Atlantic Richfield Co. v. Farm Credit Bank of Wichita

F I L E D
United States Court of Appeals
Tenth Circuit
PUBLISH
SEP 13 2000
UNITED STATES COURT OF APPEALS
TENTH CIRCUIT PATRICK FISHER
Clerk

ATLANTIC RICHFIELD COMPANY,

Plaintiff-Counter-Defendant-Appellee,

v. No. 99-1147

THE FARM CREDIT BANK OF WICHITA,
formerly known as the Federal Land Bank of
Wichita,

Defendant-Counter-Claimant-Appellant,

and

STANLEY A. MOLLERSTUEN; HAL A.
McVEY; HELEN D. McVEY; CAROL
KOSCOVE,

Defendants-Counter-Claimants,

ALFRED GARCIA; NADDIE GARCIA;
EDWARD GARCIA; MARY RUTH SALAZAR-
TIER; PEGGY GARCIA; JACQUIE GARCIA;
CATHERINE VOELKERDING; MANUELITA
BECK; ANNA M. MARTINEZ; GERALDINE
VELASQUEZ,

Intervenors,

and

NATIONAL ASSOCIATION OF ROYALTY
OWNERS, INC.,

Amicus Curiae.
ATLANTIC RICHFIELD COMPANY,

Plaintiff-Counter-Defendant-Appellant,

v. No. 99-1148

THE FARM CREDIT BANK OF WICHITA,
formerly known as the Federal Land Bank of
Wichita; CAROL KOSCOVE,

Defendants-Counter-Claimants-Appellees,

and

STANLEY A. MOLLERSTUEN; HAL A.
McVEY; HELEN D. McVEY,

Defendants-Counter-Claimants,

ALFRED GARCIA; NADDIE GARCIA;
EDWARD GARCIA; MARY RUTH SALAZAR-
TIER; PEGGY GARCIA; JACQUIE GARCIA;
CATHERINE VOELKERDING; MANUELITA
BECK; ANNA M. MARTINEZ; GERALDINE
VELASQUEZ,

Intervenors-Appellees,

and

NATIONAL ASSOCIATION OF ROYALTY
OWNERS, INC.,

Amicus Curiae.

2
ATLANTIC RICHFIELD COMPANY,

Plaintiff-Counter-Defendant-Appellee,

v. No. 99-1154

THE FARM CREDIT BANK OF WICHITA,
formerly known as the Federal Land Bank of
Wichita; STANLEY A. MOLLERSTUEN; HAL
A. McVEY; HELEN D. McVEY,

Defendants-Counter-Claimants,

and

CAROL KOSCOVE,

Defendant-Counter-Claimant-Appellant,

ALFRED GARCIA; NADDIE GARCIA;
EDWARD GARCIA; MARY RUTH SALAZAR-
TIER; PEGGY GARCIA; JACQUIE GARCIA;
CATHERINE VOELKERDING; MANUELITA
BECK; ANNA M. MARTINEZ; GERALDINE
VELASQUEZ,

Intervenors,

and

NATIONAL ASSOCIATION OF ROYALTY
OWNERS, INC.,

Amicus Curiae.

3
ATLANTIC RICHFIELD COMPANY,

Plaintiff-Counter-Defendant-Appellee,

v. No. 99-1183

DARWIN H. SMALLWOOD,

Defendant,

and

THE FARM CREDIT BANK OF WICHITA,
formerly known as the Federal Land Bank of
Wichita; STANLEY A. MOLLERSTUEN; HAL
A. McVEY; HELEN D. McVEY; CAROL
KOSCOVE,

Defendants-Counter-Claimants,

ALFRED GARCIA; NADDIE GARCIA;
EDWARD GARCIA; MARY RUTH SALAZAR-
TIER; PEGGY GARCIA; JACQUIE GARCIA;
CATHERINE VOELKERDING; MANUELITA
BECK; ANNA M. MARTINEZ; GERALDINE
VELASQUEZ,

Intervenors-Appellants,

and

NATIONAL ASSOCIATION OF ROYALTY
OWNERS, INC.,

Amicus Curiae.

4
 APPEAL FROM UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLORADO
(D.C. No. 95-Z-1767)

Steven R. Rider (E. Dwight Taylor with him on the brief), Rider & Woulf, P.C.,
of Aurora, Colorado, for The Farm Credit Bank of Wichita.

Anthony J. Shaheen (Gail L. Wurtzler, Charles L. Kaiser, and William A. Bianco
with him on the brief), Davis, Graham & Stubbs LLP, of Denver, Colorado, for
Atlantic Richfield Company.

George W. Mueller, Burns, Wall, Smith and Mueller, P.C., of Denver, Colorado,
for Carol Koscove.

H. Paul Cohen (Thomas W. Niebrugge, Lindquist, Vennem & Christensen, with
him on the brief), of Denver, Colorado, for Alfred Garcia, Naddie Garcia, Edward
Garcia, Mary Ruth Salazar-Tier, Peggy Garcia, Jacquie Garcia, Catherine
Voelkerding, Manuelita Beck, Anna M. Martinez, and Geraldine Velasquez.

Robin Stead and Donald F. Heath, Jr., Stead & Heath, P.C., of Oklahoma City,
Oklahoma, on the brief for National Association of Royalty Owners, Inc., amicus
curiae.

Before BRISCOE, McWILLIAMS, and ALARCON 1, Circuit Judges.

BRISCOE, Circuit Judge.

This complex litigation involves several oil and gas leases. The lessee,

plaintiff Atlantic Richfield Company (“ARCO”), filed a claim for declaratory

relief. The defendant lessors – the Farm Credit Bank of Wichita (“FCB”), Carol

1
Honorable Arthur L. Alarcon, Senior Circuit Judge, United States Court
of Appeals for the Ninth Circuit, sitting by designation.

5
Koscove (“Koscove”), and members of the Garcia family (“the Garcias”) –

countered by filing a variety of counterclaims against ARCO. The district court

issued a series of rulings resolving all of the parties’ claims prior to trial. ARCO

appeals three of these rulings, and the defendants appeal at least seven others.

We exercise jurisdiction pursuant to 28 U.S.C. § 1291, affirm in part, and reverse

in part. 2

I. BACKGROUND

In the 1970s, ARCO discovered that carbon dioxide (“CO²”) can be used to

increase recovery from certain types of oil reservoirs. This process is commonly

2
ARCO has filed a motion to supplement the record to “correct and
clarify” what it views as factual misstatements in the defendants’ appellate brief.
After reviewing the briefs submitted in connection with ARCO’s motion, we
conclude (as we did in United States v. Haddock , 50 F.3d 835 (10th Cir. 1995))
that the proffered materials “are neither necessary nor helpful to the resolution of
this appeal” under Federal Rule of Appellate Procedure 10(a). Id. at 841 n.4; see
also United States v. Hernandez , 94 F.3d 606, 611 n.3 (10th Cir. 1996) (declining
to consider supplemental evidence that was not necessary to the court’s decision).
For that reason, we deny the motion to supplement. ARCO has also filed a
motion seeking to strike an amicus curiae brief submitted by the National
Association of Royalty Owners (“NARO”). To the extent that NARO’s brief
raises arguments that have never been advanced by the parties, we grant ARCO’s
motion. See Tyler v. City of Manhattan , 118 F.3d 1400, 1404 (10th Cir. 1997)
(“[I]t is truly the exceptional case when an appellate court will reach out to
decide issues advanced not by the parties but instead by amicus.”). The rest of
the arguments in NARO’s brief are either unsupported by the record,
unencumbered by citations to legal authority, or irrelevant to our resolution of the
issues presented in this appeal.

6
referred to as “tertiary recovery” or “enhanced oil recovery” (“EOR”). Joint

Appendix (“Jt. App.”) at 95-96 (¶¶ 22-23), 2447 (¶ 5), 7106-07. In 1975, ARCO

acquired oil and gas leases for lands in Huerfano County, Colorado with the

potential for CO² production. FCB, Koscove, and the Garcias own royalty

interests in these leases, which were unitized 3
into a “Sheep Mountain Unit”

(“SMU”) for the exploration, development, and production of CO². Id. at 97

(¶ 27), 1700. Because the nearest market is approximately 400 miles away,

ARCO constructed a pipeline (the “Pipeline”) to transport the CO² from the SMU

to the Permian Basin in West Texas.

The parties’ leases provide the starting point for all royalty calculations.

The Garcias’ lease expressly contemplates some form of a transportation

deduction and states that royalties shall be based on market values determined “at

the mouth of the well”:

If Lessee sells gas at the mouth of the well, Lessee shall pay Lessor
as royalty 1/8 of the proceeds from such sale. If Lessee sells gas at a
point other than at the mouth of the well, Lessee shall pay Lessor as
royalty on said gas 1/8 of the proceeds from such sale, after
deducting from such proceeds the reasonable cost of preparing said
gas for market, including but not limited to the cost of any necessary
compression and the cost of transporting said gas to the point of sale.
Where gas is not sold by Lessee, but is used by Lessee for any
purpose other than the manufacture of gasoline or any other product,

3
“Unitization refers to the consolidation of mineral or leasehold interests
in oil or gas covering a common source of supply.” Amoco Prod. Co. v.
Heimann , 904 F.2d 1405, 1410 (10th Cir. 1990).

7
 Lessee shall pay Lessor as royalty on said gas 1/8 of the market value
of said gas, said value to be determined at the mouth of the well, and
in determining said market value, there shall be deducted any cost of
any necessary compression, the cost of transporting said gas to the
point of use, and any other reasonable cost for preparing such gas for
use.

Id. at 276. FCB’s lease is silent on the deductibility of transportation expenses.

Like the Garcias’ lease, however, the 1975 version of FCB’s lease states that

royalties shall be based on market values determined “at the mouth of the well”:

The lessee shall pay to lessor for gas produced from any oil well and
used by the lessee for the manufacture of gasoline or any other
product as royalty 1/8 of the market value of such gas at the mouth of
the well: if said gas is sold by the lessee, then as royalty 1/8 of the
proceeds of the sale thereof at the mouth of the well.

Id. at 345. FCB’s lease was amended and “corrected” in 1977. Among other

things, the corrected amendment changes the royalty rate from 1/8 to 3/16, id. at

348, and adds a provision entitled “Gas Pricing”:

Anything to the contrary above stated notwithstanding, the price
which Lessee shall pay for gas produced pursuant to this lease when
Lessor is not exercising its option to take in kind shall be
respectively for each chemical or generic type of gas (for example,
carbon dioxide gas, or hydrocarbon gas, etc.), as the case may be, the
highest current market price at the time the gas is produced and sold
of (1) the highest paid in Huerfano County, (2) the current market
price established by the Federal Government for its share of the gas,
or (3) the amount received by Atlantic for its share of the gas.

Id. at 352. The amendment also inserts the following language into the lease’s

granting clause: “The word ‘gas’ as used in this lease shall include gases of all

kinds, whether hydrocarbon gas or gases or nonhydrocarbon gas or gases,

8
including but not limited to carbon dioxide gas, and any mixture or mixtures of

any such gases.” Id. at 348.

In addition to the lease contracts, the question also arose as to whether

ARCO’s relationship with the Exxon Company (“Exxon”) affected the parties’

royalty obligations. ARCO executed an “Agreement on Principles” (“AOP”) in

1981 that conveyed to Exxon a 50% interest in the Pipeline and the CO² produced

at the SMU. Id. at 4025, 4030. Under the AOP, ARCO pays all royalties on CO²

produced at the SMU. Exxon then reimburses ARCO for royalties paid on

Exxon’s share of the gas. Exxon agreed in the AOP to pay the first $128.7

million to develop the SMU facilities, the first $120 million to develop the

Pipeline, and 50% of all costs thereafter. 4
By the defendants’ calculation, ARCO

ultimately contributed less than $50 million in capital toward the SMU and the

Pipeline. This $50 million contribution represented about 15% of the companies’

combined capital expenditure, which amounted to more than $285 million.

As intended, CO² from the SMU is sold, used in kind, or exchanged to

increase oil production in West Texas. To determine the “wellhead” value of the

CO² and the lessors’ royalties, ARCO uses a “work back” or “net back” method.

