In re Chesapeake Energy Corp.

• Decision Date: 13 October 2021
• Docket Number: CIVIL ACTION NO. H-21-1215
• Citation: 567 F.Supp.3d 754
• Parties: IN RE: CHESAPEAKE ENERGY CORPORATION
• Court: U.S. District Court — Southern District of Texas

567 F.Supp.3d 754

IN RE: CHESAPEAKE ENERGY CORPORATION

CIVIL ACTION NO. H-21-1215

United States District Court, S.D. Texas, Houston Division.

Signed October 13, 2021

Arleigh P. Helfer, III, Ira Neil Richards, Schnader Harrison et al., Philadelphia, PA, Aaron D. Hovan, Attorney at Law, Tunkhannock, PA, for RDNJ Trowbridge, Robert Dunlap, Wendy Dunlap.

Ira Neil Richards, Arleigh P. Helfer, III, Richard A. Barkasy, Schnader Harrison et al., Philadelphia, PA, for Pennsylvania Proof of Claim Lessors.

Michael D. Donovan, Pro Hac Vice, Donovan Litigation Group LLC, Malvern, PA, for James L. Brown, Alice R. Brown.

Michael D. Donovan, Donovan Litigation Group LLC, Malvern, PA, Tyler Graden, Kessler Topaz et al., Radnor, PA, for The Suessenbach Family Limited Partnership, James S. Suessenbach, Gina M. Suessenbach.

Matthew Dudley Cavenaugh, Jackson Walker, Houston, TX, Daniel T. Donovan, Palmer Quamme, Ragan Naresh, Kirkland & Ellis LLP, Washington, DC, for Chesapeake Energy Corporation.

AMENDED MEMORANDUM OPINION AND ORDER

Lee H. Rosenthal, Chief United States District Judge

On August 23, 2021, this court issued a memorandum opinion and order in this case. (Docket Entry No. 69). The court withdraws that memorandum opinion to correct clerical errors, none of which change the court's underlying analysis. This amended memorandum opinion and order supersedes the memorandum and order issued on August 23, 2021.

Oil-and-gas leaseholders in Pennsylvania, the bankruptcy claimants, filed three class-action lawsuits in the Middle District of Pennsylvania against Chesapeake Energy Corp. for improperly calculating royalties owed under their leases. The Pennsylvania Attorney General also sued Chesapeake for improperly calculating royalties. The Pennsylvania lawsuits had proceeded for nearly seven years when Chesapeake filed for bankruptcy in the Southern District of Texas in June 2020.

After roughly nine months in the bankruptcy court and mediation, the leaseholders, the Pennsylvania Attorney General, and Chesapeake reached three proposed settlements. In February 2021, Chesapeake reached a preliminary settlement with the Pennsylvania Attorney General. That settlement is not before the court. The parties asked the bankruptcy court for preliminary certification of the two other settlement classes and preliminary approval of the settlement terms. The bankruptcy court denied objections, the objectors appealed, and this court affirmed the bankruptcy court, holding that the two settlement classes should be preliminarily certified and the settlements approved.

The leaseholders and Chesapeake have moved to have the two settlement classes certified and the class settlements finally approved. (Docket Entry Nos. 41, 42, 43, 44, 45, 47). Counsel for both classes have also moved for approval of attorneys’ fees, costs and expenses, and incentive awards for the named plaintiffs in one of the classes. (Docket Entry Nos. 43, 44, 45). Along with the proposed settlements, the settling parties submitted affidavits from counsel for the proposed classes and valuations of the proposed settlements. The objectors challenge the motions for final approval. (Docket Entry Nos. 50, 53).

While the immediate cash relief is lower than in the two settlements that were proposed in the Middle District of Pennsylvania—which preliminarily approved the settlement for leaseholders with market-enhancement clauses—the record shows that it is appropriate to finally certify the two proposed classes and approve the proposed class settlements. The majority of the leaseholders did not file proofs of claims in the bankruptcy court and will effectively be unable to recover without the settlements. Class counsel, Chesapeake's counsel, the named plaintiffs, and the Pennsylvania Attorney General approve both settlements. The litigation proceeded for nearly seven years before the bankruptcy. The settlements were reached after arm's-length negotiations and mediation. Finally, Chesapeake's bankruptcy likely eliminated the possibility of a larger immediate recovery for the class members. The record shows that the injunctive relief guaranteed by the settlements will provide immediate and long-lasting benefits to the Pennsylvania leaseholders, benefits that the lawsuits sought in the first place.

Based on the record, the briefing, and the arguments of counsel presented at the final fairness hearing, the motions for certification of the two settlement classes, final approval of the proposed class settlement agreements, and for an award of attorneys’ fees, costs and expenses, and incentive awards, (Docket Entry Nos. 41, 42, 43, 44, 45, 47), are granted. The objections are overruled. The reasons for these rulings are set out below.

