Presenting a live 90-minute webinar with interactive Q&A Midstream Executory Contracts in Bankruptcy After Sabine Navigating Court Treatment of Transportation, Gathering and Processing Agreements; Negotiating Midstream Agreements WEDNESDAY, JUNE 1, 2016 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Denis A. (Archie) Fallon, Partner, King & Spalding , Houston Vince Slusher, Partner, DLA Piper , Dallas The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
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Midstream Executory Contracts in Bankruptcy After Sabine Vince Slusher vince.slusher@dlapiper.com
Executory Contracts in Bankruptcy Section 365(a) of the Bankruptcy Code allows a bankrupt debtor, “subject to the court’s approval,” to “assume or reject any executory contract” This section allows a bankrupt debtor to evaluate its executory contracts and seek to assume those that are most beneficial to its business and to reject those agreements that are burdensome The test for approval of assumption or rejection of an executory contract is whether the debtor’s decision to do so is a “reasonable exercise” of its “business judgment” 6
Sabine Oil & Gas Co. In Sabine Oil & Gas Co. (Bankr. S.D.N.Y.), Sabine sought to reject its gathering agreements with midstream gathering pipeline companies. Sabine argued that rejection was a reasonable exercise of Sabine’s business judgment and in the best interests of its estate because the agreements required Sabine to deliver the minimum amounts of gas and condensate set forth in the agreements, which they could not do, or pay certain deficiency payments The gathering pipeline companies argued that whether such agreements could be rejected or not, the gathering agreements or certain terms therein were “covenants that run with the land” which survive rejection by a bankrupt debtor. On March 8, 2016, the Bankruptcy Court held that Sabine may reject the agreements because the gathering pipeline companies presented no evidence challenging Sabine’s business judgment and issued a non -binding analysis that the gathering agreements should not be considered “covenants running with land” under Texas law 7
Sabine Oil & Gas Co. (cont.) Under Texas law, a covenant runs with land when “(1) it touches and concerns the land; (2) it relates to a thing in existence or specifically binds the parties and their assigns; (3) it is intended by the original parties to run with the land; and (4) the successor to the burden has notice.” Some courts have also required “horizontal privity of estate,” which generally means “‘simultaneous existing interests or mutual privity ’ between the original covenanting parties either as landlord and tenant or grantor and grantee.” The Bankruptcy Court stated that the covenants at issue do not run with the land for the following reasons: First, there was no horizontal privity of estate because Sabine did not “reserve any interest” for the gathering pipeline companies; rather Sabine engaged the gathering pipeline companies to “perform certain services related to the hydrocarbon products produced by Sabine from its property.” Moreover, the gathering agreements did not grant any property rights in Sabine’s property, as a right to gather gas is not a fundamental property right under Texas law. Second , the covenants do not “touch and concern” the land because the covenants do not “affect the owner’s interest in the property or its use.” Rather, the covenants concern Sabine’s interest in the products produced from the land. The Bankruptcy Court later confirmed this ruling in an adversary proceeding. 8
Quicksilver Resources ; Magnum Hunter Quicksilver Resources (Bankr. D. Del.) Buyer conditioned the acquisition of debtor Quicksilver’s assets on rejection of midstream gathering agreements Rejection of midstream gathering agreements, if successful, would have resulted in substantial unsecured claim of midstream companies against the estate The acquirer agreed to enter into a new contract with the debtor’s midstream pipeline operator, averting the need for the Bankruptcy Court to rule on the motion to reject Magnum Hunter Resources (Bankr. D. Del.) On March 10, 2016, the debtors in the Magnum Hunter Resources reached an agreement to terminate gas transportation and credit support agreements between one of the debtors and its midstream pipeline partner Pursuant to the agreement, the gas transportation and credit support agreements will be rejected and the midstream gathering company will be allowed a $15 million claim in the debtor’s chapter 11 case on account of the unfulfilled credit support agreement to provide letters of credit totaling $65 million On April 13, 2016, Magnum Hunter indicated that it reached an agreement to reject agreements with another midstream pipeline partner. The terms of the resolution were not disclosed. On April 14, the Bankruptcy Court authorized the rejection. 9
Impact of the Sabine Decision Impact on Midstream Companies: adversely impacts midstream gathering pipeline companies that have contracted with exploration companies facing insolvency The value of pipeline and gathering facilities construction would be jeopardized if the agreements governing their use were rejected by the upstream exploration companies in bankruptcy Impact on E&P Companies: provides leverage to financially troubled upstream exploration companies as they attempt to renegotiate agreements with gathering pipeline companies, giving them the leverage of a bankruptcy threat if their demands are not met Note: The applicability of the Sabine decision is somewhat limited where non-Texas state law governs the relevant contract and related property rights. 10
The Impact of In re Sabine Oil & Gas Corp. and the Rejection of Agreements of Midstream Companies in Bankruptcy Presentation by Archie Fallon afallon@kslaw.com King & Spalding LLP 1100 Louisiana, Suite 4000 Houston, Texas 77002 June 1, 2016
In re Sabine Oil & Gas Corporation, et al. Case No. 15-11835 (Bankr. S.D.N.Y.) – Pertinent Facts • Sabine entered into Gathering Agreements with Nordheim Eagle Ford Gathering, LLC (“Nordheim”) in 2014 Gathering Agreements state they are “covenant[s] running with the [land]” and ― are enforceable by Nordheim against Sabine, its affiliates, and their successors and assigns Privity Issue – Gathering Agreements with Sabine, but mineral rights located ― in a specified geographical area in DeWitt County, Texas and owned by Sabine South Texas LLC, who was not a party to the Gathering Agreements Sabine did not convey any portion of its real property interests to Nordheim through the Gathering Agreements • The property subject to the Gathering Agreements was subject to preexisting liens held by Sabine’s secured lenders • Nordheim’s gathering fee was not secured 12
Sabine – Opinion Takeaways • Gathering Agreements must be reviewed on a case-by-case, fact- intensive basis ― Do covenants “touch and concern” or affect the land? Is land “unburdened” by alleged covenant (e.g., minimum volume commitment)? ― Is there horizontal privity? ― What was the intent of the parties? ― Was the notice properly recorded? ― Is a conveyance of oil and gas interests necessary? 13
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