Federal Court Says Chesapeake Royalty Deductions Allowed in Ohio

The U.S. District Court in Akron, OH has just made a major ruling that affects all Utica landowners and drillers. In 2015, the Ohio Supreme Court accepted a case that will sound familiar to readers of MDN. The case, known as Lutz v. Chesapeake Appalachia, is about whether or not drillers (Chesapeake in this case) are allowed to deduct certain post-production costs from landowner royalty checks. The Ohio Supremes were asked to decide whether Ohio follows the “at the well” rule, which permits the deduction of post-production costs, or if the state follows the “marketable product” rule, which limits the deduction of post-production costs under certain circumstances. The Supremes came down off Mount Olympus in November 2016 to render their verdict (see OH Supreme Court: Royalty Deductions Decided Case-by-Case). The court said, in so many words, “We’re not deciding.” In other words, each royalty case should be litigated individually, case-by-case, in a trial court. There is no one-size-fits-all with respect to deducting expenses from royalty checks. Each case will depend on how the contract is written, and the success of lawyers litigating it. The Supremes refused to tackle the ultimate issue, which is: What does “at the well” really mean? How is it defined? The U.S. District Court in Akron did tackle that issue. The federal court took up the Lutz case and has now defined what is meant by “at the well.” The court’s decision means that Chesapeake Energy (and by extension other drillers) CAN deduct post-production expenses from landowner royalty checks…

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