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WINNER IN EXXON CASE POISED FOR BIG PAYOFF

Jan 4, 2001

R. Robin McDonald

Fulton County Daily Report

Mobile, Ala., attorney John T. Crowder Jr. first suspected oil companies were underpaying royalties to the state of Alabama when he was a member of Gov. Donald Siegelman's transition team two years ago. Those initial suspicions paid off handsomely last month when his 13-member firm, Cunningham, Bounds, Yance, Crowder & Brown, won $490 million in fees, its share of a $3.5 billion verdict against Exxon Corp.

A Montgomery County, Ala., jury made the award -- the largest in the state's history -- after a trial before Montgomery County Circuit Judge Tracey McCooey, lasting two weeks and two days, Crowder says.

Exxon, which filed a pre-emptory suit after Crowder's firm began investigating, was represented by two former presidents of the Alabama State Bar, William D. Scruggs Jr. of the Fort Payne, Ala., firm Scruggs, Dodd, Dodd & Bazemore and Joseph C. Espy III of the Montgomery firm Melton, Espy, Williams & Hayes.

FIRST SPOTTED BY AUDITORS

Possible underpayments for royalties related to drilling for gas in Mobile Bay were first spotted by Alabama state auditors.

As a member of Siegelman's transition team, Crowder was assigned to review pending issues within Aiabama's Department of Conservation and Natural Resources, which included the department's largely unsuccessful attempts to audit the oil companies.

Crowder, who has known Siegelman for 15 years, says he told the newly elected governor two years ago: "I'm telling you, where there's smoke, there's fire. These oil companies, I have no doubt, are not paying accurate royalties based on what I have seen and heard."

But there was a problem: The state didn't have the staff, the expertise or the funds in the state conservation department's budget to pursue litigation against Exxon, a "hardball" litigant that "will try a case in a heartbeat," rather than settle out of court, Crowder says.

Siegelman gave Crowder's law firm the go-ahead to pursue Exxon and four other oil companies drilling for gas in Mobile Bay. The firm would take 14 percent of any award or settlement.

Only after his firm hired a national accounting firm -- Houston-based Mann Frankfort Stein & Lipp -- and financed an 18-month audit did the extent of Exxon's deductions from a gross proceeds lease surface.

Crowder says the firm spent about $1.1 million on expert fees prior to the trial, the bulk of it to audit Exxon's books.

"The state of Alabama literally did not have the resources at the Department of Conservation in its budget to finance something like this," Crowder says. "These audits are incredibly time-consuming.

They'll put you in a room with hundreds of file boxes. People will literally throw their hands up. ... But we went through them."

NEWSPAPER RAPS FEE

An unsigned editorial in The Mobile Press-Register two days after the verdict called the firm's $490 million fee "ill-gotten wealth" and suggested that the lawyers were "rapacious profiteers" if they accepted more than a few million dollars "without donating the rest to a charitable endeavor."

But the editorial also criticized the jury for a verdict it described as "an abomination."

It called on the Alabama State Court of Appeals to reduce the verdict "to a fraction of the jury's order," claiming that it sent "a frightening message" to companies doing business in Alabama.

But Siegelman has no regrets about turning the case over to Cunningham Bounds or problems with the firm's contingency fee, says his press secretary, Carrie Kurlander. Cunningham Bounds attorneys "are among the most highly respected courtroom attorneys in Alabama," she says.

"Obviously, they had the resources to pursue a case of this magnitude and nature whereas the state couldn't. The firm was in a position to take a risk. If the case had been lost it would have been at no cost to the state.

"In the end, the record speaks for itself."

Says Crowder: "It's not popular to go against one of the largest corporations in the world." Press-Register editorialists, he says, "didn't say anything about the fraud or misconduct on Exxon's part. They just characterized us as the right hand of Satan."

FIRM'S TRACK RECORD

Now the 13-lawyer firm known in Alabama for its dogged class-action litigation -- including successful multi-million dollar class action, product liability suits against Georgia Pacific and the Masonite Corp. for defective hardboard siding, and wrongful death cases against Valuet for the 1996 Florida crash and Amtrak for a crash near Mobile -- is targeting four other oil companies that also are pumping gas from Alabama's waters. Those firms -- which include Shell Oil Co., Hunt Oil, Mobil and Amoco -- are also suspected of withholding royalties from the state, Crowder says.

