Heimann v. Kinder-Morgan CO2 Co.

2006 NMCA 127, 144 P.3d 111, 140 N.M. 552
CourtNew Mexico Court of Appeals
DecidedAugust 8, 2006
DocketNo. 25,735
StatusPublished
Cited by35 cases

This text of 2006 NMCA 127 (Heimann v. Kinder-Morgan CO2 Co.) is published on Counsel Stack Legal Research, covering New Mexico Court of Appeals primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
Heimann v. Kinder-Morgan CO2 Co., 2006 NMCA 127, 144 P.3d 111, 140 N.M. 552 (N.M. Ct. App. 2006).

Opinion

OPINION

WECHSLER, Judge.

{1} In this case we determine the scope of an arbitration clause contained in a 1998 settlement agreement between Plaintiffs, a class of carbon dioxide royalty owners, and Defendant, Kinder Morgan C02 Company, L.P., a working interest owner. Kinder Morgan appeals a district court order denying its motion to compel arbitration. We entertain this appeal pursuant to NMSA 1978, § 44-7-19(A)(1) (1971) (repealed 2001) (current version at NMSA 1978, § 44-7A-29(a)(l) (2001)), and we affirm.

BACKGROUND

{2} Plaintiffs own royalties in the Bravo Dome Carbon Dioxide Unit, a carbon dioxide producing unit in northeastern New Mexico, based on their fee ownership of the land. Carbon dioxide is transported by Kinder Morgan from the Unit to oil fields, where it is used to aid in the production of oil. Kinder Morgan uses some of the carbon dioxide it produces at the Unit in its own oil operations and sells the rest to other oil companies. It pays royalties to Plaintiffs based on the sales for the carbon dioxide it produces at the Unit.

{3} In 1995, Plaintiffs filed a lawsuit against the Unit’s carbon dioxide producers, including Shell Western E & P Inc. and Shell C02 Company, Kinder Morgan’s predecessors-in-interest, for royalties they claimed had been underpaid. Plaintiffs and Shell settled the lawsuit in 1998. Plaintiffs filed this lawsuit against Kinder Morgan in August 2004, claiming violations of the Unfair Practices Act, constructive fraud, breach of the settlement agreement, breach of the implied covenant of good faith, breach of a covenant to market, and unjust enrichment, and requesting an accounting, injunctive relief, compensatory and punitive damages, interest, and attorney fees and costs. In its answer and a subsequent motion to compel arbitration, Kinder Morgan argued that each of these claims was subject to an arbitration clause contained in the 1998 settlement agreement. The parties agree that the arbitration clause is valid, but dispute its proper scope.

{4} The 1998 settlement agreement contained numerous provisions governing the method by which future royalties would be calculated. It provided that Shell would pay royalties based on “the volume weighted average of the prices for [its] sales or other dispositions of Unit C02 that [it] separately dispose[s] of or take[s] in kind.” This volume weighted average would be calculated “utilizing a net-back methodology to adjust [Shell’s] prices for sales or other dispositions occurring downstream of the Unit Tailgate, and utilizing the prices or values established in [its] Qualified Contracts ..., [its] transportation charges established as Qualified Other Transportation Charges ..., and [its] Approved Mainline Deductions.” The settlement agreement further provided that other methodology might be used:

Nothing herein is intended to suggest that other benchmarks that may be utilized in the future to determine royalty settlement values that are not characterized as qualified or approved herein, or that future royalty payments resulting from the use of such benchmarks, are improper. [Shell], on the one hand, and Plaintiffs and members of the Class, on the other, intend, only, to omit any agreement concerning whether or not such future benchmarks, and resulting future royalty payments, are or are not proper.

{5} The arbitration clause in the settlement agreement applies to disputes involving non-qualified contracts and non-qualified transportation charges. “Non-qualified” contracts and charges, as defined by the settlement agreement, are new contracts or arrangements not pre-approved by the royalty owners. The arbitration clause states:

Any claims asserted by Plaintiffs or members of the Class against ... Shell regarding (a) the price or value under Non-Qualified Contracts ... utilized by ... Shell in establishing royalty settlement values for purposes of payment to their Respective Owners and, (b) regarding Non-Qualified Other Transportation Charges ... utilized by ... Shell in establishing royalty settlement values for purposes of payment to their Respective Owners, shall be submitted to and decided by binding arbitration____This provision concerning arbitration applies only to the claims identified in this paragraph ... and shall, in no event, apply to any future claims for breach of this Agreement.

{6} Kinder Morgan filed a motion to compel arbitration on each issue in this case. At a hearing on February 24, 2005, the district court ruled that the claims alleged involved breach of contract and were therefore not subject to the arbitration clause. It entered an order denying Kinder Morgan’s motion in March 2005.

ARGUMENTS ON APPEAL

{7} Kinder Morgan argues that the district court erred in denying its motion to compel arbitration. Because Plaintiffs contend that Kinder Morgan modified the parties’ agreed-on methodology for calculating future royalties, by using non-qualified contracts in the royalty calculations and by failing to disclose that use to Plaintiffs, Kinder Morgan argues that underlying Plaintiffs’ claims is the contention that the price of non-qualified contracts was improper. Thus, according to Kinder Morgan, all of Plaintiffs’ claims are subject to arbitration. Although the complaint is largely couched in terms of breach of contract, it also contains language that Kinder Morgan argues shows that the claims fall within the scope of the arbitration clause, such as the following:

10____ The defendant has engaged in across the board methods of fabricating prices and fixing self serving false values for the Unit C02----
25.... Small quantities of the C02 from the Unit are some times [sic] the subject of pretextual “bid” arrangements resulting in a sales contract reciting a “price” per Mcf of C02 delivered at a Permian Basin oil field. Some Unit working interest owners have cited such “prices” as a basis for valuing C02 produced at the Unit....
43. Kinder-Morgan has for the material time uniformally [sic] set “prices” that are not formed by true market forces, are grossly less than the value relative to the oil and other hydrocarbons that but for the C02 would not be recovered and are fixed by the defendant to serve its objectives of (a) reducing expense and (b) maximizing its profit____

Kinder Morgan correctly notes that ambiguity in arbitration clauses should be resolved to favor arbitration. E.g., DeArmond v. Halliburton Energy Servs., Inc., 2003-NMCA-148, ¶ 7, 134 N.M. 630, 81 P.3d 573.

{8} Plaintiffs argue that in order to invoke the arbitration clause, Kinder Morgan must give prior notice of its intention to use non-qualified contracts in its royalty calculation. Their contention is that once notice had been given, and royalty owners had objected, Kinder Morgan could then have invoked the arbitration clause. Plaintiffs also argue that the use of non-qualified contracts in calculating royalty payments is in itself a breach of the settlement agreement that would fit within the explicit exception to the arbitration clause for claims for breach of the settlement agreement. Thus, they argue, none of their claims is subject to arbitration. Finally, Plaintiffs note that the arbitration clause is narrow and should not be bound by the general policy in favor of arbitrability. See, e.g., New York v.

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Cite This Page — Counsel Stack

Bluebook (online)
2006 NMCA 127, 144 P.3d 111, 140 N.M. 552, Counsel Stack Legal Research, https://law.counselstack.com/opinion/heimann-v-kinder-morgan-co2-co-nmctapp-2006.