Chesapeake Loses Bid to Void Texas Oil, Gas Rights Award

Chesapeake Energy Corp. (CHK), facing claims by mineral rights holders in multiple states over canceled oil and gas lease offers, lost a bid to reverse a $19.7 million judgment to a Texas lease owner.

Chesapeake wrongfully canceled an agreement to buy drilling rights held by the family-owned Peak Energy Corp., the U.S. Court of Appeals in New Orleans ruled. The panel today upheld a 2011 decision by U.S. District Judge John Ward in Marshall, Texas, awarding Plano, Texas-based Peak $19.7 million.

Peak claimed Oklahoma City-based Chesapeake breached a contract and abandoned the deal as gas prices plummeted. Ward said a letter of intent signed by both sides was a valid contract. Chesapeake asked the court to reverse Ward and find that a letter of intent isn’t a binding contract.

“The absence of closing documents does not necessarily make an agreement nonbinding,” the appeals court said. “This agreement is enforceable.”

Chesapeake also asked the appeals court to cancel Ward’s order telling the company to pay the $12,000-an-acre difference between the offer price and the lease value when the bid was withdrawn. Peak didn’t have rights to almost two-thirds of the 5,405 acres (2,187 hectares) covered in the accord, Chesapeake argued.

The court upheld the damages award.

Michael Kehs, a Chesapeake spokesman, declined to comment on the ruling.

Similar Suits

Claims similar to Peak’s have been filed in federal and state courts by hundreds of landowners in states including Pennsylvania, Michigan and Texas alleging that Chesapeake breached contracts to buy oil and gas leases.

Those suing typically claim Chesapeake offered top prices, including sign-up bonuses, only to walk away from agreements when gas prices dropped or shale formations proved less profitable to develop than originally projected.

Chesapeake lost a separate Texas lawsuit July 10, when a federal judge ordered the company to pay more than $100 million to holders of three leases. The plaintiffs, Texas energy companies unrelated to Peak, sued Chesapeake in November 2008 for failing to complete the purchase of three gas leases the producer began negotiating for in June of that year, before energy prices plunged by as much as 50 percent.

‘Big Loss’

“This is a big loss for Chesapeake and will have ramifications across the U.S.,” said Anthony Sabino, a law professor at St. John’s University in New York who specializes in complex litigation and oil-and-gas law.

The federal appeals court in New Orleans, the Fifth Circuit, covers Texas, Louisiana and Mississippi, “a huge portion of the oil patch,” and is often given deference by other courts on cases involving the industry, Sabino said.

“It is unlikely that the Supreme Court will review this, so the Fifth Circuit’s decision will be final,” he said. In arguing similar lawsuits, “lawyers for Chesapeake will have to distinguish this case and why it doesn’t apply,” he said.

Chesapeake fell 21 cents, or 1 percent, to $19.89 today in New York Stock Exchange composite trading.

Chesapeake, the second-largest U.S. gas producer, lost 35 percent of its market value in the past year as the effect of tumbling energy prices was compounded by questions about Chief Executive Officer Aubrey McClendon, who led a costly push to expand the firm’s gas holdings during the past decade. He was replaced as chairman June 21 by Archie Dunham.

Under Fire

McClendon has been under fire for using personal stakes in the company’s oil and gas wells to borrow privately more than $800 million last year from some of the company’s biggest financiers.

He also has been criticized for a wrong-way bet in natural- gas prices that damaged Chesapeake’s cash flow, increased its borrowing costs and spurred its biggest investors to replace more than half the board.

Peak officials sued Chesapeake in 2009, alleging that its executives began a “land grab” in eastern Texas and western Louisiana in early 2008, seeking to acquire the rights to large swaths of the Haynesville Shale area. Chesapeake relied on an “army of landmen” to acquire leases, Peak’s attorneys said in court filings.

Peak officials contend that McClendon was personally involved in their deal, approving a landman’s offer of $15,000 an acre and pushing to speed negotiations.

Written Offer

Upon learning Peak officials wanted the offer in writing, McClendon sent his negotiator an e-mail urging him to complete the deal promptly. “Sooner the better of course!” McClendon said in the July 1, 2008, e-mail, according to court filings.

McClendon described the push to acquire rights to the Haynesville Shale formation in a July 2008 call with investors, saying he was trying to make Chesapeake “the only game in town for a lot of owners of smaller tracts of land out there.”

“We especially understand the value in today’s world of having a huge land machine that can devour big chunks of land across these massive new unconventional plays,” McClendon said, according to a transcript. “In these plays, if you snooze, you lose. And with over 4,000 landmen in the field every day buying new leases, I can assure you that Chesapeake is not snoozing.”

Four months later, McClendon and other Chesapeake officials weren’t as eager to complete the deal as gas prices fell, Peak’s lawyers said.

‘Market Conditions’

“The transaction failed to close because market conditions had changed, Chesapeake ran into cash flow problems and Chesapeake was looking for excuses to back out of its pending deals for Haynesville Shale properties,” Peak said in a February appeals court filing.

The price of natural gas had dropped in 2008 by about 50 percent from June to September, Peak, represented by attorney Clint Schumacher, said in the complaint.

“Because of the falling price of natural gas and tightening credit markets, the agreement between Chesapeake and sellers was no longer economically advantageous for Chesapeake in October 2008,” Schumacher wrote. “Chesapeake chose to repudiate the agreement.”

Chesapeake countered that the “letter of intent” between the two companies over the oil and gas leases didn’t amount to a final contract and Peak officials failed to come up with a final list of leases to be covered.

“The letter of intent was simply the beginning of a negotiation,” Chesapeake’s lawyers said in court papers in June 2010. A final agreement was never reached, the lawyers said.

Peak’s Performance

“Peak cannot enforce a sale and assignment between the parties because, as a matter of law, Peak cannot demonstrate that it performed its obligations,” Chesapeake said. “In tendering only 1,645 acres, Peak failed to perform under the letter of intent.”

Ward, the trial judge, disagreed, finding that the letter of intent was a contract, that Chesapeake breached it and that the company must pay for the acres Peak tendered.

“Chesapeake contends the district court erred in concluding that the parties intended to be bound by the July agreement,” U.S. Circuit Judge Patrick Higginbotham wrote in today’s appellate decision.

“We disagree. The agreement stated on its face that it was ‘valid and binding,’ was entitled ‘Offer to Purchase,’ and provided that Chesapeake’s offer would be void if Peak did not accept it by signing the agreement before 5 p.m. on July 3.”

While the agreement didn’t list all the properties to be covered, it “contains an adequate nucleus of description,” the court said. The lease list “is not itself an essential term of the agreement,” Higginbotham said in the 19-page decision.

The lower-court case is Coe v. Chesapeake Exploration LLC, 2:09-cv-00290, U.S. District Court, Eastern District of Texas (Marshall). The appeal is Coe v. Chesapeake Exploration LLC, 11- 41003, U.S. Court of Appeals for the Fifth Circuit (New Orleans).

To contact the reporter on this story: Margaret Cronin Fisk in Detroit at mcfisk@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net

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