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Chesapeake Triumphs in Two Barnett Royalties Lawsuits

Chesapeake Energy Corp. last week won another legal battle over royalty payments in the Barnett Shale in North Texas.

A three-judge panel of the U.S. Court of Appeals for the Fifth Circuit upheld a lower court ruling that had sided with the Oklahoma City driller.

Landowners Gordon Potts and Brandy West, who own 136 acres in Johnson and Tarrant counties, signed leases with Chesapeake predecessor FSOC Gas Co. in 2005. They claim they were underpaid by Chesapeake for drilling on their land because post-production costs were deducted before the royalties were paid.

However, the appeals court agreed with a ruling by a Texas district court, which said Chesapeake was allowed to calculate the market value of the production at the point of sale by deducting the costs before calculating the royalty payment.

The decision followed a similar Texas case decided July 16 by another three-judge panel of the Fifth Circuit. In that earlier case, Johnson/Tarrant counties landowners Charles and Robert Warren, and Abdul and Joan Javeed, claimed that affiliates Chesapeake Exploration LLC and Chesapeake Operating Inc. had deducted post-production costs before calculating royalty payments.

The lower court had dismissed the claims by the Warrens and the Javeeds with prejudice, which meant the landowners didn't have the right to file a lawsuit. The Fifth Circuit panel upheld the dismissal with prejudice against the Warrens, but it changed the Javeed dismissal to one without prejudice, which means they may seek further legal action.

Chesapeake has faced dozens of lawsuits regarding royalty underpayments elsewhere in the country. Regarding Barnett Shale production, lawsuits have been filed by the City of Fort Worth and Texas school districts in Arlington and Fort Worth, as well as the Fort Worth Housing Authority.

Chesapeake has not always prevailed. In March, the Fourth Court of Appeals in Texas affirmed a lower court ruling that Chesapeake had improperly deducted drilling expenses from royalty payments to the Hyder estate (see Shale DailyMarch 11). The Tarrant County court awarded the Hyder estate close to $1 million, including $700,000 in unpaid royalties.

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