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Smith v. Seeco, Inc.

United States Court of Appeals, Eighth Circuit

April 23, 2019

Connie Jean Smith, Individually and on behalf of all others similarly situated Plaintiff- Appellant
SEECO, Inc., Now known as SWN Production (Arkansas), LLC; Desoto Gathering Company, LLC; Southwestern Energy Services Company; Southwestern Energy Company Defendants - Appellees

          Submitted: January 15, 2019

          Appeal from United States District Court for the Eastern District of Arkansas - Little Rock

          Before SMITH, Chief Judge, COLLOTON and ERICKSON, Circuit Judges.


         Connie Jean Smith was the named plaintiff in a class action suit against Southwestern Energy Company ("Southwestern") and three of its subsidiaries alleging underpayment of gas royalties. The defendants prevailed at trial. Smith now appeals, arguing that a new trial is warranted because of the district court's[1] erroneous evidentiary and trial management rulings. Smith also requests certification of certain questions of state law to the Arkansas Supreme Court. We deny the motion to certify and affirm.

         I. Background

         SEECO, a subsidiary of Southwestern, began developing the Fayetteville Shale formation in 2004. DeSoto Gathering Company ("DeSoto"), a separate Southwestern subsidiary, was created to act as the gathering company for SEECO's operations. DeSoto accepted business as a gathering company for other producers as well. SES, another Southwestern subsidiary, marketed and sold SEECO's gas. SEECO and DeSoto entered into a Dedicated Field Services Agreement ("Agreement") to govern the terms of DeSoto's gathering, compression, and treatment services.

         As part of its operations SEECO entered into leases with landowners to obtain gas from their land. The typical lease provided a one-eighth royalty interest in the proceeds derived from the sale of gas captured from the leasehold. Connie Jean Smith leased acreage to SEECO under the standard one-eighth royalty lease. The terms of Smith's lease permitted deductions from the royalty for "all reasonable gathering, transportation, treatment, compression, processing, and marketing costs that are incurred by [SEECO] in connection with the sale" of the gas. Consistent with the lease, SEECO deducted certain costs paid to its fellow Southwestern subsidiary DeSoto for its "gas gathering" services.

         Smith sued on behalf of a class claiming that SEECO underpaid royalties because it had engaged in self-dealing when it reduced the royalty payment to reflect the amounts it paid to DeSoto for gathering. Specifically, Smith alleged that Southwestern engaged in self-dealing by instructing DeSoto to charge inflated rates to SEECO for the costs of DeSoto's services. Smith also contended that each of Southwestern's three subsidiaries were shells established and used by Southwestern to secure greater profits at the expense of landowners. Smith claimed that the improper cost deductions allowed Southwestern to gain nearly $ 100 million in profits between 2006 to the present. Smith sued on theories of breach of contract, fraud and deceit, unjust enrichment, violations of various Arkansas statutes, and civil conspiracy.

         In pretrial motions, the district court was asked to decide whether the amounts DeSoto charged SEECO qualified as gathering, treatment, and compression costs incurred in connection with the sale of the gas under the lease. Smith had argued that because those costs were paid by a third Southwestern subsidiary, SES, they were not costs "incurred" by SEECO. SEECO countered that SES acted as its agent and that in return for paying SEECO's costs, the amount of the costs were later deducted from what SES owed SEECO. The district court agreed with SEECO that SEECO "incurred" those costs "when it became liable to pay for DeSoto's services." In making its partial grant of summary judgment, the district court reserved for the jury the issue of whether the costs were reasonable. The district court granted a motion in limine prohibiting references to the partial grant of summary judgment.

         During the trial, SEECO sought to establish the reasonableness of its costs by comparing the rate it paid DeSoto to the rates other producers in the Fayetteville Shale region paid for gathering. Part of SEECO's offered evidence related to the post-production costs of BHP, another operator that sent royalty statements to Smith. SEECO offered the BHP statements which reflected specific post-production costs that were higher per unit of gas than those SEECO had deducted. Smith objected, claiming the statements were inadmissable hearsay and that they were unduly prejudicial and irrelevant. The district court overruled the objections, holding that the statements were covered by the business records exception to the hearsay rule and would aid the jury in determining the reasonableness of DeSoto's rates.

         SEECO also sought to introduce evidence of a term sheet from 2005 between SEECO and DeSoto for the purpose of showing that their agreements were "arms-length." Smith objected claiming the 2005 term sheet was not timely disclosed and had only been produced 25 days before trial. The district court sustained Smith's objection as to the admission of the term sheet, but allowed questions related to any witness's personal knowledge of the term sheet. In making this ruling, the court found that the evidence was relevant to rebut Smith's claim that the contract negotiations were a sham.

         John Thaeler, the former head of SEECO, and Gene Hammons, the former head of DeSoto, were among the witnesses who testified about the term sheet. Their testimony laid in significant details about the term sheet, including how the term sheet was first created and what it was designed to cover. Smith did not object when this testimony was received. Smith later renewed her overall objections concerning the term sheet when questions were asked of DeSoto employee Josh Weber. The district court overruled the objections and allowed Weber to testify about his personal knowledge of the term sheet.

         Southwestern briefly questioned Smith about the pre-suit notice provision in her lease. Because such provisions are inapplicable to breach-of-contract suits in Arkansas as a matter of law, [2] the district court gave a curative instruction directing the jury to ignore that ...

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