Citations
- 952 F. Supp. 2d 979
Full opinion text
MEMORANDUM OPINION
JAMES 0. BROWNING, District Judge.
THIS MATTER comes before the Court on: (i) Defendant ConocoPhillips Company’s Motion to Dismiss Plaintiffs’ First Amended Complaint for Underpayment of Oil and Gas Royalties, filed March 5, 2012 (Case No. CIV 12-0039 Doc. 11)(“CP MTD”); (ii) and Defendants WPX Energy Production, LLC and WPX Energy Rocky Mountain, LLC’s Motion to Dismiss Plaintiffs Second Amended Complaint for Underpayment of Oil and Gas Royalties, filed March 5, 2012 (Case No. CIV 12-0040 Doc. 18)(“WPX MTD”). Because the Plaintiffs named in the First Amended Complaint for Underpayment for Oil and Gas Royalties, filed in state court on December 5, 2011, filed in federal court on January 12, 2012 (Case No. CIV 12-0039 Doc. 1-1)(“FAC”) — James H. Anderson Living Trust (through James Anderson as trustee), Pritchett-Living Trust (through April Pritchett as trustee), Cynthia W. Sadler, Shirley L.- Scanlon Living Trust (through Shirley L. Scanlon, as trustee), and Robert Westfall — and the Plaintiffs named in the Second Amended Complaint, filed February 16, 2012 (Case No. CIV 12-0040 Doc. 10)(“SAC”) — James H. Anderson Living Trust (through James Anderson as trustee), Pritchett Living Trust (through April Pritchett as trustee), Cynthia W. Sadler, and Robert Westfall — are nearly identical and have made nearly identical allegations against the Defendants — ConocoPhillips Company, LLC, and WPX Energy Production, LLC, f/k/a WPX Energy San Juan LLC, Williams Production Company, LLC, and WPX Energy Rocky Mountain, LLC, fik/a Williams Production RMT Company, LLC — in both matters, and the Defendants have made nearly identical motions to dismiss the respective complaints against them, the Court will address both parties’ motions together in this Memorandum Opinion. Any differences in fact or law which exist between the two matters will be noted.
The Court held-a hearing on both motions to dismiss on June 19, 2012. The primary issues are: (i) whether the Plaintiffs have sufficiently alleged that the Defendants are in breach of the parties’ oil and gas leases; (ii) whether the Plaintiffs have stated a claim for fraud that can survive notwithstanding the parties’ contractual relationship; (iii) whether the Plaintiffs have sufficiently alleged that the Defendants breached the implied duty to market hydrocarbons as recognized by New Mexico.law; (iv) whether the Plaintiffs have alleged a plausible claim for relief under the New Mexico Proceeds Payment Act, N.M.S.A.1978, §§ 70-10-1 to 70-10-5 and the Oil. and Gas Conservation Act, Colo.Rev.Stat. §§ 34-60; (v) whether the Plaintiffs may allege a claim for bad-faith breach of contract notwithstanding the parties’ contractual relationship; (vi) whether the Plaintiffs may allege a claim for unjust enrichment, and seek a declaratory judgment and an injunction against the Defendants’ actions, notwithstanding the parties’ contractual relationship; (vii), whether the Plaintiffs may allege a claim for conversion against the Defendants notwithstanding the parties’ contractual relationship; and (viii) whether the Court should apply the Supreme Court of the United States’ jurisprudence regarding rule 8(a) of the Federal Rules of Civil Procedure to the Plaintiffs’ class-action allegations and dismiss the Plaintiffs’ class-action allegations. The Court grants in part and denies in part the CP MTD and WPX MTD. The Court will not dismiss the Plaintiffs’ first cause of action, because the Plaintiffs have sufficiently alleged that the parties are in a contractual relationship and that the Defendants have breached the terms of the parties’ leases. The Plaintiffs have plausibly alleged that the Defendants’ reporting and royalty calculation conduct breaches the Defendants’ duty of good faith and fair dealing, implied at law into every contract in New Mexico.' The Court will not, therefore, dismiss the Plaintiffs’ second cause of action to the extent it is a claim for a breach of the duty of good faith and fair dealing in contract. The Court dismisses the Plaintiffs’ second cause of action to the extent it asserts a stand-alone claim of fraud in tort. The Court similarly dismisses the Plaintiffs’ seventh cause of action, because the parties’ leases preclude the Plaintiffs from recovering in tort for the breach of a duty that their leases cover. The Court will dismiss the Plaintiffs’ third cause'of action, because New Mexico law does not recognize that the Defendants’ conduct alleged in the FAC and SAC breaches the Defendants’ implied duty to market hydrocarbons. The Court will dismiss the Plaintiffs’ fourth cause of action in part. The Plaintiffs may proceed on their theory that the Defendants’ have failed to make timely payments as required under the Proceeds Payment Act, but may not proceed under Colorado’s' Oil and Gas Conservation Act in this Court. The Court will not dismiss the Plaintiffs’ fifth cause of action because the Plaintiffs’ have sufficiently alleged that the Defendants breached their duties under the leases, and as required by the covenant of good faith and fair dealing, in bad faith. The Court will dismiss the Plaintiffs’ sixth cause of action in part. The Plaintiffs may not recover in equity for conduct that allegedly breaches the parties’ leases; the Court, therefore, dismisses the Plaintiffs’ claim for unjust enrichment. The Court also dismisses the Plaintiffs’ claim for injunctive relief, because the Plaintiffs have alleged only that the Defendants’ conduct will cause them monetary harm in the future, and monetary harm is not irreparable. The Plaintiffs may seek a declaratory judgment proscribing the Defendants’ future conduct under the leases. Lastly, the Court will not dismiss the Plaintiffs’ class-action allegations because these allegations do not purport to state a claim for relief, and, even if they did, the Plaintiffs’ have made allegations, sufficient to demonstrate that they may plausibly bring this matter as a class action.
FACTUAL BACKGROUND
This matter arises from a dispute over the royalty payments that the Defendants, producers of oil and gas in New Mexico and Colorado, and working interest holders on oil and gas leases belonging to the Plaintiffs, owe to the Plaintiffs, royalty interest holders on the leases.
The San Juan Basin, one of the largest natural gas producing fields located in northwest New Mexico and southwest Colorado, was originally developed in the early 1950’s by El Paso Natural Gas Company____The natural gas produced in the San Juan Basin is conventional gas which contains methane (natural gas) and entrained natural gas liquids (“NGLs”), such as ethane and butane. In order to make the gas safe to enter the interstate pipeline, the NGLs must be removed from the gas stream.
Elliott Indus. Ltd. P’ship v. BP Am. Prod. Co., 407 F.3d 1091, 1099 (10th Cir.2005)(“Elliott Indus.”). As this matter comes before the Court on a Motion to Dismiss, the Court will assume that all facts in the Plaintiffs’ complaints are true. See Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)(stating that, to survive a motion to dismiss, “[factual allegations must be enough to raise a right to relief above the speculative level ... on the assumption that all the allegations in the complaint are true (even if doubtful in fact)”).
