are entitled to proceeds from oil and gas sales
which they have not received.
She also alleges that through the
Purported Class VPPs, the Defendants are converting the
Purported Class’s share of gas and oil.
DISCUSSION
Defendants have moved to dismiss McCall’s complaint on
various grounds.
First, they argue that because McCall lacks
Article III standing to assert claims arising out of the
Purported Class JOAs that she is not a party to any Purported
Class VPPs that are not McCall Well VPPs, those claims, and the
defendants not party to the McCall Well VPPs, should be
dismissed.
Second, the Defendants contend that the allegations
and the High Plains VPP show that these VPPs do not cover wells
in Beckham County, Oklahoma, where the McCall Wells are located,
these two VPPs will still be considered so as to resolve any
potential contractual ambiguity on the geographic extent of the
interests connected to these wells in favor of the plaintiff.
Subaru Distribs. Corp. v. Subaru of America, Inc., 425 F.3d 119,
122 (2d Cir. 2005).
7
ignore their corporate forms and make allegations regarding
groups of Defendants without specifying which actions were taken
by any individual defendant.
Finally, the Defendants argue that
McCall fails to state claims for breach of contract, conversion,
civil conspiracy and an accounting for which relief can be
granted pursuant to Federal Rule of Civil Procedure 12(b)(6).
“Under Federal Rule of Civil Procedure 8(a)(2), a pleading
must contain a ‘short and plain statement of the claim showing
that the pleader is entitled to relief.’”
1949.
Iqbal, 129 S. Ct. at
To survive a motion to dismiss, “a complaint must contain
sufficient factual matter, accepted as true, to state a claim to
relief that is plausible on its face.”
Id. (citation omitted).
Applying this plausibility standard is “a context-specific task
that requires the reviewing court to draw on its judicial
experience and common sense.”
Id. at 1950.
When considering a motion to dismiss under Rule 12(b)(6), a
trial court must “accept all allegations in the complaint as
true and draw all inferences in the non-moving party’s favor.”
LaFaro, 570 F.3d at 475.
A complaint must do more, however,
than offer “naked assertions devoid of further factual
enhancement,” and a court is not “bound to accept as true a
legal conclusion couched as a factual allegation.”
S. Ct. at 1949–50.
Iqbal, 129
Accordingly, a court may disregard
“threadbare recitals of a cause of action’s elements, supported
8
by mere conclusory statements.”
Id. at 1940.
“In determining
the adequacy of the complaint, the court may consider any
written instrument attached to the complaint as an exhibit or
incorporated in the complaint by reference, as well as documents
upon which the complaint relies and which are integral to the
complaint.”
I.
Subaru, 425 F.3d at 122.
McCall Does Not Have Standing to Bring Claims for Breach of
Non-McCall Well JOAs or for Conversion Pursuant to NonMcCall Well VPPs.
Defendants claim that McCall lacks Article III standing to
assert claims unconnected to the McCall Well JOAs and the McCall
Well VPPs, and that this lack of standing cannot be cured by her
attempt to bring a claim on behalf of the Purported Class.
Article III of the United States Constitution limits the
jurisdiction of federal courts to “cases” and “controversies.”
U.S. Const. art. III, § 2.
“In order to ensure that this
bedrock case-or-controversy requirement is met, courts require
that plaintiffs establish their standing as the proper parties
to bring suit.”
W.R. Huff Asset Management Co., LLC v. Deloitte
& Touche LLP, 549 F.3d 100, 106 (2d Cir. 2008) (citation
omitted).
To establish standing, a plaintiff must show “[1]
that he ‘suffered an injury-in-fact -- an invasion of a legally
protected interest which is (a) concrete and particularized . .
. and (b) actual or imminent, not conjectural or hypothetical’;
[2] that there was a ‘causal connection between the injury and
9
the conduct complained of’; and [3] that it is ‘likely, as
opposed to merely speculative, that the injury will be redressed
by a favorable decision.’”
Carver v. City of New York, 621 F.3d
221, 225 (2d Cir. 2010) (quoting Lujan v. Defenders of Wildlife,
504 U.S. 555, 560 (1992)).
In a proposed class action, “the
named class plaintiffs must allege and show that they personally
have been injured, not that injury has been suffered by other,
unidentified members of the class to which they belong and which
they purport to represent.”
