Pennington v. BHP Billiton Petroleum (Fayetteville) LLC

DAN LARRY PENNINGTON, et al.Individually and on Behalf of all Others Similarly Situated PLAINTIFFS v. BHP BILLITON PETROLEUM (FAYETTEVILLE) LLC,MMGJ ARKANSAS UPSTREAM LLC,and MERIT ENERGY INC. DEFENDANTS

Case No. 4:20-cv-00178-LPR

UNITED STATES DISTRICT COURT EASTERN DISTRICT OF ARKANSAS CENTRAL DIVISION

March 31, 2021

ORDER

Before the Court is Defendants' Motion to Dismiss Plaintiffs' First Amended Complaint under Federal Rules of Civil Procedure 12(b)(2) and (6).¹ Defendants argue that Plaintiffs' claims are time-barred and otherwise insufficient. Defendants alternatively request that the Court strike Plaintiffs' class allegations under Federal Rules of Civil Procedure 12 and 23.² The Court will grant in part, deny in part, and stay in part Defendants' Motion to Dismiss.

Background

For purposes of this Motion, the Court accepts all of the factual allegations in the Amended Complaint as true and views them (and reasonable inferences therefrom) in the light most favorable to Plaintiffs.³ This case is about royalty payment obligations under three variants of oiland gas leases. Plaintiffs are the lessors in the oil and gas leases.⁴ Defendants are the lessees.⁵ The named Plaintiffs are Dan Larry Pennington, Norma J. Bryant, and Aaron Parish Black, as Trustee of the Ralph J. and Reba J. Family Trust and as Trustee of the Reba J. Parish Trust.⁶ Plaintiffs sued Defendants individually and on behalf of three subclasses of others similarly situated.⁷ Defendants are MMGJ Arkansas Upstream, LLC, BHP Billiton Petroleum (Fayetteville), LLC, and Merit Energy Company, LLC. MMGJ is the successor-in-interest to BHP Billiton Petroleum (Fayetteville).⁸

In short, Plaintiffs leased natural gas drilling rights to Defendants in exchange for royalty payments. Plaintiffs allege that Defendants have breached their respective leases by failing to pay royalties in accordance with the leases' respective royalty provisions.⁹ More specifically, Plaintiffs allege that Defendants have underpaid royalty payments owed to them (and others similarly situated) every month since January 1, 2015.¹⁰ Because each named Plaintiff has a different lease, the Court will briefly describe the relevant portions of each lease's royalty provision.

I. The Royalty Provisions

Named Plaintiff Pennington represents himself and the first proposed subclass.¹¹ The Pennington Leases (and others like it) contain an "actual amount received" royalty provision,which provides that the lessee shall:

pay Lessor for gas of whatsoever nature or kind (with all of its constituents), including but not limited to casinghead gas, coal seam gas, coal bed methane, and all other gaseous or vaporous substances, produced and sold and used off the lease premises or used in the manufacture of products therefrom, 1/5 of the gross proceeds for the gas sold, used off the premises, or in the manufacture of the products therefrom, but in no event more than 1/5 of the actual amount received by the Lessee, said payments to be made monthly.¹²

Named Plaintiff Bryant represents herself and the second proposed subclass.¹³ The Bryant Lease (and others like it) contains a "gross proceeds" royalty provision, which provides that the lessee shall:

pay Lessor for gas and oil of whatsoever nature or kind (with all of its constituents), including but not limited to casinghead gas, coal seam gas, coal bed methane, oil, and all other gaseous or vaporous substances, and all pooling and commingling production, products sold or used off the premises or used in the manufacture of products therefrom, twenty percent (20%) of the gross proceeds, with no production or transportation fees deducted, for the gas and oil sold, used off th[e] premises, or in the manufacture of products therefrom, said payments to be made monthly. . . .

Lessee shall not deduct any costs or expenses from such gross proceeds except Lessor's pro rata share of any severance taxes that may become payable out of the Lessor's share of gross production; . . .¹⁴

Finally, named Plaintiff Black represents the "Parish Trust Lease" and the third proposed subclass.¹⁵ The Parish Trust Lease (and others like it) contains the following natural gas royalty provision, which provides that the lessee shall:

pay, or as required by law, contribute to be paid to Lessor a royalty of 3/16th of the proceeds realized by lessee from the sale of all gas, including all substances contained in such gas, but in no event moreor less than the actual amount received by Lessee, less applicable taxes, said payments to be made monthly. If such gas is used by Lessee off the leased premises or used for the manufacture of casinghead gasoline or other products, Lessee shall pay Lessor 3/16th of the market value at the well for gas so used.¹⁶

The Parish Trust Lease (and others like it) also contains the following "Marketing Enhancement Clause":

