JULIE A. ROBINSON, District Judge.
Plaintiffs Thelma Jean Lambert Living Trust ("the Trust") and Crieg and Bernita Rittenhouse bring this lawsuit to recover underpaid royalties due on wells operated by Defendants Chevron U.S.A. Inc., Chevron Texaco Exploration Production, Inc., and Four Star Oil & Gas Company ("Four Star") (collectively "Chevron"). Before the Court is Defendants' Motion for Summary Judgment as to Lambert and Motion to Dismiss All Kansas Claims (Doc. 40). In conjunction with this motion, the Court also considers the Trust's Motion to Strike Most of the Declaration of Alan Bates as Improper Opinion and Conclusory Testimony (Doc. 119). These motions are fully briefed after a period of discovery was provided under Fed. R. Civ. P. 56(d), and the Court is prepared to rule. As described more fully below, the Court denies the Trust's motion to strike and grants in part and denies in part Chevron's motion for summary judgment as to the Trust. The motion is granted as to the marketable condition rule except for the Kansas conservation fee reimbursement claim.
Plaintiff Thelma Jean Lambert Living Trust is a royalty owner of two natural gas wells, Evenson #1 and #2, in Seward County, Kansas, operated by Chevron. Crieg and Bernita Rittenhouse are royalty owners of wells operated by Chevron in Texas County, Oklahoma. They bring claims individually and on behalf of a putative class of royalty owners in Chevron-operated wells in Kansas and Oklahoma from December 23, 2009 to the present. The Trust seeks only to represent the Kansas portion of the class and the Rittenhouses seek only to represent the Oklahoma portion of the class.
Natural gas must meet certain quality specifications before it can enter an interstate pipeline. Namely, it must undergo "midstream gathering and processing." Chevron contracts with third parties to perform gathering and processing, and this case deals with how those midstream gathering and processing costs are shared, if at all, between Chevron and the Trust under the terms of the leases, and the implied duties that attach thereto. Plaintiffs allege that Chevron underpaid royalty owners by taking numerous volumetric and fee-based deductions before the gas products were in marketable condition that were not revealed on the royalty owners' check stubs. Each gas contract has some type of in-kind fee and some type of monetary fee to pay for the midstream Gathering, Compression, Dehydration, Treatment, and Processing ("GCDTP") services. Plaintiffs allege that Chevron paid royalty on the net, not gross, gas contract value, in breach of the marketable condition rule. Plaintiffs claim that Chevron passes these midstream processing costs onto the royalty owners because the purported "sales" to third-party purchaser ONEOK are not true purchases; the actual gas products cannot be sold until they enter the commercial market for the starting price of each gas product.
For these reasons, beginning on December 23, 2009, Plaintiffs maintain that Chevron breached an implied covenant to place the gas and its constituent parts in "marketable condition" at Chevron's exclusive cost, and that Chevron breached the implied duty of good faith and fair dealing by entering into gas purchase agreements with ONEOK on paper only, thereby hiding the midstream processing costs that were passed on to the royalty owners. Part of the Trust's claim is that Chevron improperly deducted from royalties the Kansas Conservation Fee, which the Kansas Supreme Court has held may not be shared with royalty owners.
Plaintiffs originally filed this proposed class action complaint in Seward County District Court on June 9, 2014; Chevron removed the case on July 16, 2014. The parties entered into a phased pretrial management plan; a Phase I Class Action Certification Scheduling Order was entered on December 5, 2014.
On October 8, 2015, before Plaintiffs had filed their motion for class certification, Chevron moved for summary judgment based on a July 2, 2015 Kansas Supreme Court decision, Fawcett v. Oil Producers, Inc. of Kansas.
Summary judgment is appropriate if the moving party demonstrates that there is no genuine dispute as to any material fact and that it is entitled to judgment as a matter of law.
The moving party initially must show the absence of a genuine issue of material fact and entitlement to judgment as a matter of law.
Once the movant has met this initial burden, the burden shifts to the nonmoving party to "set forth specific facts showing that there is a genuine issue for trial."
Finally, summary judgment is not a "disfavored procedural shortcut;" on the contrary, it is an important procedure "designed to secure the just, speedy and inexpensive determination of every action."
