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Lipsey v. Seeco, Inc.

United States District Court, E.D. Arkansas, Western Division

June 20, 2017

MAURICE LIPSEY, individually and on behalf of all others similarly situated PLAINTIFFS
v.
SEECO, INC.; DESOTO GATHERING CO., LLC; and SOUTHWESTERN MIDSTREAM SERVICES CO. DEFENDANTS

          OPINION AND ORDER

          J. LEON HOLMES, UNITED STATES DISTRICT JUDGE

         Maurice Lipsey commenced this putative class action against SEECO, Inc., Desoto Gathering Company, LLC, and Southwestern Midstream Services Company by filing a complaint in this Court on March 17, 2016. He alleged that the defendants failed to pay him the full amount of royalties to which he was entitled pursuant to a lease into which he entered with SEECO on April 20, 2005. He invoked this Court's diversity jurisdiction pursuant to 28 U.S.C. § 1332(a)(1). Pending before the Court are the defendants' amended motion for summary judgment and Lipsey's motion for leave to file an amended class action complaint. Document #53; Document #89. The Court heard oral argument on the pending motions on April 11, 2017. Document #107. During argument, the Court sua sponte raised the issue of whether the amount in controversy satisfied the requirement for federal jurisdiction and directed the parties to brief the issue prior to any ruling on the pending motions. In his brief on the issue, Lipsey conceded that the amount in controversy satisfies neither the traditional diversity nor the CAFA jurisdictional requirements. Document #106. In their brief, the defendants asserted that the Court has jurisdiction, arguing that the amount in controversy exceeds the jurisdictional minimum set forth in CAFA. The Court finds that subject-matter jurisdiction exists pursuant to CAFA, grants the defendants' amended motion for summary judgment, and denies Lipsey's motion for leave to file an amended class action complaint.

         I. SUBJECT MATTER JURISDICTION

         A. The Legal Standard

         Challenges to subject matter jurisdiction may be raised at any time prior to final judgment. Grupo Dataflux v. Atlas Global Grp., L.P., 541 U.S. 567, 571, 124 S.Ct. 1920, 1924, 158 L.Ed.2d 866 (2004). The Court is obligated to consider its own jurisdiction and, if necessary, raise the issue sua sponte. Crawford v. F. Hoffman-La Roche Ltd., 267 F.3d 760, 764 n. 2 (8th Cir. 2001). Federal Rule of Civil Procedure 12(h)(3) codifies this fundamental principle: “If the court determines at any time that it lacks subject-matter jurisdiction, the court must dismiss the action.” Jurisdiction, of course, “‘depends upon the state of things at the time of the action brought.'” Grupo Dataflux, 541 U.S. at 571, 124 S.Ct. at 1924 (quoting Mollan v. Torrance, 22 U.S. 537, 539, 6 L.Ed. 154 (1824)).

         The Supreme Court has explained:

The rule governing dismissal for want of jurisdiction in cases brought in the federal court is that, unless the law gives a different rule, the sum claimed by the plaintiff controls if the claim is apparently made in good faith. It must appear to a legal certainty that the claim is really for less than the jurisdictional amount to justify dismissal. The inability of plaintiff to recover an amount adequate to give the court jurisdiction does not show his bad faith or oust the jurisdiction. Nor does the fact that the complaint discloses the existence of a valid defense to the claim. But if, from the face of the pleadings, it is apparent, to a legal certainty, that the plaintiff cannot recover the amount claimed or if, from the proofs, the court is satisfied to a like certainty that the plaintiff never was entitled to recover that amount, and that his claim was therefore colorable[1] for the purpose of conferring jurisdiction, the suit will be dismissed. Events occurring subsequent to the institution of suit which reduce the amount recoverable below the statutory limit do not oust jurisdiction.

St. Paul Mercury Indem. Co. v. Red Cab. Co., 303 U.S. 283, 288-90, 58 S.Ct. 586, 590-91, 82 L.Ed. 845 (1938) (emphasis added) (footnotes omitted); see also Sanders v. Hiser, 479 F.2d 71, 73 (8th Cir. 1973). “The first test for dismissal on jurisdictional grounds-whether the sum claimed by the plaintiff is made in good faith-should be seen as but a linguistic variance of the second-whether it appears to a legal certainty that plaintiff cannot recover the amount demanded.” Zunamon v. Brown, 418 F.2d 883, 886, n.3 (8th Cir. 1969). In other words, there is one test: legal certainty. The legal certainty standard is satisfied when the “impossibility of recovery [is] so certain as virtually to negative the plaintiff's good faith in asserting the claim.” Schubert v. Auto Owners Ins. Co., 649 F.3d 817, 822 (8th Cir. 2011) (alteration in original) (quotation and citation omitted). In this context, “proofs” means “‘summary-judgment-type evidence.'” Martin v. State Farm Fire and Cas. Co., 826 F.Supp.2d 1133, 1136 (D. Minn. 2011) (quoting Allen v. R & H Oil & Gas Co., 63 F.3d 1326, 1336 (5th Cir. 1995)).

