C CAUSE NO. ARBUCKLE MOUNTAIN RANCH IN THE DISTRICT COURT OF TEXAS, INC.,

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1 Filed: 11/19/ :07:09 AM David R. Lloyd, District Clerk Johnson County, Texas By: Sally VanSlyke, Deputy C CAUSE NO. ARBUCKLE MOUNTAIN RANCH IN THE DISTRICT COURT OF TEXAS, INC., Plaintiff, VS. CHESAPEAKE ENERGY CORPORATION, CHESAPEAKE OPERATING, INC., CHESAPEAKE OPERATING, L.L.C., JOHNSON COUNTY, TEXAS CHESAPEAKE EXPLORATION, L.L.C. as successor by merger to CHESAPEAKE EXPLORATION, L.P., CHESAPEAKE ENERGY MARKETING, INC., and TOTAL E&P USA, INC., 413TH Defendants. JUDICIAL DISTRICT PLAINTIFF S ORIGINAL CLASS ACTION PETITION TO THE HONORABLE JUDGE OF SAID COURT: COMES NOW, Arbuckle Mountain Ranch of Texas, Inc., individually and as Class Representative on behalf of all similarly situated persons and entities, and files this Plaintiff s Original Class Action Petition complaining of Defendants Chesapeake Energy Corporation, Chesapeake Operating, Inc., Chesapeake Operating, L.L.C., Chesapeake Exploration, L.L.C. as successor by merger to Chesapeake Exploration, L.P., Chesapeake Energy Marketing, Inc., and

2 Total E&P USA, Inc. (all Defendants herein are collectively referred to as Defendants ) and for cause of action show the following: I. DISCOVERY CONTROL PLAN 1. Pursuant to Texas Rule of Civil Procedure 190, Plaintiff states that discovery in this case should be conducted under a Level 3 Discovery Control Plan. II. PARTIES 2. Plaintiff Arbuckle Mountain Ranch of Texas, Inc., owns real property in Johnson County, Texas. 3. Defendant Chesapeake Energy Corporation ( Chesapeake Energy or CHK ) is a corporation organized under Oklahoma law with its principal place of business at 6100 Western Avenue, Oklahoma City, Oklahoma. It may be served with Citation and the Original Petition by serving its registered agent, CT Corporation System, 1999 Bryan Street, Suite 900, Dallas, Texas During all times material hereto, Chesapeake has been conducting, and continues to conduct, business in Texas. 4. Defendant, Chesapeake Operating, Inc. ( Chesapeake Operating ), is a foreign corporation that is a wholly owned subsidiary of Chesapeake Energy. It is an Oklahoma corporation headquartered in Oklahoma City, Oklahoma. Chesapeake Operating does business in Texas. It may receive service through its registered agent for service of process: CT Corporation System, 350 North St. Paul St., Suite 2900, Dallas, Texas During all times material hereto, Chesapeake Operating has been conducting, and continues to conduct, business in Texas. Plaintiff s Original Class Action Original Petition Page 2

3 5. Defendant, Chesapeake Operating L.L.C. ( Chesapeake Operating LLC ), is a foreign Limited Liability Company that is wholly owned and managed by Chesapeake Energy. It is a Limited Liability Company with its Principal Place of Business in Oklahoma. It may receive service through its registered agent for service of process: CT Corporation System, 350 North St. Paul St., Suite 2900, Dallas, Texas During all times material hereto, Chesapeake Operating LLC has been conducting, and continues to conduct, business in Texas. 6. Defendant, Chesapeake Exploration, L.L.C. as successor by merger to Chesapeake Exploration, L.P., ( Chesapeake Exploration ), is a foreign limited liability company and wholly owned subsidiary of Chesapeake Energy. It is organized under Oklahoma law and is headquartered in Oklahoma City, Oklahoma. It may receive service of process through its registered agent for service of process: CT Corporation System, 350 North St. Paul St., Suite 2900, Dallas, Texas During all times material hereto, Chesapeake Exploration has been conducting, and continues to conduct, business in Texas. 7. Defendant, Chesapeake Energy Marketing Inc., ( CEMI ) is a foreign corporation and wholly owned subsidiary of Chesapeake Energy. It is an Oklahoma corporation headquartered in Oklahoma City, Oklahoma. It may receive service through its registered agent for service of process: CT Corporation System, 1999 Bryan Street, Suite 900, Dallas, Texas During all times material hereto, Chesapeake Energy Marketing has been conducting, and continues to conduct, business in Texas. 8. Defendant, Total E&P USA, Inc. ( Total ), is a Delaware corporation that is headquartered in and has its principal place of business in Houston, Texas. It is both a Delaware citizen and Texas citizen. Total is a joint venture partner and 25% working interest owner in Plaintiff s leases, Plaintiff s Original Class Action Original Petition Page 3

