Walter R. Beardslee,, et al., Respondents,v.Inflection Energy, LLC, et al., Appellants.BriefN.Y.August 26, 2014To be Argued by: PETER H, BOUMAN, ESQ. (Time Requested: 30 Minutes) COURT Of"APPEATS of the STATE OT NEWYORK WALTER R. BEARDSLEE, individually and as Co-Trustee of The Drusilla Vy'. Beardslee Family Trust, ANDREA R. MENZIES, as Co-Truslee of The Drusilla W. Beardslee Family Trust, JOIIN A. BEARDSLEE, as Co-Trustee of The Drusilla W. Beardslee Family Trust, PHYLLIS L. BENSON, ELIZABETI-{ A. BEARDSLEE, LYNDA B. COCCIA, NATHAN J. DONNELLY, CAROL\'N B. DONNELLY, KEVIN P. DONNELLY, ROSE ANN DONNELI,Y, MARIE S. DONNELLY, V/ILIAM J. I{ANER, JOSEPH HANER, JAMES HANER, MARGARET LAWTON, GI,EN MARTIN, LYNN M. MARTIN, JOSEPH E, MoTAMNEY, B. LOUISE MoTAMNEY, BONNIE D. MEAD, R. DEWEY MEAD, WAYNE R. MIDDENDORF, CYNTI]IA L. MIDDENDORT, FLOYD E. MOSHER, JR., LESA D. MOSHER, aka Lesa Huntington, MOUNTATN PARADISE CLUB NY 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-Respondents, -against- INFLECTION ENEIIGY, LLC, VICTORY ENERGY CORPORATION, MEGAENERGY, INC.. Defendants-Appellants. ON APPEAL FROM TI-IE QUESTION CERTIFIED BY THE L,]NITED STATES COI]RT OF APPEAI,S FOR THE SECOND CIRCI]IT IN DOCKET NO. CTQ-2014-00006 BRIEF FOR PLAINTIFFS-RESPONDENTS Robert R. Jones, Esq. Peter H. Bouman, Esq. COUGHLIN & GERI{ART. LLP C ounse I for P laintills-Responclents P.O. Box 2039 Binghamton, NY 13902-2039 607-723-95tt CORPORATE DISCLOSURE STATEMENT Plaintiff-Appellee, Mountain Paradise Club NY 3l,LLC, by and through their undersigned counsel, file this Corporate Disciosure Statement and state that: Mountain Paradise Club NY 31, LLC is a limited liability company organized under the laws of the State of New York. Mountain Paradise Ciub NY 3 1, LLC is a privately held company and has no parent corporation. There is no publicly held corporation which owns 100á or more of its stock. TABLE OF CONTENTS CORPORATE DISCLO SURE STATEMENT TABLE OF AUTHORITIES...... COUNTER-STATEMENT OF QUESTIONS PRESERVED COUNTER-STATEMENT OF CASE..... COLINTER-STATEMENT OF RELEVANT FACTS,. . . .. .. . SUMMARY OF ARGUMENT......... ARGUMENT POINT I BACKGROUND OF OIL AND GAS LAWS AND REGULATIONS IN NEW YORK. . . .. . POINT II NEW YORK'S ENVIRONMENTAL LAWS AND REGULATIONS CANNOT FORM THE BASIS OF FORCE MAJEURE IN THIS CASE ......... Page 1V 1 2 5 9 22 28 POINTIII DRILLING FORNATT]RAL GAS AND OIL HAS NOT BEEN STOPPED INNEWYORK, SO THERE IS NO FORCE MAJEURE EVENT POINTIV FORCE MAJEURE CANNOT BE USED TO GIVE THE ENERGY COMPANIES GREATER RIGHTS UNDER TIIE LEASE POINTV ENERGY COMPANIES' CLAIM THAT IryUP IS TFIE ONLY "COMMERCIALLY VIABLE'' METHOD TO PRODT]CE GAS IS NOT RELEVANT POINTVI THE FORCE MAJETIRE CLAUSE DOES NOT ALTER THE SPECIAL LIMITATION OF T}IE HABENDUM CLAUSE 33 37 42 56 CONCLUSION 1r1 67 TABLE OF AI]THORITIES Cases 407 F.ast 6l't St. Garase v. Savov Fifth Ave. Com..23 N.Y.2d 275 Alaskan Crude Co 261 P.3d.412 (Alaska, 2011) Âlleoian¿-e llill¡¡ie¡¡¡ T P ¡¡ Rcnoe Tcr¡ec Prnr{ I T l- 347 S.W.3d 855 (Tex. App 20tl Bannin v. Peck,266 A.D.209 (1't Dep't, 1943) Genesee Conser.¡ation Foundation v. Oatka Fish & Garne Club, (4tr' Dep't, 197s). ........... Baurman v. Biwzen, 16 N.Y.S. 342 (S.Ct. N.Y. Co., 1891)................................. 65 Buckmaster v. Thompson, 36 N.Y. 558 (1867).... .......................... 65 Citizens By-Products Coal Co. v. Arthalony,l70 Ind. App. I (Ind. Cf App., 1976) 56 Commonwealth Edison Co. v. Allied-General Nuclear Services,73l F. Supp. 850 (N.D. rli., 1990) ......11, 15, 40 . . . ..22, 4l ., 67 1) L1 \O Conkling v. Krandusky , 127 A.D.76l (4th Dep't 1908) Eaton v. Allesany Gas Co., 122 N.Y. 416 (1890) Erickson v. Darl Oil & Gas Con:., 189 Mich. App.679 (Mich. Ct. App., l99l)..29 5' 5? .....65 63 A.D.2d.t1l5 ..........,............,. 65 Goldstein v. Lindner, 254 Wis. 2d 673 (Wis. Ct. App. 2002) 51 Gulf Oil Corp. v. Fedetal Energ , 706 F . 2d 444 (3d Cir r 983) 51 Guif Oil Corp. v. Southland Ro),alt), Co., 496 S.W. 2d 5 47 (Tex. 197 3).............. 60 Howard v. Hoffeld, 221 N.Y. 546 (1917)............ 4J In re Cablevision Consumer Litig., 864 F. Supp. 2d 258,264 (E.D.N.Y., 2012) .. 40 J. J. Fagan & Co. v. Burns,247 ldich.674 (Mich., 1929) .................................... 57 ll."" iilll lillll 11 'I ll¿'f¿'i; Kel Kim Corp. v. Central Markets. Inc., 131 A.D.2d 947 (3rdDep't 1987) .........'.. 47 Kirker v. Shell Oil Co. , 104 Cal App.2d. 497 (Cal. Ct App., 2d App. Dist., Div. 1, 1951) 58 Macallo]¡ Corp. v-lVþLallurg-Inc., 284 A.D.2d227 (lsr Dep't, 2001) .....17,30,31 Madeirense Do Brasil S/A v. Stulman - Emrick Lumber Co. , 147 F.2d399 (2d Ct.,1945) 52 Martin v. Penn. Dep't of Envtl. Res. ,120 Pa. Commw. 269 (1988) 51 Mitsubishi Int'l Corp v. Interstate Chern. Corp., 2008 \ryL ß87392 (S.D.N.Y 2008).......... Mott v. Richtmyer, 57 N.Y. 49 (1874)........ Natural Gas Pipeline Co. of America v. Zimmer, 447 F. Supp. 66 (N.D. Tex., 1977), af? d. 576 F2d 106 (5th Cir., 1978) 61 PEC Minerals LP. v. Chevron U.S.A., Inc. , 439 Fed. Appx. 413 (5th Cir., 20ll) 56 Perlmanv.PioneerLtd.P'Ship-g18F.2d 12446rh Cir., 1990)..............48,49,50 Phibro Enerq),. Inc. v. Empresa de Polimeros de Sines Sarl , 720 F . Supp. 3 12 (s.D.N.y., 1989)............. ,.,.............28 Phillips Puerto Rico Core 782F.2d,314 (2d Cir. 1985) 51 48Raner v. Goldbere, 244 N.Y. 438 (1927) Rohm & Hass Co. v. Crampton CorB, 2002WL 1023435 (Phila. Ct. Corn. Pleas, 2002) .. 51,52 Rome v. Vescie, 58 A.D.2d 990 ( thDep't, 1977).. ....................... 63 San Mateo Communiq¿ Collese Dist. v. Half Moon Ba)' Ltd. P'ship, 65 Cal. App. 4th 401 (Ct. of Appeals of Cal., 1st App. Dist., Div. 3, 1998)....................,.57, 58 Team Mktg. USA Corp. v. Power Pact. LLC., 41 A.D. 3d939 (4thDep't,2007) Trinidad Petroleum Corporation v. Pioneer Natural Gas Company. 416 So.2d 290 (La. Ct. App. 3'u Cir. 1982)...... ..53,54 United Equities Co. v. First ,52 A.D.2d 154 (1't Deprt, 1976), af?d.,4t N.Y.2d 1032 (1977)... .....12, t4,1s,20,38 Vaughn v. Hearrell 347 S.W.2d 5a2 (Ky.,1961) 56 .Wheatland IrrigationDist. v. McGuire,537 P.2d, 1128 (Wyo. 1975)..................50 Wiserv. Enervest Operatins. LLC, 803 F. Supp.2d 109 (N.D.N.Y.2011)....22,40, 58 Witter v. Taggarl, 78 N.Y.2d 234 (1991)....... Statutes N.Y. ENVTL. CONSERV. LAW $8-0109(2) Other Authorities 64,66 9,23,26 A Mineral Lessee's Ohlioafion to Unoroduced Portions ofthe Leases Premises inLouisiana,52La. L. Rev. 387,403 (i991).....................................55 Commissioner's Testimony at New York's Assembly Hearing on Oil and Gas Drilling........ ...............29 Gas and Oil Lease Force Maieure Provisions: Construction and Effect. 46 ALR 4th e76, $8[a] (1e86)..... .........10,26,29 N.Y. Dep't of Envtl. Conserw., New York State Oil, Gas and Mineral Resources )'t 7^ vi 2008 N.Y. Dep't of Envtl. Conserw., New York State Oil, Gas and Mineral Resources 2009 ...............27,34 N.Y. Dep't of Envtl. Conserv. , New York State Oil, Gas and Mineral Resources 2010.....,........ .......34,35 N.Y. Dep't of Envtl. Conserw., Revised Draft Supplemental Generic Enl41. Impact Statement on Oil, Gas and Solution Mining Regulatory Progran .................35 N.Y. Dep't of Envtl. Conserv., Generic Envtl. Impact Statement on Oil, Gas and Solution Mining Regulatory Program (1992) ........... Summers, The Law of Oil and Gas, Third Ed., $16.2, (2006). Williams and Meyers, Oii and Gas Law, Section 808, 56-57 Williston on Contracts $ 77:31 [4'h Ed].......... Regulations N.Y. Codes, R. & Regs. tit. 6, $617.10 a)7)5)R v COUNTER-STATEMENT OF OUESTIONS PRESENTED 1. Is the "moratorium", which only prohibits high volume hydrofracking pursuant to a pre-existing environmental tegulation, a force majeure event under this oi1 and gas lease? 2. If there is a force tnajeure event under this oi1 & gas lease, can it be used, to extend the prirnary term of the lease, when the force majeure clause is ambiguous and the habendum clause does not incotporate that clause by reference? 1, COUNTER-STATEMENT OF CASE i. Nature of the Case The Respondents-Plaintiffs ("Landowners") are 35 propefty owners who ail signed similar oil and gas leases, which are now owned by Appellants-Defendants, Inflection Energy, LLC, Victory Enelgy Corporation and MegaEnergy, lnc. ("Energy Companies" or "operators"). These leases gave the Energy Companies the exclusive right to explore, drill and produce the leaseholds for oil and gas during a primary term of 5 years. In exchange, Energy Cornpanies were required to pay the surn of$2 to $5 per acrelyear. The leasehold would continue beyond the primary term, but only for as long as Energy Companies were operating the land in the production of oil and gas (secondary term) and the Landowners were receiving royalty payments. (4. 45) It is undisputed that no operations have been conducted upon the leaseholds, as no wells have been drilled, no gas has been stored or protected, and no gas has been produced on these leaseholds' It is also undisputed that the prirnary term has expired. Landowners brought a declaratory judgrnent action in the NoÍhem District of New York against the Energy Companies asking the Court to declare that the leases expired by their own terms. The Energy Companies admit that thele were no operations, no wells, no gas storage and no gas produced on the leaseholds, and they admit that the primary term has expired. However, they claim that the primary term of the lease is extended by operation of force majeure. Specifically, they claim the since New York has halted a particulal stimulation technique known as high volume hydro-fracking using horizontal drilling ('HVHF"), that this constitutes a force majeure event under the lease terrns. Flowever, the lease says nothing about HVI{F, and the habendum clause (tenn clause) does not pertnit an extension of the primary term. ii. Course of the Proceedings and Disposition Below In the proceedings be1ow, the parties agreed that the issue of whether there is a force rnajeure event and if so, whether the leases were extended by force majeure, could be decided on surnmary judgment. All of the factual information needed to determine this issue can be found in the leases, pleadings and on the NYS' Department of Environmental Conservation ("DEC") website. Landowners filed a motion for summary judgment (4. 146) and the Energy Companies cross- moved for sumrnary judgment. (4. 185) By Memorandurn Decision and Order of the Hon. David N. Hurd, dated November 15, 2012, the District Court ruled that the Leases were expired by their terms. (4. 982) The District Court lound that there was no force majeure event because the Energy Cornpanies have not been prohibited from drilling in New York State. The Court also found that even if there was a force tnajeure event, it does not extend the primary term of the leases because the Energy Companies are not prevented from pelforming under the lease, and the purpose of the force majeure clause is to protect the Enet'gy Companies from non-perfonnance' (4. 992-994) Energy Companies appealed to the United States Coutt of Appeals, for the Second Circuit. On July 31, 2014, the Second Circuit issued its Decision and Order certifl,ing two (2) issues to this Courl: (1) whether the Moratorium on HVFIF qualifies as a force majeure event; and (2) whether the force majeure clause modifies the prirnary tenn set in the habendum clause. (.A. 23) 4 COUNTER-STATEMENT OF RELEVANT FACTS The Landowners signed similar oil and gas leases with Defendant, Victory Energy ("Victory"). The large majority of the leases were executed in 2001, although leases were also signed in2002,2004,2005,2006,and2009r. The tem of most of the leases we¡e for five (5) years, and then some leases were extended for an additional five (5) years. Al1 of the properties subject to the leases are located in rural Tioga County, New York. The consideration paid was either $2 or $5 dollars per net mineral acre, per year ("delay rental"). A1l of the leases have long expired by their tems. Leases are attached to the Complaint and are found in the Appendix atpages 41- 118. No operations have been conducted upon the leaseholds. No wells have been drilled, no gas has been stored or protected, and no gas has been produced on these leaseholds. No royalties have been paid. The Energy Companies claim that the primary tenn of the habendum clause is extended indefrnitely due to an alleged force majeure event based upon "unforeseen regulatory requirements". (A. 120-121) The Energy Cornpanies based their claim of force rnaj eure on Governor Paterson's July 2008 decision to update a 1992 Generic Environmental Impact Statement (GEIS) to address the impact of I Th" l"ure executed in 2009 was to run concunently with another lease already signed by the 5 Lessee. HVHF on the environment. (4. 