Walter R. Beardslee,, et al., Respondents,v.Inflection Energy, LLC, et al., Appellants.BriefN.Y.August 26, 2014To be Argued by: THOMAS S. WEST, ESQ. (Time Requested: 30 Minutes) Court of Appeals of the State of New York WALTER R. BEARDSLEE, Individually and as Co-Trustee of the Drusilla W. Beardslee Family Trust, ANDREA R. MENZIES, as Co-Trustee of the Drusilla W. Beardslee Family Trust, JOHN A. BEARDSLEE, as Co-Trustee of the Drusilla W. Beardslee Family Trust, PHYLLIS L. BENSON, ELIZABETH A. BEARDSLEE, LYNDA B. COCCIA, NATHAN J. DONNELLY, CAROLYN B. DONNELLY, KEVIN P. DONNELLY, ROSE ANN DONNELLY, MARIE S. DONNELLY, WILLIAM J. HANER, JOSEPH HANER, JAMES HANER, MARGARET LAWTON, GLEN MARTIN, LYNN M. MARTIN, JOSEPH E. MCTAMNEY, B. LOUISE MCTAMNEY, BONNIE D. MEAD, R. DEWEY MEAD, WAYNE R. MIDDENDORF, CYNTHIA L. MIDDENDORF, FLOYD E. MOSHER, JR., LESA D. MOSHER, AKA Lesa Huntington, (For Continuation of Caption See Inside Cover) ON APPEAL FROM THE QUESTION CERTIFIED BY THE UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT IN DOCKET NO. CTQ-2014-00006 BRIEF FOR DEFENDANTS-APPELLANTS THOMAS S. WEST CINDY MONACO THE WEST FIRM, PLLC Attorneys for Defendants-Appellants 677 Broadway, 8th Floor Albany, New York 12207 Tel.: (518) 641-0500 Fax: (518) 615-1500 October 28, 2014 MOUNTAIN 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 ENERGY, LLC, VICTORY ENERGY CORPORATION, MEGAENERGY, INC., Defendants-Appellants. i CORPORATE DISCLOSURE STATEMENT Defendants-Appellants, Inflection Energy, LLC, Victory Energy Corporation and MegaEnergy, Inc., (collectively, the “Inflection Lessees”) by and through their undersigned counsel, file this Corporate Disclosure Statement and state that: Inflection Energy, LLC is a limited liability company organized under the laws of the State of Delaware. It does not have a parent corporation. One publicly held corporation owns more than 10% of Inflection Energy LLC’s voting interests. That corporation is Noble Americas Gas & Power Corp., which is a wholly-owned subsidiary of Noble Group Ltd., a publicly-traded limited liability company. Victory Energy Corporation is a corporation organized under the laws of the State of Pennsylvania. It does not have a parent corporation, and no publicly held corporation owns more than 10% of its stock. MegaEnergy, Inc. is a corporation organized under the laws of the State of Colorado. It does not have a parent corporation, and no publicly held corporation owns more than 10% of its stock. ii TABLE OF CONTENTS CORPORATE DISCLOSURE STATEMENT ..................................................... i TABLE OF CONTENTS ....................................................................................... ii TABLE OF AUTHORITIES ................................................................................. iv CERTIFIED QUESTIONS PRESENTED ............................................................ 9 JURISDICTIONAL STATEMENT ..................................................................... 10 STATEMENT OF THE CASE ............................................................................. 10 Nature of the Case ............................................................................................. 10 The Course of Proceedings and Disposition Below .......................................... 14 STATEMENT OF BACKGROUND FACTS ..................................................... 18 The Oil and Gas Leases ..................................................................................... 18 The Moratorium on Shale Development ........................................................... 20 APPLICABLE LEGAL FRAMEWORK: FORCE MAJEURE, CONTRACT CONSTRUCTION AND RELEVANT OIL AND GAS LAW PRINCIPLES ............................................................................................... 23 A. Force Majeure ............................................................................................. 23 B. Contract Construction ................................................................................. 27 C. The Nature of Oil and Gas Leases; Oil and Gas Law Precepts .................. 28 ARGUMENT .......................................................................................................... 31 POINT I: THE MORATORIUM IS A “FORCE MAJEURE” EVENT: ................................................................................ 31 iii A. The Record Establishes That Conventional Drilling In The Vicinity Of The Leaseholds Yielded No Production And Deep Shales Are The Only Formations Capable of Production ................................................................................. 33 B. Utilizing Conventional Drilling Methods On The Leaseholds Would Not Have Yielded Paying Production And Would Have Violated Lessees’ Implied Covenants ......... 40 C. The Record Establishes That Site-Specific Review Could Not Have Resulted In An HVHF Permit .................................. 45 POINT II: THE O&G LEASES ARE EXTENDED DUE TO THE MORATORIUM ........................................................ 47 CONCLUSION ....................................................................................................... 52 iv TABLE OF AUTHORITIES CASES Allegiance Hillview, L.P. v. Range Texas Prod., LLC, 347 S.W.3d 855 (Tex. Ct. App. 2011) ............................................... 30, 42, 43 Babcock & Wilcox Co. v. Allied-General Nuclear Servs., 161 A.D.2d 350 (1st Dep’t 1990) ............................................................ 43, 44 Bank of N.Y. v. First Millennium, Inc., 607 F.3d 905 (2d Cir. 2010) .................................................................... 47, 50 Beal Sav. Bank v. Sommer, 8 N.Y.3d 318 (2007) ................................................................................ 27, 28 Burnside 711, LLC v. Nassau Reg’l Off-Track Betting Corp., 67 A.D.3d 718 (2d Dep’t 2009) ..................................................................... 25 Cifarelli v. Village of Babylon, 93 F.3d 47 (2d Cir. 1996) ........................................................................... 37, 38 City of New York v. Long Island Airports Limousine Serv. Corp., 96 A.D.2d 998 (3d Dep’t 1983), aff’d, 62 N.Y.2d 846 (1984) ..................... 29 Crown IT Servs., Inc. v. Koval-Olsen, 782 N.Y.S.2d 708 (1st Dep’t 2004) ............................................................... 24 Croxton Collaborative Architects, PC v. T-C 475 Fifth Ave., LLC, 113 A.D.3d 479 (1st Dep’t 2014) .................................................................. 51 Dolman v. U.S. Trust Co. of N.Y., 2 N.Y.2d 110 (1956) ...................................................................................... 51 Empire Props. Corp. v. Mfrs. Trust Co., 288 N.Y. 242 (1942) ...................................................................................... 27 Envirogas, Inc. v. Consol. Gas Supply Corp., 98 A.D.2d 119 (4th Dep’t 1983).............................................................. 31, 41 v Farrell Lines v. City of New York, 30 N.Y.2d 76 (1972) ...................................................................................... 27 Frey v. Amoco Prod. Co., 603 So. 2d 166 (La. 1992) ............................................................................. 29 H. Fox & Co. v. Blumenfeld, 24 A.D.3d 722 (2d Dep’t 2005) ..................................................................... 51 Harrison Svenska, AB v. Harris Corp., 3 F.3d 576 (2d Cir.1993) ............................................................................... 32 Hunter Co. v. Vaughn, 46 So. 2d 735 (La. 1950) ................................................................... 32, 48, 49 JFK Holding Co. v. City of New York, 21 N.Y.3d 722 (2013) .................................................................................... 50 Kass v. Kass, 91 N.Y.2d 554 (1998) .................................................................................... 27 Kel Kim Corp. v. Cent. Mkts., Inc., 70 N.Y.2d 900 (1987) .................................................................. 25, 28, 51, 52 LaBarte v. Seneca Res. Corp., 285 A.D.2d 974 (4th Dep’t 2001)............................................................ 31, 41 Levin v. Maw Oil & Gas, LLC, 234 P.3d 805 (Kan. 2010) ........................................................................ 48, 49 Metro. Life Ins. Co. v. RJR Nabisco Inc., 906 F.2d 884 (2d Cir. 1990) .......................................................................... 27 Morlee Sales Corp. v. Mfrs. Trust Co., 9 N.Y.2d 16 (1961) ........................................................................................ 27 Millette v. Phillips Petroleum Co., 48 So. 2d 344 (Miss. 1950) ...................................................................... 29, 41 vi Nickerson v. Te Winkle, 161 A.D.2d 1123 (4th Dep’t 1990) ......................................................... 31, 41 Pack v. Santa Fe Minerals, 869 P.2d 323 (Okla. 1994) ....................................................................... 48, 49 Perlman v. Pioneer Ltd. P’ship, 918 F.2d 1244 (5th Cir. 1990) ....................................................................... 25 Phillips Puerto Rico Core, Inc. v. Tradax Petroleum Ltd., 782 F.2d 314 (2d Cir.1985) ........................................................................... 28 PPG Indus., Inc. v. Shell Oil Co., 919 F.2d 17 (5th Cir. 1990) ........................................................................... 26 Pray v. Premier Petroleum Inc., 662 P.2d 255 (Kan. 1983) ............................................................ 30, 41, 48, 49 Ronnen v. Ajax Elec. Motor Corp., 88 N.Y.2d 582 (1996) .................................................................................... 27 San Mateo Cmty. Coll. Dist. v. Half Moon Bay Ltd. P’ship, 65 Cal. App. 4th 401 (Cal. Ct. App. 1998) ........................................ 23, 49, 50 Starke v. United Parcel Serv., Inc., 513 F. App’x 87 (2d Cir. 2013) ..................................................................... 17 Sun Operating Ltd. P’ship v. Holt, 984 S.W.2d 277 (Tex. Ct. App. 1998) ......................................... 