Ed Bass, others win royalty lawsuit against Chesapeake Energy

Chesapeake Energy improperly deducted postproduction costs from royalty checks issued to Fort Worth investor Ed Bass and 20 other landowners stemming from natural gas pumped from about 4,000 acres in the Barnett Shale, a federal judge ruled.

While the summary judgment ruling issued by U.S. District Judge Ed Kinkeade on Wednesday does not mention a dollar amount, court documents filed in the case indicate that the landowners could be owed at least $8.6 million, and the jury could add millions more.

The lawsuit against Chesapeake Energy states that the company improperly deducted postproduction costs, expressly forbidden by the leases, and then used the sale of gas to affiliates to set a below-market price on which the royalties were paid, also a breach of the lease terms.

“I think the landowners are gratified by the court’s ruling and it tracks the language of the leases,” said Daniel Charest, the attorney for Bass-led group. “The court saw there was not a material issue of fact and we are happy with the result.”

Chesapeake Energy spokesman Gordon Pennoyer in Oklahoma City declined to comment.

Terrell Lamb, a spokeswoman for Ed Bass, said he had no comment on Kinkeade’s ruling.

The parties had a settlement conference Friday, but U.S. Magistrate Judge Paul Stickney filed a report Monday saying that the parties were unable to reach a settlement. A trial on the damages is set to begin next month.

The decision is Chesapeake’s second big loss in Texas courts over how it calculates royalties to landowners in the Barnett Shale. Earlier this year, the Texas Supreme Court ruled that the company owed the Hyder family of Fort Worth at least $1 million for wrongly subtracting costs from its royalty checks from wells in Tarrant and Johnson counties.

Both cases were being widely watched by the oil and gas industry and other property owners suing Chesapeake on allegations of cheating them out of millions on royalty checks. Fort Worth attorney Dan McDonald’s law firm has filed more than 250 lawsuits in the past year against Chesapeake involving Barnett Shale leases.

The Bass case involves leases on about 4,000 acres and 42 producing gas wells. Other plaintiffs include Trinity Valley School, Texas Health Harris Methodist Hospital Southwest and Texas Health Presbyterian Hospital Dallas.

The properties in question 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 unit 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. The leases have been in place since about 2005, but production began much later.

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 landowners also contend that Chesapeake underpaid royalties because it based their payments on a weighted average sales price and that the leases call for the use of a referenced price when there is a sale to an affiliate.

Last, the landowners assert that Chesapeake failed to act as a prudent operator when it failed to connect a number of unprocessed wells on the Winscott West and Rall Ranch to an independent third-party system, instead allowing the gas to flow to an affilate that could not process it.

Chesapeake, in this case and others, has denied that it underpaid royalties to the landowners and contends that it has complied with their leases. The company has argued that it rightfully subtracts downstream postproduction costs that do not reduce the royalties’ value.

But Kinkeade disagreed with Chesapeake’s arguments, calling them “unpersuasive.”

“The court does not agree with defendant’s substantive arguments and finds the record establishes that plaintiffs are attempting to enforce the contract as written,” Kinkeade wrote.

Charest, the plaintiff attorney, said he’s not sure how wide-reaching Kinkeade’s decision may be but said the case may give others some idea of how companies like Chesapeake calculate royalties.

“I think this is a contract case and they will always be driven by the contract language,” Charest said. “But as more and more of these cases happen, you find out how these operators do business and that information might lead people to evaluate their particular contracts and see if they are being treated fairly.”

This story was originally published August 24, 2015 at 6:38 PM with the headline "Ed Bass, others win royalty lawsuit against Chesapeake Energy."