Slamon v. Carrizo (Marcellus) LLC et al
Filing
30
MEMORANDUM OPINION(Order to follow as separate docket entry) re 16 Brief in Support filed by Carrizo (Marcellus) LLC, 15 MOTION TO DISMISS FOR FAILURE TO STATE A CLAIM (Partial) filed by Carrizo (Marcellus) LLC.Signed by Honorable Robert D. Mariani on 9/5/17. (jam)
THE UNITED STATES DISTRICT COURT
FOR THE MIDDLE DISTRICT OF PENNSYLVANIA
JAMES SLAMON,
Plaintiff,
v.
3:16-CV-2187
(JUDGE MARIANI)
CARRIZO (MARCELLUS) LLC, et al.,
Defendants.
MEMORANDUM OPINION
I. INTRODUCTION AND PROCEDURAL HISTORY
Presently before the Court is a class action concerning royalty payments made on oil
and gas leases. Specifically, Plaintiff, James Slamon, claims that he and others similarly
situated 1 were paid royalties on their oil and gas leases that were improperly calculated by
Defendants, Reliance Marcellus II, LLC, Reliance Holdings USA, Inc., (collectively
"Reliance"), and Carrizo (Marcellus) LLC ("Carrizo"). On October 3, 2016, Plaintiff filed a
five count Complaint in the Court of Common Pleas of Susquehanna County, Pennsylvania,
(Doc. 1 at 10-30), seeking declaratory relief for breach of contract (Count I), damages for
breach of contract, (Count II), damages for breach of contract through a breach of the
implied duty of good faith and fair dealing (Count Ill), damages for breach of fiduciary duty,
(Count IV), and an accounting (Count V). Defendants removed the case to this Court on
1 Because
the class has yet to be certified, and because the class is based on those who have
similar leases with Defendants as the lease Plaintiff entered into, the Court will generally refer only to
Plaintiffs lease when analyzing the present Motions to Dismiss.
October 31, 2016. (Doc. 1 at 1-6). Thereafter, Carrizo and Reliance filed separate motions
to dismiss, (Docs. 15 & 17), which are now ripe for decision. For the reasons that follow,
the Court will grant in part and deny in part Defendants' Motions.
II. FACTUAL ALLEGATIONS
Plaintiffs Complaint alleges the following facts which this Court accepts as true for
the purposes of this Motion:
On April 7, 2009, Plaintiff and Carrizo entered into a lease agreement (hereinafter
"the lease" or "the contract"), where Carrizo, the Lessee, was given exclusive rights to the
oil and gas under Plaintiffs, the Lessor, land in exchange for, among other things, royalty
payments on all gas production. (Doc. 1 at 13, ~~ 14-15). In August of 2010, with Plaintiff's
approval, Carrizo assigned Reliance an undivided sixty percent interest in the contract. (Id.
at 13, ~ 18). This assignment, however, did not modify any other terms of the lease. (Id. at
14, ~ 18).
With respect to the calculation of the royalty payments, the lease provides, in part:
4.
ROYALTY PAYMENTS ....
(b)
Production Royalty. Lessee shall pay Lessor the following
royalty (the "Royalty"), free of all costs, whether pre-production or postproduction, as follows:
(ii)
GAS: Lessee shall deliver to the credit of Lessor, free of
all costs (whether pre-production or post-production), a monthly Royalty equal
2
to eighteen percent (18%) of the greater of (i) the market value, measured at
the point of take, of all gas and any constituents produced from the Leasehold
or lands pooled or unitized therewith, or (ii) the gross amount of revenue paid
to Lessee for all gas and any constituents produced from the Leasehold or
lands pooled or unitized therewith, measured at the point of take; provided,
however, that when gas production is sold in an arms-length sale transaction
with an unaffiliated third party, the value of such gas production shall be the
price paid to Lessee.
(n
Valuation. The value of oil, gas, or other hydrocarbon
production shall be determined on the basis of the greater of (i) the prevailing
local market price at the time of sale or use, or, NYMEX spot price as
published at the time of sale, whichever is greater, or (ii) the price paid to
Lessee from the sale or use of the gas, including proceeds and any other
thing of value received by Lessee; provided, however, that when gas
production is sold in an arms-length sale transaction with an unaffiliated third
party, the value of such gas production shall be the price paid to Lessee.
(Id. at 34, 35).
Defendants began gas production on Plaintiff's land in late 2011 and Plaintiff began
receiving two royalty checks-one from Carrizo and one from Reliance-in March of 2012.
(Id. at 14, ~~ 21-22). The royalty payments Plaintiff received, however, were based on gas
prices that were consistently below both the NYMEX spot price and the prices paid by other
gas producers in the area. (Id. at 14, ~ 23). Upon inquiry, Carrizo informed Plaintiff that it
was basing Plaintiff's royalty payments on the net amount Carrizo received from selling the
gas to DTE Energy Trading, Inc. ("DTE"). (Id. at 17, ~~ 29, 31). DTE, in turn, paid Carrizo
the price DTE received from reselling the gas to a third party, minus DTE's production costs
and fees. (Id. at 18, ~ 37). As a result, the price Carrizo received for the gas-on which
3
Plaintiffs royalty payments were based-had DTE's production costs and fees built into it.