As already mentioned, the instant motion for summary judgment is based almost entirely on the 2015 Fawcett decision by the Kansas Supreme Court. The parties vehemently dispute the scope of the court's holding in Fawcett, and how it applies to the facts of this case. Chevron urges that under Fawcett, summary judgment is warranted as a matter of law, whereas the Trust contends that Fawcett opens the door to genuine factual disputes about good faith. Both parties filed numerous evidentiary objections and motions to strike the summary judgment evidence. In order to consider these objections and determine the uncontroverted facts in this matter, the Court must first discuss its understanding of the Fawcett decision, and the degree to which it leaves open factual questions that may apply to the Trust's breach of lease claim in this case.
Fawcett was a class action lawsuit alleging underpayment of royalties claimed under twenty-five oil and gas leases where the lessee-operator sold raw natural gas at the wellhead to third parties that in turn processed the gas before it entered the interstate pipeline system.
The leases at issue in Fawcett were "Waechter leases" that required the lessee to pay the lessor "one eighth of the proceeds if sold at the well, or if marketed off the leased premises, then one-eighth of the market value at the well."
Chevron argues that Fawcett squarely applies to this case because the contractual relationship between Chevron and the Trust, and between Chevron and third-party purchaser ONEOK, is identical to the contractual relationships in Fawcett. As such, Chevron claims that the marketable condition rule was satisfied when gas was delivered at the wellhead to ONEOK in a condition acceptable to ONEOK, in a good faith transaction. The Trust argues that Fawcett's holding does not apply here because (1) the gas was not sold at the wellhead; (2) the gas was not marketed at the wellhead; and (3) unlike in Fawcett, the Trust here challenges Chevron's good faith and prudence in entering into the purchase agreements with ONEOK. The Trust refers to these three arguments as Fawcett's "appellate concessions" that were not made in this case and thus require this Court to deny the motion for summary judgment.
Summary judgment evidence "must be submitted `in a form that would be admissible at trial."
Chevron objects that many of the Trust's exhibits in opposition to summary judgment are unauthenticated and constitute hearsay, and thus should be excluded. On summary judgment, affidavits "must contain certain indicia of reliability."
The Court agrees with Chevron however that certain exhibits must be excluded because the Trust, as the proponent of the evidence, has failed to demonstrate that a hearsay exception applies, or that it could otherwise be presented in a form that would be admissible at trial. First, the deposition testimony from other cases attached as Exhibits 4 and 5 are inadmissible. Deposition testimony is governed by Fed. R. Civ. P. 32, and Fed. R. Evid. 804. Rule 32 allows a party to use a deposition taken in another case if it involves the same subject matter between the same parties.
Second, the Court disregards as improper legal argument any attempt to use a legal opinion from another court as evidence in this case. While the parties can litigate the weight that this Court should give to nonbinding authority outside of this circuit, it is wholly inappropriate for the Court to consider the ruling of another court as evidence in this case between different parties. Chevron's objection to Exhibit 2 is sustained.
The Court also disregards as improper legal argument any attempted analysis by Mr. Sharp in his declaration about the documents he offers. He provides no information that allows this Court to conclude such analysis could be presented in a form that would be admissible at trial. He did not prepare the documents. Instead, he provides his own self-serving interpretation of the evidence.
The Court also excludes the Pate White Paper offered as Exhibit 11. The Trust argues that Pate's article can be authenticated by ONEOK or by the publisher of the paper. But there is no bates stamp on this paper indicating that ONEOK produced it, and even if the publisher could authenticate the article, it does not alleviate the hearsay problem. The Trust offers this paper to support the factual assertion that "Midstream Services under gas gathering agreements do not become a non-service sale just by adding a title transfer clause or by labeling the contract a "purchase" agreement."
The Trust offers Exhibits 16-19, which are draft versions of the 2014 Amended contracts between ONEOK and Chevron. They are offered to show that Chevron "pushed" changes that would have changed what had been gathering agreements into purchase agreements without otherwise changing the substance of the parties' agreements. Setting to one side whether this is a reasonable interpretation of these documents, the Court agrees that Mr. Sharp lacks foundation to attest to the meaning of these documents, and the Court cannot surmise from this record whether they would be admissible at trial. While Mr. Sharp may have physically received these draft agreements during discovery, he has no personal knowledge of their genesis—which party proposed which changes and whether they were further negotiated or abandoned. To the extent the changes were proposed by ONEOK, the Trust has failed to show that a hearsay exception would apply.
Exhibits 27 and 28 are lists of deposition questions for Mr. Bates, and a representative of DCP (a competitor third-party purchase/midstream processing company), from the Pummill case in Oklahoma state court. The sets of questions were sent as attachments to emails from Richard B. Noulles, who apparently represented the defendant in that case.
