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Date: 08-10-2021
Case Style:
Phelps Oil and Gas v. Noble Energy, et al.
Case Number: 19-1376
Judge: Timothy M. Tymkovich
Court: UNITED STATES COURT OF APPEALS
TENTH CIRCUIT
Plaintiff's Attorney:
Defendant's Attorney:
Description:
Denver, CO - Oil and gas royalties lawyer represented defendant with a for underpayments on oil and gas royalties claim.
Noble owns and holds interests in certain oil and gas leases in Colorado.
From these leases, Noble produces natural gas, associated natural gas liquids
(NGLs), and condensed liquid hydrocarbons. Before the gas can be marketed, it
must be processed to remove impurities and separate liquid hydrocarbons from
natural gas steam. For processing, Noble sells its natural gas to DCP for these
post-wellhead services. First, Noble delivers its natural gas to DCP’s processing
plant. After processing, DCP sells the gas and retains a share of the sale proceeds
as compensation for its services before paying the rest of the balance to Noble.
The terms of DCP and Noble’s compensation relationship are set out under what
they call percentage or proceeds (POP) agreements.
1. The Holman Settlement
In 2003, certain recipients of gas-well royalties from Noble’s leases filed a
class action lawsuit in Colorado state court against Noble, claiming Noble was
underpaying royalties (the Holman suit). Phelps, a business that for many years
received royalties from Noble, was a member of this plaintiff class.
Four years later, the Holman suit was settled. The settlement agreement
(Holman Settlement) included what the parties called a “Future Royalty
Calculation Method,” which became effective on January 1, 2008. Under this
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methodology, Noble agreed to pay the Holman suit class members royalties on
100 percent of cash payments received by Noble from natural gas sales and NGLs
and on 50 percent of the cash proceeds retained by a provider of post-wellhead
services like DCP.
The settlement also required Noble to pay royalties on 50 percent of the
value of any volumes of natural gas and NGLs retained by post-wellhead service
providers, used up during production, or otherwise lost and unaccounted for. In
this lawsuit, Phelps contends Noble has failed to comply with the terms of the
Holman Settlement and has underpaid its royalty payments to class members.
2. DCP Settlement
In 2008, Noble commissioned an audit of DCP. After Noble drafted a
report identifying several potential instances of underpayment, DCP objected to
the findings and disputed the amount of the alleged underpayment, $34 million.
Over a period of nine months, Noble and DCP continued to negotiate the audit
report findings. Noble modified some of its claims based on new information
provided by DCP. In March 2010, Noble and DCP entered into a settlement
agreement (DCP Settlement). In the DCP Settlement, Noble and DCP modified
the terms of their contracts to increase the revenue Noble would receive from
DCP going forward. DCP also agreed to commit $17.5 million towards improving
its own gas processing and transportation infrastructure for the primary benefit of
Noble. These improvements would increase DCP’s capacity to process and
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transport natural gas from Noble’s wells. Although Noble did not receive any
direct payments from the settlement, it estimated the net present value of the
contract modifications to be approximately $44 million. All royalty owners,
including Phelps, were paid increased royalties under the renegotiated DCP
compensation contracts as a result.
B. Procedural Background
In August 2014, Phelps filed its class action in state court in Colorado,
asserting two claims against Noble based on the DCP Settlement: (1) Noble
breached the Holman Settlement by not paying royalties on claims identified in
the DCP audit where DCP underpaid Noble; and (2) Noble breached the implied
duty of good faith and fair dealing by settling with DCP rather than recovering a
higher amount in underpayments.
Shortly after the case was filed, DCP removed it to federal court. Phelps
asked the district court to remand to state court, arguing DCP had not satisfied the
amount-in-controversy requirement for diversity jurisdiction under 28 U.S.C.
§ 1332(a). The district court denied the motion to remand, stating that DCP’s
cost of compliance with Phelps’s declaratory judgment claim would exceed
$75,000. Phelps then sought a mandamus from this court, but the petition was
denied.
