Opinion
Civil Action No. SA-99-CA-0763-XR.
January 6, 2005
ORDER
On this date the Court considered (1) Defendant's motion for summary judgment on all claims of Carl Greenwood, Lyda Moreland, and Lida Beatrice Greenwood Meyers (docket no. 123); (2) Defendant's supplemental motion for summary judgment on all claims of Lyda Moreland (docket no. 124); and (3) Defendant's motion for class decertification (docket no. 137). After considering the motions and the various responsive documents, the Court will GRANT the motions.
I. Background
This case arises from the attempt by Plaintiff to file a class action against Defendant. Plaintiff complains of the use of by Defendant of field prices to value gas used in intra-corporate transfers to gas processing plants and refineries. Plaintiff suggests that this gas should be valued at the price of an arms' length, third party transaction.
The issue of certification has come before the Court four previous times, twice certification was denied, and twice certification was granted. As this case sits presently, there are two subclasses of plaintiffs that were certified by Judge Edward Prado:
Judge Prado presided over this case from its inception until he was elevated to the United States Court of Appeals for the Fifth Circuit in 2003.
Subclass I:
(1) All persons and private entities who own or owned royalty interests under leases in Arkansas, Colorado, Kansas, Louisiana, Montana, and New Mexico;
(2) Where Exxon Corporation is the lessee;
(3) The lease provided for payment of royalties on natural gas production on an amount realized/net prceeds basis or a market value/market price basis;
(4) From which Exxon Corporation has produced natural gas (including natural gas liquids) that was directly or indirectly sold or transferred to Exxon Corporation or within Exxon Corporation; and
(5) During the time period from July 14, 1995 through the present.
Subclass II:
(1) All persons and private entities who own or owned royalty interests under leases in Texas;
(2) Where Exxon Corporation is the lessee;
(3) The lease provides for payment of royalties on natural gas production on an amount realized/net proceeds basis;
(4) From which Exxon Corporation has produced natural gas (including natural gas liquids) that was directly or indirectly sold or transferred to Exxon Corporation or within Exxon Corporation; and
(5) During the time period from July 14, 1995 through the present.
The Court designated Beth Blakemore Hunter, Carl Greenwood and "Ben Myers" as class representatives. In the certification Order, the Court found five questions of law and fact common to the class. These include:
This was apparently meant to be "Bea Meyers," otherwise known as Lida Beatrice Greenwood Meyers.
(1) Whether Exxon has met its obligations to reasonably market the gas and liquids;
(2) Whether Exxon has calculated royalty payments using inter-affiliate gas prices that were lower than the prices received from sales of similar gas to third parties;
(3) Whether Exxon has calculated royalty payments by using transportation charges that are not reasonable;
(4) Whether Exxon has calculated royalty payments by using gathering and compression charges that are not reasonable;
(5) Whether class members are entitled to an accounting.
The division of the subclasses resulted from the reversal by the United States Court of Appeals for the Fifth Circuit in Stirman v. Exxon Corp., 280 F.3d 554 (5th Cir. 2002), of the initial certification. The Fifth Circuit found that the initial certification was defective because it did not take into account the pronouncement in Yzaguirre v. KCS Resources, Inc., 53 S.W.3d 368, 374 (Tex. 2001), that there is no implied covenant to market in a lease that is measured on market value, rather than the proceeds or amount realized. Stirman, 280 F.3d at 562. The Fifth Circuit held that typicality was lacking in the initial certification because that certification did not distinguish between "market value" leases and "amount realized/proceeds" leases. Id. The Fifth Circuit also noted, "There is reason to suspect that Hunter will not be an adequate representative. . . . Hunter has no incentive to fully litigate those claims not applicable to her. Further, . . . she has an incentive to litigate claims relating to [her more valuable leases] over other claims." Id. at 563 n. 7.