23, 24, 25, 26 Tejas Power Corp. v. Amerada Hess Corp., No. 14-98-00346-CV, 1999 WL 605550 (Tex. Ct. App. Aug. 12, 1999) .......................................................................25, 26, 36, 37, 44 Vt. Teddy Bear Co. v. 538 Madison Realty Co., 1 N.Y.3d 470 (2004) ...................................................................................... 27 Wallach v. Town of Dryden, 23 N.Y.3d 728 (2014) .................................................................................... 32 vii Westmoreland Coal Co. v. Entech, Inc., 100 N.Y.2d 352 (2003) .................................................................................. 29 Williams Press v. State, 37 N.Y.2d 434 (1975) .................................................................................... 28 Wiser v. Enervest Operating, LLC, 803 F. Supp. 2d 109 (N.D.N.Y. 2011) .................................................... 48, 49 STATUTES New York Environmental Conservation Law § 8-0109(8) ............................... 38, 39 REGULATIONS 6 NYCRR § 617.3(a) ............................................................................................... 39 OTHER AUTHORITIES 3 Patrick H. Martin & Bruce M. Kramer, Williams & Meyers, Oil and Gas Law§ 604.5 (2013) ..................................................................... 28, 29, 41 4 Patrick H. Martin & Bruce M. Kramer, Williams & Meyers, Oil and Gas Law§ 683 (2013) .................................................................................... 48 5 Patrick H. Martin & Bruce M. Kramer, Williams & Meyers, Oil and Gas Law§ 802 (2013) .............................................................................. 30, 41 5 Patrick H. Martin & Bruce M. Kramer, Williams & Meyers, Oil and Gas Law§ 802.1 (2013) ........................................................................... 30, 41 6A Arthur Linton Corbin, Corbin on Contracts § 1324 (1962) .............................. 23 22A N.Y. Jur. 2d Contracts § 393 (2014) ............................................................... 24 22A N.Y. Jur. 2d Contracts § 375 (2014) ............................................................... 24 viii 30 Williston on Contracts § 77:31 (4th ed. 2013) ............................................. 26, 27 Jessica S. Hoppe & William S. Wright, Force Majeure Clauses in Leases, Probate & Property 9 (Mar./Apr. 2007) ............................... 23, 24, 26 Sample Force Majeure Clauses, PPPIRC, http://ppp.worldbank.org/public- private-partnership/ppp-overview/practical-tools/checklists-and-risk- matrices/force-majeure-checklist/sample-clauses (last visited October 24, 2014) ........................................................................................................ 25 9 CERTIFIED QUESTIONS PRESENTED 1. Under New York law, and in the context of an oil and gas lease, whether the State’s now more than six-year-long moratorium on high-volume hydraulic fracturing (“HVHF”) combined with horizontal drilling (the “Moratorium”) amounts to a so-called “force majeure” event under a lease provision directing that “[i]f and when drilling . . . [is] delayed . . . as a result of some order, rule, regulation . . . or necessity of the government [“Governmental Order”], or as a result of any other cause whatsoever beyond the control of Lessee, the time of such delay . . . shall not be counted against Lessee, anything in this lease to the contrary notwithstanding.” 2. If the Moratorium qualifies as a so-called “force majeure” event (i.e., a drilling delay, resulting from Governmental Order, beyond Lessee’s control), whether this provision modifies the habendum clause of the lease and, thereby, extends the primary terms of the lease affording the Lessee additional time to exercise its drilling rights? 10 JURISDICTIONAL STATEMENT This Court has jurisdiction to hear and decide these issues under section 500.27 of this Court’s Rules of Practice, pursuant to which, by decision and order dated August 28, 2014 (Appendix [“A.”] 4, as corrected), this Court accepted the certification of questions referred to it by the United States Court of Appeals for the Second Circuit in the Second Circuit decision and order dated July 31, 2014. See A. 8-32. STATEMENT OF THE CASE Nature of the Case This case presents a straightforward issue of contract interpretation: namely, where a provision in a contract (here, an oil and gas lease) identifies an event, the occurrence of which extends the Lessee’s time to exercise its rights “anything in [the] lease to the contrary notwithstanding,” does the occurrence of that event extend the contract? This case arises in the context of oil and gas leases (the “O&G Leases”) between the Plaintiffs-Appellees (the “Beardslee Lessors”) and the Inflection Lessees which reached the end of their initially-specified primary terms during an unprecedented Moratorium. The Moratorium, which is now more than six years long, imposes a statewide ban on HVHF pending completion of the Supplemental Generic Environmental Impact Statement (“SGEIS”) ordered by then-Governor 11 Paterson in July, 2008 (the “2008 Directive”). The Moratorium effectively brought natural gas development in New York to a screeching halt, leaving hundreds of millions of dollars already invested by operators hanging in the balance. The question here is whether, during this ban on drilling by utilizing HVHF, the O&G Leases were extended under express lease language that contemplates an extension of the lease where drilling is delayed through no fault of the Lessee. Per the questions certified to this Court by the United States Court of Appeals for the Second Circuit (the “Second Circuit”), resolving this issue involves a two-fold inquiry. The first issue is whether the Moratorium’s now more than six-year-long ban on HVHF is a so-called “force majeure” event – i.e., a “drilling . . . delay[ ] . . . as a result of some order, rule, regulation or . . . necessity of the government, . . . beyond the control of Lessee.”1 1 As observed by the Second Circuit, and as is explained further throughout, the term “force majeure” is used herein for ease of reference and “should not be understood as an affirmation of the characterization’s substance” relative to the historical underpinnings of the common law force majeure doctrine. See A.14 (Second Circuit Decision and Order, at 7 n.10). This provision is an express term of the O&G Leases, and, thus, the contours of the events that qualify as so-called “force majeure” and the legal effect of the occurrence of such events are governed by the plain language of the O&G Leases, informed by the O&G Leases’ purpose. See Sun Operating Ltd. P’ship v. Holt, 984 S.W.2d 277, 282-83 (Tex. Ct. App. 1998); see also Kel Kim Corp. v. Cent. Mkts., Inc., 70 N.Y.2d 900, 902 (1987). The second inquiry is a purely legal question: i.e., whether by virtue of lease language that, where there is such a delay, “the time of such delay . . . shall not be counted against Lessee, anything in [the] lease to the contrary notwithstanding,” the primary terms of the O&G Leases are extended, allowing additional time for the Inflection Lessees to 12 exercise their drilling rights. As a matter of law, both questions must be answered in the affirmative. On the first issue, as a matter of law, the Moratorium qualifies as a drilling delay resulting from a Governmental Order beyond Lessees’ control. The Moratorium resulted from Governmental Orders, starting with the 2008 Directive that ordered the SGEIS. Subsequent Executive Orders and pronouncements from the Department of Environmental Conservation (the “Department”) have extended the Moratorium and consistently reaffirmed that no permits for HVHF will be granted until issuance of the SGEIS, the completion of which is nowhere in sight. The Moratorium has delayed drilling, as it has imposed a long-term ban on the only drilling and completion technology that can develop any of the geologic formations underlying the Beardslee Lessors’ properties (the “Leaseholds”) so as to bring about production. Finally, the delay in drilling is beyond the Inflection Lessees’ control. The Moratorium stands in an unprecedented class by itself, having shut down operators’ ability to develop deep shale formations by banning HVHF pending completion of the SGEIS. This extraordinary situation has precluded the Inflection Lessees from developing the Leaseholds in good faith to achieve production during the O&G Leases’ primary terms. The record evidence stands unrebutted that (1) no other formations are capable of production in the vicinity of the Leaseholds; (2) no 13 technology other than HVHF with horizontal drilling can develop any formations underlying the Leaseholds so as to obtain any production, let alone production in paying quantities (which is the fundamental purpose of the O&G Leases), and (3) site-specific environmental review could not have overcome the delay and resulted in issuance of an HVHF permit prior to completion of the SGEIS. Thus, the Moratorium qualifies as a drilling delay event beyond Lessees’ control under the O&G Leases. The legal effect of this is that the Inflection Lessees’ time to exercise rights under the O&G Leases is extended. The operative contract language is unambiguous: “[i]f . . . drilling or other operations [ ] are delayed . . . as a result of some order, rule, regulation, requisition or necessity of the government . . . beyond the control of Lessee, the time of such delay . . . shall not be counted against Lessee, anything in [the] lease to the contrary notwithstanding.” A. 46, ¶ 6 (emphasis added). Under settled contract construction principles in New York, the “anything in [the] lease to the contrary notwithstanding” language trumps all other contract provisions, including the habendum clause. Since the time for the delay shall not be counted against Lessee, the O&G Leases are extended during the delay, meaning that the primary terms of the O&G Leases are extended, affording the Inflection Lessees this additional time to exercise their right to drill. 