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Colorado Gas Royalty Law at the Intersection of Implied Covenants and Class Treatment: A Look Back and a Look Forward Barry C. Bartel, April 11, 2014.

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Presentation on theme: "Colorado Gas Royalty Law at the Intersection of Implied Covenants and Class Treatment: A Look Back and a Look Forward Barry C. Bartel, April 11, 2014."— Presentation transcript:

1 Colorado Gas Royalty Law at the Intersection of Implied Covenants and Class Treatment: A Look Back and a Look Forward Barry C. Bartel, April 11, 2014

2 Marketable Product Rule  Garman v. Conoco, Inc., 886 P.2d 652 (Colo. 1994)  Rogers v. Westerman Farm Co., 29 P.3d 887, 906 (Colo. 2001)

3 Once gas is deemed marketable based on a factual determination, the allocation of all costs can properly be determined. Absent express lease provisions addressing allocation of costs, the lessee's duty to market requires that the lessee bear the expenses incurred in obtaining a marketable product. Thus, the expense of getting the product to a marketable condition and location are borne by the lessee. Once a product is marketable, however, additional costs incurred to either improve the product, or transport the product, are to be shared proportionately by the lessor and lessee. All costs must be reasonable. Rogers v. Westerman Farm Co., 29 P.3d 887, 906 (Colo. 2001)

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5 Colorado royalty law  Look back: implied covenants  Intersection with class action law  Five trends that result

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7  A look back.

8 “Our nation’s deference to private ownership of minerals is inherited from England, where the common law applied the Latin maxim, cujus est solum, ejus est usque ad coelum et ad inferos: to whomsoever the soil belongs, he owns also to the sky and to the depths.” James C. Smith, Theories of Subsurface Ownership: An Overview, 14 E. MIN. L. FOUND. § 4.01 (1993).

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10  1859: Venango County, Pennsylvania  “The Pennsylvania Start-up That Changed the World,” Daniel Yergin, The Pennsylvania Start-up That Changed the World, FORBES, Sept. 3, 2009.

11  Who gets what when natural gas is produced?  Written oil and gas lease  “[F]rom the very beginning of the industry the stormcenter of litigation in the jurisprudence has been the degree of diligence which an oil and gas lessee should exercise in the development of the lands covered by his lease.” James A. Veasey, The Law of Oil and Gas, 18 MICH. L. REV. 446, 454 (Apr. 1920)

12  MAURICE H. MERRILL, THE LAW RELATING TO IMPLIED COVENANTS IN OIL AND GAS LEASES 20 (1926), 23 (1940).  Four implied obligations –to begin drilling –to keep drilling –to operate diligently –to protect the resource.

13 Davis v. Cramer, 808 P.2d 358, 361 (Colo. 1991) “Most commentators divide the implied covenants into four categories: exploration, development, production (including marketing), and protection against drainage. Merrill, The Law Relating to Covenants Implied in Oil and Gas Leases, § 4 (2d ed. 1940); Kulp, Oil and Gas Rights, § (1955); Sullivan, Handbook of Oil and Gas Law, §§ 87–93 (1955); see 5 Kuntz, supra, at § Another commentator divides production into the duty to produce and to market. Brown, The Law of Oil and Gas Leases, § (1958). Regardless, the necessity of the duty to market ‘is obvious in order that the lessor may receive the consideration for the lease, that is, the royalties which are to be paid.’ 2 Summers, supra, at § 400; see also Hemingway, Law of Oil and Gas, § 6.4 (1983).”

14 Davis v. Cramer, 808 P.2d 358, 361 (Colo. 1991) “Most commentators divide the implied covenants into four categories: exploration, development, production (including marketing), and protection against drainage. Merrill, The Law Relating to Covenants Implied in Oil and Gas Leases, § 4 (2d ed. 1940); Kulp, Oil and Gas Rights, § (1955); Sullivan, Handbook of Oil and Gas Law, §§ 87–93 (1955); see 5 Kuntz, supra, at § Another commentator divides production into the duty to produce and to market. Brown, The Law of Oil and Gas Leases, § (1958). Regardless, the necessity of the duty to market ‘is obvious in order that the lessor may receive the consideration for the lease, that is, the royalties which are to be paid.’ 2 Summers, supra, at § 400; see also Hemingway, Law of Oil and Gas, § 6.4 (1983).”