During discovery, the district court bifurcated the issues of liability and
class certification. The parties then moved for summary judgment on liability.
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The district court granted summary judgment for Noble and DCP, except for one
breach of contract claim. For the breach of contract claim, the district court
found two prerequisites to Noble’s obligation to pay royalties under the Holman
Settlement: (1) production of natural gas and/or NGLs from the relevant wells;
and (2) return of sales proceeds for that gas from DCP. Because the second
prerequisite required that Noble receive actual payments from DCP, the court
rejected Phelps’s claims for royalties based on the amount that Noble allegedly
should have received from underpayments claimed in the DCP audit. The court
also rejected Phelps’s claim for royalties based on the value of the gas retained by
DCP through sale proceeds, under the 50 percent royalty obligation. But the
court found that Phelps may be entitled to a royalty payment from Noble based on
DCP’s promise to invest $17.5 million in infrastructure—so long as the promise
provided any value to Noble beyond increased production that would already
benefit Phelps through royalty payments.
For the implied duty of good faith and fair dealing claim, the court found
that Phelps lacked any evidence that Noble exercised its discretion under the
Holman Settlement in bad faith.
The court allowed further discovery on Phelps’s one remaining breach-ofcontract claim regarding DCP’s $17.5 million infrastructure investment. In
September 2019, the district court entered final judgment and dismissed the
remaining claim, finding that Phelps had failed to show Noble received any
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benefit from the infrastructure investment separate from increased production and
revenues.
II. Analysis
Phelps argues that the district court’s denial of its motion to remand for
lack of subject-matter jurisdiction was incorrect. Phelps contends the maximum
cost of compliance for DCP on Phelps’s individual claim would be limited to the
amount of money DCP would be required to pay Noble to satisfy Phelps’s
individual claim for royalty underpayments, an amount less than $1,000.1
DCP,
in contrast, argues that a declaratory judgment in Phelps’s favor could result in
DCP being liable for the entire amount in the contracts between DCP and Noble,
which could amount to millions of dollars.
We agree with Phelps and dismiss for lack of subject-matter jurisdiction.
1
Phelps’s royalty accounting expert calculated the damages sustained by
Phelps to be $429.56 under the 100 percent obligation on the $17.5 million credit,
$321.51 on the 50 percent obligation on the entire $35.4 million audit claim, and
$162.76 on on the 50 percent obligation on the $17.9 million DCP retained from
the DCP Settlement (the difference between the claimed underpayments in the
audit and the eventual amount settled for in the agreement). App., Vol. XV,
at 3419. DCP and Noble do not dispute that this would be the amount Phelps
personally would receive in damages.
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A. Legal Framework
Subject-matter jurisdiction under 28 U.S.C. § 1332(a) requires, in addition
to diversity of citizenship, an amount in controversy in excess of $75,000. A
defendant “must affirmatively establish jurisdiction by proving jurisdictional
facts” that make it “possible” an excess of $75,000 is “in play.” McPhail v.
Deere & Co., 529 F.3d 947, 955 (10th Cir. 2008). Only if it is “legally certain”
that the recovery or cost of complying with judgment will be “less than the
jurisdictional floor may the case be dismissed.” Id. (citing Meridian Security Ins.
Co. v. Sadowski, 441 F.3d 536, 543 (7th Cir. 2006)). In an action seeking
declaratory and injunctive relief, “the amount in controversy is measured by the
value of the object of the litigation.” Lovell v. State Farm Mut. Auto. Ins. Co.,
466 F.3d 893, 897 (10th Cir. 2006) (citation and internal quotation marks
omitted).
