Roane Circuit Judge Tom Evans makes a point
Monday in a hearing about the verdict in a
class-action lawsuit over gas royalties

(Photo by Sidney Boggs Photography)

By David Hedges, Publisher

Both sides in a Roane County case that produced a jury verdict of $404 million are trying to improve their situations in post-trial maneuvering.

A Monday hearing in Roane Circuit Court was the first since the verdict was returned Jan. 27.

Defense attorneys are hoping to get the verdict set aside or at least reduced, while the plaintiffs' lawyers may be hoping to actually increase it by adding attorney fees on top of the $404 million.

The jury awarded natural gas well royalty owners $134.4 million in compensatory damages for royalties they did not receive, plus another $270 million in punitive damages designed to punish the gas companies for their actions.

Lawyers for Chesapeake Energy, which bought Columbia Natural Resources (CNR) in 2005, and NiSource are asking Judge Tom Evans to reduce the punitive damages, saying they are not appropriate since the case involved a contract dispute, not fraud.

Plaintiff's lawyers are opposed to any reduction in the award, and may be hoping to increase it by adding attorney fees and expenses on top of the jury's award.

In a brief filed prior to the hearing, lawyers who brought the suit said they are reserving the right to make a motion for attorney fees and litigation expenses after other issues are resolved.

Sources familiar with the case say the attorney fees and expenses could potentially add as much as another $100 million to the jury's award, if approved by the court.

Charleston attorney Marvin Masters, lead attorney for the plaintiffs, said the cost of litigating the case was "enormous" with out-of-pocket costs alone exceeding $1 million.

He said work on the case actually began two years before the county's first class-action lawsuit was filed in 2003.

The team of plaintiffs' attorneys includes Scott Segal, husband of state supreme court justice Robin Davis and one of the state's most successful plaintiffs' attorneys, and the firm of Carey, Scott and Douglas that includes former federal prosecutor Mike Carey and retired Roane circuit judge George Scott. The firm of Bowles, Rice, McDavid, Graff and Love represents large landowners, such as coal and timber companies, which make up about 30 percent of the plaintiffs.

Masters said the actual number of royalty owners in the case was 10,440.

He said for 13 years CNR sent royalty owners statements that said nothing was being deducted from their payments to cover transmission and related costs when, in fact, these deductions were being made.

Masters also said the royalty statements listed incorrect volumes and sales prices.

He said CNR's database contained the correct figures, although that information was never shared with royalty owners.

"They knew they were causing harm and attempted to conceal it," Masters said. "No one has been charged with a crime in this case, but the statute says it should be done."

Scott said Chesapeake was continuing to make the deductions, even though the state supreme court ruled last June that the deductions were improper.

"This is almost nine months ago," Scott said. "They're still doing it."

Masters said the compensatory damages amounted to only about $10 million per year over the 13-year period in question.

He said NiSource had a net worth of $5 billion, and Chesapeake paid $2.2 billion to purchase CNR.

"Certainly the net worth of these two companies substantiates a punitive damage award of $270 million," Masters said.

The largest portion of the award involved the advance sale of gas, or "forward sales" in which the companies sold gas on five-year contracts and received hundreds of millions up front.

The plaintiffs complained that, although the gas was sold at what was then a record-high price, the companies should have known the price would go even higher.

Defense attorney Ancil Ramey, a former state supreme court administrator who now works for Steptoe & Johnson in Charleston, said the companies should not be punished for not being able to predict the future.

"You can't use 20/20 hindsight, elsewise corporations would be paralyzed," he told Evans.

Evans pointed out that contracts prepared by CNR's parent company did indemnify the company buying the gas on the long-term contract from potential claims that might be filed by royalty owners.

Ramey said that while lawyers for royalty owners complained the forward sales were not disclosed to royalty owners, the sales were made public though filings with federal regulatory agencies.

Ramey said CNR did not have a fiduciary relationship with royalty owners in the same manner as a company would have with stockholders, "Rather, by definition, their relationship was adversarial," he wrote in court filings.

Ramey said punitive damages weren't appropriate where a dispute over royalty payments were part of a disagreement over legal interpretations. If Ramey's argument is successful, that could reduce the punitive damages.

Evans told Ramey he was not likely to change rulings he made during the case, although he did agree that punitive damages required a finding of fraud.

However, Evans did say that the evidence could support a finding of "willful, wanton misconduct and criminal indifference to a civil obligation."

In a post-trial brief, Ramey said courts throughout the country had interpreted similar lease provisions in the same manner as CNR.

Ramey said in his brief "Rather than depart from hundreds of years of Anglo-American jurisprudence, the Court should set aside the punitive damages award."

The brief also said the defense wants to contact jurors regarding the integrity of the jury process.

After almost three hours of arguments Monday morning, Evans was preparing to close the rest of the hearing to the public so lawyers could discuss pre-trial settlement negotiations, which Evans said would show if both sides had acted in good faith.

Plaintiffs' attorneys said Monday the most the defense had offered to settle the case for was 20 percent of the damages, as calculated by the defense.

Before the closed hearing could begin, this reporter asked for another hearing to determine if that hearing could be closed to the public (See Between the Lines, Page 4A).

Evans agreed and set that hearing for 3 p.m. next Monday.

The judge also delayed hearing arguments from Spencer attorney Tom Whittier, who is representing attorneys who have filed a similar class-action suit in Kentucky against Chesapeake. Those attorneys want the court records opened to assist them in preparing that suit.