Ulibarri v. Southland Royalty Co.

209 F.Supp.3d 1227

Gerald ULIBARRI, Plaintiff,

v.SOUTHLAND ROYALTY CO., LLC, Defendant.

No. CIV 16-00215 RB/WPL

United States District Court, D. New Mexico.

Filed July 20, 2016

A. Michael Chapman, Newbold Chapman & Geyer, P.C., Durango, CO, George Barton, Law Offices of George Barton, P.C., Kansas City, MO, Robert G. Harken, Law Offices of George A. Barton, P.C., Overland, KS, for Plaintiff.

Sharon Theresa Shaheen, J. Scott Hall, Lucas P. Conley, Montgomery & Andrews, PA, Santa Fe, NM, for Defendant.

MEMORANDUM OPINION AND ORDER

ROBERT C. BRACK, UNITED STATES DISTRICT JUDGE

This matter is before the Court on Plaintiff's Motion to Certify Dispositive Questions of Law to the New Mexico Supreme Court, filed on May 2, 2016 (Doc. 15). Having considered the submissions of counsel and relevant law, the Court will DENY Plaintiff's motion.

I. Background

This putative class action arises out of a disagreement between Plaintiff, who owns a royalty interest in natural gas wells in New Mexico, and Defendant, a company that produces natural gas pursuant to lease agreements with Plaintiff. Defendant incurs certain costs to put the natural gas into a condition in which Defendant can sell it to third party buyers; these costs are called "post-production costs." Plaintiff argues that Defendant has an implied duty under the "marketable condition rule" to bear these post-production costs without deducting such costs from Plaintiff's royalties. Defendant has been deducting a proportionate share of these post-production costs, including a share of a tax called the natural gas processors tax [NGPT], from Plaintiff's royalty payments. Plaintiff asks this Court to certify questions to the New Mexico Supreme Court to decide the parties' obligations with respect to the post-production costs and the tax specifically.

Plaintiff, a resident and citizen of New Mexico, owns an interest in natural gas wells located in New Mexico. (Compl. ¶ 3.) Defendant, a Delaware limited liability company with its principal place of business in Texas, produces the natural gas from the wells and is responsible for putting the gas into a marketable condition to sell to third party purchasers. (Id. ¶ 4; Docs. 15 at 2; 16 at 3.) Since January 1, 2015, Defendant has contracted with a third party company—Enterprise Field Services, LLC [Enterprise]—to process the natural gas Defendant produces from the wells in order to make the gas marketable. (Compl. ¶ 20; Doc. 15 at 2.) Plaintiff is not a party to the contract between Defendant and Enterprise. (Compl. ¶ 20.) Defendant pays Enterprise a proportionate share of post-production costs (those costs Enterprise incurs in the gathering, extraction, dehydration, compression, and other services it renders in order to process the gas and place it in marketable condition). (Id. at ¶ 27; Doc. 15 at 3.)

One of the costs Defendant shares in is a state privilege tax. Pursuant to New Mexico's Natural Gas Processors Tax Act [the Act], the state levies "a privilege tax on processors for the privilege of operating a natural gas processing plant in New Mexico." N.M. Stat. Ann. § 7–33–4(A) (1978) ; see also § 7-33-1. This tax is known "as the ‘natural gas processors tax.’ " § 7–33–4(A). A " ‘processor’ means a person who operates a natural gas processing plant ...." § 7-33-2(I). Enterprise, the company that processes the natural gas for Defendant, is a processor under the Act and pays the NGPT to the state. (Compl. ¶ 20; Doc. 15 at 2.) As part of its contract with Enterprise, Defendant pays a proportionate share of the NGPT. (Compl. ¶ 21; Doc. 15 at 2.)

Defendant then deducts a proportionate share of both the post-production costs and the NGPT from the royalties it pays to Plaintiff. (Compl. ¶¶ 22, 30; Doc. 15 at 3.) Plaintiff alleges that his Royalty Agreements with Defendant do not authorize such deductions. (Compl. ¶ 17; Doc. 15 at 2.) Moreover, Plaintiff contends that Defendant has "an implied duty to make [gas from the wells] a ‘marketable product’ [by] gathering, compressing, dehydrating, and otherwise treating the" gas without passing that cost onto Plaintiff. Davis v. Devon Energy Corp. , 147 N.M. 157, 218 P.3d 75, 78 (2009). (See also Compl. ¶¶ 27, 29, 31.) Plaintiff further believes that the state privilege tax, Section 7–33–4(A), only permits payment by those who qualify as "processors" under the Act, and owners of interest in natural gas are not subject to payment of or liability for the tax. (Compl. ¶ 23; Doc. 15 at 3.) Defendant denies any wrongdoing and asserts that there is no support for Plaintiff's position. (See Doc. 21.)

Plaintiff seeks to have two questions certified to the New Mexico Supreme Court. For purposes of the Court's analysis, the first question is:

1. Whether under the marketable condition rule, [Defendant] has the implied duty to market the natural gas produced from [Plaintiff]'s wells, which requires [Defendant] to bear the costs in placing the natural gas in a marketable condition without deducting such costs from [Plaintiff]'s royalties?