14 Accordingly, the O&G Leases have been extended, and both certified questions must be answered in the affirmative. The Course of Proceedings and Disposition Below This action arose in the context of the O&G Leases nearing the end of their primary terms, with the Inflection Lessees having been precluded for years from drilling using HVHF, which is the only effective method for developing the only potentially productive formations underlying the Leaseholds. Thus, the Inflection Lessees invoked their contractual “force majeure” rights and notified the Beardslee Lessors that the O&G Leases were extended and remained in effect pursuant to the following lease language: If and when drilling . . . [is] delayed or interrupted . . . as a result of some order, rule, regulation . . . or necessity of the government, or as the result of any other cause whatsoever beyond the control of Lessee, the time of such delay or interruption shall not be counted against Lessee, anything in this lease to the contrary notwithstanding. All express or implied covenants of this lease shall be subject to all Federal and State laws, Executive Orders, Rules or Regulations, and this lease shall not be terminated, in whole or in part, or Lessee held liable in damages for failure to comply therewith, if compliance is prevented by, or if such failure is the result of any such Law, Order, Rule or Regulation. A. 46, ¶ 6. On February 8, 2012, the Beardslee Lessors commenced this declaratory judgment action, asserting that the O&G Leases had expired by their own terms and were not extended by “force majeure.” A. 33-38. The Inflection Lessees 15 answered and counterclaimed that the O&G Leases were extended by the aforementioned express contract extension – “force majeure” – language. A. 125- 38. The Beardslee Lessors moved for summary judgment declaring that no “force majeure” event had occurred. A. 146-84. The Inflection Lessees opposed the Beardslee Lessors’ motion and cross-moved for summary judgment declaring that the O&G Leases were extended. A. 185-863. The Beardslee Lessors opposed the Inflection Lessees’ motion. Reply papers and Sur-Reply papers were submitted by the parties. A. 908-27 (Inflection Lessees’ Reply); A. 928-33 (Beardslee Lessors’ Sur-Reply). Oral argument was heard on August 30, 2012. A. 934-80. On November 15, 2012, the District Court (Hurd, J.) rendered its Decision in favor of the Beardslee Lessors, (1) granting their motion for summary judgment, (2) declaring that the O&G Leases expired by their own terms, (3) denying the Inflection Lessees’ cross-motion for summary judgment to declare the O&G Leases extended, and (4) dismissing the Inflection Lessees’ counterclaims. A. 982–98. On the same day, the District Court also entered Judgment in the Beardslee Lessors’ favor. A. 999. In its decision, the District Court did not resolve the question of whether the Moratorium qualified as a “force majeure” event under the operative contract language. Rather, the District Court held that “[e]ven if the [Moratorium] constituted a force majeure event in that it was an ‘order, rule, [or] regulation . . . 16 of the government . . . beyond the control of Lessee,’” “[t]he force majeure clause here [did] not extend the leases.” A. 992. In its analysis, the District Court misguidedly relied on common law notions of force majeure, frustration of purpose and impossibility. Relative to force majeure, the District Court stated that “[t]he primary purpose of a force majeure clause is to ‘relieve a party from its contractual duties [obligations] when its performance has been prevented by a force beyond its control or when the purpose of the contract has been frustrated.’” Id. The District Court reasoned that because “[d]efendants were leased the right to drill . . . but . . . did not have an obligation to drill, the invocation of a force majeure clause to relieve them from their contractual duties [was] unnecessary.” A. 992-93. The District Court so found, notwithstanding that the “force majeure” contract language addresses not only obligations (i.e., covenants), but also Lessees’ right to drill and expressly provides that delays in the ability to exercise that right, if due to Governmental Order beyond Lessees’ control, shall not be counted against Lessees. In effect, the District Court ignored this express extension of rights language when it found that the “force majeure” clause would not extend the O&G Leases even if the Moratorium qualified as a “force majeure” event. See A. 992. The District Court also addressed the issue of unforeseeability, even though the contract extension language of the O&G Leases does not contain an unforeseeability requirement and unforeseeability is not required under New York 17 law. A. 991, 994; see also Starke v. United Parcel Serv., Inc., 513 F. App’x 87, 88-89 (2d Cir. 2013). On the facts, the District Court never addressed the relevant event, i.e., whether the Moratorium’s long-term ban on HVHF was foreseeable. A. 991-94. Instead, the District Court found the 2008 Directive (which ordered the SGEIS) foreseeable, allegedly because “[t]he 1992 GEIS [was] clear that drilling utilizing more than 80,000 gallons of liquid would not be permitted without conducting an SGEIS or performing a site-specific EIS.” A. 994-95. On this basis, the District Court concluded that neither “‘impossibility’ nor ‘frustration of purpose’ serve[d] to extend the leases.” A. 994. The District Court so found despite the fact that the Inflection Lessees did not assert these doctrines as bases for lease extension, as they are irrelevant to the contractual “force majeure” analysis. See id. & n.10 The Inflection Lessees timely appealed to the Second Circuit on December 7, 2012. A. 999. Oral argument was heard on August 22, 2013. On July 31, 2014, the Second Circuit issued its Decision and Order (the “Decision”) certifying two questions to this Court: (1) under New York law, and in the context of an oil and gas lease, whether the Moratorium amounts to a “force majeure” event under the operative lease language; and (2) if so, whether the “force majeure” clause modifies the habendum clause (i.e., applies to delays in drilling that occur in the 18 primary term) and extends the primary terms of the leases. A. 8-32. This Court accepted both certified questions. A. 4. STATEMENT OF BAKGROUND FACTS The Oil and Gas Leases Between 2001 and 2006, Victory entered into or extended the O&G Leases with the Beardslee Lessors. A. 10; A. 130, ¶ 2; A. 149-51 ¶¶ 5-21; A. 181. MegaEnergy shares an interest in these Leaseholds under agreements with Victory. See A. 189, ¶ 8. With one exception, Inflection assumed operational rights and obligations under these Leases by virtue of agreements with MegaEnergy. See id., ¶ 10. The O&G Leases cover separate parcels owned by the Beardslee Lessors, all of which are located in close proximity to each other in the Towns of Owego, Tioga, and Nichols in Tioga County, New York. See A. 41-118, Complaint, Exh. 2. Under the O&G Leases, the Beardslee Lessors leased to Victory the exclusive right to explore, develop, and produce oil and gas from their respective Leaseholds. See A. 45 (First WITNESSETH paragraph). Each O&G Lease contains the so-called “force majeure” clause stating, among other things, that drilling delays resulting from Governmental Orders beyond Lessee’s control, “shall not be counted against Lessee, anything in [the] lease to the contrary notwithstanding.” A. 46, ¶ 6. 19 The Leaseholds are potentially viable only for development of deep shale formations, such as Marcellus Shale. This is demonstrated by, among other things, the Inflection Lessees’ multiple unsuccessful attempts to achieve any production at all from other geologic formations in Tioga County in the vicinity of the Leaseholds using conventional drilling techniques that do not depend upon HVHF. See A. 189- 92, Inflection Lessees’ Statement of Material Facts (“Inflection Statement”), ¶¶ 14- 30; A. 851-854, Affidavit of Mark S. Sexton (“Sexton Aff.”), ¶¶ 11-26; A. 824-25, Affidavit of Dan A. Billman (“Billman Aff.”), ¶¶ 18-21. It is undisputed that none of these attempts resulted in any production of oil or gas, meaning they were dry holes. See A. 851-54, Sexton Aff., ¶¶ 11-23. All of these dry holes came at great expense to the Inflection Lessees, costing in excess of $7,000,000. A. 854, Sexton Aff., ¶ 24. Further, the attempted development of other formations utilizing conventional methods demonstrated that the only formations with any potential for production were the deep shales. A. 852-54, Sexton Aff., ¶¶ 19-24 (noting positive Marcellus shows of natural gas in the Berry 1, Eaton 1A, Eaton 2, and Strong 1 wells). The development of deep shales, however, requires the use of HVHF combined with horizontal drilling and is, therefore, precluded by the Moratorium. A 825-27, Billman Aff., ¶¶ 22-26; A. 839-40, Billman Aff., Exhibit A (Billman Expert Report) at pp. 8-9. 