Taylor v. Chesapeake Operating LLC

IN THE UNITED STAT ES DISTRICT COURT

FOR THE WESTERN DISTRICT OF OKLAHOMA

DANNIS R. TAYLOR, et al., )

)

Plaintiff, )

v. ) Case No. CIV-18-565-D

)

CHESAPEAKE OPERATING, INC., )

)

Defendant. )

ORDER

This matter comes before the Court on Defendant Chesapeake Operating, Inc.’s

Motion to Dismiss [Doc. No. 23]. Plaintiffs have filed a response in opposition [Doc. No.

31], to which Defendant has replied [Doc. No. 32]. Plaintiffs have also filed a Motion for

Leave to Amend their complaint as needed [Doc. No. 33]. The matter is fully briefed and

at issue.

BACKGROUND

Defendant operates wells on Plaintiffs’ land. Response [Doc. No. 31], at 4.

Pursuant to the contract at issue, Defendant is “to operate the wells and account for revenue

and costs, make payments, and provide information to owners of interests in the wells on

[Plaintiffs’] property.” Id. Plaintiffs allege to have been underpaid royalties. Defendant

contends this is a simple breach of contract claim and nothing more. Motion at 3.

Plaintiffs, however, maintain this action sounds in fraud. They allege Defendant engaged

in a fraudulent scheme, involving hundreds of acts of fraud over the course of several years,

by which Plaintiffs were deceived and underpaid. Id. at 5

STANDARD OF DECISION

To survive a motion to dismiss under Rule 12(b)(6), “a complaint must contain

sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its

face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atlantic Corp. v.

Twombly, 550 U.S. 544, 570 (2007)). “A claim has facial plausibility when the plaintiff

pleads factual content that allows the court to draw the reasonable inference that the

defendant is liable for the misconduct alleged.” Iqbal, 556 U.S. at 678. The “plausibility

standard” announced in Twombly and Iqbal is not a “heightened standard” of pleading, but

rather a “refined standard.” Khalik v. United Air Lines, 671 F.3d 1188, 1191 (10th Cir.

2012) (citing Kansas Penn Gaming, LLC v. Collins, 656 F.3d 1210, 1214 (10th Cir. 2011)).

Under the “refined standard,” plausibility refers “to the scope of the allegations in the

complaint: if they are so general that they encompass a wide swath of conduct, much of it

innocent, then the plaintiffs have not nudged their claims across the line from conceivable

to plausible.” Khalik, 671 F.3d at 1191; see also Robbins v. Oklahoma, 519 F.3d 1242,

1247 (10th Cir. 2008). Further, the Tenth Circuit has noted that “[t]he nature and

specificity of the allegations required to state a plausible claim will vary based on context.”

Khalik, 671 F.3d at 1191.

Claims sounding in fraud must be pled with particularity, under a heightened

pleading standard. See Fed. R. Civ. P. 9(b). The particularly requirement of Rule 9(b)

applies to claims of mail and wire fraud under the Racketeer Influenced and Corrupt

Organizations Act, 18 U.S.C. §§ 1961–68 (“RICO”). See Tal v. Hogan, 453 F.3d 1244,

1263 (10th Cir. 2006).

DISCUSSION

Plaintiffs’ Amended Complaint [Doc. No. 20] sets forth six causes of action.

Plaintiffs’ claims are as follows: (1) RICO violations; (2) unjust enrichment; (3)

conversion; (4) beach of lease; (5) breach of overriding royalty interest; and, (6) actual and

constructive fraud, and negligent misrepresentation. Defendant argues that because

Plaintiffs lack standing to bring RICO claims, this Court lacks subject matter jurisdiction

and should remand the remaining state law claims. In the alternative, Defendant seeks

dismissal of counts one, two, three, and six of Plaintiffs’ Amended Complaint (referred to

as the first, second, third, and sixth causes of action), for failure to state a claim upon which

relief can be granted.

I. Plaintiff’s RICO allegations suffice to survive a motion to dismiss.

Defendant argues (1) Plaintiffs fail to show they were injured by the alleged RICO

violations; (2) the predicate act of wire fraud is not pled with particularity; (3) the predicate

act of mail fraud is not pled with particularity; (4) there is no allegation of a pattern of

racketeering activity; and, (5) Plaintiffs fail to plead an enterprise.

RICO provides a private cause of action for “[a]ny person injured in his business or

property by reason of a violation of section 1962 of this chapter.” 18 U.S.C. § 1964(c).

