by Janice Francis-Smith
The Journal Record July 31, 2008
OKLAHOMA CITY – Robert D. McCutcheon, vice president and general counsel for JMA Energy Company LLC, is happier now than he was a year ago. In June 2007, the Oklahoma Court of Civil Appeals ruled JMA was not entitled to prejudgment interest in its lawsuit against Chesapeake Energy because the case had been settled out of court.
But the case had not been settled out of court.
“The perceived settlement agreement did not exist,” said McCutcheon. “I don’t know how that happened,” said McCutcheon, regarding the court’s false impression the case had been settled. Attorneys representing both energy companies explained to the court no settlement had been reached.
The lack of a settlement rendered the appeals court’s ruling, which was based on state laws governing settlement agreements, inapplicable. So the court agreed to hear the case again – and this time, the verdict was in favor of JMA.
JMA had sued Chesapeake Exploration LP in the District Court of Roger Mills County, claiming Chesapeake had breached written agreements between the parties by failing to timely offer JMA the right to acquire a proportionate share of certain oil and gas interests Chesapeake had acquired. JMA accepted Chesapeake’s offer to pay JMA revenues dating back to the dates of first production for the wells in question, less JMA’s proportionate share of expenses. But JMA sought 12-percent prejudgment interest under the provisions of the Production Revenue Standards Act, or PRSA.
The trial court agreed with JMA, ordering Chesapeake to pay prejudgment interest at 12 percent up to the date the principal was paid and interest at 6 percent until the date judgment was entered, as well as post-judgment interest. Chesapeake appealed, arguing not only that JMA was not entitled to prejudgment interest, but also charging that the law providing prejudgment interest is unconstitutional. Chesapeake’s attorneys claimed the law attempts to impose a specific rate of interest, at 12 percent, in a contract wherein the parties had not agreed on a rate of interest, making the law unconstitutional.
The Court of Civil Appeals ruling in 2007 did not address the merits of the case; rather, the court found the law regarding prejudgment interest was not applicable due to the mistaken impression that the lawsuit had been settled. Once the misunderstanding was cleared up, the court agreed to consider the case again.
And this time, Attorney General Drew Edmondson and the Coalition of Oklahoma Surface and Mineral Owners weighed in on the matter, each issuing briefs in support of JMA’s arguments. The court agreed with the attorney general’s defense of the constitutionality of the PRSA.
“The oil and gas industry has been heavily regulated by the federal and state governments for many years as a consequence of industry discriminatory practices,” the appeals court found in its more recent ruling, issued July 23, 2008. Oklahoma state government has created several laws to protect interest owners and to remove the economic incentive for delaying payment. Enforcing the prejudgment interest law thus serves public policy, the court found. The court also ordered Chesapeake to pay JMA’s attorney fees.
Chesapeake now has a limited amount of time in which to decide whether to challenge the ruling by appealing to the state Supreme Court.