134) The Energy Companies' position is that the habendurn clause is extended "until such time as the [DEC] begins issuing permits for shale wells that will be stimuiated using [HVHF]" (A 121) Based on this, they refused to sun'ender the leases. The Landowners' propefty has been unmarketable as it was encumbered by these leases (until the Judgment was issued below). In this case, the Energy Companies used pre-printed lease forms in small type and distributed them to properly owners by landmen. (4. 171) The Energy Companies were the sole drafter of the leases. None of the Landowners were represented by counsel. All of the leases except on.t *"r" executed by Victory and MegaEnergy in 2001 fo 2006 when the drilling activities in New York were limited to known geologic formations such as the Trenton Black River, using conventional drilling techniques described by the 1992 GEIS. (4. 157-163) The leases at issue do not specifu the type of drilling, stimulation technique, or geological target considered necessary by the Appellants. (4. 45-47) The leases cerlainly did not say that they would continue until a "commercially viable" source of gas could be exploited. The Energy Companies disclaimed any duty to drill on 2 One lease was executed in 2009 to run concurrently with another lease already in force. The early leases were renewed for an additional five year tern. 6 these leaseholds. Indeed, they had the right to surender the lease at any time. (4. 46, clause 103) The sole consideration given to the Landowners were delay rental payments. The leases covered 1,200 acres. (A-34) Therefore, the maximum total consideration paid by the Appellants was $60,000.004, not $7,000,000 alluded to by them. (Appellants' brief, p. 34) Inflection did not acquire an interest in these leases until July 2010 when it entered an agreement with MegaEnelgy and Victory. (4. 850) At that tilne, the Governor's decision to conduct a full environmental analysis of HVLIF had been in effect for nine months. Neither Victory nor MegaEnergy declared force majeure. Only Inflection did so on August 9,2012, three years after the July 2008 decision. (4. 120) In at least one case, the declaration was made after the expiration of the primary term and after Victory had tried to renew the lease with the landowner. (A. 171) On February l, 2010, Inflection executed a lease with the South Maine Coalition in adjacent Broome County, New York (4. 864) for the consideration of delay rental payments of $6,000.00 per rnineral acre, staggered over a period of ' Ir-, so-" leases, the sunendcr provision appears in clause 12. See, for example, Benson lease found at page 52 of The Appendix. a Five dollars times 1200 acres times 10 years. 7 years. (4. 865-879) This lease made specific reference to existing regulations on Marcellus Shale drilling and made provision for those restrictions. (4. 876) No such provision exists in Landowners' leases. This appeal has nothing to do with the merits (or dernerits) of IIVHF. It has everything to do with 35 people who signed hve year leases at $2 to $5 per acre, now finding that these Energy Companies claim that they can continue to hold their land because they deem drilling in a manner legally allowed by New York to be "non-viable". This behavior goes way beyond any4hing contemplated in the lease. This appeal is important because it is estimated that thousands of other propefty owners and real estate titles in New York have been similarly ínpacted by other Energy Companies claiming force majeure. 8 SUMMARY OF ARGUMENT This case does not present a force majeure situation where the Energy Companies are attempting to be excused from liability for non-performance. Instead, they seek to impose non-productive leases on the Landowners for an indefinite period of time. The Appetlants seek not to avoid a burden or obligation, but to place additional burdens on the Landowners. They wish to place all the regulatory risk of existing New York law on the Landowners- It is undisputed that the Energy Companies knew of the existence of New York's regulatory framework pertaining to oil and gas production. At the time the leases were executed in 2001 and 2006, it was established law in New York that subsequent proposed actions which are not adequately addressed in a Generic Environmental Lnpact Statement require preparation of a Supplemental Generic Environmental Impact Statement (SGEIS) N.Y. Codes, R. and Regs. tit 6, $617.10(dX4); N.Y. Envtl. Conseruation Law $8-0109(2). They knew, or are deemed to have known, that a supplement to the GEIS had to be prepared. See N.Y. Codes, R. & Regs. tit. 6, $ 617. l0(dX4). They now wish the Court to believe that the supplernental GEIS (SGEIS) has taken too long, forgetting, perhaps that the original GEIS tooktwelve years to deveiop. (.A. 651) The GEIS was prepared in 1992 and contemplated use of 80,000 gallons of water. See, infra. In 2008, the Energy Cornpanies wanted to use a stimulation 9 method which required up to 5 million gallons of water. It would have been illegal for the NYS Department of Environmental Conservation (DEC) to issue permits for IfVHF without the completion of a SGEIS. The District Court below found that the events leading to the Energy Companies' declaration of force majeure were foreseeable. There is little dispute about this. Therefore, the question presented is whether the Energy Companies can extend the primary term of the habendum clause (granting or term clause) and subject the Landowners to the burden of an indehnite number of additional years under a lease, based upon the application of an existing state regulation that Appellants knew about all along. This case revolves around this issue. A govemment order predating the execution of an oil and gas lease has never been held to be a force majeure event in any state of the union. Joan Teshima, Gas and Oil Lease Force Maj eure Provisions: Construction and Effect. 46 ALR 4'h 976, $8[a] (1986). Therefore, if this Court holds that the Energy Companies here tnay successfully invoke force majeure in the face of a pre-existing regulation, it will be the only Court in the nation to do so. When asked, in effect, by the District Couft, why the Energy Companies did not deal with the regulatory risk of Environmental Law cornpliance in New York in their leases, (.A. 960-964), their counsel stated: 10 At that time, Your Honor, it was the expectation of the regulated community, including Chesapeake and MegaEnergy and Inflection and everybody else, that what wouid happen is that the department would process perrnit applications under the 1992 GEIS. (4. 960) See, also, afhdavit of Mark Sexton, CEO of Inflection, where he states that "we fully expected that the Moratorium on permitting was going to short-lived". (4. 857, T35) Because the perforrning party is a highly regulated industry, the fact that it "expected" New Yolk's laws would be ignored in lavor of them does not give rise to a force majeure situation. New York Courls do not allow a promisor to be discharged from performance merely on the ground that the expense of performance has increased since the contract was signed. Aft'| Eqú Á 1 tt q+ Go"o.,o e^.,^., Ei+L ^-,^ ñ^,* 23 N.Y.2d 275, 281-82 (1968). In the case of Cornmonwealth Edison Co. v. Allied-General Nuclear Services, 731 F. Supp. 850, 861 (N.D. I11., 1990), Circuit Judge Richard Posner explained why New York law will not provide relief to a contracting party merely because the cost of performance has increased: Of course not. That would undermine a fundarnental purpose of contracts, which is to assign the risk of unforeseen events - and normally the risk of an unforeseen increase in the costs of performance is assigned to the performing party, who is assurned to be more knowledgeable about this risk, as well as to have superior ability to prevent it from occurring. 7'1, But the regulatory risk here was not unforeseeable. It was the law which the Energy Companies said their lease was subject to. (4. 52, clause 7). Since the lease is subject to New York Law, New York Law is an integral part of the lease in question. New York has never allowed a party to successfully invoke force maj eure to get a better deal that it bargained for. United Equities Co. v. Fitst Nat'l Citv Bank, 52 A.D.2d 154 (1'tDep't,1976);afld4l N.Y.2d 1032(1977). The Energy Companies bargained for a lease which was subject to New York Law and New York Law did not allow HVF{F without a Supplemental Environmental Impact Statement. They got exactly what they bargained for. The Appellants refer repeatedly to the covenant of good faith and fair dealing "implied into oil and gas leases." Appellants' brief, p. 30 et. seq' However, it was not "good faith" and "fair dealing" for them to encumber Landowners' propefty for between 8 and 13 years without producing any retum whatsoever to the Landowner other than $2.00 or $5.00 per acre per year rental payments. The basis of the bargain was a lease for 5 years and for so long thereafter as the land was operated in the production of oil or gas - not for 5 years and then as long as needed until New York Law changes and the Energy Companies can prosper. 12 Say what they will about good faith and fair dealing, one will not find a single clause favorable to the Landowners in these pre-printed, boilerplate leases drafted solely by the Energy Cornpanies.5 (4.41). One might be wary of the Energy Cornpanies' statement of the purposes of oil and gas leases. Appellants' brief, pp. 28-33. Energy companies enter leases (which are both conveyance and contracts) with one intent: to make money. They wish to lease for the lowest bonus payrnent and the lowest royalty possible. If they lease at $2.00 per acre and can sell the leases for $10,000 per acre, they will. The Energy Companies signed 35 propefty owners at2001 to 2006 prices. None ofthe Landowners had counsel and one suspects that this is true for thousands of landowners across the State. This is contrary to the Energy Companies' assertion the parties "clearly bargained for" this force majeure clause. (A. 965) The Landowners did not hire counsel who spelled out the circumstances that would constitute the Energy Companies' right to encumber their land. They did not deal with the question of regulatory force majeure at all. They signed a pre- printed lease probably at their kitchen tables in front of a landmen employed by the Energy Company. One can call them unsophisticated, gullible, or foolish, but the law does not exist to protect only the most sophisticated in society - at least not yet. t This assumes that one could read this type r.r'ith the naked eye. 13 The Appellants would have New York adopt Texas' interpretation of force majeure. Appellants' brief, p. 24. Texas law treats oil and gas operators very well. But the controlling law in this State is Kel Kirn Com. v. Central Markets. Inc. 70 N.Y.2d 900 (1987) and its prodigy. Kel Kim holds that "contractual force majeure clauses - or clauses excusing nonperfonnance due to circurnstances beyond the control of the parties - under the common law provide a ... nanow defense." Kel Kim, supra, at 902. The pulpose of such clauses are to excuse nonpçllolrl4nçs. In this case, the Energy Companies had no obligations to perforrn. They could "drill or not drill on said land as it may elect." They could cancel the lease at any time and be relieved ofany obligations. (A.46, clause 10) The Landowners never sought damages for non-performance and they never had any right to such. But they do have the right to their land unencumbered by leases which have long expired. Kel Kim cited United Equities Co. v. First Nat'i Citv Bank,52 A.D.2d 154 (1't Dept. 1976), affd.,41 N.Y.2d 1032 (1977). The United Equi!