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Royalty Owners' Class Action Targets UPR

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 action status.

"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 natural gas."

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 ongoing litigation.

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

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