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Ulibarri v. Southland Royalty Company, LLC

United States District Court, D. New Mexico

March 15, 2019




         In this dispute over the calculation of royalty payments for natural gas produced under certain oil and gas leases, Gerald Ulibarri and White River Royalties, LLC (Plaintiffs) allege that Defendant Southland Royalty Company, LLC (Southland) employs a method of calculating royalty payments that violates their lease agreements. Before considering this contract interpretation dispute, however, the Court must rule on Plaintiffs' motion to certify their proposed class. Plaintiffs argue that there are hundreds of individuals and entities with interests in oil and gas lease agreements that are similarly breached every time Southland deducts certain post-production costs from their royalty payments. Southland counters that determining whether an individual's royalty payment is correctly calculated requires an individualized assessment of each lease and the relevant wells and market conditions.

         Southland has proffered an expert witness, Kris Terry, to opine on the customs, practices, usage of terms, and historical context that inform lease provisions in the oil and gas industry. Plaintiffs argue that her expert testimony amounts to no more than legal conclusions and impermissible opinions on contract interpretation that are not relevant to class certification issues. Plaintiffs urge the Court to exclude the entirety of her testimony from an upcoming class certification hearing and the Court's consideration of the certification issue. Having considered the submissions of the parties, the record, and relevant law, the Court will deny Plaintiffs' motion to exclude Ms. Terry's expert testimony from the class certification hearing.

         I. Background[1]

         A. The Underlying Complaint and Proposed Class

         Southland produces natural gas from various “gas only” wells in New Mexico. (Doc. 99 at 3.) Southland produces this gas and related natural gas products pursuant to the lessee's interest it holds in numerous oil and gas lease agreements that it acquired through assignment from Energen Resources Corporation on January 1, 2015. (See id.; see also Doc. 106 at 11.) These lease agreements contain provisions providing that individuals and entities holding the lessor's interest shall be paid royalties on natural gas production. (See Doc. 99 at 3.) Production, treatment, and processing of natural gas yields natural gas residue, natural gas liquids, and condensate. (Id. at 7 (“[a]fter treatment and processing, the gas . . . is converted into residue gas, natural gas liquids and condensate, [which] are then sold to third party purchasers”).) The named plaintiffs have lessor's interests in several lease agreements under which Southland produces natural gas. (Id. at 3-4.)

         Plaintiffs allege that Southland has improperly calculated their royalty payments by not basing payments on the actual sale proceeds of the natural gas products derived from their wells. (Id.) Instead, they argue, Southland consistently deducts post-production costs like treatment (which removes impurities from residue gas to make it marketable) and processing (which separates out natural gas liquid products to make them available for sale) from their royalty payments. (See Doc. 106 at 2.) Plaintiffs allege that, pursuant to their lease agreement language, such “post-production” costs should not be deducted from royalty payments, which are meant to be calculated solely on gross profits and not adjusted for the cost of post-production processing. (Id.) Plaintiffs thus allege that Southland significantly underpays royalties for the sale of natural gas liquids and residue gas, and are seeking damages in the amount of the underpayments plus interest, as well as a declaratory judgment that Southland must calculate royalties without the deduction of post-production costs. (See Docs. 106 at 2; 113 at 1-2.)

         Plaintiffs seek to bring this action on behalf of a putative class including all individuals and entities who have been paid royalties by Southland at any time since January 1, 2015, and hold a lessor's interest in a lease agreement that contains one of four different types of royalty payment provisions.[2] The royalty provisions relevant to the proposed class include:

(1) Proceeds Royalty Provisions: Require payment of “a specified percentage of the proceeds of the gas, as such, for gas from wells where gas only is found.”[3] (Doc. 99 at 1.)
(2) Gross Proceeds Royalty Provisions: Require 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 Provisions: Require 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 arm[']s length sale of such as conditioned for delivery to a transmission pipeline.” (Id.)
(4) “Gross Proceeds without Deduction of Post-Production Costs” Royalty Provisions: Require payment of “a specified percentage of the gross proceeds without deduction from the value of Lessor's royalty by reason of any required processing, cost of dehydration, compression, transportation, or other matter associated with marketing gas produced from the lands covered hereunder.” (Id. at 1-2.)

         The proposed class definition excludes any individuals or entities who receive royalties from Southland pursuant to lease language stating that royalties should be calculated “at the well” or by “prevailing field market price.” (Id. at 2.) The definition also excludes “any person or entity who has been a working interest owner in a well located in New Mexico on whose behalf Southland paid royalties on natural gas produced by Southland in New Mexico.” (Id.)

         B. Kris Terry's Proffered Expert Testimony

         Asserting that this proposed class meets the class certification requirements under Federal Rule of Civil Procedure 23(a) and (b)(3), Plaintiffs have moved to certify their putative class. (Doc. 105.) The question of certification has not yet been fully briefed, and the Court will hear arguments on the certification issue at an upcoming hearing. Plaintiffs move the Court to exclude all of the proposed expert testimony of Kris Terry, who Southland has retained to provide her opinions “as an expert in the oil and gas industry concerning the usage of terms, the customs and practices of the oil and gas industry, and the historical context and circumstances that have, over time, informed the understanding of the parties to oil and gas agreements.” (Doc. 113-6 ¶ 4; see also Doc. 113.) Plaintiffs argue that Ms. Terry's proffered testimony is comprised of inadmissible opinions regarding contract interpretation of the four types of royalty provisions at issue, “purports to opine on a question of law[, ]” and encroaches on the Court's role in deciding whether the proposed class is properly ascertainable. (Doc. 113 at 4-7.) Southland counters that Ms. Terry's four expert opinions are all “reliable opinions that will assist the Court in making its class certification determination” (Doc. 130 at 1), and “Plaintiffs' disagreement with the opinion[s] is not in any way dispositive as to [their] admissibility.” (Id. at 9.)

         II. Legal Standards

         A. Legal Standard for the Admission of Expert Testimony

         As part of its evidentiary gatekeeping function under Federal Rule of Evidence 702, the Court must “ensure that any and all scientific testimony or evidence admitted is not only relevant, but reliable.” Daubert v. Merrell Dow Pharm., Inc., 509 U.S. 579, 589 (1993). See also Kumho Tire Co. v. Carmichael, 526 U.S. 137, 141-42 (1999) (extending the Daubert standard for evaluating scientific expert testimony to “technical” and “other specialized” knowledge). This requires a two-step inquiry, first determining whether the proffered expert is “qualified by ‘knowledge, skill, experience, training, or education' to render an opinion.” 103 Inv'rs I, L.P. v. Square D Co., 470 F.3d 985, 990 (10th Cir. 2006) (quoting Fed.R.Evid. 702). Second, the Court must determine whether the proposed testimony “is sufficiently ‘relevant to the task at hand[, ]'” Bitler v. A.O. Smith Corp., 400 F.3d 1227, 1234 (10th Cir. 2005) (quoting Daubert, 509 U.S. at 597), and has “a reliable basis in the knowledge and experience of [the expert's] discipline[, ]” Daubert, 509 U.S. at 592.

         Federal Rule of Evidence 702 codifies the elements laid out in Daubert and Kumho Tire Co. that are required to meet the second prong of the Court's gatekeeping inquiry-relevance and reliability. ...

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