Plaintiffs allege violations of § 1962(c), which makes it “unlawful for any person employed

by or associated with any enterprise engaged in, or the activities of which affect, interstate

. . . commerce, to conduct or participate, directly or indirectly, in the conduct of such

enterprise’s affairs through a pattern of racketeering activity.”

To survive a Rule 12(b)(6) motion to dismiss a § 1962(c) claim, Plaintiffs must

allege that Defendant “(1) participated in the conduct (2) of an enterprise (3) through a

pattern (4) of racketeering activity.” Tal, 453 at 1244. “[R]acketeering activity” is defined

to include several predicate acts, including the two alleged here—mail fraud and wire

fraud. In addition to these elements, Plaintiffs must also show proximate causation

between the RICO predicate act and the injury. Hemi Group, LLC v. City of New York,

559 U.S. 1, 8 (2010).

a. Plaintiffs allege more than simple breach of contract.

Defendant argues that because the injury resulting from the breach of contract claim

and the alleged RICO violation are the same, Plaintiffs lack standing to bring a claim under

RICO.

“No distinct ‘racketeering injury’ requirement is necessary to maintain a private treble

damages action under RICO.” Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 495–96

(1985). If the “defendant engages in a pattern of racketeering activity in a manner

forbidden by section 1962 and the racketeering activities injured the plaintiff in his business

or property,” that is enough. Id. “[T]he plaintiff only has standing if, and can only recover

to the extent that, he has been injured in his business or property by the conduct constituting

the violation.” Id. at 496.

Defendant’s position that Plaintiffs lack standing because “they were damaged not by

supposed racketeering activity, but instead by breach of contract, an underpayment of

royalty,” is contrary to binding precedent. Reply at 10. The Supreme Court has disavowed

any requirement that a separate racketeering injury be alleged to maintain a RICO claim.

Further, at this stage in the proceedings, Plaintiffs have sufficiently pleaded the

requisite proximate cause. To this end, Plaintiffs allege that the predicate mailings

transmitted the fraudulent royalty statements, as well as the related royalty underpayments.

PAC at ¶¶ 18,19,30,45. The harm alleged is concrete and ascertainable. Id. at ¶¶

31,34,40,37. Plaintiffs allege they were also denied access to the information they needed

to accurately calculate the amount of money due to them. Id. at ¶¶ 44,83,68.

Plaintiffs allege more than a simple breach of contract claim. They assert Defendant

entered into an unlawful agreement with three other entities to purposefully underpay and

deceive lessors. Id. at ¶¶ 43–45. Thus, beyond the terms of their contracts, Plaintiffs allege

Defendant engaged in fraud to disguise the fact that Defendant was unlawfully profiting at

Plaintiffs’ expense. PAC at ¶¶ 43. These allegations—connected to the leases at issue as

they may be—specifically refer to Defendant’s intent to defraud and deceive Plaintiffs.

They “go beyond a mere breach of contract.” See Jeter v. Wild W. Gas, LLC, No. 12-CV-

411-TCK-PJC, 2015 WL 5970992, at *13 (N.D. Okla. Oct. 14, 2015) (rejecting the

argument that causation is lacking because the RICO allegations are merely “repackaged”

contract claims).

The Court finds Plaintiffs, at this stage of the proceedings, have done enough to allege

the required proximate causation under RICO.

b. Plaintiffs allege the predicate acts of mail and wire fraud with sufficient

particularity to survive a motion to dismiss.

Defendant asserts that Plaintiffs fail to plead the predicate acts with particularity. The

two predicate acts identified in this case—mail fraud and wire fraud—were also at issue in

Tal v. Hogan, 453 F.3d 1244 (10th Cir. 2006), where the court of appeals explained as

follows:

To establish the predicate act of mail fraud, [Plaintiffs] must allege “(1) the existence

of a scheme or artifice to defraud or obtain money or property by false pretenses,

representations or promises, and (2) use of the United States mails for the purpose of

executing the scheme.” Bacchus Indus., Inc. v. Arvin Indus., Inc., 939 F.2d 887, 892 (10th

Cir. 1991); see United States v. Kennedy, 64 F.3d 1465, 1475 (10th Cir. 1995). “The

elements of wire fraud are very similar, but require that the defendant use interstate wire,

radio or television communications in furtherance of the scheme to defraud.”

BancOklahoma Mortgage Corp., 194 F.3d at 1102 (internal quotation omitted).

[T]he common thread among ... these crimes is the concept of “fraud.”