Following the Fifth Circuit's determination in Stirman, the case was re-certified, over Defendant's objection, as described above. Defendant petitioned for review with the Fifth Circuit once again, but the Court declined to review the second certification order. Subsequent to this case being reassigned to the undersigned judge, Defendant filed the present motion to decertify, as well as motions for summary judgment as to certain named plaintiffs. In the motions for summary judgment, Defendant claims that Carl Greenwood, Lyda Moreland, and Lida Beatrice Greenwood Meyers cannot show that they have claims within the class definition. Plaintiffs' response to Defendant's argument asserts that these plaintiffs may well have no valid cause of action. In the motion to decertify, Defendant claims that no plaintiff has been put forward as an adequate representative for either subclass. In addition, Defendant claims that the Court should decertify under its continued duty to evaluate the propriety of class certification. Specifically, Defendant asserts that certain factors in determining class certification have yet to be fully met by Plaintiff, including the "typicality," "commonality," "predominance," and "superiority" requirements.
Each side seems to assume that Lyda Moreland is a representative plaintiff, despite the fact that she was not named as such in the operative certification Order or in any subsequent Order.
On October 27, 2004, the Court issued an Order requiring written responses to certain questions raised by the motion for decertification and the evidence presented and setting a hearing on the motion. Each side timely responded to the Court's Order with information and additional evidence attempting to describe the contentions of the case. On January 6, 2005 the Court held a hearing on the pending motions. At the hearing, Plaintiff's counsel conceded that the motions for summary judgment should be granted and that the current class structure was, at the least, problematic.
II. Law of Class Certification Applied to the Present Certification
"The party seeking certification bears the burden of demonstrating that the requirements of Rule 23 have been met." O'Sullivan v. Countrywide Home Loans, Inc., 319 F.3d 732, 737-38 (5th Cir. 2003). Rule 23(a) requires a plaintiff to meet four factors: numerosity, commonality, typicality, and adequate representation. Meeting the Rule 23(a) requirements are not particularly demanding. Common issues of law and fact should be identified to satisfy the commonality requirement and claims arising from a similar course of conduct and sharing the same legal theory should be identified to satisfy the typicality requirement. James v. City of Dallas, 254 F.3d 551, 571 (5th Cir. 2001). The more demanding analysis comes under Rule 23(b)(3). Rule 23(b)(3) requires a plaintiff to demonstrate "(1) that questions common to the class members predominate over questions affecting only individual members and (2) that class resolution is superior to alternative methods of adjudication of the controversy." Bell Atl. Corp. v. ATT Corp., 339 F.3d 294, 297 (5th Cir. 2003). The predominance and superiority requirements are "far more demanding" than the commonality requirement. Amchem Prods. v. Windsor, 521 U.S. 591, 624 (1997).
In response to the Court's questioning, and after more time for discovery and analysis, Plaintiff has conceded that continuing with the present certification is problematic. This is because, as Plaintiff's counsel states, "nobody can determine where gas is sold or used." According to Plaintiff, gas is sold or transferred after "aggregation" and it is impossible to trace the source of any particular gas stream to a particular well. Under the present certification Order, Plaintiff notes that the Court would need to examine each gas stream and determine what lease it was developed upon, where it was stored, and where it eventually went. Apparently, Defendant aggregates gas from varying gas streams and then distributes the gas according to need. It would be impossible to examine the distribution of the gas produced from each lease and determine where it precisely was distributed — whether it was sent to Defendant's refineries or gas processing plants, or sold to third parties.
Plaintiff's reasoning for not continuing with the present certification is in conjunction with the rationale put forward by Defendant. Defendant states that class action would be impossible in this case because the Court would necessarily have to examine each particular lease. Defendant has put forward a number of representative leases from each state. Virtually every lease put forward is different in language from every other lease. Certain leases specifically mention that all gas "used" by Defendant should be paid based on "the price received by Lessee under an arms' length gas sales contract prudently negotiated." ExxonMobil Lease #1010024-001 (Louisiana #4), McCraw Declaration (Defendant's Tab 39) at 10. Other leases state that all gas "used off the premises" must be paid based on the "gross proceeds received." ExxonMobil Lease # 164426 (Arkansas # 2), id. at 4. These are examples of the variety within the class of leases that must be examined. It may be impossible to apply an implied covenant to market to leases such as Arkansas #2. It is unclear exactly how gas used internally by Defendant can receive proceeds.
