Columbiana County lawsuit: Chesapeake accused of withholding millions in royalty payments

By Shane Hoover

CantonRep.com staff writer

Posted Oct. 28, 2015 at 8:16 PM

A subsidiary of Chesapeake Energy has cheated Ohio mineral owners out of $30 million in royalties and possibly more, according to a lawsuit filed Monday in Columbiana County.

Chesapeake has drilled 674 wells in Ohio’s Utica Shale, the most of any company. The Oklahoma City-based driller didn’t immediately respond to messages seeking comment.

The proposed class-action lawsuit accuses Cheaspeake subsidiary, Chesapeake Operating, of violating lease agreements by selling oil and gas from Ohio wells at below-market prices and improperly deducting production and post-production costs from royalty payments.

Companies with stakes in those wells are defendants in the case, including Chesapeake Exploration, CHK Utica, Total E&P USA, Pelican Energy and Jamestown Resources.

The alleged misconduct started in 2011, and Chesapeake Operating continues to make improper deductions from existing wells and any new wells that come into production, while claiming in royalty statements that no deductions were made, according to the lawsuit.

The plaintiffs seek to recover the withheld royalties, monetary damages, attorney fees and costs.

CLASS ACTION SOUGHT

The case was filed by attorneys for two Columbiana County farms and a Summit County resident who owns mineral rights in Carroll County. Their leases only allowed deductions for taxes.

But the lawsuit could have a wider sweep. Chesapeake Exploration used nearly identical terms in other leases involving at least 1,000 owners and 40,000 acres in Stark, Carroll, Tuscarawas, Columbiana, Guernsey, Harrison, Belmont and Jefferson counties.

“I’ve gotten dozens and dozens of phone calls over the last few months,” said William G. Williams, an attorney with Jackson Township-based Krugliak, Wilkins, Griffiths & Dougherty, one of the firms representing the plaintiffs.

It will be up to Common Pleas Judge C. Ashley Pike to decide if the case goes forward as a class action.

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Permalink Reply by Indiana Smith on November 1, 2015 at 1:45pm

Landowners sue Chesapeake over lease royalties

November 1, 2015
By DEANNE JOHNSON , Salem News

LISBON - Three local property owners have filed a class action lawsuit in Columbiana County Common Pleas Court claiming Chesapeake Exploration LLC, its subsidiaries and other companies are working together to pay less in royalties than what is due to property owners with gas and oil leases.

The lawsuit seeks damages of no less than $30 million in underpaid royalties. Additionally, the lawsuit seeks in excess of $25,000 for breach of implied covenants and express covenants.

Depending on the particulars of each lease, the lawsuit claims Chesapeake Exploration is contractually obligated to pay 17.5 percent to 20 percent on gross royalties for all oil and gas based proceeds. The contracts state the only deductions reportedly can be for a percentage of government imposed taxes or fees.

However, the lawsuit claims since 2011 there have been fees improperly deducted from the royalties, often taken under the guises of assessing costs for various activities. Although the statements to the lessors reportedly do not list that any deductions are taken, the lawsuit claims deductions can be found in comparing lease statements from other lease holders and on statements between Chesapeake's subsidiaries.

Some fees reportedly deducted were for production and post-production costs and were listed in some cases as fees for gathering, processing dehydrating, transporting, marketing, compression, third party deductions, system fuel and field fuel.

Besides Chesapeake Exploration LLC, the lawsuit names Chesapeake Operating Inc., CHK Utica LLC, Total E and P USA Inc., Pelican Energy LLC and Jamestown Resources LLC. The lawsuit claims those defendants uniformly sell the gas produced from the wells to Chesapeake Energy Marketing LLC. This company has reportedly been found to be one of Chesapeake Exploration's own affiliates.

According to the lawsuit, these gas sales are made at a price below the market value. The royalties are then fraudulently calculated on that amount. Then Chesapeake Energy Marketing LLC sells the gas to a third party buyer at market prices.

"The defendants' scheme is designed to conceal the breach of the gross royalty leases by reducing the amount of royalties paid to the lessors through the use of its affiliate entities, which royalties defendants wrongful retain to maximize profits," the lawsuit claims.

