JPMorgan Tentatively Ends $681 Million Texas Shale CaseMargaret Cronin Fisk and Laurel Brubaker Calkins
JPMorgan Chase & Co. said it tentatively settled a lawsuit by Texas mineral-rights owners who claim the bank bilked them out of fair compensation for the chance to drill on shale-rich land, to the tune of $681 million.
Trial was to begin today in San Antonio state court over claims by beneficiaries of the South Texas Syndicate Trust. They alleged the New York-based bank, supposedly working on their behalf, instead hatched sweetheart deals with Petrohawk Energy Corp. and Hunt Oil Co. for cut-rate prices on their rights to the Eagle Ford Shale formation, one of the nation’s hottest oilfields.
In the end, the beneficiaries said, they got only $32.5 million on rights that yielded benefits worth $1.1 billion because JPMorgan wanted to curry favor with the oil companies at their expense. The bank rejected the claims as speculation.
“An agreement in principle has been reached to resolve the case,” Charles Gall, a lawyer for JPMorgan, said today at a court hearing in San Antonio. “We’re not in position to sign the agreement because of the number of plaintiffs that have to be rounded up.” Terms weren’t revealed.
The dispute centers on payments for rights to drill in the Eagle Ford, a shale formation that underlies much of central and southwest Texas that has put the U.S. in competition with Saudi Arabia and Russia for title of world’s largest oil producer. Energy companies have spent the past five years scrambling to accumulate and drill as many acres as possible across that vast swath of Texas range.
The energy companies, through JPMorgan, paid trust beneficiaries as little as $200 an acre in bonuses for drilling rights on some of the property, which is on top of royalties the mineral owners get on any oil or gas pumped out.
At the time, between late 2008 and 2012, mineral leases were skyrocketing in value. This was in no small part because of a well drilled on the trust’s land proved oil could be commercially produced from the Eagle Ford through horizontal drilling and fracking.
Once JPMorgan’s commercial clients had the leases, some of them sold the acreage for as much as 70 times as much as they paid.
Ultimately all of the financial gains of exploiting properties at the heart of the Eagle Ford oil play flowed to subsequent buyers, who either produced the oilfields for their own benefit, or flipped the drilling rights at much higher prices to other companies.
Meanwhile, the original mineral owners were shut out for comparatively little, the trust claimed. JPMorgan also violated the trust’s customary leasing policies so that bank customers were allowed to lock-up the bargain-priced drilling rights far longer than usual, they alleged.
“JPMorgan’s ‘Chinese Wall’ was breached,” the trust’s lawyers said in court papers. “JPMorgan’s commercial bankers put pressure on the JPMorgan trust department on behalf of substantial commercial clients” to short-change the trust beneficiaries in order to bolster returns for other customers.
JPMorgan denied claims of “self-dealing,” countering the plaintiffs’ allegations were based on the benefit of hindsight.
“The fact a bank’s trust department enters into a deal on behalf of the trust with a person or company that has a banking relationship with one of the bank’s other departments is not evidence of self-dealing,” JPMorgan said in court filings.
The South Texas Syndicate Trust has 275 beneficiaries, who either inherited or purchased some of the 30,000 shares of mineral rights to 132,000 contiguous acres at the heart of the Eagle Ford shale, southwest of San Antonio.
The sprawling range land was originally accumulated by six Minnesota businessmen who came to Texas in 1906. Surface rights to the property were sold in 1950, and today the beneficiaries are scattered coast-to-coast and overseas.
About 175 opted to participate in the lawsuit, while the rest will share in the recovery through a common benefit fund created for all beneficiaries.
In court today, the JPMorgan lawyer said the deal should be completed by Nov. 12, he told Texas District Judge Larry Noll. The jury selected for the trial will come back that day if the settlement falls apart, he said.
“What could kill the deal?” Noll asked plaintiffs’ lawyer Jim Drought today.
“I can’t think of anything that would kill the deal,” Drought responded. “It’s just a matter of trying to get all the plaintiffs to sign it.”
The case is Meyer v. JP Morgan Chase Bank, 2018-CI-10977, District Court, Bexar County, Texas (San Antonio).