(Id. at 19, ~ 40). Reliance based its royalty payments to Plaintiff on the sale prices derived
from a similar agreement with DTE. (Id. at 21, ~ 44).
Ill. STANDARD OF REVIEW
A complaint must be dismissed under Federal Rule of Civil Procedure 12(b)(6) if it
does not allege "enough facts to state a claim to relief that is plausible on its face." Bell At/.
Corp. v. Twombly, 550 U.S. 544, 570, 127 S. Ct. 1955, 1974, 167 L. Ed. 2d 929 (2007). "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."
Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S. Ct. 1937, 1949, 173 L. Ed. 2d 868 (2009).
"While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need
detailed factual allegations, a plaintiffs obligation to provide the 'grounds' of his 'entitlement
to relief requires more than labels and conclusions, and a formulaic recitation of a cause of
action's elements will not do." Twombly, 550 U.S. at 555 (internal citations and alterations
omitted). In other words, "[nactual allegations must be enough to raise a right to relief
above the speculative level." Id. A court "take[s] as true all the factual allegations in the
Complaint and the reasonable inferences that can be drawn from those facts, but ...
disregard[s] legal conclusions and threadbare recitals of the elements of a cause of action,
supported by mere conclusory statements." Ethypharm S.A. France v. Abbott Laboratories,
707 F.3d 223, 231 n.14 (3d Cir. 2013) (internal citations and quotation marks omitted).
4
Twombly and Iqbal require [a court] to take the following three steps to
determine the sufficiency of a complaint: First, the court must take note of the
elements a plaintiff must plead to state a claim. Second, the court should
identify allegations that, because they are no more than conclusions, are not
entitled to the assumption of truth. Finally, where there are well-pleaded
factual allegations, a court should assume their veracity and then determine
whether they plausibly give rise to an entitlement for relief.
Connelly v. Steel Valley Sch. Dist., 706 F.3d 209, 212 (3d Cir. 2013).
"[W]here the well-pleaded facts do not permit the court to infer more than the mere
possibility of misconduct, the complaint has alleged-but it has not show[n]-that the
pleader is entitled to relief." Iqbal, 556 U.S. at 679, 129 S. Ct. at 1950 (internal citations and
quotation marks omitted). This "plausibility" determination will be a "context-specific task
that requires the reviewing court to draw on its judicial experience and common sense." Id.
IV. ANALYSIS
Carrizo and Reliance have raised a variety of arguments, some of which overlap, as
to why certain claims in Plaintiff's Complaint should be dismissed. The Court will address
each argument in turn.
A. Breach of Contract - Royalty Payment Pricing
Plaintiff has alleged that Defendants have breached the contract by paying royalties
that are lower than the NYMEX spot price and/or the local market price. (Doc. 1 at 25, 26,
~~
65, 73). As a result of this alleged breach, Plaintiff seeks declaratory relief in Count I and
damages in Count II. (Id.). Defendants argue that the Complaint does not state a claim for
breach of contract because it alleges that Defendants used the sale price they received
5
from DTE to calculate Plaintiffs royalty payments and the plain language of the lease allows
Defendants to value the gas at its sale price when "sold in an arms-length sale transaction
with an unaffiliated third party." (Doc. 16 at 6-13; Doc. 18 at 9-14).
"When interpreting a contract, a court must determine the intent of the parties and
effect must be given to all provisions in the contract." Krizovensky v. Krizovensky, 624 A.2d
638, 642 (Pa. Super. Ct. 1993). "It is firmly settled that the intent of the parties to a written
contract is contained in the writing itself." Id. "While unambiguous contracts are interpreted
by the court as a matter of law, ambiguous writings are interpreted by the finder of fact."
Kripp v. Kripp, 849 A.2d 1159, 1163 (Pa. 2004). "To be 'unambiguous,' a contract clause
must be reasonably capable of only one construction." John Wyeth & Bro. Ltd. v. CIGNA
Int'/ Corp., 119 F.3d 1070, 1074 (3d Cir. 1997). However, "[a] contract is ambiguous if it is
reasonably susceptible of different constructions and capable of being understood in more
than one sense." Hutchison v. Sunbeam Coal Corp., 519 A.2d 385, 390 (Pa. 1986). "If left
undefined, the words of a contract are to be given their ordinary meaning." Kripp, 849 A.2d
at 1163.
According to the lease, Plaintiff's royalty payments are calculated at eighteen
percent of the value of the natural gas produced from his land. (Doc. 1 at 34). Section 4(ij
of the lease further provides that
[t]he value of oil, gas, or other hydrocarbon production shall be determined on
the basis of the greater of (i) the prevailing local market price at the time of
sale or use, or, NYMEX spot price as published at the time of sale, whichever
is greater, or (ii) the price paid to Lessee from the sale or use of the gas,
6
including proceeds and any other thing of value received by Lessee;
provided, however, that when gas production is sold in an arms-length sale
transaction with an unaffiliated third party, the value of such gas production
shall be the price paid to Lessee.