Central States Southeast &
Southwest Areas Health & Welfare Fund v. Merck–Medco Managed
Care, L.L.C., 433 F.3d 181, 199 (2d Cir. 2005) (citation
omitted).
McCall, the only named plaintiff, cannot claim to have any
legally protected interest in the JOAs to which she is neither a
party nor a beneficiary.
“[U]nder well-settled contract
principles, only the parties to a contract have the right to
complain of a breach of the contract, with the exception that a
nonparty who proves the contract was made for his benefit, and
that the contracting parties intended he benefit from the
contract, may bring an action on the contract as a third party
beneficiary.”
Prize Energy Resources, L.P. v. Cliff Hoskins,
Inc., --- S.W.3d ----, 2011 WL 648996, at *6 (Tex. App. Feb. 23,
2011); accord Woolard v. JLG Indus., Inc., 210 F.3d 1158, 1169
10
(10th Cir. 2000) (interpreting Oklahoma contract law). 7
McCall
has made no allegation that she is a party or a beneficiary to
any JOA other than the McCall Well JOAs.
Therefore, she has not
established any injury-in-fact from the alleged breach of the
Purported Class JOAs that are not McCall Well JOAs.
McCall thus
has no standing to bring a breach of contract claim against the
Bank Defendants who are not signatories to the McCall Well VPPs.
McCall’s conversion claim relies entirely on the
Defendants’ participation in the VPPs connected to the wells of
the Purported Class, and there is no independent basis for this
claim in the Complaint.
But McCall has not alleged that she has
any interest in the oil and gas properties allegedly converted
by the Defendants through Purported Class VPPs other than those
related to the McCall Well VPPs.
She therefore has no standing
to bring a claim of conversion of any properties pursuant to any
Purported Class VPPs that are not McCall Well VPPs, and no
standing to bring this claim against the Bank Defendants that
did not sign a McCall Well VPP -- MS Tela, LLC; MS Permian, LLC;
Morgan Stanley; Obsidian Natural Gas Trust; Wells Fargo Delaware
Trust Company, NA; Barclays Capital, Inc.; GS Loan Partners;
7
The Defendants argue that Oklahoma law should apply to the
JOAs, which do not include a choice of law provision. McCall
does not contest this, but rather cites without explanation the
case law of various states in interpreting the JOAs, chief among
them Oklahoma and Texas.
11
Wells Fargo & Company; Wells Fargo Securities, LLC; Falcon VPP
LP; and DB Energy Trading LLC. 8
Similarly, McCall cannot bring a
conversion claim against the Chesapeake Defendants that are not
signatories to any McCall Well VPPs -- Chesapeake Energy;
Chesapeake Louisiana, LP; and Chesapeake Appalachia, LLC.
McCall contends that she has standing to bring claims for
the alleged breach of all the Purported Class JOAs and for the
conversion of oil and gas connected to all the Purported Class
VPPs because there are cases involving oil and gas rights
8
McCall has alleged that the Bank Defendants that signed
McCall Well VPPs -- TW Investors, LLC; Sooner Gas Trust; Blue
Devil Trust; Argonaut VPP, LLC; and High Plains Gas Trust -- are
owned by “Wells Fargo,” and that these signatory entities were
“special purpose vehicles existing on paper only.” “Questions
relating to the internal affairs of corporations . . . are
generally decided in accordance with the law of the place of
incorporation.” United States v. Funds Held in the Name or for
the Benefit of Wetterer, 210 F.3d 96, 106 (2d Cir. 2000). In
order to state a claim to pierce the corporate veil under
Delaware law, where these entities are incorporated, McCall
must allege facts that, if taken as true, demonstrate
the [parent company’s] complete domination and control
of the [subsidiary.] The degree of control required
to pierce the veil is exclusive domination and control
to the point that the [subsidiary] no longer has legal
or independent significance of its own. Piercing the
corporate veil under the alter ego theory requires
that the corporate structure cause fraud or similar
injustice. Effectively, the corporation must be a
sham and exist for no other purpose than as a vehicle
for fraud.
Wallace ex rel. Cencom Cable Income Partners II, L.P. v.
Wood, 752 A.2d 1175, 1184 (Del. Ch. 1999) (citation
omitted). McCall fails to allege facts necessary to
support a theory of piercing the corporate veil.