20 The Moratorium on Shale Development Beginning in late 2005, natural gas operators saw the potential to develop Marcellus Shale and other deep shale formations in New York State, including in Tioga County. The O&G Leases encompass properties included in the area of potential shale development. A. 839, Billman Aff., Exh. A at p. 8. Deep shale is developed using HVHF and horizontal wells to maximize recovery of natural gas. See A. 825-27, Billman Aff., ¶¶ 22-26. Hydraulic fracturing and horizontal wells have long been used in New York, and both were reviewed by the Department in the generic environmental impact statement reviewing potential environmental impacts resulting from oil and gas operations that was prepared in 1992 (“1992 GEIS”). A. 651, Affidavit of Gregory H. Sovas (“Sovas Aff.”), ¶¶ 14, 15; A. 653-54, Sovas Aff., ¶¶ 21-23. Indeed, prior to the Moratorium, the Department issued a number of shale well permits utilizing HVHF. A. 195, Inflection Statement, ¶ 50; A. 826, Billman Aff., ¶ 25. That notwithstanding, on July 23, 2008, then-Governor Paterson issued the 2008 Directive, mandating formal public environmental review to update the 1992 GEIS to address HVHF and horizontal drilling in shale formations. A. 133, ¶ 20. Thereafter, the Department reported that it would not process any permit applications to drill in shale formations using HVHF absent completion of the 21 SGEIS process or preparation of a site-specific environmental impact statement (“EIS”). Id; see also A. 647-648, Sovas Aff., ¶¶ 2-4; A. 658-59, Sovas Aff., ¶ 40. Soon it became apparent that site-specific review was not a viable option to obtain an HVHF permit. Like the SGEIS process, a site-specific EIS would require a full evaluation of all potential environmental impacts associated with HVHF and horizontal drilling, as well as public participation in the review process. A. 648, 664-69, Sovas Aff., ¶¶ 5, 63-81; see generally A. 204-21, Declaration of Yvonne E. Hennessey (“Hennessey Dec.”), ¶¶ 24-85. A site-specific EIS would also require public scoping and public comment periods, would trigger lengthy adjudicatory hearings, and would require the Department to render findings addressing virtually the same issues being addressed through the ever-evolving SGEIS process. A. 204-21, Hennessey Dec., ¶¶ 24-85. Thus, site-specific review could not overcome the ban on HVHF pending completion of the SGEIS process. See A. 221, Hennessey Dec., ¶ 85. Accordingly, the Moratorium resulted in an unprecedented halt on the issuance of any HVHF permits. A. 657, Sovas Aff., ¶ 34. Indeed, multiple pronouncements by the Executive Branch and Department have confirmed that until the SGEIS is finalized and the Department has rendered its findings pursuant to the New York State Environmental Quality Review Act (“SEQRA”), the submission of shale well permit applications, with or without a site-specific EIS, is 22 futile. See generally A. 657-59, Sovas Aff., ¶¶ 37-40; A. 683, Sovas Aff., Exh. C (Veto Message stating “[n]o permits for unconventional high-volume, horizontal fracking can be issued prior to July 1, 2011 at the earliest, if at all”); A. 685, Sovas Aff., Exh. D (Executive Order No. 41 stating “no permits may be issued prior to the completion of a final SGEIS”); A. 686, Sovas Aff., Exh. E (Executive Order No. 2, continuing Executive Order No. 41); A. 691, Sovas Aff., Exh. F (Department press release, dated September 7, 2011, stating “[n]o permits for high- volume hydraulic fracturing will be issued until the SGEIS is finalized and DEC issues the required Findings Statement”). To date, now more than six years after issuance of the first Directive in 2008, the SGEIS remains in limbo and the ban on HVHF continues in New York. Thus, through no fault of the Inflection Lessees, these events have resulted in a long-term ban on the development of deep shale wells in New York. As a result, the Inflection Lessees have been prevented from drilling in good faith on the Leaseholds, as they are precluded from (1) targeting the only geologic formations capable of producing oil or gas; and (2) utilizing the necessary technology to do so. A. 823-27, Billman Aff., ¶¶ 13-26; A. 833, 835-40, Billman Aff., Exh. A, at pp. 2, 4-9. When it became evident that there were no potentially productive geologic formations other than deep shales (development of which requires HVHF and 23 horizontal drilling that are precluded by the Moratorium), the Inflection Lessees notified the Beardslee Lessors that, due to the governmental ban, the O&G Leases had been extended under the “force majeure” clause. A. 120-21; A. 193, Inflection Statement ¶ 36; A. 858, Sexton Aff., ¶ 40. The Inflection Lessees did so even though their preference was to develop the Leaseholds in good faith by drilling wells that would produce in paying quantities, resulting in royalties to the Beardslee Lessors, in accord with the fundamental purpose of the O&G Leases. See A. 851, Sexton Aff., ¶ 41. APPLICABLE LEGAL FRAMEWORK: FORCE MAJEURE, CONTRACT CONSTRUCTION AND RELEVANT OIL AND GAS LAW PRINCIPLES A. Force Majeure Force Majeure is French for “greater force.” Historically, the notion of “force majeure” was linked to the doctrine of impossibility of performance and arose as an equitable common law concept to relieve a party of its contractual obligations upon the occurrence of uncontrollable events such as acts of god. Sun Operating Ltd. P’ship, 984 S.W.2d at 282-83 (citing 6A Arthur Linton Corbin, Corbin on Contracts § 1324 [1962]); see also Jessica S. Hoppe & William S. Wright, Force Majeure Clauses in Leases, Probate & Property 9 (Mar./Apr. 2007), available at http://www.americanbar.org/content/dam/aba/publishing/probate_prop 24 erty_magazine/rppt_publications_magazine_2007_ma_Hoppe_Wright.authcheckd am.pdf (“Force Majeure Clauses in Leases”). Historically, under the common law, the party claiming force majeure was required to use prudence, diligence and care in anticipating and avoiding the event and, once the event occurred, in trying to overcome it.2 The historical underpinnings and common law principles pertaining to force majeure, however, have effectively fallen by the wayside, with contracting parties defining both the events that constitute “force majeure” and the legal effect of those events. Sun Operating Ltd. P’ship, 984 S.W.2d at 282-83. In modern jurisprudence, the general term “force majeure” is a phrase coined primarily for the convenience of contracting parties wishing to describe such circumstances. Id. at 283 (stating that “force majeure, is now little more than a descriptive phrase without much inherent substance”). Where the contracting parties have themselves defined the contours of force majeure in their agreement, that contract language dictates the scope, application, and effect of force majeure; and this means that generalized common law notions cannot constrict the scope of the force majeure See Force Majeure Clauses in Leases, supra, at 9. 2 Force majeure is distinguishable from the doctrines of impossibility of performance and frustration of purpose. Impossibility is an equitable principle that excuses performance because of unanticipated circumstances that are absolutely not possible to overcome and could not have been guarded against in the contract, and that render performance objectively impossible. 22A N.Y. Jur. 2d Contracts § 393 (2014). The doctrine of frustration excuses performance because of something not reasonably foreseeable or controllable, yielding such extreme and substantial hardship or unreasonable expense or difficulty that the principle purpose and fundamental basis for forming the contract are frustrated. See, e.g., Crown IT Servs., Inc. v. Koval-Olsen, 782 N.Y.S.2d 708, 711 (1st Dep’t 2004); 22A N.Y. Jur. 2d Contracts § 375 (2014). 25 language adopted by the parties. See id.; Kel Kim Corp., 70 N.Y.2d at 902; Perlman v. Pioneer Ltd. P’ship, 918 F.2d 1244, 1248 & n.5 (5th Cir. 1990). In other words, courts “are not at liberty to rewrite the contract or interpret it in a manner which the parties never intended.” Sun Operating Ltd. P’ship, 984 S.W.2d at 283; see also Tejas Power Corp. v. Amerada Hess Corp., No. 14-98-00346-CV, 1999 WL 605550 at *3 (Tex. Ct. App. Aug. 12, 1999) (stating that the scope and application of force majeure clause is governed by the terms of the contract, not common law theory, and the court will not rewrite the contract or interpret it in a manner that the parties never intended). So-called “force majeure” clauses come in all sizes, shapes and colors. Some are framed only in terms of the parties’ contractual obligations. See, e.g., Sample Force Majeure Clauses, PPPIRC, http://ppp.worldbank.org/public-private- partnership/ppp-overview/practical-tools/checklists-and-risk-matrices/force-majeure- checklist/sample-clauses (last visited October 24, 2014). Others, like the “force majeure” clause in the O&G Leases, expressly address not only contractual obligations (covenants), but also the ability to exercise rights under the contract. See Burnside 711, LLC v. Nassau Reg’l Off-Track Betting Corp., 67 A.D.3d 718, 719 (2d Dep’t 2009) (containing force majeure clause addressing more than contractual obligations, including the ability to perform acts or undertakings contemplated under the lease). Some clauses merely release the parties from 26 liability for breach upon occurrence of a force majeure event. Others, like the clause at issue here, extend the time for the parties to exercise their rights. Some clauses, like the clause in this case, contain a “beyond reasonable control” requirement; others do not. See PPG Indus., Inc. v. Shell Oil Co., 919 F.2d 17, 18 (5th Cir. 1990) (recognizing that the reasonable control requirement which was allegedly an element in the historic doctrine of force majeure was applicable not because of the dictates of common law but because the parties so stated in their contract). Some force majeure clauses contain an unforesseability or “due diligence to overcome” requirement; others, like the clause here, do not. See Sun Operating Ltd. P’ship, 984 S.W.2d at 283 (rejecting imposition of “due diligence to overcome” requirement where no such language appeared in the force majeure clause). Some force majeure clauses contain notice provisions; others, like the clause here, do not. See, e.g., Force Majeure Clauses in Leases, supra, at 13 (providing example of clause with notice requirement). The point is that, in accord with settled principles of contract construction, determining whether a “force majeure” event has occurred and, if so, the effect of that event on the parties’ rights, obligations and continued viability of the contract, must be decided based on the language adopted by the parties. See Sun Operating Ltd. P’ship, 984 S.W.2d at 282-83; Tejas Power Corp., No. 14-98-00346-CV, 1999 WL 605550 at *3; see also Subpoint B, infra; 30 Williston on Contracts § 27 77:31 (4th ed. 2013) (case annotations therein demonstrating that according to most courts, a force majeure qualifying event is whatever the lease says it is). B. Contract Construction The fundamental principles governing contract interpretation in New York are well-settled. See Kass v. Kass, 91 N.Y.2d 554, 566 (1998). When a contract is unambiguous, it is the court’s province to interpret it as a matter of law, in accord with the parties’ intent. Beal Sav. Bank v. Sommer, 8 N.Y.3d 318, 324 (2007); Metro. Life Ins. Co. v. RJR Nabisco Inc., 906 F.2d 884, 889 (2d Cir. 1990). The parties’ intent is to be “gathered from the four corners” of the contract, “as expressed in the unequivocal language employed.” Beal Sav. Bank, 8 N.Y.3d at 324; Morlee Sales Corp. v. Mfrs. Trust Co., 9 N.Y.2d 16, 19 (1961) (citation omitted). These same fundamental principles of contract construction also apply to leases. See, e.g., Vt. Teddy Bear Co. v. 538 Madison Realty Co., 1 N.Y.3d 470, 475-76 (2004). Contracts, likewise, must be interpreted in light of the underlying purpose of the agreement as a whole. Farrell Lines v. City of New York, 30 N.Y.2d 76, 82 (1972). Each part of a contract should be construed with due reference to its overall object, and no portion should be rendered meaningless or without force. Empire Props. Corp. v. Mfrs. Trust Co., 288 N.Y. 242, 248 (1942); see also Ronnen v. Ajax Elec. Motor Corp., 88 N.Y.2d 582, 589 (1996). 