In Exhibit 31, the Trust offers what it characterizes as "industry papers." But this exhibit is a table that appears to compile statements made by various persons in the oil and gas industry in other court filings, legislative hearings, 10-Ks and articles. The Trust argues that these "industry papers" "can likewise be authenticated based on the websites and 10-Ks, but even if not, they are sufficient for an expert such as Mr. Reineke and Dr. Foster to rely upon them."
Chevron argues that the following exhibits attached to Exhibit A, Mr. Sharp's declaration, should be excluded under Rule 401 because they are not relevant to the issues presented by the motion for summary judgment: 2-5, 8, 11-23, 26-28 and 31-32. The Court has already excluded several of these exhibits as inadmissible hearsay. As described in the discussion about the Fawcett decision, the key inquiries here are how the marketable condition rule applies to the lease language in this case, whether Chevron delivered gas to ONEOK in a condition acceptable to ONEOK, whether the third-party contracts were good faith transactions, and whether Chevron fulfilled its implied duty of good faith and fair dealing to the Trust.
The Court sustains Chevron's objections with regard to other leases and draft agreements unrelated to the Evenson wells. These contracts have no bearing on whether Defendant breached the lease in this case. The sole claim at issue on the motion for summary judgment is the breach of lease claim as to the Lambert leases. It is undisputed that the gas produced by those wells is processed by ONEOK pursuant to gas purchase agreements with Chevron. The Court must only determine whether those agreements constitute good faith transactions under the standard set forth in the Uniform Commercial Code.
Conversely, the Court finds that the objections should be overruled as to the exhibits that pertain to the Evenson wells. The gathering agreements between the same parties or their successors that preceded the 2007 contracts and 2014 amendments that give rise to these claims are thus admissible, as are the plant statements because they implicate the particular gas production process in this case, i.e. the production process for gas produced by the Evenson wells. The objections to Exhibits 12, 13 and 14 are overruled.
Lay opinion testimony is governed by Fed. R. Evid. 701, and is "limited to one that is: (a) rationally based on the witness's perception; (b) helpful to clearly understanding the witness's testimony or to determining a fact in issue; and (c) not based on scientific, technical, or other specialized knowledge within the scope of Rule 702."
In contrast, Rule 702 governs expert testimony:
The Court has broad discretion in deciding whether to admit expert testimony.
The proponent of expert testimony must show "a grounding in the methods and procedures of science which must be based on actual knowledge and not subjective belief or unaccepted speculation."
Daubert sets forth a non-exhaustive list of four factors that the trial court may consider when conducting its inquiry under Rule 702: (1) whether the theory used can be and has been tested; (2) whether it has been subjected to peer review and publication; (3) the known or potential rate of error; and (4) general acceptance in the scientific community.
It is within the discretion of the trial court to determine how to perform its gatekeeping function under Daubert.
Initially, the Trust moved to exclude the Alan Bates declaration attached to Chevron's reply as inadmissible expert opinion testimony. The Trust argued that Bates was not designated as an expert, that his opinion contradicts testimony he provided in another case, that he is not qualified to render the opinions in his declaration, and that his opinions are incorrect. But the Court overrules and denies this motion because Bates is not being offered as an expert. Expert testimony is testimony that requires specialized or technical skill and knowledge.
To the extent the Trust argues for the first time in the reply that its motion to exclude is based on the failure to timely disclose Bates as a lay witness, the Court denies the motion as well. At the Trust's behest, the discovery in this case, and the facts addressed in the summary judgment motion, multiplied substantially after the initial motion was filed. The Trust has clearly been on notice of Bates's role and the basis for his testimony, given counsel's references to his testimony in other cases in which he has been involved. And the Trust had the opportunity to depose him during the Rule 56(d) discovery stay and opted to cancel that deposition. Moreover, the Trust has been granted leave to file a summary judgment sur-reply to address this evidence. There is no prejudice to the Trust by allowing Chevron to rely on this lay witness in the reply.
