http://m.cleburnetimesreview.com/news/article_0111ca50-2ebe-11e4-b9...

The David and Goliath war by Johnson County land owners against Chesapeake Energy may well have gained a pair of new troops on Tuesday.

Albert and Vertis Gibbs, who are Chesapeake royalty owners, attended a Cleburne Conference Center presentation by the lawyer who is suing Chesapeake on behalf of about 3,000 area royalty owners. 

“The big dogs started something,” Albert Gibbs said. “Now the little guy’s getting involved.”

About 60 lessors were on hand for the latest in the ongoing series of talks, designed to inform them of the issues, by Fort Worth attorney Dan McDonald. 

“They have stolen hundreds of millions of dollars,” from Johnson and Tarrant County royalty owners who leased land to Chesapeake, McDonald said.  “There is only one word to describe what they’ve done: stealing.”

McDonald is enlisting an army of plaintiffs who might not otherwise be able to hire a litigator; their individual claims are relatively small, and their potential judgments insignificant to Chesapeake....

However, a few new details emerged at the local meeting.

McDonald told the Cleburne crowd that District Judge William Bosworth will be handling the cases he’s filing here. 

“They’re all consolidated,” McDonald said. “Judge Bill Bosworth is going to be the Chesapeake judge.”

 Bosworth presides over the 413th District Court in Cleburne.

“Judge Bosworth is an excellent judge,” McDonald said. “I couldn’t be happier.”

McDonald, who has put together a sophisticated media campaign that includes a website devoted to the Chesapeake cases as well as billboards and a weekly 6 p.m. Wednesday royalty owners’ teleconference, told the crowd he’s hired an accountant with years of experience in the oil and gas industry to analyze clients’ royalty checks. 

On the conference center wall McDonald presented a table of one royalty owner’s payments from Chesapeake and other operators over four years. According to the graphic, underpayments ranged from an average of 54 cents per 1,000 cubic feet of natural gas in April 2011 to $1.88 per 1,000 cubic feet in May 2011.

In September, Chesapeake and McDonald are set to have a hearing on the motion to begin trying the Johnson County cases next spring, but ultimately McDonald said he expects Chesapeake to settle. 

The Fort Worth Star-Telegram last week reported that Chesapeake agreed to pay the city of Arlington $700,000 after officials there sued, alleging that the company did the same thing McDonald is charging it did to land owners here: deducted post-production costs it was not entitled to.

“Under the agreement, Chesapeake will no longer subtract post-production costs and the city’s royalty will be calculated based on the highest price received by Chesapeake when the gas is sold or the price established by a formula,” the Star-Telegram reported. “Arlington’s deal mirrors one that Chesapeake reached with Dallas/Fort Worth Airport in 2012 for $5 million. That deal also established a formula for royalty payments.

“Chesapeake also quietly settled with the Tarrant Regional Water District earlier this year when it agreed to pay the district $1.8 million for royalties on 100 leases from January 2008 through October 2011.”

McDonald’s firm is gearing up to handle the cases. 

“We have added four lawyers and six new legal assistants to work on our Chesapeake litigation and we need much more space,” McDonald wrote in an email. “We have over 3,000 Chesapeake royalty owner clients. We expect to have at least 10,000 by the end of the year.”

Barbara Smith owns two acres of land at Bowman Springs Road in Arlington. Chesapeake has a lease on one acre and another company leases drills on the other. 

She only recently heard about the lawsuits, but she’s going to send McDonald her Chesapeake paperwork.

“Chesapeake is paying me less than half what Vantage is paying for the same land,” she said. “I kept calling and they won’t do anything.”

Chesapeake declined to comment.

Taking aim on Chesapeake royalty underpayment

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Why was this not a Class Action?

This is not a class action suit because it is virtually impossible to form a class.  My understanding is that to form a class, all the plaintiffs must be identically situated.  In this case, because everyone's leases are slightly different, they are not identically situated.  McDonald Law Firm does not make its money on mineral law.  Rather, they specialize in what are called "mass tort" cases, where people are harmed my some large company.  (Think Erin Brokovich.)  Each plaintiff files a suit, but the many suits are quite similar, so the law firm doesn't have to do separate discovery for each case.  Once they get going on one case, they are prepared for all the others.  McDonald has done this successfully in the past in cases totally unrelated to oil and gas.

IMHO... the plaintiffs should be happy it is not a class action suit.  All I've ever gotten as a result of class action suits is a coupon for 10% off at a company I never want to deal with again anyway.  In this case, the plaintiff stands to recover actual money, if things go well.

Here are my notes from the Wednesday teleconference of 6/17/2015.  As usual, I only report new things, you can go back to my prior posts for earlier information.

So far 280 cases have been filed.  Nearly 20,000 people are signed up.  Cases are filed with royalty owners grouped by drilling unit.  The most people in any one lawsuit is 453 (must be an urban unit), and some cases have a single plaintiff.

The most interesting thing seems to be that McDonald has now determined that all of the major operators have underpaid their royalty owners.  So they now seem to be going after Anadarko, BP, Statoil, Devon, BHP, Matsui, Continental, and others.   This effort does not appear to be limited to CHK.  So if you have any of the other drillers, they ask you to sign up and they will determine if you have been shorted on your royalies.