Actionable fraud consists of (1) a representation; (2) that is false; (3) that is

material; (4) the speaker's knowledge of its falsity or ignorance of its truth;

(5) the speaker’s intent it be acted on; (6) the hearer’s ignorance of the falsity

of the representation; (7) the hearer’s reliance; (8) the hearer’s right to rely

on it; and (9) injury.

Id. at 1103. Failure to adequately allege any one of the nine elements is fatal to the fraud

claim. Tal, 453 F.3d at 1263. Further, “[a] plaintiff asserting ‘[mail] fraud must also

identify the purpose of the mailing within the defendant’s fraudulent scheme.’” Id. (quoting

McLaughlin v. Anderson, 962 F.2d 187, 191 (2d Cir. 1992)). The particularity requirement

of Rule 9(b) clearly applies to these fraud claims. See Tal, 453 F.3d at 1263; see also

Robbins v. Wilkie, 300 F.3d 1208, 1211 (10th Cir. 2002); accord Apache Tribe of Okla. v.

Brown, 966 F. Supp. 2d 1188, 1194 (W.D. Okla. 2013) (DeGiusti, J.).

At this early stage in the proceedings, the Court finds Plaintiffs’ Amended

Complaint sets forth sufficient facts to put Defendant on notice as to the time, content, and

nature of the mail and wire fraud. The time, place, and contents of the false representation

are reflected in the royalty statements sent to Plaintiffs every month from January 28, 2005

through August 31, 2016. PAC ¶ 39. Plaintiffs allege five instances of mail fraud and wire

fraud occurred between the 25th and 31st of each month. Id. at ¶ 50. The check stub attached

to the Amended Complaint and the alleged facts regarding the internal spreadsheet

illustrate the allegedly fraudulent deductions. Defendant is the party making the

statements. Id. at ¶ 43. The purpose of the mailing within the fraudulent scheme was to

mislead Plaintiffs as to the method for calculating their royalty payments and, ultimately,

the proper amount of royalty payments due. Id. Plaintiffs introduce specific facts as to

how Defendant, with the knowledge and approval of related entities, fraudulently deducted

costs and included this misleading information in check stubs, id. at ¶¶ 42–45, this all in

execution of a scheme to defraud Plaintiffs. Id. at ¶ 47. Mails were used to “send to

Plaintiffs the royalty payments and check stubs which misrepresented the price, gross

value, production tax and deductions.” Id. at ¶ 48. Other Plaintiffs—including Dennis

Taylor, residing in Hudson Oaks, Texas, and receiving a payment on August 30, 2005—

accept payment via wire. Id. at ¶ 50. Those who received these communications were

unaware of the misrepresentations and relied on them. Id. at ¶¶ 24–26.

The Court finds sufficient particularity in these allegations to survive a motion to

dismiss. See Jeter, 2015 WL 5970992, at *11.

c. Plaintiffs sufficiently allege a pattern of racketeering activity.

Next, Defendant argues Plaintiffs have failed to allege facts establishing a pattern

of racketeering activity. Motion at 13.

“[T]o satisfy RICO’s pattern requirement, [a plaintiff must] allege not only that the

defendants had committed two or more predicate acts, but also that the predicates

themselves amount to, or that they otherwise constitute a threat of, continuing racketeering

activity.” Bixler v. Foster, 596 F.3d 751, 761 (10th Cir. 2010) (quoting Hall v. Witteman,

584 F.3d 859, 867 (10th Cir. 2009)) (emphasis in original). “‘[T]he term pattern itself

requires the showing of a relationship between the predicates and of the threat of continuing

activity,’ so that it is ‘continuity plus relationship which combines to produce a pattern.’”

United States v. Knight, 659 F.3d 1285, 1288–89 (10th Cir. 2011) (quoting H.J. Inc. v.

Northwestern Bell Tel. Co., 492 U.S. 229, 239 (1989)). Although the relatedness of

predicate acts is not difficult to establish, “[t]he showing required for ‘continuity’ . . . is

more difficult to meet.” Bixler, 596 F.3d at 761 (internal quotation omitted). “‘Continuity’

is both a closed- and open-ended concept, referring either to a closed period of repeated

conduct, or to past conduct that by its nature projects into the future with a threat of

repetition.” H.J., 492 U.S. at 241; see also Bixler, 596 F.3d at 761. “[C]ontinuity over a

closed period” requires “a series of related predicates extending over a substantial period

of time.” H.J., 492 U.S. at 242; see also Boone v. Carlsbad Bancorp., Inc., 972 F.2d 1545,

1556 (10th Cir. 1992).

