Petition for Writ of Certiorari — Charles D. Gonzalez, et al., Petitioners v. Elna Sefcovic, LLC, et al.
Supreme Court briefOct 8, 2020
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No. ___________
In The
Supreme Court of the United States
_______________________
CHARLES D. GONZALEZ; SUSANNAH GONZALEZ;
TED. L. VAUGHAN; and HILDA VAUGHAN,
Petitioners,
vs.
ELNA SEFCOVIC, LLC; WHITE RIVER ROYALTIES, LLC;
JUHAN, LP; and ROY ROYALTY, INC., individually and on behalf
of all others similarly situated; and TEP ROCKY MOUNTAIN, LLC,
Respondents.
_______________________
On Petition For Writ Of Certiorari
To The United States Court Of Appeals
For The Tenth Circuit
_____________________
PETITION FOR WRIT OF CERTIORARI
_______________________
NATHAN A. KEEVER
Counsel of Record
DUFFORD, WALDECK, MILBURN & KROHN, LLP
744 Horizon Ct., Ste. 300
Grand Junction, CO 81506
(970) 241-5500
keever@dwmk.com
Attorneys for Petitioners
QUESTIONS PRESENTED FOR REVIEW
A Magistrate of the United States District Court for the District of Colorado
approved a class action settlement over the objection of the Petitioners. The Tenth
Circuit affirmed. The following questions are presented:
1.
Did the district court and the court of appeals improperly apply obsolete
standards for approval of settlement class actions under prior caselaw rather than the
current standard set out in the 2018 amendments to Federal Rule of Civil Procedure
23(e)(2)?
2.
When the settlement class was certified in the same order approving the
settlement, and objections and evidence of inadequate representation and intra-class
conflict of interest were before the district court and court of appeals, did the court of
appeals improperly fail to require rigorous analysis and adequate findings by the
district court as required by Federal Rules of Civil Procedure 23(a) and 23(e)(2)?
3.
When the objectors repeatedly asserted that the interests of a subclass
were wrongfully “sacrificed” by the Class Representatives, did the court of appeals
improperly decline to reach the issue of adequate representation on the grounds that
it had been waived?
4.
When the district court failed to analyze or make fact findings evidencing
the exercise of its discretion, did the court of appeals improperly affirm approval of the
class settlement based on its own fact findings and conclusions regarding the release
given by the Class Representatives on behalf of the class?
-i-
PARTIES TO THE PROCEEDING
Petitioners here, appellants below, are Charles Dean and Susannah Gonzales,
and Ted. L. Vaughan and Hilda Vaughan.
Respondents here, appellees below, are Elna Sefcovic, LLC, White River
Royalties, LLC, Juhan, LP, and Roy Royalty, Inc., individually and on behalf of all
other similarly situated, and TEP Rocky Mountain, LLC.
RELATED PROCEEDINGS
•
Lindauer, et al. v. Williams Prod. RMT Co., No. 2006 cv 317, Garfield County,
Colorado, District Court. Judgment entered March 20, 2009; proceedings
ongoing.
•
Elna Sefcovic, LLC, et al. v. TEP Rocky Mountain, LLC, No. 17-cv-01990, U.S.
District Court for the District of Colorado. Judgment entered November 9, 2018,
judgment vacated January 23, 2019, judgement entered March 15, 2019.
•
Elna Sefcovic, LLC, et al. v. TEP Rocky Mountain, LLC, No. 19-1120, U.S. Court
of Appeals for the Tenth Circuit. Judgment entered March 18, 2020, rehearing
denied May 15, 2020.
-ii-
TABLE OF CONTENTS
QUESTIONS PRESENTED FOR REVIEW . . . . . . . . . . . . . . . . . . . . . . . . .
i
PARTIES TO THE PROCEEDING .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ii
RELATED PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ii
TABLE OF CONTENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
iii
TABLE OF AUTHORITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
vi
PETITION FOR WRIT OF CERTIORARI . . . . . . . . . . . . . . . . . . . . . . . . . .
1
OPINIONS BELOW .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2
JURISDICTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2
STATUTES AND RULES INVOLVED .. . . . . . . . . . . . . . . . . . . . . . . . . . . .
3
STATEMENT OF THE CASE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3
The Lindauer Settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4
The Sefcovic Class Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5
The Sefcovic Settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7
REASONS FOR GRANTING CERTIORARI . . . . . . . . . . . . . . . . . . . . . . . .
9
-iii-
I.
II.
III.
THE DISTRICT COURT AND TENTH CIRCUIT IMPROPERLY
APPLIED OBSOLETE STANDARDS FOR APPROVAL OF A
SETTLEMENT RATHER THAN THE STANDARDS REQUIRED
IN THE 2018 AMENDMENT TO RULE 23(e)(2) .. . . . . . . . . . . . . . . . . . . .
12
THE TENTH CIRCUIT AND DISTRICT COURT OPINIONS CONFLICT
WITH THE HOLDINGS OF THIS COURT REQUIRING RIGOROUS
ANALYSIS OF THE REQUIREMENTS OF RULE 23(a) AND (e)(2) WHEN
CERTIFYING A CLASS AND APPROVING A CLASS SETTLEMENT . . . . . . .
14
IF A RIGOROUS ANALYSIS HAD BEEN PERFORMED, THERE IS
ABUNDANT EVIDENCE OF INADEQUATE REPRESENTATION, CONFLICTS
BETWEEN SUBGROUPS, AND INEQUITABLE TREATMENT OF ABSENT
CATEGORY 2 AND CATEGORY 3 LEASE OWNERS IN SUBCLASS I .. . . . . .
19
A.
There Is Undisputed Evidence That Category 3
Lease Owners Were Not Represented . . . . . . . . . . . . . . . . . . .
19
There Is Undisputed Evidence That Category 2
Lease Owners Were Not Adequately Represented . . . . . . . . .
22
There Is Undisputed Evidence of Intra-Class Conflicts . . . . .
23
BECAUSE OBJECTORS REPEATEDLY ASSERTED THAT THE
INTERESTS OF SUBCLASS I WERE WRONGLY “SACRIFICED”
BY CLASS REPRESENTATIVES, AND THE RECORD CONTAINED
EVIDENCE OF INADEQUATE REPRESENTATION AND INTRA-CLASS
CONFLICTS, THE TENTH CIRCUIT IMPROPERLY DECLINED TO
ADDRESS THE ISSUE OF ADEQUATE REPRESENTATION ON
THE GROUNDS THAT IT HAD BEEN WAIVED . . . . . . . . . . . . . . . . . . . . .
28
WHERE THE MAGISTRATE FAILED TO ANALYZE OR MAKE
FACT FINDINGS REGARDING THE SCOPE OF THE RELEASE,
THE COURT OF APPEALS IMPROPERLY AFFIRMED APPROVAL
OF THE CLASS SETTLEMENT BASED ON ITS OWN FACT
FINDINGS AND CONCLUSIONS REGARDING THE RELEASE . . . . . . . . . . .
31
CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
34
B.
C.
IV.
V.
-iv-
APPENDIX
United States Court of Appeals for the Tenth Circuit,
Opinion, March 18, 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
App. 1
United States District Court for the District of Colorado,
Order, March 15, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
App. 28
United States District Court for the District of Colorado,
Order, March 15, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
App. 34
United States District Court for the District of Colorado,
Order, March 15, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
App. 45
United States Court of Appeals for the Tenth Circuit,
Order, May 15, 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
App. 47
District Court for Garfield County, Colorado
Settlement Agreement, October 17, 2008 . . . . . . . . . . . . . . . .
App. 49
District Court for Garfield County, Colorado
Judgment, March 20, 2009 .. . . . . . . . . . . . . . . . . . . . . . . . . . .
App. 141
United States District Court for the District of Colorado,
Joint Motion for Approval, October 30, 2018 . . . . . . . . . . . . .
App. 150
United States District Court for the District of Colorado,
Objections to Approval, November 6, 2018 . . . . . . . . . . . . . . .
App. 329
United States District Court for the District of Colorado,
Second Amended Complaint, January 29, 2019 . . . . . . . . . . .
App. 344
United States District Court for the District of Colorado,
Transcript of Fairness Hearing, February 20, 2019 . . . . . . . .
App. 369
United States Court of Appeals for the Tenth Circuit,
Joint Answer Brief, October 18, 2019 . . . . . . . . . . . . . . . . . . .
App. 553
United States Court of Appeals for the Tenth Circuit,
Petition for Rehearing, May 1, 2020 . . . . . . . . . . . . . . . . . . . .
App. 617
FED. R. CIV. P. 23 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
App.644
-v-
TABLE OF AUTHORITIES
CASES:
Ace Am. Ins. Co. v. Wattles Co.,
930 F.3d 1240 (11th Cir. 2019) . . . . . . . . . . . . . . . . . . . . . . . .
29
Amchem Products, Inc. v. Windsor,
521 U.S. 591 (1997) .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
passim
Burnette v. Dresser Indus., Inc.,
849 F.2d 1277 (10th Cir. 1988) . . . . . . . . . . . . . . . . . . . . . . . .
29
Central R.R. Banking Co. v. Pettus,
113 U.S. 116 (1885) .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
25
City of Waco, Texas v. Bridges,
710 F.2d 220 (5th Cir. 1983),
cert. denied, 465 U.S. 1066 (1984) . . . . . . . . . . . . . . . . . . . . . .