15  Analyzing implied covenants related to drilling the initial well, how many further wells are necessary, and what is necessary to protect against drainage, require fact-specific inquiries.  A breach of one of those obligations could lead to cancellation of the lease. See, e.g., Brewster v. Lanyon Zinc Co., 140 F. 801, 814 (8th Cir. 1905) (a leading case discussing cancellation for breach of implied covenants).  Production (including marketing)

16 Rogers v. Westerman Farm Co., 29 P.3d 887, 906 (Colo. 2001) “Once gas is deemed marketable based on a factual determination, the allocation of all costs can properly be determined. Absent express lease provisions addressing allocation of costs, the lessee's duty to market requires that the lessee bear the expenses incurred in obtaining a marketable product. Thus, the expense of getting the product to a marketable condition and location are borne by the lessee. Once a product is marketable, however, additional costs incurred to either improve the product, or transport the product, are to be shared proportionately by the lessor and lessee. All costs must be reasonable.”

17 Rogers v. Westerman Farm Co., 29 P.3d 887, 906 (Colo. 2001) “Once gas is deemed marketable based on a factual determination, the allocation of all costs can properly be determined. Absent express lease provisions addressing allocation of costs, the lessee's duty to market requires that the lessee bear the expenses incurred in obtaining a marketable product. Thus, the expense of getting the product to a marketable condition and location are borne by the lessee. Once a product is marketable, however, additional costs incurred to either improve the product, or transport the product, are to be shared proportionately by the lessor and lessee. All costs must be reasonable.”

18  Gas produced at the well (producer pays)  Things done to gas –gather –dehydrate –compress –treat –process  What value is royalty paid on? –Depending on where sold, what can be deducted? –Does the gas have to be in a certain condition?

19 Rogers v. Westerman Farm Co., 29 P.3d 887, (Colo. 2001) “In order to resolve the dispute among the parties here, we must look to the actual language of the leases at issue and determine if they address the allocation of costs, and thus, the calculation of royalty payments. We first note that there are four variations of lease language at issue in this case. However, notwithstanding the distinct language of each of the four lease types, there is some language common to all four lease types. Specifically, all of the leases contemplate that the royalties are to be computed ‘at the well’ or ‘at the mouth of the well.’ We have not previously interpreted the type of lease language presented by the leases at issue in this case. Despite the differing language in each of the four types of leases, and despite the arguments raised that the ‘at the well’ and ‘at the mouth of the well’ language provides for the allocation of costs, we conclude that all of the leases are, in fact, silent with respect to the allocation of costs.”

20 Rogers v. Westerman Farm Co., 29 P.3d 887, (Colo. 2001) “In order to resolve the dispute among the parties here, we must look to the actual language of the leases at issue and determine if they address the allocation of costs, and thus, the calculation of royalty payments. We first note that there are four variations of lease language at issue in this case. However, notwithstanding the distinct language of each of the four lease types, there is some language common to all four lease types. Specifically, all of the leases contemplate that the royalties are to be computed ‘at the well’ or ‘at the mouth of the well.’ We have not previously interpreted the type of lease language presented by the leases at issue in this case. Despite the differing language in each of the four types of leases, and despite the arguments raised that the ‘at the well’ and ‘at the mouth of the well’ language provides for the allocation of costs, we conclude that all of the leases are, in fact, silent with respect to the allocation of costs.”

