Court Decision Puts Midstream Companies at Risk

From Vorys Energy & Environmental Law Blog:
On May 25, 2018, the United States Court of Appeals for the Second Circuit upheld a district court’s decision that Sabine Oil & Gas Corporation could reject certain gathering service agreements in bankruptcy. The agreements, with Nordheim Eagle Ford Gathering, LLC, provided that Nordheim would supply Sabine with certain gathering, transportation and treatment services for Sabine’s natural gas and condensate production. The Court of Appeals determined that the agreements were not “real covenants that run with the land,” and therefore, could be rejected in bankruptcy as executory contracts. Under Texas law, horizontal privity was required for a covenant to run with the land—i.e., “there must have been some common interest in the land other than the purported covenant itself at the time it was executed.” That was not the case here, the court found. Nor was the horizontal privity requirement satisfied by a separate agreement between Sabine and Nordheim providing for the conveyance of a pipeline easement and a separate parcel of land. As a result, the agreements could be rejected in bankruptcy.
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