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Epic Energy LLC v. Encana Oil & Gas USA Inc.

United States District Court, D. New Mexico

September 11, 2019

EPIC ENERGY LLC, Plaintiff,
v.
ENCANA OIL & GAS USA INC., Defendant.

          MEMORANDUM OPINION AND ORDER

          ROBERT C. BRACK, SENIOR U.S. DISTRICT JUDGE

         This matter is before the Court on Encana Oil & Gas (USA) Inc.'s (Defendant) Motion to Dismiss Plaintiff's Complaint. (Doc. 5.) Having considered the parties' arguments and the relevant law, the Court will grant in part and deny in part the motion.

         I. Factual Background[1]

         On April 7, 2016, Epic Energy LLC (Plaintiff), a New Mexico company, entered into a Purchase and Sale Agreement (PSA) with Defendant, a Delaware corporation with its principal place of business in Colorado (see Doc. 1 at 2), to purchase Defendant's interest in certain oil wells and oil tank batteries in New Mexico. (See Doc. 1-1 (Compl.) ¶¶ 1-2, 5, 15.) After signing two Amendments, the parties agreed that the PSA's effective date would be on or before July 1, 2016. (Id. ¶ 15; see also Doc. 1-1-B at 13-19.[2]) The PSA included an oil tank battery the parties refer to as the Federal I tank battery (Federal I). (Id. ¶¶ 4-5, 15.)

         On December 8, 2015, a tank valve in Federal I froze and leaked oil into the soil. (See id. ¶¶ 5-6; see also Doc. 1-1-A.) Under regulations promulgated by the New Mexico Oil Conservation Commission, Defendant was obligated to verbally report the leak to the Oil Conservation Division (the Division) within 24 hours and to file a C-141 form within 15 days. (See Compl. ¶¶ 10-11.) See also 19.15.29.9-10 NMAC.[3] Defendant verbally reported the leak to a Division inspector on December 14, 2015, and sent an incomplete C-141 form to the Division on December 15, 2015, asserting that “[a]ll liquids and contaminated soil were removed and disposed of in accordance with State rules.” (See Compl. ¶¶ 8, 12 (quoting Doc. 1-1-A).) According to the allegations in the Complaint, Defendant's assertion was false-it had not properly remediated the oil release. (See Id. ¶¶ 12, 14.) The Division sent two requests to Defendant asking it to “prove remediation had actually taken place by submitting soil sample data and evidence that [the] contaminated soil had been disposed of[, ]” but Defendant did not comply with either request. (Id. ¶ 13.) “On April 13, 2016[, ] a Division inspector visited the Federal I tank battery and found that the oil release had not been remediated as represented . . . .” (Id. ¶ 14.)

         As part of the parties' negotiations prior to the PSA's effective date, Plaintiff inspected the Federal I tank battery on April 19, 2016. (Id. ¶ 16.) While it was obvious that Defendant had performed recent dirt work at the site, “[t]here was no visible evidence of an oil spill or leak in and around the Federal I.” (Id.) Defendant never disclosed information to Plaintiff about the oil release or the failed remediation efforts during the parties' negotiations. (Id. ¶ 17.)

         The PSA was effective on August 1, 2016. (See Doc. 1-1-B at 13.) On July 27, 2016, the Division formally recognized Plaintiff as the new operator of the wells. (Id. ¶ 19.) In September 2017 the Division notified Plaintiff that Defendant had not complied with its request to provide soil samples in connection with the incomplete C-141 form. (Id. ¶ 20.) Representatives from both parties “and the Division obtained a witnessed soil sample on or about September 6, 2017.” (Id.) Testing of the soil sample established that oil remained in the soil; in other words, Defendant had not completed remediation. (Id. ¶ 21.)

         Because the Division recognizes Plaintiff as the operator of the wells, the Division is holding Plaintiff responsible for remediation. (Id. ¶ 22.) Plaintiff has formally asked the Division to hold Defendant responsible for the remediation (see Doc. 1-1-C), but the Division continues to hold Plaintiff liable for compliance with all applicable regulations (see Doc. 1-1-D-2; Compl. ¶¶ 23-24). See also 19.15.29.8, 19.15.29.12, 19.15.29.16 NMAC.[4] Accordingly, Plaintiff has developed a remediation plan. (See Compl. ¶ 25; see also Doc. 1-1-E.) The remediation plan “will cost approximately $150, 000 to perform.” (Compl. ¶ 26.)

