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Chesapeake Energy Corporation's 50 acre campus is seen in Oklahoma City, Oklahoma in this file photo taken April 17, 2012. REUTERS/Steve Sisney/Files, via Newscred

Lawyer seeks thousands of clients for case against Chesapeake

Max B. Baker | Fort Worth Star-Telegram

Dan McDonald stands in front of the pulpit of the New Genesis United Methodist Church in southwest Fort Worth wearing gray slacks, a short-sleeve white shirt and his best Texas drawl.

Holding a microphone, he paces within the sanctuary where usually the pastoral message speaks of love and hope and compassion. Tonight, McDonald growls about an “embezzler” and a “thief.”

And while McDonald is not a preacher, the 58-year-old attorney speaks with a missionary zeal for his latest crusade: small landowners who are upset about the dwindling size of their royalty checks and suspect they are being cheated out of money by Chesapeake Energy.

“I can’t tell you how dishonest these people are. The dishonesty is breathtaking,” McDonald tells about 250 people — old, young, black, white, Hispanic, retired, working stiffs — many of them homeowners from the Candleridge neighborhood in southwest of Fort Worth. “They have stolen our money. They have cheated us.”

It is a fiery message McDonald spouts at meetings across Tarrant and Johnson counties as he seeks to sign up thousands of clients to sue the gas drilling behemoth. He has turned up the heat on Chesapeake by shelling out money for 12 billboards across North Texas attacking the company, setting up a website called RoyaltyRipoff.com and sending out mass mailings that flatly accuse the company of fraud.

Describing it as a “populist movement,” the hard-charging McDonald is so confident of building a winning case against Chesapeake that he is making similar appeals to landowners in Pennsylvania and Louisiana where the Oklahoma City-based company is also a big player in sinking wells for natural gas. Earlier this month, he held his first five meetings — and a teleconference — in Pennsylvania.

So far, Chesapeake is not doing anything to stop McDonald — or to simply shut him up. The company is aware of his tactics, including his pointed public accusations. In court documents the company has generally denied being involved in any schemes to defraud anyone or making any misrepresentations or false promises.

“We disagree with Mr. McDonald’s allegations and will address them in the appropriate forum,” said Gordon Pennoyer, a company spokesman.

And while Chesapeake is settling similar disputes with other institutional leaseholders — it recently agreed to pay the city of Arlington $700,000 over royalty claims and the earlier this year the Tarrant Regional Water District $1.8 million — it is not rolling over every time it is sued.

The company was victorious in federal appeals court decisions in July which ruled that Chesapeake can deduct post-production costs from royalty checks — a point that goes to the heart of the lawsuits being filed by McDonald’s clients. And it is fighting litigation with the city of Fort Worth and prominent local families including a member of the Bass clan and the Hyders.

Disputes over royalty payments are as old as Spindletop, oil and gas attorneys say. Generally described as contract disputes, they typically are settled out of court and on the basis of the exact terms of the lease, not the flamboyant language of a plaintiff’s lawyer.

Shayne Moses, the attorney who represented the city of Arlington and the Dallas/Fort Worth Airport when it settled with Chesapeake for $5 million, said that these are entirely different kinds of cases compared to the personal injury and medical malpractice cases McDonald is known for handling. McDonald is a good attorney, but this is different, he said.

“This isn’t the same as a knee and hip,” said Moses. “There are so many different factors.”

McDonald is using his experience in handling what are called “mass torts,” where attorneys group multiple plaintiffs with similar complaints in individual cases. Attorneys and law professors say he is probably spending millions of dollars to build his cases against Chesapeake, which has already hired some of North Texas’ biggest and best law firms to defend it. And McDonald is doing it all on a contingency basis. If he doesn’t win, he doesn’t get paid.

“They (mass tort lawsuits) are expensive and they are labor intensive and you are taking on a company with vast resources,” said Pete Kaufman, a Los Angeles attorney who specializes in this type of litigation. “You have opponents who never seem to run out of attorneys or money.”

Hitting a big play

McDonald likes to tell potential clients he is their neighbor, and that he feels their pain.

The lawyer says he learned of Chesapeake’s actions firsthand when he had trouble getting paid royalties on investment property he owned in White Settlement. He said it took more than two years, and several calls to Oklahoma City, before he saw his first royalty check.

By then the River Oaks native heard rumors that others were having similar problems extracting money out of Chesapeake. Some landowners, who had signed lucrative leases during the mid-2000s frenzy that put unexpected money in their pockets with signing bonuses, said their checks were suddenly shrinking.

By late 2013, McDonald decided to drill a little deeper. The son of a vending machine company owner and a school teacher who instilled in him the value of hard work, McDonald had been involved in other complex lawsuits and knew what to do.

