Chesapeake Told to Pay $100 Million Over Lease Claims

Chesapeake Energy Corp. was ordered to pay more than $100 million to three Texas lease holders who claimed the second-largest U.S. gas producer reneged on agreements to purchase mineral rights.

The Texas energy companies sued Chesapeake in November 2008 for failing to complete the purchase of three gas leases the Oklahoma City-based producer began negotiating for in June of that year, before energy prices plunged by as much as 50 percent.

A U.S. judge in Houston originally sided with Chesapeake and ruled the company didn’t have to pay because the lease contracts weren’t final. The Texas leaseholders appealed to the U.S. Court of Appeals for the Fifth Circuit in New Orleans, which agreed with the landowners in February and sent the case back to Houston for trial, where it was assigned to a new judge.

“The evidence in this case indicates that the closing did not occur because Chesapeake –- the buyer –- declined to attend,” U.S. District Judge Gray Miller said in a 10-page ruling yesterday. “Clearly, the Fifth Circuit believed, having considered all of Chesapeake’s arguments, that Chesapeake breached the contract.”

Judgment Recipients

The order awards $6.6 million to Preston Exploration Co. and $88.5 million to PEC Partnership, both of The Woodlands, Texas, and $5.7 million jointly to T.S.C. Oil & Gas Inc. of Dallas and Frank Willis III. The judge subtracted from these sums the 10 percent deposit the leaseholders previously received from Chesapeake, and then added more than $18 million in pre-judgment interest to the awards, plus attorneys’ fees.

The lawsuit is one of hundreds of similar claims filed in federal and state courts in Texas, Michigan, Pennsylvania and other states alleging Chesapeake breached contracts to purchase oil and gas leases.

Chesapeake has appealed a $19.7 million judgment in a separate Texas case involving mineral rights held by the family-owned Peak Energy Corp., based in Plano, Texas. Oral arguments were heard today by the federal appellate court in New Orleans.

“We believe the court erred, will post the required bond and will appeal the judgment,” Jim Gipson, a spokesman for Chesapeake, said in an e-mail. “We had already established a reserve for the case. If we must perform under the agreement, we will receive an assignment of the leases originally contemplated to be conveyed.”

The case is Preston Exploration Co. LP v. GSF LLC, 4:08-cv-03341, U.S. District Court, Southern District of Texas (Houston).

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