City of Fort Worth, Texas, sues Chesapeake Energy Corp. alleging underpayment of royalties due to improper deductions and sham sales to affiliates

The City of Fort Worth, Texas, has become the latest landowner to sue Oklahoma City-based Chesapeake Energy Corp. for alleged underpayment of royalties, The New York Times reports (See our Aug 11, 2013, blog post for more information). In the complaint for City of Fort Worth v. Chesapeake Operating, Inc., and Total E&P (USA), Inc., filed in Tarrant County District Court, the city alleges that Chesapeake and Total are "willfully and knowingly violating express and/or implied duties owed to the City" by substantially underpaying the City "royalty payments owed under various oil and gas leases through the use of sham sales to affiliates and/or by improperly deducting costs of gas gathering, transportation, separation, treatment and other production services."

The company owns "drilling rights to more than half of the nearly 500 mineral leases that Fort Worth has issued for city property," the article said. Chesapeake's contract with Fort Worth stipulates that "royalty payments would 'be free of all costs of any kind, including, but not limited to, costs of gathering, production, transportation' and several other listed activities 'directly or indirectly incurred by lessee without prior permission from the city.'" However, in Heritage Resources v. Nationsbank, the Texas Supreme Court ruled in 1996 that "the trade meaning of royalty and market value of the well included possible built-in deductions, rendering meaningless a clause barring deductions from the value of the Lessor's royalty."

For more, read the full story and complaint.

National, Oil & Gas Litigation