pennsyl vania jeffry s. vodenichar, civil division no ... · pennsyl vania jeffry s. vodenichar, et...
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IN THE COURT OF COMMON PLEAS OF MERCER COUNTY, PENNSYL VANIA
JEFFRY S. VODENICHAR, et al., individually and on behalf of all those similarly situated,
Plaintiffs
v.
HALCON ENERGY PROPERTIES, INC., et al.,
Defendants
CIVIL DIVISION
No. 2013-512
BRIEF IN SUPPORT OF MOTION FOR CLASS CERTIFICATION
Filed on behalf of Plaintiffs.
Counsel of record for these parties:
David A. Borkovic Pa. LD. No. 23005 Of Counsel J ones, Gregg, Creehan & Gerace, LLP 411 Seventh Ave, Suite 1200 Pittsburgh, P A 15219 (412) 261-6400 [email protected]
Richard A. Finberg Pa. LD. No. 17282 300 Mt. Lebanon Blvd, Suite 206-B Pittsburgh, PA 15234 (412) 341-1342 [email protected]
David M. Cohen Complex Law Group, LLC 40 Powder Springs Street Marietta, Georgia 30064 (770) 200-3100 [email protected]
John C. Butters Law Office of John C. Butters 40 Powder Springs Street Marietta, Georgia 30064 (770) 200-3131 [email protected]
TABLE OF CONTENTS
TABLE OF AUTHORITIES ......................................................... , '" .................................. .iii-iv
STATEMENT OF MATERIAL FACTS ...................................................................................... 2
The Initial Negotiations ................................................................................................. 3
The Letter of Intent ........................................................................................................... 5
The Lease Signings ....................................................................................................... 7
Diverting Cash to Pay Class Members From the Budget in Favor of Carrizo ............... 9
The Claims of the Class Members ............................................................................... 15
The Class Definition .................................................................................................... 16
ARGUMENT
A. Pennsylvania Public Policy Favors Class Actions, Particularly in Cases Alleging Breach of Contract. ................................................................................. 16
B. The Requirements of Rule 1702 Are Satisfied .......................................................... 18
Rule 1702(1): The Class is so numerous that joinder of all members is impractical ............................................................................................................. 18
Rule 1702(2): There are Questions of Law and Fact Common to the Class ........ 19
Rule 1702(3): The Representative Plaintiffs' Claims Are Typical of the Claims of the Class ..................................................................................... 22
Rule 1704(4): The Representative Plaintiffs Will Fairly and Adequately Protect the Interests of the Class ........................................................................... 23
Rule 1702(5): This Class Action Provides a Fair and Efficient Method For Adjudicating the Controversy ........................................................................ 24
Rule 1708(a)(1): Multiple Common Questions of Fact and Law Predominate Over Individual Questions .................................................................................... 26
Rille 1708(a)(2): This Class Action is Manageable ............................................. 31
Rule 1708(a)(3): The Risk of Inconsistent Adjudications ................................... 31
Rule 1708(a)( 4): Extent of Other Existing Litigation .......................................... 32
Rule 1708(a)(5): This Forum is Appropriate to Litigate the Claims of the Class ...................................................................................................................... 32
Rule 1708(a)(6): Given the Complexities of the Issues and Expenses of this Litigation, the Claims of Most Individual Class Members are Insufficient in Amount to Support Separate Actions .............................................................. 32
1708(a)(7): A Class Action is Justified When Comparing the Damages Which May be Recovered by Individual Class Members to the Expense and Effort of Administering the Action ....................................................................... 33
1708(b )(2): A Class Action is Justified When Comparing the Damages Which May be Recovered by Individual Class Members to the Expense and Effort of Administering the Action ................................................................ 33
CONCLUSION ................................................................................................................. '" ......... 34
11
TABLE OF
Am. Pipe & Constr. Co. v. Utah, 414 U.S. 538 (1974) ................................................................ 32
Assocs. Disc. Corp. v. Goldman, 524 F.2d 1051 (3d Cir. 1975) ................................................. 15
Bald Eagle Sch. Dis!. v. Mid-State Bank & Tr. Co., Pa.Com.Pl, 1999 WL 335059 .............. 19,33
Baldassari v. Suburban Cable TV Co., 2002 P A. Super. 275, 808 A.2d 184 (2002) ............. 18, 22
Bell v. Beneficial Consumer Disc. Co., 241 Pa. Super. 192, 360 A.2d 681 (1976) ..................... 17
Braun v. Wal-Mart Stores, Inc., 2011 Pa. Super 121,24 A.3d 875 (2011) ... 16, 17,22,25,26,30
Cambanis v. Nationwide Ins. Co., 348 Pa. Super. 41, 501 A.2d 635 (1985) ............................... 27
Gen. Tel. Co. ofSw. v. Falcon, 457 U.S. 147 (1982) .................................................................. 16
Haft v. us. Steel Corp., 305 Pa. Super. 109,451 A.2d 445 (1982) ............................................ 24
In re Bridgeport Fire Litig., 2010 PA Super 181, 5 A.3d 1250 (2010) ....................................... 16
Jamison v. Concepts Plus, Inc., 380 Pa. Super. 431, 552 A.2d 265 (1988) ................................ 22
Janicik v. Prudential Ins. Co., 305 Pa. Super. 120, 451 A.2d 451 (1982) 17-20, 24, 26, 31, 32, 33
Klusman v. Bucks Cty. Court of Common Pleas, 128 Pa. Commw. 616, 564 A.2d 526 (1989) .19
Liss & Marion, P. C. v. Recordex Acq. Corp., 603 Pa. 198, 983 A.2d 652 (2009) .......... 16, 17, 26
Marcus v. MVW olN Am., LLC, 687 F.3d 583 (3d Cir. 2012) ........................................................... 22
Pac. Emplrs. Ins. Co. v. Glob. Reinsurance Corp. of Am., 693 F.3d 417 (3d Cir. 2012) ............ 22
Ross v. Shawmut Dev. Corp., 460 Pa. 328, 333 A.2d 751 (1975) ............................................... 17
Samuel-Bassett v. Kia Motors Am., Inc., 613 Pa. 371,34 A.3d 1 (2011) ............ 16, 17, 18, 20, 26
Schall v. Windermere Court Apts., 2013 Phila. Ct. Com. PI. LEXIS 296 (Feb. 6, 2013) ..... 26,27
Sharkus v. Blue Cross of Greater Phi/a., 494 Pa. 336,431 A.2d 883 (1981) ............................. 17
Starr v. 0-1 Brockway Glass, 432 Pa. Super. 255, 637 A.2d 1371 (1994) .................................. 22
Stewart v. Abraham, 275 F.3d 220 (3d Cir. 2001) ....................................................................... 19
Stonehedge Square Ltd Pshp. v. Movie Merchs:., 552 Pa. 412, 715 A.2d 1082 (1998) ............... 30
111
Walney v. SWEPI LP, 2015 U.S. Dist. LEXIS 122119 (W.D. Pa. Sept. 14,2015) ......... 20,28,30
Vodenichar v. Halcon Energy Props., 733 F.3d 497 (3d Cir. 2013) ............................................. 2
STATUTES
Pa. R. Civ. P. 1702 ......................................................................................... 18, 19, 22, 23, 24,26
Pa. R. Civ. P. 1707 ....................................................................................................................... 18
Pa. R. Civ. P. 1708(a) .......................................................................................... 25,26, 31, 32, 33
Fed. R. Civ. P. 23(b) .................................................................................................................... 25
TRESTISES
Restatement (Second) of Contracts § 211(2) (1981) ................................................................... 20
Restatement (Second) of Contracts § 228 (1981) ........................................................................ 22
IV
IN COURT OF COMMON PENNSYLVANIA
JEFFRY S. VODENICHAR, DAVID M. KING, JR. and LEIGH V. KING, husband and wife, JOSEPH B. DAVIS and LAUREN E. DAVIS, husband and wife, GROVE CITY COUNTRY CLUB, and RICHARD BROADHEAD, individually and on behalf of all those similarly situated,
Plaintiffs,
v.
HALCON ENERGY PROPERTIES, INC., MORASCYZK & POLOCHAK, and CO-EXPRISE, INC., d/b/a CX-Energy,
Defendants.
No 2013-512
BRIEF IN SUPPORT OF MOTION FOR CLASS CERTIFICATION
This lawsuit involves more than 1,400 Mercer County landowners who suffered damages
when Halcon Energy Properties, Inc. ("Hal con") refused to pay bonuses due the landowners
under oil and gas leases with Halcon. As will be shown below and later proved at the trial on
the merits - Halcon's refusal to pay class members was based upon common, unifonn facts that
apply to all class members' claims. Halcon did not reject leases based on individualized
decisions about leases or parcels of land. Rather, it spumed its contractual obligations across the
board and treated all class members alike.
The resolution of all class members' claims will be driven by one common theme:
Halcon's highest officers acted in bad faith and made a decision to divert money due class
members to other corporate purposes. Specifically, Halcon removed from its budget more than
$115,000,000 of the money that was to be paid to the Mercer County landowners to free up
money to acquire other oil and gas interests that the cOlllpany liked better. Because proof of one
set of facts will control all class members' claims and because the legal and factual issues
cOlnmon to those claims predominate over any individual issues, this Court should grant
plaintiffs' Motion for Class Certification. Thus, all claims can be resolved efficiently in one
case.
