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Chesapeake to continue paying gas royalties in bankruptcy but litigation is halted

HARRISBURG — Natural gas royalty payments to landowners will continue uninterrupted despite Chesapeake Energy filing for Chapter 11 bankruptcy, the company says.

However, the filing Sunday by the Oklahoma-based pioneer in extracting natural gas from shale rock has put a hold on litigation in federal and state courts over royalty payments.

“We will continue to operate the business as usual throughout this restructuring process and we will continue making royalty payments without interruption,” Chesapeake has assured landowners.

Royalty checks issued before the bankruptcy filing may be cashed, it says. If a check was denied, try again, the company says.

Chesapeake, which leases approximately 538,000 acres in Pennsylvania and continues to seek permits to drill wells, reported a debt of $9.5 billion at the end of 2019.

It has entered a plan with lenders to cut $7 billion of its debt and said it will continue to operate as usual during the bankruptcy process.

“Chesapeake’s bankruptcy filing is yet another tactic to delay and deceive the fine landowners,” Attorney General Josh Shapiro charged.

“The facts are clear – Chesapeake owes the good people of Bradford, Susquehanna counties millions of dollars. They can run to bankruptcy court but they can’t hide from us.”

On Thursday he asked the state Supreme Court to declare the royalties case before it and a related one in Bradford County excepted from the automatic stay caused by the bankruptcy filing.

The state’s high court in May heard arguments in the suit then Attorney General Kathleen G. Kane filed in 2015 in Bradford County on behalf of private landowners.

Kane accused gas extractors of using deceptive, misleading and unfair tactics to obtain leases.

The issue before the Supreme Court is whether those tactics fall under the Unfair Trade Practices and Consumer Protection Law and if antitrust remedies can be pursued under that statue.

Kane alleged property owners were promised certain amounts in royalties when they signed leases to allow drilling but received lower payments once the wells started producing.

The suit followed an investigation sparked by protests by property owners, especially those in Bradford County, over low royalty payments.

A farmer reported getting a $1.10 check in 2014 for gas taken from two well pads on his land in the Sayre area.

In fighting the suit, Chesapeake Energy Corp., Anadarko Petroleum Corp. and their affiliates claim the Unfair Trade Practices and Consumer Protection Law does not apply to the leases.

But, now retired Lycoming County Senior Judge Kenneth D. Brown, specially assigned in Bradford County, ruled it did.

Chesapeake and Anadarko appealed to Commonwealth Court claiming they merely are leasing subsurface mineral rights and are not selling or distributing anything so the law does not apply.

In a March 15, 2019, decision with one partial dissent, Commonwealth Court found gas leases were sales and thus fell under the consumer law.

The appeal of that decision before the Supreme Court is one of multiple suits in Pennsylvania and elsewhere regarding the calculation of royalty payments.

A number of property owners in 2013 sued Chesapeake in U.S. Middle District Court contending it is improper to deduct from royalties the cost of such things as dehydration and compression.

Judge Malachy Mannion in September 2015 certified the suit as a class action and gave preliminary approval to a proposed settlement that would have resulted in class members at that time sharing in more than an estimated $17 million.

Chesapeake also agreed to modify how it calculates royalty payments on a going-forward basis.

The settlement still is awaiting final approval because the state attorney general’s office expressed concerns it could affect the outcome of the litigation before the Supreme Court.

It will be interesting to see how it all comes out, said Thomas S. McNamara, a lawyer for some of the plaintiffs.

Royalty claims are usually treated as unsecured creditors in a bankruptcy case, he said.

Chesapeake has information about its bankruptcy filing on its website www.chk.com and has established a restructuring hotline (800-907-2082).

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