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Arlene Alexander v. Chesapeake Appalachia

March 20, 2012

ARLENE ALEXANDER; MICHAEL ALEXANDER; GARY ALLEN; MARSCHA ALLEN; ANTHONY ALVERNAZ; JENNIFER ALVERNAZ; FRANK AMBROSE; ELIZABETH AMBROSE; HAROLD BARTZ; ELISABETH BARTZ; JAMES BEHRMAN; DOREEN BEHRMAN; EDWARD BENNETT; GLORIA BENNETT; ANN BLODGETT; MATT BOGDAN; JOANNE BOGDAN; RICHARD BRAUTIGAM; MARIA BRAUTIGAM; JAMES BROWN AS TRUSTEE OF THE BROWN FAMILY TRUST; BERNADETTE BROWN AS TRUSTEE OF THE BROWN FAMILY TRUST; IRENE BUDNEY; MICHAEL BUINISKIS; MARIKAY BUINISKIS; TIMOTHY BURNETT; NANCY BURNETT; KIMBERLY A. BURRIS; THOMAS Q. CARPENTER; DIANE H. CARPENTER; JUDITH CATLIN; STEPHEN CATLIN; BRENDA CATLIN; JUSTIN CLARK; JON CLARK; DANE CLARK; JEFFREY COLEMAN; BRENDA COLEMAN; JAMES COLLINS; JUDITH COLLINS; GAYLORD CONRAD AS A TRUSTEE OF THE CONRAD LIVING TRUST; TERRY CONRAD AS A TRUSTEE OF THE CONRAD LIVING TRUST; WILLIAM E. CORSON, JR; JUDITH A. CORSON; JAMES V. CRAIN, JR.; MICHELLE M. CRAIN; STEVEN CROSSEN; MICHAEL D'ALOISIO; BRYSON DAVIS; ROSE DAVIS; MARK DEMETROS; ALVIN DEMING; WILLIAM O. EICHHORN; DOROTHY E. EICHHORN; KEVIN T. EVANEK; BRENDA M. EVANEK; JOSEPH M. FABREGAS; JUDITH A. FABREGAS; ROBERT FARNHAM; LARRY FERGUSON; DEBORAH FERGUSON; BARBARA FRECHETTE; KAREN L. GARRITY; PAUL E. GREEN; BARBARA E. GREEN; RICHARD GUMBLE; PEDRO GUTIERREZ; RUSSELL A. HAMILTON; GRACE A. HAMILTON; LINDA HAMMOND; JOHN M. HANSEN; KATHY L. HANSEN; ROYICE ANN HARFORD; EMMA HARSH-HARNER; JAMES HARZINSKI; SANDRA HARZINSKI; JAMES HIDOCK; PETER HIDOCK; GEORGE HIDOCK; ALLEN HOPKINS; MARY TARTANIAN; KENT HOWELL; EILEEN HOWELL; GARY HUDOCK; ROBIN HUDOCK; ROY HUHTA; MARGARET HUHTA; ELIZABETH J. HUNT; DALE JACKSON; PATRICIA A. JACKSON; BRYCE J. JACKSON; MICHELLE JENKINS-PARASTAN; MICHAEL JOYCE; KATHLEEN JOYCE; NORMA JOYCE; MAUDE KLOSSNER AS TRUSTEE OF THE MAUDE KLOSSNER REVOCABLE TRUST; ROBERT W. KLOSSNER; KATHLEEN KLOSSNER; STEPHEN J. KMAN; STEPHEN KMAN, II; GLORIA C. KNAPP; HAROLD KNAPP; NANCY KOBYLARZ; WALTER KOBYLARZ; HAROLD KOSTER; JOAN KOSTER; STEPHEN J. KUTNEY, JR.; HENRY KWIATKOWSKI; LBK PROPERTIES, INC.; CATHY LANNING; MICHAEL LANNING; ANTHONY LIPKA; NETTIE LIPKA; DENISE ARMAGNO; TONI DABLAN; ROBERT R. LORD; LAWRENCE R. MAIER; LINETTE MARSCHALL; WILLIAM MARSCHALL; SCOTT MCQUEEN; DAVE MOLYNEAUX; JULIE MONELL; MATTHEW MONELL; ALEX MUEHL; ANN MARIE MUEHL; DEBRAH MUSKA; ANITA NABER; NEWARK VALLEY GOLF CLUB, INC.; ANTHONY M. NIETO; ANTHONY M. NIETO, III; JOSEPH NIETO; JOYCE NIETO; NICOLE NIETO; THOMAS J. OVEN; DIANNE J. PAIGE; KEVIN C. PAIGE; EARL PAUGH; GALE PAUGH; RITA PEACOCK; CHARLES PEARSALL; RUTH ELLEN PEARSALL; MICHAEL PERRY; NANCY PERRY; SAXTON FRANKLIN AS TRUSTEE OF THE FRANKLIN W. AND SUZANNE F. SAXTON FAMILY TRUST DATED NOVEMBER 6, 2002; LARRY E. PETERSON; REBECCA PETERSON FORMERLY KNOWN AS REBECCA STREETER; FRANCES