Fearing that the downturn in oil and natural gas prices has battered the finances of Chesapeake Energy Corp. and could eventually threaten an $18 million settlement with thousands of Pennsylvania landowners, two plaintiffs have filed a motion for court ordered mediation to approve the settlement swiftly.
The settlement has been in the works for nearly three years to resolve claims that Chesapeake unfairly deducted post-production fees from the royalties of thousands of landowners in the state to cover marketing costs, including compression, dehydration and transmission. In December, though, the state Attorney General's office (AG) filed a wide-ranging lawsuit against Chesapeake and some of its affiliates for deceptive marketing practices, alleging the same complaints as the certified class (see Shale Daily, Dec. 9, 2015).
At the time, the move threatened to delay the broader settlement. But attorneys for Russell and Gayle Burkett of Bradford County, PA, argued in their motion for court ordered mediation that the AG's lawsuit and the commodities downturn now threatens to dissolve the settlement altogether. The motion was filed last week in the U.S. District Court for the Middle District of Pennsylvania.
"This settlement is in jeopardy of being irreparably lost," the couple's attorney, Douglas Clark, wrote in the motion. "Chesapeake's finances have been affected by the recent collapse in the price of natural gas and related financial markets. Thus, time is of the essence to resolve the Commonwealth's objections to the settlement agreement. If the parties were to litigate in the usual course, it could take years, and the benefit of the settlement may no longer be available."
Shortly after the AG filed its complaint, the office filed an objection to the settlement, requesting that it be modified to clarify that the class does not have standing to bring claims asserted by the state so that its own claims are not released through the settlement, otherwise known as the Demchak case (see Shale Daily, Jan. 6). While the AG did not object to any other terms of the proposed settlement, including the value, the state has requested a carve-out of its claims from the release language so they're not thrown out. It has urged the court to reject the settlement unless it is modified.
This delayed the final settlement approval and other key dates in the Demchak case, which was first reached in 2013 for $7.5 million, but has since swelled to between $15-18 million, according to the Burkett's motion and other attorneys representing other members of the class (see Shale Daily, Sept. 4, 2013).
Court ordered mediation, the Burketts argued in their motion, would allow the class, the AG and Chesapeake to resolve all objections and claims and "avoid a potentially fatal delay in approval of the settlement agreement." The motion also said that the Burketts attempts to resolve the AG's objections have been denied by the office outside of court.
While other attorneys have estimated that the class consists of more than 15,000 landowners, Clark said it likely consists of 12,000. About 9,000 members have opted-in to the settlement, but most of the rest have opted-out. According to the terms of the settlement, Chesapeake has a right to walk away if more than 5% of the class opts out. A federal judge granted the Burketts motion, but did not schedule a date for mediation.
Once the most active producer in the U.S. onshore, Chesapeake recently cut its rig count to less than 10 and cut capital spending by more than half (see Shale Daily, Feb. 24) The company reported a loss of more than $2.2 billion in the fourth quarter, and it has been asked by counterparties to post collateral as financial assurance of its performance under some midstream contracts and hedging agreements. It has also suspended its drilling program in Ohio and Pennsylvania.