21 Rogers v. Westerman Farm Co., 29 P.3d 887, 898 (Colo. 2001) Lease language with respect to deductions:  Type I: two separate clauses: –royalties based on the gross proceeds from the sale of gas at the wellhead. –for sales not occurring at the well, the royalties are to be paid based on the market value at the well, but in no event shall those royalties total more than 1/8th of the amount actually received for the sale.  Type II: the proceeds from the sale of gas... at the mouth of the well  Type III: market price at the well for the gas sold  Type IV: proceeds received for gas sold from each well... or the market value at the well of such gas used off the premises

22 Rogers v. Westerman Farm Co., 29 P.3d 887, 898 (Colo. 2001) Lease language with respect to deductions:  Type I: two separate clauses: –royalties based on the gross proceeds from the sale of gas at the wellhead. –for sales not occurring at the well, the royalties are to be paid based on the market value at the well, but in no event shall those royalties total more than 1/8th of the amount actually received for the sale.  Type II: the proceeds from the sale of gas... at the mouth of the well  Type III: market price at the well for the gas sold  Type IV: proceeds received for gas sold from each well... or the market value at the well of such gas used off the premises

23 Rogers v. Westerman Farm Co., 29 P.3d 887, 897 (Colo. 2001) “Despite the differing language in each of the four types of leases, and despite the arguments raised that the ‘at the well’ and ‘at the mouth of the well’ language provides for the allocation of costs, we conclude that all of the leases are, in fact, silent with respect to the allocation of costs.”

24 Piney Woods Country Life Sch. v. Shell Oil Co., 726 F.2d 225, 231 (5th Cir. 1984) “‘At the well’ therefore describes not only location but quality as well. Market value at the well means market value before processing and transportation, and gas is sold at the well if the price paid is consideration for the gas as produced but not for processing and transportation.”

25 Rogers v. Westerman Farm Co., 29 P.3d 887, 906 (Colo. 2001) “Once gas is deemed marketable based on a factual determination, the allocation of all costs can properly be determined. Absent express lease provisions addressing allocation of costs, the lessee's duty to market requires that the lessee bear the expenses incurred in obtaining a marketable product. Thus, the expense of getting the product to a marketable condition and location are borne by the lessee. Once a product is marketable, however, additional costs incurred to either improve the product, or transport the product, are to be shared proportionately by the lessor and lessee. All costs must be reasonable.”

26 Oklahoma Oklahoma: certified question:  In light of the facts as detailed below, is an oil and gas lessee who is obligated to pay “3/16 of the gross proceeds received for the gas sold” entitled to deduct a proportional share of transportation, compression, dehydration, and blending costs from the royalty interest paid to the lessor? Mittelstaedt v. Santa Fe Minerals, Inc., 1998 OK 7, 954 P.2d 1203,

27 Oklahoma Mittelstaedt v. Santa Fe Minerals, Inc., 1998 OK 7, 954 P.2d 1203, 1210 “In sum, a royalty interest may bear post-production costs of transporting, blending, compression, and dehydration, when the costs are reasonable, when actual royalty revenues increase in proportion to the costs assessed against the royalty interest, when the costs are associated with transforming an already marketable product into an enhanced product, and when the lessee meets its burden of showing these facts.”

28 Naylor Farms, Inc. v. Anadarko OGC Co., CIV R, 2011 WL (W.D. Okla. July 14, 2011) on reconsideration in part, CIV R, 2011 WL (W.D. Okla. Oct. 14, 2011) (clarifying that court did not intend to imply that extraction of NGLs is necessary to put gas in marketable form) “The Court concludes that the Oklahoma Supreme Court in the cases cited above deems ‘marketable’ to be distinguishable from saleable. It would be hard to imagine any gas not being saleable at least for some price the moment it comes out of the ground. Yet the Supreme Court says the operator must make the gas marketable which by inference means of interstate or intrastate pipeline quality.”

29 Naylor Farms, Inc. v. Anadarko OGC Co., CIV R, 2011 WL (W.D. Okla. July 14, 2011) on reconsideration in part, CIV R, 2011 WL (W.D. Okla. Oct. 14, 2011) (clarifying that court did not intend to imply that extraction of NGLs is necessary to put gas in marketable form) “The Court concludes that the Oklahoma Supreme Court in the cases cited above deems ‘marketable’ to be distinguishable from saleable. It would be hard to imagine any gas not being saleable at least for some price the moment it comes out of the ground. Yet the Supreme Court says the operator must make the gas marketable which by inference means of interstate or intrastate pipeline quality.”

