When Fort Worth settled its lawsuit over natural gas royalties with Chesapeake Energy and its partner for $21 million last year, the city paid its law firm about $7 million for a job well done.
City leaders were happy with the May 2016 settlement, not only because it recouped cash they felt had been improperly withheld over the years, but also because it restructured how royalties would be paid in the future, an arrangement that should produce extra revenue each year.
But nearly a year after the case was settled, it’s taking on a new life with the city and the Cantey Hanger law firm in a dispute over exactly how much of the newfound wealth the city and its taxpayers get to keep.
Cantey Hanger, one of the city’s storied law firms, contends that when it was hired in October 2013 the city agreed to pay the firm — besides a third of the cash settlement — a percentage of future royalty payments from more than 250 natural gas leases.
City officials clearly don’t think Cantey Hanger is entitled to the future payments and they’ve earmarked up to $100,000 and hired the city’s biggest law firm, Kelly Hart & Hallman, to help its cause. So far, Cantey Hanger has not filed or threatened a lawsuit to secure the additional payments.
In a statement issued to the Star-Telegram on Friday, the city describes Cantey Hanger’s demand for additional payment as “unconscionable.” The city also states that it has “fully satisfied its obligation” to the law firm and that “no additional sums are owed or deserved.”
“The issue of this additional fee was never contemplated by the City, nor was it even suggested by Cantey Hanger until after the law firm had started negotiations to settle the case,” the statement said. “The idea that an additional contingency fee was provided for in the contract was immediately disputed by the city.”
“The City has already paid Cantey Hanger $7 million, and believes that the law firm’s demand for even more is unconscionable,” the statement says.
Cantey Hanger, in a statement, conceded that the amount could be “substantial and ongoing.” City officials have been unable to provide a calculation of exactly how much money may be at stake, citing the complicated formula for calculating the value of natural gas pumped from the wells.
Cantey Hanger also said it asked Mayor Betsy Price and City Attorney Sarah Fullenwider to meet and discuss this issue “in an effort to resolve our respective interpretations of [the] attorney’s fee contract.”
“We look forward to sitting down with a neutral third party to discuss working with the city to resolve our differences over the interpretations of the fee contract,” said Ralph Duggins, the Cantey Hanger lawyer who represented the city in its litigation against Chesapeake and Total.
Other oil and gas attorneys say it is not unusual for lawyers in cases regarding oil and natural gas leases and titles to seek compensation not only from lump sum payments but from future royalties. But it all depends on the agreement. For those attorneys, the devil is in the details.
“Every one of the cases has to be evaluated and negotiated and it needs to be clear,” said John McFarland, an oil and gas attorney in Austin. “It really depends on what the parties agree to.”
Hammering out a deal
In its lawsuit filed in December 2013, Fort Worth accused Chesapeake and Total — which bought a 25 percent stake in Chesapeake’s Barnett Shale holdings in 2010 — of underpaying royalty payments by improperly deducting transportation costs through “sham” sales to company affiliates. In a later court pleading, the city accused Chesapeake and Total of cheating it out of more than $33.5 million.
Throughout the litigation and eventual settlement, Chesapeake denied doing anything wrong and said everything 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.”
In March 2016, Total settled with Fort Worth for $6 million. It also agreed that future royalty payments would not be based on an internal formula but instead be based on the price set at the Houston Ship Channel, minus 2 cents, on its portion of the gas. It also agreed not to deduct any post-production costs.
Chesapeake continued its fight with the city, but the company and Fort Worth ultimately agreed in May to a $15 million settlement with Chesapeake without any deductions for post-production costs. The price being paid for the gas would also be calculated on Houston Ship Channel prices.
“This is a very good settlement,” Mayor Price said. “Obviously, we would have liked to have the whole thing. We’ve actively pursued this on behalf of our citizens and taxpayers and we feel comfortable with where we are. We are particularly pleased with payments going forward. It adds up to a lot.”
Paying it forward
Cantey Hanger contends it is due a percentage of the additional revenue the city is earning as a direct result of the terms of the settlement. In its prepared statement, Cantey Hanger said the firm “believes it has earned a contingent fee on the value of the higher royalties that will be paid to the city.”
In a copy of the Oct. 3, 2013, fee agreement obtained by the Star-Telegram under the Texas Public Information Act, Fort Worth agreed to pay Cantey Hanger a third of “any and all amounts or value received by the City, whether by way of settlement, or judgment from a court.”
The contract language is similar, but uses different language, to the agreement the Fort Worth School District signed when it hired Cantey Hanger in January 2014 to represent it against Chesapeake, according to documents obtained through a separate open records request.
In that agreement, the district agrees to pay a 40 percent contingency fee “of any and all amounts or value received by the FWISD, whether by of settlement, future royalty payments, or judgment from a court.” The school district eventually settled with the Chesapeake for a little more than $1 million in cash.
In December, to press its interpretation of the fee agreement, the city received a letter from former Texas Supreme Court Chief Justice Tom Phillips, now an attorney at Baker & Botts in Houston, that apparently supports Cantey Hanger’s interpretation and says they’ve been hired by the Fort Worth firm. The Star-Telegram’s public records request for that letter is under review by the Texas Attorney General’s office.
It is not unusual in these kind of royalty cases for the contingency fee to address not only past arrearages but future payments, said Owen Anderson, a professor for the Kay Bailey Hutchison Center for Energy Law and Business at The University of Texas School of Law.
Years ago, Anderson said he handled a case where he got partial ownership in some oil wells as part of his compensation. He said he got a check every month for years. He said it’s all in how the deal was done.
“There could be an argument that it is not clear and then it would be up to a court to decide what they (the agreements) actually mean,” Anderson said.
This story includes material from the Star-Telegram archives.