"Bait and Switch": Pennsylvania Sues Driller and Pipeline Company Over Deceptive Deals

"Bait and Switch": Pennsylvania Sues Driller and Pipeline Company Over Deceptive Deals
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Pennsylvania’s beleaguered top prosecutor has filed a civil action against two of the nation’s largest oil and gas companies, Chesapeake Energy and pipeline company Williams Partners LP, alleging that the companies defrauded over 4,000 property owners out of the royalties owed for shale oil and gas produced from their land.

“This alleged conduct amounts to a ‘bait-and-switch,’” Attorney General Kathleen Kane said in a statement. “Pennsylvania landowners were deceived in thousands of transactions by a company accused of similar conduct in several other states,” she added, referring to Chesapeake Energy, which has faced class actions in Texas, Louisiana and Ohio over its royalty payments.

Chesapeake Energy, struggling to recover from a series of financial scandals, was able to raise over $5 billion dollars by gouging landowners nationwide and skimping on royalty payments, a ProPublica investigation concluded last year.

The state attorney general’s office said that the lawsuit is expected to help Pennsylvania landowners recover “tens of millions” of dollars in restitution, plus punitive damages.

The new legal action, the product of a nearly two-year long investigation, comes at a time when Attorney General Kane herself faces felony charges in an unrelated matter and is holding office despite a suspended law license, raising questions about her office’s capacity to enforce the state’s consumer protection laws while also facing its own legal struggles.

For years, thousands of farmers, homeowners and others have complained to their elected officials about allegedly deceptive leasing practices they encountered in dealing with landmen representing Chesapeake Energy and many other drillers during the rush to snatch up drilling rights in areas with little history of oil and gas exploration during the shale gas rush.

At least two other class action lawsuits have been filed in Pennsylvania alleging that landowners explicitly negotiated payment terms that were later ignored by the gas companies. The attorney general’s new lawsuit seeks to intervene in the settlement of one such case, valued at over $11 million.

Currently, a second wave of landmen from the oil and gas industry is sweeping across the U.S., seeking the rights to build pipelines to carry shale oil and gas to consumers. Many landowners have reported high pressure sales tactics, like telling landowners that if they refuse to sign, the company will simply seize the right to the land through eminent domain.

The Pennsylvania attorney general’s lawsuit focuses in part on the high pressure sales tactics – including making “take it or leave it” offers and leaving unreasonably short times to make decisions – that played a role in convincing homeowners, farmers and others to sign over their oil and gas rights on Chesapeake’s terms.

The new lawsuit seeks punitive damages of at least $1,000 for each unauthorized deduction as well as payment of the royalties that the state says are owed to over 4,000 landowners. Chesapeake engaged in self-dealing, artificially inflated production charges deducted from landowners royalty checks, and deliberately miscalculated the amount of money it paid out, the lawsuit asserts.

“As a result of the misrepresentations, Chesapeake and other defendants allegedly took deductions and, in some cases, made retroactive deductions of post-production expenses from royalty checks,” the attorney general’s office wrote. “These practices occurred despite landowners’ claims that their leases contained the necessary language to prohibit such deductions.”

As her office takes on a powerful industry, Attorney General Kane remains embroiled in a legal battle over allegations that she wrongfully leaked grand jury information to the Philadelphia Daily News and faces charges of obstruction of justice, official oppression and felony perjury. Her law license was suspended by the state’s Supreme Court in September, but she has continued to hold office, assigning her duties that require bar membership to attorneys within her office. 

The lawsuit against Chesapeake is being prosecuted by lawyers from the anti-trust and consumer protection divisions of the attorney general’s office, according to a statement from Kane’s office. However, it is not clear to what degree Kane’s own legal difficulties will affect her employee’s ability to focus on further investigations into Chesapeake and other drillers across the state.

Leasing Regrets

The sales pitch from leasing agents who fanned out across large swaths of the U.S. was simple: there’s oil and gas under your feet, and if you simply let us buy the right to drill it from you, we’ll make you rich.

But once the gas started flowing, Chesapeake, the nation’s second largest natural gas company and a handful of its business partners, refused to uphold their end of the bargain and deliberately engaged in complex financial transactions whose hidden purpose was to keep royalty payments out of the hands of landowners, according to the attorney general’s suit.

For years, residents have reported that something seemed shady about their royalty payments.

“There’s never a clear delineation of what those costs are,” Mary Jane Foelster of Bradford County, PA told State Impact in 2013. “I couldn’t begin to tell you what they are.

For Bradford County planning commissioner Glenn Aikens, signing a lease with Chesapeake wound up costing him more than he was paid, he told DeSmog last year as he showed a copy of a royalty check for $0.10, sent by the company as his share of the income from the three shale gas wells drilled on his 359-acre farm after the company subtracted production expenses.

Aikens and Foelster are hardly alone. Kane’s office said that they focused on their efforts the heavily-drilled northern part of the state and on Chesapeake Energy, but that their lawsuit is likely to grow.

“We have identified at least 4,000 landowners, but we expect the number could be considerably higher,” Jeffrey Johnson, a spokesperson for the attorney general told U.S. News and World Report. “We’re hopeful that today’s filing will lead other affected landowners we have not spoken with to share their concerns with the office.”

Boom and Bust

The complaints from landowners have often extended to other drillers, not simply Chesapeake Energy.

The Marcellus Shale Coalition, an industry trade group, pointed to the financial pressures faced by drillers and said that leasing problems were far from systemic. “Mineral owners are feeling the pinch of persistently low commodity prices…” the Marcellus Shale Coalition said in a statement according to Natural Gas Intelligence. “It’s important to recognize that post-production related issues – which have been extremely localized and not widespread – are being actively addressed in the courts where contract matters should be addressed.”

A Chesapeake spokesman denied that the company had done anything wrong. “We strongly disagree with Attorney General Kane’s baseless allegations and will vigorously contest them in the appropriate forum,” spokesman Gordon Pennoyer said in a statement.

The charges come at an already difficult time for the driller. Chesapeake Energy’s stock has plunged in recent years, recently testing new lows of less than $4.00/share, a sign that Wall Street investors see little to like about the company’s financial prospects.

"Bait and Switch": Pennsylvania Sues Driller and Pipeline Company Over Deceptive Deals
Sharon Kelly is an attorney and freelance writer based in Philadelphia. She has reported for The New York Times, The Guardian, The Nation, National Wildlife, Earth Island Journal, and a variety of other publications. Prior to beginning freelance writing, she worked as a law clerk for the ACLU of Delaware.

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