30
Conway v. O’Brien,
312 U.S. 492 (1941) .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14
Elna Sefcovic, LLC v. TEP Rocky Mountain, LLC,
807 Fed. Appx. 752 (10th Cir. 2020) . . . . . . . . . . . . . . . . . . . .
2
Epstein v. MCA, Inc.,
179 F.3d 641 (9th Cir. 1998),
cert. denied, 528 U.S. 1004 (1999) . . . . . . . . . . . . . . . . . . . . . .
9
General Telephone Co. of the Southwest v. Falcon,
457 U.S. 147 (1982) .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14,18
Gruin v. Int’l House of Pancakes,
513 F.2d 114 (8th Cir.),
cert. denied, 423 U.S. 864 (1975) . . . . . . . . . . . . . . . . . . . . . . .
18
Gulf Oil Co. v. Bernard,
452 U.S. 89 (1981) .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14
Hansberry v. Lee,
311 U.S. 32 (1942) .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9
-vi-
Harper v. C.R. England, Inc.,
746 Fed. Appx. 712 (10th Cir. 2018) . . . . . . . . . . . . . . . . . . . .
16
17,31,33
Hopkins v. Metcalf,
435 F.2d 123 (10th Cir. 1970) . . . . . . . . . . . . . . . . . . . . . . . . .
30
In re Agent Orange Prod. Liab. Litig.,
800 F.2d 14 (2d Cir. 1986) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
24,28
In re Corrugated Container Antitrust Litig.,
643 F.2d 195 (5th Cir. 1981),
cert. denied, 456 U.S. 998 (1982) . . . . . . . . . . . . . . . . . . . . . . .
15,33
In re General Motors Corp. Pick-Up Truck Fuel Tank Prod. Liab. Litig.,
55 F.3d 768 (3d Cir.), cert. denied,
516 U.S. 824 (1995) .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
18
In re Google Inc. Cookie Placement Consumer Privacy Litig.,
934 F.3d 316 (3d Cir. 2019) . . . . . . . . . . . . . . . . . . . . . . . . . . .
18
In re Literary Works in Elec. Databases Copyright Litig.,
654 F.3d 242 (2d Cir. 2011) . . . . . . . . . . . . . . . . . . . . . . . . . . .
19-20,24
25,26,28
In re Payment Card Interchange Fee and Merch. Disc. Antitrust Litig.,
827 F.3d 223 (2d Cir. 2016), cert. denied,
—U.S.—, 137 S. Ct. 1374, 197 L. Ed. 2d 568 (2017) . . . . . . . . 22,25,26
Irvin v. Harris,
944 F.3d 63 (2d Cir. 2019) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
20
Johnson v. NPAS Sols., LLC,
—F.3d—, 2020 WL 5553312 (11th Cir. 2020) . . . . . . . . . . . . .
25
Johnson Waste Materials v. Marshall,
611 F.2d 593 (5th Cir. 1980) . . . . . . . . . . . . . . . . . . . . . . . . . .
30
Karvaly v. eBay, Inc.,
245 F.R.D. 71 (E.D.N.Y. 2007) . . . . . . . . . . . . . . . . . . . . . . . . .
29,34
Lindauer v. Williams Prod. RMT Co.,
Case No. 2006 CV 317 (Garfield Cty, Colo., Dist. Ct.) . . . . . .
3-6,19
21,25,33
National Super Spuds, Inc. v. New York Mercantile Exch.,
660 F.2d 9 (2d Cir. 1981) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
20,28
29,31-32
-vii-
Neale v. Volvo Cars of N. Am., LLC,
794 F.3d 353 (3d Cir. 2015) . . . . . . . . . . . . . . . . . . . . . . . . . . .
33
Nelson v. Adams, USA, Inc.,
529 U.S. 460 (2000) .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
29
New England Health Care Emps. Pension Fund v. Woodruff,
512 F.3d 1283 (10th Cir. 2008) . . . . . . . . . . . . . . . . . . . . . . . .
17
Ortiz v. Fibreboard Corp.,
9,10,11,24
527 U.S. 815 (1999) .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,26,28
Palacios Seafood, Inc. v. Piling, Inc.,
888 F.2d 1509 (5th Cir. 1989) . . . . . . . . . . . . . . . . . . . . . . . . .
30
Phillips Petroleum Co. v. Shutts,
472 U.S. 797 (1985) .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9
Radcliffe v. Experian Info. Sols. Inc.,
715 F.3d 1157 (9th Cir. 2013) . . . . . . . . . . . . . . . . . . . . . . . . .
25
Sarfaty v. City of Los Angeles,
765 Fed. Appx. 280 (9th Cir. 2019) . . . . . . . . . . . . . . . . . . . . .
33
Reing v. RBS Citizens, N.A.,
912 F.3d 115 (3d Cir. 2018) . . . . . . . . . . . . . . . . . . . . . . . . . . .
33
Societe Internationale Pour Participations
Industrielles Et Commerciales, S. A. v. Rogers,
357 U.S. 197 (1958) .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14
Soranno v. New York Life Ins. Co.,
No. 96 C 7882, 2001 WL 290303 (N.D. Ill. 2001) . . . . . . . . . .
32
TBK Partners, Ltd. v. Western Union Corp.,
675 F.2d 456 (2d Cir. 1982) . . . . . . . . . . . . . . . . . . . . . . . . . . .
31-32
Tennille v. Western Union Co.,
785 F.3d 422, 434 (10th Cir. 2015), cert. denied,
—U.S.—, 136 S. Ct. 835, 193 L. Ed. 2d 719 (2016) . . . . . . . . .
12-13
Trustees v. Greenough,
105 U.S. 527 (1882) .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
25
-viii-
TVPX ARS, Inc. v. Genworth Life & Annuity Ins. Co.,
959 F.3d 1318 (11th Cir. 2020) . . . . . . . . . . . . . . . . . . . . . . . .
31,33
Volvo Const. Equip. N. Am, Inc. v. CLM Equip. Co., Inc.,
386 F.3d 581 (4th Cir. 2004) . . . . . . . . . . . . . . . . . . . . . . . . . .
29
Wachtel v. Guardian Life Ins. Co. of Am.,
453 F.3d 179 (3d Cir. 2006) . . . . . . . . . . . . . . . . . . . . . . . . . . .
32
Wal-Mart Stores, Inc. v. Dukes,
564 U.S. 338 (2011) .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14,18
Weinman v. Fid. Capital Appreciation Fund
(In re Integra Realty Res., Inc.,)
354 F.3d 1246 (10th Cir. 2004) . . . . . . . . . . . . . . . . . . . . . . . .
13,16,20
STATUTES:
28 U.S.C. §1254(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2
RULES:
FED. R. APP. P. 46 .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
30
FED. R. CIV. P. 15(b) .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
30
FED. R. CIV. P. 23 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,3,10
14,17,32
FED. R. CIV. P. 23(a) .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
passim
FED. R. CIV. P. 23(a)(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15,19,28
FED. R. CIV. P. 23(b) .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14,17
FED. R. CIV. P. 23(c)(1)(B) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
32
FED. R. CIV. P. 23(e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
17
FED. R. CIV. P. 23(e)(2) .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9,10,12
13,14,28
-ix-
1,9,10,12
13,15,16
FED. R. CIV. P. 23(e)(2)(A) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,29,30
FED. R. CIV. P. 23(e)(2)(D) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,9,10
12,13,15
28,29,30
OTHER AUTHORITIES:
4 NEWBERG ON CLASS ACTIONS §13.60 (5th ed.) . . . . . . . . . . . . . . . . .
29
6 NEWBERG ON CLASS ACTIONS §18.19 (5th ed.) .. . . . . . . . . . . . . . . .
31
FED. R. CIV. P. 23(e)(2) advisory
committee’s note to 2018 amendment . . . . . . . . . . . . . . . . . . . . . . . .
12,17
-x-
PETITION FOR WRIT OF CERTIORARI
When considering settlements in class actions, federal district courts often
simultaneously address the separate issues of (1) class certification, and (2) the
fairness and reasonableness of the proposed settlement, in a single hearing and a
single order. Unfortunately, in their (perhaps understandable) eagerness to grant
approval to a class settlement that would remove a potentially difficult, protracted, and
time-consuming case from their crowded dockets, and at the eager and united urging
of the named parties and their counsel as proponents of the settlements, the district
courts, and the courts of appeals that purport to review their decisions, frequently
succumb to the temptation to conflate or ignore the essential requirements for class
certification and for approval of a class settlement. The result is that corners are cut,
the requirements of Federal Rule of Civil Procedure 23 are overlooked or ignored,
“rigorous analysis” is replaced with boilerplate recitals, “heightened scrutiny” becomes
increased deference to the class representatives and class counsel, intra-class conflicts
are overlooked, and settlements that are unfair to a portion of the class are
nevertheless approved as “fair and reasonable.”
