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Rodenfels v. PDC Energy

United States District Court, D. Colorado

March 30, 2017

CHRISTOPHER J. RODENFELS, as Trustee of the Christopher J. Rodenfels 2000 Revocable Trust established May 10, 2000, Plaintiff,
PDC ENERGY fka Petroleum Development Corporation, a Delaware corporation, Defendant.



         This matter is before the Court on PDC Energy's Motion to Dismiss or, in the Alternative, to Stay Pending an Appraisal [Docket No. 16]. The Court has jurisdiction pursuant to 28 U.S.C. § 1332.

         I. BACKGROUND[1]

         This case concerns a general partner's buyout of the limited partners' interests in oil and gas partnerships and the fiduciary duty claim by one of the limited partners that his interest was grossly undervalued. Docket No. 1.

         Defendant PDC Energy is a “domestic independent natural gas and crude oil company” that owns and operates natural gas and crude oil properties in the Colorado region. Docket No. 1 at 2, ¶ 1. In 2004 and 2005, defendant formed oil and gas limited partnerships under West Virginia law. Docket No. 1 at 6, ¶ 12. The Christopher J. Rodenfels 2000 Revocable Trust owned four such limited partnerships, and plaintiff Christopher J. Rodenfels sues on its behalf as trustee. Id. at 2, ¶ 1. Defendant was the sole managing general partner of these partnerships. Id. at 6-7, ¶ 13. In this capacity, defendant acquired the right to explore and develop oil and gas properties, including rights in the Wattenberg Field in Colorado, and transferred those rights to the limited partnerships. Id. at 7, ¶ 14.

         In 2010, defendant began the process of buying out the limited partners. Docket No. 1 at 9, ¶ 22. In October 2010 and February 2011, defendant issued proxy statements to the limited partnerships stating that it planned to buy out their interests and transition to a “more traditional exploration and production company model.” Id. at 10, ¶ 23. The proposed transaction, upon approval, would cash out the limited partners and merge the limited partnerships' assets into a special-purpose subsidiary of PDC Energy. Id., ¶ 24. Defendant acknowledged in the proxy statements that it had a conflict between its interests and the interests of the limited partners with respect to the transaction because it owed conflicting duties to its own shareholders and the limited partners. Id. at 11, ¶ 28. Accordingly, defendant formed a special committee[2] that contracted with an investment banker to draft a fairness opinion regarding the transaction. Id. Because the transaction involved a merger, the partnership agreement required that a majority of the limited partners approve the transaction. Id. at 12, ¶ 30. The partnership agreements provided that, in the event of such a merger, limited partners who voted against the merger would be allowed to elect to receive a continuing interest in the surviving entity or a pro rata share of the partnerships appraised assets. Id. However, the proxies used for the merger provided for the elimination of the right to acquire an interest in the continuing entity. Id. This also required majority approval. Id. at 8, ¶ 20.

         The proxies contained an estimation of the value of the partnerships' proved and unproved oil and gas reserves. Id. at 13-14, ¶ 34. Defendant used the estimate of a petroleum engineering consulting firm to value the proved reserves. Id. Defendant valued the unproved reserves at $10, 000 per drilling location. Id. Plaintiff voted against the transaction, but a majority of the limited partners approved the mergers. Docket No. 1 at 16-17, ¶¶ 38, 41-42; Docket No. 16 at 3.

