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Grayson Service, Inc. v. Crimson Resource Management Corp.

United States District Court, E.D. California

December 24, 2014


For Grayson Service, Inc., a California corporation, Plaintiff: Douglas Lawrence Mahaffey, Mahaffey Law Group, PC, Newport Beach, CA.

For Crimson Resource Management Corp, Cal Royalty, LLC, Defendants: Ericka F. Houck Englert, LEAD ATTORNEY, Lewis, Bess, Williams & Weese, P.C., Denver, CO.



(ECF Nos. 13, 21, 26)


Currently before the Court is Defendants Crimson Resource Management (" Crimson") and Cal Royalty LLC's (" Cal Royalty") motion to dismiss the first amended complaint pursuant to Rule 12 of the Federal Rules of Civil Procedure.

The Court heard oral arguments on December 23, 2014. Counsel Douglas Lawrence Mahaffey appeared for Plaintiff Grayson Service, Inc., and counsel Ericka F. Houck Englert appeared for Defendants Crimson and Cal Royalty. Having considered the moving, opposition and reply papers, the declarations and exhibits attached thereto, arguments presented at the December 23, 2014 hearing, as well as the Court's file, the Court issues the following order.



Plaintiff Grayson Service, Inc. filed this action on July 17, 2014, against Defendants Crimson and Cal Royalty.[1] On July 29, 2014, Plaintiff filed a first amended complaint alleging breach of contract, breach of the covenant and right to quiet enjoyment and possession, and seeking declaratory relief. On October 31, 2014, Defendants filed a motion to dismiss this action pursuant to Rule 12(b) of the Federal Rules of Civil Procedure for failure to state a claim and failure to join an indispensable party and a request for judicial notice. Plaintiff filed an opposition to the motion to dismiss on December 10, 2014. Defendants filed a reply on December 17, 2014.



A lease originated in 1936 when Kern County Land Company (" lessor") conveyed to the Ohio Oil Company (" lessee") the right to extract water, minerals and other hydrocarbon substances from a 23 acre parcel of property located in Kern County (hereafter " Ohio Lease"). (First. Am. Compl. ¶ 8, [2] ECF No. 4.) The agreement provided that the term of the lease would be for twenty years and so long after as oil, gas, or other hydrocarbon substances were produced from the property in amounts deemed to be paying quantities by the lessee, unless the lease in whole or part was terminated sooner. (Id. at ¶ 9.)

The lease further provided that the property was to be in the sole and exclusive possession of the lessee, except that the lessor reserved the right to use or lease the land for agricultural purposes that did not unnecessarily interfere with the operation of the land. (Id. at ¶ 10.) The lease provided that the lessee could develop water on the parcel and the lessor reserved the right to any unused water on the parcel as long as it did not interfere with the lease unnecessarily. (Id. at ¶ 11.)

The lessor was not liable or responsible to the lessee in damages from any defects, liens, or encumbrances on title to the land or the assigned rights. The lessee agreed to defend and indemnify the lessor in the event of an assertion by others of a claim against the lessor due to the extraction or removal of water, oil, gas or other hydrocarbon substance, except for that portion that was the lessor's royalty, provided the lessor notified the lessee of any suit with reasonable promptness and allowed the lessee's attorney to appear in the action. (Id. at ¶ 12.)

Plaintiff contends that it is a lessee and was assigned the right to occupy 23 acres of real property and the balance of approximately 250 acres in Kern County that stems from this lease. (Id. at ¶ ¶ 5, 6.) Plaintiff maintains a water well and pressure tank on the property which is essential to their operations. (Id. at ¶ 7.) Plaintiff alleges that Defendant Crimson agreed that, to defend claims challenging Plaintiff's title, they would enter into an attorney client relationship with Plaintiff's attorneys. (Id. at ¶ 13.)

In 2012, the Kern Water Bank Authority (" KWBA") filed an action alleging that in 1996 the property and mineral rights under the Ohio Lease were transferred to KWBA. (Id. at ¶ 14.) Plaintiff notified Defendant Crimson of these claims and requested they participate in defending Plaintiff in the action. (Id. at ¶ 15.). Defendant Crimson initially assisted by providing records establishing the chain of title. (Id. at ¶ 16.) Additionally, their agent appeared and testified during the KWBA trial that Plaintiff had full possession to the surface rights subject only to Defendant Crimson's use of the same surface rights as necessary for their oil operations and that Plaintiff had rights to the remaining property subject to the lease restrictions for future development. (Id. at ¶ 16.) Defendant Crimson acknowledged that the Ohio Lease gave Plaintiff all rights arising under the lease, including surface access to all of the approximately 250 acres to produce minerals, including the future rights to explore, drill and develop the leased minerals. (Id. at ¶ 18.)

