Devon Energy is being sued for allegedly using sham transactions to underpay thousands of property owners in North Texas millions of dollars in royalties from natural gas processed through a Bridgeport plant.
The Devon case echoes accusations brought against Chesapeake Energy in Texas courts that it sold natural gas from its Barnett Shale wells to an affiliate and pocketed the profits when it was sold on the open market. Chesapeake eventually agreed to a $51 million settlement last year.
U.S. District Judge Ed Kinkeade in Dallas on Friday granted class-action certification to a lawsuit brought by four individuals with leases in Denton County. By certifying the class, Kinkeade decided that they can represent the interests of thousands of landowners because of the common legal issues.
“The court recognized that Devon owed a common duty to each of the several thousand members of the class and there is a formula to effectively determine damages for each class member,” said David Drez, a Fort Worth attorney.
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The court recognized that Devon owed a common duty to each of the several thousand members of the class and there is a formula to effectively determine damages for each class member.
David Drez, a Fort Worth oil and gas attorney
Devon, located in Oklahoma City, has denied the allegations in court documents. John Porretto, a spokesman for the company, said that Devon plans to appeal Kinkeade’s decision to the Fifth Circuit Court of Appeals.
Devon is a major player in the Barnett Shale, having acquired Mitchell Energy, which was credited with launching the drilling boom in the Barnett. Since 2002, Devon says it has drilled more than 5,000 wells in the Barnett Shale.
In their lawsuit, the landowners allege Devon Energy’s production arm sold the natural gas at a low well head price to an affiliate, Devon Gas Services, which then processed the gas through its Bridgeport processing plant and deducted an “unreasonable and lucrative 17.5 percent processing fee” from the royalty checks.
“Devon calculates the royalties it pays to Plaintiffs and Class members based on the artificial ‘price’ it manufactured as part of its sham transactions with (Devon Gas Services) rather than the (higher price)” it receives from unaffiliated third parties, which includes a profit, a court document filed in 2014 states.
Further, the lawsuit states, once the gas left the plant, Devon and its affiliates sold the residue gas to third parties for a profit but didn’t pass those profits on to the royalty owners, court records show.
Texas law implies a duty to market gas in good faith as a reasonably prudent operator would under the same or similar circumstances in every proceeds lease.
U.S. District Judge Ed Kinkeade
The lawsuit covers the sale of raw natural gas from Jan. 1, 2008, to Feb. 28, 2014. This is the time period that Devon owned the Bridgeport plant, which is now owned by Enlink Midstream Operating.
The parties tried to settle their differences in March before a federal magistrate, but were unable to reach an agreement, court records show.
Kinkeade granted the case class-action status Friday after denying it almost a year ago, and was persuaded to reverse his earlier ruling after hearing additional evidence. Devon does not contest that the class potentially contains more then several thousand plaintiffs.
Devon argued against the class action, saying that individual leases cannot generate common answers. It also has contended that some of the lease forms contain language which allows it to modify how the natural gas is sent to market, court records show.
But Kinkeade ruled that the class was limited to the use of nine standard lease forms, and that the plaintiffs “provided classwide evidence” to support their allegations that Devon “failed to diligently market the gas and obtain a reasonable price” for the class.
“Texas law implies a duty to market gas in good faith as a reasonably prudent operator would under the same or similar circumstances in every proceeds lease,” the judge wrote. “The existence of the implied duty to market in all nine class lease forms is essential to the common questions” on which the claims are based.
Kinkeade wrote that the court “concludes that resolution of these claims on a classwide basis is not only manageable, but is also the most efficient method” for deciding the dispute.
Unlike the Devon class-action lawsuit, the cases against Chesapeake Energy, mostly filed by Fort Worth attorney Dan McDonald, were handled individually but granted multi-district litigation status for pretrial issues like evidence and testimony. McDonald’s 400 lawsuits covered about 13,000 plaintiffs.
In his lawsuits, McDonald alleged Chesapeake deducted higher-than-necessary post-production costs from royalty checks. He contended that the company used sham sales to affiliates to transport and market the natural gas to increase what it earned.
In its defense, Chesapeake said it did what was allowed within the terms of the leases. It argued that the weighted average sale price paid to landowners was fair and it denied using “fraudulent transactions.”
Besides Drez, who works at Wick Phillips Gould & Martin, the other law firms involved in the Devon case include the Seidel Law Firm in Austin, Mattingly & Roselius in Oklahoma City and Kessler Topaz Meltzer & Check near Philadelphia.