Opinion

Charles W Brown and Patty N Brown LLC v. Newfield Exploration Mid-Continent Inc

Court
District Court, W.D. Oklahoma
Filed
Mar 28, 2023
Cited by
0 cases
Authority
More cited than 28.6%

The opinion

UNITED STATES DISTRICT COURT

FOR THE WESTERN DISTRICT OF OKLAHOMA

CHARLES W. AND )

PATTY N. BROWN, LLC, )

)

Plaintiff, )

)

v. ) Case No. CIV-19-600-G

)

NEWFIELD EXPLORATION )

MID-CONTINENT, INC., )

)

Defendant. )

ORDER

Now before the Court is a Partial Motion to Dismiss (Doc. No. 39) filed by

Defendant Newfield Exploration Mid-Continent, Inc. Plaintiff Charles W. and Patty N.

Brown, LLC has responded in opposition (Doc. No. 43), and Defendant has replied (Doc.

No. 45). Having reviewed the parties’ submissions and the relevant record, the Court

makes its determination.

BACKGROUND AND SUMMARY OF THE PLEADINGS

Plaintiff initiated this lawsuit on June 11, 2019, in the District Court of Stephens

County, Oklahoma. Defendant removed the action to this Court shortly thereafter.

Plaintiff alleges that it is the owner of certain mineral interests located in Section

19, Township 1 North, Range 4 West, Stephens County, Oklahoma (“Section 19”). See

Second Am. Compl. (Doc. No. 38) ¶ 5. During the relevant period, Plaintiff leased its

mineral interests in Section 19 to nonparty Heritage Resources – NonOp, LLC (“Heritage”)

pursuant to certain oil and gas lease agreements (the “Lease Agreements”). Id. ¶ 6; see

Second Am. Compl. Exs. 1, 2 (Doc. Nos. 38-1, 38-2).

Per Plaintiff’s pleading, “Section 19 is spaced as a 640-acres drilling unit as to the

common sources of supply related to the wells at issue in this case.” Second Am. Compl.

¶ 7. Pursuant to an Oklahoma Corporation Commission Pooling Order, Defendant became

the operator of record for drilling in Section 19. Id. ¶ 8; see Second Am. Compl. Ex. 3

(Doc. No. 38-3).

Plaintiff alleges that Heritage owns an interest in Section 19 and elected to

participate in drilling as provided by the Pooling Order. See Second Am. Compl. ¶¶ 9, 11.

Defendant drilled and completed multiple horizontal wells in Section 19, which “include”

Plaintiff’s minerals or mineral interests. Id. ¶¶ 10, 14. Defendant “recognizes Heritage as

a working interest owner in the wells drilled in Section 19 and is paying Heritage” pursuant

to the Lease Agreements. Id. ¶ 11.

Plaintiff alleges that the Lease Agreements entitle it to receive a royalty of one-

fourth of the gross proceeds from the production and sales of the hydrocarbons produced

in Section 19, “free of all costs except taxes.” Id. ¶ 13. Prior to the initiation of this lawsuit,

Defendant had not paid Plaintiff the royalties owed pursuant to the Lease Agreements. Id.

¶ 14. On February 20, 2020, Defendant issued a payment to Plaintiff “purporting to cover

production sales from the wells from June 1, 2018 through December 1, 2019.” Id. ¶ 15.

The Second Amended Complaint asserts four claims against Defendant: (1) breach

of contract; (2) violation of the Oklahoma Production Revenue Standards Act, Okla. Stat.

tit. 52, §§ 570.1 et seq.; (3) negligence; and (4) unjust enrichment. See id. ¶¶ 4-38. Plaintiff

seeks an accounting, actual damages, and punitive damages, as well as costs and fees. See

id. ¶¶ 21-22, 26, 33, 38.

