Davis v. Devon Energy Corp.

IN THE SUPREME COURT OF THE STATE OF NEW MEXICO

Opinion Number: 2009-NMSC-048

Filing Date: September 15, 2009

Docket No. 30,956

F. FERRELL DAVIS,

Plaintiff-Petitioner and Cross-Respondent,

v.

DEVON ENERGY CORPORATION, et al.,

Defendants-Respondents and Cross-Petitioners.

Consolidated with:

Docket No. 30,957

PHILLIS IDEAL and COLLINS PARTNERS, LTD.,

a Texas limited partnership,

Plaintiffs-Petitioners and Cross-Respondents,

v.

BP AMERICA PRODUCTION COMPANY,

Defendant-Respondent and Cross-Petitioner.

Consolidated with:

Docket No. 30,958

SMITH FAMILY, L.L.C., for itself

and all others similarly situated,

Plaintiff-Petitioner and Cross-Respondent,

v.

1

CONOCOPHILLIPS COMPANY, a Delaware corporation,

Defendant-Respondent and Cross-Petitioner.

ORIGINAL PROCEEDINGS ON CERTIORARI

James A. Hall, District Judge

Peifer, Hanson & Mullins, P.A.

Charles R. Peifer

Robert E. Hanson

Matthew R. Hoyt

Albuquerque, NM

Eaves & Mendenhall, P.A.

John M. Eaves

Albuquerque, NM

Sutin, Thayer & Browne, P.C.

Derek V. Larson

Albuquerque, NM

Mary E. Walta, P.C.

Mary E. Walta

Santa Fe, NM

for Petitioners and Cross-Respondents

Montgomery & Andrews, P.A.

Sarah M. Singleton

Sharon T. Shaheen

Santa Fe, NM

Holland & Hart, L.L.P.

Michael H. Feldewert

Mark F. Sheridan

Michael O. Campbell

Robert J. Sutphin, Jr.

Kristina E. Martinez

Santa Fe, NM

Holland & Hart, L.L.P.

Scott S. Barker

Denver, CO

2

for Respondents and Cross-Petitioners

OPINION

CHÁVEZ, Chief Justice.

{1} In these consolidated class actions, Plaintiff royalty owners allege on behalf of

themselves and those similarly situated that Defendant gas producers have improperly

deducted from Plaintiffs’ royalty payments the costs of making coalbed methane (CBM) gas

“marketable.” Plaintiffs claim that despite the differing language in the various royalty

agreements, Defendants in every case have breached an implied covenant prohibiting

Defendants from deducting the costs of gathering, treating, and otherwise making the CBM

gas marketable once it has been produced.

{2} Presented with Plaintiffs’ motions to certify these classes, the district court concluded

that Defendants’ consistent treatment of class members by uniformly deducting certain costs

from their royalties was sufficient to certify each class for declaratory and injunctive relief

under Rule 1-023(B)(2) NMRA. However, the district court denied certification for

monetary damages under Rule 1-023(B)(3), concluding that individualized inquiries into the

many and various royalty agreements, as required by Continental Potash, Inc. v. Freeport-

McMoran, Inc., 115 N.M. 690, 858 P.2d 66 (1993) and Mark V, Inc. v. Mellekas, 114 N.M.

778, 845 P.2d 1232 (1993), predominated over the common issues of law and fact. We

affirm the district court’s certification of these three classes under Rule 1-023(B)(2).

However, we conclude that the district court’s reliance on Continental Potash and Mark V

as necessary to its determination of whether the implied covenant to make CBM gas

marketable may be implied in each agreement was misplaced. We therefore reverse the

district court’s denial of class certification under Rule 1-023(B)(3) and remand to the district

court.

I. CLASS ACTION CONTEXT

{3} We granted this interlocutory appeal to review the district court’s certification orders

under Rule 1-023(B)(2) and (B)(3).1 These rules provide, in pertinent part:

B. Class actions maintainable. An action may be maintained

as a class action if the prerequisites of Paragraph A of this rule are satisfied,

and in addition:

1

Defendants do not contend that the requirements of Rule 1-023(A) have not been

met. Thus, we accept that they have been satisfied for the purposes of our review. See Rule

1-023(B) (“An action may be maintained as a class action if the prerequisites of Paragraph

A of this rule are satisfied . . . .”).

3

...

(2) the party opposing the class has acted or refused to act on

grounds generally applicable to the class, thereby making appropriate final

injunctive relief or corresponding declaratory relief with respect to the class

as a whole; or

(3) the court finds that the questions of law or fact common

to the members of the class predominate over any questions affecting only

individual members, and that a class action is superior to other available

methods for the fair and efficient adjudication of the controversy.

Our class action certification rules mirror the federal rules. See Ferrell v. Allstate Ins. Co.,

2008-NMSC-042, ¶ 7, 144 N.M. 405, 188 P.3d 1156 (noting that “we may seek guidance

from federal law applying the rule”). As the rule’s text makes clear, one significant

difference between (B)(2) and (B)(3) actions is that (B)(2) classes, unlike those certified

under (B)(3), “have no requirement that the common questions predominate over individual

questions, or that the class action be superior to other available methods for the fair and

efficient adjudication of the controversy.” 2 Alba Conte & Herbert B. Newberg, Newberg

on Class Actions § 4:11, at 62 (4th ed. 2002). Instead, (B)(2) certification requires only that

the defendant “has acted or refused to act on grounds generally applicable to the class,” Rule

1-023(B)(2), such that “final relief of an injunctive nature or of a corresponding declaratory

nature[] settl[es] the legality of the behavior with respect to the class as a whole[.]” Fed. R.

