NO. PLAINTIFFS ORIGINAL PETITION. Level 3 of Texas Rule of Civil Procedure and urge the Court to act on entering a

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1 NO. FILED TARRANT COUNTY 5/16/2014 8:54:24 AM THOMAS A. WILDER DISTRICT CLERK FORT WORTH HOUSING FINANCE CORPORATION, FORT WORTH LOCAL DEVELOPMENT CORPORATION, and THE VILLAS OF EASTWOOD TERRACE, LLC, v. Plaintiffs CHESAPEAKE ENERGY CORPORATION, CHESAPEAKE ENERGY MARKETING, INC.,, CHESAPEAKE EXPLORATION, LLC, CHESAPEAKE OPERATING, INC., TOTAL E&P (USA), INC., and AUBREY K. MC CLENDON, in his capacity as General Partner of Arcadia Resources, L.P., Defendants. IN THE DISTRICT COURT OF TARRANT COUNTY, TEXAS JUDICIAL DISTRICT PLAINTIFFS ORIGINAL PETITION 1. Plaintiffs allege that discovery in this cause should be conducted under Level 3 of Texas Rule of Civil Procedure and urge the Court to act on entering a Discovery Control Plan for this matter as promptly as reasonably possible. Summary of This Action 2. The City of Fort Worth ( the City or Fort Worth ) is the 5 th largest city in Texas. According to the most recent census, about 741,000 people live in Fort Worth. The citizens of Fort Worth take great pride in the quality of life in Fort Worth, including 1

2 reliable police and fire services, good schools, clean and well maintained streets, and safe parks. In addition, the City endeavors to help its low income residents enjoy affordable, safe and sanitary housing. Those efforts are made in part through its Fort Worth Housing Finance Corporation ( HFC ). Among other things, HFC helps finance the cost of residential ownership and development of that housing. The City also strives to promote the development of new and expanded industry and manufacturing in order to grow and diversify its economy and to provide jobs for its residents. The City does so through the use of the Fort Worth Local Development Corporation ( LDC ). The City also formed The Villas of Eastwood Terrace ( The Villas ) to provide decent, safe and affordable housing to very low-income and moderate income residents of the City by developing, owning, leasing, operating, renovating and financing and disposing of the Eastwood Terrace Senior Housing Project at the corner of Berry and Mt. Castle Streets. Fort Worth, HFC, LDC and The Villas each do business in an open, ethical and honorable manner and they honor their contracts in letter and in spirit. In turn, they expect their business partners to do the same. 3. HFC, LDC and The Villas bring this action to assert a number of claims, including claims that Chesapeake Exploration (and its agent Chesapeake Operating), McClendon, and Total as lessees have materially breached their contractual obligations to the Plaintiffs, in connection with various oil and gas leases the Plaintiffs executed to permit the exploration and production of minerals located under Plaintiffs lands. The lessee Defendants have acted in concert with related and affiliated parties to manipulate 2

3 sales points and to enter into non-arm s length agreements as a means to perpetuate a fraud in order to try to impose upon Plaintiffs costs the lessees agreed to bear. As a result, lessees have substantially underpaid Plaintiffs royalty payments owed under the leases. Plaintiffs seek to obtain true and complete production, pricing, sales and related information pertaining to their leased minerals so that the Plaintiffs can (a) quantify the total amount of underpayments, (b) quantify the total amount of costs and expenses wrongfully deducted from royalties, (c) recover a judgment for the amount of the underpayments and for actual and exemplary damages, and (d) obtain declaratory relief. Parties 4. Plaintiff the Fort Worth Housing Finance Corporation is a non-profit corporation created under the Texas Housing Finance Corporations Act by the authority of the Fort Worth City Council. 5. Plaintiff the Fort Worth Local Development Corporation is a non-profit economic development corporation created under the Texas Development Corporation Act by the authority of the Fort Worth City Council. 6. The Villas of Eastwood Terrace, LLC is a Texas limited liability company created in 2001 by the authority of the Fort Worth City Council. Its sole member is the Fort Worth Housing Finance Corporation. 7. Defendant Chesapeake Energy Corporation is a corporation organized under Oklahoma law with its principal place of business at 6100 Western Avenue, Oklahoma City, Oklahoma. It may be served with Citation and the Original Petition by 3