(Id. at 35). The discrepancy in how the parties interpret this provision concerns the proviso:
"provided, however, that when gas production is sold in an arms-length sale transaction with
an unaffiliated third party, the value of such gas production shall be the price paid to
Lessee." (Id.). Defendants argue that because this proviso is separated from the rest of the
provision by a semicolon, according to the rules of grammar and statutory construction, the
proviso modifies the entire provision. Thus, according to Defendants, if they sell gas in an
arms-length transaction with an unaffiliated third party, only the proviso is controlling and the
gas is valued at the sale price Defendants received from the third party.
Plaintiff argues that, according to the rules of grammar and statutory construction,
the proviso only modifies the immediately preceding section, subsection (ii), of section 4(~.
Thus, according to Plaintiff, if Defendants sell gas in an arms-length transaction with an
unaffiliated third party, the gas is valued at "the greater of (i) the prevailing local market
price at the time of sale or use, or, NYMEX spot price as published at the time of sale,
whichever is greater, or (ii)" the sale price Defendants received from the third party.
At this early stage of litigation, it is sufficient to say that the provision at issue is
susceptible to multiple reasonable interpretations. While it is certainly true that courts
sometimes apply rules of statutory construction to aid their interpretations of contracts, see,
e.g., J.C. Penney Life Ins. Co. v. Pilosi, 393 F.3d 356, 365-66 (3d Cir. 2004), "the
7
touchstone of contract interpretation is the intent of the parties." Dardovitch v. Haltzman,
190 F.3d 125, 139 (3d Cir. 1999). Here, the contract language is not so clear that the
parties' intent as embodied in the written instrument can be deciphered as a matter of law
on a motion to dismiss. The fact that both sides have cited rules of grammar and canons of
statutory construction that support their interpretation of the provision demonstrates that
both parties have proffered reasonable readings of the contract's language. While
discovery may shed light on the parties' intent, it is not discernible at the pleading stage in
the litigation. Accordingly, because Plaintiffs claim is based on a reasonable reading of the
contract's language, he has stated a cause of action against Defendants for breach of
contract under the plausibility standard of Iqbal/Twombly.
One argument raised by Carrizo, however, merits some more attention. Carrizo
maintains that applying the proviso only to the clause immediately preceding it would render
the proviso redundant and meaningless. (Doc. 16 at 11-12). Specifically, Carrizo argues
that the language immediately preceding the proviso specifies that the gas will be valued at
the price paid to Carrizo and the proviso provides that, when gas is sold in an arms-length
transaction with an unaffiliated third party, the gas will be valued at the price paid to Carrizo.
(Id. at 11 ). Carrizo thus urges this Court to interpret the lease in a way as to avoid
rendering the proviso meaningless.
!
1
J
8
While Carrizo's argument appears to have some merit as it pertains to section 4(n of
the lease, this provision seems to be in conflict with another provision in the lease that
pertains to royalties. Section 4 of the lease provides as follows:
(b)
Production Royalty. Lessee shall pay Lessor the following
royalty (the "Royalty"), free of all costs, whether pre-production or postproduction, as follows:
(ii)
GAS: Lessee shall deliver to the credit of Lessor, free of
all costs (whether pre-production or post-production), a monthly Royalty equal
to eighteen percent (18%) of the greater of (i) the market value, measured at
the point of take, of all gas and any constituents produced from the Leasehold
or lands pooled or unitized therewith, or (ii) the gross amount of revenue paid
to Lessee for all gas and any constituents produced from the Leasehold or
lands pooled or unitized therewith, measured at the point of take; provided,
however, that when gas production is sold in an arms-length sale transaction
with an unaffiliated third party, the value of such gas production shall be the
price paid to Lessee.
(Doc. 1 at 34). In this provision, however, it is not clear that the proviso is redundant if read
in the way that Plaintiff advocates. Subpart (ii) of section 4(b)(ii) states that Plaintiff will
receive a monthly royalty of eighteen percent of "the gross amount of revenue paid to"
Carrizo while the proviso specifies that when gas is sold in an arms-length transaction with
an unaffiliated third party, Plaintiff will receive a monthly Royalty of eighteen percent of "the
price paid to" Carrizo.
A plausible interpretation of the above is that in a situation where Carrizo does not
sell the gas production "in an arms-length sale transaction with an unaffiliated third party,"
the "greater of' analysis is undertaken with the comparators being "the market value,
9
measured at the point of take," and the "the gross amount of revenue paid to Lessee for all
gas and any constituents produced from the Leasehold or lands pooled or unitized
therewith, measured at the point of take." However, in a situation where Carrizo elects to
proceed in accordance with the proviso by selling gas production in an arms-length
transaction with an unaffiliated third party the "greater of' analysis is undertaken with the
comparators being "the market value, measured at the point of take," and the "price paid to
Lessee" pursuant to the Lessee's arms-length sale transaction.
Further, even if the proviso unambiguously modified both provisions so that "when
gas production [was] sold in an arms-length sale transaction with an unaffiliated third party,"
the gas would be valued at the sale price, (Doc. 1 at 35), Plaintiffs claim would still not be
subject to dismissal. Plaintiff's Complaint notes that Carrizo sold the gas produced from
Plaintiffs land to DTE, "which Carrizo characterizes as an 'unaffiliated third party."' (Doc. 1
at 17, ~ 29). The Complaint then describes the terms allegedly contained in Carrizo's
contract with DTE and notes that "[t]hrough this unusual arrangement, DTE-not Carrizoeffectively determines the price at which gas is sold from Carrizo to DTE." (Id. at 18, ~ 38).