STATEMENT OF MATERIAL FACTS
In early 2012, defendants Co-eXprise, Inc. ("CX-Energy" or "CX") and the law firm
Morascyzk & Polochak ("M&P") joined together to represent a large group of Mercer County,
Pennsylvania, landowners in leasing their oil and gas interests to an energy company. Under the
terms of a Landowner MarketPlace Agreement ("LMA") which the class members signed,
Energy generally coordinated marketing and administration of the program, and M&P generally
provided legal services to the landowners related to any oil and gas lease and the related lease
documents. I By mid-April 2012, CX and M&P represented and were marketing some 20,000
acres of oil and gas interests in Mercer County, Pennsylvania.2 The Mercer County landowners
who CX-M&P represented were generally known as the "Mt. Jackson Group 4."
Halc6n was among the oil and gas companies acquiring oil and gas interests in Mercer
County at the time. Mary Ellen Brook was Halc6n's Senior Land Manager and, after May 30,
2012, its Vice President - Land.3 She was responsible for acquiring oil and gas interests in
Affidavit of David A. Borkovic in support of Motion for Class Certification, Ex. 1 [LMA, Ex. 1 to the Amended Complaint] (Exhibits to the Affidavit of David A. Borkovic in Support of Motion for Class Certification will be referred to as "Ex._.") 2
Ex. 5 at Tr. 20:15-21:9. [MEB]
3 Ex. 5 at Tr. 15:23-16:3 [MEB], Ex. 4 at pA. [SEC Form 8-K filed by Hakon Resources Corporation, Earliest event: 5116112]
2
Pennsylvania and Ohio and reported directly to the company's Chief Executive Officer, Floyd
Wilson.4
The Initial Negotiations
As of April 2012, Ms. Brook was "looking for acreage to buy" and had begun talking to
CX and M&P which already had 20,000 acres to offer. 5 In addition to landowners who had
already signed LMA's, Ms. Brook learned that CX-M&P would hold "town hall meetings" for
other landowners. That process generally involved landowners bringing title information to the
meetings and then executing lease documents provided by CX-M&P. 6 Interested in the Mt.
Jackson Group 4 acreage, Ms. Brook requested that Halc6n be given the right to take some, but
not all, of the leases. CX-M&P, however, insisted that Halc6n had to enter into an oil and gas
lease with every landowner in the Mt. Jackson Group 4 who had good title.7
Ms. Brook recognized that the CX-M&P acreage was scattered and not contiguous. On
May 2,2012, she informed Halc6n's President and CEO that though CX-M&P's acreage was "a
bit scattered though [ out] the county," it fit in nicely and would fill in gaps in other leases that
Halc6n expected to acquire from a company called Vista.8 Halc6n's President, Steven Herod,
thought the project was worthwhile and instructed Ms. Brook to work with Thompson Knight, a
major Houston, Texas, law firm on it.9 Ms. Brook was in charge of the negotiations with CX-
M&P for Halc6n.lO
With the project going forward, Ms. Brook encouraged CX-M&P to get as Inany people
4 Ex. 5 at Tr. 16:22-17:21. [MEB] 5 Ex. 5 at Tr. 18:4-10,20:15-21:9. [MEB] 6 Ex. 5 at 19: 17 -24. [MEB] 7 Ex. 5 at 165:14-166:6; Ex. 26. [MEB Ex 55] 8 Ex. 5 at Tr.26:18-28:28 [MEB]; Ex. 7 [MEB Ex 3]; Ex.8. [MEB Ex 4] 9 Ex. 7. [MEB Ex 3] 10 Ex. 5 at Tr. 195:8-25. [MEB]
3
in Mercer County interested as possible.l1 By May 21, CX-M&P had signed up 36,625
acres in Mercer County and gave Ms. Brook a map showing 33,600 of the acres. 12 By May 23,
2012, Ms. Brook could see the location and size of all CX-M&P parcels through an advanced
computer program. 13 Thus, as of May 23,2012, Halcon knew the sizes and locations of the Mt.
Jackson Group 4 parcels that CX -M&P was lllarketing.
At various times, for business or other reasons, Halcon disregarded the advice of its
outside attorneys. For example, Halcon's outside attorneys recommended that the CX-M&P
agreement should require Halcon to take only "leases and lands within reasonable proximity to
one another.,,14 That provision, however, was not included in the final agreement. IS Halcon's
outside counsel also recommended that the company use a Purchase and Sale Agreement to get
nonnal tennination rights, but Halcon lllade a business decision and decided to follow that
advice. 16
On May 24,2012, while they negotiated the final letter of intent, Halcon and CX-M&P
entered into a preliminary letter of intent under which they agreed in principle that Halcon
"would accept from lessors who have acceptable title covering oil and gas mineral fee interests
located within [Mercer County, Pennsylvania].,,17 Thus the operative criteria were that the land
be within Mercer County and have acceptable title. On May 29, CX sent to Halcon and its
counsel a copy of the "finn offer letter" that CX-M&P had been using with landowners. I8 The
11 Ex. 5 at Tr. 169:25-170:20 [MEB]; Ex. 25. [MEB Ex 55]
12 Ex. 5 at Tr. 33:2-20 [MEB]; Ex. 9. [MEB Ex 6] 13 Ex. 5 at Tr. 35:15-36:25 [MEBJ; Ex. 10. [MEB Ex. 7] 14 Ex. 5 at Tr. 38:15-39:5 [MEB]; Ex. 11. [MEB Ex. 8]
15 Ex. 5 at Tr. 39:6-16. [MEB] 16 Ex. 5 at Tr. 39:23-40:7; Exl1. [MEB Ex. 8] 17 Ex. 5, Tr. 42:4-43:24 [MEB]; Ex. 12. [MEB Ex. 10] 18
Ex. 12. [MEB Ex. 10]
4
finn offer letter stated that Halcon could "reject acreage only due to bona-fide title defects .... " 19
The very next day, Halcon's outside counsel sent a revised draft of the final Letter of
Intent to CX-M&P which included the following proposed language:
" ... NOTWITHSTANDING ANYTHING STATED IN THIS LOI TO THE CONTRARY .,. HALCON RESERVES THE RIGHT, IN ITS SOLE DISCRETION, TO ACCEPT OR REJECT ANY OFFER OR LEASE.,,20
The parties, however, rejected this proposed language, and it was removed from the Letter of
Intent.21 Put simply, Halcon had no general discretionary right to reject any lease from a class
member. The parties then entered into the binding Letter of Intent described below. And,
during that time period, Halcon also submitted an offer to acquire significant amounts of oil and
gas interests frOlTI Vista.
The Letter of Intent
In early June 2012, CX-Energy, M&P and Halcon entered into the Letter of Intent dated
June 2,2012, (the "LOI") which forms a primary basis for this litigation.22 Under the Lor:
---* Halcon committed to enter into oil and gas leases with persons in the CX-M&P Mt. Jackson Group 4 who had land in Mercer County, Halcon's "Area of Interest;,,23
---* Halcon agreed to pay the landowners a bonus of$3,850 per net mineral acre;24
---* Halcon agreed to pay an 18.5% royalty to the landowners;25
---* CX-M&P agreed to hold one or more "mass lease signings" before June 30, 2012, at which landowners in Mercer County could execute the required Halcon lease documents;26
19 Ex. 3, at 3 d page from end, ,-r 1 [Amended complaint Ex 3] 20 Ex. 13 at CX _ HAL0000682. [MEB Ex. 11] 21 Ex. 5, Tr. 47:3-10. [MEB]
22 Ex. 2. [Amended Complaint Ex 2] The Amended Class Action Complaint and certain other documents refer to the LO I as the "Halc6n Agreement." 23 Id. at HALOOO 1. 24
Id. at,-r 1, HAL0002. 25
Id. at,-r 2, HAL0002. 26
Id. at,-r 4, HAL0002.