Such is the case here, where the United States Court of Appeals for the Tenth
Circuit affirmed the district court’s use of pro forma boilerplate language rather than
conducting any rigorous analysis of the requirements for certification of the settlement
class, including adequacy of representation, and then compounded that error by failing
to address the core concerns of adequacy of representation and equitable treatment of
subgroups in connection with the settlement itself, notwithstanding the express
requirements of Rule 23(e)(2)(A) and (D).
-1-
Petitioners respectfully petition for a writ of certiorari to review the judgment
of the Tenth Circuit to address the significant erosion of the due process rights of
absent class members that frequently occurs when settlement class certification and
settlement approval are addressed simultaneously in a truncated fashion that does not
include any rigorous analysis of adequacy of representation, which should be
mandatory for both class certification and settlement approval.
OPINIONS BELOW
The opinion of the District Court for the District of Colorado involved herein is
not reported but is reproduced in the Appendix hereto (“App”) at 34-44.
The opinion of the Tenth Circuit, which was designated as “unpublished,” is
reported at Elna Sefcovic, LLC v. TEP Rocky Mountain, LLC, 807 Fed. Appx. 752 (10th
Cir. 2020), and reproduced at App. 1-27. The order denying rehearing or rehearing en
banc is not reported but is reproduced at App. 47-48.
JURISDICTION
The Tenth Circuit issued its opinion on March 18, 2020, and denied rehearing
or rehearing en banc on May 15, 2020. The deadline to file any petition for writ of
certiorari was extended to 150 days by this Court’s Order dated March 19, 2020. This
Petition is therefore timely filed and this Court has jurisdiction under 28 U.S.C.
§1254(1).
-2-
STATUTES AND RULES INVOLVED
Federal Rule of Civil Procedure 23, as most recently amended effective
December 1, 2018, is set forth in full at App. 644-650.
STATEMENT OF THE CASE
Introduction
In 2009, Williams Production Company (“Williams”) (now known as “TEP”)
entered into a court-approved partial settlement of claims involving certain improper
deductions that Williams was taking from royalty payments, with the plaintiff class
in a state court class action, Lindauer v. Williams Prod. RMT Co., Case No. 2006 CV
317 (Garfield Cty., Colo., Dist. Ct.) (the “Lindauer Settlement”). See App. App. 49-140.
The Lindauer Settlement and the related state court Judgment (App. 141-149). divided
the oil and gas leases held by the Lindauer Class into thirteen distinct categories,
based on the language of their royalty clauses.
Eight years later, the Plaintiffs in this action filed suit in a different court to
enforce a portion of the Lindauer Settlement and the state court Judgment on behalf
of royalty owners under four of the thirteen lease categories that constitute the
Lindauer Class. The Plaintiffs and TEP reached a settlement, which was approved by
a Magistrate1 over the objection of the Petitioners, who are members of the Lindauer
Class.
1
The Magistrate presided over settlement approval by consent of TEP and the Sefcovic Class
Representatives. All references to the federal district court herein refer to proceedings conducted by the
Magistrate in the District of Colorado.
-3-
The Lindauer Settlement
The Lindauer Settlement provided for refunds to Lindauer Class members of
royalty deductions taken for gathering and fuel costs incurred upstream of access
points into interstate transmission pipelines. In addition, Section 4 of the Lindauer
Settlement sets out eight paragraphs of agreements regarding “Future Royalty
Payments” made to the thirteen separate categories of royalty instruments. App. 63-66.
The Petitioners own royalty interests under Lindauer Category 2 oil and gas
leases, and are members of Sefcovic Subclass I, which also includes royalty owners
under Lindauer Category 3 Instruments with substantially different terms:
• Lindauer Category 2 royalty clauses allow TEP to deduct only costs of
transporting gas “from the mouth of the well to the point of sale,” or
“customary transportation charges” or “all transportation charges.” App.
81.
• Lindauer Category 3 royalty clauses allow TEP to deduct only thirdparty transportation costs “from the mouth of the well to the point of
sale.” App. 81.
Lindauer Settlement Section 4.1 provides that, in the future, Williams will not
take “Deductions,”2 which include gathering and fuel costs, from future royalty
payments to Lindauer Class members, except those in Categories 1, 2, 3, 12 and 13.
App. 63.
2
In the Lindauer Settlement, “Deduction” is a defined term which includes costs incurred
upstream of the point of access into the Mainline Transmission Pipeline (including gathering and fuel
costs). App. 51-52.
-4-
The Lindauer Class claimed that both Category 2 and Category 3 leases prohibit
gathering and fuel deductions, and Williams/TEP agreed to refund past, but not future,
gathering and fuel deductions for both categories. This is reflected in Section 4.2, which
provides:
[N]othing herein prohibits Williams from taking any
Deductions it claims it is entitled to take under the terms of
[Category 2 and Category 3] Royalty Instruments, and
nothing herein prohibits any Settlement Class Member from
challenging such deductions.
App. 63. Section 4.4 sets out limits on TEP’s processing cost deductions, and applies
to Category 2, 3, and 5 leases included in the Sefcovic Subclasses I and II (but not to
Category 11, Subclass III). App. 64.
The Lindauer Settlement also states that the Grand Valley Gathering System
(“GVGS”) is owned by Williams/TEP. App. 53. The gas involved in this case is gathered
on the GVGS, and TEP’s deduction of the resulting charges is at the heart of this
dispute. GVGS was later transferred to Williams Field Services, so the gas is gathered
under an affiliate gathering contract. Thus, GVGS gathering and fuel costs are not
“third-party” costs and are not deductible from Category 3 owners.
The Sefcovic Class Action
The Sefcovic Class Action was filed in the Colorado District Court for the City
and County of Denver July 18, 2017, and was removed by TEP to the United States
District Court for the District of Colorado on August 17, 2017. After some informal
discovery, a settlement was reached on behalf of four subclasses described as I, II, III
and IV. Subclass I consists of royalty owners receiving payments under Lindauer
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Category 2 and Category 3 leases. The Magistrate granted preliminary approval of the
Settlement on August 17, 2018.
On January 29, 2019, only 21 days prior to the Fairness Hearing, the Sefcovic
Class Representatives filed their Second Amended Complaint, which asserted for the
first time that Subclass I’s Category 2 lease claim expressly includes gathering and
fuel deduction by TEP (App. 349. 352-353) for the sole purpose of promptly conceding
the opposite—that Category 2 (and Category 3) leases expressly authorize TEP to
deduct gathering and fuel costs.
Significantly, the Subclass I Class Representatives do not own any interest in
any Category 3 Royalty Instrument. Plaintiff Elna Sefcovic, LLC owns a single
Lindauer Category 2 Lease. Plaintiff White River Royalties, LLC owns a single
Lindauer Category 2 Lease (App. 346-348), together with substantially larger interests
in Subclasses II and III.
The newly added Subclass I claim alleges only that TEP breached the leases by
deducting gathering and fuel costs that exceeded the “reasonable transportation cost
deduction” permitted by the royalty clause. This authorization of “reasonable
transportation cost deduction[s]” is contained solely in Category 2 leases. In contrast,
Category 3 leases authorize only deduction of “third-party transportation costs.”
Significantly, the Subclass I claims in the Second Amended Complaint failed to assert
the much stronger Category 3 claim seeking to recover all deductions other than “thirdparty transportation costs”—the specific lease language that differentiates Category
3 leases from Category 2 leases. If this Category 3 claim had been made, unlike the
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belated Category 2 claim it would demand recovery of all deductions of TEP’s
non-third-party gathering and fuel costs, which are expressly prohibited by Category
3 leases. But this much stronger Category 3 claim was not made in the Second
Amended Complaint.
The Sefcovic Settlement
The Sefcovic Settlement provides that TEP will refund 100% of prior gathering,
fuel and processing costs deducted from Subclasses II, III and IV (totaling $9,570,464
before any opt-outs). App. 262-264. The Class Representatives as a whole own 99.92%
of their interests in Subclasses II, III and IV leases, and refunds to Subclasses II, III
and IV were largely uncontested by TEP.
In stark contrast, the Sefcovic Class Representatives own virtually no interest
in Subclass I leases—only 8/100ths of one percent of their interests are in Subclass I.
The Sefcovic Class Representatives agreed to forfeit the Subclass I breach of lease
claims by immediately capitulating to TEP’s factual defense that “gathering” is
synonymous with “transportation costs.” Once the Sefcovic Class Representatives
conceded this disputed fact, they construed Category 2 leases to allow the deduction
of gathering costs. The Class Representatives simply ignored that the Category 3 lease
terms, which provide that only third-party transportation costs can be deducted, cannot
be impacted by a definition equating gathering and transportation costs, because
TEP’s gathering costs are not “third-party” costs but charges by affiliated companies.