On February 10, 2014, judgment was entered in favor of KWBA which impacted Plaintiff's right to use and possess the 23 acres. (Id. at 19.) The judgment included the immediate right for KWBA to have and recover possession of the 23 acres. (Id. at ¶ 20.) The judgment provided that a writ of possession could be issued by the Kern County Sheriff evicting Plaintiff from the property. (Id. at ¶ 21.) Plaintiff contends that there are no surface rights available for KWBA due to the assignment recorded November 18, 1988 in the County records. (Id. at ¶ 22.)

Plaintiff contacted Defendant Crimson in June 2014 and advised them of the judgment, that a motion for new trial had been filed, and that Plaintiff wanted them to cooperate. (Id. at ¶ 23.) Defendant Crimson was requested to intervene or assign their rights to Plaintiff so that Plaintiff could prevent the judgment from becoming final. (Id. at ¶ ¶ 24, 25.) Plaintiff requested the Defendant Crimson assign their mineral interests with a modest reduction in royalty payment so Plaintiff could pursue claims arising out of the leasehold estate and the assignment of mineral interests against KWBA. (Id. at ¶ 27.)

KWBA has entered into the balance of the 250 acres of the Ohio lease and installed and is operating water extraction wells. (Id. at ¶ 31.) Defendant Crimson has refused to take any steps to remove or cooperate in removing KWBA from the property. (Id. at ¶ 32.)

Plaintiff brings this action against Defendants Crimson and Cal Royalty alleging breach of contract, breach of the covenant and right to quiet enjoyment and possession, and for declaratory relief that Defendant Crimson must defend the title to the property.



A. Failure to State a Claim

Under Federal Rule of Civil Procedure 12(b)(6), a party may file a motion to dismiss on the grounds that a complaint " fail[s] to state a claim upon which relief can be granted." A complaint must contain " a short and plain statement of the claim showing that the pleader is entitled to relief." Fed.R.Civ.P. 8(a)(2). " [T]he pleading standard Rule 8 announces does not require 'detailed factual allegations, ' but it demands more than an unadorned, the-defendant-unlawfully harmed-me accusation." Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)). In assessing the sufficiency of a complaint, all well-pleaded factual allegations must be accepted as true. Iqbal, 556 U.S. at 678-79. However, " [t]hreadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice." Id. at 678.

In deciding whether a complaint states a claim, the Ninth Circuit has found that two principles apply. First, to be entitled to the presumption of truth the allegations in the complaint " may not simply recite the elements of a cause of action, but must contain sufficient allegations of underlying facts to give fair notice and to enable the opposing party to defend itself effectively." Starr v. Baca, 652 F.3d 1202, 1216 (9th Cir. 2011). Second, so that it is not unfair to require the defendant to be subjected to the expenses associated with discovery and continued litigation, the factual allegations of the complaint, which are taken as true, must plausibly suggest an entitlement to relief. Starr, 652 F.3d at 1216.

B. Failure to Join a Party

Rule 12(b)(7) provides that a party can move to dismiss for " failure to join a party under Rule 19." In determining if a party is indispensable under Rule 19, the court first must decide if the party is necessary and then determine whether the party is indispensable so that the suit must be dismissed. Makah Indian Tribe v. Verity, 910 F.2d 555, 558 (9th Cir. 1990). In determining if the party is necessary, the court must decide if complete relief is possible among those already party to the suit, or alternately, whether the absent party has a legally protected interest in the suit that will be impaired or impeded by its absence or expose the parties to a risk of multiple or inconsistent obligations by reason of that interest. Makah Indian Tribe, 910 F.2d at 558; Dawavendewa v. Salt River Project Agr. Imp. And Power Dist., 276 F.3d 1150, 1155 (9th Cir. 2002). If the party satisfies either of these alternative tests it is considered a necessary party in this action. ...

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