5
CX-M&P had to provide to Halcon a listing of all landowners who agreed to participate in the leasing project by June 30, 2012;27 and
Ha1con did not have to accept leases in excess of 60,000 net mineral acres.28
Significantly, Halcon had 90 business days to complete "its title, environmental, and
other due diligence review of the Properties covered by the Leases. ,,29 It then had to pay the
$3,850 per net mineral acre bonus consideration to the landownersltnembers of Mt. Jackson
Group 4 within ten days for all properties that were not subject to an identified "title defect" or
an "other defect. ,,30 A "title defect" meant "any condition, fact or circumstance which could
result in Lessor not having Marketable Title ... ,,31 An "other defect" generally meant an
unacceptable environmental liability, a violation of law, or "any restriction on the ability of
Halcon to explore and drill for, develop and produce the oil, gas, and associated hydrocarbons.,,32
If Halcon asserted a title defect or an "other defect" with respect to any property, it had to
provide written notice to CX-M&P with enough information to identify the nature of the defect
to enable CX-Energy and M&P to cure within a specified six-month period.33
Thus, in summary, the parties agreed that (i) Ha1con was interested in leasing parcels
throughout Mercer County; (ii) the members of the Mt. Jackson Group 4 would have until June
30, 2012 to execute and deliver lease documents for property anywhere in Mercer County; (iii)
Halcon would pay $3,850 per net mineral acre to the members of Mt. Jackson Group 4; (iv)
Halcon had 90 business days to conduct due diligence; (v) Halcon had to pay unless it identified
a specific title defect or "other defect" as defined in Paragraph 10(£) of the LOI; and (vi) if
27 Id. at ~ 3, BAL0002.
28 Id. at~3,HAL0002.
29 Id. at ~ 5, BAL0003.
30 Id. at ~ 6, BAL0003.
31 Id. at ~ 10Cg), HAL0007.
32 Id. at ~ 10C±), HAL0006.
33 Id. at ~~ 5, 11, HAL0007.
6
Halc6n asserted any defect with respect to any property, it had to provide written notice of the
defect and give CX-M&P an opportunity to cure the alleged defect. The 60,000 acre luaximum
under the LOI would have required Halc6n to spend more than $230 million in lease bonus
payments to Mercer County landowners (except for properties subject to bona fide title defects or
other defined defects).34
Halc6n had no general discretion or ability to reject leases under the LOI. Moreover, the
Schedule attached to the LOI when it was executed listed parcels of all sizes that would be leased
to Halc6n, including many with just one or two acres of gas interests.35 Although Ms. Brook had
seen the schedule before she executed the LOI, she never looked at the size of individual
parcels,36 she never luentioned parcel size to CX or M&P, 37 and the word "contiguous" in
relationship to parcels does not appear in the LOI.38
The Lease Signings
Having signed the LOI, the parties prepared newspaper ads offering additional Mercer
County landowners the ability to lease their oil and gas rights to Halc6n. Halcon approved those
ads.39 The ads in the Mercer and Sharon newspapers announced an "Oil and Gas Lease Signing
Event," with Halc6n Resources, and stated "if you own land in Mercer County and are interested
in becoming part of the Mt. Jackson 4 Group, please call .... ,,40
The mass lease signing was a study in contrasts. To the Mercer County landowner
members ofMt. Jackson Group 4, it was "a glorious moment." Farmers with calloused, gnarled
34 Ex. 6, Tr. 204:25-205:6. [DSE] 35 Ex. 5, Tr. 60:18-61:23. [MEB] 36 ld. Tr. 61:24-62:6. [MEB] 37 ld. Tr. 62:20-63:1. [MEB] 38
ld. Tr. 195:3-7. [MEB] 39
ld. Tr. 35:3-6. [MEBJ 40 Ex. 5 at Tr. 50:4-51:23,52:20-53:13-43:24 [MEB]; Ex. 14, 15. [MEB Ex. 12, 13]
7
hands stood proudly with children, grandchildren and great-grandchildren, "celebrating" the
opportunity and waiting to sign oil and gas leases with Hakan.41 They were about to realize
financial independence for themselves and for their fatnilies. 42 A "wonderful" day, indeed.
To Hakon on the other hand, as Ms. Brook expressed, it was "total hillbilly heaven, but
it's necessary.,,43 She presulnably Ineant her comment literally. The same Ms. Brook described
staying in Mercer motels as " ... EWWW! Gross. Y'all can get bedbugs if you want. I'm
staying in a decent place!! 1,,44
The mass lease signing was truly successful in obtaining oil and gas acreage for Halcan.
At the end of the first day, June 12, 2012, 11,000 acres of oil and gas interests in Mercer County
had been leased, and Steve Herod, the President of Halcan, was pleased.45 Mr. Herod reported to
Floyd Wilson, Hakon's CEO, that Halcan was the "biggest thing going in Mercer County" and
he expected to get 40,000 acres.46 Halcan's CEO, Wilson, asked how much they were paying
and whether it was "totally scattered or enough to drill on.,,47 The President, Herod, replied,
"Some big enough to drill on but most will require fill in work - it fits in well with what we already have in mercer [sic] and would fit in great with vista [sic ].,,48
The next day, June 13, 2012, Halcan learned that its bid for Vista's oil and gas interests
in Mercer County had not been successfu1.49 Also on June 13, Mr. Wilson, Halcan's CEO,
questioned the CX-M&P transaction. He wrote to Steve Herod:
41 Nudi Dep. Tr. _ (transcript not fmalized). 42 ld. 43 Ex. 16 at HAL-02925-3. [MEB Ex. 24] 44 ld. at HAL-02925. 45
Ex. 5 atTr. 77:12-78:7 [MEBJ; Ex. 17. [MEB Ex. 26J 46
Ex. 36. [Herod Ex. 10] 47 ld.
48 ld. 49
Ex. 37. [Herod Ex. IIJ
8
"Mercer County. David [Elkouri] said there were lots of people there leasing an acre or two to us. We got into this play and used [a predecessor's] ... instructions to brokers as a guideline for them. No non-op, no slnall, isolated tracts, no wetlands, surface issues to be exposed before leasing, no federal leases without approval, etc.
And we are paying same amount for small tracts that we would pay for large tracts. And isn't part of Mercer thought to be dry gas?
... Don't forward this email. I am not at all criticizing Mary Ellen [Brook]. Ifwe are a bit out of control I want to reset. Floyd." 50
To start the "reset," Mr. Herod asked Ms. Brook for a spreadsheet showing how many parcels
were under 20 acres or under 2 acres and for a map showing the acreage. 51
Unknown to the Mercer County landowners in Mt. Jackson Group 4, the die had been
cast. CX-M&P continued to have landowners join the Mt. Jackson Group 4, and by June 30,
2012, they identified to Halcon, as required by the LOI, 59,000 acres of land in Mercer County
that was to be leased by Halcon. 52
Diverting Cash to Pay Class Members From the Budget in Favor o(Carrizo
By July 6, 2012, Halcon had decided that it was going to bid for oil and gas leases that
were being offered for sale by another energy company, Carrizo. 53 The Carrizo transaction
would cost roughly $110,000,000 for 17,000 net acres in Pennsylvania and Ohio that
complemented Halc6n's gas leases and was likely to be the last block Halc6n would obtain in the
area54 Halc6n informed its Board of Directors about the $110,000,000 Carrizo transaction on
July 16, 2012.55
At that same time, Halc6n's budget already included funds to acquire 59,000 acres from
50 Ex. 34. [Herod Ex. 1]
51 Ex. 5 at Tr. 79:23-80:25, 81:6-12 [MEBJ; Ex. 18 [MEB Ex. 28]; Ex. 38. [Herod Ex 12]
52 Ex. 5 at Tr. 94:15-95:4 [MEB]; Ex. 19. [MEB Ex. 34]
53 Ex. 5, Tr. 97:13-98:7. 54
Ex. 6 at Tr. 28:12-30:14 [DSE]; Ex. 26. [DSE Ex. 2] 55 ld.
9
CX-M&P, the number of Mt. Jackson Group 4 acres comnlitted as of June 30, 2012.56 The
budgeted amount for Halcon's acquisition of the Mt. Jackson Group 4 leases was $227,150,000
(59,000 X $3,850). Steve Herod requested an updated map of the 59,000 acres and a spreadsheet
showing each parcel's size.57 By July 16, Mr. Herod knew the tract sizes and locations for the
59,000 acres Halcon was obligated to acquire from the Mt. Jackson Group 4-Mercer County
residents. 58
On July 27, 2012, Halcon's President asked Ms. Brook about how much of the class
member acreage was likely to fail title. He learned that the amount Halcon would have to
acquire would be "a lot closer to 59,000 acres than to 30,000" and asked Ms. Brook whether
Halcon was obligated to take all the acres. 59 Mr. Herod eventually instructed Ms. Brook, "We
don't want to just not pay but if there are any gray areas on title on slnall tracts we should pass
,,60
Any reservations about Halcon simply not paying the class members would soon pass.
Halcon was exchanging drafts of a Purchase and Sale Agreement with Carrizo,61 and by the end
of July 2012 Halcon and Mr. Herod had unilaterally changed the budget for CX-M&P from
59,000 acres to 30,000 acres,62 and $111,650,000 budgeted for payments to the class members
simply vanished with the stroke of a pen.
On August 2, David Elkouri, Halcon's Executive Vice President and General Counsel,
asked for copies of the lease and order for payment for the Mt. Jackson Group 4 class
56 Ex. 5 at Tr. 100:12-102:24 [MEB]; Ex. 20. [MEB Ex. 37] 57
Ex. 5 at Tr. 103:8-104:25 [MEB]; Ex. 21. [MEB Ex. 38] 58 Id. Tr. 105: 1-3. 59
Ex. 39. [Herod Ex. 13] 60 Id. 61 Ex. 6 at Tr. 101:6-17 [DSE]; Ex. 29. [DSE Ex. 10] 62
Ex. 5 atTr. 128:5-7 [MEB]; Ex. 6, Tr. 40:18-41:2 [DSE]; Ex. 23. [MEB Ex. 42]
10
Inembers.63 Something was up - it was called "Carrizo." Ms. Brook volunteered that Halcon
might be able to get out of the instant leases and that there might be "wiggle language" in the
Order for Payment as well. 64 The reason for reviewing the Mt. Jackson Group 4 leases soon
became clear: "Floyd [Wilson, the CEO] wants to see how much it would be if we picked say 6
or 8 townships that we really want [from CX-M&P] and then pass on the rest.,,65 "Floyd" also
wanted to close only on blocked up acreage in the right areas,66 rather than acreage throughout
Mercer County as required by the LOr. As Ms. Brook acknowledged, if Halcon only took 6 or 8
townships from the Mt. Jackson Group 4, it would not have to pay $3,850 per acre in the other
townships and could use the money for other purposes67-like Carrizo.
