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Slamon v. Carrizo (Marcellus) LLC

United States District Court, M.D. Pennsylvania

September 5, 2017

JAMES SLAMON, Plaintiff,
v.
CARRIZO (MARCELLUS) LLC, et al., Defendants.

          MEMORANDUM OPINION

          ROBERT D. MARIANI United States District Judge.

         I. Introduction and Procedural History

         Presently before the Court is a class action concerning royalty payments made on oil and gas leases. Specifically, Plaintiff, James Slamon, claims that he and others similarly situated[1] were paid royalties on their oil and gas leases that were improperly calculated by Defendants, Reliance Marcellus II, LLC, Reliance Holdings USA, Inc., (collectively "Reliance"), and Carrizo (Marcellus) LLC ("Carrizo"). On October 3, 2016, Plaintiff filed a five count Complaint in the Court of Common Pleas of Susquehanna County, Pennsylvania, (Doc. 1 at 10-30), seeking declaratory relief for breach of contract (Count I), damages for breach of contract, (Count II), damages for breach of contract through a breach of the implied duty of good faith and fair dealing (Count III), damages for breach of fiduciary duty, (Count IV), and an accounting (Count V). Defendants removed the case to this Court on October 31, 2016. (Doc. 1 at 1-6). Thereafter, Carrizo and Reliance filed separate motions to dismiss, (Docs. 15 & 17), which are now ripe for decision. For the reasons that follow, the Court will grant in part and deny in part Defendants' Motions.

         II. Factual Allegations

         Plaintiffs Complaint alleges the following facts which this Court accepts as true for the purposes of this Motion:

         On April 7, 2009, Plaintiff and Carrizo entered into a lease agreement (hereinafter "the lease" or "the contract"), where Carrizo, the Lessee, was given exclusive rights to the oil and gas under Plaintiffs, the Lessor, land in exchange for, among other things, royalty payments on all gas production. (Doc. 1 at 13, ¶¶ 14-15). In August of 2010, with Plaintiffs approval, Carrizo assigned Reliance an undivided sixty percent interest in the contract. (Id. at 13, ¶ 18). This assignment, however, did not modify any other terms of the lease. (Id. at 14, ¶ 18).

         With respect to the calculation of the royalty payments, the lease provides, in part:

         4. ROYALTY PAYMENTS....

         (b) Production Royalty. Lessee shall pay Lessor the following royalty (the "Royalty"), free of all costs, whether pre-production or post-production, as follows:

(ii) GAS: Lessee shall deliver to the credit of Lessor, free of all costs (whether pre-production or post-production), a monthly Royalty equal to eighteen percent (18%) of the greater of (i) the market value, measured at the point of take, of all gas and any constituents produced from the Leasehold or lands pooled or unitized therewith, or (ii) the gross amount of revenue paid to Lessee for all gas and any constituents produced from the Leasehold or lands pooled or unitized therewith, measured at the point of take; provided, however, that when gas production is sold in an arms-length sale transaction with an unaffiliated third party, the value of such gas production shall be the price paid to Lessee.
(f) Valuation. The value of oil, gas, or other hydrocarbon production shall be determined on the basis of the greater of (i) the prevailing local market price at the time of sale or use, or, NYMEX spot price as published at the time of sale, whichever is greater, or (ii) the price paid to Lessee from the sale or use of the gas, including proceeds and any other thing of value received by Lessee; provided, however, that when gas production is sold in an arms-length sale transaction with an unaffiliated third party, the value of such gas production shall be the price paid to Lessee.

(Id. at 34, 35).

         Defendants began gas production on Plaintiff's land in late 2011 and Plaintiff began receiving two royalty checks-one from Carrizo and one from Reliance-in March of 2012. (Id. at 14, ¶¶ 21-22). The royalty payments Plaintiff received, however, were based on gas prices that were consistently below both the NYMEX spot price and the prices paid by other gas producers in the area. (Id. at 14, ¶ 23). Upon inquiry, Carrizo informed Plaintiff that it was basing Plaintiff's royalty payments on the net amount Carrizo received from selling the gas to DTE Energy Trading, Inc. ("DTE"). (Id. at 17, ¶¶ 29, 31). DTE, in turn, paid Carrizo the price DTE received from reselling the gas to a third party, minus DTE's production costs and fees. (Id. at 18, ¶ 37). As a result, the price Carrizo received for the gas-on which Plaintiffs royalty payments were based-had DTE's production costs and fees built into it. (Id. at 19, ¶ 40). Reliance based its royalty payments to Plaintiff on the sale prices derived from a similar agreement with DTE. (Id. at 21, ¶ 44).