Defendant seeks partial dismissal of the pleading pursuant to Rule 12(b)(6) of the

Federal Rules of Civil Procedure. Specifically, Defendant argues that Plaintiff fails to state

claims upon which relief can be granted with respect to Plaintiff’s claims for breach of

contract and for negligence. See Def.’s Mot. at 3-5, 6-7. Defendant also argues that “any

purported claim for taking allegedly improper cost deductions when calculating and paying

royalty should be dismissed, as the Complaint fails to provide fair notice of such claim or

the grounds on which it rests.” Id. at 3, 5-6.

STANDARD OF DECISION

In analyzing a motion to dismiss under Rule 12(b)(6), the court “accept[s] as true

all well-pleaded factual allegations in the complaint and view[s] them in the light most

favorable to the plaintiff.” Burnett v. Mortg. Elec. Registration Sys., Inc., 706 F.3d 1231,

1235 (10th Cir. 2013). “[T]o withstand a Rule 12(b)(6) motion to dismiss, a complaint

must contain enough allegations of fact, taken as true, ‘to state a claim to relief that is

plausible on its face.’” Khalik v. United Air Lines, 671 F.3d 1188, 1190 (10th Cir. 2012)

(quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). While the Rule 12(b)(6)

standard does not require that a plaintiff establish a prima facie case in the pleading, the

court discusses the essential elements of each alleged cause of action to better “determine

whether [the plaintiff] has set forth a plausible claim.” Id. at 1192.

A complaint fails to state a claim on which relief may be granted when it lacks

factual allegations sufficient “to raise a right to relief above the speculative level on the

assumption that all the allegations in the complaint are true (even if doubtful in fact).”

Twombly, 550 U.S. at 555 (footnote and citation omitted). Bare legal conclusions in a

complaint are not entitled to the assumption of truth; “they must be supported by factual

allegations” to state a claim for relief. Ashcroft v. Iqbal, 556 U.S. 662, 679 (2009).

DISCUSSION

I. Plaintiff’s Claim for Breach of Contract

Plaintiff’s breach of contract claim asserts that “[b]y way of Heritage’s election to

participate under the Pooling Order and [Defendant’s] position as operator of record,

[Defendant] is obligated to honor Plaintiff’s Leases.” Second Am. Compl. ¶ 17.

Specifically, Plaintiff relies on the Lease Agreements to argue that Defendant is required

to pay royalties “free of all costs except taxes” but that Defendant instead has been

improperly charging or deducting certain costs from those royalty payments. Id. ¶¶ 13, 18-

20.

Defendant contends that Plaintiff fails to state a cognizable claim for breach of

contract because Defendant is not a party to the Lease Agreements. See Def.’s Mot. at 3

(“Plaintiff has failed . . . to identify a contract between Plaintiff and [Defendant] that

[Defendant] allegedly breached.”). Defendant argues that, to the contrary, Plaintiff

“alleges that [Defendant] breached the terms of Plaintiff’s lease with Heritage by

‘wrongfully failing to pay Plaintiff as required by [the Lease Agreements].’” Id. at 5

(alterations omitted) (quoting Second Am. Compl. ¶ 20).

Plaintiff does not dispute that Defendant is not a signatory to the Lease Agreements

executed between Plaintiff and Heritage. See Pl.’s Resp. at 4. Plaintiff suggests, however,

that Defendant is bound to the terms of the Lease Agreements, entitling Plaintiff “to a

royalty payment free from costs,” solely by virtue of Defendant’s position as the operator

of record for Section 19. Id. Plaintiff also points to division orders1 reflecting Plaintiff’s

ownership of an interest in Section 19 as a basis for Defendant’s alleged obligation to

adhere to the Lease Agreements. See id.; Pl.’s Resp. Exs. 1, 2 (Doc. Nos. 43-1, 43-2).

To establish a breach of contract claim under Oklahoma law, Plaintiff must show

“(1) the formation of a contract, (2) breach of the contract, and (3) damages as a result of

that breach.” Cates v. Integris Health, Inc., 412 P.3d 98, 103 (Okla. 2018); see CRB Res.