þ! Couft explained that: Paragraph lV is a force majeure clause and should be interpreted consistently with its function as a force majeure clause. The pu{pose of force majeure clause is to limit damages in a case where the reasonable expectations of the parties and the performance of the I4 contract have been frustrated beyond the control of the parties. Id., at 157 (emphasis added.) As noted by Judge Posner while interpreting New York law: ... [M]erely reciting "force majeure" in a contract, or including in the contract a standatd, boilerplate, catch-all force majeure provision invokes a body of common law doctrine interpreting the telm that is largely indistinguishable from the doctrine of impossibility (or impracticability). Commonwealth Edison Co.. 73 1 F. Supp at 855-56, citing Ke1 Kim CorB., supra. What the Energy Companies bargained for was the right for 5 years to seek oil or gas subject to New York Law. They received exactly what they bargained for. They drilled and found that the only play which appeared promising was the Marcellus shale. This aione could have been a substantial benefit to the Energy Companies, but only if they used the information to negotiate new leases which took into account the regulatory delay and made accommodation for that delay. Instead, they "seek to use force majeure not to limit damages, but to give [them] a greater prolit than fthey] contracted for." United Equities Co. ,52 A.D.2d at 157. The reasonable expectation ofthe Energy Companies in 2001 or in 2006 was to explore the existing geological formations which had been producing for years. The Trenton Black River fonnation is a prime example. See, Point III infra. Such exploration required conventional techniques covered by the 1992 GEIS. 15 The Marcellus shale was not within the expectation of any operator in 2001 or 2006. If it had been, provisions in the leases should have been made providing for the regulatory risk that DEC permits would not be granted, or would be delayed, because they were requesting permission to use fifty (50) times more water than conventional methods approved under the existing SGEIS. As will be shown below, "drilling" has never been stopped by New York State. The only thing which is subject to delay is a stimulation method called high volume hydro-fracking GrvHF). Not one word in the force majeure clause refers to FIVHF or the use of any stimuiation method, yet the Appeilants use the tetm 47 times in their brief. That the Energy Companies could drili is proven by their actions' Apparently, Inflection drilled in the Trenton Black River, Queenston and Oriskany formations at the time the leases in question where in the primary term. What the Energy Companies do not disclose in their brief is that Inflection assumed operational rights to the oil and gas lease at issue on July 28,2010, two years after the "moratorium" came into effect. (4. 850). Inflection came into the situation with their eyes wide open, and only Inflection claimed force majeure. The Appellants complain that conventional formations are not "commercially viable". The Landowners never promised the Energy Companies commercially viable wells. If the Energy Companies are given the right to sit on 1,6 land until they find comrnercially viable plays of oil and gas, the Landowners will be bound by these leases until the end of time. The District Coufi asked the Energy Companies if "there is anything in any of the leases that mentions the word 'viable' or in any way limit the activity of the defendants in this context?" (4. 970). V/ith due respect, the Energy Companies took four paragraphs to not answer that question. (A. 97 0-97 1), The Appellants insist that "courts are not at liberty to re-write the contract or interpret it in a manner which the parties never intended." Appellants' btief, p.25. The lease reads "it is agreed that this lease shall remain in force for a primary term of hve (5) years from the date hereof and as long thereafter as the said land is operated by lessee in the production ofoil or gas". (.A. 51, Clause 1). It does not read that the lease shall remain in force until the Energy Companies are able to obtain commercially viable quantities of gas or oil. Before we move into the ambiguity of the force majeure clause itself, it might be helpful to suggest that this case can be decided on the basis of the holding in Macalloy Corp. v. Metallurg, Inc.,284 A.D.2d 227 (l't Dep't, 2001). In that case, the First Department cited both Kel Kim and United Equities and found that a parly who shut down its plant due to ltnancial consideration brought about by environmental regulations of which it was ful1y aware could not be relieved of its obligations based on the "plant shutdown" language in the force majeure clause. T7 Here the Energy Companies argue that the only way to make a profit is to employ techniques which are prohibited because of environmental regulations which had been in effect long before the leases were signed. The Energy Companies have admitted that they knew of these regulations. (A. 23, 35,36) The force maj eure provision in this case has two parts. The Energy Companies have stayed entirely away from the second part. (4. 66, Clause 7) There is a reason. That second part reads: 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 par1, nor lessee held liable in damages for failure to comply therewith, il compliance is prevented by, or if such failure is the result of any such Law, Order, Rule or Regulation. This is the only part in the document which deals with lease termination. It is the only part in the lease which deals exclusively with Governrnental Regulations, Laws, Rules and Executive Orders, etc. This is the specihc part of the lease which one would look to asceftain the impact of governmental action on the lease. As this Courl noted in Kel Kim. "the principle of interpretation applicabie to such clauses is that general words are not to be given expansive meaning; they are confined to things of the same kind and nature as the parlicular matters mentioned." Kel Kim., supra, at 903. 18 Therefore, we agree that the lease cannot be terminated by the Energy Companies' failure to abide by any express or implied covenant on its part by virtue of laws to which the lease is subject. But what covenants did the Energy Companies make in this lease? They covenanted to pay aroyalty of 1/8 of native oil produced from the land. (4. 45, Clause 2a). They made a covenant to pay a royalty of 1/8 of gas sold. (A.45, Clause 2b). They made no other covenants at all, except to pay the lessors for damaged crops or fences. (4. 45, Clause l7) The first part of the force majeure clause contains general boilerplate ianguage, and deals with lack of water, labor or materials, fire, storm, war' rebellion, riot, strikes, failure of carriers, etc. We have already shown that "drilling" was not stopped or delayed or intenupted. The first part of the force majeure clause says nothing about lease tennination, but says such delays "shall not be counted against lessee". The District Court noted that this force majeure clause "is subject, shall we say, to a variety of interpretations over the years". (A. 964) Ambiguity in a contract or lease must be held against the drafter - the Appellants. (4. 959) On what basis could the Landowners count delays against the Energy Companies? The answer is that the lease stays in effect "as long as the land is operated in the production of oi1 or gas". (A. 45, Clause 1) If the production temporarily stops in the secondary term by virtue of or government order, the 19 landowners may be stopped from asserting that the operator is no longer operating in the production of oil or gas and thereafter the lease must end by its terms. Continuous production is generally required in the secondary term, and first part of the force maj eure provision gives the Energy Companies relief from a temporary halt. But the second part, which is the only clause dealing with lease temination, applies only to the Energy Companies covenants to pay royalties. The Energy Companies disclaimed any duty to âttempt to obtain gas or oil. The only other covenant left is the implied covenant ofgood faith and fair dealing. Nothing that New York State did or did not do made it impossible for the Appellants to deal in good 1àith and làirly with the Landowners. Instead, the Energy Companies employed an aggressive and oppressive insistence on force majeure to hold favorabie and cheap leaseholds beyond the primary term. Good faith and fair dealing would have been shown if the Energy Companies had negotiated new leases to becotne effective when and if HVHF is approved. It is the Appellants' burden to prove the elements of force majeure. They argue on this appeal that New York Courts need only look at the specific language in the lease and ignore the long-standing common law regarding force majeure. However, New York law is very clear that the pupose of a force majeure provision is to relieve a pafty from its contractual duties when its performance has been prevented by a force beyond its control. United Equ{þ!-Ço., supra; see also, 30 20 Williston on Contracts $ 77:31 [4tl' Ed]. Here, the operators disclaimed any duty to drill wells. They had no duties from which they needed to be relieved. No "delay in drilling" exposed them to a breach of contract claim. The only contractual duty which the Energy Companies had under the lease was to pay delay rentais if they wanted to continue on with the primary term. The doctrine of common law contractual force majeure is used properly to excuse a pafiy's performance due to circumstance beyond the control of the promisor. Kel Kim, supra., at 902-3. The operators appear before this Court not asking to be shielded from liability. Instead, they are here because although they "didn't have to do any'thing....[they] want to do something." (4. 972) They want to use the doctrine as a sword, not as a shield. What they want to do is to hold Landowners in the trap they have sprung until FIVHF is approved. Then they can either sell the leaseholds at a great profit or operate in a known and proven play and make large profits themselves. Lastly, settled oil and gas law provides that a habendum clause may be modified by other clauses in the lease, if and only if, the habendum clause incorporated those other clauses by reference. Here, the Energy Companies are looking to overturn that law by asserting that the force majeure clause in this case can modifu the habendum clause which reads simply, "It is agreed that this lease shall remain in force for a primary tenn of FIVE (5) years fi-om the date hereof and 2'J. so long thereaÍter as the said land is operated by lessee in the production of oil or gas." As such, this force majeure clause does not modify the habendum clause. ARGUMENT POINT I BACKGROUND OF OIL AND GAS LAWS AND REGULATIONS IN NEW YORK There is a dearlh of authority in New York relating to oil and gas leases such as those now at issue. See Wiser v. Enervest Operating, LLC, 803 F. Supp. 2d 109, 117 (N.D.N.Y. 201D.6 Oil and gas leases or contracts in New York stand on an entirely different basis from any other leasehold agreements. See Conkiing v. Kr-andusky, 121 ^.D.761,766 (4th Dep't, 1908) (citing Eaton v. Allegany Gas Co., 122 N.Y. 416 (1890)). They are made in the context of a highly technical industry which employs distinct terminology used by those in the business. Wiser, 803 F. Supp.2datll7. Gas drilling in New York is governed by the Environmental Conservation Law ("ECL"). The State Environmental Quality Review Act ("SEQRA") requires all state agencies, including New York's DEC, to prepare or cause to be prepared 6 It is respectfully suggested that Magistrate Judge Peeble's discussion ofoil and gas principles in Wiser, 803 F. Supp. 2d a|117 could be ofassistance to the Couft by way of backgror.urd. 22 an Environmental Impact Statement ("EIS") for "[a]ny action....which may have a significant effect on the environment." N.Y. Envtl. Conserv. Law $8-0109(2). This includes actions subject to discretionary agency decisions, such as departmental permitting of natural gas wells. See N.Y. Envtl. Conserv. Law $8- 010e(2). In circumstances where the impacts from separate actions are common and predictable, a generic EIS may be prepared to analyze the impacts of all such actions generally and cumulatively in lieu of preparing an individual EIS for each action. See N.Y. Codes, R. & Regs. tit. 6, $617.10(a). A generic EIS, however, covers only those actions which are adequately addressed within the scope of the EIS. Subsequent proposed actions which may significantly affect the environment, but which are not adequateiy addressed, require preparation of a supplemental generic EIS, or a site-specihc environmental review by the entity seeking a permit. See N.Y. Codes, R. & Regs. tit. 6, $617.10(d)(4); see also N.Y. Envtl. Conserv. Law $8-0109(2). Pursuant to this mandate, the DEC completed a generic EIS in 1992 (1992 GEIS") addressing environrnental impacts associated with conventional oil and gas exploration. See N.Y. Dep't of Envtl. Conserv., Generic Envtl. Impact Statement on Oil, Gas and Solution Mining Regulatory Program (1992), available at www.dec.ny.gov/energy/45912.htm1. As indicated by the Energy Companies' own expert, this process took twelve years to complete. (4. 