The next day, August 3,2012, Halcon's President, Steve Herod, went through the parcels
that Halcon was required to take from CX-M&P. He reported to Halcon's CEO that he had
managed to reduce the Mt. Jackson Group 4 area to 39,289 acres by using Halcon's wet/dry gas
map.68 Mr. Herod continued:
63 64 65 66 67
"Within each township are small or irregular tracts we won't want or some may be too close to the dry gas line or whatever so the number of acres we really would want would come down further with more detailed analysis.
What David [Elkouri] and I thought of was to set ourselves a limit of 15,000 acres out of M&P - we will need to sit down and go thru the detail to pick which tracts we want.
In the forecast for the board book, we had 30,000 acres from M&P - so if we could cut that in half we'd free up $57.75 MM. It could also tum out that there are not quite 15,000 acres we really want.
Depending on what happens with Oz and other deals, we could end up with about
Ex. 35 [Herod Ex. 3]; Ex 5 at Tr. 108:20-109:14 [MEBJ; Ex. 22. [MEB Ex 40J
Ex. 35 at ADAPT0000163 [Herod Ex. 3]; Ex 5 at Tr. 111:21-112:5. [MEB]
Ex. 35 at ADAPT0000162 [Herod Ex. 3J; Ex. 22 at ADAPT0000432. [MEB Ex 40]
Ex. 5at Tr. 113:12-114:11 [MEB]; Ex. 22. [MEB Ex 40]
Ex. 5, Tr. 117:17-119:3. [MEBJ 68 Ex. 27. [Elkouri Ex. 3]
11
$100MM freed up. 69
Forty-seven minutes later, Floyd Wilson, the CEO, responded, "Have someone do the work and
the math.,,70 Put bluntly, Halcon was budgeting for the Carrizo and CX-M&P deals; 71 Carrizo
would cost $110 million; and Halcon's highest executives were determining how to shift money
from CX-M&P to Carrizo without regard to the company's obligations under the LOr.
Late in the afternoon of August 3, Mr. Herod was "trying to think of some place to come
up with some cash" to do the Carrizo deaL 72 The CEO and Mr. Herod agreed that they were in
favor of doing the Carrizo deal if they could free up cash and said, "[I]f we cut M&P from
30,000 acres (what we had in the board book) to 15,000 acres then that frees up an additional
$57mm (15000 x 3850).,,73 From Halcon's perspective, the deal to acquire the class members'
oil and gas interests had shrunk from 60,000 acres to 30,000 acres and then to 15,000 acres
behind the closed doors of Halcon' s executive suite.
On August 5, 2012, Mr. Wilson summarized the situation in the following email to
Halcon's Board of Directors:
"Due to its strategic nature, I am suggesting that we reconsider the Carrizo acreage in PA and OH.
in [sic] recognition of our sensitivity to our balance sheet and finances we have chosen several acreage deals that we can cancel, that are all in the budget as presented, that are all less strategic than Carrizo. This would have the effect of making room for Carrizo while not increasing the current budget.
In OH and P A the deals which we would forego in favor of Carrizo are:
- OZ ($28.5MM) - Brumbaugh ($7MM) - Findlay ($8.25MM)
69 fd.
70 fd. 71 Ex. 6 at Tr. 37:18-38:4,42:8-21. [DSE] 72 Ex. 40. [Herod Ex 15J 73 fd.
12
-M&P ($57MM)
In Texas the BSR deal ($1 0.6MM) would be cancelled.,,74
Halcon had determined that it was not going to acquire all of the oil and gas leases from the Mt.
Jackson Group 4 members, but which landowners would survive the budgetary scalpel?
On August 2012, Mr. Elkouri and Mr. Herod decided that Halc6n would only take
leases from M&P and ex that were in Hempfield, Salem, Sugar Grove, Sandy Creek, Otter
Creek, Greene, Perry and Sandy Lake Townships. 75 If a lease was not in one of those
Townships, Halcon was not going to take it. 76
On August 9,2012, Mr. Elkouri conveyed the grim news to eX-Energy. Mr. Seitanakis
of eX-Energy summarized the conversation with David Elkouri, in part, as follows:
2. David said, 'We are not buying that sh-t. We will only buy 30K acres that we can drill. The rest of it is sh-t. If you want to work with us to get the 30K that are contiguous or relatively contiguous then great. Do you really think we are that f'ing stupid to buy that sh-t? If I have to sue you for 2-3 years, fine. We're not f'in doing it.'
* * * 4. When I asked him to explain how a public company can agree to 60K acres, much of which he saw on a map at the lease signing, and then change its mind less than 2 months later? He claimed that is the way it is, and we took advantage of Mary Ellen [Brook].
5. David said this is the 'end game, it's where we are at.' Their final position is that we can either work together to get to 30K contiguous acres or spend the next 2-3 years suing each other 'if you are that f-ing stupid.' They will not reconsider, and he asked if this is our [mal position or if I needed to go back to you to reconsider. I left it open-ended.
It seems clear that they realized that their budget is 30K acres or thereabouts and 30K is all they are willing to do. The fact that he was angry and using profanity tells me he is trying to bully us into working with them rather than appeal to any
74 Ex. 42. [Herod Ex 18]) (Emphasis supplied.) 75 Ex. 5 at Tr. 139:16-140:20 [MEB]; Ex. 24. [MEB Ex 45] 76 Id. at Tr. 140:21-24.
13
rights they really have in the contract (and that he is a first class a-hole).
On August 14, 2012, Mr. Elkouri confinned that "... the acreage that we will lease will be
somewhere between 25,000 and 35,000 net mineral acres and under no circumstances will we
lease more than 35,000 net mineral acres.,,78
On or about August 23, 2012, Halcan entered into a definitive Purchase and Sale
Agreement with Carrizo and it reduced the budgeted amount for leases that it 'would acquire
from the Mt. Jackson Group 4.79 Three months later, it acquired $1.45 billion in oil and gas
interests in North Dakota.so
True to the executives' disregard for Ha1can's obligations and the rights of the class
melnbers, Halcan refused to take all required leases under the LOr. On or about October 19,
2012, M&P sent a fonnal notice of default for non-payment to Halcan which identifies most of
the class members.81 On November 1,2012, rather than admitting that Halcan refused to pay the
class members because it used the money for other deals, Mr. Ekouri, supposedly in reliance on
language in the Order for Payment ("OFP") that accompanied each lease, wrote:
As set forth in the OFP, the acceptance of the Leases by Ha1con [ sic] was contingent upon the subsequent inspection and approval of, among other things, the surface, geology and tile [ sic] associated with the properties offered for lease. The properties offered for lease were rejected on the basis of a failure of one or more of those conditions. 82
As discussed above, Halcan did not rej ect the class members' oil and gas leases for those
reasons.
Against this background, Halcan now claims in this lawsuit that it had a dispute with
77 Ex. 28. [DSE Ex 4J
78 Ex. 41. [Herod Ex. 17J
79 Ex. 6 atTr. 107:5-19; 109:19-110:14 [DSEJ; Ex. 30, 31. [ElkouriEx. 13, 14] 80 Id. Tr. 27:7-16.
81 Ex. 32. [Elkouri Ex. 25J See also n.86, infra.
82 Ex. 33. [DSE Ex. 26J (Emphasis supplied.)
14
CX-M&P about what Halcon's obligations were; that they came to a resolution that dispute;
and that Halcon was not obligated to take the other leases from the Mt. Jackson Group 4.83 At
the time, however, CX and M&P owed fiduciary duties to the Mt. Jackson Group 4 class
members pursuant to the LMA's. They lacked authority to settle or release the class members'
claim, see Associates Discount Corp. v. Goldman, 524 F.2d 1051, 1053 (3d Cir. 1975) (" ... an
attorney has no power to settle his client's case nor to consent to a dismissal of it upon the merits
without express authority"); the class members received no notice of any such purpolied release
or settlement; and the class members' did not consent to any settlement and release.
Halcon has also introduced another red herring, arguing that its obligations were excused
because CX-M&P supposedly deleted the word "geology" from the Orders for Payment the
class members executed. As will be seen below, however, in making mass rejections, Halcon
did not consider the specific characteristics of each individual property within the rejected
communities. As such any possible deletion of the word "geology" is an attempt to divert
attention and wholly irrelevant.