The Trust offers Reineke and Foster as experts in opposition to summary judgment. Reineke is a petroleum engineer with over forty years of experience working in the oil and natural gas industry. He has served as an operator, drilling engineer, and production engineer. He has experience operating wells and entering into oil and gas leases, as well as negotiating gathering, processing, and sales agreements. He is familiar with all phases of the natural gas production process. Reineke provides explanations and opinions on the following issues: (1) how raw gas such as that extracted from the wells operated by Chevron is produced, what the physical characteristics and qualities of that raw gas are as it comes out of the well bore and the subsequent processes necessary to transform the raw gas stream (and the constituents therein) into products that are capable of sale in the commercial marketplace; (2) what constitutes a good faith sale; and (3) Chevron's method of paying royalties owing from the sale of products from the gas stream.
Foster is an economist and the President of Foster Economic Research; he has been an independent consultant in the energy field, with an emphasis on natural gas, for over forty years. Foster's expert report addresses the following issues: (1) whether raw gas is a marketable product at or near the well; (2) when gas and its constituent parts have been transformed into marketable products such that they can be bought and sold in the commercial marketplace; (3) whether title transfers in contracts that transfer title to the raw gas prior to the provision of midstream services constitute "good faith sales" as to the royalty owners; and (4) the four third-party purchase contracts between Chevron and ONEOK discussed in Chevron's motion for summary judgment.
Chevron moves to exclude these expert reports as follows: (1) Reineke's opinion that the gas that Chevron sold to ONEOK was not in marketable condition until after processing for residue gas and after fractionalization to achieve marketable NGL products; and (2) Foster's and Reineke's opinion that the Chevron gas contracts with ONEOK were not good faith sales because the gas was sold before being put into marketable condition. The Trust argues that Foster and Reineke are unqualified to give opinions on the marketable condition of gas, and that their opinions on these issues contravene the court's holding in Fawcett.
The Court agrees with Chevron that these experts' opinions must be excluded because they plainly contradict the Kansas Supreme Court's holding in Fawcett. As Judge Melgren recently stated in excluding the same expert opinions in a similar case, "Fawcett dictates that gas is in marketable condition if it is marketed in a good faith transaction."
In addition to contradicting the controlling law on the Trust's claims in this case, the experts' opinions also must be excluded because they are legal conclusions. Fed. R. Evid. 704(a) provides that "testimony in the form of an opinion or inference otherwise admissible is not objectionable because it embraces an ultimate issue to be decided by the trier of fact." Still, "testimony on ultimate questions of law, i.e., legal opinions or conclusions, is not favored."
It is clear to the Court that the experts in this case simply disagree with the Fawcett decision. A few examples illustrate the blatant contradictions and conclusory assertions of law. First, despite the fact that Kansas law clearly recognizes a category of oil and gas leases— Waechter leases—that are based on proceeds "from the sale of gas as such at the mouth of the well where gas only is found" or "if sold at the well," the experts opine that gas can never be sold or marketed at the well.
Second, Foster states his understanding of Fawcett as requiring the operator to "enter into a `good faith sale' of gas in marketable condition."
This Court is bound to apply governing Kansas law to the Kansas breach of lease claim in this matter. The Fawcett decision clearly holds, under quite similar facts, that gas may be sold and marketed at the wellhead, and that if it is sold at the wellhead in a condition acceptable to the purchaser in a good faith sale, it has satisfied the marketable condition rule.
In considering the parties' factual submissions, the Court excludes the evidence described above that could not be presented in admissible form at trial, and disregards all factual assertions that constitute legal argument by counsel, or are not supported by specific citations to the record. What remains are the following facts that are uncontroverted for purposes of summary judgment, and viewed in the light most favorable to the Trust as the nonmoving party.
One of the Chevron Defendants, Four Star, is the lessee by assignment under a September 8, 1944, Oil and Gas Lease of approximately 320 acres in Seward County, Kansas; Lambert is the lessor under the lease, by deed acquisitions dated December 7, 1965 (1/2 mineral interest) and November 5, 1985 (100% mineral interest) ("Lambert Lease"). The Lambert Lease's royalty provision states:
Under the Lambert Lease, the Trust has an interest in only two Chevron-operated wells: the Evenson #1 and #2 wells, both in Seward County, Kansas. There are no provisions in the Lambert lease for deductions required to make the gas acceptable to purchasers.
From May 2007 to the present, all gas produced from the Evenson #1 and #2 wells was subject to Gas Purchase Agreements between Chevron and ONEOK. These agreements define ONEOK as the buyer and Chevron as the seller. They state that "BUYER desires to purchase and SELLER desires to sell" gas specified in the contracts that include the Evenson wells.