4 units and wells in the Barnett Shale including all units and wells that are the substance of this lawsuit. It may receive service through its registered agent for service of process: CT Corporation System, 350 North St. Paul St., Suite 2900, Dallas, Texas During all times material hereto, Total has been conducting, and continues to conduct, business in Texas. 9. Chesapeake Energy managed, directed, and controlled the other Chesapeake Defendants Chesapeake Energy Corp., Chesapeake Operating Inc., Chesapeake Operating L.L.C., Chesapeake Exploration, L.L.C., CEMI, and their assets such that they were mere instrumentalities of each other, and collectively these defendants will sometimes be referred to herein collectively as Chesapeake. The Chesapeake entities were the alter egos of Chesapeake Energy and each other. While there is a great deal of overlap between the Chesapeake entities, and all are controlled ultimately by Chesapeake Energy, Chesapeake Operating Inc. and L.L.C. undertook to drill and operate the wells on the Properties described herein; CEMI undertook to market production from the Properties. III. JURISDICTION AND VENUE 10. Plaintiff s claims arise under the common law of Texas and under the Texas Civil Practice and Remedies Code. This Court, therefore, has subject matter jurisdiction under the Texas Constitution, Article V, This court has jurisdiction over the cause of action, because the amount in controversy is within the jurisdictional limits of this Court. Plaintiff s Original Class Action Original Petition Page 4

5 12. This Court has personal jurisdiction over each Defendant in that each has conducted, and continues to conduct, business in Texas, and therefore, has sufficient contacts with Texas. 13. Venue is proper in Johnson County, Texas, because a substantial portion of the events giving rise to the claims in this cause occurred in this County. Venue is therefore proper pursuant to Tex. Civ. Prac. & Rem. Code , , IV. FACTS 14. Plaintiff and all class members are currently mineral interest owners (and in almost all instances also owners of the surface estate) in Johnson and Tarrant Counties, Texas. Some members of the class, and numerous third party lenders (collectively lenders ), were prior mortgagees, i.e. mortgage owners, with valid, properly recorded mortgages on properties, and mineral interests, ( property or properties ) whereby those lands and mineral interests were pledged as collateral on loans to lenders ( mortgages ). Chesapeake and Total post-mortgage later produced gas and other minerals (collectively gas ) from the properties. 15. In many instances Chesapeake, or its predecessor in interest, purported to take a valid oil and gas lease (the leases ) from the mortgagors, but failed to obtain and properly file a subordination agreement which would have made the oil and gas lease superior to the first-intime mortgages. 1 Chesapeake recognized and acknowledged that its proposed development and drilling of the wells under or near the properties would drain the gas underneath the properties. 1 At any place herein Plaintiff makes reference to a lease, in no way is it implying or stating said lease is valid or in any way superior to Plaintiff s interest in the mineral estate. Plaintiff s Original Class Action Original Petition Page 5