Technically, Defendant may be able to argue that no royalty is owed for gas used internally on this lease.
There would also be a problem in addressing how to determine any damages under the present certification. Different states have different laws as to who pays post-production costs. Texas, Louisiana, and Montana all require the lessor to share in post-production costs. Colorado requires the lessee (Exxon) to handle all post-production costs. Kansas requires the lessee to handle all post-production costs except for transportation costs. And in Arkansas, it appears that the lessee generally is expected to handle all post-production costs. In all these states, however, the general rule as to post-production costs is subject to lease language dealing with costs. As an example, Defendant put forward ExxonMobil Lease # 1011624-001 (Colorado #1), which states that "For Gas used off the premises, Wellhead Value (royalty value to be paid) shall be determined by taking the weighted average price of gas sold by Lessee closes to the point at which the Gas is used, subtracting all apportioned costs incurred between the wellhead and the point of sale." This lease, as far as can be discerned, modifies the existing Colorado law as to post-production costs. This is one example of a likely non-typical lease that would need to be individually examined under the present certification.
Another problem is that under the present certification Order, Hunter's leases are not an adequate representation of the other royalty interest holders in the putative class. There are varying leases in each state that are very different from Hunter's. In addition, as to the Texas subclass, Hunter's leases are not representative of the certified class. While the parties constantly refer to Hunter's leases as "multi-prong," with regard to the actual issue in this case all of Hunter's leases are the same: they all require royalty payments on gas "used" by Defendant to be paid based on the "market value at the well." Texas law specifically states that the implied covenant to market does not apply to "market value" leases such as Hunter's. Therefore, Hunter's leases are not representative of the class and Hunter is not an adequate representative of the present Texas subclass.
Further, under the present certification Order, individual issues clearly predominate over common issues and the class action is not the superior form to address the claims of the class. Whether the implied covenant to market applies to each individual class member depends on whether the lease language falls within the class definition. Each lease would need to be examined to ensure that it does not have a clause specifically providing how to determine royalty calculations for gas "used" by Defendant. Louisiana #4, requiring payment at the price of an arms' length transaction prudently negotiated, is an example of a lease that specifically addresses the situation at issue. The royalty interest holder under this lease may have a good claim for breach of contract if they were not paid according to the terms; however, each months' division orders would have to be examined to determine whether the terms were complied with. Under the present certification Order, a "series of individual trials" will likely be necessary to determine whether each individual royalty interest holder was damaged by Defendant's practices. See O'Sullivan, 319 F.3d at 738. Each lease will need to be examined, at the least to ensure that the lease does not specifically address the situation at hand as does Louisiana #4. After each lease is examined, the Court will then have to examine each division order to determine precisely what damage, if any, was incurred by each royalty interest holder each month. In considering the superiority requirement, a district court must consider "how a trial on the alleged causes of action would be tried." Castano v. Am. Tobacco Co., 84 F.3d 734, 740 (5th Cir. 1996). As recognized by the Fifth Circuit in its recent opinion of Robinson v. Texas Auto. Dealers Assoc., 387 F.3d 416 (5th Cir. 2004), one consideration of Rule 23(b)(3), "the difficulties likely to be encountered in the management of a class action," counsel against class action where individual issues, such as price negotiations or individual lease language, will have to examined for each class member.
For example, in Texas, the law is that "[w]hen an operator prepares a division order that allocates payments among the interest owners in a manner that differs from the lease provisions and the operator retains the benefits, the division order is not binding." Heritage Resource, Inc. v. NationsBank, 939 S.W.2d 118, 123 (Tex. 1996).
