Royalty Owners' Class Action Targets UPR
More than 27,000 Texas royalty owners were granted class action
status in a suit charging Ft. Worth-based Union Pacific Resources
Group and affiliates manipulated gas transactions resulting in
underpayment of royalties for the last six years.
While the suit itself does not specify damages, one plaintiff
law firm estimated damages could amount to $100 million.UPR says
the suit is bogus and an example of "lawsuit lottery."
A class action certification order, signed Dec. 7 in state court
in Brenham, allows royalty owners under leases in Texas to seek
recovery for underpayment of royalties from UPR for gas production
during the first quarter of 1994 through the present. UPR said it
will "vigorously appeal" the Brenham judge's certification of class
"Under Texas law, Union Pacific Resources has a duty to these
royalty owners to market their gas diligently," said Robert R.
Herring Jr. of Fleming & Associates, one of the plaintiffs' law
firms. "Union Pacific Resources failed to market the gas diligently
in this case because they simply sold the gas to an affiliate and
paid royalty on the proceeds from this sham transaction instead of
on the proceeds that UPR actually received on the open market."
Herring estimated the damages at $100 million. "While discovery has
not been completed, we believe the damages will be substantial."
Affiliates named in the class action include Union Pacific
Resources , Union Pacific Fuels, Union Pacific Oil and Gas, and
Union Pacific Austin Chalk.
The lawsuit alleges UPR engaged in a deliberate scheme aimed at
lowering royalty payments. "What they did was quite clever," said
Will Bowen, the class action suit representative. "They shifted the
value of the natural gas production away from the point where the
royalties were calculated to a position downstream in a
wholly-owned subsidiary. They sold the natural gas through a
process of inter-affiliate sales from one wholly-owned subsidiary
to another at an arbitrary price. These controlled transfer prices
were then used as the basis to calculate our royalty payments."
UPR said the merits of the case have not been reviewed by the
trial court and that damage estimates released by plaintiffs'
lawyers are "grossly exaggerated.
"We believe this action is without merit," said UPR General
Counsel Joseph A. LaSala Jr. "In fact, while UPR values its royalty
owners, the plaintiffs have not alleged any amount of damages in
their court papers and have presented no evidence to support the
amount mentioned in their press release. The plaintiffs' theories
ignore market realities. The prices, based on market indices, upon
which royalties are currently paid are widely accepted and used
throughout the industry --- dispelling any 'sham' nature to those
transactions. To us, this has strong flavor of some trial lawyers
playing lawsuit lottery. Union Pacific Resources has done nothing
improper and stands solidly behind its practices in marketing
UP Fuels was sold by Union Pacific Resources for $1.35 billion
to Duke Energy in early 1999. "We believe that after this sale
Union Pacific Resources has continued to market the gas to Duke
Energy based on arbitrary and artificial index prices rather than
marketing the gas with due diligence in order to obtain the best
deal reasonably possible," Herring said. "Essentially we believe
that the practice of short-changing the royalty owners continues
today." A Duke spokeswoman said the company does not comment on
In a separate case in federal court, Union Pacific Resources
Corp. and five other oil and gas companies reportedly agreed to pay
a $71 million settlement for underpaid royalties on oil production
which when combined with other individually negotiated settlements
is estimated to total more than $276.3 million.
"Contrary to the trial lawyers' suggestion in their press
release, UPR was one of the smaller contributors to the amount of
the settlement," UPR said in a press release.
The lawsuit was filed in Brenham, TX, by Houston-based law firms
Fleming & Associates and Looper, Reed, Mark & McGraw Inc.,
and Brenham-based Moorman, Tate, Moorman, Urquhart & Haley.
Joe Fisher, Houston