28 Additionally, these settled principles apply to the construction of force majeure clauses. New York courts will construe a force majeure clause to apply to the events identified in the clause which are not due to the parties’ fault or negligence. See Kel Kim Corp., 70 N.Y.2d at 902-03; see also Phillips Puerto Rico Core, Inc. v. Tradax Petroleum Ltd., 782 F.2d 314, 319 (2d Cir.1985). Like any other contract provision, a force majeure clause must also be interpreted in accord with the parties’ intent as expressed by the contract’s plain language and in light of its underlying purpose. See Beal Sav. Bank, 8 N.Y.3d at 324-25; Williams Press v. State, 37 N.Y.2d 434, 440 (1975). C. The Nature of Oil and Gas Leases; Oil and Gas Law Precepts Oil and gas leases are contracts, though of a unique nature, as was recognized by the Second Circuit. A. 22. In a typical landlord-tenant arrangement, the parties’ interests are at odds: the landlord seeks to maximize the rent, whereas the tenant seeks to minimize it. With oil and gas leases, however, the lessor and lessee share the same fundamental objective – prudent development of the resource to obtain production that results in some profit to the lessee (over operating expenses) and royalties to the lessor. 3 Patrick H. Martin & Bruce M. Kramer, Williams & Meyers, Oil and Gas Law § 604.5 (2013) (“Williams & Meyers”).3 3 As the Second Circuit observed, there is a dearth of oil and gas precedent in New York. A. 22- 23. It is necessary, therefore, to rely upon authoritative treatises and precedent from other jurisdictions, recognizing as well that there may be conflicts in the caselaw of sister jurisdictions. 29 This mutual raison d’etre distinguishes oil and gas leases from other types of contracts. Frey v. Amoco Prod. Co., 603 So. 2d 166, 174 (La. 1992) (stating that, with the lessor-lessee relationship arising from an oil and gas lease, the obligation of each party is the cause of the other). This unique feature of oil and gas leases gives rise to a number of established oil and gas law precepts that must guide any interpretative analysis. See Westmoreland Coal Co. v. Entech, Inc., 100 N.Y.2d 352, 358 (2003) (a contract must be read in light of its purpose). The first concerns the fundamental purpose of an oil and gas lease, which, as the Second Circuit acknowledged (A. 25), “is not merely to have oil or gas flow from the ground but to obtain production that is commercially profitable to both parties.” 3 Williams & Meyers § 604.5; Millette v. Phillips Petroleum Co., 48 So. 2d 344, 348 (Miss. 1950) (“[t]he primary purpose of . . . [mineral] leases is . . . profitable development”); see also City of New York v. Long Island Airports Limousine Serv. Corp., 96 A.D.2d 998, 999 (3d Dep’t 1983), aff’d, 62 N.Y.2d 846 (1984) (reciting the principle that courts may infer the principal purpose of a contract from the overall context of the transaction, even if that purpose is not expressly stated in the agreement). For this reason, certain terms are implicitly part of an oil and gas lease. For example, where (as here) an oil and gas lease has a production-based habendum clause (i.e., setting forth lease duration of a specified primary term and for so long 30 thereafter as there is production), it is implicit that the parties understood the term “production” to mean production in paying quantities, as only if the production is in paying quantities will be the lease be carried into the secondary term (absent application of another savings provision in the lease). See Pray v. Premier Petroleum Inc., 662 P.2d 255, 257 (Kan. 1983) (“[a]lthough the phrase ‘in paying quantities’ does not specifically appear in oil and gas leases, it is implicitly a part of the habendum clause,” meaning that the “production” that will hold a lease in force must be production in paying quantities). Second, relative to achieving or maintaining production in paying quantities, a number of covenants are implied into oil and gas leases, among them, the covenant of good faith and fair dealing and the covenant to act as a reasonably prudent operator. See Allegiance Hillview, L.P. v. Range Texas Prod., LLC, 347 S.W.3d 855, 871-72 (Tex. Ct. App. 2011) (upholding the finding that the city’s failure to issue a drilling permit qualified as a force majeure event and extended the time to commence drilling; noting that in pursuing development, the defendant had a duty to act [and did act] as a reasonably prudent operator and, thus, finding the resulting delay to be within scope of force majeure clause); 5 Williams & Meyers §§ 802, 802.1 (discussing implied duty of good faith and fair dealing in every oil and gas lease); A. 25 (Second Circuit Decision, noting that New York law acknowledges the implied covenant of good faith and fair dealing; citing 31 LaBarte v. Seneca Res. Corp., 285 A.D.2d 974, 975 [4th Dep’t 2001] [involving allegations of improper payment of royalties; stating “every contract contains an implied covenant of good faith and fair dealing in the course of performance of the contract”]).4 Accordingly, all of these principles inform the analysis of what the parties intended when they agreed that if drilling delays resulted from Governmental Order “beyond Lessee’s control,” the time of such delay “shall not count against Lessee,” “anything in [the] lease to the contrary notwithstanding.” ARGUMENT POINT I THE MORATORIUM IS A “FORCE MAJEURE” EVENT Under the O&G Leases’ plain language, drilling delays resulting from Governmental Order beyond Lessees’ control are “force majeure” events. A. 46, ¶ 6. There is no dispute that the Moratorium is a drilling delay resulting from Governmental Order. The Moratorium’s ban on HVHF pending completion of the SGEIS has resulted in an unprecedented, now more than six-year-long delay in drilling (i.e., a long-term ban). The Second Circuit Decision confirms as much, 4 See also Nickerson v. Te Winkle, 161 A.D.2d 1123, 1124 (4th Dep’t 1990) (stating that, to succeed, plaintiff must establish that defendant failed to act in good faith and as a reasonably prudent operator); Envirogas, Inc. v. Consol. Gas Supply Corp., 98 A.D.2d 119, 122 (4th Dep’t 1983) (citation omitted) (noting majority rule in other jurisdictions that pooling authority must be exercised “in good faith and as a prudent operator;” stating that “[this] rule should also be applied in New York since every contract contains an implied covenant of good-faith performance and fair dealing”). 32 and notes this Court’s recent acknowledgment of the Moratorium on HVHF. A. 17 & n.13 (citing Wallach v. Town of Dryden, 23 N.Y.3d 728 [2014]). The Moratorium also indisputably results from a Governmental Order – an “order, rule, [or] regulation, . . . of the government.” A. 657-59, Sovas Aff., ¶¶ 33- 40 and exhibits cited therein (documenting the series of orders and pronouncements confirming the ongoing Moratorium). The Moratorium commenced with the then-Governor’s 2008 Directive, has been repeatedly memorialized and extended in subsequent Executive Orders, and has been reaffirmed in Department press releases and other official statements that make it unambiguously clear that no permit for HVHF will be issued until conclusion of the SGEIS process. Id. Thus, the Moratorium is a standing Governmental Order within the meaning of the “force majeure” clause. See id.5 Accordingly, the issue here is whether the delay in the ability to drill is beyond the Inflection Lessees’ control. Clearly, the Moratorium is beyond the Inflection Lessees’ control, as they have no control over the Executive Branch and the Department concerning when the SGEIS process will be finalized. As such, the only outstanding issue is whether there were any other means by which the Inflection Lessees could have exercised their drilling rights under the Leases. 5 See also Harrison Svenska, AB v. Harris Corp., 3 F.3d 576, 580 (2d Cir.1993) (holding that the government preventing sales to Iran constituted “governmental interference” under the force majeure clause and excused performance); Hunter Co. v. Vaughn, 46 So. 2d 735, 736-37 (La. 1950) (holding oil and gas lease extended under force majeure clause where agency order precluded drilling in the primary term). 