Chieftain Royalty Company v. Marathon Oil Company

Filing 41

OPINION AND ORDER by Magistrate Judge Steven P. Shreder granting in part and denying in part 26 Motion to Dismiss Case for Failure to State a Claim by Marathon Oil Company. GRANTED as to Count III (Fraud), and DENIED as to Counts I (Breach of Statutory Duty to Pay O&G Proceeds and Interest), II (Breach of Duty to Investigate and Pay), IV (Accounting and Disgorgement), and V (Injunctive Relief). Furthermore, Count III (Fraud) is dismissed without prejudice. Plaintiff is given fourteen days to file an Amended Complaint. (ndd, Deputy Clerk)

IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF OKLAHOMA
CHIEFTAIN ROYALTY COMPANY,
Plaintiff,
v.
MARATHON OIL COMPANY,
Defendant.

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Case No. CIV-17-334-SPS

OPINION AND ORDER
This matter comes before the Court on motion by Defendant Marathon Oil
Company (“Marathon”) for dismissal of the Plaintiff’s First Amended Complaint for
failure to state a claim. For the reasons set forth below, the Court finds that the Defendant’s
Motion to Dismiss Plaintiff’s First Amended Complaint and Brief in Support [Docket No.
26] is hereby GRANTED IN PART and DENIED IN PART.
BACKGROUND
The Plaintiff Chieftain Royalty Company (“Chieftain”) is an Oklahoma Corporation
that owns oil and/or gas wells, including a well in Blaine County, Oklahoma, described as
Boeckman 1-13H. The Defendant Marathon Oil Company is the operator of that same
well. Chieftain contends that Defendant, as the operator, is obligated to pay oil and gas
production proceeds to Plaintiff within certain time periods described by state statute.
Plaintiff contends that the Defendant has failed to comply with this obligation, and instead
engages in the practice of delaying payment of proceeds and denying interest payments.

In addition to the personal allegations, Chieftain asserts that it is acting as
representative of a class defined as:
All non-excluded persons or entities who
(1) Received, or during the pendency of this action will receive, Untimely
Payments from Defendant for O&G Proceeds from Oklahoma Wells and
whose payments did not also include the statutory interest prescribed by
the Act;
(2) currently are, or become during the pendency of this action, Owners
legally entitled to O&G Proceeds held by Defendant in Suspense
Accounts (for reasons of unmarketable title, unknown addresses, and/or
other reasons) for more than the applicable time periods prescribed in the
Act, without the payment by Defendant of statutory interest prescribed by
the Act for the benefit of such Owners.
The persons or entities excluded from the Class are: (1) agencies,
departments or instrumentalities of the United States of America or the State
of Oklahoma; (2) publicly traded oil and gas companies and their affiliates;
and (3) persons or entities that Plaintiff’s counsel may be prohibited from
representing under Rule 1.7 of the Oklahoma Rules of Professional Conduct;
and (4) officers of the court, and (5) Owners who are entitled to O&G
Proceeds form an Oklahoma Well of less than $10.00 for a calendar year
pursuant to Okla. Stat. tit. 52 § 570.10(B)(3)(a).
Docket No. 25, pp. 4-5, ¶ 17. The class allegations indicate that the common questions of
fact include: (a) whether Plaintiff and the Class own legal interests in the Oklahoma Wells
for which Defendant has an obligation to pay O&G Proceeds; (b) whether, under Oklahoma
law, Defendant owed interest to Plaintiff and the Class on any Untimely Payments, either
received or not yet received; and (c) whether Defendant had a duty to promptly investigate
whether Plaintiff and the Class were owed interest and, if so, to properly pay the interest
owed to the Plaintiff and the Class; (d) whether Defendant’s failure to pay interest to
Plaintiff and the Class on any Untimely Payments, either received or not yet received,
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constitutes a violation of the Act; (e) whether Defendant defrauded Plaintiff and the Class
by knowingly withholding statutory interest; and (f) whether Defendant is obligated to pay
interest on future Untimely Payments, either received or not yet received. See Docket No.
25, p. 5, ¶ 19.
The Plaintiff’s Complaint sets out the following enumerated causes of action:
(I) breach of statutory duty to pay O&G Proceeds and interest, (II) breach of duty to
investigate and pay, (III) fraud, and (IV) accounting and disgorgement, and (V) injunctive
relief. The Defendants have moved to dismiss all Counts.
ANALYSIS
A complaint must contain “a short and plain statement of the claim showing that the
pleader is entitled to relief[.]” Fed. R. Civ. P. 8(a)(2). Detailed factual allegations are not
required, but the statement of the claim under Rule 8(a)(2) must be “more than an
unadorned, the-defendant-unlawfully-harmed-me accusation.” Ashcroft v. Iqbal, 556 U.S.
662, 678 (2009), citing Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007), citing
Papasan v. Allain, 478 U.S. 265, 286 (1986).

