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2nd Circ. Backs Sabine's Rejection of Gas Servicing Contracts

Sabine Oil & Gas Corp. had the right to reject gas-gathering contracts with two midstream service companies after filing for Chapter 11 bankruptcy, the Second Circuit has affirmed.

In a brief, five-page summary order entered Friday, a unanimous three-judge panel said that U.S. District Judge Jed S. Rakoff was right to find that Sabine could reject contracts it inked with Nordheim Eagle Ford Gathering LLC and HPIP Gonzales Holdings LLC.

A summary order is similar to an unpublished opinion and has no precedential effect per se.

Judge Rakoff had determined that the contracts with Nordheim and HPIP were “personal obligations” and not “covenants that run with the land,” as interpreted under Texas law, and U.S. Bankruptcy Judge Shelley C. Chapman was within her rights to allow Sabine to terminate the contracts during its Chapter 11 case.

On appeal Nordheim again tried to argue that the contracts were in fact “real covenants that run with the land,” making them exempt from the bankruptcy court’s jurisdiction.

Nordheim said that it not only agreed to provide gas-gathering services to Sabine but also had a real interest in the land itself as a result of the contracts.

But the appellate panel said Friday that the key to answering that question was the panel's finding that Texas law requires parties to have “horizontal privity” with one another for a contract to be one that “runs with the land.”

“In order for the parties to the original agreement to have been in horizontal privity with one another, there must have been some common interest in the land other than the purported covenant itself at the time it was executed,” the panel said — in other words, both parties needed to own the land jointly before the contract was signed.

Nordheim had argued that horizontal privity was established thanks to separate agreements signing over a pipeline easement and a separate parcel of land, but the panel, like Judges Chapman and Rakoff, begged to differ.

“We agree with the bankruptcy court that this separate conveyance cannot establish horizontal privity of estate between the parties,” the panel said Friday.

Judge Chapman’s original 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.

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 bankruptcy in August of that year.

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

Neither Sabine nor Nordheim responded to requests for comment Tuesday.

U.S. Circuit Judges Rosemary S. Pooler, Reena Raggi and Christopher F. Droney sat on the panel for the Second Circuit.

Sabine is represented by Erin E. Murphy, Anna G. Rotman, Kenneth A. Young, James H.M. Sprayregen and Ryan Blaine Bennett of Kirkland & Ellis LLP.

Nordheim is represented by Yvonne Y. Ho and Robert G. Burns of Bracewell LLP.

The case is In re: Sabine Oil & Gas Corp., case number 17-1026, in the U.S. Court of Appeals for the Second Circuit.