651) The highest producing geologic formations in New York State have traditionally been in the Trenton Black River, Medina, Herkimer and Queenston formations. See N.Y. Dep't of Enl.tl. Conserv., New York State Oil, Gas, and Mineral Resources 2009, p.l4 (2009), available at htç://www.dec.ny.gov/pubs/36033.html (last visited December 3, 2014). When the leases in this case were executed (a11 but one prior to 2006), the Marcellus Shale was producing relatively small arnounts of gas in New York and its major development was not within the reasonable expectations of the parties. (A.1s7-163) The 1992 GEIS described conventional gas well stimulation as follows: Water-Gel Fracs Water-gel fracs are the most common stimulation technique. Twenty to eighty thousand gallons of fluid are injected into the producing formation under high pressure. Approximately 20 pounds of ge1 are added to every thousand gallons of water. The gel increases the water's viscosity allowing it to cany from 40,000 to 100,000 pounds of sand down the well. Surfactants are also used at the rate of one gallon per 1,000 gallons of water to reduce surface tension. In shallow oil wells, these stimulation operations usualiy use less than 5,000 gallons of water and only 4 - 6,000 pounds ofsand per stage.1992 GEIS at 9-26. In early 2008, gas drilling companies found that they could extract natural gas from black shale formations like the Marcellus by using a well stimulation 24 technique known as HVHF with horizontal drilling, which uses 70 to 300 times more fluid than conventional hydro-fracking. This technique produces more chemicals, more toxic waste, more truck traffic, the use of more fresh water and much larger well pads. In July 2008, recognizingtha|lhe 1992 GEIS failed to adequately consider a number of environmental impacts newly posed by FIVIIF with horizontal drilling activities in the State, the Governor directed the DEC to prepare a supplemental GEIS ('SGEIS") to study all potential new impacts from HVIIF with horizontal driliing within the Marcellus shale before issuing further permits. The \992 GEIS contained regulations goveming hydro-fracking with up to 80,000 gallons of water and therefore the 1992 GEIS was no longer adequate under SEQRA to cover FfVHF using 5 million gallons of water per well. Simply put, it would have been illegal for the DEC to issue permits for this type of stimulation technique without a full SEQRA analysis. See N.Y. Codes, R. & Regs. tit. 6, $617.10(dX4). The Energy Companies have admitted that they knew or should have known the existing New York State Regulations on oil and gas drilling when they acquired interests in these leaseholds. (4. 35-36, 128) The existing regulations in effect when these leases were signed, renewed and assigned were the 1992 GEIS. Without performing a site-specific 25 environmental review, fi'acking a well using more than 80,000 gaiions of water could not be permitted. See, N.Y. Envtl. Conserv. Law $8-0109(2). The operators asseft that they were discouraged from using HVHF within the Marcellus shale formation by State regulation. That is true. But the 1992 GEIS was an existing element in the regulatory scheme when they entered their leases. A government order predating lease execution has never been held to be a force maj eure event. Joan Teshirna, Gas and Oil Lease Force Majeure Provisions: Construction and Effect. 46 ALR 4't'976, $8tal (1986). The Energy Companies never submitted a site specihc environmental review for HVHF in the Marcellus shale, despite the fact that they had geologists, environmental engineers, and consultants at their disposal and despite the fact that the law afforded them this opportunity. The leases at issue speci$ no particular geological formation and no particular drilling method, and it certainly did not mention a specific type of stimulation technique. (A. 45-47) Therefore, the appellants could have drilled in any formation in New York using all drilling techniques approved by the 1992 GEIS. The Energy Companies declared force majeure because the State discouraged them from using a pafticular stimulation method for Marcellus shale 26 that was not adequately studied under New York Law. This was not a new or unexpected development. The Energy Companies assert that the only geological play capable of producing gas or oil is the Marcellus shale, and that HVHF is only method to be employed with any possibility of achieving any production. (Appellants' brief pp 33-34) There are no clauses in these leases which make the ability to develop deep shale formations or the use of HVHF a basis of the bargain between the parties. Nothing in the force majeure clause states that "if lessee cannot use lIVl{F" the primary term will be extended until New York State approves such a technique. The five year primary term has expired. The Energy Companies did not perform any operations on the leaseholds in the production of oil or gas. Even if relevant, Marcellus wells were permitted in New York under the 1992 GEIS during the relevant time period. It is a fact that in 2008 al,one,64,063 million cubic feet of gas were produced from fifteen veÍical Marcellus wells permitted under fhe 1992 GEIS. N.Y. Dep't of Envtl. Conserv., New York State Oil, Gas, and Mineral Resources 2008, p. 18 (2008), available at http://www.dec.ny.gov/pubs/36033.htmI (last visited Decernber 3,2014). The Energy Companies argue that conventional Marcellus drilling is not as prohtable as FfVlIF. Under the iaw, this is not relevant. Mere impracticality or unanticipated "difficulty is not enough to excuse perfonnance" under a force 27 majeure clause. Phibro Energy. Inc. v. Empresa de Polimeros de Sines Sarl ,720 F Supp. 312, 318 (S.D.N.Y., 1989). POINT II NEW YORK'S ENVIRONMENTAL LAWS AND REGULATIONS CANNOT FORM THE BASIS OF A FORCE MAJEURE EVENT IN THIS CASE The 1992 GEIS and New York's environmental laws and regulations were in place when the leases were executed. Therefore, then Gov. Paterson's directive that the 1992 GEIS be updated was absolutely foreseeable. N.Y. Codes, R. & Regs. tit. 6, $617.10(dX4) was enacted in1996. Itreads: A supplement to the final generic EIS must be prepared if the proposed action was not addressed or was not adequately addressed in the generic EIS and the subsequent action may have one or more significant adverse environmental impacts. Energy Companies caff1ot, and indeed do not claim that they were unaware of this regulation. They do not claim that they were unaware of the 1992 GEIS which contemplated the use of only 80,000 gallons of water and attendant chemicals. The Commissioner of the DEC explained the situation in his testimony at a New York State Assembly Hearing on October 15, 2008. He said: In 1992, however, the typical frac job used less than 100,000 gallons of water, and accordingly the (1992) GEIS addresses impacts associated with that level of water use.... What distinguishes the proposed Marcellus shale drilling operations is that the volume of water used for the hydro-fracking will be rnuch greater than previously undertaken in New York. Each well may be anl,where from one million to five million gallons of water, and that raises a host ofregulatory issues for us. Commissioner's Testimony at New York's Assembly Hearing on Oil and Gas Drilling October 15, 2008, http:/iu¡ww.dec.ny.eov/e (last visited December 3,2014). A government order/regulation predating the lease executions has never been held to be a force majeure event. See Alaskan Crude Corp. v. State of Alaska Dep't of Natural Res.. 261 P.3d 412,420 (Alaska, 20i1). This reasoning is in conformity with every jurisdiction in the nation which has decided the issue. See e.g. Joan Teshima, Annotation, Gas and Oil Lease Force Maj eure Provisions; Construction and Effect, 46 A.L.R. 4rh976 $2(a) (1986); Erickson v. Dart Oil & Gas Cory., 189 Mich. App. 679,688 (Mich. Ct. App., 1991). Inflection knew that the New York DEC was in the process of supplementing fhe 1992 GEIS in March of 2009. (4. 856) Inflection did not assunìe operational rights to Plaintiffs' oil and gas Leases until July 28,2010. ( . 850) Six months earlier, Inflection signed leases with the Maine Millennium 29 Group in Broome County for bonus payments, which although staggered over three years, amounted to $6,000.00 per net minerai acre with a 20o/o royalty . By assuming the Landowners' nearly expired Leases at $5 per acre and a l2o/o royalfy, and then declaring force majeure, Inflection acquired those ieaseholds for almost nothing. That, in essence, is what this case is all about. Mr. Sexton is right when he states Inflection could 'Just pay the landowners an extremely generous bonus payment of $3,000.00 per acre for an additional five year lease..." (4. 856) That is exactly what Inflection did do by its leases with the Maine Millennium Group. (4. 86s-87e) "New York Law requires courls to interpret force majeure clauses to excuse performance only for events actually named in the clause and of which the parties could not have been aware of when they entered the agreement [emphasis added]." Mitsubishi lnt'l Corp. v. Interstate Chem. Corp., 2008 WL4387392, 5, n.3 (S.D.N.Y., 2008), citing Kel Kim Corp. ggp¡4., and Macallov Corp. v. Metallurg. lnc., 284 4.D.2d.227 (lst Dep't, 2001). The Energy Companies were fully aware of New York's regulatory scheme and did not structure their lease to deal with the use of stimulation methods not covered inthe 1992 GEIS, such as FIVFIF. 30 The Appellants' assertion that it drilled in the vicinity of Landowners' land is not material to the life of these leases. (4. 851-852) No operations were performed on Landowners' lands and only that could extend the term. (4. 45) The Energy Companies' drilling activity does show however, that the drilling pçI lq was never delayed in New York. The halt of permitting for wells using FIVFIF affects only the amount of fracking fluid which can be used. The drilling which was done was valuable in its own right. It showed good plays in the Marcellus. (4. 853-854) That information could have been used to negotiate lease extensions, or even the sale from Victory and Megaenergy to Inflection. Inflection's chairman assessed that drilling conventional wells did not make sense from a "purely business perspective." (4. 855) Therefore, it stopped drilling conventional wells. This brings the case squarely within the holding of Macalloy Corc.,284 A.D. 2d af 227-28, where the court held: Plaintiff shut down its plant voluntarily due to financial considerations brought about by environmental regulations. Those are not circumstances constituting a force majeure event, and financial hardship is not grounds for avoiding performance under a contract (citations omitted). Fufthermore, Plaintiff was fully aware of the environment regulations, and the Environmental Protection Agency's intention to enforce them fully, prior to entering into the contract with Defendant. 