4 serving its registered agent, CT Corporation System, 1999 Bryan Street, Suite 900, Dallas, Texas Defendant Chesapeake Energy Marketing, Inc. is a corporation organized under Oklahoma law with its principal place of business at 6100 Western Avenue, Oklahoma City, Oklahoma. It may be served with Citation and the Original Petition by serving its registered agent, CT Corporation System, 1999 Bryan Street, Suite 900, Dallas, Texas Defendant Chesapeake Exploration, LLC ( Chesapeake Exploration ) is an Oklahoma limited liability company with its principal place of business at 6100 North Western Avenue, in Oklahoma City, Oklahoma. Chesapeake Exploration should be served with a copy of this Petition and Citation by serving its registered agent, CT Corporation System, 1999 Bryan Street, Suite 900, Dallas, Texas Defendant Chesapeake Operating, Inc. ( Chesapeake Operating ) is a corporation organized under Oklahoma law with its principal place of business also at 6100 Western Avenue in Oklahoma City, Oklahoma. Chesapeake Operating should be served with a copy of this Petition and Citation by serving its registered agent, CT Corporation System, 1999 Bryan Street, Suite 900, Dallas, Texas Defendant Total E&P (USA), Inc. ( Total ) is a corporation organized and existing under the laws of the State of Delaware, with its principal place of business in Houston, Harris County, Texas. Total should be served with a copy of this Petition and 4

5 Citation by serving its registered agent, CT Corporation System, 1999 Bryan Street, Suite 900, Dallas, Texas Defendant Aubrey K. McClendon, the General Partner of Arcadia Resources, L.P., is an individual believed to be a resident of and domiciled in, the State of Oklahoma, who may be located at 6902 Avondale Drive, Nichols Hills, Oklahoma Pursuant to Tex. Civ. Prac. & Rem. Code and , McClendon may be served with the Citation and the Original Petition by serving the Texas Secretary of State, 1019 Brazos Street, Austin, Texas who should then mail a copy of the Citation and Original Petition to McClendon at 6902 Avondale Drive, Nichols Hills, Oklahoma Plaintiffs assert claims in this cause that are within the jurisdictional limits of a district court in Tarrant County, Texas. Plaintiffs are unsure at this point of the damages they have suffered but presently seek monetary relief over $200,000 but not more than $1,000, Venue is mandatory in Tarrant County because Plaintiffs seek to recover real property or an estate or an interest in real property pursuant to of the Texas Civil Practice & Remedies Code. Venue is further proper in Tarrant County pursuant to (a)(1) because Tarrant County is the county in which all or a substantial part of the events or omissions giving rise to the Plaintiffs claims occurred. 5

6 The Leases 15. Plaintiffs HFC and LDC each owned mineral interests under their respective lands. The Villas owned mineral interests under its property. Several years ago, the City of Fort Worth and Plaintiffs were approached by various oil and gas operators, including by way of illustration, Chesapeake Exploration, Dale Property Services, LLC and Four Sevens Oil Co., Ltd., each of whom expressed interest in leasing mineral interests for the purpose of drilling and producing oil and natural gas. In connection with those transactions, the Chesapeake parties represented that royalties paid to the Plaintiffs would never bear, directly or indirectly, any part of the costs or expenses of production, or, post-production costs of gathering, transportation, treating, compression, dehydration, processing, marketing, or trucking of oil or gas produced from leased lands. Those representations were made for the purpose of inducing the City and the Plaintiffs to enter into leases with Chesapeake Exploration and Plaintiffs relied on those representations by entering into leases with Chesapeake Exploration. Chesapeake Exploration, Total, and upon belief, Arcadia Resources, LP and McClendon, are lessees under the leases identified on the list attached as Exhibit A (the Leases ). 16. Importantly, each of the Leases obligate the lessees to pay Plaintiffs the specified royalty percentage on the higher of (a) the proceeds received from good faith, arms length sales to unaffiliated third party purchasers of the oil, gas, casinghead gas and any other liquid or gaseous hydrocarbons, or (b) the market value thereof after Lessees have incurred all costs including costs of gathering, production, transportation, treating, 6

7 compression, dehydration, processing, marketing, trucking or other expenses, necessary to make production from the Leases meet pipeline specifications and to physically deliver it with a transfer of title and risk of loss to an unaffiliated third party purchaser under a good faith sale at arm s length. The royalty percentage varies from 25% to 26% depending upon the lease. When the Leases are construed as a whole, the Leases reflect that Plaintiffs negotiated for language that tracked the guidance set forth in Heritage Resources, Inc. v. Nations Bank, 939 S.W.2d 118 (Tex. 1996), because the Leases expressly provide that the royalties to be paid Plaintiffs would be free of all costs of any kind, including, but not limited to, costs of gathering, production, transportation, treating, compression, dehydration, processing, marketing, trucking or other expense, directly or indirectly incurred by Lessee. To eliminate any possible doubt concerning the lessees express duties to pay all costs, including costs pertaining to treating, transporting, and marketing the gas to the point it was sold at arm s length and delivered to a party unaffiliated with a lessee, the Leases further specify that the oil, gas or products produced could not be sold to a subsidiary or affiliate of a lessee without prior written permission from Plaintiffs. Defendants never sought and Plaintiffs never granted written permission under the Leases for any sales to any subsidiary or affiliate of a lessee. The Plaintiffs would not have entered into the leases but for those assurances from Chesapeake Exploration and its affiliates and agents. 7

