Although the proposed settlement has not yet been even preliminarily approved by the court, and although it would not affect most of the royalty owners who have joined the Marcellus Royalty Action to date, it would affect some of our existing and prospective royalty owner clients, and we are getting questions about it already, so we thought it would be appropriate to address the subject here.
The plaintiffs in the Demchak Partners filed a putative (meaning not yet certified) class action on behalf of themselves and other royalty owners whose leases govern Pennsylvania leaseholds and contain Market Enhancement Clauses, as defined in the agreement, alleging that Chesapeake took impermissible deductions for post-production costs in calculating their royalties, in violation of the terms of their leases. Those royalty owners are referred to in the settlement agreement as Settlement Class Members. If the Court gives its preliminary approval to the proposed settlement, then notice will be provided to members of the putative class by mail and publication, setting a deadline by which they will have to take steps to "opt-out" or exclude themselves from the Settlement Class. A copy of the proposed form of Settlement Notice appears at the end of the proposed form of settlement agreement (available at link above).
Royalty Owners whose leases contain Market Enhancement Clauses, but who do not timely take the required steps to opt-out of the Settlement Class, will automatically be included in the Settlement Class, and will be bound by the terms of the settlement, including the release of defined Settled Claims against Chesapeake and its affiliates. If your lease does not contain a Market Enhancement Clause, then you are not a member of the proposed Settlement Class, and will not be affected by the proposed settlement. The term "Market Enhancement Clause" is defined in Section 1.25 of the Amended Class Action Settlement Agreement, and examples of such clauses are provided in Section 4 of the proposed Settlement Notice.
The leases of most of the royalty owners who have retained us to represent them in the Marcellus Royalty Action do not contain Market Enhancement Clauses. As a result, they are not included in, and will not be affect by, the proposed settlement of the Demchak Partners case. The leases of some of our clients, however, do contain Market Enhancement Clauses. We will be separately notifying those clients to make sure they are aware of the proposed settlement, and will be scheduling a conference call in the near future to discuss the terms of the proposed settlement.
If your lease contains a Market Enhancement Clause and the proposed settlement is preliminarily approved by the Court, you will then have to decide whether it is in your best interests to remain part of the Settlement Class or to take steps to timely opt-out of the settlement and continue to pursue your claims through the Marcellus Royalty Action, or otherwise. If any of our clients whose leases contain Market Enhancement Clauses decide to remain part of the Settlement Class in the Demchak Partners action, and become bound by a final settlement in that case, they will not be required to pay any separate legal fees or costs in the Marcellus Royalty Action.
Several of our royalty owner clients already have contacted us and expressed their disapproval of the proposed settlement, and their intent to opt-out and continue to pursue their claims in the Marcellus Royalty Action. Although we are naturally biased in favor of the approach we are taking in the Marcellus Royalty Action, which we believe will maximize the value of any settlement or judgment, and although it is in our self-interest for as many royalty owners as possible to remain part of (or join in) the Marcellus Royalty Action, each royalty owner will need to decide for himself or herself, if and when the time comes, whether it is in his or her best interests to participate in the settlement or to opt out. At the same time, we strongly believe that the proposed Amended Class Action Settlement Agreement in the Demchak Partners case has serious flaws and shortcomings which prevent us from recommending it, in its present form, to those of our clients whose leases contain Market Enhancement Clauses.
We will address our concerns about the proposed Demchak Settlement in further detail with our clients in one-on-one telephone calls, and in a conference call in the near future.
In the meantime, we have prepared a short-form summary, available here comparing the basic monetary terms of the propose Amended Class Action Settlement Agreement with those of the original proposed Class Action Settlement Agreement that was filed in the Demchak Partners case on August 30, 2013, highlighting some of the material defined terms used in the agreement, and listing some of the questions that we have about the proposed settlement. Our summary comparison does not address all of the material terms of the proposed settlement. We encourage anyone whose lease contains a Market Enhancement Clause to read the full settlement agreement and Settlement Notice and to seek advice from counsel of your choice.