31 Most natural gas wells are placed on farmland in Upstate New York. The 1992DEC Findings Statement for Oil and Gas GEIS (September 1,1992), Table 1, item C (SEQR Determinations) deals with gas drilling permits in agricultural districts and it has been the controlling regulation for the life of Landowners' leases. It reads, in pertinent part as follows: For most oil and gas operations in agricultural districts which utilize less than 2Yz acres the GEIS satishes SEQR. If more than 2/z acres are disturbed, this is a type 1 action under 6 NYCRR Paft 617 and an additional determination of significance is required (Emphasis added).7 The Energy Companies' use of HVHF and multi-well pad drilling would disturb three times the acreage allowed by rhe 1992 GEIS. The DEC's Executivê Summary of the revised draft of the SGEIS dated Septernber 7,2011 explains that the DEC examined HVHF operations cumently ongoing in Pennsylvania and elsewhere. It concluded that: ... [T]he average disturbance associated with a multi-well pad, access road and proporlionate infrastlucture during the drilling and fi'acturing stage is estimated at 7.4 acres... N.Y. Dep't of Envtl. Conserv., Revised Draft Supplemental Generic Envtl. Impact Staternent on Oil, Gas and Solution Mining Reguiatory Program, Chapter 5.1 7 These documents are all available at http://www.dec.ny.gov/energy/ 45912.htm1; http://www.dec.ny.gov/docs/materials minerals¡rdflfgeisseqrcon.pdf 32 (2011), available at www.dec.ny.eov/energy/75370.htm1 (last visited December 3, 20r4). The Energy Companies could never have used the 1992 GEIS to construct HVHF well pads in New York's agricultural districts without doing a site specific study. This was not a surprise to anyone. It had been the regulation in force in New York for sixteen years before July 2008. POINT III DRILLING FORNATURAL GAS AND OIL HAS NOT BEEN STOPPED IN NEW YORK, SO THERE IS NO FORCE MAJEURE EVENT From August 1, 2008 until May of 2012, 1,086 oil and gas wells were drilled in New York. (A-158) From 7984 to 2010,281,792 million cubic feet of gas were produced from New York's Marcellus (Black Shale) formation using vertical drilling and conventional (80,000 gallons of water or less) hydraulic fracturing. (A-158) From 2004 to July 2008, 22 Marcellus shale wells were drilled in New York. Of those 22 wells, 4 remain active. (A- 1 60) After July 2008, 1 1 Marcellus wells were drilled; of these 11 wells, 3 remain active. (A-i60) In 2008, 429 permits for gas wells were granted and 270 wells were completed. N.Y. Dep't of Enltl. Conserv., New York State Oil, Gas and Mineral Resources 2008 p. 4 (2008) available at http://www.dec.ny.gov/pubs/36033.htmi (last visited December 3,2014). In 2008, 50,320 billion cubic feet of gas wete produced in New York. Id. There were 15 Marcellus producing wells in New York in 2008. Id. at 5. ln 2009,, 246 gas drilling permits were issued and 134 wells were completed. Ln2009,44.85 billion cubic feet of gas was produced. The market value of all oil and gas produced in New York in 2009 was $206 million. N.Y. Dep't of Envtl. Conserw., New York State Oil, Gas and Mineral Resources 2009, p. 4 (2009) available at http://www.dec.ny.gov/pubs/36033.html (last visited December 3, 2014). In 2009, there were 16 Marcellus wells producing in New Yolk, all vertical weils. Id. at 5 In 2010, 152 gas drilling permits were granted and 720 wells were completed. N.Y. Dep't of Envtl. Conserv. , New York State Oil, Gas and Mineral Resources 2010, p. 4.t,' (2010) available at htç://www.dec.ny.gov/pubs136033.html (last visited December 3,2014). Infhat 8 A 10 yea. oil and gas summary of drilling activity in New York is available on the DEC websile. n Oil drilling and production stayed active during these years and since the leases at issue allow for oil production, the Court can review those figures at the above sources if it \ /ishes. The NYS DEC searchable database, which rnay be found at www.dec.ny.sory'cfmx/extapps/'GêsQj.ll ; The Oil, Gas and Mineral Resources Annual Gas Oil/ and the Empire State Oil and Gas lnformation System at www.esoitis.nvsm.nysed. eov/esogis/index.cfm, repofis individual gas well- data. 34 year, the total oil and gas market value was $196 mi1lion. Id. There were 15 verlical Marcellus wells producing in 2072 and their combined gas production for the year was 34.1 million cubic feet of gas. Total gas production in 2012 was 35.94 billion cubic feet. Id. at 5. On May 17,2012 Carrizo Marcellus, LLC applied for a vertical well permit targeting the Marcellus Shale. The location was the Town of Owego, Tioga County. This is the immediate area of the leaseholds in question. On August 9, 2012 the permit was granted. On October 20,2012 the well was completed to a depth of 4,745 feet. The fact is that a verlical well permit for the Marcellus in this part of Tioga County was obtained. Well information is available at http://esogis.nysm.nysed.gov/esogis/well.cfm?api:3 I 107265020000 (last visited December 3,2014). "Drilling" has not been delayed or interrupted by New York State. Only the issuance of pemits contemplating the use of lfVFIF, which raises new, potentially signihcant adverse impacts not studied in the DEC's 1992 Generic Environmental Impact Statement has been affected. The Revised Draft, SGEIS, September 7, 201I (available af www.dec.ny.gov/energy/75370.htm1), Executive Surnmary, the DEC explains exactly why the 1992 GEIS was not adequate to deal with FWIIF: 35 High-volume hydraulic fracturing is distinct from other types of wells completion that have been allowed in the State under 1992 GEIS and Department permits due to the much larger volumes of water and additives used to conduct hydraulic fracturing operations. The use ofhigh- volume hydraulic fracturing with horizontal well driliing technology provides for a number of wells to be drilled fron a single well pad (multi-pad wells). Although horizontal driiling results in fewer well pads than traditional vertical well drilling, the pads are larger and the industrial activity taking place on the pads is more intense. Also, hydraulic fracturing requires chemical additives, some of which may pose hazards when highly concentrated. The extra water associated with such drilling may also result in significant adverse impacts relating to water supplies, wastewater treaûnent and disposal and truck trafhc. Horizontal wells also generate greater volumes of drilling waste (cuttings). The industry projections of the level of drilling, as reflected in the intense development activity in neighboring Pennsylvania, has raised additional concelns relating to community character and socioeconomics. 201 1 Draft SGEIS, Executive Summary, pp. 1 - 2. As the Second Circuit noted, the 1992 GEIS described "water - gel fracs" as the most common "stimulation technique" then employed to force gas from the shale formation. More recently, however, the techniques available for extracting gas have undergone a dramatic transformation as high volume hydraulic fi'acturing, combined with horizontal drilling, has become feasible. HVHF involves the injection of more than a million gallons of water, sand and chemicals at high pressure down and across into horizontally drilled weils as far as 10,000 feet below 36 the surface. The pressurized mixture causes rock layer to crack and the gas to flow into the well. (4. 16-17) In reality, the Energy Companies can drill vertically and then horizontally. They could also stimulate the weli using up to 80,000 gallons of water. They don't want to do that. They want to use millions of gallons of water (as opposed to 80,000 or less) to stimulate wells, which is not permitted under the 1992 GEIS. The only thing that has been delayed in New York is the issuance of permits contemplating the use of HVHF. "Drilling", as evidenced by the number of wells permitted and drilled since 2008 has not been delayed. Thus, there is no force majeure event under the lease. POINT IV FORCE MAJEURE CANNOT BE USED TO GIVE THE ENERGY COMPANIES GREATER RIGHTS UNDER THE LEASE Under New York law, the doctline of force majeure can be used to avoid damages for breach of conttact, but it cannot be used to give one pafty greater rights than it had under a contract. The District Court observed the "the primary purpose of a force majeure clause is to relieve a pafty from its contractual duties 37 when its performance has been prevented by a force beyond its control or when the purpose of the contract has been frustrated." (4,. 992) An examination of the pupose of a force majeure clause is exactly the analysis which is required under New York law. In United Equities Co., supra., the Court held that a force majeure clause "(s)houid be interpreted consistently with its function as a force majeure clause. The purpose of a force majeure clause is to limit damages in a case where the reasonable expectations of the parties and the performance of the contract have been fiustrated by circumstances beyond the control of the parties." United Equities, 52 A.D.2d af 157. In United Equities, the court ruled that the "plaintitï seeks to use the force majeure clause not to limit damages but to give it a greater proht than it bargained for." Id. The Energy Companies seek to do that here. They presented Landowners with a lease that "shall remain in force for a primary term of 5 years from the date hereof and as long thereafter as said land is operated by Lessee in the production of oil and gas". (4. 45) They operated none ofthe leaseholds in the production of oil or gas and the leases expired. They do not face damages or seek to avoid them, because they never had an obligation to drill under the leases. (4. 46, clause 10) What the Energy Companies seek is to hold the Landowners to these $2 and $5peryearleaseswaybeyondtheprirnaryterm. By doing so, they will gain a 38 substantial commercial advantage if and when New York's SGEIS is approved. That economic advantage is precisely the reason this case is before the Cour1. The Leases at issue contain the following clauses: " 10. Lessee may, at any time during the terrn hereof, cancel and surender this lease, and be relieved of any and all obligations, payments and liabiiities thereafter to accrue as to the ieased premises, by the mailing of a notice of such surrender, and a check covering all rentals, if any, due up to the date of such cancellation or surrender. I 1 . It is agreed that the said Lessee may drill or not drill on lands pooled or unitized with the leased premises as it may elect, and the consideration and rentals paid and to be paid hereturder constitute adequate compensation for such privilege." (4. 46) Thus, the Energy Companies' only contractual duties under this lease (covenants) are to make delay rental payments during the primary term and to pay royalties in theeventthattheydrillandproducegasoroil. (A.45,clause2(a)(b)and3) Delay rentals and royalties are not at issue in this case, so there were no contractual duties which could be relieved of by the force majeure clause. The Energy Companies are attempting to use the clause to obtain a lease term longer than what they bargained for contrary to the holding of United Equillsl. Circuit Judge Richard A. Posner, citing New York Law, observed that [m]erely reciting "force majeure" in a contract, or including in the contract a standard boilerplate, catch-all force majeure provision, invokes a body of common 1aw 39 doctrine interpreting the tenn that is largely indistinguishable from the doctrine of impossibility (or impracticability). Commonwealth Edison Co.,731 F. Supp. at 856, supra, citing Kel Kim Corp., supra. Therefore the sense and purpose of this clause must be examined exactly as the District Court did below. This is especially true because the Landowners were presented with a boilerplate lease, in sma1l type, covering a subject rarely dealt with in New York. New York Law provides that "force majeure clauses are to be interpreted in accord with their function, which is to relieve a party frorn liability when the parlies' expectations are fiustrated due to an event that is an extreme and unforeseeable occurrence that was beyond that party's control and without its fault or negligence." Team Mkts. USA Corp. v. Power Pact, LLC., 41 A.D. 3d939,942 (4th Dep't, 2007), cifins. Williston on Contracts , 577:31 [4'h Ed]); See, also, In re Cablevision Consumer Litig., 864 F. Supp. 2d 258,264 (E.D.N.Y., 2012). "The habendum clause dictates the duration of the Lease." Wiser, 803 F. Supp. 2d atl27. Where the language in the habendum clause clearly makes that provision subject to other terms in the agreement, the life of the lease may be subject to modification. Id. In this case, the habendum clause states that "[i]t is agreed that this lease shall remain in force for a primary term of five years fi'om the 40 date hereof and as long thereafter as the said land is operated by the lessee in the production of oil or gas." (4. 45) The duration of the lease is not subject to modification by the force majeure clause. Therefore the passage offive years without operations in the production of gas causes the leases to automatically expire. The tenn "as long thereafter as" is a special limitation on the interest of the Energy Companies in Landowners' property. See Eaton v. Allegany Gas Co., 122 N.Y. 416,423 (1890). We suggest that under fundamental principles of oil and gas law the force majeure clause cannot effect the prirnary term of the lease. $çq Point VI, infra. But at the very least, there is ambiguity created by these two competing clauses. Therefore an examination of the basic purpose of a force majeure clause is essential. The Energy Cornpanies say that this Court may not do this; that this Court must hnd the meaning of the force majeure clause within the four corners of the lease. In interpreting oil and gas leases, New York holds that... "[t]he work which is to be done is ordinarily experimental and specuiative. If oil is not found, no estate vests in the lessee." Conkling v. Krandusky , 127 A.D. 761,766 (4th Dep't, 1908). The operators' use of the force majeure clause here is an attempt to create a vested estate until they can use the technology they want to use. 4t The District Courl found that the 2008 State directive was foreseeable. (4. 