As a result, TEP is expressly precluded from deducting them from royalty payments
under Category 3 leases.
-7-
Subclass I class members collectively received a one-time payment of $454,845
(App. 261), but forfeited their claim to approximately $2.6 million in prior gathering
and fuel deductions. App. 523-524. In addition, ¶ 9.a. of the Sefcovic Settlement
authorizes TEP to deduct $1.2 million per year (for the thirty to fifty year life of the
leases) from Subclass I class members, and ¶ 9.b authorizes TEP to recoup another $4
million in past gathering deductions from Subclass I owners. App. 524-526. Thus, the
Sefcovic Class Representatives agreed, over the long life span of their leases, to allow
TEP to retain, recoup, and continue to deduct from Subclass I class members 90 to 140
times the amount they receive under the Sefcovic Settlement.
To summarize the effect of the Sefcovic Settlement: (1) Sefcovic Class
Representatives received 100% of TEP’s undisputed improper deductions under their
Subclasses II, III and IV leases; (2) the Category 2 and Category 3 lease owners in
Subclass I each owed more money to TEP on the date of distribution than they received
and will forfeit between $36 million and $60 million in additional deductions over the
life of their leases; and (3) TEP will profit, because it will retain three to six times
more in future deductions from Subclass I class members than the entire amount it
paid to all Sefcovic Class Members under the settlement. Subclass I members with
Category 3 leases, which expressly preclude TEP’s affiliated gathering and fuel
deductions, have and will needlessly suffer the same fate as Category 2 owners, who
have much different claims because of their different lease langauge.
-8-
REASONS FOR GRANTING CERTIORARI
Due process requires adequate representation of absent class members “at all
times.” Phillips Petroleum Co. v. Shutts, 472 U.S. 797, 811-812 (1985); see also
Hansberry v. Lee, 311 U.S. 32, 41-44 (1942) (class members are only bound by a
judgment “where they are fairly and adequately represented.”) This Court applied the
bedrock concepts of due process and adequacy of representation to class action
settlements in Amchem Products, Inc. v. Windsor, 521 U.S. 591, 626 (1997), holding
that no member of a subgroup in a settlement class can be bound, except when their
class representative understands his or her role is to represent solely the members of
that respective subgroup. Where an intra-class conflict exists, it is cured only by
forming homogenous subclasses with separate class representatives and class counsel
for each. Ortiz v. Fibreboard Corp., 527 U.S. 815 (1999). These decisions led to “a new
era of judicial scrutiny of class certification and settlement.” Epstein v. MCA, Inc., 179
F.3d 641, 651 (9th Cir. 1998) (Thomas, J., dissenting), cert. denied, 528 U.S. 1004
(1999).
In 2018, two decades after Amchem and Ortiz, Rule 23(e)(2) was amended to
expressly and uniformly require federal courts to enter findings regarding whether the
class representatives and class counsel sponsoring a class settlement have adequately
represented the class, and whether the settlement treats members equitably relative
to each other, consistent with this Court’s holdings in Amchem and Ortiz. See FED. R.
CIV. P. 23(e)(2)(A) & (D).
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In this case—which involves a settlement-only class—despite express objections
and undisputed evidence that (1) Category 3 class members were not represented at
all; (2) Category 2 class members were not adequately represented; and (3) material
intra-class conflicts of interest existed, the district court did not conduct the rigorous
analysis required by Amchem. The district court also did not make the findings
regarding adequacy of representation and intra-class conflicts as indicated by this
Court’s holdings in Amchem and Ortiz and expressly required by Rule 23(e)(2)(A) and
(D), as amended. Instead, both the district court and the Tenth Circuit applied
different standards previously developed by the Tenth Circuit, which the 2018
amendment of Rule 23(e)(2) was purposefully enacted to supersede.
Petitioners expressly reiterated the applicability of the 2018 amendments in
their Petition for Rehearing (App. 626-627), but the Tenth Circuit continued to
disregard and fail to apply the 2018 amendments.
The Tenth Circuit also failed to require fact findings, rigorous analysis, and the
heightened scrutiny required by the holdings of this Court and by Rules 23(a) and
23(e)(2) to protect absent class members and ensure the adequacy of representation.
The Tenth Circuit did not grasp that the district court certified the settlement class in
its order approving the settlement, so that a rigorous analysis of all factors including
adequacy of representation was required by Rule 23. This fundamental failure is
particularly apparent in this case where a “rigorous analysis,” or anything beyond the
district court’s boilerplate pro forma recitals, would have established a lack of adequate
representation, conflicts between subgroups of class members, and inequitable
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treatment of Subclass I members with Category 2 and Category 3 leases by their
purported Class Representatives, who own virtually no interest in the affected
subgroups.
Compounding its fundamental misapplication of the law, the Tenth Circuit held
that the Petitioners somehow waived the issue of lack of adequate representation,
despite that: (1) the Magistrate purported to rule on the issue in the context of class
certification as required by Rule 23(a); (2) the Petitioners raised the issue in their
briefs; and (3) the uncontested evidence at the fairness hearing and in the record
clearly demonstrated the lack of adequate representation and the existence of
substantive conflicts between subgroups of class members.
Finally, even though the district court failed to address the disputed issue of
whether the scope of the release was fair and reasonable, the Tenth Circuit refused to
remand for additional fact findings. Instead, the Tenth Circuit improperly engaged in
its own, limited fact findings and analysis regarding the scope and propriety of the
release included in the class settlement.
The Tenth Circuit’s opinion conflicts with this Court’s holdings in Amchem and
Ortiz regarding the fundamental matters of due process of law, adequacy of
representation, and intra-class conflicts in class actions. The Tenth Circuit has
reverted to the pre-Amchem standard when minimal boilerplate statements regarding
class certification and settlement approval, drafted by the named parties prior to any
hearing, were often considered adequate with no real analysis of the facts in evidence
nor protection of absent class members by the district court. In addition, the Tenth
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Circuit has departed from the accepted and usual course of judicial proceedings by
disregarding the new requirements of Rule 23(e)(2)(A) and (D), and refusing to correct
obvious legal errors on rehearing. Finally, the Tenth Circuit’s holdings regarding fact
findings, “rigorous analysis,” and waiver are contrary to law and depart from the
accepted and reasonable course of appellate review of class action settlements.
I.
THE DISTRICT COURT AND TENTH CIRCUIT IMPROPERLY APPLIED OBSOLETE
STANDARDS FOR APPROVAL OF A SETTLEMENT RATHER THAN THE STANDARDS
REQUIRED IN THE 2018 AMENDMENT TO RULE 23(e)(2).
Rule 23(e)(2) was amended in 2018 to permit approval of a class settlement:
only on finding that it is fair, reasonable and adequate after
considering whether:
(A) the class representatives and class counsel
have adequately represented the class; . . . and
(D) the [settlement] proposal treats class
members equitably relative to each other.
FED. R. CIV. P. 23(e)(2).
This amendment was enacted to address the long lists of differing factors
developed by the separate circuit courts of appeal, and “directs the parties to present
the settlement to the court in terms of a shorter list of core concerns, by focusing on the
primary procedural considerations and substantive qualities that should always matter
to the decision whether to approve the proposal.” FED. R. CIV. P. 23(e)(2) advisory
committee’s note to 2018 amendment.
Rather than following the current mandates of Rule 23(e)(2) as amended, the
Tenth Circuit reviewed whether the settlement was “fair, reasonable and adequate”
using wholly different and contradictory criteria set out in Tennille v. Western Union
-12-
Co., 785 F.3d 422, 434 (10th Cir. 2015), cert. denied, —U.S.—, 136 S. Ct. 835, 193 L.
Ed. 2d 719 (2016). App. 8. Notably, the Tennille factors do not include Rule 23(e)(2)’s
new requirements that the court must consider whether the class (and all subclasses)
have been adequately represented and that the settlement treats all class members
equitably. The Tennille factors are “whether ‘(1) the settlement was fairly and honestly
negotiated, (2) serious legal and factual questions placed the litigation’s outcome in
doubt, (3) the immediate recovery was more valuable than the mere possibility of a
more favorable outcome after further litigation, and (4) [the parties] believed the
settlement was fair and reasonable.’” Tennille, 785 F.3d at 434 (quoting Weinman v.
Fid. Capital Appreciation Fund (In re Integra Realty Res., Inc.,) 354 F.3d 1246, 1266
(10th Cir. 2004)). In fact, the amended Rule 23(e)(2) is intended to replace the Tennille
factors and directs the parties and the federal courts to apply a shorter list of different
factors. Here, the Tenth Circuit did not even mention the current requirements of Rule
23(e)(2)(A) or (D) and acted contrary to those requirements.
