April 23, 2019

Tenth Circuit: Declaratory Judgment Action Moot where Business Interests Sold During Litigation

The Tenth Circuit Court of Appeals issued its opinion in Schell v. OXY USA, Inc. on Monday, December 14, 2015, and modified the opinion on February 9, 2016.

The plaintiff class (appellees and cross-appellants in the Tenth Circuit) consists of approximately 2200 surface owners of Kansas land burdened by oil and gas leases held or operated by OXY, the appellant and cross-appellee. The leases contained a “free gas” clause that, in substance, purported to grant the lessor access to free gas for domestic use. In August 2007, OXY sent letters warning free gas users that their gas may become unsafe to use, either because of high hydrogen sulfide content or low pressure at the wellhead, as a result of the well reaching the end of their productive life.

On August 31, 2007, leaseholders David Schell, Donna Schell, Howard Pickens, and Ron Oliver filed this action on behalf of themselves and others similarly situated, seeking a permanent injunction and a declaratory judgment based on alleged breaches of mineral leases entered into with OXY for failure to supply free usable gas. The district court certified a class of all surface owners of Kansas land burdened by oil and gas leases held or operated by OXY which contain a free gas clause. Plaintiffs and OXY then filed cross-motions for summary judgment. The district court denied OXY’s motion for summary judgment and granted the plaintiffs’ motion for summary judgment. The district court granted the plaintiffs declaratory relief requiring OXY to provide free useable gas under the contract; however, the district court denied the plaintiffs’ motion for a permanent injunction.

Because the district court found that the free gas clauses were ambiguous and interpreted them according to principles of Kansas law, OXY moved to vacate the judgment to permit it to discover extrinsic evidence of the clauses’ meaning. The district court agreed and vacated its judgment. The district court subsequently granted plaintiffs’ resubmitted motion for summary judgment. It also denied plaintiffs’ motion for attorneys’ fees, expenses, and incentive awards. OXY then filed this appeal, and the plaintiffs cross-appealed. After the appeal and cross-appeal were filed, OXY sold all of its interests in the Kansas leases to Merit Hugoton, L.P. (“Merit”). The plaintiff class filed a motion to dismiss the appeal as moot based on this sale. The Tenth Circuit Court of Appeals permitted the appeal to proceed to briefing and oral argument. One week after oral argument, Merit filed a motion to intervene as an appellant and cross-appellee, which was denied by the Tenth Circuit.

The Tenth Circuit concluded the appeal is moot, thereby granting the motion of the plaintiff class to dismiss the appeal, reasoning OXY’s sale of the leases to Merit leads to the conclusion that its conduct cannot be affected by a declaratory judgment concerning the same leases. The Tenth Circuit dismissed OXY’s argument that the leaseholders could sue OXY over its prior conduct during the time when it was operating the wells, considering the fact that allowing OXY to continue the present litigation in order to protect itself from hypothetical unfiled future litigation would render the instant declaratory judgment action a prohibited advisory opinion. Further, the court stated Merit’s request to intervene does not change the conclusion that the declaratory judgment action is moot, in that the record is devoid of any evidence suggesting that a judgment against OXY would bind Merit with respect to the plaintiff class.

Next, the Tenth Circuit determined it was appropriate to dismiss the appeal without vacating the district court’s granting of the plaintiff class’s declaratory judgment action. Although the general rule is to vacate the judgment below when the case becomes moot on appeal, the court found OXY’s intentional conduct (i.e., selling of the leases to Merit) caused the issue over the free gas clauses of the leases to be moot, and that no other entity was more responsible for mooting the controversy, thereby justifying the equitable resolution of leaving in place the district court’s judgment granting the plaintiffs declaratory relief. To act otherwise, the court noted, would permit OXY to benefit from its voluntary act by wiping away a loss.

Lastly, with respect to plaintiffs’ cross-appeal challenging the district court’s denial of their motion for attorneys’ fees, expenses, and an incentive award, the Tenth Circuit determined it had jurisdiction over the matter, as the issue of attorneys’ fees (and related issues) was not moot, despite the mootness of the merits of the appeal. The Tenth Circuit then affirmed the district court’s holding that the plaintiff class has not shown a legally sound basis for an award of attorneys’ fees and other related relief. In so holding, the court found that neither the common-benefit exception to the American Rule nor 28 U.S.C. § 2202 was applicable. Because OXY sold all of the leases to Merit, the common benefit exception does not apply, as an award of attorneys’ fees under the exception would be an impermissible penalty on OXY. The Tenth Circuit affirmed the district court’s statement that there is no independent statutory or contractual basis for attorneys’ fees under § 2202.

Max Montag is a 2016 J.D. Candidate at the University of Denver Sturm College of Law.

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