8 17. Plaintiffs relied upon the lessees to develop and produce oil and gas from wells to be drilled and operated on Plaintiffs lands. The lessees are required to properly measure, test, value, and account to Plaintiffs for all royalties due them. 18. The Plaintiffs rights of action alleged in this Petition are not barred by any statute of limitations. Tex Civ. Prac. & Rem. Code Ann (a) (Vernon 2008). 19. Plaintiffs have the right under the Leases to full and free access at all times to the books and records of lessees that pertain to the production and sale of royalties. 20. Plaintiffs believe there are currently nine operating wells covered by the Leases. Chesapeake Operating purports to operate the wells on behalf of Chesapeake Exploration and Total, and the other working interest owners, and also purports to act as agent for Chesapeake Exploration in selling its share of production. Upon belief, Total purports to take its share of production at the wellhead. On behalf of Chesapeake Exploration, McClendon and Total, as well as any other working interest owners, Chesapeake Operating pays royalties (although not pursuant to the Leases) to Plaintiffs. 21. In material breach of the Leases, the lessees have failed to bear 100% of all costs and expenses incurred in rendering hydrocarbons produced on or from the leases premises marketable and delivering the same into an unaffiliated purchaser s pipeline. That is, the lessee Defendants have failed to pay Plaintiffs royalties free of all costs of any kind, including, but not limited to, costs of gathering, production, transportation, treating, compression, dehydration, processing, marketing, trucking or other expense, 8

9 whether directly or indirectly incurred by Lessee, or whether as a direct charge or a reduced price or otherwise. 22. At dates presently unknown to Plaintiffs, Chesapeake Energy Corporation and McClendon in his capacity as its CEO, devised a scheme that included the creation and use of affiliates and related parties, together with non-arm s length agreements to be entered into among and between those related parties, as a means of evading legal obligations under various oil and gas leases in the Barnett Shale. Chesapeake Energy Corporation tortiously and wrongfully interfered with the Plaintiffs leases by conceiving, planning, directing, and implementing the scheme and by urging, directing or causing the affiliates to enter into non-arm s length arrangements pertaining to oil, gas or liquids produced, and to be produced, from the Leases and to ignore commitments in the Leases to bear all post-production costs prior to an arms length sale with physical delivery, passage of title, and risk of loss to an unaffiliated third party. 23. Specifically, Chesapeake Energy Corporation caused or directed the formation of Chesapeake Energy Marketing, Inc. ( CEMI ) and Chesapeake Midstream Partners, L.P. ( Chesapeake Midstream ). According to information publicly filed by one or more of the Chesapeake parties, Chesapeake Exploration entered into an agency agreement with Chesapeake Operating by which Chesapeake Operating, as agent for Chesapeake Exploration, drills wells, produces oil and gas from those wells, and calculates and pays royalties on behalf of the working interest owners. Chesapeake Exploration and Chesapeake Operating purport to sell gas produced from the wells to 9

10 CEMI at the wellhead before the gas has been separated, gathered, dehydrated, compressed, transported, processed, treated, or rendered marketable. Chesapeake Energy Corporation and/or Chesapeake Exploration then caused CEMI to enter into long-term gas gathering and processing agreements with Chesapeake Midstream whereby CEMI agreed to pay Chesapeake Midstream non-arm s length above-market fees that escalate on an annual basis. The same person signed at least one of those agreements on behalf of CEMI, Chesapeake Exploration, Chesapeake Operating, and two other Chesapeake affiliates, Chesapeake Louisiana and DDJET, Ltd. Under those gas gathering agreements, Chesapeake Midstream uses gathering systems it purports to own to gather gas either at the individual wellheads, or at a central receipt point into which production from multiple wells is gathered, and then on behalf of CEMI, treats, compresses and transports the gas to a downstream pipeline owned by an unaffiliated party such as Atmos Pipeline Texas, Energy Transfer Pipeline Texas or Enterprise Texas Pipeline. At some point, CEMI purports to deliver and sell the gas to an unaffiliated party. The amounts paid by the unaffiliated party, free of all costs of any kind, are the amounts on which Plaintiffs should have been paid, and should be paid, royalty. Under the Leases, the point of sale which is to be used to compute the royalty to be paid to Plaintiffs is the point of an arm s length sale to an unaffiliated third party after gas has been gathered, treated, compressed, dehydrated, processed and transported. Therefore, any and all costs, whether direct or indirect, incurred by any of the various Chesapeake entities and affiliates to that point may not be deducted from Plaintiffs royalties. 10

