IN THE UNITED STATES DISTRICT COURT

FOR THE EASTERN DISTRICT OF TEXAS

MARSHALL DIVISION

PLAINTIFFS’ ORIGINAL COMPLAINT

TO THE HONORABLE UNITED STATES DISTRICT JUDGE:

            COME NOW, MERRELL and LUCILLE WITT, EUGENE and SHARON WITT, PAULA and LARRY PIGG, and JOSEPH and DEBORAH CAMPBELL, the Plaintiffs and proposed Class Representatives on behalf of all others similarly situated (collectively the “Class”), and complain of Defendant CHESAPEAKE EXPLORATION, L.L.C. (“Chesapeake”).  Plaintiffs ask the Court to certify a class, or, if necessary, sub-classes, appoint Plaintiffs as class representatives, and permit this case to proceed to judgment as a class action.  For such cause of action, Plaintiffs respectfully show the Court as follows:

I.
Nature of Action

1. This lawsuit arises from Chesapeake's arbitrary and unjustified refusal to pay agreed-upon lease bonuses to mineral interest owners/lessors in several important hydrocarbon shale plays throughout Texas. A "lease bonus" is the money paid by a lessee in consideration for mineral owners signing an oil and gas lease. The lease bonus is usually expressed in terms of dollars per mineral acre ($/acre). In the summer of 2008, Chesapeake actively and aggressively sought leasehold interests in natural gas plays in north and east Texas. As a company practice and policy, Chesapeake would obtain an oil and gas lease from a mineral interest owner, file the lease of record, thus acquiring the minerals and taking the minerals "off the market." Chesapeake would also have an obligation to pay the mineral interest owner the lease bonus at the expiration of a certain number of days. Chesapeake also utilized an agreement to lease with other mineral owners, promising them payment of lease bonuses after a set time for Chesapeake to reach a good faith opinion concerning its supposed diligent review of title. Much to the dismay of the mineral interest owners, just before payments were due, Chesapeake, without justification, decided not to honor its agreed-upon lease bonus payment obligations. Chesapeake breached its contracts by refusing to pay. Still wanting to lease, but at a drastically reduced price, Chesapeake then sought to reduce its leasing costs, lock out its competitors from the shale play by keeping the minerals off the market, and force a "renegotiation" with the mineral owners, offering only a fraction of the bonus amounts owed. This lawsuit seeks to recover the wrongfully-dishonored payment obligations from Chesapeake for the benefit of the Class. 

II.
Parties

2.                  Merrell and Lucille Witt reside in Midland, Midland County, Texas, and are citizens of the State of Texas.  Eugene and Sharon Witt reside in Garland, Dallas County, Texas, and are citizens of the State of Texas.  Paula and Larry Pigg reside in Anthem, Maricopa County, Arizona and are citizens of the State of Arizona.  Joseph and Deborah Campbell reside in Nacogdoches, Nacogdoches County, Texas, and are citizens of the State of Texas.  Plaintiffs Merrill Witt, Eugene Witt, Paula Witt Pigg, and Joseph Campbell each own an undivided interest in minerals in the same 33 acre tract located in Harrison County, Texas.

3.                  Defendant Chesapeake Exploration, L.L.C. is a limited liability company registered in Oklahoma with its principal place of business at 6100 North Western Avenue, Oklahoma City, Oklahoma.  Summons should be served on Chesapeake Exploration, L.L.C. through its registered agent for service in Texas, CT Corporation System, 350 North St. Paul St., Dallas, Texas  75201.

III.
Jurisdiction and Venue

4.                  This Court has original jurisdiction over this matter pursuant to 28 U.S.C. § 1332(a).  The matter in controversy exceeds the sum or value of $75,000, exclusive of interest and costs.  Plaintiffs are citizens of several states other than Oklahoma and Chesapeake Exploration, L.L.C. is a citizen of Oklahoma. 

5.                  Further, this Court has jurisdiction over this class action pursuant to 28 U.S.C. § 1332(d).  The matter in controversy exceeds $5,000,000.  At this time, Plaintiffs estimate that the Class exceeds four hundred (400) mineral owners/lessors and that Chesapeake wrongfully dishonored and refused to pay over $9,000,000 in lease bonus obligations.  Plaintiffs are members of the Class and are citizens of the states of Texas and Arizona, different from Chesapeake Exploration, L.L.C., who is a citizen of the State of Oklahoma, thereby meeting the minimum diversity requirement.

