Contributed by Nelly Almeida
The Fifth Circuit’s recent decision in Coe v. Chesapeake Exploration, L.L.C., No. 11-41003, 2012 WL 3966722 (5th Cir. Sept. 12, 2012), caught our eye even though it isn’t a bankruptcy decision. The appeal in Coe turned on the enforceability of an oral agreement to acquire natural gas rights, followed up by an offer to purchase in an email. The buyer did not perform when gas prices plummeted. The Fifth Circuit found the agreement enforceable and affirmed a judgment for damages in the seller’s favor. So why does a fairly run-of-the-mill statute of frauds case interest us? Because it illustrates the need for careful analysis of executory contracts in chapter 11 and serves as a warning that even contracts that lack a formal executed agreement may be enforceable and pass through a chapter 11 reorganization if not properly rejected under section 365 of the Bankruptcy Code.
The Fifth Circuit affirmed an award of damages to Peak Energy Corporation on account of an agreement with Chesapeake Exploration, LLC. In 2008—a time when natural gas prices were soaring—Chesapeake sought to acquire as much natural gas producing acreage as it could. It enlisted the services of a Texas “oil man,” Greg Wood, who identified Peak Energy as an owner of mineral rights in Haynesville Shale, a rock formation in east Texas containing large quantities of natural gas. Wood initiated contact with Richard Coe at Peak Energy on Chesapeake’s behalf and following an agreement on price per acreage, Chesapeake instructed Wood to “make a deal.” On July 1, 2008, Wood and Coe entered into an oral agreement whereby Peak Energy agreed to sell its rights, title, and interest in certain oil and gas leases to Chesapeake at $15,000 per acre. Chesapeake’s executive vice president then sent an email letter entitled “Offer to Purchase” to Peak Energy confirming Chesapeake’s intent to purchase Peak’s rights. Chesapeake included a purchase price, the terms and conditions for certain purchase price adjustments, and a map of Harrison County highlighting the acres in question. Shortly thereafter Chesapeake asked Peak to prepare a final list of leases. In October 2008, before receiving such list and at a time with significant decrease in natural gas prices, Chesapeake asked Peak to postpone the closing until January 2009. Peak Energy instead filed suit to enforce the July agreement.
The district court considered whether the July agreement was an agreement to negotiate—as alleged by Chesapeake–or an enforceable contract and the district court ruled in favor of Peak, awarding the company $19,751,004 in damages in addition to attorneys’ fees and costs. Chesapeake appealed to the Fifth Circuit Court of Appeals and in affirming the district court’s opinion the Court of Appeals noted that “the absence of closing documents does not necessarily make an agreement non-binding.” As long as the agreement contains all “essential” terms, “the need to formalize the transaction with closing documents is not fatal to its enforceability.” The Fifth Circuit determined that, in this case, essential terms such as purchase price, net revenue interest rate, depth provisions, closing and delivery dates, and a description of the property to be conveyed by way of the exhibit attached to the email, were all included in the July agreement and were sufficient to find that agreement to be an enforceable contract. The Fifth Circuit found that Chesapeake failed to show the agreement was too indefinite and dismissed Chesapeake’s assertion that there was no agreement as to certain essential terms as “meritless.” The Fifth Circuit also rejected Chesapeake’s argument that the July agreement did not provide a “sufficient nucleus of description to satisfy the statute of frauds,” which requires that a contract include the means or data by which the property to be conveyed may be identified with reasonable certainty, and in doing so noted that “a central purpose of the statute of fraud’s ‘reasonable certainty’ requirement is to avoid instances in which a court enforces the sale of property that the seller did not intend to convey, or that the buyer did not inten
t to purchase, based on an unclear contract.”
Now here’s the bankruptcy hook. Section 365(a) of the Bankruptcy Code authorizes a trustee to assume or reject executory contracts and unexpired leases. Upon filing of a chapter 11 petition, a debtor will file a schedule listing all executory contracts and unexpired leases. In a case where the debtor is reorganizing, it is typical for the plan of reorganization to provide that all executory contracts not expressly rejected are assumed.
The Coe decision shows that even an agreement lacking formal documentation might be an enforceable, executory contract. Under a plan that defaults to assumption of all executory contracts unless specifically rejected, the agreement in Coe would pass through a reorganization, obligating both the buyer and the seller to perform. This could cause significant financial trouble for a debtor expecting a “fresh start” free from improvident pre-bankruptcy agreements. The lesson here is that when preparing their schedules, debtors should be careful to consider even those agreements that lack “closing documents” but may still be considered enforceable contracts under applicable state law.
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