They think there are two places where you could be short-changed.  First, is that you could be overcharged for the post-production things like compression, marketing, transportation, etc.  Even though many leases allow for deductions, McDonald says there is an implied covenant under the law that these fees must be reasonable.  The second is that if the company used your gas for hedging and kept the profits, they assert that you should have received the higher hedged price for your gas.

In Texas, you can recover 4 years of underpayments, but in Louisiana you can recover only 3 years of underpayments. 

Henry here....  That's about it.  At one time, McDonald said the first case was scheduled for trial in June.  I am guessing this has been delayed because there was no mention of any near-term trial dates in this teleconference.

Thank's Henry,

        I look forward to your weekly report, as I'm sure we all do. Very informative. Have a good evening......................

Thanks, Henry, it is interesting to watch this case play out. I guess there are no laws governing what expenses can be applied to the cost of payout for UMIs and that anything and everything can be deducted from income.

The LA mineral code specifies the types of costs that may be charged to the UMI's proportional share of production.  However the state does not monitor or audit those costs so a UMI must perform that due diligence.

Thanks, Skip.

Pam,

Here is a thought....  I have no idea if it applies to you or not.  If your operator did what CHK did with hedges, then  (and I have no real idea) you might be entitled to the hedged price.  I don't know the law.  And it may be that your operator charged excessive fees for transportation, compression, etc.  While the law allows them to charge you for these fees since you are UMO, I doubt the law allows excessive charges for these fees.

The only way to know for sure is to call the McDonald Law firm and discuss your situation with them.  They will tell you if you they think you've been short-changed, after analyzing your statements and comparing your deductions to what their experts say are reasonable deductions.  If it is found that your operator is charging excessively, they might take your case.

If you don't call them, you will never know.

There is existing case law on the question of royalty interests receiving payment based on hedge prices.  Hedges don't always work.  Companies often loose money on hedges.

Lessor is Not Entitled to Royalty on Hedging Profits

By Charles Sartain on May 21st, 2013 Posted in Lease Disputes

A Louisiana lessee does not owe its lessor royalties based on hedging profits, said a federal district court in Cimarex Energy Co. v. Chastant. Cimarex, the lessee, hedged its gas contracts and didn’t pay its lessor, Chastant, earnings from the hedge.

As the court described it, hedging involves buying and selling financial positions as a strategy to avoid the risk of a price fluctuation. The hedging party uses financial transaction derivatives to minimize the risk if/when the price of the commodity drops below a certain level. 

Cimarex Memorandum in Support of Motion for Summary Judgment is a good description of the hedging process and its value to oil and gas producers.

The question for the court was whether additional royalties must paid on amounts the lessee generated by a separate, purely financial, transaction from the sale of the oil and/or gas at the property.  The answer is “no”.

Chastant’s royalty clause provided for payment by Cimarex, on gas, of 1/8 of the market value at the mouth of the well and on oil, 1/8 of the price received f.o.b. the leased property.  In Louisiana, a royalty is the “landowner’s share of production, free of expenses of production.”

Chastant argued that since Cimarex calculated the hedge price in filings with the SEC, the hedge price constitutes “market value” under the lease. Chastant cited Frey v. Amoco Prodcution, a 1992 case where the Louisiana Supreme Court held that royalties were owed on a take-or-pay case settlement because the the take-or-pay payments were part of the “amount realized” under the terms of the lease. Therefore, said Chastant, any benefit derived by the lessee because of oil and gas production, even separate transactions, should be included in the calculation of the royalties due to the lessor. 

Cimarex argued that the lease royalty provisions are in keeping with well-established Louisiana principles in which “market price” is based on the market price at the well or field for the oil and/or gas. Therefore, the market price cannot be tied to some future financial transaction because of the oil and gas produced.

The court rejected Chastant’s arguments. To agree with Chastant would overturn decades of Louisiana oil and gas law by holding that standard lease language allows royalties to be based on something other than the price or value of the oil and/or gas. According to the court, such a holding would allow royalties to be based on monies earned by any transaction remotely connected to the oil or gas. Therefore, Cimarex did not owe royalties based on its hedging profits.

Many thanks to Ann Weissman for her contribution to this post.

Thanks, Henry and Skip. As always, your input is valued and appreciated!

You're welcome, Pam.  This topic has been discussed on several occasions over the years.  If lessees/operators were required to pay royalty based on hedges and royalty interests knew that they had as much risk of receiving reduced payments as they did increased payments I think the majority would stick with the market price at the well or field.  The more relevant question is the deductions allowed for gathering, treatment, compression and transport.  Adding the hedging allegation to the claims in a suit would seem to detract from that more important question.

I agree, Skip. I don't even know if Encana is involved in this hedging business anyway. As far as deductions, I don't have any idea who could go over five year's worth of quarterly statements to check for excessive deductions and I doubt I could afford to pay someone to anyway. It seems to me that only actual expenses should be deducted, whether reasonable or not. I would think someone would need copies of supporting documentation such as invoices to do an audit of deductions. So, I feel like I'm just SOL, lol.

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