11 24. Even if the Leases permitted the lessees to deduct post-production costs or expenses for gathering, transportation, treating, compression, dehydration, processing, marketing, trucking or other expense (and they do not), the amounts paid to Chesapeake Midstream, now known as Access Midstream, and directly or indirectly deducted from Plaintiffs royalties, are above market and unreasonable. Plaintiffs believe that Chesapeake Energy Corporation caused affiliates to enter into the long-term, fixed-fee natural gas gathering, treating, and compression contracts with Chesapeake Midstream at above market rates in order to generate badly needed cash to cover losses, debt service, or negative cash flows generated by the reckless spending of Chesapeake Energy Corporation and its former CEO, Aubrey McClendon, with the approval of its Board of Directors. 25. As a further indication that various Chesapeake entities and affiliates involved in the wrongful conduct were created for the primary purpose of wrongfully imposing costs upon royalty owners, often the same people work for or simultaneously act on behalf of the various Chesapeake entities involved in the leases. As one example, in June 2012, after Chesapeake Energy Corporation had caused or directed affiliates to enter into the non-arm s length gathering agreement at above market and unreasonable rates, Chesapeake Energy Corporation then sold to Global Infrastructure Partners its ownership interests in Chesapeake Midstream and in its general partner. However, Domenic J. Dell Osso, Jr., the Executive Vice President and Chief Financial Officer of Chesapeake Energy Corporation, remained (and remains) on the Board of Directors of 11

12 Chesapeake Midstream, now known as Access Midstream. And even though Access Midstream claims as a result of the sale that it is no longer an affiliate of Chesapeake Energy Corporation, Access Midstream utilizes employees of Chesapeake Energy Corporation and CEMI to provide legal, accounting, treasury, human resources, information technology and administration services. Moreover, the revenues earned by Access Midstream are derived almost exclusively from long term, fixed fee, natural gas gathering, treating, and compression contracts with Chesapeake entities. Other executives also wore multiple hats. Mike Stice was an executive officer with Chesapeake Midstream at the same time he also was Senior Vice President Natural Gas Projects at Chesapeake Energy Corporation. Upon belief, Stice wore both hats when the gathering contracts between the Chesapeake parties and Chesapeake Midstream were signed. And in a further effort to mislead Plaintiffs and other Barnett Shale royalty owners, the royalty checks and check detail provided by the Chesapeake parties falsely represent that no deductions were taken from royalties paid Plaintiffs. 26. Because of intense investor scrutiny over the financial condition of Chesapeake Energy Corporation, concern over liabilities that McClendon and management may not have disclosed (or fairly disclosed) in company financial statements, and pressing debt service needs, Chesapeake Energy Corporation began marketing or promoting the interests of Chesapeake Exploration in various Barnett Shale leases. 12

13 27. Total or one of its affiliates either expressed interest in the various leases or was approached by Chesapeake Energy Corporation and McClendon and his staff about the Barnett Shale leases. Before Total signed its deal in December 2009 to acquire an interest in various leases, including the Leases, it was told or knew of the scheme Chesapeake Energy Corporation, McClendon, and Chesapeake Exploration had devised to use arrangements with related or affiliated parties to pass on to royalty owners, like Plaintiffs, costs that the leases required the lessees to bear. So when Total contracted to acquire an interest in the Leases in dispute, as well as other leases, Plaintiffs believe Total priced the amount it was paying based upon its plan to engage in the same or similar sham arrangements and sales. 28. In January 2010, Chesapeake Energy Corporation and Total announced that they had entered into a $2.25 billion joint venture. Total then entered into the same or similar gathering agreements with Chesapeake Midstream at above market and unreasonable rates. 29. When Total became a lessee under the Leases, it initially sold its share of production to CEMI before Total had borne all direct and indirect post-production costs of separation, gathering, dehydration, compression, transportation, trucking, processing, treatment, storage or marketing. Total also used Chesapeake Operating to pay royalty using the same improper scheme employed by Chesapeake Exploration. Shortly thereafter, Total began to sell its share of production to a Total affiliate in order to impose upon Plaintiffs post-production costs for treatment, separation, extraction, gathering, 13

14 processing, compression, dehydration, transportation, trucking, processing, storage, and marketing. 30. At a date, or dates, unknown to the Plaintiffs, McClendon caused Chesapeake Energy Corporation to enter into to an arrangement with him or an entity he owned or controlled, that later became an agreement known as the Founder Well Participation Program ( FWPP ). Under the FWPP, McClendon, through Arcadia Resources, participated as working interest owner or lessee, at his sole option, in either all or none of the wells spudded by Chesapeake Energy Corporation or its affiliates during each calendar year. Upon information and belief, McClendon, through Arcadia Resources, elected to participate in wells drilled on lands covered by the Plaintiffs Leases and is therefore a Lessee. However, upon information and belief, Chesapeake Energy Corporation apparently later entered into a separation agreement that provided for a Founder Joint Operating Services Agreement effective January 29, 2013 pursuant to which McClendon receives a monthly credit of $50,000 from Chesapeake Energy Corporation to reduce the marketing fees billed by Chesapeake Energy Corporation or its affiliates. 31. Through the use of these improper and sham arrangements, and in material breach of the Leases, the lessee Defendants have wrongfully failed or refused to pay Plaintiffs a cost free royalty as mandated by the Leases and have pocketed substantial amounts of money that belongs to Plaintiffs. The extent of the damages suffered by 14

