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Fifth Circuit Rules Against Chesapeake in Canceled Lease Deal

The U.S. Court of Appeals for the Fifth Circuit in New Orleans has ruled against Chesapeake Energy Corp. in its bid to reverse a $19.7 million judgment over a canceled oil and gas lease offer in Texas, a decision that may hold implications on canceled lease claims by mineral rights owners in several other states.

Chesapeake wrongfully voided an agreement to buy the mineral rights held by family-owned Peak Energy Corp., the appeals court ruled last week, upholding a 2011 decision by U.S. District Court Judge John Ward of the Eastern District of Texas in Marshall, who had awarded the Plano, TX-based operator $19.7 million in damages (Richard Coe et al. v. Chesapeake Exploration LLC et al., No. 11-41003).

Peak claimed that Chesapeake breached a contract and abandoned the transaction as natural gas prices fell. In his ruling Ward had said the letter of intent signed by both sides was a valid contract. Chesapeake had asked the appeals court to reverse the verdict and find that the letter of intent was not a binding contract. Chesapeake also asked the appeals court to cancel Ward's order that required Chesapeake to pay the $12,000/acre difference between the offer price and the lease value when the bid was withdrawn. Chesapeake had argued that Peak didn't have the rights to nearly two-thirds of the 5,405 acres that were covered in the agreement.

However, "the absence of closing documents does not necessarily make an agreement nonbinding," the Fifth Circuit ruled. "This agreement is enforceable," it said in upholding the damage award.

In its original 2009 lawsuit Peak claimed that Chesapeake began a "land grab" in East Texas and western Louisiana in early 2008 to acquire Haynesville Shale acreage using "an army of landmen." Peak claimed that Chesapeake CEO Aubrey McClendon personally was involved in negotiations. Upon learning that Peak officials wanted a $15,000/acre offer in writing, McClendon sent his negotiator an e-mail in July 2008 that urged him to complete the deal, "Sooner the better, of course!," the filings said.

The price of natural gas dropped by about half from June to September 2008, Peak noted in its complaint. The transaction "failed to close because market conditions had changed, Chesapeake ran into cash flow problems and Chesapeake was looking for excuses to back out of its pending deals for Haynesville Shale properties," Peak said. "Because of the falling price of natural gas and tightening credit markets, the agreement between Chesapeake and sellers was no longer economically advantageous for Chesapeake in October 2008. Rather than suffering the ill-effect of the changing market by fulfilling its contractual obligations to sellers, Chesapeake chose to repudiate the agreement."

Chesapeake in July lost a lawsuit also in Texas unrelated to Peak when a federal judge ordered the company to pay more than $100 million to three leaseholders (see NGI, July 16). In that lawsuit, filed in 2008, the plaintiffs had accused Chesapeake of failing to complete its purchase of three gas leases for which it had been negotiating before prices plunged.

In July landowner groups in Ohio said they were battling it out with Chesapeake over the company's attempts to renegotiate leases to expand acreage and increase the size of drilling units (see NGI, July 23). The landowners claimed landmen are going door to door, trying to pressure them into signing on for larger drilling units so Chesapeake would not have to drill as many wells to hold onto its acreage.

In June a drilling unit of Chesapeake settled with the New York Attorney General's Office and agreed to allow more than 4,400 New York landowners locked into natural gas leases the opportunity to renegotiate their contracts (see NGI, June 18). The settlement followed a 2011 ruling against the producer, which found that despite a de facto moratorium on high-volume hydraulic fracturing in New York, Chesapeake Appalachia LLC was still required to pay property owners to hold the leases (see NGI, April 11, 2011).

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