Northern Natural Gas Co. v. L.D. Drilling, Inc.

          MEMORANDUM AND ORDER

          J. Thomas Marten, Judge.

         A number of the motions are before the court in the present dispute over the effects of the migration of natural gas which plaintiff Northern Natural Gas injected into a storage field. The gas subsequently migrated to other property. Northern brings claims for private nuisance against the Producer defendants who obtained the gas, based on the allegation that the production caused an unreasonable interference with its storage field. It also brings a claim for unjust enrichment against other interest owner defendants, alleging that they unfairly profited from the extraction. The parties have filed motions which seek to exclude certain evidence, as well as motions for summary judgment on various aspects of the case. The court first addresses the evidentiary motions.

         A. Evidentiary Motions

         1. Motion to Exclude Expert Keeney

         Northern (Dkt. 727) moves to exclude the testimony of George N. Keeney, III, an expert retained by L.D. Drilling, and the opinions contained in his October 17, 2018 report, which was subsequently adopted by other defendants in the action. Keeney was retained to assess the damages that Northern claims it incurred in mitigating the alleged nuisance created by the producer defendants. Northern argues that Keeney's opinions are speculative and unreliable.

         Effectively conceding that some of Northern's arguments are well-founded, the defendants argue that Northern's request to exclude the entirety of Keeney's testimony is “overreaching” and that the court should not “exclude all of Keeney's testimony and opinions.” (Dkt. 752, at 1, 5) (emphasis in original). Having reviewed the pleadings, the court agrees that substantial portions of Keeney's proposed opinions and testimony have not been shown to be reliable and are hereby excluded.

         Keeney is a CPA and has been certified by the American Institute of CPAs in Financial Forensics. He has 38 years of experience in the oil and gas industry. He has frequently offered expert opinions in Oklahoma litigation. In his report, Keeney breaks down Northern's claimed damages as falling into six categories:

Gas Purchase	$ 36, 629, 738
Financial Hedging	16, 888, 276
Construction & Expansion	20, 007, 434
Experts and O&M Costs	5, 595, 775
Experts and O&M Costs Northern in-house	2, 800, 471
Profits Disgorgement/Unjust Enrichment	30, 443, 753

         He then presents five opinions as to these claimed damages. He believes the gas purchase amounts claimed are invalid because Northern has failed to account for the production by non-defendant producers Phillips and Trisum prior to 1984. (Dkt. 728-1, at 4). Second, he contends that the reason for Northern's gas purchases “was more economic than operational, ” because the timing of the purchases indicates that Northern bought gas when the market price was high, rather than when it was low. (Id. at 5). Keeney expressly linked this conclusion in his report to a supposed lack of supporting information:

No evidence has been provided that indicates the purchased gas was actually injected into the storage facility; in February of 2010 the purchased volume exceeds the injected volume by 16 times. Inclusion of the entirety of purchased gas in the NNG claim is inappropriate. I have searched, but found no NNG internal documents that support its claim that it was necessary to purchase the gas for operational reasons and/or that such purchases were attributable to Defendants' conduct.

(Id.)

         Third, Keeney states that the hedging losses were not the fault of the defendants, but “the result of bad bets” by Northern in the derivatives markets. He founded this conclusion on (a) the fact that derivative markets were “purely speculative” and “costless collars that are not related to the purchases of natural gas” made by Northern, and (b) that the timing of the hedges appeared to be unrelated to the actual purchases of replacement gas. “Why were the hedges necessary?, ” he asked. “The disconnect between the periods and prices of hedging and the periods when gas was purchased are a clear indication that the hedges were purely speculative and unrelated.” (Id. at 5-6).

         Fourth, Keeney opines that the cost to improve the Cunningham storage facility overstates the cost of mitigating the nuisance, because it is simply a tally of capital expenditures at the field since 2004. According to Keeney, the work includes costs for containment and storage that Northern would have incurred anyway, or would have incurred as the result of FERC and KCC orders. (Id. at 6-7).

         With respect to the expert costs for improving the storage field, Keeney again focuses on the lack of support: “the detail supporting the claim for Expert fees associated with the Cunningham projects is inadequate to allow determination of the activities performed and the nature of the respective engagements.” (Id. at 7).

