United States District Court, D. Colorado
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.
A. BRIMMER, UNITED STATES DISTRICT JUDGE
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.
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.
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.
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 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,
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.
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,
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
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,
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
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.
Failure to State a Claim
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).
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