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Midstream Service Cos. Fight Rejection of Sabine Contracts

Attorneys for two midstream service companies on Wednesday urged a New York federal judge to overturn a bankruptcy court decision that allowed oil and gas producer Sabine Oil & Gas Corp. to reject gas-gathering contracts in Chapter 11, saying that ruling has riled the energy industry.

Counsel for Nordheim Eagle Ford Gathering LLC and HPIP Gonzales Holdings LLC told U.S. District Judge Jed Rakoff that rejection of the companies' contracts with Sabine earlier this year is at odds with decades of Texas case law interpreting covenants between parties.

Nordheim and HPIP are seeking to overturn a decision by U.S. Bankruptcy Judge Shelley Chapman who ruled earlier this year that those companies' contracts did not contain covenants that “run with the land” as interpreted under Texas law, allowing Sabine to reject the agreements in Chapter 11.

Nordheim attorney Michael Heffner of Bracewell LLP said Texas courts have long understood that the types of gas-gathering contracts at issue in the Sabine bankruptcy convey real property interests to midstream companies.

“What this bankruptcy judge did was interfere with that longstanding precedent,” Heffner said during a court hearing in Manhattan.

Judge Chapman’s decision has sent ripples throughout the midstream services industry, which focuses on the processing, transportation and storage of oil and gas between producers and final users. Last week, a committee representing unsecured creditors of Tristream East Texas LLC filed a lawsuit in the Lone Star State arguing the business cannot reject contracts with other midstream service providers under U.S. bankruptcy law.

Kirkland & Ellis partner Anna Rotman said Judge Chapman correctly interpreted the contracts with Nordheim and HPIP and said the decision should be upheld on appeal. Rotman said the contracts at issue concern actions that occur after raw materials are extracted from the ground.

Rotman said either Nordheim or HPIP could have obtained security for the contracts but did not, putting them in the same position as any other unsecured creditor of Sabine.

“They are trying to take money out of the pockets of secured creditors to pay themselves, unsecured creditors,” Rotman said.

Sabine filed for bankruptcy in July 2015, listing assets of approximately $2.5 billion and debts of $2.9 billion. Judge Chapman approved Sabine’s Chapter 11 plan earlier this year, and the company emerged from Chapter 11 bankruptcy in August.

Sabine has said that freeing itself of the Nordheim and HPIP contracts and replacing those services with a new pipeline agreement will save the company $35 million.

Sabine is represented by Anna Rotman, Jonathan S. Henes, James H.M. Sprayregen, Paul M. Basta, Christopher Marcus, Gabor Balassa, Ryan Blaine Bennett, A. Katrine Jakola and Devon M. Largio of Kirkland & Ellis LLP.

Nordheim is represented by Michael Heffner, William A. Wood III, Jason G. Cohen and Robert G. Burns of Bracewell LLP.

HPIP is represented by Christopher Harris and Keith A. Simon of Latham & Watkins LLP.

The appeal is In re: Sabine Oil & Gas Corporation, case number 1:2016-cv-04615, in the U.S. District Court for the Southern District of New York.