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Spring Creek Exploration & Production Co., LLC v. Hess Bakken Investment, II, LLC

United States Court of Appeals, Tenth Circuit

April 10, 2018

SPRING CREEK EXPLORATION & PRODUCTION COMPANY, LLC; GOLD COAST ENERGY, LLC, Plaintiffs - Appellants,
v.
HESS BAKKEN INVESTMENT, II, LLC, f/k/a TRZ Energy, LLC; STATOIL OIL & GAS, LP, f/k/a Brigham Oil & Gas, LP, Defendants - Appellees.

          Appeal from the United States District Court for the District of Colorado (D.C. No. 1:14-CV-00134-PAB-KMT)

          Tamir I. Goldstein (John W. Mill and Joseph C. Daniels with him on the briefs), Sherman & Howard L.L.C., Denver, Colorado, for Plaintiffs - Appellants.

          Cameron P. Pope, Andrews Kurth Kenyon LLP, Houston, Texas (Alexis J. Gómez, Andrews Kurth Kenyon LLP, Houston, Texas; Craig L. Stahl, Andrews Kurth Kenyon LLP, The Woodlands, Texas; and Frank C. Porada, Berenbaum Weinshienk PC, Denver, Colorado, with him on the briefs), for Defendant - Appellee Statoil Oil & Gas LP.

          Robert S. Safi, Susman Godfrey L.L.P., Houston, Texas (Ashley L. McMillian and Abigail C. Noebels, Susman Godfrey L.L.P., Houston, Texas, and Elizabeth J. Hyatt, Ogborn Mihm, L.L.P., Denver, Colorado, with him on the briefs), for Defendant -Appellee Hess Bakken Investments II, LLC.

          Before LUCERO, McKAY, and McHUGH, Circuit Judges.

         ORDER

         This matter is before us on Plaintiffs-Appellants' Petition for Panel Rehearing ("Petition") and Defendants-Appellees' responses thereto. Upon careful consideration of the Petition and the responses, we grant the Petition in part to the extent of the modifications in the attached revised opinion. Our February 21, 2018 opinion is withdrawn and replaced by the attached revised opinion.

          McHUGH, Circuit Judge.

         Plaintiffs Spring Creek Exploration & Production Company, LLC ("Spring Creek") and Gold Coast Energy, LLC ("Gold Coast") appeal from four separate district court orders dismissing contract and tort claims against Defendants Hess Bakken Investments II, LLC ("Hess") and Statoil Oil & Gas, LP ("Statoil").[1] For reasons to follow, we affirm.

         I. BACKGROUND

         A. Factual History

         This case arises out of the oil fields of western North Dakota. Our story begins around January 2009, when Statoil entered into two agreements with a Hess affiliate. One of those agreements the parties call the "Rough Rider Agreement." The Rough Rider Agreement prohibited Hess for one year from acquiring any oil or gas interests in the Rough Rider Prospect (a sizable swath of land in North Dakota's McKenzie and Williams Counties) in exchange for Hess's affiliate receiving certain proprietary information from Statoil.

          1. The Tomahawk Agreement

         On October 8, 2009, still within the one-year non-compete period, Hess entered into a series of agreements (collectively, the "Tomahawk Agreement") with Spring Creek, Gold Coast, and non-party Coachman Energy relating to the Tomahawk Prospect, a collection of land lying entirely within the much larger Rough Rider Prospect. As one part of the Tomahawk Agreement, Spring Creek and Gold Coast sold all of their oil and gas leasehold interests (covering about 5, 400 net acres) in the Tomahawk Prospect to Hess in exchange for an overriding royalty interest ("ORRI") in the hydrocarbons produced under the terms of the leases. The parties refer to this portion of the Tomahawk Agreement as the "First Assignment." Hess's plan for these leases was to drill enough exploratory wells to prove their value and then sell them to larger operators. Spring Creek's president, William Coleman, testified that, at the time of the Tomahawk transaction, he understood that Hess's intention was to "drill [the area] up and then sell it." Aplt. App'x, Vol. XXIII, at 3759, 234:14-21.

         In another part of the Tomahawk Agreement, Spring Creek, Gold Coast and Hess executed the "Area of Mutual Interest Agreement." That agreement (the "AMI Agreement") established the entire Tomahawk Prospect as an Area of Mutual Interest ("AMI") for a term of three years. In relevant part, the AMI Agreement states:

During the term of the AMI, only [Hess] may proceed to lease or otherwise acquire interests within the AMI. If, during the term of the AMI, [Hess] should acquire any oil and gas lease, leasehold interest or mineral interest, [Hess] shall offer such interest to Coachman in the following proportions, [Hess] (90%), Coachman (10%), pursuant to that certain Participation Agreement dated October 8, 2009, by and between [Hess] and Coachman.

