IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NORTH DAKOTA NORTHWESTERN DIVISION
October 4, 2011
CARMEN AND CAROL WOLD, CORDELL WOLD, EDITH WOLD, KRIS WOLD, KEVIN WOLD, ) AND LYLE AND MELBA LARSON AS TRUSTEES OF THE LARSON FAMILY NOMINEE TRUST,
DIAMOND RESOURCES, INC., ZAVANNA, LLC, AND ZENERGY, INC. DEFENDANTS. JAMES AND JODY RENBARGER, ELISE RENBARGER, AND CAROLYN BENJAMIN, PLAINTIFFS,
DIAMOND RESOURCES, INC., ZAVANNA, LLC, ) AND ZENERGY, INC. DEFENDANTS.
The opinion of the court was delivered by: Charles S. Miller, Jr. United States Magistrate Judge
ORDER FOR REMAND
The above cases are before the court on motions for remand filed by plaintiffs. While the cases have not been joined, the issues presented by the motions are identical. In addition, plaintiffs in both cases are represented by the same attorney and the defendants are the same. Consequently, the motions will be considered together.
In both cases, plaintiffs are the owners of mineral rights located in Mckenzie County, North Dakota, who entered into oil and gas leases with defendant Diamond Resources, Inc. ("Diamond"). Diamond later assigned its lease interests to defendant Zavanna, LLC ("Zavanna"). Also, in each case, defendant Zenergy, Inc. ("Zenergy") has drilled an oil well within a spacing unit that encompasses part or all of the acreage covered by the leases that are the subject of the case.*fn1
The complaints in both cases were filed by the plaintiffs in state court. The complaints seek orders declaring that the referenced leases have lapsed and that title be quieted in plaintiffs' names free and clear of any claims of the defendants. In both cases, plaintiffs allege that the leases lapsed prior to any development that would extend or hold the leases, including the drilling of the wells by Zenergy. In addition, one or more plaintiffs in each of the cases allege that they have not been timely paid lease royalties. These plaintiffs seek cancellation of the leases for this reason as well or, in the alternative, statutory penalties.
Defendants removed the cases to this court alleging diversity as the basis for the court's jurisdiction. In the notices of removal, defendants acknowledge that Diamond is a nondiverse party. However, they allege that Diamond has no interest in this case, given the assignment of its lease interests to Zavanna, and that it has been named as a defendant solely for the purpose of defeating the court's jurisdiction. The issue presented by the motions for remand in each of the cases is whether the inclusion of Diamond as a defendant amounts to "fraudulent joinder."
A. Governing law
A defendant may remove to federal court any civil action filed in state court in which the amount in controversy exceeds $75,000 and the citizenship of each plaintiff is diverse from the citizenship of each defendant. Caterpillar Inc. v. Lewis, 519 U.S. 61, 68 (1996); 28 U.S.C. §§ 1332 and 1441(a). This right "cannot be defeated by the fraudulent joinder of a resident defendant." Simpson v. Thomure, 484 F.3d 1081, 1083 (8th Cir. 2007) (quoting Wilson v. Republic Iron & Steel Co., 257 U.S. 92, 97 (1921)).
While actual fraud will invoke the doctrine of "fraudulent joinder," the term is somewhat of a misnomer in that proof of fraud is not required to invoke the doctrine. Joinder will also be considered "fraudulent" when there is no reasonable basis in fact or law for the claims being made against the non-diverse defendant, regardless of the plaintiff's intent in naming the non-diverse defendant. See, e.g., Schur v. L.A. Weight Loss Centers, Inc., 577 F.3d 752, 763 n.9 (7th Cir. 2009); Wilkinson v. Shackelford, 478 F.3d 957, 964 (8th Cir. 2007); Filla v. Norfolk S. Ry. Co., 336 F.3d 806, 810 (8th Cir. 2003); Iowa Pub. Serv. Co. v. Medicine Bow Coal Co., 556 F.2d 400, 406 (8th Cir.1977).
In removing an action, the defendant bears the burden of establishing the court's jurisdiction, including any claim of fraudulent joinder that is alleged to overcome the facial lack of diversity. Filla v. Norfolk S. Ry. Co., 336 F.3d at 810. All doubts about the court's jurisdiction and the claim of fraudulent joinder must be resolved in favor of remand. See id.; Wilkinson v. Shackelford, 478 F.3d at 964.
