United States District Court, D. New Mexico
SDF, L.L.C., a New Mexico Limited Liability Company, Plaintiff,
CONOCOPHILLIPS COMPANY and HILCORP SAN JUAN, L.P., Defendants.
MEMORANDUM OPINION AND ORDER GRANTING IN PART
PLAINTIFF'S MOTION TO COMPEL
MATTER comes before the Court on Plaintiff's Motion to
Compel No. 1 for Production of Documents (Doc. 37), filed
January 19, 2018. Having thoroughly reviewed the parties'
submissions and all pertinent authority, the Court finds that
Plaintiff's Motion is well taken in part.
case stems from a dispute regarding gas overriding royalties
(“ORR”) and the so-called “500 Mcf
Clause” associated with San Juan Basin federal lease
NM-03560 and federal lease NM-03521. The 500 Mcf Clause
stipulates that the owner of the royalties is entitled to
payment of the ORR Interest (“ORRI”) only when
the wells located on the subject lease produce more than 500,
000 cubic feet of gas per well per day.
September 2012, Defendant ConocoPhillips (“COP”)
notified Plaintiff SDF, L.L.C. (“SDF”) that it
would suspend its ORRI payments because gas production
associated with SDF's lease was below that level. Despite
this notification, however, COP continued making ORRI
payments to SDF until terminating those payments in May 2016.
then sought an explanation for the termination of the ORRI
payments. In an October 14, 2016 e-mail, COP Division Order
Analyst Ladonna Mitchell explained that “[i]t was
determined that the average daily production has been below
500 mcf/day since 1957 . . . . Notice letters were sent to
SDF, LLC on September 5, 2012 . . . notifying them of
COP's intent to reduce the ORRI . . . . This was
discovered during a Land audit of the Exhibit B Schedules for
each of the Federal Unit.” Doc. 1-1 at 2.
issue on this motion to compel is Plaintiff's Request for
Production No. 3 which seeks production of “the
documents concerning and reflecting results of the Land audit
of the Exhibit B Schedules for each Federal Unit audited as
stated in the Mitchell Email.” Doc. 37-1 at 2.
Defendants objected, but did state that they would
“make available for inspection the ‘Land
audit' file for the property that is the subject of
Plaintiff's claims in this case.” Doc. 37-1 at 3.
Plaintiff, however, seeks production of the entire Exhibit B
Audit, not just its individual land audit file.
assert that the referenced Exhibit B Audit “involved
analyzing the ownership schedules . . . of more than 20
federal units to confirm the accuracy of COP's working
interest as stated on the schedules.” Doc. 42 at 2. As
part of the audit, COP learned of the 500 Mcf discrepancy
related to SDF's ORRI, but “COP believes that other
than this SDF issue, the Exhibit B Audit did not involve or
otherwise implicate any other 500 mcf clauses.” Doc. 42
at 3. Instead, Defendants explain that COP reviewed 500 Mcf
Clauses in 2010-2012 (“the Royalty Review”). Doc.
42 at 2. Accordingly, Plaintiff also now seeks production of
documents reflecting the results of the Royalty Review. Doc.
44 at 4-5. Defendants object to these requests, arguing the
information sought is irrelevant and not proportional to the
Federal Rule of Civil Procedure 26(b)(1), discoverable
information is anything non-privileged “that is
relevant to any party's claim or defense and proportional
to the needs of the case.” “[A] request for
discovery should be considered relevant if there is any
possibility that the information sought may be relevant to
the subject matter of the action.” In re Vaughan
Company, No. 12-cv-0817 WJ/SMV, 2014 WL 12787951, at *2
(D.N.M Sept. 19, 2014) (citing Williams v. Bd. of Cnty.
Comm'rs, 192 F.R.D. 698, 702 (D. Kan. 2000)).
Proportionality is determined by considering “the
importance of the issue at stake in the action, the amount in
controversy, the parties' relative access to relevant
information, the parties' resources, the importance of
the discovery in resolving the issues, and whether the burden
or expense of the proposed discovery outweighs its likely
benefit.” Fed. R. Civ. P 26(b)(1). While the scope of
discovery under Rule 26 is broad, Gomez v. Martin Marietta
Corp., 50 F.3d 1511, 1520 (10th Cir. 1995), discovery is not
meant to be a fishing expedition. McGee v. Hayes, 43
Fed.Appx. 214, 216-17 (10th Cir. 2002).
believe that the Exhibit B Audit did not involve review of
any 500 Mcf Clauses, other than in relation to SDF's
ORRI. Rather, Defendants assert the Exhibit B Audit involved
analyzing COP's ownership schedules. While Plaintiff
requests all documents concerning and reflecting the Exhibit
B Audit results for every Federal Unit, it makes clear in its
Motion to Compel that the only relevant information is audit
results specifically related to 500 Mcf Clauses. See, e.g.,
Doc. 37 at 6 (“[H]ow the royalty accounting has been
consistent, or inconsistent, among owners whose instruments
contain the 500 Mcf Clause goes to the heart of
enforceability.” (emphasis added)); Doc. 44 at 6
(“[D]isclosure of all defendants' files regarding
the Exhibit B audit and the Royalty Review as they involve
the 500 Mcf Clause is particularly critical to a resolution
of this dispute . . . .” (emphasis added)). Therefore,
documents of results from the Exhibit B Audit not related to
500 Mcf Clauses are not relevant, and Defendants do not have
to produce them.
both the results of the Exhibit B Audit and the Royalty
Review, insofar as they relate to 500 Mcf Clauses, are
relevant to Plaintiff's claim of breach of the implied
covenant of good faith and fair dealing. “[T]he implied
covenant of good faith and fair dealing helps insure that
both parties receive the benefit of their respective
bargains. The covenant acts to protect the parties to the
contract by prohibiting one party from obstructing the other
party's benefit, whether that benefit is express or
implied.” Sanders v. FedEx Ground Package Sys.,
2008-NMSC-040, ¶ 10, 188 P.3d 1200. Better said, the
covenant protects the spirit of the deal.
Plaintiff to establish there has been a breach of the
covenant, it is necessary to determine the initial intent
behind the 500 Mcf Clause. Here, the ORRI assignments were entered
in to by predecessors in interest on both sides. Plaintiff
correctly points out that it will be difficult, if not
impossible, to locate the original parties. The Exhibit B
Audit and the Royalty Review results that show how Mcf
Clauses have historically been enforced, and thereby
indicative of a course of conduct, may assist in interpreting
the original intent behind identical Mcf Clauses.
the results are relevant to Plaintiff's breach of
contract claim. Other district courts have held that
extrinsic evidence is relevant in insurance disputes to prove
the meaning of an ambiguous policy provision when “such
information may show that identical language has been
afforded various interpretations by the insurer . . .
.” Phillips v. Clark County School Dist., No.
2:10-cv-02068-GMN-GWF, 2012 WL 135705, at *5 (D. Nev. Jan.
18, 2012) (citing Nestle Foods Corp. v. Aetna Cas. & Sur.
Co., 135 F.R.D. 101, 106-017 (D.N.J. ...