Id. at Vol. II, 304, § 1. The agreement further provides that "for any oil and gas lease acquired" by Hess in the AMI during the three-year term, Spring Creek and Gold Coast would receive ORRIs in those newly acquired leases, in addition to the ORRIs Spring Creek and Gold Coast were already slated to receive under the existing leases transferred to Hess in the First Assignment. Id.

Finally, the AMI Agreement contains two other clauses relevant to this dispute:
4. Covenant Running with the Land. This AMI and all rights, covenants and conditions hereof shall be considered covenants running with the land and shall inure to and be binding upon the Parties hereto, and their respective successors and assigns.
5. Confidentiality. The terms of this Agreement are confidential and no Party, nor any of its respective affiliates or representatives shall furnish this Agreement, or disclose any of its contents, to any third party.

Id. at 306.

         2. Hess-Statoil Settlement Agreement

         Hess's foray into the Tomahawk Prospect did not go unnoticed. On January 15, 2010, Statoil sent a letter to Hess alleging that Hess had breached the Rough Rider Agreement by acquiring leases in the Rough Rider Prospect during the non-compete period. That letter led to a February 2010 settlement agreement (the "Hess-Statoil Settlement Agreement"), in which Hess sold most of its Tomahawk Prospect leases to Statoil at a discount. Hess further agreed that any leases it acquired in the Tomahawk Prospect in the next three months would be offered to Statoil at cost (the "three-month tail"). In connection with Statoil's due diligence in executing the Hess-Statoil Settlement Agreement, Hess disclosed to Statoil the terms of the AMI Agreement and provided it with a copy. Statoil had no interest in inheriting Hess's obligations under the AMI Agreement. To that end, the Hess-Statoil Settlement Agreement states the assignment of leases from Hess to Statoil does "not include . . . the Area of Mutual Interest Agreement dated October 8, 2009, among [Hess] . . ., Spring Creek . . . and Gold Coast." Id. at Vol. XXXIV, 5760, ¶ 2.

         Neither Spring Creek nor Gold Coast was privy to the Hess-Statoil negotiations. After the agreement was finalized, however, Statoil publicly announced that it had acquired about 10, 000 net acres in the Rough Rider Prospect. And on April 12, 2010, Hess and Statoil executed an Assignment, Bill of Sale and Conveyance (the "Second Assignment"), formally transferring the Tomahawk leasehold interests from Hess to Statoil. That conveyance was recorded four days later.

         3. The Parties' Dealings After the Hess-Statoil Settlement Agreement

         Pursuant to the AMI Agreement, Hess made three assignments to Spring Creek and Gold Coast of ORRIs in leases that Hess acquired in the Tomahawk Prospect. The first, completed in April 2010, included leases acquired through March 24, 2010. The second, sent to Plaintiffs in June 2010, included nine leases acquired through March 11, 2010. The third, sent to Plaintiffs in November 2010, only included leases acquired in 2009. All three assignments referenced "Brigham Leases, " a reference to Statoil's predecessor, in the footer.

         After the three-month tail in the Hess-Statoil Settlement Agreement expired, Hess notified its lease brokers to resume the hunt for leasing opportunities in the Tomahawk Prospect. Hess was presented at least one opportunity to acquire a lease in the Tomahawk Prospect, but declined to follow through because the lease was relatively small and Hess's strategy was to acquire acreage in larger quantities. Statoil, meanwhile, acquired many additional leases in the Tomahawk Prospect during this time, dozens of which were publicly recorded throughout 2010.

         Although it is not clear exactly when Plaintiffs learned of the Hess-Statoil transaction, on September 13, 2010, Mark McPherson, Gold Coast's president, sent an email stating, "We sold Tomahawk to Randy, who flipped to [Hess] until [Statoil] came to [Hess] and claimed [Hess] violated an agreement and [Statoil] got to buy [the Tomahawk Prospect leases] from [Hess]." Id. at Vol. XXVII, 4764. At his deposition, Mr. McPherson was asked how he knew that Statoil purchased the Tomahawk Prospect leases from Hess. His answer: "I think Bill [Coleman, Spring Creek's president] told me." Id. at Vol. XXIV, 3990, 125:13-125:18. That answer is consistent with the testimony of Gold Coast's Rule 30(b)(6) deponent, Amy Pfannenstein. According to Ms. Pfannenstein, Gold Coast knew about the Hess-Statoil Settlement Agreement in September 2010, and Gold Coast learned about the agreement from Spring Creek. Id. at Vol. XXVII, 4672-73, 125:19-126:17.

