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Producers Lose Another Legal Battle on New York Leases

In two separate but related cases, the U.S. District Court or the Northern District of New York again has ruled that energy operators may not use the state's de facto moratorium against high-volume hydraulic fracturing (HVHF) as an excuse to invoke force majeure to extend expiring oil and natural gas leases.

U.S. District Judge David Hurd said the defendants, which included a subsidiary of Chesapeake Energy Corp., "cannot rely on impossibility nor frustration of purpose to extend the leases. The leases terminated at the conclusion of their primary terms, and defendants cannot invoke force majeure, the doctrine of frustration of purpose, nor the prescribed payments clause to extend the leases," stated one ruling. A similarly worded statement accompanied a second ruling.

The rulings effectively release the 90 plaintiffs involved in the two cases from leases they had signed, beginning in 2000. Chesapeake and the other defendants were given 30 days to appeal.

"Most people used common sense and thought these leases expired," said plaintiffs' attorney Scott Kurkoski. "We have wells that are being drilled here on a regular basis. So the concept that Chesapeake would try to say that it's impossible to drill just didn't sit very well with most people, and clearly didn't sit well with Judge Hurd."

Thomas West, who represented the defendants in both lawsuits, said he was confident of an appeal to the U.S. Second Circuit Court of Appeals based on state laws now on the books. "It's just another setback for operators in New York State," West told NGI.

In the first case plaintiffs that collectively own about 1,200 acres in Tioga County, NY, filed a lawsuit against three producers (Beardslee et al v. Inflection Energy LLC et al, No. 3:12-cv-242-DNH-DEP). In the second case 55 plaintiffs with 2,785 acres in Broome and Tioga counties challenged Chesapeake Appalachia LLC and Statoil USA Onshore Properties Inc. (Aukema et al. v. Chesapeake Appalachia LLC et al, No. 3:11-CV-489-DNH-ATB).

Inflection, one of the producers in the Beardslee case, declared a force majeure in 2010. Chesapeake declared one in May 2010. A similar lawsuit was filed later that year in the same New York district court on behalf of 146 property owners in Broome County, NY (David Wiser, et al. v. Enervest Operating LLC, Belden & Blake Corp. and Chesapeake Appalachia LLC, No. 3:10-CF-794). The district court ruled last year that even if producers were prevented from fracking wells in New York that they couldn't declare a force majeure and still had to pay property owners to hold the leases (see NGI, April 11, 2011).

In June Chesapeake settled with New York Attorney General Eric T. Schneiderman to allow more than 4,400 landowners the opportunity to renegotiate their natural gas leases (see NGI, June 18). Chesapeake agreed to either match other operators' terms or release the landowners' original leases, including leases that had expired or would expire before Dec. 31, 2013.

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