15 Plaintiffs is presently unknown and cannot be known until Plaintiffs have access to true and complete records of production, pricing, and bona fide sales to unrelated third parties. 32. As lessees (whether as the original lessee or by subsequent assignment) under the Leases, Chesapeake Exploration, along with its agent, Chesapeake Operating, and Total and McClendon, have by law, and pursuant to the express terms of the Leases, a duty to reasonably develop the minerals covered by the Leases to produce those minerals, and to market the production from the Leases without influence or regard to the unrelated policy considerations of Defendants, any entity or individual affiliated with Defendants, including Chesapeake Energy Corporation, Total s ultimate parent, and McClendon, as well as any entity working in concert with them, and they had a duty to market production from the Leases in the same manner as a reasonably prudent operator unaffected by the considerations of affiliates would have marketed that production. Their duties to Plaintiffs notwithstanding, lessees have not acted as a reasonable and prudent operator in making decisions as to the marketing of production from the Leases, and in deciding how and in what manner oil, gas, or hydrocarbons produced from the Leases would be sold. Instead, lessees have marketed production from the wells situated on Plaintiffs lands for reasons of personal gain to Defendants and their affiliates. Causes of Action Count One Breach of Contract 33. Plaintiffs incorporate by reference all preceding paragraphs. 15

16 34. The Leases are valid and enforceable contracts governed by the laws of the State of Texas. All conditions precedent, if any, to Plaintiffs claims for relief either have been performed or have occurred. 35. The lessee Defendants have materially breached their contractual obligations to the Plaintiffs in one or more of the following ways: (a) Deducting from royalties paid to Plaintiffs post-production costs the lessees agreed to bear and are required to bear; (b) Failing to pay Plaintiffs proper royalties that are free of all costs of any kind, including, but not limited to, costs of gathering, production, transportation, treating, compression, dehydration, processing, marketing, trucking or other expense, directly or indirectly incurred by lessee, whether as a direct charge or a reduced price or otherwise; (c) Causing Plaintiffs royalty to bear, directly or indirectly, costs and expenses incurred in rendering hydrocarbons produced on or from the leased premises marketable and thereafter transporting and delivering the same into an unaffiliated third party purchaser s pipeline pursuant to a good faith, arm s length sale; (d) Failing to pay Plaintiffs a proper royalty based upon the higher of (i) the proceeds, free of all costs, paid by an unaffiliated third party purchaser in good faith, and at arm s length, for oil, gas, casinghead gas and any other liquid or gaseous hydrocarbons, or (ii) the highest gross price reasonably attainable therefor after Lessees have incurred all costs and expenses necessary to render hydrocarbons produced on or from the leased premises marketable and have thereafter transported the same to the point 16

17 at which the hydrocarbons could be physically delivered and accepted with a transfer of title, to an unaffiliated third party purchaser pursuant to a good faith arm s length sale; (e) Failing to pay Plaintiffs proper royalties on products based upon the gross market value or proceeds received from an unaffiliated third party purchaser from the good faith, arm s length sale, after lessees incurred 100% of all costs and expenses incurred in rendering the products marketable and in transporting and delivering the same to such purchaser s pipeline; (f) Failing to pay Plaintiffs proper royalties on residue gas or gas remaining after separation, extraction or processing operations, based upon the proceeds of a good faith, arm s length sale to an unaffiliated third party or the market value thereof, whichever is higher; (g) Purporting to enter into a contract for the sale, delivery, transportation or processing of gas produced from the leased premises without the prior written approval of the Plaintiffs and without complying with subparagraph 4(G) of the Leases; (h) Selling oil, gas or products produced from the leased lands to a subsidiary or affiliate without the Plaintiffs prior written permission; and/or (i) Computing royalties paid Plaintiffs based upon sales to a subsidiary or affiliate of a Lessee without Plaintiffs prior written permission. 36. The foregoing breaches of the Leases were individually, and collectively, material and have directly and proximately caused substantial damages to Plaintiffs and resulted in unjust benefits to the lessee Defendants. 17