         B. Procedural History

         This litigation began on December 13, 2013, when Spring Creek brought suit against Hess and Statoil in Colorado state court. The original complaint identified six claims for relief:

1. Breach of Contract (against Hess)
2. Breach of Contract (against Statoil)
3. Breach of the Implied Covenant of Good Faith and Fair Dealing (against Hess)
4. Tortious Interference with Contract (against Statoil)
5. Fraudulent Concealment (against Hess and Statoil)
6. Civil Conspiracy (against Hess and Statoil)

         Spring Creek attached three exhibits to its original complaint:

1. The First Assignment (part of the October 8, 2009, Tomahawk Agreement, by which Spring Creek and Gold Coast sold Tomahawk leases to Hess)
2. The AMI Agreement (also part of the Tomahawk Agreement, by which Spring Creek, Gold Coast, and Hess identified the Tomahawk area as one of mutual interest)
3. The Second Assignment (part of the Hess-Statoil Settlement, by which Hess assigned its Tomahawk leases to Statoil)

         On January 17, 2014, Statoil removed Spring Creek's suit to the United States District Court for the District of Colorado. Hess and Statoil then separately moved to dismiss the complaint.

         The district court granted in part and denied in part each motion. Spring Creek Expl. & Prod. Co., LLC v. Hess Bakken Inv. II, LLC, No. 14-CV-00134-PAB-KMT, 2014 WL 4400764, at *14 (D. Colo. Sept. 5, 2014) ("Spring Creek I"). In particular, the district court dismissed with prejudice Spring Creek's third, fourth, fifth, and sixth claims for relief. Id. That left just the breach of contract claims, but even those did not escape unscathed. As to Hess, the district court dismissed Spring Creek's breach of contract claim to the extent it alleged Hess failed to disclose leases acquired after April 2010 and failed to acquire new leases in the AMI. Id. at *4-5. As to Statoil, the district court dismissed Spring Creek's breach of contract claim to the extent it alleged Statoil failed to disclose all leases acquired by Statoil in the AMI. Id. at *11. The district court then explained what was left of Spring Creek's suit:

. "Plaintiff may proceed with [its] first claim for relief based on Hess Bakken's alleged breach of the confidentiality provision and failure to honor royalty interests in existing leases."
. "Plaintiff may proceed with its second claim for relief based on Statoil's alleged failure to assign override interests in new leases to Spring Creek and failure to honor royalty interests in existing leases."

Id. at *14. Put differently, Spring Creek had two surviving claims against Hess: (1) that Hess breached the AMI Agreement's confidentiality provision by disclosing its terms to Statoil without Spring Creek's consent, and (2) that Hess breached the AMI Agreement by not paying ORRIs on the "Existing Leases, " which the original complaint defines as those leases sold to Hess in the First Assignment, plus leases acquired by Hess in the AMI through November 2010. And Spring Creek had two surviving claims against Statoil: (1) that Statoil failed to pay ORRIs on those same Existing Leases, and (2) that Statoil failed to pay ORRIs on the "New Leases, " which the original complaint defines as those oil and gas leasehold interests acquired by Statoil within the Tomahawk Prospect after Statoil entered into the Hess-Statoil Settlement Agreement.

         Spring Creek promptly moved for reconsideration of the district court's order. The district court denied that motion. Spring Creek Expl. & Prod. Co., LLC v. Hess Bakken Inv. II, LLC, No. 14-CV-00134-PAB-KMT, 2015 WL 3542699, at *3 (D. Colo. June 5, 2015) ("Spring Creek II "). While the reconsideration motion was pending, Gold Coast moved to intervene as an additional plaintiff The district court granted Gold Coast's motion. On April 28, 2015, Plaintiffs filed an amended complaint, which added Gold Coast as a plaintiff but was otherwise identical to the original complaint.

         Meanwhile, the case proceeded through discovery. In May 2015, Hess moved for partial summary judgment on Plaintiffs' request for reliance damages. The district court granted that motion in full. Spring Creek Expl. & Prod. Co., LLC v. Hess Bakken Inv. II, LLC, No. 14-CV-00134-PAB-KMT, 2016 WL 1170105, at *6 (D. Colo. Mar. 24, 2016) ("Spring Creek III").

