This article originally provided by The Times Record

November 15, 2008

Checks from royalty verdict not in mail yet

By DAVID HEDGES
Publisher

The more than 10,000 natural gas well royalty owners waiting on their share of a $400 million verdict in Roane Circuit Court may have to wait a little longer.

But it won't be as long as they have waited already, according to Marvin Masters, lead attorney in the class-action lawsuit.

Attorneys have reached a preliminary settlement in the case that alleged Columbia Natural Gas (CNG) shortchanged royalty owners over a period of several years.

That proposal is the subject of a hearing in Roane Circuit Court set for Saturday, Nov. 22.

If all goes well, royalty owners may know the amount of their share by early next year.

"My sense is that if the settlement is approved on the 22nd, we ought to be getting a resolution of the amounts in two to three months," Masters said.

After a three-week trial in January of last year, a jury in Roane Circuit Court awarded the plaintiffs $134.3 million plus another $270 million in punitive damages, for a total of $404.3 million.

The proposed settlement reached Oct. 23 would reduce that to $380 million and also forego interest accumulating since the verdict.

In exchange, the successors to CNR — Chesapeake Energy and NiSource — would drop their appeal to the U.S. Supreme Court.

The suit filed in 2003 alleged CNR deducted production and other expenses from royalty checks, and hid that from royalty owners who traditionally received a one-eighth share before expenses.

The suit also said CNR was still paying several flat rate leases, some of which gave royalty owners only $100 a year, even though those had been prohibited for several years.

In the three weeks since the preliminary settlement was reached, Masters said notices have been sent to the royalty owners.

"The members of the class should have already received the notices, or are receiving them now," Masters said.

He said some royalty owners may have changed addresses since the class was formed in 2004, so their notices could be delayed.

The class members are being notified of the proposed settlement and of the Nov. 22 hearing, when they can object to the proposal.

Should Judge Tom Evans approve the settlement, Masters predicted it would be a matter of months before royalty owners begin receiving their share. Payments will be distributed by a CPA firm in Hurricane.

But there will still be a few bugs to work out in the meantime, including who gets what out of the $380 million.

The attorneys have agreed to take no more than one-third, which amounts to nearly $127 million.

That would leave more than $253 million for the royalty owners.

If divided equally, that would give each of the 10,440 royalty owners more than $24,000. But Masters doesn't expect that will be the case.

Instead, he said each class member's portion would depend on the volume of production of each well and the percentage of ownership. The dates of ownership will also be considered.

The settlement will be divided proportionately according to those factors.

"It's complicated because we are going back 18 years on some things," Masters said.

Royalty owners can collect damages for production back to 1990, while the flat rate lease cases only go back as far as 1993. In addition, the flat rate leaseholders will not receive punitive damages, which amounts to two-thirds of the total.

"The good part for the flat rate owners is they get their leases converted to one-eighth royalty going forward, plus they get paid for damages," Masters said.

Masters said the flat rate leases account for more than 900 of the total number of royalty owners.

The W.Va. Supreme Court has already turned down an appeal request filed by the gas companies.

A request for an appeal to the U.S. Supreme Court is set for Nov. 25, three days after the hearing in Roane County. Should the proposed settlement be approved, the defendants have agreed to withdraw that appeal.

The U.S. Supreme Court has already slashed the punitive damages in one high-profile case this year. Exxon had been ordered to pay $2.5 billion in punitive damages following the Valdez oil spill in 1989, but in June of this year the high court reduced the punitive damages to about $500 million.

In its ruling, the court said that under federal maritime law, punitive damages couldn't be any higher than the compensatory damages the company was ordered to pay.

"That is of some concern," Masters said. "If the U.S. Supreme Court would cut (the punitive damages) it would have a significant effect on recovery in this case.

"But if Judge Evans approves the settlement, the defendants will withdraw their appeal," he said. "That's part of the settlement agreement."