18 Count Two Breach of the Implied Duty of Marketing 37. Plaintiffs incorporate by reference all preceding paragraphs. 38. In the alternative to the claims set forth in Count One herein, Plaintiffs bring claims against the lessee Defendants for breach of the implied duties of marketing. By virtue of the lessee Defendants self-dealing and breaches, Plaintiffs have suffered actual damages in amounts equal to the royalties which Plaintiffs would have received from the date of first production had Defendants operated and administered the Leases as reasonable and prudent operators and accounted to the Plaintiffs for all royalty payments due Plaintiffs on all production based upon market sales at arm s length to non-affiliated parties. Count Three Right to Terminate the Leases 39. Plaintiffs incorporate by reference paragraphs 1 through The Leases provide that all royalties due must be paid to Plaintiffs no more than sixty days after the end of the month following the month during which production takes place. The Leases further provide that if a Lessee fails to timely pay the proper royalties due, the Lessor shall have the option to send written notice to Lessee that Lessor intends to terminate the Lease and in the event of such notice, Lessee shall have thirty days from the date of service of such written notice in which to avoid termination by making or causing to be made the proper royalty payment or payments that should have been made. As set forth herein, lessee Defendants have failed to pay the proper royalties due under the Leases. 18

19 41. The Leases further provide that each lessee shall conduct lessee s operations in strict compliance with all of the terms and provisions of this lease. Each of the Leases also provide that in the event the lessor considers that operations are not, at any time, being conducted in compliance with the lease, the lessor may notify lessee in writing of the facts relied upon as constituting a breach and lessee shall have sixty days after receipt of such notice in which to commence compliance with its obligations. If the lessee fails to commence efforts to rectify the breach, its breach shall operate as a forfeiture of the lease. 42. Plaintiffs therefore allege that this pleading shall constitute written notice to lessee Defendants within the meaning of paragraphs 4(F) and 20 of each of the Leases. If the lessee Defendants fail within thirty days from service of Citation and this Original Petition to pay the proper royalty payments due or that should have been paid, Plaintiffs seek a declaratory judgment from this Court that should Plaintiffs elect to exercise their respective options to terminate, each of the Leases shall terminate and be of no further force or effect as of the date on which Plaintiffs file a Notice of Termination of the Leases with the County Clerk of Tarrant County. In addition, and independent of the foregoing, if the lessee Defendants fail within sixty days from service of Citation and this Original Petition to cease and desist from sales of any oil, gas or products produced from the Leases to any subsidiary or affiliate of a lessee, Plaintiffs seek a decree that the lessee Defendants have breached paragraph 4L of the Leases and that if sales to affiliates of a 19

20 lessee continue beyond thirty days from the date such decree becomes final, the lessee Defendants shall have forfeited the Leases to Plaintiffs. 43. In addition, Plaintiffs allege that it would be equitable and just to award them their costs and reasonable and necessary attorneys fees in connection with their requests for this declaratory relief. Count Four Declaratory Relief 44. Plaintiffs incorporate by reference all preceding paragraphs. 45. Plaintiffs, Chesapeake Exploration, Chesapeake Operating, Total, and McClendon are persons interested under one or more contracts and/or oil and gas leases. 46. On or about August 28, 2013, a representative of Chesapeake Exploration, Chesapeake Operating, and Total gave certain employees of the City who were attempting to obtain information pertaining to the scope and extent of underpayment of royalties owed the City, a copy of a Base Contract for the Sale and Purchase of Natural Gas between Chesapeake Operating and CEMI. 47. Apparently Chesapeake Exploration and Chesapeake Operating contend (or may contend) that Plaintiffs agreed to the sham arrangements between Chesapeake Exploration, Chesapeake Operating and Total and their affiliates by failing to object to such purported contract within fifteen days after such contract was purportedly provided to the City. Alternatively, Chesapeake Exploration and Chesapeake Operating may contend that such delivery on August 28, 2013 constituted a trigger under paragraph 4(G) of the Leases something Plaintiffs deny. By letter dated September 23, 2013, 20

21 Chesapeake Exploration and Chesapeake Operating were advised that lessees had failed on August 28, 2013 to deliver the proposed contract at least thirty days prior to the execution of that contract, that what was presented was not a complete copy of the proposed contract, and that what was delivered was not delivered to the appropriate party by certified mail, as required by the Leases. 48. At no time did Chesapeake Operating, Chesapeake Exploration, Total, McClendon, or any affiliate provide Plaintiffs or the City with a complete copy of that contract thirty days prior to its apparent execution on or about September 13, Plaintiffs therefore seek the following declarations as to the rights and legal relations among and between Plaintiffs, Chesapeake Exploration, Chesapeake Operating, Total, and McClendon: (a) that oil, gas, casinghead gas, or any other liquid or gaseous hydrocarbons produced from the Leases is not marketable until after the Lessee has incurred all costs of gathering, production, transportation, treating, compression, dehydration, processing, marketing, trucking, or other expense necessary to make the production meet pipeline specifications and to deliver the same with a transfer of title and risk of loss into the pipeline of an unaffiliated third party purchaser under a good faith sale at arm s length; (b) that the Leases precluded the lessee Defendants from deducting from Plaintiffs royalties the costs the lessee Defendants have in fact deducted from first production to date; 21