         If the amount in controversy is satisfied when the action is commenced, subsequent events reducing that amount do not “oust jurisdiction.” St. Paul Mercury, 303 U.S. at 289-90, 58 S.Ct. at 590-91. “Subsequent events may, however, be relevant to prove the existence or non-existence of diversity jurisdiction at the time of filing.” Scottsdale Ins. Co. v. Universal Crop Prot. Alliance, 620 F.3d 926, 931 (8th Cir. 2010). Courts, including the Eighth Circuit, have distinguished subsequent events that reduce the amount in controversy from subsequently obtained information that shows the amount in controversy failed to satisfy jurisdictional requirements from the action's inception. Id.; see also State Farm Mut. Co. v. Powell, 87 F.3d 93, 97 (3d Cir. 1996); Coventry Sewage Assocs. v. Dworkin Realty Co., 71 F.3d 1, 4 (1st Cir. 1995); Tongkook Am. Inc. v. Shipton Sportswear Co., 14 F.3d 781, 785 (2nd Cir. 1994); Jones v. Knox Exploration Grp., 2 F.3d 181, 183 (6th Cir. 1993); Am. Mut. Liab. Ins. Co. v. Campbell Lbr. Mfg. Corp., 329 F.Supp. 1283, 1286 (N.D.Ga. 1971).

         The Eighth Circuit has recognized the inherent tension between the rule that post-filing events do not divest the court of jurisdiction and the rule that courts may look to post-filing, pre-trial proofs to determine, in hindsight, the amount in controversy at the time of filing. Schubert, 649 F.3d at 822. The court has explained that the tension is resolved “by deferring to the plaintiff's estimate with respect to the amount in controversy whenever the impossibility of recovery is not apparent from the face of the pleadings but emerges from adjudication of the merits. Further resort to material developed in discovery is allowed merely to amplify the meaning of the complaint allegations.” Id. (internal citation and quotation omitted). Here the impossibility of recovery is not apparent from the face of the pleadings; nor has it emerged from adjudication of the merits. The question is whether evidence produced during discovery has amplified the meaning of the complaint allegations so as to demonstrate to a legal certainty that the amount in controversy from the inception failed to meet the minimum required for federal jurisdiction.

         B. The Record in this Case

         Lipsey's complaint requests damages for the defendants' alleged under-measurement of gas, theft of gas, and reduced royalty payments in the amount of $10, 000, 000; as well as punitive damages in the amount of $15, 000, 000. Document #1 at 24. Lipsey alleges:

In the instant matter, it is clear that SEECO received the full “actual amount” of proceeds for all the gas produced, saved, and sold at the time the gas was first sold, and it was only Lipsey and the other royalty owners who received the rest of their proceeds at a later date and time.

Document #80 at 9-10 (emphasis added). SEECO paid royalty owners “the rest of their proceeds” through prior period adjustments to the royalty statements.

         During oral argument on the defendants' motion for summary judgment, the Court asked defense counsel to explain the accounting issue that gives rise to negative lost and unaccounted for gas, which behooves SEECO to make prior period adjustments to royalty owners. Gas is sold based on British Thermal Units (BTUs), a measurement of energy content. The drier the gas is, the higher the BTU. This is because less water in the gas means more energy content. Defense counsel explained that when the gas is measured at the wellhead, a calculation is performed to determine its BTUs.[2] Upon performing the calculation, an assumption is made regarding the water saturation of the gas. SEECO assumes the gas at the wellhead is wet, as opposed to dry. Before the gas reaches the sales point, it is processed to remove excess water molecules. When the gas reaches the sales point, the BTU calculation is performed a second time. Now that the gas has been processed, SEECO assumes the gas is dry.

