Source: https://www.bakerlaw.com/alerts/colorado-royalty-litigation-exhaustion-of-administrative-remedies-before-the-colorado-oil-and-gas-conservation-commission
Timestamp: 2019-04-23 18:34:26+00:00

Document:
Few areas of the law have seen such substantial evolution in a three-year span as Colorado case law on oil and gas royalty litigation. Since 2015, 13 Colorado state district court opinions have required royalty plaintiffs first to take their claims to the Colorado Oil and Gas Conservation Commission (the Commission). Although four opinions have reached the opposite conclusion, 13 accord with Colorado principles governing exhaustion of administrative remedies. The Commission now has five cases pending before it, and further developments in this area are imminent.
Colo. Rev. Stat. § 34-60-118.5(5); see also Grynberg v. Colo. Oil & Gas Conservation Comm’n, 7 P.3d 1060 (Colo. App. 1999). “[T]he Act’s comprehensive scheme means that primary jurisdiction for [a] dispute remains with the Commission” when the issue for determination relates to the three areas discussed above and no bona fide contractual dispute exists. Grant Bros. Ranch, LLC v. Antero Res. Piceance Corp., 409 P.3d 637, 643 (Colo. App. 2016). Several Colorado district courts have dismissed suits on this basis.
Colorado state district courts have split on dismissing royalty underpayment suits – 13 in favor and four against. On Feb. 12, 2015, Judge Lynch issued the first order of its kind, dismissing a payee’s lawsuit related to payment of proceeds and requiring the payee to exhaust administrative remedies before the Commission. See Richard & Mary Jolley Family, LLLP v. Bill Barrett Corp., No. 14CV30330 (Colo. Dist. Ct., Garfield Cty., Feb. 12, 2015). Judge Lynch’s reasoning turned on the availability of an administrative remedy before the Commission. Id. at 3 (“[T]he Court finds that the substance of Plaintiff’s claims fall within the statutory jurisdiction of the [Commission] and that an administrative remedy exists for the disposition of those claims.”). But a few courts have disagreed.
To illustrate the differences, this article focuses on Freeman v. Bill Barrett Corporation and Retova v. Bill Barrett Corporation. The article then catalogs the cases addressing this issue.
In November 2017, Judge David H. Goldberg of the State District Court for the City and County of Denver dismissed a case against Bill Barrett Corp. (Barrett) for the plaintiff’s failure to exhaust administrative remedies before the Commission. Freeman Invs. v. Bill Barrett Corp., No. 2017CV32667 (Colo. Dist. Ct., Denver City & Cty., Nov. 6, 2017). Freeman Investments sued Barrett for the alleged underpayment of royalties by deducting post-production costs in violation of the implied duty to market under Rogers v. Westerman Farm Co., 29 P.3d 887 (Colo. 2001). Barrett moved to dismiss Freeman’s case for, inter alia, lack of subject matter jurisdiction because Freeman had not sought relief from the Commission before going to court. Barrett argued that Freeman must first exhaust the administrative remedies because the Act prescribes that the Commission “shall determine whether a bona fide dispute exists regarding the interpretation of a contract defining the rights and obligations of the payer and payee.” Colo. Rev. Stat. § 34-60-118.5(5).
Judge Goldberg agreed. Freeman did not attempt to resolve its royalty issues with the Commission. The court reasoned that the Commission did not have a chance to determine whether it had jurisdiction to resolve Freeman’s claims. The court also noted that Freeman did not point to any language in the royalty agreement that was the subject of a disputed interpretation between the parties. Absent a disputed interpretation, there was no reason to assume the Commission lacked jurisdiction over the matter. In so reasoning, Judge Goldberg rejected the interpretation of Grynberg v. Colorado Oil & Gas Conservation Commission, 7 P.3d at 1063, relied on by Freeman. Freeman argued Grynberg stands for the proposition that the Commission lacks the authority to address not just a matter involving a disputed interpretation of a royalty agreement but also any matter alleging a breach of a royalty agreement, whether its interpretation is disputed or not.