22 (c) that the royalties due Plaintiffs under the Leases may not be reduced by any post production costs, including owner third party costs, or any charges directly or indirectly taken as a result of sales to CEMI or to any other affiliate; (d) that Chesapeake Exploration, Chesapeake Operating, Total, and McClendon materially breached the Leases by selling oil, gas or products produced pursuant to the Leases to a subsidiary or affiliate of Chesapeake Exploration without Plaintiffs prior written permission; (e) that Chesapeake Exploration, Chesapeake Operating, Total, and McClendon have failed to pay Plaintiffs proper royalties on oil, gas and casinghead gas, together with any other liquid or gaseous hydrocarbons, based upon the proceeds paid by an unaffiliated purchaser pursuant to a good faith, arm s length sale free of all costs of any kind; (f) that Chesapeake Exploration, Chesapeake Operating, Total, and McClendon have failed to pay Plaintiffs proper royalties on products produced pursuant to the Leases based upon the gross market value or proceeds of a bona fide arm s length sale thereof, whichever is higher; (g) that Chesapeake Exploration, Chesapeake Operating, Total, and McClendon have failed to pay Plaintiffs proper royalties on residue gas or gas remaining after separation, extraction or processing operations, based upon the proceeds of a bona fide arm s length sale or the market value thereof, whichever is higher; 22

23 (h) that Chesapeake Exploration, Chesapeake Operating, Total, and McClendon must provide Plaintiffs free access at all times to each of their books and records relative to the production and sale of oil, gas or other minerals from any of the leased premises; and (i) that it would be equitable and just to award Plaintiffs their costs and reasonable and necessary attorneys fees. Count Five Fraud in a Real Estate Transaction 50. Plaintiffs incorporate by reference all preceding paragraphs. 51. Defendants Chesapeake Energy Corporation and Chesapeake Exploration, or their agents, made a false representation of a past or existing material fact to Plaintiffs for the purpose of inducing Plaintiffs to enter into the Leases that was relied upon by Plaintiffs in entering into those leases, or, made a false, material promise to do an act that was made with the intention of not fulfilling it, made to Plaintiffs for the purpose of inducing them to enter into the Leases, and that was relied upon by Plaintiffs in entering into those leases. Chesapeake Energy Corporation and Chesapeake Exploration have therefore engaged in fraud in a real estate transaction in violation of of the Texas Business & Commerce Code. 52. As a direct and proximate result of the foregoing, Plaintiffs have sustained actual damages equal to the amount of royalty which should have been paid under the leases but which has not been paid. 23

24 53. The false representations and/or promises by the Chesapeake parties were made with actual awareness of their falsity. Alternatively, Chesapeake Energy Corporation had actual awareness of the falsity of a representation or promise made by Chesapeake Exploration, failed to disclose the falsity of the representation or promise to Plaintiffs, and benefited from the false representation or promise. Accordingly, Plaintiffs seek from Chesapeake Energy Corporation and Chesapeake Exploration actual damages, exemplary damages, reasonable and necessary attorneys fees, expert witness fees, costs for copies of depositions, and costs of court as set forth in Chapter 27 of the Texas Business & Commerce Code. County Six Tortious Interference with Contract 41. Chesapeake Energy Corporation s conduct constituted tortious and wrongful interference with the Leases by engaging in acts or conduct that complicates or prevents lessees performance of the Leases. Chesapeake Energy had actual knowledge of the existence of the Leases and of Plaintiffs interest in the Leases. Chesapeake Energy Corporation engaged in the acts and conduct with the knowledge or belief that its conduct would result in Plaintiffs receiving less royalty. As a result of the acts and conduct of Chesapeake Energy Corporation, it induced or caused Chesapeake Exploration and Chesapeake Operating to breach the Leases. As a direct and proximate result of the wrongful and intentional interference by Chesapeake Energy Corporation, Plaintiffs have suffered damages equal to the amount of royalties that should have been paid under the Leases but which were not paid. Further, the acts and conduct of 24

