The Top 5 Chesapeake Royalty Litigation Trends to Watch
By Keith Mauck
Over the last few years litigation arising from Chesapeake Energy’s royalty practices, has reached a tipping point with a number of new suits being filed in the last year and stretching into new legal theories of liability. The origins of this litigation boom against Chesapeake stems from changes in the company’s royalty calculation, which saw them reinterpreting thousands of royalty agreements beginning in 2012. Among industry observers, this strategy was an attempt partially to mitigate a massive debt burden and cash shortfalls arising out of the 2012 drop in gas prices. Although some experts indicate that, the foundation for this move was rooted in the financial collapse of 2008.
As reported previously, the initial wave of litigation saw the company fighting or settling royalty underpayment lawsuits in Texas, Oklahoma, Louisiana, Arkansas, Kentucky, New York, Virginia and Pennsylvania, areas where Chesapeake leased vast swaths of acreage in the early days of the shale boom. The first wave of lawsuits saw mixed results, with some litigants failing to advance their claims against the company while others were largely successful.
One case that illustrates the potential shift toward decisions favoring royalty owners. In the Demchak litigation (Demchak Partners Limited Partnership, et al. v. Chesapeake Appalachia, L.L.C.), Chesapeake has agreed in principle, although still pending Court approval, to pay $7.5 million as part of a settlement with over 1,000 Pennsylvania landowners claiming an underpayment due to the company deducting post-production costs from royalty checks.[1] The case involved a class action suit involving several thousand leaseholders and prompted the Pennsylvania legislature to pass an amendment to the “Guaranteed Minimum Royalty Act” signed by the Governor requiring royalty check transparency. According to the law listed as Senate Bill 259, royalty check statements must provide a more thorough accounting of payments and deductions.
The second wave of litigation appears to have been spurred on by the success of the Demchak case. In the last year, class action litigation against Chesapeake appeared to be gaining traction. In addition to small leaseholders filing as a plaintiff class, a number of large leaseholders have also advanced litigation with some of the large leaseholders’ cases filed during the first wave of litigation being resolved. It has also seen litigants expanding their theories of liability to include new claims against the company arising from improper deductions from royalty payments. Lastly, Chesapeake has also drawn the attention of Federal Authorities with criminal enforcement measures being launched in Michigan by the Department of Justice. This second wave of royalty litigation marks a new phase in which there will likely be more leaseholder litigants advancing claims and most likely case law in a number of state and federal jurisdictions will likely be shaped by this uptick in litigation.
For royalty owners observing litigation trends against Chesapeake Energy, the following cases could be influential on future royalty dealings with Chesapeake and may shape legal doctrine concerning leaseholder rights. Further, as Demchak illustrated this wave of litigation may act as a potential driver behind new legislation at the state level aimed at how royalties are calculated and disclosed to leaseholders.
The following list represents five recent trends in royalty litigation against Chesapeake to watch in the next year.
5. More Small Leaseholders in Filing Single Cases: The Demchak settlement may act as a trigger point for small leaseholders to advance their claims. However, some firms have elected to employ the strategy of filing individual royalty claims rather than navigate the procedural requirements of establishing a class action suit. For example, the Texas-based McDonald law firm has reportedly been retained by around 4,000 with the hope of 10,000 signing up by Christmas. These suits against Chesapeake in Texas will likely result in a flood of litigation against Chesapeake, which could prove logistically difficult to defend.
4. New Theories of Recovery: In June 2014 a group of Pennsylvania royalty owners have filed suit seeking $5 Million in damages in Federal Court alleging Chesapeake and Access Midstream Partners LP violated the federal Racketeering Influenced and Corrupt Organizations (RICO) Act. This argument takes the traditional royalty claim beyond a matter of contract interpretation to include the allegation that the companies have engaged in a scheme to raise capital by reducing payouts to royalty owners.
3. Potential Criminal Cases: On September 10, 2014 a Michigan State Court judge has ordered that sufficient probable cause existed for the company to stand trial on a racketeering charge and 20 counts of false pretenses charges brought by the Michigan Attorney General. The allegations of the case state that the company allegedly defrauded Michigan property owners by cancelling nearly all of its lease agreements when competition dried up.
2. Developments in Federal Case Law: Two recent federal court decisions this summer coming from the Fifth U.S. Circuit Court of Appeals in New Orleans ruled that Chesapeake could charge royalty owners for post-production costs despite lease provisions, which appeared to state otherwise. This Federal Circuit's jurisdiction includes Louisiana, Texas and Mississippi, potentially affecting Federal and State royalty litigation in these areas.
