Sabine Oil’s Rejection of Midstream Contract Affirmed

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By Daniel Gill

Bankrupt Sabine Oil & Gas Corp. could reject a contract with a “midstream service provider” because the agreement didn’t create a property right, the U.S. Court of Appeals for the Second Circuit affirmed.

The May 25 summary order upheld a New York bankruptcy court’s 2016 decision.

It’s a great result, Sabine’s lawyer Ryan Bennett of Kirkland & Ellis LLP in Chicago, told Bloomberg Law. A reversal could have resulted in an award of damages against the company, he said.

After filing Chapter 11 in 2015, Sabine won confirmation of its plan of reorganization in July 2016. It emerged from bankruptcy the following month, Bennett said. He called the bankruptcy a success with the company coming out with “its balance sheet cleaned up and performing well.”

Houston-based Sabine produces natural gas and crude oil. Before the bankruptcy, it had a contract with Nordheim Eagle Ford Gathering, LLC, known in the industry as a “midstream provider,” for moving, storing or otherwise disposing of gas and oil products and by-products removed by Sabine from land in Texas.

Prior to confirming a plan, Sabine moved to ‘reject'—effectively terminate—the Nordheim contract as “unnecessarily burdensome.” In bankruptcy a debtor can assume or reject certain contracts if performance is still required by both sides of the agreement.

But that power to reject would not be in effect if the contract involves real property rights. Nordheim argued it did.

The court sided with Sabine and held the agreement was for services and did not implicate a property interest under applicable Texas law. To be a property interest, it said, the parties must have been in “horizontal privity,” meaning that the original agreement would have to have been made as part of a conveyance of land. There was no such transfer.

With the rejection affirmed, Sabine doesn’t have to be concerned about paying damages for contracting with another midstream provider in the years since the rejection, Bennett said.

Counsel for Nordheim declined to comment.

Circuit Judges Rosemary S. Pooler, Reena Raggi, and Christopher F. Droney heard the case.

Sabine was represented by Kirkland & Ellis, LLP. Nordheim was represented by Bracewell LLP and Baker Botts LLP.

The case is Sabine Oil & Gas Corp. v. Nordheim Eagle Ford Gathering, LLC (In re Sabine Oil & Gas Corp.) , 2018 BL 185976, 2d Cir., No. 17-1026, 5/25/18 .

To contact the reporter on this story: Daniel Gill in Washington at dgill@bloomberglaw.com

To contact the editor responsible for this story: Jay Horowitz at jhorowitz@bloomberglaw.com

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