HomeMy WebLinkAboutResolution 4253-10-2013 A Resolution
NO. 4253-10-2013
RATIFYING THE LAWSUIT FILED BY THE CITY OF FORT WORTH AGAINST
CHESAPEAKE OPERATING, INC. AND TOTAL E&P (USA), INC. AND
RATIFYING THE EMPLOYMENT OF RALPH DUGGINS OF THE FIRM OF
CANTEY HANGER L.L.P. AS OUTSIDE LEGAL COUNSEL TO REPRESENT THE
CITY IN THE LAWSUIT, AND AUTHORIZING PAYMENT OF COUNSEL FEES
WHEREAS, the City of Fort Worth has entered in to numerous oil and gas leases of city
property within the Barnett Shale Field; and
WHEREAS, the leases provide that the royalty is to be free of costs of any kind; and
WHEREAS, Chesapeake Operating, Inc., and Chesapeake Exploration, LLC and Total E&P
(USA), Inc. are the lessee or assignee of the lessee of many of the oil and gas leases with the City of Fort
Worth; and
WHEREAS, the City of Fort Worth has determined that Chesapeake Operating, Inc. and Total
E&P (USA), Inc. have reported as the gross sales price of produced gas the net sales price after
disallowed costs when reporting and remitting royalty payments to the City of Fort Worth for leases held
by Chesapeake Operating, Inc. and Total E&P (USA), Inc. in violation of the terms of the leases; and
WHEREAS, on September 23, 2013, the City of Fort Worth notified Chesapeake Operating,
Inc. of its audit findings and demanded payment by October 21, 2013; and
WHEREAS, City staff believed it was necessary to file suit immediately after the due date of
the demand letter and City Council finds that to it was in the best interest of the City of Fort Worth; and
WHEREAS, because of the extraordinary complexity of this area of law, the City Manager and
the City Attorney recommend that the City retain outside legal counsel with knowledge and expertise in
matters involving oil. and gas law; and
WHEREAS, Ralph Duggins of the law firm of Cantey Hanger L.L.P. possesses the required
knowledge and expertise in oil and gas law.
ORT'W09H
Resolution No. 4253-10-2013
NOW THEREFORE, BE IT RESOLVED BY THE CITY COUNCIL OF THE CITY OF
FORT WORTH, TEXAS, THAT:
1.
That the filing of a lawsuit against Chesapeake Operating, Inc. and Total E&P (USA), Inc. is
hereby ratified.
2.
That the employment of Ralph Duggins of the firm of Cantey Hanger L.L.P., as outside legal
counsel pursuant to Chapter VI, Section 3, of the City Charter to represent the City in the above
referenced lawsuit is hereby ratified.
3.
The City is hereby authorized to compensate Ralph Duggins of the firm of Cantey Hanger
L.L.P., by contingency and the City Manager is authorized to enter into a contract setting out the
contingency with all costs of litigation to be advanced by Cantey Hanger L.L.P..
Adopted this 22nd day of October, 2013.
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Mary Kayser, otty Secretary 00000 00 ICY
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City of Fort Worth, Texas
Mayor and Council Communication
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COUNCIL ACTION: Approved on 10/22/2013 - Resolution,No. 4253-10-2013,
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DATE: Tuesday, October 22, 2013 REFERENCE NO.: G-18047
LOG NAME: 12CHESAPEAKELAWSUIT
SUBJECT:
Adopt Resolution Ratifying the City's Lawsuit Against Chesapeake Operating, Inc., and Total E&P (USA)
Inc., and the Retention of Ralph Duggins of Cantey Hanger L.L.P., as Outside Counsel to Represent the
City in the Lawsuit, and Authorize Payment of Counsel Fees by Contingency(ALL COUNCIL DISTRICTS)
RECOMMENDATION:
It is recommended that the City Council adopt the attached Resolution ratifying the lawsuit filed by the City
against Chesapeake Operating, Inc., and Total E&P (USA), Inc., and the retention of Ralph Duggins of the
law firm Cantey Hanger L.L.P., as outside legal counsel to represent the City, and authorize payment of
counsel fees by contingency.
DISCUSSION:
In the early 2000s, the City of Fort Worth began leasing City-owned properties in the Barnett Shale for gas
exploration. Currently the City of Fort Worth has in excess of(500) properties under lease. A majority of
those leases are currently held by Chesapeake Operating, Inc., and Total E&P (USA), Inc. (collectively
Chesapeake) as either the original lessee or as an assignee from the original lessee. Virtually all those
leases provide that the royalty to be paid to the City of Fort Worth was to be free of all costs of any kind.
Following a partial audit of leases, the City of Fort Worth determined that Chesapeake has sold the
produced gas at the wellhead to its subsidiary, Chesapeake Energy Marketing, Inc. and has been
reporting to the City of Fort Worth as a gross sales price what is in fact the net price after costs as the
basis of the City's royalty. Based on a preliminary audit of one lease at Spinks Airport, the City of Fort
Worth has determined that Chesapeake has underpaid the monthly royalty for a portion of Spinks Airport
in the amount of approximately $100,000.00 in each of the seven months audited. Staff believes that
each lease with Chesapeake likely has been charged costs which are disallowed by the terms of the
leases.
The City of Fort Worth, by and through its Assistant City Manager, made demand on the Chesapeake
Operating, Inc., to pay the shortage on the Spinks Airport Lease, to provide an account for any other lease
that disallowed costs were charged against and to pay the due royalty on disallowed costs by October 21,
2013. It is not anticipated that Chesapeake will fulfill its duties under the lease and as demanded in the
letter to Chesapeake. Therefore, it is recommended that the City Council ratify the filing of a lawsuit
against Chesapeake Operating, Inc., and Total E&P (USA), Inc. as being privy to disallowed charges to
recover the royalties not paid on such disallowed costs, for a declaratory judgment that such costs are not
chargeable to the royalties, for injunctive relief and for reasonable attorney fees incurred in prosecuting
the lawsuit. Due to the important nature of the issues involved in this lawsuit, it was necessary for the
City to proceed with the filing of this lawsuit.
The City Manager and the City Attorney agree that, because of the extraordinary complexity of this area of
law it is necessary to retain outside legal counsel with significant knowledge in oil and gas law to ensure
that the City's interests are protected. The City Manager has recommended Ralph Duggins of the firm
Logname: 12CHESAPEAKELAWSUIT Pagel of 2
Cantey Hanger L.L.P., who has experience in a wide range of oil and gas matters, to represent the City of
Fort Worth in this litigation and he has agreed to represent the City. Chapter V1, Section 3 of the City
Charter requires the City Council to approve the retention of any outside legal counsel for assistance to
the City Attorney. Accordingly, it is recommended that the City Council adopt the attached Resolution
ratifying the lawsuit and ratifying the retention of Ralph Duggins of the firm Cantey Hanger L.L.P. to
represent the City in the lawsuit, and authorizing payment of counsel fees by contingency.
FISCAL INFORMATION / CERTIFICATION:
The Financial Management Services Director certifies that this action will not increase the total
appropriations of the City funds. The Legal Department will be responsible for the collection of any funds
due to the City as a result of this action.
FUND CENTERS:
TO Fund/Account/Centers FROM Fund/Account/Centers
................ .................
CERTIFICATIONS:
Submitted for City Manager's Office by: ALL AGMs (6222)
Originating Department Head: Sarah Fullenwider (7606)
Christa Reynolds (8984)
Additional Information Contact: Gerald Pruitt (7616)
Logname: 12CHESAPEAKELAWSUIT Page 2 of 2