Chesapeake Energy 2015 Annual Report Download - page 103

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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Redemption of 2019 Notes. See Note 3 for a description of pending litigation regarding our redemption in May
2013 of our 2019 Notes. As a result of the reversal of the trial court’s decision in our declaratory judgment action against
the indenture trustee, we accrued a loss contingency of $100 million for this matter in 2014, and we accrued an additional
$339 million in 2015 as a result of the judgment on remand entered on July 17, 2015. The loss contingency associated
with this matter is fully accrued as of December 31, 2015.
Business Operations. Chesapeake is involved in various other lawsuits and disputes incidental to its business
operations, including commercial disputes, personal injury claims, royalty claims, property damage claims and contract
actions. With regard to contract actions, various mineral or leasehold owners have filed lawsuits against us seeking
specific performance to require us to acquire their oil and natural gas interests and pay acreage bonus payments,
damages based on breach of contract and/or, in certain cases, punitive damages based on alleged fraud. The Company
has successfully defended a number of these failure-to-close cases in various courts, has settled and resolved other
such cases and disputes and believes that its remaining loss exposure for these claims will not have a material adverse
effect on the Company’s financial position, results of operations or cash flows.
Regarding royalty claims, Chesapeake and other natural gas producers have been named in various lawsuits
alleging royalty underpayment. The suits against us allege, among other things, that we used below-market prices,
made improper deductions, used improper measurement techniques and/or entered into arrangements with affiliates
that resulted in underpayment of royalties in connection with the production and sale of natural gas and NGL. Plaintiffs
have varying royalty provisions in their respective leases, oil and gas law varies from state to state, and royalty owners
and producers differ in their interpretation of the legal effect of lease provisions governing royalty calculations. The
Company has resolved a number of these claims through negotiated settlements of past and future royalties and has
prevailed in various other lawsuits. We are currently defending lawsuits seeking damages with respect to royalty
underpayment in various states, including, but not limited to, Texas, Pennsylvania, Ohio, Oklahoma, Louisiana and
Arkansas. These lawsuits include cases filed by individual royalty owners and putative class actions, some of which
seek to certify a statewide class. The Company also has received DOJ, U.S. Postal Service and state subpoenas
seeking information on the Company’s royalty payment practices.
Chesapeake is defending numerous lawsuits filed by individual royalty owners alleging royalty underpayment
with respect to properties in Texas. On April 8, 2015, Chesapeake obtained a transfer order from the Texas Multidistrict
Litigation Panel to transfer a substantial portion of these lawsuits filed since June 2014 to the 348th District Court of
Tarrant County for pre-trial purposes. On February 12, 2016, Chesapeake filed a motion to change venue for several
other lawsuits to Harris County, or alternatively, to Tarrant County. These lawsuits, which primarily relate to the Barnett
Shale, generally allege that Chesapeake underpaid royalties by making improper deductions and using incorrect
production volumes. In addition to allegations of breach of contract, a number of these lawsuits allege fraud, conspiracy,
joint venture and antitrust violations by Chesapeake. Chesapeake expects that additional lawsuits will be filed by new
plaintiffs making similar allegations. The lawsuits seek direct damages in varying amounts, together with exemplary
damages, attorneys’ fees, costs and interest.
On December 9, 2015, the Commonwealth of Pennsylvania, by the Office of Attorney General, filed a lawsuit in
the Bradford County Court of Common Pleas related to royalty underpayment and lease acquisition and accounting
practices with respect to properties in Pennsylvania. The lawsuit, which primarily relates to the Marcellus Shale and
Utica Shale, alleges that Chesapeake violated the Pennsylvania Unfair Trade Practices and Consumer Protection Law
(UTPCPL) by making improper deductions and entering into arrangements with affiliates that resulted in underpayment
of royalties. The lawsuit seeks statutory restitution, civil penalties and costs, as well as temporary injunction from
exploration and drilling activities in Pennsylvania until restitution, penalties and costs have been paid and permanent
injunction from further violations of the UTPCPL. On February 8, 2016, the Office of Attorney General amended the
complaint to, among other things, add an additional UTPCPL claim and antitrust claim alleging that a joint exploration
agreement to which Chesapeake is a party established unlawful market allocation for the acquisition of leases.
Putative statewide class actions in Pennsylvania and Ohio and purported class arbitrations in Pennsylvania have
been filed on behalf of royalty owners asserting various claims for damages related to alleged underpayment of royalties
as a result of the Company’s divestiture of substantially all of its midstream business and most of its gathering assets
in 2012 and 2013. These cases include claims for violation of and conspiracy to violate the federal Racketeer Influenced
and Corrupt Organizations Act and one of the cases includes claims of intentional interference with contractual relations
and violations of antitrust laws related to purported markets for gas mineral rights, operating rights and gas gathering
sources. We have not accrued a loss contingency for any of the Pennsylvania and Ohio matters seeking class
certification.