The Petitioners properly focused on the Rule 23(a) and (e)(2)(A) and (D)
considerations of adequate representation of absent Subclass I class members, and
whether Subclass I was treated equitably relative to other Subclasses (i.e., whether
Subclass I interests were “sacrificed” and an intra-class conflict exists). But neither the
Tenth Circuit nor the district court evaluated these factors. Instead, they erroneously
focused solely on the now-obsolete Tennille factors.
This Court has previously observed the need to grant certiorari “to examine
whether there ha[s] been sufficient compliance” with the Federal Rules of Civil
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Procedure. Conway v. O’Brien, 312 U.S. 492, 493 (1941). See also Societe Internationale
Pour Participations Industrielles Et Commerciales, S. A. v. Rogers, 357 U.S. 197, 203
(1958) (granting certiorari to consider “important questions as to the proper application
of the Federal Rules of Civil Procedure”). That is especially true in the present class
action context, where the Court has recognized a duty to “ensure that the [lower] court
is furthering, rather than hindering, the policies embodied in the Federal Rules of Civil
Procedure, especially Rule 23.” Gulf Oil Co. v. Bernard, 452 U.S. 89, 101-02 (1981). The
present case presents a situation that warrants the Court’s intervention as guardian
of the Federal Rules.
II.
THE TENTH CIRCUIT AND DISTRICT COURT OPINIONS CONFLICT WITH THE
HOLDINGS OF THIS COURT REQUIRING RIGOROUS ANALYSIS OF THE
REQUIREMENTS OF RULE 23(a) AND (e)(2) WHEN CERTIFYING A CLASS AND
APPROVING A CLASS SETTLEMENT.
It is well-established that Rule 23(a) and (b) require the district court to conduct
a “rigorous analysis” and make actual findings of fact when certifying a class.
Wal-Mart Stores, Inc. v. Dukes, 564 U.S. 338, 363, 375 (2011); General Telephone Co.
of the Southwest v. Falcon, 457 U.S. 147, 161 (1982). Rule 23(e)(2), as amended in 2018,
also requires express fact findings, and necessarily involves a “rigorous analysis” under
Wal-Mart and “heightened scrutiny” under Amchem (particularly of disputed issues),
regarding its four enumerated prerequisites. This is especially the case where, as here,
certification of a settlement class and the fairness and reasonableness of the settlement
are being considered simultaneously.
When approving class action settlements, all Rule 23(a) requirements for class
certification must be satisfied (except for manageability). Settlement class certification
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is not entitled to deference or relaxed standards, but demands heightened scrutiny to
protect absent class members. Amchem, 521 U.S. at 620; Cf. Corrugated Container
Antitrust Litig., 643 F.2d 195, 217 (5th Cir. 1981) (without adequate evaluation of the
facts and law an appellate court lacks any basis upon which to review the discretion
of the district court), cert. denied, 456 U.S. 998 (1982).
Here, the district court’s final order contains only one perfunctory, boilerplate
paragraph which starkly concludes, without any analysis, that all Rule 23(a)
requirements are met:
There are questions of law and fact common to the
Settlement Class and Subclasses. The claims of the Plaintiff
class representatives are typical of the claims of the
Settlement Class and Subclasses. The Plaintiff class
representatives will fairly and adequately protect the
interests of the Settlement Class and Subclasses. The
prerequisites to maintain this action as a class action set
forth in Fed. R. Civ. P. 23(a) are met.
App. 39-40. Thus, the district court merely uttered its forecast that representation
“will” be adequate in the future. But there was no rigorous analysis, as demanded by
Amchem, and no rule-based analysis regarding the settlement. There is not even a
mention of adequacy of representation under Rule 23(e)(2)(A) nor of equitable
treatment of class members relative to each other under Rule 23(e)(2)(D). There was
no evaluation of the facts in evidence, nor of applicable law, upon which to base any
appellate review of the discretion of the district court.
The heightened scrutiny of certification of a settlement class and rigorous
analysis demanded by Amchem cannot be satisfied by pro forma recitals, and serve the
purpose of satisfying critically important due process requirements. Rule 23(a)(4) and
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(e)(2)(A) both expressly require the district court to determine whether the absent class
members are adequately represented in the settlement. “The adequacy inquiry. . .
serves to uncover conflicts of interest between named parties and the class they seek
to represent.” Amchem, 521 U.S. at 625.
Brevity may be the soul of wit, but it isn’t the soul of
rigorous analysis. Such a short discussion of class
certification is incompatible with the district court’s
obligation for thorough examination. . . . We can’t determine
whether the district court abused its discretion when the
district court didn’t explain how or why it exercised its
discretion.
Harper v. C.R. England, Inc., 746 Fed. Appx. 712, 721 (10th Cir. 2018); see also
Weinman, 354 F.3d 1246, 1268 (10th Cir. 2004) (“mere boilerplate approval phrased
in appropriate language but unsupported by evaluation of the facts or analysis of the
law” is not adequate.)
Here, faced with substantive objections to the sacrifice of the interests of
Category 2 and Category 3 lease owners in Subclass I, together with actual evidence
of both inadequate representation and actual intra-class conflicts, the district court
failed to provide written findings or otherwise evidence rigorous analysis of the
prerequisites for certification and settlement approval.
The Tenth Circuit attempted to justify its failure to require rigorous analysis
and accompanying fact findings regarding adequacy of representation because, it said,
rigorous analysis is only required when the district court certifies a class under Rule
23(a), and is therefore “inapposite” here. App. 7, n.4. But in reaching this conclusion
the Tenth Circuit applied the wrong legal standard. This fundamental error occurred
-16-
because the Tenth Circuit overlooked the fact that the district court’s order
simultaneously certified the Sefcovic Class pursuant to Rule 23(a) and (b) and
approved the settlement under 23(e). App. 7. Further, class certification is mandated
by Rule 23 when any class settlement proposal is approved:
In addition to evaluating the proposal itself, [the court]
must determine whether it can certify the class under the
standards of Rule 23(a) and (b) for purposes of judgment
based on the proposal.
FED. R. CIV. P. 23(e)(2) advisory committee’s note to 2018 amendment.
It seems apparent that the Tenth Circuit found the required analysis to be
missing because it undertook to do the lower court’s job for it by writing eight pages of
its own fact-finding and evidence-weighing. App. 12-18, 26-27. But, where a district
court fails to conduct the analysis required by Rule 23, the remedy is not for the
appellate court to assume the role of factfinder to fill in the district court’s gaps.
Rather, the proper course, consistent with the accepted and usual course of judicial
proceedings, is to remand to the district court with instructions to make adequate
findings. See, e.g., Harper, 746 Fed. Appx. at 722; New England Health Care Emps.
Pension Fund v. Woodruff, 512 F.3d 1283, 1290-91 (10th Cir. 2008).
The shortcomings of the district court’s analysis are further demonstrated by the
fact that it dismissively reduced the objections to the settlement to a single inaccurate
sentence:
The principal argument advanced by the settlement
objectors is the uncertainty of future obligations by the
Settlement Class to incur deductions from their royalty
payments based on post-production costs.
-17-
App. 38. To the contrary, Petitioners raised no concerns about “future uncertainties,”
but rather objected to the existing certainty that the settlement sacrificed the
interests of Subclass I by allowing TEP to deduct substantial previously-disputed costs
from Subclass I—the only subclass in which the Class Representatives own virtually
no interest. These objections and the actual evidence elicited at the fairness hearing
required rigorous analysis, factfinding, and heightened scrutiny by the district court,
which were entirely absent. See In re Google Inc. Cookie Placement Consumer Privacy
Litig., 934 F.3d 316, 330-31 (3d Cir. 2019) (mischaracterizing objections and dismissing
the issue with a single sentence is not “the scrupulous examination required of a court
acting as a fiduciary for absent class members”).
When rigorous analysis is not performed and required findings are not made,
certification of a settlement-only class becomes simply a “rubber-stamp” procedure for
the proponents of the settlement to manipulate, and deprives absent class members of
the due process required by Amchem. The district court abrogated its duty to act as the
guardian and fiduciary of the absent class members of each subgroup. See Gruin v. Int’l
House of Pancakes, 513 F.2d 114, 123 (8th Cir.), cert. denied, 423 U.S. 864 (1975); In
re General Motors Corp. Pick-Up Truck Fuel Tank Prod. Liab. Litig., 55 F.3d 768, 785
(3d Cir.), cert. denied, 516 U.S. 824 (1995). The Tenth Circuit opinion endorsing that
approach conflicts with this Court’s holdings in Falcon, Wal-Mart, and Amchem, and
with the holdings of other circuits.
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III.
IF A RIGOROUS ANALYSIS HAD BEEN PERFORMED, THERE IS ABUNDANT
EVIDENCE OF INADEQUATE REPRESENTATION, CONFLICTS BETWEEN
SUBGROUPS, AND INEQUITABLE TREATMENT OF ABSENT CATEGORY 2 AND
CATEGORY 3 LEASE OWNERS IN SUBCLASS I.
