A $7.5 million settlement reached last year between Pennsylvania landowners and Chesapeake Energy Corp. to resolve claims that the company improperly deducted post-production fees from royalty checks has yet to be approved and remains tied-up in a federal court.
Although a settlement was reached last August, just three hours after a lawsuit was filed in U.S. District Court for the Middle District of Pennsylvania by lead plaintiff Demchak Partners LLP and 13 others, not a single landowner has been compensated under its terms, as a federal judge considers competing claims and for other reasons that remain unclear (see Shale Daily, Sept. 4, 2013).
“We’re still waiting for preliminary approval of the settlement. We don’t know why it’s taking so long. I wish I could give you a better answer than that,” said plaintiffs’ lead counsel Michelle O’Brien, of the O’Brien Law Group, who led negotiations on the settlement. “We’ve requested a status conference with the judge, but we’re still waiting to hear back. There’s a case in arbitration regarding a very similar issue that’s going on, but we still don’t know if that’s what’s causing the delay.”
The lawsuit alleged that Chesapeake unfairly deducted post-production fees from royalties to cover marketing costs, despite lease terms that precluded it from doing so. The lawsuit also claimed that the fees charged were more than the actual costs incurred and that the company improperly based the royalties on the market value of the natural gas before it was processed, which was lower.
Before a federal judge could approve the settlement, though, Russell and Gayle Burkett of Ulster, PA, in Bradford County, filed a motion to intervene, claiming it was not in the best interest of affected leaseholders.
In April 2013 — before the settlement was reached — the Burketts’ attorney, Douglas Clark, had filed a demand with the American Arbitration Association (AAA) seeking damages related to Chesapeake and its affiliates’ post-production fees. Clark wrote to the AAA alleging that the companies had been breaching oil and gas leases in the state since at least 2010 that they’d entered into with “hundreds or, more likely, thousands of landowners” in the Marcellus and Utica shales.
Clark was unavailable to comment for this story, but in documents filed with the AAA he said the Burketts were seeking to represent an entire class of landowners who have experienced similar problems. He also said the contractual dispute over post-production costs requires the attention of an arbitrator, as he said most leases require.
“It’s a bad settlement. Every time a landowner files one of these things in court, Chesapeake says ‘bad venue, change of venue,’ so we went straight for arbitration before this settlement was reached,” a representative from Clark’s office told NGI’s Shale Daily. “We will fight on every level to say this is a bad settlement; that doesn’t mean we have a problem with it. There were 13 people and a hundred-something odd acres involved in the Demchak case. We now represent 172 clients across 5,600 acres. We believe we’re better suited to represent landowners in this case.”
Clark’s office said they asked a federal judge to withhold from granting preliminary approval until the AAA granted its case class action status. In January, the association determined it had jurisdiction in the matter, and it is currently working to decide if the Burketts’ case can go forward under class construction.
The Burketts also contend that their lease allows for deductions only after natural gas is processed and in marketable form. In arbitration documents, the couple said Chesapeake’s royalty checks detailed and itemized “gathering, compression and third party” deductions, even though Statoil USA, which also has an agreement with the couple, does not.
In response to a request to stop making such deductions, arbitration documents show Chesapeake argued gas is in marketable form at the wellhead. When it began to deduct post-production costs from other landowners last year, the company also said it was allowed to under the Pennsylvania Guaranteed Minimum Royalty Act of 1979 (see Shale Daily, March 14).
O’Brien said although it has been reported that a federal judge has delayed the settlement because he is deciding whether the court or the AAA should decide the case, “that’s not how we see it.”
“Our position is that we have reached a settlement, and if people don’t like it, they can opt out,” she said. “We don’t have a clear reason for why this is taking so long, whether it’s waiting on a decision from an arbitration panel or something else. We’re waiting for the court to decide.”
Jackie Root, president of the Pennsylvania chapter of the National Association of Royalty Owners (NARO), told NGI’s Shale Daily that she too was unclear why the Chesapeake settlement has been delayed for more than a year now.
“They have not settled the Demchak class action suit,” she said. “Everybody thought that’s what happened. It’s in the hands of a judge, but it has not been paid out. Nobody has received any money.”
O’Brien added that she had “no idea” when the settlement might be authorized, or when she might hear anything from the federal court. Complicating matters, is a renewed round of claims from a separate group of plaintiffs and frustrated landowners who have lodged similar complaints about Chesapeake’s post-production fees in the state.
Another group of landowners led by the Sussenbach family limited partnership filed a lawsuit against Chesapeake seeking $5 billion this year for racketeering, unjust enrichment and honest services fraud among other things (see Shale Daily, July 2). In yet another case, Scout Petroleum, a land-based oil and gas company, has asked the AAA to order a full refund of post-production fees and is also asking that its case be granted class action status (see Shale Daily, April 10).
Root said that if the $7.5 million settlement is approved for Demchak Partners and the other plaintiffs it would likely apply to a sizeable group of landowners throughout the state, including NARO members.
She added that those seeking arbitration are also likely not satisfied with that deal, given that a number of individual claims were overlooked in the short amount of time that the Demchak settlement was negotiated and said it could have been higher as a result.
Chesapeake is currently fighting to stave off Scout Petroleum’s request for class action status. The company filed an injunction seeking to prevent such action in the U.S. District Court for the Middle District of Pennsylvania in April.
Attorneys for the company have also said that a plaintiff must have clear evidence that disputes should be settled through arbitration rather than the court. While a number of leases in question are thought to have arbitration clauses, Chesapeake says many do not.
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