Lessors Sue Chesapeake Energy for $5 Billion by Erin McAuley, June 25, 2014, Court House News
HARRISBURG, Pa. – Chesapeake Energy Corp. and its subsidiary Access Midstream Partners cheated Pennsylvania landowners of more than $5 billion in gas and oil royalties through inflated and unreasonable fees, a RICO class action claims in Federal Court. Lead plaintiff, the Suessenbach Family Limited Partnership, seeks damages for racketeering, unjust enrichment, mail fraud, wire fraud, honest services fraud, conversion and civil conspiracy.
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The complaint states: “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 Suessenbachs claim that “Chesapeake’s subsidiaries have paid fees, which are then charged to lessors, for gas pipeline transport to Access Midstream that are many multiples of Access Midstream’s actual costs.” In one case, the family claims, the markup was more than 3,000 percent.
“These deductions were inflated, improper, completely unrelated to the ‘cost of services,’ did not serve to enhance the marketability of gas, and instead, merely served to enrich the co-conspirators who devised the scheme,” the complaint states.
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Under the Guaranteed Minimum Royalty Act, the complaint states, there are two kinds of land leases entered into for natural gas extraction with landowners that promise a royalty to the landowners based on oil and gas price realized by Chesapeake’s subsidiaries. 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.”
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According to the complaint, “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.”
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According to the complaint, Chesapeake got into money trouble almost five years ago when “Despite their dominant role in natural gas extraction in the United States, Chesapeake was experiencing severe financial difficulty, including funding gaps, reportedly due to major capital expenditures and lower natural gas prices and cash flow. As a result, Chesapeake needed cash quickly to service its outstanding debt and fund its operations.
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According to ProPublica, an independent, nonprofit news source cited in the complaint, a rival company executive described the gas-gathering agreements this way: “Chesapeake had found a way to make the landowners pay the principal and interest on what amounts to a multi-billion loan to the company from Access Midstream.”
The Suessenbachs claim that Chesapeake “pledged to pay Access enough in fees to repay the $5 billion plus a 15 percent return on its pipelines.”
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ProPublica, reported in March this year that “Chesapeake executed an adroit escape, raising nearly $5 billion … [b]y gouging many rural landowners out of royalty payments they were supposed to receive.”
According to the complaint, “Chesapeake conspired with Access Midstream to continue its scheme to extract inflated royalty deductions from lessors … in order to … satisfy an off-balance-sheet loan from Access Midstream that was disguised as asset sales. The purpose of the off-balance sheet loan was to hide Chesapeake’s need to ‘raise billions of dollars quickly’ without alerting the market to its financial troubles when it was already saddled with billions of dollars in debt.”
Confused by the answers he received after writing to Chesapeake CEO Robert Lawler, Gov. Tom Corbett asked Attorney General Kathleen Kane to investigate Chesapeake’s deductions from royalty payments. State Senator Gene Yaw also wrote to Kane about Chesapeake, describing its royalty deductions as “cheating,” “stealing,” and “fraud,” the complaint states.
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The Suessenbachs seek class certification, an injunction, disgorgement of ill-gotten gains and damages. Their lead counsel is Robert Schaub with Rosenn Jenkins & Greenwald, of Wilkes-Barre, assisted by Joseph Meltzer, with Kessler Topaz Meltzer & Check, of Radnor. [Emphasis added]
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