Every few weeks, another news outlet reports that a wave of energy-related bankruptcy cases is on the way.  See links below if you need some examples.[1]  A recent decision in the Alta Mesa bankruptcy case about pipeline contracts has some important lessons for producers and midstream companies evaluating how future bankruptcy cases may affect their costs and revenue.

Alta Mesa Holdings, LP filed an adversary proceeding against one of its major midstream partners, Kingfisher Midstream, LLC, seeking a declaratory judgment that two gas gathering agreements between the parties did not run with the land and could be rejected as executory contracts under Section 365 of the Bankruptcy Code.  The agreements at issue obligated Kingfisher to build a gas gathering system linking certain of Alta Mesa’s wells in Oklahoma to a central collect point, and obligated Alta Mesa to deliver its hydrocarbons (up to a certain threshold) to Kingfisher. Alta Mesa wanted to reject those contracts as part of its bankruptcy case.

The Bankruptcy Code provides that a debtor in bankruptcy can reject executory contracts, but cannot reject a real property covenant that runs with the land.  For an agreement to be a classified as a real property covenant under Oklahoma law, three factors must be met: (1) the covenant must “touch and concern” real property, (2) there must be privity of estate, and (3) the original parties to the covenant must have intended to bind their successors.  United States Bankruptcy Judge Marvin Isgur determined that the pipeline agreements were real property covenants because they concerned real property in Oklahoma by burdening and benefitting Alta Mesa’s lease interests; there was privity of estate because the agreements conveyed an easement to Kingfisher to construct and maintain the gas gathering system; and the agreements evidenced an intent to bind the parties’ successors by identifying the agreement as one “running with the land” and requiring recordation.

In coming to its conclusion, the court distinguished a New York Bankruptcy case (Sabine Oil & Gas Corp. v. HPIP Gonzales Holdings, LLC (In re Sabine Oil & Gas Corp., 550 B.R. 59 (Bankr. S.D.N.Y. 2016))), which held that gas gathering agreements did not form real property covenants under Texas law.  Both Texas and Oklahoma law require the same elements to form a real property covenant. However, the Sabine Court found that the agreements did not touch and concern real property and that parties lacked privity of estate, two of the essential elements to a real property covenant. The Sabine Court found it particularly important that there was no privity because surface and mineral rights are severable under Texas law.  The lack of a real property covenant allowed the gas gathering agreements in Sabine to be rejected.

Judge Isgur’s decision in Alta Mesa, and the decision in Sabine that reached a different result, will be cited repeatedly in 2020 and 2021.  Just last week, Chesapeake Energy Corp. filed for Chapter 11 protection, and one of its first motions asks the Bankruptcy Court to approve its request to reject roughly $311 million in pipeline contracts.[2]  Whether those contracts are classified as “executory contracts” that can be rejected, or “real property covenants” that cannot be rejected, will have a major impact on Chesapeake, its midstream counterparties, and its other creditors.


[1] https://www.latimes.com/business/story/2020-05-25/shale-bankruptcies-demand-coronavirus



[2] https://pgjonline.com/news/2020/06-june/chesapeake-asks-to-cancel-pipeline-contracts-amid-bankruptcy-filing