Hydrofracking risk: Not just for energy companies anymore

Companies in many different sectors need to assess their connection to hydrofracking and the risks it could bring

As previously noted, hydrofracking carries business risk for many companies, even those without direct links to the energy industry. Insurance carriers, for example, may see claims rise against a number of types of policies. Yet, this is not the only sector that could be open to liability from hydrofracking. Consider the following, for example.

Securities Violations: Investors, brokers and energy companies themselves may face liability stemming from corporate statements made about the benefits and risks of hydrofracking. At least one state attorney general—Eric T. Schneiderman in New York—is looking closely at the research done by hydrofracking companies and the information they possess about risks and benefits. To some extent, this is about possible environmental risk, but it’s likely Schneiderman may believe that companies were either underselling the risk of hydrofracking, overselling the benefits or both to investors in order to raise funds to finance operations. If this is the case, then investors and brokers stand to lose, and the companies themselves could face securities fraud investigations and charges.

This creates a gray area for banks where little legal precedent exists. The issue is further compounded if, as has been happening in greater and greater numbers, the farm property falls into receivership and ownership either reverts to the bank or is sold in a short sale. In these cases, there is little clarity on the status of the hydrofracking contracts. Does the lease go with the land?

This adds an entirely new wrinkle to the wave of bankruptcies we’re already seeing. Now as you sort out the rights of landowners and banks, you also have to consider the standing of the hydrofracking contracts. It’s a perfect storm that is only likely to get sorted out in the courts.

Contributing Author

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Greg Hoffnagle

Greg Hoffnagle is an attorney in the New York office of Edwards Wildman Palmer, and focuses his practice on international litigation and arbitrations involving energy/environmental, technology, cyber risk and securities insurance...

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