A reasonable inference from these passages is that DTE is not truly an unaffiliated third
party or that Carrizo's agreement with DTE was not the product of an arms-length
transaction. Thus, even if the contract language was clear, the Complaint pleads that the
proviso is not applicable to the transaction between Carrizo and DTE.
10
Consequently, even under Defendants' reading of the contract, if the proviso is not
applicable, then Plaintiff would be entitled to have his royalty payment based upon "the
greater of (i) the prevailing local market price at the time of sale or use, or, NYMEX spot
price as published at the time of sale, whichever is greater, or (ii) the price paid to Lessee
from the sale or use of the gas." (Doc. 1 at 35). Because Plaintiff has pleaded that his
royalties were based on gas valued at less than the local market price and the NYMEX spot
price, Plaintiff has stated a plausible cause of action for breach of contract.
Accordingly, the Court will deny Defendants' Motions to Dismiss as they pertain to
Plaintiff's breach of contract claim involving royalty payment pricing.
B. Breach of Contract - Post-Production Costs
In Count I and II, Plaintiff has also alleged that Defendants breached the contract by
deducting DTE's fees and post-production costs from Plaintiff's royalties. (Doc. 1 at 25, 26,
~~
65, 72). Defendants argue that Plaintiff has not stated a claim for breach of contract
because he has not alleged that Defendants deducted any post-production costs that
Defendants incurred before selling the gas to a third party. (Doc. 16at13-15; Doc. 18 at 68).
The relevant provision of the lease provides that "Lessee shall pay Lessor the
following royalty (the 'Royalty'), free of all costs, whether pre-production or post-production."
(Doc. 1 at 34). Defendants agree that this provision prohibits them from deducting postproduction costs from the royalties they pay Plaintiff. Defendants, however, argue that the
11
Complaint does not allege that Defendants deducted any post-production costs from
Plaintiff's royalties, but instead that a third party, DTE, deducted its own costs after
Defendants had already sold the gas to DTE. Defendants contend that the costs incurred
by a third party after the initial sale do not fall within the definition of "post-production costs"
as that term has been defined by the Pennsylvania Supreme Court.
Here, the contract does not define the term "post-production costs," and it is not
immediately clear from the context of the lease that this term does not include those postproduction expenses Defendants incur indirectly through a third party. Defendants,
however, rely on Kilmer v. Elexco Land Services, Inc., 990 A.2d 1147 (Pa. 2010), to argue
that Pennsylvania law gives a fixed meaning to the term "post-production costs". Kilmer
concerned whether the "net-back" method of calculating gas royalties violated
Pennsylvania's Guaranteed Minimum Royalty Act, 58 P.S. § 33. Kilmer, 990 A.2d at 1149.
In a footnote, the court noted that "[i]n industry parlance ... 'post-production costs' refer to
expenditures from when the gas exits the ground until it is sold. We will adhere to these
definitions throughout this opinion." Id. at 1149 n.2. The Court also stated that "[i]n the
industry, as referenced above, the 'expenses of production' relate to the costs of drilling the
well and getting the product to the surface, but do not encompass the costs of getting the
product from the wellhead to the point of sale, as those costs are termed 'post-production
costs."' Id. at 1157.
12
Defendants argue that the definition of "post-production costs" in Kilmer excludes
those costs that occur after the initial point of sale to DTE. Kilmer, however, did not concern
how courts should interpret the term "post-production costs" under Pennsylvania law when it
appeared undefined in a contract.2 Instead, the court simply defined the term for use in the
opinion. Thus, nothing in Kilmer compels the conclusion that the term "post-production
costs" as used in the contract at issue here has a fixed meaning under Pennsylvania law.
Turning to the Complaint, Plaintiff has pleaded that, because post-production costs
were built into the sale price Defendants received from DTE, and because Plaintiff's
royalties were calculated from this sale price, Plaintiff's royalties were improperly reduced
by "post-production costs." (Doc. 1 at 18-19, ~~ 38-40). As the lease does not clearly limit
"post-production costs" to only those production expenses incurred directly by Defendantsas opposed to those incurred directly to third parties and passed onto Defendants-Plaintiff
has adequately pleaded a cause of action for breach of contract.
2
In fact, the contract at issue in Kilmer defined post-production costs as the parties used the term
in their contract:
As used in this provision, Post Production Costs shall mean (i) all losses of produced
volumes (whether by use as fuel, line loss, flaring, venting or otherwise) and (ii) all costs
actually incurred by Lessee from and after the wellhead to the point of sale, including,
without limitation, all gathering, dehydration, compression, treatment, processing,
marketing and transportation costs incurred in connection with the sale of such production.
For royalty calculation purposes, Lessee shall never be required to adjust the sales
proceeds to account for the purchaser's costs or charges downstream from the point of
sale.
Kilmer, 990 A.2d at 1150.
13
Accordingly, the Court will deny Defendants' Motions to Dismiss as they pertain to
Plaintiffs breach of contract claim involving post-production costs.
