Beardslee v. Inflection Energy, LLC

Citation761 F.3d 221
Decision Date31 July 2014
Docket NumberDocket No. 12–4897–cv.
PartiesWalter R. BEARDSLEE, individually and as Co–Trustee of The Drusilla W. Beardslee Family Trust, Andrea R. Menzies, as Co–Trustee of The Drusilla W. Beardslee Family Trust, John A. Beardslee, as Co–Trustee of The Drusilla W. Beardslee Family Trust, Phyllis L. Benson, Elizabeth A. Beardslee, Lynda B. Coccia, Nathan J. Donnelly, Carolyn B. Donnelly, Kevin P. Donnelly, Rose Ann Donnelly, Marie S. Donnelly, William J. Haner, Joseph Haner, James Haner, Margaret Lawton, Glen Martin, Lynn M. Martin, Joseph E. McTamney, B. Louise McTamney, Bonnie D. Mead, R. Dewey Mead, Wayne R. Middendorf, Cynthia L. Middendorf, Floyd E. Mosher, Jr., Lesa D. Mosher, aka Lesa Huntington, Mountain Paradise Club N.Y. 31 LLC, James W. Reynolds, as Trustee of the James W. Reynolds Trust, Mary A. Pfeil–Ellis, Kerry K. Ellis, Paul R. Salamida, Pauline M. Salamida, Gary D. Shay, Bonita K. Shay, Brad A. Vargason, Plaintiffs–Counter–Defendants–Appellees, v. INFLECTION ENERGY, LLC, Victory Energy Corporation, Megaenergy, Inc., Defendants–Counter–Claimants–Appellants.
CourtUnited States Courts of Appeals. United States Court of Appeals (2nd Circuit)

OPINION TEXT STARTS HERE

Thomas S. West, The West Firm, PLLC, Albany, N.Y., for DefendantsCounter–ClaimantsAppellants Inflection Energy, LLC, et al.

Robert R. Jones (Peter H. Bouman, on the brief), Coughlin & Gerhart, LLP, Binghamton, N.Y., for PlaintiffsCounter–DefendantsAppellees Walter R. Beardslee, et al.

Walter P. Loughlin (Walter A. Bunt, Jr., Bryan D. Rohm, on the brief), K & L Gates LLP, New York, N.Y., for Amicus Curiae Marcellus Shale Coalition.

Before: WINTER, WESLEY, and CARNEY, Circuit Judges.

SUSAN L. CARNEY, Circuit Judge:

Inflection Energy, LLC (Inflection), Victory Energy Corporation (Victory), and Megaenergy, Inc. (Mega) (collectively, the “Energy Companies”) appeal from the District Court's order granting summary judgment to Walter and Elizabeth Beardslee and over thirty other landowners (collectively, the “Landowners”), and denying summary judgment to the Energy Companies.

Starting in 2001, the Landowners entered into certain oil and gas leases (the “Leases”) with the Energy Companies, granting the Energy Companies specified rights to extract oil and gas underlying the Landowners' real property (the “Properties”) in the Southern Tier of New York State. Each of the Leases has an initial primary term of five years and provided for a secondary term that, once triggered, would last “as long thereafter as the said land is operated by Lessee in the production of oil or gas.” App'x 32 ¶ 1.

The Energy Companies failed to produce oil and gas from the Properties within the Leases' primary terms, and thereafter, in 2012, the Landowners filed this action seeking a declaration that the Leases had expired. The Energy Companies counterclaimed for a declaration to the contrary. They argued that each Lease was extended by operation of a purported force majeure clause, triggered (they argued) by New York State's de facto moratorium (the “Moratorium”) on the use of horizontal drilling and high-volume hydraulic fracturing (“HVHF”).

The District Court ruled in favor of the Landowners and declared that the Leases had expired. Beardslee v. Inflection Energy, LLC, 904 F.Supp.2d 213 (N.D.N.Y.2012) (Hurd, Judge ).1 The Energy Companies timely appealed.

For the reasons discussed below, 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. Accordingly, we certify two pivotal questions of New York law to the New York Court of Appeals, requesting its consideration of these questions in the first instance.

BACKGROUND
1. The Oil and Gas Leases

This action concerns rights of access to the important natural resources underlying land in Tioga County, New York.2 Located in the Southern Tier of New York and bordering Pennsylvania, Tioga County sits on the Marcellus Shale, “a black shale formation extending deep underground from Ohio and West Virginia northeast into Pennsylvania and southern New York.” 3 The formation as a whole is estimated to contain up to 489 trillion cubic feet of natural gas—an energy resource of enormous potential.4 The formation has been characterized in recent years as offering “one of the most significant opportunities for domestic natural gas development in many years.” 5

Beginning in 2001, the Landowners separately entered into the oil and gas Leases with Victory, granting Victory certain rights to extract oil and gas resources underlying the Properties.6 For a nominal annual fee or, if drilling commenced, the right to receive a royalty on gross proceeds related to oil and gas extracted and sold, Victory acquired “the rights of drilling, producing, and otherwise operating for oil and gas and their constituents” during the lease term. App'x 32. It undertook no obligation, however, to drill.

