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Denver Producer Prevails in Gas Royalties Case

K.P. Kauffman Co. Inc. (KPK), a privately owned Denver-based producer, has prevailed in a class-action lawsuit that sought more than $10.6 million for underpayment of natural gas royalties.

The lawsuit, filed in Denver District Court in 2007, alleged Kauffman underpaid royalties on natural gas production by not paying royalty owners for the residue gas and natural gas liquids. The class action, which included about 2,500 royalty owners, demanded damages and increased royalties on the company's future gas production (Helen Mleynek v. K.P. Kauffman Company Inc.).

On Monday a jury rejected the lawsuit's claims and found that Kauffman had fulfilled its duty to market its natural gas by selling it at the wellhead.

"I am proud of my family, our staff and the legal team at Holland & Hart (H&H) for supporting our efforts to stand up to this legal challenge," said CEO Kevin P. Kauffman, who also founded the company.

"This victory is not just for my company, but it is for the entire oil and gas industry in Colorado," he said. "The lawsuit demanded we pay royalties on money we do not have and will not receive. I always believed it was important to fight it, and I am thankful to those who stood by me."

H&H's Tony Shaheen, who represented KPK, said the lawsuit's allegations were based on the Colorado Supreme Court's opinion in Rogers v. Westerman Farm Co, which "dramatically altered state law on royalty calculation." The Rogers case held that "unless mineral leases expressly provide otherwise, producers are required to make natural gas fit for sale and deliver the gas to the first commercial market, free of cost to royalty owners."

The lawsuit claimed that Kauffman's gas was not marketable until it was processed and that royalties should have been paid on the residue gas and natural gas liquids.

Up to now, Shaheen said "conventional wisdom was that, because of the Rogers case, you could not prove gas was marketable at the wellhead. Kauffman's win proves that the conventional wisdom was wrong."

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