Face Challenges Confidently

324 Preston Exploration Co. v. Chesapeake Energy Corp.

Monday, August 31st, 2015

Richard F. Brown

The following is not a legal opinion. You should consult your attorney if the case may be of significance to you.
Preston Exploration Co. v. Chesapeake Energy Corp., 716 F. Supp. 2d 656 (S.D. Tex. 2010)held that for a Purchase and Sale Agreement (“PSA”) to be enforceable, the leases described on the exhibit to the PSA must be identified by reference to the volume and page where the leases are recorded. In June of 2008, Chesapeake agreed to purchase oil and gas leases in two Texas counties from Preston. Over the next several months, the parties negotiated the terms of the PSA, exchanged multiple drafts by e-mail of the schedules and exhibits describing the leases to be conveyed, and the proposed closing date was delayed several times. There was a proposed closing date of October 7, 2008, which was delayed at the last minute by agreement to November 7, 2008, but only after Chesapeake paid to Preston a non-refundable deposit of approximately $11,000,000.00. Also on October 7, there was agreement on some final changes to the PSA, and Preston sent a series of e-mails to Chesapeake that afternoon which included a set of PSA Exhibits and a set of Assignment Exhibits. Chesapeake did not review the Assignment Exhibits and focused on reviewing the PSA Exhibits, which were not identical to the Assignment Exhibits. There were some agreed changes to the PSA Exhibits on October 7, and, late on October 7, Preston signed the PSA with the PSA Exhibits attached. The Assignment Exhibits were not physically attached to the PSA signed by Preston. On October 8, there were a few more agreed changes to the PSA Exhibits, and Chesapeake then executed and returned to Preston the signature pages to the PSA. Chesapeake did not close on November 7, Preston promptly filed suit, and Chesapeake counterclaimed for return of the non-refundable deposit.
Chesapeake’s defense was based on the statute of frauds. The statute of frauds requires that to be enforceable a contract purporting to sell oil and gas leases “‘must furnish within itself, or by reference to some other existing writing, the means or data by which the land to be conveyed may be identified with reasonable certainty.’” The PSA Exhibits as prepared by Preston contained the name of the lessee, effective date of the lease, gross acres leased, royalty of the lease, the net revenue interest, and apparently also the name of the lessor, the survey, lease term, and net acreage. The PSA Exhibits also showed Preston’s unique internal lease identification number for each lease, which correlated to the numbered lease files in Preston’s office that contained a hard copy of the lease itself or a data sheet with the metes and bounds description for that particular lease. The Assignment Exhibits, unlike the PSA Exhibits, included the volume and page where the various leases were recorded. The case generally turned upon an analysis of the adequacy of the descriptions used on the various schedules and exhibits and upon determining which documents collectively comprised the agreement of the parties.
For the description used to be effective under the statute of frauds, it cannot require a search of the public records in order to arrive at the location of the property that corresponds to each lease. The data set forth in the PSA Exhibits did not inherently contain such identifying information.  “By contract, had the volume and page number information for each of the leases been included in the PSA Exhibits, this would have constituted an explicit reference to the public records containing the required location information. This distinction between characteristic data versus volume and page information is crucial . . . .” Public real property records can be considered only if they are attached or referenced in the contract. “Here, with the data contained in the PSA Exhibits, it is the search of the public records, which are wholly extrinsic to the data provided, that allows the property corresponding to each lease to be identified. If volume and page information had been provided, by contrast, the public records would have been explicitly referenced within the writing and thereby incorporated into the agreement. In that case, therefore, extrinsic evidence would have been wholly unnecessary to discern location information.” Similarly, Preston’s internal lease identification numbers were insufficient, because the numbers require extrinsic testimony or evidence before the significance of the numbers can be ascertained. Therefore, the PSA Exhibits did not satisfy the statute of frauds because they failed to disclose the location and boundaries of the properties corresponding to the leases to be conveyed.
The court then considered whether the Assignment Exhibits (which contained recording references) were incorporated into the agreement of the parties, although not physically attached to the PSA. The court held that in the modern era of remote closings and electronic documents, there has to be a more flexible approach to the statute of frauds. Sending documents over e-mail prior to execution could have the same impact as physically attaching all the documents once the contract is executed. The act of sending the documents via e-mail raises a logical presumption that the documents are part of the package reviewed prior to signing the contract. Limiting the statute of frauds in this electronic age by saying documents must be physically attached when exchanged would be contrary to the statute’s purpose.
However, in this case, the court found that the Assignment Exhibits were not finalized documents because the parties had not agreed upon the terms of the Assignment Exhibits at the time the PSA was signed. Pursuant to basic contract law, if the exhibits are not final upon the execution of the PSA and there is not a meeting of the minds, they cannot be considered part of the parties’ agreement. Therefore, the agreement of the parties included no description of the leases to be conveyed, except the inadequate description on the PSA Exhibits.
Finally, the court held that Chesapeake could not recover the non-refundable deposit. Even though the PSA was ultimately held to be unenforceable, Chesapeake did receive the consideration for which it bargained-a delay in making a decision on whether to close.
The significance of this case is the application of the statute of frauds to a PSA and exhibits attached to a PSA. Even if the location of the leases can be determined with absolute certainty by reference to extrinsic information, if the actual legal location of the leases is not determinable from the exhibit itself, the exhibit will not comply with the statute of frauds. Volume and page number of the recording information for the leases being conveyed can be listed on the exhibit, which will incorporate the leases by reference, and that will satisfy the statute of frauds requirement. The case is also significant for its discussion of electronic or remote closings and the treatment of electronic exhibits under the statute of frauds.