Each of the four agreements contains an Exhibit A that sets forth the details of consideration, including a breakdown of proceeds, fees and charges. The buyer is to pay to the seller natural gas liquids payment based on a percentage of net Natural Gas Liquids and net residue proceeds, less certain fees such as a gathering and compression fee, a third-party fee, and a plant fuel fee. The proceeds due under the contract are based on the value received by the sale of the gas by the buyer, net costs and fees incurred. The Trust's royalty was calculated based on a percentage of these proceeds.
ONEOK is not related to, nor affiliated with, any Chevron entity. The 2007 ONEOK gas purchase agreements and the 2014 ONEOK gas purchase agreements are arms-length agreements negotiated by representatives of Chevron's commercial department and ONEOK.
At all times from 2007 to present, the gas delivered to ONEOK under the gas purchase agreements was in a condition acceptable to ONEOK. ONEOK accepted the gas and paid Chevron the proceeds. No costs were assessed to the Trust or deducted from the Trust's royalty payments to meet ONEOK's requirements as to the quality of the gas at the time and place of delivery.
The 2007 agreements explicitly terminated "any prior agreements for the sale of gas between the parties or their predecessors in interest concerning any gas produced from any sources covered by this Agreement described in Exhibit `B.'" Each contract listed a Gas Gathering Agreement dated September 23, 1996, and a Compression Agreement, dated May 1, 2001, in this section.
At all time since December 1, 2009, Kansas has imposed a regulatory fee on operators of oil and gas wells known as a Conservation Fee. Between December 23, 2009, and September 30, 2012, Chevron deducted Conservation Fees from the Trust. Beginning in production month October 2012, Chevron ceased taking any further deductions from royalty for Conservation Fee payments Chevron made to the Kansas Corporation Commission ("KCC"). On or about March 28-30, 2016, Chevron affected accounting credit to all royalty owners in Kansas wells who had a conservation fee deducted from royalties from May 2009 to September 2012, including the Trust.
The reimbursements to royalty owners, including the Trust, were included in their monthly royalty checks where applicable. The Trust's check was sent on March 30, 2016 to its current address. There was no notice provided, or other accounting, that conveyed to the Trust that its royalty check included the conservation fee credit. Counsel for Chevron forwarded the check detail to counsel for the Trust by email on April 5, 2016. On April 11, 2016, Mr. Sharp emailed counsel for Chevron and asked for more detail on how it had calculated the Conservation Fee refund, and where the interest calculation was reflected on the check detail. On April 12, Chevron's counsel responded with the specific code on the check detail for the interest paid. The Trust's check cleared effective May 4, 2016. On May 5, 2016, Chevron's counsel provided further information to the Trust's counsel about the back payments of conservation fees to other Kansas royalty owners.
The total amount of conservation fee reimbursement paid to the Trust was $92.97. Chevron also paid interest on the refunded conservation fee calculated on a monthly basis during the refund period at the rate of 10%. The total amount of interest paid to the Trust was $48.29. The total amount of conservation fees and interest to Kansas royalty owners was $11,863.56.
As described earlier in this Order, the Trust's response to the Fawcett decision hinges on its claim that there were three "appellate concessions" in Fawcett not made in this case that distinguish the Kansas Supreme Court's holding and render it in applicable here: (1) the gas here was not sold at the wellhead; (2) the gas here was not marketed at the wellhead; and (3) unlike in Fawcett, the Trust here challenges Chevron's good faith and prudence in entering into the purchase agreements with ONEOK. The Court does not agree with the Trust that these "appellate concessions" distinguish the facts of this case from Fawcett. Based on the uncontroverted facts of this case, the marketable condition rule was satisfied because the Waechter leases provided for a sale of raw gas at the well, the gas was marketed at the well, and the gas was delivered in a condition acceptable to ONEOK in a good faith transaction. Moreover, the Trust has failed to point this Court to case-specific evidence that creates a genuine issue of material fact about whether Chevron breached its implied duty of good faith and fair dealing under the lease.
The Trust argues that the rule announced in Fawcett does not apply here because the gas was neither sold nor marketed at the well. In order to determine the geography of the sale of gas, and of the royalty computations, Kansas courts look to the royalty language in the lease.
The Kansas Court of Appeals found that the Fawcett leases were Waechter leases, and found "the gas was sold at the well and that the leases require royalty payment based on the proceeds from wellhead sales with no provisions for deductions or adjustments from gas sale contracts."