He hired landmen — the same ones who pushed the leases that the landowners are now griping about — and dispatched them to the Johnson County courthouse where they collected the names of 5,000 mineral owners. McDonald then sent the leaseholders letters asking “if they were happy campers.”

“And the phone rang off the wall,” McDonald said. He knew he had hit his own big play.

Related: Chesapeake Energy to face racketeering charges in Michigan trial

Time after time, property owners, many of them who owned large tracts of land where Chesapeake had sunk wells, told McDonald they were getting drastically higher payouts from companies like XTO and Devon for gas pumped within the same area.

“They were getting $3 (mcf, or per one thousand cubic feet) from XTO and less than a dollar from Chesapeake,” McDonald said. “These people didn’t have to be convinced they had been cheated.”

McDonald traced their change in fortunes to 2008, when the price of oil and natural gas plummeted as the national economy collapsed. Overextended from buying up gas leases during a nationwide land rush, Chesapeake in 2010 sold 25 percent of its Barnett Shale assets for $25 billion to Total E&P USA, a French energy giant, and its pipeline and gathering system for $4 billion to Global Infrastructure Partners.

In the midst of all this, Chesapeake sent letters to leaseholders saying that it had re-examined the leases many of them had signed that barred the gas producer from deducting any post-production costs from their royalty payments. Chesapeake said that, going forward, it would subtract the costs necessary to get the gas to market, for processes such as compression, dehydration and transportation.

“Royalty owners’ checks dropped in half overnight, and they didn’t do it with pinpoint accuracy. They would do it to whomever they could do it to,” McDonald said.

Larger leaseholders like the cities of Fort Worth and Arlington filed suit. The Hyder family, with a lease covering 1,000 acres, took Chesapeake to court and won an award of $1 million.Billionaire Ed Bass, along with the Trinity Valley School and Texas Health Harris Hospital Southwest, among others, sued over leases covering 3,290 acres.

Smaller leaseholders — some covering a few hundred acres, others only the lot where their house sits — were left holding the bag. Fighting Chesapeake seemed like an insurmountable task.

“It is amazing to me that a big ol’ company like that will chisel people out of what little royalties they get to make up for their losses,” said Buddy Taylor, an 81-year-old retired feed lot operator in Johnson County. At one time, he got a royalty check for $1,000. A later check was for 16 cents.

“I tried to talk to Chesapeake but you can’t hardly get through to those people. I tried to write a letter (but) I thought you needed to have it all legal looking so I forgot that,” said Taylor, who was counting on the money to help out in his retirement.

Representing guys like Taylor against the Chesapeakes of the world is nothing new for McDonald. His entrepreneurial zeal helped him earn millions by representing thousands of clients suing large companies over breast implants, fen-phen and hip replacements.

Since hearing their stories, McDonald has recruited experienced lawyers from other firms to help, including appellate specialist George Parker Young and Mark Oliver, a veteran oil and gas attorney. At his own firm, he has hired four new attorneys and six legal assistants and six landmen. In all, 22 people are working on nothing but Chesapeake.

He recently moved into 12,000 square feet of prime office space on West Seventh Street which, ironically, is not far from the office tower formerly called Chesapeake Plaza.

About 4,000 people have contracted with McDonald in Texas, and he hopes to have 10,000 signed up by Christmas. He has filed about a dozen lawsuits in Johnson and Tarrant counties.

His team will represent clients for free until there is a settlement or a trial. If he wins, he gets 39 percent of the final judgment as attorneys fees, which are often tacked on by the court, allowing the client to keep every dime they win in court.

“It’s about justice. It is about as meritorious a case that I’ve seen in 34 years of practicing law,” most of it handling this kind of litigation, McDonald said. “Tens of thousands of royalty owners have been cheated. If I don’t help them, they won’t be helped.”

“Unconscionable expenses”

There’s a sign near Lem Miller’s family homestead outside Cleburne that gets close to summing up what he and others think about Chesapeake.

“NOTICE: This property’s minerals are leased to Chesapeake Energy, a company with lots of good people. There are, however, some in upper management that will intentionally deceive you,” the sign shouts.

Miller, 60 years old and now a real estate agent in Coppell, grew up in the area working on his Dad’s dairy farm. He calls his neighbors “the salt of the earth.” And while they may be angry about what is happening, they hate the idea of actually suing Chesapeake for their royalty payments.

“These are farmers. They don’t want to fight anybody. They don’t understand this stuff,” he said.

But even Miller was shocked when he sat down recently and studied what Chesapeake was paying for gas from seven wells located on 160 acres near Cleburne compared to what he was getting from properties where Devon Energy was working one well and what three other producers had paid on another.

