JAMES O. BROWNING, District Judge.
This matter arises from a dispute over the royalty payments that the Defendants, producers of oil and gas in New Mexico and Colorado, and working interest holders on oil and gas leases belonging to the Plaintiffs, owe to the Plaintiffs, royalty interest holders on the leases.
Elliott Indus. LP v. BP Am. Prod. Co., 407 F.3d 1091, 1099 (10th Cir.2005). As this matter comes before the Court on a Motion to Dismiss, the Court will assume that all facts in the FAC are true. See Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)(stating that, to survive a motion to dismiss, "[f]actual allegations must be enough to raise a right to relief above the speculative level ... on the assumption that all the allegations in the complaint are true (even if doubtful in fact)").
The Plaintiffs in this matter all own interests in hydrocarbons derived from wells in the States of New Mexico and Colorado. See FAC ¶¶ 1-7, at 2-3. The Plaintiffs reside in the southwestern part of the United States of America, specifically, in the states of Utah (Anderson Living Trust), Colorado (Pritchett Living Trust), Texas (Sadler), and New Mexico (Scanlon Living Trust and Robert Westfall). See FAC ¶¶ 1-7, at 2-3. Defendants WPX Energy Production, LLC, f/k/a WPX Energy San Juan LLC, Williams Production Company, LLC, and WPX Energy Rocky
The Plaintiffs, or their predecessors, acquired their interests in the hydrocarbon revenues from the subject wells through executing oil-and-gas mining leases or permits with the Defendants. See FAC ¶ 11, at 4. All the leases were executed between October 17, 1945, and October 6, 1948, see FAC ¶ 26, at 10-12, meaning that the most recent lease was executed over sixty-three years before the Plaintiffs filed this lawsuit, see First Amended Complaint for Underpayment of Oil and Gas Royalties, filed in state court on December 5, 2011, filed in federal court on January 12, 2012 (Doc. 1-1). Under the leases, the Defendants owe the Plaintiffs a "duty to pay royalties on all hydrocarbons" for the value or price which the Defendants do or should receive from the "arm's length" sale of the hydrocarbons. FAC ¶ 12, at 5. The leases give the Plaintiffs a right to royalties in the "drip condensate," a liquid product which is recovered during the Defendants' oil and gas mining processes.
The Defendants have not credited the Plaintiffs with the revenue derived from the drip condensate. See FAC ¶ 29, at 13. Currently, the Defendants calculate the Plaintiffs' royalty interests on the sale price received from the Defendants' affiliated intermediaries for hydrocarbons from wells in which the Plaintiffs own royalty interests, mixed with hydrocarbons from other wells in which the Plaintiffs do not own royalty interests. See FAC ¶¶ 33-34, at 14. The Defendants' affiliated intermediaries sell the hydrocarbons at a significant profit, a profit which the Defendants do not pass on to the Plaintiffs. See FAC ¶ 33, at 14. Additionally, the Defendants' royalty payments to the Plaintiffs have not been consistent. On "numerous instances," the Defendants have waited longer than forty-five or even ninety days after receiving revenue from the Plaintiffs' shares to pay the Plaintiffs their royalty interest. FAC ¶¶ 57-60, at 20-21.
The Defendants have not always disclosed to the Plaintiffs the gross volume of gas produced from the Plaintiffs' wells, the gross revenue or value the Defendants obtain from the gross production of gas, and the extent of costs that are deducted from the Plaintiffs' royalty payments. See FAC ¶ 38, at 15-16. One such cost that is deducted from the Plaintiffs' royalty payments is the cost of rendering marketable the natural gas and other hydrocarbons taken from the subject wells. See FAC ¶ 51, at 18.
The Plaintiffs assert nine causes of action that are either new to the FAC or have survived dismissal, see Memorandum Opinion, filed June 28, 2013 (Doc. 108)("Memo. Opinion"), and are carried over from previous iterations of the complaint: (i) the first cause of action, "failure to pay royalty on volumes of hydrocarbons, including drip condensate," FAC ¶¶ 22-30, at 10-13 (title case omitted); (ii) the second cause of action, "breach of the duty of good faith and fair dealing," FAC ¶¶ 31-42, at 14-17 (title case omitted); (iii) the fourth cause of action, "violation of the New Mexico Oil and Gas Proceeds Payment Act" N.M. Stat. Ann. §§ 70-10-1 to -6 ("NMOGPPA"), a pre-existing claim, and "interest due under Colorado law," a new claim the Plaintiffs raise for the first time in the FAC, FAC ¶¶ 56-61, at 20-21 (title case omitted); (iv) the fifth cause of action, "bad faith breach of contract," FAC ¶¶ 62-66, at 21-22 (title case omitted); (v) the sixth cause of action, a claim for declaratory relief, which is new and unique to the FAC, see FAC ¶¶ 67-70(b), at 22-23; (vi) the ninth cause of action, "fraudulent concealment," a new claim unique to the FAC, FAC ¶¶ 84-92, at 26-28 (title case omitted); (vii) the tenth cause of action, "estoppel and continuing wrong," a new claim unique to the FAC, FAC ¶¶ 93-97, at 28-29 (title case omitted); (viii) the eleventh
The Defendants filed their MTD pursuant to rule 12(b)(6) of the Federal Rules of Civil Procedure to dismiss, in part, the "Plaintiffs' first, second, fourth, fifth, eleventh, and twelfth causes of action" based upon the applicable statutes of limitations. See MTD at 1 (title case omitted). The MTD also seeks the dismissal of the Plaintiffs' twelfth cause of action in its entirety for failure to state any claim upon which relief can be granted, contending that under the Tenth Circuit's interpretation of New Mexico law in Elliott Industries LP v. BP America Production Co., the Defendants have not breached the implied duty to market hydrocarbons. See MTD at 1, 21-24 (citing Elliott Indus. LP v. BP Am. Prod. Co., 407 F.3d at 1091).
The Defendants argue that the statutes of limitations bar: (i) all of the Plaintiffs' claims founded upon breach of written contracts — to the extent that the claims seek relief for any such breach occurring on or before October 20, 2005, i.e., more than six years before the Plaintiffs filed their initial complaint on October 20, 2011 — because New Mexico has a six-year statute of limitations on actions based on a written contract, see MTD at 2 (citing N.M. Stat. Ann. § 37-1-3); and (ii) all of the Plaintiffs' claims founded upon violation of the NMOGPPA, breach of the duty to market under Colorado law, breach of the implied covenant to market under New Mexico law, the claim for "interest due under Colorado law," and breach of the implied covenant of good faith and fair dealing — to the extent that the claims seek relief for any such violation occurring on or before October 20, 2007, i.e., more than four years before the Plaintiffs filed their initial complaint — because New Mexico has a four-year statute of limitations for actions on unwritten contracts and actions whose limitation period is not otherwise specified by statute, MTD at 2 (citing N.M. Stat. Ann. § 37-1-4). The Defendants contend that New Mexico law supplies the controlling statutes of limitations even for the "interest due under Colorado law" component of the fourth cause of action and the eleventh and twelfth causes of action, which the Defendants assert all arise under Colorado law, see MTD at 4, because "`[a] federal court hearing a diversity action applies the statute of limitations which would be applied by a court of the forum state,'" and "`[u]nder New Mexico choice of law principles, a statute of limitations is procedural,'... [and] applies `even where the applicable substantive law is that of another state.'" MTD at 3, 3-4 (first and second alterations in original)(quoting Porcell v. Lincoln Wood Prods., Inc., 713 F.Supp.2d 1305, 1316 (D.N.M.2010) (Armijo, J.)
The Defendants contend that all of the claims that arise under Colorado law are subject to the shorter four-year limitation period set out by N.M. Stat. Ann. § 37-1-4, see MTD at 4, because the eleventh and twelfth causes of action allege breach of the implied covenant to market, and "the New Mexico Supreme Court made explicitly clear that it has `held that the implied
The Defendants next argue that, "[u]nder New Mexico law, the statute of limitations in a breach of contract action ... `begins to run from the time of the breach.'" MTD at 7 (quoting Welty v. W. Bank of Las Cruces, 1987-NMSC-066, ¶ 8, 106 N.M. 126, 740 P.2d 120, 122). They contend that "[t]he Tenth Circuit has recognized that `New Mexico has refined this rule by holding the cause of action accrues at the time of injury.'" MTD at 7 (quoting Zamora v. Prematic Serv. Corp., 936 F.2d 1121, 1123 (10th Cir.1991)). The Defendants assert that the FAC "avoid[s] alleging the specific dates on which [the Plaintiffs] contend they first suffered injury in fact," but that their "artful pleading is insufficient to avoid dismissal of the claims barred by the applicable statutes of limitations," because, "despite the absence of specific dates, it is indisputably clear... that Plaintiffs seek to recover for injury or loss allegedly incurred more than four years, and more than six years, before the filing of their initial complaint." MTD at 7-8.
The Defendants assert that "New Mexico applies the `discovery rule,' which means that the statute of limitations `commences when an injury manifests itself and is ascertainable.'" Great Am. Ins. Co. v. Crabtree, No. CIV 11-1129, 2012 WL 3656500, at *13 (D.N.M. Aug. 23, 2012) (Browning, J.). They argue:
MTD at 9 (alterations in original)(quoting Butler v. Deutsche Morgan Grenfell, Inc., 2006-NMCA-084, ¶ 28, 140 N.M. 111, 140 P.3d 532, 539). They further contend that "this burden applies `at the motion to dismiss stage.'" MTD at 9 (quoting Butler v. Deutsche Morgan Grenfell, Inc., 2006-NMCA-084, ¶ 28, 140 P.3d at 539). The Defendants argue that the FAC "contains no factual allegations to satisfy the discovery rule." MTD at 9. They argue that no Plaintiff has shown that he or she made a diligent investigation, and "each of them would have been able to discover the facts underlying each claim alleged." MTD at 9.
The Defendants then argue that the Plaintiffs, "[h]aving ignored the discovery rule entirely, ... have resorted instead... to allegations of fraudulent concealment, equitable estoppel, and continuing
The Defendants argue that they had no special duty to disclose, and attempt to rebut what they maintain is the FAC's contention that such a duty "arose `by virtue of the superior knowledge available to Williams [sic] all material times,'" MTD at 11 (alteration in original)(quoting FAC ¶ 85, at 26), and because the Plaintiffs' "`placed trust and reliance in Williams,'" MTD at 11 (quoting FAC ¶ 85, at 26). The Defendants contend that, "[u]nder New Mexico law, `absent a fiduciary duty to speak on the part of the defendants ... silence, nondisclosure, or denial of alleged fraudulent concealment so as to toll a statute of limitations.'" MTD at 11 (quoting Cont'l Potash, Inc. v. Freeport-McMoran, Inc., 1993-NMSC-039, 115 N.M. 690, 701, 858 P.2d 66, 77 (N.M.1993)). The Defendants argue that "this Court has already recognized that no such duty exists." MTD at 12 (referring to the Memo. Opinion).
The Defendants argue that the allegation that they misrepresented deducted expenses in check stubs sent to the Plaintiffs is not pled with the specificity that rule 9(b) requires. See MTD at 14 (citing FAC ¶ 87, at 27). They contend that the Plaintiffs must allege "`who, what, when, where and how'" the fraud occurred, MTD at 14 (quoting United States ex rel. Sikkenga v. Regence Bluecross Blueshield of Utah, 472 F.3d 702, 727 (10th Cir.2006)), and assert that the Plaintiffs did not "plead how any `volume' or `price' or `expense' information is inaccurate or misleading," MTD at 14 (quotations unattributed). The Defendants additionally argue that the FAC fails to allege that the causes of action were not discoverable through due diligence, see MTD at 15, arguing that "`[i]t [is] incumbent upon Plaintiff[s] to demonstrate that if she diligently investigated the problem, she would have been unable to discover the cause of her injury.'" MTD at 15 (first and second alterations in original)(quoting Martinez v. Showa Denko, K.K., 1998-NMCA-111, ¶ 22, 125 N.M. 615, 964 P.2d 176, 181).
The Defendants also argue that the Plaintiffs have failed to adequately allege equitable estoppel. See MTD at 17. The Defendants contend that
MTD at 17 (quoting Skyberg v. United Food & Commercial Workers Int'l Union, 5 F.3d 297, 302 (8th Cir.1993), relied upon by Tiberi v. Cigna Corp., 89 F.3d 1423, 1430 (10th Cir.1996)). The Defendants contend that, "[b]ecause Defendants'
The Defendants further argue that the continuing wrong doctrine does not apply, primarily because it applies only "`in the context of tort liability,' and not in breach of contract cases." MTD at 18-19 (quoting Jeffers v. Butler, 762 F.Supp. 308, 309 (D.N.M.1990) (Mechem, J.))(citing McNeill v. Rice Eng'g & Operating, Inc., 2006-NMCA-015, ¶ 25, 139 N.M. 48, 128 P.3d 476, 482-83). They also argue that the Plaintiffs' claims "allege no more than a breach which begins at a single point in time and then has continuing effects." MTD at 21.
Last, the Defendants contend that the Plaintiffs failed to state a proper claim in their twelfth cause of action. See MTD at 21. The contend that the Memo. Opinion and Elliott Industries LP v. BP America Production Co. foreclose relief. See Memo. Opinion; Elliott Indus. LP v. BP Am. Prod. Co., 407 F.3d 1091, 1113-14 (10th Cir.2005). They argue that, although the restyling of the Plaintiff's
MTD at 22 (emphasis in original) (citation omitted). They assert that the Court "expressly held that oil and gas lessees who, like WPX in this case, `were and are actively producing gas, processing the gas, and selling the refined natural gas and NGLs,' are in compliance `with the implied duty to market as articulated by the New Mexico courts.'" MTD at 24 (emphasis in original)(quotation unattributed).
The Plaintiffs responded to the MTD twenty days later. See Plaintiffs' Response to Defendants' Motion to Dismiss Claims in Plaintiffs' Fourth Amended Complaint, filed November 8, 2013 (Doc. 156)("Response"). They first argue that the MTD is more aptly styled as a motion for summary judgment under rule 56, because it "request[s] the Court to consider and evaluate evidentiary materials that were not made a part of, or incorporated into," the FAC. Response at 2. They contend that the Court should deny the MTD. See Response at 3. They assert that "[t]he inclusion of the check stub in Defendants' motion may affect the Court's determination of the merits of the motion." Response at 4. Although they acknowledge that "the Court may consider on a motion to dismiss `undisputed documents central to the allegations in Plaintiffs' complaint," they contend that, because "there are potentially thousands of check stubs that will be examined at trial and that no one, single check stub is `central' to the case," what is really happening is that the Court is being asked to consider extrinsic evidence. Response at 5. They argue that, if the Court chooses to convert the motion into one for summary judgment, it should also consider the five documents they attach to their Response: (i) the Affidavit of Bradley Brickell Pursuant to Fed.R.Civ.P. 56(d) in Support of Plaintiffs' Response to
The Plaintiffs also argue that they have pled sufficient facts for a jury to reasonably conclude that the statutes of limitations have been tolled and attempt to justify all three tolling doctrines. See Response at 7. In this brief, they do not dispute that New Mexico law supplies all the relevant statutes of limitations. See Response at 7 n. 2. They assert that the FAC alleges fraudulent concealment by alleging that the Plaintiffs "placed trust and reliance on Defendants as lessees of the oil and gas leases," and that the Defendants' "`superior knowledge' regarding their production of hydrocarbons from Plaintiffs' wells" imparts an obligation of "a `full and fair disclosure of the true and complete facts of all hydrocarbons produced from the subject wells.'" Response at 7 (quoting FAC ¶ 85, at 26). They further assert that the Defendants affirmatively concealed facts underlying the causes of action in their monthly statements, which: (i) "contain `erroneous and misinformation about the volumes, values, prices, and types of hydrocarbons produced, used or sold from [the] subject wells,'" Response at 7-8 (alteration in original)(quoting FAC ¶ 86, at 26); (ii) do not represent "`the values of hydrocarbons based on arms' length transfers/contracts,'" Response at 8; and (iii) "misrepresent[] and omit[] that `certain types and amounts of expenses were deducted for certain services,'" Response at 8 (quoting FAC ¶ 87, at 27).