6 Since the now-invalid leases were included in a Unit created by Chesapeake, there is a presumption that the properties would be and were drained by Chesapeake s wells. 16. The lenders subsequently properly foreclosed on their prior mortgages, cutting off any later-filed lease on the properties Chesapeake and Total purported to own. Plaintiff (and all Class Members) were the successful bidders at the validly held foreclosure sales, or are owners who took title by, through or under the successful bidder, taking fee simple title to the subject properties, not subject to any oil and gas lease, and thereby acquiring all mineral interests attendant to the property ( owners ). 17. Since the date of each foreclosure, Chesapeake and Total have produced enormous volumes of gas and other minerals from the properties without valid leases from the true owners who were not bound by the later-filed leases that followed the valid mortgage. The foreclosure and subsequent trustees deeds means that Chesapeake and Total have been producing gas and other minerals from the properties without proper title. Chesapeake and Total are trespassers as to Plaintiff s (and each Class Member s) property, land and mineral interests. Chesapeake and Total have been taking Plaintiff s production without proper payment, and have improperly converted Plaintiff s production, as well as direct proceeds from that production. 18. Chesapeake and Total, because of the prior recording of the mortgages by and/or through which Plaintiff (and each Class Member) took title to the land and mineral interests, could not even claim to be good faith trespassers or to be acting under any color of title or in good faith. Indeed, Chesapeake has been well aware for several years that it held a significant number of leases that in fact had been extinguished by foreclosure of the prior mortgage. Chesapeake consciously determined that instead of undertaking the significant, expensive curative work Plaintiff s Original Class Action Original Petition Page 6

7 needed to address this problem, and properly accounting to and paying the true property owners, it would ignore the problem. 19. In 2010, Total became Chesapeake s joint venture partner in the Barnett Shale and purchased a 25% working interest in all Chesapeake wells and underlying purported leases and assumed a separate obligation to account for all production taken, and to account to and pay Plaintiff and all Class Members. 20. The claims of Plaintiff and the class DO NOT include the underpayment of royalties on leases in Tarrant and Johnson Counties, where there was a valid lease on the subject properties not extinguished by foreclosure. 21. Chesapeake and Total have failed, and continue to fail, to account for and pay Plaintiff and the Class Members on all production from the Properties. Defendants have in their exclusive possession, custody and control the records that identify the production actually taken from the properties, and the identity of any individuals and entities they may have purported to pay royalty to instead of Plaintiff or the proper Class Member, if any. 22. On information and belief, the amount in controversy claimed by Plaintiff for itself and for the class exceeds $100 million. V. CLASS ACTION ALLEGATIONS 23. Plaintiff brings this action as a class action and as the representative of a class pursuant to Rule 42 of the Texas Rules of Civil Procedure. Plaintiff seeks and requests the certification of a class ( the Class or Class Members ) comprised of the following: Plaintiff s Original Class Action Original Petition Page 7

8 All non-excluded persons or entities, in Johnson and Tarrant Counties, Texas, who are, or were, since 2004, purchasers of property, including mineral interests, at foreclosure, of valid, prior-recorded mortgages on properties, or owners who took title by, through or under such a purchaser, from which Chesapeake and Total produced gas and other minerals ( production ) ( the Properties ). 2 In most instances Chesapeake and Total claimed, or claim, the right to drill under a subsequently obtained lease from the mortgagor which was inferior to the prior recorded mortgage, with the lender not having executing a valid, properly-recorded subordination agreement, said lease being extinguished by the subsequent foreclosure of the prior-recorded mortgage. Excluded from the Class are those properties covered by validly executed and recorded post-foreclosure leases, proper pre-mortgage leases to Chesapeake or Chesapeake s predecessor in interest, and any mineral lease made superior to the foreclosed mortgage by a valid, properly recorded subordination agreement. Also excluded is any instance where the minerals were carved out or reserved from the mortgage. 24. The Class Claims are for the following: (a) Declaration that Chesapeake and Total have no valid lease to or on Plaintiff s and the Class s mineral interests from the Properties; (b) Declaration that Chesapeake (and Total) have been, and are, naked trespassers on the Properties, including as to the class mineral interests; (c) Declaration, and if necessary, injunction, prohibiting Chesapeake and Total from taking the proceeds from production from the Properties, and instead, requiring them to turn over 100% of all such proceeds to Plaintiff and the Class Members; (d) A full accounting to the Class members; and (e) Money damages paid to the class 2 Properties include purchase at foreclosure by successfully bidding in some portion, or all, of the underlying debt. Plaintiff s Original Class Action Original Petition Page 8