Therefore, the Complaint does not sufficiently demonstrate
that she has standing to sue defendants Wells Fargo &
Company and Wells Fargo Securities, LLC.
12
disputes that allow a working interest owner to represent a
class of other working interest owners.
The basic principle
that it may be possible to represent a class of working interest
owners, however, is not in dispute.
The cases to which McCall
cites do not consider the relevant standing issue here -whether a single plaintiff or group of plaintiffs who do not
share contractual or property interests with the class they
purport to represent may nonetheless bring a claim on behalf of
that class.
In fact, the cases upon which McCall relies do not
consider the issue of standing at all.
McCall also argues that her conspiracy claim provides a
“juridical link” which provides her standing against all the
Bank Defendants.
The juridical link doctrine, however, is
employed to allow plaintiffs to satisfy the adequacy or
typicality requirements for class certification where there was
an alleged conspiracy or other relationship between defendants.
Cassese v. Washington Mut., Inc., 262 F.R.D. 179, 183-84
(E.D.N.Y. 2009).
McCall does not cite to any case where the
juridical link doctrine was found to cure a named plaintiff’s
lack of Article III standing, and, other courts in the Second
Circuit have dismissed this same argument.
See id.; In re AIG
Advisor Group, No. 06 Civ. 1625(JG), 2007 WL 1213395, at *6
(E.D.N.Y. 2007).
Finally, McCall contends that the Defendants’ challenge to
13
her standing is premature until class certification issues are
briefed.
In support of this argument, she cites Ortiz v.
Fireboard Corp., 527 U.S. 815 (1999) and Amchem Prods., Inc. v.
Windsor, 521 U.S. 591 (1997), in which the Supreme Court
approved the consideration of class certification issues before
reaching any Article III challenge.
In both cases, the Supreme
Court reviewed decisions by courts of appeals regarding
decertification of a class created for settlement purposes.
Due
to this particular procedural posture, it was necessary to first
address challenges to the certification of the classes because
the Article III issues “would not exist but for the [classaction] certification.”
U.S. at 831.
Amchem, 521 U.S. at 612; see Ortiz, 527
As the Honorable Paul A. Crotty stated in the case
on which McCall relies for this proposition, Amchem and Ortiz
“appear to be sui generis, involving global mass tort
settlements in distinct and unique procedural postures.”
In re
Salomon Smith Barney Mut. Fund Fees Litig., 441 F.Supp.2d 579,
606 (S.D.N.Y. 2006).
This action is not in an analogous
procedural posture because the certification of a class is not
being challenged.
Therefore, McCall’s standing must be
determined now; an “Article III court must be sure of its own
jurisdiction before getting to the merits.”
Ortiz, 527 U.S. at
831. 9
9
McCall also contends that further discovery is necessary
14
II.
McCall Fails to State a Claim for Breach of Contract.
A. The McCall Well VPPs Do Not Convey Oil and Gas Properties
In the Ground, But Rather An Overriding Royalty Interest.
The parties to a JOA have a shared undivided interest in
the oil and gas in the ground; “no single owner has exclusive or
separate rights as to any particular portion of the tract, but
all such owners have a common ownership and share
proportionately in the enjoyment of the property as a whole.”
1-5 Kuntz, Law of Oil and Gas § 5.1 (2011) [hereinafter
“Kuntz”]; 8-J Williams & Meyers Manual of Oil and Gas Terms
(2009) [hereinafter “Manual of Terms”] (definition of “joint
operating agreement”).
These “[o]wners of undivided interests
in the working interest in an oil and gas lease are tenants in
common.”
De Mik v. Cargill, 485 P.2d 229, 231 (Okla. 1971).
But under JOAs that provide that “[e]ach party shall take in
kind or separately dispose of its proportionate share of all oil
and gas produced,” the oil and gas becomes personal property of
the working interest owners in proportion to their share once
produced from the ground.
1-2 Kuntz § 2.5.
Working interest owners can dispose of their share of the
before any standing determination is made because the parties
dispute how many Purported Class VPPs apply to the McCall Wells.
This argument is moot because this Opinion finds that McCall
lacks standing only as to those Purported Class VPPs that, by
the terms in her Complaint, have no connection to oil and gas
properties in Oklahoma where her wells are located, and that as
many as five Purported Class VPPs were McCall Well VPPs.
15
produced oil and gas through a variety of transactions,
including by selling an overriding royalty interest or a
production payment.
