A New York federal judge has upheld a bankruptcy court decision that allowed oil and gas producer Sabine Oil & Gas Corp. to reject gas-gathering contracts with two midstream service companies in Chapter 11, finding that the agreements did not grant the companies an interest in Sabine’s land.
In a March 9 opinion, U.S. District Judge Jed Rakoff affirmed a holding that Sabine could reject executory contracts it penned with Nordheim Eagle Ford Gathering LLC and HPIP Gonzales Holdings LLC since those prepetition service agreements did not contain covenants that “run with the land” as interpreted under Texas law.
Upholding a 2016 ruling by U.S. Bankruptcy Judge Shelley C. Chapman, Judge Rakoff said that Nordheim and HPIP’s agreements to provide gas-gathering services to Sabine did not convey a royalty or property interest in the debtor’s mineral estate, only a contractual right to be the exclusive providers of certain services for gas and condensate produced in certain areas.
He also rejected the servicers’ arguments on appeal that Sabine's interests in its real property were burdened by its obligation to deliver all of the gas and condensate it produced to Nordheim and HPIP for treating and processing.
“Sabine's obligation under the agreements is simply to use Nordheim's and HPIP's respective gathering and processing services when it does produce and deliver gas and condensate, and that restriction does not limit Sabine's enjoyment of the land itself,” Judge Rakoff said.
Further, the judge said that the agreements entitle the servicers to receive fees for processing delivered gas and condensate, regardless of where that processing takes place, so the contracts therefore do not render more valuable the land on which HPIP and Nordheim have located their processing facilities.
Attorneys for the parties did not immediately respond to requests for comment Monday.
Nordheim and HPIP filed the instant appeal after Judge Chapman ruled that Sabine’s contracts with those companies could be shed through Chapter 11 proceedings because the agreements don’t concern Sabine’s land or its use, just the hydrocarbons being pulled out of the ground.
In her ruling, Judge Chapman also rejected an argument by Nordheim and HPIP that the contracts “touch and concern” the mineral resources in the ground, meaning they concern real property. Neither the contracts nor Texas law on when minerals are considered real property support those arguments, she said.
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.
While the appellants argued to Judge Rakoff that the bankruptcy court’s decision is at odds with decades of Texas case law interpreting covenants between parties, counsel for Sabine contended that 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.
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 in 2016, 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 Hefter, 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 numbers 1:16-cv-04127, in the U.S. District Court for the Southern District of New York.
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