4
ARCO, Exxon, and Amerada Hess own the Pipeline. ARCO and Exxon
own 50% interests in the northern part of the Pipeline, and 35% interests in the
southern part. Amerada Hess owns the remaining 30% interest in the southern
part of the Pipeline.

9
ARCO calculates the wellhead value of the CO² by subtracting transportation and

conditioning costs from the value of the CO² in the West Texas market. The costs

deducted by ARCO fall into three categories: (1) operations and maintenance

costs; (2) depreciation costs, which include interest during construction (“IDC”);

and (3) cost of capital (“COC”). ARCO defines IDC as the cost of money used to

build a facility, or the “[i]nterest charged on the investments made prior to

commencement of operations.” Id. at 2787, 2917. ARCO defines COC as the

“opportunity cost” of capital, including the cost of building a facility through debt

or equity financing. Id. at 2923-24, 2963. In other words, COC is “the rate of

return that is required to induce investors to purchase the securities of a firm.

This rate of return is the same as an investor’s opportunity cost of capital, which

is the rate of return that an investor can earn on an investment of similar risk.”

Id. at 2787 (citation omitted).

ARCO initiated this litigation by filing suit against FCB, Koscove, and

other parties in July 1995. Among other things, the company requested a judicial

declaration that “it has been and continues to be proper for ARCO to deduct the

allocated share of all costs associated with transporting the CO² Gas from the

point of production at the Sheep Mountain Unit to the West Texas market from

royalty payments.” Id. at 80-81. With the district court’s permission, the Garcias

10
intervened and became parties to the case in April 1997. 5
FCB, Koscove, and the

Garcias answered the complaint and filed counterclaims alleging that ARCO

breached the lease agreements by underestimating the fair market value of SMU

CO² and by deducting certain transportation costs from royalty payments. The

defendants also asserted counterclaims for fraud and breach of fiduciary duty

based on ARCO’s alleged misrepresentation and concealment of the manner in

which the company calculated market value and royalty deductions.

II. ARCO’S TRANSPORTATION DEDUCTION

Because the parties litigated the propriety of ARCO’s transportation

deduction in motions for summary judgment, our standard of review is de novo.

See King of the Mountain Sports, Inc. v. Chrysler Corp. , 185 F.3d 1084, 1089

(10th Cir. 1999) (affirming that “[w]e review the grant of summary judgment de

novo”) . Summary judgment is appropriate if “the pleadings, depositions, answers

to interrogatories, and admissions on file, together with the affidavits, if any,

show that there is no genuine issue as to any material fact and that the moving

party is entitled to a judgment as a matter of law.” Fed. R. Civ. P. 56(c). When

5
The Garcias filed two motions to intervene, the first of which was denied
without prejudice. The Garcias agreed in their second motion to intervene “to
enter th[e] litigation subject to all previous orders regarding substantive legal
issues and procedural matters.” Jt. App. at 2280 (¶ 15).

11
applying this standard, we “view the evidence and draw all reasonable inferences

therefrom in the light most favorable to the party opposing summary judgment.”

Martin v. Kansas , 190 F.3d 1120, 1129 (10th Cir. 1999) . “Only disputes over

facts that might affect the outcome of the suit under the governing law will

properly preclude the entry of summary judgment.” Martin , 190 F.3d at 1129

(citation omitted). When the parties file cross motions for summary judgment,

“we are entitled to assume that no evidence needs to be considered other than that

filed by the parties, but summary judgment is nevertheless inappropriate if

disputes remain as to material facts.” James Barlow Family Ltd. Partnership v.

David M. Munson, Inc. , 132 F.3d 1316, 1319 (10th Cir. 1997); see also Buell

Cabinet Co. v. Sudduth , 608 F.2d 431, 433 (10th Cir. 1979) (“Cross-motions for

summary judgment are to be treated separately; the denial of one does not require

the grant of another.”).

A. Procedural history

The parties began by submitting cross-motions for summary judgment

addressing the deductibility of transportation costs from the defendants’ royalties.

ARCO later withdrew its request for summary judgment against Koscove, stating

that “certain unique facts and circumstances” indicated that “it was the intent of

the parties to the Koscove lease that transportation costs not be deducted.” Id. at

940. The district court then considered the balance of ARCO’s motion and

12
concluded that ARCO could deduct transportation expenses for its 50% share of

the SMU CO² from the royalties of all defendants except Koscove. The court

ruled that the phrase “at the mouth of the well” in FCB’s original lease was an

industry term of art, and that the 1977 amendments to FCB’s lease unambiguously

“did not extinguish th[at] word of art.” Id. at 1386f; see also id. (“It just seems

very clear to this court that that’s the only way that [the Gas Pricing provision]

can be read.”). The court also found that the 1981 AOP constituted a “sale at the

well head” of 50% of the CO² to Exxon, from which transportation costs could

not be deducted. Id. at 1386e.

The defendants subsequently filed a separate motion for summary judgment

asking the district court to rule that IDC, COC, and other depreciation costs could

not be used by ARCO to reduce royalty payments. The court granted the motion

in part, holding that under the terms of the defendants’ leases “neither the cost of

capital, nor the interest during construction are to be included or can be included

as a matter of law in transportation costs.” Id. at 3795. The court reasoned that

IDC and COC were “ownership charges, not transportation charges.” Id. at 3794.

ARCO filed two motions to reconsider, both of which were denied. In its order

denying ARCO’s first motion to reconsider, the court reiterated that the

defendants’ lease contracts permitted deductions for “ actual costs, that is,

plaintiff’s out of pocket expenses for transporting the gas. . . . Interest during

13
construction is not authorized under the agreement, and cost of capital and

plaintiff’s hypothetical profit margin for transporting the gas are not actual

costs.” Id. at 3849-50 (emphasis in original). The court went on to conclude that

operations and maintenance costs and depreciation expenses constituted “actual

cost[s] of transporting the gas.” Id. at 3850.

On ARCO’s motion, the parties then filed briefs “to determine the

appropriate methodology to value the Exxon share of the Sheep Mountain gas for

royalty payments.” Id. at 3816. The parties agreed that this was a question of

law, and stipulated certain facts. Ruling from the bench, the district court held

that ARCO’s depreciation deduction should be based on “the sale price in Texas

less the transportation cost without regard to the 15-percent/85-percent provisions

in the AOP.” Id. at 5144. The court commented that the deduction had to be

calculated for “50 percent of the gas,” and found that the AOP was “not relevant

to the royalty owners’ obligation to share a proportional share of the costs of

transportation.” Id. at 5150, 5152. The court also concluded that (1) the

language of FCB’s lease did not preclude a transportation deduction; and (2)

ARCO properly based FCB’s royalty on a weighted average price (“WAP”), rather

than the highest price for CO² in any individual sales contract.

The district court thus made three important rulings bearing on ARCO’s

transportation deduction. The court determined that (1) ARCO could deduct

14
transportation costs from FCB’s and the Garcias’ royalties, but not from

Koscove’s; (2) ARCO could not include IDC or COC in its transportation

deduction, but could include other depreciation costs; and (3) ARCO and Exxon

should share all transportation costs equally for purposes of computing the

depreciation deduction. 6
ARCO appeals the court’s ruling that IDC and COC

should not have been included in the transportation deduction. The defendants

appeal the remainder of the district court’s rulings. In addition, FCB appeals the

court’s approval of WAP-based royalty calculations.

B. Royalty calculations under FCB’s lease

We must first determine whether the district court correctly construed

FCB’s lease. The Colorado Supreme Court recognizes that “[t]he primary goal of

contract interpretation is to determine and give effect to the intention of the

parties.” USI Properties East, Inc. v. Simpson , 938 P.2d 168, 173 (Colo. 1997);

see also May v. United States , 756 P.2d 362, 369 (Colo. 1988) (“It is axiomatic

that a contract must be construed to ascertain and effectuate the mutual intent of

the parties.”). The parties’ intent “is determined primarily from the language of

6
In May 1996, the district court granted Exxon’s motion for summary
judgment and dismissed Exxon as a party. The court determined that there was
“no basis in this case for Exxon to be sued” because there was “no privity
between any of the lessees and Exxon.” Jt. App. at 1386b. The court also
concluded that there was “no indication that Exxon [wa]s a partner of ARCO or a
joint venturer with ARCO.” Id. ARCO and the defendants do not contest this
ruling on appeal.

15
the instrument itself and extraneous evidence of intent is only admissible where

there is an ambiguity in the terms of the agreement.” May , 756 P.2d at 369; see

also New York Life Ins. Co. v. KN Energy, Inc. , 80 F.3d 405, 411 (10th Cir.

1996) (stating that under Colorado law a reviewing court must “ascertain the

parties’ intent at the time the document was executed, and that intent is to be

determined primarily from the instrument itself”); Pepcol Mfg. Co. v. Denver

Union Corp. , 687 P.2d 1310, 1314 (Colo. 1984) (“It is only where the terms of an

agreement are ambiguous or are used in some special or technical sense not

apparent from the contractual document itself that the court may look beyond the

four corners of the agreement in order to determine the meaning intended by the

parties.”). In determining whether a contractual term is ambiguous, “the

instrument’s language must be examined and construed in harmony with the plain

and generally accepted meaning of the words employed, and reference must be

made to all the provisions of the agreement.” May , 756 P.2d at 369 (quoting

Radiology Prof’l Corp. v. Trinidad Area Health Ass’n, Inc. , 577 P.2d 748, 750

(Colo. 1978)) . “Merely because the parties have different opinions regarding the

interpretation of the contract does not itself create an ambiguity in the contract.”

USI Properties East , 938 P.2d at 173; accord Radiology , 577 P.2d at 750; see also

Lowell Staats Mining Co. v. Pioneer Uravan, Inc. , 596 F. Supp. 1428, 1430 (D.

Colo. 1984) (indicating that under Colorado law “[t]he express provisions of a

16
document should not be rewritten merely because of the contrary assertions of a

party to the agreement”).

1. Transportation expenses

The 1975 version of FCB’s lease clearly permits deductions for

transportation expenses. The original lease states that FCB’s royalty shall be

based on the “proceeds of the sale” at “the mouth of the well.” By itself, the

phrase “at the mouth of the well” necessarily incorporates a transportation

deduction, since the nearest market for CO² from the SMU is 400 miles away in

West Texas:

Many leases make specific provision for payment on the basis of the
market value or market price at the well. . . . If there should be no
market for gas at the well but there should be a distant market, then
the market value of gas at the well may be determined by using the
market price at the distant market after deducting from such price the
costs of transportation to such distant market.

3 Eugene Kuntz, Treatise on the Law of Oil and Gas § 40.5, at 356 (1989); see

also 3 Williams & Meyers on Oil and Gas Law § 645.2, at 597-98, 601-02 (1999)

(confirming that a royalty interest payable “at the well” is “usually subject to a

proportionate share of the costs incurred subsequent to production,” including

“[t]ransportation charges or other expenses incurred in conveying the minerals

produced from the well-head to the place where a buyer of the minerals takes

possession thereof”). Even if we assume that the “at the mouth of the well”

clause is silent on the allocation of transportation costs, Colorado law fills the

17
void. The rule in Colorado is that “absent a lease provision to the contrary, the

cost required to transport an otherwise marketable product to a distant market is

to be deducted before the royalty is to be computed.” Rogers v. Westerman Farm

Co. , 986 P.2d 967, 971 (Colo. Ct. App. 1999); see also Garman v. Conoco, Inc. ,

886 P.2d 652, 654 n.1 (Colo. 1994) (noting that “[t]raditionally, the costs to

transport gas to a distant market are shared by all benefitted parties”). 7

Unable to identify any ambiguities in the original lease, FCB nonetheless

argues that the “at the mouth of the well” clause cannot support a transportation

deduction for two reasons. First, FCB asserts that there was no “trade usage or

custom relating to the leasing, production or transportation of CO²” at the time

the phrase “at the mouth of the well” was written into the lease. FCB’s Opening

Brief at 16. As a result, says FCB, it could not have “contracted in reference to

‘mouth of the well’” as a binding “term of art.” Id. at 20. Second, FCB contends

that “the word ‘gas’, as used in the original Leas[e], was not understood by the

parties to include CO².” Id. at 20. In FCB’s view, the lease did not encompass

the production and sale of CO² until it was amended in 1977.

