June 16, 2019

Colorado Court of Appeals: Lessee of Oil and Gas Interest Must Incur Post-Production Costs Where Lease is Silent

The Colorado Court of Appeals issued its opinion in Patterson v. BP America Production Co. on Thursday, March 12, 2015.

Class Action—Moratory Interest Request—CRS § 5-12-102(1)(a) and (b)—Fraudulent Concealment and Equitable Tolling—Jury Instructions.

In the early 1970s, named plaintiffs and approximately 4,000 royalty owners (collectively, Royalty Owners) entered into lease agreements with BP America Production Company (BP) to be paid royalties in exchange for natural gas extracted from their wells. The lease agreements provided that BP would pay Royalty Owners “1/8 of the proceeds of the market value of such gas at the mouth of the well; if said gas is sold by [BP], then as royalty 1/8 of the proceeds of the sale thereof at the mouth of the well.” Post-production costs were not expressly authorized as being deductible from royalty payments.

In the 1980s, BP changed how it calculated royalties and started employing a netback methodology whereby BP deducted a proportionate share of the post-production costs. The royalty statements did not disclose these deductions.

In 2003, Royalty Owners sued BP for breach of contract, alleging underpayment of royalties between January 1, 1986 and December 1, 1997. A jury found that BP breached the lease agreements by underpaying royalties and that BP fraudulently concealed the underpayments, thereby tolling the applicable statute of limitations. The jury awarded Royalty Owners $7,941,809.23 in damages. The district court amended the judgment to add $32,273,817 in statutory prejudgment interest, pursuant to CRS § 5-12-102(1)(b).

Royalty Owners appealed the district court’s pretrial grant of BP’s CRCP 56(h) motion and its denial of moratory interest. CRS § 5-12-102(1)(a) codifies the common law concept of moratory interest. Moratory interest is intended to be compensatory, not punitive. To obtain moratory interest, a plaintiff must demonstrate the defendant’s gain or benefit realized on the withheld money by a preponderance of the evidence. The Court of Appeals found no evidence or discernible means to calculate any such gain or benefit by BP on the underpaid royalty money. Therefore, the district court’s grant of the motion denying moratoryinterest was affirmed.

On cross-appeal, BP contended that the district court erred by denying its motions for a directed verdict and judgment notwithstanding the verdict because (1) Royalty Owners could not prove their fraudulent concealment and equitable tolling claims for all class members; and (2) the evidence demonstrated that Royalty Owners’ gas was undisputedly marketable at the well and thus the post-production deductions from royalties were proper. In reviewing the record and the evidence in the light most favorable to Royalty Owners, the Court concluded the evidence was sufficient to send the issue of fraudulent concealment to the jury and that reasonable jurors could find that Royalty Owners were ignorant of BP’s concealed royalty deductions, relied on the concealment, and were unable, using reasonable diligence, to discover the concealment.

Colorado law provides that where, as here, royalty agreements are silent on the allocation of post-production costs, the “implied covenant to market must be considered in determining the rights and obligations of the parties.” This covenant obligates BP, not Royalty Owners, to make the gas marketable, and BP must incur those costs. If, however, the gas is marketable at the wellhead, and post-production costs merely enhance the value of the gas, those costs may be shared. Marketability at the wellhead is a question of fact. The Court concluded that a reasonable person could determine that the wellhead was not the first market for gas extracted from the wells during the time period at issue.

BP also argued that it was error to decline to instruct the jury that “[i]f a person signs a contract without reading it, that person is barred from claiming he or she is not bound by what it says.” The Court disagreed, holding that this instruction would have only confused jurors, incorrectly informed them on the issues in the case, and improperly directed them as to the proper weight to give the contracts.

BP further argued it was error to deny its request to decertify the class. The Court found that the district court rigorously analyzed the evidence and did not abuse its discretion in concluding that the questions of law or fact common to the members of the class predominated over any questions affecting only individual members. The judgment was affirmed.

Summary and full case available here, courtesy of The Colorado Lawyer.

Print Friendly, PDF & Email

Speak Your Mind