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

United States District Court, E.D. California

March 23, 2015

GRAYSON SERVICE, INC., Plaintiff,
v.
CRIMSON RESOURCE MANAGEMENT CORP. et al., Defendants.

ORDER GRANTING DEFENDANTS' MOTION TO DISMISS THE SECOND AMENDED COMPLAINT AND DISMISSING THIS ACTION FOR FAILURE TO STATE A CLAIM (ECF Nos. 31, 32, 33)

STANLEY A. BOONE, Magistrate Judge.

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

The Court, having reviewed the record, finds this matter suitable for decision without oral argument. See Local Rule 230(g). Accordingly, the previously scheduled hearing set on March 25, 2015 will be vacated and the parties will not be required to appear at that time.

I.

PROCEDURAL BACKGROUND

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 the first amended complaint which was granted on December 24, 2014. Plaintiffs filed a second amended complaint on January 23, 2015. On February 20, 2015, Defendants filed a motion to dismiss the second amended complaint. Plaintiff filed an opposition on March 11, 2015. (ECF No. 32.) On March 18, 2015, Defendant filed a reply. (ECF No. 33.)

II.

SECOND AMENDED COMPLAINT ALLEGATIONS

Plaintiff alleges that Defendant Crimson is the successor in interest to Kern County Land Company ("KCLC") as lessor of the August 7, 1936 Ohio lease. (Second Am. Compl. ¶ 3, [2] ECF No. 29.) Defendant Cal Royalty is an affiliate of Defendant Crimson established to manage or own certain of Defendant Crimson's assets. (Id. at ¶ 4.) Defendant Cal Royalty owns the mineral rights adjacent to the zones that Plaintiff produces from and manages the Ohio lease on behalf of Defendant Crimson. (Id.) In a prior court action, the person most knowledgeable for Defendants testified that as to the GSI lease, Defendants Cal Royalty and Crimson are the same. (Id. at ¶¶ 4, 5.)

After acquiring the fee simple interest in lands in Kern County, Kern County Land Company ("lessor") entered into a lease with the Ohio Oil Company ("lessee") on August 7, 1936 (hereafter "Ohio lease"). (Id. ¶ 7.) The portion of the Ohio lease at issue in this action is approximately two hundred and fifty acres. (Id.) On September 21, 1984, Marathon Oil Company (previously Ohio Oil Company) assigned all of its right, title, and interest in the Ohio lease to Plaintiff. (Id. at ¶ 8.)

Immediately after acquiring rights under the Ohio lease, Plaintiff occupied the surface of the lease by occupying multiple buildings and using a water well which were transferred under the lease. (Id. at ¶ 9.) These buildings and the water well have been used exclusively by Plaintiff as expressly allowed under the Ohio lease. (Id.) Plaintiff has produced oil from the zones under the parcel and occupied buildings on the property continuously since being assigned rights under the Ohio lease. (Id. at ¶¶ 11, 12.)

In the 1970s, KCLC was purchased by Tenneco, Inc. and KCLC's name was changed to Tenneco West, Inc. ("TWI"). (Id. at ¶ 13.) On June 30, 1988, TWI assigned their fee interest in the minerals underlying the Ohio lease and all surface rights related to the Ohio lease to Tenneco Oil Company ("TOC"). (Id. at ¶ 15.) All obligations and responsibilities to perform the duties of the Ohio lease were expressly assumed by TOC. (Id.) There was no severance of any surface estate due to this assignment of the Ohio lease. (Id. at ¶ 17.) Simultaneously TOC executed an identical assignment to TOC-Pacific Coast Inc. (Id. at ¶ 18.)

On December 15, 1988, Atlantic Richfield Company ("ARCO") merged with TOC-Pacific Coast Inc. and acquired rights under the Ohio lease. (Id. at ¶ 21.) On January 1, 1995, ARCO conveyed and assigned all oil, gas, and mineral fee estates and associated surface rights under the Ohio lease to Defendant Crimson. (Id. at ¶ 22.) Defendant Crimson conveyed a portion of the minerals underlying Plaintiff's production zone to Defendant Cal Royalty on January 1, 1995. (Id. at ¶ 23.)

Defendant Crimson operates a well on the parcel. (Id. at ¶ 24.) The well produces hydrocarbons from the fee mineral estate that Defendant Crimson purchased from ARCO. (Id.) Defendant Crimson maintains related tanks and equipment on the parcel. (Id.) Defendant Crimson and Plaintiff share the entire surface of the parcel under the Ohio lease which provides that the Lessor and Lessee may use the surface and buildings as long as neither interferes with the other's operations. (Id. at ¶ 25.) Defendant Crimson delegated the duty to manage the Ohio lease as it pertains to Plaintiff's rights and obligations to Defendant Cal Royalty. (Id. at ¶ 26.)