PHILLEY; JASON PIPHER; DOROTHY MAE RAPP; BRENDA RHODES; DOUGLAS RHODES; LUCILLE RHODES; MARGARET M. RICHARDS AS A TRUSTEE FOR THE RICHARDS FAMILY TRUST; RAYMOND R. RICHARDS AS A TRUSTEE FOR THE RICHARDS FAMILY TRUST; LELAND E. RIDER AS A TRUSTEE OF THE LELAND RIDER AND MARJORIE V. RIDER DECLARATION AND TRUST; MARJORIE V. RIDER AS A TRUSTEE OF THE LELAND RIDER AND MARJORIE V. RIDER DECLARATION AND TRUST; BRIAN RIECHERS; IRENE RIECHERS; ANDREW J. ROBINSON; ARTHUR W. ROBINSON AS TRUSTEE OF THE ARTHUR W. ROBINSON LIVING TRUST DATED 5/18/06; BRUCE R. ROBINSON AS TRUSTEE OF THE BRUCE R. ROBINSON LIVING TRUST DATED 5/27/06; STEVEN E. ROBINSON; GARY ROCKWELL; JEANINE ROCKWELL; GARY E. ROZELLE; CHERYL SACCO FORMERLY KNOWN AS CHERYL INSINGA; HELEN SACCO; JOHN SACCO; MIKE SACCO; SUSAN J. SAUNDERS; GARY SCHOONOVER; HELEN SCHOONOVER; NICK SCHOONOVER; SUZANNE YANUZZI; KAREN A. COULTER; SUSAN NICHOLSON; GLENN SCOTT; DAVID SHAFER; STEPHEN SHAFER; JOAN SHAVER; RAY SHAVER; ALOYSUIS E. SHIPMAN; PATRICIA SHIPMAN; STEPHEN SHIPMAN; VALERIE J. SHIPMAN; KENNETH W. SHORT; RUSSELL SHOULTES; CHAD SHOWERS; JUDITH SHOWERS; KEVIN SLAUGHTER; DOUGLAS SPARKS; JACQUELINE SPARKS; KENNETH ALEXANDER AS OWNER; VERNA ALEXANDER AS OWNER; BRIAN CAIN; LUCINDA HANBURY AS ADMINISTRATOR OF THE ESTATE OF ROBERT HANBURY; ST. NICK'S FOREST, LLC; DAVID STACK AS PURCHASER OF PROPERTY CURRENTLY OWNED BY KENNETH & VERNA ALEXANDER; ROSE STACK AS PURCHASER OF PROPERTY CURRENTLY OWNED BY KENNETH & VERNA ALEXANDER; BENJAMIN STERNBERG; DEB STOUGHTON; TIM STOUGHTON; BRIAN STOUT; JOSEPH F. STOUT; MARCIA STOUT; CLAUDE STRIFE; DIANE STRIFE; ANNA MARIE SULLIVAN; LAURENCE SULLIVAN; ANNA SZANTO; ARPAD SZANTO; RICHARD TAYLOR; VERDA TAYLOR; DORA E. TRUESDAIL; JESSE TRUESDAIL, JR.; JOHN TRUESDAIL; RALPH TRUESDAIL; LAURENCE TURNER; JOAN VILLECCO; JOSEPH VILLECCO; DANIEL R. VOUGH; LINDA R. VOUGH; HAROLD VRABEL ALSO KNOWN AS HAROLD VARBEL; KAREN AUNE; RALPH WALKER; BRIAN WANCK; GERALD WANCK; GLENN WANCK; JACQUELINE WANCK; KEVIN WANCK; TAMARA WANCK; WANDA WANCK; GERALD WEED; MARTINA WEED; MARION WEISSE; GEORGIA WESTGATE; ROGER WESTGATE; BARBARA WILLETT; RICHARD WILLETT; ROBERT L. WOODBURN; DANIEL WOODRUFF; YVONNE WOODRUFF; DONALD ZIMMER; MARY ZIMMER; BRIAN ZORN; JERRINE ZORN; ADAM S. BURCH, JR. AS CO-TRUSTEE OF THE BURCH, JR. FAMILY TRUST; GERTRUDE S. BURCH AS CO-TRUSTEE OF THE BURCH, JR. FAMILY TRUST; CARL P. DEYO; DIANE DEYO; DANIEL P. FLANAGAN; LAURIE GANOUNG; STEVEN GANOUNG; JACK GROB; DONALD L. PERRY INDIVIDUALLY AND AS CO-TRUSTEE OF THE SANDRA L. PERRY REVOCABLE LIVING TRUST; SANDRA L. PERRY INDIVIDUALLY AND AS CO-TRUSTEE OF THE SANDRA L. PERRY REVOCABLE LIVING TRUST; RICHARD A. RIDGEWAY, JR.; JOYCE A. WHITE; PETER C. WHITE; KENNETH HERZL-BETZ; AND LOUISE HERZL-BETZ, PLAINTIFFS,
v.
CHESAPEAKE APPALACHIA, LLC AND STATOILHYDRO USA ONSHORE PROPERTIES, INC., DEFENDANTS.