“A pleading that offers labels and

conclusions or a formulaic recitation of the elements of a cause of action will not do. Nor
does a complaint suffice if it tenders naked assertion[s] devoid of further factual
enhancement . . . 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. A
claim has facial plausibility when the plaintiff pleads factual content that allows the court
to draw the reasonable inference that the defendant is liable for the misconduct alleged.”
Iqbal, 556 U.S. at 678, quoting Twombly, 550 U.S. at 555-557, 570 [internal quotation
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marks omitted]. “While legal conclusions can provide the framework of a complaint, they
must be supported by factual allegations.” Iqbal, 556 U.S. at 679. “While the 12(b)(6)
standard does not require that Plaintiff establish a prima facie case in h[is] complaint, the
elements of each alleged cause of action help to determine whether Plaintiff has set forth a
plausible claim.” Khalik v. United Air Lines, 671 F.3d 1188, 1192 (10th Cir. 2012). This
requires a determination as to “whether the complaint sufficiently alleges facts supporting
all the elements necessary to establish an entitlement to relief under the legal theory
proposed.”

Lane v. Simon, 495 F.3d 1182, 1186 (10th Cir. 2007), quoting Forest

Guardians v. Forsgren, 478 F.3d 1149, 1160 (10th Cir. 2007).
Breach of Statutory Duty to Pay O&G Proceeds and Interest. Marathon first
asserts that the Plaintiff’s Count I (Breach of Statutory Duty to Pay O&G Proceeds and
Interest) should be dismissed for failure to state a claim. Chieftain alleges in the First
Amended Complaint that Marathon held payments belonging to Chieftain (and the
purported class), and in doing so failed to make timely payments, and did not pay the
interest owed on these untimely payments. Marathon contends that this claim is conclusory
because Chieftain has not identified specific late or insufficient payments and contains no
information to infer deadlines for when Marathon was supposed to have made these
payments, and that the use of the phrase “Untimely Payments” is a legal conclusion without
factual support.
The Tenth Circuit has stated that “the Twombly/Iqbal standard recognizes a plaintiff
should have at least some relevant information to make the claims plausible on their face,”
but that “Rule 8(a)(2) [“A pleading that states a claim for relief must contain . . . a short
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and plain statement of the claim showing that the pleader is entitled to relief.] still lives.”
Khalik, 671 F.3d at 1191, 1193. This was recognized by the Supreme Court in Erickson v.
Pardus, 551 U.S. 89 (2007), finding that “[s]pecific facts are not necessary; the statement
need only ‘give the defendant fair notice of what the . . . claim is and the grounds upon
which it rests.’” Erickson, 551 U.S. at 93, quoting Twombly, 550 U.S. at 555, quoting
Conley v. Gibson, 355 U.S. 41, 47 (1957). Here, the Plaintiff alleges that Defendant made
payments of oil and gas proceeds in an untimely manner, in violation of Okla. Stat. tit. 52,
§ 570.10, and further failed to pay interest on these untimely payments. The Court finds
that the allegations are sufficient where, as here, the rate of interest is statutorily prescribed
and it does not appear that the Defendant lacks knowledge to defend this claim. See
Reirdon v. Cimarex Energy Co., 2016 WL 4991552, at *3, Case No. CIV-16-113-KEW
(E.D. Okla. Sept. 16, 2016) (“The level of specificity sought by Defendant is not mandated
by the plausibility standard in Twombly/Iqbal and their progeny. Post-Twombly, the
essence of Rule 8 of the Federal Rules of Civil Procedure remains providing a ‘defendant
fair notice of what the . . . claim is and the grounds upon which it rests’ and cautioning that
‘[s]pecific facts are not necessary.’”), quoting Khalik, 671 F.3d at 1192. Accordingly,
Marathon’s Motion to Dismiss is denied as to Count I.
Breach of Duty to Investigate and Pay. Next, Marathon contends that Chieftain’s
claim that Marathon breached a duty to investigate and pay oil and gas proceeds and owes
punitive damage for this breach is a new tort that has never been recognized in Oklahoma,
and that there is no free-standing duty to investigate. Okla. Stat. tit. 52, § 903 provides that
the Production Revenue Standards Act [“PRSA”] shall provide the exclusive remedy to the
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person entitled to proceeds from production for failure of a holder to pay the proceeds
within the time periods required for payment.” That statute further indicates that the
statutorily-prescribed interest rates:
are deemed to be adequate remedies for failure to pay proceeds within the
time periods required for payment and no other penalty or damages shall
