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Ulibarri v. Southland Royalty Co., LLC

United States District Court, D. New Mexico

January 2, 2019

GERALD ULIBARRI, Plaintiff,
v.
SOUTHLAND ROYALTY COMPANY, LLC, Defendant.

          MEMORANDUM OPINION AND ORDER

          ROBERT C. BRACK SENIOR U.S. DISTRICT JUDGE

         This matter is before the Court on Plaintiff Gerald Ulibarri's Motion for Leave to File a Second Amended Class Action Complaint. (Doc. 60.) Having reviewed the submissions of counsel and relevant law, the Court will grant Plaintiff's Motion and allow Plaintiff until January 16, 2019, to file his Second Amended Class Action Complaint.

         I. Background

         This case originally reached the Court in March 2016, when Defendant Southland removed Mr. Ulibarri's original class action complaint. (Doc. 1 at 1.) The original complaint alleged breach of contract, breach of implied duty to market, and violations of the New Mexico Oil and Gas Proceeds Payment Act. (Doc. 1-1 at 8-12.) The claims were based on allegations that Southland had been underpaying royalties to leaseholders by improperly deducting from their royalty payments proportionate shares of: (1) the New Mexico Natural Gas Processor's Tax, and (2) the post-production costs of processing and otherwise making natural gas marketable for sale. (Id. at 5-8.) In July 2016, the Court denied Plaintiff's motion to certify dispositive questions on these two issues to the New Mexico Supreme Court. (Doc. 25.) The matter was stayed pending the resolution of Anderson Living Trust v. Energen Resources Corp., a Tenth Circuit case addressing nearly identical issues and many of the same lease agreements. See 879 F.3d 1088 (10th Cir. 2018), amended and superseded on reh'g, 886 F.3d 826 (10th Cir. 2018). (See also Doc. 30.) In early 2018, the Tenth Circuit resolved Energen, [1] holding that production companies can pass along to leaseholders a proportionate share of the Natural Gas Processors Tax. 886 F.3d at 831. In addition, the court held that the “marketable condition rule” does not apply in New Mexico-meaning Energen can “deduct[] from [leaseholders'] royalty payments their proportionate share of post-production costs-those costs necessary to make the gas marketable.” Id.

         Following the decision in Energen, Plaintiff filed his First Amended Complaint, which made two significant changes to the definition of the proposed class and his claims against Southland. (Doc. 41.) First, Plaintiff excluded from the proposed class definition any individuals or entities whose lease agreements provide for royalty payments based on “market value at the well, ” “the prevailing field market price, ” or any other agreement language stating that value should be calculated “at the well.” (Id. at 1.) This change was based on Plaintiff's belief that the holding in Energen narrowly applies to only certain types of leases, and thus allows the deduction of post-production costs only insofar as that deduction is necessary to calculate the value of the gas “at the well.” (See Doc. 37 at 2-3.)

         The Tenth Circuit explained in Energen that natural gas is not marketable when it is first produced (i.e., “at the well”). See 886 F.3d at 832. Thus, when a lease agreement calls for royalties to be calculated based on the value of the gas at the well, producers must determine this value using a “netback” or “workback” method of calculation. See id at 832-33. This involves calculating a price for the natural gas “at the well” by selling the natural gas after it has been processed into marketable condition, then deducting the post-production costs that were necessary to prepare it for sale to actually earn that value. See Id. at 832 (explaining that the leases in Energen “set the basis for royalty payments as the ‘market value at the well' or the ‘prevailing field market price.' Determining those amounts, however, is not straightforward, because Energen does not sell the gas it produces on these leased properties ‘at the well'” (internal citations omitted).) Plaintiff's First Amended Complaint thus asserts that while Energen dictates that the deduction of post-production costs is allowed when the lease requires calculating “at the well” value for natural gas, it is still improper to deduct post-production costs from the royalties paid under all those leases that don't require calculations of value “at the well.” (See Docs. 37 at 2-3; 41 at 4-6.)

         Plaintiff's First Amended Complaint also alleges that Defendant has improperly calculated royalty payments for the class members by not basing payments on the actual sale proceeds of the natural gas and related products derived from their wells. (Doc. 41 at 6.) “After treatment and processing, the gas which came from the Class members' wells is converted into residue gas, natural gas liquids[, ] and condensate, [which] are then sold to third party purchasers.” (Id. at 5.) Plaintiff alleges that Defendant significantly underpays royalties on the sale of such products, in contravention of the class members' lease agreements. (Id. at 6.) The First Amended Complaint summarizes Plaintiff's current breach of contract claims this way:

Southland has breached the applicable Royalty Agreements by engaging in a common method of royalty accounting which: (1) calculates a value for the royalties which are paid to Plaintiff and the Class members that is substantially less than the sale proceeds received on the sale of gas, including residue gas, the natural gas liquid products, and condensate, which came from Plaintiff's and the Class members' Southland Wells; and (2) improperly deducts costs for gathering, compression, processing, NGPT, natural gas liquids transportation and fractionation, and other costs and expenses.

Id. Defendant did not object to Plaintiff amending his complaint to reflect these new allegations and class definitions. (Doc. 38 at 1.)

         On October 5, 2018, Plaintiff filed a Motion for Leave to File a Second Amended Class Action Complaint. (Doc. 60.) The proposed amendments would only change the definition of the putative class, not the substantive allegations or claims for relief. (See Id. at 2-3.) First, Plaintiff seeks to include in the class all royalty owners holding two new types of leases, claiming the language in these new leases' royalty provisions also prohibits deducting post-production costs and reveals that Defendant is underpaying royalties based on its calculation method. (See id.) Second, Plaintiff seeks to remove one type of lease agreement from the proposed class definition, as further discovery revealed that “Southland does not hold the lessee's interest in any New Mexico oil and gas lease which has this royalty provision.” (Id. at 2.) Finally, Plaintiff seeks to add White River Royalties, LLC as a named plaintiff. (Id. at 3-4.) White River Royalties, LLC holds an oil and gas lease with Southland that includes an identical royalty provision to those in Plaintiff's leases (a “Proceeds” provision, as explained below). (Id. at 3.)

         Plaintiff's proposed class in its Second Amended Complaint would include any individual or entity holding a lease with Southland since January 1, 2015, that contains one of four different types of royalty payment provisions:[2]

(1) “Proceeds” Royalty Provision: Requires payment of “a specified percentage of the proceeds of the gas, as such, for gas from wells where gas only is found.”[3] (Id. at 5.)
(2) “Gross Proceeds” Royalty Provision: Requires payment of “a specified percentage of the gross proceeds each year, payable quarterly, for the gas from each well where gas only is found.” (Id.)
(3) “Greater of Market Value or Gross Proceeds” Royalty Provision: Requires payment of “a percentage of the greater of (i) the market value of the product sold or used in a condition acceptable for delivery to a transmission pipeline, or (ii) the gross proceeds received by Lessee upon arms length sale of such ...

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