7
Kansas, FCB’s principal place of business, observes the same rule. See
Sternberger v. Marathon Oil Co. , 894 P.2d 788, 796 (Kan. 1995) (“[W]here
royalties are based on market price ‘at the well,’ or where the lessor receives his
or her share of the oil or gas ‘at the well,’ the lessor must bear a proportionate
share of the expenses in transporting the gas or oil to a distant market.”); id. at
800 (stating that the Colorado Supreme Court in Garman “held as we believe the
law in Kansas to be”).

18
 Both of these arguments are red herrings. As discussed above, the phrase

“at the mouth of the well” in the original lease either (a) expressly contemplates a

transportation deduction; or (b) is silent on the issue, in which case the parties are

required to share transportation expenses under state law. FCB’s purported

ignorance of any “trade usage” associated with the phrase “at the mouth of the

well” in 1975 simply does not address the latter proposition. FCB’s assertion that

the original lease did not encompass CO² is similarly irrelevant. Even if the

original lease did not specifically address CO² (an issue that we need not decide),

the amended lease does. Unless the corrected amendment eliminates or alters the

“at the mouth of the well” clause, transportation costs for CO² must be shared.

See Rogers , 986 P.2d at 972 (explaining that lease terms which “provid[e] that the

valuation point is the wellhead” confirm the “traditional rule” that “transportation

costs to some other point are to be shared”).

This brings us to the 1977 amendments, which arguably trump the terms of

the original lease. The Gas Pricing provision appears to shift the focus of FCB’s

royalty calculation from the “proceeds of the sale” at “the mouth of the well” to

the highest of three “current market price[s] at the time the gas is produced and

sold.” Jt. App. at 352. The Gas Pricing provision further states that it overrides

“[a]nything to the contrary.” Id. Without any immediate market in Colorado,

ARCO necessarily had to account for transportation costs under the original lease

19
to determine the proceeds of any sale “at the mouth of the well.” In contrast, the

Gas Pricing provision in the amended lease ostensibly requires ARCO to pay a

3/16 royalty on the highest of three specified amounts at the moment of any CO²

sale. Whether ARCO must transport the CO² to a distant market has no effect on

this proposed calculation. Stated differently, the royalty calculation under the

amended lease may not involve a constructed value for CO² “at the mouth of the

well,” but instead may turn on one of three pre-determined amounts. Nothing

within the four corners of the lease contract suggests that this interpretation of the

Gas Pricing provision is unreasonable.

There is, however, an alternative interpretation of the Gas Pricing provision

that is equally reasonable. As ARCO points out, the original lease arguably

“provided the critical information for calculating FCB’s royalty: (i) the rate –

‘1/8’, (ii) the principal or corpus on which the royalty is calculated – ‘proceeds of

the sale’ and (iii) the place of valuation – “at the mouth of the well.’” ARCO’s

Response Brief To Opening Brief Of FCB at 5. Because the Gas Pricing

provision “does not mention the place of valuation,” id. at 9, it is conceivable that

the 1977 amendments had no effect on the “at the mouth of the well” language in

the 1975 version of the lease. The amendments do not expressly contradict or

remove this language, and adopt by reference most of the terms of the original

lease “as if fully set out herein.” Jt. App. at 348, 351. Once again, nothing

20
within the four corners of the contract suggests that this alternative interpretation

of the Gas Pricing provision is unreasonable.

We therefore conclude that the Gas Pricing provision is ambiguous when

juxtaposed with the “at the mouth of the well” clause in the original lease. It is

beyond cavil that “[t]erms used in a contract are ambiguous when they are

susceptible to more than one reasonable interpretation.” B & B Livery, Inc. v.

Riehl , 960 P.2d 134, 136 (Colo. 1998) . Once a contract is determined to be

ambiguous, “the meaning of its terms is generally an issue of fact to be

determined in the same manner as other disputed factual issues.” Dorman v.

Petrol Aspen, Inc. , 914 P.2d 909, 912 (Colo. 1996) (citation omitted) ; see also

Polemi v. Wells , 759 P.2d 796, 798 (Colo. Ct. App. 1988) (stating that when an

ambiguity “cannot be resolved by reference to other contractual provisions,”

extrinsic evidence must be considered “to determine the mutual intent of the

parties at the time of contracting”). The parties’ appellate briefs refer to several

types of extrinsic evidence that may help resolve this issue of fact, including (1)

statements by FCB’s chief negotiator suggesting that he inserted the Gas Pricing

provision in 1977 to replace the “at the mouth of the well” clause ; (2)

correspondence from 1977 suggesting that ARCO did not bargain away its right to

deduct transportation expenses ; and (3) Koscove’s lease, which may be similar in

some respects to FCB’s. We leave it to the district court to consider on remand

21
whether this or any other extrinsic evidence is relevant and admissible for the

purpose of clarifying the Gas Pricing provision.

2. Highest price

FCB also contends that the amended lease precludes ARCO from (1) using

a weighted average price (WAP) to calculate royalties, and (2) basing the WAP in

part on the value of Exxon’s CO². ARCO acknowledges that its WAP

methodology “takes into account all the volumes of CO² sold or delivered and the

prices received for those volumes,” ARCO’s Response To Opening Brief Of FCB

at 26-27, and does not object to FCB’s description of the process:

Each month ARCO first calculates the volume of gas it uses based on
contracts for sale, in-kind use, and exchanges in West Texas.
Depending on the month, ARCO adds the volumes of twenty or so
different contracts to determine total volume. It then estimates the
value for exchanges and supply-in-kind contracts based on sales
contracts in that unit. It then multiplies the value times the volume.
ARCO then adds the volume of gas used by Exxon, times the Exxon
price. Finally, ARCO averages the values from all sales, exchanges
and supply-in-kind contracts to arrive at a weighted average price.

FCB’s Opening Brief at 12-13 (footnote omitted). According to FCB, this

methodology is inconsistent with the phrase “amount received by Atlantic for its

share of the gas” in subsection (3) of the Gas Pricing provision.

We conclude the “amount received” language in the Gas Pricing provision

does not foreclose the use of a WAP. “Amount” typically means “aggregate” or

“the total number or quantity.” Webster’s Third New Int’l Dictionary 72

22
(unabridged ed. 1993). That definition indicates that the “amount received” in the

amended lease refers to the aggregate price received by ARCO from all CO² sales,

not the price received from a particular sale. Furthermore, it is hornbook law that

“[t]he court’s duty is to interpret and enforce contracts as written between the

parties, not to rewrite or restructure them.” Fox v. I-10, Ltd. , 957 P.2d 1018,

1022 (Colo. 1998) . Accepting FCB’s proffered interpretation would require us to

do just that. Subsection (3) of the Gas Pricing provision does not say that FCB is

entitled to the “ highest amount received” by ARCO on its share of the gas.

Instead, it says that FCB is entitled to the “highest current market price at the

time the gas is produced and sold of” a specified range of alternatives, one of

which is ARCO’s “amount received.”

On the flip side of the coin, however, the use of Exxon’s sales to calculate

the WAP disregards the plain language of the lease. Subsection (3) of the Gas

Pricing provision does not say that a potential basis for FCB’s royalties is “the

amount received by Atlantic and Exxon ” for their respective shares of the CO².

Rather, the only party named in the subsection is ARCO. ARCO contends that

interpreting the contract to exclude the amount received by Exxon would

“produce an absurd result,” because the AOP grants Exxon a 50% interest in the

SMU CO² and “royalty is due on all production.” ARCO’s Response To Opening

Brief Of FCB at 26. But any “absurdities” created by this interpretation stem

23
from ARCO’s voluntary decision to enter into the AOP, not from the amended

lease. As a consequence, we conclude that the Gas Pricing provision permits the

use of a WAP founded on the amounts received by ARCO – not Exxon – for

ARCO’s share of the CO².

C. The components of the transportation deduction

1. IDC and COC

Whether IDC and COC are deductible transportation expenses depends in

part on the language of the parties’ lease contracts. We begin with the Garcias’

lease contract, which permits “reasonable” deductions for the “cost of

transporting” CO² from the SMU to the point of use. Jt. App. at 276.

Accordingly, our first task is to determine whether the phrase “cost of

transporting” in the Garcias’ lease unambiguously includes or excludes IDC and

COC. If we conclude that the phrase is indeed unambiguous and that it includes

IDC and COC, our next task is to determine whether the reasonableness of

ARCO’s deductions is a disputed issue of material fact.

We need not complete the second task, because the phrase “cost of

transporting” is decidedly ambiguous. The phrase does not expressly include IDC

and COC. Nor does it expressly exclude IDC and COC. Moreover, several

permutations of the word “cost” have been deemed ambiguous by Colorado

courts. For example, in Tripp v. Cotter Corp. , 701 P.2d 124 (Colo. Ct. App.

24
1985), a Colorado court of appeals concluded that the phrase “cost of milling”

was ambiguous:

[T]he mining contract at issue here does not expressly describe the
components to be included in calculating the costs of milling. There
is nothing in the contract which defined the phrase “cost of . . .
milling,” nor were there any provisions which described what the
phrase encompassed in terms of those costs. The phrase in question
is therefore ambiguous, and testimony offered for the purpose of
explaining and interpreting it should not have been excluded.

Id. at 126. Other Colorado cases reach similar results. See Pepcol , 687 P.2d at

1314 (finding the term “at seller’s cost” to be ambiguous); Southgate Water Dist.

v. City and County of Denver , 862 P.2d 949, 955 (Colo. Ct. App. 1992) (deeming

the phrase “actual costs” to be ambiguous); Hott v. Tillotson-Lewis Constr. Co. ,

682 P.2d 1220, 1223 (Colo. Ct. App. 1983) (finding the term “cost-plus” to be

ambiguous).

Generic dictionary definitions also provide little assistance in resolving this

ambiguity. The leading definition of “cost” is “the amount or equivalent paid or

given or charged or engaged to be paid or given for anything bought or taken in

barter or for service rendered.” Webster’s Third New Int’l Dictionary 515

(unabridged ed. 1993); see also Black’s Law Dictionary 345 (6th ed. 1990)

(defining “cost” as “expense,” “price,” and “[t]he sum or equivalent expended,

paid or charged for something”). “Transport” is normally defined as “to transfer

or convey from one person or place to another,” and “transportation” is commonly

25
thought to mean “an act, process, or instance of transporting or being

transported.” Webster’s Third New Int’l Dictionary 2430 (unabridged ed. 1993);

see also Black’s Law Dictionary 1499 (6th ed. 1990) (defining “transport” as “[t]o

carry or convey from one place to another,” and “transportation” as “[t]he

movement of goods or persons from one place to another, by a carrier”). It is not

obvious whether IDC and COC – i.e., the returns that might have been achieved

through alternative investments – constitute “amounts paid or given or charged”

to “transfer or convey” something from one place to another. Given the uncertain

meaning of the Garcias’ lease, we reverse the district court’s grant of summary

judgment and remand this issue for additional proceedings.

Next we address FCB’s lease contract, which does not contain the phrase

“cost of transporting.” Because FCB’s lease does not address the deductibility of

transportation expenses, our review of the contract is governed by Garman .

Garman and its progeny establish that lessees may deduct reasonable

“transportation costs,” absent a lease provision to the contrary. See Rogers , 986

P.2d at 971, 975. Hence, under the Garman -Rogers rubric ARCO’s IDC and COC

are deductible if they (1) qualify as transportation costs, and (2) are reasonable.

The definition of “transportation costs” is a question of law, while the

reasonableness of any given transportation expense is a question of fact. Cf.

Garman , 886 P.2d at 661 n.28 (remarking that the deductibility of certain post-

26
production marketing costs is “a question of fact to be decided based on

competent evidence in the record”); Rogers , 986 P.2d at 972 (echoing that

“whether any specific post-production cost” is incurred to make a product

marketable or to enhance its value is “to be determined by the fact-finder in each

case”) .

We conclude that IDC and COC are, in fact, deductible unless the parties

provide otherwise in the lease contract . No Colorado case directly addresses this

issue. Nonetheless, at least two other sources of authority suggest that IDC and

COC fall within the definition of “transportation costs” for purposes of royalty

deductions. First, as the Colorado Supreme Court intimated in Garman , federal

regulations governing deductions for post-production expenses are “instructive.”