         Plaintiff filed suit in the Eleventh Judicial District Court, State of New Mexico, on January 11, 2019. (See Id. at 1.) Defendant removed the lawsuit to this Court on February 15, 2019, on the basis of diversity. (See Doc. 1 at 1.)

         II. Legal Standard

         In reviewing a motion to dismiss under Fed.R.Civ.P. 12(b)(6), the Court “must accept all the well-pleaded allegations of the complaint as true and must construe them in the light most favorable to the plaintiff.” In re Gold Res. Corp. Sec. Litig., 776 F.3d 1103, 1108 (10th Cir. 2015) (citation omitted). “To survive a motion to dismiss, ” the complaint does not need to contain “detailed factual allegations, ” but it “must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.'” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 570 (2007)).

         III. Analysis

         Plaintiff has asserted claims for: (1) declaratory judgment and injunctive relief pursuant to N.M. Stat. Ann. §§ 70-2-2, 70-2-3(B), and 70-2-29 (1978) (Compl. ¶¶ 27-33); (2) breach of contract and warranties (id. ¶¶ 34-37); (3) fraud and deceit (id. ¶¶ 38-41); and (4) breach of contract with respect to taxes (id. ¶¶ 42-46). Defendant moves to dismiss all four claims. (Doc. 5.) The Court begins by examining the claim for breach of contract and warranties.

         A. Plaintiff has alleged facts sufficient to state a claim for breach of contract pursuant to Section 6(b) of the PSA but may not maintain its claim for breach of warranties pursuant to Section 11.

         In its second claim for relief, Plaintiff (the Buyer) asserts that Defendant (the Seller) breached the parties' PSA and the warranties therein, including the following two provisions:

6. Apportionment of Liabilities. . . .
b. Seller's Retention of Liabilities. Seller shall retain and shall pay, perform, fulfill and discharge . . . (2) any fines, penalties or monetary sanctions imposed by any governmental authorities as a result of violations or non-compliance with law as a result of the ownership, use or operation of the Assets prior to the Effective Date for which a claim has been made, filed, or initiated as of the Closing Date . . . .
11. Seller's Representations and Warranties. Seller represents and warrants to Buyer as of the date of this Agreement and the Closing Dated: . . . (vi) no suit, action or other proceeding is pending (including environmental claims) or, to the Knowledge of Seller, threatened against or affecting the Assets; (vii) to Seller's knowledge, the Assets have been operated in compliance with all applicable laws, including environmental laws, and Seller has not received notice of any alleged violations or liability under environmental laws or with respect to the environmental condition of the Assets . . . .

(Compl. ¶¶ 35-36 (quoting Doc. 1-1-B at 21, 22).) Plaintiff contends that Defendant knew of the oil release, submitted an incomplete form to the Division that falsely represented that the spill had been properly cleaned, and falsely represented to Plaintiff that it had complied with all applicable laws and had not received notice of any violations. (See Id. ¶¶ 7, 12-13, 17, 36; see also Doc. 7 at 13.) Thus, Plaintiff argues that Defendant's representations regarding the Federal I tank battery were false and breached the PSA and its warranties to Plaintiff.

         1. Plaintiff has stated a claim for breach of Section 6(b) because the remediation plan qualifies as “monetary sanctions.”

         Defendant first contends that “no ‘fines, penalties or monetary sanctions' have been imposed by any governmental authority” pursuant to Section 6(b) of the PSA. (Doc. 5 at 15.) Plaintiff responds that Defendant inadequately remediated the 2015 oil release in violation of Division rules and falsely reported complete remediation. (Doc. 7 at 13.) Section 19.15.29.12 NMAC provides that “[t]he responsible party must remediate all releases regardless of volume[, ]” and “[u]nless remediation is completed, and a final closure report submitted, within 90 days of discovery of the release, the responsible party must complete division-approved remediation for releases either pursuant to a remediation plan approved pursuant to 19.15.29.12 NMAC or pursuant to an abatement plan . . . .” 19.15.29.12(A)-(B)(1) NMAC. As Defendant did not comply with these rules, Plaintiff contends that the cost of the remediation plan is a “monetary sanction[] imposed by [a] governmental authorit[y] as a result of violations or non-compliance with law . . . prior to the Effective Date . . . for which a claim has been . . . initiated as of the Closing Date” in violation of Section 6(b). (Doc. 7 at 13.)

