Beardslee v. Inflection Energy, LLC

Citation904 F.Supp.2d 213
Decision Date15 November 2012
Docket NumberNo. 3:12–CV–00242.,3:12–CV–00242.
CourtU.S. District Court — Northern District of New York
PartiesBEARDSLEE, Walter R. & Elizabeth A.; Walter R. Beardslee, Andrea R. Menzies & John A. Beardslee as Co–Trustees of The Drusilla W. Beardslee Family Trust; Benson, Phyllis L. & Coccia, Lynda B.; Donnelly, Nathan J. & Carolyn B. & Kevin P.; Donnelly, Rose Ann & Marie S.; Haner, William J. & Joseph, James; Lawton, Margaret; Martin, Glen & Lynn M.; McTamney, Joseph E. & B. Louise; Mead, Bonnie D. & R. Dewey; Middendorf, Wayne R. & Cynthia L.; Mosher, Jr., Floyd E. & Lesa D. (a/k/a Lesa Huntington); Mountain Paradise Club N.Y. 31 LLC, and James W. Reynolds as Trustee of the James W. Reynolds Trust; Pfeil–Ellis, Mary A. & Ellis, Kerry K.; Salamida, Paul R. & Pauline M.; Shay, Gary D. & Bonita K.; and Vargason, Brad A., Plaintiffs, v. INFLECTION ENERGY, LLC; Victory Energy Corporation; and Megaenergy, Inc., Defendants.

OPINION TEXT STARTS HERE

Coughlin & Gerhart, LLP, Peter H. Bouman, Esq., Robert R. Jones, Esq., of counsel, Binghamton, NY, for Plaintiffs.

The West Firm, LLP, Thomas S. West, Esq., of counsel, Albany, NY, for Defendants.

MEMORANDUM–DECISION and ORDER

DAVID N. HURD, District Judge.

I. INTRODUCTION

Plaintiffs Walter and Elizabeth Beardslee and other landowners 1 (collectively plaintiffs) brought this declaratory judgment action against defendants Inflection Energy, LLC (Inflection), Victory Energy Corporation (Victory), and Megaenergy, Inc. (Mega) (collectively defendants) seeking a declaration that certain oil and gas leases entered into between the parties expired at the conclusion of the primary terms of those leases and that the terms have not been extended by force majeure. See Compl. Defendants counterclaim seeking a declaration that the leases were extended due to force majeure.

Plaintiffs moved for summary judgment declaring that no force majeure event occurred and that the leases have expired. Defendants opposed plaintiffs' motion and cross-moved for summary judgment declaring that the leases were extended by force majeure and are in full force and effect. Plaintiffs opposed defendants' motion and replied in support of their motion. Defendants replied in support of their motion.

Oral argument was heard on August 30, 2012, in Utica, New York. Decision was reserved.

II. BACKGROUNDA. Oil and Gas Industry in New York State

Gas drilling in New York State is governed by the Environmental Conservation Law. Under the authority of that statute, the State Environmental Quality Review Act (“SEQRA”), N.Y. Envtl. Conserv. Law section 8–0101, was passed “to inject environmental considerations directly into governmental decision making.” City Council of Watervliet v. Town Bd. of Colonie, 3 N.Y.3d 508, 515, 789 N.Y.S.2d 88, 822 N.E.2d 339, 341 (2004) (internal quotations omitted).

SEQRA requires all New York State agencies, including the New York State Department of Environmental Conservation (“DEC”), to prepare or cause to be prepared an Environmental Impact Statement (“EIS”) for “any action ... which may have a significant effect on the environment.” N.Y. Envtl. Conserv. Law § 8–0109(2).2 Where the impacts from separate actions are common and predictable, a generic EIS (“GEIS”) may be prepared to analyze the impact of all such actions generally and cumulatively instead of preparing an individual (or site-specific) EIS for each action. SeeN.Y. Comp.Codes R. & Regs tit. 6, § 617.10(a). The purpose of a GEIS is to provide a comprehensive review of the potential environmental impacts of an activity and how those impacts could be mitigated. Subsequent proposed actions which may significantly affect the environment, but which are not adequately addressed by a GEIS, require either a supplemental GEIS (“SGEIS”) or a site-specific EIS. See id. § 617.10(d)(4); N.Y. Envtl. Conserv. Law § 8–0109(2).

In 1992, the DEC issued a GEIS addressing the environmental impacts associated with oil and gas exploration. N.Y.S. Dep't of Envtl. Conservation, Generic Envtl. Impact Statement on Oil, Gas, and Solution Mining Regulatory Program (1992), available at http:// www. dec. ny. gov/ energy/ 45912. html. The 1992 GEIS contemplated conventional well fracturing using 20,000 to 80,000 gallons of fluid.