1. Large Leaseholders Suits: Large leaseholders have brought improper royalty deduction claims against Chesapeake recently with a number of these suits being settled for significant sums of money. For example, the cities of Fort Worth and Arlington sued Chesapeake in 2013 settling their claims this August for over $1 Million. The Hyder family, the leaseholder, owns approximately 1,000 acres, brought a claim against Chesapeake in a San Antonio Court winning an award of $1 Million. Billionaire Ed Bass, Trinity Valley School and Texas Health Harris Methodist Hospital Southwest Fort Worth among others have sued Chesapeake over leases covering 3,290 acres in the Northern District of Texas Federal Court. The case is still pending at this time.
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Replies to This Discussion
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Permalink Reply by Dion Warr, CPL on -
Keith:
It would appear that the last paragraph is an inadvertent repeat of the third paragraph near the beginning of the article.
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Permalink Reply by Keith Mauck (Site Publisher) on
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Permalink Reply by Steve P on
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Thanks or article highlighting the many fronts in which the issues are being fought.
I fear that those of us from, or mineral/landowners in Louisiana will be the last in line to ever recover any underpayments. Being cautious, I don't know for a fact that my Chesapeake royalty payments have been less that I am owed, but because I also get monthly checks from 3 other operators, my $/MMBTU always seems noticeably less from Chesapeake. How is that for understating the proposition?
But in Michigan or Pennsylvania, you have state governments standing up on the royalty owners' side. They have a fighting chance. My operating paradigm is that neither the Louisiana Courts nor elected officials will stand up for the royalty owners. While I didn't really spend any time reviewing the 5th Circuit decision cited above, that was a blow to our last, best chance to find out if we are getting our due from Chesapeake.
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Permalink Reply by Hopeful About Natural Gas on
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There is another strategy - divestiture of public money from CHK. Your tax dollars are being invested in Chesapeake right now. Do you think that CHK is a good investment?
Public employee retirement funds invest in CHK. It's a fair question in Louisiana if taxpayers money should be invested in Chesapeake.
This strategy is akin to public shaming - and it's effective. It's a lot easier to get pension funds to hear advocacy than it is to get courts to hear it. They have many other natural gas companies to invest in, so just cutting CHK out of the investment fund would not hurt returns one bit.
However, divestiture could cost CHK billions. It could cause their stock price to fall because they would be shunned by institutional investors. Fewer investors for their stock is just like supply and demand for anything.
For example, the Caddo Parish school board or Shreveport City Council could request the state of LA investment fund to simply not purchase any more Chesapeake stock.
Then, you get another public body to send a letter to the same things. Sooner or later it would be a big news story in Louisiana and then could go national and be a big embarrassment to CHK.
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Permalink Reply by 30 yr-landman on
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I've been in the land side of the oil & gas business now for over 33 years and want to first say I give no awards to Chesapeake for good faith and fair dealing. My company has had a battle or two with Chesapeake and was treated not much better than the insurance industry treats its customers (past 20 years). Problem is this has all been tuned to be to the complete advantage of lawyers who are happy to take on such cases on a contingency fee basis for payment. BE FORE WARNED, all that tough talk about getting their clients big monetary awards/settlements is basically B.S. Mineral/landowners need to understand that these "class action" lawsuits are nothing shy of legalized "ambulance chasing" where the last person being represented by these lawyers are their clients. Nothing more than an opportunity for them to take the misfortune of their client(s) and use it to their monetary advantage. Fancy suits, offices and receptionists and expensive cars, planes and jets cost big money and the only way these crooks can pay for these items is by paying you less and themselves/their law firms more. If you believe otherwise, then best of luck to you. Lawyers are about to ruin our system of justice in the USA. Again, Chesapeake can be a den of snakes......but again (same as the lawyers), in order for their corporate officers to live life in the fast lane...know that all well production depletes and depletion causes well costs to go up and profits to go down...thus these big companies have to find more money and therefore try to pinch a more and more pennies from each payee because they have to get it out of someone's pocket. However, criminal investigations need to be opened to review the practices of some these lawyers....but be reminded that most of our Congress is made up of lawyers who take huge campaign contributions from big law firms and special interest groups (ACLU).....which they don't want to lose. End result, the middle class "Joe The Plumber" gets screwed. Its past time to place your vote carefully in upcoming elections and choose carefully who you decide to do business with going down the road.
