New York Landowners Sue Norse Energy USA Over Leases

Eighty-nine New York landowners who once agreed to let Norse Energy Corp. USA drill for natural gas on their property have filed a lawsuit against the struggling company, arguing that its executives have unfairly extended the life of their lease agreements using a legal clause meant for natural disasters and terrorist attacks.

The landowner group said that Norse Energy USA shouldn't be allowed to use what is called force majeure to extend the life of the leases they signed before former New York Gov. David Paterson banned high-volume hydraulic fracturing, or fracking, while state regulators come up with new permitting rules for the drilling process.

In their lawsuit, the landowners asked Judge Carl Bucki, who has been monitoring the company's restructuring case in U.S. Bankruptcy Court in Buffalo, N.Y., to determine that the leases have expired.

"Despite requests from landowners, Norse has refused to provide documents cancelling the lease as of record," attorney Robert Jones, who is representing the landowners, said in the lawsuit. "The [property owners'] lands are now being unlawfully encumbered, and [they] cannot sell, mortgage or lease their property by virtue of the [company's] actions."

Norse Chief Legal Officer Dennis Holbrook said that the force majeure clause "was properly exercised."

"We believe that the events in New York support a position of force majeure," he told Dow Jones. "We anticipate that the courts will ultimately agree with that position."

Norse Energy USA, which filed for bankruptcy protection on Dec. 6, said that its roughly 1,200 landowner leases are its most valuable asset, enabling it to drill for oil and natural gas beneath the 133,000 acres of its land in Upstate New York. In quarterly reports, the company has said that it is positioned to pull 951 net million barrels of oil equivalent from the ground once the New York State Department of Environmental Conservation lifts its ban.

At the time of the bankruptcy filing, the company had only about $1 million in cash, according to earlier court papers.

Despite the halt on drilling, the company said it owes money to bondholders who extended $21 million to the company. And last fall, a New York judge told Norse Energy USA officials to put nearly $8 million in an account until a judge can determine whether it owes a Buffalo-based business partner any money.

The force majeure clause that was written in Norse Energy USA's lease clauses was meant to get it of contractual duties when performing those duties "has been prevented by a force beyond its control," according to court papers. Natural disasters commonly trigger force majeure arguments, and some companies cited the clause to get out of contracts after the Sept. 11 terrorist attacks.

Other natural-gas drillers in New York have used the clause to keep the leases alive, though a federal judge recent determined that citing that provision is improper. In November, Judge David Hurd said that an affiliate of Chesapeake Energy Corp. couldn't use force majeure to extend its leases.

"The clause is apparently being invoked to give Norse greater rights than it bargained for," Mr. Jones, the landowner attorney, said in the lawsuit.

The New York landowner group also protested the process that Norse Energy USA planned to use to drill for natural gas on their property, which would have involved injecting several million gallons of water, sand and chemicals into the ground "to stimulate oil or gas wells," Mr. Jones said. He said that the property owners he represents didn't consent to that drilling that would have injected so much material into the ground.

Older technology injected a much smaller amount of drilling material, and Norse Energy USA hadn't relied much on the high-volume drilling strategy in the past, Mr. Jones said.

"The leases involved are silent as to the type of drilling to be used," Mr. Jones said in court papers.

Norse Energy USA officials have already had to fight to defend its leases after they asked Judge Bucki to allow them to assume the agreements as part of their bankruptcy-court reorganization. That request in federal court gave landowners an opportunity to object to the lease's validity--a request that could have easily cost them $10,000 if they had to file a lawsuit instead, said landowner attorney Christopher Denton.

"By Norse filing for bankruptcy, they gave us a forum where everybody could come in at once" to challenge the leases, he said.


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