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

• Decision Date: 12 September 2012
• Docket Number: No. 11–41003.,11–41003.
• Citation: 695 F.3d 311
• Parties: Richard C. COE; Barbara Anne Coe; Douglas Coe, Jr.; Peak Energy Corporation, Plaintiffs–Appellees, v. CHESAPEAKE EXPLORATION, L.L.C.; Chesapeake Energy Corporation, Defendants–Appellants.
• Court: U.S. Court of Appeals — Fifth Circuit

695 F.3d 311

Richard C. COE; Barbara Anne Coe; Douglas Coe, Jr.; Peak Energy Corporation, Plaintiffs–Appellees,

v.CHESAPEAKE EXPLORATION, L.L.C.; Chesapeake Energy Corporation, Defendants–Appellants.

No. 11–41003.

United States Court of Appeals, Fifth Circuit.

Sept. 12, 2012.

John Clinton Schumacher, William Scott Hastings (argued), Elizabeth L. Tiblets, Locke Lord, L.L.P., Dallas, TX, Scott English Stevens, Stevens Love Law Firm, Longview, TX, for Plaintiffs–Appellees.

Jesse R. Pierce (argued), James Chadwick Newton, Pierce & O'Neill, L.L.P., Houston, TX, for Defendants–Appellants.

Appeal from the United States District Court for the Eastern District of Texas.

Before JOLLY, HIGGINBOTHAM and DENNIS, Circuit Judges.

PATRICK E. HIGGINBOTHAM, Circuit Judge:

In July 2008 Chesapeake Exploration, LLC entered into an agreement to purchase deep rights held by Peak Energy Corporation in certain oil and gas leases in the Haynesville Shale formation, for the hefty sum of $15,000 per acre. When the price of natural gas plummeted several months later, Chesapeake refused to honor its commitment. In response to the complaint filed by Peak it contended that the parties' agreement was unenforceable under the Texas statute of frauds, fatally indefinite, and that the plaintiffs had failed to tender performance. The district court disagreed, rendering judgment in favor of Peak and its principals and awarding them damages in the amount of $19,951,004, pre-judgment and post-judgment interest, and attorneys' fees and costs. Finding no error, we affirm.

I.

The Haynesville Shale is a stratigraphic rock formation in east Texas, northwest Louisiana and southwest Arkansas that lies beneath the Cotton Valley formation and contains large quantities of natural gas. In 2008, when natural gas prices were soaring, Chesapeake¹ attempted to acquire as much producing acreage as it could. To that end it engaged the services of Texas oil man Greg Wood who, with the help of Steve Howell of Howell Oil and Gas, identified Peak Energy Corporation² as an owner of mineral rights in the area. Based on information that Wood obtained from Howell, Chesapeake created detailed maps of Peak's potential holdings.

On June 30, 2008 Wood initiated contact with Richard Coe at Peak. He told Coe that Chesapeake was interested in acquiring all of the deep rights that Peak owned in the Haynesville Shale, and that it was his understanding that Peak had rights in 5,404.75 acres in Harrison County, Texas, where part of the Haynesville Shale is located. Coe stated he did not know how many acres Peak had in the area. Based on this conversation, Wood informed Chesapeake that Peak might be willing to sell its holdings for $15,000 per acre for a net revenue interest of 75%. Chesapeake CEO Aubrey McClendon instructed Wood to “make the deal for us,” and on July 1 Wood and Coe reached an oral agreement.

On July 2, 2008 Douglas Jacobson, Chesapeake's executive vice president, e-mailed a letter entitled “Offer to Purchase” to Coe that stated:³

Chesapeake Exploration, L.L.C. (“Chesapeake”) hereby submits a cash offer of Eighty One Million Seventy One Thousand Two Hundred Fifty and No/100ths Dollars ($81,071,250.00) (“Purchase Price”) to Peak Energy Corporation (“Seller”), effective July 2, 2008 (the “Effective Date”), for all the Seller's right, title and interest in certain oil and gas leases located in Harrison County, Texas (and only those located in Harrison County, Texas), such leases being shown in the map attached hereto as Exhibit “A”, excepting and reserving unto the Seller all right, title and interest in and to the formations, intervals, strata and depths found between from the surface of the Earth and the stratigraphicequivalent of the base of Cotton Valley formation and further reserving an overriding royalty interest described below (the “Leases”).