886 P.2d at 661 n.28. These regulations permit a “transportation allowance”

based on the “reasonable actual costs” incurred by certain lessees. 30 C.F.R.

§ 206.157(b) (1998). As implemented by the Minerals Management Service (a

bureau of the United States Department of the Interior), federal regulations allow

ARCO to deduct IDC and COC when calculating royalties on government leases.

Second, Colorado tax regulations enacted in 1996 allow “return on investment”

and “return of investment” deductions for transportation equipment. Jt. App. at

2375-76, 2434-36, 2442. These regulations likewise suggest that IDC and COC

constitute deductible expenses.

27
 The writings of Professor Owen L. Anderson – upon which the defendants

heavily rely in their appellate brief – also support ARCO’s position. In a 1994

article, Professor Anderson opined that an oil and gas lessee often has “an

incentive to overstate post-production costs in order to minimize its royalty-

payment obligations,” and that courts should “consider only reasonable and

necessary costs, not to exceed actual direct costs, when determining the lessee’s

royalty obligation.” Owen L. Anderson, Calculating Royalty: “Costs” Subsequent

To Production – “Figures Don’t Lie, But . . . .” , 33 Washburn L.J. 591, 597

(1994). Professor Anderson thus concluded that in what are known as “wellhead

value” jurisdictions, “a return on investment ‘cost’ should be eliminated from the

work-back royalty calculation or – at the very least – be limited to a cost-of-

money charge, such as the prime rate of interest.” Id. at 637. In a forthcoming

piece, however, Professor Anderson clarifies his 1994 article and states that a

different rule should attach in “marketable product” jurisdictions such as

Colorado:

Because the lessee is unable to recover the royalty owner’s costs up
front, prior to the payment of royalty, the lessee must recover its
capital costs of moving gas through depreciation. Accordingly, even
in the absence of third-party financing, the operator incurs an indirect
cost of money. . . . [T]he lessee should be ordinarily permitted to
recover, against undepreciated capital, its reasonable cost-of-money
when calculating freight in a marketable-product jurisdiction. . . .
[I]n keeping with the general goal that a lessee should incur no loss
or profit in moving gas, a reasonable cost-of-money charge should
ordinarily be allowed even if the cost of building the system was not

28
 actually financed with borrowed money. The argument for a cost-of-
money charge is that, by electing to construct a gathering or
transportation system with its own cash, the lessee is unable to use
this money elsewhere. Moreover, by recovering capital through
depreciation over the life of production, such as would occur with
unit-of-production depreciation, a cost-of-money charge against
undepreciated capital merely reimburses the lessee for financing the
royalty owner’s proportionate share of moving costs. Based upon
this . . . reasoning, the lessee would be permitted to deduct a
reasonable cost-of-money charge against the undepreciated design,
construction and start-up capital costs of a gathering or
transportation system that is actually constructed.

Owen L. Anderson, Royalty Valuation: Calculating Freight in a Marketable-

Product Jurisdiction , 20 Energy & Min. L. Inst. 331, 354-55 (2000). While

Colorado tribunals obviously do not uncritically defer to Professor Anderson’s

views, the Rogers court adopted an argument advanced by Professor Anderson

and rejected contrary positions taken by courts in Kansas and Oklahoma. See 986

P.2d at 972, 974-75 (citing Owen L. Anderson, Royalty Valuation: Should

Royalty Obligations Be Determined Intrinsically, Theoretically, Or Realistically? ,

37 Nat. Resources J. 611, 669, 646-47 & n.138 (1997)). 8

8
The defendants also rely on Huddleston v. Grand County Board of
Equalization , 913 P.2d 15 (Colo. 1996), but that decision does not address the
dispositive issue in this case. Construing a mine tax valuation statute, the
Huddleston court disallowed a deduction for a “margin allocation” that was
admittedly “a hypothetical figure not representing direct costs.” Id. at 18. At the
outset, the court acknowledged that it was “dealing with a very different kind of
property with its own taxation scheme under the constitution and statutes.” Id. at
20. The court then determined that “[t]he history of the mine tax valuation
system” demonstrated that “a hypothetical profit or margin allocation is not
(continued...)

29
 2. Depreciation

On this issue of first impression, we hold that ARCO’s depreciation

deduction cannot be based on Exxon’s capital expenditures. The defendants’

leases require ARCO to make royalty payments on all CO² from the SMU. Before

ARCO pays the defendants’ royalties, it is entitled to deduct reasonable

transportation expenses. Simply because ARCO pays royalties on 100% of the

CO² does not mean that ARCO shouldered 100% of the cost to construct the

Pipeline to transport the gas to West Texas. As the district court acknowledged,

the record indicates that ARCO may have contributed only 15% of the capital

needed to build the SMU and the Pipeline. To permit ARCO to deduct expenses

for capital contributions it never made would be both nonsensical and unfair. An

extreme example illustrates the point. Suppose that ARCO and Exxon executed

an agreement under which ARCO contributed $1 of the $285 million needed to

construct the SMU and the Pipeline, and retained responsibility for paying

royalties on 100% of the CO². Under ARCO’s logic, the company would still be

able to claim a substantial royalty deduction, even though it incurred virtually no

costs to transport the gas. Nothing in the “work back” method requires such an

8
(...continued)
deductible.” Id. The court simply did not consider the deductibility of IDC and
COC, let alone the deductibility of these expenses in the context of an oil and gas
lease. In the words of the Colorado Supreme Court, “the law of oil and gas is
unlike any other area.” Davis v. Cramer , 808 P.2d 358, 359 (Colo. 1991).

30
indefensible result.

Practical considerations also support the conclusion that ARCO cannot use

Exxon’s capital expenditures to reduce the defendants’ royalties. First, ARCO

cannot use Exxon’s capital expenditures to obtain tax deductions. ARCO offers

no objection to the following description of joint venture tax returns filed by the

two companies: “These returns conform to . . . the 1981 AOP and the amendment

thereto, including ARCO and Exxon’s tax partnerships. In these documents

ARCO and Exxon receive credit for depreciation expense for the capital each

provided to the venture. ARCO does not report a depreciation expense based on

Exxon capital and vice versa.” Opening Brief of Koscove, FCB, and Garcias at

54. Second, to calculate their royalty dividends the defendants should not be

forced to examine the financial reports of third parties like Exxon. That ARCO

decided to execute an agreement with Exxon does not change the equation.

Through the AOP, ARCO voluntarily conveyed to Exxon a 50% interest in CO²

from the SMU. ARCO pays the defendants’ royalties, and Exxon reimburses

ARCO for royalties paid on Exxon’s share of the gas. If Exxon were required to

pay royalties to the defendants, it too could deduct its transportation expenses.

But Exxon is not in privity with and has no direct royalty obligation to the

defendants. Only ARCO bears that obligation, and the defendants should not be

forced to audit the books of other companies to ascertain the amounts owed by

31
ARCO.

There is, however, yet another factual matter that must be remanded to the

district court for consideration. ARCO contends that it “paid” for Exxon’s

unequal capital contribution by assigning 50% of the SMU CO² to Exxon under

Article 3.1 of the AOP. Some evidence adduced by ARCO appears to support this

argument. For instance, an Exxon division manager testified in his deposition

that ARCO gave up a 50% interest in the CO² “in return for th[e] disproportionate

investment being provided by Exxon.” Jt. App. at 4761; see also Opening Brief

of Koscove, FCB, and Garcias at 51 (“Defendants acknowledge that ARCO likely

did not secure Exxon’s disproportionate capital contribution without ARCO’s

concession of one-half of the SMU CO².”). The district court should determine

on remand (1) whether ARCO’s assignment of 50% of the CO² is sufficiently

analogous to a capital expenditure to permit a depreciation deduction; and (2)

ARCO’s total deductible contribution to the SMU and the Pipeline.

III. THE DEFENDANTS’ PREJUDGMENT INTEREST

Well-worn principles govern our review of the district court’s grant of

prejudgment interest. “A federal court sitting in diversity applies state law, not

federal law, regarding the issue of prejudgment interest.” Chesapeake Operating,

Inc. v. Valence Operating Co. , 193 F.3d 1153, 1156 (10th Cir. 1999) . An award

32
of prejudgment interest “is generally subject to an abuse of discretion standard of

review on appeal.” Driver Music Co. v. Commercial Union Ins. Companies , 94

F.3d 1428, 1433 (10th Cir. 1996); accord Chesapeake Operating , 193 F.3d at

1156 . That said, “any statutory interpretation or legal analysis underlying such an

award is reviewed de novo.” Driver Music , 94 F.3d at 1433.

A. Procedural history

The issue of prejudgment interest arose after the district court ruled that

ARCO improperly deducted IDC and COC from the defendants’ royalties. The

parties stipulated that as a result of these deductions, ARCO withheld $988,909

from FCB and $687,556 from the Garcias. Applying Colorado Revised Statutes

(“C.R.S.”) § 5-12-102(1)(b), the court awarded prejudgment interest on these

sums at an annually compounded rate of 8%. The court denied the defendants’

request for moratory interest pursuant to C.R.S. § 5-12-102(1)(a). FCB and the

Garcias appeal this ruling. The court also rejected ARCO’s argument that

prejudgment interest after July 1, 1990 should be governed by C.R.S. § 34-60-

118.5. ARCO appeals this ruling.

B. C.R.S. § 34-60-118.5

ARCO contends that the district court should have applied § 34-60-118.5 of

the Colorado Oil and Gas Conservation Act, not § 5-12-102, to determine the rate

of prejudgment interest. Section 34-60-118.5 governs certain proceedings before

33
the Colorado Oil and Gas Commission (“Commission”), see generally Grynberg v.

Colorado Oil and Gas Conservation Comm’n , No. 98CA1928, 1999 WL 1243320,

at *1-*3 (Colo. Ct. App. Dec. 23, 1999) (discussing the Commission’s jurisdiction

under the statute), and contains the following provision:

If a payor does not make payment within the time frames specified in
. . . this section and such delay in payment was not caused by any of
the reasons specified in . . . this section, the payor shall pay such
payee simple interest on the amount of the proceeds withheld, which
interest shall be calculated from the date of each sale at a rate equal
to two times the discount rate at the federal reserve bank of Kansas
City as such rate existed on the first day of the calendar year or years
in which proceeds were withheld.

C.R.S. § 34-60-118.5(4). The statute defines a “payee” as a person “legally

entitled to payment from proceeds derived from the sale of oil, gas, or associated

products from a well.” C.R.S. § 34-60-118.5(1)(a). The definition of “payor”

includes an operator who “has entered into an agreement under which” it “has

accepted responsibility for making payment to payees.” C.R.S. § 34-60-

118.5(1)(b).

ARCO’s argument is twofold. First, ARCO labels § 34-60-118.5 as a

“specific” (rather than a “general”) provision, and asserts that nothing in the

statute “limits the interest rate on ‘proceeds withheld’ to Oil and Gas Commission

proceedings.” ARCO’s Opening Brief at 63. Second, ARCO draws an analogy to

Bulova Watch Co. v. United States , 365 U.S. 753 (1961). In that case a claimant

recovered a judgment against the United States for “an overpayment of its excess

34
profits taxes.” Id. The claimant and the government disputed whether the

provisions of 28 U.S.C. § 2411(a) or the provisions of § 3771(e) of the Internal

Revenue Code governed the date from which interest accrued. The claimant

asserted that § 2411(a) controlled because his judgment was entered by a court

rather than an administrative body. The Supreme Court rejected the claimant’s

position, reasoning that the effect of the claimant’s argument would make “the

starting date of interest in such cases dependent upon the forum selected by the

taxpayer. . . . [I]t is almost certain that Congress did not intend such an

anomalous, nonuniform and discriminatory result.” Id. at 757.

Neither of these arguments demonstrates that the district court’s refusal to

apply § 34-60-118.5 was erroneous. As in most jurisdictions, in Colorado “[i]t is

a well-accepted principle of statutory construction that in the case of conflict, a

more specific statute controls over a more general one.” Delta Sales Yard v.