C. Breach of Contract - Implied Duty of Good Faith and Fair Dealing
Count Ill of Plaintiff's Complaint alleges that Defendants breached the implied duty of
good faith and fair dealing by accepting sale prices from DTE that were well below market
value for natural gas. (Doc. 1 at 27, ~~ 79-83). Reliance argues that this claim should be
dismissed because a breach of the duty of good faith and fair dealing is not an independent
cause of action and instead should be merged with Plaintiffs other breach of contract
claims. (Doc. 18 at 16-17). Carrizo raises the separate argument that Plaintiffs claim
should be dismissed because Plaintiff is attempting to impermissibly use the implied duty of
good faith and fair dealing to impose duties at odds with the express provisions of the
contract. (Doc. 16 at 15-18).
"Pennsylvania courts have cited Restatement (Second) of Contracts § 205 for the
proposition that every contract has an implied term that the parties will perform their duties
in good faith." Northview Motors, Inc. v. Chrysler Motors Corp., 227 F.3d 78, 91 (3d Cir.
2000). "In practice, however, the courts have recognized an independent cause of action
for breach of a duty of good faith and fair dealing only in very limited circumstances." Id.
Indeed, "[t]he precise extent to which Pennsylvania law extends the duty of good faith and
fair dealing ... is the subject of a degree of uncertainty." Fremont v. E.I. DuPont
DeNemours & Co., 988 F. Supp. 870, 874 (E.D. Pa. 1997). "One reason for this confusion
14
is that Pennsylvania courts have been less than clear on whether the covenant applies to all
contracts or only certain types of contracts." Cessna v. REA Energy Coop., Inc.,_ F.
Supp. 3d _, 2017 WL 2799325, at *12 (W.D. Pa. 2017). In Ash v. Continental Insurance
Co., 932 A.2d 877 (Pa. 2007), the Pennsylvania Supreme Court "note[d] that it had not yet
in a precedential opinion addressed the conflicting cases or adopted § 205," and then
declined to resolve the conflict "because the issue was not before the court." Cessna,_
F. Supp. 3d at_, 2017 WL 2799325, at *12. Here, neither party has argued that the
lease at issue does not contain an implied duty of good faith and fair dealing. Thus, the
Court will assume for the purposes of these motions that the duty does apply to the lease.
"The covenant of good faith and fair dealing involves an implied duty to bring about a
condition or to exercise discretion in a reasonable way." USX Corp. v. Prime Leasing Inc.,
988 F.2d 433, 438 (3d Cir. 1993) (quotation marks, alterations and emphasis omitted). As
such, "[c]ourts have utilized the good faith duty as an interpretive tool to determine the
parties' justifiable expectations in the context of a breach of contract action." Northview
Motors, Inc., 227 F.3d at 91. "Examples of bad faith can include 'evasion of the spirit of the
bargain, lack of diligence and slacking off, willful rendering of imperfect performance, abuse
of a power to specify terms, and interference with or failure to cooperate in the other party's
performance."' Benchmark Grp., Inc. v. Penn Tank Lines, Inc., 612 F. Supp. 2d 562, 583
(E.D. Pa. 2009) (quoting Somers v. Somers, 613A.2d 1211, 1213 (Pa. Super. Ct.1992)).
15
The "implied covenant[ ] and any express terms of a contract are necessarily
mutually exclusive-one can invoke 'implied' terms only when there are no express terms in
the contract relating to the particular issue." Id. at 584; see a/so Northview Motors, Inc., 227
F.3d at 91 (noting that the "duty is not divorced from the specific clauses of the contract and
cannot be used to override an express contractual term."). Further, "a party is not entitled to
maintain an implied duty of good faith claim where the allegations of bad faith are 'identical
to' a claim for 'relief under an established cause of action."' Northview Motors, Inc., 227
F.3d at 91-92 (quoting Parkway Garage, Inc. v. City of Phi/a., 5 F.3d 685, 701-02 (3d Cir.
1993), overruled on other grounds by United Artists Theatre Circuit, Inc. v. Twp. of
Warrington, 316 F.3d 392, 400 (3d Cir. 2003)).
Turning to the parties' arguments, Reliance contends that Plaintiff's bad faith claim
should be dismissed because it is not an independent cause of action and should be
merged with Plaintiff's other breach of contract claims. This argument misunderstands the
relevant law. "[A] claim for breach of the implied covenant of good faith and fair dealing is a
breach of contract action, not an independent action for breach of a duty of good faith and
fair dealing." Cummings v. Allstate Ins. Co., 832 F. Supp. 2d 469, 473 (E.D. Pa. 2011)
(citing LSI Title Agency, Inc. v. Evaluation Servs., Inc., 951 A.2d 384 (Pa. Super. Ct. 2008)).
Thus, "Pennsylvania law does not recognize a separate breach of contractual duty of good
faith and fair dealing where said claim is subsumed by a separately pied breach of contract
16
claim." Simmons v. Nationwide Mut. Fire Ins. Co., 788 F. Supp. 2d 404, 409 (W.D. Pa.
2011 ).
