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Gas driller Chesapeake Energy Corp. to pay $7.5M to settle Pa. leaseholders' complaint

| Thursday, Sept. 5, 2013, 12:01 a.m.

Chesapeake Energy Corp. has agreed to pay $7.5 million to settle a class-action complaint by Pennsylvania leaseholders who claimed the gas driller shorted them on royalty payments by making unauthorized deductions for some expenses.

The settlement covers thousands of landowners, including some in Western Pennsylvania, who accused the company of recouping post-production expenses from their royalties. Pennsylvania law allows these deductions, but the landowners say their contracts with Chesapeake prohibited them.

Most of the landowners are likely to be from northeast Pennsylvania where Chesapeake, the state's largest driller, has the bulk of its gas operations. The company had only 10 producing wells in Greater Pittsburgh at year's end, according to state records.

“There's not a lot of them, certainly,” said Michelle R. O'Brien, a Lackawanna County attorney for plaintiffs. “But we think it's a fantastic settlement and an excellent opportunity for every class member.”

The agreement was filed on Friday in U.S. District Court in Scranton. Gov. Tom Corbett issued a statement on Wednesday in which he praised the deal and said that he had personally appealed to Chesapeake CEO Robert D. “Doug” Lawler about the case.

Chesapeake disputed many of the case's accusations, according to the court filings. A company spokesman said on Wednesday that its officials were not answering questions from reporters.

“Chesapeake is pleased to have reached a fair and reasonable agreement with (the plaintiffs), and we are hopeful the Court will approve the resolution of this dispute,” spokesman Jim Gipson wrote in a one-sentence, emailed statement.

The company and attorneys for the plaintiffs agreed to settle the case through mediation, which began in June. They negotiated for two months with a retired federal judge as the mediator before reaching a settlement.

The accuracy of royalty payments became a hot-button issue this summer, with state legislators holding public hearings and passing a new law to clarify the data drillers send their royalty recipients. Some landowners had lost as much as 95 percent of their royalty checks to deductions that drillers were taking, according to the National Association of Royalty Owners.

Corbett had told Lawler that he was concerned about whether the company was treating landowners fairly under their leases, said the governor's spokesman Eric Shirk.

“I am very appreciative of Mr. Lawler's personal interest and efforts to resolve this matter,” Corbett said in his statement. “While I understand that serious issues still remain concerning other landowners affected by royalty payment deductions, the proposed settlement is a significant step forward in protecting the interests of Pennsylvania's landowners.”

Both landowners and some industry officials said this summer that Chesapeake was the most aggressive in taking out deductions, some of which are legal under Pennsylvania law. The company as of last August faced more than a dozen lawsuits over royalties, including accusations that it deducted costs from landowners who had leases prohibiting deductions.

This Pennsylvania settlement applies only to people who had a “Market Enhancement Clause” in their leases. The plaintiffs claim the company did not properly follow that clause. They said it was supposed to prohibit deductions that Pennsylvania law otherwise would let the company take for the costs of processing and transporting gas after drilling.

Only Chesapeake knows exactly how many people are affected, where they are and what they're owed, the plaintiffs' attorney O'Brien said. Once it provides that information, attorneys can fully calculate the settlement.

It is designed to repay a percentage of what the company had taken, and will be prorated for each individual leaseholder, according to the settlement. Legal fees for the plaintiffs also can be deducted from the payout, and Chesapeake can't object to what they ask for unless its more than a third of the total award, the settlement states.

U.S. District Judge Malachy E. Mannion will still have to approve the settlement and legal fees. Affected landowners should get legal notices in the mail in the coming months, but they may opt out to try to negotiate their own individual settlements with the company if they like, O'Brien said.

Timothy Puko is a staff writer for Trib Total Media.He can be reached at 412-320-7991 or tpuko@tribweb.com.Bloomberg News contributed to this report.

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