6.                    Venue is proper in the Eastern District of Texas pursuant to 28 U.S.C. § 1391(a).  A substantial number of the mineral interest owners and the lands that are the subject of the action are situated in the Eastern District of Texas.

IV.
Background Facts

A.        Chesapeake’s Involvement in the Haynesville Shale

7.                  The Haynesville Shale is an organic-rich shale of Upper Jurassic age which underlies approximately 3.5 million acres in Texas and Louisiana. It is estimated to contain 250 trillion cubic feet of recoverable natural gas which would make it the largest natural gas reserve in the United States and the fourth largest in the world. The Haynesville Shale is reported to contain the equivalent to over 40 billion barrels of oil, or 23 years worth of current U.S. oil production.

8.                  Aubrey McClendon, a founder and the Managing Member of Chesapeake, bragged that by late 2007, Chesapeake knew that in the Haynesville Shale, it had a “tiger by the tail.”  In March of 2008, Chesapeake announced its new natural gas discovery in the Haynesville Shale. As a result of that discovery and others, Chesapeake announced its plans to ramp up its leasehold expenditures to more fully capture the value of the hydrocarbon plays and prospects recently identified by Chesapeake.

9.                  In July of 2008, Chesapeake announced it had entered into a Haynesville Shale joint venture with Plains Exploration & Production Company (“PXP”) in which PXP had agreed to acquire a 20% interest in Chesapeake’s Haynesville Shale leasehold as of June 30, 2008 for $1.65 billion. In addition PXP agreed to fund 50% of Chesapeake’s 80% share of drilling and completion costs for future Haynesville Shale joint venture wells over a several year period until an additional $1.65 billion had been paid. Chesapeake also announced that it would continue acquiring leasehold interests in the Haynesville Shale play and that PXP would have the right to a 20% participation in any such additional leasehold acreage.

10.              By November of 2008 Chesapeake controlled more than 500,000 acres of the Haynesville Shale and had drilled only 16 active wells, some of which were producing more than 10 million cubic feet of natural gas per day. As that time, Chesapeake planned to drill 600 Haynesville Shale wells in the next three years.

11.              By October of 2009, Chesapeake’s gross daily production from the Haynesville Shale reached 500 million cubic feet from approximately 125 operated wells. According to Chesapeake, it is the largest leasehold owner, largest producer, and most active driller of new wells in the Haynesville Shale play.

B.        Chesapeake Takes Oil and Gas Leases from Plaintiffs to Amass its Empire

12.              Effective August 26, 2008, Chesapeake, as Lessee,  acquired oil and gas mineral leases from Plaintiffs with respect to their undivided mineral interests in approximately 33 acres located in Harrison County, Texas, which is within the Haynesville Shale play. Paragraph 17 of each lease specifically provides:

Lessor understands that these lease payments and terms are final and that Lessor entered into this lease without duress or undue influence….Neither party to this lease will seek to alter the terms of this transaction based upon any differing terms which Lessee has or may negotiate with any other lessors/oil and gas owners.

The leases granted by Plaintiffs were recorded by or on behalf of Chesapeake in the deed records of Harrison County on the dates show in the table in paragraph 14, below.

13.              Under Texas law, a mineral “lease” represents a determinable fee sale of the minerals by the Lessor to the Lessee.  Chesapeake purchased Plaintiffs’ minerals for the Primary Term (5 years) and for so long thereafter as the lands produced hydrocarbons in paying quantities.

14.              The consideration (lease bonus amount) agreed to be paid by Chesapeake to each mineral owner in the 33 acre tract was $14,000 per acre.  The lease bonus amounts for Plaintiffs and Nan Campbell Vann McConnell are as follows:

Chesapeake agreed to pay Plaintiffs and Ms. McConnell their respective bonus amounts within forty-five (45) business days.  In consideration for the oil and gas leases, documents evidencing Chesapeake’s obligation to pay Plaintiffs were delivered to the Plaintiffs on or about September 8, 2008, listing Chesapeake as the “Draftor” and the respective Plaintiffs as payees.  The instruments declare the unconditional obligation of Chesapeake to pay:

A cashiers check made payable to your bank will be mailed upon the expiration of the waiting period (days) indicated on the front of the draft.