The Plaintiffs in this matter all own interests in hydrocarbons derived from wells in the States of New Mexico and Colorado. See FAC ¶¶ 1-7, at 1-2; SAC, ¶¶ 1-4, at 1-2. The Plaintiffs reside in the southwest, in the states of Utah (Anderson Living Trust), Colorado (Pritchett Living Trust), Texas (Sadler), and New Mexico (Scanlon Living Trust and Robert West-fall). See FAC ¶¶ 1-7, at 1-2; SAC ¶¶ 1-4, at 1-2. ConocoPhillips and WPX Energy Production, LLC, f/k/a WPX Energy San Juan LLC, Williams Production Company, LLC, and WPX Energy Rocky Mountain, LLC, f/k/a Williams Production RMT Company, LLC (“WPX”) are producers and vendors of conventional natural gas, originating from the Fruitland coal formation; coalbed methane (“CBM”) natural gas; and other petroleum hydrocarbons from wells in which the Defendants own lease-hold interests. See FAC ¶ 8, at 2-3; SAC ¶ 9, at 3. “Plaintiffs each own a non-cost bearing interest in the revenues derived from the production and sale of hydrocarbons pursuant to the terms of oil and gas leases owned or partially owned by” the Defendants in the “subject wells,” save for Scanlon Living Trust, which owns no interest in WPX lease-hold interests. FAC ¶ 9, at 3; SAC ¶ 10, at 3. The “subject wells” are “all wells in the States of New Mexico and Colorado in which [the Defendants own] all or a portion of the oil and gas leases under which non-cost bearing, royalty and/or overriding royalty payments are/were owed, and which produce or produced hydrocarbons.” FAC ¶ 10, at 3; SAC ¶ 11, at 3. The Plaintiffs bring this action as a class against the Defendants on behalf of all owners of “noncost bearing” royalty interests in the subject wells. FAC ¶ 12, at 4; SAC ¶ 13, at 4.
The Plaintiffs, or their predecessors, acquired their interests in the hydrocarbon revenues from the subject wells through executing oil and gas mining leases and/or permits to Defendants. See FAC ¶ 10, at 3; SAC ¶ 11, at 3. Under the leases, the Defendants owe the Plaintiffs a “duty to pay royalties on all hydrocarbons” for the value or price which the Defendants do or should receive from the “arm’s length” sale of the hydrocarbons. FAC ¶ 11, at 3; SACT12, at 3“4. The leases give the Plaintiffs a right to royalties in the “drip condensate,” a liquid product which is recovered during the Defendants’ oil and gas mining processes. FAC ¶ 26, at 9; SAC ¶ 28, at 9. The leases do not provide for the Defendants to calculate the Plaintiffs’ royalty payments using the average sale price of a mixture of hydrocarbons from wells in which the Plaintiffs own a royalty interest and other wells in which the Plaintiffs do not own royalty interests. See FAC ¶ 11, at 3-4; SAC ¶ 12, at 3-4.
The Defendants have not credited the Plaintiffs with the revenue derived from the drip condensate. See FAC ¶ 27, at 9; SAC ¶ 29, at 9-10. Currently, the Defendants calculate the Plaintiffs’ royalty interests on the sale price received from the Defendants’ affiliated intermediaries for hydrocarbons from wells in which the Plaintiffs own royalty interests, mixed with hydrocarbons from other wells in which the Plaintiffs do not own royalty interests. See FAC ¶¶ 31-32, at 10-11; SAC ¶¶133-34, at 11. The Defendants’ affiliated intermediaries sell the hydrocarbons at a significant profit, a profit which the Defendants do not pass on to the Plaintiffs. See FAC ¶ 32, at 11; SAC ¶ 33, at 11. Additionally, the Defendants royalty payments, to the Plaintiffs have not been consistent. On “numerous instances,” the Defendants have waited longer than forty-five or even ninety days after receiving revenue from the Plaintiffs’ shares to pay the Plaintiffs their royalty interest. FAC ¶¶ 55-57, at 17; SAC ¶¶ 57-60, at 16-17.
The Defendants have not always disclosed to the Plaintiffs the gross volume of gas produced from the Plaintiffs’ wells, the gross revenue or value the Defendants obtain from the gross production of gas, and the extent of costs that are deducted from the Plaintiffs’ royalty payments. See FAC ¶ 36, at 12; SAC ¶ 38, at 12. One such cost which is deducted from the Plaintiffs’ royalty payments is the cost of rendering the natural gas and other hydrocarbons taken from the subject wells marketable. See FAC ¶49, at 14; SAC ¶51, at 15.
PROCEDURAL BACKGROUND
Many of the Defendants’ arguments for the Court to dismiss the Plaintiffs’ FAC and SAC are grounded in a theory that the parties’ contractual relationship, as defined by the Plaintiffs’ leases, precludes the Plaintiffs’ claims in tort. The parties also dispute whether the Plaintiffs may bring a claim alleging that the Defendants have violated the marketable condition rule. These core issues dominate the parties’ dispute. Many of the Defendants’ arguments overlap, and are applicable against numerous causes of action in the FAC and SAC.
1. The Plaintiffs’ First Cause of Action: Failure to Pay Royalty on Volumes of Hydrocarbons, Includiny Drip Condensate.
The Plaintiffs allege in their first cause of action that the Defendants’ continual failure to credit revenues from the value of the drip condensate is a breach of the Plaintiffs’ leases and a violation of state law. See FAC ¶ 27, at 9; SAC ¶ 29, at 9-10. In support of this claim, the Plaintiffs allege that the Defendants are the working interest holders of leases belonging to the Plaintiffs. See FAC ¶¶ 22-23, at 7-8; SAC ¶¶ 23-25, at 7-8. The Plaintiffs allege that the Defendants are in breach of the leases by failing to provide the Plaintiffs with a “certain fractional percentage of the revenue” derived from the value of the drip condensate. FAC ¶¶ 25, 27, at 9; SAC ¶¶ 27, 29, at 9-10. The Plaintiffs provide information identifying the leases at issue, including the name of the lessors, name of the lessees, the date of execution, and a description of each lease. See FAC ¶ 24, at 8; SAC ¶ 26, at 8-9.
The Defendants contend that the Plaintiffs have failed to sufficiently allege the existence of a contractual relationship between the parties. The Defendants point to the Tenth Circuit’s ruling in Elliott Indus., and assert that oil and gas leases are construed “ ‘like any other contract.’ ” CP MTD at 3 (quoting 407 F.3d at 1108); WPX MTD at 3 (same). The Defendants argue that, although the Plaintiffs have referenced the original leases granting royalty interest in the SAC and FAC, the Plaintiffs have not shown with any specificity that the named Plaintiffs are the owners of those interests or how the Plaintiffs acquired royalty interests from those contracts. The Defendants assert that the Plaintiffs’ assertion of ownership interests are conclusory, because the Plaintiffs have not provided the specific instruments giving them title to the leases. See CP MTD at 3-4; WPX MTC at 3-4. Further, the Defendants argue that the Plaintiffs fail to state a claim, because the Plaintiffs have not pled the specific contractual term which the Defendants supposedly breached. See CP MTD at 4-5; WPX MTD at 4. ConocoPhillips points to Plaintiffs’ statement that they are “entitled to a certain fractional percentage of the revenue” and argues that, without including the contractual term granting the percentage of the revenue in the FAC, the Plaintiffs’ allegation is merely stating a legal conclusion. CP MTD at 5. WPX asserts that the Plaintiffs’ “vague allegation” that WPX is required by state law to pay royalties is insufficient, because the Plaintiffs identify no legal provision that imposes a duty to pay royalties on WPX. WPX MTD at 5.