An overriding royalty interest conveys oil
and gas produced at the surface from the seller’s share of
production, free of the expense of the production.
8-O Manual
of Terms; see also XAE Corp. v. SMR Property Mgmt. Co., 968 P.2d
1201, 1207 (Okla. 1998).
This interest attaches only once the
oil and gas is produced from the ground.
XAE Corp., 968 P.2d at
1207; 1-16 Kuntz § 16.2 (“a mineral interest is thought of as
being a right to or an interest in oil or gas as they reside in
place; whereas the royalty interest is thought of as being a
right to or interest in oil or gas after capture”).
A
production payment is substantially the same thing as an
overriding royalty interest, except that “its duration is
limited to the time required for the stated number of units of
production or the sum specified in the instrument creating the
oil payment to be realized; an overriding royalty, on the other
hand, normally has the same duration as the working interest out
of which it was created.”
1-4 Williams & Meyers Oil and Gas Law
§ 422.3 (2010) (“[t]his difference does not appear to justify
any distinction in the nature of the property interests
created”); see also 8-O Manual of Terms (definitions of “oil
payment,” “overriding royalty interest”); 8-P Manual of Terms
(definition of “production payment”).
16
McCall’s breach of contract claim 10 relies on her argument
that under the McCall Well VPPs, the Chesapeake Defendants have
sold oil and gas properties in the ground, properties in which
McCall and the other working interest owners party to the McCall
Well JOAs have an undivided interest as tenants in common.
In
so doing, the Chesapeake Defendants have allegedly breached
several provisions in the McCall Well JOAs, namely, the
Interests of the Parties Clause, the Maintenance of Uniform
Ownership Interest Clause, the Subsequently Created Interest
Clause and the Waiver of Rights to Partition Clause, which
McCall alleges prohibit the Chesapeake Defendants “from
partitioning and selling solely for themselves a portion of the
minerals in the ground.”
The Defendants, on the other hand,
argue that the McCall Well VPPs sell only Chesapeake’s share of
their own working interest in the oil and gas properties and
only after they have been produced, granting the Bank Defendant
purchasers an overriding royalty interest.
Such an interest is
permitted by the McCall Well JOAs and does not breach
10
The elements of a breach of contract claim are
substantially the same in either Oklahoma or Texas. See Digital
Design Group, Inc. v. Information Builders, Inc., 24 P.3d 834,
843 (Okla. 2001) (elements are “1) formation of a contract; 2)
breach of the contract; and 3) damages as a direct result of the
breach.”); Southern Elec. Servs., Inc. v. City of Houston, --S.W.3d ----, 2011 WL 3612300, at *3 (Tex. App. Aug. 18, 2011)
(elements are “(1) the existence of a valid contract; (2)
performance or tendered performance by the plaintiff; (3) breach
of the contract by the defendant; and (4) damages sustained by
the plaintiff as a result of the breach”).
17
Chesapeake’s contractual obligations to McCall or any other
working interest owner.
This distinction -- whether the McCall
Well VPPs sell oil and gas properties in the ground to which all
working interest owners have an undivided interest or only
Chesapeake’s share of the oil and gas properties after they have
been produced -- is recognized by all parties as the critical
issue in determining whether McCall has stated a claim for
breach of contract.
By the clear language of the McCall Well VPPs, the
Chesapeake Defendants have sold only an interest of oil and gas
carved out of their working interest in the McCall Wells and
only after it has been produced from the ground.
The Purchase
and Sale Agreement, a main operating document of each of the
McCall Well VPPs, states that the VPP causes the sale by a
Chesapeake Defendant to a Bank Defendant of “the Production
Payment,” a sale which “shall apply to runs of Gas” commencing
as of a specified date determined in the Conveyances.
This
Production Payment conveys a “term overriding royalty interest.”
The Conveyance, another key VPP document, states that the
overriding royalty interest conveyed to the Bank Defendant is
“in and to the Subject Interests and in and to the Subject
Hydrocarbons attributable thereto.”
The “Subject Interests” are
“all of the [Chesapeake Defendant’s] interest in and
to (a) the Subject Wells and (b) the estates, titles,
and rights granted under the Leases to the extent, and
18
only to the extent, [they] give [the Chesapeake
Defendant] the right and power to own, operate and
maintain the Subject Wells and to capture, produce,
receive, sell and otherwise dispose of Hydrocarbons
produced from the well bores of the Subject Wells”
(emphasis supplied).
