Business climate too bad to expand in W. Va., company says

By John O'Brien | May 29, 2008

CHARLESTON, W. Va. (Legal Newsline) - One of the country's largest natural gas producers will not construct a state-of-the-art building in Charleston to use as the head of its eastern operations, citing the West Virginia Supreme Court's refusal to hear its appeal of a $405 million verdict against it.

Chesapeake Energy Corp. announced Thursday that it will not build its much-anticipated Eastern Division headquarters that it planned to invest as much as $35 million building, according to a report in the Charleston Daily Mail.

Because Chesapeake bought a company that had allegedly shortchanged property owners on natural gas royalties, the company is on the hook for the verdict, which includes $270 million in punitive damages.

"(The Supreme Court decision) sends a profoundly negative message about the business climate in the state. The reality of this decision is that nobody in West Virginia, similarly situated, has a guaranteed right of appeal in the judicial system," company spokesman Scott Rotruck said, according to the report.

The company will continue to lease space in Charleston and plans to appeal the verdict to the U.S. Supreme Court, the report adds.

Gov. Joe Manchin had heavily supported the company's plans, even supporting legislation that would have cleared up the state's royalty laws.

"This is not Joe Manchin's fault," Rotruck said, according to the report. "When you think about this decision, remember you have three distinct, separate branches of government."

In Feb. 2007, a Roane Circuit Court jury imposed about $134.3 million in compensatory damages and $270 million in punitive damages against defendants in the case of Tawney, et al. v. Columbia Natural Resources.

CNR is a former NiSource Inc. subsidiary, which was sold in 2003. NiSource, Columbia Energy Group and Chesapeake Appalachia LLC were named as defendants in the lawsuit. Oklahoma City-based Chesapeake Energy bought Columbia Natural Resources of Charleston in November 2005 for $2.2 billion.

The plaintiffs in the case, natural gas royalty owners, filed the lawsuit in early 2003 alleging that CNR underpaid royalties by deducting a portion of post-production costs incurred to gather and transport gas to interstate pipelines and by not paying market value for gas produced under all leases, even those providing for payment based on actual proceeds received for the gas. Plaintiffs sought the alleged royalty underpayment and punitive damages.

The defendants believe CNR operated in good faith and that there is no valid basis for any award of punitive damages, "let alone the unwarranted and unreasonable levels granted in this case."

"NiSource believes the verdict in the case is clearly excessive and should be set aside by the trial court or overturned on appeal," the company said in a press statement. "The result, if left standing, would set a precedent that is contrary to existing law and could undermine the legal underpinnings of nearly every natural gas royalty contract in the state.

"As such, the decision not only affects the defendants, but also potentially harms every natural gas producer in West Virginia and could have a negative impact on future oil and gas development."

In another statement, Chesapeake said it also was "surprised and disappointed" by the verdict.

"If allowed to stand, the verdict would have far-reaching negative implications for all gas producers in West Virginia and would reinforce the hostile legal environment all businesses face in West Virginia," the company said. "A judgment has not yet been entered in the case. Important motions must be filed and considered by the trial court before judgment is entered. When judgment is entered, Chesapeake will analyze the judgment and decide the proper course of action including any appeal."

The jury award was one of the seven largest in the country in 2007. West Virginia courts produced two others, including a $220 Brooke County verdict against Massey Energy. The Supreme Court also refused to hear Massey's appeal in that case.

West Virginia was recently ranked last in a polling of corporate defense lawyers arranged by the U.S. Chamber of Commerce, the owner of the West Virginia Record.

The state has also been dubbed a "judicial hellhole" by the American Tort Reform Association every year since 2002.

From Legal Newsline: Reach John O'Brien via e-mail at john@legalnewsline.com.

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