After receiving final approval from the Arlington City Council on August 19, 2014, the City of Arlington executed formal settlement documents in connection with the City’s royalty underpayment lawsuit against Chesapeake Exploration, L.L.C and TOTAL E&P USA, Inc. In August 2013, the City filed a lawsuit against Chesapeake and TOTAL in Tarrant County, Texas, asserting a number of claims involving oil and gas leases covering over 1,900 acres of City-owned parks and other properties. The settlement resolved a majority of the claims asserted in the lawsuit. The parties agreed to carve out several remaining issues addressed by the lawsuit and are continuing to work toward a resolution of those issues in the hope of avoiding further litigation.
The City was represented in the lawsuit by Shayne Moses, David Palmer and Tim Howell of the Fort Worth law firm of Moses, Palmer & Howell, L.L.P. The lawsuit asserted claims that Chesapeake and TOTAL failed to honor their commitments to the City under the governing oil and gas leases by, among other things, underpaying royalties, deducting unauthorized and unreasonable post-production costs from the City’s royalties, selling gas produced under the leases to affiliates without the City’s permission, failing to comply with certain pooling and continuous development obligations, and failing to release acreage that was not retained or earned under the terms of certain leases.
Under the settlement, the City will be paid a lump sum of $700,000 to resolve its claims for royalty underpayments and improper cost deductions that occurred prior to 2014. Looking forward, the settlement clarifies that no post-production costs of any type are to be deducted from or otherwise directly or indirectly assessed against the City’s royalty, such that the City will receive a true cost-free royalty on all production after January 1, 2014. This will result in an additional, substantial payment to the City in reimbursement of all costs deducted from the City’s royalties since the beginning of this year. The settlement also establishes a set formula for calculating the City’s future royalties. The formula is based upon the higher of the price actually received by Chesapeake and TOTAL from sales of the City’s gas (after adding back in any post-production costs deducted or netted out from that amount) or a published index price minus a defined adjustment. As part of the settlement, Chesapeake and TOTAL have also agreed to release certain non-retained acreage that was originally covered by some of the City’s leases, but is not included in an existing, producing unit.
“This settlement represents a victory for the City of Arlington and its citizens,” said Mr. Moses. “It not only compensates the City for significant past underpayments, but also ensures that no post-production costs will be charged against the City’s royalties in the future and provides certainty as to how Chesapeake and TOTAL must calculate royalties going forward. It is anticipated that the agreement clarifying how future royalty payments will be calculated should result in hundreds of thousands, if not millions, of dollars of additional income to the City over the life of the leases. We are pleased with the result because it protects the public interest by assuring that the original intent of the leases will be honored and that the City will be paid what it is truly owed in the future.”
The settlement calls for the City’s claims in the lawsuit to be dismissed. The Arlington Independent School District, which is also represented by the firm of Moses, Palmer & Howell, L.L.P., joined the City’s lawsuit in November 2013 and asserted similar royalty underpayment and lease non-compliance claims related to its oil and gas leases. AISD’s claims in the lawsuit are not affected by the City’s settlement and remain pending in the 141st Judicial District Court of Tarrant County.
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