         Northern's motion argues that Keeney's opinions are unreliable because they rest on the assumption that Northern lacked documentation for its damages claims, and that the assumption was false. The information supplied by Northern (Dkt. 728, at 3) indicates that it did, indeed, supply defendants with information which would support its damages claims, and that this information was simply ignored by the defendants and its expert.

         The defendants in response stress the sheer size of the discovery presented in the case. (Dkt. 752, at 3) (given the “terabytes” of data, “Keeney [could] not possibly review all of the production in this case”). The defendants suggest that Northern bears the fault for Keeney's failure to identify the relevant documents, because it “refused” to identify the specifically relevant documents.^[1]

         The court finds there are two problems with this argument. First, the issue of fault is secondary to the key issue of whether Keeney's opinions are reliable. For the reasons stated below, the court concludes that in important respects they are not, because their central premise is that Northern has no documentary evidence to support its claims. Shorn of this support, Keeney's opinions in many respects fall back on his own ipse dixit. Second, the record does not support the conclusion that Northern refused to identify the relevant documents. Northern communicated with defendants as to its claimed damages, but noting the volume of the underlying invoices and other materials, it proposed “retain[ing] the invoices and backup” absent a “request for production.” In October, 2018, defendants requested help in locating certain documents - but not supposedly missing damages documents which later formed an essential part of Keeney's opinions.

         A review of Keeney's March 1, 2019 deposition supports the conclusion that a lack of supporting evidence was an important factor in Keeney's opinions. Keeney testified that he relied on defendants' counsel to supply him relevant documentation. He would ask for information, and if none would be supplied, he assumed it did not exist:

Q. Were there any documents that you asked for specifically?

A. Yes.

Q. Okay. And what documents would those be?

A. The -- the native format spreadsheets from virtually all of the experts and the employees that provided information on damages. I asked for copies of contracts with regard to the hedging. I asked for contracts, settlement documents, delivery tickets and so forth with regard to the gas purchases. Most of what I was asking for was backup for -- to substantiate the claim numbers that were being evaluated.

Q. Okay. And were those provided to you?

A. Some were; some weren't.

Q Okay. Do you know what [documents] weren't provided to you?

A. Any kind of supporting documentation.

Q. Can you elaborate on that?

A. Delivery tickets, invoices, payment stubs, gas analysis to purchase gas, the contracts associated with the hedging with the spreads that were done. Virtually all of that information was simply summarized. It was a spreadsheet and that's all the support that was provided.

Q. Okay. Do you know why the additional documentation wasn't provided to you?

A. No.

Q. Okay.

A. I presume it wasn't available.

Q. If it was available, is it something you would want to review?

A. Absolutely.

         As Northern notes, Keeney's basic opinion that Northern was buying gas when it was expensive rather when it was cheap is strongly counterintuitive. Further, the opinion fails to take account of other evidence in the case, such as FERC constraints on when Northern could purchase gas, existing deposition testimony (by Dan Fancler) that the additional gas was in fact purchased in order to meet operating commitments to customers, and that Keeney's opinion as to purchase timing failed to take into account defendants' increasing production after 2010.

         Keeney had no opinion as to Northern's actual gas purchases, or as to the volumes of gas purchased by Northern. And, again in each instance, the supposed lack of supporting documents was important to him:

Q. Can you agree reviewing - well, first of all, do you have any reason to dispute that Exhibit No. 10, which was Exhibit 2 to Mr. Fonda's deposition, do you have any reason to dispute that that accurately reflects the physical gas purchases that Northern made?

A. I have no way to verify that. I've asked for the documentation that supports the purchases. I haven't been able to obtain it. But I don't know.

….

A. I have no explanation for the volumes. You'll have to ask Northern what the criteria was.

Q. Okay. And you have no reason to dispute whatever information Northern puts out there for the volumes that it did choose to purchase?

A. I'd love to see the backup.

         And he agreed that the suggestion the purchases weren't necessary is linked to the lack of documentary evidence:

Q. You're not [offering] an opinion that gas purchases were not operationally needed; correct?

A. I am - I'm - I'm of the opinion that I didn't find any evidence from any internal documents, from any reservoir engineer, from any pressure maintenance group, from anybody inside NNG that said, “We better buy some gas.” Q. Okay. So your opinion is simply that you didn't see anything that would support that conclusion?