At the Fairness Hearing, previously unavailable testimony was elicited largely
through cross examination from the Class Representatives. This was new, live
testimony that could not have been presented in pre-hearing briefs (at least not by the
Petitioners). When this fairness hearing testimony is combined with the documentary
record in the case, it is apparent that absent class members were not adequately
represented, conflicts between subgroups existed, and subgroups of absent class
members were treated inequitably by Class Representatives.
A.
There Is Undisputed Evidence That Category 3 Lease Owners
Were Not Represented.
Subclass I consists of Category 2 and Category 3 owners with two quite different
types of oil and gas leases. The claims of Category 2 owners (with leases that permit
deduction of “all transportation costs”) are not common with, nor typical of, the claims
of Category 3 owners, whose leases permit deduction only of “third-party
transportation costs.” This difference is fundamental because costs incurred by TEP
on the non-third-party gathering system cannot be deducted under Category 3 leases.
App. 81. Indeed, it is because their lease terms are different that Category 2 and
Category 3 lease owners were assigned separate categories in Lindauer.3
“To satisfy Rule 23(a)(4), the named plaintiffs must ‘possess the same
interests[s] and suffer the same injur[ies] as the class members’” in the represented
3
Lindauer Category 5 and11 leases, which make up Sefcovic Subclasses II, III, and IV, have
different terms, as is apparent from the Complaint and Lindauer.
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subgroup. See In re Literary Works in Elec. Databases Copyright Litig., 654 F.3d 242,
249 (2d Cir. 2011) (quoting Amchem, 521 U.S. at 625-26) (alterations by the court). It
is fundamental that class representatives “cannot represent a class of whom they are
not a part . . . .” National Super Spuds, Inc. v. New York Mercantile Exch., 660 F.2d 9,
17 (2d Cir. 1981); Irvin v. Harris, 944 F.3d 63, 71 (2d Cir. 2019). The Class
Representatives clearly fail this test because none of them is a part of the Category 3
subgroup.
No Sefcovic Class Representative owns any interest in a Category 3 lease.
Therefore, no Class Representative falls within the Category 3 subgroup, nor do they
have claims in common with or typical of Category 3 claims. The purported Subclass
I Class Representative, Ms. Jerman, owns a Category 2 Lease but not a Category 3
Lease. She testified that the interests of Category 3 class members were not considered
by the Class Representatives. App. 485. Further, Ms. Jerman testified that she had not
even thought of Category 3 class members and was not familiar with, and had not even
read, a Category 3 lease.4 App. 485.
Subclass II and IV’s representative, Mr. Juhan, testified he had not considered
the interests of Category 3 lease owners and had no understanding of how the Category
3 owners were negatively affected by the Sefcovic Settlement. App. 499. Thus, no Class
Representative owns any interest in a Category 3 Lease, and they are admittedly
4
No testimony was offered from the other Subclass I representative, Elna Sefcovic, LLC, and
there is no evidence it adequately represented Subclass I. See Weinman, 262 F.3d at 112 (“‘A party
seeking to certify a class is required to show under a strict burden of proof, that all the requirements of
Fed. R. Civ. P. 23(a) are clearly met,’ including that the class is adequately represented by the named
party.” [citation omitted]).
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totally uninformed regarding the rights and interests of Category 3 class members. The
Sefcovic Subclass I Representatives never attempted to protect the interests of
Category 3 lease owners, who have different and much better claims than Sefcovic and
White River, who hold only Category 2 leases.
Significantly, the Second Amended Complaint asserts that TEP’s deductions
were improper solely because they exceeded “the reasonable transportation” costs
permitted by the Sefcovic and White River Leases, which are both Category 2 leases.
There is no allegation that deductions were improper because they involved an
affiliated company’s charges and not the third-party transportation costs permitted by
the Category 3 leases. App. 346-349. By failing to contest TEP’s deduction of
non-third-party transportation costs, the Class Representatives abandoned a claim
that was unique to the Category 3 class members. Because that quintessential
Category 3 claim was never asserted nor certified, the Subclass I Class Representative
and Class Counsel had no power to settle the Category 3 claims.
In an apparent attempt to disguise the lack of adequate representation of
Category 3 members, TEP and the Sefcovic Class Representatives jointly misled the
Tenth Circuit by stating that “the leases in Categories 2 and 3 of the Lindauer
Settlement expressly provide that TEP is entitled to deduct the cost for transporting
gas ‘from the mouth of the well to the point of sale,’ or ‘customary transportation costs’
or ‘all transportation charges.” App. 569. This statement was patently false, because
it recited only Category 2 lease terms, and Category 3 leases have wholly different
terms which permit deduction of only “third-party transportation” costs.
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At the Fairness Hearing, Class Counsel also misled the district court by stating
that all Category 2 and Category 3 leases include Category 2 terms (which “permit the
lessee to deduct the full cost of transporting gas from the well head to the point of
sale.”) App. 376. Class Counsel further misled the district court by eliciting testimony
from Ms. Jerman that her Category 2 lease is a typical royalty provision for both
Category 2 and Category 3 leases. App. 467. This testimony was also false, because
Category 3 leases contain different royalty terms than her Category 2 lease.
B.
There Is Undisputed Evidence That Category 2 Lease Owners
Were Not Adequately Represented.
Although Ms. Jerman owns a Category 2 Lease, she cannot adequately represent
Category 2 lease owners in Subclass I because she also owns significantly greater
interests under leases in Subclasses II and III, which have divergent interests. In
Amchem, this Court held that even if the class representative
thought the Settlement serves the aggregate interests of the
entire class[,] . . . the adversity among subgroups requires
that members of each subgroup cannot be bound to a
settlement except by the consents given by [representatives]
who understand their role is to represent solely the
members of their respective subgroups.
521 U.S. at 626 (citation omitted, emphasis added); see also In re Payment Card
Interchange Fee and Merch. Disc. Antitrust Litig., 827 F.3d 223, 233-36 (2d Cir. 2016),
cert. denied, —U.S.—, 137 S. Ct. 1374, 197 L. Ed. 2d 568 (2017).
Ms. Jerman conceded that the settlement forfeits the gathering and fuel cost
deduction claims of Subclass I members (both Category 2 and Category 3 owners),
App. 482-483, that she did not know how much TEP could deduct from Subclass I class
-22-
members for gathering costs after the settlement and that she thought this outcome
was fair because “I am thinking of the settlement as a whole. I can’t think only of
myself [or my subgroup]. I have to think of the settlement based on the whole class.”
App. 484-485. Although her willingness to “take one for the team” might be
commendable in other contexts, it has no place in the thoughts of a subclass
representative, as Amchem makes clear.
On this record, it is clear that Ms. Jerman mistakenly believed that her role was
to represent the Sefcovic Class as a whole, rather than solely her own subgroup as
Amchem requires. In fact, she did not actually represent solely the interests of Subclass
I members and conceded that she sacrificed the interests of that subgroup for the
benefit of the Sefcovic Class “as a whole.” App. 485. Ms. Jerman’s belief that the
settlement was “fair” was no doubt influenced by the fact that the vast majority of her
leasehold interests fall within Subclasses II and III, which were treated much better
than Subclass I, which she nevertheless purported to represent. As in Amchem, there
is “no assurance here—either in the terms of the settlement or in the structure of the
negotiations—that the named plaintiffs operated under a proper understanding of their
representational responsibilities.” 521 U.S. at 627.
C.
There Is Undisputed Evidence of Intra-Class Conflicts.
Regardless of who introduced the idea to the settlement negotiations, at the time
the proposal was made to benefit TEP by forfeiting the Subclass I claims in which the
Sefcovic Class Representatives own virtually no interest, and to simultaneously benefit
the Class Representatives and Class Counsel by refunding 100% of the improper
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deductions to the Class Representatives in Subclasses II, III and IV, the divergent
interests of the Sefcovic subgroups became competing and antagonistic interests, and
the fundamental intra-class conflict of interest became obvious.
Once this conflict emerged, Class Counsel could no longer properly represent
three groups with opposing interests in the same negotiation. From that point,
separate class representatives and separate counsel were required to continue the
negotiation with TEP on behalf of at least three subgroups: (1) Category 2 lessors; (2)
Category 3 lessors; and (3) Subclass II, III and IV lessors. See Amchem, 521 U.S. at
627. Class Counsel then had the duty to disclose this conflict between the Class
Representatives and other class members to the district court so that the court could
take appropriate steps to protect the absent class members. In re Agent Orange Prod.
Liab. Litig., 800 F.2d 14, 18 (2d Cir. 1986).
The Literary Works court applied Amchem and Ortiz and explained that the
class representative must have “no interests antagonistic to the interests of other class
members” in the subgroup she represents. 654 F.3d at 249. It also held that a class
representative cannot own interests in multiple subgroups with competing interests
and adequately represent the interests of the members of any one of those subgroups,
because the ownership of any interest in another subgroup with antagonistic interests
creates a structural conflict of interest between the class representative and the
subgroup members she purports to represent. Id. at 251-255.
