Chesapeake Energy settles royalty lawsuits for $52.5 million

Chesapeake Energy is settling hundreds of lawsuits against it regarding natural gas royalty payments.
Chesapeake Energy is settling hundreds of lawsuits against it regarding natural gas royalty payments. Star-Telegram archives

Chesapeake Energy, trying to put its troubles in the Barnett Shale behind it, is settling hundreds of lawsuits that accuse the company of cheating property owners out of millions of dollars in natural gas royalties.

The biggest settlement, for $52.5 million, covers more than 400 lawsuits covering 13,000 clients filed by Fort Worth’s McDonald Law Firm and the Circelli, Walter & Young law firm. The suits were filed primarily in Tarrant and Johnson counties.

In addition, Chesapeake confirmed it has reached a settlement with the city of Fort Worth over its royalty lawsuit. While the settlement agreement is on the agenda for the Fort Worth City Council’s Tuesday meeting, details of the out-of-court deal are not included and Chesapeake would not disclose them. In March, the city settled a royalty lawsuit with Total E&P USA Inc, Chesapeake’s partner in the Barnett Shale, for $6 million.

“We are pleased to have reached a mutually acceptable resolution of this legacy issue and look forward to further strengthening our relationships with our royalty owners,” Gordon Pennoyer, a spokesman for Chesapeake in Oklahoma City, said in a statement.

We are pleased to have reached a mutually acceptable resolution of this legacy issue and look forward to further strengthening our relationships with our royalty owners.

Gordon Pennoyer, Chesapeake Energy spokesman

Under the terms of the deal reached with the McDonald and Circelli law firms, Chesapeake will pay $29.4 million and Total $13.1 million in cash, plus $10 million through a Chesapeake promissory note payable in three years.

The settlement, however, is contingent on the law firms getting written approval from 90 percent of their clients by July 11. Plaintiffs will get statements explaining the deal and they will be given time to ask questions, according to a joint statement released by Chesapeake and the law firms.

The settlement was reached after three weeks of good-faith mediation led by a former federal judge, according to a statement from attorney George Parker Young.

After three weeks of good-faith mediation led by a former federal judge [the lawsuits have] been resolved to our satisfaction.

Attorney George Parker Young

“We are pleased that we have achieved a mutually acceptable global settlement and greatly appreciate the constructive approach taken by Chesapeake’s current leadership to resolve this matter,” Young said.

The amount to be paid to each plaintiff will vary widely, based on the language in each landowner’s lease. While the settlement covers 13,000 individuals, the large majority of them have small-acreage leases that allowed post-production deductions, unlike many other royalty underpayment lawsuits that have been filed, according to a joint statement.

Settling the lawsuits would continue a trend by Chesapeake to reach agreements with landowners without going to trial. Recently, Chesapeake settled two cases filed by McDonald, which followed a $1 million out-of-court deal reached with the Fort Worth school district.

Chesapeake has also been settling what are described as “high value” lawsuits, with landowners who have substantial acreage. One noteworthy settlement was with Fort Worth investor Ed Bass, Trinity Valley School and 19 other landowners involving leases on about 4,000 acres and 42 gas wells. While the judgment did not specify an amount, court documents indicated landowners were owed at least $8.6 million with the possibility of a jury doubling that amount.

A settlement with Fort Worth would fall into the high value category. In a court pleading filed in August, the city accused Chesapeake of cheating it out of more than $33.5 million in royalty payments. The lawsuit covers more than 260 leases on about 5,800 acres of city property in Tarrant and Johnson counties.

The Fort Worth City Council will vote Tuesday to approve a resolution authorizing the settlement and amending its gas leases with Chesapeake and Oklahoma City-based Dorchester Resources, once known as Arcadia Resources. According to Reuters, Arcadia was a holding company for the late Aubrey McClendon, Chesapeake’s former CEO who died in an auto accident.

“It’s a good settlement,” Gerald Pruitt, deputy city attorney in Fort Worth, said Monday.

Dan McDonald made a cottage industry out of suing the Oklahoma City energy giant over how it paid landowners. His lawsuits alleged that 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 has 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.”

But McDonald’s populist message struck a cord with the small, rooftop leaseholders he sought out. In a no-holds-barred campaign using billboards, websites, community meetings — and even koozies — McDonald signed up thousands of clients.

The number of cases filed by McDonald became so onerous that Chesapeake persuaded the courts to grant the lawsuits multidistrict litigation status, allowing a district judge to hear pretrial motions for groups of lawsuits. The tactic helps companies facing legal challenges cut down on costs and get consistent rulings from the courts.

But in this instance, there were so many cases that two multidistrict courts were established: one for the McDonald cases and a second for lawsuits filed by other attorneys.

Several other royalty lawsuits remain unresolved. For example, the Tarrant County College District has a pending lawsuit against Chesapeake. And earlier this month Tarrant County Commissioners voted to hire a law firm to sue Chesapeake over its seven leases with the company.

Tarrant County Administrator G.K. Maenius said the county hired the firm “ to see if we can negotiate a settlement.”

At a September 2014 community meeting at the New Genesis United Methodist Church, attorney Dan McDonald spoke to potential clients about the lawsuits he planned to file against Chesapeake Energy.

Staff Writer Sandra Baker contributed to this report, which includes material from the Star-Telegram archives.

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