30 Kansas Sternberger v. Marathon Oil Co., 257 Kan. 315, 331, 894 P.2d 788, 800 (1995) “Once a marketable product is obtained, reasonable costs incurred to transport or enhance the value of the marketable gas may be charged against nonworking interest owners. The lessee has the burden of proving the reasonableness of the costs. Absent a contract providing to the contrary, a nonworking interest owner is not obligated to bear any share of production expense, such as compressing, transporting, and processing, undertaken to transform gas into a marketable product. In the case before us, the gas is marketable at the well. The problem is there is no market at the well, and in that instance we hold the lessor must bear a proportionate share of the reasonable cost of transporting the marketable gas to its point of sale.”

31 “Marketable Product Rule”  Colorado (with location element)  Oklahoma  Kansas  Litigating in New Mexico  Not universal

32 North Dakota “[¶ 21] We conclude the term market value at the well is not ambiguous. We join the majority of states adopting the “at the well” rule and rejecting the first marketable product doctrine. Thus, we conclude the district court properly determined Petro–Hunt can deduct post-production costs from the plant tailgate proceeds prior to calculating royalty. We affirm the district court's order granting Petro–Hunt summary judgment regarding the use of the work-back method to calculate royalties.” Bice v. Petro-Hunt, L.L.C., 2009 ND 124, 768 N.W.2d 496, 502

33 Texas “Although it is not subject to the costs of production, royalty is usually subject to post-production costs, including taxes, treatment costs to render it marketable, and transportation costs. Martin v. Glass, 571 F.Supp. 1406, 1410 (N.D.Tex.1983), aff'd, 736 F.2d 1524 (5th Cir.1984); Williams & Meyers, supra, p However, the parties may modify this general rule by agreement. Martin, 571 F.Supp. at 1410.” Heritage Res., Inc. v. NationsBank, 939 S.W.2d 118, 122 (Tex. 1996)

34 Marketable product rule:  Conditions for royalty law –to intersect with  Class treatment

35 (a) Prerequisites. One or more members of a class may sue or be sued as representative parties on behalf of all members only if: (1) the class is so numerous that joinder of all members is impracticable; (2) there are questions of law or fact common to the class; (3) the claims or defenses of the representative parties are typical of the claims or defenses of the class; and (4) the representative parties will fairly and adequately protect the interests of the class. (b) Types of Class Actions. A class action may be maintained if Rule 23(a) is satisfied and if: * * * * * (3) the court finds that the questions of law or fact common to class members predominate over any questions affecting only individual members, and that a class action is superior to other available methods for fairly and efficiently adjudicating the controversy. Fed. R. Civ. P. 23

36 Class Certification (a) Prerequisites. One or more members of a class may sue or be sued as representative parties on behalf of all members only if: (1) the class is so numerous that joinder of all members is impracticable; (2) there are questions of law or fact common to the class; (3) the claims or defenses of the representative parties are typical of the claims or defenses of the class; and (4) the representative parties will fairly and adequately protect the interests of the class. (b) Types of Class Actions. A class action may be maintained if Rule 23(a) is satisfied and if: * * * * * (3) the court finds that the questions of law or fact common to class members predominate over any questions affecting only individual members, and that a class action is superior to other available methods for fairly and efficiently adjudicating the controversy. Fed. R. Civ. P. 23

37  Marketable Product Rule –common questions predominate if:  lease language does not override the implied covenant  the implied covenant is defined in a way that applies broadly –“Marketable Product”  Cases articulating the rule: –Rogers (Colorado) not a class action –Mittelstaedt (Oklahoma) not a class action –Sternberger (Kansas) was a class action  Supreme Courts have not addressed the marketable product rule in class context

38  Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541, 2550, 180 L. Ed. 2d 374 (2011)  Comcast Corp. v. Behrend, 133 S. Ct. 1426, 1432, 185 L. Ed. 2d 515 (2013)

39  Wallace B. Roderick Revocable Living Trust v. XTO Energy, Inc., 725 F.3d 1213 (10th Cir. Kan. 2013)  Chieftain Royalty Co. v. XTO Energy, Inc., 528 F. App'x 938 (10th Cir. Okla. 2013) (not selected for publication)