The Plaintiffs also argue that they have properly pled equitable estoppel. See Response at 8. They support this contention by pointing to allegations in the FAC and by characterizing the delivery of false monthly statements as a "`continuing wrong.'" Response at 8-9 (quoting FAC ¶ 94, at 28). They point to the contention in the FAC that "the class members `did not discovery [sic] and could not have reasonably discovered their claims as alleged herein of underpayments,'" as a properly pled allegation of due diligence. Response at 9.
The Plaintiffs additionally rely upon the discovery rule, which they contend "is raised more in the context of tort cases, [but] can certainly be used in cases of fraudulent concealment and in other cases involving fraudulent concealment, as pled herein." Response at 9-10. They assert that they properly "allege that they did not discover Defendants' wrongful conduct until they filed suit as a result of Defendants' fraudulent concealment and principles of equitable estoppel, which toll the statute of limitations." Response at 10. The Plaintiffs argue that they have also pled fraudulent concealment under the similar Colorado law. See Response at 10-11.
The Plaintiffs argue that the question whether they exercised reasonable diligence to ascertain the facts that underlie their claims is fundamentally a question for the jury, is inappropriate on summary judgment, and certainly not appropriate on
Last, the Plaintiffs argue that they have stated a proper claim for breach of the implied covenant of marketability. See Response at 13. They contend that,
Response at 14 (emphasis in original). They further assert that "the New Mexico Supreme Court in ConocoPhillips Co. v. Lyons, 2013-NMSC-009, 299 P.3d 844, held that the deductions used in calculating Lessees' royalty obligations must be reasonable even though ... [they] need not be `actual.'" Response at 14-15 (emphasis in original).
The Defendants replied to the Plaintiffs' Response before the Plaintiffs filed the supplement to their Response. See Defendants' Reply in Support of Motion to Dismiss Claims in Plaintiffs' Fourth Amended Complaint, filed December 4, 2013 (Doc. 172)("Reply"). The Defendants argue that the Court may consider the exhibit they attached to their MTD, "as it is central to Plaintiffs' claims," but that the Court should disregard the extrinsic materials submitted by the Plaintiffs "in a transparent effort to convert this motion into one for summary judgment." Reply at 1-2. They contend that, under Tenth Circuit law, "if a document `is referred to in the complaint and is central to the plaintiffs claim, a defendant may submit an indisputably authentic copy to the court to be considered on a motion to dismiss.'" Reply at 3 (quoting GFF Corp. v. Associated Wholesale Grocers, Inc., 130 F.3d 1381 (10th Cir.1997)). They assert that the "Defendants' monthly statements, which include Exhibit A, repeatedly are referred to, directly and indirectly," in the FAC. Reply at 3. They further contend that the monthly statements are "central," because "a document attached to a motion to dismiss is `central' to the plaintiffs' claims if the claims, `at least in part,' are based on the document." Reply at 4 (quoting Jornigan v. N.M. Mut. Cas. Co., No. CIV 03-0813, 2004 WL 3426437, at *6 (D.N.M. April 19, 2004)(Browning, J.)). They also argue that, although the FAC "does not allege the specific date that Defendants or their predecessors `first initiated delivery of monthly statements,' that omission does not per force establish that Plaintiffs' claims, as alleged, are not time-barred." Reply at 2 (emphasis in original)(quoting FAC ¶ 94, at 28).
The Defendants then argue that the Court should not convert the MTD into one for summary judgment. Reply at 6. They address what they characterize as an attempt by the Plaintiffs to convert the motion by way of documents attached to their Response:
Reply at 6 (emphasis in original)(quoting Response at 5). They assert that this attempt is "in clear conflict with the Tenth Circuit's decision in Geras v. IBM Corp., 638 F.3d 1311 (10th Cir.2011)." Reply at 6. The Defendants acknowledge that "a motion to dismiss under Rule 12(b)(6) must, in general, be treated as a motion for summary judgment under Rule 56 if `matters outside the pleadings are presented to and not excluded by the court.'" Reply at 6 (emphasis in original)(quoting Fed.R.Civ.P. 12(d)). They contend, however, "that the district court is not required to accept evidence proffered by the plaintiff in response to a motion to dismiss." Reply at 7 (emphasis in original).
The Defendants next address the equitable tolling doctrines that the Plaintiffs allege apply in the case. See Reply at 8. They state that, "[a]lthough Plaintiffs label these allegations as `causes of action,' in this case they are not." Reply at 8-9. See Reply at 9 & n. 1. The Defendants contend that equitable estoppel is inapposite, because "a central element to any assertion of equitable estoppel is the plaintiffs awareness of his cause of action," and the FAC not only fails to allege this knowledge, but "it does exactly the opposite." Reply at 10 (citing FAC ¶ 96, at 29). They repeat their contention from the MTD that the continuing wrong doctrine applies only in tort cases. See Reply at 10-11. They oppose the Plaintiffs' allegations of fraudulent concealment on the ground that the allegations are not plead with particularity as rule 9(b) requires, see Reply at 15, and on four substantive grounds: (i) that they fail to allege a fiduciary relationship between the Plaintiffs and the Defendants, see Reply at 11-13; (ii) that the Plaintiffs have not alleged an affirmative act of concealment, which the Defendants contend is necessary to make out a claim of fraudulent concealment in the absence of a fiduciary relationship, see Reply at 13-14; (iii) that the Plaintiffs have not alleged how they exercised the due diligence that the Defendants contend is an essential element of a fraudulent concealment claim, see Reply at 14; and (iv) that BP America Production Co. v. Patterson is inapposite, because the procedural posture of that case "was an appeal of a class certification decision under the Colorado rule corresponding to Rule 23," and has "no relevance to the question whether Plaintiffs have properly pled fraudulent concealment in this case," Reply at 15-16 (citing BP Am. Prod. Co. v. Patterson, 263 P.3d 103 (Colo. 2011)).
The Defendants address the viability of the Plaintiffs' twelfth cause of action by arguing that the "`conception of the implied duty to market'" upon which the Plaintiffs rely "`finds no support within New Mexico case law.'" Reply at 17 (quoting Elliott Indus. LP v. BP Am. Prod. Co., 407 F.3d at 1114). They contend that, "[i]n Elliott, plaintiff asserted that the implied duty to market under New Mexico law not only does not permit lessees `to deduct costs incurred before a gas is in a marketable condition,' but also does not permit them `to deduct costs that are not actually incurred or are unreasonable.'" Reply at 18 (emphasis in original)(quoting Elliott Indus. LP v. BP Am. Prod. Co., 407 F.3d at 1111). They assert that "the Tenth Circuit rejected this claim, holding, as this Court recognized, that oil
The Defendants also counter Plaintiffs' "seeming reliance" on ConocoPhillips Co. v. Lyons, 2013-NMSC-009, 299 P.3d 844, noting that the Supreme Court of New Mexico's holding "with respect to the lessees' right to deduct `reasonable' costs of post-production services in paying royalty was based not on the implied covenant to market, but rather on the express royalty terms in state leases." Reply at 19 (emphasis in original)(quoting ConocoPhillips Co. v. Lyons, 2013-NMSC-009, ¶¶ 20, 24, 68, 299 P.3d at 851, 852-53, 861).
Last, the Defendants contend that the "Plaintiffs' submission of a Rule 56(d) affidavit and their assertion that the determination of Defendants' motion to dismiss would be `premature' is improper and should be disregarded," because the MTD "`tests the sufficiency of the allegations within the four corners of the complaint.'" Reply at 20 (quoting Mobley v. McCormick, 40 F.3d 337, 340 (10th Cir.1994)).
The Court held a hearing on the MTD a week before the Plaintiffs submitted their Response Supp. See Transcript of Hearing at 12-80, taken February 21, 2014 ("Tr.").
The Court first clarified with the Defendants that what they mean when they refer to dismissing claims "in part" is "just cutting off damages" past four-to-six years before the filing of the case; the Defendants confirmed this characterization. Tr. at 17:8-14 (Court, Sheridan). As the Defendants outlined their analysis, starting with what they contend are the applicable six-year and four-year statutes of limitations, the Plaintiffs for the first time — as this hearing was before the Response Supp. was filed — asserted that Colorado law might supply the statutes of limitations for the claims under Colorado law. See Tr. at 19:9-20:22 (Court, Brickell).
The discussion then turned to the tolling doctrines, see Tr. at 25:6-7 (Court), and the Defendants first addressed equitable estoppel, arguing again that the doctrine "assumes that the plaintiff is aware of the facts underlying his or her cause of action, but is persuaded to forego filing suit by virtue of the defendant's actions." Tr. at 26:4-7 (Sheridan)(purporting to quote Tiberi v. Cigna Corp., 89 F.3d 1423 (10th Cir.1996), but the Court can find no such quote). They assert that in the Plaintiffs' Response "at page 10 ... they say [that]... they did not discover defendant's wrongful conduct until they filed suit. So if that is to be accepted as true, ... then they do not have an equitable estop[pel] claim." Tr. at 26:20-27:3 (Sheridan).
The Plaintiffs stated that they "have a totally different read of the [Tiberi v. Cigna Corp.] case." Tr. at 28:1-2 (Brickell). They assert that, in "paragraph 31,"
The Defendants responded first by voicing their displeasure at the Plaintiffs raising an issue that they seemingly forfeited in their Response, noting that, although they "know that this Court ... places great importance on making the right answer,... it seems to [them] that it's not appropriate to be making arguments ...
The Defendants then moved to the doctrine of continuing wrong, which they asserted "is not a tolling doctrine as such, [but rather] relates to when a statute of limitations actually begins to run as opposed to being tolled, and it is a tort law doctrine." Tr. at 33:2-6 (Sheridan). They assert that Tiberi v. Cigna Corp. "[s]pecifically mentions that where a tort involves a continuing or repeated injury," the continuing wrong doctrine applies. Tr. at 33:9-10 (Sheridan). They noted that in McNeill v. Rice Engineering & Operating, Inc., 2003-NMCA-078, 133 N.M. 804, 70 P.3d 794, the Court of Appeals of New Mexico "rejected the continuing wrong doctrine in the context of a trespass and nuisance action." Tr. at 33:16-17 (Sheridan). They also cited a case, Bishop v. Evangelical Lutheran Good Samaritan Society, 2010 WL 3998030, at *8 (N.M.Ct. App. Feb. 9, 2010), in which the Defendants assert that the Court of Appeals of New Mexico ruled that, in
Tr. at 34:18-35:4 (Sheridan).
The Plaintiffs half-heartedly defended the FAC's assertion of the continuing wrong doctrine:
Tr. at 36:17-37:10 (Brickell). When asked if they "kn[e]w of any Supreme Court case in New Mexico that applies the continuing wrong to a contract case," the Plaintiffs answered that they "do not." Tr. at 37:23-38:1 (Court, Brickell). The Plaintiffs asserted, however, that Oklahoma has applied the continuing wrong doctrine to contract cases, see Tr. at 39:2-3 (Brickell), and cited without discussing a case called Tull v. City of Albuquerque, 1995-NMCA-123, 120 N.M. 829, 907 P.2d 1010, see Tr. at 39:19 (Brickell). The Court concluded the discussion of the continuing wrong doctrine by noting that it was "inclined to think that this is more of a kind of accrual.... It doesn't sound like it's a primary
Turning to the fraudulent concealment issue, the Defendants first argued that the FAC "is wholly lacking in the who, what, when, where, how, and why allegations necessary to properly alleged fraudulent concealment to equitably toll a statute of limitations," but "[b]eyond the pleading failures, ... there are some substantive problems as well." Tr. at 41:19-41:24 (Sheridan). They contend that, "to the extent that it is based upon a nondisclosure,... [i]n the absence of a duty to disclose, there cannot be fraudulent concealment." Tr. at 41:25-42:3 (Sheridan). They assert that the Plaintiffs rely upon this theory in ¶ 85 of the FAC, which they characterize as stating that the "class members have placed trust and reliance in Williams by virtue of the superior knowledge available to Williams[;] at all material times plaintiffs [and] class members are owed a full and fair disclosure." Tr. at 42:6-10 (Sheridan). The Defendants contend that a duty to disclose arises only from a fiduciary relationship and that "there are two types of fiduciary duties": "there are duties which are fiduciary as a matter of law, [such as] a situation involving a lawyer and a client, a doctor and a patient, priest and penitent, [or a] principal and agent"; and "[t]here are other situations where a relationship between parties can rise to the level of being a fiduciary duty in fact" — "those are relationships that are typically the subject of special trust and confidence," with the "classic example [being] the widow and the housekeeper where the housekeeper attend[s] to all of the widow's needs[,] living with her 24 hours a day[,] tak[ing] care of her[,] and then the widow changes her will and leaves everything to the housekeeper[,] disinheriting the children." Tr. at 42:18-43:8 (Sheridan). The Defendants assert that there is no legally recognized fiduciary duty between an oil lessee and lessor, and that "[t]here are no facts alleged... that in any way establish any kind of relationship of special trust or confidence." Tr. at 43:12-14 (Sheridan). They asserted that "[a]ll of the plaintiffs have received their interest subsequently" — i.e., none of them were the original signatories to their leases — and "almost every case through inheritance." Tr. at 46:16-22 (Sheridan). They concluded their nondisclosure argument by noting that "there is simply nothing that's alleged ... that creates any sort of special trust or confidence between somebody who gets a check once a month 45[] years after the contract was entered into and the parties sending the check." Tr. at 46:23-47:2 (Sheridan).
The Defendants then argued that the FAC alleges no affirmative act of concealment. See Tr. at 47:8-9 (Sheridan). They contended that "[w]hat has to be concealed is the cause of action," Tr. at 47:13-14 (Sheridan), "[a]nd there aren't any allegations in the complaint to show that the cause of action could not have been discovered by the exercise of due diligence," Tr. at 48:14-16 (Sheridan). The Defendants last contended that, under Tenth Circuit law, "the absence of an allegation regarding how and when [the plaintiff] learned of the alleged misconduct forecloses a claim that defendants['] fraudulent concealment prevented [the plaintiff] from discovering defendant's involvement." Tr. at 49: 13-17 (Sheridan)(citing Dummar v. Lummis, 543 F.3d 614, 622 (10th Cir.2008) (Hartz, J.)).