In the verdict's wake, at least one of the companies has contacted the firm to discuss a settlement, Crowder says, although he declines to name it.

Crowder has been designated as a special assistant state attorney general to handle the gas lease litigation.

"I never cease to be amazed at what they will do to fudge paying royalties to a true royalty owner," Crowder says. "The more we dug, the more we found. They fought us at every corner, at every step along the way.... A lot of credit goes to Gov. Siegelman and [Alabama Attorney General] Bill Pryor for having the courage to stand up against someone like Exxon. It's not a popular thing to do politically."

The judgment includes $87 million in compensatory damages and $3.4 billion in treble punitive damages based on the value of three years of Exxon's gross production in Mobile Bay, Crowder says.

"It's not that large [a verdict] when you look at Exxon's anticipated gain," he says. The company, he says, easily could have siphoned $1.5 billion from state coffers over the estimated 30-year life of the gas field.

EXXON: LEASE 'AMBIGUOUS'

Exxon has labeled the verdict "manifestly unfair." Company spokesman Thomas Cirigliano says Exxon believes the lease with the state was "ambiguous" and that the company had a "legitimate dispute over the interpretation of how to calculate royalties."

Exxon attorneys intend to ask that the verdict be set aside. If that request is denied, Cirigliano says the company will appeal.

Alabama's royalty contract, unlike most of Exxon's industry-friendly contracts, was one of the most favorable mineral rights contracts that Crowder says he has ever seen an oil company grant.

That contract awarded the state 25 percent of the gross proceeds of gas sales derived from Mobile Bay as opposed to one where the company's drilling expenses are deducted before any royalties are paid.

Historically, the oil company's royalty contracts allowed deductions for the cost of drilling, pumping and processing the gas.

"This is a gross proceeds lease," Crowder says. "But Exxon treated it like a typical industry lease, which aliows them to take deductions."

DEDUCTIONS EXPANDED

During discovery, the Alabama attorneys learned not only that Exxon was deducting expenses before paying the royalties, but the oil company was also deducting the cost of personnel in its Houston and New Orleans offices as well as depreciation on office computers, beepers, and telephones in those cities, Crowder says. Exxon also deducted from state royalties expenses for maid and catering service for its gas rig workers, and for the cost of fuel and helicopters.

Crowder says among the documents that Exxon was finally forced to turn over to the state was a cost analysis done for Exxon's president. That analysis showed that corporate executives knowingly took deductions from Alabama's royalties after company accountants determined that Exxon stood to save nearly $20 million a year. "They made a decision if they had as much as a 25 percent chance of prevailing in litigation, they were going to take the deduction," Crowder says. "If the state ever went to court, all they would have to do is give the money back plus 12 percent interest and the cost of litigation."

Company memos also described the state's staff as inexperienced at enforcing royalty contracts. "I'm sure they said, 'These people are not from New York. They're from Alabama. We got us a bunch of bubbas,' " Crowder says.

Cirigliano says the state's characterization of Exxon as willing to cheat the state of Alabama is "absolutely untrue." Memos describing state staff as inexperienced, he says, were "an attempt to explain why the Alabama lease form is so unclear.

Crowder says three of the firm's senior partners and five paralegals spent about two years litigating the case. The firm, he says, decided on a 14 percent contingency fee because another firm had a similar contingency arrangement with former Republican Gov. Fob James. The firm's normal contingency arrangement ranges from a third to 40 percent, he says.

"We think that is a very reasonable contingency arrangement, especially when the contract also has a provision in there which says we don't get our expenses back if we lose," Crowder says.

"We'd never ask a client to reimburse us for expenses if we lose." Crowder says the firm, although small, can absorb the expenses attached to long-term civil litigation because its partners select cases "we think we have a good chance of winning on."

But, he adds, "I'm blessed with having the best partners in the world. It's a team of racehorses the defense bar knows will try a lawsuit. And we will spend whatever it takes to get it ready for trial."

The National Law Journal contributed to this article.

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