The Plaintiffs contend that their first cause of action is well within the required pleading standards of Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009), and Bell Atl. Corp. v. Twombly. See Plaintiffs’ Response to Defendant ConocoPhillips Company, LLC’s Motion to Dismiss Plaintiffs’ First Amended Complaint for Underpayment of Oil and Gas Royalties at 3, filed April 18, 2012 (Case No. CIV 12-0039 Doc. 23)(“CP MTD Response”); Plaintiffs’ Response to Defendants WPX Energy Production, LLC and WPX Energy Rocky Mountain, LLC’s Motion to Dismiss Plaintiffs Second Amended Complaint for Underpayment of Oil and Gas Royalties at 3, filed April 18, 2012 (Case No. CIV 12-0040 Doc. 35)(“WPX MTD Response”). The Plaintiffs assert that their FAC and SAC satisfy the Ashcroft v. Iqbal and Bell Atl. Corp. v. Twombly standards by alleging the elements of a claim for breach of contract: “(1) Plaintiffs and Defendants are parties to a contract; (2) the contract require Defendants to pay the Plaintiffs a proportionate share of the value of all production of hydrocarbons from Defendants’] wells; and (3) Defendant has failed to properly make such payments to Plaintiffs.” CP MTD Response at 6-7; WPX MTD Response at 6, 8. The Plaintiffs assert that they have notified the Defendants of the specific contractual provisions that the Defendants are breaching the obligations: (i) to “pay royalties on all hydrocarbons, including drip condensate, produced from each of Plaintiffs’ wells, for the value/price which is/should be received by the Defendant upon an arm’s length sale of said hydrocarbons;” (ii) to “market Plaintiffs’ natural gas and all other proceeded and/or processed hydrocarbons at the highest obtainable price; to account for and pay each Plaintiff accurately for its proportionate interest” in proceeds received from the sale of the Plaintiffs’ share of hydrocarbons; (iii) to “pay royalties on’ the value of drip condensate;” (iv) to “pay royalties based on the value of the highest available price in an arm’s-length transaction of the products from Plaintiffs’ well;” (v) to “market production to the mutual advantage of both the lessee and Plaintiffs;” and (vi) to “market condensate, natural gas, natural gas liquids, and all other products derived from the hydrocarbons produced, in order to obtain the highest possible price to the parties’ mutual advantage.” CPT MTD Response at 4 (citing FAC ¶¶ 11, 26, 30, 42, 43, at 3-4, 9, 10. 13-14); WPX MTD Response at 4 (citing SAC ¶¶ 12, 28, 32, 44, 45, at 3-4, 9,11, 14). The Plaintiffs further contend that they do not have a “duty to re-type each oil and gas lease ‘into’ the complaint, especially when the Defendant ... has an entire department that maintains its lease files and ... pays these Plaintiffs every month, based on said lease contracts.” CP MTD Response at 5 (emphasis in original); WPX MTD Response at 6 (same). The Plaintiffs assert that the Defendants are asking the Court to apply a motion for summary judgment standard to their FAC and SAC. See CP MTD Response at 6; WPX MTD Response at 6. The Plaintiffs assert that “nothing in Rule 8(a), Twombly, or Iqbal requires the level of specificity urged by” the Defendants. CP MTD Response at 9; WPX MTD at 8 (emphasis in original). The Plaintiffs contend that they need not attach a title to the FAC or SAC to survive a motion to dismiss. See CP MTD Response at 9; WPX MTD at 8. The Plaintiffs assert that their allegation that the Defendants failed to credit any revenues to them for the value of drip condensate is an allegation of fact, and not a legal conclusion, as the. Defendants assert. See CP MTD Response at 9-10; WPX MTD Response at 9.
The Plaintiffs also assert that there is no “alternative, lawful explanation” for the Defendants’ conduct, and, therefore, the Court has no basis to conclude that the Defendants’ conduct has a plausible, legal explanation. CP MTD Response at 7; WPX MTD Response at 7. The Plaintiffs assert that the Defendants’ denial of illegal conduct is “threadbare” and “conclusory.” CP MTD Response at 7; WPX MTD Response at 8. The Plaintiffs contend that the Court must accept as true that the Plaintiffs, and/or their predecessors, executed oil and gas mining leases and/or permits to the Defendants, and that the Defendants operate and/or are the leasehold owners of the subject wells from which oil and gas/hydrocarbons are produced and sold. See CP MTD Response at 8 (citing Arkalon Grazing Assoc. v. Chesapeake, No. CIV 09-1394-EFM, 2010 WL 4622441 (D.Kan. Nov. 4, 2010)); WPX MTD Response at 8.
The . Plaintiffs assert that the Defendants’ reliance on Elliott Indus, is misplaced. The Plaintiffs contend that, unlike the plaintiffs in Elliott Indus., who expressly disclaimed any breach-of-contract claim, the “cornerstone” of the Plaintiffs’ FAC and SAC is a breach of contract claim. CP MTD Response at 10 (citing Elliott Indus., 407 F.3d at 1108); WPX MTD Response at 9 (same). The Plaintiffs contend, therefore, that Elliott Indus. does not apply to the motions to dismiss their FAC or SAC. See CP MTD Response at 10; WPX MTD at 10.
The Defendants contend that the Plaintiffs have failed to demonstrate that they are parties to a relevant contract. See ConocoPhillips Company’s Reply Memorandum in Further Support of its Motion to Dismiss Plaintiffs’ First Amended Complaint for Underpayment of Oil and Gas Royalties at 2, filed May 24, 2012 (Case No. CIV 12-0039 Doc. 30)(“CP Reply”); Defendants’ Reply Memorandum in Further Support of their Motion to Dismiss Plaintiffs’ Second Amended Complaint for Underpayment of Oil and Gas Royalties at 2, filed May 24, 2012 (Case No. CIV 12-0040 Doc. 45)(“WPX Reply”). The Defendants point out that the Plaintiffs’ names do not match the names of the lessors of the leases listed in the FAC'and SAC. See CP Reply at 2 (citing FAC ¶ 24, at 8-9); WPX Reply at 2 (citing SAC ¶ 24, at 7-8). The Defendants also assert that it is impossible to determine their legal duties to the Plaintiffs, because neither the FAC nor SAC lists the specific interests which the Plaintiffs hold, and the Defendants’ duties vary with different possible interests: the Defendants contend that an overriding royalty interest does not enjoy the benefit of an implied covenant to market production, an instrument creating an overriding royalty may have language that negates an obligation to make payments without subtracting downstream processing costs, and a unit agreement may allow for post-production costs to be deducted from royalty payments. See CP Reply at 2-3; WPX Reply at 2 (citing Elliott Indus., 407 F.3d at 1109-10; Creson v. Amoco Prod. Co., 2000-NMCA-081, ¶¶6, 12, 15, 24, 129 N.M. 529, 10 P.3d 853; Cont'l Potash, Inc. v. Freeport-McMoran, Inc., 115 N.M. 690, 701, 705-06, 858 P.2d 66, 81-82 (1993)). The Defendants contend that the Plaintiffs’ interests may vary in “legally significant ways,” and the Plaintiffs have obfuscated their breach-of-contract claim by crafting the FAC and SAC as though one contract created each of the Plaintiffs’ interests. CP Reply at 3; WPX Reply at 3.
ConocoPhillips contends that for two of leases listed in the FAC — which list the United States Land Office, Department of the Interior, and the State of New Mexico as lessors — “it is simply not plausible that those sovereigns assigned their royalty interest to a private party,” and, therefore, the Plaintiffs’ must own “something other than a royalty interest, such as an overriding royalty interest.” CP Reply at 2.
