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Drilling for natural gas in the Barnett Shale has been an economic boon to North Texas since production began in 2001, but hundreds of disgruntled property owners are lining up to sue drilling companies over terms of mineral leases.
Dallas plaintiffs lawyer Kip Petroff says his firm and two others represent close to 1,000 clients who own land in parts of Fort Worth and Arlington and who have a beef with the drilling companies. Dallas firms Petroff & Associates, Mathis & Donheiser, and Riddle & Williams formed the North Texas Lease Litigation Group this year to represent the property owners in litigation against the drilling companies and their agents.
On Nov. 17, seven clients who live in Arlington and Grand Prairie filed a petition in state district court in Tarrant County alleging XTO Energy Inc. of Fort Worth; Permian Land Co., a division of Oklahoma-based Devonian Enterprises Inc.; and Fred W. Jones, owner of Devonian, conspired to reduce bonus and royalty payments in mineral lease agreements for property in the Barnett Shale.
They allege the object of the conspiracy is to "prevent the natural market forces which had been setting prices for the bonus and royalty payments from continuing, and instead substituting an artificially low price for bonus and royalty payments, thereby increasing the profits each participant would receive at the expense and injury of individual landowners."
The plaintiffs in Omar "Lee" Garza, et al. v. XTO Energy Inc., et al. also bring a breach of contract cause of action against XTO, and fraud, negligent misrepresentation, fraud in connection with the sale of real estate, and violation of the Texas Free Enterprise and Antitrust Act of 1983 causes of action against the defendants.
Garza is the third suit filed by clients of the North Texas Lease Litigation Group — property owners represented by the group filed two others in August — but Petroff says the lawyers expect to file petitions in Tarrant County on behalf of many more property owners in the Barnett Shale who wanted to sign lease agreements with drilling companies in 2008 but did not sign on the dotted line before the companies allegedly changed the terms of the lease agreements in October 2008 to offer less money to the landowners.
"We are saying a deal is a deal," Petroff says.
In many cases, he notes, groups of homeowner associations negotiated lease terms, and property owners were invited to "signing parties" at churches or civic centers, but not all had opportunity to sign leases.
"The deal was made with the homeowners' alliance. The people never got the chance to sign, and the deal was pulled out from under them," he alleges.
In Garza , the seven plaintiffs allege that in April 2008 the South East Arlington Communities of Texas (SEACTX) — a coalition of homeowners, homeowner associations and neighborhoods — negotiated an agreement with XTO and at least two other drilling companies that set terms of mineral leases. They allege that Permian, XTO's agent, failed to provide them with a time to attend a signing party where they could sign a lease, and no one from XTO or Permian told them that the offer negotiated by SEACTX in April 2008 was "being terminated."
The plaintiffs allege that because of the defendants' representations, they have lost the opportunity to enter into a lease with another company because the market has changed and bonus payments are much lower than under the agreement negotiated by SEACTX. They seek a court order to force XTO to "perform in accordance with contract terms" and issue them signing bonus checks at the rate of $26,517 per acre, along with unspecified punitive damages and treble damages under §15.01 of the Texas Business and Commerce Code.
Defense attorney Jeffrey King, a partner in K&L Gates in Fort Worth who represents XTO, Permian, Devonian and Jones, did not return two telephone calls seeking comment before presstime on Nov. 19. In response to an e-mail, King replied on Nov. 18 that he was out of the office on vacation and unable to return a call.
Bonus Money
Petroff says most of the property owners who are clients of the North Texas Lease Litigation Group own property in the Barnett Shale but did not have an opportunity to sign a lease agreement.
However, the allegations in the two suits filed in August differ, he notes. In one suit, the plaintiffs signed a lease agreement but allege they were not paid enough in bonus money, and in the other the plaintiff alleges a paperwork problem prevented her from signing a lease agreement.
The plaintiffs in Willie Booth, et al. v. XTO Energy Inc., et al. , filed on Aug. 6, allege the defendants conspired to eliminate marketplace competition in the Barnett Shale region in North Texas, and violated the Texas Free Enterprise and Antitrust Act of 1983.
Willie and Carmen Booth, who live in Arlington, allege XTO Energy, which was seeking mineral leases in the Barnett Shale area in 2008, entered into a lease agreement in April 2008 with SEACTX. Terms of the lease agreement featured a $26,517 bonus payment per acre and 26.5 percent royalties for production, the Booths allege in their petition.
The Booths allege they were invited to a "signing party" and signed a lease agreement. Then, in October 2008, "XTO withdrew its agreement to lease from the Booths and others in SEACTX" and the Booths have not been paid what they were promised — specifically a nearly $5,000 bonus.
The Booths allege the defendants "abruptly and simultaneously" abandoned efforts to sign lease agreements with many Tarrant County landowners, informed neighborhood organizations that all lease signing programs were "terminated," and recently began to lease mineral rights from property owners in the same areas under less lucrative terms.