Nothing in the case law, however, bars a plaintiff from bringing a cause of action for
breach of contract and a cause of action for breach of the duty of good faith and fair dealing
when those two actions are based on separate conduct. See Clunie-Haskins v. State Farm
Fire &Gas. Co., 855 F. Supp. 2d 380, 388 (E.D. Pa. 2012) ("Here, however, the conduct
forming the basis of Plaintiffs' breach of contract claim-the failure to defend or indemnifyis not the same conduct as their claim for breach of the duty of good faith and fair dealing
... Consequently, Plaintiffs' two claims do not merge."). Instead, because a good faith and
fair dealing claim is a breach of contract claim, Pennsylvania law simply bars a plaintiff from
bringing both a breach of contract claim and a bad faith claim based on the same conduct.
See King of Prussia Equip. Corp. v. Power Curbers, Inc., 158 F. Supp. 2d 463, 467 (E.D.
Pa. 2001) ("Because the actions forming the basis of [the plaintiffs] breach of contract claim
and its good faith and fair dealing claim are essentially the same, [the plaintiff] cannot
pursue both causes of action."); Smith v. Allstate Ins. Co., 904 F. Supp. 2d 515, 522 (W.D.
Pa. 2012) (noting that "claims for breach of the contractual duty of good faith and fair
dealing have been dismissed where Plaintiff also asserts a claim for breach of contract and
Plaintiffs claim for breach of the duty of good faith and fair dealing is redundant.").
Similarly, a party cannot bring a bad faith claim when the acts or omissions underlying the
17
claim can be brought under another established cause of action. See Norlhview Motors,
Inc., 227 F.3d at 91-92.
Here, under Plaintiff's breach of contract claim, Plaintiff alleges that Defendants'
breached the lease "by (i) deducting DTE's fee and post-production costs; (ii) paying
Royalties that are lower than the NYMEX spot price and/or the local market price; (iii)
paying Royalties based on different prices for gas taken from the same well during the same
month; and (iv) paying Royalties based on an improper conversion from MMBtu to Mcf."3
(Doc. 1 at 25, ~ 65). In contrast, Plaintiff's claim for breach of the duty of good faith and fair
dealing alleges that Defendants acted in bad faith by accepting sale prices under their
contracts with DTE that were well below a competitive market price. (Id. at 27, ml 82-83).
Thus, Plaintiff has pleaded that even if Defendants were entitled to pay him royalties based
on the sale price of gas to DTE, they breached a duty, implied in the contract, to exercise
their discretion in a reasonable way by obtaining a competitive market price for the natural
gas. This is a distinct theory of breach and thus is not subsumed by Plaintiff's other breach
of contract claims. See Clunie-Haskins, 855 F. Supp. 2d at 388.
Reliance, however, argues that Zaloga v. Provident Life and Accident Insurance
Company of America provides that "[t]here is ... no independent cause of action for a
breach of the covenant of good faith and fair dealing-arising in contract-in Pennsylvania
because such a breach is merely a breach of contract." 671 F. Supp. 2d 623, 631 (M.D. Pa.
3 These
last two theories of breach have not been challenged in either of Defendants' Motions to
Dismiss.
18
2009). While Reliance accurately quotes Zaloga, Reliance misses its meaning. The above
statement of law does not bar actions for a breach of the covenant of good faith and fair
dealing, it simply provides what this Court has already stated, namely that a breach of
contract claim and a separate bad faith claim cannot be based on the same underlying
conduct. Indeed, that Za/oga does not bar actions for breach of the duty of good faith and
fair dealing is readily apparent from the fact that the Zaloga court allowed such a claim to
proceed in that case. Id. at 632. 4
Carrizo takes a different approach by arguing that Plaintiff's claim is at odds with the
express terms of the lease. According to Carrizo, the parties' contract addresses how gas
would be valued for the purpose of royalty payments and they agreed "that when gas
production is sold in an arms-length sale transaction with an unaffiliated third party, the
value of such gas production shall be the price paid to" Defendants. (Doc. 1 at 35). Thus,
Carrizo contends that the contract already addresses how gas will be valued and that "[i]f
the parties had intended to include a requirement that the gas be sold or valued at, or within
a certain range of, the market price in all circumstances, they could have included that term
in the lease agreement." (Doc. 24 at 6-7).
4
Reliance also misconstrues Za/oga statement that "[i]t has been said that a breach of the implied
covenant of good faith and fair dealing merges with a breach of contract claim." Za/oga, 671 F. Supp. 2d at
631. Za/oga does not mandate that a bad faith claim be merged with any other breach of contract claim
that is pleaded in a lawsuit. As discussed above, a court need merge a bad faith claim and a breach of
contract claim only if they are based on the same conduct. See Clunie-Haskins, 855 F. Supp. 2d at 388.
Here, Plaintiffs claim for breach of the duty of good faith and fair dealing cannot be merged with a breach
of contract claim because there is no other breach of contract claim based on Defendants' alleged act of
accepting below market prices for the gas produced from Plaintiffs land.