Importantly, the Literary Works court concluded that when, as here, a structural
conflict exists, a court cannot determine whether the discount or disadvantage to any
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subgroup in the settlement results from the weakness of that subgroup’s claims, or
from the sacrifice of that subgroup’s interests by a conflicted subclass representative.
Id. at 253. It held that the interests of the disadvantaged subgroup can only be
adequately represented by the formation of homogenous subclasses, with separate class
representatives who own only an interest in the disadvantaged subgroup, and with
separate and independent counsel for each, as required by Amchem and Ortiz. Id. at
254-255; see also Payment Card, 827 F.3d at 232-36.
As noted above, the Sefcovic Class Representatives, all of whom own virtually
no interest in Subclass I, agreed to a settlement that disproportionately benefits
Subclasses II, III and IV while sacrificing the claims of the Lindauer Category 2 and
3 owners in Subclass I. They testified that they did so because of an erroneous belief
that it was necessary to obtain a greater benefit to the class as a whole—meaning
Subclasses II, III, and IV, in which their true interests lay. As a result, no Class
Representative owned any interest in a Category 3 lease or protected the interests of
the owners of those leases.5 These facts demonstrate the existence of fundamental
intra-class conflicts of interest.6
5
Elna Sefcovic, LLC’s interest also is not typical of and is in conflict with the interests of
Subclass I members it represents, because it received an incentive award of $5,000 for entering into the
Sefcovic Settlement, which award dwarfed its $153 distribution as a Subclass I member. See Radcliffe
v. Experian Info. Sols. Inc., 715 F.3d 1157, 1164 (9th Cir. 2013).
6
White River Royalties, Inc. (Ms. Jerman’s entity) was added as a Subclass I representative
after the settlement was agreed to. For her time and trouble in ratifying the Settlement after the fact
and testifying at the Fairness Hearing, Ms. Jerman also received an “incentive award” of $5,000.00. Cf.
Johnson v. NPAS Sols., LLC, —F.3d—, 2020 WL 5553312, at *10-12 (11th Cir. 2020) (describing
incentive awards to be “part salary and part bounty” and, relying upon Trustees v. Greenough, 105 U.S.
527 (1882) and Central R.R. Banking Co. v. Pettus, 113 U.S. 116 (1885), finding that such awards are
not allowed, even though they are “commonplace in modern class-action litigation”).
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Where such competing interests exist, only advocacy of a class representative
who owns only interests in the one subgroup and an attorney who represents only each
subgroup can ensure that the interests of that particular subgroup are in fact
adequately represented. Amchem, 521 U.S. 591; Ortiz, 527 U.S. 815; Literary Works,
654 F.3d at 233-234.
The need for separate representation of each subgroup is explained in Payment
Card, 827 F.3d at 233-34, and is demonstrated by the conduct of the Sefcovic Class
Counsel in this case. First, as described in more detail in Section III.A., Class Counsel
attempted to mislead both the Tenth Circuit and the district court by falsely stating
that Category 2 and Category 3 leases have the same (Category 2) terms. Second, Class
Counsel filed a Second Amended Complaint that lumped Category 2 and Category 3
leases together and completely omitted any claim that, under Category 3 leases, TEP’s
deductions were improper in toto. Third, just days after filing that pleading claiming
that TEP’s gathering and fuel deductions under Category 2 leases were improper,
Class Counsel completely capitulated to TEP’s factual defense and declared that the
provisions of Category 2 and 3 leases expressly allowed those deductions. Class
Counsel stated:
[Subclass1, Category 2 and 3 leases] unlike Category 5 and
11 leases, generally have provisions that expressly permit
. . . TEP to deduct the full cost of transporting the gas from
the wellhead to the point of sale. . . . [G]athering cost
deductions are essentially the cost of transporting the gas
from the wellhead to the point of sale, and so that for the
gathering cost deductions about which the [objectors]
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complain, there are express provisions in the lease which
foreclose that.7
App. 376-377.
In the same breath, Class Counsel advocated that the Sefcovic Class
Representatives be refunded 100% of their prior gathering, fuel and processing
deductions under their Category 4 and 11 leases in Subclasses II, III, and IV, and
advocated forfeiting the claims of two separate, homogeneous subgroups Counsel also
purports to represent in order to obtain the refund for the Class Representatives—and
not coincidentally, to secure Counsel’s own significant fee. Despite the contrary
allegations in the Second Amended Complaint, Class Counsel told the district court
that it is undisputed that the terms of Category 2 and Category 3 leases have always
“foreclose[d]” their claims that TEP deductions for gathering and fuel costs are
improper. The intended result of Counsel’s statement is recovery of 100% of all (nonSubclass I) TEP deductions for the Class Representatives, a large fee for Class
Counsel, a profit for TEP, and a massive loss for Category 2 and 3 lease owners. “An
advantage to the class, no matter how great, simply cannot be bought by the
uncompensated sacrifice of claims of [any subgroup], whether few or many.” Super
Spuds, 660 F.2d at 19.
7
This is not a capitulation that counsel representing only the interest of either Category 2 or
Category 3 owners could ever make, because it seeks to benefit the opposing interests of the Class
Representatives and TEP to the detriment of both Category 2 and 3 lease owners. Adequate counsel
representing only Category 3 owners, for example, would not mischaracterize their claims as being based
on the much different Category 2 lease terms, and thereby forfeit their claim that only third-party costs
can be deducted. Such counsel could not disparage Category 3 lease terms just so their claims could be
sacrificed and TEP could deduct an additional $1,200,000/year from Category 2 and 3 lease owners for
thirty to fifty years in exchange for a one-time payment of $454,854. Counsel’s capitulation repudiated
the vigorous and tenacious protection of the interests of Category 2 and Category 3 owners that is
required of an adequate representative. See Gonzales v. Cassidy, 474 F.2d 67, 75 (5th Cir. 1973).
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Class Counsel’s statement also demonstrates the fundamental intra-class
conflict in this case—that the Class Representatives obtained a settlement which
recovered 100% of TEP’s improper deductions from Subclasses II, III, and IV by
agreeing to forfeit to TEP the Subclass I claims, namely: claims under Category 2
leases, in which the Class Representatives own virtually no interest, and claims under
Category 3 leases, in which they own no interest at all. The Tenth Circuit’s opinion
endorsing and encouraging such intra-class conflicts is irreconcilable with the holdings
in Amchem, Ortiz, Agent Orange, Literary Works, and Super Spuds.
IV.
BECAUSE OBJECTORS REPEATEDLY ASSERTED THAT THE INTERESTS OF
SUBCLASS I WERE WRONGLY “SACRIFICED” BY CLASS REPRESENTATIVES, AND
THE RECORD CONTAINED EVIDENCE OF INADEQUATE REPRESENTATION AND
INTRA-CLASS CONFLICTS, THE TENTH CIRCUIT IMPROPERLY DECLINED TO
ADDRESS THE ISSUE OF ADEQUATE REPRESENTATION ON THE GROUNDS THAT
IT HAD BEEN WAIVED.
The Tenth Circuit compounded the district court’s lack of rigorous analysis by
refusing to even consider the issue of adequacy of representation in the mistaken belief
that the issue had been waived. App. 19, 21.
The Tenth Circuit ignored the Rule 23(a)(4) and (e)(2) requirements that the
district court must rule on the adequacy of representation in two separate contexts,8
and further overlooked the fact that the district court actually purported to rule on the
issue, albeit only perfunctorily and prospectively, and only in the context of class
certification. App. 39-40. When the district court rules on an issue, that issue is
8
Rule 23(a)(4) plainly requires a determination that absent class members have actually been
adequately represented in order to certify the settlement class. Rule 23(e)(2) further mandates that a
class settlement cannot be approved unless the court determines each of four issues—the first being
adequacy of representation and the fourth conflicts among subgroups. FED. R. CIV. P. 23(e)(2)(A) & (D).
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preserved on appeal. Volvo Const. Equip. N. Am, Inc. v. CLM Equip. Co., Inc., 386 F.3d
581, 604 (4th Cir. 2004); see also Ace Am. Ins. Co. v. Wattles Co., 930 F.3d 1240, 1250,
n.14 (11th Cir. 2019); Burnette v. Dresser Indus., Inc., 849 F.2d 1277, 1282 (10th Cir.
1988). There can be no doubt that the issue of adequacy of representation was properly
before the Tenth Circuit.
The Tenth Circuit’s holding that adequacy of representation had been waived
is also clearly contrary to the record. Petitioners repeatedly asserted the interests of
Subclass I were “sacrificed” by the Class Representatives, i.e., not adequately
represented by the proponents of the settlement because of intra-class conflicts. See
Nelson v. Adams, USA, Inc., 529 U.S. 460, 469 (2000) (preservation of an issue “does
not demand the incantation of particular words; rather, it requires that the lower court
be fairly put on notice as to the substance of the issue”). These objections plainly
addressed the requirements of Rule 23(e)(2)(A) and (D), together with the requirements
of Rule 23(a)—commonality, typicality and adequate representation of each subgroup.