Civ. P. 23 advisory committee note to subdivision (b)(2). The predominancy and superiority

requirements “are applicable only for Rule 23(b)(3) class actions.” Conte & Newberg, supra

§ 4:11 at 62.

{4} For the purpose of our review, we accept as true all well-pled factual allegations from

Plaintiffs’ complaints. See Armijo v. Wal-Mart Stores, Inc., 2007-NMCA-120, ¶ 23, 142

N.M. 557, 168 P.3d 129 (at the certification stage, “the court accept[s] Plaintiffs’ factual

allegations about the merits as true and decline[s] to examine evidence proffered by

Defendants that dispute[s] such allegations”). Class certification is not the appropriate time

to decide the merits of the case, Ferrell, 2008-NMSC-042, ¶ 2 n.1, because “‘[i]n

determining the propriety of a class action, the question is not whether the plaintiff or

plaintiffs have stated a cause of action or will prevail on the merits, but rather whether the

requirements of Rule 23 are met.’” Eisen v. Carlisle & Jacquelin, 417 U.S. 156, 178 (1974)

(quoting Miller v. Mackey Int’l, 452 F.2d 424, 427 (5th Cir. 1971)); see also Ferrell, 2008-

NMSC-042, ¶ 7 (noting that our “current class action rule mirrors the federal rule upon

which it is based. Thus, we may seek guidance from federal law applying the rule.”

(citations omitted)). These principles do not mean that the courts should “blindly accept any

conclusory allegations which parrot Rule [1-0]23 [NMRA] requirements.” Armijo, 2007-

NMCA-120, ¶ 23 (internal quotation marks and citation omitted). Rather, the court should

“engage in a rigorous analysis to determine whether Plaintiffs satisfied the requirements of

Rule 1-023.” Id.

4

II. BACKGROUND

{5} Defendants are energy companies that either own or have owned working interests

in various leases, units, and wells that produce CBM gas from the Fruitland coal formation

of New Mexico’s San Juan Basin. Plaintiffs seek to represent classes of hundreds of

individuals and entities that own thousands of royalty interests and overriding royalty

interests (collectively, “royalties”) in Defendants’ CBM gas production. Plaintiffs allege

that the CBM gas produced from the Fruitland formation cannot be sold until it has been

gathered, compressed, dehydrated, and otherwise treated to remove impurities such as

carbon dioxide and water. Whether those costs may be deducted from Plaintiffs’ royalties

is the focus of the parties’ dispute.

{6} Plaintiffs offer a number of theories purporting to grant them relief. Each claim,

however, is founded upon the allegation that Defendants have breached the royalty

agreements by deducting from their royalty payments the costs of making the CBM gas

“marketable.” They contend that under the implied covenant to market CBM gas,

recognized by this Court in Darr v. Eldridge, 66 N.M. 260, 263, 346 P.2d 1041, 1044

(1959), Defendants have an implied duty to make CBM gas a “marketable product” such that

the costs of gathering, compressing, dehydrating, and otherwise treating the CBM gas before

it is sold in the interstate market may not be passed on to the royalty owners. This new

covenant has been called the “first-marketable product rule,” see, e.g., Rogers v. Westerman

Farm Co., 29 P.3d 887, 904 (Colo. 2001) (en banc), as well as the “marketable condition

rule.” See, e.g., Devon Energy Corp. v. Kempthorne, 551 F.3d 1030, 1036-37 (D.C. Cir.

2008). Plaintiffs’ requested relief includes a declaratory judgment, a permanent injunction,

and money damages. Defendants deny any wrongdoing.

{7} The district court consolidated these three cases for the purposes of discovery and

class certification. In each case, Plaintiffs moved to certify a class of royalty owners under

both Rule 1-023(B)(2) and (B)(3), and Defendants opposed certification. At the heart of the

parties’ dispute was whether the many royalty instruments are sufficiently similar in relevant

respects to merit class certification. Defendants argued that even if the marketable condition

rule applies in New Mexico, each owner’s contract must be independently reviewed, along

with extrinsic evidence relevant to each party’s intention, to determine if that covenant

appears in each agreement. Therefore, Defendants contended that because the royalty

language in many contracts is different, litigating these claims on a class-wide basis would

be unmanageable under any provision of Rule 1-023. Plaintiffs argued that the agreements

are sufficiently similar to warrant class certification because none expressly permitted the

deductions of the costs necessary to make the CBM gas “marketable.” Plaintiffs also argued

that Defendants’ uniform treatment of Plaintiffs in deducting those costs is sufficient to

certify the class.

{8} In three similar memorandum opinions and corresponding orders, the district court

found that in all three cases, there exist variations in the language of the royalty instruments

that could affect whether the costs of removing the impurities could be deducted from

5

Plaintiffs’ royalties. However, the district court also found that despite these differences in

the written words of each contract, Defendants take a “standardized approach” in calculating

royalty payments. The district court concluded that all Defendants deduct certain costs

uniformly, regardless of the various language in each royalty agreement.2

{9} Based on this “consistent treatment” in calculating royalties, the district court

concluded that Defendants had acted or refused to act on grounds generally applicable to the

class, such that if Defendants were found liable, the court would be in a position to craft

declaratory and injunctive relief to require them to comply with their contractual obligations.

