Flanagan et al v. Chesapeake Exploration, LLC et al
Filing
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MEMORANDUM OPINION AND ORDER: The Court has reviewed Plaintiffs' proposed amended pleadings, and GRANTS in part and DENIES in part Plaintiffs Motion Amend (Doc. 19) filed by David L Patterson, Theresa R Flanagan. The Court GRANTS LEAVE to Plaintiffs to amend their claim for breach of the implied duty to reasonably market oil and gas and DISMISSES with prejudice their declaratory judgment claim. (Ordered by Judge Jane J Boyle on 11/4/2015) (sss)
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF TEXAS
DALLAS DIVISION
THERESA R. FLANAGAN and
DAVID L. PATTERSON,
Plaintiffs,
v.
CHESAPEAKE EXPLORATION, LLC,
CHESAPEAKE ENERGY
MARKETING, INC. and CHESAPEAKE
OPERATING, INC.,
Defendants.
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CIVIL ACTION NO. 3:15-CV-0222-B
MEMORANDUM OPINION AND ORDER
Plaintiffs Theresa Flanagan and David Patterson seek to amend their claims for breach of the
implied duty to reasonably market oil and gas and for declaratory judgment following dismissal under
Fed. R. Civ. P. 12(b)(6). The Court, in its Memorandum Opinion and Order issued August 10,
2015, Doc. 13, Mem. Op. & Order (August 10 Order), permitted Plaintiffs to replead their claims
to overcome the deficiencies identified in the order. The Court has reviewed Plaintiffs’ proposed
amended pleadings, and GRANTS in part and DENIES in part Plaintiffs’ Motion to Amend (Doc.
19). The Court GRANTS LEAVE to Plaintiffs to amend their claim for breach of the implied duty
to reasonably market oil and gas and DISMISSES with prejudice their declaratory judgment claim.
I.
BACKGROUND
This is a class action for underpayment of oil and gas royalties. The August 10 Order recounts
the facts in this case in detail. To summarize, Plaintiffs and Chesapeake Exploration entered into oil
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and gas leases to pay twenty-five percent (25%) royalties on proceeds computed at an undefined
point of sale. Doc. 1, Compl. ¶ 16. Chesapeake Exploration sold gas covered by the leases at the
wellhead to its wholly-owned subsidiary Chesapeake Energy Marketing that would then sell the gas
on the open market to an unaffiliated purchaser for a much higher price. Id. ¶¶ 17–18. From this,
Plaintiffs would receive royalty payments on the lower wellhead sales price rather than the higher
open-market price. Plaintiffs believed they were entitled to the higher royalties, and that Chesapeake
Exploration, Chesapeake Energy Marketing, and Chesapeake Operating (Chesapeake Defendants)
had executed sham transactions to improperly minimize their royalty payments. Id.
Based on this, Plaintiffs filed a complaint. They brought numerous claims against Chesapeake
Defendants, including claims for breach of contract, breach of the implied duty to reasonably market
oil and gas, and for declaratory judgment. Id. ¶¶ 27–33. The Court’s August 10 Order dismissed all
of Plaintiffs’ claims except for their breach of contract claim, but allowed Plaintiffs to replead their
claims for breach of the implied duty to reasonably market oil and gas and for declaratory judgment.
Plaintiffs repleaded. Doc. 19-1, Proposed Am. Compl. (Prop. Am. Compl.). Accompanying the
repleading was a synopsis explaining how the amendments overcome the grounds stated for dismissal.
Doc. 19. Chesapeake Defendants responded asserting that Plaintiffs had not pleaded anything new;
rather, they had simply realleged the same causes of action the Court had dismissed. Doc. 22.
II.
LEGAL STANDARD
Under Rule 15(a) of the Federal Rules of Civil Procedure, courts “should freely give leave [to
amend] when justice so requires.” Fed. R. Civ. P. 15(a)(2). But this “generous standard is tempered
by the necessary power of a district court to manage a case.” Priester v. JP Morgan Chase Bank, N.A.,
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708 F.3d 667, 678 (5th Cir. 2013) (quoting Schiller v. Physicians Resource Group Inc., 342 F.3d 563,
566 (5th Cir. 2003)). Although Rule 15 indicates a bias in favor of granting leave to amend, leave
is by no means automatic. Southmark Corp. v. Schulte Roth & Zabel (In re Southmark Corp.), 88 F.3d
311, 318 (5th Cir. 1996) (citing Wimm v. Jack Eckerd Corp., 3 F.3d 137, 139 (5th Cir. 1993); Dussouy
v. Gulf Coast Inv. Corp., 660 F.2d 594, 598 (5th Cir. 1981)). A district court must have a “substantial
reason” to deny leave, yet the decision remains within the court’s discretion. Smith v. EMC Corp.,
393 F.3d 590, 595 (5th Cir. 2004) (citing Quintanilla v. Tex. Television, Inc., 139 F.3d 494, 499 (5th
Cir. 1998)). In its discretion, the court should consider several factors, including “undue delay, bad
faith or dilatory motive on the part of the movant, repeated failure to cure deficiencies by
amendments previously allowed, undue prejudice to the opposing party by virtue of the allowance
of the amendment, [and] futility of the amendment.” Rosenzweig v. Azurix Corp., 332 F.3d 854, 864
(5th Cir. 2003) (quoting Foman v. Davis, 371 U.S. 178, 182 (1962)). Absent one of these factors,
leave should be freely given. Id. (citing Foman, 371 U.S. at 182).
III.
ANALYSIS
After reviewing the Proposed Amended Complaint, the Court concludes that the futility of
amendment factor weighs against granting Plaintiffs leave to amend its declaratory judgment claim.1
A.
Futility of Amendment
It is within the Court’s discretion to deny a motion for leave to amend if the amendment
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For either repleaded claim, the Court does not find any undue delay, bad faith or dilatory motive
on the part of the movant, repeated failure to cure deficiencies by amendments previously allowed, or undue
prejudice to the opposing party by virtue of the allowance of the amendment.
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would be futile. Stripling v. Jordan Production Co., LLC, 234 F.3d 863, 872–73 (5th Cir. 2000). But
if the proposed amendment is not “clearly futile, then denial of leave to amend is improper.” 6
Charles Alan Wright, Arthur R. Miller & Mary Kay Kane, Federal Practice and Procedure § 1487 (3d
ed. 1998). In determining an amended complaint’s futility, courts “apply the same standard of legal
sufficiency as applies under Rule 12(b)(6).” Id. (citations omitted). That is, whether the amended
complaint states a claim, plausible on its face, upon which relief could be granted. See Fed. R. Civ.
P. 12(b)(6); Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). Where the proposed amendment
would be subject to the same grounds of dismissal as contained in the defendants’ original 12(b)(6)
motion, amendment is futile, and denial of the motion to amend is proper. See Cent. Laborers’ Pension
Fund v. Integrated Elec. Servs. Inc., 497 F.3d 546, 556 (5th Cir. 2007); DeLoach v. Woodley, 405 F.2d
496, 497 (5th Cir. 1968) (“Where a complaint, as amended, would be subject to dismissal, leave to
amend need not be granted.”). Thus, the Court must determine whether the Proposed Amended
Complaint overcomes the deficiencies of the original complaint and states a plausible claim for
breach of the implied duty to reasonably market oil and gas or for declaratory judgment
B.
Breach of the Implied Duty to Reasonably Market Oil and Gas
Plaintiffs’ first amended claim is for breach of the implied duty to reasonably market oil and
gas. In Texas, where an oil and gas lease is silent on the subject, courts imply a duty to manage and
administer the lease. Yzaguirre v. KCS Res., Inc., 53 S.W.3d 368, 373 (Tex. 2001); Cabot Corp. v.
Brown, 754 S.W.2d 104, 106 (Tex. 1987). This duty includes the “duty to reasonably market the oil
and gas produced form the premises,” which is two-pronged: (1) “the lessee must market the
production with due diligence,” and (2) must “obtain the best price reasonably possible.” Cabot Corp,
754 S.W.2d at 106 (citations omitted). The implied duty to reasonably market oil and gas serves to
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protect lessors from lessee self-dealing and negligence. Occidental Permian Ltd. v. Helen Jones
Foundation, 333 S.W.3d 392, 402–03 (Tex. App.—Amarillo 2001, pet. denied) (citing Yzaguirre, 53
S.W.3d at 374). But asserting self-dealing, by itself, is insufficient to plead a breach of duty. Id. at
403. To sufficiently plead a breach, the lessor must also allege that different action was required of
a reasonably prudent operator under same or similar circumstances. Id.
In their Original Complaint, Plaintiffs alleged that Chesapeake Exploration breached the
implied duty to reasonably market oil and gas by selling their gas at the wellhead to Chesapeake
Energy Marketing rather than at the higher price paid by unaffiliated purchasers downstream of the
wellhead. Compl. ¶¶ 16–18, 27. These allegations addressed only the second prong of the two-prong
duty: the duty to “obtain the best price reasonably possible.” Cabot Corp, 754 S.W.2d at 106.
Plaintiffs, however, did not allege that Chesapeake Exploration “could have obtained a higher price
from another company for the gas at the wellhead.” August 10 Order at 14. In its August 10 Order,
the Court held that Plaintiffs were required to allege this. Id. Otherwise, Plaintiffs had merely
asserted self-dealing, which, without more, could not substantiate a breach. For this reason, the
Court found that Plaintiffs had failed to state a plausible claim. Id.
Key to the Court’s determination was where the implied duty applied and for what price the
implied duty required Chesapeake Exploration to sell the gas. Id. Gas is sold at “the point of sale.”
See Potts v. Chesapeake Exploration, L.L.C., 760 F.3d 470, 473 (5th Cir. 2014). Lessees must obtain
the best price reasonably possible at that point. Occidental Permian Ltd., 333 S.W.3d at 403. In
essence, the point of sale is where the price is set, and this is the point where the duty to reasonably
market oil and gas, including the duty to obtain the best price reasonably possible, applies. See Potts,
760 F.3d at 473; Occidental Permian Ltd., 333 S.W.3d at 403. Plaintiffs’ leases direct Chesapeake
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Exploration to calculate proceeds at the point of sale (i.e., the wellhead); therefore, its duty was to
obtain the best price reasonably possible at the wellhead. Plaintiffs did not allege there was a better
price reasonably possible at the wellhead, but that there was a better price reasonably possible
downstream of the wellhead. This was insufficient to show a reasonably prudent operator, selling gas
at the wellhead, would have acted differently.
In their Proposed Amended Complaint, Plaintiffs again allege that Chesapeake Exploration
breached the implied duty by failing to take Plaintiff’s gas to a competitive market, but rather sold
it at the wellhead. Prop. Am. Compl. ¶ 28. But now they further allege that there is no market at the
wellhead, that the market that does exist can be accessed only after the gas is processed, and that
had Chesapeake Exploration taken the gas to a competitive market, it could have obtained a higher
price, which would have increased Plaintiffs’ royalty payments. Id. ¶¶ 27–29. Plaintiffs argue that
their amended complaint alleges a violation of the first prong of the two-prong duty—the duty to
“market the production with due diligence,” Cabot Corp, 754 S.W.2d at 106—whereas their original
complaint alleged only a violation of the second prong.
Chesapeake Defendants respond that this confuses where the implied duty applied and for
what price the implied duty required Chesapeake Exploration to sell the gas. Doc. 22, Defs.’ Resp.
to Mot. to Am. (Defs.’ Resp.) 2–3. As explained above, the duty to reasonably market oil and gas
applies at the point of sale. Thus, the included duty to market the production with due diligence
applies there as well. This, however, presumes an existing market. The Court originally dismissed
Plaintiffs’ claims because they did not allege that Chesapeake Exploration could have obtained a
higher price from another company for the gas at the wellhead. August 10 Order at 14. By requiring
this additional pleading, the Court was requiring Plaintiffs’ to plead something more than mere self-6-
dealing. It was requiring that Plaintiffs plead that a reasonably prudent operator would have taken
a different action under same or similar circumstances (i.e., would have sold the gas for a higher price
to a non-affiliate).
Plaintiffs repleaded that there was no market at the wellhead, and that the market that does
exist can be accessed only after the gas is processed. Prop. Am. Compl. ¶ 28. For purposes of deciding
a 12(b)(6) motion to dismiss, the Court must take Plaintiffs’ statements as true. Wolcott v. Sebelius,
635 F.3d 757, 763 (5th Cir. 2011). Taken as true, these statements demonstrate more than mere
self-dealing because a reasonably prudent operator would have taken the gas to market rather than
sell to an affiliate. Thus, the duty to market the production with due diligence would have been
implicated and possibly violated at the point of sale (the wellhead).2 Therefore, Plaintiffs’ Proposed
Amended Complaint would not be subject to the same grounds of dismissal as contained in
Chesapeake Defendants’ original 12(b)(6) motion, and amendment would not be futile.
C.
Declaratory Judgment
Plaintiffs’ second amended claim is for declaratory judgment under both federal and Texas
law. Federal law applies.3 The Court has broad discretion in determining whether to entertain a
2
Despite Defendants’ contentions, Plaintiffs’ repleadings that Chesapeake Exploration sold the gas
at the wellhead to Chesapeake Energy Marketing and that there is no market at the wellhead do not
invalidate each other. Defs.’ Resp. 7. For there to be a market, there must be more than isolated sales or a
market dominated by a few producers and purchasers; a market must be open and competitive. Eugene O.
Kuntz, Law of Oil & Gas § 40.4(d). This means Plaintiffs could consistently claim a self-dealing transaction
occurred where there was no market.
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The Fifth Circuit has consistently interpreted the Texas Declaratory Judgments Act as a procedural
statute that is inapplicable to declaratory judgment actions in federal court. See Camacho v. Tex. Workforce
Comm’n, 445 F.3d 407, 409 (5th Cir. 2006); Utica Lloyd’s of Tex. v. Mitchell, 138 F.3d 208, 210 (5th Cir.
1998). As such, federal courts apply federal procedural rules. Rhodes v. Prince, No. 05-CV-2343, 2006 WL
954023, at *4 (N.D. Tex. Apr. 11, 2006) aff'd sub nom. Rhodes v. City of Arlington, 215 F. App’x 329 (5th Cir.
2007). Thus, the Court must consider Plaintiffs’ claim for declaratory judgment under the Federal Declaratory
Judgment Act, 28 U.S.C. § 2201. Id.
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declaratory judgment action under the Federal Declaratory Judgment Act, 28 U.S.C. § 2201. Winton
v. Seven Falls Co., 515 U.S. 277, 287 (1995) (noting that the Declaratory Judgment Act is “an
enabling Act, which confers discretion on the courts rather than an absolute right upon the
litigant”). Although a court may not dismiss a request for declaratory relief “on the basis of whim or
personal disinclination . . . the court may consider a variety of factors in determining whether to
decide a declaratory judgment suit.” Rowan Cos., Inc. v. Griffin, 876 F.2d 26, 28–29 (5th Cir. 1989).
For example, if a request for a declaratory judgment adds nothing to an existing lawsuit, it need not
be permitted. See Pan-Islamic Corp. v. Exxon Corp., 632 F.2d 539, 546 (5th Cir. 1980) (affirming
refusal to allow leave to add claims that were adequately raised in the original complaint).