The “terms and conditions” section specified that “[t]he leases to be conveyed ... shall include approximately 5,404.75 net acres,” and “[a]djustments to the Purchase Price based on the Seller delivering more or less than 5,404.75 net acres shall be made in accordance with the allocated value of $15,000 per net acre.” It further provided that “[t]his offer will be considered void if not accepted by 5:00 PM CDT on July 3, 2008,” was a “valid and binding agreement,” and that the transaction's closing date was August 31, 2008. At Coe's request, an asterisk was added after “Peak Energy Corporation” to indicate that “Seller” included “affiliated entities for which Peak Energy Corporation or its officers have the authority to act as agent or principal.” Attached to the letter was Exhibit A, a letter-sized map showing Harrison County and parts of neighboring counties. Several areas in Harrison County were highlighted and had “PEAK” written next to them. Jacobson and Coe signed the letter on behalf of Chesapeake and Peak, respectively.

Three weeks after the July Agreement had been signed, Chesapeake asked Peak to prepare a final list of leases to be conveyed. “Prior to that date,” the district court found, “Chesapeake had relied exclusively on its own due diligence to determine what leases were subjected to the parties' agreement.” As they worked to complete the lease list and other closing documents, both parties requested and obtained extensions beyond the original closing date. Chesapeake repeatedly expressed its intent to complete the transaction and Peak, believing itself bound by the July Agreement, did not solicit or entertain any offers for its holdings in Harrison County.

On October 9, Chesapeake requested that closing be postponed until January 2009. Six days later, it informed Coe that it would not be completing the transaction. Michael Falen, Chesapeake's supervisor of acquisitions, told Coe there were “timing issues” and that the properties were “edgy.” This decision coincided with a significant decrease in natural gas prices that had begun in August 2008. By October, these prices had fallen approximately 50% from their high in early July, and the fair market value of deep right leases in Harrison County had decreased to $3,000 per acre.

Peak and the Coes filed suit to enforce the agreement in September 2009. Chesapeake insisted the July Agreement was simply an agreement to negotiate, or letter of intent, and not binding. It claimed the agreement did not meet the requirements of the Texas statute of frauds and was too indefinite to be enforced. The district court held a bench trial in September 2010. In November, it appointed retired oil and gas attorney William Huffman as an expert,⁴ and asked him: “Reviewing only the Partial Findings of Facts, the furnished exhibits, and an unlimited review of the Deed and Property Records of Harrison County ... could he identify by reference to the volume and page number of said deed records the oil and gas leases contained within the shaded areas of the Map wherein Peak Energy Corporation is named as the lessee?” Huffman testified that he could, but emphasized that “without reviewing the real property records in the office of the County Clerk of Harrison County he would not be able to identify the leases in the name of Peak.” He also concluded he could determine whether a lease contained a depth limitation by reading the lease or, if the lease included a depth severance provision, by looking at additional public records such as those of the Texas Railroad Commission.

The district court ruled the July Agreement was enforceable and entered judgment in favor of Peak in September 2011. It awarded damages to Peak in the amount of $19,751,004, as well as pre-judgment and post-judgment interest. ⁵ Peak also received $434,951.80 in attorneys' fees and $19,851.92 in costs. Execution of the judgment was stayed pending this appeal.

II.

“The standard of review for a bench trial is well established: findings of fact are reviewed for clear error and legal issues are reviewed de novo.”⁶ Because this case came before the district court on diversity jurisdiction, we apply the substantive law of Texas. ⁷ In “making an Erie-guess in the absence of explicit guidance from the state courts, we must attempt to predict state law, not to create or modify it.”⁸

III.

Chesapeake's first argues that the parties' July Agreement is unenforceable under the Texas statute of frauds because it does not adequately identify the property to be conveyed. “To 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.”⁹ The description must be contained in the written agreement and written instruments to which it refers, as “the knowledge and intent of the parties will not give validity to the contract, and neither will a plat made from extrinsic evidence.”¹⁰ A map referenced in the agreement may be used to aid a defective description so long as it “contains enough descriptive information which, when considered in connection with the attempted written description ... make[s] location of the land possible.”¹¹

If the agreement contains a sufficient nucleus of description, then “parol evidence may be introduced to explain the descriptive words in order to locate the [property].”¹² “Extrinsic evidence may be used only for the purpose of identifying the property with reasonable certainty from the data contained in the contract,” however, and “not for the purpose of supplying the location or description of the property.”¹³ As the Texas Supreme Court explained in Wilson v. Fisher, “[t]he details which merely explain or clarify the essential terms appearing in the instrument may ordinarily be shown by parol. But the parol must not constitute the framework or skeleton of the agreement. That must be contained in the writing.” ¹⁴

As we explained above, the July Agreement stated:

Chesapeake Exploration, L.L.C. (“Chesapeake”)...