A. Correct.

         With respect to tying the hedging transactions to the Cunningham gas purchases, a lack of documentation was also an important part of Keeney's opinions as related in his deposition.

Q. And if, in fact, the 16 million in losses on the swap agreements are tied to direct purchases to offset storage ... gas taken out of the Cunningham field on a one-to-one basis by the defendants ..., would your opinion change?

[A.] I believe the hedging losses are unrelated because they're hedging losses.

….

I -- I haven't seen a document that would convince me of that.

Q. …. Okay. But that doesn't answer the question that I just asked, does it? Because I asked if you were provided documents that satisfied you that that was, in fact, the case, what would your opinion be?

A That's -- I mean, hypothetically, I - I can't answer the question until I see the documents. What I've seen does not support this claim and this claim.

….

Q. Okay. So you reviewed the spreadsheets that were attached as PDFs as deposition exhibits?

A. That's correct.

Q. ….No other documents?

A I was not able to find -- in fact, as part of the interrogatories, we asked for all the supporting documentation. I asked for the native spreadsheets. I asked for the contracts themselves. I asked for trade dates. I asked to see any memoranda that had anything to do with the thought process behind the hedging, and I got this.

…..

A. Two pages.

Q. Okay. And you weren't provided any of those things that you asked for?

A No, none of those things could be located or were responded to in the interrogatories.

         There is substantial documentary evidence directly linking the hedges to the Cunningham field purchases. Keeney was shown such documentation in his deposition and he agreed it was the type of important information that he would have liked to have had before issuing his report.

Q. And without committing - I'm not asking you to commit to the specifics, but would this type of contract seem to be consistent with the memorandum that we looked at from Kent Miller to Mark Hewett indicating hedging .5 BCF of Northern's 1.8 BCF open position from 2008 and 2009?

A. Well, without being able to reconcile it to the position, I can't really tell you. That's what these are, and, yes, I -- I suspect, if given the opportunity to go through all of them, I could at least correlate some --some kind of strategy out of it.

Q. And, sir, I just want to make sure that we have a clean record here because I can sense some of your frustration because you've expressed to us today that you would have liked to have reviewed all of these agreements, you would have liked to have gone through all the financial details of these transactions in order to form an opinion; correct?

A. That is correct.

Q. And I want to make clear to you that all of these agreements as indicated by the Bates numbers that are on the bottom of the page have been produced in this litigation and were, in fact, produced in this litigation in 2017 before the depositions of Mr. Waymire and Mr. Fonda. But you have not had the opportunity before today to see anything similar to this; correct?

A. That is correct.

         With respect to his opinion as to the capital expenditures being ordinary and necessary costs, Keeney again did not review the underlying information which had been produced by Northern. Instead, Keeney had looked at the 2017 deposition of David Waymire and the exhibits that were attached in it. He did not review the invoices and other backup documentary information under the AFEs and summaries. He testified, “I was not aware that they were provided, ” although “I asked for them.” He agreed that they were important to review. Further, although the underlying work order runs were not explicitly attached to the Waymire deposition as exhibits, Waymire explicitly spoke about them in the deposition. Those documents, he testified, were voluminous, but showed the actual costs incurred, and that having such information was important for any accountant to be able to “drill down and see the invoice and the details.”

         With respect to the claim for the expert costs associated with improving the Cunningham field, Keeney's report again relied on an alleged lack of evidence. However, in this respect it may be noted that in his deposition Waymire had explicitly testified that Exhibit 3 was simply a summary. He clearly indicated that there was specific documentation, and that it had been produced by Northern to the defendants.

         Expert testimony is admissible if it is reliable. Daubert v. Merrell Dow Pharms., 509 U.S. 579, 589-93 (1993); Dodge v. Cotter Corp., 38 F.3d 1212, 1222-23 (10th Cir. 2003). Reliability is absent where the putative expert fails to review the available evidence. See Miller v. Pfizer, Inc., 19 F.Supp.2d 1062, 1085 (D. Kan. 2002), aff'd, 356 F.3d 1326 (10th Cir. 2004).