The Claims of the Class Members
As set forth in the Amended Class Action Complaint, the representative plaintiffs and the
class members assert the following causes of action and seek certification of the class with
respect to the following Counts: (Count I) breach of contract against Halcon for breach of the
LOI aJk/a the Halcon Agreement; (Count II) a declaration that Halcon breached its duties under
the LOI; (Count III) intentional interference by Halcon with the contractual relationships
between the class members and CX -Energy and M&P, including a request for punitive damages;
(Count IV) breach of contract against CX-Energy and M&P to the extent that Halcon can evade
83 Ex. 6 at Tr. 176:18-20. [DSE]
15
its obligations to the class meInbers because CX-Energy and M&P did not provide the class
members with lease documents that conformed to the requirements of the LOI; and (Count V)
breach of fiduciary duty against CX-Energy and M&P.
THE CLASS DEFINITION
This action is brought on behalf of the following class:
All persons (1) who entered into a Landowner MarketPlace Agreement with CXEnergy and M&P relating to property located in Mercer County, Pennsylvania, (2) who executed an oil and gas lease and related documents with Halcon Energy Properties, Inc., (3) whose name was submitted to Halcon pursuant to ~ 3 of the Halcon Agreement, but (4) whose oil and gas lease was not paid by Halcon. Excluded from the class are claims arising froln any oil and gas lease for which Halcon, within the time period permitted under the Halcon Agreement, gave written notice to CX-Energy or M&P asserting a Title Defect or "other Defect," except for any purported notice contained in the November 1, 2012 letter from David S. Elkouri to Joseph E. Morascyzk.
ARGUMENT
A. Pennsylvania Public Policy Favors Class Actions. Particularly in Cases Alleging Breach of Contract
A class certification motion determines who will be parties to the action, nothing more.
Samuel-Bassett v. Kia Motors Am., Inc .. , 613 Pa. 371, 397, 34 A.3d 1, 15-16 (2011) ("Bassett
Class actions promote efficiency and save resources by litigating issues affecting every class
member in an economical fashion. General Telephone Co. of the Southwest v. Falcon, 457 U.S.
147, 155 (1982). Pennsylvania courts embrace class actions, recognizing that they "promote
efficiency and economy of litigation in adjudicating the claims of large groups of similarly
situated plaintiffs." In re Bridgeport Fire Litigation, 5 A.3d 1250, 1255 (Pa.Super. 2010). Thus,
class certification decisions are made liberally and in favor of maintaining class actions. Braun
v. Wal-Mart Stores, Inc., 24 A.3d 875, 892 (Pa.Super. 2011), aff'd 106 A.3d 656 (Pa. 2014); Liss
& Marion, P.C. v. Recordex Acquisition Corp., 937 A.2d 503, 505 (Pa.Super. 2007). See also,
16
Bell v. Beneficial Consumer Discount Co., 241 Pa. Super. 192, 205, 360 A.2d 1, 688 (1976)
("Since the class action is an important social device ... , decisions in favor of lTIaintaining a
class action should be liberally made.").
The COllliTIOnwealth's policy encouraging class actions IS especially appropriate in
actions arising under the same contract or form contracts. Under Pennsylvania law, "lcJlaims
arising from intelpretations of a form contract generally give rise to coml1lon questions."
Janicik v. Prudential Ins. Co., 305 Pa. Super. 120, 133, 451 A.2d 451, 457 (Pa. Super 1982)
(emphasis supplied.); Ross v. Shawmut Development Corp., 460 Pa. 328, 334, 333 A.2d 751, 753
(1974). Class treatment is appropriate even if clailTIs arise under different contracts so long as
"the relevant contractual provisions raise common questions of law and fact and do not differ
Inaterially. n Sharkus v. Blue Cross of Greater Philadelphia, 494 Pa. 336, 343, 431 A.2d 883,
886 (1981).
Class certification is a mixed question of law and fact, Liss and Marion, 603 Pa. 198,
217, 983 A.2d 652, 663 (Pa. 2009), in which the trial court is vested with broad discretion.
Bassett, 34 A.3d at 14. At the certification hearing, the burden of proof lies with the proponent.
However, "since the hearing is akin to a preliminary hearing, it is not a heavy burden. The
proponent need only present evidence sufficient to make out a prima facie case from which the
court can conclude that the five class certification requirements are met." Braun, 24 A.3d at 894.
The burden then shifts to the class opponent to come forward with contrary evidence. Bassett,
34 A. 3d at 18.
Ultimate liability is not at issue during certification, and the trial court cannot consider
the underlying merits of the class' claims in the certification decision. Bassett, 34 A.3d at 16. A
court reviews the substantive elements of the case only "to envision the form that a trial on those
17
issues would take. Id. (citations omitted). A trial court normally decides certification issues
based on the complaint and answer, on depositions or admissions supporting these allegations,
documentary evidence, and any testimony offered at the class certification hearing. Explanatory
Comment to Pa.R.Civ.P. 1707 and Bassett, 34 A.3d at 15-16.84
In short, class certification is not a mini-trial, and the class need not establish liability
during the class certification phase." Bassett, 34 A.3d at 22.85 The court instead focuses on the
requirements ofPa.R.Civ.P. 1702, 1708 and 1709. Those rules are readily satisfied in this case.
B. The Requirements of Rule 1702 Are Satisfied
Pennsylvania Rules of Civil Procedure 1702 sets forth five requirements for class
certification:
1. the class is so numerous that joinder of all members is impracticable;
2. there are questions of law or fact common to the class;
3. the claims or defenses of the representative parties are typical of the claims or defenses of the class;
4. the representative parties will fairly and adequately assert and protect the interests of the class under the criteria set forth in Rule 1709; and
5. a class action provides a fair and efficient method for adjudication of the controversy under the criteria set forth in Rule 1708.
Rule 1702(1): The Class is so numerous that joinder of all members is impractical
There are more than 1,400 rejected leases and approximately 2,200 or more class
members counting joint owners separately.86 The precise identity of each class member can be
84 A strict burden of proof is inconsistent with the policy of the Commonwealth that decisions in favor of maintaining a class action should be liberally made. Cj, Janicik, 451 A.2d at 454. 85 See also, Baldassari v. Suburban Cable TV Co., 2002 PA. Super. 275, 808 A.2d 184, 189-90 ("The hearing is confined to a consideration of the class action allegations and is not concerned with the merits of the controversy or with attacks on the other avennents of the complaint .... " 86 M&P's October 19, 2012 letter to Halcon demanding that Halcon pay the landowners identified on "Exhibit A" to such letter. (Ex. 32, [Elkouri EX 25]) Exhibit A lists for each lease the lease number, names of landowners,
18
detennined from records maintained by Halc6n, Energy and M&P. Such a class is clearly
"so numerous that joinder of all members is impracticable." Pa.R.Civ.P. 1702(1). The exact
number of class melnbers need not be shown, as long as the class is defined with "SaIne precision
and affords the court with sufficient indicia that more Inembers exist than it would be practicable
to join." Janicik, 305 Pa. Super. at 132, 451 A.2d at 456; Klusman v. Bucks County Court of
Common Pleas, 128 Pa. Cmwlth. 616, 624, 564 A.2d 526, 530 (1989), affd, 524 Pa. 593, 574
A.2d 604 (Pa. 1990). Classes with as few as even 40 members nonnally have a presumption of
numerosity. See, e.g., Stewart v. Abraham, 275 F.3d 220, 226-27 (3d Cir. 2001). In Bald Eagle
School District v. Mid-State Bank & Trust Co., 1999 WL 335059 (Pa. Com. PI. Blair Cnty), the
court per Judge Hiram Carpenter certified a class consisting of 49 Pennsylvania school districts,
noting: "Every effoli should be made to decide issues in one litigation where it can adequately
and fairly be accomplished .... " Id. at *2. Here, the numerosity requirement is clearly satisfied,
as expressly admitted by both M&P and CX-Energy. (Ex. 43 & 44).
Rule 1702(2): There are Questions of Law and Fact Common to the Class
A plaintiff must demonstrate the existence of questions of law or fact common to the
class. Pa.R.Civ.P. 1702(2). To establish commonality, the class proponent has to identify
common questions of law and fact e.g., a common source of liability. Common questions
exist if the class members' legal grievances "arise out of the 'same practice or course of conduct'
on the part of the class opponent." Janicik, 451 A.2d at 457 (citations omitted). "The critical
inquiry ... is whether the material facts and issues of law are substantially the same for all class
parcel numbers, gross acreage, and parcel township. Hakon itself submitted Ex. 32, Ex. A to the federal court as a list of purported class members. That list, however, may not include all class members. There are numerous additional records maintained by defendants from which identities of class members can be ascertained and verified. These include the "voided" leases themselves, records maintained by ex -Energy and M&P as to persons with whom they entered LMAs, and records relating to commission payments Hakon remitted to eX-Energy when paying bonus payments as to accepted parcels. It is clearly impracticable to join all class members.
19
members. The court should be able to envision that the C0l111non issues could be tried such that
'proof as to one claimant would be proof as to all' members of the class." Bassett, 34 A.3d at 37.
However, as discussed below in the predolninance section, the claims of all class members need
not be identical. The existence of distinguishing individual facts does not preclude certification
- common questions of fact and law must merely predominate over individual questions.
Janicik, 451 A.2d at 461-62.
In a similar case alleging failure of an oil and gas company to pay bonus payments, Chief
Judge Conti issued a thorough and instructive opinion certifying a class of Verango County, P A
landowners as to claims for breach of express contract and breach of contract ilnplied in fact.