Accordingly, the district court certified the following (B)(2) class in each case:

All present owners of royalty and overriding royalty interests, which burden

[Defendants’] working interests in the units, leases, and wells which are now

or have been productive of coal bed [sic] methane gas from the Fruitland coal

formation underlying New Mexico lands, whether now or formerly owned

or operated by [Defendants].

{10} While the district court certified the class under (B)(2), it denied certification under

(B)(3), concluding that individualized issues predominated over common ones and that

management of Plaintiffs’ claims would be “extremely difficult.” Unlike its conclusion that

it would be in a position to grant declaratory and injunctive relief, the district court

concluded that “determining whether a particular class member’s contract has been breached

and, if so, the appropriate damages, would involve significant individual issues.” The

district court reasoned that because the parties would have “the opportunity to present

evidence to determine whether each contract is ambiguous, the evidentiary presentations on

the variety of contract terms would overwhelm the case.” Thus, the court concluded that

“[w]hile common questions of law and fact do exist in [these cases], those common issues

do not predominate over the individual issues in the claims for damages.”

{11} After being denied interlocutory review in the Court of Appeals, Plaintiffs sought

certiorari review in this Court of the denial of their (B)(3) class, and Defendants sought

certiorari review of the certification of the (B)(2) class. We consolidated these three cases

and granted Plaintiffs’ and Defendants’ petitions. Davis v. Devon Energy Corp., 2008-

NMCERT-003, 143 N.M. 682, 180 P.3d 1181; Ideal v. BP Am. Prod. Co., 2008-NMCERT-

003, 143 N.M. 683, 180 P.3d 1182; Smith Family, L.L.C. v. ConocoPhillips Co., 2008-

NMCERT-003, 143 N.M. 683, 180 P.3d 1182.

III. DISCUSSION

2

The district court noted an exception to this conclusion: those royalty instruments

that require payment on a “same as fed” basis, which do not allow the allocation of certain

post-production costs to the royalty interest owner. See 3 Howard R. Williams et al., Oil and

Gas Law § 645.2, at 612-612.1 (2008).

6

A. STANDARD OF REVIEW

{12} We review the district court’s decision to certify or not certify a class action for an

abuse of discretion. See Armijo, 2007-NMCA-120, ¶ 17 (“[T]he district court has broad

discretion whether or not to certify a class.” (internal quotation marks and citation omitted));

Brooks v. Norwest Corp., 2004-NMCA-134, ¶ 7, 136 N.M. 599, 103 P.3d 39 (declining the

plaintiffs’ invitation “to apply a ‘less deferential standard’ where the district court has denied

[class] certification”). However, the district court’s interpretation of Rule 1-023 is a

question of law that is reviewed de novo, Ferrell, 2008-NMSC-042, ¶ 39, as are other

questions of law. Boradiansky v. State Farm Mut. Auto. Ins. Co., 2007-NMSC-015, ¶ 5, 141

N.M. 387, 156 P.3d 25.

{13} When making its certification decision, the district court will often make factual

findings beyond the facts it accepts as true from the plaintiff’s complaint. This is because

the district court “must engage in a rigorous analysis of whether the Rule’s requirements

have actually been met[,]” Ferrell, 2008-NMSC-042, ¶ 8 (internal quotation marks and

citation omitted), and may “probe behind the pleadings [to] forecast what kind of evidence

may be required or allowed at trial.” Armijo, 2007-NMCA-120, ¶ 22 (internal quotation

marks and citation omitted). We review the district court’s factual findings for substantial

evidence. See Brooks, 2004-NMCA-134, ¶ 7 (“If the correct law has been applied to the

facts, the district court's [class certification] decision must be affirmed when it is supported

by substantial evidence.” (citation omitted)). When there are no challenges to the district

court’s factual findings, we accept those findings as conclusive. State v. Rotherham, 1996-

NMSC-048, 122 N.M. 246, 266, 923 P.2d 1131, 1151 (Minzner, J., specially concurring)

(stating when reviewing the record for substantial evidence to support the district court’s

findings of fact, findings not challenged in the parties’ briefs will be “deemed conclusive”

(internal quotation marks and citation omitted)). We discern no such challenges here.

B. WE DO NOT ADDRESS THE MARKETABLE CONDITION RULE

{14} The district court ruled on summary judgment in Ideal and Smith that “under the

implied duty to market, the marketable condition rule applies in New Mexico.” Although the

district court was not presented with a similar motion for summary judgment in Davis, its

memorandum opinion in Davis is essentially identical to those in Ideal and Smith in that they

each assume that the marketable condition rule applies in New Mexico. For the purposes

of our review, we accept this interlocutory ruling of the district court as applicable in each

case, and we do not address the existence of the marketable condition rule in New Mexico

or its applicability in any of these cases. Cf. Ferrell, 2008-NMSC-042, ¶ 2 n.1 (declining

to reach the substantive mootness issue “[b]ecause the validity of class certification [was]

the only issue on appeal”).

