Judge Allows Mineral Interest Fight Against Chesapeake, Total E&P to Proceed

© 2018 The Texas Lawbook.

By Natalie Posgate

(June 11) – A state court in Fort Worth has denied requests by Chesapeake Exploration and Total E&P USA to dismiss claims in multidistrict litigation brought by North Texas mineral interest owners over “sham” transactions tied to royalty payments.

The ruling, which was signed by Tarrant County District Judge Dana Womack last Tuesday but announced by the plaintiffs’ lawyers today, cleared the way for the mineral owners’ claims over “sham” transactions to proceed.

The mineral owners, led by Addax Minerals Fund, claim that the calculation of royalties based on the wellhead sale of gas by Chesapeake to Total E&P, its affiliate, qualifies as a “sham” transaction under Texas law. Chesapeake has been accused by landowners of undervaluing royalties in sales to its own affiliates who resell that production at closer to market prices.

The dispute involves oil and gas leases covering roughly 6,000 mineral acres and more than 960 producing gas wells in the Tarrant County, Johnson County and Ellis County regions of the Barnett Shale.

In May 2017, Oklahoma-based Chesapeake Energy and Total E&P USA agreed to pay $52.5 million to 13,000 people who made similar claims of underpayment on royalties for leases in the Barnett Shale.

The $52.5 million settlement followed two decisions by the Supreme Court of Texas – one in 2017 and one in 2015 – that concluded Chesapeake wrongly deducted $1 million in costs from royalty payments it was supposed to pay a Fort Worth family.

“The Texas Supreme Court recognized the ‘sham’ transaction theory many years ago, and operators have tried to avoid its implications ever since,” Daniel Charest, one of the attorneys for the royalty owners, said in a statement. “We say Chesapeake and Total have benefitted from the higher value of downstream sales while using affiliate ‘sales’ at the wellhead to avoid their obligation to pay fair royalties. On those facts, courts can disregard corporate formalities and calculate royalties as the leases intended on the higher prices.”

The mineral owners are also being represented by Spencer Cox, who practices with Charest at Burns Charest in Dallas, as well as James Key of of Harris, Finley & Bogle in Fort Worth.

The Texas Lawbook has reached out to lead counsel for Chesapeake and Total seeking comment.

Chesapeake’s lead lawyer is Thompson & Knight’s Greg Curry. Others from T&K representing Chesapeake include Rachelle Glazer and Jenny Henry.

Total is being represented by Jeff King, Adam Plumbley and Jamie Bryan of K&L Gates, as well as David Ammons of Winstead.

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