A Chesapeake Energy Corp. subsidiary has for now fended off a class action lawsuit brought by landowners in Ohio that alleged that the company underpaid royalties.
The U.S. District Court for the Northern District of Ohio denied the landowners’ motion for summary judgment, finding that Chesapeake Exploration LLC (CELLC) paid royalties according to the terms of the class leases.
Dale Henceroth and Marilyn Wendt, along with eight others, filed the lawsuit against Chesapeake in 2015. The federal court later certified a class of royalty owners in 2017. The class leases produce natural gas from more than 400 Utica Shale wells.
The plaintiffs sued for breach of contract, alleging CELLC underpaid oil and gas royalties by basing them on the wrong price. The landowners took issue with CELLC’s sale of gas to an affiliate at lower prices. The affiliate would then foot the cost of post-production expenses to cover marketing costs, including those for compression, dehydration, processing and transmission, before marketing the gas to other customers at a premium.
The plaintiffs argued that they should receive royalty payments based upon the downstream sales price paid to affiliate Chesapeake Energy Marketing LLC without cost deduction.
The court found, however, that CELLC paid royalties consistent with the class leases, noting the language in the leases was “plain and unambiguous” with a provision for a one-eighth royalty on proceeds received from the sale of the oil and gas produced and marketed from the leaseholds.
“That is exactly what the parties negotiated for” in the leases, the court said, adding that “there are no genuine, material facts in dispute” that require further interpretation.
Chesapeake exited Ohio last year with the $2 billion sale of its Utica assets to Houston-based Encino Acquisition Partners. The company and other producers have battled similar claims over how royalties are calculated across the country, in some instances settling class action cases for millions of dollars.
The same day the Northern District made its judgment, the plaintiffs filed a notice of appeal to the U.S. Court of Appeals for the Sixth Circuit.
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