When Gerrit K. Spieker decided to join more than 20,000 other people suing Chesapeake Energy for cheating them out of natural gas royalties, he knew it was a long shot.
Spieker, 74, of Richland Hills, owns a house that sits on one-third acre with a gas lease tied to two nearby wells. He had received little money from the wells over the years.
So Spieker wasn’t dismayed when he learned in a letter that he may only get about $300 of a $52.5 million settlement with the Oklahoma City energy giant. Fort Worth attorney Dan McDonald and Chesapeake announced a possible end to their long legal battle late last month.
Under the proposed deal, Chesapeake and its partner, Total E&P USA, will pay $29.4 million and $13.1 million in cash, respectively, plus $10 million through a Chesapeake promissory note payable in three years. Individual clients are expected to get payments ranging from several thousand dollars to a few hundred.
“I have a few minor reservations, but that’s how it goes,” said Spieker, a retired engineer who would have liked more money from the deal but is resigned to what he’s getting. “Without them, I got nothing.”
McDonald and the other attorneys who joined his fiery crusade against Chesapeake hope most of their clients from more than 400 lawsuits against Chesapeake agree and accept the settlement by a July 11 deadline, or it may go back to court and an uncertain future.
McDonald and lawyers at Circelli, Walter & Young, along with officials at Chesapeake, won’t talk about the settlement or what was debated in mediation sessions on May 10 and 16. But the deal represents a “reasonable and practical solution,” according to a declaration signed by the mediator, a former Oklahoma federal judge, that was obtained by the Star-Telegram.
The uncertainty of success for McDonald’s legal strategy, along with Chesapeake’s wobbly financial condition, were major factors leading to the out-of-court compromise, retired Judge Michael Burrage wrote. His declaration is included in materials distributed to McDonald’s clients.
“Based on the claims and defenses in the case, and my personal experience in handling claims for underpayment of royalties, it is clear to me that this litigation involves highly disputed and complex issues and that the outcome of this litigation is highly uncertain,” Burrage wrote.
On the other hand, “The most significant consideration in the negotiations was Chesapeake’s financial condition. Chesapeake’s financial troubles are common knowledge,” Burrage said, pointing to the 80 percent-plus decline in Chesapeake stock in 2015.
So far, most of the people are happy with the deal, McDonald said. By Friday afternoon, slightly more than half of the forms sent out, about 7,300, had been returned and only 74 people had rejected the settlement, he said. McDonald’s firm wants a “yes” or “no” by June 17.
“We’re doing the best we can to field questions from clients,” McDonald said. “I’m happy our clients are happy about it, and that is ringing through based on the responses we’re getting.”
But make no mistake, not everyone is ready to go along. The deal includes provisions they don’t like, including the inability of McDonald’s legal team to impose a cap on postproduction costs in the future, meaning Chesapeake could deduct money the same way again.
And for some, the numbers just don’t add up.
Lem Miller, a real estate agent in Coppell with leases on an old family dairy farm near Cleburne that includes seven wells on 160 acres, said his lease doesn’t allow postproduction costs to be taken at all. He joined with his neighbors in hiring McDonald to sue Chesapeake. Their entire lawsuit covers about 420 acres, Miller said.
“There is no part of this that is fair and right,” said Miller, who says Chesapeake owes him around $450,000 while he’s being offered about $124,000 to settle before attorney fees and expenses. “It’s a bad deal for me but not for 90 percent of those in this lawsuit.”
Corralling clients, filing lawsuits
Over the past two years, McDonald has made a cottage industry out of suing Chesapeake. His blitzkrieg approach included billboards, websites, community meetings — and even koozies — as well as charismatic speeches as McDonald recruited clients for his mass tort lawsuit.
“I can't tell you how dishonest these people are. The dishonesty is breathtaking,” McDonald told about 250 people gathered at a church in southwest Fort Worth in late 2014. “They have stolen our money. They have cheated us.”
His lawsuits alleged that Chesapeake deducted higher-than-necessary postproduction 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.
Chesapeake, for its part, denied doing anything wrong and said everything it did was allowed under terms of its leases. It also argued that it paid a weighted average sales price to landowners and rejected the notion that it was using “fraudulent transactions.”
Many of McDonald’s clients had leases covering small acreage and allowed postproduction costs to be deducted, unlike some of the leases obtained by larger landowners and institutional investors that prohibited postproduction costs. His cases were tougher to litigate.
Still, McDonald was successful in corralling clients and filing lawsuits, so much so that the cases were granted multidistrict litigation status, which allowed for one judge to hear pretrial motions to cut down on costs, get consistent rulings and keep the cases moving. There were two multidistrict courts, one to hear McDonald’s cases and another to hear lawsuits filed by other attorneys.