{15} The district court left open the following questions, among others, pertaining to the

scope of the marketable condition rule and its application in these cases: (1) whether, under

the marketable condition rule, Defendants are obligated to pay royalties on a marketable

7

product and to bear the cost of placing the gas in a marketable condition; (2) whether CBM

gas from the Fruitland formation is in a “marketable condition” when it emerges from the

wellhead; (3) whether the costs deducted by Defendants were necessary to make the product

marketable; and (4) whether those costs are actually and reasonably incurred. These issues

are directly relevant to the existence and application of the marketable condition rule in New

Mexico and will be the subject of the parties’ continued litigation. Thus, the question of

whether and under what circumstances the marketable product rule applies in New Mexico

is not ripe for review at this time. See Rio Grande Kennel Club v. City of Albuquerque,

2008-NMCA-093, ¶ 24, 144 N.M. 636, 190 P.3d 1131 (“[T]he doctrine of ripeness is

intended to prevent the courts, through avoidance of premature adjudication, from entangling

themselves in abstract disagreements.” (alteration in original, internal quotation marks and

citation omitted)). Therefore, nothing in this opinion should be construed as either the

recognition or disapproval of the marketable condition rule, its scope, or its applicability.

We discuss only the propriety of the district court’s certification orders.

C. CERTIFICATION OF THE CLASSES UNDER RULE 1-023(B)(2) WAS

PROPER

{16} Defendants first argue that the district court’s (B)(2) certification was in error

because the requested declaratory and injunctive relief will not be uniform for each class

member. They contend that even though their accounting methodologies in deducting

certain costs are uniform for each class, to determine if that methodology is improper, and,

if so, what relief is appropriate, the district court must review the terms of each royalty

agreement, as well as extrinsic evidence relevant to the parties’ intentions. These inquiries,

they assert, are “highly individualized” and may require that the district court fashion a

variety of remedies, “each tailored to fit the varying circumstances of the individual

Plaintiffs’ royalty instruments.” Thus, according to Defendants, this necessity for

“individualized proof” of the terms of each agreement makes injunctive relief impossible

“with respect to the class as a whole[.]” Rule 1-023(B)(2). We disagree.

{17} Defendants’ reliance on “individualized proof” and “highly individualized inquiries”

is an improper attempt to incorporate the predominance and superiority requirements of Rule

1-023(B)(3) into the (B)(2) certification analysis. They effectively argue that because

individualized inquiries might be required to determine if each royalty agreement was

breached, those inquiries make class certification imprudent. However, the district court

need not be satisfied that common issues predominate or that a class action is a superior

method for resolving class members’ claims in a (B)(2) action. Rather, the district court

must only conclude that “the party opposing the class . . . acted or refused to act or failed to

perform a legal duty . . . on grounds generally applicable to all class members” and that the

final injunctive or declaratory relief will “settl[e] the legality of the behavior with respect

to the class as a whole[.]” 2 Conte & Newberg, supra § 4:11 at 55, 56.

{18} Here, the district court found that Defendants acted on grounds generally applicable

to all class members by deducting certain costs uniformly in all royalty agreements,

8

regardless of the language of those instruments. In Devon’s case, the district court found

that:

Devon calculates royalty based on sale of the gas at the wellhead. Devon

uniformly calculates “at the well” valuation by computing a gross value

based upon actual sales to third parties at the tailgate of the plant and then

netting that value back to the wellhead or central delivery point by deducting

costs for gathering, dehydrating and [carbon dioxide] removal incurred

between the well or central delivery point and the sales point.

With respect to BP, the district court found that its “various methodologies all include

deductions for one or more of the following services: fuel, transportation, gathering,

compression, dehydration, and treatment, including the removal of [carbon dioxide] from

CBM.” Finally, regarding Conoco, the district court found that it pays class members “on

a ‘proceeds’ basis (weighted average sales price less post-production costs incurred between

the well and the sales point).” These findings are not challenged by Defendants on review.

{19} Given Defendants’ standardized treatment of all class members in deducting certain

costs, we agree with the district court that it would be in a position to declare the rights of

the parties on a class-wide basis with respect to the propriety of those deductions. For those

agreements in which the marketable condition rule may be implied, a matter we address later

in this opinion, the court would be in a position to adjudicate on a class-wide basis whether

the costs uniformly deducted by Defendants were necessary to put the CBM gas in a

marketable condition. Thus, should Plaintiffs prevail, the district court would be in a

position to grant class-wide injunctions to compel Defendants to stop deducting those costs

from the royalty payments. Therefore, Defendants’ reliance on individualized inquiries is

misplaced.

{20} Finally, with respect to the district court’s (B)(2) ruling, Defendants argue that

certification was inappropriate because monetary damages predominate Plaintiffs’ claims.

They rely on federal precedent for the proposition that injunctive and declaratory relief must

be the predominant remedy in order to certify a class under (B)(2). See, e.g., Allison v. Citgo

Petroleum Corp., 151 F.3d 402, 411 (5th Cir. 1998) (noting that the Fifth Circuit has

“adopted the position taken by the advisory committee that monetary relief may be obtained

in a (b)(2) class action so long as the predominant relief sought is injunctive or declaratory”

(footnote omitted)). Defendants argue that because Plaintiffs’ claims are dominated by

requests for money damages, certification of the (B)(2) class was an abuse of discretion.