As opposed to alleging a single fraudulent business deal between two entities,

Plaintiffs here allege the “existence of long-term criminal activity committed against a

multitude of royalty owners.” Jeter, 2015 WL 5970992, at *10 n.13; cf. Tal, 453 F.3d at

1267–68 (questioning whether “grant of one development contract acquired through

misrepresentation of financial backing” constitutes a distinct threat of long-term

racketeering activity). Plaintiffs allege that Defendant committed “695 acts of fraud over

the course of 11 years and 7 months,” pertaining to “the same oil and gas wells, victimized

the same individuals, for the benefit of the same members of the enterprise and employing

the same logistics.” Response at 17–18. Accepted as true and viewed in the light most

favorable to Plaintiffs, this is sufficient to survive a motion to dismiss. Whether Plaintiffs

can establish their claims is yet to be seen. See Brown v. Access Midstream Partners, L.P.,

141 F. Supp. 3d 323, 337 (M.D. Pa. 2015).

d. Plaintiffs sufficiently allege the existence of an enterprise.

Finally, Defendant asserts Plaintiffs failed to plead an enterprise, as they have given

“no particulars concerning what Chesapeake allegedly did, other than to conduct its own

business and to pay royalties.” Motion at 14.

Plaintiffs must establish that Defendant was associated with and participated in the

“operation or management” of the enterprise to bring a cause of action pursuant to civil

RICO. Reves v. Ernst & Young, 507 U.S. 170, 184 (1993). For a defendant “to conduct or

participate” in the affairs of a RICO enterprise, a defendant must, in some capacity, direct

the affairs of the enterprise. Id. at 178–79. A defendant will not be liable simply because

he provides services that benefit the enterprise; instead, there “must be a nexus between

the person and the conduct in the affairs of an enterprise. The operation or management

test goes to that nexus.” Id.

Plaintiffs allege Defendant and three other entities constitute an “enterprise” or

“association-in-fact.” PAC at ¶¶ 63,65. These four entities “owned a portion of the lessee’s

interests in the oil and gas leases.” Id. at ¶ 16. Defendant was allegedly compensated for

executing the fraud scheme, id. at ¶ 65, and allegedly did so by “by taking unauthorized

royalty deductions and then sending false check stubs showing no deductions.” See Jeter,

2015 WL 5970992, at *9. This will suffice to survive a motion to dismiss.

Therefore, the Court denies Defendant’s motion to dismiss count one, or the “First

Cause of Action,” of Plaintiffs’ Amended Complaint.

I. Plaintiffs may plead in the alternative and state a claim for unjust enrichment.

Defendant next asserts that Plaintiffs cannot pursue a claim for unjust enrichment, an

equitable remedy, where an adequate remedy at law is available. Motion at 15.

Unjust enrichment arises “from the failure of a party to make restitution in

circumstances where it is inequitable,” or one party holds property “that, in equity and good

conscience, it should not be allowed to retain.” Harvell v. Goodyear Tire and Rubber Co.,

164 P.3d 1028, 1035 (Okla. 2006); accord Am. Biomedical Grp., Inc. v. Techtrol, Inc., 374

P.3d 820, 828 (Okla. 2016). “One is not unjustly enriched, however, by retaining benefits

involuntarily acquired which law and equity give him absolutely without any obligation on

his part to make restitution.” McBride v. Bridges, 215 P.2d 830, 833 (Okla. 1950). Further,

a party is not entitled to pursue a claim for unjust enrichment when it has an adequate

remedy at law for breach of contract. Krug v. Helmerich & Payne, Inc., 362 P.3d 205, 209

(Okla. 2015).

Though Defendant may own only a partial interest in the oil and gas lease at issue, an

adequate remedy at law does exist to make Plaintiffs whole. Plaintiffs argue that Defendant

was not a party to the contracts at issue. Response at 10 (“Plaintiffs have not alleged that

Defendant owns any interest in the oil and gas lease.”). But Plaintiffs then go on to say

that Defendant perhaps owns a partial interest. Id. at 28. And Plaintiffs have, in fact, stated

a breach of contract claim against Defendant. PAC at ¶ ¶ 101–05.