9 members for all production from the Properties taken to date since the later of 2004 or from first production. 25. Excluded from the Class are: (a); All governmental entities, including federal, state, local governments and their respective agencies, departments and quasi-governmental entities, including but not limited to Fannie Mae, Freddie Mac, and related agencies; (b) the states and territories of the United States, and any foreign citizens, states, nations, territories or entities; (c) the United States of America; and (d) any person or entity that Plaintiff s counsel is, or may be, prohibited from Texas law from representing. 26. On information and belief, and after a preliminary search through the real property records ( deed records ) of Johnson and Tarrant Counties, the Class Members number between three thousand and five thousand. The Class is so numerous and spread out across the United States that joinder of all is impractical. 27. The averments of fact and questions of law herein are common to the Class. These questions of law are outcome-determinative, since a fundamental principal of Texas real property law is: first in time, first in right. Application of that principal here is simple and straightforward. The underlying facts to which that principal will apply will be almost entirely uncontested and incontrovertible (such as date and recording date of mortgage, existence vel non of any prior valid lease and severance of the mineral estate, the date of any subsequent lease, the existence of a valid subordination agreement or not, date of foreclosure, and landowner/mineral interest owner s title (by virtue of trustee s deed and in some cases, subsequent deed)). The production volumes for each Property should likewise be factually verifiable. There are no subjective elements to Plaintiff s (and the Class Member s) claims, such Plaintiff s Original Class Action Original Petition Page 9

10 as reliance, pain and suffering, future medical, or any of the other difficult-to-verify elements that might preclude certification of a Class. The question, if any, of Chesapeake s good faith as a trespasser will be common to the entire Class. 28. The claims asserted by Plaintiff are typical of the Class. 29. Plaintiff will fairly and adequately protect the interests of the Class. Plaintiff s interest do not conflict with the interests of the Class. Plaintiff is represented by counsel skilled in oil and gas and real estate mortgage and foreclosure law, and other aspects of Texas law. They are highly experienced trial lawyers. They are deeply experienced in complex litigation. Plaintiff s counsel have successfully pursued other class actions. 30. Allegations of fact and questions of law which are typical and common to the members of the Class predominate over questions affecting only individual members. A class action is superior to other available methods for fair and efficient adjudication of the controversy. A class action is superior for reasons including: (a) Questions of law and issues of fact are so uniform across the class that there is no reason why individual Class Members would want to control the prosecution of the claims, especially because this class action will eliminate tremendous duplications of effort on the part of individual landowners/mineral interest owners. (b) There is no pending litigation against Defendants that fully incorporates all the core claims of the Class. For example, a great deal of the other litigation against the Defendants in the two counties involves underpayments or non-payments of royalty based on common law and breach of contract, i.e. where a valid lease was executed between those plaintiffs and Chesapeake, or its predecessor in interest. Plaintiff s Original Class Action Original Petition Page 10

11 (c) The interests of the parties, public, and judiciary in resolving these matter in one forum without the need for a multiplicity of actions are great and substantial. (d) Only slight differences exist between Class Members claims, especially in relation to potential benefits to be received for and on behalf of each and every Class Member. (e) Defendants have known of these legal issues, and their production of gas based on invalid, subsequently extinguished leases, for a number of years, and consciously determined to avoid addressing the problem, to the great damage of the Class. (f) Class status will promote orderly, efficient, effective and expeditious and appropriate adjudication and administration of class claims, promoting economic use of time and resources. 31. Identifying the Class Members. Identifying the specific class members, and providing to them customized, specific notice of this action and of their rights related to this litigation, is readily feasible and efficiently accomplished. Their identity is capable of being determined from public, existing records. Indeed, Class Counsel has already undertaken to prepare a list of potential class members from public records in Johnson and Tarrant County Counties. VI. CAUSES OF ACTION Count 1 Declaration of Termination and Extinguishment of Lease 32. Plaintiff incorporates by reference all preceding paragraphs as if fully set forth herein. Plaintiff s Original Class Action Original Petition Page 11

