Jurors hear plaintiff claim royalties shorted

Lawsuit represents 12,000 landowners

Testimony in one of the biggest class-action lawsuits to emerge from Fayetteville Shale activity began Tuesday with two hours of questions for an educator from Nashville, Tenn., who sued Southwestern Energy Co. and three subsidiaries, alleging underpayment for the use of her land during the natural-gas boom in north-central Arkansas.

Connie Jean Smith’s case hinges on what a 12-person federal jury will decide is “reasonable” for SWN Production, formerly known as SEECO, to deduct from Smith’s promised cut of the company’s proceeds.

Smith’s case is class-action certified to represent about 12,000 Arkansas landowners whom Smith’s attorneys say were cheated out of $98 million during years of royalty payments for the use of their land to produce natural gas. That averages out to more than $8,000 per lease.

Attorneys for Smith argue that two of the subsidiaries, run by many of the same officers and all answering to Southwestern Energy, conspired to create the third subsidiary with delegated tasks and costs

that the companies could then deduct, from Smith’s promised compensation, to create additional profit. Such an action, Smith’s attorneys argue, should not be considered a “reasonable cost” for deduction from such compensation.

Attorneys for the companies argue the lease allows for deductions related to the “reasonable costs” of doing business, that companies should be allowed to profit from their business and that Smith and thousands of other landowners have already benefited immensely from the royalty payments they’ve received.

Smith’s case is one of numerous lawsuits filed against Southwestern Energy subsidiaries and other natural-gas companies in Arkansas and elsewhere that allege the shortchanging of royalty payments to landowners.

Smith’s case covers the largest number of people among the lawsuits against Southwestern Energy subsidiaries in the shale, and it is class-action certified along with two other state circuit court lawsuits against the companies over similar complaints. The companies opted to settle one of the cases — Eldridge Snow v. SEECO, et. al. — in Conway County Circuit Court last month for $45 million. A circuit judge will hold a fairness hearing on the settlement June 28 before deciding on final approval.

Southwestern Energy produced about 70 percent of the gas in the shale field, which still has active wells but no drilling rigs creating new wells.

The trial, which requires six court reporters and features hundreds of exhibits, began Monday with five hours of jury selection and nearly two hours of opening statements. It is expected to last three to four weeks.

Smith owns 30.3 acres of land off Interstate 40 in Conway County and half of the mineral rights for the property, according to testimony Tuesday. She inherited the land from her father in 1996 and has operated a tree farm of loblolly pines on it.

Smith signed a lease with SEECO, short for Southwestern Energy Exploration Co., in 2005 for five years and one-eighth of the company’s proceeds from the sale of the gas from her land. She chose SEECO over other natural-gas companies after deciding that the company’s offer was the best, she said. SEECO drilled a well on a neighbor’s property but extracted gas from under Smith’s land.

She testified Tuesday that pay stubs never indicated that costs for the Desoto Gathering subsidiary were deducted from her compensation and that she wouldn’t have known about it if a family friend, Morrilton lawyer Ben Caruth, hadn’t called her in May 2014 to tell her about another lawsuit alleging underpayments of royalties to landowners who reside in Arkansas. After that, Smith decided to sue in federal court.

According to Smith’s attorneys, SEECO and Southwestern Energy Services Co., — both subsidiaries of Southwestern Energy Co. — created DeSoto Gathering Co. to gather, compress and treat natural gas, which SEECO had been doing, and then deducted DeSoto’s cost of doing business from compensation promised to Smith by SEECO.

Mark Boling, executive vice president of Southwestern Energy Co., testified in a November 2015 deposition — a nearly two-hour excerpt of which was played in federal court Tuesday afternoon — that creating DeSoto Gathering as a separate company was necessary because Southwestern Energy had certain desires for the kind of leadership it wanted for the gathering process.

Boling also said that Southwestern wanted three separate entities — SEECO, DeSoto and Southwestern Energy Services — to run three separate steps of the natural-gas business. SEECO explored and produced natural gas; DeSoto gathered, compressed and treated it; and Southwestern Energy Services marketed it.

“In my mind, it was the most prudent thing to do, to do that, and that’s why we did it,” Boling said.

On cross-examination, Mike Powell, an attorney for the companies, questioned Smith’s definition of “reasonable costs,” which she said were “actual costs,” and asked Smith whether she was opposed to companies earning a profit. Smith said she was not. Powell also questioned whether she was trying to rewrite her lease in court.

“I like the lease as it is,” Smith said. “I just don’t believe the lease has been honored in good faith.”