• Sabine Bankruptcy Judge Authorizes Rejection of Gas Gathering Agreements
  • June 9, 2016 | Authors: Thomas A. (Tom) Howley; Omar Samji; Jeffrey A. (Jeff) Schlegel
  • Law Firm: Jones Day - Houston Office
  • In In re Sabine Oil & Gas Corp., 2016 BL 70494 (Bankr. S.D.N.Y. Mar. 8, 2016), Judge Shelley C. Chapman of the U.S. Bankruptcy Court for the Southern District of New York permitted Sabine Oil & Gas Corporation (“Sabine”) to reject three gas gathering and handling agreements with Nordheim Eagle Ford Gathering, LLC (“Nordheim”) and HPIP Gonzales Holdings, LLC (“HPIP”). All of the agreements are governed by Texas law.

    In connection with its efforts to restructure, Sabine filed a motion to reject the gathering agreements with Nordheim and HPIP. Sabine argued that it could not deliver the required minimum amounts of gas and condensate and that rejection would save it as much as $115 million. Nordheim opposed the motion to reject, arguing that rejection was not a proper exercise of Sabine’s business judgment because the agreements included dedications that were stated to be covenants running with the land, which would continue to burden the debtor’s interests following rejection. While HPIP did not oppose rejection, it also argued that the relevant hydrocarbon dedications were covenants running with the land which would survive rejection. Sabine’s response to the objections was that, among other things, the purported dedications lacked the requisite intent and privity to establish covenants running with the land and were not consistent with real property conveyances under Texas law, as they lacked traditional real property terms and were instead more consistent with services agreements.

    Judge Chapman held that Sabine’s rejection of the midstream agreements was a proper exercise of Sabine’s business judgment, but she determined that the questions of Texas real property law were not properly before the court because the court could not adjudicate the issues in the context of a motion to reject an executory contract. In a nonbinding portion of the court’s analysis of applicable Texas law, however, the court noted that the agreements fail to meet Texas’s five-part test for covenants running with the land, remarking that “none of the covenants run with the land either as a real covenant or as an equitable servitude.” In particular, the court explained that the covenants merely identify the rights and obligations related to the services to be provided under the agreements and do not convey interests in the underlying real property.

    The court recognized that, in the event that the agreements were later determined to include covenants running with the land, the producer would likely be required to work out a deal with existing gatherers on terms consistent with the dedications, notwithstanding Sabine’s rejection of the agreements. If, however, it were ultimately determined that the agreements do not contain covenants running with the land—which, as noted, the court indicated in dicta was its understanding of Texas law—the producer would be free to seek other providers of midstream services.

    After reading her bench decision to the parties at the hearing on Sabine’s motion to reject the agreements, Judge Chapman stated that “[i]t might be time to talk about a commercial resolution of some of these issues, but that’s for you and your clients to decide.”