Dufresne v. PDC Energy, Inc.

          ORDER ON MOTION TO DISMISS

          R. BROOKE JACKSON, UNITED STATES DISTRICT JUDGE

         This matter is before the Court on defendants PDC Energy, Inc. (“PDC”), Bart Brookman, Jr., Lance Lauck, Jeffrey Swoveland, Anthony Crisafio, and David Parke's (“individual defendants”) motion to dismiss [ECF No. 39] plaintiffs' second amended complaint (“SAC”) [ECF No. 37]. For reasons stated below, the motion is GRANTED in part and DENIED in part.

         I. BACKGROUND

         PDC is a publicly traded oil and gas company headquartered in Denver, Colorado. SAC, ECF No. 37 at ¶¶3, 23. It owns, operates, and manages oil and gas properties primarily in Colorado, Texas, and West Virginia. Id. at ¶3. In the mid-1980s until 2007, PDC formed dozens of limited partnerships to raise capital to finance the acquisition and development of additional oil and gas properties. Id. PDC served as the managing general partner for the limited partnerships, and it used the millions invested to drill new wells. Id. at ¶15.

         Of the 76 limited partnerships that PDC formed, there are just two at issue in this case: the Rockies Region 2006 Limited Partnership and Rockies Region 2007 Limited Partnership (collectively, the “Partnerships”). Id. at ¶4. The Partnerships owned the rights to multiple oil and gas properties, including rights in the Wattenberg Field in Colorado. Id. According to plaintiffs, the Wattenberg Field is one of PDC's most profitable properties. Id. As such, this field became a central figure in the alleged wrongful scheme to deprive the Partnerships of their interests.

         The alleged scheme began at some point prior to 2010. Plaintiffs allege that PDC decided to divest itself of its obligations to the numerous partnerships, including the Partnerships involved in this case, because PDC wanted to solely benefit from the production of oil and gas that the Wattenberg Field produced. Id. at ¶5. So, PDC devised a scheme to purchase the Partnerships and their associated assets below market value. Id. Mr. Lauck was the supposed “mastermind” of the plan. Id. Plaintiffs believe that PDC concealed the wrongful scheme under the guise of a “shift in corporate strategy” away from the partnership model to a more traditional oil and gas model. Id. at ¶6.

         According to the SAC, PDC's alleged scheme went into action when it started merging earlier partnerships formed between 2002 and 2005. Id. at ¶7. This sparked a separate class action lawsuit against PDC in the Central District of California, where plaintiff Schulein served as the lead plaintiff. Id. (citing Schulein v. Petroleum Dev. Corp., No. SACV 11-1891 AG ANX, 2014 WL 114520, at *1 (C.D. Cal. Jan. 6, 2014)). In that case, the district court ultimately approved a $37 million settlement. Id. As a result, plaintiffs assert that PDC halted the alleged scheme to purchase the 2006 and 2007 Partnerships. Id. at ¶8.

         Nonetheless, plaintiffs allege at least four specific wrongful acts committed by PDC as part of the broader scheme. First, plaintiffs allege that defendants failed to assign the Partnerships 32-acre spacing units as required by the agreement. SAC, ECF No. 37 at ¶53. The terms of the Partnership Agreement required PDC to assign to the Partnerships “prospects, ” which the agreement defines as a “drilling or spacing unit on which [a] well will be drilled by the Partnership which is the minimum area permitted by state law or local practice on which one well may be drilled.” Id. at ¶16; Ex. 2, ECF No. 37-2 at 18. Because at the time the minimum drilling or spacing unit for a vertical well in the Wattenberg Field was 32 acres, plaintiffs assert that PDC was obligated to transfer 32-acre spacing units to the Partnership. SAC, ECF No. 37 at ¶16. So, when PDC assigned the Partnerships lesser “wellbore” interests-which is simply the shaft of a vertical well drilled by the Partnerships-instead of the full 32-acre spacing units, plaintiffs assert that PDC breached its contractual obligations. Id. at ¶16. Plaintiffs primarily object to this decision because it allowed PDC to drill horizontal wells through the spacing units in the Wattenberg Field assigned to the Partnerships, which effectively drained the oil and gas from the Partnerships' existing vertical wells and thus drained plaintiffs' expected revenue. Id. at ¶53.