The opinion of the court was delivered by: David N. Hurd United States District Judge

MEMORANDUM-DECISION and ORDER

I. INTRODUCTION

Plaintiffs Arlene and Michael Alexander and other landowners*fn1 (collectively "plaintiffs") brought this declaratory judgment action against Chesapeake Appalachia, LLC ("Chesapeake") and Statoilhydro USA Onshore Properties, Inc. ("Statoil") (collectively "defendants"), seeking a declaration that plaintiffs' leases with defendants expired based on the primary lease term; that the covenants clause in the leases does not extend the primary lease term; that no force majeure event*fn2 exists which extends the leases; that the leases are void for a failure of consideration; that defendants failed to make prescribed payments as required by the leases; and that defendants failed to invoke force majeure during the lease term. See Second Am. Compl.. Finally, plaintiffs charge defendants with violating New York General Business Law section 349 and assert a claim for conversion of their oil and gas rights. Id.

Defendants moved to compel arbitration and stay the claims of three plaintiffs not subject to arbitration. Plaintiffs opposed and defendants replied. The motion was taken on its submissions without oral argument.

II. BACKGROUND

The following facts are undisputed. Plaintiffs are a group of landowners who reside in New York State throughout Broome, Tioga, Cortland, and Chemung counties. They collectively own approximately 10,000 acres of land. Between 1999 and 2005, the plaintiffs each*fn3 entered into separate oil and gas leases with either Central Appalachian Petroleum ("CAP") or Columbia Natural Resources, LLC ("CNR") (collectively the "leases"). Plaintiffs each leased to either CAP or CNR all oil, gas, and constituents underlying their property, and the rights necessary to develop, produce, measure, and market them. The CAP leases were executed in 1999 and 2000 for a ten year primary term. See Second Am. Compl., Ex 2. The CNR leases were executed in 2004 and 2005 for a five year primary term. See id. Generally, the terms provided for the lessees to pay the lessors an annual Delay Rental payment until the commencement of Royalty payments (upon production of oil or gas). The CAP leases provided for a Delay Rental payment of $3.00 per acre per year and the CNR leases provided for a Delay Rental payment of $5.00 per acre per year. Each lease was duly recorded in the proper county clerk's office. In total, there are approximately 150 leases that are the subject of this litigation.