40 Wallace B. Roderick Revocable Living Trust v. XTO Energy, Inc., 725 F.3d 1213 (10th Cir. Kan. 2013) “Holdings: The Court of Appeals, Paul J. Kelly, Jr., Circuit Judge, held that: “1 district court abused discretion in relaxing and shifting burden of proof as to whether royalty owners of natural gas wells satisfied commonality requirement; “2 predominance of common issues was not established simply by virtue of lessee's uniform methodology of payments to royalty owners; and “3 lessee's previous settlement of natural gas royalty litigation did not collaterally or judicially estop lessee from litigating class certification issues. “Vacated and remanded.”

41 Wallace B. Roderick Revocable Living Trust v. XTO Energy, Inc., 725 F.3d 1213 (10th Cir. Kan. 2013) “1 district court abused discretion in relaxing and shifting burden of proof as to whether royalty owners of natural gas wells satisfied commonality requirement;” –lease language –marketable product –vacated certification

42 With the intersection of implied covenants and class treatment  A Look Forward: 1.Litigation over the meaning of lease language 2.Litigation over the existence and scope of the implied covenant (where is gas a marketable product) 3.New leases taking into account rulings 4.Litigation over class certification standards 5.Settlement

43 With the intersection of implied covenants and class treatment  A Look Forward: 1.Litigation over the meaning of lease language 2.Litigation over the existence and scope of the implied covenant (where is gas a marketable product) 3.New leases taking into account rulings 4.Litigation over class certification standards 5.Settlement

44 Lindauer v. Williams Prod. RMT Co., No. 10CA0798 (Colo. App. Apr. 21, 2011) (unpublished) –Class action –Settlement: all but two issues  gross proceeds leases  enhanced value of gas

45 Lindauer v. Williams Prod. RMT Co., No. 10CA0798 (Colo. App. Apr. 21, 2011) (unpublished)  “A provision in natural gas leases states that the lessee will pay the lessors a percentage of the ‘gross proceeds’ from gas ‘used off the premises.’” –Plaintiff: gross proceeds where sold –Defendant: silent under Rogers

46 Lindauer v. Williams Prod. RMT Co., No. 10CA0798 (Colo. App. Apr. 21, 2011) (unpublished) “In sum, we conclude that the term ‘gross proceeds’ as used in the leases here does not preclude Williams from deducting reasonable costs to transport gas on mainline transmission pipelines.”

47 With the intersection of implied covenants and class treatment  A Look Forward: 1.Litigation over the meaning of lease language 2.Litigation over the existence and scope of the implied covenant (where is gas a marketable product) 3.New leases taking into account rulings 4.Litigation over class certification standards 5.Settlement

48 In Mleynek et al. v. K.P. Kaufman Co., Inc., Case No. 07-CV-3268 (D. Ct. Denver County, Colo. 2009), the jury returned a verdict for defendant where the class claimed that defendant breached the leases by paying royalties on gas before it was in marketable condition.

49 Lindauer v. Williams Prod. RMT Co., No. 06CV317, Order Regarding Enhancement (D. Ct. Garfield County, Colo., Jan. 21, 2014) “The Court previously held that Williams could deduct from the royalty payments the transportation expenses it incurred to move gas downstream if doing so enhanced the value of the gas.”

50  Lindauer v. Williams Prod. RMT Co., No. 06CV317, Order Regarding Enhancement (D. Ct. Garfield County, Colo., Jan. 21, 2014)  Parties stipulated: –Time period involved –Average index price –Gross price that Williams received –Net price after deducting transportation –Starting point for evaluating whether value enhanced  The only issue remaining for the Court to determine is what price should be used to make the comparison.

51  Lindauer v. Williams Prod. RMT Co., No. 06CV317, Order Regarding Enhancement (D. Ct. Garfield County, Colo., Jan. 21, 2014)  “The only issue remaining for the Court to determine is what price should be used to make the comparison.” –Williams wants the Court to hold that Index minus 25 should be used. –Plaintiffs want the Court to hold that the average index price for each of the three pipelines as determined by Platts should be used.

