Appeals court sends back gas royalty case

A federal appeals court on Monday sent a $52 million natural gas royalty settlement case back to federal court in Oklahoma over the calculation of attorney fees.

In a 2-0 ruling, a panel of the 10th U.S. Circuit Court of Appeals in Denver said the district court didn’t properly calculate attorney fees in the class-action settlement according to Oklahoma law.

The case alleged underpayment of natural gas royalties by SM Energy Co., several funds affiliated with EnerVest Energy and FourPoints Energy LLC. It was settled in 2015 for $52 million, minus expenses and fees. The case was brought by Chieftain Royalty Co.

Attorney fees in such royalty class-action cases are figured using either a “percentage of the fund” analysis or the “lodestar” approach. Oklahoma law favors the lodestar approach, which comes from multiplying the number of hours spent on the case by a reasonable hourly rate.

However, the district judge in the Chieftain case approved attorney fees of one-third of the settlement fund, or $17.33 million. The court also awarded Chieftain 0.5 percent of the fund, $260,000, as an incentive award.

“Here, the attorney-fee award was based on the outcome of the litigation not the district court’s power to discipline the litigants,” the opinion said. “State law therefore governs the propriety of granting a fee award.”

The court also overturned the incentive award, saying the district court didn’t receive any supporting documents to grant the award or to calculate its amount. The Appellate Judges sent the case back to district court for further fact-finding on both the attorney fees and the incentive award.

Former appellate judge Neil Gorsuch, now on the U.S. Supreme Court, participated in the oral argument but not in the decision. Court rules allow the remaining two panel judges to act as a quorum to resolve the appeal.