Inc. v. Newfield Expl. Mid-Continent Inc., No. CIV-16-1270-R, 2018 WL 4101523, at *4

(W.D. Okla. Aug. 28, 2018). As relevant here, “[c]ontracts are binding only upon those

who are parties thereto.” Wells Fargo Bank v. Heath, 280 P.3d 328, 334 (Okla. 2012)

(internal quotation marks omitted).

Defendant is not a signatory to the Lease Agreements, and Plaintiff pleads no facts

plausibly suggesting an assignment or assumption of Heritage’s obligations thereunder.

See Chieftain Royalty Co. v. Dominion Okla. Tex. Expl. & Prod., Inc., No. CIV-11-344-R,

2011 WL 9527717, at *2 (W.D. Okla. July 14, 2011) (“[T]o state plausible claims for

breach of oil and gas leases . . . Plaintiffs must identify or describe their individual leases

in which Defendant . . . is the lessee or successor lessee . . . .”); see also James Energy Co.

1 “A division order is an instrument for the purpose of directing the distribution of proceeds

from the sale of oil, gas, casinghead gas or other related hydrocarbons which warrants in

writing the division of interest and the name, address and tax identification number of each

interest owner with a provision requiring notice of change of ownership.” Okla. Stat. tit.

52, § 570.11.

v. HCG Energy Corp., 847 P.2d 333, 338 (Okla. 1992); Sultan Oil Co. v. Trinity Operating

(USG), LLC, No. CIV-19-175-CBG, 2020 WL 3106313, at *1-2 (E.D. Okla. June 11,

2020). The Court again rejects Plaintiff’s contention that Defendant, simply by reason of

its status as operator, may be held liable for breach of contract based on a failure to comply

with payment obligations imposed by the Lease Agreements. See Order of Mar. 17, 2021

(Doc. No. 32) at 5; see also CRB Res., 2018 WL 4101523, at *4 (“In issuing Pooling Order

646542 the Corporation Commission utilized its police powers; it did not create a contract

between Plaintiffs and Defendant.” (citation omitted)). Further, even assuming the Court

could properly consider the division orders attached to Plaintiff’s Response on a Rule

12(b)(6) motion,2 any party privity on those separate instruments does not establish a

plausible claim that Defendant breached the Lease Agreements.

Because Plaintiff fails to plead the existence of a relevant contract between it and

Defendant, Plaintiff’s breach of contract claim must be dismissed.

II. Improper Cost Deductions

As referenced, the Second Amended Complaint alleges that Defendant “improperly

charg[ed] or deduct[ed]” certain costs from its royalty payments. Second Am. Compl. ¶

19. More specifically, Plaintiff alleges:

Upon review of the February 20, 2020 [Defendant] payment, subsequent

payments, and other documents obtained from [Defendant], [Defendant] has

improperly charged or deducted, either directly or indirectly, certain costs

necessary to transform raw hydrocarbon production from the wells holding

Plaintiff’s Leases into a marketable product. As an example, though by no

means intended to be an exhaustive list, transportation and fractionation costs

2 The Second Amended Complaint does not reference or incorporate the division orders or

assert any liability on Defendant’s part with respect to those orders.

are being deducted which is a cost to [be] born[CG1][e] by the working interest

owners, not [Plaintiff].

Id. ¶ 18; see also id. ¶ 12 (alleging that Defendant has an agreement with an unidentified

third party where Defendant is charged for the third party’s gathering and processing of

raw hydrocarbons).

Defendant contends that Plaintiff should not be permitted to pursue relief for any

allegedly improper deductions beyond the transportation and fractionation costs expressly

identified in the pleading. See Def.’s Mot. at 5-6. Defendant argues that it “has not been

provided fair notice of the nature of” any other allegedly improper deductions, as required

under Twombly. Def.’s Reply at 3-4; see Twombly, 550 U.S. at 555 (citing Fed. R. Civ. P.