“Subject Hydrocarbons” are defined as
“[g]as in and under and that may be produced . . . from the
Subject Wells from the Subject Interests.”
Under these
provisions, the McCall Well VPPs conveyed to a Bank Defendant
only an “overriding royalty interest” carved from the interest
that the Chesapeake Defendant itself had in the wells subject to
those documents, and no more.
Furthermore, the gas and oil
properties in which the Bank Defendants received an interest
were explicitly limited to properties produced from the ground.
Other provisions of the McCall Well VPPs underline the
limitations of what was sold to the Bank Defendants.
The
Production Payment “shall be satisfied solely from Production
Payment Hydrocarbons,” which are defined as “Subject
Hydrocarbons conveyed to” the Bank Defendant pursuant to the
Conveyance.
Therefore, the Bank Defendant “bears the risk that
actual production of Production Payment Hydrocarbons may prove
insufficient.”
To be clear, the Purchase and Sale Agreement
states that the Bank Defendant “will not own any rights to
conduct or direct operations [in connection with the Subject
Interests] or any tangible property interest [in the Subject
Interests] . . . all such rights, tangible property interests
19
and equipment being retained by [the Chesapeake Defendant].”
These provisions emphasize that the Bank Defendants’ interests
are limited to oil and gas properties once produced and that the
Bank Defendants have no recourse to any other oil and gas
properties, including those still in the ground or those not
part of the Chesapeake Defendants’ working interest. 11
Such
language belies McCall’s arguments about the property conveyed
by the McCall Well VPPs.
In her opposition, McCall presents a list of “language from
the VPP conveyances” -- a misleading list that suggests that it
is directly quoting from the McCall Well VPPs while actually
incorporating argument by McCall -- that she argues shows that
the Purported Class VPPs convey minerals in the ground before
production.
The quotes she cites do not support her argument,
as each relies on the definition of terms such as “Subject
Interests” and “Production Payment,” which, as described above,
make explicit that the McCall Well VPPs convey only production
from the Chesapeake Defendants’ interests in the McCall Wells.
Despite McCall’s assertions, all the cases that have
discussed VPPs confirm that they are common oil and gas
transactions used to convey a seller’s production of mineral
11
Further illustrating this point, the Gas Sales Agreements
which establish the Bank Defendants’ commitment to sell back the
oil and gas properties to the Chesapeake Defendants refer to
these properties as “the natural gas production accruing to the
[Bank Defendants] pursuant to the Conveyance.”
20
interests, not mineral interests in the ground.
Energy
Acquisition Corp. v. Millennium Energy Fund, L.L.C., 611 F.
Supp. 2d 1147, 1149 (D. Colo. 2009); Belotz v. Jefferies & Co.,
Inc., No. 98 Civ. 2587(LAP), 1999 WL 587916, at *1 n.3 (S.D.N.Y.
Aug. 4, 1999); EOG Resources, Inc. v. Department of Revenue, 86
P.3d 1280, 1282-83 (Wyo. 2004); 12 Dernick Resources, 312 S.W.3d
at 868 & n.1.
McCall’s reading of Dernick Resources to support her
arguments is based on a misunderstanding of the facts of that
case.
Unlike here, the party that had entered a VPP, Dernick,
was also party to a joint venture agreement with the plaintiffs,
pursuant to which Dernick held the title to the working
interests of plaintiffs as well as its own.
312 S.W.3d at 869.
Dernick Resources,
In signing the VPP, Dernick represented that
it was the sole owner of the undivided interests in the field,
and promised to convey a portion of the production from all of
the interests in the field, which thereby included the interests
of the plaintiffs.
Id. at 881-82.
Dernick then used the
proceeds of the VPP for its own financing needs, failed to
inform the plaintiffs to whom it owed fiduciary duties under the
12
EOG Resources describes the VPP at issue in that case as
involving a sale of “a production payment in reserves in the
ground.” EOG Resources, 86 P.3d at 1283 (emphasis supplied).
The Wyoming Supreme Court clarified that in a VPP, “[a] producer
sells its production” and “[t]he buyer receives a share of oil
and gas produced.” Id. at 1282; see also id. at 1283, 1284-85.
