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Chesapeake Must Face Ohio Lawsuit Over Unpaid Royalties

May 29 (Bloomberg) -- Chesapeake Energy Corp. must face an Ohio lawsuit over claims the company underpaid gas royalties for years, an appeals court said, reinstating the case.

Leaseholders in the proposed class-action suit allege that a Chesapeake predecessor company by 1993 began to “deliberately and fraudulently underpay the full gas royalty due,” and that Oklahoma City-based Chesapeake continued the practice after taking over the leases in 2005.

An Ohio trial court dismissed the case in 2010, citing a state law that requires filing such claims within four years of the action under attack. The U.S. Court of Appeals in Cincinnati reversed that decision today, saying that allegations of continuing underpayment mean the claims aren’t time-barred.

“The plaintiffs are permitted to pursue their breach of contract claim pertaining to any underpayment of royalties that occurred within four years prior to the filing of their complaint in September 2009,” the court said.

The leaseholders may also be allowed to pursue earlier claims if they can prove they couldn’t have discovered underpayments before the four-year period because of “fraudulent concealment” by Chesapeake, the court said.

The Ohio lawsuit isn’t the only one in which Chesapeake is accused of underpayment of royalties. Its record is mixed. Courts in Kentucky and New York have rejected cases. One in Virginia was allowed to proceed, and the parties settled.

Leaseholders’ Attorney

“This is a good day for the Ohio landowners in this case,” plaintiffs’ attorney Robert Sanders said in an e-mail. “We are optimistic that they will eventually be paid the full royalties due them.”

Michael Kehs, a Chesapeake spokesman, declined to comment on the decision.

The leaseholders claim that Chesapeake’s predecessor, Columbia Natural Resources, fraudulently underpaid them by deducting post-production costs from payments and calculating monthly royalties using a value that was less than the market price at the time of production.

Chesapeake, after acquiring Columbia, allegedly continued to underpay until at least January 2007 and “perhaps to the present,” according to court filings.

The case is Lutz v. Chesapeake Appalachia, 10-4538/11-3034, U.S. Court of Appeals for the Sixth Circuit (Cincinnati).

To contact the reporter on this story: Margaret Cronin Fisk in Detroit at mcfisk@bloomberg.net.

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net.

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