Taylor v. Chesapeake Operating, Inc.

DANNIS R. TAYLOR, et al., Plaintiff, v. CHESAPEAKE OPERATING, INC., Defendant.

Case No. CIV-18-565-D

UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF OKLAHOMA

November 20, 2019

ORDER

This matter comes before the Court on Defendant Chesapeake Operating, Inc.'s Motion to Dismiss [Doc. No. 23]. Plaintiffs have filed a response in opposition [Doc. No. 31], to which Defendant has replied [Doc. No. 32]. Plaintiffs have also filed a Motion for Leave to Amend their complaint as needed [Doc. No. 33]. The matter is fully briefed and at issue.

BACKGROUND

Defendant operates wells on Plaintiffs' land. Response [Doc. No. 31], at 4. Pursuant to the contract at issue, Defendant is "to operate the wells and account for revenue and costs, make payments, and provide information to owners of interests in the wells on [Plaintiffs'] property." Id. Plaintiffs allege to have been underpaid royalties. Defendant contends this is a simple breach of contract claim and nothing more. Motion at 3. Plaintiffs, however, maintain this action sounds in fraud. They allege Defendant engaged in a fraudulent scheme, involving hundreds of acts of fraud over the course of several years, by which Plaintiffs were deceived and underpaid. Id. at 5

STANDARD OF DECISION

To survive a motion to dismiss under Rule 12(b)(6), "a complaint 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 Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007)). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Iqbal, 556 U.S. at 678. The "plausibility standard" announced in Twombly and Iqbal is not a "heightened standard" of pleading, but rather a "refined standard." Khalik v. United Air Lines, 671 F.3d 1188, 1191 (10th Cir. 2012) (citing Kansas Penn Gaming, LLC v. Collins, 656 F.3d 1210, 1214 (10th Cir. 2011)). Under the "refined standard," plausibility refers "to the scope of the allegations in the complaint: if they are so general that they encompass a wide swath of conduct, much of it innocent, then the plaintiffs have not nudged their claims across the line from conceivable to plausible." Khalik, 671 F.3d at 1191; see also Robbins v. Oklahoma, 519 F.3d 1242, 1247 (10th Cir. 2008). Further, the Tenth Circuit has noted that "[t]he nature and specificity of the allegations required to state a plausible claim will vary based on context." Khalik, 671 F.3d at 1191.

Claims sounding in fraud must be pled with particularity, under a heightened pleading standard. See Fed. R. Civ. P. 9(b). The particularly requirement of Rule 9(b) applies to claims of mail and wire fraud under the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. §§ 1961-68 ("RICO"). See Tal v. Hogan, 453 F.3d 1244, 1263 (10th Cir. 2006).

DISCUSSION

Plaintiffs' Amended Complaint [Doc. No. 20] sets forth six causes of action. Plaintiffs' claims are as follows: (1) RICO violations; (2) unjust enrichment; (3) conversion; (4) beach of lease; (5) breach of overriding royalty interest; and, (6) actual and constructive fraud, and negligent misrepresentation. Defendant argues that because Plaintiffs lack standing to bring RICO claims, this Court lacks subject matter jurisdiction and should remand the remaining state law claims. In the alternative, Defendant seeks dismissal of counts one, two, three, and six of Plaintiffs' Amended Complaint (referred to as the first, second, third, and sixth causes of action), for failure to state a claim upon which relief can be granted.

I. Plaintiff's RICO allegations suffice to survive a motion to dismiss.

Defendant argues (1) Plaintiffs fail to show they were injured by the alleged RICO violations; (2) the predicate act of wire fraud is not pled with particularity; (3) the predicate act of mail fraud is not pled with particularity; (4) there is no allegation of a pattern of racketeering activity; and, (5) Plaintiffs fail to plead an enterprise.

RICO provides a private cause of action for "[a]ny person injured in his business or property by reason of a violation of section 1962 of this chapter." 18 U.S.C. § 1964(c). Plaintiffs allege violations of § 1962(c), which makes it "unlawful for any person employed by or associated with any enterprise engaged in, or the activities of which affect, interstate . . . commerce, to conduct or participate, directly or indirectly, in the conduct of such enterprise's affairs through a pattern of racketeering activity."

To survive a Rule 12(b)(6) motion to dismiss a § 1962(c) claim, Plaintiffs must allege that Defendant "(1) participated in the conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity." Tal, 453 at 1244. "[R]acketeering activity" is defined to include several predicate acts, including the two alleged here—mail fraud and wire fraud. In addition to these elements, Plaintiffs must also show proximate causation between the RICO predicate act and the injury. Hemi Group, LLC v. City of New York, 559 U.S. 1, 8 (2010).

a. Plaintiffs allege more than simple breach of contract.