21
joint venture agreement about the VPP, and withheld from the
plaintiffs proceeds from the VPP proportional to the burden
placed on their working interest.
Id. at 877-78.
Dernick’s
actions contrast with that of the Chesapeake Defendants because
the McCall Well JOAs are not a joint venture agreement, and so,
among other things, do not grant the Chesapeake Defendants title
for McCall’s working interest in the McCall Wells.
Therefore,
the Chesapeake Defendants did not and could not have conveyed
production from McCall’s working interest to the Bank Defendants
as part of the McCall Well VPPs, which explicitly limit the
transaction to the interests owned by the Chesapeake Defendants.
Furthermore, absent such a joint venture relationship, the
Chesapeake Defendants have no obligation to inform or include
McCall in a VPP transaction.
McCall argues that the public filings of Chesapeake Energy,
the parent public company of the Chesapeake Defendants, support
her conclusion that the Purported Class VPPs conveyed to the
Bank Defendants mineral interests in the ground when they use
the terms “reserves” or “proved reserves” to describe the VPPs.
First, insofar as these statements might be contrary to the
terms of the McCall Well VPPs, it is, of course, only the
language of those VPPs that define the transactions between the
Chesapeake Defendants and the Bank Defendants and that could
have any impact on McCall’s rights under the McCall Well JOAs.
22
Any discrepancies between the terms of the Purported Class VPPs
and their description in Chesapeake Energy’s public filings
would be, at most, a misrepresentation of concern to Chesapeake
Energy’s shareholders and the SEC, not a basis for a breach of
contract claim.
But the public filings are not inconsistent with the terms
of the McCall Well VPPs as described above.
McCall has pointed
to no language in the filings that suggests that the Chesapeake
Defendants transferred anything beyond their own mineral
interests.
Nor has she shown that the filings describe the VPPs
as sales of minerals still in the ground.
“Proved reserves,”
are defined by the SEC as such quantities that “can be estimated
with reasonable certainty to be economically producible -- from
a given date forward, from known reservoirs . . . prior to the
time at which contracts providing the right to operate expire”
and with the “reasonable expectation that there will exist the
legal right to produce or a revenue interest in the production.”
17 C.F.R. § 210.4-10(a)(22), 10(a)(26).
By referring to “proved
reserves” in its public filings, Chesapeake Energy was
explaining no more than its affiliates were transferring
produced minerals from their own working interests in the
Purported Class Wells.
Similarly, the Chesapeake Defendants’ accounting treatment
of the Purported Class VPPs are of no consequence to the breach
23
of contract claim.
The accounting treatment of a transaction
does not control the actual operation of the contract for that
transaction.
And McCall has made no allegations to suggest she
has a claim for improper accounting of any of the Purported
Class VPPs.
In any case, Statement 19 of the Financial
Accounting Standards Board (“FASB”), to which McCall cites, only
indicates that there is a distinction between those production
payments that involve only transfers of cash and those that
include transfers of “a specified quantity of oil and gas . . .
out of a specified share of future production” which should be
recorded “as the delivery takes place.”
¶ 47(a) (emphasis supplied).
FASB Statement No. 19,
This statement further confirms
that the VPPs conveyed an interest in future production from the
Chesapeake Defendants’ working interest.
B. In Conveying an Overriding Royalty Interest in Their Own
Production Through the McCall Well VPPs, the Chesapeake
Defendants Do Not Breach the McCall Well JOAs.
The McCall Well JOAs explicitly acknowledge the right of
working interest owners such as the Chesapeake Defendants to
sell overriding royalty interests in their proportionate share
of production from the McCall Wells and others, without
burdening the interests of the other working interest owners.
This is what the Chesapeake Defendants have done through the
McCall Well VPPs.
For example, the JOAs state that
[e]ach party shall take in kind or separately dispose
24
of its proportionate share of all oil and gas produced
. . . . . Each party shall pay or deliver . . . all
royalties, overriding royalties, or other payments due
on its share of such production, and shall hold the
other parties free from any liability therefor.
Other provisions state that “[i]f the interest of any party
. .
. is subject to an overriding royalty, production payment or
other charge . . . such party shall assume and alone bear all
excess obligations,” and that any overriding royalty or
production payment interest “shall be specifically made subject
to all the terms of” the JOAs.
McCall, in fact, acknowledges
that parties have the right to create an overriding royalty
interest in the JOAs.