994) If the Energy Cornpanies are allowed to extend their leases due to foreseeable events, unreasonable and untoward consequences could foliow. Energy Companies in this industry are known for trading and selling leases once they have acquired them. I0 To hold a lease merely because a pre-existing regulatory framework does not allow maximum profitability opens the door to land speculation by Energy Companies at the expense of the Landowners. If a SGEIS is adopted, and Energy Companies still hold the leases, they will be in the position to assign these leases at even greater profit for themselves. Landowners will receive none of this benefit. POINT V ENERGY COMPANIES' CLAIM THAT HVHF IS THE ONLY "COMMERCIALLY VIABLE'' METHOD TO PRODUCE GAS IS NOTRELEVANT ln 1917, this Coul afhrmed a Judgment against a natural gas driller who clairned that he did not have to comply with his contractual duty because he drilled and found gas, but not in sufficient quantity for commercial purposes. Howard v. l0 One need only look at the trading activity in Wiser, 803 F. Supp. 2d 109 or in this case to see that phenomenon. A sample of Oil & Gas cases nationwide conhrrns this tlading behavior. See also, Enviroeas Inc. v. Consol. Gas SuÞÞly Corp., 98 A.D. 2d 119 (4thDep't, 1983); Aukema v. Chesapeake AÞ_palaqhiaLLC, 904 F.Snpp. 2d 199 (\I.D.N.Y.,2012). 42 Hoffeld, 221 N.Y. 546 (1917). This Court required the lessee to fulfill its obligations under the lease notwithstanding the lessee's argument that it could not find gas in paying quantities. Commercial viability was not relevant. The result should be no different here. In its simplest terms, the Energy Companies' argument is that (1) New York has halted the issuance of pennits seeking to stirnulate wells using HVHF, and. (2) this makes it impossible from them to drill "commercially viable" (read: profitable) wells on the affected properties, so (3) there is a force majeure event until New York begins issuance of cerlain permits for HVI{F - if at all. They misuse the principles of "reasonably prudent operator" and "duty to act in good faith" in suppoft of their position. As explained below, whether HVI{F is the only commercially viable method to produce gas is irrelevant to the force majeure analysis in this case. First, the lease says nothing about whether the lack of "commercial viability" will constitute a force rnajeure event. "Cornmercial viability" is not mentioned. No provision states that if the Energy Companies encounter something that makes their efforts not commercially viable, the prirnary term of the lease will continue on and on for a payment of$2 or $5 per acre.rr 1l A1l ofthe Lessors in this case refused such rentals after the leases expired. 43 The Landowners granted to the operators "exclusive access to their land for the purpose of dri11ing, producing, and otherwise operating for oil and gas and their constituents, including the right to conduct geophysical, seismic and exploratory tests. . . .." (A-45) This right was granted for five years and so long thereafter as the land was operated in the production of oil and gas. (A-45) They were not guaranteed access to commercially viable formations. They were not granted the right to operate in a rnanner inconsistent with New York Law. They were not granted the right to hold the land until they made a profit. They were granted legal access for five years and that is all. New York law holds that "[o]rdinarily, only if the force majeure clause specifically includes the event that actually prevents a party's performance will that paúy be excused." Kel Kim Corp. 70 N.Y.2d at 902-03. The Energy Cornpanies do not seek to be excused. They want their leases extended. Fufther, the event that actually prevented the Energy Companies' activities was not a delay in drilling. Drilling in New York has not been halted. See, Point III, supra. The preventing force, in the Energy Companies' eyes, is their inability to operate using HVI{F. That particular stimulation method is not mentioned in the force majeure clause or anywhere else in the lease. Under Kel Kim. New York's leading authority on the subject, force majeure provides a narrow defense and mandates that general words in those clauses are not 44 to be given an expansive reading. The lease at issue places no limitation on the definition of the term "drilling" so that the Energy Companies' are allowed to driil in any of New York's nineteen geological formations. In this case it would be patently unfair to allow the Energy Companies to unilaterally rewrite the terms of the Lease to mandate their ability to obtain a permit to use HVHF as a material condition. Such a condition is clearly not there, but a provision recognizing that the Lease is subject to New York's laws is. The Energy Companies are experienced in the energy industry and they drafted the leases. Yet, they did not include their ability to obtain a permit to use HVHF a material term in the lease. Landowners have done everything required ofthem under the Lease. They granted to the Energy Companies the exclusive right to drill, produce, operale, conduct geophysical, seismic and other exploratory tests, lay pipelines, roads, power lines etc., for five continuous years. (4. 45, granting clause). In other words, they granted to Energy Companies the quiet enjoyment of the parcels for frve years. They did not guarantee that the Energy Companies would hnd oil or gas, much less gas in paying quantities. They granted the Appellants the opportunity to explore. The Lease does not insure that the Energy Companies will f,rnd comrnercially viable quantities of oil or gas. Impodantly, the prirnary term of a Lease and its certainty are the basis of the bargain for the Landowners. To destroy that cefiainty, as being requested by the 45 Appellants, is to destroy the basis of the bargain and to do damage to real property titles everywhere in the State. The president of Victory Energy Corporation, Lynn A. Doverspike, stated in his affidavit that: ...when Victory enters into an oil and gas lease with a Landowner, we do so with the full intention that we will develop the Leasehold targeting the most productive formation. W'e also do so with the expectation and full intent to use the best technology that is available to extract natural gas from the target formation and to allow for technological advances during the term of the Lease. Doverspike Aff. (4. 862) This being the case, all Victory had to do was to inserl a provision in the Lease covering the emergence of new, but unpermitted technological developments, and pay the Lessor an adequate bonus for whatever lease extension is required. They did not do this. The Appellate Division obserwed in Kel Kim that: ...[T]here is no indication whatsoever in the record that Kei Kim was unable, or even attempted, to secure the necessary insurance had the premises been utilized for a commercial purpose other than that of a rolier skating rink. In addition, since the lease places no limitation on plaintifls use of the demised premises, it would be patently unfair to allow it to unilaterally rewrite the terms of the lease so as to limit use of the premises to a roller rink. In short, even assuming that the condition of the liability insurance market was as plaintiffs represent, that did not prohibit them from using the building to conduÒt other businesses thereon for which the requisite insurance 46 could have been secured; the decision not to do so was one they elected to make. Kei Kim Corp. v. Central Markets Inc.,131 A.D.zd947,949 (3rd Dep't. 1987), aff d 70 N.Y. 2d 900 (1987). If the tenant in Kel Kim had complained vehemently that operating the vacant supermarket for anything other than a roller rink would not be "commercially viable", would the result in the case be any different? The answer is absolutely not. If the proof was that the premises could not be prohtable for any other use such as a dollar store, a supermarket, a health club, would the result be any different? Again, the answer is no. The landlord gave Kel Kim quiet enjoyment of the building. It was not the landlord's obligation to insure that its tenant could operate profitably. By analogy, let us suppose that the lessee rented a 600 acre fann for five years and for so long thereafter as a porlion of the crops were delivered to the lessor in paying quantities. Let's assume further that the lessee planted corn and beans during the first five years, but that these crops failed or had no rnarket value. During the five year term a bill was pending, but not yet passed in the State Legislature, which would allow the cultivation of medical marijuana. At the end of five years, having been paid no crops as rent, the lessor seeks to evict the lessee. The lessee refuses to leave the premises clairning that he wishes to grow medical marijuana because it is the only "commercially viable" crop, but has been 47 prevented from doing so because of the legislature's delay in passing such legislation. I{aving impiiedly contracted to farm in a legal mannet, the lessee has no right to extend the five year term and squat on the land as a holdover until the legislature makes a final decision on the growing of medicinal marijuana. The Energy Companies knew that they had to obtain permits from the DEC no matter what type of well they contemplated. They should not be allowed to pass all the regulatory risks on to the Landowners who knew nothing of such matters. When a Lessee enters into a lease for the purpose of engaging in a business which requires a license, his duty is not discharged if the license is denied. See, Raner v. Goldberg. 244 N.Y. 438,441-442 (1927). From a factual perspective, the closest case to this one we have found is Perlman v. Pioneer Ltd. P'ship_, 918 F. 2d 1244 (5th Cir., 1990). Periman was a gas drilling case where the Operator anticipated using his patented "Perlman Process" to produce coal seam gas which involved the injection of large amounts of water during the drilling process (the fracturing phase). ld. at 1246. The Court noted that "[s]ignificantly in this case, Perlman's obligation was not limited to use ofhis patented process." Id. at 1249. Perlman had agreed to operate for oil and gas on acreage in Montana and Wyoming. In return, he agreed to pay $137,676.00 in rent and to spend $1,500,000.00 in exploring the acreage. The "specifically bargained for force 48 majeure clause excused the Lessee if compliance was.....hindered by. . ...inability to obtain govemmental permits or approvals necessary or convenient to Lessor's operations...." Id. af 1248. Perlman used his patented process and produced only large volumes of water. Vy'yoming officials called a meeting and required Perlman to conduct hydrology studies at costs estimated to be from $50,000.00 to $200,000.00 per we11. Perlman unilaterally declared force majeure arguing that Wyoming's actions hindered him by their refusal to commit to permitting a gas well using Perlman's process once he completed the studies, and because the regulatory process itself might have prevented his meeting the six month drilling deadline. ld. at 1247. In Perlman, the Lessee attempted to use the force majeure clause to shield hirnself from damages, not to gain an increased lease term. The Fifth Circuit found no force majeure because Perlman did not begin the permitting process and because he did not use an alternative method of drilling for coal seam gas which would not produce as much water and not be subj ect to such strict regulation. Id. at 1249. The Court deemed it material that Perlman's obligation was not limited to use of his patented process and that he failed to try to perform using the methods that do not yield so much water. 49 We note that the 5th Circuit applied Texas interpretation of force rnajeure apparently because the "Lease (was) unarnbiguous and its terms were specifically bargained for by both parties." Perltnan, 918 F.2d al. 1248. The Court found a "dearth of Wyoming case law" on force majeure and decided to apply Texas law. Id. Texas applied the four comers rule to deliberately bargained for contract tenns. With all due respect to the 5th Circuit, it may have not found the case of 'Wheatland Inigation Dist. v. McGuire,537 P.2d 1128 (Wyo. 1975), where the Court stated: We cited with approval... the following proposition: The "act of God" which excludes the operation of the Rr;Je (þlsnd!