The Defendants also contend that the Plaintiffs cannot state a claim for breach of contract because they have not alleged any “terms of any payment obligations.” CP Reply at 3; WPX Reply at 3. The Defendants contend that the Plaintiffs’ statement that the Defendants must “pay a percentage of revenue from production to Plaintiffs ... calculated on arms-length transactions” is a legal conclusion. CP Reply at 3; WPX Reply at 3. The Defendants also assert that the allegations regarding sales to affiliated intermediaries does not make the Plaintiffs’ breach-of-contract claim more plausible. See CP Reply at 4; WPX Reply at 3. The Defendants assert that the “sale of production to affiliates is not in and of itself a breach of a payment obligation.” CP Reply at 4 (citing Garfield v. True Oil Co., 667 F.2d 942, 946 (10th Cir.1982)); WPX Reply at 3-4 (same). The Defendants contend that the Plaintiffs’ reliance on Arkalon Grazing Assoc. v. Chesapeake Operating, Inc. is misplaced, because the United States District Court for the District of Kansas did not evaluate the adequacy of the plaintiffs’ breach-of-contract claim in that opinion, but, rather, provided information regarding the breach-of-contract allegations only as background for the defendants’ motion to dismiss particular allegations of fraudulent concealment. See CP Reply at 5 (citing 2010 WL 4622441, at *2); WPX Reply at 4 (same). The Defendants assert that the Plaintiffs have “declined to satisfy their pleading burden”. by not restating the particular contractual language allegedly breached, and, further, the Plaintiffs have failed to “plead the legal effect of each agreement with an adequate factual description of those terms,” and, therefore, the Plaintiffs’ breach of contract claim fails to state a claim upon which relief can be granted. CP Reply at 5-6; WPX Reply at 4-5. The Defendants also assert that the Plaintiffs have mischaracterized the Tenth Circuit’s holding in Elliott Indus., arguing that, just as the plaintiffs in Elliott Indus. divorced their claims from any contractual language, the Plaintiffs’ failure to provide specific contractual language that the Defendants have breached renders their allegation of breach of contract legally inadequate. See CP Reply at 6-7 (citing Elliott Indus., 407 F.3d at 1109-15); WPX Reply at 5 (same).
2. The Plaintiffs’ Second Cause of Action: Fraud and Misstatement of Value of Gas and Affiliate Sales.
The Plaintiffs allege in their second cause of action that the Defendants have reaped “substantial, unjustified benefits and profits at Plaintiffs’ direct expense;” and the Defendants have “knowingly failed to disclose excessive and impermissible charges and reductions ... as well as the gross volume, value and type of all hydro.carbons produced, used, sold or traded” in violation of the Defendants’ statutory and common-law duty to report that production, and to “act in good faith and fair dealing.” FAC ¶¶35, 38, at 11-12; SAC ¶¶ 37, 40, at 12-13. ■
The Plaintiffs allege that the Defendants have a duty under the leases and state law to “pay royalties based on the value of the highest available price in an arms-length transaction of the products from the Plaintiffs’ wells.” FAC ¶ 30, at 10; SAC ¶32, at 11. In support of their claim, the Plaintiffs assert that the Defendants’ practice of calculating the Plaintiffs’ royalty payments on the sale to affiliated intermediaries of hydrocarbons from wells in which the Plaintiffs’ have ownership interests, mixed with hydrocarbons form wells in which the Plaintiffs do not have royalty interests, is “self-dealing.” FAC ¶¶ 30-34, at 10-11; SAC ¶¶ 32-36, at 11-12. The Plaintiffs state that the Defendants and their affiliates have “realized substantial profits from the resale of said hydrocarbons, to Plaintiffs’ detriment.” FAC ¶ 32, at 11; SAC ¶ 33, at 11. The Plaintiffs assert that this practice increases the “[l]egally assessable costs ... downstream of the wellhead” beyond .a reasonable level. FAC ¶ 34, at 11; SAC ¶ 36, at 11. The Plaintiffs allege that this practice is a breach of the “duties and covenants imposed upon ConocoPhillips by law, including good faith and fair dealing, by the Lease(s), covenants, and applicable spacing orders and/or unitization agreements and, as such, constitutes a continuing wrong.” FAC ¶ 35, at 11; SAC ¶ 37, at 12.
The Plaintiffs also allege, as part of their second cause of action, that Defendants knowingly “failed to disclose the gross volume and value and eharaeter/type of all hydrocarbons produced, processed, used, traded or sold from Plaintiffs’ wells.” FAC ¶ 37, at 12; SAC ¶ 39, at 12. The Plaintiffs allege that they have suffered damages as a result of the Defendants’ “false” monthly statements. FAC ¶ 37, at 12; SAC ¶ 39, at 12. Further, the Plaintiffs allege that the Defendants “intended for Plaintiffs to- rely upon” the monthly statements. FAC ¶ 38, at 12; SAC ¶ 40, at 13. The Plaintiffs argue that, by not disclosing the volume, value, and hydrocarbons produced with more particularity, the Defendants violated their duty to report and to act in good faith and fair dealing, constituting fraudulent concealment. See FAC ¶ 38, at 12; SAC ¶ 40, at 13.
The Defendants assert that Tenth Circuit case law bars the Plaintiffs’ second cause of action. See CP MTD at 6-7; WPX MTD at 6. The Defendants assert that Elliott Indus, requires the Plaintiffs to “allege sufficient facts to establish that tort liability does not conflict with the contractual duties between the parties” to avoid contractual duties precluding the Plaintiffs’ tort claims. CP MTD at 6-7 (internal quotations omitted); WPX MTD at 6 (same). The Defendants argue that the Plaintiffs have not shown that their tort claims are separate from any claims arising from the parties’ contractual relationship, because the Plaintiffs have not provided specific contractual language in the FAC or SAC. The Defendants assert, thus, that the parties’ contractual duties preclude the Plaintiffs’ tort claims. See CP MTD at 6-7, WPX MTD at 6-
Additionally, the Defendants assert that the Court must dismiss the Plaintiffs’ fraud claim because the Plaintiffs have not pled sufficient particular facts to establish the claim of fraud. See CP MTD at 7; WPX MTD at 6-7. Specifically, the Defendants argue that the Plaintiffs’ have not provided any facts which show that the Defendants knowingly made false representations to the Plaintiffs to induce them to act. See CP MTD at 7-8; WPX MTD at 7. The Defendants assert that the Plaintiffs’ allegation of fraud is conclusory, merely stating the cause of action, and therefore insufficient. See CP MTD at 7-8; WPX MTD at 7. With respect to Plaintiffs’ allegation that the Defendants had a duty to disclose certain information in the monthly statements, the Defendants argue that the Plaintiffs have not shown any contractual authority which imposes that duty on the Defendants. See CP MTD at 8; WPX MTD at 7. The Defendants also assert that New Mexico law does not impose on them a duty to disclose. See CP MTD at 8; WPX MTD at 7. The Defendants assert that the Plaintiffs have not shown that a fiduciary relationship exists between the parties and that, without a fiduciary relationship, New Mexico law does not impose a duty to disclose on a party. Rather, the Defendants assert that, under Cont’l Potash, Inc. v. Freeport-McMoran, Inc., 115 N.M. at 701, 858 P.2d at 77, an “arms-length relationship established by a mineral lease between the working interest owners and the royalty interest owners” does not create a fiduciary duty that would require disclosures be made. CP MTD at 9; WPX MTD at 8. In response to the Plaintiffs’ assertion that the duty of good faith and fair dealing creates a duty to disclose in the Defendants, the Defendants argue that “implied covenants” go to the issue of breach, and not to whether a party had a duty to disclose material information. CP MTD at 9-10 (citing Cont’l Potash, Inc. v. Freeport-McMoran, Inc., 115 N.M. at 701, 858 P.2d at 77); WPX MTD at 8 (same). WPX further alleges that the Proceeds Payment Act does not impose a duty to disclose on payors of royalties in response to the Plaintiffs’ statement that New Mexico law imposes a duty to disclose. See WPX MTD at 9.
