426 Coe v. Chesapeake Exploration, L.L.C.

Richard F. Brown

 
The following is not a legal opinion.  You should consult your attorney if the case may be of significance to you.
 
Coe v. Chesapeake Exploration, L.L.C., 695 F.3d 311 (5th Cir. 2012), held that a purchase and sale agreement was a valid and binding contract under the statute of frauds when the property interests to be conveyed were identified as all of grantor’s interests within a specific geographical area.  In July 2008, Chesapeake emailed an “Offer to Purchase” to Peak Energy Corporation, which stated:
 
Chesapeake Exploration, L.L.C. (“Chesapeake”) hereby submits a cash offer of . . . ($81,071,250.00) (“Purchase Price”) to Peak Energy Corporation (“Seller”), effective July 2, 2008 . . . for all the Seller’s right, title and interest in certain oil and gas leases located in Harrison County, Texas . . . such leases being shown in the map attached hereto as Exhibit “A”. . . .
 
The offer was accepted and the parties began working on the matters necessary to close.  While the offer identified “approximately 5,404.75 net acres” to be conveyed, adjustments to the Purchase Price based on the Seller delivering more or less than 5,404.75 net acres were permitted at an allocated value of $15,000.00 per net acre.  In October, Chesapeake informed Peak that it would not complete the transaction.  This refusal to honor the July Agreement coincided with a sharp decline in the price of natural gas, which resulted in a significant decrease in the fair market value of a drilling lease in the Haynesville Shale in Harrison County to approximately $3,000 per acre in October of 2008.  The acreage actually owned by Peak that fit within the terms of the agreement was only 1,645 net acres.  The principal issues on appeal were whether the agreement was unenforceable under the Texas statute of frauds or because Peak was unable to perform.
 
Under established Texas law, “[t]o satisfy the Statute of Frauds, a contract [conveying an interest in land] must furnish within itself, or by reference to some other existing writing, the means or data by which the property to be conveyed may be identified with reasonable certainty.”  An agreement that contains a sufficient “nucleus of description” of the property to be conveyed may be supported by parol evidence to assist in identifying the property’s location with reasonable certainty.  The reasonable certainty standard does not require that the property be identified by metes and bounds, and Texas courts have recognized other means of identification.  In Kmiec v. Reagan, 556 S.W.2d 567 (Tex. 1977), the Texas Supreme Court acknowledged that a recital of ownership (e.g., “my property” or “my land”) can create a sufficient nucleus of description under the statute of frauds.  The Kmiec court held that “[w]hen the grantor is stated to be the owner of the property to be conveyed, and it is proved that the grantor owns only a single tract answering the description, the land is identified with reasonable certainty.”  Subsequent Texas courts have found that the recital of ownership satisfies the statute of frauds when the owner conveys “all of the property that he owns in the area described by the agreement.”
 
In this case, Peak agreed to convey all of its drilling rights in oil and gas leases located within the geographical area depicted on the map attached as Exhibit A to the July Agreement.  Additionally, the July Agreement expressly referenced the map at Exhibit A as representing the specific location of the Peak leases to be conveyed.  This identified with reasonable certainty under the statute of frauds the property to be conveyed.
 
The actual acreage owned by Peak within the area depicted on the map, further reduced by the effect of the depth limitations and net revenue interest limitations in the agreement, was ultimately determined to be 1,645 net acres, instead of the approximately 5,404 acres described in the agreement.  Texas courts have held that a seller fails to tender performance if the amount of acreage it delivers to the buyer differs by 10% or more from the acreage listed in a contract, but this applies only to a sale in gross of a designated tract of land and not to a sale of land by the acre.  In this case, the court determined that the sale was by the acre as indicated by the price adjustment mechanism and that the acreage was recited to be “approximately” 5,404 net acres.  Therefore, Peak could perform its obligations under the agreement, and the agreement was not unenforceable because Peak could only deliver 1,645 net acres.
 
Although purchase and sale agreements for oil and gas properties are usually lengthy and complicated, the provisions necessary to have a binding agreement are generally just the parties, the effective date, the price, the description of the properties to be conveyed, and an agreement to convey.  The description is generally the most difficult to prepare and most likely to be subject to challenge in a statute of frauds case.