         Hess and Statoil thereafter separately moved for summary judgment. In September 2016, the district court granted in part and denied in part both motions.[2] Spring Creek Expl. & Prod. Co., LLC v. Hess Bakken Inv. II, LLC, No. 14-CV-00134-PAB-KMT, 2016 WL 9735145, at *17 (D. Colo. Sept. 8, 2016) ("Spring Creek IV"). As to Hess, the district court held Plaintiffs' claims for breach of the AMI Agreement's confidentiality provision were time-barred. Id. at *14. As to Statoil, the district court held that Statoil was not an assignee of the AMI Agreement; it partially granted Statoil's motion for summary judgment on that basis. Id. at *10-11. As to both Hess and Statoil, the district court denied their motions for summary judgment on Plaintiffs' breach of contract claims for underpayment of royalties on the Existing Leases. Id. at *11, 15.

         Rather than proceed to trial on the underpayment-of-royalties claims, the parties jointly moved to dismiss the remaining claims without prejudice, as all preferred to arbitrate them instead. Indeed, the parties executed an Agreement to Arbitrate dated December 7, 2016. On December 15, the district court granted in part the stipulated motion to dismiss the Existing Leases claims.[3] It entered final judgment on December 16 and an amended final judgment on December 21, 2016. This appeal timely followed.

         Contemporaneous with the parties' briefing in this court, the Existing Lease claims were resolved in arbitration. In October 2017, an arbitrator dismissed with prejudice Spring Creek's Existing Lease claims against both Hess and Statoil. And in November 2017, upon stipulation of the parties, the same arbitrator awarded Gold Coast $82, 924.96 from Statoil and dismissed Gold Coast's claims against Hess, with prejudice.

         II. JURISDICTION

         Before addressing the merits, we first dispose of two jurisdictional questions. The first concerns the district court's subject matter jurisdiction; the second, our appellate jurisdiction. For the reasons that follow, we conclude we do have jurisdiction to decide this appeal.

         A. District Court's Subject Matter Jurisdiction

         The parties all agree that the district court had diversity jurisdiction pursuant to 28 U.S.C. § 1332(a). But we have "an independent obligation to determine whether subject-matter jurisdiction exists, even in the absence of a challenge from any party." Arbaugh v. Y&H Corp., 546 U.S. 500, 514 (2006). "To determine whether a party has adequately presented facts sufficient to establish federal diversity jurisdiction, appellate courts must look to the face of the complaint, ignoring mere conclusory allegations of jurisdiction." Penteco Corp. v. Union Gas Sys., Inc., 929 F.2d 1519, 1521 (10th Cir. 1991) (citations omitted). "The party seeking the exercise of jurisdiction in his favor 'must allege in his pleading the facts essential to show jurisdiction.'" Id. (quoting McNutt v. General Motors Acceptance Corp., 298 U.S. 178, 189 (1936)). "Ordinarily, 'the jurisdiction of the Court depends upon the state of things at the time of the action brought, and . . . after vesting, it cannot be ousted by subsequent events.'" Price v. Wolford, 608 F.3d 698, 702 (10th Cir. 2010) (quoting Mullan v. Torrance, 22 U.S. (9 Wheat.) 537, 539 (1824)).

         Both plaintiffs in this case are limited liability companies. Although an open question in the Tenth Circuit, the "majority rule" is that, for diversity purposes, a limited liability company is a citizen of every state in which its members reside. See Shannon's Rainbow, LLC v. Supernova Media, Inc., 683 F.Supp.2d 1261, 1266-67 & n.23 (D. Utah 2010) (collecting cases); accord Carden v. Arkoma Assocs., 494 U.S. 185, 189, 195 (1990) (holding that, corporations aside, "for diversity purposes, the citizenship of an artificial entity . . . depends on the citizenship of 'all the members'") (quoting Chapman v. Barney, 129 U.S. 677, 682 (1889)). In their Disclosure Statement to this court, Plaintiffs assert (a) at the time Spring Creek filed its state court complaint, all five of its members were citizens of Colorado, and (b) at the time Gold Coast intervened in this suit, both of its members were citizens of Colorado. These assertions are not supported by citations to the appellate record.

         Plaintiffs never pleaded the citizenship of Spring Creek's members. Recall that Spring Creek's initial complaint was filed in state court. In that original complaint, Spring Creek alleged only that it "is a Colorado limited liability company with its principal place of business located" in Colorado. Aplt. App'x, Vol. I, at 56, Compl. ¶ 1. Being a state-court complaint, it did not allege federal jurisdiction. Id. at 57, Compl. ¶¶ 5-7. After Gold Coast was permitted to intervene, Plaintiffs filed an Amended Complaint, which remains the operative complaint in this action. In their Amended Complaint ("AC"), Plaintiffs alleged in relevant part:

1. Spring Creek is a Colorado limited liability company with its principal place of business located at 1200 17th St., ...

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