Patten , 892 P.2d 297, 298 (Colo. 1995) . But that general principle does not

control the outcome of this case, because there is no inherent conflict between

§ 34-60-118.5 and § 5-12-102. By its terms, § 34-60-118.5 only governs

enforcement proceedings before the Commission and is inapplicable to claims for

breach of contract:

Section 34-60-118.5 does not create an entitlement to proceeds; it
presumes the existence of such an entitlement and imposes deadlines
for the payment to those legally entitled to receive payment. The
statute demonstrates the General Assembly’s intent to grant to the

35
 Commission jurisdiction only over actions for the timely payment of
proceeds and not over disputes with respect to the legal entitlement
to proceeds under the terms of a specific royalty agreement.

Grynberg , 1999 WL 1243320, at *2. Indeed, through its amendment of the statute

in 1998, the Colorado legislature clarified and reinforced its intent “to exclude the

resolution of contractual disputes from the jurisdiction of the Commission.” Id. at

*3; see also C.R.S. § 34-60-118.5(5) (stating that the Commission “shall decline

jurisdiction” over any “bona fide dispute over the interpretation of a contract for

payment”). Unlike the claimant in Bulova , therefore, a Colorado litigant alleging

a breach of an oil and gas royalty agreement cannot select among different fora.

Instead, that litigant must assert his claim in a court of law, where § 5-12-102

establishes the rate of prejudgment interest. In addition, even if a litigant alleging

a breach of an oil and gas agreement could choose between administrative and

judicial tribunals, Bulova would not necessarily control. The law of oil and gas

“is unlike any other area,” see supra n.7, and the Supreme Court’s construction of

the Internal Revenue Code hardly limits the Colorado General Assembly’s ability

to prescribe different rates of prejudgment interest for different types of oil and

gas proceedings.

C. Moratory interest

Moratory interest is governed by § 5-12-102(1). That statute “allows a

court to award interest in ‘an amount which fully recognizes the gain or benefit

36
realized by the person withholding such money,’ or at the statutory rate of eight

percent per annum compounded annually.” Ballow v. PHICO Ins. Co. , 878 P.2d

672, 683 (Colo. 1994) (citations omitted); accord Northwest Cent. Pipeline Corp.

v. JER Partnership , 943 F.2d 1219, 1229 (10th Cir. 1991) . 9 Section 5-12-102(1)

“recognizes the time value of money,” and is intended to “discourage a person

responsible for payment of a claim to stall and delay payment until judgment or

settlement.” Mesa Sand & Gravel Co. v. Landfill, Inc. , 776 P.2d 362, 364 (Colo.

1989) ; see also Great Western Sugar Co. v. KN Energy, Inc. , 778 P.2d 272, 274

(Colo. Ct. App. 1989) (indicating that the aim of the statute is to “correct the

situation in which a wrongdoer would stall settlement or judgment in order to reap

the benefit of having use of money or property which was producing more profit

9
Section 5-12-102(1) provides in full:

(1) Except as provided in section 13-21-101, C.R.S., when there is
no agreement as to the rate thereof, creditors shall receive interest as
follows:
(a) When money or property has been wrongfully withheld,
interest shall be an amount which fully recognizes the gain or benefit
realized by the person withholding such money or property from the
date of wrongful withholding to the date of payment or to the date
judgment is entered, whichever first occurs; or, at the election of the
claimant,
(b) Interest shall be at the rate of eight percent per annum
compounded annually for all moneys or the value of all property
after they are wrongfully withheld or after they become due to the
date of payment or to the date judgment is entered, whichever first
occurs.

37
for him than the statutory interest rate he would eventually have to pay”).

Colorado courts generally “apply a liberal construction to the statute” to achieve

this purpose. Mesa Sand & Gravel , 776 P.2d at 365 . Nevertheless, “in order to

receive the higher interest rate, the claimant must specifically prove that the

withholding party actually benefited in a greater amount.” Northwest , 943 F.2d at

1229; see also Lowell Staats Mining Co. v. Pioneer Uravan, Inc. , 878 F.2d 1259,

1270 (10th Cir. 1989) (stating that the statutory interest rate applies “in the

absence of specific proof of the benefit derived by the defendant”); Davis Cattle

Co. v. Great Western Sugar Co. , 393 F. Supp. 1165, 1194 (D. Colo. 1975) (same),

aff’d , 544 F.2d 436 (10th Cir. 1976). Accordingly, “a trial court faced with a

record devoid of evidence relating to the amount of the withholding party’s gain

or benefit lacks discretion to award interest at a rate other than the statutory rate

of 8% per annum.” Chaparral Resources, Inc. v. Monsanto Co. , 849 F.2d 1286,

1291 n.4 (10th Cir. 1988); accord Ballow , 878 P.2d at 683-84.

In the present case, the district court held that the defendants failed to show

ARCO’s return on wrongfully withheld royalties was greater than 8%. The

defendants offered to prove that (1) ARCO “had the use of these underpayments

of royalty in its own corporate treasury;” (2) the appropriate measure of ARCO’s

gain was its “return on equity” (“ROE”), or “the net income of the company

divided by the average amount of equity;” and (3) ARCO’s ROE for the period in

38
question was approximately 16%. Jt. App. at 7182, 7183-86, 7292. The court

concluded that § 5-12-102 required a “showing [of] what happened to the specific

money withheld,” and found that the defendants’ proffered evidence did not

address “what happened with this particular money.” Id. at 7212. Because this

evidence was “speculative” and there was “not sufficient tracing of the funds,”

the court applied § 5-12-102(1)(b). Id. at 7211, 7212.

The district court did not commit reversible error by refusing to award

moratory interest. Section 5-12-102(1)(a) requires “specific proof” of the amount

gained from withheld funds. See , e.g. , Northwest , 943 F.2d at 1229; Lowell

Staats , 878 F.2d at 1270; Davis Cattle , 393 F. Supp. at 1194. The defendants’

return on equity calculation lacks the requisite specificity. As ARCO notes in its

appellate brief, the values undergirding the calculation come from annual reports

that

are derived from consolidated balance sheets and cash flows for a
wide range of different entities, both domestic and international.
Those computations measure ARCO’s overall performance on a
consolidated basis for all its operations around the world and are
based in part on investments made long before any additional
royalties were withheld.

ARCO’s Answer Brief In Response To Opening Brief Of Koscove, FCB and

Garcias at 53 (citations omitted). The annual reports do not contain a ROE for

the SMU, ARCO Permian (the ARCO division responsible for the SMU), or even

ARCO’s domestic oil and gas operations. Moreover, the value of the additional

39
royalties owed is dwarfed by ARCO’s net income, making it difficult to say with

certainty what gain ARCO specifically derived by withholding those payments.

The defendants’ arguments to the contrary are not compelling. The

defendants maintain that the district court’s ruling renders § 5-12-102(1)(a)

“inapplicable to ARCO or virtually any company which wrongfully withholds

another’s money,” because companies like ARCO could create “an effective

defense against claims for moratory interest” simply by “co-mingling” funds with

other corporate assets. Opening Brief Of Koscove, FCB, and Garcias at 61-62.

This argument sidesteps the rule that § 5-12-102 requires a claimant to

specifically prove the gain or benefit received by the offending party – whether

that party is an individual or a corporation. The “specific proof” requirement has

been in force at least since the Davis Cattle decision in 1975, and in the interim

the Colorado legislature has declined to amend the statute. Perhaps for that

reason, courts routinely deny requests for moratory interest pursuant to § 5-12-

102. See , e.g. , Northwest , 943 F.2d at 1229; Lowell Staats , 878 F.2d at 1270-71;

Chaparral , 849 F.2d at 1291 & n.4; James v. Coors Brewing Co. , 73 F. Supp. 2d

1250, 1256 (D. Colo. 1999); FDIC v. Clark , 768 F. Supp. 1402, 1414-15 (D. Colo.

1989); Ballow , 878 P.2d at 683-84. Indeed, over the last 25 years it appears that

courts have approved awards of moratory interest in only two published opinions,

neither of which is factually similar to the instant case. See Great Western Sugar ,

40
778 P.2d at 273-75 (approving an award of moratory interest based on a three-part

model designed to show the net profit resulting from the wrongful withholding of

natural gas under a sales contract); Davis Cattle , 393 F. Supp. at 1194-95

(awarding moratory interest where the claimant demonstrated that the offending

party “was able to leave $23-million of [its] credit line untapped” and save 11.5%

in interest).

IV. THE DEFENDANTS’ FRAUD COUNTERCLAIMS

A. Procedural history

Koscove and FCB each asserted counterclaims sounding in fraud. 10
In her

claim for fraudulent concealment, Koscove alleged that ARCO “intentionally

prepared and disseminated false accounting reports and correspondence” to hide

improper deductions. Jt. App. at 186 (¶ 99). This concealment purportedly

prevented Koscove from taking timely action against ARCO to recover the

improper deductions and to “set a proper valuation for the gas.” Id. (¶ 100). FCB

alleged in its claim for fraud that the stubs on payment checks used by ARCO

contained printed codes that “did not set forth the amounts that [ARCO] was

deducting.” Id. at 2222-26 (¶ 124(a)(1)). FCB further alleged that it made

The Garcias also asserted a claim for fraud, but voluntarily dismissed it
10

with prejudice.

41
repeated inquiries about the extent of ARCO’s deductions, but ARCO either

ignored these inquiries or provided misleading responses.

FCB’s claim survived ARCO’s initial motions to dismiss, but Koscove’s

did not. After the district court denied ARCO’s first motion to dismiss as

untimely, the company sought judgment on the pleadings under Federal Rule of

Civil Procedure 12(c) . The court granted ARCO’s request for judgment on the

pleadings, but permitted FCB and Koscove to re-plead their claims if they could

allege “some detrimental reliance other than delay in pursing legal remedies.” Jt.

App. at 2087, 2100-01. In accordance with the court’s instructions, FCB re-

pleaded its claim. Koscove, who did not re-plead her claim, appeals the district

court’s original order of dismissal.

ARCO challenged FCB’s re-pleaded fraud claim in two motions. The first

was a motion for summary judgment , which the district court denied. As the

scheduled trial date approached, ARCO filed a “Motion To Exclude Evidence Of

Farm Credit’s Alleged Fraud Damages.” Id. at 3965. The court granted this

motion, precipitating the dismissal of FCB’s fraud claim. Id. at 5186, 6639, 6867.

FCB appeals the grant of ARCO’s motion to exclude.

B. Koscove’s claim

A motion for judgment on the pleadings under Rule 12(c) is treated as a

motion to dismiss under Rule 12(b)(6). Mock v. T.G. & Y. Stores Co. , 971 F.2d

42
522, 528 (10th Cir. 1992) . Our standard of review is therefore de novo.

Realmonte v. Reeves , 169 F.3d 1280, 1283 (10th Cir. 1999) . We uphold a

dismissal under Rule 12(b)(6) “only when it appears that the plaintiff can prove

no set of facts in support of the claims that would entitle the plaintiff to relief.”

Mock , 971 F.2d at 529 (quoting Jacobs, Visconsi & Jacobs Co. v. City of

Lawrence , 927 F.2d 1111, 1115 (10th Cir. 1991)). We likewise “accept the well-

pleaded allegations of the complaint as true and construe them in the light most

favorable to the non-moving party.” Realmonte , 169 F.3d at 1283; accord Mock ,

971 F.2d at 529.

Even if we construe the allegations in her favor, Koscove’s claim for

fraudulent concealment is insufficient as a matter of law. Detrimental reliance is

an essential element of a claim for fraudulent concealment. A plaintiff asserting

such a claim must show

(1) the concealment of a material existing fact that in equity and
good conscience should be disclosed; (2) knowledge on the part of
the party against whom the claim is asserted that such a fact is being
concealed; (3) ignorance of that fact on the part of the one from
whom the fact is concealed; (4) the intention that the concealment be
acted upon; and (5) action on the concealment resulting in damages.

Ballow v. PHICO Ins. Co. , 875 P.2d 1354, 1361 (Colo. 1993); see also Alzado v.