The lawsuit has been filed by Zehentbauer Family Land LP, which owns 656 acres under lease; Hanover Farms LP, which has 296 acres also under lease; and Evelyn Frances Young, a successor of the Robert Milton Young Trust, the owner of oil and natural gas estates in tracks of land in Carroll County with 166 acres leased. However, the lawsuit also notes it has been filed on behalf of everyone entitled to similar royalty payments from Chesapeake Exploration LLC and others companies named in the lawsuit. That would create a class action lawsuit with the number of plaintiffs exceeding 100.

djohnson@mojonews.com

© Copyright 2015 Salem News. All rights reserved. This material may...
Permalink Reply by Undecided About Oil on November 2, 2015 at 6:38am

Has anyone contacted the KWGD Law Firm regarding this potential Class Action law suite?

0ym9x5ag7ury2Permalink Reply by 0ym9x5ag7ury2 on November 3, 2015 at 3:10am

Indiana,

      Thanks for the post.

Ohio's loss is in the Billions, Mark my words.

Mike MurphyPermalink Reply by Mike Murphy on November 3, 2015 at 3:43am

http://www.ohioattorneygeneral.gov/About-AG/Contact.aspx

Take the time and submit a complaint to wake up Mike Dewine

Permalink Reply by Undecided About Oil on November 3, 2015 at 7:45am
Permalink Reply by Undecided About Oil on November 4, 2015 at 3:53am

For the past 5 YEARS,

Retail Natural Gas has oscillated, like clock work,

between a lower limit of $9.00 and an upper limit of $17.00 per thousand cubic foot

EIA Chart

CHPK produced about 80 Billion cubic feet of Utica Natural Gas in 2015 Q2.

80 Million MCF x $13/MCF (avg) x 4 Qtrs =

$4.2 Billion RETAIL Sales per year (approx)

The other number we need to verify is ...

Total Volume produced as reported on the Royalty Statements vs

Total Volume actually delivered and sold into the Gathering Pipeline System.

Given this is an "Honor System" ...

Does anybody actually believe those two "Total Volume" values will add up to the same number?

Permalink Reply by Undecided About Oil on November 6, 2015 at 2:36am

For example:

400 lawsuits were recently consolidated in Texas,

where 25,000 property owners say Chesapeake

has withheld $1 Billion in royalty payments.

Even after "stealing", a Billion here, and a Billion there,

from the landowners royalties

Chesapeake still reports a $8.75 Billion LOSS, over the past two quarters.

Permalink Reply by Undecided About Oil on November 3, 2015 at 8:14am

Item 45.  To the direct harm of the Plantiffs and the proposed Class, the defendants, operator / lessees under the Gross Royalty Leases, uniformly sell the well production to Chesapeake Energy Marketing, LLC (CEMLC) ( formerly known as Chesapeake Energy Marketing, Inc ("CEMI") ), its own affiliate, at a price below market value.

Item 46.  CEMLC then sells the production to a 3rd party buyer at market prices.

Item 47.  The operator, Chesapeake Operating; lessees Chesapeake Exploration and CHK Utica; and purchaser CEMLC, are related Chesapeake Energy Corporation entities or affiliates.

Item 48.   Through the related entity sales, the Defendants then pay its lessors a fraudulent royalty calculated from (1) below market prices for the Oil and Gas produced from the leaseholds, and (2) with post production costs deducted from the purchase price, which are unwarranted and excessive, while the Defendants still receive fair market value when their affiliate later sells the products to a non-affiliated third party, plus defendants receive additional monthly income due to the lessor paying a portion of the post-production costs.

Item 49.  The Defendants scheme, is designed to conceal breach of the Gross Royalty Lease, ...

 

========================================================

Chesapeake was very willing to sign a Gross Royalty Lease

but before the ink was dry on the contracts ...

they were designing a "SCHEME" to attempt to  pay only Net Royalties

========================================================

Permalink Reply by Indiana Smith on November 5, 2015 at 1:35am

2nd lawsuit filed against Chesapeake over royalties

November 5, 2015
By DEANNE JOHNSON , Salem News

LISBON -A second class action lawsuit has been filed by local property owners against Chesapeake Energy Corp., claiming royalties are being underpaid on the actual production of wells in the area.

There are several claims made by the lawsuit, including that Chesapeake Energy, the parent company of Chesapeake Exploration, and Chesapeake Operating LLC, an affiliate of Chesapeake Exploration, are conspiring to defraud local landowners with gas and oil leases out of full royalty payments.

The lawsuit claims three items are being fraudulently calculated - the amount of product produced, the price paid by the buyer and the costs deducted.

According to the lawsuit, in some cases the Chesapeake defendants are claiming the costs of extracting the product is so large that the deductions are completely canceling out the amount of the royalty being paid for that product and other products.