12 33. Plaintiff pleads that they and the Class are each a person interested under a deed, will written contract whose rights, status, or other legal relations are affected by a contract as set forth in Texas Civil Practice & Remedies Code There exists a genuine controversy between the parties as to the validity of the prior leases. Plaintiff, for themselves and the Class, seek to have determined the validity of the prior lease agreement(s) between Defendants and Plaintiff s predecessor in interest and a declaration that a) any prior lease agreement does not bind Plaintiff and is of no further legal effect; and b) any prior lease agreement has been extinguished by virtue of the foreclosure and no longer serves as an encumbrance on the Properties. 35. Plaintiff seeks costs and attorney s fees as allowed by Texas Civil Practice & Remedies Code Count 2 Declaration and Injunction to Pay All Future Proceeds 36. Plaintiff incorporates by reference all preceding paragraphs as if fully set forth herein. 37. Plaintiff, for themselves and the Class, seek a declaration and accounting from this Court as to the minerals and royalties taken by Defendants under an invalid lease. Plaintiff seeks a declaration from this Court that all future proceeds from Plaintiff s mineral estate be fully payable to Plaintiff as the sole and rightful owners of such proceeds. 38. Plaintiff, for themselves and the Class, seek costs and attorney s fees as allowed by Texas Civil Practice & Remedies Code Plaintiff s Original Class Action Original Petition Page 12

13 Count 3 Trespass and Injunction to Prevent Future Trespass 39. Plaintiff incorporates by reference all preceding paragraphs as if fully set forth herein. 40. Plaintiff, and the Class, is the rightful owners of the mineral estates of the Properties by virtue of a valid foreclosure action. As owners of the mineral estate Plaintiff is entitled to the sole right of possession of the mineral estate and the sole right to exclude third parties from the mineral estate. 41. Since the Plaintiff and the Class became the rightful owners of the mineral estate, Defendants have knowingly, repeatedly, wrongfully and intentionally interfered with Plaintiff Properties without their consent. 42. The multiple acts of trespass by Defendants have caused, and continue to cause damage to Plaintiff and the Class. Future trespasses by Defendants will likewise cause Plaintiff and the Class future injury. As a result of Defendants wrongful acts, Plaintiff and the Class have suffered and will continue to suffer injury. Accordingly, Plaintiff, on behalf of themselves and the Class, request the recovery of the costs and expenses to counteract Defendants' unlawful acts, and damages, including nominal damages. 43. Plaintiff further seeks injunctive relief for themselves and the Class to prevent future trespass by Defendants because a remedy of damages is inadequate and due to a multiplicity of actions necessary to obtain redress. Count 4 Conversion 44. Plaintiff incorporates by reference all preceding paragraphs as if fully set forth herein. Plaintiff s Original Class Action Original Petition Page 13

14 45. Defendants are liable to Plaintiff and the Class as a result of Defendants conversion of production and production proceeds from Plaintiff and the Class members property. Defendants withheld specifically identifiable sums of money from Plaintiff and the Class Members without color of legal title or claim. Plaintiff was the rightful owner of these specifically identifiable sums of money. Defendants severed Plaintiff s minerals and wrongfully exercised dominion and control over these minerals (and the proceeds thereof), or, in the alternative, acquired possession wrongfully, proximately causing Plaintiff and the Class injury and damages within the jurisdictional limits of this court. Count 5 Money Had and Received 46. Plaintiff incorporates by reference all preceding paragraphs as if fully set forth herein. 47. Plaintiff pleads that Defendants hold unpaid royalties which constitute specifically identifiable sums of money that in equity and good conscious belong to Plaintiff and the Class. Defendants have been and will continue to be unjustly enriched if allowed to keep the unpaid royalties. Plaintiff and the Class have been damaged within the jurisdictional limits of this court. Count 6 Exemplary Damages 46. Plaintiff incorporates by reference all preceding paragraphs as if fully set forth herein. 47. Plaintiff pleads that Defendants trespassed on their property for years with full knowledge that they were producing Plaintiff s minerals without a valid lease or other color of title. Defendants are thus guilty of the intentional tort of trespass. Plaintiff pleads that exemplary damages should be awarded against the Defendants in order to punish their willful, knowing and Plaintiff s Original Class Action Original Petition Page 14