Defendant argues that because the injury resulting from the breach of contract claim and the alleged RICO violation are the same, Plaintiffs lack standing to bring a claim under RICO.

"No distinct 'racketeering injury' requirement is necessary to maintain a private treble damages action under RICO." Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 495-96 (1985). If the "defendant engages in a pattern of racketeering activity in a manner forbidden by section 1962 and the racketeering activities injured the plaintiff in his business or property," that is enough. Id. "[T]he plaintiff only has standing if, and can only recover to the extent that, he has been injured in his business or property by the conduct constituting the violation." Id. at 496.

Defendant's position that Plaintiffs lack standing because "they were damaged not by supposed racketeering activity, but instead by breach of contract, an underpayment of royalty," is contrary to binding precedent. Reply at 10. The Supreme Court has disavowed any requirement that a separate racketeering injury be alleged to maintain a RICO claim.

Further, at this stage in the proceedings, Plaintiffs have sufficiently pleaded the requisite proximate cause. To this end, Plaintiffs allege that the predicate mailings transmitted the fraudulent royalty statements, as well as the related royalty underpayments. PAC at ¶¶ 18,19,30,45. The harm alleged is concrete and ascertainable. Id. at ¶¶ 31,34,40,37. Plaintiffs allege they were also denied access to the information they needed to accurately calculate the amount of money due to them. Id. at ¶¶ 44,83,68.

Plaintiffs allege more than a simple breach of contract claim. They assert Defendant entered into an unlawful agreement with three other entities to purposefully underpay and deceive lessors. Id. at ¶¶ 43-45. Thus, beyond the terms of their contracts, Plaintiffs allege Defendant engaged in fraud to disguise the fact that Defendant was unlawfully profiting at Plaintiffs' expense. PAC at ¶¶ 43. These allegations—connected to the leases at issue as they may be—specifically refer to Defendant's intent to defraud and deceive Plaintiffs. They "go beyond a mere breach of contract." See Jeter v. Wild W. Gas, LLC, No. 12-CV-411-TCK-PJC, 2015 WL 5970992, at *13 (N.D. Okla. Oct. 14, 2015) (rejecting the argument that causation is lacking because the RICO allegations are merely "repackaged" contract claims).

The Court finds Plaintiffs, at this stage of the proceedings, have done enough to allege the required proximate causation under RICO.

b. Plaintiffs allege the predicate acts of mail and wire fraud with sufficient particularity to survive a motion to dismiss.

Defendant asserts that Plaintiffs fail to plead the predicate acts with particularity. The two predicate acts identified in this case—mail fraud and wire fraud—were also at issue inTal v. Hogan, 453 F.3d 1244 (10th Cir. 2006), where the court of appeals explained as follows:

To establish the predicate act of mail fraud, [Plaintiffs] must allege "(1) the existence of a scheme or artifice to defraud or obtain money or property by false pretenses, representations or promises, and (2) use of the United States mails for the purpose of executing the scheme." Bacchus Indus., Inc. v. Arvin Indus., Inc., 939 F.2d 887, 892 (10th Cir. 1991); see United States v. Kennedy, 64 F.3d 1465, 1475 (10th Cir. 1995). "The elements of wire fraud are very similar, but require that the defendant use interstate wire, radio or television communications in furtherance of the scheme to defraud." BancOklahoma Mortgage Corp., 194 F.3d at 1102 (internal quotation omitted).

[T]he common thread among ... these crimes is the concept of "fraud." Actionable fraud consists of (1) a representation; (2) that is false; (3) that is material; (4) the speaker's knowledge of its falsity or ignorance of its truth; (5) the speaker's intent it be acted on; (6) the hearer's ignorance of the falsity of the representation; (7) the hearer's reliance; (8) the hearer's right to rely on it; and (9) injury.

Id. at 1103. Failure to adequately allege any one of the nine elements is fatal to the fraud claim. Tal, 453 F.3d at 1263. Further, "[a] plaintiff asserting '[mail] fraud must also identify the purpose of the mailing within the defendant's fraudulent scheme.'" Id. (quoting McLaughlin v. Anderson, 962 F.2d 187, 191 (2d Cir. 1992)). The particularity requirement of Rule 9(b) clearly applies to these fraud claims. See Tal, 453 F.3d at 1263; see also Robbins v. Wilkie, 300 F.3d 1208, 1211 (10th Cir. 2002); accord Apache Tribe of Okla. v. Brown, 966 F. Supp. 2d 1188, 1194 (W.D. Okla. 2013) (DeGiusti, J.).

At this early stage in the proceedings, the Court finds Plaintiffs' Amended Complaint sets forth...