And, like the purchase agreements in Fawcett, the purchase agreements in this case provide that "Title, possession and control of SELLER's Gas and all Condensate and Plant Products contained therein shall pass from SELLER to BUYER at the Receipt Point(s)."
When the gas is sold and marketed at the well, the marketable condition rule as set forth in Fawcett requires that it be acceptable to the purchaser when delivered. The uncontroverted evidence establishes that ONEOK desired to purchase raw gas, that the gas was accepted by ONEOK, and that no deliveries were rejected nor costs imposed for failure to meet certain qualitative standards set forth in the purchase agreements.
The Trust urges that the gas in this case was not marketable at the well based on counsel's inadmissible comparison of gas analysis for the raw gas sold to ONEOK to the standards in the gas purchase contracts, which he claims shows that it did not meet the quality standards set forth in the gas purchasing contracts. The Trust also relies on excluded expert reports concluding that there is no market for raw gas at the mouth of the well. Like the contract in this case, the OPIK contract in Fawcett contained quality requirements, and the third-party purchasers had the right to either refuse delivery or accept the gas and deduct treatment costs if needed.
Having concluded that there is no genuine issue of material fact about whether the gas was sold and marketed at the wellhead, or whether the gas was acceptable to the purchaser when it was delivered, under Fawcett the Court must finally consider whether the gas purchase contracts were good faith transactions.
As the Trust correctly notes, a determination of good faith is a question of fact.
Chevron comes forward with uncontroverted evidence that the gas purchase agreements were arm's length agreements between two unaffiliated companies. The Trust challenges this evidence by arguing that they are "sham sales," "paper title transfers," or "pre-market sales" designed solely to avoid Chevron's duty to market and prepare the raw gas for market. As with its wellhead sale argument, the Trust's good faith argument relies on the generalized premise that no third-party purchase agreement at the wellhead could be a good faith transaction. The Court rejects this generalized argument and finds no case-specific evidence that creates a genuine issue of material fact about good faith in this case. The Trust presents no evidence that the parties in this case conspired or colluded to evade the marketable condition rule, or that the purchase agreements were not executed in good faith.
Chevron has submitted evidence from a ONEOK representative that the 2007 and 2014 gas purchase agreements are representative of agreements routinely used by both ONEOK and Chevron. Bates, who is familiar with ONEOK's operations in Kansas and with its contracts with Chevron, states that his employer "routinely purchases natural gas at the wellhead or other field locations under percentage of proceeds ("POP") and percentage of index ("POI") contracts in Kansas."
The Trust argues that marketability requires the gas to be of a quality that can be sold "at the ordinary price in a recognized market." It contends that the mere fact that it is capable of sale is insufficient; raw gas is incapable of sale before full GCDTP services can be performed and the products are sold downstream. These are the same assertions in the Trust's expert reports, which this Court has excluded as contrary to controlling Kansas law. For the same reasons it excluded those opinions, the Court cannot find that this argument negates the good faith element of marketability set forth in Fawcett. The Trust's argument turns the holding of Fawcett into a circular analysis: the duty to make gas marketable is satisfied when the operator delivers the gas to the purchaser in a condition acceptable to the purchaser in a good faith transaction, but it can only be a good faith transaction if it is marketable. Accepting the Trust's argument would also write out of Fawcett its rejection of the claim that the gas must be in a certain physical condition to be sold in the commercial marketplace.
The Trust has offered many other contracts between Chevron and ONEOK, and between other parties, to support its claim that these third-party purchase agreements violate commercially reasonable standards of good faith in the industry. The Court has excluded draft and executed contracts unrelated to the wells in this case as not relevant to the good faith of these specific transactions. The Trust offers the gathering agreements that preceded the gas purchase agreements between ONEOK and Chevron as to the Evenson wells. The Trust argues that the gathering agreements used in the past accomplish the same services as the gas purchase agreements, and that the "paper title transfers" in the gas purchase agreements have no effect other than allowing Chevron to share the processing expenses with the royalty owners. But there is nothing in the gathering agreements, draft agreements, or predecessor agreements that make this clear, or allow such an inference. The purchase agreements provide for title transfer at the receipt points; the gathering agreements did not. There is no evidence that operators and purchasers began to execute purchase agreements instead of gathering agreements to explicitly avoid the marketable condition rule, other than the conclusory statements of the Trust's experts, which this Court has excluded. Indeed, the original 2007 contracts at issue here predate the Fawcett decision.