15.              As directed by Chesapeake, Plaintiffs timely deposited the instruments in their respective banks.   The items were sent for collection to the Bank of Oklahoma in Tulsa, Oklahoma where Chesapeake maintains its lease bonus accounts.

16.              Unknown to the Plaintiffs or other mineral owners, on or about October 1, 2008, after the leases had been recorded and the bonus instruments deposited in the banks, the Land Manager for Chesapeake for East Texas, William Allan Smith, advised several key employees in the Chesapeake land department by e-mail that Chesapeake had defeated the competition in the Haynesville play area and Chesapeake needed to begin to drive down the bonus costs for the Haynesville leases.  Mr. Smith told his staff to disregard existing obligations to pay the lease bonuses.  He further advised that Chesapeake was not affected by the credit crunch and had sufficient cash flow to conduct all of its drilling operations and leasing efforts.  The land department and all land brokers were instructed to send in their “land packages…as soon as possible” because Chesapeake would be reimbursed by their Haynesville joint venture partner, PXP, “for every acre leased.”  Emphatically, Chesapeake management admonished its leasing staff to immediately drop lease bonus considerations on a per acre basis.

17.              Meanwhile, on or about October 20, 2008, Chesapeake paid Nan Campbell Vann McConnell the lease bonus due her.

18.              On or about November 10, 2008, Gary S. Dunlap, Vice president of Land - South Division of Chesapeake Energy Corporation, communicated new Haynesville Leasing ‘guidelines’ issued directly by Aubrey McClendon: “No new deals closed before Jan. 1”; “renegotiate existing deals over $5K per ac to $5K per ac or less”; “Get below $2500 (or $1000), find the base new market price.”

19.              As a result, in late November 2008 and early December, each of the instruments in favor of Plaintiffs obligating Chesapeake to pay was returned to Plaintiffs’ respective banks unpaid because Chesapeake refused to honor them. No payment whatsoever was received by Plaintiffs even though Plaintiffs had sold the minerals by signing and delivering the oil and gas leases naming Chesapeake as Lessee.  The leases were recorded in the Harrison County records by or on behalf of Chesapeake, with Chesapeake as leasehold owner of Plaintiffs’ minerals. 

20.              Further, on information and belief, Chesapeake instructed the Bank of Oklahoma to dishonor the payment obligation instructing its bank to advise that Chesapeake was “renegotiating” the lease bonuses, clearly breaching the agreement.  Chesapeake unilaterally and blatantly dishonored the instrument, ignoring the unconditional mandate on the instrument that “A cashiers check made payable to your bank will be mailed upon the expiration of the waiting period (days) indicated on the front of the draft.” (emphasis added).  Chesapeake refused to honor their payment obligations to Plaintiffs even though each contract (lease) specifically stated it could not be renegotiated by either party and even though the instruments presented to Plaintiffs provided that the money would be deposited in their account within forty-five (45) business days of the date the instrument was presented for payment.

C.        Other Leasing Activity

21.              Chesapeake claims to own more oil and gas leasehold interests than any other exploration and production independent oil and gas company.  On information and belief, Chesapeake entered into leases and contracts with mineral owners in Texas from 2006 through 2009 in which substantial leasing bonuses were agreed to be paid by Chesapeake Exploration, L.L.C. to mineral owners, which Chesapeake refused to honor and pay despite its legal obligation to do so.

V.
The Class

22.              Plaintiffs bring this lawsuit on behalf of themselves and all others similarly situated, who compose the Class:

All parties who, after January 1, 2006, executed and delivered oil and gas leases and other contracts and agreements to execute oil and gas leases with Chesapeake Exploration, L.L.C., or its agents, involving minerals located in Texas, and which Chesapeake Exploration, L.L.C. failed to pay the originally agreed upon consideration.

VI.
Class Action

23.              This lawsuit meets the class action requirements of Federal Rule of Civil Procedure 23 as shown below.

A.        Numerosity

24.              This Class is so numerous that joinder of all members is impracticable.  On information and belief, the Class will include at least four hundred (400) mineral interest owners and, potentially, any respective spouses.  It is believed that Chesapeake and its agents possess electronic information, databases and spreadsheets that will provide the exact number of mineral interest owners who executed and delivered oil and gas leases or contracts to execute oil and gas leases, as well as the lease bonus amounts for each mineral owner.  The public records of the respective counties where the minerals are located can also provide information regarding the correct number of mineral interest owners.