The Plaintiffs contended that the Defendants took on a special duty to disclose when they started sending monthly statements to the Plaintiffs. See Tr. at 51:11-20 (Brickell). They acknowledged that "[t]here may not have been a duty to send
Tr. at 53:7-56:7 (Brickell). The Plaintiffs also argued that, even though none of the Plaintiffs were the original signatories to their leases, they are parties by succession and should be treated the same as if they had signed the leases themselves. See Tr. at 60:23-61:4 (Brickell).
The Defendants, after providing a brief summary of what they considered "this case is about," Tr. at 65:7-66:20 (Sheridan), argued that "fraudulent breach of a contract does not give rise to an action for fraud," Tr. at 67:3-4 (Sheridan). They further argued: "There is a difference between fraud in the inducement and fraud in the performance of a contract, okay. There is no cause of action for fraud in the performance of a contract. You have a claim for breach of contract." Tr. at 67:12-16 (Sheridan)(citing Brick v. Cohn-Hall-Marx Co., 276 N.Y. 259, 11 N.E.2d 902 (1937)).
The Court interjected to opine that, as far as it could tell, "this isn't really a nondisclos[ure] case.... [T]he duty is sort of a red herring here. Once you start sending out the statements you've got to be accurate. That's what the case is about, isn't it, it's not a nondisclosure, it's not a duty." Tr. at 71:24-25 (Court); id. at 72:8-12 (Court). The Defendants responded that "[i]t has to rise to the level of being fraudulent." Tr. at 72:12-15 (Sheridan). They last argued that, because the Court had previously dismissed the standalone claim for fraud, the same facts could not suffice to toll the statute by way of fraudulent concealment. See Tr. at 72:17-73:2 (Sheridan). The Court stated that it would take the matter under advisement. See Tr. at 79:12-14 (Court).
The Plaintiffs filed a supplemental brief to their Response a week after the hearing and almost three months after the Defendant filed their Reply. See Supplemental Brief in Response to Defendants' Motion to Dismiss — Application of Forum State's Statute of Limitations, filed February 28, 2014 (Doc. 215)("Response Supp."). The Response Supp. first argues that the Court "should determine whether it would be fundamentally unfair to apply the New Mexico statute of limitations to the Plaintiffs' and Class Members' claims under wells in Colorado," Response Supp. at 2 (citing Lujan v. Regents of the Univ. of Cal., 69 F.3d 1511, 1515-16 (10th Cir. 1995)), and, if so, apply the relevant Colorado statute of limitations — which the Plaintiffs assert is six years, see Response Supp. at 4 — to the claims arising under Colorado law, see Response Supp. at 2. They argue that the fraudulent concealment and equitable tolling doctrines of both states are similar, citing Continental Potash, Inc. v. Freeport-McMoran, Inc., 1993-NMSC-039, 115 N.M. 690, 858 P.2d 66, from New Mexico, and BP America
Rule 12(b)(6) authorizes a court to dismiss a complaint for "failure to state a claim upon which relief can be granted." Fed.R.Civ.P. 12(b)(6). "The nature of a Rule 12(b)(6) motion tests the sufficiency of the allegations within the four corners of the complaint after taking those allegations as true." Mobley v. McCormick, 40 F.3d 337, 340 (10th Cir.1994). The sufficiency of a complaint is a question of law, and when considering a rule 12(b)(6) motion, a court must accept as true all well-pled factual allegations in the complaint, view those allegations in the light most favorable to the non-moving party, and draw all reasonable inferences in the plaintiff's favor. See Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007)("[O]nly if a reasonable person could not draw ... an inference [of plausibility] from the alleged facts would the defendant prevail on a motion to dismiss."); Smith v. United States, 561 F.3d 1090, 1098 (10th Cir.2009)("[F]or purposes of resolving a Rule 12(b)(6) motion, we accept as true all well-pled factual allegations in a complaint and view these allegations in the light most favorable to the plaintiff." (citing Moore v. Guthrie, 438 F.3d 1036, 1039 (10th Cir. 2006))).
A complaint need not set forth detailed factual allegations, yet a "pleading that offers labels and conclusions or a formulaic recitation of the elements of a cause of action" is insufficient. Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009)(citing Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)). "Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice." Ashcroft v. Iqbal, 556 U.S. at 678, 129 S.Ct. 1937. "Factual allegations must be enough to raise a right to relief above the speculative level, on the assumption that all the allegations in the complaint are true (even if doubtful in fact)." Bell Atl. Corp. v. Twombly, 550 U.S. at 555, 127 S.Ct. 1955 (citation omitted).
To survive a motion to dismiss, a plaintiff's complaint must contain sufficient facts that, if assumed to be true, state a claim to relief that is plausible on its face. See Bell Atl. Corp. v. Twombly, 550 U.S. at 570, 127 S.Ct. 1955; Mink v. Knox, 613 F.3d 995, 1000 (10th Cir.2010). "A claim has facial plausibility when the pleaded factual content allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal, 556 U.S. at 678, 129 S.Ct. 1937 (citing Bell Atl. Corp. v. Twombly, 550 U.S. at 556, 127 S.Ct. 1955). "Thus, the mere metaphysical possibility that some plaintiff could prove some set of facts in support of the pleaded claims is insufficient; the complainant must give the court reason to believe that this plaintiff has a reasonable likelihood of mustering factual support for these claims." Ridge at Red Hawk, LLC v. Schneider, 493 F.3d 1174, 1177 (10th Cir.2007)(emphasis omitted). The Tenth Circuit stated:
Robbins v. Oklahoma, 519 F.3d 1242, 1247 (10th Cir.2008) (quoting Bell Atl. Corp. v.
Although affirmative defenses must generally be pled in the defendant's answer, not argued on a motion to dismiss, see Fed.R.Civ.P. 8(c), there are exceptions where: (i) the defendant asserts an immunity defense — the courts handle these cases differently than other motions to dismiss, see Glover v. Gartman, 899 F.Supp.2d 1115, 1137-39, 1141 (D.N.M. 2012) (Browning, J.)(citing Pearson v. Callahan, 555 U.S. 223, 129 S.Ct. 808, 172 L.Ed.2d 565 (2009); Robbins v. Oklahoma, 519 F.3d 1242 (10th Cir.2008)); and (ii) where the facts establishing the affirmative defense are apparent on the face of the complaint, see Miller v. Shell Oil Co., 345 F.2d 891, 893 (10th Cir.1965) ("Under Rule 12(b), a defendant may raise an affirmative defense by a motion to dismiss for the failure to state a claim. If the defense appears plainly on the face of the complaint itself, the motion may be disposed of under this rule."). The defense of limitations is the affirmative defense most likely to be established by the uncontroverted facts in the complaint. See 5 Charles Alan Wright, Arthur R. Miller, Mary Kay Kane, Richard L. Marcus & Adam N. Steinman, Federal Practice & Procedure: Civil § 1277 (3d ed.2014). If the complaint sets forth dates that appear, in the first instance, to fall outside of the statutory limitations period, then the defendant may move for dismissal under rule 12(b)(6). See Rohner v. Union Pac. R.R. Co., 225 F.2d 272, 273-75 (10th Cir.1955); Gossard v. Gossard, 149 F.2d 111, 113 (10th Cir. 1945); Andrew v. Schlumberger Tech. Co., 808 F.Supp.2d 1288, 1292 (D.N.M.2011) (Browning, J.). The plaintiff may counter this motion with an assertion that a different statute of limitations or an equitable tolling doctrine applies to bring the suit within the statute; the Tenth Circuit has not clarified whether this assertion must be pled with supporting facts in the complaint or may be merely argued in response to the motion. Cf. Kincheloe v. Farmer, 214 F.2d 604 (7th Cir.1954) (holding that, once a plaintiff has pled facts in the complaint indicating that the statute of limitations is a complete or partial bar to an action, it is incumbent upon the plaintiff to plead, either in the complaint or in amendments to it, facts establishing an exception to the affirmative defense). It appears, from case law in several circuits, that the plaintiff may avoid this problem altogether — at least at the motion-to-dismiss stage — by simply refraining from pleading specific or identifiable dates, see Goodman v. Praxair, Inc., 494 F.3d 458, 465-66 (4th Cir.2007); Hollander v. Brown, 457 F.3d 688, 691 n. 1 (7th Cir. 2006); Harris v. New York, 186 F.3d 243, 251 (2d Cir.1999); Honeycutt v. Mitchell, 2008 WL 3833472 (W.D.Okla. Aug. 15, 2008) (West, J.), although the Tenth Circuit has not squarely addressed this practice.
Generally, the sufficiency of a complaint must rest on its contents alone. See Casanova v. Ulibarri, 595 F.3d 1120, 1125 (10th Cir.2010); Gossett v. Barnhart, 139 Fed.Appx. 24, 24 (10th Cir.2005) (unpublished)
The Court has previously ruled that, when a plaintiff references and summarizes statements from defendants in a complaint for the purpose of refuting the statements in the complaint, the Court cannot rely on documents the defendants attach to a motion to dismiss which contain their un-redacted statements. See Mocek v. City of Albuquerque, No. CIV 11-1009 JB/ KBM, 2013 WL 312881, at *50-51 (D.N.M. Jan. 14, 2013)(Browning, J.). The Court in Mocek v. City of Albuquerque reasoned that the statements were neither incorporated by reference nor central to the plaintiff's allegations in the complaint, because the plaintiff only cited the statements to
The Supreme Court has held that a federal court sitting in diversity should apply the same statute of limitations that a state court of the forum state would apply. See Guaranty Trust Co. v. York, 326 U.S. 99, 65 S.Ct. 1464, 89 L.Ed. 2079 (1945). The district court must, therefore, look to the forum state's choice-of-law rules to determine which state's law to apply — both to control the substance of the dispute and the limitations period in which the suit can be brought. See Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496-97, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941); Pepsi-Cola Bottling Co. v. PepsiCo, Inc., 431 F.3d 1241, 1255 (10th Cir.2005).
New Mexico courts have held that "`the law of the forum governs matters of procedure.'" Estate of Gilmore, 1997-NMCA-103, ¶ 10, 124 N.M. 119, 946 P.2d 1130, 1133 (quoting Sierra Life Ins. Co. v. First Nat'l Life Ins. Co., 1973-NMSC-079, ¶ 14, 85 N.M. 409, 512 P.2d 1245, 1249). See Restatement of Conflict of Laws § 585 (1934)("First Restatement")("All matters of procedure are governed by the law of the forum."). "The line between substance and procedure, [however], is not always clear, and the judgment where to draw the line in a particular case may depend on the reasons for drawing the line." Estate of Gilmore, 124 N.M. at 122-23, 946 P.2d at 1133-34 (citing Ammerman v. Hubbard Broad., Inc., 89 N.M. 307, 310, 551 P.2d 1354, 1357 (1976)). See Sun Oil Co. v. Wortman, 486 U.S. 717, 726, 108 S.Ct. 2117, 100 L.Ed.2d 743 (1988)(stating that, "[e]xcept at the extremes, the terms `substance' and `procedure' precisely describe very little except a dichotomy, and what they mean in a particular context is largely determined by the purposes for which the dichotomy is drawn."). "`A court usually applies its own local law rules prescribing how litigation shall be conducted even when it applies the local law rules of another state to resolve other issues in the case.'" Estate of Gilmore, 124 N.M. at 123, 946 P.2d at 1134 (citing Restatement (Second) of Conflict of Laws § 122 (1971)("Second Restatement")). Similarly, "procedure [is] the judicial process for enforcing rights and duties recognized by
Estate of Gilmore, 1997-NMCA-103, ¶ 13, 946 P.2d at 1134 (citing Second Restatement § 122 cmt. a). Furthermore, the Court of Appeals of New Mexico stated that, because parties to a lawsuit do not usually think about matters of judicial administration before entering into legal transactions, they do not usually place reliance on the applicability of specific state rules. See Estate of Gilmore, 124 N.M. at 124, 946 P.2d at 1133 (citing Second Restatement § 122 cmt. a.). For these reasons, there is no danger in applying the forum state's rules in such procedural matters. See Estate of Gilmore, 124 N.M. at 124, 946 P.2d at 1134. Furthermore, "`[e]normous burdens are avoided when a court applies its own rules, rather than the rules of another state, to issues relating to judicial administration, such as the proper form of action, service of process, pleading, rules of discovery, mode of trial and execution and costs.'" Estate of Gilmore, 124 N.M. at 123, 946 P.2d at 1134 (quoting Second Restatement § 122 cmt. a).
The Supreme Court of New Mexico has adopted the First Restatement approach to choice-of-law analyses, see United Wholesale Liquor Co. v. Brown-Forman Distillers Corp., 108 N.M. 467, 469, 775 P.2d 233, 235 ("New Mexico adheres to a traditional conflicts of law analysis contained in Restatement (First) of Conflicts of Law (1934)."), but for the purposes of determining the applicable statute of limitation, the First and Second Restatement come out the same way: in the absence of a "borrowing statute" enacted by the forum state that adopts foreign states' statutes of limitations when applying their substantive law, the statute of limitations of the forum state governs all disputes even when another state supplies the substantive law. Compare First Restatement §§ 603-604 ("If action is barred by the statute of limitations of the forum, no action can be maintained though action is not barred in the state where the cause of action arose.... If action is not barred by the statute of limitations of the forum, an action can be maintained, though action is barred in the state where the cause of action arose.") with Second Restatement § 142("(1) An action will not be maintained if it is barred by the statute of limitations of the forum, including a provision borrowing
"Although a statute of limitations bar is an affirmative defense, it may be resolved on a Rule 12(b)(6) motion to dismiss `when the dates given in the complaint make clear that the right sued upon has been extinguished.'" Torrez v. Eley, 378 Fed. Appx. 770 (10th Cir.2010)(quoting Aldrich v. McCulloch Props., Inc., 627 F.2d 1036, 1041 n. 4 (10th Cir.1980)). Accord Lee v. Rocky Mountain UFCW Unions & Emp's Trust Pension Plan, No. 92-1308, 1993 WL 482951 (10th Cir. Nov. 23, 1993)("Because the critical dates appeared plainly on the face of [plaintiffs] complaint, we conclude that the statute of limitations defense was properly raised and resolved in the Rule 12(b) context."). When a party has asserted a statute of limitations issue in a rule 12(b)(6) motion, a court accepts all well-pled factual allegations in the complaint as true and views them in the light most favorable to the plaintiff to determine whether the statute of limitations has run. See Sunrise Valley, LLC v. Kempthorne, 528 F.3d 1251, 1254 (10th Cir.2008). The statute of limitations for a breach-of-contract claim on a written contract, under New Mexico law, is six years. See N.M. Stat. Ann. § 37-1-3 ("Those founded upon any bond, promissory note, bill of exchange, or other contract in writing, or upon any judgment of any court not of record, within six years."). The statute of limitations for fraud, under New Mexico law, is four years. See N.M. Stat. Ann. § 37-1-4 ("Those founded upon accounts and unwritten contracts; those brought... for relief upon the ground of fraud, and all other actions not herein otherwise provided for and specified within four years.").
