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Chesapeake Reneged on Texas Leasehold Contract, Says Fifth Circuit

Chesapeake Energy Corp. failed to persuade a federal appeals court to overturn a lower court's decision that the operator must pay $121 million after reneging on a transaction in Texas.

The U.S. District Court for the Southern District of Texas in Houston had ruled in 2012 that Chesapeake had contractual obligations to pay Preston Exploration Co. and affiliates for more than 500 leaseholds for which it negotiated in 2008 (see Shale Daily, July 12, 2012). Chesapeake had begun working with Preston to acquire the leases in June 2008. However, before the contract was closed in November 2008, natural gas prices plunged.

After Chesapeake failed to attend the closing, Preston sued [Preston Exploration Co. LP et al. vs GSF LLC et al., No. 4:08-cv-03341].

Chesapeake argued that Preston failed to satisfy the "conditions precedent to the obligations of the buyer" and that it was not obligated to close the agreement. It said Preston lacked title to almost $9 million worth of the leases.

However, on appeal, a three-judge panel of the U.S. Court of Appeals for the Fifth Circuit in New Orleans on Thursday upheld the lower court's ruling. Chesapeake breached the contract and had no basis to claim Preston and affiliates couldn't deliver their end of the bargain, the panel said.

"Because it is undisputed that Chesapeake neither attended closing nor transferred the purchase price, we affirm that Chesapeake breached" the contracts and affirm the district court's ruling to pay the full amount.

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