$405 million gas verdict could have 'chilling effect'

By Chris Dickerson | Feb 1, 2007


SPENCER – A $405 million weekend verdict in a Roane County class-action suit could have a "chilling effect" on future oil and natural gas development in the state, according to one of the involved companies.

And officials with another of the defendant companies said the verdict reiterates the notion that West Virginia's court system isn't fair and isn't favorable to businesses.

One of the plaintiff's attorneys in the case, however, disputes that claim, saying the jury was attentive during the trial and did what it believed was just.

On Saturday, a Roane Circuit Court jury imposed about $134.3 million in compensatory damages and $270 million in punitive damages against defendants in the case of Tawney, et al. v. Columbia Natural Resources.

CNR is a former NiSource Inc. subsidiary, which was sold in 2003. NiSource, Columbia Energy Group and Chesapeake Appalachia LLC were named as defendants in the lawsuit. Oklahoma City-based Chesapeake Energy bought Columbia Natural Resources of Charleston in November 2005 for $2.2 billion.

The plaintiffs in the case, natural gas royalty owners, filed the lawsuit in early 2003 alleging that CNR underpaid royalties by deducting a portion of post-production costs incurred to gather and transport gas to interstate pipelines and by not paying market value for gas produced under all leases, even those providing for payment based on actual proceeds received for the gas. Plaintiffs sought the alleged royalty underpayment and punitive damages.

The defendants believe CNR operated in good faith and that there is no valid basis for any award of punitive damages, "let alone the unwarranted and unreasonable levels granted in this case."

"NiSource believes the verdict in the case is clearly excessive and should be set aside by the trial court or overturned on appeal," the company said in a press statement. "The result, if left standing, would set a precedent that is contrary to existing law and could undermine the legal underpinnings of nearly every natural gas royalty contract in the state.

"As such, the decision not only affects the defendants, but also potentially harms every natural gas producer in West Virginia and could have a negative impact on future oil and gas development."

In another statement, Chesapeake said it also is "surprised and disappointed" by the verdict.

"If allowed to stand, the verdict would have far-reaching negative implications for all gas producers in West Virginia and would reinforce the hostile legal environment all businesses face in West Virginia," the company said. "A judgment has not yet been entered in the case. Important motions must be filed and considered by the trial court before judgment is entered. When judgment is entered, Chesapeake will analyze the judgment and decide the proper course of action including any appeal."

Chesapeake Energy Vice President Henry Hood, speaking on MetroNews' TalkLine radio program with host Hoppy Kercheval, said the company was "very disappointed" with the verdict.

The Oklahoma-based company recently announced plans to build its eastern regional headquarters in Charleston, and Hood said the company had "high hopes" of doing more drilling in the state to provide royalties for property owners and tax revenue for the state.

"We had heard coming into West Virginia that the court system was not fair, not favorable to the business climate, and unfortunately this just reinforces that," Hood told Kercheval.

Scott Segal, one of the plaintiff's attorneys in the case, said the statement from the defendants companies, especially those by Chesapeake Energy's Hood, are "very derisive and not very fair."

"Within this class are many large corporations, many medium-sized corporations and small land companies who complained of the Mahonia deal and the improper deductions which they suffered over the years," Segal said. "This isn't something a bunch of laywers made up."

CNR sold gas to Mahonia for a fixed price for five years in advance in return for $150 million up front. A later deal gave them $250 million up front. That gas then was resold by Mahonia, and the land owners did not receive the proper royalties, the claim says. Mahonia Ltd. and Mahonia Natural Gas Ltd. are subsidiaries of J.P. Morgan Chase & Co.

"The Mahonia deal ... the only other people who did a deal with them besides Columbia was Enron," Segal said. "The jury was able to see the actual documents and the Securities and Exchange filings."

The three components behind the land owners not getting the proper royalties, Segal said, were the Mahonia deal, gathering cost deductions and volume deductions.

"The way they did these deductions and this Mahonia deal were not proper," he said.$$$

Segal said the defendant companies' comments after the verdict were extremely unfair to the judiciary and the jurors.

"The jury spent three week on this case," he said. "They worked for three weeks, and they heard all of the defense witnesses. They came down on the side that this is not the way we want businesses to conduct themselves in West Virginia."

The plaintiff's case never wasn't about the company collecting money.

"It was that they did it on the backs of the royalty owners and didn't tell the royalty owners that they did it," he said. "It was wrong and fraudulent.

"It was done behind the backs of people. That's why, I think, the jury got so upset. The plaintiffs had to hire lawyers and file lawsuits to get the truth on the table."

Segal also said he thinks the defendants received a fair shake during the trial process.

"The judge gave most of the instructions their lawyers asked for," he said. "Their defenses ... was that they thought it was legitimate to do what they did.

"It's not like anybody's hands were tied. If you could see the facial expressions of their attorneys, I think they thought they had a fair airing of the evidence."

In addition to Segal, Charleston lawyers Marvin Masters and Mike Carey were the trial attorneys. Additional counsel included George Scott, Mark Adkins, Tom Lane and Robert Douglas.

The verdict and award of damages are subject to review by the trial court, which could result in the verdict being set aside or reduced. The defendants say they will appeal any adverse judgment.

The case was heard by Roane Circuit Judge Tom Evans. The lawsuit was initially brought by Garrison Tawney, a retired teacher from Looneyville. He died after the lawsuit was filed in 2003.

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