New Mexico applies the "discovery rule," which means that the statute of limitations period "begins to run when the claimant has knowledge of sufficient facts to constitute a cause of action." Gerke v. Romero, 2010-NMCA-060, ¶ 10, 148 N.M. 367, 237 P.3d 111, 115 (citing Martinez-Sandoval v. Kirsch, 1994-NMCA-115, ¶ 26, 118 N.M. 616, 884 P.2d 507, 513). "The discovery rule provides that `the cause of action accrues when the plaintiff discovers or with reasonable diligence should have discovered that a claim exists.'" Williams v. Stewart, 2005-NMCA-061, ¶ 12, 137 N.M. 420, 112 P.3d 281, 285 (quoting Roberts v. Sw. Comm. Health Servs., 1992-NMSC-042, ¶ 24, 114 N.M. 248, 837 P.2d 442, 449). Accord Eoff v. N.M. Corr. Dep't, Nos. CIV 10-0598, 10-0599, 10-0600, 2010 WL 5477679, at *18 (D.N.M. Dec. 20, 2010) (Browning, J.)("The Court believes that, in breach-of-contract actions involving an employee's termination, the statute of limitations should not begin to run until the employee is aware of
"Under the continuing wrong doctrine..., `where a tort involves a continuing or repeated injury, the cause of action accrues at, and the limitations begin to run from, the date of the last injury.'" Tiberi v. Cigna Corp., 89 F.3d at 1430 (quoting 54 C.J.S. Limitation of Actions § 177 (1987)(applying New Mexico law)). "In other words, the `the statute of limitations does not begin to run until the wrong is over and done with.'" Tiberi v. Cigna Corp., 89 F.3d at 1431 (quoting Taylor v. Meirick, 712 F.2d 1112, 1118 (7th Cir. 1983)). The treatise cited by the Tenth Circuit explicates the doctrine further:
54 C.J.S. Limitations of Actions § 223 (2014)(footnotes omitted).
Although the doctrine has its origins in tort law, the New Mexico courts have never explicitly held that the doctrine is inapplicable to breach-of-contract actions. The Court of Appeals of New Mexico has, however, declined to apply the continuing wrong doctrine to contract cases in each of the few cases in which the argument was made. See Bishop v. Evangelical Lutheran Good Samaritan Soc'y, No. 25, 510, 2010 WL 3998030 (N.M.Ct.App.2010); Tull v. City of Albuquerque, 1995-NMCA-123, ¶¶ 4-11, 120 N.M. 829, 907 P.2d 1010, 1010-13. See also Village of Angel Fire v. Bd. of Cnty. Comm'rs of Colfax Cnty., 2010-NMCA-038, ¶¶ 14, 18, 148 N.M. 804, 242 P.3d 371, 374, 375-76 (declining to consider the application of the continuing wrong doctrine on the ground that the issue had not been properly preserved). Notably, it rejected a plaintiff's contention that, after an allegedly wrongful refusal by an employer to promote the plaintiff to a higher-paying position, the reduced paychecks the plaintiff received in the ensuing years constituted a continuing wrong. See Tull v. City of Albuquerque, 1995-NMCA-123, ¶¶ 4-11, 907 P.2d at 1010-13. It held that the wrongful promotion was a discrete act — a "single wrong with continuing effects" — and dismissed the plaintiffs claim. Tull v. City of Albuquerque, 1995-NMCA-123, ¶ 7, 907 P.2d at 1011.
Tull v. City of Albuquerque is the seminal case on continuing wrong doctrine in the contract context in New Mexico. See, e.g., Village of Angel Fire v. Bd. of Cnty. Comm'rs of Colfax Cnty., 2010-NMCA-038,
Tull v. City of Albuquerque, 1995-NMCA-123, ¶ 6, 907 P.2d at 1011.
The Court of Appeals of New Mexico appears to define the doctrine's tolling effects — at least in the contract context — differently than the Tenth Circuit and Corpus Juris Secundum do in the tort context. As traditionally employed, the continuing wrong doctrine provides that the statute of limitations on an entire tortious course of action does not commence until the course of action is complete. For example, if a statute of limitations for a tort is five years, and a defendant engages in a continuing wrong for fifteen years, the plaintiff would be able to seek damages for the entire fifteen-year period, not merely the most-recent five years. The Court of Appeals of New Mexico appears to be using an alternative definition — one that would allow the plaintiff to collect on the damages incurred in the most-recent five years, but not in the preceding ten. When conceived this way, the doctrine only does work if the wrongful course of action would otherwise be analyzed as a single, discrete wrong that occurred at the beginning of the fifteen-year period, out of reach of the statute of limitations.
Tull v. City of Albuquerque, 1995-NMCA-123, ¶¶ 4-5, 907 P.2d at 1010-11. Ultimately, the Court of Appeals of New Mexico would not even permit the plaintiff to seek damages incurred in the most-recent three years, holding that the defendant's allegedly wrongful failure to promote the plaintiff was a one-time wrong, not a continuing one, and that the plaintiff's reduced paychecks thereafter were merely continuing effects of the one-time wrong. Because the statute of limitations barred the true cause of action, the failure to promote, the plaintiff could not sue on damages stemming from a cause of action not included in the suit.
Thus, it appears that the Court of Appeals of New Mexico may be talking about something different when it refers to the continuing wrong doctrine in the contract context — defining it as a doctrine that allows for cut-off damages rather than no damages at all, not as a doctrine that allows for complete damages rather than cut-off damages.
Equitable tolling applies before a complaint was filed when the litigant was prevented from filing suit because of "extraordinary events beyond his or her control." Ocana v. Am. Furniture Co., 2004-NMSC-018, ¶ 15, 135 N.M. 539, 91 P.3d 58, 66. "Equitable tolling is a nonstatutory tolling theory which suspends a limitations period." Ocana v. Am. Furniture Co., 2004-NMSC-018, ¶ 15, 91 P.3d at 66. "Such extraordinary event[s] include conduct by a defendant that caused the plaintiff to refrain from filing an action during the applicable period." Roberts v. Barreras, 484 F.3d 1236, 1241 (10th Cir.2007)(internal quotation marks omitted)(citing In re Drummond, 1997-NMCA-094, ¶ 13, 123 N.M. 727, 945 P.2d 457, 462 ("[A] party may be estopped from asserting a statute-of-limitations defense if that party's conduct has caused the plaintiff to refrain from filing an action until after the limitations period has expired.")). See also Bell v. Bd. of the Albuquerque
New Mexico law, under principles of equitable estoppel, recognizes the doctrine of fraudulent concealment as a means of tolling a statute of limitations. See Garcia ex rel. Garcia v. La Farge, 119 N.M. 532, 893 P.2d 428, 432 (1995). See also Ballen v. Prudential Bache Sec., Inc., 23 F.3d 335, 337 (10th Cir.1994) (Brorby, J.). A party seeking to toll a statute of limitations through this doctrine must prove that: (i) the other party engaged in conduct amounting to intentional false representation or concealment of material facts; (ii) the injured party reasonably relied on the other party and the concealment was successful; and (iii) the injured party did not know, and through the exercise of reasonable diligence, could or should not have known the true facts giving rise to a cause of action. See Contl. Potash, Inc. v. Freeport-McMoran, Inc., 1993-NMSC-039, ¶ 28, 115 N.M. 690, 858 P.2d 66, 74; Kern ex rel. Kern v. St. Joseph Hosp., Inc., 1985-NMSC-031, ¶¶ 11-12, 102 N.M. 452, 697 P.2d 135, 139. Because equity tolls the statute, it does so only as long as the party is not guilty of failing to exercise ordinary diligence in pursuit of a cause of action. See Great Am. Ins. Co. v. Crabtree, No. CIV 11-1129 JB/KBM, 2012 WL 3656500, at *13 (D.N.M. Aug. 23, 2012) (Browning, J.).
Normally, a plaintiff need plead only "a short and plain statement of the claim showing that the pleader is entitled to relief." Fed.R.Civ.P. 8(a)(2). Fraud claims, however, must meet more stringent standards. "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." Fed.R.Civ.P. 9(b). See Two Old Hippies, LLC v. Catch the Bus, LLC, 784 F.Supp.2d 1200, 1207 (D.N.M.2011)(Browning, J.).
With respect to rule 9(b)'s scope, a court should require parties to plead a cause of action with particularity when that cause of action contains allegations grounded in fraud. See 2 James Wm. Moore, Jeffrey A. Parness, & Jerry Smith, Moore's Federal Practice § 9.03(1)(d), at 9-20 (3d ed.2008). On the other hand, claims based on negligent or innocent misrepresentation, to the extent those claims do not require proof of fraud, may be pled in accordance with the more relaxed standards of rule 8(a). See Moore, supra § 9.03(1)(d), at 9-21; Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1104-05 (9th Cir.2003)("Allegations of non-fraudulent conduct need satisfy only the ordinary notice pleading standards of Rule 8(a).").
The primary motives that animate rule 9(b) help illuminate the reason for limiting the rule's reach to claims grounded in fraud. First, the requirement of pleading with particularity protects defendants' reputations from the harm attendant to accusations of fraud or dishonest conduct. See Guidry v. Bank of LaPlace, 954 F.2d 278, 288 (5th Cir.1992) ("[The particularity requirement] stems from the obvious concerns that general, unsubstantiated charges of fraud can do damage to defendant's reputations."); United States ex rel. Harrison v. Westinghouse Savannah River Co., 352 F.3d 908, 921 (4th Cir.2003) ("Rule 9(b) protects defendants from harm to their goodwill and reputation.") (citations omitted)(internal quotation marks
The Tenth Circuit has fleshed out the components necessary to a successful rule 9(b) pleading. In Sheldon v. Vermonty, 246 F.3d 682 (Table), 2000 WL 1774038 (10th Cir. Dec. 4, 2000), the Tenth Circuit held that the plaintiff alleged with specific particularity a violation of the Securities Exchange Act of 1934, 15 U.S.C. § 78a-pp. See 2000 WL 1774038 at *4. The Tenth Circuit concluded that the complaint
2000 WL 1774038, at *5 (citations omitted)(internal quotation marks omitted). "At a minimum, Rule 9(b) requires that a plaintiff set forth the who, what, when, where and how of the alleged fraud." United States ex rel. Schwartz v. Coastal Healthcare Group, Inc., 232 F.3d 902 (Table), 2000 WL 1595976 at *3 (10th Cir.2000)(unpublished opinion). "To survive a motion to dismiss, an allegation of fraud 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.'" Midgley v. Rayrock Mines, Inc., 374 F.Supp.2d 1039, 1047 (D.N.M.2005) (Browning, J.)(quoting Schwartz v. Celestial Seasonings, Inc., 124 F.3d 1246, 1252 (10th Cir.1997)). "On the other hand, rule 9(b) does not require specific knowledge regarding the defendant's state of mind." Midgley v. Rayrock Mines, Inc., 374 F.Supp.2d at 1047. See Two Old Hippies, LLC v. Catch the Bus, LLC, 784 F.Supp.2d at 1207.
Oil and gas leases are construed "like any other contracts." Elliott Indus. LP v. BP Am. Prod. Co., 407 F.3d at 1108. Additionally, New Mexico implies in law a duty — "`to make diligent efforts to market the production in order that the lessor may realize on his royalty interest'" — on oil-and-gas producers, "in equity, without looking to the language of the agreements or other evidence of the parties' intentions." Davis v. Devon Energy Corp., 2009-NMSC-048, ¶ 35, 147 N.M. 157, 218 P.3d 75 (quoting Darr v. Eldridge, 66 N.M. 260, 263, 346 P.2d 1041, 1044 (1959)). This obligation is called the "duty to market." Davis v. Devon Energy Corp., 2009-NMSC-048, ¶ 35, 147 N.M. 157,
In 2005, in Elliott Industries LP v. BP America Production Co., the Tenth Circuit addressed various obligations that oil-and-gas lessors owe the royalty interest owners on their leases under New Mexico law. The plaintiffs in Elliott Industries LP v. BP America Production Co. were royalty owners who sued ConocoPhillips, the working interest owner, to collect additional royalties. The production subject to the plaintiffs' claim in Elliott Industries LP v. BP America Production Co. was conventional gas. The gas contained NGLs that are removed through processing before the residue is generally acceptable for transportation on interstate pipeline transmission systems. See 407 F.3d at 1110-11. The plaintiffs alleged that ConocoPhillips was underpaying its royalty interests by reducing their royalties with illegitimate post-production costs, including "processing, marketing, transportation, and fractionation costs, from the value of the refined natural gas products." 407 F.3d at 1100. The plaintiffs alleged that ConocoPhillips violated the NMOGPPA, breached the implied duty of good faith and fair dealing, breached the implied duty to market, and constituted conversion, constructive fraud, fraud, and unjust enrichment, among other alleged wrongs. See 407 F.3d at 1101. The plaintiffs expressly declined to assert any contract claims under the governing lease. See 407 F.3d at 1107. ConocoPhillips contended that it was performing its contractual obligations within the terms of the plaintiffs' leases. See 407 F.3d at 1101.
The Tenth Circuit, in an opinion authored by the Honorable Michael R. Murphy, United States Circuit Judge, determined that the district court properly granted ConocoPhillips summary judgment on the plaintiffs' allegation that ConocoPhillips' royalty payment practices violated the implied duty to market. The plaintiffs alleged that ConocoPhillips was obligated under the implied duty to market to pay royalties based upon the best price reasonably available for the gas-and-oil products, and not the actual price minus reasonable or actual cost deductions. 407 F.3d at 1113-14. The Tenth Circuit noted that New Mexico recognizes an "`implied covenant on the part of the lessee ... that after production of oil and gas in paying quantities is obtained, he will thereafter continue the work of development ... with reasonable diligence .... having in mind his own interest as well as that of the lessor, to market the product.'" 407 F.3d at 1113 (quoting Libby v. DeBaca, 51 N.M. 95, 95, 179 P.2d 263, 265 (1947)). Perhaps because the Tenth Circuit construed Elliott Industries LP v. BP America Production Co. before the Supreme Court of New Mexico's pronouncement in Davis v. Devon Energy Corp., 2009-NMSC-048, ¶ 35, 218 P.3d at 85-86, that the duty to market is implied "in equity, without looking to the language of the agreements or other evidence of the parties' intentions," the Tenth Circuit interpreted New Mexico law to imply the duty to market only in fact, based upon "whether any implied duty to market was intended by the parties
The Tenth Circuit also noted that there was no implied-in-fact marketable condition rule term in the royalty provisions in the plaintiffs' leases, because the royalty provisions expressly covered how ConocoPhillips was to calculate the plaintiffs' royalty payments. See 407 F.3d at 1113-14 ("[U]nder New Mexico law, covenants are not implied for subjects that are treated in express provisions.... [T]he express terms of the royalty obligations direct the royalty to be paid on the value of gas `at the well.'"). Moreover, the Tenth Circuit stated that the plaintiffs failed to show how ConocoPhillips' conduct violated any implied duty to market under New Mexico law. The Tenth Circuit stated that, because ConocoPhillips was and is "actively producing gas, processing the gas, and selling the refined natural gas and NGLs," ConocoPhillips' conduct "complied with the implied duty to market as articulated by the New Mexico courts." 407 F.3d at 1113 (citing Darr v. Eldridge, 346 P.2d at 1044). The Tenth Circuit expressly held that the plaintiffs'"conception of the implied duty to market" as requiring ConocoPhillips' to "bear the burden of all costs incurred to put the gas in a marketable condition including the cost of removing the NGLs from the gas ... finds no support within New Mexico law." 407 F.3d at 1113-14.