In assessing whether the amount in controversy has been met, we apply the
“either viewpoint” rule. Under this rule, we consider either the value of a
judgment from the viewpoint of the plaintiff or the cost from the viewpoint of the
defendant of injunctive and declaratory relief. Justice v. Atchison, Topeka and
Santa Fe Ry. Co., 927 F.2d 503, 505 (10th Cir. 1991). In other words, we look to
“the pecuniary effect an adverse declaration will have on either party to the
lawsuit.” City of Moore v. Atchison, Topeka & Santa Fe Ry. Co., 699 F.2d 507,
509 (10th Cir. 1983).
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But in multiple-plaintiff cases, such as this one, the “either viewpoint” rule
does not override the well-established principle that each plaintiff or member of
the class must individually satisfy the amount-in-controversy requirement. See
Lonnquist v. J.C. Penney Co., 421 F.2d 597, 599 (10th Cir. 1970). In class
actions, “separate and distinct claims of two or more plaintiffs cannot be
aggregated in order to satisfy the jurisdictional amount requirement.” Snyder v.
Harris, 394 U.S. 332, 335 (1969); see also Lovell, 466 F.3d at 897 (“Class
members’ claims may be aggregated to meet the amount in controversy
requirement only when they unite to enforce a single title or right in which they
have a common and undivided interest.”) (internal quotations omitted); 14 Charles
Alan Wright & Arthur R. Miller, Federal Practice and Procedure § 3725.3 (4th
ed. 2020) (“By contrast, the rule has long been that separate and distinct claims of
multiple plaintiffs cannot be aggregated to satisfy the amount-in-controversy
requirement.”).
B. Application
Phelps has put forth undisputed evidence that the maximum dollar amount
it could recover, exclusive of interest, even if it prevailed on all of its claims
against Noble and DCP, is less than $1,000. It is “legally certain” that a
declaratory judgment entered as to Phelps would not result in more than $75,000
at controversy in this case. McPhail, 529 F.3d at 955. Accordingly, the amountin-controversy requirement cannot be met through Phelps’s claim alone.
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DCP does not resist this conclusion but instead argues that more than
$75,000 is at issue because of the possibility that Noble could offensively deploy,
by cross-claim or in future litigation, Phelps’s declaratory judgment victory to
hold DCP liable to the entire amount of underpayments owed to Noble. In this
scenario, DCP contends it would be collaterally estopped from relitigating the
issue of underpayment in the event of Phelps’s success in this litigation.
But Noble has made no cross-claim, nor has it shown any interest in
bringing a separate lawsuit against DCP. This is fatal. Our precedents explain
that the amount in controversy cannot be based on contingent, speculative, or
collateral claims that could possibly occur as a result of the judgment. See First
Eng. Lutheran Church of Oklahoma City v. Evangelical Lutheran Synod of
Kansas & Adjacent States, 135 F.2d 701, 703 (10th Cir. 1943) (finding that the
church’s future charitable payments could not be used to determine the amount in
controversy because it was “uncertain, contingent, and speculative”); New
England Mortg. Sec. Co. v. Gay, 145 U.S. 123, 130 (1892) (finding the amount in
controversy is “determined by the amount involved in the particular case, and not
by any contingent loss either one of the parties may sustain by the probative
effect of the judgment”); Healy v. Ratta, 292 U.S. 263, 267 (1934) (finding that
any “collateral effect” of a judgment “upon other and distinct controversies, may
not be considered in ascertaining whether the jurisdictional amount is involved,
even though their decision turns on the same question of law”); 14 Charles Alan
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Wright & Arthur R. Miller, Federal Practice and Procedure §3702.5 (4th ed.
2020) (“A very important corollary to the measurement principle is that whatever
the collateral effects a decree or judgment might have by virtue of stare decisis,
collateral estoppel, or any other impact on the rights or interests of third parties,
those consequences cannot be taken into account in calculating the amount in
controversy.”).
Other circuits have similarly found that the amount in controversy cannot
be met by “conjecture” and speculation. Columbia Gas Transmission Corp. v.
