Beer et al v. XTO Energy Inc
Filing
357
ORDER denying 298 Defendant's Motion for Partial Summary Judgment. Signed by Honorable Tim Leonard on 02/23/12. (jy)
IN THE UNITED STATES DISTRICT COURT FOR THE
WESTERN DISTRICT OF OKLAHOMA
BILL FANKHOUSER and TIM GODDARD, )
on behalf of themselves and all others
)
similarly situated,
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)
Plaintiffs,
)
)
vs.
)
)
XTO ENERGY, INC. f/k/a CROSS
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TIMBERS OIL COMPANY, a Delaware
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Corporation (“XTO”),
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Defendant.
)
Case No. CIV-07-798-L
ORDER
Plaintiffs Bill Fankhouser and Tim Goddard are royalty owners in wells
operated by defendant XTO Energy, Inc. Fankhouser owns royalty interests in three
gas wells located in Texas County, Oklahoma and one well located in Kearny
County, Kansas. Goddard owns royalty interests in two wells located in Seward
County, Kansas. The wells produce gas from the Chase formation in the GuymonHugoton field. Plaintiffs assert three claims for relief on behalf of themselves and
others similarly situated: breach of contract, breach of fiduciary duty, and unjust
enrichment. In addition, plaintiffs seek the equitable remedy of an accounting for
themselves and members of the class. On December 16, 2010, the court certified
this matter as a class action. The class consists of:
Non-governmental royalty owners who received payments
based on production from a well that is/was operated by
XTO Energy, Inc., for which the production is/was sold to
Timberland Gathering and Processing Co., Inc., and
processed at the Tyrone natural gas processing plant.
Kansas Subclass. Royalty owners encompassed
within the definition set forth above, who received
royalties from at least one well located in the State
of Kansas.
Oklahoma Subclass. Royalty owners encompassed
within the definition as set forth above, who
received royalties from at least one well located in
the State of Oklahoma.
Excluded Claims. All released claims under the settlement
agreement entered in Booth v. Cross Timbers Oil Co., No. CJ98-16 (Okla. Dist. Ct. Dewey County 2002).
Fankhouser v. XTO Energy, Inc., Case No. CIV-07-798-L, mem. op. at 15 (W.D.
Okla. Dec. 16, 2010) (Doc. No. 261).
This matter is before the court on Defendant’s Motion for Partial Summary
Judgment. Defendant seeks a ruling that, as a matter of law, certain members of the
plaintiff class may not assert a claim for breach of the implied duty to market. It
argues that the royalty language in certain leases negates the implied covenant to
produce a marketable product. Defendant also seeks judgment that it has no duty
to process gas to remove natural gas liquids (“NGLs”), and therefore has no
obligation to pay royalties based on the value of the NGLs. Finally, defendant
argues that, as a matter of law, plaintiffs cannot assert a claim for unjust enrichment
because they have an adequate remedy at law.
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Summary judgment is appropriate if the pleadings, affidavits, and depositions
“show that there is no genuine issue as to any material fact and that the movant is
entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(c)(2). Any doubt as to
the existence of a genuine issue of material fact must be resolved against the party
seeking summary judgment. In addition, the inferences drawn from the facts
presented must be construed in the light most favorable to the nonmoving party.
Board of Education v. Pico, 457 U.S. 853, 863 (1982). Nonetheless, a party
opposing a motion for summary judgment may not simply allege that there are
disputed issues of fact; rather, the party must “set out specific facts showing a
genuine issue for trial.” Fed. R. Civ. P. 56(e)(2) (emphasis added). See also,
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249 (1986). “[T]here is no issue for
trial unless there is sufficient evidence favoring the nonmoving party for a jury to
return a verdict for that party.
If the evidence is merely colorable, or is not
significantly probative, summary judgment may be granted.” Anderson, 477 U.S. at
249-50 (citations omitted). In addition, “the plain language of Rule 56(c) mandates
the entry of summary judgment, after adequate time for discovery and upon motion,
against a party who fails to make a showing sufficient to establish the existence of
an element essential to that party's case, and on which that party will bear the
burden of proof at trial.” Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986).
Oklahoma and Kansas law recognizes in oil and gas leases an implied duty
on the lessee’s part to market production. “[T]he implied duty to market means a
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duty to get the product to the place of sale in a marketable form.” Wood v. TXO
Production Corp., 854 P.2d 880, 882 (Okla. 1993). The lessee bears the costs of
putting the gas into a marketable condition, and such costs may not be charged to
royalty owners. See Mittelstaedt v. Santa Fe Minerals, Inc., 954 P.2d 1203, 1205
(Okla. 1998); TXO Production Corp. v. Commissioners of Land Office, 903 P.2d 259,
262-63 (Okla. 1995); Sternberger v. Marathon Oil Co., 894 P.2d 788, 791 (1995);
Wood, 854 P.2d at 882. Oklahoma courts have held that the implied duty to market
“prohibits a lessee from deducting a proportionate share of transportation,
compression, dehydration, and blending costs when such costs are associated with
creating a marketable product.” Mittelstaedt, 954 P.2d at 1205. The Court in Wood
reasoned:
We interpret the lessee’s duty to market to include the cost
of preparing the gas for market. The lessor, who generally
owns the minerals, grants an oil and gas lease, retaining
a smaller interest, in exchange for the risk-bearing working
interest receiving the larger share of proceeds for
developing the minerals and bearing the costs thereof.