Finally, they argue that the monetary relief is not a “group remedy” in that damages

available to each class member depend on the “varying circumstances” of each class

member’s case. We are not persuaded.

{21} Although we have said that Rule 1-023(B)(3) “generally applies when class members

seek monetary damages[,]” Ferrell, 2008-NMSC-042, ¶ 10 (citation omitted), our appellate

courts have not yet considered the impact of requests for monetary relief on class

9

certification under Rule 1-023(B)(2). Those jurisdictions that impose a requirement that

requests for money damages must not predominate the plaintiff class’s claims do so in

reliance on the Advisory Committee Note to Federal Rule of Civil Procedure 23(b)(2), which

explains that certification under that provision “does not extend to cases in which the

appropriate final relief relates exclusively or predominantly to money damages.” Fed. R.

Civ. P. 23(b)(2) advisory committee note to subdivision (b)(2) (emphasis added); see also

Allison, 151 F.3d at 411. The primary concern appears to be that the class members’ rights

in (B)(3) actions to receive notice of the class action and to opt out of that litigation are not

required in (B)(2) cases. See Rule 1-023(C)(2); Allison, 151 F.3d at 412-13. These rights

are protected in (B)(3) cases because “[m]onetary remedies are more often related directly

to the disparate merits of individual claims.” Allison, 151 F.3d at 413. In other words, “a

class seeking substantial monetary remedies will more likely consist of members with

divergent interests.” Id.

{22} These divergent interests, it is said, are minimal when the plaintiff class seeks

declaratory and injunctive relief because “its members suffer from a common injury properly

addressed by class-wide relief[.]” Id. Classes certified under (B)(2) are “assumed to be a

homogenous and cohesive group with few conflicting interests among its members.” Id.

Thus, the rights to notice and opt out are less critical in (B)(2) cases because the need to

protect the individual rights of class members is said to be less critical than in cases where

individualized issues relating to money damages are at the forefront of the litigation.

{23} However valid the concerns are about the need to protect an individual’s right to

litigate his or her money damages claim, they must be considered in light of the reality that

“[m]onetary damages are almost always requested when injunctive relief is sought.” 2 Conte

& Newberg, supra § 4:11 at 61. We agree that “[r]efusing to certify a Rule 23(b)(2) class

action based on a request for monetary relief defeats the possibility of ever maintaining an

injunctive class action.” Id. at 61-62. What is more, disputes about which type of relief,

injunctive or monetary, predominates the plaintiff class’s claims are difficult to resolve

because they require a court to determine which relief is more important to the plaintiff class.

See id. § 4:14 at 93-94. We believe that rather than attempting to weigh which form of relief

is the focus of the plaintiffs’ case, “the court should conclude that when the Rule 23(a)

prerequisites are satisfied and declaratory or injunctive relief is sought as an integral part of

the relief for the class, then Rule 23(b)(2) is applicable regardless of the presence or

dominance of additional prayers for damages relief for class members.” Id. at 94. When

both the injunctive and monetary relief are of roughly equal importance, and the other

requirements of certification have been met, (B)(2) certification is proper. Id. at 93.

{24} Although we recognize that our holding will allow actions for money damages and

injunctive relief to proceed under (B)(2), we are nevertheless mindful of the importance of

the notice and opt-out requirements of (B)(3) actions. See Allison, 151 F.3d at 412 n.4

(recognizing due process rights to notice and opt out in class actions seeking monetary

relief). Therefore, to protect the rights of absent class members, courts should engage in a

practical assessment of the plaintiffs’ claims and, consistent with their broad discretion to

10

manage class litigation, see Salcido v. Farmers Ins. Exch., 2004-NMCA-006, ¶ 9, 134 N.M.

797, 82 P.3d 968, determine when and if notice and the right to opt out of the damages

portion of the suit should be made available. See 2 Conte & Newberg, supra § 4:14 at 94-95,

103, 104-06 (listing options for class certification when both money damages and injunctive

relief are sought by the plaintiff class). For example, the court could require notice and opt

out in a (B)(2) case under Rule 1-023(D)(2), pursue a hybrid certification where notice and

opt out are provided only after a determination of liability has been made, or certify only

particular issues under Rule 1-023(C)(4)(a). See Thomas R. Grande, Innovative Class Action

Techniques—The Use of Rule 23(B)(2) in Consumer Class Actions, 14 Loy. Consumer L.

Rev. 251, 264-67 (2002). We do not determine whether the district court must provide

notice and the right to opt out to (B)(2) class members in this case, as that issue is not before

us. We simply acknowledge that district courts and litigants should be aware that

certification of a (B)(2) class requesting significant money damages might present additional

management issues.

{25} Here, the district court concluded that while Plaintiffs seek to recover damages for

the class, “[t]o say that the primary relief requested is monetary damages fails to recognize

the likelihood of substantial royalty payments which will occur in the future. Given the

reserves of CBM gas, the requested declaratory relief and injunctive relief could be of

greater import than the claim for damages.” We agree. Although we cannot tell from the

record what a typical class member’s damages award might be if Defendants are found

liable, we are nonetheless convinced that Plaintiffs are equally concerned about correcting

Defendants’ allegedly improper past conduct, as well as their conduct in the future. For each

of these reasons, therefore, we affirm the district court’s certification of all three classes

under Rule 1-023(B)(2).

