Court Approves Unleased Mineral Owner Suit Against Chesapeake

This is an excerpt.  There is a link at the bottom to the full court ruling, 10 pages.

UNITED STATES DISTRICT COURT

WESTERN DISTRICT OF LOUISIANA

SHREVEPORT DIVISION

 

ALLEN JOHNSON, ET AL                                      CIVIL ACTION NO. 16-1543

VERSUS                                                                    JUDGE S. MAURICE HICKS, JR.

CHESAPEAKE LOUISIANA, LP                            MAGISTRATE JUDGE HORNSBY-

 

MEMORANDUM RULING

 

Before the Court are two Motions for Partial Summary Judgment. See Record Document 24 & 28. The first is a Motion for Partial Summary Judgment (Record Document 24) filed by Defendants, Chesapeake Louisiana, L.P. and Chesapeake  Operating, L.L.C. (collectively “the Chesapeake Defendants”). The second is Cross- Motion for Partial Summary Judgment (Record Document 28) filed by Plaintiffs AllenJohnson, Linda Johnson, Donald A. Crosslin, Jr., Mary Jo Gragg, Rodney M. Hudson, Clifton Layman, Alfred R. Meshell, Sherman R. Meshell, David E. Oliver, Tracy Oliver, Laura S. Pendleton, Andrew L. Piccolo, Karla S. Piccolo, Randall S. Rodgers, Freddie P. Spohrer, Tim G. Taylor, Charles R. Waldon, Rexford Galen White, James Shope, Donna Shope, Charlotte McCune, and Jerry McCune. The motions are fully briefed and the Court heard oral arguments on the cross-motions. The sole legal issue to be decided in the cross-motions is whether Plaintiffs, twenty-two unleased mineral owners (the “UMO Plaintiffs”), are responsible for a proportionate share of post-production costs.1 For the reasons set forth below, this Court holds that under Louisiana Revised Statute 30:10(A)(3), post-production costs cannot be recovered by an operator from an unleased mineral owner’s share of production proceeds. Thus, the UMO Plaintiffs’ Cross-Motion for Partial Summary Judgment (Record Document 28) is GRANTED and the Chesapeake Defendants’ Motion for Partial Summary Judgment (Record Document 24) is DENIED.

1The Chesapeake Defendants previously argued in their motion that post-production costs were operating costs. Yet, as noted in both the briefing and during oral argument, the Chesapeake Defendants have now abandoned this argument.

 

BACKGROUND

The Chesapeake Defendants were at all times relevant the operator of the Kelley Well, which is the unit well of the HA RA SU86 unit (“the Unit”). The UMO Plaintiffs are landowners within the Unit and own a non-operating, unleased interest in the Unit. In their Petition, the UMO Plaintiffs allege, among other claims, that the Chesapeake Defendants improperly deducted certain post-production costs from the UMO Plaintiffs’ share of production proceeds. In particular, Plaintiffs contend that Chesapeake has violated Louisiana law by charging or netting-out post-production costs from Plaintiffs’ share of production secured from the Kelley Well. These post-production costs generally include gathering, compression, treatment, processing, transportation, and dehydration costs.

The Chesapeake Defendants moved for partial summary judgment, alleging that their deductions for post-production costs are authorized under general principles of unjust enrichment and, alternatively, co-ownership. See Record Document 24. The Chesapeake Defendants contend that La R.S. 30:10 is inapplicable to the instant matter, as such statute is limited to development and operation costs and does not address post- production costs. The UMO Plaintiffs opposed the motion and filed their own cross- motion, arguing that general principles of co-ownership and unjust enrichment cannot supersede the positive statutory law governing their payment rights.  They contend that the statutory scheme set forth in La. R.S. 30:10 as a whole governs and that post-production costs are not among the exclusive list of expenses deductible against unleased owners, as set forth in Section 10(A)(3).

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Replies to This Discussion

Permalink Reply by Steve P on March 23, 2019 at 12:50

I read many of the stories in the Shreveport Times and here on GHS about companies not closing on an outstanding offer.  The lawyer in me understands and agrees with the courts that said the lease offer wasn’t a contract until the site draft was accepted.  Having said that, there’s a huge difference between a legallly binding contract and “doing the right thing.”  Glad I wasn’t practicing in Louisiana at that time and hired to represent CHK or several of the others.

On your situation, after being “gilted” at the altar, you took an intentional business risk, and from your comment, I assume that so far it hasn’t worked out for you.  I was caught in a similar situation, also with CHK, although I did not have a lease in hand or a site draft.  Nevertheless, while we were in discussion and working on the special appendix terms, but agreed to bonus and royalty, the price dropped $6000/acre.  I had 18 acres to lease, so a significant drop.  I took the reduced offer.  Still have multiple problems with CHK over the years but very glad I took the lease route.