19
A review of the lease reveals-and Carrizo's argument implicitly acknowledges-that
there is no explicit term in the contract that constrains Defendants' discretion when setting
the price at which they sell gas to third parties. Nor is there any term in the contract that
explicitly gives Defendants unfettered discretion in setting gas prices. Contrary to Carrizo's
assertion, however, the absence of such terms does not negate Plaintiff's claim. Rather, it
is the absence of any express terms that allow a court to "utilized the good faith duty as an
interpretive tool to determine the parties' justifiable expectations in the context of a breach
of contract action." Northview Motors, Inc., 227 F.3d at 91. Here, Plaintiff's claim is
predicated on the fact that the contract does not explicitly constrain Defendants' discretion
to set the price at which they sell gas to third parties, but that Defendants' are nonetheless
required by the implied covenant of good faith and fair dealing to exercise discretion in a
reasonable way by selling gas at a commercially reasonable price. See USX Corp., 988
F.2d at 438. Because there are no explicit and unambiguous terms in the contract to the
contrary, Plaintiff has stated a claim for breach of the duty of good faith and fair dealing.
Accordingly, the Court will deny Defendants' Motions to Dismiss as they pertain to
Count Ill of Plaintiff's Complaint.
D. Breach of Fiduciary Duty
In Count IV of his Complaint, Plaintiff alleges that Defendants' exclusive control over
the production and sale of the natural gas under the lease gave rise to a fiduciary duty on
the part of Defendants. (Doc. 1 at 28, 1f 90). Plaintiff alleges that Defendants breached this
20
fiduciary duty by (1) accepting a sale price for natural gas well under both the NYMEX spot
price and local market price, (2) paying royalties at a rate lower than owed under the lease,
and (3) failing to adequately represent Plaintiff's financial interests. (Id. at 28, ~ 91).
Carrizo and Reliance argue that this claim is subject to dismissal under the gist of the action
doctrine. (Doc. 16 at 18-20; Doc. 18 at 18-20). Reliance also contends that the claim is
barred because the lessor-lessee relationship does not give rise to any fiduciary duties.
(Doc. 18 at 18). The Court will only address the latter argument, as it provides a sufficient
basis to dismiss Count IV of Plaintiff's Complaint.
"To allege a breach of fiduciary duty, a plaintiff must establish that a fiduciary or
confidential relationship existed between her and the defendants." Baker v. Family Credit
Counseling Corp., 440 F. Supp. 2d 392, 414 (E.D. Pa. 2006).
Although no precise formula has been devised to ascertain the existence of a
confidential relationship, it has been said that such a relationship is not
confined to a particular association of parties but exists whenever one
occupies toward another such a position of advisor or counselor as
reasonably to inspire confidence that he will act in good faith for the other's
interest.
Silver v. Silver, 219 A.2d 659, 662 (Pa. 1966); see a/so In re Clark's Estate, 359 A.2d 777,
635 (Pa. 1976) ("A confidential relationship exists as a matter of fact whenever one person
has reposed a special confidence in another to the extent that the parties do not deal with
each other on equal terms, either because of an overmastering dominance on one side, or
weakness, dependence or justifiable trust, on the other." (quotation marks and alteration
omitted)). "In some cases, as between trustee and cestui que trust, guardian and ward,
21
attorney and client, and principal and agent, the existence of a confidential relationship is a
matter of law." In re Estate of Mihm, 497 A.2d 612, 615 (Pa. Super. Ct. 1985). "In other
cases, where these relationships do not exist, confidential relations may still arise based on
the facts and circumstances apparent on the record." Basile v. H & R Block, Inc., 777 A.2d
95, 102 (Pa. Super. Ct. 2001 ).
With respect to parties to a contract, '"[t]here is a crucial distinction between
surrendering control of one's affairs to a fiduciary or confidant or party in a position to
exercise undue influence and entering an arms length commercial agreement, however
important its performance may be to the success of one's business."' eToll, Inc. v.
Elias/Savion Advert., Inc., 811 A.2d 10, 23 (Pa. Super. Ct. 2002) (quoting Valley Forge
Convention &Visitors Bureau v. Visitor's Servs., Inc., 28 F. Supp. 2d 947, 953 (E.D. Pa.
1998)). Indeed, "[m]ost commercial contracts for professional services involve one party
relying on the other party's superior skill or expertise in providing that particular service." Id.
"This does not mean, however, that a fiduciary relationship arises merely because one party
relies on and pays for the specialized skill or expertise of the other party." Id. "Rather, the
critical question is whether the relationship goes beyond mere reliance on superior skill, and
into a relationship characterized by 'overmastering influence' on one side or 'weakness,
dependence, or trust, justifiably reposed' on the other side." Id. (quoting Basile, 777 A.2d at
101).
Here, taking all the well pleaded factual allegations in the Complaint as true, Plaintiff
22
has failed to plead facts giving rise to a fiduciary relationship between Plaintiff and
Defendants. Rather, Plaintiff has pleaded the existence of a contractual relationship in
which all parties sought to act in their own interest for a mutual benefit. The mere fact that
Defendants had sole control over when and if to extract gas from Plaintiff's land-and, once
extracted, the price at which to sell it to third parties-does not give rise to a confidential
relationship. Nor does the fact that Plaintiff unilaterally trusted Defendants to act in his
financial interest give rise to a fiduciary relationship because, simply put, there is nothing in
the lease which requires Defendants to subordinate their interests to Plaintiff's interests.