52 Lindauer v. Williams Prod. RMT Co., No. 06CV317, Order Regarding Enhancement (D. Ct. Garfield County, Colo., Jan. 21, 2014) “The Court notes at the outset that there is no case law in Colorado or elsewhere to assist the Court in its determination. Counsel for both parties are specialists in oil and gas law and if there was anything out there, the Court is certain that they would have brought it to the attention of the Court.”

53 Lindauer v. Williams Prod. RMT Co., No. 06CV317, Order Regarding Enhancement (D. Ct. Garfield County, Colo., Jan. 21, 2014) “The Court concludes that the evidence does not support using the average index price as the comparison point to determine whether the gas was enhanced. The index price includes markets outside of the Basin. The average index price is not a fair reflection of the price Williams could obtain for gas sold in the Basin. The evidence is that Williams could not obtain the average index price in the Basin which is why the gas was sold outside of the Basin. The Court finds that the average index price should be adjusted to reflect what gas could sell for in the Basin. The Court concludes that this price should be the index price minus 20 cents which is what Mr. Killion testified the gas sold for in the Basin during the relevant time period.”

54  Dines v. Berry Petroleum Co., D. Ct. Denver County, Complaint filed December 28, 2012  Paragraph 11 Common Question:  “2. Determining that royalties should be paid to Plaintiffs and the Class on future Natural Gas production by Berry Petroleum based on the proceeds received for the sale of the Natural Gas at the commercial market, after such Natural Gas has been gathered and processed at a processing plant, and sold to third party purchasers and/or delivered into a long distance transportation pipeline.”

55  Gagon v. Merit Energy Co., D. Colo, Complaint filed March 21, 2014 (Colorado and Oklahoma wells)  “35. Defendant underpays Plaintiffs and the Class in one or more of the following ways, without limitation:  “(b) Natural Gas Liquids (NGLs). Defendant: (i) fails to pay royalty for all of the NGLs produced (some is lost and unaccounted for and some is used in fuel during gathering and/or processing); (ii) deducts processing fees and expenses; (iii) and reduces payment by T&F all before obtaining commercially marketable fractionated NGLs. NGLs should be paid on a fully fractionated basis and only on arm’s length sales.”

56 With the intersection of implied covenants and class treatment  A Look Forward: 1.Litigation over the meaning of lease language 2.Litigation over the existence and scope of the implied covenant (where is gas a marketable product) 3.New leases taking into account rulings 4.Litigation over class certification standards 5.Settlement

57 With the intersection of implied covenants and class treatment  A Look Forward: 1.Litigation over the meaning of lease language 2.Litigation over the existence and scope of the implied covenant (where is gas a marketable product) 3.New leases taking into account rulings 4.Litigation over class certification standards 5.Settlement

58  The certification decision is a defining moment that can “sound the ‘death knell’ of the litigation on the part of plaintiffs, or create unwarranted pressure to settle non-meritorious claims on the part of defendants,” Kalow & Springut, LLP v. Commence Corp., 272 F.R.D. 397, 401 (D.N.J. 2011)  More cases may proceed to trial, particularly if classes are of more limited scope.

59 Colorado appellate cases applying Rogers in class certification setting.  Colorado Supreme Court: None –Washington Cnty. Bd. of Equalization v. Petron Dev. Co., 109 P.3d 146, 154 (Colo. 2005) (“analogy between this [taxation] case and Rogers misplaced”) –Aloi v. Union Pac. R.R. Corp., 129 P.3d 999, 1004 (Colo. 2006) (cited for unrelated point)  Colorado Court of Appeals: None published

