Drilling Down

Second Class Action Lawsuit Filed Against Chesapeake

YOUNGSTOWN, Ohio — For the second time in two weeks, a class action complaint has been filed against Chesapeake Energy Corp. and certain of its affiliates in which the plaintiffs allege they are victims of corporate fraud designed to deny their rightful payment of oil and gas royalties.

The lawsuit, filed Wednesday in U.S. District Court in Youngstown, accuses Chesapeake Energy of violating the Ohio Corrupt Practices Act and seeks an injunction to stop the company “from engaging in fraudulent conduct.”

The litigation was filed by attorneys Mark A. Hutson of Columbiana, James A. Lowe of Cleveland and Robert C. Sanders, whose office is in Maryland.

The lead plaintiff is New Hope Community Church in Wellsville. Other plaintiffs are landowners in Lisbon, Salem and Kensington in Columbiana County and landowners in Carroll and Stark counties.

According to the pleadings, Chesapeake and its affiliates “conspired to defraud, and did defraud, plaintiffs and the other class members of the full amount of oil and gas royalties due them by means of multiple fraudulent and illegal acts including acts of accounting fraud, wire fraud, mail fraud, theft and theft by deception, all in violation of the Ohio RICO Act.”

Unlike the first lawsuit filed Oct. 26 in Columbiana County Common Pleas Court by Zehentbauer Family Land LP, Hanover Farms and Evelyn Frances Young, which seeks $30 million in damages, the New Home Community Church lawsuit, filed in federal court, does not specify an amount of damages above $1 million. The pleadings are similar in how plaintiffs argue they were defrauded but the New Hope Church lawsuit adds the Ohio RICO claim.

States the New Hope Church litigation, “Defendants’ fraud encompassed all three variables in the royalty calculation: the amount of the product produced, the price paid by the buyer and the costs deducted.”

The New Hope lawsuit contrasts its pleadings  with the Zehentbaurer lawsuit, which it describes as a class action for a limited subset of potential plaintiffs “for breach of contract and an accounting for the underpayment of oil and gas royalties.” The New Hope Church lawsuit seeks certification as the class action for “all Ohio leases entered into by, or assigned to Chesapeake Exploration,” lists additional claims for recovery, and seeks an injunction to stop Chesapeake from continuing “fraudulent acts.”

The 57-page suit contains numerous charts, tables, landowners’ royalty documents and specific examples to buttress its case. It also cites claims filed against Chesapeake in other states, and a March 2014 article published by Pro Publica, “Chesapeake Energy’s $5 Billion Shuffle.”

The pleadings allege the company “scheme[d] to raise $4.76 billion through royalty decisions” so it could  repay  investors who funded the “creation of an unaffiliated midstream services company, Access Midstream Partners LP,” which it then sold to solve “its urgent need for cash.”

Simultaneously, according to the lawsuit, Chesapeake “entered into nonpublic side agreements with Access Midstream in which it agreed that almost all gas produced by its oil and gas production affiliates … would be serviced by Access Midstream for exorbitant gathering fees that would guarantee Access Midstream recoupment of its $4.76 billion investment over 10 years with a 15% return.”

To pay Access Midstream these fees, Chesapeake deducted “grossly inflated and fraudulent gather fees from the oil and gas royalties” owned the plaintiffs and other class members,” the lawsuit states.

Access Midstream was part of the joint venture that created the UEO Midstream system to gather and process gas and natural gas liquids drilled in the Utica shale in eastern Ohio. The system includes the cryogenic processing plan in Kensington and fractionation plant in Harrison County.

The company was acquired in February by Williams Partners LP.

On Wednesday, Chesapeake Energy posted a third-quarter loss of $4.7 billion, or $7.08 a share, compared to a $662 million profit, or 26 cents, in the third quarter of 2014. The company said it wrote down $5.4 billion in the value of oil and natural gas fields.

Published by The Business Journal, Youngstown, Ohio.