http://www.star-telegram.com/2013/03/14/4703401/ed-bass-other-plain...

BY SANDRA BAKER AND JIM FUQUAY JFUQUAY@STAR-TELEGRAM.COM

sabaker@star-telegram.com,

Fort Worth investor Ed Bass and more than a dozen other landowners in southern Tarrant County have sued units of Chesapeake Energy in federal court in Dallas, accusing the Barnett Shale's second-largest producer of cheating them out of millions of dollars in royalties.

At issue is whether Chesapeake Operating and Chesapeake Exploration properly calculated royalty payments on the Oklahoma City-based company's natural gas production.

According to the lawsuit, the companies improperly deducted production costs, expressly forbidden by the leases, and used "sham transactions" with two other Chesapeake affiliates to set a below-market price on which royalties were paid, also a breach of lease terms.

The lawsuit, filed Wednesday in U.S. District Court in Dallas, seeks a jury trial and at least $75,000 in damages.

However, an attorney for the landowners told the Star-Telegram that the damages are more likely in the millions.

Julie Wilson, Chesapeake's vice president for urban development in Fort Worth, which handles its Barnett Shale operations, declined to comment on the lawsuit.

It's not the first time Chesapeake has been sued over royalty payments.

In September, it agreed to pay Dallas/Fort Worth Airport more than $5.3 million in additional royalties after nearly three years of litigation over the sales price for gas used by Chesapeake and other issues.

In 2010, Fort Worth resident Robyn Coffey sued Chesapeake, saying its royalty payments were based on a "fictitious price" for natural gas produced in the White Lake Hills area in east Fort Worth.

That price was less than the company actually received, the suit said.

Brandy Bramlett, an Austin attorney representing Coffey, said that the suit was dismissed and that she could not discuss its resolution.

And last year, Chesapeake faced at least eight lawsuits in five states alleging underpayment of royalties, according to Bloomberg News.

The case with Bass and the others involves leases on 3,952 acres.

The properties include Bass' Winscott Ranch on the Tarrant-Johnson county line, the 74-acre Trinity Valley School campus off Bryant Irvin Road, and the 660-acre Rall Ranch surrounding the school.

According to the lawsuit, all the mineral-rights owners signed leases, now held by Chesapeake, that gave the company rights to produce gas under their property.

In return, the owners would receive royalties -- a share of the value of the gas produced.

Daniel Charest, a Dallas attorney for the plaintiffs, said the property owners "have a number" they feel they are owed, which he described as "millions."

The leases have been in place since about 2005, but production began much later, he said.

"We have a contract case," Charest said. "We just want our rights under the contract."

Under the lease terms, Chesapeake is not allowed to pass along "any part of the costs or expenses" of producing, gathering, transporting or processing gas, the suit states.

The leases require the owners to bear their share of certain expenses up to 75 cents per 1,000 cubic feet (mcf) "under certain conditions," but those conditions never applied, it says.

Chesapeake imposed costs on the owners exceeding 75 cents per mcf, the suit says.

John Baen, a University of North Texas real estate professor active in oil and gas leasing, said the suit isn't surprising.

He said his understanding is that as Chesapeake's financial woes deepened, its policy was to cut expenses and increase revenue and that meant "charging costs no matter what the lease says."

Chesapeake, like other producers, has been hit hard by low natural gas prices and has had to sell billions in holdings to raise cash for operations.

Co-founder and CEO Aubrey McClendon is set to leave the company by April 1 after the board of directors was overhauled last year by two big shareholders.

John McFarland, an oil and gas lawyer in Austin who represents mineral-rights owners, said that he's not familiar with the latest case but that producers in the Barnett Shale must deal with thousands of leases.

"I suspect Chesapeake paid them all the same way," by deducting costs, he said. "Only when the mineral-rights owner complains will they change it."

While Charest said the suit was filed in federal court because the parties are in different states, Baen and McFarland said the federal courts are perceived as more favorable than state courts to mineral owners.

Suing in federal court can be more expensive, Baen said, but it's worth it to avoid an appeals process that ends at the Texas Supreme Court, which he called "pro-oil."

McFarland said he thinks a jury trial would be similar in state or federal court but agreed that mineral-rights owners "don't get a very good shake at the Texas Supreme Court."

Sandra Baker, 817-390-7727

Twitter: @SandraBakerFWSTTwitter: @jimfuquay

Jim Fuquay, 817-290-7552

Twitter: @SandraBakerFWSTTwitter: @jimfuquay