33 As the unrebutted record evidence establishes, the answer to this question is undeniably no, because drilling using conventional technologies did not yield any production in the vicinity of the Leaseholds and would not have yielded any production from the Leaseholds, let alone production in paying quantities, had more dry holes been drilled. Because HVHF is the only drilling method that can be employed in good faith with any possibility of achieving any production, and because no HVHF permits will be issued (if at all) until conclusion of the SGEIS process, the Moratorium is a drilling delay beyond the Inflection Lessees’ control and, thus, squarely within the operative lease language. See Point I.A-I.C, infra. A. The Record Establishes That Conventional Drilling In The Vicinity Of The Leaseholds Yielded No Production And Deep Shales Are The Only Formations Capable Of Production The record evidence stands unrebutted that: (1) prior to and during the Moratorium, the Inflection Lessees made multiple unsuccessful attempts to develop formations in the vicinity of the Leaseholds using conventional methods, and the result was no production at all; and (2) during these drilling efforts, the only formations that demonstrated any potential productivity were deep shale formations, the development of which requires HVHF and horizontal drilling. The Billman Affidavit (A. 823-25, ¶¶ 13-21) and his attached Expert Report (A. 835- 38, Exh. A) demonstrate that there are no geologic formations in the vicinity of the Leaseholds that will produce oil or natural gas. Likewise, he opines that the 34 combination of horizontal drilling and HVHF is necessary to unlock the deep shale resources. See A. 825-27, Billman Aff., ¶¶ 22-26; A. 839-40, Billman Aff, Exh. A, at pp. 8-9 (detailing that HVHF and horizontal drilling are needed to develop Marcellus Shale). Notably, these opinions were not rebutted by the Beardslee Lessors. Indeed, the record further establishes that the Inflection Lessees made multiple attempts to drill other formations using conventional methods, all of which resulted in dry holes – no production. A. 189-92, Inflection Statement, ¶¶ 14-30; A. 851-54, Sexton Aff., ¶¶ 12-24; A. 824-25, Billman Aff., ¶¶ 18-25. Multiple wells in the Trenton Black River formations failed to produce any oil or gas. A. 189-191, Inflection Statement, ¶¶ 15, 16-18, 28; A. 851-854, Sexton Aff., ¶¶ 13, 16, 17, 23; A. 825, Billman Aff., ¶ 20. Testing of the Queenston formation revealed no gas. A. 190, Inflection Statement, ¶ 19; A. 852, Sexton Aff., ¶ 18; A. 25, Billman Aff., ¶ 19. Multiple Oriskany wells failed to encounter reservoir quality rock, meaning that natural gas was not present. A. 189-91, Inflection Statement, ¶¶ 15, 20-26; A. 852-53, Sexton Aff., ¶¶ 19-22; A. 824-25, Billman Aff., ¶ 18. Throughout these drilling efforts, the only formation that presented good gas shows was the Marcellus Shale formation. A. 851-54, Sexton Aff., ¶¶ 14-23. These drilling efforts cost Inflection alone approximately $7,000,000. A. 35 854, Sexton Aff., ¶ 24. Once again, this evidence was not rebutted by the Beardslee Lessors. Next, the Beardslee Lessors assert that the Inflection Lessees could have drilled vertical wells and completed the vertical wells with low-volume hydraulic fracturing that is compliant with the 1992 GEIS. A. 144, Reply to Counterclaim, ¶ 11. However, the Billman Affidavit and his attached Expert Report chronicle how both in New York and Pennsylvania attempts to develop the Marcellus Shale using vertical wells and high-volume hydraulic fracturing have not been successful. A. 825-27, Billman Aff., ¶¶ 22-26; A. 839-40, Billman Aff., Exh. A, at pp. 8-9. He, therefore, concludes that drilling a vertical well and attempting to complete that well with low-volume hydraulic fracturing will not result in any viable production. Accordingly, the record belies the Beardslee Lessors’ suggestion that vertical wells could be drilled to obtain production from the Marcellus Shale formation underlying the Leaseholds. And, with all due respect, but contrary to the Second Circuit’s interpretation (A. 25, n. 18), the Inflection Lessees most certainly maintain that, not only would vertical wells in the Marcellus formation on the Leaseholds fail to result in paying (i.e., profitable) production, but also that such vertical wells would fail to result in any production at all. A. 825-27, Billman Aff., ¶¶ 22-26; A. 839-40, Billman Aff., Exh. A, at pp. 8-9. Accordingly, while a conventional drilling permit could have been obtained to drill a vertical well in the 36 Marcellus, the record stands unrebutted by any competent evidence that such a well drilled on the Leaseholds would not have yielded any production. In the end, the record establishes the inability to drill, in good faith, any formations underlying the Leaseholds utilizing conventional methods. The Beardslee Lessors, however, go one step further and suggest that the “force majeure” clause cannot be invoked because the Inflection Lessees could have, and should have, drilled wells on all of the Lessors’ properties. See A. 19 (Second Circuit Decision noting the Beardslee Lessors’ argument that the Inflection Lessees “could have acquired permits that would [have] allow[ed] drilling on the [Leaseholds] during the primary terms using the conventional drilling methods described in the 1992 GEIS”). The Beardslee Lessors’ argument thus amounts to the position that a “force majeure” extension is unavailable because the Inflection Lessees could have, but did not, knowingly engage in bad faith operations and drill dry hole after dry hole on the Leaseholds, after having already drilled numerous dry holes in the immediate vicinity of the Leaseholds. The Beardslee Lessors’ proposed standard for being able to invoke the “force majeure” clause is nothing short of absurd, as it renders the “force majeure” language meaningless and flies in the face of the O&G Leases’ implied covenants that require the Inflection Lessees to act in good faith and as a reasonably prudent operator. See Tejas Power Corp., No. 14-98-00346-CV, 1999 WL 605550 at *3 37 (finding force majeure clause suspending obligations properly invoked relative to supply contract where abnormally cold weather resulted in freezing gas wells and creating gas shortage, notwithstanding due diligence to overcome requirement; rejecting claim that defendant was required to purchase gas on the market at five times the price set forth in the contract; finding that the force majeure clause was meant to deal with this type of circumstance, and concluding that plaintiff’s reading would render the force majeure clause meaningless). Moreover, the proof put forth by the Beardslee Lessors does not raise any genuine issue of fact as to whether the Inflection Lessees could have obtained production from the Leaseholds using conventional drilling methods. See Cifarelli v. Village of Babylon, 93 F.3d 47, 51 (2d Cir. 1996) (stating that to defeat summary judgment, the non-movant must “set forth specific facts in [ ] affidavits . . . showing a genuine issue [of fact] exists for trial”). For example, in support of their claim that the Moratorium is not a “force majeure” event because a conventional well drilling permit could have been obtained, the Beardslee Lessors provide nothing more than a database survey attached to the Affidavit of David W. Keefe, sworn to on June 8, 2012 (“Keefe Aff.”). See A. 157-63. Beyond the fact that the affiant, Mr. Keefe, is not a geologist, the Keefe Affidavit shows only that well drilling permits were granted in other geographically (and geologically) irrelevant parts of New York State after July 2008. A. 158, Keefe Aff., ¶ 7. Nothing in the Keefe 38 Affidavit ties a particular well permit to a particular location (most notably, to Tioga County where the Leaseholds are located), or mentions whether any particular well permit resulted in any production. Id. The Keefe Affidavit purports only to give the total numbers of wells drilled in a particular timeframe as well as the total volumes of gas produced for certain formations, but provides no context as to geography, geology, technology or individual well viability. See A. 159-64, Keefe Aff., ¶¶ 8-15. This is a far cry from the type of evidence necessary to raise a question of fact as to whether the Inflection Lessees could have obtained a non- HVHF permit that could have possibly resulted in production from the Leaseholds. See Cifarelli, 93 F.3d at 51; see also A. 201-04, Hennessey Dec., ¶¶ 13-22; A. 230, Hennessey Dec., Exh. B (confirming that during the same time period reviewed by Mr. Keefe, only two wells were drilled in all of Tioga County, neither of which was productive). The Keefe Affidavit is also wrong in claiming that exploratory wells for Marcellus development could have been drilled absent completion of the SGEIS, or that operations could have been conducted to hold the O&G Leases. See A. 163, Keefe Aff., ¶¶ 27-30. Absent obtaining a well drilling permit for HVHF, which cannot be issued until completion of the SGEIS process, no surface activities can be conducted, not even the construction of access roads, let alone actual drilling. See New York Environmental Conservation Law (“ECL”) § 8- 39 0109(8) (prior to approving an action that is the subject of an EIS, the agency must make explicit findings that the adverse impacts have been minimized or avoided to the maximum extent practicable); see also 6 NYCRR § 617.3(a) (stating that no “physical alteration related to an action” under SEQRA review may occur until SEQRA review is completed). As such, the Inflection Lessors could not have started development and then suspended development pending completion of the SGEIS. Also unsupported by the record is the Beardslee Lessors’ assertion that the Inflection Lessees could have utilized extraction methods other than HVHF. A. 143, Amended Reply to Counterclaim, ¶ 6. This contention is based solely on their observation that (1) the O&G Leases are not limited to HVHF as an extraction method; and (2) drilling permits using conventional methods have been granted in New York State and natural gas was produced after July 2008. See A. 158-60, Keefe Aff., ¶¶ 7-10. However, fatally lacking is any affidavit or offer of proof concerning whether methods other than HVHF potentially could have resulted in production from any formation underlying the Leaseholds. See generally id. Simply stated, the Inflection Lessees introduced unrebutted record evidence establishing that (1) there are no geologic formations in the vicinity of the Leaseholds that are capable of production other than deep shales; and (2) they made multiple good faith attempts to develop other geologic formations in the vicinity of 40 the Leaseholds, all of which were unsuccessful and most of which demonstrated promising shows of natural gas only in the Marcellus. See A. 851-54, Sexton Aff., ¶¶ 11-26; A.824-25, Billman Aff., ¶¶ 18-21. The result of those efforts was no production at all and a showing of potential productivity only as to the Marcellus Shale formation. Moreover, the Inflection Lessees have established