D. WE REVERSE THE DISTRICT COURT’S DENIAL OF CLASS

CERTIFICATION UNDER RULE 1-023(B)(3)

{26} In denying class certification under Rule 1-023(B)(3), the district court relied on two

authorities, Continental Potash and Mark V. The court determined that under Continental

Potash, it must examine the language from each royalty agreement to determine if its express

terms addressed whether the costs of making CBM gas marketable could be deducted from

the royalty calculations. It found that Defendants established that the express terms of the

contracts vary: there are at least nineteen different variations in Davis, thirty-four variations

in Ideal, and an undetermined number of variations in Smith. Thus, according to the district

court, it would be “impossible to conclude that the contract analysis would be the same for

the proposed class members,” and therefore the individualized inquiries required under

Continental Potash predominate over any common issues of law or fact.

{27} The district court also concluded that under Mark V

the court would be required at a minimum to receive evidence on relevant

usage of trade, course of dealing and course of performance to determine

11

whether an ambiguity exists in the express terms of the contracts. Even for

those contracts that have the same express terms, it may be necessary to

receive evidence regarding the circumstances surrounding the making of the

individual contracts.

In sum, the court concluded that because it must look to the express language of potentially

thousands of contracts under Continental Potash, as well as extrinsic evidence of the parties’

intentions under Mark V, “[m]anagement of a [(B)(3)] class action under the various claims

for damages would be extremely difficult.” It stated that “[w]ith the opportunity to present

evidence to determine whether each contract is ambiguous, the evidentiary presentations on

the variety of contract terms would overwhelm the case.” We review the district court’s

interpretation of Continental Potash and Mark V in light of the requirements of interpreting

Rule 1-023 de novo as questions of law. See Ferrell, 2008-NMSC-042, ¶ 39.

{28} Plaintiffs argue that the district court’s reliance on Continental Potash and Mark V

was misplaced, as those cases are inapplicable to the facts before the court in these

consolidated class actions. While we acknowledge that the district court’s reading of

Continental Potash and Mark V was reasonable, we conclude that its reliance on these two

cases was in error. We therefore reverse the district court’s denial of certification under Rule

1-023(B)(3) and take this opportunity to clarify the requirements of Continental Potash and

Mark V as they apply to the implication of legal duties on one or more parties to a mining

contract.

{29} In Continental Potash, this Court adopted Texas law to determine whether an implied

covenant exists in the context of mining law.

[W]hen parties reduce their agreements to writing, the written instrument is

presumed to embody their entire contract, and the court should not read into

the instrument additional provisions unless this be necessary in order to

effectuate the intention of the parties as disclosed by the contract as a whole.

An implied covenant must rest entirely on the presumed intention of the

parties as gathered from the terms as actually expressed in the written

instrument itself, and it must appear that it was so clearly within the

contemplation of the parties that they deemed it unnecessary to express it,

and therefore omitted to do so, or it must appear that it is necessary to infer

such a covenant in order to effectuate the full purpose of the contract as a

whole as gathered from the written instrument. It is not enough to say that

an implied covenant is necessary in order to make the contract fair, or that

without such a covenant it would be improvident or unwise, or that the

contract would operate unjustly. It must arise from the presumed intention of

the parties as gathered from the instrument as a whole.

115 N.M. at 704, 858 P.2d at 80 (internal quotation marks and citations omitted). The Court

concluded that “[t]he general rule is that an implied covenant cannot co-exist with express

12

covenants that specifically cover the same subject matter.” Id. (citation omitted).

{30} In addition to evaluating the express terms of an agreement to determine if they

conflict with the provisions of a purported implied covenant, Continental Potash requires

an examination of the agreement as a whole, as well as extrinsic evidence, to determine if

implying those provisions would be consistent with the parties’ intentions.

When it is clear, however, from the relevant parts of the contract

taken together and considered with the facts and circumstances surrounding

the execution of the agreement, that the obligation in question was within the

contemplation of the parties or was necessary to effect their intention, then

such obligation may be implied and enforced.

Id. In implying a covenant, then, Continental Potash relies heavily on the parties’ intentions,

as evidenced by their written agreement.

{31} The district court apparently relied on our use of the term “implied covenant” to

describe the duty to market in Darr, 66 N.M. at 263, 346 P.2d at 1044, in determining that

the provisions of Continental Potash applied to a determination of whether the marketable

condition rule may be implied as a covenant in each royalty agreement. 115 N.M. at 704,

858 P.2d at 80 (discussing when covenants may be implied in mining contracts). What

Continental Potash failed to make clear, however, is that there are different types of

“covenants” that may be implied in a given agreement, and depending on the nature of the

promise to be implied, different rules of construction apply. In other words, Continental

Potash is not applicable in all cases.

{32} In determining whether a covenant may be implied in a given contract, courts must

first determine the legal theory supporting the implication of that promise. In implying a

covenant, courts may either be effectuating the parties’ intentions by interpreting the written

terms of an agreement and analyzing the parties’ conduct, or they may be stating that a duty

imposed by law creates an obligation on one or more of the parties to the agreement.

Depending on the nature of the implied promise, the court may or may not be required to

interpret the parties’ agreement and effectuate their intentions.