Since that time, the leases have been acquired by Chesapeake which, in turn, assigned 32.5% of its interest in the leases to Statoil. By the primary lease terms of five and ten years, the leases at issue expired in 2009 and 2010. As of those dates, no wells had been drilled on the properties and no royalties had been paid to plaintiffs. To date, there has still been no drilling and no royalty payments.

With the exception of two leases (the "Hidock leases"*fn4 ), each lease that is the subject of plaintiffs' complaint contains the following arbitration clause:

ARBITRATION: In the event of a disagreement between Lessor and Lessee concerning this lease, performance thereunder, or damages caused by Lessee's operation, settlement shall be determined by a panel of three disinterested arbitrators. Lessor and Lessee shall appoint and pay the fee of one each, and the two so appointed shall appoint the third, whose fee shall be borne equally by Lessor and Lessee. The award shall be by unanimous decision of the arbitrators and shall be final.

See e.g., Second Am. Compl., Ex. 2 ("Lease A").

III. LEGAL STANDARD--CHOICE OF LAW

The parties first disagree over which law is to be applied to this motion. Defendants contend the Federal Arbitration Act ("FAA") governs because the oil and gas leases concern interstate commerce. Plaintiffs dispute the application of the FAA and argue New York law applies because all of the leases concern real property in New York and no gas has been drilled yet alone transported in interstate commerce. They urge that public policy in New York precludes arbitration under these circumstances because the dispute centers on matters of important governmental policy and state interest.

Diversity jurisdiction exists over this matter pursuant to Title 28 of the United States Code, section 1332. Because diversity actions are generally governed by state substantive law, a district court sitting in diversity must determine whether an arbitration dispute is governed by the FAA or state law. The FAA applies only to written arbitration agreements connected to a transaction involving interstate commerce.See ACEquip Ltd. v. Am. Eng'g Corp., 315 F.3d 151, 154 (2d Cir. 2003); 9 U.S.C. §§ 1, 2; see also David L. Threlkeld & Co., Inc. v. Metallgesellschaft Ltd., 923 F.2d 245, 249 (2d Cir. 1991) ("[FAA] applies in federal court to diversity suits which relate to contracts involving interstate or international commerce.").

The FAA's application here turns on whether the leases involve commerce. The Supreme Court has held that the term "involving commerce" signifies the "broadest permissible exercise of Congress' Commerce Clause power." Citizens Bank v. Alafabco, Inc., 539 U.S. 52, 56, 123 S. Ct. 2037, 2040 (2003) ("[T]he FAA encompasses a wider range of transactions than those actually 'in commerce'-that is, 'within the flow of interstate commerce.'"). The Supreme Court explained that "Congress' Commerce Clause power 'may be exercised in individual cases without showing any specific effect upon interstate commerce' if in the aggregate the economic activity in question would represent 'a general practice . . . subject to federal control.'" Id. at 56--57, 123 S. Ct. at 2040 (quoting Mandeville Island Farms, Inc. v. Am. Crystal Sugar Co., 334 U.S. 219, 236, 68 S. Ct. 996, 1006 (1948)).

Thus, "[o]nly that general practice need bear on interstate commerce in a substantial way." Id. at 57, 123 S. Ct. at 2040.

Applying those guidelines, the leases here fall within the extent of Congress' Commerce Clause power. Although the oil and gas leases at issue involve real property only in New York, the plaintiff landowners in New York negotiated the subject leases with CAP, an Ohio company and CNR, a Delaware limited liability company. Those leases have since been acquired by Chesapeake, an Oklahoma limited liability company and Statoil, a Delaware corporation. Further, while no drilling has yet been commenced on the properties and thus no gas has been found nor shipped in interstate commerce, the contracts clearly evidence transactions involving interstate commerce. As defendants point out, the leases' primary purpose is the development of gas resources which will ultimately be placed in an interstate pipeline subject to federal regulation. The ...


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