For example, in July 2013 Chesapeake was setting the price at an average of $1.71 mcf for gas taken from the wells on his property, Miller said, while Devon and Premier Natural Resources said the gas’ value was $3.40 and $3.86, respectively. The average difference was $1.92.

In April 2012, Miller said Chesapeake was only setting the value of the gas at an average of 22 cents, while Devon was at $1.86, or about eight times higher.

“Let’s say (the difference) is 5 percent or 10 percent, I could live with that. But when it’s just ridiculous …” Miller said. “This isn’t rocket science. It’s common sense.”

That is why Miller convinced his neighbor, Weldon Wadsworth, who owns 90 acres next door and has posted the anti-Chesapeake sign, to join him and others in what is called the Clear Creek Unit in hiring McDonald to sue Chesapeake. McDonald is grouping his clients into the same pools to reflect how Chesapeake reported its drilling activity to the Texas Railroad Commission.

In a lawsuit McDonald has filed in Johnson County, Chesapeake is accused of boosting the amount of post-production costs it is subtracting from royalty checks through a “sham” process in which it sold its gas gathering and intrastate pipeline system and then started improperly calculating the costs of transporting the gas to market.

Through this “artifice,” Chesapeake sells the gas to itself in a process that suppresses the actual price — and inflates the actual costs — that could be obtained for the production from the wells, the lawsuit states. It then pays to related entities excessive gathering, compression and transportation costs and deducts them from the royalty payments, documents show.

By focusing on the amount of the expenses being subtracted by Chesapeake in the lawsuits, McDonald hopes to avoid the fate of two lawsuits recently tossed out by the 5th U.S. Circuit Court of Appeals. In those cases, the federal panel decided that royalty owners can be charged reasonable post-production costs, even if other language in the lease says otherwise, citing a Texas Supreme Court case.

“They are charging unconscionable expenses here. There is no basis in reality,” McDonald said. “It has to be reasonable expenses.”

But Chesapeake has argued in other cases that the procedures it uses to drill, market and sell the gas are acceptable and done within the letter of the law and the leases. They’ve said that the royalties are to be based on the price of the gas at the wellhead. But after that sale takes place, an affiliate, Chesapeake Energy Marketing, markets the gas and trades it downstream through pipelines to the next buyer to maximize the price, records show.

What Chesapeake Energy Marketing eventually pays is what is known as the “weighted average sales price” that it gets from an unaffiliated third-party less the actual post-production costs incurred in moving the gas.

Successful in the real estate business, Miller said he never counted on the gas royalties to support his family. But his older sister in Oklahoma, with whom he inherited the land after his parents’ death, needs the money to supplement her Social Security.

“I’m honoring my Dad by taking care of my sister,” said Miller, who still has an emotional attachment to the land and the lessons of hard work he learned toiling alongside his father. “It is something my Dad would want me to do.”

Selling hope

Before entering the Cleburne Conference Center for yet another rally, McDonald stops outside the door of the meeting and said: “I feel like Bono when I walk into one of these things.”

About 70 people are sitting in folding chairs to hear his spiel about Chesapeake “being a stealing, cheating gas company.”

Peppered with questions from the crowd — How long the cases will last? When will they ever see their money? — McDonald tells them that the Johnson County cases already have been assigned to one judge and that he expects the first ones to be heard sometime in the spring.

McDonald closes the meeting, as he does others, by talking about an auto mechanic who approached him after one of his first public gatherings in Cleburne. The mechanic said he had signed with Chesapeake, and at first the checks were about $1,200 a month. Then the infamous 2011 letter came saying production costs would be subtracted, and his checks dropped to $500.

McDonald said the guy was dressed in a blue jumpsuit and covered in grease and dirt from his chin to the soles of his shoes from working six days a week. He told McDonald he didn’t think anyone was going to be able to do anything to help him. That made the attorney’s blood boil.

“Well, there is somebody here now who is going to do something about that,” McDonald said.

But oil and gas attorneys and others familiar with royalty disputes say it will come down to what people agreed to when they signed on the dotted line.

“These cases are rarely settled in court” but in arbitration, said Gene Powell, publisher of the Powell Shale Digest. “It all comes down to the language in the lease. There is not a whole lot involved.”

David Drez, the attorney who represents the Hyder family in their dispute with Chesapeake, said these kind of disputes have been going on for more than a 100 years.

“Go back to when they had Spindletop, as soon as they started drilling and there was money being made people started arguing over whether they were paid right,” Drez said.

 

Max B. Baker, 817-390-7714 Twitter: @MaxBBaker

 

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