Blinder, Robinson & Co. , 752 P.2d 544, 558 (Colo. 1988) (“To claim damages

from allegedly fraudulent statements, the plaintiff must establish detrimental

reliance on the statements.”) . Here, Koscove concedes that she cannot plead

43
detrimental reliance other than delay in filing suit. See Opening Brief Of

Koscove, FCB and Garcias at 5, 42. Delay in filing suit, without more, does not

satisfy the fifth element of a claim for fraudulent concealment – “action on the

concealment resulting in damages.” Koscove does not allege that her delay in

filing suit permitted ARCO to successfully assert a statute of limitations defense.

Nor does she allege that her delay caused any other form of damage. Because

Koscove’s fraudulent concealment claim contains no allegations of any injury, the

district court properly dismissed it. Cf. Mills v. Merrill Lynch, Pierce, Fenner &

Smith, Inc. , 703 F.2d 305, 308 (8th Cir. 1983) (finding that a plaintiff failed to

establish detrimental reliance because he did not allege that he was “barred from

filing suit” as a consequence of the defendant’s conduct); Werman v. Malone , 750

F. Supp. 21, 23 (D. Me. 1990) (concluding that a plaintiff’s bare-bones allegation

that he “refrained from filing suit” as a result of the defendant’s conduct was

“insufficient as a matter of law to establish the element of detrimental

reliance”). 11

C. FCB’s claim

11
Koscove’s suggestion that she should be able to pursue a claim for
fraudulent concealment in order to obtain punitive damages puts the cart before
the horse. Under Colorado law “[a] claim for punitive damages is not a separate
and distinct cause of action; rather, it is auxiliary to an underlying claim. An
award of punitive damages can be entered only after awarding damages in
conjunction with an underlying and successful claim for actual damages.”
Pulliam v. Dreiling , 839 P.2d 521, 524 (Colo. Ct. App. 1992).

44
 The district court excluded evidence relating to FCB’s fraud claim on two

grounds. First, the court held that FCB inexcusably failed to include its theory of

damages in the final pre-trial order. FCB initially alleged that, but for ARCO’s

fraudulent conduct, it would have taken its share of CO² from the SMU in kind.

Unable to produce any evidence to support that theory , FCB later alleged that

ARCO’s fraudulent conduct prevented it from selling its “entire mineral interest.”

Jt. App. at 5165-66. FCB did not disclose or list witnesses for the latter theory in

the pre-trial order. Second, the court concluded that FCB’s newly alleged fraud

damages were “too speculative to go to [a] jury.” Id. at 5169. We review the

court’s rulings for an abuse of discretion. See Koch v. Koch Indus., Inc. , 203

F.3d 1202, 1222 (10th Cir. 2000) (“This court reviews a district court’s failure to

amend a final pretrial order for an abuse of discretion.”); Vining v. Enterprise

Fin. Group, Inc. , 148 F.3d 1206, 1217 (10th Cir. 1998) (stating that “the

admission or exclusion of evidence” is reviewed “for abuse of discretion”).

The district court’s exclusion of FCB’s alleged fraud damages was proper.

The only argument advanced by FCB on appeal is that evidence of its damages

“was available to ARCO” through the report of FCB’s expert. Opening Brief Of

Koscove, FCB and Garcias at 62-63. FCB cites no evidence in the record and no

case law to support its assertion. Under these circumstances, the district court’s

refusal to amend the pre-trial order cannot be deemed an abuse of discretion. See

45
Koch , 203 F.3d at 1222 (explaining that a final pre-trial order “shall be modified

only to prevent manifest injustice,” and that “the burden of demonstrating

manifest injustice falls upon the party moving for modification”) . Similarly, FCB

presents no argument on appeal concerning the district court’s ruling that the

proposed “mineral interest” damages were too speculative to go to a jury. FCB’s

failure to address this issue in its appellate brief constitutes a waiver. See

Coleman v. B-G Maintenance Management of Colorado, Inc. , 108 F.3d 1199,

1205 (10th Cir. 1997) (“Issues not raised in the opening brief are deemed

abandoned or waived.”); Phillips v. Calhoun , 956 F.2d 949, 953-54 (10th Cir.

1992) (observing that “[a] litigant who fails to press a point by supporting it with

pertinent authority, or by showing why it is sound despite a lack of supporting

authority or in the face of contrary authority, forfeits the point”) (citation

omitted).

V. THE DEFENDANTS’ BREACH OF FIDUCIARY DUTY
COUNTERCLAIMS

A. Procedural history

FCB, Koscove, and the Garcias asserted counterclaims against ARCO for

breach of fiduciary duty. The defendants alleged that ARCO, as the operator of

the SMU, breached a fiduciary duty “[b]y selling and using the gas at less than

fair market value” and “by wrongfully deducting . . . post-production costs and

46
expenses without disclosure.” Jt. App. at 185 (¶ 96). The defendants averred that

they “d[id] not have access to the records and information” maintained by ARCO,

and that ARCO occupied “a position of superiority” with respect to this revenue

and royalty information. Id. at 146 (¶ 104). The defendants reiterated their

allegation that ARCO brushed aside “repeated demands for an accounting and for

proper payment of royalty owed.” Id. (¶ 109).

As it did with FCB’s re-pleaded fraud claim, ARCO challenged the

defendants’ breach of fiduciary duty claims in two motions. After an

unsuccessful attempt to secure judgment on the pleadings, ARCO filed a motion

for summary judgment. The court granted the summary judgment motion,

concluding that relationship between ARCO and the defendants involved “no

fiduciary duty” under Colorado law. Id. at 3793. Each of the three defendants

appeals this ruling, which we review de novo. See King of the Mountain Sports ,

185 F.3d at 1089; Lopez , 172 F.3d at 759.

B. ARCO’s alleged duty

Prior decisions from Colorado and this circuit strongly suggest that a

lessee-lessor relationship, even if it encompasses the operation of an oil and gas

unit, does not automatically create fiduciary responsibilities. Cases dealing with

“overriding” royalty owners are illustrative. For example, the court in Degenhart

v. Gold King Petroleum Corp. , 851 P.2d 304 (Colo. Ct. App. 1993) commented

47
that “[o]rdinarily, the mere reserving of an overriding royalty in the assignment of

an oil and gas lease does not create a confidential or fiduciary relationship.” Id.

at 306; see also id. (stressing that the record in the case was “devoid of any

evidence indicating any personal or other special relationship between plaintiffs

and defendant which could support the existence of a confidential or fiduciary

relationship”). The Colorado Supreme Court expressly endorsed this portion of

the Degenhart opinion in Garman . See 886 P.2d at 659 n.23 (stating that the

Degenhart court “correctly explained the reservation of an overriding royalty

interest does not create a confidential or fiduciary relationship”). Furthermore, at

least one case from this circuit indicates that a lessee who serves as a unit

operator generally owes lessors only a duty of good faith, not a fiduciary duty:

[A]lthough the lessee’s duty of good faith requires that it take the
lessor’s interest into account in exercising its powers under the
unitization clause, the lessee need not subordinate its interest entirely
to those of the lessor. Thus, although the lessee’s good faith duty
has at times been referred to as fiduciary, such standard is altogether
too strict.

Amoco Prod. Co. v. Heimann , 904 F.2d 1405, 1412 (10th Cir. 1990) (citations

omitted). In view of these precedents, we predict that the Colorado Supreme

Court would not categorize as fiduciary all lessee-lessor relationships involving

unitization agreements. 12

12
In the same vein, it is unlikely that the Colorado Supreme Court would
(continued...)

48
 However, that a fiduciary duty does not necessarily arise from a lessee-

lessor relationship does not mean a fiduciary duty never arises from such a

relationship. Colorado courts recognize that a variety of relationships can create

fiduciary responsibilities under certain circumstances, even if those relationships

are not fiduciary per se. See , e.g. , Paine, Webber, Jackson & Curtis, Inc. v.

Adams , 718 P.2d 508, 517-18 (Colo. 1986) (declining to “adopt a rule that a

stockbroker/customer relationship is, per se, fiduciary in nature,” and holding that

the existence of any fiduciary obligations turns on “proof of circumstances”);

Bohrer v. DeHart , 943 P.2d 1220, 1225 (Colo. Ct. App. 1996) (remarking that a

clergy-parishioner relationship “may be fiduciary in nature,” depending on the

facts of the case); Dolton v. Capitol Fed. Sav. and Loan Ass’n , 642 P.2d 21, 23

(Colo. Ct. App. 1981) (“While there is no per se fiduciary relationship between a

borrower and lender, a fiduciary duty may arise from a business or confidential

relationship . . . .”). These cases demonstrate that “the existence of a fiduciary or

confidential relationship is generally a question of fact for the jury.” Elk River

12
(...continued)
follow Leck v. Continental Oil Co. , 800 P.2d 224 (Okla. 1989). Leck generally
recognizes “the existence of a fiduciary duty owed by a unit to the royalty owners
and lessees who are parties to the unitization agreement or subject to the order
creating the unit.” Id. at 229. As one commentator has observed, “[m]ost
jurisdictions other than Oklahoma have rejected the notion that there is a
fiduciary obligation owed by [an] operator absent special circumstances.” Gary
W. Catron, The Operator’s ‘Fiduciary’ Duty To Royalty And Working Interest
Owners , 64 Okla. Bar J. 2763 (1993).

49
Associates v. Huskin , 691 P.2d 1148, 1152 (Colo. Ct. App. 1984); see also

Winkler v. Rocky Mountain Conference of the United Methodist Church , 923

P.2d 152, 157 (Colo. Ct. App. 1995) (“Whether a fiduciary relationship exists is a

question of fact to be resolved by the jury.”).

Applying these authorities to the case at hand, we conclude the district

court erred when it entered summary judgment as a matter of law on the

defendants’ fiduciary duty claims. The district court granted ARCO’s motion for

summary judgment based on Degenhart and Garman . Our review of the facts

asserted by the parties convinces us there are material facts at issue and we

remand the case for further factual development of this issue. The proceedings on

remand should take into account Colorado’s definition of a “fiduciary”: “a person

having a duty, created by his undertaking, to act primarily for the benefit of

another in matters connected with the undertaking.” Destefano v. Grabrian , 763

P.2d 275, 284 (Colo. 1988) . Further proceedings should also take into account

Colorado’s operative definition of a “fiduciary relationship”:

A fiduciary relationship exists when one person is under a duty to act
for or to give advice for the benefit of another upon matters within
the scope of their relationship. A fiduciary relationship can arise
when one party occupies a superior position relative to another. It
may be based upon a professional, business, or personal relationship.

Johnston v. CIGNA Corp. , 916 P.2d 643, 646 (Colo. Ct. App. 1996); see also

Winkler , 923 P.2d at 157 (citing the Restatement (Second) of Torts § 874 (1979)

50
for an identical proposition); Dolton , 642 P.2d at 23 (indicating that “a fiduciary

duty may arise from a business or confidential relationship which impels or

induces one party ‘to relax the care and vigilance it would and should have

ordinarily exercised in dealing with a stranger’”) (citation omitted).

VI. THE DEFENDANTS’ FAIR MARKET VALUE COUNTERCLAIMS

Our review of the defendants’ fair market value counterclaims is controlled

by Daubert v. Merrell Dow Pharmaceuticals, Inc. , 509 U.S. 579 (1993) and

Kumho Tire Co., Ltd. v. Carmichael , 119 S. Ct. 1167 (1999). Daubert requires a

trial judge to “ensure that any and all scientific testimony or evidence admitted is

not only relevant, but reliable.” 509 U.S. at 589. This inquiry is “a flexible one,”

not governed by “a definitive checklist or test.” Id. at 593, 594. Potentially

pertinent factors include whether the expert’s theory or technique (1) “can be (and

has been) tested,” id. at 593; (2) “has been subjected to peer review and

publication,” id. ; (3) has a “known or potential rate of error” with “standards

controlling the technique’s operation,” id. at 594; and (4) enjoys “widespread

acceptance” in the relevant scientific community. Id. Kumho Tire establishes

that the “gatekeeping” requirement set forth in Daubert “applies not only to

testimony based on ‘scientific’ knowledge, but also to testimony based on

‘technical’ and ‘other specialized’ knowledge.” 119 S. Ct. at 1171 (citation

51
omitted). The objective of that requirement “is to make certain that an expert,

whether basing testimony upon professional studies or personal experience,

employs in the courtroom the same level of intellectual rigor that characterizes

the practice of an expert in the relevant field.” Id. at 1176.