___y,-!L9!9þ9L) in question means any extraordinaty occurrence or act which could not reasornbly be anticipated or prevented by reasonable care, and it may be one which it is either physically or practically impossible to guard against. (Emphasis in original). Id. at I138-39. In this case the force majeure clause is unclear, ambiguous and buried in srnall print. The Landowners certainly did not specifically bargain for it. It is doubtful that they knew a) that is was there and b) that they knew what it was. Therefore, the clause should be interpreted in the light of reason and the long tradition of common law. Otherwise in situations like these, it will become a weapon for energy companies to use any time they wish to extend their leases due to environmental regulations that they prefer did not exist. 50 In Rohm & Hass Co. v. Crampton Con:. 2002 WL 1023435,6 (Phila. Ct. Com. Pleas, 2002') the Coutt surveyed Pennsylvania Law and observed that the Commonwealth Couft in Martin v. Penn. Dep't of Envtl. Res., 120 Pa. Commw. 269 (1988) engaged in the most extensive di discussion to date by any Pennsylvania appellate Court. The Martin Court held that, In order to use a force maj eure clause as an excuse for non-performance, the event alleged as an excuse must have been beyond the party's control and not due to any fault or negligence by the non-performing palty. Furthermore, the non-performing party has the burden of proof as well as a duty to show what action was taken to perform the contract, regardless of the occurrence of the excuse. Gulf Oil CorÞ. v. Federal Enerey Regulatory Commission, 706 F. 2d 444 (3d Cir. 1983), cerl. denied, 464 U.S. 1038, 104 S. Ct.698, 79L.8d.2d164 (1984). Martin, l20Pa. Commw. af 2J3. While acknowiedging Texas' four comers rule, the Court in Rohm & Hass observed that: In any event, most definitions ascribed to the term "force majeure" echo both the language used in the Force Majeure Provision and the description provided in Martin by focusing on the party's control. See, e.g., Phillips Puerlo Rico Core Inc. v. Tradax Petroleum, 782 F. 2d 314, 319 (2d Cir. 1985) ("The basic purpose of force majeure clauses....is in general to relieve a party from its contractual duties when its performance has been prevented by a force beyond its control or when the purpose of the contract has been frustrated."); Goldstein v. Lindner, 254 Wis. 2d 673,648 N.V/.2d 892,2002 WI App 122, 2002 WL 523786 ('Wis. Ct. App. 2002) ("Force 51 majeure clauses extend leases only when the non- performance is 'caused by circumstances beyond the reasonable control of the lessee or by an event which is unforeseeable at the time the parties entered in the contract."). Rohm & Hass, supra at 9-10. Since we have found no New York case dealing with force rnajeure in the particular context ofa boilerplate oil and gas lease, we respectfully suggest that the approach used by Rohm & Hass has much to recommend. Please see Madeirense Do Brasil S/A v. Stulman - Ernrick Lumber Co.,147 F.2d399,403 (2d Cir., 1945) which holds that an event which was a foreseeable risk which a paúy willingly took upon itself cannot constitute the defense of force rnajeure. The Energy Companies cite the case of Allegiance Hillview. L.P. v. Range Texas Prod.. LLC.,347 S.W.3d 855 (Tex.4pp.2011) for the proposition that courts have considered prudent effective developrnent in evaluating whether a force majeure event occurred. (Appellants' brief, at 42-43) However, this case actually suppofts Landowners' position. In Allegiance, the parties executed an amended surface use agreement (.'SUA") which specifically provided that the deadline to drill could be extended if lessee was prevented fi'om drilling by an event of force majeure. Id. at 858. Further, the SUA expanded the force majeure provision to include the City's failure to issue a pennit provided the permit application was "timely and 52 thoroughly submitted". Id. at 859. In determining whether the permit was timely and thorough, the court adopted the District Court's finding that Range timely filed its permit applications. Id. at872. However, what is instructive about the Alleeiance case is that the SUA specifically provided that the drilling deadline could be extended by a force rnaj eure event, and the SUA defined a force majeure event to include delays in issuance of a permit by the City. Furthermore, it was the City's notification emor which led to the delay. Id. at 868. In the instant case, we have neither. The Lease does not provide for an extension of the habendum clause and the force majeure clause does not provide for an event when a specific drilling method is not approved by the Department of Environmental Conservation. A significant force majeure case was decided in Trinidad Petroleum Corr¡. v. Pioneer Natural Gas Co.,416 So.2d 290 (La. Ct. App. 1982). In that case, the lessee, Trinidad argued that after it invoked its force rnajeure clause, it had no obligation, to inter alia, drill on unproven pofiions of a leasehold under the standard of the reasonably prudent operator. Here, the Energy Cornpanies have argued that the Marcellus Shale with FIVFIF is the only "viable" play and that it need not operate in other formations to hold their leases under the habendum cl,ause. ld. at297. The Trinidad Court disagreed with this argument in holding that: 53 Certainly, the lessee should not be permitted to contend that since he is urging force majeure he does not have to corlmence drilling or re-working operations, except on known producing areas of the lease. Ic!- at 300. In so holding, the Trinidad Court stated further, "the prudent-operator standard is not the proper explanation because it is inapplicable to operations necessary to keep a lease alive under a special limitation or condition. !d- at 298 (citing 5 Williams and Meyers, Oil and Gas Law, Section 808, 56-57). The "reasonably prudent operator" is a standard of care in testing the performance of implied covenants by lessee. It cannot be used to avoid the special limitations under the habendum clause. This is fatal to Appellants' argument. The special limitation under the instant lease is that the term be for hve years and as long thereafter as the said land is operated by lessee in the production of oil or gas. The five years have passed and no operations are being conducted. The special limitation has been breached and no argument that other plays are not viable can prevail to keep these leases in effect. Moreover, the term "Operations" is not limited to drilling. The Energy Companies have had ten years to engage in the following: "...seismic exploration, geological studies, padicipation in other prospects and attempts to procure others to drill marginally attractive prospects through farmout and subleases are all things that prudent Energy Companies do to discover potentially productive reservoirs under lands, and things that the Courts have recognized as 54 being comprehended within the obligation to investigate the mineral potential of the property." Thomas A Harrell, A Mineral Lessee's Obligation to Explore Unproduced Portions of the Leases Premises in Louisiana,52La. L. Rev. 387,403 (1991). The Energy Companies have not engaged in any such operations or they would have claimed that the secondary term of the habendum clause is invoked. To paraphrase the Trinidad Court, although the Energy Companies did not have the obligation to reiease any portion of the leased acreage, they were required to make the choice of either releasing the areas they thought to be non-productive or ailowing those areas to remain subject to the obligation to perform operations in the production of gas after the expiration of the primary term. An oii & gas operator cannot be permitted to sit on leases indefinitely under the guise of the prudent driller standard. They must either operate for production or surrender the leaseholds. If the Energy Companies had wanted to preserue a specific drilling method and stilnulation technique, regardless of the legality or illegality, such language had to be in the force majeure clause under the doctrine of Kel Kim. It was not. The Energy Companies' force majeure defense fails. 55 POINT VI THE FORCE MAJEURE CLAUSE DOES NOT ALTER THE SPECIAL LIMITATION OF THE HABENDUM CLAUSE The Appellants claim that the force majeure clause (assuming there is a force majeure event in New York) provides for an extension of the habendum clause. This is not true. "The general rule is that absent contrary language, the habendum clause of an oil and gas lease is indivisible."r2 PEC Minerals LP, v. Chevron U.S.A., Inc., 439 Fed. Appx. 413, 416 (5th Cir.,2011). "[T]he fixed term dominates the period for which a lease shall run, and if any other clause is not in harmony with the tenn clause, and it does not purpoú in words to modify the tenn clause, then the term clause must prevail." Citizens B)'-Products Coal Co. v. Arlhalon)', 170 Ind. App. 1, 4 (lnd. Ct App., 1976.) (citine Vaushn v. Heaffell 347 S.W.2d 5a2 (Ky.,1961). As the highest courl in Michigan obserued a long time ago: By the great weight of authority, the tenn clause, which is the habendum clause, dominates the period for which the lease shall run, so that, unless it is properly modified 12 It has been observed that "New York presents essentially a blank slate as to all significant oil and gas lease issues." 4 Tex. J. Oil & Cas & Encrgy 155. 192" A Primel on oil and sas Law in Marcellus Shale States (2009). There are no cases in New York which address the interrelationship between the two clauses. Therefore, we respectfully refer the Court to settled case law in other oil and gas jurisdictions. 56 by other provisions, all rights of the lessee cease at the expiration of the hxed time stated in the term clause, except in the one contingency that at the expiration of such time the lessee is actually producing oil and gas on the premises. A late start or miscalculation of difficulties or time does not excuse failure to produce. J. J. Fasan & Co. v. Burns , 247 Mich. 67 4 (Mtch., 1929) In a factually analogous case, San Mateo Communit]¡ Colleee Dist. v. Half Moon Bay Ltd. P'ship, 65 Cal. App. 4th 401 (Ct. of Appeals of Cal., lst App. Dist., Div. 3, 1998), the Landowners filed a quiet title action to deciare an oil and gas lease tenninated. The operator claimed that its force majeure provision extended the term of the lease. The habendum clause read, in pertinent part, as follows: The lease term is hve years commencing on July 21 , 1982 and ending July 21 , 1987 ... except that lessee may continue its operation past the termination date as to each well producing or being drilled at the time and in respect to which lessee is not in default. Lessee's right to continued operation as to said wells shall continue so iong as such wells shall produce oil in paying quantities. ld. 405-406. The force majeure provision said in perlinent paft: The obligations of Lessee hereunder shall be suspended while Lessee is prevented from complying therewith, in whole or in part, by... laws, rules and regulations of any government officer or agent purpoÍing to act under authority... or other matters or conditions beyond the control of the Lessee... It is expressly understood... that all of Lessee's operations under the lease... shall be conducted in accordance with applicable law. . .." 57 Id. at 406-407. The operator claimed, inter alia, that air quality regulations prohibited the venting of gas from its well, and that oil could not be produced without venting gas, and that oil could therefore not be produced without violating the law. Id. at 415. The Califomia Court dismissed this claiin on factual grounds, but more importantly, it ruled that the force majeure clause did not have any effect on the special limitations of the habendum clause. The Courl observed that an oil and gas lease is both a conveyance and a contract. The conveyancing elen.rents are the granting and habendum clauses. The contractual elements include the provisions that pertain to the Lessee's obligations with respect to exploring, drilling and producing operations. Id. The Court observed fhaf "...if. is a long established rule of law that any language in a deed, subsequent to the granting and habendum clauses, may not modifl', cut down or control those clauses unless such clauses (granting and habendum) incorporate the additional language by express reference." San Mateo, 65 Cal. Ãpp. 4th at 412 (citing Kirker v. Shell Oil Co. , 104 Cal App. 2d. 497, 503 (Cal. Ct App., 2d App. Dist., Div. 1, 1951)). In this case, the Energy Companies assert a broad proposition that the force majeure clauses can extend the term of the habendum clauses. (Appellant's brief, pp. 26) What the Energy Companies' did not mention is that the habendum 58 clauses in those other cases specihcally stated that they were "subject to" other provisions in the lease. See gg Wiser, 803 F. Supp. 2d at 119-120; Sun Operating, 984 S.V/. 