Chesapeake Energy settling “high value” royalty lawsuits

Chesapeake Energy is quietly settling lawsuits filed by large landowners over royalty payments.
Chesapeake Energy is quietly settling lawsuits filed by large landowners over royalty payments. Star-Telegram archives

Chesapeake Energy is quietly settling lawsuits from large landowners, businesses and government institutions that accuse the Oklahoma City energy giant of miscalculating millions of dollars in royalty payments from gas wells on their property.

On Tuesday, the Fort Worth School District was the latest to reach an out-of-court settlement, though the exact amount that taxpayers will receive has not been released. Fort Worth attorney Ralph Duggins, who represented the school district in the negotiations, declined to disclose any details, including the amount.

A review of court records indicates that Chesapeake’s attorneys also have resolved, in one way or another, 13 other lawsuits from companies, private foundations and large landowners in Tarrant, Dallas and Johnson counties since June. One attorney referred to them as “high value” cases.

Among the remaining cases are lawsuits filed by the city of Fort Worth, the Fort Worth Housing Finance Corp. and Union Pacific Railroad. In a court pleading filed in August, for example, the city accused Chesapeake of cheating it out of more than $33.5 million in royalty payments.

Attorneys are reluctant, and often prohibited, from discussing their settlements except to say that they worked out terms favorable for their clients. But some admit Chesapeake’s troubling financial fortunes, made worse by the plunging price of oil, may convince some plaintiffs to make a deal in case the company’s situation gets worse.

Attorneys are reluctant, and often prohibited, from discussing their settlements except to say that they worked out terms favorable for their clients. But some admit Chesapeake Energy’s troubling financial fortunes may convince some plaintiffs to make a deal.

In the past 52 weeks, Chesapeake’s stock has fallen from $21.49 per share to $3.56, lowering its market cap, or total value of outstanding shares, to $2.45 billion. It has also stopped paying dividends, cut its drilling budgets and laid off employees.

“It can push settlement,” said David Drez, an attorney who has settled five cases against Chesapeake in the past year. “Certainly people watch the news. I would say it is likely a factor, or having an influence, on the decision-making process.”

Attorneys for Chesapeake were not available and Gordon Pennoyer, company spokesman in Oklahoma City, also declined to comment.

The company has argued in court documents that the procedures it uses to drill, market and sell natural gas from its wells are acceptable and that it has fully complied with the lease terms.

The company has also taken steps in recent weeks to shore up its finances. In December, it completed a bond exchange that cut about $1.5 billion off its debt. It also has a revolving credit facility that exceeds $4 billion, according to Seeking Alpha, a financial reporting website.

Multidistrict litigation

In April 2015, a state judicial panel granted a request from Chesapeake that the lawsuits be granted what is known as multidistrict litigation status and appointed two judges to hear pretrial motions on such issues as evidence and testimony in an effort to streamline the legal process.

The theory behind granting the multidistrict status is that allowing one judge to hear pretrial motions can provide consistent court rulings and cut down on costs. At the end of the process, the multidistrict judge transfers the cases back to the courts where they were filed for trial.

One attorney referred to the cases being settled as “high value” cases

State District Judge Dana Womack was appointed to hear cases filed by Fort Worth attorney Dan McDonald. Many of them are described as “Mom and Pop” or “rooftop” cases involving smaller acreage. The first trial of one of those cases is set for April.

State District Judge David Evans was appointed the multidistrict judge for 30 cases like the one filed by the Fort Worth school district that had similar claims but were filed by attorneys other than McDonald.

In Evans’ court, attorneys are working through a set of rules governing discovery that they hope to complete within the next few weeks. Once an order is signed by Evans, each side will start producing evidence and providing witnesses for deposition. Individual pleadings are also entered seeking information related to an individual case.

“Perpetuate a fraud”

The lawsuit filed by the Fort Worth school district against Chesapeake in May 2014 includes at least 30 leases going back to 2006 and covering at least 1,000 acres, according to court documents. The lawsuit also names Total E&P USA, the French energy giant that owns 25 percent of Chesapeake’s Barnett Shale holdings, as well as former Chesapeake CEO Aubrey McClendon.

The district’s lawsuit accuses Chesapeake of working with affiliated partners to “manipulate sales points” and to enter into non-arm’s length agreements “as a means to perpetuate a fraud” that imposes on the district costs it is not suppose to bear, cutting into its royalty payments.

$33,472,000The amount the city of Fort Worth says Chesapeake owes in damages as of February 2015

The city of Fort Worth’s lawsuit makes similar claims. An August court filing mentioned that as of February 2015 Chesapeake’s alleged contract breaches resulted in damages to the city in excess of $33,472,000. An early court document said that the lawsuit included about 260 leases in Tarrant and Johnson counties.

In the city’s lawsuit, attorneys are tussling over a report written by Cinco Energy Management Group and commissioned by Total when it bought its interest in Chesapeake in 2010, before litigation began. The document analyzes the royalty clauses in the leases controlled by Chesapeake.

Fort Worth is also seeking to get documents Chesapeake filed in its lawsuit with Fort Worth investor Ed Bass, Trinity Valley School and 19 other landowners involving leases on about 4,000 acres and 42 gas wells. Chesapeake and the plaintiffs settled out of court last year. While the judgment did not specify an amount, court documents indicated landowners were owed at least $8.6 million and there was speculation that a jury could double that amount.

Duggins, who also serves as the city’s lawyer, said it “appeared Chesapeake was afraid to let a jury decide how much it owed under the Bass, Trinity Valley leases.”

There haven’t been any settlement talks with the city in at least a year, Duggins said.

Max B. Baker: 817-390-7714, @MaxbakerBB