Lastly, the Defendants assert that the Plaintiffs’ second cause of action fails to meet the pleading standards of rules 8(a)(1) and 9(b) of the Federal Rules of Civil Procedure. See CP MTD at 10; WPX MTD at 9. The Defendants assert that the Plaintiffs’ allegations of fraud are insufficient, because the Plaintiffs did not point to the lack of any specific facts that demonstrates the Defendants’ transactions with the affiliated intermediaries or any fact that identifies the affiliated intermediaries. See CP MTD at 10-11; WPX MTD at 9-10. The Defendants assert that, on the whole, the Plaintiffs’ second cause of action for fraud and misstatements fails to provide anything more than eonclusory allegations, and is devoid of the facts necessary to survive a motion to dismiss. See CP MTD at 10-12; WPX MTD at 9-11.
The Plaintiffs contend that they have pleaded all of the elements of a fraud claim, with particularity, under New Mexico law:
that [the Defendants] misrepresent[ ] the volume and value of gas produced; that [they] know[ ] the volumes and values reflected on Plaintiffs’ check stubs are incorrect but [] state[] them anyway; [they] continue[ ] to mislead Plaintiffs as to the true volume value of the gas produced and uses on affiliate sale in order to decrease Plaintiffs’ share of revenues on the true values and volumes of produced hydrocarbons; and [they] continue[] reporting in this fashion to conceal the true amounts owed Plaintiffs.
CP MTD Response at 11 (citing Golden Cone Concepts, Inc. v. Villa Linda Mall, Ltd., 113 N.M. 9, 14, 820 P.2d 1323, 1328 (1991)); WPX MTD Response at 10 (same).
The Plaintiffs further contend that the, Defendants’ reliance on Elliott Indus, for the assertion that the Plaintiffs’ contractual claims preclude their tort claims is inapposite, because the Tenth Circuit dismissed the plaintiffs’ tort claims in Elliott Indus, on the basis of the plaintiffs’ failure “to establish any contractual obligations owing the plaintiffs.” CP MTD Response at 11 (citing Elliott Indus., 407 F.3d at 1116); WPX MTD Response at 11 (same).
The Plaintiffs also contend that they have pleaded misstatements giving rise to a claim of fraud: (i) that the Defendants engaged - in self-dealing and non-arm’s-length transactions with their affiliates resulting in improper charges to the Plaintiffs; (ii) that the Defendants failed to disclose the gross volume of gas produced from the subject wells on the monthly statements; (iii) that the Defendants failed to disclose the gross revenue or value attributed to the gross production, and the reductions and/or costs to the Plaintiffs’ royalty payments from the sale to the affiliated intermediaries, on the monthly statements; and (iv) that the Defendants failed to disclose the “character/type of all hydrocarbons ‘produced, processed, used, traded or sold from Plaintiffs’ wells’ ” on the monthly statements. CP MTD Response at 11-12 (quoting FAC ¶¶ 36-37, at 12)(citing FAC ¶36, at 12); WPX MTD Response at 11 (quoting SAC ¶ 39, at 12)(citing SAC ¶¶ 38-39, at 11-12). The Plaintiffs assert that the FAC and SAC allege that the Defendants improperly calculated the amount of their royalty payments, and that the Defendants do not inform the Plaintiffs of the actual volume of oil and/or hydrocarbons produced from the subject wells. See CP MTD Response at 12 (citing Paiz v. State Farm Fire & Cas. Co., 118 N.M. 203, 212, 880 P.2d 300, 309 (1994); Spencer v. J.P. White Bldg., 92 N.M. 211, 213, 585 P.2d 1092, 1095 (1978)); WPX MTD Response at 11 (same).
The Plaintiffs assert that the Defendants’ conduct is more than a breach of contract, but is also fraud, because the Defendants have intentionally, failed “to disclose pertinent information to Plaintiffs and provide false production volumes, values and improper costs when calculating Plaintiffs’ royalty with the intent to deceive Plaintiffs.” CP MTD Response at 12 (citing FAC ¶¶ 36-38, at 12); WPX MTD Response at 11-12 (citing SAC ¶ 38, at 12). The Plaintiffs assert that they have relied upon the Defendants’ representations to their detriment. See CP MTD Response at 12; WPX MTD Response at 12.
The Plaintiffs concede that, as the Defendants allege, New Mexico has not recognized a fiduciary duty between mineral rights lessors and lessees. See CPT MTD Response at 13; WPX MTD Response at 12. The Plaintiffs assert, however, that the leases created a “special relationship” between the Plaintiffs and the Defendants, under which the Defendants have a duty to disclose accurate reports regarding the production volumes, values, and associated costs from the subject wells. CP MTD Response at 13 (citing IGEN Int’l Inc. v. Roche Diagnostics GmbH, 335 F.3d 303, 314-15 (4th Cir.2003); R.A. Peck, Inc. v. Liberty Fed. Sav. Bank., 108 N.M. 84, 89, 766 P.2d 928, 933 (Ct.App.1988)); WPX MTD Response at 12 (same).
The Plaintiffs assert, contrary to the Defendants’ allegations, that the Defendants’ sales to affiliated intermediaries constitutes fraud. The Plaintiffs contend that the Defendants’ sales to affiliated intermediaries, through which the Defendants “realize a higher value from the sale of hydrocarbons than what Defendant[s] report to Plaintiffs,” are fraudulent transactions, because the Defendants use “artificial, non-arm’s-length sales or transfers as the basis for its royalty payments .to Plaintiffs,” and because the Defendants do not share the “so-called ‘profits’ on its arm’s length sales with Plaintiffs.” CP MTD Response at 14 (citing FAC ¶¶ 31, 32, 34, at 10-11); WPX MTD Response at 13 (citing SAC ¶¶ 33, 34, 36, 37, at 11-12). The Plaintiffs assert that in Arkalon Grazing Assoc, v. Chesapeake, the United States District Court for the District of Kansas determined that plaintiffs had, in a similar suit, sufficiently alleged that the defendants’ calculation of royalty payments constituted fraudulent concealment. See CP MTD Response at 15; WPX MTD Response at 15. The Plaintiffs urge the Court to reach the same conclusion here as the district court did in Arkalon Grazing Assoc. v. Chesapeake. See CP MTD Response at 15; WPX MTD Response at 15.
The Defendants contend that the Plaintiffs’ allegations of fraud only restate their allegations for breach of contract, and, therefore, are legally insufficient under New Mexico law. See CP Reply at 7 (citing Isler v. Tex. Oil and Gas Corp., 749 F.2d 22 (10th Cir.1984); Rio Grande Jewelers Supply, Inc. v. Data Gen. Corp., 101 N.M. 798, 689 P.2d 1269 (1984)). The Defendants further contend that the Plaintiffs have failed to plead an allegation of fraud with particularity, because neither the FAC nor the SAC references an “affirmative misrepresentation of fact, known to be untrue, made with intent to deceive and induce Plaintiffs to act, or that Plaintiffs relied on misrepresentations to their detriment.” CP Reply at 8 (emphasis in original); WPX Reply at 6 (same). The Defendants contend that the Plaintiffs’ closest allegation of fraud is the assertion that the Defendants withheld information in the monthly statements, but the Defendants contend that the Plaintiffs have not provided any information which would allow the Court to plausibly conclude that the Defendants had a duty to disclose the withheld information. See CP Reply at 8; WXP Reply at 7. The Defendants assert that the Plaintiffs do not allege or contend that the leases require the Defendants to make the allegedly withheld disclosures, as the Plaintiffs rely on common law or statutory law to assert' a breach of the duty to disclose information. See CP Reply at 8, WPX Reply at 7. The Defendants contend that under New Mexico law, an implied covenant of good faith and fair dealing does not create a duty to disclose information, the withholding of which constitutes fraud. The Defendants contend, rather, that New Mexico law “unequivocally rejects the proposition that a mineral lease creates a fiduciary relationship between working-interest owners and royalty-interest owners such that a duty to disclose material information arises.” CP Reply at 8-9 (citing Cont'l Potash v. Freeport-McMoran, Inc., 115 N.M. at 701, 858 P.2d at 77); WPX Reply at 7-8 (same).