Tarbuck, 62 F.3d 538, 543 (3d Cir. 1995) (finding that the court “will not
ordinarily consider such speculative arguments in determining the amount in
controversy”); see also Kheel v. Port of New York Auth., 457 F.2d 46, 49 (2d Cir.
1972) (“[T]he jurisdictional test is applicable to that amount that flows directly
and with a fair degree of probability from the litigation, not from collateral or
speculative sources.”); Morrison v. Allstate Indem. Co., 228 F.3d 1255, 1268–69
(11th Cir. 2000) (finding benefits resulting “from an injunction . . . so uncertain”
that the court could not “reasonably determine whether the amount of money
placed in controversy by the present suit exceeds $75,000”).
It is true that Phelps’s declaratory judgment claim implicates contracts that
are potentially worth several million dollars. And a judgment in Phelps’s favor
could possibly invoke issue preclusion principles in other cases. But, as
explained above, these consequences alone are insufficient to satisfy the amount-
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in-controversy requirement. Both either (1) require aggregation of separate and
distinct claims, or (2) require speculation about the possibility of future, uncertain
litigation that results in a judgment against DCP. But no evidence has been
provided to support either of these theories. DCP does not dispute that separate
and distinct claims of different plaintiffs cannot be aggregated to meet amount in
controversy. Nor does our precedent support basing the jurisdictional minimum
amount in controversy on the sheer possibility that Noble may use the declaratory
judgment of the court as a sword against DCP in later litigation.
DCP points to McPhail, where we held a defendant may establish amount
in controversy by “attaching a copy of the contract, valued at more than $75,000”
or “introduc[ing] evidence, in the form of affidavits from the defendant’s
employees or experts about how much it would cost to satisfy the plaintiff’s
demands.” 529 F.3d at 956. DCP included a declaration by its senior director of
revenue accounting, attesting that DCP had paid Noble more than $113 million on
the five specific contracts related to the wells at issue in this case. The language
in McPhail, however, specifically explains that the affidavits must demonstrate
the amounts necessary to “satisfy the plaintiff’s demands.” Id. Here, the cost to
satisfy Phelps’s demands could not possibly be more than $75,000. Moreover, the
example of “attaching a copy of the contract” was limited to where a “plaintiff
seeks damages in an indeterminate amount.” Id. Phelps is not seeking to hold
DCP or Noble liable for the entire amount of the compensation agreements
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between DCP and Noble, but rather the limited amount of an individual royalty
payment.
DCP insists that because it does not individually pay royalties to Phelps,
the declaratory judgment would require DCP to change numerous business
practices. It suggests that this fact calls into question the entire monetary amount
of its contracts with Noble. Although Phelps’s complaint does mention DCP’s
procedures, it remains within the context of practices that led to lost
revenues—on which Phelps seeks the relief of “commensurate compensation,”
and includes no mention of any request for DCP to overhaul its established
practices. App., Vol. I, at 95.
In its ruling, the district court acknowledged that Phelps was “not seeking
more than $75,000 in damages for itself.” Id. at 184. Instead, the court found “if
plaintiff were to receive the declaratory relief for which it prays, DCP would be
liable to Noble” and “plaintiff may seek further relief.” Id. Both phrases admit
that further action beyond the declaratory judgment is required. Id. We must
determine the amount in controversy with the facts that are before us, not on the
“uncertain, contingent, and speculative” costs of future litigation. First Eng.
Lutheran, 135 F.2d at 701.
In sum, it is legally certain that the jurisdictional facts do not establish a
sufficient amount in controversy to qualify for federal subject-matter jurisdiction
under § 1332(a).
Outcome: For the foregoing reasons, we REVERSE the district court’s denial of
Phelps’s motion to remand and dismiss for lack of jurisdiction. Because we lack
jurisdiction, we do not reach the merits of Phelps’s remaining claims.
Plaintiff's Experts:
Defendant's Experts:
Comments: