(01/11/2007)
Trial underway in class-action lawsuit

By David Hedges, Publisher
Times Record-Roane County Reporter

More than a hundred million dollars. And that's just for starters.

That's what attorneys in a huge lawsuit over natural gas well royalties say their clients are owed, even before the trial got started.

As the trial began this week, both sides agreed the plaintiffs in a class-action lawsuit involving gas well royalty payments had already won something.

They just don't know how much.

It could be in excess of a hundred million dollars. And, if you accept the argument of attorneys who filed the action against the former Columbia Natural Resources and related companies, that's just for one part of the case.

These same attorneys say CNR (now Chesapeake Energy) committed fraud against 8,000 to 10,000 royalty owners in the state.

On the other side, the defense agreed that court rulings issued before the trial started have already determined CNR and its successors owe royalty owners something. They just disagree over the amount.

That and several other issues are to be decided in the trial that is believed to be the county's first class-action lawsuit.

After a full day was spent Monday selecting a jury, seven men and three women were picked for the six-member jury and four alternates. Roane Circuit Judge Tom Evans decided to go with a higher number of alternates than normal because the trial is expected to take three weeks to complete.

Opening remarks got underway Tuesday, when each side took about two hours to outline their case in presentations that included computerized audio-visual technology.

In addition to about a half dozen lawyers at each table, the courtroom was crowded with several more attorneys on hand to observe the proceedings for one reason or another. Some represent other oil and gas companies named in four other class actions brought since the suit against CNR was filed in 2003.

There were also technicians and legal assistants on hand to help with the presentations, and even a private court reporter, that, in addition to the court's regular reporter, was taking down every word of the proceedings.

In his opening remarks, defense attorney Tim Miller quipped that there were more lawyers than jurors.

"It's a complicated case," said Miller. "And it's going to be awfully boring."

Miller, part of the Robinson & McElwee firm representing Chesapeake, said the company bought CNR in 2005 and came to West Virginia to open its eastern regional headquarters.

Marvin Masters, lead attorney for those representing the royalty owners, said Chesapeake bought CNR's parent company for $2.2 billion.

In his opening, Miller said there were seven major issues in the case.

He said Evans had already ruled that the company could not take post-production expenses from payments to royalty owners, and that old flat-rate leases, sometimes paying only a few hundred dollars a year, had to be converted to standard leases which pay royalty owners a 1/8th interest.

On these two issues, Miller said the only remaining question is how much the company will have to pay to royalty owners.

In his opening, Masters said that out of 8,000 to 10,000 royalty owners involved, 651 had flat rate leases. He said the flat-rate leases had been banned by the state legislature in 1982.

An even bigger issue is the expenses for gathering, compressing and processing gas that Masters said CNR began deducting from royalty payments in late 1992.

Going back to 1993, those deductions alone amount to more than $100 million, Masters said. When interest is added, he said the total exceeds $150 million.

He said the jury should also award punitive damages to prevent future violations.

Masters said the case started when Looneyville resident Garrison Tawney, a retired teacher who is now deceased, began questioning royalty payments for a well on his property.

While Masters tried to put a face on the thousands of royalty owners, introducing a few sitting in the courtroom including Tawney's daughters, local attorney Orton Jones and Walton resident Larry Parker, Miller pointed out that about 30 percent of the royalty owners were large landholding companies that own thousands of acres in the state that produce revenue through the sale of coal, timber and other resources.

Miller said Tawney was an educated man who had a local attorney, Richard Brumbaugh, go over his lease before he signed it. He said Brumbaugh, also now deceased, was one of the top oil and gas attorneys in the state and made several changes to the lease.

Also at issue is the price royalty owners received for their gas.

Masters claimed CNR sold gas under a long-term contract to a company on the Island of Jersey in the English Channel. He said the company consisted of "no more than a few lawyers and maybe a secretary."

He said the gas was sold at a price below the fair market value.

Miller responded by saying the industry has many small companies and individuals that buy and resell contracts for gas. Under the five-year contract, he said the CNR locked-in "historically high prices" for its gas.

Unfortunately, he said, the market would go even higher.

"Gas prices went wild," Miller said. "There was no way we could have predicted that."

Another defense attorney, Henry Lawrence of the firm of Steptoe & Johnson, said if royalty owners lost out by underselling the gas, CNR lost out even more.

If royalty owners lost $30 million, as he said plaintiffs' attorneys claimed, then CNR lost over $200 million by selling its gas below value.

"CNR was motivated to get the best price for its gas, because 7/8ths of that price went to CNR," Lawrence said.

Also at issue are questions over the loss of gas during transmission, called "shrinkage," the alleged sale of natural gas liquids without reimbursement to royalty owners and questions about unmetered wells.

Masters said CNR committed fraud against the royalty owners in a variety of ways.

"The defendants broke the rules, broke their promise and broke the trust" of the royalty owners, Masters told the jury. "You will decide what their rights are and the compensation they are entitled to."

Read the rest of the story at   www.thetimesrecord.net


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