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FREEMAN v. GREAT LAKES ENERGY PARTNERS

February 11, 2001

JACK L. FREEMAN AND ROBERTA W. FREEMAN, INDIVIDUALLY AND ON BEHALF OF ALL THOSE SIMILARLY SITUATED, PLAINTIFFS,
V.
GREAT LAKES ENERGY PARTNERS, L.L.C., RANGE RESOURCES CORPORATION, RANGE OPERATING COMPANY, FIRST ENERGY TRADING SERVICES, INC., RANGE ENERGY SERVICES COMPANY, FIRST ENERGY CORP., FIRST ENERGY SERVICES CORP., AND RANGE RESOURCES DEVELOPMENT COMPANY, DEFENDANTS. VIVIAN K. KERSHAW, INDIVIDUALLY AND ON BEHALF OF ALL THOSE SIMILARLY SITUATED, PLAINTIFFS, V. COLUMBIA NATURAL RESOURCES, INC., COLUMBIA GAS TRANSMISSION CORP., COLUMBIA ENERGY GROUP, AND COLUMBIA ENERGY RESOURCES, INC. DEFENDANTS.



The opinion of the court was delivered by: Curtin, District Judge.

INTRODUCTION

Presently before the court are a pair of motions to remand, which arise from two separate lawsuits: Jack and Roberta Freeman, et al. v. Great Lakes Energy Partners, et al., 00-CV-204 ("Freeman"), and Vivian Kershaw, et al. v. Columbia Natural Resources, et al., 00-CV-246 "(Kershaw"). Both actions were removed by the respective defendants to the Western District in March 2000. The Clerk assigned Freeman to this court, Item 1 (Freeman;); and by an order dated April 20, 2000, the Honorable William M. Skretny transferred Kershaw to this court. Item 10 (Kershaw.)

Although these two actions are distinct in many respects, they are broadly related in their factual background and by the fact that the representative plaintiffs — the Freemans and Ms. Kershaw — employ the same counsel: Paul Yesawich III and Patrick Maxwell of Harris Beach & Wilcox, LLP. In addition, the two actions resemble one another in that the Freemans and Ms. Kershaw have moved this court to remand their respective actions to the New York State Supreme Court of Chautauqua County. Item 5 (Freeman) and Item 6 (Kershaw). The court granted all parties an opportunity to submit arguments on these motions to remand and then, on June 21, 2000, heard oral argument.

BACKGROUND

Defendants in both Freeman and Kershaw are gas well operators that have entered into various leasing arrangements with members of the putative classes. The Freemans and Ms. Kershaw are landowners who hold royalty interests in gas wells operated by certain defendants. Item 5, ¶ 4 (Freeman) and Item 9, ¶¶ 3-4 (Kershaw). The majority of leases involved in these two actions grant the landowners a standard royalty of 1/8 or 12.5%, of a gas well's annual revenue. Id. In many cases, defendants drilled a single well that extended over several contiguous properties. As a result, many members of the putative classes actually split a 1/8 royalty with other plaintiff-landowners. In fact, both the Freemans and Ms. Kershaw submit that an average of three plaintiff-landowners hold an interest in any given well. Item 5, ¶ 4 (Freeman) and Item 9, ¶ 4 (Kershaw).

Natural gas well operators, like these defendants, sell natural gas in "Mcf's" (thousands of cubic feet). Both the Freeman and Kershaw defendants*fn1 paid annual royalties to plaintiff-landowners by multiplying the following figures:

(a) the number of Mcf's sold from a well in a year;

(b) the sale price of the gas; and

(c) the royalty percentage (1/8 or .125).

Thus, if a gas well produced 100 Mcfs in a year, at a price of $1.00 per Mcf, and a royalty rate of .125 (or 1/8), a landowner would be entitled to a royalty of $12.50. See Item 5, ¶ 5 (Freeman) and Item 9, ¶ 5 (Kershaw).

FACTS

The Freemans and Ms. Kershaw claim that the Freeman defendants and Kershaw defendants, respectively, conspired to underpay the royalty interests that members of the putative classes held in natural gas wells located in, among other places, Chautauqua County, New York. Item 5, ¶ 6 (Freeman) and Item 9, ¶ 6 (Kershaw).*fn2

I. Value of Claims: Plaintiffs' Positions

A. Claims for Compensatory Damages

At this point in the litigation, the issue of underpayment is just an allegation. For the purposes of determining diversity jurisdiction, the court looks to plaintiffs' allegations. The Freemans allege that the Freeman defendants underpaid their putative class by approximately $4.00 per Mcf. See Item 5, ¶ 7 (Freeman). For her part, Ms. Kershaw states that the Kershaw defendants underpaid her class by approximately $3.78 per Mcf. See Item 9, ¶ 8 (Kershaw).

