June 07, 2016 Articles

New York Bankruptcy Judge Sends Shudders Through Midstream Market

Sabine Oil and Gas Corp. wins bankruptcy court approval to enter into a new facilities agreement after the court allowed it to reject existing facilities agreements.

By Stephen A. Roberts – June 7, 2016

Midstream companies would be well advised to explore restructuring and redrafting their contracts with exploration and production companies. In March 2016, New York bankruptcy judge Shelley Chapman sent shudders through the midstream energy market when she ruled that Sabine Oil and Gas Corp. could reject, or breach, its gas-gathering contracts with Nordheim Eagle Ford Gathering, LLC, and then later ruled, contrary to the prevailing wisdom in the industry, that the debtor could avoid the dedications of the hydrocarbons in the contracts because they were not covenants running with the land. In re Sabine Oil & Gas Corp., No. 15-11835 (SCC) (Bankr. S.D.N.Y. Mar. 8, 2016). Observers predicted her rulings would shift the leverage to distressed energy and production companies saddled with unfavorable gas gathering contracts. It did not take long to prove observers right. On May 19, 2016, Judge Chapman allowed Sabine to enter into a new facilities agreement with DCP South Central Texas LLC, bypassing Nordheim’s gathering system.

Bankruptcy law generally allows debtors to reject, or breach, certain burdensome contracts, but not contracts that contain covenants “running with the land”; that is, contracts relating to real property that are binding not only on the parties but also on anyone who acquires an interest in the property. Gas gathering contracts are commonly drafted with covenants the parties agree are covenants running with the land and so have been widely believed to be enforceable in bankruptcy.

Judge Chapman has changed all that.

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