The Trust also offers revisions to the 2014 amended contracts between Chevron and ONEOK, claiming that they evidence Chevron "pushing" changes that would convert the agreements into purchase agreements without changing the substance of the contracts. However, these amended agreements replaced the 2007 purchase agreements, not the earlier gathering agreement. There was no reason to push "purchase agreement" language into amendments to a purchase agreement. Second, the Court excluded these documents under the rule against hearsay, and because there is no foundation for these revisions. It is purely conclusory, in the absence of evidence from ONEOK or Chevron, to speculate (a) that these were changes proposed by Chevron; and (b) the purpose of the changes beyond the plain meaning of the fully executed contracts. The Trust points to nothing about the facts surrounding the specific transactions in this case, which call their good faith into question. Instead, the Trust posits that raw gas can never be sold at the wellhead in a good faith transaction. Under Fawcett, the Trust must come forward with specific evidence about the transactions in this case to create a genuine issue of material fact on good faith.
The Trust's argument that the purchase agreements are a sham is not specific to the purchase agreements in this case. It depends on a finding by this Court that all such purchase agreements are a sham, despite the court's acknowledgement in Fawcett, that "most natural gas produced in Kansas is sold under formula-based purchase agreements similar to those in this case."
In addition to challenging the good faith of the transactions between Chevron and ONEOK under the marketable condition rule, the Trust argues that Chevron breached the implied duty of good faith and fair dealing it owes to the Trust under the lease by entering into the third-party purchase agreements in this case. In Fawcett, the court acknowledged that under its formulation of the marketable condition rule, there is potential for "mischief given an operator's unilateral control over production and marketing decisions."
Under Kansas law,
This requires a case-specific inquiry. The Court does not read Fawcett as creating a new rule or duty involving good faith and fair dealing between a lessor and lessee. Instead, the preexisting duty of good faith and fair dealing was sufficient in the court's mind, along with the implied duty of marketability, to protect royalty owners from an operator's bad faith conduct in making production and marketing decisions. This Court does not read Fawcett as contemplating a result whereby a plaintiff only must demonstrate that an operator sells gas to a third-party purchaser before the gas reaches the interstate pipeline to create a triable issue on the duty of good faith and fair dealing, despite fulfilling the marketable condition rule. The Trust must demonstrate some evidence specific to these parties to create a genuine issue of material fact on the implied duty. Because all of the Trust's good faith and fair dealing arguments assert a generalized grievance about these third-party contractual arrangements, summary judgment is appropriate in favor of Chevron. Nonetheless, the Court addresses the Trust's specific arguments below.
First, the Trust argues that reducing the royalty payments based on net proceeds cannot constitute good faith because the fruits of the lease were to be paid for all valuable minerals that came out of the well. The Trust's argument that it has not received proceeds on all minerals because drip condensate and helium are excluded is without evidentiary support. Actual proceeds on which Chevron calculated royalties was based on consideration under the gas purchase contracts for "all components" in the raw gas stream. Defendant submitted Morby's declaration that Chevron paid Lambert royalty based on its proportionate share of total proceeds for all gas and its components, as measured at the wellhead. This would include drip condensate and helium. Moreover, the duty of good faith and fair dealing cannot supply new contract terms to a contract.; it grows out of the existing terms.
Second, the Trust argues that Chevron failed to inform the royalty owners that they were liable for midstream service costs under these purchasing agreements, in breach of the duty of good faith and fair dealing. In support of this argument, the Trust cites Bank of America v. Narula, a commercial mortgage foreclosure case where a lender was found in breach of the duty of good faith and fair dealing on a loan agreement, and in breach of its fiduciary duty to the borrowers, where the bank failed to advise and inform the borrowers that they would be personally responsible for certain fees.
Finally, the Trust argues that Chevron breached the duty of good faith and fair dealing by "exercising its discretion to recapture foregone opportunities," citing two law review articles in support.
In sum, Chevron has demonstrated an absence of evidence that the third-party purchase agreements in this case violated either the implied duty of marketability or the implied duty of good faith and fair dealing. The Trust has failed to come forward with evidence that would be admissible at trial that would create a genuine issue of material fact as to these issues. Summary judgment is therefore granted to Chevron on the marketable condition claim.
The First Amended Class Action Complaint, filed February 8, 2016, after Chevron's motion for summary judgment was filed, alleged for the first time that the Conservation Fee had been wrongfully deducted from Kansas royalty owners' payments:
Defendant does not dispute that the conservation fee was wrongfully deducted from these royalty payments.