Finally, the scope of the present class is called into question by the evidence provided by Defendant. According to Robert Wallenhorst, Supply Coordinator of ExxonMobil Gas Power Marketing Company — the person responsible for setting field prices — a field price was an average calculated monthly by Defendant of index prices published monthly by industry publications, and was used until approximately August 31, 2003. Each index price was an accurate reflection of actual third-party sales made by producers other than Defendant during that month. Each index is an as-delivered-at-the-marketplace price that does not deduct any allowance for postproduction costs. The fact that this index pricing apparently reflects the average pricing for third-party sales suggests that Defendant may not be liable for any damages to the royalty interest owners. While this might be an issue best left to the trier of fact in determining whether a reasonably prudent operator would act in this way if a class were certified, at this stage this evidence counsels against continued certification because a district court should look beyond the pleadings to understand the claims, defenses, relevant facts, and applicable substantive law to "prevent the class from degenerating into a series of individual trials." O'Sullivan, 319 F.3d at 738. Wallenhorst also states that from July 14, 1995 through August 2003, Defendant calculated region-wide field prices for only three regions — West Texas, East Texas, and Louisiana. Wallenhorst states that a field price was never used in Arkansas, Colorado, Kansas, Montana, or New Mexico. Because the Fifth Circuit seems to have foreclosed the possibility of bringing the Louisiana claims in Chevron USA Inc. v. Vermilion Parish Sch. Bd., 377 F.3d 459 (5th Cir. 2004), at this time it would appear that Plaintiff's theory of liability would extend only to Texas leases. The present class certification fails the Rule 23(b)(3) requirements of predominance and superiority and cannot continue.
The Fifth Circuit found that the Louisiana notice statute applies to all claims for gas royalty payments. 377 F.3d at 462-64 (applying Art. 137 of the Louisiana Mineral Code). Plaintiff agrees that notice was not provided in accordance with Article 137 and that it appears that the Louisiana claims should be excluded.
III. Pending Motions for Summary Judgment
Defendant has moved for summary judgment as to the named plaintiffs other than Hunter — Carl Greenwood and Bea Meyers — as well as Lyda Moreland, who is not a named plaintiff. These plaintiffs ("the New Mexico plaintiffs") are alleged by Defendant to own no royalty interests in leases that have ever had gas transferred internally within Defendant. Additionally, Defendant maintains that Lyda Moreland has no present royalty interests; her interests are solely future interests. In the September 24, 2004 response, Plaintiff concedes that the summary judgment motions as to the New Mexico plaintiffs "may be proper" as the evidence establishes that no gas from the single tract owned by the New Mexico plaintiffs is subject to the class definition. Therefore, the motions for summary judgment as to the New Mexico plaintiffs is not opposed and are GRANTED.
IV. Conclusion
Defendant has moved for decertification of the presently certified class action, relying on this Court's continuing duty to evaluate the propriety of class certification. It has become clear that the currently certified class action actually cannot be maintained. Though the Court is mindful that this case has twice been certified as a class action, and that the Fifth Circuit has already declined to intervene as to the current class certification, the Court does not believe that this case as presently constituted can go forward as a class action. It would require examining a large number of leases to determine whether the language fell within the definition of the class. In addition, Plaintiff is not an adequate representative of the class, as her leases do not provide her with a claim. Further, the evidence does not support the currently certified class, as only leases in Texas and Louisiana have been subject to the internal transferring process complained of by Plaintiff; thereby limiting the class definition only to Texas plaintiffs. Plaintiffs have failed to meet the requirements of class certification. Decertification is proper where continuing review establishes individual issues predominate over common issues. Nichols v. Mobile Bd. of Realtors, Inc., 675 F.2d 671, 675-79 (5th Cir. 1982). A decision on certification or decertification is left to the discretion of the district court. Pederson v. Louisiana State Univ., 213 F.3d 858, 866 (5th Cir. 2000). Therefore, Defendant's motion for decertification is GRANTED (docket no. 137). Defendant's motion for summary judgment (docket no. 123) and supplemental motion for summary judgment (docket no. 124) are likewise GRANTED.
Plaintiff's counsel has expressed an intention to propose a new class definition and to submit a new motion for certification. Given that the Court has now decertified the class action, the Court will grant leave to Plaintiff to file a new motion for class certification within sixty (60) days of the receipt of this Order. Plaintiff's counsel should endeavor to explain how Hunter would be an adequate representative, given the Court's reading of her lease language and the evidence as presented, or put forward a separate representative who would qualify as an adequate representative of the newly proposed class. Plaintiff's counsel should also endeavor to explain how the newly proposed class will alleviate the Court's expressed concerns that each individual lease may have to be examined under the current damages theories.