25 Chesapeake Energy Corporation caused harm that resulted from fraud, malice, or gross negligence. As a direct and proximate result of the foregoing, Plaintiffs have sustained actual damages equal to the amount of royalty which should have been paid under the Leases but which has not been paid. And because the harm suffered by Plaintiffs was a direct and proximate result of fraud, malice, or gross negligence by Chesapeake Energy Corporation, Plaintiffs seek from Chesapeake Energy Corporation actual damages and exemplary damages. Count Seven Attorneys Fees 54. Plaintiffs incorporate by reference all preceding paragraphs. 55. As a result of the actions of Defendants, including their respective breaches of the Leases, Plaintiffs were forced to retain Ralph H. Duggins and the law firm of Cantey Hanger LLP, and in addition, John A. Cardwell and the law firm of Cardwell Hart & Bennett, LLP, to represent Plaintiffs and to prosecute the Plaintiffs claims. Plaintiffs have requested that Defendants comply with the Leases and Defendants have unjustifiably refused to do so. Therefore, as to Counts One and Two, pursuant to of the Texas Civil Practice & Remedies Code, as to Counts Three and Four, pursuant to of the Texas Civil Practice & Remedies Code, and, as to Count Five, pursuant to Section 27.01(e) of the Texas Business & Commerce Code, Plaintiffs seek a judgment against Defendants for a reasonable attorneys fee to be determined in accordance with Rule 1.04(d) of the Texas Rules of Professional Conduct. 25

26 Prayer WHEREFORE, Plaintiffs pray that Defendants be cited to appear and answer and that upon final hearing or trial, Plaintiffs have and recover Judgment from Defendants as follows: (a) An award against the lessee Defendants of actual damages equal to the amount of royalties due and payable under the Leases; (b) Judgment awarding the declaratory relief set forth in Counts Three and Four, including a declaration that Plaintiffs may terminate the Leases; (c) In the alternative to the damages sought in (a), an award against the lessee Defendants of actual damages suffered by Plaintiffs as a result of the breaches of the implied duties to market; (d) As to Count Five, an award against Chesapeake Energy Corporation and Chesapeake Exploration for actual damages equal to the amount of royalty which should have been paid under the Leases but which has not been paid, an award of exemplary damages in an amount to be set by the jury, together with an award of reasonable and necessary attorneys fees, expert witness fees, costs for copies of depositions, and costs of court; (e) As to Count Six, an award against Chesapeake Energy Corporation of actual damages equal to the amount of royalty which should have been paid under the leases but which has not been paid together with an award of exemplary damages in an amount to be set by the jury; 26

27 (f) An award of attorneys fees in connection with Counts One, Two, Three, Four and Five; (g) (h) (i) Pre- and post-judgment interest at the highest lawful rate; All costs of suit; and Such other and further relief to which Plaintiffs may show themselves justly entitled. 27

28 Of Counsel: GERALD PRUITT Deputy City Attorney State Bar No City of Fort Worth 1000 Throckmorton Street Fort Worth, Texas (817) (817) Fax /s/ Ralph H. Duggins RALPH H. DUGGINS State Bar No PHILIP A. VICKERS State Bar No DEREK CARSON State Bar No Cantey Hanger LLP 600 West 6 th Street, Suite 300 Fort Worth, Texas (817) (817) Fax JOHN A. CARDWELL State Bar No john@cardwellhartbennett.com J. BRUCE BENNETT State Bar No bruce@cardwellhartbennett.com Cardwell Hart & Bennett, LLP 807 Brazos, Suite 1001 Austin, Texas (512) (512) Fax ATTORNEYS FOR PLAINTIFFS FORT WORTH HOUSING FINANCE CORPORATION, FORT WORTH LOCAL DEVELOPMENT CORPORATION, and THE VILLAS OF EASTWOOD TERRACE, LLC 28

29 Exhibit A Oil and Gas Leases No. Lessor Original Lessee Acres Lease Date Lease_Name 1 Fort Worth Housing Finance Corporation Chesapeake Exploration, LLC Mar MITCHELL BLVD 2 Fort Worth Housing Finance Corporation Chesapeake Exploration, LLC Sep CLINTON 3 Fort Worth Housing Finance Corporation Chesapeake Exploration, LLC Jan AVE C 4 Fort Worth Housing Finance Corporation Chesapeake Exploration, LLC Oct RAMEY 5 Fort Worth Housing Finance Corporation Chesapeake Exploration, LLC Jan 11 BRAYLON UNIT 6 Fort Worth Housing Finance Corporation Chesapeake Exploration, LLC Nov 09 HFC EASTCREST EDGEWOOD 7 Fort Worth Housing Finance Corporation Chesapeake Exploration, LLC Sep 11 SHERATON ADDN, BLK 2 LOTS Villas of Eastwood Terrace Chesapeake Exploration, LLC Feb 11 VILLAS OF EASTWOOD TERRACE 9 Fort Worth Local Development Corporation Chesapeake Exploration, LLC Jun 09 LDC 1776 E. BERRY ST 10 Fort Worth Local Development Corporation Dale Property Services, LLC Jun 08 LDC 2851 S RIVERSIDE DR 11 Fort Worth Local Development Corporation Chesapeake Exploration, LLC Jun 09 LDC 3217 & 3224 YUMA ST