Victory shared its leasehold interests with Mega. In July 2010, Inflection assumed from Mega the operational rights and responsibilities under most of the Leases.7

Each of the Leases contains an identical “habendum clause.” 8 This clause establishesthe period during which the Energy Companies may exercise the drilling rights granted by the Lease. The Leases' habendum clauses contain both a five-year “primary term,” and an option for a “secondary term.” 9 Each clause provides:

It is agreed that this lease shall remain in force for a primary term of FIVE (5) years from the date hereof and as long thereafter as the said land is operated by Lessee in the production of oil or gas.

App'x 32 ¶ 1.

In addition, each Lease contains what the parties refer to as a force majeure clause, which speaks to delays and interruptions in drilling. That clause provides, in relevant part:

If and when drilling ... [is] delayed or interrupted ... as a result of some order, rule, regulation ... or necessity of the government, or as the result of any other cause whatsoever beyond the control of Lessee, the time of such delay or interruption shall not be counted against Lessee, anything in this lease to the contrary notwithstanding. All express or implied covenants of this lease shall be subject to all Federal and State Laws, Executive Orders, Rules or Regulations, and this lease shall not be terminated, in whole or in part, nor Lessee held liable in damages for failure to comply therewith, if compliance is prevented by, or if such failure is the result of any such Law, Order, Rule or Regulation.

App'x 33 ¶ 6.10

2. Applicable State Statutory Law and Regulatory Actions

Article 23 of the New York Environmental Conservation Law, “Mineral Resources,” governs oil and gas production in the State of New York. N.Y. Envtl. Conserv. Law § 23–0101 et seq. Article 8 of the New York Environmental Conservation Law, “Environmental Quality Review,” governs how state agencies address the environmental effects of their actions, including their actions with respect to oil and gas production. N.Y. Envtl. Conserv. Law § 8–0101 et seq. Enacted in 1975 and codified in Article 8, the State Environmental Quality Review Act (“SEQRA”) “represents an attempt to strike a balance between social and economic goals and concerns about the environment.” Matter of Jackson v. N.Y. State Urban Dev. Corp., 67 N.Y.2d 400, 414, 503 N.Y.S.2d 298, 494 N.E.2d 429 (1986). SEQRA requires that New York State agencies “prepare, or cause to be prepared ... an environmental impact statement [‘EIS'] on any action ... which may have a significant effect on the environment.” N.Y. Envtl. Conserv. Law § 8–0109(2). When “separate actions hav[e] generic or common impacts,” regulations issued pursuant to SEQRA permit agencies to prepare a “generic EIS” (“GEIS”) assessing the environmental impacts of those actions. N.Y. Comp.Codes R. & Regs. tit. 6, § 617.10(a)(3). If, after issuing a GEIS, an agency proposes to take actions not addressed by the GEIS but that might significantly and adversely affect the environment, it must prepare either a supplemental GEIS (“SGEIS”) or a site-specific EIS. Id. § 617.10(d)(4).

In 1992, the New York State Department of Environmental Conservation (the “Department” or “DEC”) issued a GEIS that addressed the environmental impact of conventional drilling techniques then in use.11 The 1992 GEIS described “water-gel fracs” as the most common “stimulation technique” then employed to derive gas from the shale formation. That technique required using approximately “twenty to eighty thousand gallons of fluid” in a stimulation operation. 1992 GEIS at 9–26.

More recently, however, the techniques available for extracting gas have undergone a dramatic transformation as high-volume hydraulic fracturing combined with horizontal drilling has become feasible. HVHF—also commonly known as “fracking”—is “an unconventional drilling technology which involves the injection of more than a million gallons of water, sand, and chemicals at high pressure down and across into horizontally drilled wells as far as 10,000 feet below the surface.” Beardslee, 904 F.Supp.2d at 216 n. 4. “The pressurized mixture causes the rock layer ... to crack.... [and the] gas to flow into the well.” Id.; see generally Wallach v. Town of Dryden, 23 N.Y.3d 728, 992 N.Y.S.2d 710, 16 N.E.3d 1188, 2014 WL 2921399 (N.Y. June 30, 2014).

The technological development, not surprisingly, was accompanied by increased interest in obtaining permits for the combined use of horizontal drilling and HVHF. On July 23, 2008, in response to these paired developments, then-Governor David Paterson directed the Department to update and supplement the 1992 GEIS (the 2008 Directive”). He instructed the DEC to “ensure that it is suitable to address potential new environmental impacts from drilling, including horizontal drilling in Marcellus...

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