REPORTS FROM THE COURTHOUSES IN SELECT STATES WITH RECENT ROYALTY LITIGATION ACTIVITY COLORADO
| Jurisdiction | United States |
(Dec 2008)
REPORTS FROM THE COURTHOUSES IN SELECT STATES WITH RECENT ROYALTY LITIGATION ACTIVITY COLORADO
Carver, Schwarz, McNab & Bailey, LLC
Denver, Colorado
Craig Carver is a partner with the Denver law firm of Carver Schwarz McNab & Bailey, LLC. Craig's practice specializes in representing companies involved in extraction, transportation and marketing of oil and gas and other natural resources. It includes extensive lead counsel trial experience in complex cases in federal and state courts and in arbitration, covering the gamut from natural gas purchase and transportation issues to operational, royalty and other leasehold disputes, valuation, condemnation, environmental and bankruptcy issues. Craig served as the Foundation's President for 2007-2008, its Vice President for 2006-7, and its Treasurer for 2001-2003. He currently serves on the Foundation's Executive Committee. He is a frequent lecturer on natural resource subjects, particularly those involving the leasing of federal oil and gas interests. He has authored numerous articles in the natural resources area, the most recent being: "The New Standing and Ripeness Doctrines: Who Can Challenge Public Lands Decisions, and When?" 45 Rocky Mtn. Min. L. Inst. (1999) and "Natural Gas Price Indices: Do They Provide a Sound Basis for Sales and Royalty Payments?" 42 Rocky Mtn. Min. L. Inst. (1996). Craig is a graduate of Stanford University (A.B., 1970) and the University of Denver (J.D., 1974).
I. Origins of Colorado Royalty Litigation
A. Garman v. Conoco, 886 P.2d 652 (Colo. 1994).
The Garman case was filed in the Colorado federal district court by owners of overriding royalty interests in federal leases. Substantively, Conoco took the position that post-production gathering, compression and other downstream treating and transportation costs were deductible before calculating the royalty payment. Procedurally, the parties agreed to certify the following question to the Colorado Supreme Court: "Under Colorado law, is the owner of an overriding royalty interest in gas production required to bear a proportionate share of post-production costs, such as processing, transportation, and compression, when the assignment creating the overriding royalty interest is silent as to how post-production costs are to be borne?"
Conoco urged the Supreme Court to answer the question as a matter of law, without reference to the specific terms of the instrument creating the overriding royalty interests. Over the objection of plaintiffs, the Supreme Court followed Conoco's approach. However, in answering the certified question it adopted the Kansas/Oklahoma position that since lessees owe an implied duty to market gas, they must shoulder all costs incurred to place the gas into condition to sell. Specifically, the court answered the certified question as follows: "absent an assignment provision to the contrary, overriding royalty interest owners are not obligated to bear any share of post-production expenses, such as compressing, transporting and processing, undertaken to transform raw gas produced at the surface into a marketable product." In a footnote, the Court further stated: "whether these expenses are required to create a marketable product is a question of fact for the trial court."
B. Rogers v. Westerman, 29 P.3d 887 (Colo. 2001).
At trial, the jury in the Rogers case answered the factual question posed in Garman by finding that there was a market at the wellhead; therefore all subsequent downstream costs could be deducted from the royalty. The Colorado Court of Appeals affirmed. The Supreme Court reversed on the ground that the jury instructions had not properly spelled out the lessee's duties and the bases upon which the jury should make its decision as to the place where gas could first be marketed. The case then settled on remand.
The Rogers decision is lengthy, complex and has engendered severe criticism
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from academics and counsel for royalty payors.1 Reduced to its basics, the case creates two major problems for royalty payors: (a) it declares that the point at which gas has been placed in a condition and at a location where it is "marketable" is a question of fact for a jury to decide; and (b) it fails to articulate comprehensible and unambiguous standards for the jury to apply in making this determination. As is demonstrated by the cases discussed below, these problems make it impossible for a producer to adjust its royalty payments voluntarily in a fashion that is unquestionably in compliance with the Rogers requirements.
What producers see as problems with Rogers have been seen as opportunities for the class action plaintiffs' bar. The result has been a succession of Colorado royalty cases, most of which have been brought as class action cases. The balance of this update paper identifies the cases and summarizes their results.
II. Cases tried since Rogers.
A. Clough v. Williams, Garfield County District Court 2002cv32, 2007 Colo. App. LEXIS 182 (2/8/2007)
The jury awarded over $4 million in damages, apparently based upon its finding that the first market was at the inlet of the interstate pipeline, and all costs upstream of that point were non-deductible. That award was upheld by the Court of...
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