Kumho Tire also establishes that “a court of appeals is to apply an abuse-

of-discretion standard when it ‘review[s] a trial court’s decision to admit or

exclude expert testimony.’” Id. (quoting General Elec. Co. v. Joiner , 522 U.S.

136, 138-39 (1997)); accord Summers v. Missouri Pacific R.R. Sys. , 132 F.3d

599, 603 (10th Cir. 1997). This standard “applies as much to the trial court’s

decisions about how to determine reliability as to its ultimate conclusion.”

Kumho Tire , 119 S. Ct. at 1176. As a general matter, a district court abuses its

discretion “when it renders ‘an arbitrary, capricious, whimsical, or manifestly

unreasonable judgment.’” Copier v. Smith & Wesson Corp. , 138 F.3d 833, 838

(10th Cir. 1998) (quoting FDIC v. Oldenburg , 34 F.3d 1529, 1555 (10th Cir.

1994)) . Put another way, under the abuse of discretion standard “a trial court’s

decision will not be disturbed unless [we have] a definite and firm conviction that

the [trial] court has made a clear error of judgment or exceeded the bounds of

permissible choice in the circumstances.” Beaird v. Seagate Tech., Inc. , 145 F.3d

1159, 1164 (10th Cir.) (citation omitted), cert. denied , 119 S. Ct. 617 (1998) .

A. Procedural history

52
 The defendants’ fair market value counterclaims rested in large part on the

testimony of their expert witness, economist James Smith. ARCO filed a motion

in limine to preclude Smith from testifying, arguing that Smith’s opinions were

speculative, based on unsupported hypotheses, and unreliable. At a hearing the

court advised the defendants that it would allow Smith to render opinions based

on “actual sales” of CO², but it was “not going to permit him to make assumptions

and projections and hypotheticals that conflict with the actual data.” Jt. App. at

5173. The defendants informed the court that an important component of Smith’s

analysis was that there was neither a competitive market for nor “reliable actual

sales” of CO² in West Texas. Id. at 5175. According to Smith, actual prices did

not reflect the true market value of the gas “because of the vertical integration of

the buyers and the sellers of CO² and . . . because there were no arms’ length

transactions.” Id.

Before ruling on ARCO’s motion in limine, the district court held an in

camera evidentiary hearing. Smith testified at the hearing and was subject to

cross-examination. After listening to Smith’s testimony and reviewing the papers

submitted by the parties, the court concluded that Smith “disregarded the actual

sales data of carbon dioxide gas in West Texas” and “failed to look to comparable

sales of CO² in other markets.” Id. at 6583. The court thus excluded Smith’s

proposed testimony, holding that Smith could only discuss “what the market

53
conditions actually are in West Texas and what the comparables are.” Id. at 6584.

The defendants appeal this ruling. Because the defendants could not present a

prima facie case without Smith’s testimony, the court dismissed their claims for

fair market value.

B. Smith’s theory of valuation

The valuation theory in Smith’s expert report proceeds along the following

lines. Smith’s initial premise is that “a high percentage” of the CO² from the

SMU “is never sold.” Id. at 4855. Instead, “it is supplied in-kind by Exxon and

Arco to satisfy their own needs as working interest owners in various West Texas

EOR projects.” Id. (footnote omitted). While ARCO “planned from the

beginning to sell some amount of its gas to outsiders,” those projected sales “have

been small relative to Arco’s own use.” Id. at 4856. Smith estimates that only

about 14% of ARCO’s SMU production has been “available over the life of the

field to support third-party sales,” and that in recent years ARCO sold less than

5% of the gas. Id.

According to Smith, ARCO and Exxon “are not alone in producing carbon

dioxide primarily to meet their own needs.” Id. Smith notes that the industry is

“vertically integrated,” id. , since the same firms that produce CO² also consume

much of what they produce:

The six principal suppliers of carbon dioxide (i.e., Shell, Mobil,
Amoco, Arco, Exxon, and Amerada Hess) also collectively operate

54
 two-thirds of all the carbon dioxide injection wells located in the
Permian Basin of West Texas. But that does not represent the full
extent of their needs for carbon dioxide, since all of these firms hold
additional working interests in, and supply carbon dioxide to,
injection wells that are operated by other firms. Although the
resulting transfers of carbon dioxide from upstream entities to
downstream affiliates may be referred to as “intradivisional sales,”
they do not constitute arms-length transactions where the separate
and opposing interests of buyer and seller would establish a fair
market value.

Id. (footnotes omitted). As a result, “most of the carbon dioxide moves within,

not between, firms, and therefore the market price is not observed.” Id.

Against this backdrop, Smith avers that “third-party sales of carbon dioxide

in West Texas” do not provide “a reliable indicator of fair market value.” Id. at

4857. Because ARCO supplies CO² in kind to satisfy its own needs, “the

company’s interest in obtaining a high price (as seller) is nullified by an

offsetting interest in obtaining a low price (as buyer).” Id. Taking into account

“the impact on royalties and taxes,” Smith concludes that “Arco gains on balance

whenever the price of carbon dioxide is reduced.” Id. In other words, “[g]iven

the incentives that are created by the vertically integrated structure of this

industry, there is no assurance that the price favored by Arco would correspond to

the fair market value of the gas. Indeed, Arco gains by establishing a price that is

below fair market value.” Id. ; see also id. (“The fact that Arco also sells some of

its carbon dioxide to third parties does not change the conclusion that the

company comes out ahead if prices are held below fair market value.”).

55
 Smith then turns his attention to the actual market value of CO² from the

SMU. Smith states that he is unaware of “any other market where carbon dioxide

is sold at prices that would provide an accurate benchmark for estimating the fair

market value.” Id. at 4861. Smith reasons that the value of CO² from the SMU

derives from its usefulness in recovering enhanced oil reserves in
West Texas. Relatively few projects of this type are located
anywhere else – more than 80% of the carbon dioxide injection wells
that exist in the world are located in the Permian Basin area of West
Texas. Moreover, the West Texas fields that receive carbon dioxide
from Sheep Mountain are the best prospects for this particular
technology and give better results with greater recovery of enhanced
oil reserves than the carbon dioxide-based EOR projects located
elsewhere.

Id. (footnotes omitted). Thus, “even if arms-length prices were available from

other geographic areas or other markets, the amount that purchasers would be

willing to pay for use of carbon dioxide in those applications would understate the

value” of CO² that is shipped from the SMU to West Texas. Id.

Because no “direct indicator” of fair market value is available, Smith

focuses on “indirect indicators” of what CO² “would sell for in West Texas if the

market were perfectly competitive and characterized by truly arms-length

transactions.” Id. Smith acknowledges that “this approach involves a

hypothetical situation, and the price that would result can only be estimated, not

observed.” Id. Nonetheless, says Smith, the economic theory of “profit

maximization” provides “a clear prediction regarding the price that would emerge

56
under such conditions, and clear directions on how to estimate that price.” Id. In

a nutshell, profit maximization theory “predicts that, in equilibrium, the price paid

by firms to purchase the carbon dioxide will equal the net economic benefit which

that carbon dioxide generates in use.” Id. Using this approach, Smith estimates

the true market value of CO² from the SMU from 1983 through 1996, ranging

from a high of $3.38 per thousand cubic feet (“mcf”) in 1983 to a low of $1.15

per mcf in 1986 and 1988. Id. at 5562. 13

C. Basis for exclusion

The district court did not abuse its discretion by excluding Smith’s

testimony. The court initially examined some of the factors listed in Daubert , and

found that (1) Smith’s opinions were formed specifically for this litigation; (2)

Smith had not employed the profit maximization theory on previous occasions to

13
At the in camera evidentiary hearing, Smith’s testimony on direct
examination closely followed the statements in his expert report. Smith reiterated
that the industry was “vertically integrated” and that the market for CO² was not
competitive. Jt. App. at 5212. Smith likewise testified that sales to third parties
and other market indicators did not reflect “the actual fair market value of the
CO².” Id. at 5213. Smith emphasized that “over 80 percent of the CO²
production wells in the world are located in West Texas” and that other CO²
projects are “widely scattered” and “mostly in foreign countries.” Id. at 5214.
Smith repeated that the market lacks “arms length” transactions, and that
suppliers such as ARCO have “a clear interest and profit in setting the price of
the CO² below the fair market value.” Id. at 5216. Smith also discussed the
“underlying assumption” of the profit maximization theory – that “management is
driven by the objective to maximize profits for the firm.” Id. at 5228. Smith
revised his estimate of outside sales, stating that ARCO sold 22% of its SMU
CO² to third parties from 1983 to 1996.

57
determine the value of CO²; and (3) Smith’s opinions had not been published or

subjected to peer review in scholarly journals. There is evidence in the record to

support all of these findings. The court then concluded that Smith’s analysis

disregarded or failed to account for (1) the prices actually received by certain CO²

suppliers in West Texas, and (2) the prices actually received by CO² suppliers in

comparable markets. As discussed below, neither of these findings “exceeded the

bounds of permissible choice in the circumstances.”

The defendants offered Smith’s testimony as a means of determining the

“market value” to which their lease contracts referred. “Market value” represents

“the price that would be paid by a willing buyer to a willing seller in a free

market.” 3 Eugene Kuntz, Treatise on the Law of Oil and Gas § 40.4, at 329

(1989); see also Black’s Law Dictionary 597 (6th ed. 1990) (defining “fair market

value” as “[t]he amount at which property would change hands between a willing

buyer and a willing seller, neither being under any compulsion to buy or sell and

both having reasonable knowledge of the relevant facts”); Rhodes v. Amoco Oil

Co. , 143 F.3d 1369, 1373 n.4 (10th Cir. 1998) (same) . That being the case, when

a lessee sells gas in an open and competitive market,

the price derived from such sale should establish the market price
and market value of the gas. If however, the lessee is a corporate
affiliate of the purchaser and the sale is not at an arm’s length, the
sale price will not be accepted as representing the market price or
market value. Nor will sales on a market which is dominated by a
few producers and purchasers establish an acceptable market price of

58
 gas.

3 Eugene Kuntz, Treatise on the Law of Oil and Gas § 40.4, at 332 (1989)

(footnotes omitted); 14
cf. United States v. 79.95 Acres of Land , 459 F.2d 185, 187

(10th Cir. 1972) (recognizing in a condemnation proceeding that a transaction that

is not conducted at arm’s length “is not evidence of fair market value”) . If a

competitive market does not exist at the well, there is “general agreement” that

market value “can be determined from comparable sales of gas,” and that

“comparable sales are those that are comparable in time, quality, quantity, and

availability of marketing outlets.” 3 Eugene Kuntz, Treatise on the Law of Oil

and Gas § 40.4, at 335 (1989). As a corollary,

[i]f the market value cannot be established by proof of comparable
sales, then the actual value or intrinsic value of the gas can be
shown. The burden is on the lessor to prove that there is no market
and to prove the reasonable value of the gas. . . . In proving the
actual value of the gas, the lessor is not limited to proof of the
market value at a distant market less the expense of transportation,
but the lessor may also prove such value by proof of other factors

14
While this section of the Kuntz treatise uses “market value” and “market
price” interchangeably, the two terms are not always synonymous:

Market price is the price that is actually paid by buyers for the same
commodity in the same market. It is not necessarily the same as
‘market value’ or ‘fair market value’ or ‘reasonable worth’. Price
can only be proved by actual transactions. Value or worth, which is
often resorted to when there is no market price provable, may be a
matter of opinion.

Shamrock Oil & Gas Corp. v. Coffee , 140 F.2d 409, 410-11 (5th Cir. 1944).

59
 and by the “opinion of competent persons having knowledge of the
facts, whether expert or not.”

Id. § 40.4, at 337 (footnotes and citation omitted); see also Weymouth v.

Colorado Interstate Gas Co. , 367 F.2d 84, 88 (5th Cir. 1966) (stating that market

value “may be established by expert opinion” or by “[e]vidence of sales of

comparable properties”) (citation omitted).