(Doc. 15 at 1.) Second, Plaintiff asks:

2. Whether under New Mexico's Natural Gas Processors Tax Act, ... Defendant ... is permitted to deduct a proportionate share of the amounts it paid for New Mexico's natural gas processors tax in its calculation and payment of royalties to [Plaintiff]?

(Id. ) Plaintiff believes he has met all prerequisites for certification pursuant to N.M. Stat. Ann. § 39–7–4 (1978) and N.M. R. App. P. 12-607(A)(1)(a) (2004)). (Doc. 15 at 3–5.) Defendant disagrees and asserts that not only does Tenth Circuit precedent prevent this Court from certifying these questions to the supreme court, even if it could, the issue is not yet ripe for review. (Doc. 21 at 3–8, 11–14.)

The Tenth Circuit precedent Defendant refers to is the decision in Elliott Industries Ltd. Partnership v. BP America Product ion Co. , 407 F.3d 1091 (10th Cir.2005). In Elliott , "the Tenth Circuit addressed various obligations that oil-and-gas lessors owe the royalty interest owners on their leases" and found that the marketable condition rule is not supported by New Mexico case law. Anderson Living Tr. v. WPX Energy Prod., LLC (ALT v. WPX) , 27 F.Supp.3d 1188, 1219–20 (D.N.M.2014). Since the Tenth Circuit decided Elliott , Plaintiff asserts, the New Mexico Supreme Court has issued three decisions that call Elliott into question. (Doc. 15 at 8–9 (discussing Davis , 218 P.3d 75 ; ConocoPhillips Co. v. Lyons (Lyons ), 299 P.3d 844, 860 (N.M.2012) ; Ideal v. Burlington Res. Oil & Gas Co. LP , 148 N.M. 228, 233 P.3d 362 (2010) ).) Were this Court to follow Elliott , Plaintiff maintains, it would "directly contradict" these recent supreme court decisions "and violate the fundamental principles of the Erie doctrine ...." (Id. at 5 (citing Erie R. Co. v. Tompkins , 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938) ).) Plaintiff believes the only way around such a result is to certify these questions to the New Mexico Supreme Court. (Id. )

This is the third such motion brought before this district court. Judge Browning denied a motion to certify a question about the marketable condition rule in Anderson Living Trust v. ConocoPhillips Co. (ALT v. Conoco II ), ¹ No. 12–CV–00039 JB/SCY, 2013 WL 11549178 (D.N.M. Sept. 18, 2013), and Judge Johnson denied a similar motion in Anderson Living Trust v. Energen Resources Corp. (ALT v. Energen I ), No. 13–CV–00909 WJ/CG, 2014 WL 11515640 (D.N.M. Nov. 25, 2014). It is no coincidence that this issue is being raised now before a third judge, because there are connections between the three cases: Defendant "is a successor-in-interest to Energen Resources Corporation [, t]he leases and wells at issue in the instant case are a subset of the same leases and wells at issue in ALT v. Energen [, and] Plaintiff and the putative class members in the instant case are also putative class members in ALT v. Energen. " (Doc. 21 at 4 (citing Doc. 16 at 5).) Additionally, counsel for the plaintiffs in ALT v. Conoco are almost identical to counsel for plaintiffs in ALT v. Energen. It will come as no surprise to Plaintiff, then, that the Court denies his motion for the same reasons as those so persuasively articulated by Judges Browning and Johnson in their earlier opinions.

II. Legal Standard

"Under the Uniform Certification of Questions of Law Act, the New Mexico Supreme Court may answer a question of law certified to it if the ‘answer may be determinative of an issue in pending litigation in the certifying court and there is no controlling appellate decision, constitutional provision or statute of this state.’ "

Hartford Ins. Co. of the Midwest v. Cline , 367 F.Supp.2d 1342, 1344 (D.N.M.2005) (quoting § 39–7–4 ). "In addition to the question of law to be answered ..., an order of certification must contain[ ] ‘the facts relevant to the question, showing fully the nature of the controversy out of which the question arose ....’ " Hartford Ins. Co. of the Midwest , 367 F.Supp.2d at 1345 (quoting § 39-7-7(A)(2)); citing Rule 12-607). "The intent of the certification of facts and the determinative answer requirements is that [the New Mexico Supreme Court] avoid rendering advisory opinions." Id. (quoting Schlieter v. Carlos , 108 N.M. 507, 775 P.2d 709, 710 (1989) ). "The submitted facts must be sufficiently nonhypothetical and evidentiary." Id. (citing Schlieter , 775 P.2d at 711 ).

"Federal courts have the option of determining what a state court would do if confronted with the same issue, See Erie ..., 304 U.S. [at] 78, 58 S.Ct. 817, ... or of certifying the question to the state appellate court for review, See Allstate v. Stone , 116 N.M. 464, 863 P.2d 1085, 1086 (1993) (‘This matter comes before us by way of certification from the United States District Court for the District of New Mexico.’)." Farm Bureau Mut. Ins. Co. v. Jameson , 472 F.Supp.2d 1272, 1280 (D.N.M.2006) (citing Lehman Bros. v. Schein , 416 U.S. 386, 390–91, 94 S.Ct. 1741, 40 L.Ed.2d 215 (1974) ( "The decision to...