         Second, plaintiffs allege that defendants failed to take proper steps to maximize the profits of the Partnerships' property. To start, plaintiffs allege that PDC represented to investors that it would “recomplete or refracture” the Partnerships' existing wells within five or six years after the initial drilling. Id. at ¶12. Despite this alleged representation, PDC ultimately decided to “plug and abandon” most of the Partnerships' vertical wells. Id. at ¶¶12, 17. Plaintiffs further allege that defendants refused to drill additional infill wells on the Partnerships' spacing units when in 2009 Colorado reduced the minimum spacing unit for a vertical well from 32 to 20 acres. Id. at ¶16. Finally, plaintiffs allege that PDC failed to maximize the Partnerships' profits by failing to utilize other standard procedures to develop Partnership prospects, such as farmouts or pooling. Id. at ¶14.

         Third, plaintiffs allege PDC breached its fiduciary duties when it profited from the drilling of horizontal wells that passed through the Partnerships' spacing units in the Wattenberg Field without compensating the Partnerships. Id. at ¶15. And lastly, plaintiffs allege yet another breach of fiduciary duty by PDC when it entered into an agreement with Noble Energy, Inc. (“Noble”) by which it traded to Noble a portion of the Partnerships' spacing acreage for other acreage in the Wattenberg Field that is adjoining PDC's own acreage. Id. This allowed PDC to drill longer and more profitable horizontal wells for its own benefit and at the expense of the Partnerships' interest. Id.

         Defendants tell a different story. They contend that after paying significant distributions to plaintiffs for many years, the productivity of the Partnerships' wells naturally declined with age. ECF No. 39 at 3. In fact, defendants allege that the costs to maintain plaintiffs' wells started to exceed revenues by hundreds of thousands of dollars per year. Id. This loss required PDC to plug or abandon the Partnerships' wells beginning in October 2017. Id. Further, defendants allege that plaintiffs' only beef with them is that they want a share of the profits PDC has earned from the horizontal wells that it operated in the same area as the Partnerships' wells. Id. at 2. However, defendants refuse to share in their profits from the horizontal wells because the original investment offerings concerned only the original wells; any additional wells that PDC drilled were explicitly not part of the agreement. Thus, defendants believe that the Partnerships have no rights to any subsequently drilled wells. Id.

         Procedural History

         Derivative plaintiffs Dufresne, Gaffey, and Schulein (“derivative plaintiffs”), on behalf of the Partnerships, brought their initial complaint on December 20, 2017. ECF No. 1. Derivative plaintiffs amended their complaint on April 26, 2018 to add class claims. ECF No. 26. Plaintiffs Glickman and McDonald are the “class plaintiffs.” SAC, ECF No. 37 at 2 n.1. Plaintiffs subsequently filed a second amended complaint on July 10, 2018. ECF No. 37. Defendants filed their motion to dismiss on July 31, 2018. ECF No. 39. Plaintiffs responded on August 21, 2018, ECF No. 41, and defendants filed a reply brief shortly thereafter, ECF No. 42. The motion is now ripe for review.

         II. STANDARD OF REVIEW

         To survive a Fed.R.Civ.P. 12(b)(6) motion to dismiss, the complaint must contain “enough facts to state a claim to relief that is plausible on its face.” Ridge at Red Hawk, L.L.C. v. Schneider, 493 F.3d 1174, 1177 (10th Cir. 2007) (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007)). A plausible claim is a claim that “allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). While the Court must accept the well-pleaded allegations of the complaint as true and construe them in the light most favorable to the plaintiff, Robbins v. Wilkie, 300 F.3d 1208, 1210 (10th Cir. 2002), conclusory allegations are not entitled to be presumed true. Iqbal, 556 U.S. at 681. However, so long as the plaintiff offers sufficient factual allegations such that the right to relief is raised above the speculative level, he has met the threshold pleading standard. See, e.g., Twombly, 550 U.S. at 556; Bryson v. Gonzales, 534 F.3d 1282, 1286 (10th Cir. 2008).

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