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Patterson v. BP America Production Co.

Court of Appeals of Colorado, Sixth Division

March 12, 2015

David Patterson, Phillip McCoy, and William Schaefer, Plaintiffs-Appellants and Cross-Appellees,
v.
BP America Production Company, f/k/a Amoco Production Company, Defendant-Appellee and Cross-Appellant

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City and County of Denver District Court No. 03CV9926. Honorable Robert S. Hyatt, Judge.

Law Offices of George A. Barton, P.C., George A. Barton, Kansas City, Missouri; Jones & Keller, P.C., G. Stephen Long, Denver, Colorado; Charles Carpenter, Denver, Colorado for Plaintiffs-Appellants and Cross-Appellees.

Wheeler Trigg O'Donnell LLP, Scott S. Barker, N. Reid Neureiter, Kendra N. Beckwith, Nathan P. Murphy, Denver, Colorado for Defendant-Appellee and Cross-Appellant.

Opinion by JUDGE FOX. J. Jones and Sternberg[*], JJ., concur.

OPINION

FOX, J.

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[¶1] Plaintiffs, David Patterson, Phillip McCoy, William Schaefer, and approximately 4000 royalty owners (collectively Royalty Owners), brought a class action against BP America Production Company, formerly Amoco Production Company, (collectively BP), alleging the underpayment of royalties on the sale of natural gas. Following a jury trial, the district court entered judgment in favor of Royalty Owners. Royalty Owners now appeal the court's pretrial order granting BP's C.R.C.P. 56(h) motion and denying Royalty Owners' moratory interest request. [1] BP cross-appeals, alleging multiple errors. We affirm.

I. Background

[¶2] In the early 1970s, Royalty Owners entered into lease agreements with BP, obligating BP to pay Royalty Owners royalties in exchange for natural gas extracted from their wells in Weld or Adams Counties and processed at BP's Spindle or Wattenberg processing plants -- all located within the Denver-Julesburg (DJ) Basin. As applicable here, these lease agreements provided that BP would pay Royalty Owners " 1/8 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." [2] The lease agreements did not expressly authorize BP to deduct from the royalty payments any post-production costs incurred in making the gas marketable after its extraction.

[¶3] Royalty Owners also signed oil and gas division and transfer orders, which stated, in pertinent part:

Settlements for gas shall be based on the net proceeds at the wells after deducting a fair and reasonable charge for compressing and making it merchantable and transporting if the gas is sold off the property. Where gas is sold subject to regulation by the Federal Power Commission [FPC] or other governmental authority, the price applicable to such sale approved by order of such authority shall be used to determine the net proceeds at the wells.[3]

[¶4] This section of the division and transfer order identifies alternative procedures to calculate Royalty Owners' royalty payments. As interpreted by another division of this court in Patterson v. BP America Production Co., 159 P.3d 634, 640 (Colo.App. 2006), rev'd, 185 P.3d 811 (Colo. 2008), the first sentence provided that royalties would be calculated based on the net proceeds at the wells after deducting any post-production costs incurred in making the gas marketable. The second sentence, however, provided that, as long as gas was federally regulated, royalties would be based on a fixed price set by the FPC or other government entity. Id.

[¶5] When most Royalty Owners signed the lease agreements and division and transfer orders, gas prices were federally regulated, and Royalty Owners were paid at the maximum lawful price, or the price specified by the lease agreements. In the 1980s, the process of deregulating the natural gas market began, and BP gradually changed how Royalty Owners' royalties were calculated. BP began to employ a netback methodology to calculate royalty payments, whereby BP deducted from Royalty Owners' royalty

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checks a proportionate share of the post-production costs incurred to make the gas marketable, including transportation, processing, and refinement costs.

[¶6] Royalty Owners' royalty statements did not disclose these deductions. Royalty Owners claim that BP consistently concealed the changed royalty calculations and misrepresented to Royalty Owners the deduction of post-production costs. Royalty Owners also assert that BP never informed them that any of their wells had been deregulated. Indeed, Royalty Owners contend that they did not become aware of the deductions until shortly before they sued.

[¶7] In 2003, Royalty Owners sued BP for breach of contract, alleging that BP underpaid their royalties between January 1, 1986, and December 1, 1997 (Class Time Period). Royalty Owners also moved to certify the action as a class action. In response, BP filed a motion for partial summary judgment, objecting to the class certification because Royalty Owners' claims were allegedly barred by a six-year statute of limitations. See § 13-80-103.5(1)(a), C.R.S. 2014. Royalty Owners responded that BP fraudulently concealed the material facts giving rise to their claims (i.e., the post-production cost deductions), thereby tolling the applicable statute of limitations.