The Defendants contend, additionally, that even if a duty to disclose exists, the Plaintiffs’ allegations are too conclusory to state a claim for a breach of that duty. See CP Reply at 9; WPX Reply at 8. The Defendants assert that “nothing in Plaintiffs’ response shows that the complaint[s] meet[ ] the more stringent requirements of Rule 9(b) for pleading fraud,” as the Defendants contend that the Plaintiffs’ allegation of a method by which the Defendants may have underpaid royalties is insufficient to meet rule 9(b)’s requirements. CP Reply at 9 (citing United States ex rel. Schwartz v. Coastal Healthcare Group, Inc., 232 F.3d 902, 2000 WL 1595976, at **5-6 (10th Cir.2000) (unpublished)); WPX Reply at 8 (same). The Defendants assert that “Rule 8’s preference for simplicity in pleading does not excuse a complete failure to state the circumstances of the fraud with particularity.” CP Reply at 10; WPX Reply at 9.
3. The Plaintiffs’ Third Cause of Action: Breach of the Duty to Market Hydrocarbons.
The Plaintiffs’ third cause of action is based upon the allegation that the Defendants violated the terms of the leases by deducting from the Plaintiffs’ royalties the cost of rendering the hydrocarbons marketable. See FAC ¶¶46, 50, at 14, 15; SAC ¶¶ 47, 52, at 14, 15. The Plaintiffs contend that deducting such costs is a violation of the “mutual covenants and obligations contained in the Leases and/or under state law,” which impose a duty on the Defendants to “market condensate, natural gas, natural gas liquids and all other products derived from the hydrocarbons produced, in order to obtain the highest possible price advantage” for the Plaintiffs. FAC ¶¶ 42-43, at 13; SAC ¶¶ 44-45, at 14. The Plaintiffs assert that the Defendants, as lessees and. owners of working interests in the subject wells, have a duty to “render the natural gas and other hydrocarbons marketable at [their] own expense, and not at the expense of Plaintiffs and other non-cost bearing interest owners.” FAC ¶ 46, at 14; SAC ¶48, at 14.
The Defendants argue that the Plaintiffs have unsuccessfully attempted to state a claim for a breach of the “marketable condition rule” in the third cause of action. CP MTD at 12; WPX MTD at 11. WPX •asserts that the Plaintiffs’ claim can survive only if the duty to “not deduct costs incurred before a gas is in a marketable condition” and to not “deduct costs that are not actually incurred or are unreasonable” is implied into the language of the leases. WPX MTD at 11. WPX posits that New Mexico case law does not allow a court to imply a covenant in an oil and gas lease “except in the absence of any expressed” covenant on the subject. WPX MTD at 12 (citing Libby v. De Baca, 51 N.M. 95, 99, 179 P.2d 263, 265 (1947), State ex rel. Shell Petroleum Corp. v. Worden, 44 N.M. 400, 103 P.2d 124, 126 (1940)). WPX asserts that, under Conti Potash, Inc. v. Freeport-McMoran, Inc., a court may imply a covenant only where the covenant is “fundamental to the purposes” of the lease at issue and- “justified upon the grounds of legal necessity.” WPX MTD at 12. The Defendants argue that the Plaintiffs’ claim for breach of the marketable condition rule fails to articulate a claim for an implied covenant under New Mexico regarding implied covenants. See CP MTD at 17-18; WPX MTD at 13. The Defendants allege that, because the Plaintiffs did not first demonstrate that leases are silent regarding the payment of royalties, or that a covenant must be implied into the lease by necessity, the Court cannot imply the marketable condition rule into the Leases. See CP MTD at 17-18; WPX MTD at 13. WPX further asserts that the implied, duty to market does not extend beyond a lessee’s obligation to “ ‘make diligent efforts to market the production in order that the lessor may realize on his royalty interest.’ ” WPX MTD at 16 (quoting Wolfe v. Texas Co., 83 F.2d 425, 432 (10th Cir.1936)).
The Plaintiffs assert that the Defendants “again” confuse “the standard for pleading a claim with the standard for proving a claim.” CP MTD Response at 16 (emphasis in original); WPX MTD Response at 16 (same). The Plaintiffs contend that the FAC and SAC adequately allege that the Defendants have breached the implied duty to market through their allegations that the leases impose a duty on the Defendants to “market production to the mutual advantage of.both the lessee and Plaintiffs.” CP MTD Response at 16 (citing FAC ¶ 12, at 4); WPX MTD Response at 16 (citing SAC ¶¶ 44-45, at 14). The Plaintiffs further assert that they have alleged that, “under the mutual covenants and obligations contained in the Leases and/or under state law,” the Defendants have a “duty to market condensate, natural gas, natural gas liquids and all other products derived from the hydrocarbons produced, in order to obtain the highest possible price to the mutual advantage of’ the parties. CP MTD Response at 17 (citing FAC ¶ 45, at-14-15); WPX MTD Response at 16 (citing SAC ¶¶ 44, 45, 47, 48, at 14). The Plaintiffs assert that they need not “attach a copy of the leases at issue” to the FAC or to the SAC to survive a motion to dismiss. CP MTD Response at 17; WPX MTD Response at 16. The Plaintiffs assert that, accepting their allegations as true, they have stated a plausible claim that the Defendants failed to market hydrocarbons in accordance with their duty under the leases. See CP MTD Response at 17; WPX MTD Response at 16.
The Plaintiffs further contend that New Mexico law recognizes the duty to market hydrocarbons. See CP MTD Response at 18 (citing Davis v. Devon Energy Corp., 2009-NMSC-048, ¶ 35, 147 N.M. 157, 218 P.3d 75); WPX MTD Response at 17 (same). The Plaintiffs assert that, under New Mexico law, the duty to market hydrocárbons is implied in all-oil-and-gas royalty instruments, unless the parties expressly disavow the duty in writing. See CP MTD Response at 18; WPX MTD Response at 17. The Plaintiffs contend that New Mexico law follows the “marketable condition rule,” which requires the Defendants to bear the cost of making oil and hydrocarbons marketable, and that the Defendants may not pass this cost onto the Plaintiffs. See CP MTD Response at 18 (citing Creson v. Amoco Prod. Co., 2000-NMCA-081, ¶ 13, 129 N.M. 529, 10 P.3d 853); WPX MTD Response at 18 (same). The Plaintiffs assert that, under the marketable condition rule, the producer/lessee of a gas well must bear specific post-extraction costs, including the cost of rendering the production marketable. See CP MTD Response at 19; WPX MTD Response at 18.
