Shale Daily / Northeast / NGI All News Access

Federal Appeals Court Delays Decision on Extended NY Leases

A federal appeals court has delayed making a decision on whether New York's de facto moratorium on high-volume hydraulic fracturing (HVHF) constitutes a force majeure. It will seek input on the matter from the state's high court.

Last Thursday, three judges on the U.S. Second Circuit Court of Appeals certified that they would ask the New York Court of Appeals if the moratorium amounted to a force majeure event, and if so, would that trigger the habendum clause contained in oil and gas leases and therefore extend their primary term.

At issue in the case, Beardslee v. Inflection Energy LLC [Docket No. 12-4897-cv], are oil and gas leases that about 35 landowners in Tioga County, NY, had signed with Inflection, Victory Energy Corp. and Mega Energy Inc. Collectively, the landowners own about 1,200 acres.

Most of the leases were signed in 2001, but others were signed between 2002 and 2006. Most also stipulated a five-year term with some extended for an additional five years.

The landowners sued after Inflection declared a force majeure in 2010. The landowners prevailed two years later when U.S. District Court Judge David Hurd ruled that the companies could not use the moratorium as an excuse to invoke force majeure and extend the leases (see Shale DailyNov. 26, 2012). The companies appealed.

"We conclude that this case turns on significant and novel issues of New York law concerning the interpretation of oil and gas leases, a legal field that is both relatively undeveloped in the state and of potentially great commercial and environmental significance to state residents and businesses," judges Susan Carney, Richard Wesley and Ralph Winter wrote.

"New York law offers no guidance on whether a force majeure event would extend the primary terms of the leases. Given the importance of this issue and the likelihood that it will recur in other cases involving similar oil and gas leases, we think it prudent to leave this issue to the New York Court of Appeals."

Thomas West, an attorney for The West Firm PLLC in Albany, NY, who represented the companies in the case, told NGI's Shale Daily on Tuesday that it was unclear whether the state's high court would accept the certification.

"We had hoped that [the Second Circuit] would decide these issues but look forward to any guidance that we'll get from the New York Court of Appeals," West said. "That being said, I'm not sure they will accept the certification, particularly as to the first issue because it has a number of factual components to it and they have very limited jurisdiction regarding questions of fact. They make take the second question because it's more of a question of law."

West said the plaintiffs have argued that the companies could have drilled other formations and used conventional drilling methods.

"Our response has always been that's not accurate because the record reveals that Inflection actually tried to drill two other formations using conventional means and drilled dry holes in all cases," West said. "So therefore they proved that at least in the immediate vicinity of those wells, there is no other formation. We also argued that an operator shouldn't be forced to go out and drill dry holes to prove that HVHF is necessary to advance the drilling rights under the lease."

Hurd had also ruled in favor of the plaintiffs in another force majeure case, Aukema et al. v. Chesapeake Appalachia LLC et al, which pitted 55 landowners with 2,785 acres in New York's Broome and Tioga counties against Chesapeake Appalachia LLC and Statoil USA Onshore Properties Inc. West said that case was not appealed.

Asked how long he thought it would be before the Second Circuit issued a final decision in the Beardslee case, West pointed out that the certification occurred nearly one year after oral arguments were heard in the case.

"I don't think the end is near," he said.

ISSN © 2577-9877 | ISSN © 2158-8023

Recent Articles by Charlie Passut

Comments powered by Disqus