that HVHF combined with horizontal drilling, the very combination of which is prohibited by the Moratorium, is the only completion technique that will unlock the deep shale resources. A. 825-27, Billman Aff., ¶¶ 22-26; A. 839-40, Billman Aff., Exh. A, at pp. 8-9. As such, the delay in drilling resulting from the Moratorium is beyond the Inflection Lessees’ control and is, thus, a “force majeure” event under the operative lease language. B. Utilizing Conventional Drilling Methods On The Leaseholds Would Not Have Yielded Paying Production And Would Have Violated Lessees’ Implied Covenants Even if there were a question of fact regarding whether some production could have resulted from the Leaseholds using conventional drilling methods, the record stands unrebutted that employing those methods would not have resulted in production in paying quantities. Therefore, attempting to drill more wells that would not achieve production in paying quantities would have violated the Inflection Lessees’ implied covenants to act in good faith and as a reasonably prudent operator. Again, this means that, as a matter of law, the drilling delay 41 resulting from the Moratorium is beyond the control of the Inflection Lessees and, therefore, is a “force majeure” event under the lease language. As the Second Circuit acknowledged, “the objective of [an oil and gas] lease is not merely to have oil or gas flow from the ground, but to obtain production that is commercially profitable to both parties.” A. 25 (quoting 3 Williams & Meyers § 604.5). Likewise, the Second Circuit acknowledged that, in New York, “every contract,” including an oil and gas lease, “contains an implied covenant of good faith and fair dealing.” A. 25 (quoting LaBarte, 285 A.D.2d at 975). Thus, as explained above, the “force majeure” analysis must be guided by these principles – namely, where the lessee undertakes any activities on the leasehold, the objective is to seek production in paying quantities, with the lessee at all times acting in good faith and as a reasonably prudent operator . See 3 Williams & Meyers § 604.5; Millette, 48 So. 2d at 348; Pray, 662 P.2d at 257; see also 5 Williams & Meyers §§ 802, 802.1; LaBarte, 285 A.D.2d at 975; Nickerson, 161 A.D.2d at 1124; Envirogas, Inc., 98 A.D.2d at 122. Simply stated, the mutual objective of lessor and lessee to an oil and gas lease is not merely to obtain a dribble of gas, as this results in no benefit to either party, and will not hold the lease in effect in any event.6 6 See Pray, 662 P.2d at 257 (“[a]lthough the phrase ‘in paying quantities’ does not specifically appear in oil and gas leases, it is implicitly a part of the habendum clause,” meaning that the Moreover, if lessee engages in what it 42 knows to be ineffective or imprudent operations, lessee violates the implied covenants to act in good faith and as a prudent operator. This means, of course, that if, as the Beardslee Lessors maintain, the Inflection Lessees are precluded from invoking the “force majeure” clause because they did not first violate these covenants by imprudently and blindly conducting surface operations on the Leaseholds, drilling knowingly unproductive wells with knowingly ineffective technologies, then the “force majeure” clause is utterly meaningless. In this regard, Allegiance Hillview, L.P. is instructive. 347 S.W.3d 855. Therein, the Texas Appeals Court held that the city’s failure to issue drilling permits qualified as a force majeure event and extended the time to commence drilling, even though the delay resulted, in part, from the defendant-operator’s attempt to obtain a variance for the sixth well in the defendant’s development plan. Id. at 867-72. There, “force majeure” was defined to include the city’s failure to issue permits, provided, among other things, that the event was beyond the party’s reasonable control and the party had taken all reasonable action to remedy the force majeure. Id. at 867. Plaintiff in Allegiance Hillview, L.P. argued that no force majeure event had occurred because the permit could have been timely obtained had defendant proceeded initially with an application for five wells instead of six, but, rather, “production” that will hold a lease in force to carry it into and maintain it in the secondary term must be production in paying quantities). 43 defendant had “made a ‘conscious and informed business decision to delay filing its applications in order to try to increase its profits.’” Id. at 871. The court rejected plaintiff’s argument, finding that defendant “had a duty to act as a reasonably prudent operator under the same or similar circumstances and to reasonably develop the premises.” Id. Since there was evidence that defendant believed six wells (and, hence, the third set-back waiver) were necessary to fully develop the property, the court held that the force majeure clause applied. Id. at 871-72. In other words, the court considered prudent, effective development as the standard in determining whether the force majeure clause was triggered. See id. Finally, given the established purpose of, and covenants implied in, oil and gas leases, it matters not that the words “commercial viability,” “production in paying quantities,” “prudent operations,” or HVHF do not appear in the “force majeure” clause. See id. at 867-72. These concepts are all implicit in oil and gas leases and well-settled oil and gas jurisprudence. See Applicable Legal Framework, supra, at C, pp. 28-31. In the end, to read the “force majeure” language as being inoperative because the Inflection Lessees could have, but did not, engage in futile, bad faith activities on the Leaseholds with no hope of achieving paying production would be nonsensical and impermissibly render the force majeure language meaningless. See A. 855-56, Sexton Aff., ¶¶ 27-33; Babcock & Wilcox Co. v. Allied-General Nuclear Servs., 161 A.D.2d 350, 351-52 44 (1st Dep’t 1990) (holding force majeure clause applicable to relieve defendants of liability for failing to reprocess spent nuclear fuel where defendants failed to receive license; where President announced that license applications would likely be denied and agency terminated further environmental impact assessment [without which license could not issue], finding no issue of fact that impediment to licensing could not have been overcome by a second license application); see also Tejas Power Corp., No. 14-98-00346-CV, 1999 WL 605550 at *3 (in face of inclement weather that created gas shortage, rejecting interpretation that would have required defendant to purchase gas on the market at five times contractually- agreed price, as such would have rendered “act of god”-type force majeure clause meaningless). Thus, even in the unlikely event this Court finds that the Beardslee Lessors’ proof raises an issue of fact that some production could have been obtained from drilling on the Leaseholds with conventional methods, the end result is the same: the delay in the ability to drill due to the Moratorium is still a “force majeure” event beyond the Inflection Lessees’ control. The record stands unrebutted that no technology other than HVHF could have been utilized in good faith with any hope of achieving production in paying quantities, and there was no means to obtain an HVHF permit other than awaiting conclusion of the SGEIS process. This renders 45 the delay in the ability to drill in good faith beyond the Inflection Lessees’ control and, hence, a “force majeure” event. C. The Record Establishes That Site-Specific Review Could Not Have Resulted In An HVHF Permit Although not mentioned as an issue in the Second Circuit Decision, in a further attempt to assert that the delay in drilling was subject to the Inflection Lessees’ control, the Beardslee Lessors argue that the Inflection Lessees could have pursued HVHF by performing a site-specific EIS rather than awaiting the completion of the SGEIS. A. 155, ¶ 46. However, once again, the record evidence is unrebutted that that no permit for HVHF could (or can) be issued until conclusion of the SGEIS process, which, to date, remains in limbo. This is confirmed not only by the procedural realities that would have been involved with site-specific environmental review, but also by multiple pronouncements from both the Executive Branch and the Department unequivocally and unambiguously asserting that no permit for HVHF will be issued (if at all) until after conclusion of the SGEIS process. See generally A. 657-59, Sovas Aff., ¶¶ 37-40; A. 683, Sovas Aff., Exh. C (Veto Message stating “[n]o permits for unconventional high-volume, horizontal fracking can be issued prior to July 1, 2011 at the earliest, if at all”); A. 685, Sovas Aff., Exh. D (Executive Order No. 41 stating “no permits may be issued prior to the completion 46 of a final SGEIS”); A. 686, Sovas Aff., Exh. E (Executive Order No. 2, continuing Executive Order No. 41); A. 691, Sovas Aff., Exh. F (Department press release, dated September 7, 2011, stating “[n]o permits for high-volume hydraulic fracturing will be issued until the SGEIS is finalized and DEC issues the required Findings Statement”). And, the Beardslee Lessors’ contrary claim is not only unsupported, it is also belied by the record. The Beardslee Lessors’ proof amounts to one generalized paragraph in the Keefe Affidavit, citing a statement from the Department on its website. See A. 162, ¶ 22. Nothing in the Beardslee Lessors’ proof addresses whether site-specific review possibly could have concluded prior to completion of the SGEIS process to have allowed use of HVHF during the primary term of any of the O&G Leases. The Sovas Affidavit and the Hennessey Declaration fully detail why pursuit of site-specific review would have been futile. A. 648, 664-69, Sovas Aff., ¶¶ 5, 63-81; see generally A. 204-21, Hennessey Dec. ¶¶ 24-85. Further, as detailed above, the reality that site-specific review was not an option is redundantly confirmed by multiple pronouncements by the Executive Branch and the Department, all of which assert that no HVHF permits may be issued prior to the completion of a Final SGEIS. Thus, the Inflection Lessees