Walney v. SWEPI LP, _ F. Supp.3d _,2015 U.S. Dist. LEXIS 122119 (W.D. Pa., Sept. 14,
2015) (numerous issues of contractual interpretation were common to the class and predominated
over individualized issues). Walney is discussed more fully infra in connection with the
predominance requirement, and a copy of the opinion is provided at Tab 23 of Plaintiffs' Case
Law Appendix submitted herewith.
Here, all parties' rights and obligations arise from the LOI, the standardized oil and gas
leases executed by class members and delivered to Halc6n pursuant to the LOI, and (as to CX-
Energy and M&P) the LMAs.87 Moreover, as described in the Statement of Facts, a common set
of facts underlies each class member's claims, facts that will be established whether tried in one
action or in hundreds of separate lawsuits.
87 Halcon's obligations and class member's rights are determined within the four comers of these documents, making any individual understandings of standard contractual terms irrelevant. As recently stated by the Supreme Court, "Contracting parties are normally bound by their agreements without regard to whether the terms thereof were read and fully understood." Bassett, 34 A.3d at 25. See also, Restatement (Second) of Contracts § 211(2), which provides "[w]here a party to an agreement signs or otherwise manifests assent to a writing and has reason to believe that like writings are regularly used to embody terms of agreements of the same type. . .such a writing is interpreted wherever reasonable as treating alike all those similarly situated, without regard to their knowledge or understanding of the standard tenns of the writing" (emphasis supplied).
20
Among the common questions of law and fact are the following:
(i) Whether Balcon breached the Lor when it rejected leases from the plaintiffs and class lnembers and is liable for nonpayment of the bonuses;
(ii) Whether Balcon had any discretionary light under the Lor to reject leases based upon the city, borough or township in which the land was located;
(iii) Whether Balcon had a right to refuse to pay the class members based on its internal budget decisions unrelated to its obligations under the LOr;
(iv) Whether Balcon acted uniformly in refusing to pay the class members based on its internal budgetary decisions unrelated to any provision in the LOr;
(v) Whether Balcon acted honestly and in good faith and fair dealing;
(vi) Whether by rejecting such leases, Balcon lost, waived or is estopped from asserting any right to inspect or to object based upon any purported Title Defect or "other Defect";
(vii) The interpretation of the class members' rights under the LOr, including whether they are parties or third-party beneficiaries;
(vi) Whether the Lor was an offer and the actions of class members in executing and executing the form leases and other documents constituted an acceptance;
(vii) Whether Balcon accepted in advance all oil and gas leases submitted by class members, subject only to good title and the absence of "other Defects," when it entered into the LOr with eX-Energy and M&P, acting on behalf of class members;
(viii) The measure of dmnages;
(ix) Whether the lease documents eX-Energy and M&P provided to class members differed from the lease documents required by the LOr, and whether any such variation in the lease documents was material and justified Balcon's refusal to perform;
(x) Whether Balcon rejected oil and gas leases of plaintiffs because of any such variations in the lease documents, or rather, used any such late-discovered variation as a subterfuge to seek to avoid its obligations to class members;
(xi) Whether Balcon engaged in wanton and outrageous conduct when it attempted to obtain from eX-Energy and M&P releases or compromises of plaintiffs' and the class members' claims; and
(xii) Whether Balcon obtained a release of liability from eX-Energy and M&P for the
21
class Inembers and whether any such release is valid.
These and other common questions focus on defendants' conduct which affects all class
members in the same manner. These core issues will be resolved based on the interpretation of
the LOI and on common evidence of breach of contract and bad faith, including Halc6n's
decision to divert funds due class members to other corporate purposes. 88 These common
questions are the focal points of this action and answering them will resolve the litigation for all
class members. Accordingly, the commonality requirement of Pa.R.Civ.P. 1702(2) is satisfied.
Indeed, two of the three defendants have expressly admitted that the majority of the above-listed
questions of law and fact are COlllinon to alllnembers of the class. (Ex. 43, 44)
Rule 1702(3): The Representative Plaintiffs' Claims Are Typical of the Claims of the Class
Rule 1702(3) is closely akin to the commonality requirement of subsection 1702(2) and
the adequacy requirement in subsection 1702(4). "The purpose of the [Rule 1702(3)J typicality
inquiry is to determine whether the class representative's overall position on the common issues
is sufficiently aligned with that of the absent class members to ensure that her pursuit of her own
interests will advance those of the proposed class members." Braun, 24 A.3d at 894-895.
In Baldassari v. Suburban Cable TV Co., 2002 PA Super 275,808 A.2d 184 (Pa. Super.
2002), a single common allegation satisfied typicality where the claims arose out of the same
course of conduct and were based upon the same legal theories, notwithstanding factual
differences between the claims of the representatives and other class members. Id. at 193.
The Court of Appeals for the Third Circuit explained typicality as follows in Marcus v.
MVW olN Am., LLC, 687 F.3d 583 (3d Cir. 2012):
88 Halc6n had to make any evaluation of title defects or "other Defects" reasonably and in good faith. Pacific Employers Ins. Co. v. Global Reinsurance Corp., 693 F.3d 417,429 n.5 (3d Cir. 2012); Starr v. 0-1 Brockway Glass, Inc., 432 Pa.Super. 255, 260, 637 A.2d 1371, 1373 (1994); Jamison v. Concepts Plus, Inc., 380 Pa.Super. 431,439, 552 A.2d 265,269 (1988); RESTATEMENT (SECOND) OF CONTRACTS § 228.
22
The concepts of typicality and commonality are closely related and often tend to merge. See Baby Neal v. Casey, 43 F.3d 48, 56 (3d Cir.1994). "Both serve as guideposts for determining whether under the particular circumstances maintenance of a class action is economical and whether the named plaintiffs claim and the class claims are so interrelated that the interests of the class Inembers will be fairly and adequately protected in their absence." Falcon, 457 U.S. at 158 n. 13, 102 S.Ct. 2364. Typicality, however, derives its independent legal significance from its ability to "screen out class actions in which the legal or factual position of the representatives is markedly different from that of other members of the class even though common issues of law or fact are present." 7 A Wright, supra, § 1764.
* * * * If a plaintiffs claim arises from the same event, practice or course of conduct that gives rise[ ] to the claims of the class members, factual differences will not render that claim atypical if it is based on the same legal theory as the claims of the class. Hoxworth v. Blinder, Robinson & Co., 980 F.2d 912,923 (3d Cir. 1992).
Id. at 597-98.
Here, the representative plaintiffs are members of the class. All their rights, and Halc6n
obligations, spring from a single document - the LOI - and from virtually identical form oil and
gas lease documents. The class representatives' claims are typical of, if not identical to, the
claims of the class and will require evidentiary proof of the same kind and application of the
same law. Moreover, the representative plaintiffs' claims are not adverse or antagonistic to the
interests of the other class members. Therefore, the typicality requirement of Pa.R.Civ.P.
1702(3) is readily satisfied.
Rule 1702(4): The Representative Plaintiffs Will Fairly and Adequately Protect the Interests of the Class
Under Pa.R.Civ.P. 1702(4), a representative plaintiff must "fairly and adequately assert
and protect the interests of the class under the criteria set forth in Rule 1709." The Rule 1709
criteria to be considered are:
(1) whether the attorney for the representative parties will adequately represent the
interests of the class;
23
(2) whether the representative patiies have a conflict of interest in the maintenance of the class action; and
(3) whether the representative parties have or can acquire adequate financial resources to assure that the interests of the class will not be harmed.
Counsel will adequately represent the class: "[U]ntil the contrary is demonstrated, courts
assume that members of the bar are skilled in their profession." Haft v. United States Steel
Corp., 305 Pa. Super. 109, 115, 451 A.2d 445, 448 (1982); accord, Janicik, 451 A.2d at 458.
Courts may infer the attorney's adequacy from the pleadings, briefs, and other materials
presented in the case. Haft, 451 A.2d at 448. Plaintiffs have retained counsel who are respected
and experienced in complex state and federal class action litigation, including similar cases
involving alleged breaches or oil and gas leases. Resumes of counsel appear at Ex. 46 through
49. Counsel have and will competently and vigorously protect the interests of the class.
The Representative Plaintiffs Have No Conflict of Interest. Courts presume that no
conflict of interest exists unless otherwise demonstrated. Haft, 451 A.2d at 448. No conflict
exists.
The Representative Plaintiffs Have Adequate Financial Resources. Plaintiffs have
adequate financial resources to pursue this action vigorously, including an agreement by their
counsel to bring this case on a contingent basis and to advance reasonable and necessary costs.
The adequate fmancing requirement is generally satisfied where class counsel are advancing
costs to the class. Haft, 451 A.2d at 448; Janicik, 451 A.2d at 459-60. There is little or no
danger of a premature or inadequate settlement by counsel in light of the procedural safeguards
inherent in class suits. Id. at 460.
Rule 1702(5): This Class Action Provides a Fair and Efficient Method for Adjudicating the Controversy
Rule 1702(5) requires that a class action provides a fair and efficient method for
24
adjudicating the controversy under the criteria set forth in Rule 1708. Where plaintiffs seek a
monetary recovery, the court must consider the following factors set forth in Pa.R.Civ.P.
