Hathaway v. Dan

          ORDER

          RAYMOND P. MOORE United States District Judge.

         This case involves determination of the scope of royalty interests, if any, transferred between the parties with respect to certain oil and gas wells. It is before the Court upon review of Defendants' Motion to Dismiss (Motion, ECF No. 23; Reply, ECF No. 27), to which Plaintiffs responded. (Response, ECF No. 25.) Magistrate Judge Hegarty considered the Motion and recommended that it be granted in part and denied in part, finding that every claim should remain except for Count One, which asserts breaches of contract and of the covenant of good faith and fair dealing. (Recommendation, ECF No. 28, at 12-15; see also Am. Compl., ECF No. 18 ¶ 95- 103.) Plaintiffs filed the only objection, arguing that dismissal of Count One would be improper. (Objection, ECF No. 29, at 1.) Defendants did not respond.

         The Court has reviewed these filings, together with the relevant portions of the record. Upon consideration of the Motion, Response, Court file, Recommendation, and the applicable law, the Court adopts the Recommendation for the reasons that follow.

         I. BACKGROUND

         The Court takes the following facts from the Amended Complaint (ECF No. 18) and attachments to the Motion briefing^[1] in the light most favorable to Plaintiff.

         A. Hathaway's Companies and Their Oil & Gas Interests

         There are two types of oil and gas ownership interests relevant here: working interests and overriding royalty interests. Working interests are true ownership interests in a lease or well and require payment of expenses to drill and operate the well. By contrast, overriding royalty interests are carved out of working interests; they entitle their owner to production revenue without her having to drill or otherwise operate the underlying well. (Am. Compl. ¶ 10.)

         Plaintiff Crystal Hathaway owned working and royalty interests in oil and gas wells in Weld County, Colorado and controlled two entities: Malu Lani Oil & Gas Company (“Malu Lani”) and Plaintiff Dios Del Mar Petroleum Company, Inc. (“DDM”). (Id. ¶¶ 9, 12.) She had all her royalty interests in Malu Lani and all her working interests in DDM (except for a portion of royalty interests in “Wells Ranch, ” which remained in DDM). (Id. ¶¶ 11-12, 35.) In August 2012, DDM sold 91% of its working interests to third-party 1280 Horizons, LLC, who assigned some of those working interests to Defendant Avi Dan. (Id. ¶¶ 13, 15.) DDM transferred the remaining 9% of its working interests to Malu Lani. (Id. ¶ 14.)

         In August 2014, Ms. Hathaway instructed her personal assistant to transfer the remaining working interests from Malu Lani back to DDM, but to leave untouched the royalty interests held in Malu Lani. (Id. ¶¶ 23-24.) On October 24, 2014, contrary to those directions, the assistant recorded a form conveyance that transferred to DDM “one hundred percent of [Malu Lani's] working interests . . . and any other interests of any kind and nature . . . in Weld County, Colorado.” Id. ¶ 26.

         B. Plaintiffs' First Transaction with Defendants

         In October 2014, Dan contacted Hathaway about selling the remaining working interests that she held in DDM, and they discussed a potential purchase price of $450, 000.00. (Id. ¶¶ 19- 20.) Hathaway clarified that she did not wish to sell her royalty interests. (Id. ¶ 21.) From November 2014 to January 2015, Hathaway and Dan discussed sale of the working interests over the phone. (Id. ¶¶ 33-35.) In each call, Hathaway reiterated, and Dan acknowledged, that the deal would involve only working interests. (Id. ¶¶ 33-37.) Before they reached a final agreement, Dan performed a title search and learned that the October 24, 2014 conveyance from Malu Lani to DDM transferred both the royalty interests and the working interests. (Id. ¶ 40.) Notwithstanding this knowledge, Dan informed Hathaway that his title search revealed that her royalty interests remained in Malu Lani. (Id. ¶ 41.)

         Meanwhile, several third-party well operators-keeping track of title in order to collect operating expenses and make revenue payments-contacted Hathaway's assistant to inquire whether Hathaway intended to include the royalty interests in the October 24, 2014 conveyance. (Id. ¶¶ 29-30.) Although Hathaway's assistant informed them that only the working interests had been transferred, Hathaway executed a correction conveyance between Malu Lani and DDM on January 20, 2015 to clarify that Malu Lani did not transfer its royalty interests to DDM. (Id. ¶ 31.) The conveyance was recorded on January 30, 2015 (“Corrective Conveyance”). (Id. ¶ 32.)

         In January 2015, Hathaway and Dan reached a final agreement to sell the working interests for $450, 000.00. (Id. ¶ 39.) On January 21, 2015, Dan flew to Denver and asked Hathaway to meet him at a hotel immediately to execute the sale and transfer documents and that he would cancel the sale if she did not meet him that afternoon. (Id. ¶¶ 44-45.) When Hathaway arrived, Dan orally confirmed that he was purchasing Hathaway's remaining working interests. (Id. ¶ 48.) He then told Hathaway that he had to travel for business, so he drafted a quick letter agreement memorializing the terms of the sale. (Id. ¶ 52.) The letter agreement stated that Hathaway and DDM agreed to sell Dan and Defendant Alpha Energy Group, LLC “100% of the working interests and all rights and title [to royalty interests] owned by [DDM and Hathaway] in [ ] Weld County.” (Id. ¶ 53; January 21, 2015 Letter, ECF No. 23-2.) Hathaway objected to that language as broadly including royalty interests and expressed that she needed to have an attorney read the agreement. (Am. Compl. ¶ 55.) Dan responded that there was no such need because, to his knowledge, DDM only held working interests (other than the Wells ranch royalty interests), so there were no other interests being conveyed. (Id. ¶ 59.) He reassured Hathaway that he would help her to fix title in the event any non-working interests had been inadvertently conveyed by DDM pursuant to the letter agreement. (Id. ¶ 60.) Relying on these statements, Hathaway executed the January 21, 2015 Letter. (Id. ¶ 61.) The parties then executed an assignment reflecting transfer from DDM to Alpha Energy “all right, title and interest” in the aforementioned properties. (Original Assignment, ECF No. 23-5.)

         C. Plaintiffs' Second ...