During 2008 there was an increased interest in the issuance of permits for horizontal drilling 3 and high volume hydraulic fracturing (“HVHF” or “hydro fracking”) 4 to develop the Marcellus Shale and other low-permeability gas reservoirs.5 According to the DEC, the Marcellus Shale is a shale formation extending deep underground from Ohio and West Virginia northeast into Pennsylvania and southern New York. It is as deep as 7,000 feet or more below ground in some areas. See N.Y.S. Dep't of Envtl. Conservation, Marcellus Shale (2012), available at http:// www. dec. ny. gov/ energy/ 46288. html. Geologists estimate that it may contain up to 489 trillion cubic feet of natural gas.6Id. Although the gas potential in the Marcellus Shale is not a new discovery, drilling companies abstained from exploration and extraction because of the difficulty and expense associated with drilling such a deep formation. However, recent advancements in technology and the use of HVHF prompted drilling companies to reconsider opportunities in the Marcellus Shale.

As a result of the interest in horizontal drilling combined with HVHF, and the unknown environmental impact caused by it, on July 23, 2008, Governor David Paterson directed the DEC to update its 1992 GEIS covering oil and gas drilling. See N.Y. Envtl. Conserv. Law—Oil and Gas Wells, L. 2008 ch. 376, 2008 N.Y. Sess. Laws 1658–59 (McKinney) (“Directive”). He directed the DEC's update “to address potential new environmental impacts from drilling, including horizontal drilling in Marcellus shale formations.” Id. Important concerns included “potential impacts on groundwater resources, procedures for the treatment and transport of process water contaminated during drilling operations, potential impacts on local infrastructurefrom increased heavy truck traffic, the safety of fluids used in the hydraulic fracturing of geologic formations and potential cumulative impacts of wide-scale drilling.” Id.

Accordingly, the DEC commenced the development of a SGEIS. That process is still ongoing. The most recent revised draft SGEIS was released on September 7, 2011, with the period for public comment ending on January 11, 2012. According to the DEC, no permit applications to drill horizontal wells utilizing HVHF in the Marcellus Shale are being processed pending completion of the SGEIS or preparation of a site-specific EIS. Any site-specific review must take into account the same issues being considered in the SGEIS and must be consistent with the requirements of SEQRA and the Environmental Conservation Law.

According to defendants, the Directive constitutes a moratorium which has effectively brought natural gas development in New York State to a screeching halt. According to plaintiffs, defendants may, and have acquired permits to drill utilizing the conventional drilling methods contemplated by the 1992 GEIS. For example, in 2009 there were sixteen vertical Marcellus wells producing in New York State. See 2009 DEC Annual Report at 5.

B. The Instant Leases

Plaintiffs are a group of landowners who reside in Tioga County, New York. Plaintiffs each 7 entered into separate oil and gas leases with defendant Victory, leasing all oil, gas, and constituents underlying their property, and the rights necessary to develop, produce, measure, and market them (the “Victory leases”). Collectively, the Victory leases encumber approximately 1,200 acres of real property owned by plaintiffs. Defendant Mega shares an interest in all of the leaseholds with Victory, and as of July 28, 2010, defendant Inflection assumed operational rights and responsibilities under the leases via Mega (with the exception of the leases held by the Beardslees and the Beardslee Family Trust).

The majority of the Victory leases were executed in 2001, although leases were also signed in 2002, 2004, 2005, and 2006. Most leases contained a five year term, with some leases extended for an additional five years. The leases provide that “Lessor ... has granted, demised, leased and let, exclusively unto Lessee, with covenants of general warranty, for the purpose and with the rights of drilling, producing, and otherwise operating for oil and gas and their constituents.” Countercl. 6, ¶ 6.8

The lease term, also known as the habendum clause, provides: “It is agreed that the 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.” Id. 7, ¶ 7. This provision, like many habendum clauses, provides that the interest conveyed by the lease exists for a prescribed term of years (here, five), “and as long thereafter” as the land is operated by lessee in the production of oil or gas. See, e.g., Wiser v. Enervest Operating, LLC, 803 F.Supp.2d 109, 118 (N.D.N.Y.2011) (Peebles, M.J.). Habendum clauses “establish a definite (or primary) term in which the lessee [is] permitted to develop the property, with an option for an indefinite secondary term permitting the lessee to reap the long-term value and return on the money spent developing the property during the primary term.” Id. (internal quotations omitted).

The Victory leases also contain a force majeure clause. A force majeure event is an event beyond the control of the parties which prevents performance under a contract and may excuse non-performance. See Kel Kim Corp. v. Cent. Mkts., Inc., 70 N.Y.2d 900, 902, 524 N.Y.S.2d 384, 519 N.E.2d 295, 296 (1987). The clause here provides:

If and when drilling or other operations hereunder are delayed or interrupted by lack of water, labor or material, or by fire, storm, flood, war, rebellion, riot, strike, differences with workmen, or failure of carriers to transport or...

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  • Beardslee v. Inflection Energy, LLC
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    ...statutory framework and background are explained in detail in the decisions of the Federal District Court (Beardslee v. Inflection Energy, LLC, 904 F.Supp.2d 213 [N.D.N.Y.2012] ) and the Second Circuit (761 F.3d 221 [2d Cir.2014] ).Plaintiffs, various landowners in Tioga County, entered int......
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    ...statutory framework and background are explained in detail in the decisions of the Federal District Court (Beardslee v. Inflection Energy, LLC, 904 F.Supp.2d 213 [N.D.N.Y.2012] ) and the Second Circuit (761 F.3d 221 [2d Cir.2014] ).Plaintiffs, various landowners in Tioga County, entered int......
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