25.              Plaintiffs are in possession of information derived from only one of Chesapeake’s leasing agents which indicates there are at least seventy-eight (78) owners of minerals in acreage located in the eastern half of Harrison County, Texas, related only to the Haynesville Shale, who are potential members of the Class.  On information and belief, Chesapeake utilized at least five other brokers in the Harrison County, Haynesville Shale play.  Assuming fifty (50) Class members for each of the other five brokers, the Class is projected to contain at least 328 mineral owners from Harrison County alone.  According to information furnished by Chesapeake, other Texas counties in which Chesapeake is active in the Haynesville Shale play are Upshur, Gregg, Rusk, Shelby, Smith and Panola Counties, all of which are located in the Eastern District of Texas.  In addition, Chesapeake is active in the Barnett Shale play which consists of many owners of minerals located in counties such as Dallas, Johnson, Hood, Parker, Wise and Tarrant (to name a few) which mineral owners are also potential Class members.  The Class is so numerous that joinder of all members is inefficient and impracticable.

B.        Commonality

26.              There are a number of questions of law or fact common to the Class.  The predominant common questions include, but are not limited to:

            a.         Whether the transactions entered into by Chesapeake create binding contracts requiring Chesapeake to pay the bonus amounts;

            b.         Whether Chesapeake’s decision to dishonor all lease bonus payments due to “economic concerns” breached the contracts with the mineral interest owners (Class Members); and

            c.         Whether the mineral interest owners are entitled to damages (lease bonus amounts) under the contracts.

C.        Typicality

27.              In addition, the claims of the representative parties, the Plaintiffs, are typical of the claims of the Class.  Plaintiffs own an undivided mineral interest in 33 mineral acres in lands which Chesapeake sought and obtained an oil and gas lease.  Chesapeake filed the lease agreements obtained from Plaintiffs in the records of Harrison County, Texas declaring to the public (and Chesapeake’s competitors) its lease of the minerals under those lands described.  After Chesapeake recorded the oil and gas leases and removed the sought-after leasehold asset from the open market, Chesapeake wrongfully dishonored the bonus payments to Plaintiffs citing “economic concerns,” but held the leases while attempting to renegotiate the lease bonuses.  Likewise, other members entered into a contract to lease in which Chesapeake promised to pay a set lease bonus by a date after conducting a title check.  The claims of Plaintiffs are typical of the claims of the entire Class.

D.        Fair and Adequate Protection

28.              Plaintiffs will fairly and adequately protect the interest of the Class for the following reasons:

            a.         Plaintiffs are members of the proposed Class;

            b.         Plaintiffs have expressed an interest in representing the Class;

            c.         Plaintiffs have access to funds to assist and help underwrite the costs of this litigation;

            d.         Plaintiffs have no known interest adverse to the other Class members; and

            e.         Plaintiffs have suffered the same harm as the Class.

VII.
Types of Class Action

29.              Having satisfied the prerequisites of Rule 23(a), the Court should maintain this class action because prosecuting separate actions by individual members of the Class would create a risk of:

a)         inconsistent or varying adjudications with respect to individual class members that would establish incompatible standards of conduct for Chesapeake; or

b)         adjudications with respect to individual Class members that, as a practical matter, would be dispositive of the interests of the other members not parties to the individual adjudications or would substantially impair or impede their ability to protect their interests.

30.              In addition, and in the alternative, this class action is maintainable because:

a)         Chesapeake has acted or refused to act on grounds that apply generally to the Class, so that corresponding declaratory relief is appropriate respecting the Class as a whole; or

b)         the questions of law and fact common to the Class members predominate over any questions affecting only individual members, and because this, class action is superior to other available methods for fairly and efficiently adjudicating the controversy and claims of the Class against Chesapeake.

