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Chesapeake Royalty Suit Is Time-Barred, 6th Circ. Says

The Sixth Circuit on Friday said Ohio landowners had not shown that a Chesapeake Energy Corp. unit hid their underpayment of natural gas royalties, which would have allowed them to evade a four-year statutory deadline to sue the company.

An appeals court panel unanimously said that a lower court properly concluded that the landowners had failed to show that Ohio's four-year statute of limitations to bring royalty claims against Chesapeake Appalachia should be tolled because the company fraudulently concealed the below-market gas prices it used to calculate royalty payments. The panel split 2-1 on claims that Chesapeake fraudulently concealed deductions of post-production costs from royalties.

This was the second time the Sixth Circuit had weighed in on the putative class action launched in 2009 accusing Chesapeake of underpaying royalties. It had previously reversed an earlier dismissal of the suit, saying that Ohio's four-year statute of limitations applies separately to each royalty underpayment and is not based on the first underpayment, and that the lower court had to consider whether any concealment by Chesapeake tolled Ohio's four-year statute of limitations.

Writing for the majority, U.S. Circuit Judge Chad A. Readler said subsequent discovery in the lower court showed that the landowners didn't look at the payment-related data on their royalty check stubs – and in some cases, admitted they had not even read the stubs – so they could not reasonably have relied on any alleged misrepresentations.

“Plaintiffs did not read the check stubs, and thus could not have relied upon any purported discrepancy in the price or costs listed there, let alone to their detriment,” Judge Readler wrote for the majority. “In failing to take even those pedestrian steps, it was plaintiffs’ own conduct that 'kept them from timely bringing suit.'”

The Sixth Circuit panel rejected the landowners' argument that Chesapeake's alleged underpayment wasn't apparent on the face of the royalty check stubs. Judge Readler wrote that the landowners had information on the stubs about how much gas was drilled, allocation of post-production costs and net royalty payments, and could find public information regarding gas prices.

Any dispute about the payment was thus discoverable not by 'moving heaven and earth,' but rather by seeking out public information through the internet or other means,” Judge Readler wrote. “Yet plaintiffs undertook no investigation — even when information easily accessible to them would have tipped them off to the pricing dispute and perhaps to other possible points of disagreement with Chesapeake regarding the royalty leases.”

While U.S. Circuit Judge Jane B. Stranch concurred with her colleagues that the landowners had not sufficiently alleged that Chesapeake fraudulently concealed the below-market gas prices, she said that isn't necessarily the case when it comes to the post-production costs.

Since the record in the case shows that landowners who reviewed their check stubs focused on how much they were paid, that must include an interest in whether Chesapeake deducted any money for post-production costs, Judge Stranch wrote in a partial dissent.

The check stubs reported the landowners' share of post-production costs as “$0.00,” but the record suggests that Chesapeake was deducting post-production costs at the same time, Judge Stranch wrote.

“A genuine dispute of material fact thus remains as to whether defendant’s deduction scheme 'was simply too hidden for plaintiffs' to have discovered and whether plaintiffs fairly relied on the inaccuracies of defendant’s reported $0.00 deductions,” Judge Stranch wrote.

Representatives for the parties could not be immediately reached for comment Friday.

Circuit Judges Chad A. Readler, Jane B. Stranch and Eric E. Murphy sat on the panel for the Sixth Circuit.

Chesapeake is represented by Nicolle R. Snyder Bagnell of Reed Smith LLP; and Daniel T. Donovan and Ragan Naresh of Kirkland & Ellis LLP.

The landowners are represented by Robert C. Sanders of the Law Office of Robert C. Sanders; and James A. Lowe of Lowe Eklund & Wakefield Co. LPA.

The case Lutz et al. v. Chesapeake Exploration LLC et al., case number 19-3315 in the U.S. Court of Appeals for the Sixth Circuit.