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Permalink Reply by Skip Peel - Mineral Consultant on
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Hannie, price is set at hubs around the country which often vary significantly by region. For example the primary Marcellus hub was $1.73/ MMBtu on the same day it was $3.89 at the Henry Hub. Transportation and treatment charges also vary quite a bit from place to place. Deductions are governed in part by language in a lease. And that language also varies widely. The only meaningful comparison would be the price paid and deductions charged by different operators using the same gathering system and paying royalty separately to the same mineral owner. The fact that there is such wide variations in individual situations is one of the reasons that LA courts make class action certification so difficult.
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Permalink Reply by wpt9452 on
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A couple of months ago I got shocked by my royalty check. I has been as low as $30 and as high as 60 bucks but I got this huge envelope and a check for $656.00 and a copy of every month of well production for the last 5 years. No explanation about anything.
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Permalink Reply by Skip Peel - Mineral Consultant on
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Did you follow up regarding the 5 years of production history? I'm curious because there have been some organizational changes at CHK. They have changed their Operator Number and Operator Name. For years it was C084 - Chesapeake Operating, Inc. And then recently changed to C441 - Chesapeake Operating, L.L.C.
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Permalink Reply by 1kw6x71km1v37 on
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wpt9452,
Be sure there is no "accord and satisfaction" clause somewhere on that check, which would bind you to the amount of the signed check when you may actually be owed more.
Yes, they will do that to you.
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Permalink Reply by 30 yr-landman on
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Need to prepare your lease to nail down royalty payment items as follows:
- Pay within 60 days of the month of production occurs.
- Non-payment of royalty is grounds for lease termination (usually 2 notices to Lessee/operator required) then lease terminates..
- Royalty paid on an arm's length basis based upon specified market index price on either an MMBTU basis or based upon the actual receipts of the Operator/Lessee.
- Written consent to assign lease to third party required.
- Specify a time limit on Lessee's right to pay shut-in royalties.
- Specify a minimum annual royalty (price per acre) to be paid to royalty owners.
- Protect against oil company selling to sister pipeline company at a lower price. (Market Value royalty provision many times based upon the average of the three highest prices paid being paid in the field or county where produced).
I've seen royalty provisions from one paragraph long to multiple legal pages long. Don't think of the folks your leasing to, think of them assigning all their rights to dirt bags like Chesapeake and what you need to do to protect your interests.
If someone wants a good royalty provision send me a note. Different States have different laws!
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imo, all good points.
although land wasn't/isn't my thing, back in the day when we contracted for 15 to 20 years at a time, we often would see many of these sorts of provisions in gas purchase or sales agreements. (especially desired was most favored nations provisions)
were i negotiating a lease agreement today, in addition to insisting that all of operator's commercial arrangements be arm's length with unaffiliated third parties and with terms and conditions of each to not be outside a range of the average of similar agreements in the affected production area w/arbitration as to this last notion if it came to it. lastly, i'd insist that the gas transfer price to be based upon the most relevant hub published index.
also, and perhaps, imo, the most important thing i'd endeavor to obtain the right to audit all of operator's records regarding marketing/midstream/sales commercial agreements to include the ongoing right to review the actual relevant agreements: gas, liquids and liquifiables and their payment records. i'd also want the ongoing right to have access to applicable gas, liquids and liquifiables measurement records.
p.s. fwiw, when i leased our haynesville acreage, i just signed their bid and cashed the bonus money checks. since then, i've learned a lot about practical aspects of royalty agreements. and, all i've learned came via this site and through the excellent quality, like yours, of the vast majority of its' posts and the experience/wisdom of their authors.
p.p.s. i know my 'aspirational' items above would never be found in a mineral lease covering any property smaller than the king ranch; but, one is always free to dream, right?
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Permalink Reply by 30 yr-landman on
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Many mineral owners focus too much on the lease bonus amount and not enough on the lease royalty and protection provisions. Yes, we always reserve the right to obtain well, lease and accounting information from our Lessee upon written request. Other tidbit.....always retain the right to get copies of all logs, drilling/operations reports, etc. fromt he Lessee/Operator. Next, one should always retain the right to place their own meter on the well/property, problem is oil companies can't deal with 100 royalty owners who want to check out how many pennies their getting shorted. Be reasonable and you will get treated reasonably by a reputable company. Be a pain in the ass and that's how they will treat you. However such is not the usual case with lawyers (their born pricks with little to no business sense). I always laugh out loud when I see the language used "plus reasonable attorneys fees". There is no such thing!
Best of everything to each of you and remember to save part of your good fortune, be charitable and teach your children to live as if it wasn't there. I've seen too many families that had the same good fortune only to be heartbroken over spoiled grand kids (and later heirs) who had never even had a real job and couldn't balance their checkbooks.
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