Chesapeake Energy may face a class-action lawsuit that claims it has cheated North Texas landowners of at least $100 million by pumping gas from properties that had gone through foreclosure, invalidating the oil and gas leases.
Chesapeake continued to tap reserves beneath the various properties in Johnson and Tarrant counties even after the Oklahoma City-based energy giant discovered it had troubled leases following the economic downturn in 2008, choosing instead to “ignore the problem,” the lawsuit asserts.
Dan McDonald, the Fort Worth attorney who filed the case Wednesday in state District Court in Cleburne, estimates that 3,000 to 5,000 landowners could be involved if the court approves the class action. Plaintiffs would include individual landowners as well as financial institutions that still own the parcels taken in a foreclosure, the lawsuit states.
The suit was specifically filed by the Arbuckle Mountain Ranch of Texas, which owns land in Johnson County, against Chesapeake Energy, its affiliates and Total E&P, the huge French energy corporation that bought a 25 percent stake in Chesapeake’s wells in the Barnett Shale four years ago.
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“This is no different than Chesapeake putting a drilling rig in your front yard and drilling for the gas and selling it and not paying you a nickel,” McDonald said. “Chesapeake has done nothing to account to these people for what they are owed, or even to acknowledge what has happened.”
McDonald said he met with Chesapeake lawyers last month to gauge settling the case out of court, giving them until Monday to respond.
Instead, the company released a statement Wednesday disputing McDonald’s claims.
“We disagree with Mr. McDonald's allegations and will address them in the appropriate forum,” Chesapeake spokesman Gordon Pennoyer said.
Jeffrey King, the Fort Worth attorney representing Total, said his client will not comment until after analyzing the allegations.
McDonald’s law firm says it already represents thousands of plaintiffs in lawsuits in Texas, Louisiana and Pennsylvania against Chesapeake regarding underpayment of royalties. He says the driller improperly deducted post-production costs from royalty checks to landowners.
McDonald said the landmen he used to find his clients in the royalty lawsuits have been working on this case for months. “We have an enormous amount of data for over 4,000 [leases] that we have confirmed,” McDonald said. He expects to have an exact number of class members by the end of the year.
Plaintiffs in the proposed class action include mineral interest owners in Johnson and Tarrant counties who bought land in foreclosure. Others will be third-party lenders, such as banks, that still own the properties and mineral rights after taking them back for bad loans.
When lenders properly foreclose on prior mortgages, it invalidates the leases signed by the previous owners. When the land is sold at a foreclosure sale — or taken over by the bank — the lease for the property needs to be renegotiated by Chesapeake, the lawsuit states.
But Chesapeake failed to do so, according to McDonald. As a result, Chesapeake and Total became “naked trespassers” when they produced gas and other minerals on property “without proper title,” the lawsuit states.
“Indeed, Chesapeake has been well aware for years that it held a significant number of [such invalid] leases,” the lawsuit says. Chesapeake “consciously determined” that instead of undertaking the significant, expensive work needed to account to and pay the true property owners, it chose to “ignore the problem,” it continues.
Though it would take a crew of landmen to go out and renegotiate the leases, that is what Chesapeake should have done, McDonald said. He said Chesapeake has settled with a few landowners in Tarrant County and even hired a consultant to help look at the problem.
“It would be different if they didn’t know about it, but they’ve known about it for years and ignored it,” McDonald said. “How are they any different than the guy who is shoplifting from Wal-Mart right now?”
McDonald’s firm calculated the possible damages by looking at production reports Chesapeake filed with the Texas Railroad Commission for the past four years, which is within the statute of limitations from when the lease changed hands through foreclosure.
The Johnson County state district judge would have to approve McDonald’s lawsuit as a class action. In a class action lawsuit one or more plaintiffs are allowed to represent a larger group with similar claims. It is seen as a way to manage suits that otherwise might overwhelm a court.
Relatively few class-action lawsuits are approved in Texas, but McDonald said he’s confident that the case will win judicial approval.