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Verde Minerals, LLC v. Koerner

United States District Court, S.D. Texas, Corpus Christi Division

March 29, 2019

VERDE MINERALS, LLC, et al, Plaintiffs,
v.
DIANE DUNCAN KOERNER, et al, Defendants.

          ORDER GRANTING MOTION TO DISMISS

          NELVA GONZALES RAMOS, UNITED STATES DISTRICT JUDGE

         Before the Court is Defendant Burlington Resources Oil and Gas Company, LP (Burlington's) motion to dismiss (D.E. 81), challenging the third amended class action complaint (D.E. 78), which alleges a claim for nonpayment of oil and gas proceeds pursuant to Texas Natural Resources Code § 91.404(c) along with a request for declaratory relief. Plaintiffs Verde Minerals, LLC, Mark Larson, and Scott Saufferer, on behalf of themselves and all others similarly situated (collectively, “Verde”), filed a response (D.E. 87), and Burlington replied (D.E. 88). For the following reasons, Burlington's motion to dismiss (D.E. 81) is GRANTED.

         BACKGROUND

         The Court previously described the facts of this case in the order granting the Co-defendants' motion for partial dismissal (D.E. 68), which the Court hereby incorporates by reference. In the third amended complaint, Verde pleads two claims against Burlington, the lessee and operator of the Hawley Tract. Verde first asserts that Burlington failed to distribute payments on the oil and gas proceeds of the Hawley Tract to Verde under Texas Natural Resources Code § 91.404(c). Verde also seeks a declaratory judgment determining: (1) that the Hawley Deeds conveyed to the grantees undivided mineral interests in the oil and gas found to be in, under or upon the Hawley-Ayers Survey, and rights and interests in and to the proceeds for oil and gas found and sold from the Hawley-Ayers Survey; (2) that the right to develop and the right to lease were reserved by Hawley from the Hawley Deeds' conveyances of undivided mineral interests in the oil and gas found to be in, under or upon the Hawley-Ayers Survey; and (3) that the rights to receive bonus, delay rental, and royalty payments were conveyed by Hawley to the grantees of the Hawley Deeds along with undivided mineral interests in the oil and gas found to be in, under or upon the Hawley-Ayers Survey.

         Defendant Burlington moves to dismiss these claims under Federal Rule of Civil Procedure 12(b)(6), arguing that (1) Verde cannot sustain a cause of action for nonpayment, and (2) a declaratory judgment is an improper vehicle for a title dispute under Texas law.

         STANDARD OF REVIEW

         The test of pleadings under Rule 12(b)(6) is devised to balance a party's right to redress against the interests of all parties and the court in minimizing expenditure of time, money, and resources devoted to meritless claims. Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 558 (2007). To survive a 12(b)(6) motion to dismiss, a plaintiff must plead “enough facts to state a claim to relief that is plausible on its face.” Id. at 570. Rule 8(a)(2) requires only “a short and plain statement of the claim showing that the pleader is entitled to relief.” Fed.R.Civ.P. 8(a)(2). On a motion to dismiss, the court must view all reasonable inferences in the light most favorable to the non-movant and accept well-pleaded facts as true. Lormand v. U.S. Unwired, Inc., 565 F.3d 228, 232 (5th Cir. 2009) (citations omitted). However, a plaintiff's “formulaic recitation of the elements of a cause of action will not do.” Twombly, 550 U.S. at 555.