The Freemans and Ms. Kershaw also state that, on average, New York State natural gas wells produced approximately 3,089 Mcf's annually from the years 1994 through 1998. See Item 5, ¶ 8 and Exh. B (Freeman) and Item 9, ¶ 9 and Exh. B (Kershaw) (citing report from New York State's Department of Environmental Conservation ("NYS DEC"), Mineral Resources Division). Thus, in order to calculate the probable claims of each plaintiff, both the Freemans and Ms. Kershaw use the following formula:

(a) take the average production of a New York State natural gas well (3,089 Mcf's);
(b) multiply by the estimated amount of underpayment to the plaintiff class ($4.00 in Freeman and $3.78 in Kershaw).
(c) multiply by the royalty interest of 1/8, or .125;
(d) multiply by six, which represents the number of years for which plaintiffs may recover once the statute of limitations for fraud is applied; and
(e) divide by three, which represents the number of plaintiff-landowners who typically held interests in the same well.

In this way, the Freemans estimate that a typical member of their putative class will have a claim for compensatory damages of just under $3,100.*fn3 Similarly, Ms. Kershaw estimates that the typical member of her plaintiff class will have a compensatory claim of just under $3,000.*fn4

B. Claims for Punitive Damages

In addition to their compensatory claims, both the Freemans and Ms. Kershaw have asserted $100,000,000 claims for punitive damages on behalf of their putative classes. See Item 5, ¶ 14 (Freeman) and Item 9, ¶¶ 16-17 (Kershaw). The Freemans estimate that there are approximately 26,600 members of their plaintiff class. Item 5, ¶ 16.*fn5 For her part, Ms. Kershaw estimates that there are approximately 24,000 members of her plaintiff class.*fn6 Thus, the Freemans allege that each member of their plaintiff class would be entitled to approximately $3,700 in punitive damages, Item 5, ¶ 17, and Ms. Kershaw estimates that each member of her plaintiff class would be entitled to approximately $4,167 in punitive damages. Item 9, ¶ 17.

II. Value of Claims: Defendants' Positions

In opposition to the Freemans' estimates of the likely value of individual claims, Freeman defendant Great Lakes Energy Partners submits proof tending to show that certain unnamed plaintiff class members could have claims well in excess of $75,000. For example, statistics compiled by the N.Y.S. DEC's Mineral Resources Division show that since 1982, some natural gas wells in New York have produced close to 600,000 Mcfs. See Item 18, pp. 6-7 and Exh. A. Thus, certain prospective members of either putative class could be entitled to compensation of approximately $300,000, if that person had held rights in such a well since 1982. See supra n. 3 (dismissing plaintiffs' attempt to apply statute of limitations defense prematurely). On the other hand, if, as plaintiffs aver, three landowners shared an interest in one such well, then there would be three claims of $100,000.

Similarly, the Kershaw defendants submit evidence tending to demonstrate that Ms. Kershaw herself may have a claim in excess of $75,000. See Item 19, Exh. 1 (Kershaw). First, Ms. Rebekah Barnes, a Senior Prospect Engineer with defendant Columbia Natural Resources, reports that Ms. Kershaw's lease is connected with a well that has produced over 48,000 Mcfs of gas between 1981 and 1993. If Ms. Kershaw's well has continued to produce similar amounts of gas for the rest of the 1990s, Ms. Kershaw would likely claim compensatory damages of approximately $30,000. In addition, Ms. Barnes projects that the Kershaw well will produce another 32,000 Mcfs in its lifetime. Item 19, Exh. 1. Thus, the value of Ms. Kershaw's past damages, combined with the value of injunctive relief, would be approximately $45,000, see Item 19, p. 6, which is significantly more than the $7,200 Ms. Kershaw projects. Item 8, ¶ 6 (Kershaw).

Further, Ms. Barnes reports that at least seven members of the Kershaw putative plaintiff class "would have received in excess of $75,000 in additional royalty payments for the 6 year period between 1994 through 1999 if the actual calculated royalty volumes were multiplied by 3.78." Item 19, Exh. 1, ¶ 5 (Kershaw).

III. Court's Conclusion on Value of Claims

For the reasons explained herein, the court finds that the likely value of a claim by an average member of the Freeman class would be approximately $16,000, while the likely value of a claim by an average ...


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