The Plaintiffs assert that the Defendants falsely rely on Darr v. Eldridge, Libby v. DeBaca, and Elliott Indus, in arguing that they do not have a duty to render the hydrocarbons marketable at their own cost. The Plaintiffs assert that Libby v. DeBaca recognizes an implied obligation to market recoverable mineral interests and the lessee/producer’s obligation to bear such costs as a reasonably prudent operator, although the decision does not reference the “marketable condition rule.” CP MTD Response at 19-20 (citing Cont’l Potash v. Freeport-McMoran, Inc., 115 N.M. at 706, 858 P.2d at 82; Libby v. DeBaca, 51 N.M. at 99-100, 179 P.2d at 265); - WPX MTD Response at 19 (same). The Plaintiffs further assert that the Defendants’ reliance on Creson v. Amoco Prod. Co. is misplaced, because the Creson v. Amoco Prod. Co. decision does not “stand for the proposition that, in all cases, there is no marketable condition rule in New Mexico,” and, Creson v. Amoco Prod. Co. did not “involve issues related to the defendant’s failure to produce CBM gas in marketable condition and did not reject the marketable condition rule,” and the New Mexico Court of Appeals explicitly stated that it did not decide the applicability of the marketable condition rule in Creson v. Amoco Prod. Co. CP MTD Response at 20; WPX MTD Response at 19.
The Plaintiffs assert that “courts from around the nation have adopted the marketable condition rule or some version thereof.” CP MTD Response at 22-22 (citing Wallace B. Roderick Revocable Living Trust v. XTO Energy, Inc., 679 F.Supp.2d 1287 (D.Kan.2010); Estate of Tawney v. Columbia Natural Res. LLC, 219 W.Va. 266, 633 S.E.2d 22 (2006); Rogers v. Westerman Farm Co., 29 P.3d 887 (Colo.2001); Wood v. TXO Prod. Corp., 854 P.2d 880, 882-83 (Okla.1992)); WPX MTD Response at 20-21. The Plaintiffs assert that in the cases in which courts have adopted the marketable condition rule, the courts derived the rule from the implied duty to market. See CP MTD Response at 22; WPX MTD Response at 21.
The Defendants contend that the Plaintiffs have failed to allege a claim for breach of the' marketable condition rule. See CP Reply at 11; WPX Reply at 9. The Defendants assert, first, that the Plaintiffs allegations are insufficient to state a claim that the Defendants breached an implied duty to not deduct post-production costs incurred in rendering hydrocarbons marketable from the Plaintiffs’ royalty payments. The Defendants assert, second, that the Plaintiffs’ allegations that the marketable condition rule is implied in the leases is contrary to the Tenth Circuit’s holding in Elliott Indus. See CP Reply at 11; WPX Reply at 10-11.
The Defendants assert that the Plaintiffs must demonstrate that the leases are silent regarding the deduction of post-production costs, and that the parties intend to be bound by the marketable condition rule, as demonstrated by the leases’ terms. The Defendants assert that the Plaintiffs have failed on both fronts. The Defendants contend that the FAC and SAC are devoid of any factual allegations which would lead to a plausible conclusion that the leases are silent regarding the deduction of post-production costs, and that the parties intended to be bound by the marketable condition rule. See CP Reply at 12; WPX Reply at 10 (citing Cont’l Potash v. Freeport-McMoran, Inc., 115 N.M. at 704, 858 P.2d at 80). The Defendants contend that, because the Plaintiffs have failed to specify the interests they own, it is just as plausible that the Plaintiffs’ own overriding royalty interests which are not bound by the marketable condition rule. The Defendants assert that the Plaintiffs have admitted that their “interests have been ‘granted or reserved in lease agreement,’ ” which, the Defendants contend, indicates the Plaintiffs own overriding royalty interests. CP Reply at 13 (quoting CP MTD Response at 17); WfPX Reply at 11 (quoting WPX MTD Response at 17).
WPX further asserts that the Plaintiffs have not challenged its allegation that “the language of express royalty provisions customarily addresses the deductibility of post-productions costs.” WPX Reply at 11 (citing WPX MTD at 12-15).
The Defendants also assert that New Mexico has not adopted the marketable condition rule as part of an implied duty to market. See CP Reply at 13 (citing Davis v. Devon Energy Corp., 2009-NMSC-048, ¶ 37, 147 N.M. 157, 218 P.3d 75); WPX Reply at 12 (same). The Defendants contend that the Court should dismiss the Plaintiffs’ allegations of a violation of the marketable condition rule under Elliott Indus. See CP Reply at 13 (citing Elliott Indus., 407 F.3d at 1113-14); WPX Reply at 12 (same). The Defendants contend that, contrary to the Plaintiffs’ assertion, a majority of courts have rejected the marketable condition rule. See CP Reply at 14 (citing Bice v. Petro-Hunt, LLC, 768 N.W.2d 496, 501-02 (N.D.2009)); WPX Reply at 14 (same). The Defendants assert that, although the Plaintiffs rely on cases from Kansas, Oklahoma, and West Virginia, those authorities are inapposite, because New Mexico treats royalty interests as real property, unlike those states. See CP Reply at 14 (citing Uhden v. N.M. Oil Conservation Comm’n, 112 N.M. 528, 530, 817 P.2d 721, 723 (1991)); WPX Reply at 12-13 (same). The Defendants contend that a royalty interests vests “upon the physical extraction of the gas from the ground and its removal,” and, therefore, “costs incurred after production of the gas or' minerals are normally proportionately borne by both the operator and the royalty interests owners.” CP Reply at 14-15 (citing Harvey E. Yates Co. v. Powell, 98 F.3d 1222, 1230 (10th Cir.1996); Creson v. Amoco Prod. Co., 2000-NMCA-081, ¶ 18, 129 N.M. 529, 10 P.3d 853 (internal alterations and quotations omitted)); WPX Reply at 13 (same). The Defendants also assert that many royalty clauses in oil and gas leases expressly provide for the royalty to be valued based upon the value of the oil or gas “as it emerges at the wellhead,” because the royalty interests vest when the oil or gas produced “has been reduced to possession.” CP Reply at 15 (citing Creson v. Amoco Prod. Co., 2000-NMCA-081, ¶ 15, 129 N.M. 529, 10 P.3d 853; 8 Howard R. Williams & Charles J. Meyers, Oil and Gas Law § 645.2, at 614.4 (Patrick H. Martin & Bruce M. Karmer, eds.2010)(internal quotations omitted)); WPX Reply at 13 (same). The Defendants contend that because the Plaintiffs’ royalty interests are real property, and not personal property, the marketable condition rule does not apply to their royalty interests. See CP Reply at 15 (citing N.M.S.A. 1978, § 55-2-107(1); Davis v. Devon Energy Corp., 2009-NMSC-048, ¶ 6, 147 N.M. 157, 218 P.3d 75; Williams & Meyers, supra, § 645.2, at 614.4); WPX Reply at 13-14 (same). The Defendants note that the Plaintiffs’ reliance on decisions from Colorado state courts is inapposite to the Plaintiffs’ allegations, because the Plaintiffs have not alleged that the leases are silent regarding the allocation of post-production costs, and, the Defendants assert, Colorado has not adopted a standard for determining when to imply the marketable condition rule into an oil and gas lease, unlike the standard New Mexico announced in Cont’l Potash, Inc. v. Freeportr-McMoran, Inc. See CP Reply at 15-16 (citing Rogers v. Westerman Farm Co.; Fort Lupton State Bank v. Murata, 626 P.2d 757 (Colo.App.1981)); .WPX Reply at 14-15 (same).