         DISCUSSION

         A. Section 91.404(c) of the Texas Natural Resources Code

         Generally, an operator of an oil and gas lease must pay the royalty owners, or lessors, their royalties on production. Leavitt v. Ballard Exploration Co., Inc., 540 S.W.3d 164, 171 (Tex. App.-Houston [1st Dist.] 2017, no pet.) (citing Prize Energy Res., L.P. v. Cliff Hoskins, Inc., 345 S.W.3d 537, 562 (Tex. App.-San Antonio 2011, no pet.)). The Texas Natural Resources Code § 91.402 sets out the time requirements for these payments and permits operators to withhold payments without interest if there is (1) a dispute concerning title that would affect distribution of payments; or (2) a reasonable doubt that the payee has clear title to the interest in the proceeds of production. See ConocoPhillips Co. v. Koopman, 547 S.W.3d 858, 879 (Tex. 2018). If payment is not made as required by § 91.402, “[a] payee has a cause of action for nonpayment of oil or gas proceeds or interest on those proceeds . . . in any court of competent jurisdiction in the county in which the oil or gas well is located.” Tex. Nat. Res. Code § 91.404(c). A “payee” is defined as “any person or persons legally entitled to payment from the proceeds derived from the sale of an oil and gas well located in this state.” Tex. Nat. Res. Code § 91.401(1); see Concord Oil Co. v. Pennzoil Exploration & Prod. Co., 966 S.W.2d 451, 462 (Tex. 1998) (“As an owner of an interest in the minerals, [the lessor] has a legal right to compensation for oil and gas that has been produced . . . and is a ‘payee.'”).

         Burlington argues that Verde's nonpayment claim is premature because there is a “dispute concerning title” and “a reasonable doubt” that Verde has an interest in the proceeds, permitting Burlington to withhold payments. Thus, Verde cannot sustain a cause of action under the statute.

         Citing to several Texas cases, Verde argues that the statute clearly provides a cause of action. However, these cases did not involve a cause of action for nonpayment while title was disputed. See N. Natural Gas Co., a Div. of Enron Corp. v. Vanderburg, 785 S.W.2d 415, 419 (Tex. App.-Amarillo 1990, no pet.) (“It is undisputed that [plaintiff] is the legal owner of the lessor's ⅛ royalty under the oil and gas lease on the property in question.”); see also Koopmann, 547 S.W.3d at 862 (rejecting party's argument that Section 91.402 precluded a breach of contract claim); Anadarko E & P Co., LP v. Clear Lake Pines, Inc., No. 03-04-00600-CV, 2005 WL 1583506, at *1 (Tex. App.-Austin 2005, no pet.) (issue involving prejudgment interest under Section 91.403 for late royalties paid); Prize Energy, 345 S.W.3d at 559 (parties disputed applicability of the statute to calculate damages); Crimson Exploration, Inc. v. Magnum Producing L.P., No. 13-15-00013-CV, 2017 WL 6616740, at *8 (Tex. App.-Edinburg Dec. 28, 2017, pet. filed) (involving a dispute regarding award for prejudgment interest, not a cause of action for nonpayment). Verde has not cited to any law that supports its cause of action for nonpayment of oil and gas proceeds before ownership to mineral or royalty interests is determined. Thus, Verde has failed to establish that it is a “payee” as required by the statute.

         In a final attempt to support its claim, Verde argues that the “safe harbor” provision under § 91.402 only excuses interest payments-not payments altogether. However, this is inconsistent with Texas case law. In Leavitt v. Ballard Exploration Co., Inc., the operator entered into a valid lease agreement with the owners of the land, drilled on the land that was potentially burdened by plaintiff's royalty interest, and paid all royalties owed to the owners. 540 S.W.3d at 174. The Leavitt plaintiff then gave notice to the operator asserting a royalty interest in the unit at issue and filed a related lawsuit. Id. The court deemed these facts to a be a “classic situation” where there is “a dispute concerning title that would affect distribution of payments.” Id. at 174. Contrary to Verde's argument, the court upheld the dismissal of the plaintiff's claims because “[the payor] was entitled to withhold the distribution of royalty payments from the [unit] until the dispute over who was entitled to the distribution of those royalties was resolved.” Id. at 176.

         Here, Burlington entered into a lease with the Co-defendants to produce oil and gas on the Hawley Tract. Verde gave Burlington notice asserting its interest in the proceeds and brought this lawsuit. These facts establish that there is a “dispute over title” that allows Burlington to withhold payments until the issue of Verde's ownership interests is resolved. Thus, Verde has failed to plead ...


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