60 Colorado Court of Appeals: 2 royalty cases on Westlaw; neither was a class action Clough v. Williams Prod. RMT Co., 179 P.3d 32 (Colo. Ct. App. 2007) Holdings: The Court of Appeals, Bernard, J., held that: 1 evidence of marketability of natural gas at wellhead prior to deregulation of industry was not relevant to determining whether gas was marketable after deregulation; 2 separate jury instructions on bad faith and marketability did not mislead the jury; 3 trial court did not err in refusing to instruct the jury that natural gas leases at issue were silent on the allocation of costs; and 4 evidence was sufficient to support jury's damages award of $4,091, for underpayment of royalties. Savage v. Williams Prod. RMT Co., 140 P.3d 67 (Colo. Ct. App. 2005) Holdings: The Court of Appeals, Hawthorne, J., held that: 1 marketability analysis was appropriate to determine allocations between parties; 2 determination when gas was marketable required consideration of specified factors; 3 sufficient evidence support finding that [gas] at wellhead was not marketable; and 4 lessee's failure to make counterclaim for taxes precluded deducting taxes.

61 BP Am. Prod. Co. v. Patterson, 263 P.3d 103 (Colo. 2011) (does not cite Rogers; does not discuss lease language, implied covenants) Holdings: Upon grant of certiorari, the Supreme Court, Martinez, J., held that: 1 common issues of fraudulent concealment regarding production company's use of the netback methodology for calculating royalty payments predominated over individual issues of natural gas royalty owners, and 2 trial court did not abuse its discretion in certifying a class extending from January 1, 1986 through December 1, 1997.

62 Patterson v. BP America Prod. Co., Case No: 03- CY-9926, Denver D. Ct trial August 19 - September 4, 2013 –Claims for underpayment of royalty, fraudulent concealment –BP argued gas in marketable condition at the well –Alleged damage approximately $23m for underpayment –Jury verdict nearly $8m –Plus over $32 million prejudgment interest (back to Jan. 1, 1986) Jury Verdict reporter of Colorado (Dec. 2, 2013)

63 Fitzgerald v. Chesapeake Operating, Inc., Case No. 111,566 (Okla. App. Feb. 14, 2014)  reversed certification of state-wide class  cited Tenth Circuit’s XTO decisions, Wal-Mart  “Our review of the record shows a class action is not the superior method of adjudicating these claims due to two material questions which will have to be proved individually: whether a particular lease allows some or all GCDTP costs to be born by the royalty owners and at what point the gas in a particular field or gathering system is marketable (and therefore what GCDTP services and costs are necessary and whether they may be passed on to the royalty owner).”  Petition for Cert pending

64 Colorado:  Dines v. Berry Petroleum Co., Denver D. Ct., Complaint filed Dec. 28, 2012 –Motion to Certify class filed March 3, 2014  Gagon v. Merit Energy Co., D. Colo, Complaint filed March 21, 2014 (Colorado and Oklahoma wells)

65 With the intersection of implied covenants and class treatment  A Look Forward: 1.Litigation over the meaning of lease language 2.Litigation over the existence and scope of the implied covenant (where is gas a marketable product) 3.New leases taking into account rulings 4.Litigation over class certification standards 5.Settlement  future methodology?

66  Settlement after certification: –Mountain West Expl, Inc. v. Evergreen Resources, Las Animas County (2002) –Holman v. Patina Oil and Gas Corp., Weld County (2007) –Boulter v. Kerr-McGee Rocky Mtn. Corp., Denver County (2005) –Burkett, et al., v. Huber, et. al., LaPlata County (2005) –Miller v. EnCana Oil and Gas (USA), Inc., Denver County (2008) (with future methodology)

67  Settlement after certification: –Mountain West Expl, Inc. v. Evergreen Resources, Las Animas County (2002) –Holman v. Patina Oil and Gas Corp., Weld County (2007) –Boulter v. Kerr-McGee Rocky Mtn. Corp., Denver County (2005) –Burkett, et al., v. Huber, et. al., LaPlata County (2005) –Miller v. EnCana Oil and Gas (USA), Inc., Denver County (2008) (with future methodology)

68 Objection to future methodology in settlement: “Part of the beauty of the existing covenants to market contained in the leases is that they are timeless and adapt to changing technologies and changed ways of transporting and processing gas in the future. In contrast, the Stipulation is rigid in its application [and] expressly carves out exceptions on what kind of deductions will be prohibited (e.g. anything downstream of entry into a mainline).”

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70  Questions?


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