         Defendant disagrees and offers four reasons to reject Plaintiff's construction of the term “monetary sanction.” First, Defendant argues that the plain meaning of “monetary sanction” forecloses inclusion of the costs of remediation. “‘Monetary' means ‘of, relating to, or involving money[, ]'” and “‘[s]anction' means ‘a penalty or coercive measure that results from failure to comply with a law, rule, or order.'” (Doc. 11 at 4 (quoting Monetary & Sanction, Black's Law Dictionary (10th Ed. 2014)).) “Thus, ‘monetary sanction' means a ‘money penalty that results from failure to comply with a law, rule, or order.'” (Id.) Defendant argues that “[a]ssuming oversight for and paying a third-party contractor to remediate historical contamination is not a ‘monetary sanction.'” (Id.) Yet, the costs of the remediation plan stem from Defendant's alleged failure to remediate the oil release “in accordance with State rules” in 2015. (See Compl. ¶¶ 12-14.) See also 19.15.29.12 NMAC. Because of Defendant's failure, Plaintiff has now been ordered to perform remediation of the release. (Compl. ¶ 22.) Thus, the cost of performing the remediation can be construed as a sanction that resulted from Defendant's failure to comply with State rules that required it to properly remedy the oil release.

         Second, Defendant argues that “Plaintiff's construction violates the . . . principle” that “‘[w]here general words follow an enumeration of persons or things of a particular and specific meaning, the general words are not construed in their widest extent but are instead construed as applying to persons or things of the same kind or class as those specifically mentioned.'” (Doc. 11 at 4 (quoting Lucero v. Richardson & Richardson, Inc., 39 P.3d 739, 745 (N.M. Ct. App. 2001)).) For example, the New Mexico Court of Appeals held that “in interpreting the language ‘buildings, structures, trees, shrubs or other natural features, '” the term “other natural features included only above-ground, not subsurface, features, since all the features listed existed above ground.” Lucero, 39 P.3d at 745 (quoting Hartman v. Texaco, 937 P.2d 979, 982 (N.M. Ct. App. 1997)). Defendant argues that construing “‘monetary sanctions' to mean ‘assume responsibility and pay for the costs of any remediation' constitutes ‘the widest extent' of those words, much different from the ‘same kind or class' as ‘fines and penalties.'” (Doc. 11 at 4-5.) The Court disagrees. The Division requires that remediation occur as a consequence of the release-the Court finds this falls comfortably into a “sanction” as used in the provision.

         Defendant next argues that “Plaintiff's construction ignores” Section 6(a) of the PSA, which provides “that Plaintiff ‘shall assume, pay for and perform all claims, taxes, costs, expenses, liabilities and obligations accruing or relating to . . . [the Assets] . . . including those related to the environmental condition of the Assets.” (Id. at 5 (quoting Doc. 1-1-B at 20).) Defendant does not, however, quote the entire text of Section 6(a), which provides:

(6) Apportionment of Liabilities.
(a) Buyer's Assumption of Liabilities.
i. Except for the Retained Liabilities and the allocation of revenues and expenses set forth in Section 6(c), after closing Buyer shall assume, pay for and perform all claims, taxes, costs, expenses, liabilities and obligations accruing or relating to owning, developing, exploring, operating or maintaining the Assets or producing, transporting and marketing of Hydrocarbons produced from the Assets, arising either before or after the Effective Date, including those related to the environmental condition of the Assets . . . .

(Doc. 1-1-B at 20 (emphasis added).) While Section 6(a) dictates that Plaintiff generally will be responsible for all obligations after closing, Section 6(b) carves out several specific items that Defendant will retain liability for, including “any fines, penalties or monetary sanctions imposed by any governmental authorities as a result of violations or non-compliance with law . . . .” (Id. at 21.) Defendant explains neither how this construction of Section 6(b) renders Section 6(a) meaningless, nor how its own construction is superior.

         Finally, Defendant argues that its “responsibility for ‘fines, penalties or monetary sanctions' is limited to those ‘for which a claim has been made, filed, or initiated as of the Closing Date . . . .'” (Doc. 11 at 5 (quoting Doc. 1-1-B at 21).) The Division initially contacted Defendant about remediation prior to the closing date; thus, the claim for remediation fits within this limitation. For these reasons, the Court finds that Plaintiff ...


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