Chesapeake must face Ohio suit over royalties, court says

By Margaret Cronin Fisk
Bloomberg News

Chesapeake Energy Corp. must face an Ohio lawsuit over allegations the company underpaid gas royalties for years, an appeals court said, reinstating the case.

The lawsuit, brought as a class action on behalf of Ohio leaseholders, alleges that a Chesapeake predecessor company began by 1993 to “deliberately and fraudulently underpay the full gas royalty due” and that Oklahoma City-based Chesapeake continued the practice after taking over the leases in 2005.

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An Ohio trial court dismissed the lawsuit in 2010 citing a state law that requires filing such claims within four years after the cause of action occurs. The U.S. Court of Appeals in Cincinnati reversed that decision today, agreeing with the plaintiffs that allegations of continuing underpayment meant the claims aren’t time-barred.

“The plaintiffs are permitted to pursue their breach of contract claim pertaining to any underpayment of royalties that occurred within four years prior to the filing of their complaint in September 2009,” the court said.

The leaseholders may also be allowed to pursue earlier claims if they can prove they weren’t able to discover underpayments before the four-year period because of “fraudulent concealment” by Chesapeake, according to the 23- page decision.

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The Ohio lawsuit isn’t the only case against Chesapeake claiming underpayment of royalties. Chesapeake’s record in these disputes has been mixed. Courts in Kentucky and New York have rejected such cases. A suit in Virginia was allowed to proceed and the parties settled.

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Michael Kehs, a Chesapeake spokesman, declined to comment on the decision. James Lowe, an attorney for the leaseholders, didn’t immediately return a call and e-mail seeking comment.

The case is Lutz v. Chesapeake Appalachia, 10-4538/11-3034, U.S. Court of Appeals for the Sixth Circuit (Cincinnati).

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