When a court finds a promise by implication, its procedure may be nothing

more than the ordinary interpretation of word symbols; it may be the

interpretation of a person’s acts and other conduct not including words; it

may be the judicial determination that a legal duty exists, stating the result

in the language of promise without doing anything that can properly be

called interpretation; or it may be a combination of any two of these or of all

three at once.

6 Arthur Linton Corbin, Corbin on Contracts § 561, at 1-2 (1979) (emphasis added). Thus,

in implying promises in contracts, courts must be clear if the “‘implication’ is true

13

interpretation or is purely judicial construction.” Id. at 4. The former requires an analysis

of the parties’ intentions. The latter is merely a judicial determination of the duties the law

imposes on the parties.

{33} In this way, the basis supporting the implication of the promise or covenant

determines the court’s analysis. If the court is identifying an implied legal duty of a party

to a contract, it may do so regardless of the parties’ intentions. See, e.g., Sanders v. FedEx

Ground Package Sys., Inc., 2008-NMSC-040, ¶ 7, 144 N.M. 449, 188 P.3d 1200 (stating that

the implied covenant of good faith and fair dealing is implicit in every contract). However,

if a covenant or promise does not operate to impose a duty as a matter of law, any implied

obligation must arise from the parties’ intentions. This latter “process of implication is

treated instead as a process of interpretation, a process of logical and factual inference and

not a pure construction or creation by the court.” 6 Corbin, supra § 562, at 10. We note

that:

It would probably be advantageous if when finding a promise by

“implication” the court would ask itself whether it finds the promise by

actual interpretation—that is, by searching for the meaning given to the

words of the contract by one or both of the parties[—]or is putting into

promissory language its finding that a party to the contract ought now to act

as if he had made such a promise even though nobody actually thought of it

or used words that express it.

Id. § 561 at 4. It is this distinction that we did not make clear in Continental Potash.

{34} Continental Potash applies to the process of interpreting an agreement and its

surrounding circumstances to effectuate the parties’ intentions, not to the implication of a

legal duty controlling the parties’ conduct. Continental Potash held that the defendants did

not have an implied duty to blend different grades of potash and refrain from “high-grading”

the mined potash, because “express provisions in the contract according the defendants

exclusive discretion and control in the mining operations left no room for the implied

covenants that the trial court enforced against [them].” 115 N.M. at 703, 704-05, 858 P.2d

at 79, 80-81. By looking to the express provisions of the parties’ contract, this Court

determined that the parties intended that the defendants would have exclusive control over

certain mining operations. Id. at 705, 858 P.2d at 81. Thus, the Court held that these

implied covenants could not be implied as legal duties as a matter of law. Id. at 705-06, 858

P.2d at 81-82. As a result, the analysis set forth in Continental Potash only applies to those

promises that may be implied because the parties so intended them. Its analysis does not

apply to covenants that impose legal duties upon contracting parties as a matter of law.

{35} In this way, Continental Potash is inapplicable to the implication of the marketable

condition rule as announced by the district court in this case. The district court ruled that

“under the implied duty to market, the marketable condition rule applies in New Mexico.”

(Emphasis added.) In Darr, this Court recognized the implied covenant “to make diligent

14

efforts to market the production in order that the lessor may realize on his royalty interest.”

66 N.M. at 263, 346 P.2d at 1044 (internal quotation marks and citation omitted); see also

Libby v. De Baca, 51 N.M. 95, 99, 179 P.2d 263, 265 (1947) (recognizing the lessee’s duty

to “proceed with reasonable diligence, as viewed from the standpoint of a reasonably prudent

operator, having in mind his own interest as well as that of the lessor, to market the product”)

(citation omitted). We implied this legal duty on oil and gas producers in equity, without

looking to the language of the agreements or other evidence of the parties’ intentions. Darr,

66 N.M. at 264, 346 P.2d at 1044. Therefore, given the district court’s conclusion that the

duty to market, which applies in equity irrespective of the parties’ intentions, incorporates

the duty to put CBM gas in a marketable condition (a conclusion we do not review in this

opinion), the requirements of Continental Potash are likewise inapplicable to a

determination of whether the marketable condition rule may be implied in each royalty

agreement.

{36} For the same reasons that Continental Potash is inapplicable to this case, the extrinsic

evidence analysis required by Mark V is also unnecessary. In Mark V we “discuss[ed] the

appropriate methods for a trial court to use in determining whether a contract contains

ambiguous terms and in resolving any ambiguities thus discovered.” 114 N.M. at 779, 845

P.2d at 1233. As we have just explained, given the district court’s summary judgment

ruling, the provisions of each royalty agreement are irrelevant to the implication of the

marketable condition rule in each contract because the district court is imposing a legal duty

on Defendants. This is a matter of “purely judicial construction.” 6 Corbin, supra § 561,

at 4. Thus, the determination and resolution of any ambiguities in the contract’s terms are

likewise unnecessary.