2d a1286. This is not true in the instant case and that makes all the difference. In stark contrast, the habendum clause in the instant case is not subj ect to any other provisions of the lease. The habendum clause simply reads "It is agreed that this lease shall remain in force for a prirnary term of FIVE (5) years from the date hereof and as long thereafter as the said iand is operated by Lessee in the production of oil or gas." (4. 45, Clause 1). The tenn "as long thereafter as" is a special limitation on the interest of the Energy Companies in Landowners' propefty. See Eaton v. Alleghany Gas Co., 122 N.Y. 416,423 (1890). The drafters of this lease - the operators - knew how to provide for modification of the habendum clause because they attempted to do so in Clause 9 (A. 52)13, which states: If the Lessee shall begin operations for the commencement of a well during the term of this Lease or any extension thereof, the lessee shall have the right to complete drilling of such wells, and if oil or gas or either of thern be found in paying quantities, the Lease shall continue and be in force and with like effect as if such well had been completed within the term first herein mentioned (emphasis supplied). 13 This contract provisions is designated as Clause 7 in some ofthe leases. See, for example, the Beardslee lease at page 46 in the Appendix. 59 The Energy Companies also knew how to be precise with regard to time. In clause 3 (4. 51), they wrote "In the event of completion of a commercially unproductive well on the premises the Lessee shall be under no obligation to make delay rental payments for a period of one year following the completion of such well. At the expiration of this rental free period, Lessee may continue to hold this lease for such further term as it may desire not to exceed the primar)r term thereof, upon the payment of the rentals above mentioned." (emphasis added). The force majeure clause at issue says nothing about the tetm clause or the habendum clause. However, the Energy Companies insist that the language of force majeure clause has the effect of extending the Lease by providing that 'the time of the delay or interruption shall not be counted against the lessee - anything in the Lease to the contrary notwithstanding'. However, that language excuses the Lessee only during the secondary term where operations in the production of gas were necessary. The Texas Couft of Appeals ruled in 1973 that language which is identical to the language in the instant lease cannot extend the term set forth in the habendunr clause because the habendum clause did not specifically say it was subject to any other provision. The Court noted "counting time against Lessee and counting time on the duration of the term of the lease are two different matters." Gulf Oil Corp. v. Southland Royalry Co.., 496 S.W. 2d 547,552 (Tex. 1973). 60 Counting time against the Lessee deals with Lessee's compliance with the performance required of it by the Lease. Id. Here the Energy Companies had no requirement to perform at all. A Federal Court in Texas has stated that the "Supreme Court of Texas has reaffirmed the principle that in construing oil and gas leases the habendum clause tr'aditionally controls unless properly modified by other provisions, and the fixed term therein stated is not to be extended by words found elsewhere in the Lease not certainly directed to modification of the habendum clause. Natural Gas Pipeline Co. of America v. Zimmer. et al , 447 F . Supp. 66, 70 0{.D. Tex., 1977), af? d. 576 F2ð,106 (5th Cir., 1978). The Energy Cornpanies knew or should have known that the force majeure clause of this lease contains words "not certainly directed to modification of the habendum clause." Despite this, they used the same confusing words that had failed to pass muster back in 1973. Although Texas Law is by no means binding on this Coutl, Texas did deal with this specific Lease provision in Gulf Oil case 40 years ago. So, if the Energy Companies intended to have the force majeure clause modify the habendum clause in these leases, it makes no sense that they chose language which was found by the highest coufi in Texas not to modiÍ! the habendum clause. Stated differently, why would the Energy Cornpanies not use language sirnilar to that which is found in 61, clause 9 which specifically mentions that the term of the habendum clause shall be extended? The answer is that the Enetgy Companies never intended for this force majeure clause to apply during the primary term of the lease. Instead, it applies during the secondary term when the Lessee has the obligation to operate in the production of oil or gas, or the lease terminates. For example, it could come into effect if a producing well was temporarily shut down by a governtnental order beyond the control of the Operator. At that point the clause could function to prevent the loss of the Operator's investment of millions of dollars spent in drilling a producing well on the leasehold. The District Court below noted, and we agree, that the entire clause is subject to a variety of interpretations. (4. 964) It is weil settled that oil & gas leases shall be construed against the lessee and in favor of the lessor. Summers, The Law of Oil and Gas, Third Ed., $16.2, (2006). The lease was not terminated by any law or regulation, it was tenninated by the express habendum clause in the lease - to wit, the passage of time. The second sentence in the force majeure clause, which deals exciusively with govermnental regulations, pertains only to the Energy Companies' express or implied covenants, a term normally used to refer to the lessee's obligations. Since the Energy Companies made no express or implied covenants applicable to the 62 primary terrnla, the clause must relate to continuous operations after oil or gas has been produced. The second parl of the force majeure clause which deals particularly with govemmental regulations has not been referred to once by the Energy Companies. That section reads: A1l 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 parl, nor Lessee held liable in damages for failure to comply therewith, if compliance is prevented by, or if such failure is the resuit of any such law, order, rule or regulation. (A-46, Clause 6) In construing a deed, controlling force is to be given to "parlicular" over "generai" description regardless of which appears first in the documents. See Rome v. Vescie, 58 A.D.2d 990,991 (4th Dep't, 1977),rev'd on other grounds, 45 N.Y.2d 980 (1978). Therefore it is this part of clause 6, if any, which would apply. The iaw in other jurisdictions which holds that the fixed term in an oil & gas lease dominates the period for which a lease shall run, and does not allow a vague clause to extend an express prirnary term of the Lease is in accord with New York public policy. This oil and gas lease gives the Energy Companies the exclusive right to explore and operate for the production of oil or gas. During that time, the 14 other than to pay delay rentals, 63 landowner's title is clouded and he or she cannot lease to another who might produce oil or gas and hence pay royalties. As this Court held in Vy'itter v. Taggaft, 78 N.Y.2d 234,238 (1991): "The law has long favored the free and unencumbered use of real properly, and covenants restricting use are strictly construed against those seeking to enforce them." Insofar as we krow, none of the Leases at issue were ever recorded. Instead, a Memorandum of Lease was recorded. See, for example, Memorandum of Lease found at pages 43-44 in the Appendix. Section 291-c of the Real Property Law requires these Memoranda to state "the tenn of the Lease with the date of commencement and the date of temination of such term and if there is a right of extension or renewed; the maximum period for which or date to which the Lease may be extended..." The purpose of this law is certainly, so that others may determine when the lease begins and ends. Consistent with that purpose, it has long been New York Law that the purpose of a habendum clause is to defrne precisely the extent of the interest granted. Mott v. Richtm)¡er, 57 N.Y. 49, 63 (t874). Under the Appellants' contention, the force majeure clause will extend the primary term of the lease if anything whatsoever beyond the control of the Lessee 64 delays operations. However, nothing is mentioned about the force majeure clause extending the term in the Memoranda recorded by the Energy Cornpanies. In essence, the Appellants demand specihc performance of these Leases. New York has long held that a covenant for a lease which is indefinite as to the length of the term and the rental to be paid cannot be enforced specifically. Baurman v. Biwzen, 16 N.Y.S. 342 (S.Ct. N.Y. Co., 1891); Buckmaster v. Thompson, 36 N.Y. 558 (1867). Genesee Conseruation Foundation v. Oatka Fish & Garne Club,63 A.D.2d 1115 (41h Dep't, 1978). New York has always held, for example, where the granting clause in a deed conveyed a fee-simple title and the habendum clause conveyed a life estate, the habendurn clause is void. Bannin v. Peck, 266 A.D. 209, 212 ( l't Dep't, 1 943). 'We have rules like these to prevent duplicitous behavior. We have these rules to prevent one pafiy from giving with one hand and taking away with the other. Five year means hve years - not five years unless we misread New York's regulations in which event the Lease goes on until the regulations are changed. The landowners in an oil and gas situation are primarily concemed with the tenn ofthe Lease and the rentais or royalties to be paid. Often, those provisions are all they know. 65 Here, a layperson could know that the prirnary term was five years and for so long as the land was operated in the production of oil or gas. Nothing alerted them that the term clause was subject to any other provision in this 21 clause Lease. The tenn clause stood alone, subject to nothing else. The construction urged by the Energy Companies, which would extend the term clause by a clause six paragraphs away which does not mention the tenn clause, promotes the opporlunity for deception. These Leases were not hammered out by two powerful law firms dickering over evely line and comma. They were drawn by and for the Energy Companies alone with little or no expectation that they would be negotiated at all. The Second Circuit certihed the issue ofwhether, under the language ofthis Lease, the force majeure clause can extend the habendum clauses. It noted that no New York case addresses the relationship between a habendum clause and a force majeure clause in an oil and gas lease. (4.29) That being the case, one must ask how in the world unsophisticated, unrepresented landowners were supposed to know how Clause 6 related to Clause I in a Lease with print so small that a magnifuing glass is needed to read it. We respectfully suggest that this Courl decide the issue by demanding clarity and good faith disclosure in oil and gas leases used in New York, Please see 'Witter, supra at 240; which holds that: "It goes almost without repeating that 66 definiteness, cerlainty, alienability and unencumbered use of property are highly desirable objectives of properly law." Under New York Law, "[o]il [and gas] leases or contracts stand on an entirely different basis from any other leasehold agreements." Conkling. suplA., at 766. We respectively suggest that New York should insist that theses Leases must be clear in their terms and readable in their fotmats. If the primary term can be extended by a force majeure clause found later, the force maj eure clause and the habendum clause should make that clear. This Lease did not do that. The force majeure clause shouid not be permitted to extend the primary term of the leases indefinitely. CONCLUSION For the reasons stated above, we respectfully subrnit that there is no force majeure event in New York, and the habendum clause of this lease cannot be modified by the force majeure clause. ,/ Dated: December 2014 Jones, Esq Peter Bouman, Esq. Coughlin & Gerharl, L.L.P. Attomeys fot Plainti ffs-Respondents 99 Corporate Drive P.O. Box 2039 Binghamton, New York 13902 67