have established that the delay in drilling utilizing HVHF is beyond Lessees’ control, meaning that the Moratorium qualifies 47 as a “force majeure” event. Therefore, the first certified question must be answered in the affirmative. POINT II THE O&G LEASES ARE EXTENDED DUE TO THE MORATORIUM Regarding the legal effect of the Moratorium, the Second Circuit concluded it could not answer the question of whether the “force majeure” extension applied to extend the primary terms specified in the O&G Leases’ habendum clauses. The Second Circuit noted that, “[u]nder New York contract law, ‘clauses similar to the phrase “notwithstanding any other provision” trump conflicting contract terms.’” A. 29 (quoting Bank of N.Y. v. First Millennium, Inc., 607 F.3d 905, 917 [2d Cir. 2010]). However, because the habendum clause in the O&G Leases does not contain “subject to” or other such language expressly making the habendum clause subject to other lease terms, the Second Circuit found that it was for this Court to decide whether the “anything in this lease to the contrary notwithstanding” language in the “force majeure” clause has the effect of modifying the primary term set forth in the habendum clause. A. 31. This issue is easily resolved, both as a matter of oil and gas law and New York contract law. As a matter of oil and gas law, habendum clauses are typically modified by other lease savings provisions that by their plain terms affect lease duration, and there is no requirement that the habendum clause contain “subject to” 48 language. See generally 4 Williams & Meyers § 683 (stating that lessees employ savings provisions to protect themselves from, inter alia, loss of a lease by operation of clauses of limitation). Examples of such savings provisions include, among others, shut-in royalty clauses, delay in marketing clauses, cessation of productions clauses, and “force majeure” clauses. See, e.g., Hunter Co., 46 So. 2d at 736-37 (holding that force majeure clause modified typical production-based habendum clause where an agency order precluded drilling on the leasehold within the primary term; finding the lease still to be in effect, even though there was no production in the originally specified primary term); see also Levin v. Maw Oil & Gas, LLC, 234 P.3d 805, 809-10, 814-15 (Kan. 2010) (finding that shut-in royalty clause modified the habendum clause and would perpetuate the lease if triggered); Pack v. Santa Fe Minerals, 869 P.2d 323, 325, 327-30 (Okla. 1994) (finding that the shut-in royalty clause and cessation of production clause modified the typical production-based habendum clause); Pray, 662 P.2d at 257-58 (finding typical production-based habendum clause modified by shut-in royalty clause). Thus, the applicability of any savings provision, including a force majeure clause, is determined not by any bright-line requirement for ‘magic language’ in the habendum clause, but, rather, by reading the lease as a whole, including the savings provision at issue. See Wiser v. Enervest Operating, LLC, 803 F. Supp. 2d 49 109, 117, 121 (N.D.N.Y. 2011) (articulating general principle that leases must be read as a whole; analyzing identical force majeure language, stating “both logic and the unambiguous terms of the leases dictate[d] that the primary terms of the leases [would have been] extended indefinitely” had the “unless” leases not terminated for lessee’s failure to continue making delay rental payments).7 Importantly, while the habendum clause in Wiser admittedly has “subject to” language, that holding does not translate into a requirement that such language is a prerequisite to finding the habendum clause modified by other lease provisions. This is plain from the precedent in sister jurisdictions wherein the courts have found production-based habendum clauses to be modified by savings provisions affecting lease duration, notwithstanding the lack of “subject to” or comparable language in the habendum clause. See, e.g., Hunter Co., 46 So. 2d at 736-37; Levin, 234 P.3d at 809-10; Pack, 869 P.2d at 325, 327-30; Pray, 662 P.2d at 257- 58. Indeed, San Mateo Cmty. Coll. Dist. v. Half Moon Bay Ltd. P’ship, 65 Cal. App. 4th 401 (Cal. Ct. App. 1998), which the Second Circuit discussed in its 7 In Wiser, the court held that the leases had terminated due to the lessee’s failure to continue making delay rental payments during the delay. The leases were “unless” leases, stating that absent production, the leases would terminate unless delay rental payments were timely paid during the primary term. The court found that, if the Moratorium were a force majeure event, the primary terms of the leases would have been extended. Thus, the lessee’s failure to continue tendering delay rentals during the delay (i.e., the extended primary term) resulted in automatic termination of the leases. Accordingly, while the Wiser court’s analysis of the force majeure language is instructive here, this case is wholly inapposite as to its result. 50 Decision, proves this point. In that case, the force majeure clause (1) was limited to suspending the lessee’s obligations (and did not address the exercise of the lessee’s rights); and (2) did not contain “anything in the lease to the contrary notwithstanding” language. San Mateo, 65 Cal. App. 4th at 406-07, 411-12. Significantly, the court distinguished the lease at issue there from others, like the O&G Leases, which direct that the time period for suspension shall not count against the lease term. See id. at 412-13. As the Second Circuit observed, the San Mateo court also suggested that if the force majeure clause itself contained language purporting to modify the habendum clause, then the case may have come out differently. Id.; A. 29. Moreover, if the San Mateo court believed that the absence of “subject to” (or comparable) language in the habendum clause were dispositive, the court would not have needed to consider the language of the force majeure clause in its analysis. Here, under a plain language reading, the “force majeure” clause in the O&G Leases modifies the habendum clause and extends the leases’ primary terms. As the Second Circuit recognized, as a matter of New York contract law, “anything to the contrary notwithstanding” (or similar) language has consistently been held to unambiguously mean exactly what it says – i.e., that regardless of other contract provisions, that clause control. See A. 29 (citing Bank of N.Y., 607 F.3d at 917); see also JFK Holding Co. v. City of New York, 21 N.Y.3d 722, 725-26 (2013); 51 Dolman v. U.S. Trust Co. of N.Y., 2 N.Y.2d 110, 116 (1956) (finding that tenant specifically agreed “in unambiguous terms” that lease would be null and void at landlord’s option in the event of condemnation, where lease stated “anything herein contained to the contrary notwithstanding”); Croxton Collaborative Architects, PC v. T-C 475 Fifth Ave., LLC, 113 A.D.3d 479, 480 (1st Dep’t 2014) (finding no conflict between two lease provisions; where the one provision was prefaced with “anything herein contained to the contrary notwithstanding,” finding that that provision trumped the earlier provision); H. Fox & Co. v. Blumenfeld, 24 A.D.3d 722, 722-23 (2d Dep’t 2005) (finding that such language is unambiguous and controls over any other lease provision). In short, this language means what it says: the parties expressly agreed that drilling delays not attributable to Lessees shall not count against the Lessees regardless of anything else in the O&G Leases, and this includes the habendum clause. Accordingly, this plain language must be given its plain meaning, consistent with settled principles of contract construction in New York. Notably as well, this result also ensues as a matter of New York “force majeure” jurisprudence. The O&G Leases’ “force majeure” clause meets the Kel Kim Corp. standard by identifying the events to which it pertains: that is, the clause speaks unqualifiedly to drilling delays, meaning any and all drilling delays, resulting from Governmental Order beyond Lessee’s control. See 70 N.Y.2d at 52 902-03. There are no other qualifiers in the “force majeure” clause limiting its application to drilling delays occurring in the secondary term as opposed to the primary term (another nonsensical argument put forth by the Beardslee Lessors). To the contrary, drilling is expressly contemplated in the primary term in order to carry the lease into the secondary term. See A. 45 (First WITNESSETH paragraph and paragraph 1, granting broad rights of drilling, producing, and otherwise operating during the primary term). Thus, the only result consistent with a plain language reading and longstanding principles of New York law is that the “force majeure” clause pertains to all such drilling delays, including those occurring in the primary term. Accordingly, the primary terms of the O&G Leases are extended, allowing the Inflection Lessees additional time to exercise their drilling rights, and the second certified question must be answered in the affirmative. CONCLUSION For all of the foregoing reasons, both certified questions must be answered in the affirmative. The Moratorium is a “force majeure” event because it bans the only drilling methodology that would allow the Inflection Lessees to engage in any good faith development of the Leaseholds. The effect of the Moratorium is that the time of the delay shall not be counted against the Inflection Lessees, anything in the O&G Leases to the contrary notwithstanding, thus including the habendum clause and consequently extending the Inflection Lessees’ right to drill. The primary terms of the O&G Leases, therefore, are extended, affording the Inflection Lessees additional time to exercise their right to drill and proceed with good faith development of the Leaseholds for the mutual benefit of the Beardslee Lessors and the Inflection Lessees. Dated: October 28, 2014 Albany, New York 53 es ,Esq. C' dy Monaco, Esq. ttorneys for Defendants- Appellants, Inflection Energy, LLC, Victory Energy Corporation, Megaenergy, Inc. 677 Broadway - 8th Floor Albany, New York 12207 Tel.: (518) 641-0500 Fax: (518) 641-1500 twest@westfirmlaw.com