         Plaintiff alleges that the proxy statements contained material misrepresentations that undervalued the limited partnership units. Docket No. 1 at 19-20. Plaintiff claims that defendant “knew at the time the proxies in question were solicited that infill wells and horizontal wells would substantially increase the volume of oil and gas that each Partnership could produce.” Docket No. 1 at 9, ¶ 21; see also Id . at 15, ¶ 37 (“[T]he estimated value of the reserves accessible by infill wells and by horizontal drilling using assumptions about production, commodity prices and costs that are similar to those that were used to value the proved reserves were known to PDC and should have been disclosed in the proxy statements.”). Plaintiff also claims that defendant knew that new extraction technologies such as horizontal drilling and fracking made the drilling rights more valuable, but “failed to disclose its own high valuation of these assets.” Id. at 18, ¶ 46; see also id. at 14, ¶ 35 (“These reserve valuations . . . failed to take into account technological developments that PDC itself had publicly touted as likely to give rise to substantially increased revenues: infill drilling and enhanced recovery from horizontal drilling in the Wattenberg Field in Colorado.”). Plaintiff alleges that defendant breached the fiduciary duty it owed as the managing general partner by making material misrepresentations about the value of the limited partnerships' assets. Id. at 19, ¶ 52.[3]

         Plaintiff joined a class action lawsuit in the U.S. District Court for the Central District of California against defendant under its previous name, captioned Schulein v. Petroleum Dev. Corp., Case No. 8:11-cv-01891-AG-AN. Docket No. 16 at 7.[4] Schulein included both federal securities class action claims and breach of fiduciary duty claims that were based on allegations similar to this case. Schulein v. Petroleum Dev. Corp., 2012 WL 12884851, at *4 (C.D. Cal. June 25, 2012). The defendants in Schulein moved to dismiss the federal securities claims and the breach of fiduciary duty claims. Id. at *7. In the alternative, the defendants requested a stay, id., which the court denied. Id. at *6. The defendants settled the class action for $37 million. Docket No. 1 at 5, ¶ 9.

         Plaintiff opted out of the class action settlement in Schulein and, on February 2, 2016, filed the present suit to pursue his breach of fiduciary duty claim. Docket No. 1 at 10.[5] On May 2, 2016, defendant moved to dismiss or stay this action in favor of an appraisal. Docket No. 16. Defendant argues that, under the West Virginia law that governs the transaction at issue, appraisal is the exclusive remedy for an investor who claims the consideration for a merger was insufficient. Docket No. 16 at 9 (citing W.Va. Code § 31D-13-1302). Defendant admits that this law provides an exception to the exclusive appraisal remedy where the merger was “procured as a result of fraud or material misrepresentation, ” W.Va. Code § 31D-13-1302(d)(2), but argues that plaintiff has failed to plead the proxy statements were fraudulent or contained a material misrepresentation. Docket No. 16 at 9. Specifically, defendant argues that plaintiff “does not allege any false statement by PDC at all.” Id. If dismissal is denied, defendant argues that the Court should nonetheless stay this proceeding in favor of an appraisal proceeding in the interests of judicial economy because, by doing so, “the burden on PDC and the Court will be reduced.” Id. at 11.

         II. ANALYSIS

         A. Failure to State a Claim

         The Court's function on a Rule 12(b)(6) motion for failure to state a claim upon which relief can be granted is not to weigh potential evidence that the parties might present at trial, but to assess whether the plaintiff's complaint alone is sufficient to plausibly state a claim. Fed.R.Civ.P. 12(b)(6); see also Dubbs v. Head Start, Inc., 336 F.3d 1194, 1201 (10th Cir. 2003). In doing so, the Court “must accept all the well-pleaded allegations of the complaint as true and must construe them in the light most favorable to the plaintiff.” Alvarado, 493 F.3d at 1215 (quotation marks and citation omitted). At the same time, however, a court need not accept conclusory allegations. Moffett v. Halliburton Energy Servs., Inc., 291 F.3d 1227, 1232 (10th Cir. 2002).

         The parties agree that whether plaintiff's exclusive remedy is an appraisal is controlled by W.Va. Code § 31D-13-1302(d). Docket No. 16 at 9; Docket No. 25 at 10. Section 1302(d) provides that a “shareholder entitled to appraisal rights under this article may not challenge a completed corporate action for which appraisal rights are available unless the corporate action: . . . (2) Was procured as a result of fraud or material misrepresentation.” This statute was enacted in 2002 and no reported decisions have ...

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