The Court has carefully reviewed the pleadings and presumed all of Plaintiffs’ factual

allegations are true, construing them in the light most favorable them. The Court finds

that, at this stage of the litigation, Plaintiffs have the right to plead alternative theories of

recovery and, therefore, Plaintiffs’ unjust enrichment claim should not be dismissed. See

Briggs v. Freeport-McMoran Copper & Gold, Inc., No. CIV-13-1157-M, 2015 WL

1461884, at *6 (W.D. Okla. Mar. 30, 2015).

II. Plaintiffs’ conversion claim must be dismissed, as Defendant is not alleged to

have converted any tangible property.

Defendant asserts that Plaintiffs’ conversion claim must be dismissed, as conversion

under Oklahoma law is reserved for personal property.

“Conversion is any act of dominion wrongfully exerted over another’s personal

property in denial of, or inconsistent with, his rights therein.” Steenbergen v. First Fed.

Sav. & Loan, 753 P.2d 1330 (Okla. 1987). The general rule in Oklahoma is that only

tangible personal property may be converted. Shebester v. Triple Crown Ins., 826 P.2d 603

(Okla. 1992). Conversion will not lie for a debt. Steenbergen, 753 P.2d at 1332. Black

defines conversion as “an unauthorized assumption and exercise of the right of ownership

over goods or personal chattels of another.” B ’ L D 333 (7th ed.

1999); accord Welty v. Martinaire of Okla., Inc., 867 P.2d 1273, 1275 (Okla. 1994).

Plaintiffs here make no assertion that Defendant has converted any of their personal

chattels. Under Oklahoma law, the failure to pay royalties creates a debt, and does not

result in the deprivation of personal property. See Welty, 867 P.2d at 1275; Tarrant v.

Capstone Oil & Gas Co., 178 P.3d 866, 872 (Okla. Civ. App. 2008) (“Conversion does not

lie for a debt. The failure to pay royalties in this case created a debt; it did not result in

Royalty Owners being deprived of tangible personal property.”).

Plaintiffs conversion claims must be dismissed for failure to state a claim upon which

relief can be granted.

III. Plaintiffs have alleged sufficient facts to maintain a state law fraud claim.

Finally, Defendant argues that Plaintiffs have failed to plead with particularity the

elements of fraud.

“In Oklahoma the elements of fraud are: 1) a false material misrepresentation; 2) made

as a positive assertion which is either known to be false or is made recklessly without

knowledge of the truth; 3) with the intention that it be acted upon; and, 4) which is relied

on by the other party to his or her own detriment.” Lopez v. Rollins, 303 P.3d 911 (Okla.

Civ. App. 2013).

As more carefully analyzed supra, Plaintiffs have alleged sufficient facts for these

claims to survive a motion to dismiss. They have identified the discrepancies between an

internal spreadsheet and a check stub. Plaintiffs explain exactly how the check stub

representations differ from the internal spreadsheet, obtained from Defendant’s employee.

PAC at ¶¶ 21–27, 31. Allegedly, Defendant has accurate knowledge of the data that it

should be providing to Plaintiffs. Id. at ¶ 27. Nevertheless, Defendant is also alleged to

have mailed out check stubs containing inaccurate information and concealing the

information Plaintiffs needed to properly calculate royalty payments. Id. at ¶¶ 27–29.

Plaintiffs provide the approximate dates of the misrepresentations. Id. at ¶ 32. And finally,

Plaintiffs allege they relied on the misrepresentations to their detriment. That is, they

“accepted the payment in reliance on [Defendant’s] misrepresentations in the check stubs

and believed the royalty payments were calculated accurately and that they were being paid

correctly.” Id. at ¶ 25.

At this stage in the proceedings, considering Rule 9(b)’s more stringent pleading

requirements, these allegations suffice to survive a motion to dismiss.

CONCLUSION

For the reasons more fully set forth herein, the Court finds the “third cause of action”

of Plaintiffs’ Amended Complaint [Doc. No. 20], fails to state a claim under Fed. R. Civ.

P. 12(b)(6). Plaintiffs have moved for leave to amend [Doc. No. 33], and such leave shall

be granted.

IT IS THEREFORE ORDERED that Defendant’s Motion to Dismiss is

GRANTED IN PART and DENIED IN PART. Plaintiffs’ “Third Cause of Action” for

conversion is DISMISSED WITHOUT PREJUDICE. Plaintiffs may file an amended

complaint no later than twenty-one (21) days from the issuance of this Order.

IT IS SO ORDERED this 20" day of November, 2019.

by Q.

TIMOTHY D. DeGIUSTI

Chief United States District Judge

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