On or about March 28-30, 2016, before the Trust had responded to the summary judgment motion, Chevron affected accounting credit to all royalty owners in Kansas wells who had a conservation fee deducted from royalties from May 2009 to September 2012, including the Trust. The reimbursements to royalty owners, including the Trust, were included in their monthly royalty checks where applicable. But there was no notice or accounting that put the recipients on notice that the checks included reimbursement for the conservation fees. The Trust's check was sent on March 30, 2016 to the Trust's current address. Chevron's counsel providing accounting code information and a check statement after the Trust cashed the check.
In the reply memorandum, Chevron argues that its payment of the conservation fee renders this claim constitutionally moot.
The standing doctrine requires federal courts, before considering the merits of an action, to "satisfy themselves that the plaintiff has alleged such a personal stake in the outcome of the controversy as to warrant [the plaintiff's] invocation of federal-court jurisdiction."
Even though the Trust had standing to assert a conservation fee claim at the time the First Amended Complaint was filed, "[a]n `actual controversy must be extant at all stages of review, not merely at the time the complaint is filed.'"
The Trust argues that the conservation fee claim is not moot despite Chevron's refund, because the royalty owners were not provided with adequate notice of the refund; it was included with their monthly royalty checks with no disclosure that it had been included. The Trust characterizes the payments as essentially a hidden settlement.
The Tenth Circuit has discussed the mootness inquiry in the class action context as follows:
Another potential mootness exception may apply where a defendant "picks off" the named plaintiffs before a class action can be certified.
It is undisputed that Chevron tendered payment, plus interest, to all Kansas royalty owners charged a conservation fee during the relevant time frame. It is also undisputed that the Trust at least was not provided with notice of the conservation fee reimbursement along with its royalty check. The Court can infer from the facts submitted that Chevron similarly did not provide notice to the other royalty owners that the credits on their royalty payments were for past conservation fees withheld, plus interest.
Given Chevron's failure to notify the Trust and other royalty owners of what was essentially an offer to settle the conservation fee claim in this case, Chevron's refunds are analogous to unaccepted offers of judgment. The Supreme Court has recently held that an unaccepted offer of judgment in this context is insufficient to moot out a plaintiff's claim.
Also, the Supreme Court has explained that an order limiting communications between parties and putative class members requires "a clear record and specific findings that reflect a weighing of the need for a limitation and the potential interference with the rights of the parties," which involves "identifying the potential abuses being addressed."
The Court agrees with Chevron that the Fawcett decision controls disposition of the Kansas claims in this matter. The Trust attempts to avoid the result of Fawcett by repackaging its implied duty of marketability argument as a breach of the duty of good faith and fair dealing. But Fawcett addresses the issues raised by the Trust, regardless of the label. The lease language is virtually identical. As in Fawcett, the gas here was sold and marketed at the well and the quality of the gas does not dictate a finding that the gas was not in a marketable condition. Therefore, in order to satisfy the marketable condition rule and allow for midstream costs to be shared with the royalty owners, the gas was required to be acceptable to ONEOK, the third-party purchaser, at the time of delivery, and the third-party purchase agreements must have been good faith transactions. Chevron satisfied its summary judgment burden of showing an absence of evidence that the gas was either not acceptable to ONEOK, or that the four third-party purchase agreements were not good faith transactions. The Trust has not come forward with specific evidence to show that these particular transactions do not meet the standards set forth in Fawcett, and this Court declines to make a generalized finding that the sales arrangements at issue in this case, which were also at issue in Fawcett, constitute sham sales designed to circumvent the marketable condition rule.
Moreover, the Trust has not come forward with evidence that Chevron breached the duty of good faith and fair dealing implied in the lease. The Trust has failed to point to an existing provision in the lease that required Chevron to pay royalty on proceeds minus post-sale expenses incurred by third party purchasers to add further value to the gas before it entered the interstate pipeline. Moreover, there is no specific evidence in the record about the third-party transactions in this case that suggests Chevron breached the good faith and fair dealing duty it owed the Trust when they were executed. As such, summary judgment is granted in favor of Chevron on the marketable condition rule claim.
Because Chevron failed to provide notice to the Trust and putative class members that its payments of the conservation fees charged between 2009 and 2012, plus interest, were credited on royalty payments, the conservation fee claim is not moot. As such, summary judgment is denied on this component of the breach of lease claim.
