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Pennsylvania Royalties Settlement Swells to $17M-Plus And Growing For Chesapeake

A long-delayed class action settlement between Pennsylvania landowners and Chesapeake Energy Corp. to resolve claims that the company improperly deducted post-production fees from royalties has received preliminary approval from a federal judge, ballooning to more than $17 million and now involving thousands of property owners.

Originally reached in August 2013, the $7.5 million settlement between Chesapeake and a little more than a dozen landowners now includes in excess of 15,000 people, who are expected to receive portions of an estimated $17 million. Attorney Michelle O'Brien of the O'Brien Law Group, who represents the lead plaintiff, Demchak Partners LLP, and who has been negotiating the settlement for years now, said the estimate could grow. It's unclear, she said, how many landowners could ultimately be included in the class.

"The settlement is based on the actual deduction taken out of each individual class member's royalty check," she said. "Every single day that amount increases and now it will increase further until Feb. 2 if the settlement is approved. We don't know the final number yet, so that was a rough estimate from several months ago."

A federal judge in October gave preliminary approval for the settlement, which had long been delayed as other parties filed similar complaints against Chesapeake and vied to represent a broader class (see Shale Daily, Sept. 11, 2014). Notices of the proposed settlement, which apply to any Pennsylvania Chesapeake lessor with a lease containing a market enhancement clause, were sent out Nov. 2. An approval hearing has been set for Feb. 2, 2016 in the U.S. District Court for the Middle District of Pennsylvania.

Under terms of an "opt-out" settlement, eligible parties must reply to exclude themselves from proceedings, object or file comments. If they do nothing, they would remain class members under the terms of the settlement. The Demchak lawsuit alleged that Chesapeake unfairly deducted post-production fees from royalties to cover marketing costs, including compression, dehydration and transmission (see Shale Daily, Sept. 4, 2013). Since 2013, Chesapeake has agreed to a growing settlement pool (see Shale Daily, Jan. 2).

Under preliminary approval, the company would make a payment to each member of the settlement class in an amount equal to 55% of all post-production costs deducted from royalty payments prior to June 1, 2014, plus 34% of all post-production costs deducted from payments from June 1, 2014 through the effective settlement date. It also sets forth a future royalty calculation method under which class members would no longer bear 100% of post-production costs, but would be responsible for 66% of those costs after the settlement's effective date.

That has Jackie Root, president of the Pennsylvania Chapter of the National Association of Royalty Owners (NARO), concerned.

"There's a lot of vague things in the settlement that these landowners would be giving up going forward. For being an 'opt-out' settlement, it has a lot of questions marks," Root said of notices that were sent out last month. "It's just telling you how to know if you're a [class] member. You're talking about people with an acre to more than 100 acres, that for the most part are older and some are a lot older. People cannot understand why they're a part of this if they haven't done anything. Our fear is a lot of people are going to do nothing and if they do, they're part of this."

Chesapeake has argued in arbitration that its natural gas is in marketable form at the well head. It also has claimed that post-production deductions are allowed under the Pennsylvania Guaranteed Minimum Royalty Act of 1979, which state lawmakers have been trying to clarify to better protect landowners (see Shale Daily, June 26)

If 5% of eligible class members opt-out, Chesapeake can elect to withdraw from the settlement, as well. The company could not be reached to comment about the settlement's preliminary approval. At a recent meeting for affected landowners in Bradford County, PA, Root said attendees asked how many notices were sent out. They were told by attorneys on the panel that between 7,000 to more than 15,000 were sent.

Complicating matters, Root said, have been lease and property transfers. Some people could still be eligible for the settlement if Chesapeake has retained an interest in leases that have been transferred to other companies. Property transfers could have an impact on new landowners, and the settlement also applies to others with Chesapeake leases that are not paying royalties.

"We've talked to quite a few people who didn't get notices, but should have," she said. Since notices were sent out in early November, Root and O'Brien said, more than 200 additional landowners have been notified. With no fixed amount included in the settlement, it could continue growing as Chesapeake would be responsible for paying a portion of the deductions it made based on each class member's acreage. Most landowners have until Dec. 17 to opt-out of the deal, while others who have only recently received notice would be granted an extended deadline.

While NARO is not recommending to opt-in or opt-out of the settlement, Root, who also works as a certified mineral manager for an energy consultancy, said she believes the settlement is a bad one. She fears that if landowners agree, it could affect their royalties going forward and their relationship with the company. For example, if landowners opt-in, they would lose their ability to sue the company in the future and attorney fees and other court costs would be deducted from any award they receive.

The settlement had been delayed for more than two years as other landowners and energy companies filed lawsuits against Chesapeake for post-production deductions. While some of those parties have left arbitration and joined the Demchak case, it remains unclear how any approved settlement would affect similar cases.

"This took a significant amount of time and involved more work than anyone knows," said O'Brien, in defense of the settlement. "I personally have been working on this case for five years for Demchak. This is not a rushed settlement; we were in mediation three times. It's a very good deal, and I'm very proud of it. We have reached a good result for landowners."

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