From the time of the Tenth Circuit's decision in Elliott Industries LP v. BP America Production Co., the Supreme Court of New Mexico has, twice, expressly declined to decide whether a marketable condition rule is implied as a matter of law in oil and gas leases. In Davis v. Devon Energy Corp., 2009-NMSC-048, ¶ 1, 218 P.3d at 77 (Chavez, J.), the issue before the Supreme Court of New Mexico was whether a state district court properly denied certification of a class alleging that defendant gas producers underpaid the plaintiffs' royalties by improperly deducting the cost of rendering the gas marketable. The state district court concluded that the plaintiffs failed to establish the commonality requirement to proceed as a class action, because determining whether the defendants' royalty payments violated the terms of the plaintiffs' leases would require interpreting each plaintiffs individual lease — totaling as many as thirty-four lease agreements — and, therefore, the plaintiffs failed to demonstrate that common questions of law or fact predominated the class' allegations. See 2009-NMSC-048, ¶ 26, 218 P.3d at 83. The Supreme Court of New Mexico concluded, however, in an opinion written by the Honorable Edward L. Chavez, Chief Justice of the Supreme Court of New Mexico,
In ConocoPhillips v. Lyons, the issue before the Supreme Court of New Mexico was whether ConocoPhillips properly calculated the State of New Mexico's royalty payments as required under the statutes creating New Mexico's leases. See 2013-NMSC-009, ¶¶ 1-3, 299 P.3d 844. New Mexico contended that ConocoPhillips was not allowed, under the terms of New Mexico's statutory lease forms, to deduct the post-production costs necessary to render gas marketable from New Mexico's royalty payments. See 2013-NMSC-009, ¶¶ 2-6, 19-21, 299 P.3d 844. The Supreme Court of New Mexico, in an opinion written by the Honorable Petra J. Maes, Chief Justice of the Supreme Court of New Mexico,
2013-NMSC-009, ¶ 17, 299 P.3d 844 (citing Creson v. Amoco Prod. Co., 2000-NMCA-081, ¶¶ 11-12, 129 N.M. 529, 10 P.3d 853). New Mexico's statutorily created royalty interests, however, did not specify that net proceeds should be calculated at the well, but rather stated that net proceeds should be calculated "from the sale of such gas in the field." 2013-NMSC-009, ¶ 19, 299 P.3d 844 (secondary quotation marks omitted). The "key question" before the Supreme Court of New Mexico, therefore, was "whether a lease which provides for royalty payable upon `net proceeds ... in the field' or `from the sale of gas from each gas well' compels a different royalty calculation
New Mexico also alleged that ConocoPhillips' calculation of royalty payments breached the implied covenant to market. New Mexico asserted that the implied covenant to market required ConocoPhillips to "place the gas in a marketable condition and requires that the expenses incurred in obtaining a marketable product ... be borne by Lessees." 299 P.3d at 859. The Supreme Court of New Mexico determined, however, that it need not reach the issue whether the marketable condition rule is incorporated into the implied covenant to market. The Supreme Court of New Mexico explained that whether the marketable condition rule applies in New Mexico was not ripe for review, because legislative policy decisions inform the extent of post-production costs that ConocoPhillips may deduct from New Mexico's royalty payments, but the lower court had not yet reached a decision of the merits on that issue. See 299 P.3d at 859-60.
The Court will not dismiss any of the claims on limitations grounds, because the Plaintiffs have alleged facts that might reasonably establish that the discovery rule delayed the accrual of the statutes of limitations: it is plausible that the Plaintiffs' reasonable diligence either was or would have been inadequate to uncover the Defendants' alleged misconduct; and the Plaintiffs did not actually discover the misconduct until recently enough to put their suit within the statute. The Court will, however, dismiss the ninth cause of action without prejudice for failure to plead with particularity pursuant to rule 9(b)'s heightened pleading requirement. The Court will also dismiss the tenth cause of action with prejudice, because it is not an independent claim upon which relief can be granted, but rather an attempt to recite facts to establish two tolling doctrines. Last, the Court will dismiss the twelfth cause of action, because the Tenth Circuit has held that it has no basis in New Mexico law.
Before ruling on the substantive issues that the MTD presents, the Court must decide whether to convert the MTD into a motion for summary judgment, and, at the same time, whether to consider any or all of the various documents, extrinsic to the FAC, offered by each side. The Defendants request that the Court analyze their motion under rule 12(b)(6), but that the Court consider the check stubs it attached to its MTD; the Plaintiffs ask that the Court convert the MTD into a motion for summary judgment under rule 56, and that it consider various affidavits and deposition excerpts in ruling on the motion. The Court will let the Defendants be masters of their own motion and thus will not convert their rule 12(b)(6) motion into one for summary judgment. The Court will, however, consider the check stubs that the Defendants attached to the MTD, as it agrees with the Defendants that the check stubs satisfy the three-prong inquiry fashioned by the Tenth Circuit in Jacobsen v. Deseret Book Co., because they: (i) are "documents referred to in the complaint," see FAC ¶¶ 86, 87, at 26-27; id. ¶ 95, at
The Court will not dismiss any of the claims on limitations grounds, because, assuming the truth of the factual allegations in the FAC, a jury could reasonably conclude that the statutes of limitations did not accrue until October 20, 2007,
New Mexico's six-year statute of limitations for claims founded upon written contracts, see N.M. Stat. Ann. § 37-1-3, controls the Plaintiffs' first, fifth, and sixth causes of actions; their second, fourth, eleventh, and twelfth causes of action are subject to New Mexico's four-year statute of limitations for actions upon unwritten contracts and miscellaneous actions,
New Mexico law supplies the controlling statutes of limitations for all claims, including the eleventh cause of action, which arises under Colorado substantive law, because of the following reasons. First, a federal court sitting in diversity jurisdiction must apply the same statutes of limitations that a state court of the forum state would apply to the case. See Guaranty Trust Co. v. York, 326 U.S. at 109, 65 S.Ct. 1464. Second, New Mexico uses the First Restatement approach to choice-of-law analyses in most circumstances. See United Wholesale Liquor Co. v. Brown-Forman Distillers Corp., 1989-NMSC-030, ¶ 9, 775 P.2d at 235 ("New Mexico adheres to a traditional conflicts of law analysis contained in Restatement (First) of Conflicts of Law (1934)."). Third, the First Restatement
The Plaintiffs half-heartedly argue that, if "it would be fundamentally unfair to apply the New Mexico statute of limitations to the Plaintiffs' and Class Members' claims under wells in Colorado," the Court should apply the Colorado statutes of limitations. Response Supp. at 2 (citing Lujan v. Regents of the Univ. of Cal., 69 F.3d at 1515-16). The case they cite does not rely on the "fundamentally unfair" distinction to come to the conclusion it does, but rather highlights another point of analysis. In Lujan v. Regents of the University of California, the Tenth Circuit held that New Mexico's wrongful death statute of limitations must be "treated as" substantive
The Second Restatement offers the following guidance to determine whether a statute of limitations bars the right or merely the remedy:
Second Restatement § 143 cmt. c.
The Court must next identify which statutes of limitations to analyze. The Plaintiffs appear to ask, not merely that the Court apply the Colorado statute of limitations, class-wide, to the one claim arising under Colorado state law, but rather that the Court should apply Colorado statutes of limitations to all claims — including the eight claims arising under New Mexico law — as to all wells located in Colorado.
The Plaintiffs contend that the applicable statute is the "six year statute of limitations that exists for breach of contracts in Colorado," Response Supp. at 4, apparently referring to Colo.Rev.Stat. Ann. § 13-80-103.5 (providing a six-year limitations period for "actions to recover a liquidated debt," "actions for arrears of rent," "actions by the public employees' retirement association to collect unpaid contributions from employers," and actions to recover damages arising from the passing of bad checks (citing Colo.Rev.Stat. Ann. § 13-21-109 (providing for the "[r]ecovery of damages for checks, drafts, or orders not paid upon presentment"))). The Court concludes that the applicable statute of limitations for the implied-duty-to-market claim is the two-year statute of limitations provided in Colo.Rev.Stat. Ann. § 13-80-102. That section provides the limitations period for "[a]ll other actions of every kind for which no other period of limitation is provided"; after examining Article 80 of Title 13 of the Colorado Statutes, the Court concludes that no other statute of limitations specifically applies to breach of the implied duty to market hydrocarbons. Colo.Rev.Stat. Ann. § 13-80-102(1)(i). Even if the claim sounds in contract, however, the Plaintiffs misidentify the appropriate statute — Colorado has a three-year limitation on breach-of-contract actions. See Colo.Rev.Stat. Ann. § 13-80-101(1)(a) (providing a three-year limitations period for "[a]ll contract actions").
Regardless whether the two-year statute in section 102 or the three-year statute in section 101 applies, the Court concludes that both statutes merely cut off remedies, vice extinguishing rights. "The almost invariable prerequisite [for concluding that a statute of limitation bars a right] is that the liability sought to be enforced must have been created by statute." Second Restatement § 143 cmt. c. Here, the right sued upon is a creature of the common law, attributed by the Plaintiffs to Rogers v. Westerman Farm Co., 29 P.3d 887 (Colo.2001). See FAC ¶ 100, at 30. The Court will also assess
Second Restatement § 143 cmt. c. The statute here presents the opposite scenario: it applies to the eleventh cause of action only by way of a catch-all provision; or, if § 13-80-101 applies, by an ambiguous reference to "contract actions," read to encompass all implied-in-law covenants and judicially crafted duties. Colo.Rev. Stat. Ann. § 13-80-101(1)(a). The Colorado statute of limitations applicable to breach of the implied duty to market hydrocarbons, therefore, bars merely the remedy, not the right, and thus cannot be
The "fundamentally unfair" language used by the Plaintiffs harks back to Phillips Petroleum Co. v. Shutts, in which the Supreme Court reversed a Kansas state court's decision to apply Kansas substantive law to all the claims in an oil and gas lease class action, even though over ninety-nine percent of the leases and ninety-seven percent of the class members had no connection with the state of Kansas. 472 U.S. at 815, 105 S.Ct. 2965. The Supreme Court recognized that, for large class actions to be workable mechanisms, the usual rules — as to notice, personal jurisdiction, plaintiff autonomy, and choice-of-law — would have to be fudged: it held that the minimum contacts analysis that informs personal jurisdiction over defendants did not apply to absent plaintiffs (class members) and that courts need not demand that absent plaintiffs affirmatively "opt in" to being part of a class. 472 U.S. at 811-12, 105 S.Ct. 2965. It held, however, that due process places limits on the extent to which the time-tested rules governing non-complex litigation could be modified in the class action context: while a class need not be composed entirely of Kansas residents with Kansas leases to apply Kansas law to the whole class — i.e., the application of Kansas law to a class action does not require that each class member, if he brought suit as an individual, would be subject to Kansas law — Kansas must have "a `significant contact or significant aggregation of contacts' to the claims asserted..., contacts `creating state interests,' in order to ensure that the choice of Kansas law is not arbitrary or unfair." 472 U.S. at 821-22, 105 S.Ct. 2965 (quoting Allstate Ins. Co. v. Hague, 449 U.S. 302, 312-13, 101 S.Ct. 633, 66 L.Ed.2d 521 (1981)).
Here, the New Mexico statute of limitations would be appropriately applied even if this case were not complex, and the Phillips Petroleum Co. v. Shutts inquiry is thus inapposite. If the Plaintiffs may validly sue under New Mexico substantive law, and if a New Mexico court is a valid forum in which to hear the case — and no party has objected to either condition — then New Mexico statutes of limitations would govern all claims based on the analysis the Court has already conducted.
The Court concludes that the Plaintiffs' first, fifth, and sixth causes of action are founded upon breach of written contract, and are thus subject to the six-year limitations period outlined in N.M. Stat. Ann. § 37-1-3. The fourth cause of action, violation of the NMOGPPA, is subject to the four-year limitations period that N.M. Stat. Ann. § 37-1-4 provides for "all other actions not herein otherwise provided for," because the NMOGPPA has no internal provision or specified external provision setting forth a limitations period. See N.M. Stat. Ann. §§ 70-10-1 to -6. Section 37-1-4's four-year statute of limitations also controls the second, eleventh, and twelfth causes of action, which each allege breach of an implied duty attendant to a contract, because the Court concludes that those claims fall under either the section's provision for actions "founded upon accounts and unwritten contracts," or its provision covering "all other actions not
The Court's conclusions align with the Defendants' contentions. See MTD at 3-6. In their initial response, the Plaintiffs wrote that, "[f]or the purposes of this response, Plaintiffs do not dispute the limitation periods assigned to these claims but assert ... that any applicable statute has been tolled." Response at 7 n. 2. The Plaintiffs now argue that Colorado law might, possibly, supply the limitations periods, see Response Supp. at 1-4, but do not argue that New Mexico's longer, six-year statute, for actions on written contracts, should apply to their claims for breach of good faith and the implied duty to market, see Response at 7-13; Response Supp. at 1-5. The Court could view this argument as waived, but, even upon independent examination of the statute and case law, the Court concludes that breaches of the implied duty of good faith and the implied duty to market come under the four-year statute.
Although judicially implied-in-law duties are said to be part of a contract, and do not exist in the absence of a contractual relationship, they do not require the existence of a written contract, and are themselves, of course, always unwritten. From an evidentiary perspective, implied covenants are more similar to statutory obligations and unwritten contractual terms — an implied duty could be said to be a blend of both — both of which § 37-1-4 governs, than they are to written contractual terms. While the Court can see some utility in applying a single limitations period to all claims surrounding a written instrument, it is not overly difficult to administer a situation where, as would happen here if the Court were to cut off damages, the Plaintiffs are entitled to six years' worth of damages on breach of the written terms, and four years' worth of damages on breach of the implied terms.
There is a dearth of case law from the New Mexico courts on this issue,
Accepting all factual allegations in the FAC as true and drawing all reasonable inferences in the Plaintiffs' favor,
The mechanics of the discovery rule — namely, which party carries the burden of proof at various stages of the case — are not well defined. The rule is an exception to an affirmative defense, and, when overlaid with procedural standards of rule 12(b)(6), is susceptible to numerous different implementations. It is not even clear whether, under Erie R.R. Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938), the Court should look to federal or state law in determining how to allocate or shift the burden of production. See Fed.R.Evid. 301 (providing that federal courts are to allocate the burden of production, but not the burden of persuasion, in response to presumptions that controlling substantive law supplies); 21B Charles Alan Wright, Kenneth W. Graham, Jr., Victor James Gold & Michael H. Graham, Federal Practice & Procedure: Evidence §§ 5122, 5132 (2d ed.2014)(equivocating on the issue whether to apply state or federal burdens of production in a diversity case); Second Restatement § 134 (stating that, in a horizontal choice-of-law analysis, the forum state's allocation of the burden of production applies). What is clear is that the Court must apply the substance of the discovery rule as the Supreme Court of New Mexico would interpret it,
The Defendants' argument misapprehends the requirements of notice pleading, and the scrutiny and burden-allocation of the rule 12(b)(6) inquiry. The crux of their argument is buried deep within the MTD:
MTD at 7 (emphasis added). The Defendants extend this logic — that, because limitations defenses can sometimes be adjudicated at the motion-to-dismiss stage, the burden is on the Plaintiffs to plead facts that permit a full adjudication of the limitations issue — to the discovery rule as well, arguing that, because the Plaintiffs do not plead the reasonable diligence issue to the Defendants' satisfaction, the Defendants are entitled to a win by default.