15 wanton conduct, to discourage the Defendants from ever again engaging in such conduct and to serve as a deterrent to others operators from engaging in such conduct. Count 7 Appointment of Class Counsel and Attorneys Fees 48. Plaintiff incorporates by reference all preceding paragraphs as if fully set forth herein. 49. As a direct and proximate result of the actions of Defendants as more fully set forth above, Plaintiff has been forced to hire the undersigned counsel to protect the rights of Plaintiff and the entire Class. Undersigned counsel has the requisite experience and expertise to pursue these causes of action on behalf of Plaintiff and the Class and would seek appointment from this Court as Class Counsel. Undersigned counsel has expended and will expend considerable time and resources to pursue these claims on behalf of Plaintiff and the Class. Accordingly, Plaintiff seeks attorney s fees and costs of court pursuant to Texas Civil Practice and Remedies Code Count 8 Prejudgment and Post-Judgment Interest 50. Plaintiff incorporates by reference all preceding paragraphs as if fully set forth herein. 51. Plaintiff seeks prejudgment and post-judgment interest on all damages and/or attorney s fees to which they and the Class are entitled, pursuant to Section 304 of the Texas Finance Code, other statutory provisions, the common law, and equity. VII. DEMAND FOR JURY TRIAL 52. Plaintiff demands the causes of actions alleged herein be tried before a jury. Plaintiff s Original Class Action Original Petition Page 15

16 VIII. TEXAS RULES OF CIVIL PROCEDURE 47(C) STATEMENT REQUIREMENT 53. Plaintiff at this time cannot assess accurately a definite limit to the damages it or the Class has sustained or will sustain in the future as a result of Defendants acts, though the damages from the wrongful production by Defendants are capable of relatively simple calculation from public records and Defendants records. Given the early state of this litigation, an accurate projection cannot be made regarding the full extent of damages. Plaintiff make the following representation in compliance with Tex. R. Civ. P. 47(c) to aid in the efficient court administration. Plaintiff believe that the most reasonable option afforded under Tex. R. Civ. P. 47, at this time, prior to the completion of discovery in the case, is to seek monetary relief in excess of $1,000,000, exclusive of interest and costs, which is the only option that does not require Plaintiff to select a speculative, arbitrary cap on its damages. Plaintiff reserves the right to modify or adjust this statement, as the litigation progresses and additional evidence is compiled. Regardless of what Plaintiff must state for administrative purposes as the amount of damages it seeks pursuant to Tex. R. Civ. P. 47(c), the final determination of damages, if any, is within to the sole province of the jury, based upon the credible evidence presented to the jury at trial. PRAYER WHEREFORE, PREMISES CONSIDERED, Plaintiff prays that Defendants be cited to appear and answer herein, and that upon final hearing or trial, Plaintiff have the following: a. Class Certification as set forth herein, with Plaintiff as Class Representative, and Plaintiff s counsel as Class Counsel. b. Declaratory Judgment and Monetary Judgment against Defendants for a sum within the jurisdictional limits of this Court for all actual damages, both past and future, as indicated above; Plaintiff s Original Class Action Original Petition Page 16

17 c. Injunctive relief as set forth herein; d. Prejudgment interest as provided by law; e. Post-Judgment interest as provided by law; f. Attorneys fees (in connection with the declarations set forth above) g. Costs of suit; and h. Such other and further relief, at law and in equity, to which they may show themselves to be justly entitled. Respectfully submitted, Dan McDonald State Bar No Preston J. Dugas III State Bar No Connie S. Ditto State Bar No MCDONALD LAW FIRM, P.C. One Museum Place 3100 W. 7th Street, Suite 230 Fort Worth, Texas (817) telephone (817) facsimile Plaintiff s Original Class Action Original Petition Page 17

18 George Parker Young, Esq. State Bar No Vincent Circelli State Bar No CIRCELLI & YOUNG, PLLC Tindall Square Warehouse 500 E. 4 th Street, Suite 250 Fort Worth, Texas (682) telephone ATTORNEYS FOR PLAINTIFF Plaintiff s Original Class Action Original Petition Page 18