         In his affidavit presented after Northern's motion, Keeney concedes that, upon reviewing the documents specified by Northern, he longer opines that “Northern's damages claim for replacement gas should be wholly disallowed for complete lack of support, ” and that its “damages claim for expert costs and containment [sic] O&M costs should be wholly disallowed for complete lack of support.” (Dkt. 728-2, at ¶ 20-21). At the same time, but in purely conclusory fashion, Keeney also avers that none of the documents cited by Northern has caused him to change his opinions that Northern fails to account for lost gas due to other causes, that its losses were “driven by market concerns, ” that the derivative trades are “independent financial transactions, separate and apart from the physical purchase of natural gas, ” or that the capital costs “would have been incurred regardless of the conduct of the defendants.” (Id. at ¶¶ 13-15, 19).

         The court believes that Keeney's opinions as to market-driven motivation and capital expenses as ordinary and necessary costs should be excluded. A review of Keeney's original report, and his deposition, reveals that the supposed lack of underlying documentary support was an essential component of his opinions. When queried about these opinions in his deposition, the cornerstone of Keeney's position was always that Northern had failed to support its position with documentary evidence. This was true even though Northern had produced such evidence, and even where the limited sources reviewed by Keeney (such as the Waymire deposition) clearly indicated that there were additional invoices and backup documentation available. Once the pillar of a supposed lack of documentary support is removed, Keeney's remaining opinions provide little help to the jury.

         As noted earlier, Keeney is unfamiliar with many of the circumstances which might affect the timing of Northern's gas purchases, rendering his testimony of limited utility at the outset. But the opinion was also integrally tied to the mistaken contention that there were “no [Northern] internal documents that support its claim that it was necessary to purchase the gas.” (Dkt. 728-2, at 5). Keeney's opinion rested on a false premise. Similarly, the contention that Northern's gas purchases were somehow “market driven” is not a reliable expert opinion, once the false premise is removed. The remaining opinion of market motivation by Keeney rests on nothing more than his say so. Keeney was asked in his deposition about the counterintuitive nature of his claim that Northern was only buying gas at high prices.

Q. [I]t would seem to me that if somebody is simply trying to purchase gas when it is most beneficial in the market, you would want to purchase when the prices are low and not purchase when the prices are high.

. . .

Q. (By Mr. Olmstead) So explain to me why my understanding is wrong.

A. Because you're not in the financial markets.

Q. That's not an answer, sir.

A. Yes, it is.

         An essential element of an expert witness is that they are able to explain the opinion, rather that simply invoke their own authority. When coupled with Keeney's lack of familiarity with other factors which might have influenced the timing of Northern's gas purchases, the court finds that the opinion that the purchases were market-related is unreliable.

         The court will also exclude Keeney's opinion that the Northern's capital costs were ordinary and necessary expenses, rather than compensable responses to the defendants' alleged nuisance. Again, the supposed lack of documentation was an important pillar of Keeney's opinion, as reflected in his report and in the deposition. See Report (Dkt. 728-2) at ¶ 5.D.2 “there is insufficient information to allow any evaluation”). Without this support, Keeney's opinion appears to rest solely upon Doug Johnson's conclusions, that the capital expenditures were otherwise required by administrative agencies. See id. at ¶ 5.D.3. Keeney's opinion therefore adds no additional evidentiary support for the defendant's contentions.

         The court reaches a different result conclusion on Keeney's opinion that Northern's derivative losses are unrelated and unrecoverable hedging transactions. Northern highlights the defendants' concession in their response that that the produced documents “would otherwise confirm that the transactions actually occurred and that there was nothing unusual about them.” (Dkt. 752, at 9). But a review of Keeney's original opinion as expressed in his report indicates that the lack of documentation played an important but not (as with the claim of market driven gas purchases) an essential role in Keeney's opinion as to the hedging transaction. The Report (Dkt. 728-2, at ¶¶ 5.C.3-6) stresses the disconnect between the timing and nature of the actual gas purchases and the derivative transactions. The court finds that Keeney may provide testimony as to the opinions expressed in Section 5C of his Report. Although it is a close question, the court concludes that the questions by Northern as to the documentary support for the hedging claims are an appropriate basis for the cross-examination of Keeney rather than a sufficient basis for exclusion of his opinion.

