6th Circuit Win in Oil and Gas Lease Dispute

by Reed Smith
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On June 6, 2014, the Sixth Circuit affirmed the district court’s entry of summary judgment in favor of Chesapeake Appalachia, L.L.C. in Eastham v. Chesapeake Appalachia, L.L.C., Case No. 13-4233. This is the first appellate decision arising out of a series of cases in different jurisdictions challenging Chesapeake’s extensions of oil and gas leases pursuant to a common Paragraph 19, which provided an “option to extend or renew on similar terms a like lease.”

In Eastham, Chesapeake argued that it validly exercised an option to extend the primary term of the Lease with the Easthams pursuant to Paragraph 19, and by paying the Easthams the same consideration they received at the time they signed the Lease. The Easthams filed a class action lawsuit seeking to void the Lease, contending that Chesapeake’s interpretation of Paragraph 19 was wrong, and that Chesapeake was obligated to enter into a new lease and pay current market rates. Market rates had increased substantially as a result of the development of the Marcellus and Utica Shale formations. The Easthams also argued that enforcement of Chesapeake’s interpretation of Paragraph 19 contravened Ohio public policy or produced an unconscionable result. The United States District Court for the Southern District of Ohio entered summary judgment in favor of Chesapeake on the Easthams’ claims, and they appealed to the Sixth Circuit Court of Appeals.

The Sixth Court of Appeals affirmed in an opinion recommended for full text publication. The Sixth Circuit held that the district court correctly interpreted the language in Paragraph 19 in accordance with Ohio law, which recognizes a clear distinction between the terms “extend” and “renew.” The Sixth Circuit found that the plain meaning of the word “extend” was to “increase the length of duration of” the same lease, which was consistent with Chesapeake’s interpretation. The Sixth Circuit ruled that Chesapeake’s interpretation of Paragraph 19 gave meaning to all of the words in Paragraph 19 as required by Ohio rules of contract construction. The Sixth Circuit also rejected plaintiffs’ argument that Chesapeake exercised the option in Paragraph 19 too early, noting that it could not find any authority that invalidated an option on such a basis, and even assuming that there was a condition precedent, any breach was immaterial and excusable. The Sixth Circuit found that enforcement of the plain meaning of Paragraph 19 did not contravene any established public policy of Ohio, and also that the Easthams had failed to prove either procedural or substantive unconscionability, noting that the Easthams admitted that the Lease “was a good deal at the time.”

The Sixth Circuit’s ruling on Paragraph 19 follows other federal and state court decisions that Reed Smith has obtained on the same provision. Kenney, et al. v. Chesapeake Appalachia, L.L.C., 2013 CV 240 (Ct. Comm. Pleas (Columbiana) Ohio, April 3, 2014); Brown v. Chesapeake Appalachia, L.L.C., 2013 U.S. Dist. LEXIS 118827 (N.D. W.Va. Aug. 18, 2013); Bissett v. Chesapeake Appalachia, L.L.C., 2014 U.S. Dist. LEXIS 59080 (N.D. W.Va. April 14, 2014).

Chesapeake Appalachia, L.L.C. was represented by Kevin C. Abbott, Nicolle R. Snyder Bagnell, James C. Martin, and Justin H. Werner of Reed Smith LLP.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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