While there are obvious efficiencies to disposing of clearly time-barred claims at the motion-to-dismiss stage, not all limitations defenses are open-and-shut cases; genuine factual disputes can exist, and a rule 12(b)(6) motion is not the place to decide them. Unless it is essential to the establishment of the prima facie elements of a claim or the claim is for fraud or mistake, see Fed.R.Civ.P. 9(b), a plaintiff is under no obligation to plead specific or identifiable dates at all. Another court in the Tenth Circuit has concluded, applying Supreme Court precedent, that
Honeycutt v. Mitchell, No. CIV 08-140 W, 2008 WL 3833472, at *4 (W.D.Okla. Aug. 15, 2008) (footnotes renumbered from original to maintain continuity) (citation omitted). This analysis applies even to a strictly enforced statute of limitations that does not incorporate the discovery rule.
The introduction of the discovery rule into the calculus only tilts the scales further in the plaintiff's favor. The Court can conceive of several possible ways to allocate the burden of production at the motion-to-dismiss stage, which will be listed in descending order of favorability to the plaintiff. First, the Court could require that the defendant definitively establish,
For better or worse, the Tenth Circuit has borrowed from New Mexico state court procedure to require some form of burden-shifting whenever the discovery rule comes into play at the pleading stage:
Elm Ridge Exploration Co., LLC v. Engle, 721 F.3d at 1211. The case that the Tenth Circuit cites for the proposition that the "plaintiff has the burden" expounds further:
Butler v. Deutsche Morgan Grenfell, Inc., 2006-NMCA-084, ¶¶ 27-28, 140 P.3d at 539 (alterations in original) (citations omitted)(internal quotation marks omitted).
The Court concludes that option (ii) — requiring the plaintiff to bolster what would, without the activation of the discovery rule, be a facially time-barred claim with allegations that, if proven at trial, could convince a reasonable jury to reject the limitations defense — is the most faithful to precedent. The Court arrives at this conclusion by separately examining the dictates of Butler v. Deutsche Morgan Grenfell, Inc.: (i) the burden-shifting is triggered "[w]hen a defendant makes a prima facie showing that a claim is time barred"; the Court interprets "prima facie" to mean that the defendant need establish only that the facts giving rise to the cause of action occurred outside the limitations period, not that its discovery did; the Court interprets "showing" to mean that the defendant can definitively establish this fact using only the facts in the complaint and any other documents the Court may properly consider in a rule 12(b)(6) motion; (ii) when the burden shifts to the plaintiff to argue or present evidence for the application of the discovery rule, the statement that "great specificity is not required" strongly indicates that the heightened pleading standard of rule 9(b) does not control the form of the plaintiffs rebuttal; (iii) the statement that the plaintiff "must have alleged in the complaint, or must respond to the motion to dismiss with, factual allegations" indicates that while the complaint need not be amended — assertions in the response may suffice — the limitations defense must be rebutted with facts, and not with mere argument; (iv) the requirement that the plaintiff allege facts that "would support" application of the discovery rule implies that the plaintiff need not definitely establish that the discovery rule applies, but, at most, need only allege facts upon which a reasonable jury could find that the discovery rule applies; and (v) the Court of Appeals of New Mexico's equation of the motion-to-dismiss and summary-judgment standards implies that, although courts are to accept all factual assertions as true, the facts must establish the elements of the discovery rule, not merely render their establishment plausible.
For the foregoing reasons, the Court will require the Plaintiffs to assert facts that, if proven at trial, could lead a reasonable jury to conclude that reasonable diligence would most likely have been futile in discovering the causes of action.
"Reasonable diligence" is defined, in the first instance, by the New Mexico courts, and any uncertainty that remains in the definition is reserved for the jury room. The courts have done almost nothing to pare down jury discretion by providing a more concrete definition,
The Plaintiffs have alleged facts in their FAC that, if proven at trial, could convince a reasonable jury that reasonable diligence would not have uncovered the causes of action:
In sum, the Plaintiffs argue: (i) that they exercised reasonable diligence, because there was nothing more, within reason, they could do to verify the information reported to them by the Defendants, who were in a much better position to collect knowledge about the financial circumstances of each well; and (ii) that their exercise of reasonable diligence, and their subsequent inability regardless to discover the causes of action, proves the futility of reasonable diligence, and satisfies that element of the discovery rule. The injury to any given Plaintiff in this case is very low — thus why this case is being brought as a class action — and expensive methods of auditing or independently verifying the information reported by the Defendants would almost certainly have been costlier than they were worth. Even now, when the Plaintiffs know for certain that potential causes of action exist — something that is not known when considering whether to invest money in investigating the performance and disclosures of a lessor — the suit might not be economically viable if the Court does not certify a class action.
It is not clear what more the Defendants want. They offer no concrete examples of
The Defendants largely contend that the check stub was enough to put the Plaintiffs on notice. In the end, the check stub tells an investor little. Royalty owners are terribly dependent on their working interest owners. If the Defendants were not accurate and truthful, there was little an investor could do to know whether it had a cause of action. In the Court's view, the merits of the cause of action are intertwined with the statute of limitations defense. In sum, it is for a jury to decide whether the Plaintiffs should have discovered that they were being wronged.
Although the Plaintiffs pled fraudulent concealment in an attempt to toll the statute of limitations, not to seek additional damages, and the Defendants have not moved for the dismissal of this claim, the Court will dismiss the ninth cause of action for failure to plead with particularity pursuant to rule 9(b). Fed.R.Civ.P. 9(b). To satisfy the rule 9(b) standard, "[a]t a minimum,... a plaintiff [must] set forth the who, what, when, where and how of the alleged fraud." United States ex rel. Schwartz v. Coastal Healthcare Group, Inc., 232 F.3d 902 (Table), 2000 WL 1595976 at *3 (10th Cir.2000) (unpublished opinion). The FAC does no such thing, and falls short of the heightened pleading standard. If the Plaintiffs want to assert a claim for fraud, they must plead: (i) exactly how the Defendants perpetrated their fraud, contrasting dollar amounts on check stubs and statements with the amounts the Plaintiffs contend that they are owed, divulging how they arrived upon the latter figure as well as, most likely, the investigative techniques they used to uncover the fraud in the first place; (ii) how the Defendants executed their concealment; and (iii) the basis and extent of the Plaintiffs' reliance upon the Defendants' representations, and facts supporting that the reliance was reasonable — although this substantive element of fraudulent concealment overlaps significantly with the reasonable diligence element of the discovery rule, the facts in the FAC that establish reasonable diligence must be re-pled with much greater particularity.
The Plaintiffs gain nothing from a limitations perspective by including a fraudulent concealment claim, as fraudulent concealment contains all the elements of the discovery rule, plus other substantive elements, and additionally requires heightened pleading. The Court will dismiss the ninth cause of action without prejudice, so the Plaintiffs may re-file if they please, but the Court recommends that they do not, unless they are prepared to satisfy the rigorous pleading requirements the Court has set forth. The Court will not strike the factual allegations enumerated underneath
Neither equitable estoppel nor continuing wrong is a claim upon which relief can be granted; they are merely tolling doctrines. See 28 Am.Jur.2d Estoppel and Waiver § 30 (2011)(stating that estoppel acts "always as a shield, never as a sword" and "does not ... give a cause of action"). As such, the Court will dismiss the tenth cause of action with prejudice.
The Court will not strike the factual allegations supporting the cause of action, but, even as tolling doctrines, equitable estoppel and continuing wrong are inapplicable in the case. Equitable estoppel requires that the Plaintiffs were aware of their cause of action, but the Defendants persuaded them not to file suit. See Tiberi v. Cigna Corp., 89 F.3d at 1430. Not only are there no facts in the FAC to support this theory, but, if the theory were properly alleged, it would destroy the Plaintiffs' ability to toll the statute on discovery rule or fraudulent concealment grounds, and those theories both require that the plaintiff was unaware of the cause of action.
The continuing wrong doctrine — as it is traditionally conceived, and as the Plaintiffs assert it — strongly appears to only apply in tort cases. Although New Mexico courts have purported to consider the doctrine's application in the breach-of-contract context, they appear to be talking about something different: allowing a plaintiff to sue on the portion of a long-term, contract-breaching course of conduct that falls within the six years immediately preceding the lawsuit — the portion within the limitations period — but not before. See Tull v. City of Albuquerque, 1995-NMCA-123, ¶¶ 4-11, 907 P.2d at 1010-13. In every case in which a New Mexico court has considered applying the doctrine to a contract dispute, the choice has been between cut-off damages (partial dismissal) and no damages at all (outright dismissal), but the Plaintiffs argue that they are entitled to full damages, and no party disputes that the Plaintiffs are entitled to seek, at the very least, cut-off damages.
The Plaintiffs assert that the Defendants, in rendering the hydrocarbons marketable, deducted costs that were unreasonably high and sometimes deducted costs that they did not actually incur from the royalties that they owed the Plaintiffs. Although these facts may — and do — make out other causes of action, they do not establish a breach of the implied duty to market hydrocarbons as the Supreme Court of New Mexico has articulated, and as the Tenth Circuit interpreted in Elliott Industries LP v. BP America Production Co., 407 F.3d 1091.
The Court already dismissed a similar claim for breach of the implied duty to market, the Plaintiffs' original third cause of action. See Memo. Opinion at 128-36; FAC ¶¶ 43-55, at 17-19. That claim alleged, not that unreasonably or fraudulently deducting expenses was a breach of the implied duty to market, but that by deducting
The Court need not rely on abstract principles, however, to dismiss the Plaintiffs' claim. The claim that the Tenth Circuit dismissed in Elliott Industries LP v. BP America Production Co. did not, like
Memo. Opinion at 132 (quoting 407 F.3d at 1114).
Last, the Court notes that it has already dismissed at least part of the claim that the Plaintiffs now style as the twelfth cause of action. See Memo. Opinion at 128-36. In their ill-fated third cause of action, the Plaintiffs alleged — likely as a fallback in case the Court did not adopt the expansive reading of the marketable condition rule they pushed for — that "[a]t all material times, Williams has deducted revenues ... greater than the actual or original cost of transforming [hydrocarbons] into a marketable product(s)." FAC ¶ 51, at 18. When the Court dismissed the third cause of action in its entirety, it recognized that, even if the Court accepted as true the allegation that the Defendants passed on nonexistent charges to the Plaintiffs, that set of facts does not state a proper claim for breach of the implied duty to market. The Plaintiffs' twelfth cause of action contains an additional allegation — that the Defendants passed on expenses that, although actually incurred, were unreasonable. The Court cannot see how a claim for unreasonable expenses can be viable if a claim for phantom expenses is not. It is much more invidious to assess fabricated claims against a royalty owner than it is to assess unreasonable ones, because the unreasonableness of expenses is kept naturally in check by the simple fact that the Defendants must actually incur them.
For the foregoing reasons, the Court will dismiss the Plaintiffs' twelfth cause of action with prejudice. On the other hand, while the Court does not believe it can, under Elliott Industries LP v. BP America Production Co., find that unreasonable expenses violate the implied duty to market, it is not convinced that there is no claim for unreasonable or fabricated expenses. There may be an implied condition that expenses and deductions must be reasonable, and so a breach-of-contract claim may protect the royalty owner from unreasonable royalty reductions. Also, the implied covenant of good faith and fair dealing may protect royalty owners from
The Fruitland Coal formation is "one of the most prolific sources of U.S. coalbed methane reserves." Mesa Royalty Trust: Topics: San Juan Basin Fruitland Coal Drilling, wikinvest (April 24, 2013, 11:14 AM EDT), http://www. wikinvest.com/stock/Mesa_Royalty_ Trust_MTR./San_Juan_Basin_Fruitland_Coal_Drilling. CBM natural gas is natural gas extracted from coal beds. See Coalbed Methane, Wikipedia (Apr. 23, 2013), http://en.wikipedia. org/wiki/Coalbed_methane.
64 F.R. 43506-01.
United States v. Austin, 426 F.3d 1266, 1274 (10th Cir.2005). The Court finds that Gossett v. Barnhart, Carter v. Daniels, 91 Fed.Appx. 83 (10th Cir.2004), Nard v. City of Oklahoma City, 153 Fed.Appx. 529 (10th Cir.2005), and Douglas v. Norton, 167 Fed.Appx. 698 (10th Cir.2006), all have persuasive value with respect to a material issue, and will assist the Court in its disposition of this Memorandum Opinion and Order.
The other case referenced in Tull v. City of Albuquerque, Miller v. Beneficial Management Corp., applied the "continuing violation" doctrine, but it did so in the manner traditionally contemplated, allowing for the recovery of full, versus merely cut-off, damages where an employee had faced a pattern of long-term discrimination in the workplace. See 977 F.2d at 848. Furthermore, that case was an employment discrimination case, and the federal courts have a well-defined and unique body of case law relating to the application of statutes of limitation to Title VII claims. See, e.g., Bell v. Bd. of Educ. of the Albuquerque Pub. Schs., No. CIV 06-1137 JB/ACT, 2008 WL 4104070 (D.N.M. Mar. 26, 2008) (Browning, J.)("The Tenth Circuit has yet to apply the continuing-violation doctrine outside of the context of Title VII employment cases." (citing Dean v. Boeing Co., 260 Fed.Appx. 124 (10th Cir.2008) (unpublished)(Kelly, J.))).
The Court believes that, if and when the Supreme Court of New Mexico determines that the existence of the marketable condition rule is ripe for review, it will find that the rule is included in oil-and-gas contracts as part of the implied duty to market. Colorado, Wyoming, Kansas, and Oklahoma have all adopted a version of the marketable condition rule. The Supreme Court of Colorado announced its adoption of the marketable condition rule in Garman v. Conoco, Inc., 886 P.2d 652 (Colo.1994). The Supreme Court of Colorado held that, "absent an assignment provision to the contrary, overriding royalty interest owners are not obligated to bear any share of the post-production expenses ... undertaken to transform raw gas produced at the surface into a marketable product." 886 P.2d at 661. The Supreme Court of Colorado noted that, although an oil-and-gas lease is "entered into for the mutual benefit of the parties, not all parties participate equally in lease development decisions." 886 P.2d at 657. Interest owners, whether of royalty or overriding royalty interests, must defer to the lessees "where and when to drill, the formations to be tested and ultimately whether to complete a well and establish production." 886 P.2d at 675. The Supreme Court of Colorado was also persuaded by its neighboring states' — Wyoming, Kansas, and Oklahoma — and the federal government's requirement that lessees place gas in a marketable condition at no cost to the lessor. See 886 P.2d at 658 (citing 30 C.F.R. § 206.153(i); Wyo. Stat. § 30-5-304(a)(vi) (1994 Supp.); Wood v. TXO Prod. Corp., 854 P.2d 880, 882 (Okla.1992); Gilmore v. Superior Oil Co., 192 Kan. 388, 388 P.2d 602, 606 (1964)). The Supreme Court of Colorado explained that the marketable condition rule logically followed from a lessee's duty to effectuate the terms of a lease; the Supreme Court of Colorado reasoned that, just as the "purpose of an oil and gas lease could hardly be effected if the implied covenant to drill obligated the lessor to pay for his proportionate share of drilling costs," the purpose of a lease would be thwarted if lessors bore the cost of making a product marketable. 886 P.2d at 659. The Supreme Court of Colorado rejected an argument from oil-and-gas producers that industry practice dictates that lessees and lessors bear proportionately post-production costs necessary to render gas marketable. The Supreme Court of Colorado explained that, while other oil-and-gas producers may be aware of industry custom and factor that custom into oil-and-gas agreements, "[o]ften, however, executing an oil and gas lease, or assigning a federal lease won under the previously existing federal lottery system is the extent of a party's contact with the oil industry." 886 P.2d at 660. The Supreme Court of Colorado further emphasized that the marketable condition rule is consistent with the bargaining power of lessees and lessors: "The payment of royalties is controlled by lessees, and lessors have no ready means of ascertaining current market value other than to take lessees' word for it." 886 P.2d at 660.