In addition to civil conspiracy, the Booths bring causes of actions including breach of contract against XTO, and fraud, real estate fraud and negligent misrepresentation against XTO and its agents — Permian and its parent Devonian, and Jones, Jack Huxel and Jay Van Zandt, who own or work for Permian or Devonian. The suit is pending in a Tarrant County state district court.
The plaintiffs allege the "anti-competitive nature" of the defendants' conduct is evident because the defendants no longer are negotiating with landowner coalitions and are offering property owners signing bonuses of around $5,000 per acre, which is much less than the more than $25,000 per acre the drilling companies offered prior to October 2008.
"The question is not whether these things happened. . . . The only question is whether the conduct is illegal," the plaintiffs allege in an omnibus motion to compel filed in Booth on Oct. 27.
In Velma Ann Myles v. XTO Energy Inc., et al., filed in August in a Dallas County state district court, Myles alleges she did not receive a bonus check for about $3,000 after she signed a contract with XTO. She also brings a civil conspiracy cause of action, alleging the defendants "conceived a plan or scheme in concert" to drive down bonus and royalty payments.
Defense attorneys dispute the allegations in the two suits filed in August.
"It's our belief that these lawsuits are totally frivolous and do not represent an accurate presentation of the laws of the state of Texas with regard to antitrust, deceptive trade practices, or oil and gas development," says Alfred "Rusty" Allen, a partner in Turner & Allen in Graham who represents The Caffey Group LLC and Titan Operating LLC, both of Fort Worth, and Colorado-based Vantage Energy LLC.
Allen declines specific comment on the allegations in Booth or Myles , but says, "It's very unfortunate that these suits are being filed when these companies have done so much to promote the economy of the counties in the Barnett Shale during a time of economic downturn."
According to a study prepared for the Fort Worth Chamber of Commerce that was made public in March, the Barnett Shale created 111,131 jobs and provided more than $11 billion for the North Texas economy in 2008. However, economist Dr. Ray Perryman, who authored the report, predicted that activity would "dip substantially" in 2009 and provide about 70,000 jobs this year and $6.5 billion in output.
Thomas Ferrier, a partner in Murphy, Mahan, Keffler & Farrier in Fort Worth who represents Four Sevens Energy Co., says his client doesn't believe there is any basis for the allegations.
"We don't believe Four Sevens should be in the suits," he says, noting that Four Sevens of Fort Worth does leasing for Chesapeake Exploration Co. of Oklahoma City, another defendant.
K&L Gates partner King represents XTO Energy, Permian and its parent Devonian, as well as Bryson Kuba LLP of Fort Worth, and Jones, Huxel and Van Zandt.
Lawyers for other defendants did not return telephone calls seeking comment. They include Michael Kennington, associate general counsel for Carrizo Oil & Gas Inc. of Houston; Robert Doby, a partner in Cantey Hanger in Fort Worth who represents Cheaha Land Services LLC of White Settlement; Michael Dinnin, a partner in Bracewell & Giuliani in Dallas who represents Chesapeake Exploration; Christian Tucker, a partner in Friedman, Suder & Cooke in Fort Worth who represents Dale Property Services of Dallas; Brian Zimmerman, a shareholder in Zimmerman, Axelrad, Meyer, Stern & Wise of Houston who represents Amarillo-based Llano Operation Corp., and D. Stephen Fort, an attorney who works at Trinity East Energy of Fort Worth.
David Ammons, an associate with Diamond McCarthy in Dallas who represents Quicksilver Resources Inc. of Fort Worth, did not return a telephone call seeking comment before presstime.
Chief Oil & Gas of Dallas was nonsuited in Booth and Myles ,says Craig Haynes, a partner in Thompson & Knight in Dallas.
Except for Red Oak Energy partners, Huxel and Van Zandt, all of the defendants in Booth also are named as defendants in Myles.
Petroff, who usually handles personal-injury litigation, says he became involved in the Barnett Shale litigationbecause of a friendship with Christopher Payne, an oil and gas attorney at Riddle & Williams. Petroff says homeowner associations approached Riddle & Williams with their concerns about the lease agreements, and Payne got involved because of his energy practice.
Petroff says Riddle & Williams contacted him because of his experience in fen-phen drug litigation and other cases involving mass torts, and Petroff contacted Randal Mathis, who was his mentor when he was a new attorney at Strasburger & Price in Dallas, for trial assistance.
"We've had cases together on and off over the years. This looked like a case where I could use his experience. His partner, Mark Donheiser . . . is our appellate man," Petroff says.
Lawyers from Riddle & Williams and Mathis & Donheiser refer comment to Petroff. "Somebody had to be the point person," Petroff says.
