Oil and Gas Leaseholder Can’t Duck $20M Tab

     (CN) – Chesapeake Energy owes almost $20 million for trying to skip out on oil and gas leases when prices plummeted, the 5th Circuit ruled Wednesday.
     Peak Energy Corp. sold the rights to over 5,400 acres in Harrison County to Chesapeake Exploration LLC and Chesapeake Energy LLC for $81 million cash in July 2008. Chesapeake agreed to pay $15,000 per acre.
     On October 9, 2008, Chesapeake asked to postpone the closing until January 2009. Six days later, it informed Peak that it would not be completing the purchase. Michael Falen, Chesapeake’s supervisor of acquisitions, told Coe there were “timing issues” and that the properties were “edgy.”
     By this point, natural gas prices had plummeted approximately 50 percent from their highs in early July and the fair-market value of the leases in Harrison County had fallen to $3,000 per acre.
     Finding that the contract was enforceable, a federal judge in the Eastern District of Texas awarded Peak Energy $19.75 million in damages, more than $434,000 in attorneys’ fees and more than $19,000 in costs.
     The New Orleans-based federal appeals court affirmed Wednesday, rejecting Chesapeake’s argument that the contract is unenforceable under the Texas statute of frauds because Peak allegedly failed to adequately identify the property in question.
     “The July Agreement conveys all of Peak’s rights, interest and title in oil and gas leases in the areas shown on Exhibit A, which outlined several tracts of land in Harrison County,” Judge Patrick Higginbotham wrote for a three-judge panel. “This description is similar to other agreements enforced by Texas courts in which an owner conveyed all the property he owned in a specified state, county or survey.”
     “Because the property description contained in the July Agreement achieves the same ‘reasonable certainty’ found in other ‘recital of ownership’ cases, we conclude that the agreement contains an adequate nucleus of description under the statute of frauds,” Higginbotham added.
     Chesapeake also failed to show that the agreement was too indefinite.
     “The identity of the property to be conveyed is an essential term in a purchase agreement,” the 19-page opinion states. “As explained in our discussion of the statute of frauds, the July Agreement adequately described those properties. The lease list, which provides a more formalized description of the conveyed property, is not itself an essential term of the agreement. Its absence therefore does not make the July Agreement too indefinite to be enforced.”
     The panel also dismissed as “meritless” Chesapeake’s argument that the parties had never agreed upon the essential term of revenue interest.
     Chesapeake furthermore lost its claim that neither party expected a binding agreement since they subsequently signed a confidentiality agreement.
     “The final paragraph provided that ‘[n]othing in this agreement shall impose any obligation upon the companies or the recipient to consummate any business transaction with the other or to enter into any discussions or negotiations with respect thereto,'” Higginbotham wrote. “The language in this form agreement does not outweigh other evidence demonstrating the parties’ intent to be bound when they signed the July agreement.”
     For its final unsuccessful attempt at characterizing the contract as unenforceable, Chesapeake said that Peak could not perform its obligations and that evidence did not support the massive award.

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