The Defendants contend that they have not misinterpreted or misapplied Creson v. Amoco Prod. Co., as the Plaintiffs assert. The Defendants argue that, just as in Creson v. Amoco Prod. Co. the Court of Appeals of New Mexico held that the gas leases at issue governed the plaintiffs’ royalty interests, the Plaintiffs’ oil and gas leases here govern whether the Defendants may deduct post-production costs from the Plaintiffs’ royalty interests. See CP Reply at 16-17 (citing Creson v. Amoco Prod. Co., 2000-NMCA-081, ¶¶ 3, 22, 129 N.M. 529, 10 P.3d 853); WPX Reply at 15-(same). The Defendants further assert that Creson v. Amoco Prod. Co. is relevant to the Plaintiffs’ allegations, because the Court of Appeals of New Mexico rejected the plaintiffs’ assertion that “gas is not in a ‘marketable condition’ until it is suitable for delivery into the pipeline transportation system,’ ” because the leases did not require that gas be in a condition appropriate for delivery into the pipeline system before the Plaintiffs’ royalty payments would be calculated. CP Reply at 17 (quoting Creson v. Amoco Prod. Co., 2000-NMCA-081, ¶ 25, 129 N.M. 529, 10 P.3d 853); WPX Reply at 15 (same). The Defendants assert that, as they argue in the CP MTD and WPX MTD, Elliott Indus. controls the Plaintiffs’ claims that the Defendants breached the implied marketable condition rule, and the Plaintiffs have provided no explanation why Elliott Indus. does not control the Court’s analysis of the FAC and of the SAC. See CP Reply at 17 (citing CP MTD Response at 19; CP MTD at 13-19); WPX Reply at 16 (citing WPX MTD Response at 19; WPX MTD at 15-18).
4. The Plaintiffs’ Fourth Cause of Action: Violation of the New Mexico Oil and Gas Proceeds Payment Act.
The Plaintiffs allege that the Defendants failed on “numerous instances” to make timely royalty payments to the Plaintiffs as required by New Mexico and Colorado statutes. FAC ¶¶ 55-57, at 16; SAC ¶¶ 57-59, at 16-17. See FAC at 16; SAC at 16. The Plaintiffs- state that the Proceeds Payment Act requires the Defendants to pay royalties within forty-five days of the end of the calendar month in which the Defendants receive payment for the Plaintiffs’ interests. See. FAC ¶55, at 16; SAC ¶ 57, at 16. The Plaintiffs also allege that Colo.Rev.Stat. § 34-60-118.5 imposes the same duty on the Defendants, but provides a ninety-day window for the Defendants to pay the Plaintiffs’ royalties. See FAC ¶ 56, at 16; SAC ¶ 58, at 16. The Plaintiffs assert that the Defendants have failed to meet both of these time limits on numerous occasions. See FAC ¶¶ 55-57, at 16; SAC ¶¶ 57-59, at 16-17.
The Defendants argue that the Court should dismiss the Plaintiffs’ fourth cause of action, because the statutes upon which the Plaintiffs rely do not support their allegations. See CP MTD at 20; WPX MTD at 22-23. The Defendants asserts that the Proceeds Payments Act provides only a derivative remedy and will not support a claim for relief absent evidence that a lessor breached an underlying agreement with an interest owner. See CP MTD at 20; WPX MTD at 25-26. WPX argues that, under Elliott Indus., the Plaintiffs must allege a “ ‘claim for underpayment of royalties or theory of liability ... independent of any claim under the Act itself.’ ” WPX MTD at 26 (quoting Elliott Indus., 407 F.3d at 1120) (internal alterations omitted). WPX asserts that, because the Plaintiffs have failed to allege a “viable” claim for underpayment of royalties, their allegations arising from the Proceeds Payment Act are doomed as well. WPX MTD at 26.
ConocoPhillips additionally argues that “[njothing in the Act suggests that the interest ‘penalty’ and attorneys’ fees provision apply to contractually-based claims by royalty owners contending payments previously received were incorrectly calculated under novel legal theories.” CP MTD at 20 (quoting .N.M.S.A.1978, § 70-10-5). ConocoPhillips asserts that, because the Proceeds Payment Act imposes a penalty, the Court cannot expand its reach “beyond that clearly supported by the statutory language.” CP MTD at 20 (citing United Rentals N.W., Inc. v. Yearout Mech, Inc., 2010-NMSC-030, ¶ 27, 148 N.M. 426, 237 P.3d 728; United Nuclear Corp. v. Allendale Mut. Insur. Co., 103 N.M. 480, 495, 709 P.2d 649, 664 (1985); GEA Integrated Cooling Tech. v. N.M. Taxation and Revenue Dep’t, 2012-NMCA-010, ¶ 7, — N.M. -, 268 P.3d 48). ConocoPhillips asserts that, “in the twenty five year history of the Proceeds Payment Act, not one court has held that the penalty and attorneys’ fees provisions of the Act apply to contractual royalty underpayment claims.” CP MTD at 21.
WPX also asserts that the Proceeds Payment Act does not extend relief to the Plaintiffs’ allegation of royalty underpayments. See WPX MTD at 22. Further, WPX asserts that the Proceeds Payment Act provides relief to a royalty owner only after the royalty owner has submitted to a royalty payor a division order “setting forth the royalty owner’s proper interests” in oil and gas proceeds, and the royalty payor withholds a royalty payment, as explained in N.M.S.A.1978, § 70-10-5. WPX MTD at 22. WPX asserts that, under N.M.S.A.1978, § 70-10-5, a royalty payor may withhold payment of oil-and-gas proceeds, and avoid interest, when: (i) “the payor believes in good faith that the payee does not have good and marketable title;” (ii) “the payor has received other information” questioning the payee’s asserted title to a royalty payment; (iii) the royalty owner has “failed or refused to execute a division or transfer order in favor of the payor;” or (iv) “the amount is less than $100.” WPX MTD at 23-24 (citing N.M.S.A.1978, § 70-10-5(A)-(D); Murdock v. Pure-Lively Energy 1981-A, Ltd., 108 N.M. 575, 579, 775 P.2d 1292, 1296 (1989)). WPX asserts that the Proceeds Payment Act provides a remedy to royalty owners only if: (i) “the royalty payment has been withheld for longer than the statutorily authorized time period provided in Section 70-10-3;” and (ii) the royalty payor has withheld1 the payment “after the payor has received a division or transfer order from the royalty owner showing the interest to which the royalty owner is legally entitled, as provided in Section 70-10-3.1.” WPX MTD at 24.
WPX asserts that the Plaintiffs’ allegations do not set forth a situation that the Proceeds Payment Act covers. WPX first contends that the Plaintiffs have not demonstrated that they hold an interest in oil and gas proceeds, the payment of which WPX has withheld. ConocoPhillips contends that the Plaintiffs have failed to identify any “specific interest” in an oil and gas proceed, or the “type of ‘proceeds’ or the ‘value’ to which their purported interests apply.” WPX MTD at 24-25 (quoting N.M.S.A.1978, § 70-10-2(B)). WPX argues that the Plaintiffs’ assertion of an ownership in “ ‘non-cost bearing interests’ ” is insufficient to qualify for relief under the Proceeds Payment Act, because it covers only those oil and gas proceeds described in N.M.S.A.1978, § 70-10-2(B). WPX MTD at 25 (quoting SAC ¶¶ 10, 23, at 3, 7). WPX also argues that the Plaintiffs do not qualify for relief under the Proceeds Payment Act.unless they demonstrate that WPX “has withhel