In particular with natural gas liquids calculations, the lawsuit said the defendants falsely reported the natural gas liquids were being sold at a steep loss, canceling out the royalties and sometimes diminishing the royalties of other products such as natural gas and oil being produced.

In one example in the lawsuit, over a five-month period the costs deducted for processing natural gas liquids was listed at 142 percent, 176 percent, 164 percent, 133 percent and 106 percent of the value of the natural gas liquids. Yet Chesapeake Energy reportedly has been increasing the amount of natural gas liquids being produced by 31 percent, a move the lawsuit claims does not make sense if that amount of money is being lost in production.

Further, the lawsuit claims instead of the usual industry norm of 3 percent being taken for fuel, the defendant told property owners about 17 percent of the gas being produced was being used for the fuel needed to produce the product. Yet the gross volume amounts being reported to the property owners is reportedly 17 percent less than the produced volumes being reported to the Ohio Department of Natural Resources for the wells.

The lawsuit also claims a fuel charge to produce natural gas of 51 cents per thousand cubic feet was charged to the property owners, while investors were told fuel costs were held down to 10 cents per thousand cubic feet.

After the products have been sold to Chesapeake Energy Marketing LLC, at the well, the lawsuit claims additional costs are being deducted from the royalties being paid, including a 3 percent marketing fee. This, the lawsuit claims, the additional cost being alleged after Chesapeake Exploration no longer holds the title to the gas and the oil are fraudulent. Additionally, the lawsuit claims there were fraudulent claims for costs incurred by Total E and P USA Inc., another purchaser of the gas produced.

The lawsuit talks about some of the financial history of Chesapeake Energy, claiming in a deal to help raise money Chesapeake Energy was apart of the creation a new company, Access Midstream Partners L.P. After 2010, nearly all the gas produced in the Utica shale in Ohio are being serviced by Access Midstream Partners L.P., which charges "exorbitant gathering fees" to try to recoup the billions of dollars that company invested in Chesapeake.

Similar to the previous lawsuit filed in Columbiana County Common Pleas Court in late October, this lawsuit claims the royalties are being paid on a much lower than market sales price, instead of the final price being paid by the third-party buyer. Additionally the lawsuit claims the property owners were not paid $1.5 billion in royalties from derivative contract sales.

This lawsuit was filed on behalf of a long list of plaintiffs and led by Hope Christian Fellowship, which is also known as New Hope Community Church, state Route 39, Wellsville.

The lawsuit also names Julius P. Heil, Thomas Hanson, Dale and Melinda Henceroth, Ruth Burchfield, James and Toni Burchfield, Marilyn S. Wendt, Janet K. Cooper, Wilford L. Copeland, Lance and Nicole Hull, John and Ruth Williams, Zeb and Judith Locklear, Leroy and Christine Baker, Thomas and Nancy Sherwood, Thomas and Nancy Keating, Bruce and Irma Meadows and Samantha, Debra and Holly Meister.

It is also noted there are more than 2,000 people and organizations who could be party to the class action lawsuit.

The lawsuit asks the court to find the Chesapeake defendants in violation of the Ohio Corrupt Practices Act, including engaging in patterns of corrupt activity, racketeering activity and theft by deception. It further asks the court to stop future fraudulent activities by the defendants and to pay compensatory damages to the plaintiffs.

The lawsuit was filed electronically Wednesday afternoon in U.S. District Court for the Northern District of Ohio, Eastern Division, in Youngstown by Robert C. Sanders, a Maryland attorney who specializes in natural gas lawsuits, along with Ohio attorneys James A. Lowe of Cleveland, Robert L. Guehl of Dayton and Mark A. Hutson of Columbiana.

djohnson@mojonews.com

© Copyright 2015 Salem News. All rights reserved. This material may...
Permalink Reply by Undecided About Oil on November 5, 2015 at 4:05am

Does anybody know...

If both of these lawsuits become "Class Action" status then

will they be combined into one big Class Action lawsuit?

Permalink Reply by Undecided About Oil on November 5, 2015 at 9:15am

Gross Royalty Lease with alleged deductions made Chesapeake:

1) Gathering

2) Processing

3) Dehydrating

4) Transporting

5) Marketing

6) Compression

7) Third-Party Deductions

8) Systems Fuel

9) Field Fuel

10) Chesapeake Operating’s "Additional Charges" < what ever that is?

The only items missing is Payroll and Bonuses.

Permalink Reply by bo boboski on November 5, 2015 at 9:40am

You forgot meals.

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