Midstream Contracts Remain in Doubt in Bankruptcy

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By now, both producers and midstream companies are aware of the Bankruptcy Court decisions in the Sabine bankruptcy proceedings (i) rejecting the gas gathering agreements as executory contracts and (ii) determining that the agreements and commitments for transferring the produced gas, water and condensate were not covenants that run with the land or equitable servitudes.  (In re Sabine Oil & Gas Corp., 547 B.R. 66 (Bankr. S.D.N.Y. 2016) (decision on rejection of gathering agreements as executory contracts); In re Sabine Oil & Gas Corp., 2016 Bankr. LEXIS 12905 (Bankr. S.D.N.Y. May 3, 2016) (decision on determination of covenants).  Following these well-reported decisions, similar disputes in the Magnum Hunter and Quicksilver cases were settled prior to court decisions.  Various articles have been published about the underlying issues and how the decision could affect similar midstream contracts including our prior newsletters.

Since that initial spate of publicity and discussions, it has been somewhat quiet in the E&P bankruptcy cases on midstream issues until recently.  First, in the aftermath of the Sabine decision, the same Bankruptcy Court released a written decision denying motions for stay pending appeal and for direct certification of an appeal to the Second Circuit Court of Appeals. (See Memorandum Decision and Order, Docket No. 1267, Case No. 15-11835).  While the rulings are not surprising, the court’s rationale in connection with the denial of the direct certification is noteworthy.  The gas gathering contract parties, Nordheim and HPIP, sought a direct appeal from the bankruptcy court to the Second Circuit Court of Appeals (the normal route is to first appeal from the bankruptcy court to the district court and then after the district court rules, then to the circuit court).  These types of direct appeals have the benefit of getting a ruling by the circuit court in a much more expeditious manner via bypassing the district court.

Direct appeals are a two-step process.  The first step is to get a certification for a direct appeal and the second step is to ask the circuit court to accept the direct appeal.  In order to satisfy the first step, all parties must agree to a direct appeal or the bankruptcy court must determine that one of statutory tests has been met.  The Sabine debtors would not agree and opposed the direct appeal.  Nordheim and HPIP argued in favor of one of the legal tests that there is either (i) no controlling law or (ii) it is a matter of public importance.  Agreeing with the Sabine debtors, the Bankruptcy Court found both lacking.  Specifically, the court held that the covenant running with the land issue was neither novel nor unsettled under Texas law.  In this regard, the court stated that it applied the facts and specific contractual language and did not purport to rule on some unsettled issue of Texas law. Moreover, the court rejected the argument that this case involved matters of public importance.  In doing so, the court was not persuaded by the argument that the media and publicity and potential far reaching effect on producers and midstream contracts created the type of public importance as a basis for a direct appeal.  Instead, the court reiterated that this was a private dispute, governed by specific contractual language applied to settled Texas law.  

The second recent event occurred in early June when the Emerald Oil Inc. debtors in their bankruptcy case pending in Delaware (Case No. 16-10704) filed an adversary proceeding to determine that certain gas gathering, crude oil gathering and water gathering and disposal agreements are not covenants that run with the land or equitable servitudes under North Dakota law. (See Docket No. 1, Adv. Pro. No. 16-50998, Emerald Oil, et al. v. Dakota Midstream, LLC, et al).  In conjunction with the adversary proceeding, the Emerald Oil debtors filed a motion to reject these agreements as executory contracts in the main bankruptcy case (see Docket No. 362).  Because these filings are so recent, briefing has not been completed and there have been no rulings by the court.  It will be interesting to see if the midstream contracting parties can convince the court that under North Dakota law and/or the language in the agreements, there should be a different result than that reached in Sabine under Texas law.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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