1708(a):
(1) whether common questions of law or fact predominate over any question affecting only individual members;
(2) the size of the class and the difficulties likely to be encountered in the
management of the action as a class action;
(3) whether the prosecution of separate actions by .,. individual members of the class
would create a risk of:
(a) inconsistent or varying adjudications with respect to individual members
of the class which would confront the party opposing the class with incompatible
standards of conduct; or
(b) adjudications with respect to individual members of the class which would
as a practical matter be dispositive of the interest of other members not parties to
the adjudications or substantially impair or impede their ability to protect their
interests;
(4) the extent and nature of any litigation already commenced by or against members
of the class involving any of the same issues;
(5) whether the particular forum is appropriate for the litigation of the claims of the
entire class;
(6) whether in view of the complexities of the issues or the expenses of litigation, the
separate claims of individual class members are insufficient in amount to support separate
actions; and
(7) whether it is likely that the amount which may be recovered by individual Class
members will be so slnall in relation to the expense and effort of administering the action
as not to justify a class action.
Unlike Fed.R.Civ.P. 23(b), Pennsylvania's class action rules do not consider whether alternative
methods Inay be superior to a class action. Braun, 24 A.3d at 895. Instead, Pennsylvania courts
examine the usefulness of the class action mindful that a class action promotes efficiency and
25
fairness in handling large nUlnbers of similar claims. Janicik, 451 A.2d at 461.
Rule 1708(a)(1): Multiple Common Questions of Fact and Law Predominate Over Individual Questions.
While related, the Rule 1702(2) commonality requirement and the Rule 1708(a)(1)
predominance requirement are distinct prerequisites for class certification. Commonality
requires the class proponent to identify common questions of law and fact - e.g., "a common
source of liability." Bassett, 34 A.3d at 22. The predominance requirement makes clear that the
claims of all class melnbers need not be identical. Rather, individual questions are contemplated
by the rules Braun, 24 A.3d at 895. The predominance inquiry tests whether proposed classes
are cohesive. 34 A.3d at 23. This is not a high barrier. Common questions must merely
predominate over inherent individual questions. Id.
The standard for showing predolninance "is more delnanding than that for showing
commonality, but is not so strict as to vitiate Pennsylvania'S policy favoring certification of class
actions." Bassett, 34 A.3d at 23. A plaintiff must establish a prima facie case that the material
facts and issues of law are substantially the same for all class members. Bassett, 34 A.3d at 22
(emphasis added). But a plaintiff need not" ... prove that the claims of all class members are
identical." Braun, 106 A.3d at 663 n.8. The issue becomes whether "most" of the essential
elem,ents of a cause of action may be established through class-wide evidence. Bassett, 34
A.3d at 23.89 Viewed against this standard, the Motion for Class Certification must be granted.
An informative application of these principles occurred in Schall v. Windermere Court
Apts., 2013 Phila. Ct.Com. PI. LEXIS 296 at *13-14, 27 Pa. D.&C.5th 471, 482-83 (2013). In
Schall, the court certified a class in an action alleging negligence and private nuisance in
89 See also, Liss & Marion, 983 A.2d at 666 "Class members may assert a single common complaint even if they have not all suffered actual injury; demonstrating that all class members are subject to the same harm will suffice." (emphasis added). And, class certification should not be denied simply because a defendant may assert affirmative defenses against individual members. Braun, 24 A.3d at 893 n.ll.
26
connection with a catastrophic apartment building fire. The court explained:
Questions of negligence, causation and damages are sometimes blurred and inseparable. In this case, however, all subsidiary questions flow from the single inquiry: did defendants breach a duty of care owed to their residents and lessees? Only when this question is answered can the trial proceed on the other matters. It is a singular benefit of class action treatment that this question be asked and answered once, thereby averting inconsistent negligence findings that otherwise would flow from individual lawsuits .
Id. (emphasis added). Here, as in Schall, all subsidiary questions flow from answers to questions common to all
Inembers of the class, including: Did Halc6n breach a duty owed to class members under the
LO I? Was Halc6n permitted to rej ect leases because it changed its business strategy and chose
to divert funds earmarked for class members to other corporate purposes? Did Halc6n
breach its implied obligation of good faith and fair dealing under the LOI and oil and gas leases?
As in Schall, these questions need only "be asked and answered once," thereby averting
inconsistent findings that would flow from individual lawsuits, as well as conserving the
resources of the Court and the parties. And only when these watershed questions are answered
can the trial proceed to other matters here, the determination ofremedy.90
In this case, any potential individual questions regarding class member leases need never
be reached, because common evidence will demonstrate that properties within entire townships
or municipalities were rejected across the board to free up funds for other business opportunities.
Halc6n's mass rejection was not based on consideration of Title Defects or "Other Defects" of
individual properties. Moreover, under the LOI, Halc6n was required to within a limited time
90 This is itself straightforward since the bonus payment amounts are a matter of contract; in any event, damage issues are no bar to class certification, as has long been established. See e.g., Cambanis v. Nationwide Ins. Co., 348 Pa.Super. 41,50,501 A.2d 635,640 (1985).
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period give notice of any purported Title Defects or "other Defects.,,91 No known notices were
given identifying title or other defects in those townships and municipalities where Halcon
rej ected leases en mass, let alone "enough information to identify the nature of such Title Defects
or other Defects." LOI, ,-r 5. Nor did Ha1con provide CX-Energy and M&P an opportunity to
cure any purported defects as required by the LOr. Id. at ,-r 11. In short, by unilaterally
breaching the LOI and the leases wholesale, Halcon relinquished any rights to inspect and eject
properties based upon bona fide defects. Additionally, the class definition itself specifically
excludes any claims based upon oil and gas leases for which Halcon tilnely gave the required
notice of a Title Defect or "other Defect.,,92 Thus, any potential issues relating to title defects or
other defects need not be addressed.
In Walney v. SWEPI LP, _ F.Supp.3d _, 2015 U.S. Dist. LEXIS 122119 (W.D. Pa.,
Sept. 14, 2015), SWEPI entered into oil and gas leases with numerous Verango County
landowners, but failed to pay the specified bonus payments. The landowners brought a federal
class action against SWEPI. After a thorough analysis, Chief Judge Conti certified the class as to
plaintiffs' claims for breach of express contract and breach of contract implied in fact.
Plaintiffs in Walney argued, among other things, that the transactional documents showed
the existence of a contract and raised no individual issues; that the language of the documents
provided SWEPI with the opportunity during a 90-day period to conduct a title examination if it
so chose; that, if it did not do so, SWEPI became legally bound to make the bonus payments
irrespective of whether the lessors had good title to the minerals in question; and that because
91 Under the LOl, if Halcon elected to assert any such purported defects, it was required to provide to CX Energy and M&P "enough infonnation to identify the nature of such Title Defects or other Defects." fd. at ~ 5. CX Energy and M&P then had a "Cure Period" to cure any such purported defect. fd. at ~ 11. 92 More specifically, the class defmition states: " .... Excluded from class treatment are any claims arising from any oil and gas lease as to which Halcon, within the time period permitted under the Halcon Agreement, gave written notice to CX-Energy or M&P asserting a Title Defect or "other Defect," except for any purported notice contained in the November 1, 2012 letter from David S. Elkouri to Joseph E. Morascyzk."
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each lease transaction was a completed conveyance, the appropriate measure of damages is the
amount of the "sum certain contract price," i.e., the bonus payment.
In certifying the class, the court held that there were numerous common questions that
predominated over individual issues, including the meaning of the contract, the parties' rights
and obligations under the contract, and certain damage questions. As Judge Conti explained:
Resolution of the foregoing questions will depend on an interpretation of certain key provisions in the form documents that are materially uniform and applicable to all transactions. The court will have to determine, in the first instance, whether the contractual provisions at issue are ambiguous in their meaning and, if so, what the legal consequences are. '" If the agreements are found to be unambiguous, the court can declare their meaning as a matter of law.... Moreover, if the court adopts plaintiffs' proposed construction of the agreement plaintiffs will be able to establish liability on a classwide basis by virtue of nonpayment alone. Thus, plaintiffs' breach of contract theory can potentially be resolved by reference to, and interpretation of, common form documents. At the very least, common, classwide issues are present, the resolution of which will drive this litigation forward, toward either judgment or a possible settlement. Accordingly, at this procedural juncture, the court finds that common classwide issues predominate over questions affecting only individual class members.
ld. LEXIS 122119 at *35-*36 (citations, quotations, and footnote omitted)(emphasis supplied).
Many of the legal and factual issues in Walney are analogous to this case, and the same
reasoning process applies when analyzing the class action rules. The meaning of the LOI,
individual lease and LMAs, and the rights and obligations arising thereunder, present common
questions that apply to each class member. Whether a breach of contract occurred, whether
Halc6n acted in bad faith, the consequence of Halc6n not making individualized lease decisions,
and the measure of damages also present common questions. Such questions clearly
predominate over individual questions, which need not even be reached. Here, the argument in
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favor of class certification is even more compelling than in Walney.93
The overarching and predominant core issues in the present action include interpreting
Halcon's obligations under the LOI, whether Halcon rejected leases based on changes in
business strategy, whether rejections of class member leases were based on Halcon's business
decision to divert funds to other corporate purposes, whether Halcon acted in good faith, whether
it gave notice of title or other Defects, and whether in fact, as Halcon belatedly contends in this
litigation, Halcon rejected leases because of changes made to the orders for payment. Additional
issues include whether ex Energy and M&P released any of the class members' rights, as
alleged by Halcon. These common issues are the focal points of this action and will generate
answers that will resolve the litigation for all class members.