be recoverable in any litigation involving a claim for unpaid or underpaid
proceeds from production including, without limitation, punitive or
exemplary damages or disgorgement damages, unless there shall be a
determination by the finder of fact upon clear and convincing evidence
that the holder who failed to pay such proceeds did so with the actual,
knowing and willful intent: (a) to deceive the person to whom the
proceeds were due, or (b) to deprive proceeds from the person the holder
knows, or is aware, is legally entitled thereto.
Okla. Stat. tit. 52, § 903 (emphasis added).
Marathon continues the argument from the first claim, that Chieftain has failed to
allege facts establishing untimely payments, and further asserts that there is no separate
duty to investigate, much less a tort for breach of such a duty. Chieftain contends that it
has satisfied its burden at this stage, and that such a duty has long been recognized by the
Oklahoma Supreme Court. The Court finds that the Plaintiff has raised a claim for punitive
damages under Okla. Stat. tit. 52, § 903. Although it is not technically a separate claim for
relief from the claimant’s first claim, the Court finds that dismissal is premature until the
merits of the first claim has been determined.
Fraud. Next, Marathon asserts that Chieftain’s claim of Fraud, Count III, failed to
state a claim for relief. Specifically, Marathon argues: (i) again, that Chieftain has not
alleged facts that Marathon made untimely payments and owes statutory interest; (ii) that
Chieftain has not properly pleaded the elements of fraud; and (iii) that Chieftain has not
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alleged an injury. Under Fed. R. Civ. P. 9(b), “In alleging fraud or mistake, a party must
state with particularity the circumstances constituting fraud or mistake. Malice, intent,
knowledge, and other conditions of a person’s mind may be alleged generally.” In this
case, Chieftain alleges that Marathon “took on such duties [to pay oil and gas proceeds to
owners in accordance with Oklahoma law] with the intent to deceive Owners and not to
pay the full O&G Proceeds owed. Specifically, Defendant knew it owed interest on
Untimely Payments, but knowingly and intentionally suppressed the fact that interest was
owed to Plaintiff and the Class members. Further, Defendant intended to avoid its
obligation to pay the statutorily mandated interest and only pay when an Owner specifically
requests payment of the statutory interest.” Docket No. 25, p. 12, ¶ 59. Furthermore,
Chieftain alleges that “Plaintiff and the Class relied on and trusted Defendant to pay them
the full O&G proceeds” and that “Plaintiff and the Class have been damaged by
Defendant’s actions and violations of law.” Id. at ¶¶ 60-61.
In the Tenth Circuit, a Complaint must “set forth the time, place and contents of the
false representation, the identity of the party making the false statements and the
consequences thereof.” Koch v. Koch Industries, Inc., 203 F.3d 1202, 1236 (10th Cir.
2000), quoting Lawrence National Bank v. Edmonds (In re Edmonds), 924 F.2d 127, 180
(10th Cir. 1991). The purpose of this requirement is to provide the Defendants with “fair
notice of plaintiff’s claims and the factual ground upon which [they] are based.” Id. at
1236-1237 (citations omitted). Additionally, “[u]nder the Supreme Court’s plausibility
standard, the plaintiffs were required to plead sufficient facts to create a reasonable
inference of reliance.” Hitch Enterprises, Inc. v. Cimarex Energy Co., 859 F. Supp. 2d
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1249, 1261 (W.D. Okla. 2012), citing Iqbal, 556 U.S. at 678, and Bryson v. Gonzales, 534
F.3d 1282, 1286 (10th Cir. 2008) (“[A] complaint still must contain either direct or
inferential allegations respecting all the material elements necessary to sustain a recovery
under some viable legal theory.”) (quotation omitted). The Court therefore finds that here,
as in Hitch, “[t]he plaintiff[‘s] allegation of reliance is conclusory and lacking factual
specificity. Allegations are not entitled to be assumed to be true when they merely restate
the essential elements of a claim rather than provide specific facts to support those
elements.” Hitch, 859 F. Supp. 2d at 1261. See also Chieftain Royalty Co. v. Dominion
Oklahoma Texas Exploration & Production, Inc., 2011 WL 9527717, at *4 (W.D. Okla.
July 14, 2011) (“Plaintiffs have failed to allege that they relied to their detriment on the
alleged false and misleading monthly statements sent by DOTEPI, and any facts showing
that that was the case.”) (emphasis added). Although there may be some information not
in the hands of the Plaintiff at this stage of the litigation, that is not the case with facts
establishing a reasonable inference of reliance.