The term of the lease provide that it 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 ¶ 27.) 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 ¶ 27.) 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 ¶ 29.) The Ohio lease is still in effect today. (Id. at ¶ 30.)

Plaintiff's right to explore, drill, operate, and have exclusive access to the surface of the parcel is subject only to non-interfering use by Defendant Crimson. (Id. at ¶ 31.) Plaintiff has unlimited access to the minerals on the property that it leases and produces from under the Ohio lease. (Id. at ¶ 33.) Plaintiff maintains a water well and pressure tank on the parcel that are essential to its oil operations. (Id. at ¶ 34.)

In or about 2012, Kern County Water Bank Authority ("KWBA") began to interfere with Plaintiff's use and occupancy of the parcel. (Id. at ¶ 35.) KWBA's conduct was premised on a claim of paramount title to which Defendant Crimson expressly consented. (Id.) KWBA demanded that Plaintiff vacate the parcel, remove all buildings, and cease all oil production, and quitclaim all rights to use the surface to KWBA. (Id. at ¶ 36.) Plaintiff disputed the demand and maintained that it had rights under the Ohio lease that allowed Plaintiff full access to the surface of the parcel, rights to occupy the buildings on the parcel, and rights to continue accessing and using the well on the parcel. (Id. at ¶ 37.)

In 2012, KWBA filed an action in state court regarding possession of the property. (Id. at ¶ 38.) KWBA claimed that it owned the surface rights to the parcel by tracing a chain of title back to the State of California. (Id. at ¶ 39.) Plaintiff notified Defendant Crimson in writing of the judicial proceedings. (Id. at ¶ 40.) Plaintiff informed Defendants on multiple occasions that they were required to participate in defending the title to the property based on KWBA's claim of paramount title. (Id. at ¶ 41.)

Defendant Crimson agreed to assist Plaintiff by providing records establishing their chain of title to the property and providing an agent to appear and testify at the trial. (Id. at ¶ 43.) Defendant Crimson's agent testified that Plaintiff had the right to full possession of the surface rights of the property, subject only to Defendant Crimson's use of the same surface rights for their own operations; Plaintiff had rights to the property subject only to restrictions in the Ohio lease for future development; the Ohio lease reserved to Plaintiff all rights arising out of the Ohio lease, including surface access to every portion of the parcel as well as the balance of the 250 acres as necessary and reasonable to produce minerals under the Ohio lease. (Id. at ¶¶ 44-46.) Defendant Crimson's agent also testified that through their assignment of the Ohio lease, Defendant Crimson was the lessor and Plaintiff was the lessee. (Id. at ¶ 47.) Defendant's agent testified that Crimson received royalty payments from Plaintiff under the terms of the Ohio lease. (Id. at ¶ 48.) Finally, Plaintiff contends that Defendant Crimson's agent falsely testified that Crimson had not granted access to KWBA to any portion of the subject premises, acknowledging that KWBA had entered into the areas outside of the parcel prior to the commencement of the trial. (Id. at ¶ 49.)

On February 10, 2014, judgment was entered for KWBA. (Id. at ¶ 50.) The judgment ordered the immediate right for KWBA to recover possession of the parcel; a writ of possession may be issued by the Sheriff of Kern County evicting Plaintiff from the property; removal of Plaintiff's buildings from the property; and Plaintiff to pay damages, including attorney fees to KWBA. (Id. at ¶¶ 51-54.)

Plaintiff contacted Defendants and informed them of the judgment and that Plaintiff had filed a motion for new trial. (Id. at ¶ 56.) Plaintiff requested that Defendants cooperate, intervene, defend and otherwise assist Plaintiff to avoid removal from the parcel. (Id.) Alternately, Plaintiff requested that Defendants assign their mineral rights on the parcel to Plaintiff, with a modest reduction in royalty payment, so that Plaintiff could apply the rights to prevent the judgment from becoming final. (Id. at ¶¶ 57-58.)

KWBA has entered the balance of the 250 acres of the Ohio lease and installed and is operating water extraction wells. (Id. at ¶ 61.) The judgment issued by the state court only applied to the parcel at issue in this action. (Id. at ¶ 62.) Defendant Crimson acquiesced to KWBA entering onto the remainder of the land subject to the Ohio lease. (Id. at ¶ 64.) The wells being operated by KWBA are causing subsidence and other related damage to Plaintiff's oil wells. (Id. at ¶ 66.) Plaintiff has been forced to vacate the parcel. (Id. at ¶ 68.)

Plaintiff brings two causes of action for breach of contract. Plaintiff's first cause of action is for Defendants' breach of contract for failing to defend Plaintiff's right and possession to the parcel based upon the implied covenant of quiet possession. (Id. at ¶¶ 71-85.) Plaintiff's second cause of action alleges that Defendants breached the contract by allowing KWBA to ...


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