8(a)(2)). Plaintiff responds that without the benefit of discovery, it is unable to provide an

exhaustive list of all costs that are being deducted, and that the Second Amended Complaint

sufficiently puts Defendant on notice as to Plaintiff’s allegation. See Pl.’s Resp. at 5.

To the extent Plaintiff relies on Defendant’s improper deductions as support for

Plaintiff’s breach of contract claim, Defendant’s argument is moot. Plaintiff fails to state

a claim for breach of contract upon which relief can be granted, as outlined above.

To the extent Plaintiff cites the improper royalty deductions to plead its remaining

claims, the Court concludes that the current iteration of Plaintiff’s pleading “raise[s] a right

to relief above the speculative level.” Twombly, 550 U.S. at 555; see, e.g., Second Am.

Compl. ¶¶ 18-19, 26-27. While minimal, Plaintiff’s allegations provide sufficient notice

to Defendant of the basis of the alleged liability at this initial pleading stage.

III. Plaintiff’s Negligence Claim

Under Oklahoma law, “[t]o support an actionable claim for negligence, a plaintiff

must establish the concurrent existence of: a duty on the part of the defendant to protect

the plaintiff from injury; a failure of the defendant to perform that duty; and an injury to

the plaintiff resulting from the failure of the defendant.” Krokowski v. Henderson Nat’l

Corp., 917 P.2d 8, 11 (Okla. 1996). Plaintiff’s negligence claim asserts that Defendant has

violated its duties to Plaintiff “to operate the wells within Section 19 in a prudent manner,”

“to act in good faith,” and to “pay [Plaintiff] properly each month.” Second Am. Compl.

¶¶ 28-31. Plaintiff alleges that it has been damaged by Defendant’s negligence “in an

amount in excess of $30,000.” Id. ¶ 32.

Defendant asserts that this claim must be dismissed, arguing that the pleading fails

to plausibly allege “how [Defendant] allegedly breached any duty, the circumstances

supposedly giving rise to a breach, and the damages Plaintiff allegedly suffered as a result.”

Def.’s Mot. at 6 (footnote omitted). Plaintiff objects, citing authority for the proposition

that “a unit operator” such as Defendant “‘has a duty to operate the leaseholds as a unit and

to safeguard the correlative rights of various interest holders.’” Pl.’s Resp. at 6 (quoting

Fransen v. Conoco, Inc., 64 F.3d 1481, 1487 (10th Cir. 1995)); see also Krug v. Helmerich

& Payne, Inc., 320 P.3d 1012, 1018 (Okla. 2013). Plaintiff argues that Defendant’s “duty

to protect and acknowledge Plaintiff’s royalty interest” included proper payment of the

royalty fees and that Defendant has continued to breach this duty. Pl.’s Resp. at 6.

Having considered the pleading and the applicable Rule 12(b)(6) standards, the

Court concludes that Plaintiff has “plead[ed] factual content that allows the court to draw

the reasonable inference that [Defendant] is liable for the misconduct alleged.” [gbal, 556

U.S. at 678. Taken in context, Plaintiffs allegations plausibly show negligence on the part

of Defendant with respect to the well operation and royalty payments and permit this claim

to survive dismissal.

CONCLUSION

For the foregoing reasons, Defendant’s Partial Motion to Dismiss (Doc. No. 39) is

GRANTED IN PART and DENIED IN PART as follows:

1. Defendant’s Motion is GRANTED as to Plaintiffs claim for breach of contract,

and this claim is DISMISSED without prejudice; and

2. Defendant’s Motion is otherwise DENIED.

IT IS SO ORDERED this 28th day of March, 2023.

(Barba B. Kadota

United States District Judge

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.

A word about cookies

We need a few to keep you signed in and the library working. The rest help us see which pages people use and where they get stuck. They stay off unless you say yes.