VIII.
Proposed Class Counsel

31.              The proposed Class Counsel consists of Terry W. Rhoads (Attorney in Charge), Susan R. Richardson and Reagan L. Butts, all members of Cotton Bledsoe Tighe & Dawson, P.C. (“Cotton Bledsoe”) and local counsel Harry L. “Gil” Gillam, Jr. of Gillam & Smith, L.L.P.  Cotton Bledsoe has committed its resources (legal experience and personnel) to this case to provide legal services for the benefit of the Class.  Cotton Bledsoe consists of 38 attorneys, 17 of whom are board certified in various areas by the Texas Board of Legal Specialization.  Nine (9) attorneys are board certified in Oil, Gas & Mineral Law while five (5) attorneys are certified in civil and personal injury specialties.  In addition to providing quality legal representation, Cotton Bledsoe serves the legal community through its attorneys’ involvement in various State Bar boards, councils and committees, and by its attorneys’ writing and speaking on relevant legal topics.  Both firms together have the support staff to provide data base management, file management, and the other office services to support this class action litigation.  Cotton Bledsoe and Gillam & Smith are uniquely qualified to provide the support and tools to serve the proposed Class Counsel for the benefit of the Class.

32.              Briefly, some of the qualifications of proposed Class Counsel are as follows:

Terry W. Rhoads

            Terry W. Rhoads has practiced for over 27 years in Texas since graduating from Texas Tech University School of Law in 1982.  He has been board certified by the Texas Board of Legal Specialization in Personal Injury Trial Law and Civil Trial Law since 1993.  Terry has managed many lawsuits and as tried approximately 100 cases as lead counsel.  While serving as lead counsel, Cotton Bledsoe successfully defended a case in which over 3,500 plaintiffs claimed personal injuries from alleged toxic exposure from a nearby petrochemical plant.  He handles complex commercial and personal injury litigation as well as writes and speaks at various seminars throughout the State.  He has participated in complex litigation before the Supreme Court of Texas, the Fifth Circuit Court of Appeals, the Federal Circuit Court of Appeals, at least four of the Texas courts of appeal, and currently is attorney in charge of cases pending in the Eastern, Northern, and Western Districts of Texas.  Although most of his federal experiences have been in the Western District, he has served as attorney in charge in cases spanning the four federal districts in the State.

Susan R. Richardson

            Susan R. Richardson has practiced law for over 33 years in Austin, Houston, and Midland, Texas since graduating from the University of Texas School of Law in 1976.  She has been board certified by the Texas Board of Legal Specialization in Oil, Gas and Mineral Law since 1993. She has participated in complex litigation before the United States Supreme Court¹(involving a class action), the Supreme Court of Texas, the Fifth Circuit Court of Appeals, the Federal Circuit Court of Appeals, several Texas courts of appeal and all four federal districts in Texas. She has acted as lead counsel in oil and gas litigation involving more than 1800 individual parties. She is a Life Fellow of the Texas Bar Foundation and a former member of the council for the Oil, Gas and Energy Section of the State Bar of Texas.

Reagan L. Butts

            Reagan L. Butts graduated from Baylor University School of Law and was licensed to practice in Texas in 2006.  During law school, Mr. Butts served as the Technology Editor and on the Texas Practice Edition staff of the Baylor Law Review.  As a litigation associate at Cotton, Bledsoe, Tighe & Dawson, P.C., Mr. Butts’ practice involves a wide variety of litigation matters.  Mr. Butts has assisted on several complex personal injury and business disputes.  In oil and gas cases, Mr. Butts has handled disputes involving working interest owners, duties owed to non-executive mineral interest owners, duties owed under an oil and gas lease, and other oil and gas contract disputes.  In addition, Mr. Butts has spent several months investigating, analyzing, and preparing the factual and legal issues raised by this lawsuit.

Harry L. “Gil” Gillam

            Gil Gillam has capably represented clients in this Court in complex litigation.  Gil Gillam has demonstrated his abilities to manage and try complex cases in this Court.  Although his firm is small, when combined with Cotton, Bledsoe, the legal team will effectively represent the Class and efficiently navigate the handling of the class action.

IX.
Cause of Action

A.        Breach of Contract

33.              Paragraphs 1-32 of this Original Complaint are incorporated herein by reference as if fully set forth at length herein.