This right was also recognized by a Court
of Civil Appeals in Oklahoma, which found that under the McCall
Well JOAs, each working interest owner had the right to sell its
proportionate share of the production of oil and gas and McCall
could not force Chesapeake Operating to include her in its
contracts disposing of the sale of its share.
McCall, 164 P.3d
at 1126.
The overriding royalty interests such as those conveyed in
the McCall Well VPPs being explicitly allowed in the McCall Well
JOAs, it is not surprising that the McCall Well VPPs do not
violate the clauses of the McCall Well JOAs cited in the
Complaint.
The McCall Well JOAs’ Maintenance of Uniform
Ownership Interest Clause provides that
[f]or the purpose of maintaining uniformity of
25
ownership in the oil and gas leasehold interests
covered by this contract, and notwithstanding any
other provisions to the contrary, no party shall sell,
encumber, transfer or make other disposition of its
interest in the leases embraced within the Unit Area
and in wells, equipment, and production unless such
disposition covers either: (1) the entire interest of
the party in all leases and equipment and production;
or (2) an equal undivided interest in all leases and
equipment and production in the Unit Area.
The McCall Well VPPs do not convey to the Bank Defendant “any
rights to conduct or direct operations [in connection with the
Subject Interests] or any tangible property interest [in the
Subject Interests] . . . all such rights, tangible property
interests and equipment being retained by [the Chesapeake
Defendant].”
Thus, through the McCall Well VPPs, the Bank
Defendants were sold only an equal undivided interest in
production, not any property interests.
The sale did not impact
the uniformity of ownership in the oil and gas leasehold
interests under the JOAs.
The Waiver of Rights to Partition Clause in the McCall Well
JOAs states that “[e]ach party hereto owning an undivided
interest in the Unit Area waives any and all rights it may have
to partition and have set aside to it in severalty its undivided
interest therein.”
The “Unit Area” is defined as “all of the
lands, oil and gas leasehold interests and oil and gas interests
intended to be developed and operated for oil and gas purposes.”
“Oil and gas interests” is defined as “unleased fee and mineral
26
interests in tracts of land lying within the Unit Area”
(emphasis supplied).
Thus, the Waiver of Rights to Partition
Clause only limits rights to divide the land, leasehold interest
and oil and gas in the ground subject to the McCall Well JOAs,
not the oil and gas production sold in the McCall Well VPPs.
McCall alleges that she and the other parties to the McCall
Well VPPs are subjected to excess charges and a diversion of
production in violation of the McCall Well JOAs’ Interests of
the Parties Clause, which provides that “[i]f the interest of
any party . . . is subject to an overriding royalty, production
payment, or other charge . . . such party shall assume and alone
bear all such excess obligations.”
These conclusory allegations
are devoid of factual enhancement and so need not be accepted as
true.
See Iqbal, 129 S. Ct. at 1949–50.
The monthly statement
that McCall suggests supports the excess charges claim shows -by her own admission -- that her share of lease operation
expenses, taxes and royalties have not been changed.
Stability
in her share of expenses could only support a finding that
McCall was overcharged if McCall were correct in arguing that
the Chesapeake Defendants had sold McCall’s working interest
through the McCall Well VPPs.
She is not. 13
13
An undated letter from Chesapeake Operating that McCall
offers in opposition to the motion to dismiss is similarly
unhelpful to her claim that she has been overcharged. The
27
III. McCall Fails to State a Claim for Conversion.
“Conversion occurs when a defendant exercises unauthorized
dominion over personal property in interference with a
plaintiff’s legal title or superior right of possession.”
LoPresti v. Terwilliger, 126 F.3d 34, 41 (2d Cir. 1997); see
also Lawmaster v. Ward, 125 F.3d 1341, 1353 (10th Cir. 1997)
(“Under Oklahoma law, a conversion is any act of dominion
wrongfully exerted over another’s personal property in denial of
or inconsistent with his rights therein.”).
McCall’s claim for
conversion is based entirely on her reading of the McCall Well
VPPs as conveying mineral interests in the ground from the
undivided interest of all owners with working interests in the
McCall Wells.
She presents no further allegations in the
Complaint, nor any argument in the opposition, to suggest an
alternate basis for finding that the Defendants have converted
her interests in the McCall Wells.