[¶8] BP contended that it did not fraudulently conceal the deductions, in part, because the lease agreements and division and transfer orders provided Royalty Owners with notice that BP intended to deduct post-production costs from Royalty Owners' royalties.

[¶9] The district court granted BP's motion, ruling that Royalty Owners' claims were time-barred. A division of the court of appeals reversed in Patterson, 159 P.3d 634, on the ground that Royalty Owners' claims did not accrue until the date they discovered or should have discovered BP's post-production cost deductions.

[¶10] The division also held that the division and transfer orders " did not provide the Royalty Owners with actual notice of BP's use of the netback method." Id. at 640. Rather, the orders stated that BP would deduct post-production costs only if the federal government decided to deregulate gas prices. Id. Thus, to claim that Royalty Owners had actual notice of any deductions, BP would need to demonstrate that it notified Royalty Owners of deregulation and of its decision to begin using the netback method to deduct post-production costs. Id. The division also concluded that there remained a disputed issue of material fact regarding whether Royalty Owners " should have known" about BP's use of the netback method to calculate deductions. Id.

[¶11] The supreme court reversed the court of appeals in BP America Production Co. v. Patterson, 185 P.3d 811, and remanded the case, holding that Royalty Owners' claims accrued on the date their royalties became due, not on the date they discovered the alleged breach of contract. Id. at 815. The supreme court, however, left untouched the court of appeals' rulings that the division and transfer orders did not give Royalty Owners actual notice of BP's use of the netback method, that a disputed issue of material fact existed regarding whether BP fraudulently concealed the deductions it made, and whether the statute of limitations had been equitably tolled as a result. See id.

[¶12] On remand, Royalty Owners filed a renewed motion for class certification under C.R.C.P. 23(b)(3). Central to certification was the disputed (and undecided) issue of whether Royalty Owners could prove the elements of their fraudulent concealment claim on a class-wide basis to toll the statute of limitations. The district court held an evidentiary hearing, found Royalty Owners' fraudulent concealment and equitable tolling claims persuasive, and certified the class.

[¶13] BP again objected and filed an interlocutory appeal. The court of appeals affirmed the certification in Patterson v. BP America Production Co., 240 P.3d 456, 469 (Colo.App. 2010), concluding that BP's limited evidence regarding several isolated Royalty Owners was insufficient to defeat Royalty Owners' fraudulent concealment claim. BP sought certiorari review in the supreme court, and the court affirmed in BP America Production Co. v. Patterson, 263 P.3d 103, 106 (Colo. 2011). The supreme court noted

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that the district court's certification order remained " subject to proof later discovered or presented at trial on the merits" regarding individual Royalty Owners. Id. at 114.

[¶14] Following the second remand, BP deposed nine Royalty Owners and discovered that several class members were gas industry participants who used the netback methodology themselves and who acknowledged that the division and transfer orders notified Royalty Owners of BP's intent to use such methodology. Based on this new information, BP moved to decertify the class, arguing that these class members should have known about the royalty deductions and that Royalty Owners' fraudulent concealment and equitable tolling claims therefore failed on a class-wide basis. The district court denied the motion.

[¶15] After the second remand, BP also moved for a pretrial determination of a question of law pursuant to C.R.C.P. 56(h) on Royalty Owners' claim for moratory interest, under section 5-12-102(1)(a), C.R.S. 2014, on all unpaid royalties. The district court agreed with BP and held that Royalty Owners were not entitled to moratory interest.

[¶16] At the conclusion of trial, a jury found that BP breached the lease agreements by underpaying royalties and that BP fraudulently concealed the underpayments, thereby tolling the statute of limitations. The jury awarded Royalty Owners $7,941,809.23 in damages.

[¶17] BP timely filed a C.R.C.P. 59(a)(2) motion for a judgment notwithstanding the verdict (JNOV) or a new trial, which which the district court denied. In response to Royalty Owners' C.R.C.P. 59(a)(4) motion, the district court amended the judgment to add $32,273,817 in statutory prejudgment interest, pursuant to section 5-12-102(1)(b), bringing the total judgment to $40,215,626.23.

[¶18] Royalty Owners now appeal the district court's pretrial grant of BP's C.R.C.P. 56(h) motion and its denial of moratory interest under section 5-12-102(1)(a). BP cross-appeals from the judgment, contending that the district court erred by (1) denying BP's motions for a directed verdict and JNOV, (2) failing to properly instruct the jury, and (3) declining to decertify the Royalty Owners' class.