There will be no need to inquire into mitigation by the class members. There is no duty
to mitigate in a commercial lease transaction. Stonehedge Square Limited Partnership v. Movie
Merchants, Inc., 552 Pa. 412, 416 715 A.2d 1082, 1084 (1998) ("Pennsylvania has followed the
common law view that a non-breaching [lessor] has no duty to mitigate damages ... ").
Moreover, the entire bonus payment was a guaranteed paid-up amount, and nothing in the LOI or
lease provided for reducing or rebating this payment if Halcon chose to abandon its leasehold.
Additionally, even if mitigation became an issue, the substantial, but mostly unsuccessful,
subsequent efforts by ex Energy and M&P to obtain leases for class members with other oil and
gas companies itself presents common issues.
93 Alnong other things, Walney did not involve a master LOr applicable to all class members - there were no
parties there in a role equivalent to that of eX-Energy and M&P here - but involved individual transactions directly between landowners and SWEPI. Moreover, while the Pennsylvania class action rules were modeled after the original federal Rule 23, class certification is, if anything, generally more difficult under the federal rules than under Pennsylvania law because federal class action law does not (currently at least) have a "strong and oft-repeated policy ... that, in applying the rules for class certification, decisions should be made liberally and in favor of maintaining a class action. '" Braun, supra, 24 A.3d 875, 892.
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Under any rational view of this action, common questions of law and fact predominate.
Rule 1708(a)(2): This Class Action is Manageable
The court must consider the difficulties likely to be encountered in the management of a
class action. Pa.R.Civ.P. 1708(a)(2). The trial of this action on a class basis will be
straightforward. As described in the Statement of Facts, the class members' claims depend upon
an interpretation of the Letter of Intent, the standard form lease documents, and Halc6n' s actions
in refusing to pay the class members so that Halc6n could purchase oil and gas interests from
Carrizo. Any possible difficulties in administering this class action do not preclude class
certification, as such preclusion would contradict the policies underlying the class action device.
Janicik, 451 A.2d at 462. Counsel's ingenuity and the Court's inherent authority to control the
action are adequate to solve any management problems that Inight arise.
Rule 1708(a)(3): The Risk of Inconsistent Adjudications
Rule 1708(a)(3)(i) requires that the court consider whether individual adjudications (i)
would impose inconsistent standards of conduct on a defendant, or (ii) either be dispositive of the
interests of other class members not parties to the litigations, or substantially impair or impede
their interests. Janicik, 451 A.2d at 462. A finding of such risks is not essential to certification.
Janicik, 451 A.2d at 461. Clearly, a class action would be the most efficient manner to provide a
remedy if one is due. See Janicik, 451 A.2d at 462-463.
The risk of inconsistent adjudications, if the class were not certified, is an especially
pertinent consideration here. Many class members live in small rural communities, and for most
class members, the cost of individual litigation would be prohibitive. Friends, neighbors and
even joint owners could get different result and, in many cases, would be effectively deprived of
any remedy due to the prohibitive cost of litigation.
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Rule 1708(a)(4): Extent of Other Existing Litigation
Counsel are not aware of other existing litigation. However, if a class is not certified, it is
likely that many separate suits will be filed. In this connection, "class action" is defined in Rule
1701 as "any action brought by or against parties as representatives of a class until the court
refuses to certify the class or revokes a prior certification." (emphasis added). This definition
carries into effect the decision of the United States Supreme Court in American Pipe and
Construction Company v. State of Utah, 414 U.S. 538 (1974), the purpose of which is to avoid
flooding the courthouse with otherwise needless protective actions while the class suit is
pending. See, 1977 Explanatory Comment to Rule 1701.
Rule 1708(a)(5): This Forum is Appropriate to Litigate the Claims of the Class
This Court is clearly an appropriate forum for this class action. The representative
plaintiffs reside in or own property in Mercer County, the leases at issue were in almost all
instances executed in Mercer County, and this action involves real estate located in this County.
In relnanding this case to this Court the Court of Appeals for the Third Circuit found, " ... all of
the land is located in Mercer County, Pennsylvania." Vodenichar v. Halcon Energy Properties,
Inc., 733 F.3d 497, 508 (3d Cir. 2013). No other formn could be Inore appropriate.
Rule 1708(a)(6): Given the Complexities of the Issues and Expenses of this Litigation, the Claims of Most Individual Class Members are
Insufficient in Amount to Support Separate Actions
Subsection (a)(6) of Rule 1708 permits the Court to consider whether the complexity of
issues and expenses of litigating separate claims of individual class members are of such a
magnitude as to exclude separate actions by each individual class member. As the court in
Janicik noted, "the possibility that class members may maintain individual actions is not
necessarily fatal to class certification." 451 A.2d at 463. The cost of individual litigation is very
32
expensive in a complex matter such as this. stated in Janicik: "In many cases, "to permit a
defendant to contest liability with each claimant in a single, separate suit would ... give
defendants an advantage which would be almost equivalent to closing the door of justice to all
slnall claimants."
Even if a few claims were large enough to arguably justify a separate suit, it would still
be more efficient and economical to combine those claims in a class proceeding. Doing so
would ease the burden on the court system, avoid repetitive litigation and avoid the prospect of
repetitive pre-trial procedures and multiple testimony by witnesses (possibly including expert
witnesses). There is no reason to burden the Courts and the parties with many separate, complex
and expensive actions, when a single class action will suffice. See also, Bald Eagle School
District v. Mid-State Bank & Trust Co., 1999 WL 335059 (class including many multi-million
dollar claims was certified where the claims averaged more than a million dollars each).
1708(a)(7): A Class Action is Justified When Comparing the Damages Which May be Recovered bv Individual Class Members to the
Expense and Effort of Administering the Action.
The final factor of subsection (a)(7) of Rule 1708 addresses whether the damages which
may be recovered by individual class members will be so small in relation to the expense and
efforts of administering the action as not to justify a class action. This section of the rule is
inapplicable to the present case, and in no way hinders class certification.
1708(b )(2): A Class Action is Justified When Comparing the Damages Which May be Recovered by Individual Class Members to the Expense and Effort of Administering the Action.
Because plaintiffs also seek declaratory relief, Rule 1708(b )(2) requires an inquiry into
whether defendant acted or refused to act on grounds. generally applicable to the class. As
desceibed in the Statement of Facts, supra, Halcan acted uniformly with respect to the class
33
members and did not base its decisions on any individualized Inqulnes. As such, the
requirements ofPa.R.Civ.P. 1708(b)(2) are satisfied.
Finally, defendants CX-Energy and M&P admit that class certification is appropriate in
this action (Ex. 43, 44), and plaintiffs incorporate by reference the Amended Class Action
Complaint, Plaintiffs' Reply to New Matter, the Affidavit of David A. Borkovic in Support of
Motion for Class Certification, including all exhibits to such Affidavit, and all evidence that may
be presented in Plaintiffs' Reply or at the class certification hearing.
CONCLUSION
For the foregoing reasons, plaintiffs respectfully request that this Court enter the attached
order certifying this action as a class action, designating the class representatives, appointing
counsel for the class and providing that notice be sent to the class members.
DATED: October 15,2015
J ones, Gregg, Creehan & Gerace, LLP 411 Seventh Ave, Suite 1200 Pittsburgh, PA 15219 (412) 261-6400
Richard A. Finberg 300 Mt. Lebanon Blvd, Suite 206-B Pittsburgh, P A 15234 (412) 341-1342
David M. Cohen Complex Law Group, LLC 40 Powder Springs Street Marietta, Georgia 30064 (770) 200-3100
John C. Butters Law Office of John C. Butters 40 Powder Springs Street
34
Marietta, Georgia 30064 (770) 200-3131
Attorneys for plaintiffs and all those similarly situated.
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CERTIFICATE OF SERVICE
I hereby certify that I have caused to be served a true and correct copy of the foregoing
Brief in Support of Plaintiffs' Motion for Class Certification this 15th day of October, 2015, upon
all counsel of record by first class U.S. mail, postage prepaid, addressed as follows:
Andrew G. Jenkins, Esquire Burleson LLP Southpointe Town Center 1900 Main Street, Suite 201 Canonsburg, P A 15317 (Attorneys for Halcon Energy Properties, Inc.)
James R. HankIe, Esquire Beverly A. Block, Esquire Nicholas L. Fiske, Esquire Sherrard, German & Kelly, P.C. 535 Smithfield Street, Suite 300 Pittsburgh, PA 15222 (Attorneys for Co-eXprise, Inc.)
Daniel M. Taylor, Jr., Esquire Margolis Edelstein 525 William Penn Place, Suite 3300 Pittsburgh, PA 15219 (Attorneys for Morascyzk & Polochak)