» Chesapeake Attempt to Void Oil and Gas Contract Loses in Court

Chesapeake Attempt to Void Oil and Gas Contract Loses in Court

Chesapeake Energy Corp., the Oklahoma City-based gas driller, has lost an appeal attempting to reverse a multi-million dollar award to a leaseholder in Texas. The company is facing multiple claims from mineral rights holders over the cancellation of offers for oil and gas leases.

In a 2011 decision in U.S. District Court, the Plano, Texas-based Peak Energy Corp. was awarded $19.7 million. The U.S. Court of Appeals in New Orleans agreed, holding that Chesapeake was wrong to cancel an agreement over drilling rights.

As gas prices have decreased, Chesapeake has attempted to cancel hundreds of agreements with landowners to buy oil and gas rights from Pennsylvania to Texas. District Court Judge John Ward had held that Chesapeake’s attempt to abandon the deal with family-owned Peak Energy was a breach of contract. Chesapeake’s unsuccessful argument on appeal was that the letter of intent that both companies signed was not a valid contract.

“The absence of closing documents does not necessarily make an agreement nonbinding,” the appeals court said in its decision. “This agreement is enforceable.”

The appeals court also upheld Ward’s decision ordering Chesapeake to pay the difference between the offer amount and the value of the lease when the bid was canceled, amounting to $12,000 per acre. Chesapeake had argued that Peak Energy did not hold valid rights to the majority of the 5,405 acres in question.

Hundreds of landowners are suing Chesapeake, saying that the company’s offers to pay high prices, including signing bonuses, were valid contracts that the driller then tried to walk away from after gas prices plummeted or profits were not as high as expected.

Three lease holders won a separate lawsuit against Chesapeake on July 10, with a federal judge ruling that the company had to pay more than $100 million to the landowners after the company failed to complete the purchase.

The appeals court decision is from the Fifth Circuit, which covers a huge swath of oil land in Texas, Louisiana and Mississippi. The court’s decisions are influential in other circuits where the oil and gas industry is prominent.

According to observers, the Peak Energy case is unlikely to be reviewed by the Supreme Court, so Chesapeake’s attorneys may be forced to attempt to distinguish the many other pending cases from this one in order to prevail in those other cases.

Chesapeake Energy, the country’s second-largest gas producer, has seen its stock value fall. It has lost 35 percent of market value in the last year, arguably due to falling energy prices and an executive shake-up, as CEO Aubrey McClendon was dismissed over conflict-of-interest questions.

Gregory D. Jordan is an Austin business attorney, Austin employment lawyer, and Austin business litigation lawyer. To learn more, visit Theaustintriallawyer.com.

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