II. C.R.C.P. 56(h) Motion

[¶19] Royalty Owners contend that the district court erred in granting BP's C.R.C.P. 56(h) motion and concluding that Royalty Owners were not entitled, as a matter of law, to prejudgment interest under section 5-12-102(1)(a), at a rate greater than the eight percent statutory rate authorized in section 5-12-102(1)(b). We discern no error.

A. Standard of Review

[¶20] We review an order granting a C.R.C.P. 56(h) motion de novo. Henisse v. First Transit, Inc., 247 P.3d 577, 579 (Colo. 2011); In re Estate of McCreath, 240 P.3d 413, 417 (Colo.App. 2009). A determination of a question of law under C.R.C.P. 56(h) is proper " [i]f there is no genuine issue of any material fact necessary for the determination of the question of law." See Henisse, 247 P.3d at 579. The nonmoving party is entitled to all favorable inferences, and we resolve any doubt as to the existence of a genuine issue of material fact in the nonmoving party's favor. Id.; McCreath, 240 P.3d at 417-18.

B. Section 5-12-102(1)(a)

[¶21] Section 5-12-102(1)(a) specifies that where, as here, money or property is wrongfully withheld, " interest shall be an amount which fully recognizes the gain or benefit realized by the person withholding such money or property." This language, which allows for a higher interest rate than otherwise statutorily authorized, codifies the common law concept of " moratory interest." See Davis Cattle Co. v. Great W. Sugar Co., 393 F.Supp. 1165, 1186-87 (D. Colo. 1975) (applying Colorado law), aff'd, 544 F.2d 436 (10th Cir. 1976). Absent proof of the withholding party's gain or benefit, however, interest is awarded at the statutory rate of eight percent per year. See § 5-12-102(1)(b); E.B. Jones Constr. Co. v. City & Cnty. of Denver, 717 P.2d 1009, 1015 (Colo.App. 1986).

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[¶22] The purpose of awarding moratory interest is two-fold: to discourage the withholding party from delaying payment until after judgment and to compensate the injured party accordingly. Great W. Sugar Co. v. KN Energy, Inc., 778 P.2d 272, 276 (Colo.App. 1989). Moratory interest is therefore intended to be compensatory, not punitive, in nature. Id.

[¶23] For a plaintiff to recover moratory interest under section 5-12-102(1)(a), the plaintiff must demonstrate the defendant's gain or benefit realized on the withheld funds by a preponderance of the evidence. See E.B. Jones Constr., 717 P.2d at 1015; see also § 13-25-127(1), C.R.S. 2014. The statute does not clarify the meaning of " gain or benefit realized," specify the plaintiff's evidentiary burden, or suggest a means of calculation. See Great W. Sugar, 778 P.2d at 274.

[¶24] Likewise, Colorado courts have not drawn a clear line regarding what evidence is sufficient or what interest-calculating formula should be used. However, some proof demonstrating a defendant's gain or benefit and linking it to the withheld money or property is required. E.B. Jones Constr., 717 P.2d at 1015 (holding that " absent proof of [the defendant's] gain from its retention of the money," the statutory rate applies); see also Great W. Sugar, 778 P.2d at 274 (awarding moratory interest because the plaintiff's interest-calculating model showed the specific amount of property withheld and the defendant's net profit gain on that specific amount).

[¶25] We agree with the Tenth Circuit that this proof cannot be too speculative or general and must reflect the defendant's actual gain or benefit realized on the withheld funds. See Atl. Richfield Co. v. Farm Credit Bank of Wichita, 226 F.3d 1138, 1158 (10th Cir. 2000) (requiring " specific proof" of the amount gained from the withheld funds" ); see also Echo Acceptance Corp. v. Household Retail Servs., Inc., 267 F.3d 1068, 1093-94 (10th Cir. 2001) (To satisfy section 5-12-102(1)(a), a plaintiff must '" specifically prove that the withholding party actually benefitted'" from the withheld funds. (quoting Nw. Cent. Pipeline Corp. v. JER P'ship, 943 F.2d 1219, 1229 (10th Cir. 1991))) (emphasis added); Great W. Sugar, 778 P.2d at 274 (discussing section 5-12-102(1)(a)'s intent to compensate the injured party based on the withholding party's " benefit resulting from the wrongful withholding," and accepting the plaintiff's interest calculation because it connected the specific amount of property withheld to the defendant's profit); E.B. Jones Constr., 717 P.2d at 1015 (affirming the district court's conclusion that " absent proof of [the defendant's] gain from its retention of the money, [the plaintiff's] moratory interest damages ...


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