The cases Plaintiff cites in support of his position that the lease in this case gives
rise to a fiduciary relationship are easily distinguishable. In Garbish v. Malvern Federal
Savings and Loan Association, the court found a mortgagee was an implied agent of a
mortgagor under a home construction loan-and thus owed the mortgagor a fiduciary like
duty-because the mortgagee retained the loan proceeds, demanded an additional $16,000
contribution to the construction fund, and refused to allow the mortgagor any control over
the distribution of the money for the construction. 517 A.2d 547, 552-54 (Pa. Super. Ct.
1986). Similarly, in Baker v. Family Credit Counseling Corporation, the court found a
fiduciary relationship arose when the plaintiffs "gave [the] defendants limited power of
attorney to act as their 'fiduciary' and the authority to withdraw funds from their checking
accounts." 440 F. Supp. 2d at 415-16. In contrast, there is no allegation here that
Defendants held any of Plaintiff's property for the benefit of Plaintiff, were acting in any other
23
way as Plaintiffs agent, or were acting as a counselor or advisor to Plaintiff. Instead, the
lease "grant[ed] Carrizo exclusive rights to the oil and gas underlying [Plaintiffs] land" in
exchange for "an initial bonus payment and, among other things, ... a 'production royalty'
on all gas production." (Doc. 1at13, ~ 15). Such an arrangement does not give rise to a
fiduciary relationship.
Accordingly, the Court will grant Defendants' Motions to Dismiss as they pertain to
Count IV of Plaintiff's Complaint.
E. Statute of Limitations
Lastly, Carrizo argues that, to the extent that Plaintiffs breach of contract claims
seek relief for royalty payments made before October 3, 2012, the claims are barred by the
statute of limitations. (Doc. 16 at 5). "[T]he law of this Circuit (the so-called 'Third Circuit
Rule') permits a limitations defense to be raised by a motion under Rule 12(b)(6), but only if
'the time alleged in the statement of a claim shows that the cause of action has not been
brought within the statute of limitations."' Robinson v. Johnson, 313 F.3d 128, 135 (3d Cir.
2002) (quoting Hanna v. U.S. Veterans' Admin. Hosp., 514 F.2d 1092, 1094 (3d Cir. 1975)).
"'If the bar is not apparent on the face of the complaint, then it may not afford the basis for a
dismissal of the complaint under Rule 12(b)(6).'" Id. (quoting Bethel v. Jendoco Constr.
Corp., 570 F.2d 1168, 1174 (3d Cir. 1978)).
In Pennsylvania, the statute of limitations for a breach of contract claim is four years.
42 Pa. C.S.A. § 5525(a)(8); see also Hahnemann Univ. Hosp. v. All Shore, Inc., 514 F.3d
24
300, 306 (3d Cir. 2008). "[T]he statute of limitations begins to run on a claim from the time
the cause of action accrues." Cole v. Lawrence, 701 A.2d 987, 989 (Pa. Super. Ct. 1997).
"In general, an action based on contract accrues at the time of breach." Id. However, "[t]he
discovery rule tolls the running of the statute of limitations during the time that the plaintiff
did not know or could not have known that he had been injured and the defendant caused
the injury." Raucci v. Candy & Toy Factory, 145 F. Supp. 3d 440, 448 (E.D. Pa. 2015).
"The discovery rule in Pennsylvania applies to all causes of action, including breach of
contract." Morgan v. Petroleum Prods. Equip. Co., 92 A.3d 823, 828 (Pa. Super. Ct. 2014);
see a/so Creghan v. Procura Mgmt., Inc., 91 F. Supp. 3d 631, 649 (E.D. Pa. 2015).
Carrizo argues that Plaintiff filed the present action on October 3, 2016, and
therefore cannot seek recovery for royalty payments made prior to October 3, 2012. (Doc.
16 at 5). Carrizo further contends that the discovery rule is inapplicable because Plaintiff
has pleaded that (1) he started to receive royalty checks in March of 2012, and (2) his
royalties were less than the NYMEX spot prices and royalties paid by other gas producers in
the area. (Doc. 24 at 11-13).
Although Plaintiff pleaded that he received his first royalty check in March of 2012,
(Doc. 1 at 14, ~ 21 ), the Complaint does not specify whether the royalty check contained
sufficient information for Plaintiff to calculate the rate at which he was being paid. Further,
nothing in the Complaint details when Plaintiff learned that Defendants were valuing the gas
produced from Plaintiff's land at a rate less than the NYMEX spot prices and those paid by
25
other gas producers in the area. Indeed, Plaintiff pleaded that "Defendants maintain[ed]
exclusive control over ... all production data, sales data, and pricing information." (Id. at
27, ~ 81) (emphasis added). Consequently, although the NYMEX spot prices are public
information, it is unclear when Plaintiff could have first made a comparison between the rate
at which the gas was valued under his lease and the NYMEX spot prices.
Accordingly, the Court will deny Carrizo's Motion to the extent that it seeks to dismiss
portions of Plaintiff's breach of contract claims as untimely.
V. CONCLUSION
For the reasons outlined above, this Court will grant in part and deny in part
Defendants' Motions to Dismiss, (Docs. 15, 17). A separate Order follows.
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