I. Background

In late 2013 and early 2014, Pennsylvania oil-and-gas leaseholders filed three lawsuits in the Middle District of Pennsylvania against Chesapeake, alleging that it underpaid royalties due to the leaseholders under each lease. (Docket Entry No. 8 at 1264). In the first lawsuit, Demchak v. Chesapeake , the plaintiffs alleged that Chesapeake improperly deducted postproduction costs in calculating the royalties due. (Demchak Partners Ltd., et al., v. Chesapeake Appalachia, LLC , No. 13-2289 (M.D. Pa. 2013)). The plaintiffs in the Demchak class have leases with market-enhancement clauses, which preclude Chesapeake from "deducting [postproduction costs] incurred to transform leasehold gas into marketable form," but allow Chesapeake to "deduct a pro-rata share of [postproduction costs] incurred after the gas is marketable if they enhance the value of the marketable gas." (Docket Entry No. 8 at 1288; see also id. 1543). Postproduction costs are the costs of "gathering, compressing, treating, dehydrating, processing, transporting, or transmitting" gas. (Docket Entry No. 8 at 1289). The Demchak plaintiffs alleged that Chesapeake improperly deducted postproduction costs for "gathering," dehydrating, and compressing gas to meet "the quality and pressure specifications of the interstate pipeline into which it is delivered." (Demchak Partners Ltd. , No. 13-2289, Docket Entry No. 1 at ¶ 23).

At the same time the case was filed, Chesapeake and the Demchak plaintiffs entered into a classwide settlement agreement, which the Pennsylvania federal district court preliminarily approved in 2015. (Docket Entry No. 8 at 1264). The agreement secured over $17,000,000 for the class members. (Demchak Partners Ltd. , No. 13-2289, Docket Entry No. 91). Before reaching the initial class settlement agreement, counsel for the Demchak plaintiffs investigated potential claims for royalty underpayments, interviewed Chesapeake's accounting employees, and reviewed production documents and royalty data. (Docket Entry No. 46 at ¶ 7–10). The settlement was awaiting final approval when Chesapeake declared bankruptcy.

In the second and third lawsuits, Brown v. Access Midstream Partners, LP and Suessenbach v. Access Midstream Partners, LP , the plaintiffs alleged that Chesapeake underpaid royalties by improperly inflating the postproduction costs it deducted from royalty payments, in violation of the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1962(c) – (d). (See Brown v. Access Midstream Partners, LP , No. 14-00591 (M.D. Pa. 2014); Suessenbach v. Access Midstream Partners, LP , No. 14-01197 (M.D. Pa. 2014)). The leases involved in the Brown and Suessenbach cases do not have market-enhancement clauses. Chesapeake and the Brown and Suessenbach plaintiffs settled in August 2018 in Pennsylvania. (Docket Entry No. 8 at 1264). The settlement was awaiting preliminary court approval when the bankruptcy filing intervened. (Docket Entry No. 8 at 1264).

The Pennsylvania Attorney General sued Chesapeake in May 2016 for allegedly violating Pennsylvania antitrust law and the Pennsylvania Unfair Trade Practices and Consumer Protection Law by inflating midstream prices, improperly deducting postproduction costs from royalty payments, engaging in unfair leasing practices, and restraining trade. (Docket Entry No. 8 at 1286). An appeal before the Pennsylvania Supreme Court was pending when Chesapeake declared bankruptcy. (Commonwealth v. Chesapeake Energy Corp., et al. , No. 81-MAP-2019 (Pa. 2020); see also Commonwealth v. Chesapeake Energy Corp. , ––– Pa. ––––, 247 A.3d 934 (2021) ).

In June 2020, Chesapeake filed for bankruptcy under Chapter 11 of the United States Bankruptcy Code in the Southern District of Texas. (Docket Entry No. 8 at 13, 1266). The automatic stay halted the Demchak, Brown, Suessenbach , and Pennsylvania Attorney General lawsuits. (Docket Entry No. 8 at 1425). The Pennsylvania Attorney General filed a proof of claim before the bankruptcy court in the Southern District of Texas, as did 161 individual leaseholders. (Docket Entry No. 8 at 1266). In January 2021, the bankruptcy court confirmed Chesapeake's plan of reorganization. (Docket Entry No. 8 at 1266–67).

On February 9, 2021, Chesapeake reached a preliminary settlement with the Pennsylvania Attorney General. The terms of that settlement are as follows:

• Pennsylvania oil-and-gas leaseholders may choose whether to have their royalties calculated based on the in-basin index price or the netback price. The in-basin index price is the average of two oil-and-gas price indexes, without deducting postproduction costs. The netback price is the average sales price Chesapeake receives for its "production month sales to third parties minus a proportionate share" of postproduction costs. (Docket Entry No. 8 at 1268).

• Chesapeake will pay Pennsylvania $5,300,000, which the state will distribute to Pennsylvania leaseholders.¹ (Docket Entry No. 8 at 1268).

A month later, Chesapeake reached a preliminary settlement with the Demchak, Brown , and Suessenbach plaintiffs. The Demchak plaintiffs entered what is identified as the MEC settlement, and the Brown-Suessenbach plaintiffs entered into the Non-MEC settlement. These settlements were negotiated...