Royalty battle: Pennsylvania landowners file $5 billion suit against Chesapeake

SALEM, Ohio — A $5 billion dollar class action lawsuit has been filed by Pennsylvania landowners against Chesapeake Energy Corp. and its subsidiary, Access Midstream Partners, over gas and oil royalties they feel they were robbed of through fees charged by Chesapeake.

The suit was filed earlier this summer in the U.S. District Court for the Middle District of Pennsylvania.

Manipulation

The Suessenbach Family Limited Partnership is the lead plaintiff and allege the defendants used racketeering, unjust enrichment, mail fraud, wire fraud, honest service fraud, conversion and civil conspiracy in their business practices related to royalty payments.

Chesapeake Exploration is one of the largest natural gas producers in Pennsylvania and in the United States.

The Suessenbach family claims that Chesapeake subsidiaries have paid fees, which are then charged to lessors, for gas pipeline transport to Access Midstream that are many times the actual costs for Access Midstream.

“Since at least 2010, Chesapeake engaged in unlawful conduct to improperly extract billions of dollars in royalties owed to plaintiffs and other lessors by artificially manipulating and deducting from royalty payments the cost of ‘marketing,’ ‘gathering,’ and ‘transporting’ natural gas. The marketing, gathering and transportation deductions at issue in this action were both unreasonable and inflated,” the lawsuit states.

Guaranteed Minimum Royalty Act

Under Pennsylvania’s Guaranteed Minimum Royalty Act (link opens .pdf), there are two kind of land leases entered into for natural gas extraction that promise landowners a royalty based on oil and gas price realized by Chesapeake.

By law, the leases allow search and extraction of natural gas with royalty deductions for production, transport, treatment and process of gas, “but nowhere does either lease permit deductions in excess of actual cost or which are unreasonable,” according to the lawsuit.

Federal rules

Gas is transported from the wells to gathering pipes, and then taken through a transmission pipeline, which connects to interstate transmission pipelines and eventually takes the gas to other parts of the United States.

“While federal rules limit fees that can be charged on the interstate pipelines to prevent gouging, drilling companies levy fees on local pipelines known as gathering lines. However, even where such fees are deducted, they must be reasonable and actual,” the lawsuit states.

In 2010, Chesapeake formed Access Midstream and spun off its midstream assets. The lawsuit claims that Chesapeake used its subsidiaries to artificially inflate deductions charged to lessors.

The Suessenbach family claims that Chesapeake’s deals with its subsidiaries exploited lease deduction language to shift repayment of Chesapeake’s loans to Access Midstream to the landowners with leases.

According to the complaint, Chesapeake used its money trouble from its capital expenditures and low natural gas prices to find cash to pay for its outstanding debts and fund its operations.

Spin-off agreements

The lawsuit goes on to claim the transactions included “post spin-off agreements” in order for Chesapeake to get a rebate of some of the money they would pay out to Access Midstream.

The lawsuit states, “…Access Midstream is managed and directed by former and current Chesapeake officers, has made extensive use of other Chesapeake employees to conducts its operations and continues to pay Chesapeake and other affiliates and subsidiaries for a variety of services.”

According to the lawsuit, the Suessenbach family accuses Chesapeake of conspiring with Access Midstream to satisfy an off-balance sheet loan from Access Midstream that was designed to look like asset sales. The purpose of the off-balance sheet loan was to hide Chesapeake’s financial state and raise funds quickly without alerting investors of its billions of dollars in debt.

Lawsuit

The Suessenbach family seeks the lawsuit to be certified as a class action lawsuit, an injunction and damages.

The lead counsel for the Suessenbach family is Robert Schaub with Rosenn Jenkins and Greenwald, of Wilkes-Barre, Pennsylvania.

—-

Related stories:

Pa. bill protects landowners’ royalties, Feb. 25, 2014

Marcellus shale: Chesapeake comes under fire for extra post-production costs, Feb. 18, 2014
West Virginia: Two brothers and Chesapeake are at odds, Jan. 2, 2014

In Pennsylvania: Court battle looms over royalties, Sept. 25, 2013

About the Author

Kristy Foster Seachrist lives in Columbiana County raising sheep and horses. She earned her degree from Youngstown State University and has worked in both print and broadcast journalism. You can follow her on Twitter at http://twitter.com/fosterk96. More Stories by Kristy Foster Seachrist

Leave a Comment

Receive emails as this discussion progresses.

eNewsletter

Get our Top Stories in Your Inbox

Recent News