Eventually the first 10 cases were set for trial stretching into early next year. To prove their allegations, McDonald’s team over two years reviewed hundreds of thousands of pages of documents and took more than 30 depositions from Chesapeake and Total, the settlement letter sent to the clients states. They hired five industry experts to analyze their claims and offer advice.
Chesapeake and Total fired back with their own high-dollar experts. They also won legal victories in court, such as in early May when a judge ruled that McDonald couldn’t sue on breach of contract claims tied to hedging, or how Chesapeake played the market with the natural gas. The judge also indicated she was going to limit the years of natural gas production covered by the lawsuits.
All of this legal wrangling was taking place against the backdrop of a company with well-publicized financial struggles. In April, Chesapeake pledged almost everything it owns to keep its $4 billion line of credit. It also has been selling off assets to raise cash and improve its bottom line.
“Chesapeake has told us and the public they have no plans or intention to file for bankruptcy this year, but market conditions and realities make a Chesapeake bankruptcy a real possibility,” the client letter states. If bankruptcy is going to be filed, it is more likely in 2017, the letter says.
Devil in the details
For the settlement to be approved, 90 percent of the clients must give written approval and they must represent 95 percent of the clients’ natural gas production from May 2011 until February.
The $52.5 million payment is based on 100 percent participation and would be prorated to conform with the number participating, according to a copy of the settlement agreement obtained by the Star-Telegram. There is also is a provision to negotiate further if the approval thresholds are not met, the document states.
If the settlement is approved, Chesapeake and Total will deposit the cash portion of the settlement by July 18, with plaintiffs receiving their first check by September and the first payment on the three-year note made payable by June 2019, according to the client letter. The attorneys agreed to allow Chesapeake to finance the future payment to prevent “additional financial distress.”
The attorneys would take 39 percent of the $52.5 million settlement, or about $20.5 million. About $2.1 million is set aside for expenses, including about $1 million for experts. The money would be subtracted from clients’ checks based on their leases’ gas production, the letter states.
Johnson County plaintiffs are set to get slightly bigger payments because the reasonable cost of gathering and transporting natural gas in Tarrant County’s urban setting is higher, the letter states.
Spieker, whose gross settlement is about $532, will get about $301 after attorney fees and expenses are taken out. Spieker tracks his lease production through Texas Railroad Commission records.
“I don’t begrudge McDonald the 39 percent because they put together the operation and always answered the phone,” Spieker said. “As far as representation goes, I’m satisfied.”
In the letter, McDonald’s legal team expresses regret it could not get a future cap on deductions, but the attorneys fought off efforts to prevent any additional claims on overcharges, instead winning a two-year moratorium on those that may accrue, the letter states. The letter also says the attorneys believe that excess charges will not be an issue, since Chesapeake is negotiating lower pipeline rates.
The cases of clients who “opt out” of the settlement will remain active. The letter does not state whether McDonald will continue to represent them, but attorney George Parker Young said earlier that they are not taking any new Barnett Shale clients. “We have moved on,” Young said.
Train leaves the station
Don’t expect Gene Stutts to sign on the dotted line.
An 87-year-old retired car dealership employee who lives in Fort Worth, Stutts said his gross claim is about $255, but after attorneys fee and other costs are subtracted, he’ll get about $144.
Stutts is upset about the $2.1 million in expenses, especially the money spent on experts. His portion of the expenses is costing him about $19, he said.
“There is no way I’m going to go with it,” Stutts said. “It makes no sense and I’m not going to go long with it. … I will reject it and I probably won’t be the only one.”
Miller said he believes his lease is pretty ironclad since it was drawn up by a large Houston law firm years ago, unlike a majority of the other leases. To go along with this deal, Miller said, he would be “signing his life away.”
“I’m real frustrated with the whole thing,” Miller said. “I’m not a bad guy, I just want what is due me. It just wears you out. The money, it is just so wrong.”
Roger Ellis is not the least bit frustrated with how it all turned out. The 62-year-old retired military buyer leased the mineral rights to his old home in southwest Fort Worth. While he says his settlement is “decent,” something to put in the piggybank, he won’t say how much.
But to Ellis, a Marine veteran, that is beside the point because McDonald taught Chesapeake a lesson.
“If I had got $2.88 I would have been tickled pink because it’s the principle of the thing,” Ellis said. “I’m happy with how this turned out.”
Spieker wishes there was a benchmark on postproduction prices going forward, but he’s happy that Chesapeake “got its knuckles rapped” for its past business practices.
As far as the money he may get, Spieker already has plans for it. A model train enthusiast, he has his eye on a scale model locomotive that used to work in the Fort Worth Stockyards. It costs about $750.
“I’ve been lusting after it since they released it,” Spieker said. “So this will help pay for that.”
This report includes material from the Star-Telegram archives.