Judge Rules Against Chesapeake, Inflection in NY Lease Case

gavelAn important court case has ruled in favor of landowners against energy companies in New York State. Last Thursday, U.S. District Court Judge David Hurd ruled against Chesapeake Energy and Inflection Energy (and in favor of landowners) in a case where the companies had tried to extend leases beyond the original term by invoking “force majeure,” a legal phrase that means the terms of the lease could not be carried out due to extenuating circumstances.

Chesapeake and Inflection had argued that New York State’s moratorium on hydraulic fracturing of shale meant they could not drill on New York land for which they hold leases. But as with many things legal, the story is not so simple…

The leases in question were signed between five and 12 years ago and most had a 10-year term and were signed at $3 per acre. The leases were signed with smaller firms who later turned around and re-sold them to larger companies like Chesapeake and Inflection. Thing is: Back when the leases were signed, high volume hydraulic fracturing of shale gas was not yet common in the Marcellus region. It wasn’t on anyone’s radar screen, including the energy companies. The drillers were free to drill conventional (vertical) wells, so to claim that a delay in allowing horizontal fracking in New York is hypocritical on the part of the drillers. The judge agreed.

In separate but similar decisions, U.S. District Court Judge David Hurd ruled against natural-gas giant Chesapeake Energy and Denver-based Inflection Energy, which had claimed that the state’s de facto moratorium on fracking was reason to extend leases with landowners.

The rulings will immediately end the gas leases for at least 65 landowners in Tioga and Broome counties when they file the decision with their county clerks. The companies have 30 days to appeal.

“The leases terminated at the conclusion of their primary terms, and defendants cannot invoke the force majeure clause nor the doctrines of impossibility or frustration of purpose to extend the leases,” Hurd wrote in one of his decisions.

Several companies had attempted to extend thousands of gas leases in New York based on “force majeure” since the DEC launched its review. Bob Jones, an attorney for the landowners who sued Inflection Energy, said Thursday’s decision was a “game changer.”

"We now have a court ruling — where we didn’t have one before — on whether force majeure extended these leases or not,” said Jones, an attorney for Broome County-based Coughlin & Gerhart. “And the court said unequivocally they do not."

Most of the leases in the case against Chesapeake were signed between five and 12 years ago, according to Scott Kurkoski, an attorney who represented the landowners. Most were signed for just $3 an acre — well below current market value — and were set to expire before the suit was filed.

“This shows that when a group of people get together, there is something they can do, even against a company the size of Chesapeake,” said Kurkoski, of Broome County-based Levene Gouldin and Thompson LLP.

Both Kurkoski and Jones said the case now sets a legal precedent for other landowners facing force majeure claims.

"This has implications for many, many people in the Southern Tier,” Jones said. “And it’s good news, because now they’re not held to these onerous leases with very unfavorable business terms.”*

Separately, in June of this year the New York State Attorney General’s office settled a case with Chesapeake to allow 4,400+ New York landowners with a collective 264,000 acres to renegotiate old gas drilling leases that Chesapeake was attempting to extend using the “force majeure” clause (see this MDN story for more on that case).

A hat tip to MDN reader Jonathan Schindel for alerting us to this story.

*Binghamton (NY) Press & Sun-Bulletin (Nov 15, 2012) – Gas companies lose battle to extend leases in Broome, Tioga