Having found that the VPPs
only convey minerals after production from the Chesapeake
Defendants’ working interest, McCall has not made any plausible
allegation that the Defendants have exercised dominion over any
property in which she has rights.
Therefore, even assuming that
the interests transferred by the McCall Well VPPs are personal
property that could be converted, this claim is also dismissed.
letter states that her net “share of the gas revenue will remain
unaffected” by changes in the Chesapeake Defendants’ production
delivery contracts.
28
IV.
McCall Fails to State a Claim for Civil Conspiracy.
Under the laws of New York, Oklahoma and Delaware, the
states in which the various Defendants are located, there is no
independent tort of conspiracy and a claim of civil conspiracy
must be dismissed if the underlying torts are also dismissed.
Peterson v. Grisham, 594 F.3d 723, 730 (10th Cir. 2010); Kirch
v. Liberty Media Corp., 449 F.3d 388, 401 (2d Cir. 2006);
Ramunno v. Cawley, 705 A.2d 1029, 1039 (Del. 1998).
As the
other tort claims that might provide the basis for a civil
conspiracy claim have been dismissed, this also fails as a
matter of law.
V.
Accounting
McCall’s claim for an accounting is based explicitly on the
rights afforded parties to the Purported Class JOAs.
McCall
alleges that the Defendants “have a contractual duty to maintain
books and records of the lease operations for the [Purported
Class] . . . [the Purported Class] also ha[s] audit rights under
the JOAs.”
Indeed, as described in Exhibit C to the McCall Well
JOAs,
[a] Non-Operator, upon notice in writing to Operator
and all other Non-Operators, shall have the right to
audit Operator’s accounts and records relating to the
accounting hereunder for any calendar year within the
twenty-four (24) month period following the end of
such calendar year.
Thus, McCall has a right to audit the Operator’s accounts under
29
the McCall Well JOAs, and the Operator’s failure to comply with
that right would be a breach of those contracts. 14
This
accounting claim is thus truly a breach of contract claim.
This claim fails for several reasons.
First, only the
“Operator” is subject to an audit under the JOAs.
The
Defendants have identified the Operator as Chesapeake Operating,
which is not a defendant named in this action.
With respect to
one of the McCall Well JOAs, an Oklahoma court also found that
Chesapeake Operating was the Operator.
1122.
McCall, 164 P.3d at
As noted above, McCall has not identified in her
Complaint or opposition to this motion which Chesapeake entity
is the Operator under the McCall Well JOAs.
Insofar as it is
Chesapeake Operating, and not a defendant named in this action,
her accounting claim must fail.
Second, McCall has not alleged that she has given the
Operator written notice of her intent to audit its accounts, a
condition precedent that must be fulfilled before she can make
claim that the Operator breached its obligation to permit such
an audit.
Harwell v. State Farm Mut. Auto. Ins. Co., 876 S.W.2d
494, 498 (Tex. App. 1994).
Finally, there is no allegation of a
refusal by the Operator to turn over its accounts and records,
which would be required to allege a failure to perform, a
14
McCall has not identified any other provision of the McCall
JOAs that would provide her a right to conduct an accounting of
the Chesapeake Defendants.
30
required element of any breach of contract claim.
See Digital
Design Group, 24 P.3d at 843; Southern Elec. Servs., 2011 WL
3612300, at *3.
In her opposition to the motion to dismiss, McCall appears
to argue that she also has a claim to an equitable remedy of an
accounting.
But nowhere in the Complaint does she assert an
equitable claim, mentioning only the “accounting” right under
the McCall Well JOAs.
McCall may not use her opposition to the
motion to dismiss to amend her Complaint, especially as she has
already taken the opportunity to amend granted by Federal Rule
of Civil Procedure 15(a)(1) and did not seek permission to
further amend it pursuant to Federal Rule of Civil Procedure
15(a)(2). 15
15
McCall also seems to confuse her claim for accounting with
her rights to discovery under the Federal Rules. At no point
did the Defendants argue that she be prevented from taking
discovery, nor does the dismissal of McCall’s accounting claim
limit in any way the rights to discovery she would be afforded
had this action survived the motion to dismiss.
31
CONCLUSION
The Defendants' April 8, 2011 motion to dismiss is granted.
The Clerk of Court shall enter judgment for the Defendants and
close this action.
Dated:
New York, New York
September 13, 2011
United Sates District Judge
32
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