         III. Standard of Review

         A complaint must be dismissed under Federal Rule of Civil Procedure 12(b)(6) if it does not allege "enough facts to state a claim to relief that is plausible on its face." BellAtl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 1974, 167 L.Ed.2d 929 (2007). "A claim has facial plausibility when the plaintiff pleads factual content 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, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009).

         "While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, a plaintiffs obligation to provide the 'grounds' of his 'entitlement to relief requires more than labels and conclusions, and a formulaic recitation of a cause of action's elements will not do." Twombly, 550 U.S. at 555 (internal citations and alterations omitted). In other words, "[f]actual allegations must be enough to raise a right to relief above the speculative level." Id. A court "take[s] as true all the factual allegations in the Complaint and the reasonable inferences that can be drawn from those facts, but... disregard[s] legal conclusions and threadbare recitals of the elements of a cause of action, supported by mere conclusory statements." Ethypharm S.A. France v. Abbott Laboratories, 707 F.3d 223, 231 n.14 (3d Cir. 2013) (internal citations and quotation marks omitted).

Twombly and Iqbal require [a court] to take the following three steps to determine the sufficiency of a complaint: First, the court must take note of the elements a plaintiff must plead to state a claim. Second, the court should identify allegations that, because they are no more than conclusions, are not entitled to the assumption of truth. Finally, where there are well-pleaded factual allegations, a court should assume their veracity and then determine whether they plausibly give rise to an entitlement for relief.

Connelly v. Steel Valley Sen. Dist, 706 F.3d 209, 212 (3d Cir. 2013).

         "[W]here the well-pleaded facts do not permit the court to infer more than the mere possibility of misconduct, the complaint has alleged-but it has not show[n]-that the pleader is entitled to relief." Iqbal, 556 U.S. at 679, 129 S.Ct. at 1950 (internal citations and quotation marks omitted). This "plausibility" determination will be a "context-specific task that requires the reviewing court to draw on its judicial experience and common sense." Id.

         IV. Analysis

         Carrizo and Reliance have raised a variety of arguments, some of which overlap, as to why certain claims in Plaintiffs Complaint should be dismissed. The Court will address each argument in turn.

         A. Breach of Contract - Royalty Payment Pricing

         Plaintiff has alleged that Defendants have breached the contract by paying royalties that are lower than the NYMEX spot price and/or the local market price. (Doc. 1 at 25, 26, ¶¶ 65, 73). As a result of this alleged breach, Plaintiff seeks declaratory relief in Count I and damages in Count II. (Id.). Defendants argue that the Complaint does not state a claim for breach of contract because it alleges that Defendants used the sale price they received from DTE to calculate Plaintiffs royalty payments and the plain language of the lease allows Defendants to value the gas at its sale price when "sold in an arms-length sale transaction with an unaffiliated third party." (Doc. 16 at 6-13; Doc. 18 at 9-14).

         "When interpreting a contract, a court must determine the intent of the parties and effect must be given to all provisions in the contract." Krizovensky v. Krizovensky, 624 A.2d 638, 642 (Pa. Super. Ct. 1993). "It is firmly settled that the intent of the parties to a written contract is contained in the writing itself." Id. "While unambiguous contracts are interpreted by the court as a matter of law, ambiguous writings are interpreted by the finder of fact." Kripp v. Kripp, 849 A.2d 1159, 1163 (Pa. 2004). "To be 'unambiguous, ' a contract clause must be reasonably capable of only one construction." John Wyeth & Bro. Ltd. v. CIGNA Int'l Corp.,119 F.3d 1070, 1074 (3d Cir. 1997). However, "[a] contract is ambiguous if it is reasonably susceptible of different constructions and capable of being understood in more than one sense." Hutch ...


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