The Supreme Court of Kansas based its formulation of the marketable condition rule on Colorado's. In Kansas, the rule currently requires a lessee of an oil-and-gas lease to "bear the entire expense of producing the gas at the wellhead pursuant to the terms of the oil and gas lease. Additionally, the lessee must bear the entire cost of putting the gas in condition to be sold pursuant to the court-made `marketable condition rule.'" Coulter v. Anadarko Petroleum Corp., 296 Kan. 336, 292 P.3d 289, 306 (2013) (citing Sternberger v. Marathon Oil Co., 257 Kan. 315, 894 P.2d 788 (1995)). The Supreme Court of Kansas adopted a version of the marketable condition rule in Sternberger v. Marathon Oil Co. that allowed a lessee to share with a royalty owner the costs of transporting a marketable product to a point of sale and "to enhance the value of the gas stream, e.g., the processing costs to extract a saleable component such as helium." 292 P.3d at 306. The Supreme Court of Kansas explained that, in Kansas, ambiguities in oil-and-gas leases must be construed against the lessee, but found that the oil-and-gas leases at issue were not ambiguous. See 894 P.2d at 794. Rather, the Supreme Court of Kansas' adoption of the marketable condition rule was based upon the lessee's duty to "produce a marketable product," which requires "the lessee alone [to] bear[] the expense in making the product marketable." 894 P.2d at 799.
Kansas' interpretation of the marketable condition rule, which allows lessees to share the cost of transportation to the market with lessors may be vulnerable to attack. The Supreme Court of Kansas recognized, in Coulter v. Anadarko Petroleum Corp., that the Supreme Court of Colorado's decision in Rogers v. Westerman Farm Co., 29 P.3d 887, 896-902 (Colo.2001), "clarified that .... `marketability' includes both the physical condition of the gas and the location of the gas, i.e., the commercial marketplace," and, therefore, whether oil-and-gas lessees in Kansas may share with lessors the cost of transporting marketable products to a market "may be questionable." Coulter v. Anadarko Petroleum Corp., 292 P.3d at 306 (quoting Rogers v. Westerman Farm Co., 29 P.3d at 902, 903). In Rogers v. Westerman Farm Co., the Supreme Court of Colorado held that, under the marketable condition rule, "the expense of getting the product to a marketable condition and location are born by the lessee." 29 P.3d at 906. The Supreme Court of Colorado explained that, whether gas is marketable is a question of fact, and requires, first, evidence that gas is "in the physical condition where it is acceptable to be bought and sold in a commercial marketplace," and, second, that the gas must be in a location "that is, the commercial marketplace, to determine whether the gas is commercially saleable in the oil-and-gas marketplace." 29 P.3d at 905. The Supreme Court of Colorado noted that "`a royalty clause should be construed in its entirety and against the party who offered it, and in light of the fact that the royalty clause is the means by which the lessor receives the primary consideration for a productive lease.'" 29 P.3d at 898 (quoting Owen L. Anderson, Royalty Valuation: Should Royalty Obligations be Determined Intrinsically, Theoretically, or Realistically, Part 2 (Should Courts Contemplates the Forest or Dissect Each Tree?), 37 Nat. Resources J. 611, 636 (1997)). The Supreme Court of Colorado reasoned that gas is not marketable until it is ready to be bought in a marketplace by a willing purchaser, and, accordingly, a lessee has not met its implied duty to market until a gas is transported to a marketplace, if transportation is necessary to reach purchasers. See 29 P.3d at 904-06.
Similarly, the Supreme Court of Oklahoma's adoption of the marketable condition rule is based upon the bargaining power of oil-and-gas lessees and lessors. In Wood v. TXO Prod. Corp., the Supreme Court of Oklahoma explained that "[p]art of the mineral owner's decision whether to lease or to become a working interest owner is based upon the costs involved," and, when an interest owner agrees to relinquish operating rights and lease a well in exchange for a royalty interest, as a lessor, the interest owner has no power to control post-production costs. 854 P.2d at 882-83. The Supreme Court of Oklahoma reasoned that, if lessees, oil-and-gas producers, were allowed to share production and marketing costs with royalty owners, "royalty owners would be sharing the burdens of working interest ownership without the attendant rights," including the greater share of proceeds which oil-and-gas producing lessees enjoy. 854 P.2d at 883. Accordingly, the Supreme Court of Oklahoma held that "in Oklahoma the lessee's duty to market involves obtaining a marketable product." 854 P.2d at 883.
Texas, on the other hand, has not adopted the marketable condition rule, but, rather, interprets oil-and-gas leases more strictly in accordance with their terms. The first case in Texas to discuss a marketable condition rule was Danciger Oil & Refineries v. Hamill Drilling Co., in which the Supreme Court of Texas interpreted a royalty clause which stated that payments were to be made out of "all the oil, gas, casinghead gas, and other minerals produced, saved and marketed at the prevailing market price paid by major companies in the Gulf Coastal area from the properties." 171 S.W.2d at 322. The Supreme Court of Texas interpreted the lease as requiring the lessee to pay royalties for oil-and-gas "produced, saved and marketed," but not to "provide a market for all the products produced." 171 S.W.2d at 323. The Supreme Court of Texas concluded that the language did not indicate that the gas produced from the subject wells would be "so mixed with other products as not to be `gas' of the kind contemplated" and also concluded that the lessee's operating expenses, which lease required the lessees to bear, did not include expenses "of processing the named product into some other product after it has been produced." 171 S.W.2d at 323. That there was no market for the gas in its unprocessed form in the vicinity of the wells did not sway the Supreme Court of Texas' ruling. "The mere fact that there was then no market in that vicinity for the product then being produced from the lease, is not alone sufficient to justify us in overturning the plain, certain, and unambiguous terms of the contract." 171 S.W.2d at 323. The Supreme Court of Texas concluded that the lessor was "bound to accept payments out of the gas as it was then being produced from the wells, and is not entitled to have the gas refined into some other commodity." 171 S.W.2d at 323. The Supreme Court's decision in Danciger Oil & Refineries v. Hamill Drilling Co. has evolved into a rule in Texas courts: "Since the early history of oil and gas litigation, the courts have held that covenants are implied when an oil and gas lease fails to express the lessee's obligation to develop and protect the lease." Amoco Prod. Co. v. Alexander, 622 S.W.2d 563, 567 (Tex.1981). Accordingly, although Texas recognizes an implied duty to reasonably market oil and gas as part of an implied covenant of management and administration, which may be included in an oil-and-gas lease, the implied duty to market does not override language which specifies a particular payment method. For example, the Supreme Court of Texas has held that a gas lease which provides for payments to be made based upon the gas'"market price" is not breached when a lessee contracts to sell the gas at a price above the prevailing market cost, reaping profits beyond that which it could obtain in an open market, but calculates and pays royalties based upon the lower, prevailing, market price for the gas, because the language of the lease provides for royalty payments in accordance with "market price." Yzaguirre v. KCS Resources, Inc., 53 S.W.3d 368, 370, 373-75 (Tex.2001) ("Depending on future market behavior, this may be financially beneficial to the lessor ... or it may be less advantageous, as here. In either event, the parties have received the benefit of their bargain.").
The Court believes that, when the Supreme Court of New Mexico determines the existence of the marketable condition rule is ripe for review, it will find the reasoning of Colorado, Kansas, Oklahoma, and Wyoming more persuasive than that of Texas. Like Kansas and Colorado, which construe oil-and-gas leases against the lessees, the Supreme Court of New Mexico has established a "rule that an oil and gas lease is to be construed most strongly against the lessee." Greer v. Salmon, 82 N.M. 245, 250, 479 P.2d 294, 299 (1970). This canon of construction is consistent with the duties a lease imposes on a lessee, such as the duty of "achiev[ing] the primary purpose of the lease, to explore, develop and produce." 82 N.M. at 250, 479 P.2d at 299. Colorado and Kansas have recognized that, once a lessor assigns its working and operating interests to a lessee, the lessee possesses the ability to evaluate and choose which post-production measures are necessary to render a gas marketable. Based upon the lessee's ability to assess post-production measures, Kansas and Colorado have determined that the lessee, and not the lessor, should bear the cost of those measures, as lessors generally will have "`no ready means of ascertaining'" the cost-benefit of a post-production measure "`other than to take lessees' word for it.'" Garman v. Conoco, 886 P.2d at 660 (quoting Piney Woods Cnty. Life Sch. v. Shell Oil Co., 726 F.2d 225, 240 (5th Cir.1984)).
A critique of the marketable condition rule is that it necessarily turns on questions of fact, which the Supreme Court of Colorado recognized in Rogers v. Westerman Farm Co., because, whether a buyer is willing to purchase a product, and at what point, will vary from case to case. See Rogers v. Westerman Farm Co., 29 P.3d at 903-06; Scott Lansdown, The Marketable Condition Rule 44 S. Tex. L.Rev. 667, 702-04 (Summer 2003)("The strongest argument against the marketable condition rule is that ... if the rule is adopted, oil and gas lessees will be faced with an endless wave of expensive, burdensome and wasteful litigation .... [because of] [t]he failure of ... any real criteria for marketability."). The Court does not believe that the factual questions necessary to determining marketability are fatal to the marketable condition rule. The cases discussed herein indicate that, in certain locations and with certain products, no willing buyer may be found until an oil or gas product is either transformed into a different condition, or transported to a different location. At a minimum, the burden which the marketable condition rule imposes is that a market-ready product is able to reach the hands of a willing buyer, which is a burden New Mexico has already determined lessees should bear. Cf. Libby v. DeBaca, 51 N.M. at 99, 179 P.2d at 265 (holding that the implied covenant to market requires a lessee to construct a plant for converting gas into dry ice at his own cost, because the gas could be marketed only in dry ice form). The Court believes that the Supreme Court of New Mexico would find that, consistent with its holding that "pronouncement without disposition of the product is futile," the implied covenant to market includes a duty to render products marketable at the lessee's, and not lessor's, expense. Darr v. Eldridge, 66 N.M. at 263, 346 P.2d at 1044. While the situation which allows a buyer to purchase an oil or gas product will vary from case to case, the requirement that a royalty interest owner does not pay for the meeting of product and buyer is not onerous, and will, logically, be satisfied whenever a lessee realizes the goal of a lease: receiving a profit on oil-and-gas products. This finding leads to the second critique of the marketable condition rule: requiring a lessee to bear the burden of post-production costs is pointless, because the marketable condition rule will incentivize lessees to find purchasers that will purchase unrefined products. Unrefined or unprocessed oil and gas will necessarily sell at a lower cost, because purchasers of the unprocessed products will factor into the price their costs to process the oil or gas. This critique of the marketable condition rule concludes, therefore, that payments will be calculated on oil-and-gas profits less production costs, regardless whether the lessee bears those costs. In theory, therefore, the marketable condition rule may not increase royalty owners' profits beyond their present state, as the cost of production will be taken from royalty payments in either transaction. The only change is in the entity deducting postproduction costs. See Lansdown, supra, at 705-07. The Court does not believe that the Supreme Court of New Mexico will find this critique persuasive. The Court believes that the Supreme Court of New Mexico will conclude that, while it is true, in either situation, that post-production costs must be borne somewhere, the marketable condition rule, nonetheless, avoids an inefficient result. If oil-and-gas lessees may pass the cost onto lessors, the lessees lose the motivation for purchasing the most cost-efficient post-production measures. Oil-and-gas producers, as lessees, may attempt to pass those costs downstream to purchasers, but, in that instance, the purchaser will be assessing its own costs, and will, again, be incentivized to take on only cost-efficient post-production measures. See Libby v. DeBaca, 51 N.M. at 99, 179 P.2d at 265. In sum, the marketable condition rule incentivizes the entities with the most knowledge and ability to produce oil-and-gas in the most cost-effective manner. Without the marketable condition rule, oil-and-gas producers, as lessees, may pass post-production costs onto lessor-royalty-owners, who lack the knowledge and ability to evaluate and choose the best option. For these reasons, the Court believes that the Supreme Court of New Mexico will find that, included within the implied duty to market in New Mexico, is the marketable condition rule.
If the Court were not to construct the claims in this self-evident manner, then the Plaintiffs would be unable to pursue damages they incurred before whatever arbitrary date the Court chose as being the cut-off point in its interpretation of the claims. The MTD would be irrelevant, because the remedy it seeks — cut-off damages — would already have been provided.
The Court must decide how to weigh Tenth Circuit case law against more-recent state court decisions, choosing a point on the spectrum between the two extremes: rigidly adhering to Tenth Circuit precedent unless there is intervening case law directly on point from the state's highest court, on one end; and independently interpreting the state law, regarding the Tenth Circuit precedent as persuasive authority, on the other. In striking this balance, the Court notes that it is generally more concerned about systemic inconsistency between the federal courts and the state courts than it is about inconsistency among federal judges. Judges, even those within a jurisdiction with ostensibly identical governing law, sometimes interpret and apply the law differently from one another; this inconsistency is part and parcel of a common-law judicial system. More importantly, litigants seeking to use forum selection to gain a substantive legal advantage cannot easily manipulate such inconsistency: cases are assigned randomly to district judges in this and many federal districts; and, regardless, litigants cannot know for certain how a given judge will interpret the state law, even if they could determine the identity of the judge pre-filing or pre-removal. All litigants know in advance is that whomever federal district judge they are assigned will look to the entirety of the state's common law in making his or her determination — the same as a state judge would. Systemic inconsistency between the federal courts and state courts, on the other hand, not only threatens the principles of federalism, but litigants may more easily manipulate the inconsistency. When the Tenth Circuit issues an opinion interpreting state law, like Elliott Industries LP v. BP America Production Co., and the state courts subsequently shift away from that interpretation, litigants — if the district courts strictly adhere to the Tenth Circuit opinion — have a definite substantive advantage in choosing the federal forum over the state forum, or vice versa.
The Court further notes that district courts may be in better position than the Tenth Circuit to be responsive to changes in state law. Tenth Circuit decisions interpreting a particular state's law on a specific issue are further apart in time than the collective district courts' are. More importantly, the Tenth Circuit does not typically address such issues with the frequency that the state's courts themselves do. As such, Tenth Circuit precedent can lag behind developments in state law — developments that the district courts may be nimble enough to perceive and adopt. Additionally, much of the benefit of having a consistent Tenth Circuit-wide interpretation of a particular state's law is wasted. Other than Oklahoma, every state encompassed by the Tenth Circuit contains only one federal judicial district, and there is relatively little need for federal judges in Wyoming and Kansas to have a uniform body of New Mexico law to which to look. Last, the Court notes, respectfully, that district courts may be in a better position than the Tenth Circuit to develop expertise on the state law of the state in which they sit. Every federal judicial district in the nation, except the District of Wyoming, covers at most one state. It is perhaps a more workable design for each district court to keep track of legal developments in the state law of its own state(s) than it is for the Tenth Circuit to monitor separate legal developments in eight states.
Having outlined the relevant considerations, the Court thinks the proper stance on vertical stare decisis in the context of federal court interpretations of state law is as follows: the Tenth Circuit's cases are binding as to their precise holding — what the state law was on the day the opinion was published — but lack the positive precedential force that its cases interpreting a federal statute or the Constitution of the United States of America possess. A district court considering a state law issue after the publication of a Tenth Circuit opinion on point may not come to a contrary conclusion based only on state court cases available to and considered by the Tenth Circuit, but it may come to such a conclusion based on intervening state court cases. The Supreme Court of the United States has addressed what the federal courts may use when there is not a decision on point from the state's highest court:
Fid. Union Trust Co. v. Field, 311 U.S. 169, 177-80, 61 S.Ct. 176, 85 L.Ed. 109 (1940) (footnotes omitted) (citations omitted). The Supreme Court has softened this position over the years; federal courts are no longer bound by state trial or intermediate court opinions, but "should attribute [them] some weight ... where the highest court of the State has not spoken on the point." Comm'r v. Estate of Bosch, 387 U.S. 456, 465, 87 S.Ct. 1776, 18 L.Ed.2d 886 (1967) (citing King v. Order of United Commercial Travelers, 333 U.S. 153, 159, 68 S.Ct. 488, 92 L.Ed. 608 (1948)). See 17A James Wm. Moore et al., Moore's Federal Practice § 124.20 (3d ed. 1999)("Moore's")("Decisions of intermediate state appellate courts usually must be followed... [and] federal courts should give some weight to state trial courts decisions." (emphasis omitted)(title case omitted)).
When interpreting state law, the Tenth Circuit does not and cannot issue a case holding that x is the law in New Mexico; it holds that the proper interpretation of New Mexico law, at the time the opinion is released, is x. Its holdings are descriptive, not prescriptive — interpretive, not normative. Because federal judicial opinions lack independent substantive force on state law issues, but possess such force regarding federal law issues, the Court thinks the following is not an unfair summary of the judicial interpretive process: (i) when interpreting federal law, the federal appellate courts consider the existing body of law, and then issue a holding that both reflects and influences the body of law; that holding subsequently becomes a part of the body of law; but (ii) when interpreting state law, the federal appellate courts consider the existing body of law, and then issue a holding that only reflects the body of law; that holding does not subsequently become a part of the body of law. The federal district courts are bound to conclude that the Tenth Circuit's reflection of the then-existing body of law was accurate. The question is whether they should build a doctrine atop the case and use the existence of the Tenth Circuit's case to avoid any responsibility to independently consider the whole body of state law that exists when the time comes that diversity litigants raise the issue in their courtrooms. Giving such effect to the Tenth Circuit's interpretations of state law is at tension with Erie, giving independent substantive effect to federal judicial decisions — i.e., applying federal law — in a case brought in diversity.
The purpose of Erie is well-known and simple, and the Court should not complicate it beyond recognition: it is that the same substantive law governs litigants' cases regardless whether they are brought in a federal or state forum. For simplicity's sake, most courts have settled on the formulation that "the federal court must attempt to predict how the states' highest court would rule if confronted with the issue." Moore's § 124.22[3] (citing Comm'r v. Estate of Bosch, 387 U.S. 456, 465, 87 S.Ct. 1776, 18 L.Ed.2d 886 (1967) ("[A]n intermediate appellate state court [decision] is a datum for ascertaining state law which is not to be disregarded by a federal court unless it is convinced by other persuasive data that the highest court of the state would decide otherwise." (citation omitted)(internal quotation marks omitted))). This may not be the most precise formulation if the goal is to ensure identical outcomes in state and federal court — the Honorable Milton I. Shadur, United States District Judge, looks to state procedural rules to determine in which state appellate circuit the suit would have been filed were it not in federal court, and then applies the state law as that circuit court interprets it, see Abbott Laboratories v. Granite State Ins. Co., 573 F.Supp. 193, 196-200 (N.D.Ill.1983) (noting that the approach of predicting the state supreme court's holdings will often lead to litigants obtaining a different result in federal court than they would in state court, where only the law of the circuit in which they filed — and certainly not nonexistent, speculative state supreme court law — governs) — but it is a workable solution that has achieved consensus. See Allstate Ins. Co. v. Menards, Inc., 285 F.3d 630, 637 (7th Cir.2002) ("[W]e adhere today to the general rule, articulated and applied throughout the United States, that, in determining the content of state law, the federal courts must assume the perspective of the highest court in that state and attempt to ascertain the governing substantive law on the point in question."). This formulation, built out of ease-of-use, does not relieve courts of their Supreme Court-mandated obligation to consider state appellate and trial court decisions. To the contrary, even non judicial writings by influential authors, statements by state supreme court justices, the closeness of the vote on a prior case addressing the issue, and personnel changes on the court — considerations that would never inform a federal court's analysis of federal law — may validly come into play. The question is whether the district courts must abdicate, across-the-board, the "would decide" aspect of the Erie analysis to their parent appellate courts when the Court of Appeals has declared an interpretation of state law.
The Erie doctrine results in federal cases that interpret state law withering with time. While cases interpreting federal law become more powerful over time — forming the groundwork for doctrines, growing upward from one application (Congress may create a national bank) to many (Congress may set quotas on wheat-growing for personal consumption), expanding outward from the general (states must grant criminal jury trials) to the specific (the jury need not be twelve people, nor must it be unanimous) — federal cases interpreting state law often become stale. New state court cases — even when not directly rebuking the federal court's statement of law — alter the common-law legal landscape with their dicta, their insinuations, and their tone. The Supreme Court of the United States, which picks cases its cases sparingly and for maximum effect, almost never grants certiorari to resolve issues of state law.
The question is whether the Court should look, not to Elliott Industries LP v. BP America Production Co., but to its own interpretation of New Mexico law, and conclude that New Mexico recognizes the marketable condition rule. The issue is whether, by so doing, the Court would be jettisoning and ignoring Tenth Circuit precedent, or would be rather recognizing, after conducting the Erie-mandated inquiry, that New Mexico law has changed since its 2005 publication. The Tenth Circuit's snapshot of New Mexico law may have been correct at the time, but it has decayed in the ensuing years. It does not appear to have shaped New Mexico law to any discernable degree or to have been ratified as a proper interpretation: no New Mexico court has cited it, although the state courts must be aware of it; the oil companies are certain to have cited it in their briefs opposing the state courts' adoption of the marketable condition rule. When called upon to interpret New Mexico law in 2014, the Northern District of California — unbound by Tenth Circuit precedent — agreed with the Court's assessment that Elliott Industries LP v. BP America Production Co. no longer accurately reflects New Mexico law. See Ellsworth v. U.S. Bank, N.A., ___ F.Supp.3d ___, ___ n. 10, No. C 12-02506 LB, 2014 WL 1218833, at *22 n. 10 (N.D.Cal. March 21, 2014)(forthcoming in F.Supp.2d)(citing Elliott Indus. LP v. BP Am. Prod. Co., 407 F.3d at 1117; Anderson Living Trust v. ConocoPhillips Co., 952 F.Supp.2d 979, 1033 (D.N.M.2013) (Browning, J.)).
The Court's views on Erie, of course, mean little if the Tenth Circuit does not agree. In Wankier v. Crown Equipment Corp., the Tenth Circuit said that,
Wankier v. Crown Equip. Corp., 353 F.3d 862, 866 (10th Cir.2003) (McConnell, J.). From this passage, it seems clear the Tenth Circuit only permits a district court to deviate from its view of state law on the basis of a subsequent case "of the state's highest court." See The American Heritage Dictionary of the English Language 1402 (William Morris ed., New College ed.1976)(defining "unless" as "[e]xcept on the condition that; except under the circumstances that"). A more aggressive reading of the passage — namely the requirement that the intervening case "resolv[e] the issue" — might additionally compel the determination that any intervening case law must definitively and directly contradict the Tenth Circuit interpretation in order to be considered "intervening."
It is difficult to know whether Judge McConnell's limitation of "intervening decision" to cases from the highest state court was an oversight or intentional. Most of the Tenth Circuit's previous formulations of this rule have defined intervening decisions inclusively as all subsequent decisions of "that state's courts," a term which seems to include trial and intermediate appellate courts. Even Koch v. Koch Industries, Inc., 203 F.3d 1202, 1231 (10th Cir.2000), the primary authority upon which Wankier v. Crown Equipment Corp. relies, uses the more inclusive definition. In fact, Wankier v. Crown Equipment Corp. quotes its relevant passage:
Wankier v. Crown Equip. Corp., 353 F.3d at 867.
Whether the decision to limit the intervening authority a district court can consider was intentional or not, the Tenth Circuit has picked it up and run with it. In Kokins v. Teleflex, Inc., the Tenth Circuit, quoting Wankier v. Crown Equipment Corp., refused to consider an opinion from the Colorado Court of Appeals holding directly the opposite of an earlier Tenth Circuit interpretation of Colorado law. See Kokins v. Teleflex, Inc., 621 F.3d 1290, 1297 (10th Cir.2010) (Holmes, J.)("[T]he Colorado Court of Appeals decided Biosera[, Inc. v. Forma Scientific, Inc., 941 P.2d 284 (Colo.Ct.App.1996)], so it is not an `intervening decision of the state's highest court.'" (emphasis in original)(quoting Wankier v. Crown Equip. Corp., 353 F.3d at 866)).
The Tenth Circuit has set forth a stringent restriction on its district courts' ability to independently administer the Erie doctrine. More importantly, the Tenth Circuit's view may be at tension with the above-quoted Supreme Court precedent, as well as its own prior case law. Moore's lists the Tenth Circuit as having been, at one time, a "court [that] hold[s] that a prior federal appellate decision [interpreting state law] is persuasive." Moore's § 124.22[4] (citing State Farm Mut. Auto. Ins. Co. v. Travelers Indem. Co., 433 F.2d 311, 312 (10th Cir.1970)). Still, the Court is bound to abide by the Tenth Circuit's interpretation of Erie. This scheme may be inefficient, because the plaintiffs may appeal, after trial, the Court's ruling on the marketable condition rule. The Tenth Circuit may certify the question to the Supreme Court of New Mexico, and the Tenth Circuit may then have to reverse the Court after a full trial on the merits.
Even knowing the high bar the Tenth Circuit now sets for what constitutes intervening case law, the Court is tempted to conclude that Davis v. Devon Energy Corp. directly and unequivocally overrules Elliott Industries LP v. BP America Production Co., for three broad reasons. First, the Tenth Circuit analyzed the implied duty to market as a term implied in fact, not one implied in law. An implied-in-fact term is a "real" contractual term, put there by the parties' agreement — albeit their unwritten and unspoken agreement. Because its origins are in the parties' agreement, direct conflict with a written term of the contract destroys the implied term. Other than having the word "implied" in them, implied-in-fact terms have little in common with implied-in-law terms, like the covenant of good faith and fair dealing, which the courts "imply" onto all contracts — without the pretense that the parties silently agreed to the term, and, in fact, often in spite of the parties' agreement. When Davis v. Devon Energy Corp. held that the marketable condition rule was an implied-in-law term, reversing the district judge who styled it as an implied-in-fact term, it undermined the logic of Elliott Industries LP v. BP America Production Co. To the extent that the Tenth Circuit's case can still be read for its narrow conclusion — now supported only by damaged logic — that there is no marketable condition rule in New Mexico, the Court will decline to ignore Elliott Industries LP v. BP America Production Co. on this ground.
Second, the Court notes that Davis v. Devon Energy Corp. may have held that there is a marketable condition rule, and its unambiguous disclaimer to the contrary, literally in all-caps and boldface type, that it "do[es] not address the marketable condition rule," may have been mere dicta (albeit clear, and loud, dicta). 2009-NMSC-048, ¶ 14, 218 P.3d at 80 (emphasis omitted). In that case, the district court had concluded that there was a marketable condition rule governing primary conduct in New Mexico, but declined to certify a class action for its breach because the district court thought that the rule was an implied-in-fact term. New Mexico procedure entitles parties to a contract to a parol evidence hearing on all disputed contractual terms, and the district court thought that these hearings — which would need to be individualized — would render the class action unmanageable. The Supreme Court of New Mexico reversed on an abuse-of-discretion standard, holding that the marketable condition rule is an implied-in-law term — for which no parol evidence hearings would need to occur — and certified the class action. See 2009-NMSC-048, ¶¶ 37, 40, 218 P.3d at 86, 87. The Supreme Court of New Mexico did not purport to hold that the marketable condition rule actually exists, but rather that, if it does exist, it is an implied-in-law duty. If that were the case's holding, however, the Court cannot see how the district court's error would not be harmless: the district court misconstrued the nature of a cause of action, but the cause of action does not exist — at least not according to the Supreme Court of New Mexico — at all, so no legally cognizable harm was done to the plaintiffs. The Court, however, is reticent to defy the express declaration of a state's highest court in implementing the Erie doctrine, so it will not adopt this view. Moreover, the Supreme Court of New Mexico declined from deciding whether the marketable condition rule exists, no doubt knowing about the Tenth Circuit's opinion in Elliott Industries LP v. BP America Production Co., and did not take the opportunity to make it clear to the federal courts what the law is.
Third, and perhaps most obvious, whatever else can be said about Davis v. Devon Energy Corp.'s holding, one thing is clear: the Supreme Court of New Mexico permits, even if it does not direct, its subordinate courts to recognize and apply the marketable condition rule. The Court can, additionally, find no case holding that a district court may decline to recognize the marketable condition rule. The Court, however, is not confident this holding applies in federal court. Even if the Supreme Court of New Mexico intended to extend its invitation to adopt the marketable condition rule to the federal courts — and there is no indication that it did — New Mexico trial courts have some freedom to be a part of shaping New Mexico law, and recognizing novel or uncertain causes of action may be appropriate for them to do. The Court, on the other hand, is bound to interpret and apply the state law of New Mexico, without injecting its own policy preferences. Were it not for its opinion that the marketable condition rule already exists in New Mexico, the Court would likely not consider adopting a state cause of action that was merely permissive as to the state's district courts, and that being so, the Court will not allow its disagreement with the Tenth Circuit to cloud its judgment here. The Court will apply the Tenth Circuit's holding from Elliott Industries LP v. BP America Production Co., and conclude that it is not free to decide that the marketable condition rule exists under New Mexico law.