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Diana Allen Life Insurance Trust v. BP P.L.C.

March 31, 2008


The opinion of the court was delivered by: Honorable Paul A. Crotty, United States District Judge


This case stems from the shut-down of the Prudhoe Bay oil field in Alaska, the largest oil field in North America. Plaintiff, the Diana Allen Life Insurance Trust, ("Plaintiff" or "Diana Allen"), is a Unit holder of the BP Prudhoe Bay Royalty Trust (the "Trust"). As a Trust Unit Holder, Plaintiff receives quarterly royalty payments which are calculated as a percentage of Prudhoe Bay oil field's daily net production. Due to a pipeline spill which occurred in March 2006, and the subsequent shut-down of the Prudhoe Bay field in August 2006, the Plaintiff's quarterly royalty interest declined. Plaintiff brings this class-action suit alleging that the decline in royalty payments was the direct result of Defendant BP Alaska's failure to maintain the pipeline as obligated by contract and tort principles, and by the failure of the other Defendants to meet their contractual obligations to the Trust Unit Holders.

Plaintiff's claims are for breach of contract, breach of an implied covenant of good faith and fair dealing, tortious interference with property rights and prospective economic advantage, and negligent maintenance of the pipeline.

Defendants BP ("BP"), BP Exploration (Alaska) ("BP Alaska"), and the Standard Oil Company ("Standard Oil"), (collectively "Defendants"), now move to dismiss Plaintiff's Complaint on the grounds that: (i) Plaintiff lacks standing to bring its claims with respect to the Trust because the claims are derivative, not direct, and therefore, properly asserted only by the Trustees and not the individual Unit Holders; and (ii) although Plaintiff has standing to bring a claim under the Support Agreement, that claim is not adequately pleaded. For the reasons set forth below, Defendants' motion is granted.


A.The Prudhoe Bay Oil Field and Spill

The Prudhoe Bay Oil field in Alaska, the largest oil field in North America, was discovered in 1968 and has been in production since 1977. Since July 1, 2000, Defendant BP Alaska had sole responsibility for the operation of the Prudhoe Bay field. On March 2, 2006, BP Alaska discovered a large oil spill in the western portion of Prudhoe Bay. Following a mandate by the United States Department of Transportation, BP-the parent company of both BP Alaska and Standard Oil, the other two named Defendants-embarked on an investigation of the spill and inspection of the pipeline. The inspection revealed that the spill was the result of a pipeline rupture, which, in turn, was caused by severe corrosion within the pipeline itself. A subsequent investigation revealed that BP had failed for years to properly maintain the pipeline, and that miles of pipeline required repair.*fn2 In a letter to Congress dated June 2006, Maria Cino, then Deputy Secretary of Transportation, stated that BP's management of the pipeline "does not represent sound management practices for internal corrosion control." (Compl. ¶ 33.)

C. The Royalty Trust and Trust Agreements

The BP Prudhoe Bay Royalty Trust is a Delaware business trust which receives a royalty interest in the Prudhoe Bay oil field production. It was created pursuant to the Prudhoe Bay Royalty Trust Agreement (the "Trust Agreement"), dated February 28, 1989, which names Standard Oil and BP Alaska as Grantors of the Trust, Bank of New York and F. James Hutchinson as Trustees, and the Trust Unit Holders (the "Unit Holders") as the express beneficiaries. By its terms, it is governed by Delaware law. (Trust Agreement ("Trust Agmt.") § 12.07.)*fn3 The Trust Agreement states that "the Trust is intended to be a passive entity limited to the receipt of revenues attributable to the Royalty Interest and the distribution of such revenues, after payment of or provision for Trust expenses and liabilities, to the Unit Holders." (Trust Agmt. § 2.02.) It further provides that subject to certain enumerated limitations, the Trustee is authorized to and shall take such actions as in its judgment are necessary, desirable, or advisable to achieve the purposes of the Trust, including . . . the taking of appropriate action to enforce the terms of the Conveyances and the Support Agreement (including the institution of any actions or proceedings at law or in equity necessary to the foregoing) . . . ." (Trust Agmt. § 6.01 (emphasis added).) Each Trust Unit represents an equal share of the Trust interest.

To effectuate the purpose of the Trust, and create the mechanism by which the Unit Holders received royalties, the parties entered two other agreements: the Overriding Royalty Conveyance and the Trust Conveyance. The Overriding Royalty Conveyance transferred the royalty interest in the output of Prudhoe Bay from BP Alaska to Standard Oil. Standard Oil then transferred that same royalty interest to the Trust via the Trust Conveyance.

The Overriding Royalty Conveyance describes the method for computing the royalty payments to be received by the Trust,*fn4 and required BP Alaska to "conduct and carry on the development, exploration, production, maintenance and operation of the [Prudhoe Bay oil field] with reasonable and prudent business judgment . . . and good oil and gas field practices, as a reasonable and prudent operator . . . ." (Overriding Royalty Conveyance ("ORC") § 7.1.)*fn5 BP Alaska also promised to perform "all material obligations" under the contract using "its best efforts." (ORC at § 7.2.)

Standard Oil and BP Alaska also executed the Trust Conveyance, which created the mechanism by which Trust Unit Holders would receive their royalties. By its terms, the "Trust receives all rights and benefits" from the Overriding Royalty Conveyance, and the sole property of the Trust is the Prudhoe Bay royalty interest. (Compl. ¶ 13.)

D. The Support Agreement

On the same day that the Trust Agreement, the Overriding Royalty Conveyance, and the Trust Conveyance were executed-February 28, 1989-the Defendants and the Trust also signed the Support Agreement which provided that in the event that BP Alaska or Standard Oil could not satisfy their financial obligations under the Trust, then BP-the parent company-would provide financial support to those subsidiaries so that they could meet their payment obligations.*fn6

The Support Agreement provides that, "[n]otwithstanding any other provision of this Agreement or the Royalty Trust Agreement, the holder of any Trust Units shall have the right to initiate suit against BP for the enforcement of BP's obligation . . . to cause the Company to perform its payment obligations."*fn7 (Supt. Agmt. ยง 2(a).) As evidenced by the language quoted above, the Trust Unit Holder's right to initiate ...

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