I will take Skip’s and other’s word that many owners were never offered a lease.  Despite Skip’s explanation, that’s pretty bad.  If someone offered to lease and was still turned down, then I think that’s really bad ASSUMING they were willing to lease for whatever the going rate was at the time.  For those who bargained hard, and never got a deal, I have little sympathy.  There’s that old saying about a “gift horse.”  I have land that I purchased for $450/acre in the early 80’s and inherited land within the HA play that has made a significant contribution to my retirement funds and nice houses.  Could I have done a lot better - yes.  Could I have done much, much worse, absolutely.

Permalink Reply by Skip Peel - Mineral Consultant on March 23, 2019 at 13:52

Steve as an attorney I think you appreciate the time and expense involved with performing title due diligence on small acreage interests.  In the C-suites it really didn't matter whether a mineral owner was "willing" to lease, or not.  It was a question of time and expense.  The more time taken, the more acreage lost to competitors.  They accepted the risk knowing that small acreage interests are unlikely to mount an effective legal challenge.  A lot of those who never completed the lease process were negotiating terms other than the lease bonus.  Before the collapse of lease offers, one of the main points of contention was the length of the primary term and whether an extension clause would be included.  Operators had quickly come to the realization that they were leasing such large expanses of mineral rights that three years would make it difficult to drill to hold all the leases.

Permalink Reply by Spring Branch,mineral owner on March 26, 2019 at 10:53

We were leased to Petrohawk on 60 ac in the section. Chesapeake as operator drilled a well and let it sit there for over a year without fracking it. In the meantime our lease with Petrohawk expired.  About two months AFTER the lease had expired Petrohawk sent us a check for $60 for shut in royalty.  When we pointed out that the lease had expired without the payment of shut in royalty, Petrohawk sent us a release of the Lease, saying basically they would just as soon not have a non-op relationship with Chesapeake in the section.

At that time we offered to give Chesapeake a free lease with the same terms as our Petrohawk lease and they declined to lease us!!!

Permalink Reply by Steve P on March 26, 2019 at 11:23

well, there was a period where the lease bonuses dropped like the stock market, but I can't imagine them turning down a free lease assuming your royalty with Petrohawk was not more then 25%.

Like I said to KKM just now, you won't ever find me in the position of defending CHK. 

It appears to me that the Louisiana Mineral Code, adopted 40 or 50 years ago, may not be sufficient for what is going on in the industry today.   

Permalink Reply by Spring Branch,mineral owner on March 26, 2019 at 11:26

It was a 25% cost free royalty lease but we all know that Chesapeake ignores the
"cost free" part!

Permalink Reply by GARY SHEFFIELD on March 23, 2019 at 5:05

I wonder if all these un-leased parties would qualify for class-action status? Got any idea Skip?

Permalink Reply by Skip Peel - Mineral Consultant on March 23, 2019 at 5:10

Yes, I do.

Permalink Reply by Joe Fertitta on March 23, 2019 at 5:18

I am in a Petrohawk well which was later sold to BHP.   The well has operated since October 2010 and their was never any  leaseoffer made from Petrohawk to lease my 5 Acres.  I even attended a couple of meetings with attorneys from Petrohawk and asked them to have leasing agents to contact me...This never happened.  Then I heard the well was drilled and we were in a forced pool The Well is Tensas Delta EXPL, 8H1  in Section 18, Township 16N, Range 13W Caddo Parish.     No Division order was done on the well to my knowledge. 

    By contacting BHP through an attorney, I get a quarterly report that says well has not paid out.and basically IT PROBABLY NEVER WILL BE PAID OUT....SO HAVE A NICE DAY.

Joe Fertitta  

Permalink Reply by Pam on March 23, 2019 at 5:41

Would this also apply to those being deducted from revenues when figuring the payout balance?

Permalink Reply by Skip Peel - Mineral Consultant on March 23, 2019 at 5:46

Payout has no relevance in this ruling.  If you are a UMI and your operator is deducting for gathering and treating you are owed reimbursement.  At least.

Permalink Reply by kittycatmama on March 23, 2019 at 14:59

Skip don't you think Chesapeake will appeal?? If this stands they will be out lots of money

Permalink Reply by Steve P on March 23, 2019 at 15:23

Your question is to Skip, but I’d guess that it will be appealed.  Remember, this is not a final verdict, but a denial of a Motion for Summary Judgment.  However, if this stands, then the only issue left for both sides at trial is not “if” but “how much” CHK will owe them.  

If you are a land or mineral owner and lose in District Court, whether or not to appeal is primarily a financial issue.  CHK may be broke, but they can still afford to pay their attorneys to file an appeal.  Small change spent in comparison to a spread of this decision on how much CHK can deduct from their payments to a number of other unleased mineral owners.   If the shoe was on the other foot, the cost of an appeal to a mineral owner may well not be small change.

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