In previous Energy newsletters, we have addressed one of the current hot topics in E&P bankruptcy cases – rejection of midstream contracts and declaratory relief that the “dedications” contained in those agreements are not covenants/servitudes that run with the land. Parties and courts are still dealing with the much reported decision authorizing the rejection of midstream contracts in the Sabine Energy bankruptcy cases. Recently, two reported cases have demonstrated the resistance  by the contract counterparties to debtor actions involving these types of midstream contracts and related litigation.

The first case comes from the Emerald Oil bankruptcy cases and the debtors’ ongoing disputes with its midstream counter party, Dakota Midstream LLC (Dakota). This case involves both a motion under Bankruptcy Code section 365 to reject the midstream contracts and an adversary proceeding to declare that those contracts did not create covenants or servitudes that run with the land (based on North Dakota law). The Emerald Oil debtors elected to ignore their contractual commitments and started shipping oil and wastewater by truck, and flaring natural gas, instead of using the Dakota pipeline and facilities. At Dakota’s request, the Bankruptcy Court issued a temporary restraining order (TRO) against these “unilateral” actions by the debtors. (Case No. 16-10704(KG), Adv. Pro. 16-50998 (Docket No. 11)).

In the short TRO, the Court noted that stopping these debtor actions (1) maintained the status quo, and (2) “Dakota stood the likelihood of prevailing on the merits of the adversary proceeding in which the Debtors seek a ruling from the Court that the dedication agreements [midstream contracts] do not run with the land.”  While this last finding is a necessary element of any court signing a TRO, it appears to reflect at least some sense that the Court was unhappy with the debtors’ unilateral actions while the legal issues over the midstream contracts were being litigated. It will be interesting to see how this matter progresses and whether the TRO foreshadows the Court’s ultimate determination on the merits (assuming the matter is not settled). Practically, the success of Dakota in obtaining the TRO is instructive to other midstream companies facing E&P counterparties acting outside of their contractual commitments.

The second case comes from the Triangle USA Petroleum cases, Case No. 16-11566 (MFW) (like the Emerald Oil cases, pending in Delaware but before a different judge). That case involves similar issues of contract rejection and determination of property rights  under North Dakota law involving midstream agreements with Caliber Midstream Partners, L.P., Caliber North Dakota LLC, Caliber Measurement Services LLC and Caliber Midstream Fresh Water Partners LLC (collectively, “Caliber”). However, here, the issue came before the court in a different setting.

In Triangle, as part of the overall restructuring, and as somewhat typical in large, complex cases, the debtors entered into a “plan support agreement” (PSA) with its principal senior lenders. Generally speaking, plan support agreements outline how the case will proceed including the proposed restructuring transaction, and, subject to its terms, binds the non-debtor parties to support the bankruptcy case and the proposed outcome. In Triangle, per the debtors’ filings, the  PSA has been approved by 75% of its Noteholders, which assert both secured and unsecured claims. That PSA purports to approve an overall restructuring that includes (i) paying off in full the reserve based secured facility and (ii) converting the unsecured notes into equity of the reorganized debtor. Further, the PSA is conditioned on various factors including the debtors being successful in the litigation with Caliber. The Triangle debtors filed a motion to reject the midstream agreements in the main bankruptcy case, (main bankruptcy case Docket No. 67) and a complaint for declaratory relief in Adv. Pro. No. 16-51023 that the agreements do not create liabilities that run with the land. As expected, Caliber objects to this relief. Prior to determination of the midstream contract issues, the debtors also filed a motion which sought to assume the PSA. Caliber opposed on a number of grounds. The Court agreed with at least one of those objections: that under the PSA, the senior lenders could abandon the restructuring proposal with effectively no restrictions and denied the assumption of the PSA (Docket No. 210). Per the Court’s comments, the PSA was “frankly, an illusory agreement.”  The Court further is reported to have stated “[t]his is unlike any other plan support agreement that has been presented to this court. I don’t know if it can even be called a plan support agreement because the Noteholders are not agreeing to anything.” 

At least for now, the assumption of the PSA has been denied but that does not necessarily bear on how the Court will decide the contract and North Dakota property law issues. It does reflect a more comprehensive effort by the midstream parties to engage in the bankruptcy case at an early stage that is not directly tied to those legal issues.