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SDF, L.L.C. v. Conocophillips Co.

United States District Court, D. New Mexico

March 6, 2018

SDF, L.L.C., a New Mexico Limited Liability Company, Plaintiff,



         Statutes of limitations, legally-imposed time limits on when a plaintiff may bring certain claims, “are intended to put defendants on notice of adverse claims and to prevent plaintiffs from sleeping on their rights . . . .” See Crown, Cork & Seal Co., Inc. v. Parker, 462 U.S. 345, 352 (1983) (citations omitted). But these legally-imposed time limits can create inequitable results, a reality that spurred New Mexico courts to adopt the doctrine of equitable recoupment over twenty years ago. Equitable recoupment reduces the inequity of statutes of limitations by allowing a party to assert a time-barred claim as a defense against another party's factually-related claims.

         The plaintiff in this case, SDF LLP, asks the Court to recognize for the first time in New Mexico an “illegal recoupment” claim when a party wrongfully invokes the doctrine of equitable recoupment. As there is no good reason to recognize such a claim, and such a claim would eviscerate New Mexico's equitable recoupment doctrine, the Court declines to recognize the proposed illegal recoupment claim.


         Plaintiff SDF is a limited liability company whose sole member is Samuel L. Dazzo Jr., a citizen of New Mexico. (See Doc. 1 at 2.) SDF owns the right to receive about 1/4th of 7/8th (or about 7/32) of the oil and gas revenue from certain federal leases in Rio Arriba County, New Mexico. (See Doc. 1, Ex. 1 at 2.) SDF refers to this 7/32 royalties interest as “Subject Overrides.” (Id.)

         Since 1990, Defendant ConocoPhillips Company (COP), a Delaware corporation with its principal place of business in Texas, has paid Subject Overrides to SDF. (Id. at 1, 4.) But in May 2016, COP stopped paying Subject Overrides. (Id. at 7.) According to COP, it was only contractually obligated to pay Subject Overrides for the months when it extracted, on average, more than 500, 000 cubic feet (500 Mcf) of gas per well each day. (See Id. at 3, 7.) COP has never met the 500 Mcf threshold, so from its perspective it had unnecessarily paid Subject Overrides since 1990. (See Id. at 4, 7.)

         After halting Subject Override payments, COP sold its interest in the federal leases burdened by the Overrides to Defendant Hilcorp San Juan, L.P. (See Id. at 7.) Hilcorp, a limited partnership with no partners in New Mexico, then took over COP's obligation to pay Subject Overrides to SDF. (See Doc. 1 at 2; Doc. 1, Ex. 1 at 8.) Like COP, Hilcorp believes that Subject Override payments are only necessary for the months when it extracts a daily average of 500 Mcf of gas per well. (See Doc. 1, Ex. 1 at 8.)

         SDF disagrees with COP and Hilcorp's interpretation of their obligation to pay Subject Overrides. (See Id. at 5.) It sued COP and Hilcorp (collectively, “Defendants”) in New Mexico state court, asking the court to declare that Defendants had to pay the Subject Overrides regardless of whether they met the 500 Mcf threshold. (See Id. at 8.) SDF also alleged that, among other things, Defendants were guilty of breach of contract and “illegal recoupment.” (See Id. at 10-11.)

         Defendants removed the case to this Court, (see Doc. 1 at 1), and now ask the Court to dismiss SDF's illegal recoupment claim, (Doc. 8 at 1).


         Through Federal Rule of Civil Procedure 12(b)(6), defendants may ask a court to dismiss any part of a plaintiff's complaint that fails to state a viable claim for relief. See Fed. R. Civ. P. 12(b)(6). When considering whether to dismiss the challenged portion of a plaintiff's complaint based on a 12(b)(6) motion, the court examines the plausibility of the complaint, accepting all of the plaintiff's well-pleaded allegations as true and construing the allegations in the light most favorable to the plaintiff. Alvarado v. KOB-TV, L.L.C., 493 F.3d 1210, 1215 (10th Cir. 2007) (quotations and citations omitted).


         Jurisdiction arises under 28 U.S.C. § 1332 as the amount in controversy exceeds $75, 000, and there is complete diversity between the plaintiff and defendants. Venue is proper in the District of New Mexico because the District embraces the state court where the action was pending. See 28 U.S.C. § 1441(a); see also Polizzi v. Cowles Magazines, Inc., 345 U.S. 663, 665-66 (1953) (explaining that in removal actions, venue is governed by 28 U.S.C. § 1441(a) instead of 28 U.S.C. § 1391, the general venue statute).

         Defendants argue that SDF's illegal recoupment claim is not a legitimate claim for relief in New Mexico. The validity of an illegal recoupment claim has never been addressed by the New Mexico Supreme Court-the highest court of the state. As such, this Court must predict how the New Mexico Supreme Court would rule on the ...

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