         The lost and unaccounted for gas is the difference between the measurement at the wellhead and the measurement at the sales point. Normally, the lost and unaccounted for gas is a positive value, because gas is in fact lost as it travels from the wellhead to the sales point. In this case, however, the lost and unaccounted for gas is a negative value because of the assumption at the wellhead that the gas is more water saturated than it is in fact. To account for the negative lost and unaccounted for gas, SEECO makes a prior period adjustment, which is reflected on its royalty owners' statements. Lipsey's royalty statements show approximately a two-year delay between the original compensation for the gas sold and the prior period adjustment for negative lost and unaccounted for gas. Defense counsel attributed the delay to the fact that SEECO did not initially know why the BTU calculations rendered a higher measurement at the sales point.

         Prior to the hearing, the Court calculated that SEECO had made $60 in prior period adjustments to Lipsey, according to the royalty statements before it, which encompasses May of 2015 through September of 2016, for royalty checks written on August 25, 2015, through December 25, 2016. After the hearing, Lipsey clarified that the $60 value is the amount of prior period adjustments made to Lipsey's pool, which includes the interests of several other royalty owners and SEECO. The total of Lipsey's prior period adjustments is much less.

         The only evidence in the record as to the amount in controversy are the royalty statements covering May 2015 to September 2016. To determine the amount in controversy, the Court must extrapolate from those statements to calculate Lipsey's potential recovery. The relevant statute of limitations, Ark. Code Ann. § 16-56-111(a), provides that Lipsey's action must have been commenced within five years after his cause of action accrued.[3] In his complaint, Lipsey alleges that the defendants knew they were under-measuring the gas but continued to do so without notifying or compensating the royalty owners. Document #1 at 9-10, ¶ 23. For the purposes of calculating the amount in controversy, the Court assumes that Lipsey could prove fraudulent concealment and therefore toll the statute of limitations until he discovered the fraud-when he received the first prior period adjustment in May 2015. See First Pyramid Life Ins. Co. of Am. v. Stolz, 311 Ark. 313, 318-19, 843 S.W.2d 842, 845 (1992).

         The royalty statements show that Lipsey received approximately $8 in prior period adjustments during the sixteen-month span from May 2015 through September 2016, which adjusted the amounts of royalties paid from November 2013 through September 2014.[4] Document #80-2. For purposes of estimating the amount in controversy, the Court will assume that Lipsey would have received a similar amount in prior period adjustments during the five years preceding the first prior-period adjustment. From this sampling, the Court assumes that Lipsey was owed $30[5] during the five years prior to May 2015, when he first discovered that he had not received the full amount of royalties to which he was entitled. The Court will also assume that Lipsey has continued to receive prior period adjustments since September 2016, when the records end, in the amount of $4.[6]

         Discovery has shown that the following were the amounts in controversy: (1) the amount of unpaid royalties plus interest and penalties during the five years prior to when Lipsey received the first prior-period adjustment; (2) the interest and penalties SEECO owes to Lipsey and others similarly situated, based on the delayed prior period adjustments Lipsey received from May 2015 through the present; and (3) any punitive damages and statutory attorney fees deemed appropriate.

         C. Ordinary Diversity Jurisdiction

         “The district courts shall have original jurisdiction of all civil actions where the matter in controversy exceeds the sum or value of $75, 000, exclusive of interest and costs.” 28 U.S.C. § 1332(a). If Lipsey were to succeed on the merits, SEECO would be liable for 12% interest on the delayed amounts for each year they remained unpaid after the due date. Ark. Code Ann. § 15-74-601(e). If Lipsey also were able to show that the defendants willfully withheld the full royalty payments to which he was entitled, then SEECO would be liable for an additional 14% penalty on the delayed amounts for each year they remained unpaid after the due date. Ark. Code Ann. § 15-74-602(a).

         Because Lipsey did not receive prior-period adjustments from May 2010 to May 2015, the $30 remains unpaid and has remained unpaid for a number of years. To estimate the interest for which the defendants are liable more accurately, the Court apportioned the $30 into each of the five years within the statutory period during which prior period adjustments were not made and multiplied that amount by the number of years it has remained unpaid.

2010 8(6 x .12) = $5.76
8(6 x .14) = $6.72
2011 7(6 x .12) = $5.04
7(6 x .14) = $5.88
2012: 6(6 x .12) = $4.32
6(6 x .14) = $5.04
2013: 5(6 x .12) = $3.60
5(6 x .14) = $4.20
2014: 4(6 x .12) ...

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