Lessor's royalty shall never bear or be charged with, directly or indirectly, any part of the costs or expenses of production, gathering, dehydration, compression, transportation, manufacturing, processing, treating, or marketing of oil and/or gas produced from the leased premises. There shall be no deductions from Lessor's royalty for costs and expenses associated with the construction, operation, or depreciation of any pipeline, gathering system, plant or other facility or equipment for processing and /or treating oil and /or gas or their constituents produced from the leased premises. However, any such costs which result in enhancing the value of the marketable oil, gas or other products to receive a better price may be deducted from Lessor's share of production so long as they are based on Lessee's actual cost of such enhancements. However, in no event shall Lessor receive a price that is less than, or more than, the price received by Lessee.¹⁷

II. The Process and Payments

Despite the differences in the leases and their respective royalty payment provisions, Plaintiffs allege that Defendants breached the respective leases in the same manner and through the same course of events.¹⁸ Indeed, each of the named Plaintiffs originally entered into oil and gas leases with Chesapeake Exploration, LLC.¹⁹ On or about January 1, 2011, Chesapeake assigned its interest in each of the leases to BHP Billiton Petroleum (Fayetteville) and BHPPetroleum (Arkansas Holdings) LLC.²⁰ "BHP Fayetteville and BHP Arkansas owned the lessee's interests . . . between January 1, 2011 and July 1, 2018, at which time BHP Fayetteville and BHP Arkansas assigned their interests . . . to Merit and/or MMGJ Upstream."²¹ Merit and/or MMGJ Upstream have owned these interests from July 1, 2018 through the present.²²

"With the consent of Defendants," SEECO, Inc. has operated Plaintiffs' wells and "paid royalties to [Plaintiffs] on behalf of the Defendants with respect to the natural gas produced and sold from" Plaintiffs' wells.²³ Since January 1, 2015, Plaintiffs have "received royalties from SEECO, Inc., on behalf of one or more of the Defendants, based on the production of natural gas from wells subject to" the respective royalty agreements.²⁴ The process by which Plaintiffs have been receiving their royalty payments is as follows.

Since January 1, 2015, SEECO has had an agreement with DeSoto Gathering Company, LLC, "in which DeSoto charged SEECO certain gathering, treating, and compression fees in exchange for providing gathering, storing, separating, treating, dehydrating, compressing, processing, transporting, and marketing services ('midstream services') for the natural gas produced" from Plaintiffs' wells.²⁵ "After the midstream services [are] provided by DeSoto to transform the raw natural gas into a marketable form," all of the natural gas produced from Plaintiffs' wells is "transferred to SWN Energy Services Company, LLC ('SES')."²⁶ Once SESreceives the marketable gas, it sells "the natural gas to third parties . . . ."²⁷ SES "then remits the proceeds to SEECO based on a weighted average sales price ('WASP') calculated by SES."²⁸ Finally, SEECO pays Plaintiffs their respective royalties after it deducts from the WASP "the fees charged by DeSoto for the midstream services required to transform the raw gas into a marketable product . . . ."²⁹

Plaintiffs allege that, "[i]n the calculation and payment of royalties to [Plaintiffs] . . . SEECO did not pay royalties, on behalf of the Defendants, based upon the gross proceeds received on the sale of natural gas to third party purchasers as required by" the respective royalty agreements.³⁰ Plaintiffs allege that "SEECO improperly deducted various post-production costs from the sales price of the natural gas in its calculation and payment of royalties to" Plaintiffs and all of the proposed subclass members.³¹

Discussion

On June 3, 2020, Defendants filed the instant Motion to Dismiss.³² Defendants argue that dismissal is appropriate under Rule 12(b)(2) and (6).³³ Alternatively, Defendants assert that Plaintiffs' class claims should be stricken from the Amended Complaint.³⁴ Because this is a diversity jurisdiction case, the Court will apply the substantive law of the forum state—Arkansas.³⁵

I. Rule 12(b)(2)

Defendants' personal jurisdiction argument is only about Merit. In order to survive a motion to dismiss based on a lack of personal jurisdiction, the party asserting jurisdiction must make a prima facie showing of personal jurisdiction.³⁶ Defendants assert that the Amended Complaint "fails to establish that this Court has general or specific jurisdiction over Merit, a limited liability company organized under the laws of Delaware."³⁷ Defendants argue that the Amended Complaint "contains no allegations that Merit did anything in Arkansas with regards to Plaintiffs that establishes specific jurisdiction."³⁸

The Amended Complaint alleges that "[t]his Court has personal jurisdiction over Merit and MMGJ Upstream, because such defendants have concluded substantial business activities in the State of Arkansas . . . ."³⁹ The Amended...