For example, Objectors stated:
[T]here is no reason why some class members should be
forced to give up something of value to enable other class
members to benefit from a settlement made richer at their
expense. (Citations omitted).” Karvaly v. Ebay, Inc., 245
F.R.D. 71, 90 (E.D.N.Y. 2007). See also, 4 NEWBERG ON
CLASS ACTIONS §13.60; Nat’l Super Spuds v. N.Y. Merch.
Exch., 660 F.2d 9, 18 (2d Cir. 1981) (Sacrifice of
uncompensated claims of putative class members indicates
inadequate representation.)
App. 331-332.
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Again, the Tenth Circuit’s holding conflicts with the applicable rule and the
holdings of other circuits, and it does not explain how Petitioners could do more to
challenge the defects in the district court’s abbreviated Rule 23(a) ruling, or the lack
of any Rule 23(e)(2)(A) and (D) rulings, before the district court issued its final order.
See FED. R. APP. P. 46 (“Failing to object does not prejudice a party who had no
opportunity to do so when the ruling or order was made.”); City of Waco, Texas v.
Bridges, 710 F.2d 220, 228 (5th Cir. 1983) (issue can be raised for first time on appeal
where “there was no opportunity to object to an order upon its issuance”), cert. denied,
465 U.S. 1066 (1984).
Moreover, evidence received without objection establishes the existence of an
issue that is properly “before the court for determination” on appeal. Hopkins v.
Metcalf, 435 F.2d 123, 124 (10th Cir. 1970); see also, e.g., Palacios Seafood, Inc. v.
Piling, Inc., 888 F.2d 1509, 1512 (5th Cir. 1989). Issues tried by consent (whether
express or implied) at the Fairness Hearing are treated as if they were raised by the
Petitioners in their pleading. See FED. R. CIV. P. 15(b); Johnson Waste Materials v.
Marshall, 611 F.2d 593, 600, n.13 (5th Cir. 1980) (issues raised by admitted evidence
are preserved for appeal). Evidence of lack of adequate representation was admitted
at the Fairness Hearing, without objection, and was thereby preserved for appeal.
Because it ruled, contrary to law, that the issue of adequate representation had
been waived, the Tenth Circuit disregarded the undisputed evidence at the fairness
hearing and in the documentary record of intra-class conflicts and inadequate
representation of absent class members.
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V.
WHERE THE MAGISTRATE FAILED TO ANALYZE OR MAKE FACT FINDINGS
REGARDING THE SCOPE OF THE RELEASE, THE COURT OF APPEALS
IMPROPERLY AFFIRMED APPROVAL OF THE CLASS SETTLEMENT BASED ON ITS
OWN FACT FINDINGS AND CONCLUSIONS REGARDING THE RELEASE.
To obtain a fair and reasonable result for absent class members, the courts are
required to “police a proposed settlement agreement to ensure that the release . . . does
not release claims outside the factual predicate of the class claims.” 6 NEWBERG ON
CLASS ACTIONS §18.19 (5th ed.). Petitioners objected that the Sefcovic release was
unfair and overbroad, but the Magistrate did not comment on this disputed issue. The
Tenth Circuit then misconstrued and misapplied the “identical factual predicate” rule
based on its own purported fact findings. Cf. Harper, 746 Fed. Appx. at 722 (remand
is the proper course when fact findings are not made by the district court)
The “identical factual predicate” rule was first applied to class action releases
by the Second Circuit.
[To] achieve a comprehensive settlement that would prevent
relitigation of settled questions at the core of a class action,
a court may permit the release of a claim based on the
identical factual predicate as that underlying the claims in
the settled class action… (Emphasis supplied).
TBK Partners, Ltd. v. Western Union Corp., 675 F.2d 456, 460 (2d Cir. 1982); TVPX
ARS, Inc. v. Genworth Life & Annuity Ins. Co., 959 F.3d 1318, 1326 (11th Cir. 2020)
(“[A]n ‘identical factual predicate’ cannot exist unless the defendant was engaged in the
same offending conduct during the prior action.”).
TBK followed Judge Friendly’s reasoning in Super Spuds, that “if a judgment
after trial cannot extinguish claims not asserted in the class action complaint, a
judgment approving a settlement in such action should not be able to do so either.”
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TBK, 675 F.2d at 462 (quoting Super Spuds, 660 F.2d at 18). Judge Friendly explained
that a class judgment can only determine certified common questions, and not any
other claims that class members may have against the defendant. Super Spuds, 660
F.2d at 18. The “identical factual predicate” rule applies this same limit to class action
releases in class action settlements—which can only release claims that have the
“identical factual predicate” as the certified common class claims at the core of the class
action.
The certified class claims issue also defines the boundaries of the due process
authority of class representatives and class counsel to represent absent class members.
The class representatives are empowered by Rule 23 to represent members of the class
solely with respect to those matters certified as common class claims by the court and
in which all members have a common interest. Super Spuds, 660 F.2d at 17. “This
means that [class representatives] have no authority to release claims beyond those
that are common to the class.” Soranno v. New York Life Ins. Co., No. 96 C 7882, 2001
WL 290303, at *4 (N.D. Ill. 2001).
Rule 23(c)(1)(B), requires that the order certifying the class “must define . . . the
class claims, issues or defenses.” “[A] sufficient certification order must, in some clear
and cogent form, define the claims, issues, or defenses to be treated on a class basis.”
Wachtel v. Guardian Life Ins. Co. of Am., 453 F.3d 179, 189 (3d Cir. 2006). In this case,
the district court’s order does not comply with Rule 23(c)(1)(B) because the order does
not define the common certified class claims, disputed issues, nor TEP’s defenses which
are to be treated on a class basis.
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Although objections to the overbroad release were raised, the district court made
no comment nor fact findings regarding the “identical factual predicate” of the
undefined certified claims, the scope of release, nor the objections. Thus, the Tenth
Circuit had no factual nor legal basis on which to review the district court’s exercise
of its discretion to approve the TEP release as a part of the settlement, and remand
was required. TVPX ARS, 2020 WL 2730789 at *6; Corrugated Container, 643 F.2d at
218; Sarfaty v. City of Los Angeles, 765 Fed. Appx. 280, 281 (9th Cir. 2019); Reing v.
RBS Citizens, N.A., 912 F.3d 115, 126-27 (3d Cir. 2018); Neale v. Volvo Cars of N. Am.,
LLC, 794 F.3d 353, 369 (3d Cir. 2015).
Rather than remanding, the Tenth Circuit developed and substituted its own
conception of the class claims together with its own legal analysis and entered its own
fact findings to fill the void left by the district court. App. 25-27. Such a substitution
of the appellate court’s judgment for that of the district court is improper. See Harper,
746 Fed. Appx. at 722.
Contrary to the Tenth Circuit’s purported fact findings, TEP and the Sefcovic
Class Representatives conceded, and the district court agreed, that their lawsuit was
limited to the claims for alleged breaches of a formula for calculating royalties that was
established in the Lindauer Settlement. App. 34-35.
The only claims actually investigated, settled and compensated in the Sefcovic
Settlement are claims to recover TEP’s improper gathering, fuel and processing cost
deductions. The facts that prove TEP’s offending conduct are those which prove these
alleged improper gathering, fuel and processing costs. These are the actually-settled
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claims for which the class was compensated, and form the actual “factual predicate”
of the Sefcovic Class Action.
It is also clear that, contrary to the Tenth Circuit’s opinion, the certified claims
do not extend to all claims “arising from [TEP’s] calculation and/or payment of
royalties . . . to Plaintiffs and the Class . . . .” App. 25. The Class Representatives did
not, and in fact could not, assert all possible claims, both individual and common, both
known and unknown, both existent and non-existent, arising from TEP’s calculation
and payment of royalties, but rather asserted and settled only defined improper
gathering, fuel and processing deduction claims. TEP did not breach all possible claims
arising from royalty calculation and payments at one time, and the Class
Representatives did not allege, certify, settle nor distribute compensation to the Class
for such a broad universe of all possible claims. Therefore, TEP can properly obtain a
release of the actually settled and certified common core claims in the Sefcovic Class
Action, but is precluded from obtaining a release of all possible claims arising from
royalty calculation and payment by the “identical factual predicate” rule.
[T]o strip [any] individual of their rights to sue the
defendants upon a wide range of offenses that have nothing
to do with the misconduct . . . in the present action, for no
more consideration . . . is an offense to the principle of due
process so egregious as to render the proposed settlement
untenable . . . .
Karvaly v. eBay, Inc., 245 F.R.D. 71, 88-89 (E.D.N.Y. 2007).
CONCLUSION
For the foregoing reasons, the petition for a writ of certiorari should be granted.
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Respectfully submitted,
/s/ Nathan A. Keever
NATHAN A. KEEVER
Counsel of Record
DUFFORD, WALDECK, MILBURN & KROHN, LLP
744 Horizon Ct., Ste. 300
Grand Junction, CO 81506
(970) 241-5500
keever@dwmk.com
Attorneys for Petitioners
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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.