Part of the mineral owner’s decision whether to lease or to
become a working interest owner is based upon the costs
involved. We consider also that working interest owners
who share costs under an operating agreement have input
into the cost-bearing decisions. The royalty owners have
no such input after they have leased. In effect royalty
owners would be sharing the burdens of working interest
ownership without the attendant rights. If a lessee wants
royalty owners to share in compression costs, that can be
spelled-out in the oil and gas lease. Then, a royalty owner
can make an informed economic decision whether to enter
into the oil and gas lease or whether to participate as a
working interest owner.
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Wood, 854 P.2d at 882-83. If a lessee wants to burden a royalty owner with the
costs associated with making the gas marketable, the lease must expressly and
clearly provide that such costs are chargeable to the lessor. Mittelstaedt, 954 P.2d
at 1207 (citing Wood, 854 P.2d at 883).
Citing a number of cases that do not construe royalty clauses,1 defendant
argues that the implied duty to market can be negated by lease language that
requires royalties be paid on gas “at the well”, “gas as such”, “raw gas”, “net
proceeds” or “proceeds, less handling costs” of gas sold. This argument, however,
ignores the fact that the cases in which the implied duty to market has been found
had similar royalty clauses. For example, the royalty clause at issue in Wood
required the lessee to pay “3/16 at the market price at the well for the gas sold.”
Wood, 854 P.2d at 880 (emphasis added). Likewise, Kansas cases that hold the
duty to market requires providing a marketable product without cost to the lessor
involve royalty clauses providing for payment based on the market price or value at
the well or for payment on gas as such. See Sternberger, 894 P.2d at 792 (lessee
1
Two of the cases cited by defendant are not even tangentially related to oil and gas leases.
Marsh v. Coleman Co., 774 F. Supp. 608 (D. Kan. 1991) (employment discrimination); Mercury Inv.
Co. v. F.W. Woolworth Co., 706 P.2d 523 (Okla. 1985) (lease of a commercial building). Rogers
v. Heston Oil Co., 735 P.2d 542 (Okla. 1984), concerned the implied duty to prevent drainage, but
found no waiver of the covenant by a lessor’s acceptance of delay rentals. Id. at 547. Duvanel v.
Sinclair Refining Co., 227 P.2d 88 (Kan. 1951) and Fox v. Cities Serv. Oil Co., 200 P.2d 398 (Okla.
1948), concerned surface leases and the failure of the lessee to return the realty to its original
condition. Central States Prod. Corp. v. Jordan, 86 P.2d 790 (Okla. 1939), which arguably did
construe a royalty provision, merely stands for the unremarkable principle that “express covenants
control over implied covenants.” Id. at 791. The key, however, is that the contractual language
must be express.
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to pay “one-eighth (1/8), at the market price at the well, (but, as to gas sold by
lessee, in no event more than one-eighth (1/8) of the proceeds received by lessee
from such sales)”) (emphasis added); Gilmore v. Superior Oil Co., 388 P.2d 602
(Kan. 1964) (lessee to pay “1/8 of the market value of such gas at the mouth of the
well . . . . The lessee shall pay lessor as royalty 1/8 of the proceeds from the sale
of gas as such at the mouth of the well where gas only is found”) (emphasis added).
The court therefore holds the implied duty to market is not negated by the lease
language cited by defendant in this action. To the extent the court in Naylor Farms,
Inc. v. Anadarko OCG Co., Case No. CIV-08-668-R, ord. at 6 (W.D. Okla. Jul. 14,
2011) (Doc. No. 209), holds otherwise, this court respectfully disagrees. Moreover,
Naylor Farms is distinguishable from this case. It is undisputed that the gas
purchase contracts at issue in Naylor Farms were arms-length agreements. Id. at
1. In contrast, the gas purchase contracts in this case are between affiliates and
therefore subject to the rules pronounced in Howell v. Texaco Inc., 112 P.3d 1154
(Okla. 2004).2 See Beer v. XTO Energy, Inc., Case No. CIV-07-798-L, ord. at 5-7
(Doc. No. 148).
The court also finds that defendant has not established that it is entitled to
judgment as a matter of law on the issue of whether extraction of NGLs is required
2
It is noteworthy that one of the royalty provisions at issue in Howell provided for payment
of “one-eighth (1/8) of the market value at the mouth of the wells . . . of the raw gas”. Exhibit 7 to
Plaintiffs’ Response to Defendant’s Motion for Partial Summary Judgment and Brief in Support
(Doc. No. 324-7). In Howell, the Court reiterated that post-production costs are chargeable against
the royalty payment only when the gas is marketable at the wellhead. Howell, 112 P.3d at 1159.
The Court did not hold that the lease language in question negated the duty to market.
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to make the gas marketable. Furthermore, even if defendant had established that
the gas at issue is in marketable condition, it has not met its burden under
Mittelstaedt. It is defendant’s burden to prove that the cost of extracting NGLs was
reasonable, that such extraction enhanced an already marketable product, and that
royalty revenues increased in proportion to such costs. Mittelstaedt, 954 P.2d at
1209-10. Defendant’s motion for summary judgment on the implied duty to market
is therefore denied.
In addition, the court finds defendant has not established it is entitled to
judgment as a matter of law on plaintiffs’ unjust enrichment claim. Plaintiffs are
permitted under the rules to plead alternative claims for relief as long as they do not
obtain double recovery for the same harm. See Fed. R. Civ. P. 8(a)(3).
In sum, the court DENIES Defendant’s Motion for Partial Summary Judgment
(Doc. No. 298).
It is so ordered this 23rd day of February, 2012.
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