2. The dispute over post-production costs in Grynberg involved contract interpretation; whereas in Freeman, it was the Commission’s responsibility to determine whether it has jurisdiction to decide payment issues under Colo. Rev. Stat. § 34-60-118.5(5.5).
Section 34-60-118.5(5.5) does not contain any mandatory language directed at a payee. Nowhere does the statute provide that the [Commission] is the only body that can determine jurisdiction or that a payee must bring an action with the [Commission] prior to seeking resolution of the matter in district court.
Retova Res., LP v. Bill Barrett Corp., No. 2015CV34351, at 3 (Colo. Dist. Ct., Denver City & Cty. March 11, 2016). Second, the court found it was enough for Retova to allege that the royalty agreements “do not expressly authorize the deduction of post-production costs” for the court to determine that there was a bona fide contractual dispute between the parties. See id. at 4.
On Feb. 5, 2018, Barrett renewed its motion to dismiss in light of developments in Colorado law concerning the Commission’s jurisdiction over royalty disputes. On Feb. 21, 2018, the court vacated a hearing on class certification in light of the pending motion, and indicated its intent to address the issues in a subsequent order. That order is likely imminent.
To Court or to the Commission?
Is There an Immediate Appeal of a Dismissal?
In Miller Land & Cattle Co. v. Bill Barrett Corp., Judge John F. Neiley dismissed without prejudice yet another royalty lawsuit based on Rogers for failure to exhaust remedies before the Commission. No. 2016CV30102 (Colo. Dist. Ct., Garfield Cty., March 6, 2017), cert. denied (Dec. 4, 2017). The court ruled that the Commission has primary jurisdiction. On July 13, 2017, the Court of Appeals dismissed the Miller Land appeal, determining that it lacked jurisdiction because the district court’s dismissal without prejudice was not a final judgment. See Order of Dismissal, Miller Land & Cattle Co. v. Bill Barrett Corp., No. 2017CA632 (Colo. App. July 13, 2017). Then the Colorado Supreme Court denied Miller Land’s Petition for Writ of Certiorari on Dec. 4, 2017. See Order of Court, Miller Land & Cattle Co. v. Bill Barrett Corp., No. 2017SC601 (Colo. Dec. 4, 2017). Until the Court of Appeals or the Supreme Court exercises discretionary authority to consider a dismissal, dismissals will not be subject to challenge until after a final judgment.
The jurisdictional issue is now before the Commission. On Oct. 5, 2017, after dismissal for failure to exhaust administrative remedies, five payees filed applications with the Commission – without sending the operators Form 37s – asking the Commission to determine that it did not have jurisdiction. Each argued that the allegation in their complaints in district court – that the royalty agreements did not expressly authorize deductions – was enough to deprive the Commission of jurisdiction. On Jan. 19, 2018, the Commission dismissed all five applications, ordering the payees to comply with “the Form 37 process for each well in each case.” The hearing regarding the Commission’s jurisdiction over the five cases is scheduled for April 30 or May 1, 2018. Currently, the operators are answering the payees’ Form 37s.
Absent an amendment to the Act or a ruling of the Colorado Supreme Court, there might remain some degree of uncertainty regarding the Commission’s primary jurisdiction over royalty disputes when there is no dispute over the interpretation of royalty agreement language. That uncertainty appears slight, however, given the customary relationship between Colorado’s courts and its agencies. Courts should defer to the Commission’s reasonable interpretations of the Act. Grynberg, 7 P.3d at 1062. It is difficult to see how courts can defer to the Commission’s interpretation without first requiring plaintiffs to avail themselves of the Commission’s process to determine whether the Commission has jurisdiction.
Authorship Credit: L. Poe Leggette, Shanisha Y. Smith, Alexander K. Obrecht and Emily B. Thomas.

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