On December 20, 2019, the Bankruptcy Court for the Southern District of Texas in Alta Mesa Holdings, LP v. Kingfisher Midstream, LLC (In re Alta Mesa Resources, Inc.) held that dedications in gathering agreements create covenants that run with the land that cannot be rejected in bankruptcy, contrary to the holding in In re Sabine Oil & Gas Corp. Although the dispute in Alta Mesa involved Oklahoma law, whereas Sabine involved Texas law, the court stated that the “requirements to form a real property covenant in Texas mirror those in Oklahoma.” In addition, the Court’s decision is in accord with another recent decision under Utah law, Monarch Midstream, LLC v. Badlands Production Co. (In re Badlands Energy, Inc.). While the decision provides protection for midstream service providers in structuring transactions, the jurisdictional split in the case law leaves continued uncertainty.

BACKGROUND

Section 365 of the Bankruptcy Code allows a debtor in possession, “subject to the court’s approval,” to “assume or reject any executory contract.” In most situations, rejecting an executory contract (i) relieves a debtor from future performance obligations; and (ii) leaves the contractual counterparty with a prepetition, unsecured claim against the debtor for breach of contract.