{37} In denying class certification under Rule 1-023(B)(3), the district court relied

exclusively on Continental Potash and Mark V to determine that individualized issues

predominated over common ones and that the class litigation would not be a superior method

for resolving Plaintiffs’ claims because managing the various claims for damages would be

difficult. Although we make no decision in this opinion regarding the existence or the

applicability of the marketable condition rule, we believe that in light of our holding that

Continental Potash and Mark V are inapplicable to these class actions, the district court’s

conclusion that the marketable condition rule has been incorporated in the existing duty to

market is sufficient to certify these classes under Rule 1-023(B)(3). The primary issue to be

litigated on remand is whether the costs deducted by Defendants were necessary to make the

CBM gas “marketable.” This is an issue common among all class members and is

appropriate for class certification. The district court retains broad discretion in managing

these class actions on remand. For example, should it see fit, it may divide the class into

subclasses under Rule 1-023(C)(4)(b) or otherwise alter, amend, or decertify the class prior

to a decision on the merits. Rule 1-023(C)(1).

E. THE DISTRICT COURT DID NOT ERR BY FAILING TO ADOPT FORMAL

FINDINGS OF FACT AND CONCLUSIONS OF LAW

15

{38} Plaintiffs contend that the district court’s failure to enumerate specific findings of

fact and conclusions of law in its certification orders was in error. They admit that “Rule 1-

023 does not require that a class certification order contain findings of fact.” Salcido, 2004-

NMCA-006, ¶ 19. Instead, they contend that under Salcido, the district court is required to

enter formal findings of fact and conclusions of law in a class certification order when

requested to do so by the parties, as they did here. Plaintiffs are correct that Salcido did

suggest that a district court must honor a party’s request to enter findings of fact and

conclusions of law when making a class certification decision. See id. (“[I]f Defendants

wanted to have findings and conclusions accompanying the order, they could have submitted

their own and requested they be entered.”). Salcido relied on DeTevis v. Aragon, 104 N.M.

793, 800, 727 P.2d 558, 565 (Ct. App. 1986) for the proposition that “[t]he trial court must,

if requested, adopt findings of fact resolving the material issues raised by the parties.” Id.

(internal quotation marks omitted). In support of that proposition, DeTevis relied on the

predecessor to Rule 1-052 NMRA. DeTevis, 104 N.M. at 800, 727 P.2d at 565. Rule 1-052

charges the district court with entering findings of fact and conclusions of law in a case tried

by a judge without a jury. See Rule 1-052(A). Salcido improperly equated the necessity of

the court entering findings of facts and conclusions of law in non-jury trials with those

“strongly encourage[d]” to be entered in class certification orders. Rivera-Platte v. First

Colony Life Ins. Co., 2007-NMCA-158, ¶ 45, 143 N.M. 158, 173 P.3d 765. Thus, to the

extent that Salcido suggested that the district court must enter findings of fact and

conclusions of law in a class certification order based on Rule 1-052, it is incorrect.

{39} The Court of Appeals has suggested in “class certification cases that district courts

should provide findings of fact and conclusions of law.” Romero v. Philip Morris Inc.,

2005-NMCA-035, ¶ 33, 137 N.M. 229, 109 P.3d 768; see also Berry v. Fed. Kemper Life

Assurance Co., 2004-NMCA-116, ¶ 19 n.1, 136 N.M. 454, 99 P.3d 1166 (“We take this

opportunity to state a strong preference for district courts entering formal findings of fact and

conclusions of law in support of their ruling in Rule 1-023 proceedings.”), abrogated on

other grounds by Ferrell v. Allstate Ins. Co., 2007-NMCA-017, ¶ 40, 141 N.M. 72, 150 P.3d

1022, rev’d by Ferrell, 2008-NMSC-042. We agree that “[f]indings will make review on

appeal more informed and will force the parties to explicitly address the Rule's

requirements.” Berry, 2004-NMCA-116, ¶ 19 n.1 (citation omitted). Like the Court of

Appeals, we therefore strongly encourage the district court to enter findings of fact and

conclusions of law in their class certification orders. However, entering findings of fact and

conclusions of law is not a prerequisite to our review of the district court’s certification

order. The district court in Plaintiffs’ cases actually made factual findings and entered

conclusions of law in its memorandum opinions. Its findings and conclusions may not have

been enumerated as such in a formal manner, but, as indicated throughout this opinion, they

were nonetheless present.

IV. CONCLUSION

{40} For the reasons stated above, we affirm the district court’s certification of the classes

under Rule 1-023(B)(2). We reverse the district court’s denial of certification under Rule

16

1-023(B)(3) and remand to the district court. While our ruling requires certification of these

classes under both (B)(2) and (B)(3) at this stage, the district court retains its broad

discretion to manage these class actions as this litigation progresses.

{41} IT IS SO ORDERED.

______________________________________

EDWARD L. CHÁVEZ, Chief Justice

WE CONCUR:

___________________________________

PATRICIO M. SERNA, Justice

___________________________________

PETRA JIMENEZ MAES, Justice

___________________________________

RICHARD C. BOSSON, Justice

Topic Index for Davis v. Devon Energy Corp., No. 30,956 consolidated with Ideal v. BP

America Production Co., No. 30,957 consolidated with Smith Family LLC v.

ConocoPhillips Co., No. 30,958

AE APPEAL AND ERROR

AE-IA Interlocutory Appeal

CP CIVIL PROCEDURE

CP- CA Class Actions

CP-FD Findings and Conclusions

CP-RC Rules, Construction of Civil Procedure

CN CONTRACTS

CN-AM Ambiguous Contracts

CN-IN Interpretation

CN-IP Implied Promises and Covenants

NR NATURAL RESOURCES

NR-OG Oil and Gas

NR-RO Royalties

17