         Northern's arguments as to the remaining portions of Keeney's opinions are relatively limited. The court will also deny Northern's motion as it relates to Kenney's opinions that Northern's damages claims fail to account for gas storage lost due to reasons other than any nuisance created by defendants (Report Section 5A). Northern's discussion of his opinion (Dkt. 728 at 6, Dkt. 766 at 5-6) is cursory. The original opinion expressed by Keeney in his report cited storage gas lost before 1984 due to production by Philips, or other production by Trisum or TransPac. Nothing in Northern's original motion addresses this aspect of Keeney's opinion. In its Reply, Northern cites a portion of John Fonda's deposition stating that it was “[m]y understanding” that Dan Dobbins had calculated what “would have been … if a Bcf of gas was produced from these wells he made a deduction for native gas to determine the amount of gas that need to be purchased for replacement.” (Dkt. 766-5, at 4).

         But the narrow portion of the deposition cited does not establish what Fonda meant by “these wells.” Since the ambiguous evidence is cited only in Northern's Reply, the court will provisionally deny the request to exclude Keeney's opinion that the replacement gas figure does not account for other storage gas lost due to other reasons.

         The court grants the plaintiff's motion as to the contention (Report Section 5F) that Northern's claim for disgorgement of profits improperly duplicates its claim for the cost of purchasing replacement gas. The defendants note that they have independently moved to determine that Northern cannot recover for both claims, and argue that Keeney should be allowed to testify as to the issue “in the event that motion is denied.” (Dkt. 752, at 12). That motion is addressed elsewhere; the issue here is whether Kenney can address the issue as an expert. Defendants' argument assumes that Keeney as a forensic accountant has some expertise in the legal determination of what is duplicative recovery. Keeney's Report cites no relevant expertise, and instead simply references “my understanding” of court rulings. The court determines that such opinion would not be helpful to the finder of fact.

         The court grants plaintiff's motion as to the opinions expressed by Keeney in Sections 5B (“Market Driven Actions”), 5D (‘Ordinary and Necessary Costs”), 5E (“Expert Costs are Ordinary and Necessary”), and 5F (“Duplicative Claim”) of his Report. A supposed lack of documentation was a vital and integral support for the first four of these opinions in Keeney's report, and the same plays a vital role in his defense of those opinions in his deposition. And without that support, the remaining opinion lacks sufficient reliability for submission to the jury. The final opinion, asserting the legal conclusion of that Northern's claims are duplicative, falls outside the scope of the witness's expertise.

         2. Motion to Exclude Disgorgement Evidence

         In the Pretrial Order (Dkt. 275, at 38), Northern explains its claim for Unjust Enrichment this way:

UNJUST ENRICHMENT: Northern seeks disgorgement of profits realized by all defendants from the unjust production and sale of gas drawn to defendants' Extension Area wells (save and except Nash's Holland 1-26 and J.C. 1 wells) from the Cunningham Storage Field. Northern estimates Defendants' cumulative total profit from the sale of gas from the Extension Area wells to be in excess of $30 million. When Defendants' production of gas at their wells became unjust is a question of fact for the jury and is when Defendants knew or reasonably should have known their wells were producing storage gas drawn from the Cunningham Storage Field and/or interfering with or damaging the Cunningham Storage Field. Northern thus seeks disgorgement of all net profits realized from and after the date and/or dates on which the jury determines Defendants' production was wrongful and retention of profits was unjust.

         The defendants seek exclusion of any evidence relating to disgorgement of profits, arguing that Northern violated its obligation to support that claim in its Rule 26 disclosures, in its answers to interrogatories, the Rule 30(b)(6) deposition of its corporate representative, or in his expert report.

         In its disclosures of August 6, 2009 and July 21, 2016, Northern indicated that it sought the disgorgement of “more than $75, 000” from sums gained by defendants through unjust enrichment. In 2016, defendants submitted Rule 33 interrogatories asking Northern for the amount of damages it sought under each Count in the Third Amended Complaint. Northern responded that “this discovery request will be the subject of expert testimony and will be supplemented with expert reports per the Court's rules and schedule.”