34.              Plaintiffs and Chesapeake, through its agents, representatives, and employees, entered into binding contracts, including oil and gas leases and instruments, so that Chesapeake could mine the subject minerals (inclusive of natural gas).  Plaintiffs have fully and faithfully complied with all material obligations and conditions precedent under the referenced contracts.  By entering into contracts with the Class (oil and gas leases and agreements to lease), Chesapeake is obligated to pay each Class member the bonus amounts promised.  Defendant has wholly failed to pay the outstanding sums due and owing, thereby breaching the contracts with all members of the Class. 

35.              Furthermore, Chesapeake has waived any conditions precedent to payments of the bonus amounts, and Chesapeake is estopped from denying the existence of said leases, agreements to lease, and the obligation to pay the lease bonuses. 

36.              As a direct consequence of the material breaches, Plaintiffs and other members of the Class have suffered damages in excess of the minimum jurisdictional limits of this Court.  The Class seeks actual damages, pre-judgment and post judgment interest, attorneys’ fees and court costs as more fully described in the following paragraphs.

B.        Quantum Meruit

37.              Paragraphs 1-32 of this Original Complaint are incorporated herein by reference as if fully set forth at length herein.

38.              In the alternative, Plaintiffs assert quantum meruit on behalf of the Class, seeking recovery of the reasonable value of the executed leases and agreements at the time delivered to Defendant.  Plaintiffs and others in the Class provided leases and agreements to lease to Chesapeake who accepted the said contracts and the associated payment terms thereunder.  Chesapeake had reasonable notice that the Class expected compensation for the leases and agreements.  The Class seeks damages in excess of the minimum jurisdictional limits of this Court as addressed below.

X.
Declaratory Judgment

39.              Paragraphs 1-38 of this Original Complaint are incorporated herein as if fully set forth at length herein.

40.              Plaintiffs request the Court, under the Declaratory Judgment Act (28 U.S.C. §§ 2201 and 2202), to declare the validity, rights, obligations, and other legal relations of the parties to the contracts (oil and gas leases and agreements to lease) between members of the Class and Chesapeake, that Chesapeake breached its obligation to pay members of the Class the lease bonus amounts originally promised in the respective contracts, that the Class members are entitled to recover their full measure of damages, attorneys fees, and costs as provided by law, and such further relief as may be determined necessary or proper.

XI.
Damages

41.              The Class seeks unliquidated damages against Chesapeake caused by its breach of contract and by virtue of amounts owed under the legal theory of  quantum meruit.  Plaintiffs seek actual damages for the Class for Chesapeake’s failure to honor its lease bonus payment obligations.  The damages sought exceed the minimal jurisdictional limits of the Court.  Plaintiffs further seek pre-judgment interest, post judgment interest, taxable costs of suit, attorneys’ fees, and all nontaxable costs which the Court may grant as authorized by law and are fair and just.

XII.
Attorneys’ Fees

42.              By reason of Chesapeake’s actions, Plaintiffs originally employed the services of Cotton, Bledsoe, Tighe & Dawson, P.C. to represent them.  Now, the Class seeks recovery of reasonable attorneys fees as authorized by law and as are fair and just. Fed. R. Civ. P. 23(h).  Plaintiffs will show that attorneys fees for Class Counsel are recoverable under Texas law for a claim and cause of action for breach of contract.  Tex. Civ. Prac. & Rem. Code § 38.001(b).

XIII.
Conditions Precedent

43.              All conditions precedent to the Class’ claims for relief have been performed or have occurred.

XIV.
Prayer

            WHEREFORE, PREMISES CONSIDERED, Plaintiffs MERRELL and LUCILLE WITT, EUGENE and SHARON WITT, PAULA and LARRY PIGG, and JOSEPH and DEBORAH CAMPBELL, individually and on behalf of all others similarly situated, request that the Court issue summons for Chesapeake Exploration, L.L.C. to appear and answer, conduct a class certification hearing at an early practicable time, after which the Court certifies the Class and any appropriate sub-classes, appoint the undersigned as Class Counsel, and that upon final hearing the Court declare the subject contracts enforceable, that Chesapeake breached the contracts, and that the Class be awarded judgment against Defendant for the following:

            1.         actual damages against Chesapeake;

            2.         pre-judgment and post judgment interest;

            3.         court costs (both taxable and nontaxable);

            4.         reasonable attorneys’ fees; and

            5.         such other and further relief, in law and in equity, to which the Class may be justly entitled.