Plaintiffs have not disputed defendants' contention that Diamond has completely and irrevocably assigned its lease interest to Zavanna and has retained nothing.*fn2 Rather, their argument is that the assignments did not discharge Diamond of its contractual obligations under the leases because of the lack of their consent to a discharge, i.e., the lack of "novation."
North Dakota follows the "well-established principle in the law of contracts that a contracting party cannot escape its liability on the contract by merely assigning its duties and rights under the contract to a third party." Rosenberg v. Son. Inc., 491 N.W.2d 71, 74 (ND 1992); see also Estate of Murphy v. Murphy, 554 N.W.2d at 437 ("Even where there is an effective assignment of a contractual obligation, the assignor's 'duty remains absolutely unchanged.'") (quoting 4 Corbin on Contracts § 866). Under North Dakota law, this principle applies to all categories of contracts, including the oil and gas leases at issue here. Cf. Holman v. State, 438 N.W.2d 534, 537 (ND 1989) ("[D]ocuments conveying oil and gas interests are subject to the same general rules that govern interpretation of contractual agreements."); see generally 5-64 E. Kuntz, A Treatise on the Law of Oil and Gas § 64.7 (Matthew Bender rev. ed. 2011) ["Kuntz"]; 2-4 P. Martin & B. Kramer, Williams & Meyers, Oil and Gas Law § 403.1 (Matthew Bender 2010) ("Williams & Meyers"). The only manner in which Diamond could have been discharged from its lease obligations is if there was a novation whereby plaintiffs expressly or impliedly consented to the discharge. See Estate of Murphy, 554 N. W.2d at 437; Rosenberg, 491 N.W.2d at 75.
Defendants do not disagree with these well-established principles.*fn3 Rather, they point to a lease clause that is common to all of the leases, which states:
If all or any portion of this lease is assigned, no leasehold owner shall be liable for any act or omission of any other leasehold owner.
Defendants argue that this language represents an agreement by the plaintiffs that Diamond would be released of its lease obligations upon a complete assignment of its interests.
But if that is the intended meaning of the lease language, at best it can only be inferred since neither this clause nor any other part of the leases expressly states that the independent obligations of the lessee to perform the lease covenants are extinguished upon assignment.*fn4 Moreover, there appears to be at lease one other plausible construction. Assume, for example, that original lessee A assigned a 40% undivided interest in the lease to B and the remaining 60% undivided interest to
C. The language could be construed to mean that assignees B and C would be relieved of liability for each other's acts or omissions, but that it would not discharge the independent obligations of lessee A to the lessor.*fn5
At the end of the day, it might very well be that defendants' construction of the lease language is the more plausible and that a state court will dismiss Diamond if the cases are remanded. But the question here is not what a North Dakota court would likely conclude, but rather whether there is any reasonable possibility of a conclusion either (1) that the lease language is not specific enough to extinguish Diamond's independent lease obligations or, perhaps, (2) that the language is ambiguous and further proceedings are required to resolve the ambiguity.*fn6 With respect to this question, defendants have failed to carry their burden of demonstrating that plaintiffs lack a "colorable claim" against Diamond.
Not surprisingly, the cases and treatises relied upon by the defendants reference lease language that is more explicit in stating that the obligations of the lessee are extinguished upon assignment, with one exception. See, e.g., 4-6 Williams & Meyers at § 677.3. The exception is Sims v. Inexeco Oil Co., 618 F. Supp. 183 (S.D. Miss. 1985), which contained a lease clause that is virtually identical to the one relied upon by the defendants here. However, the only issue that the court focused on in that case was whether the assignment was a true assignment or a sublease. The court did not address the particular arguments made by plaintiffs here. Also, it is only one case. In short, Sims is not enough, either in terms of its weight or persuasiveness, to fairly eliminate the possibility that a North Dakota court might conclude that the language in question is not sufficiently explicit under North Dakota law to discharge the lessee of its obligations or is ambiguous.
Based on the foregoing, plaintiffs' motions for remand (Doc Nos. 28 in both cases) are GRANTED and the cases are REMANDED to state court based upon the lack of diversity jurisdiction.*fn7
IT IS SO ORDERED.
/s/ Charles S. Miller, Jr.