Accordingly, Count III (Fraud) is

dismissed without prejudice.
Accounting, Disgorgement, and Injunctive Relief. Finally, the Plaintiff set forth
Counts IV (Accounting and Disgorgement) and V (Injunctive Relief) as separately
enumerated claims. The Court notes that these claims for equitable relief necessarily flow
out of the base claims of breach of contract and fraud, but finds that separately identifying
these requests for relief does not merit dismissal at this stage of the proceedings as it is
premature to determine whether one or all of the bases for equitable relief has merit. See,
e. g., Hitch, 859 F. Supp. 2d at 1258-1259 (“Because certain theories of recovery survive
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the defendants’ instant request for dismissal – theories for which equitable remedies are
also available – and because the Court cannot determine at this stage whether these
equitable remedies are ‘necessary to afford the parties complete relief,” the Court finds that
the defendants are not entitled at this juncture to dismissal of the plaintiffs’ ‘claim’ for
accounting[.]”), citing Fleet v. Sanguine, Ltd., 1993 OK 76, ¶ 19, 854 P.2d 892, 902. As
such, Marathon’s motion to dismiss is denied as to Counts IV (Accounting and
Disgorgement) and V (Injunctive Relief).
CONCLUSION
Consequently, IT IS ORDERED that the Defendant’s Motion to Dismiss Plaintiff’s
First Amended Complaint and Brief in Support [Docket No. 26] is hereby GRANTED as
to Count III (Fraud), and DENIED as to Counts I (Breach of Statutory Duty to Pay O&G
Proceeds and Interest), II (Breach of Duty to Investigate and Pay), IV (Accounting and
Disgorgement), and V (Injunctive Relief). Furthermore, Count III (Fraud) is dismissed
without prejudice. Plaintiff is given fourteen days to file an Amended Complaint.
DATED this 7th day of June, 2018.

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