         On April 12, 2017, Defendants served a Rule 30(b)(6) deposition notice upon Northern requiring it to designate a corporate representative to address “the amounts Northern claims for disgorgement of profits realized by the defendants.” Northern then designated geologist Thomas Cook to address the issue.

         Cook testified on the issue on May 9, 2017 as the plaintiff's designated corporate representative.

Q. What time span you -- does Northern include in its calculations for disgorgement of profits?

A. It would be from when the wells initially started producing in roughly 2003 up through shut-in, which for Nash, I believe, was 2010, and February 2011 for L.D. Drilling.

….

Q. [D]o you see the topic number 12…Looking at Exhibit 1 the topic asks for the amounts Northern claims for disgorgement of profits you're working on that, but you can't give us those numbers today, correct?

A. That's right, yes, sir.

….

Q. In terms of Topic 12 and the L.D. Drilling Group, tell me how much the amount Northern claims for disgorgement of profits realized by L.D. Drilling for their alleged wrongful production of storage gas?

A. I don't have that number today.

         Cook was asked about how he calculated the amount of net profits, and explained that he was “in the process of reviewing all of the income statements and expense statements or revenue statements and expense statements” provided in discovery by the defendants. He stated he was “still in the process of running the numbers essentially. There is quite a . . . bit of information on a monthly basis.” Cook agreed that at that point he “simply ha[d] reviewed revenue statements and expense statements for the individual producers.”

Q. What time span did you -- does Northern include in its calculation for disgorgement of profits?

A. It would be from when the wells initially started producing in roughly 2003 up through shut-in, which for Nash, I believe, was 2010, and February 2011 for L.D. Drilling.

Q. Okay. Now, the Nash Young well began producing in, I believe, December of '94, so why is it that you don't begin your calculation until 2003?

A. Well, for the assessment that I've done so far I do not have had any of Nash Oil & Gas's records from 1994 to 2001, I believe. So, I guess, to back up from Nash's purpose -- Nash Oil & Gas I started in 2001 when I had records from them.

….

Q. [W]hy is it that you include revenue and expenses prior to June 2010 in your calculations?

A. I think that's a legal question as far as when - when the break is. . . . [A]ll I'm doing right now is running revenue from 2001 to when the wells were shut-in. And how that is divided up will be in my expert report and legal decision.

…..

Q. [D]o you think it's fair to seek disgorgement of profits from the producers for a time period prior to FERC finding enough evidence that the Extension Area wells were producing storage gas?

A. Once it became - once it appears the operators knew that they were producing storage gas then I would say, yes, [from] that point on.

Q. Okay. At what point in time does Northern believe the operators knew they were producing storage gas?

A. I haven't pinpointed that[, ] that's still in my expert report, I don't have an exact date at this point.

Q. Do you believe it's as far back as 2001?

A. No.

Q. Okay. Do you believe it's as far back as 2005?

A. Possibly.

….

Q. And what is Northern's understanding as to what is the alleged wrongful production of storage gas by the defendant producers?

A. That would be when they became aware they were producing storage gas and continued to produce it.

Q. Okay. But you've told me that you can't tell us when the producers became aware they were producing storage gas, correct?

A. Not today, no, sir.

Q. [Y]ou would agree with me that the defendant producers did not know they were producing storage gas as far back as 2001, right?

A. Well, I don't know if they knew back in 2001, but you know, whenever they started - their actions started acting like they were producing storage gas is what I am ultimately looking at.

….

Q. I'm asking you right now because you're offered as a witness on behalf of Northern on a particular issue and I'm asking you what is the wrongful conduct or wrongful production that you're referring to?

A. That would be when the actions of the operators indicated that they were reasonably sure they were producing storage gas.

         The course of the May 2017 deposition established the parties were in conflict as to the need for the plaintiff to articulate at that time the extent of the amount of profits which should be disgorged. Defendants thought Northern was required to do so; Northern stated that the amount could not then be determined, that it had yet to receive its expert report, but that the defendants should be required to relinquish their profits once they manifested a knowledge they were producing storage gas. Counsel for one of the defendants responded that “whether that was inherent in and required to answer the question No. 12 we'll take up with the judge.” Northern represented that Cook would ...