In the Federal Rule of Civil Procedure 12(b)(6) context, courts regularly reject declaratory
judgment claims that seek resolution of matters that will already be resolved as part of the claims in
the lawsuit. See, e.g., Regus Mgmt. Grp., LLC v. Int’l Bus. Mach. Corp., No. 07-CV-1799, 2008 WL
2434245, at *3 (N.D. Tex. June 17, 2008) (dismissing declaratory judgment claim as entirely
repetitive and unnecessary); Xtria LLC v. Tracking Sys., Inc., No. 07-CV-0160, 2007 WL 1791252,
at *3 (N.D. Tex. June 21, 2007) (dismissing declaratory judgment action under Rule 12(b)(6) where
it duplicated an existing breach of contract claim); Assistmed, Inc. v. Conceptual Health Solutions, Inc.,
No. 05-CV-0880, 2006 WL 3691003, at *17 (N.D. Tex. Dec. 14, 2006) (same); Albritton Props. v.
Am. Empire Surplus Lines, No. 04-CV-2531, 2005 WL 975423, at *2 (N.D. Tex. Apr. 25, 2005)
(granting Rule 12(b)(6) motion dismissing counterclaim for declaratory judgment where the disputed
issues were already pending before the court); Kogul v. Xspediou Mgmt. Co., No. 04-CV-2518, 2005
WL 1421446, at * 4 (N.D. Tex. June 1, 2005) (dismissing declaratory actions that sought resolution
of matters already to be resolved in the ongoing lawsuit).
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In their Original Complaint, Plaintiffs sought a declaration as to how their royalties should
be calculated. Compl ¶ 33. In its August 10 Order, the Court held that this was precisely what it
must determine to resolve the breach of contract claim. August 10 Order at 19. In their Proposed
Amended Complaint, Plaintiffs allege that Chesapeake Exploration has an ongoing duty to calculate
Plaintiffs’ royalties that will extend beyond the judgment. Prop. Am. Compl. ¶ 33. They argue that
the ongoing duty would require them to periodically file to request a money judgment, and that
declaratory judgment would more appropriately shape Chesapeake Defendants’ future obligations.
Doc. 19, Mot. to Am. ¶¶ 11–12 (citing 5436, LLC v. CBS Corp., No. CIV.A. H-08-3097, 2009 WL
3378379, at *16 (S.D. Tex. Oct. 16, 2009); Trammell Crow Residential Co. v. Va. Surety Co., Inc., 643
F. Supp. 2d 844, 856 & n.15 (N.D. Tex. 2008); Perido Sun Condominium Ass'n, Inc. v. Nationwide
Mut. Ins. Co., No. 3:06cv318/MCR, 2007 WL 2565990, at *4 (N.D. Fla. Aug. 30, 2007); Halliburton
Energy Servs. v. Axis Techs., LLC, 444 S.W.3d 251, 262 (Tex. App.—Dallas 2014, no pet.)).
Defendants respond that the cases Plaintiffs cite dealt with declaratory judgments where the
issue did not duplicate the claims for breach of contract. Defs.’ Resp. 9. The Court is inclined to
agree with Defendants. Claims for declaratory judgment were allowed in those cases because
something more than the claims for breach of contract was at stake. The purpose of a declaratory
judgment in this case would be to afford relief from future uncertainty regarding Plaintiffs’ legal rights
to higher royalty payments. See Halliburton Energy Servs., 444 S.W.3d at 262–63. Resolving the
breach of contract claim would resolve any future uncertainty. See Regus Mgmt. Grp., LLC, 2008 WL
2434245, at *3. Any determination concerning royalty obligations will have res judicata effect and
will determine future rights and obligations. Thus, the Court concludes that Plaintiffs’ declaratory
judgment claim would be subject to the same grounds of dismissal as contained in Chesapeake
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Defendants’ original 12(b)(6) motion. Therefore, the amendment is futile.
IV.
CONCLUSION
For these reasons, the Court GRANTS in part and DENIES in part Plaintiffs’ Motion to
Amend (Doc. 19). The Court GRANTS LEAVE to Plaintiffs to amend their claim for breach of the
implied duty to reasonably market oil and gas and DISMISSES with prejudice Plaintiffs’ declaratory
judgment claim.
SO ORDERED.
SIGNED: November 4, 2015.
_________________________________
JANE J. BOYLE
UNITED STATES DISTRICT JUDGE
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