While expert testimony based on hypothesis can (and sometimes must) be

used to establish market value, courts tend to prefer evidence derived from actual

sales. For instance, in Ashland Oil, Inc. v. Phillips Petroleum Co. , 554 F.2d 381

(10th Cir. 1975), we intimated that “comparable sales or current market price is

the best” and “by far the preferable method” for determining value. Id. at 387;

see also id. (commenting that the expert testimony presented in the case, “[n]o

matter how interesting” as a matter of theory, was “only opinion evidence” and

did not “establish facts”); cf. Brooke Group Ltd. v. Brown & Williamson Tobacco

Corp. , 509 U.S. 209, 242 (1993) (“Expert testimony is useful as a guide to

interpreting market facts, but it is not a substitute for them.”). Accordingly, even

if the relevant market is not perfectly competitive, “it still makes better sense to

begin with the collective judgment expressed in the market price” than to start

with “a wholly subjective pronouncement of worth.” Campbell v. United States ,

661 F.2d 209, 221 (Ct. Cl. 1981). By the same token, when determining market

value “[c]ompletely comparable sales are not likely to be found” and “[s]ales that

60
have some different characteristics must be considered.” Piney Woods Country

Life Sch. v. Shell Oil Co. , 726 F.2d 225, 239 (5th Cir. 1984); see also id.

(suggesting that a court “should not dismiss fairly comparable sales out of hand

because of certain incomparable qualities”).

Judged by these standards, the district court’s conclusion that Smith strayed

too far from the available sales data cannot be described as “manifestly

unreasonable.” For example, the prices received by ARCO from several CO²

sales in the early 1980s conceivably could serve as the basis for a “market value”

calculation. The record indicates that between 1982 and 1984, ARCO made

several sales to “working interest” owners in West Texas who were not CO²

suppliers. The defendants do not contest that during this time ARCO sold or

delivered approximately 55% of its CO² to third parties. The record also indicates

that between 1983 and 1989 ARCO sold or delivered an average of 37% of its

CO² to third parties. In light of this evidence, it was not “arbitrary, capricious, or

whimsical” for the district court to conclude that, at least during the early 1980s,

ARCO’s purported incentive to depress CO² prices was substantially blunted.

Moreover, the district court’s conclusion that Smith unjustifiably

disregarded sales data from all CO² markets outside of West Texas falls short of

an abuse of discretion. The district court received testimony that the Oil and Gas

Journal publishes a list of all EOR projects in the United States and around the

61
world. This testimony revealed the existence of EOR projects that use CO² in

north Texas, Colorado, Wyoming, Oklahoma, Louisiana, Mississippi, and Canada.

Smith admittedly did not use sales data from any of these markets when

estimating the fair market value of CO² from the SMU. Smith also admitted that

he did not attempt to determine whether these markets were competitive or

characterized by arm’s length transactions. Smith opted not to do so because he

believed “the economic benefits that would be generated by the use of CO²” in

other markets “would not be comparable to the West Texas productivity.” Jt.

App. at 5280. But the only evidence cited by Smith to establish that other

markets were wholly uncomparable was the response of an ARCO witness to the

following deposition question: “Q: Where are the fields that are most susceptible

to the use of CO² located? A: Located in the Permian Basin in West Texas.” Id.

at 5557. 15 It is difficult to quarrel with the district court’s judgment that this

abbreviated response was “a far cry from saying that West Texas is unique and

15
Smith also claimed that he had “seen this statement in various forms in
various documents.” Jt. App. at 5283. That may be true, but none of those
documents have been submitted by the defendants on appeal. The only evidence
highlighted by the defendants is (1) a statement by an ARCO witness that he
would not look to other geographical markets in order to formulate a bid for a
CO² supply contract in West Texas ; and (2) a statement by another ARCO
witness that he would not value an in kind delivery for a specific EOR in West
Texas by looking to another state. These statements do not directly address the
issue faced by the district court, and even if they did, they hardly constitute
overwhelming proof that all forms of comparison between West Texas and other
markets are invalid.

62
that other markets should not be considered, as the court in Piney Woods

indicates.” Id. at 6582.

Suffice it to say that our standard of review plays a major role in the

disposition of this issue. Whether the existence of other markets and the sales

data presented by ARCO fatally undermine Smith’s theory is eminently debatable.

If our review were de novo, we might very well conclude that Smith’s theory

explains or otherwise accounts for these markets and data. When we apply an

abuse of discretion standard, however, “we defer to the trial court’s judgment

because of its first-hand ability to view the witness or evidence and assess

credibility and probative value.” Towerridge, Inc. v. T.A.O., Inc. , 111 F.3d 758,

763 (10th Cir. 1997) (quoting Moothart v. Bell , 21 F.3d 1499, 1504 (10th Cir.

1994)) . With that standard in mind, we affirm the district court’s exclusion of

Smith’s testimony.

VII. ARCO’S STATUTE OF LIMITATIONS DEFENSE

A. Procedural history

The final issue for review has a brief procedural history. In a motion for

judgment as a matter of law, ARCO asserted a statute of limitations defense

against some of the Garcias’ counterclaims. Citing C.R.S. § 13-80-109, the

district court held that the counterclaims were timely because they (1) “arose out

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of the same transaction that is the subject matter of ARCO’s declaratory judgment

claim;” and (2) “were filed within one year after ARCO initiated” its claim for

declaratory relief. Jt. App. at 3735. ARCO appeals this ruling, which we review

de novo. See King of the Mountain Sports , 185 F.3d at 1089 .

B. C.R.S. § 13-80-109

The focal point of the parties’ arguments on appeal is § 13-80-109. That

statute states in full:

Except for causes of action arising out of the transaction or
occurrence which is the subject matter of the opposing party’s claim,
the limitation provisions of this article shall apply to the case of any
debt, contract, obligation, injury, or liability alleged by a defending
party as a counterclaim or setoff. A counterclaim or setoff arising
out of the transaction or occurrence which is the subject matter of the
opposing party’s claim shall be commenced within one year after
service of the complaint by the opposing party and not thereafter.

As interpreted by the Colorado courts, this provision “makes it clear that its

purpose is to allow a party against whom a claim has initially been asserted to

plead a stale claim only in response to the claim asserted against that party and

only if it arises out of the same transaction or occurrence, or the same series

thereof.” Duell v. United Bank of Pueblo , 892 P.2d 336, 340-41 (Colo. Ct. App.

1994); see also id. at 343 (stating that the statute brings Colorado “into line” with

“the majority of jurisdictions which allow the use of stale claims defensively”)

(Tursi, J., concurring).

We reject at the outset ARCO’s proposed construction of § 13-80-109.

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ARCO principally contends that (1) § 13-80-109 “says nothing about reviving all

claims which were time-barred when the complaint was filed,” unlike specific

revival statutes in other jurisdictions, ARCO’s Opening Brief at 52-53; and (2)

interpreting § 13-80-109 as a “revival” provision would be inconsistent with the

statute’s legislative history, as well as the purpose of declaratory judgment

actions. These arguments cannot be squared with the statement in Duell that

§ 13-80-109 permits a defending party “to plead a stale claim.” 892 P.2d at 340-

41. “Although we are not required to follow the dictates of an intermediate state

appellate court, we may view such a decision as persuasive as to how the state

supreme court might rule.” Sellers v. Allstate Ins. Co. , 82 F.3d 350, 352 (10th

Cir. 1996) ; see also Lowell Staats , 878 F.2d at 1269 (“In the absence of a state

supreme court ruling, a federal court must follow an intermediate state court

decision unless other authority convinces the federal court that the state supreme

court would decide otherwise.”). Without any direct authority to the contrary, we

view Duell as persuasive.

Even so, the district court erred when it applied § 13-80-109 to the Garcias’

counterclaims. To trigger the statute, one party must seek relief against a

“defending party.” That did not happen in this case. In its declaratory judgment

action, ARCO asserted no claim against the Garcias. Because the Garcias were

not named as defendants, ARCO was not obligated to serve them. The Garcias

65
essentially named themselves as defendants in 1997, when they sought and

received permission to intervene. By that time, however, well over a year had

elapsed since ARCO filed its claim for declaratory relief in 1995. By leaving the

Garcias out of its complaint, ARCO eliminated the risk that it would be exposed

to defensive counterclaims that otherwise would have been barred by the statute

of limitations. By the Garcias’ reasoning, a party who previously sat on its hands

could automatically revive a “stale” claim arising out of a common transaction or

occurrence by seeking and obtaining leave to intervene as a defendant. That

stretches the language of § 13-80-109 too far. Consequently, we vacate the

district court’s ruling and remand the case to determine whether the Garcias’

claims are in fact barred by the applicable statute(s) of limitation. 16

VIII. CONCLUSION

16
The Garcias suggest that ARCO waived its statute of limitations defense
by failing to object to their motion to intervene, but cite no authority to support
their position. A limitations defense “is generally waived unless it is raised in
the defendant’s responsive pleading.” Expertise, Inc. v. Aetna Fin. Co. , 810 F.2d
968, 973 (10th Cir. 1987); see also Venters v. City of Delphi , 123 F.3d 956, 967
(7th Cir. 1997) (“Federal Rule of Civil Procedure 8(c) requires a defendant to
plead a statute of limitations defense and any other affirmative defense in his
answer to the complaint.”). ARCO raised the defense in its answer. The Garcias
also suggest that as intervenors they had “the same power as the original parties.”
Response Brief of FCB and Garcias at 55 (citation omitted). Even if that is true,
it does not demonstrate that the Garcias were entitled retroactively to name
themselves as “defending parties” and invoke § 13-80-109.

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 Our ruling today is necessarily multifaceted.

1. We REVERSE the district court’s ruling that FCB’s lease

unambiguously permits ARCO to deduct transportation expenses, and REMAND

this issue for additional proceedings. On remand the district court should

determine what extrinsic evidence, if any, is relevant and admissible for the

purpose of clarifying the meaning of the Gas Pricing provision in FCB’s contract.

2. We AFFIRM the district court’s ruling that FCB’s lease permits ARCO

to use a weighted average price under the third subsection of the Gas Pricing

provision, but REVERSE the district court’s ruling that the same provision

permits ARCO to use amounts received by Exxon to calculate the weighted

average price.

3. We REVERSE the district court’s ruling that the phrase “cost of

transporting” in the Garcias’ lease unambiguously excludes IDC and COC, and

REMAND this issue for additional proceedings. On remand the district court

should again determine what extrinsic evidence, if any, is relevant and admissible

for the purpose of clarifying the meaning of the phrase “cost of transporting” as it

appears in the Garcias’ contract.

4. As regards FCB’s lease which was silent as to transportation costs, we

REVERSE the district court’s ruling that IDC and COC do not constitute

“transportation costs” under Garman and its progeny. Unless the parties intended

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something to the contrary in their contracts, IDC and COC are “transportation

costs” under Garman and its progeny. If the district court or a jury determines on

remand that FCB’s lease permits ARCO to deduct transportation expenses, then

IDC and COC should be included in the calculation.

5. We REVERSE the district court’s ruling permitting ARCO to deduct

depreciation expenses based on Exxon’s capital expenditures, and REMAND this

issue to determine the amount ARCO actually contributed toward the development

of the SMU and the Pipeline.

6. We AFFIRM the district court’s ruling that C.R.S. § 5-12-102(1)(b),

rather than C.R.S. § 34-60-118.5, governs the rate of prejudgment interest. If the

district court or a jury determines on remand that the leases executed by FCB and

the Garcias permit ARCO to deduct IDC and COC, this issue will become moot.

7. We AFFIRM the district court’s ruling that the defendants failed to

specifically prove their entitlement to moratory interest.

8. We AFFIRM the district court’s ruling that Koscove failed to plead the

element of detrimental reliance and thus failed to state a claim for fraudulent

concealment.

9. We AFFIRM the district court’s ruling that FCB failed to present or

preserve a viable damages theory in support of its claim for fraud.

10. We REVERSE the district court’s ruling that the defendants’ breach of

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fiduciary duty counterclaims are insufficient as a matter of law and REMAND for

further proceedings.

11. We AFFIRM the district court’s ruling excluding the testimony of the

defendants’ expert, Dr. James Smith.

12. We REVERSE the district court’s ruling that C.R.S. § 13-80-109

applies to the Garcias’ counterclaims, and REMAND this issue to determine

whether the Garcias’ claims are barred by the applicable statute(s) of limitation.

69