Texas Supreme Court Dabbles in Bankruptcy Law

Gray Reed
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Noble Energy Inc. v. ConocoPhillips Company, a 6-to-3 Texas Supreme Court decision, is a reminder of two things:

  • How parties to a property transaction describe what’s being acquired and what’s being left behind can have grave consequences. The purchaser can acquire specific obligations associated with purchased assets, excluding all others not mentioned. Or, he can acquire all obligations, disclaiming none, including those not even mentioned and those he doesn’t even know about. Here, the difference cost Noble $63 million.
  •  When given a choice, the Texas Supreme Court is likely to resolve a dispute by relying on the words in a contract rather than notions of equity.

Conoco and Alma had an Exchange Agreement in which each agreed to indemnify the other for environmental claims. Alma filed for bankruptcy protection. Along came Noble, who entered into an Asset Purchase Agreement by which it acquired Alma’s assets.

The decision considered bankruptcy reorganization plans, Section 365 of the Bankruptcy Code, and executory contracts, none of which we will consider in detail here.

The EA was an executory contract (the dissent agreed), based on this test: At the time of Alma’s filing the failure of either party to complete performance of the indemnity obligation would constitute a material breach of the contract, thereby excusing performance by the other party.

The majority – the contract governs

Did Noble acquire Alma’s indemnity obligations under the EA?

Yes. Under Section 10.8 of Alma’s Reorganization Plan, executory contracts not specifically referenced would be assumed and assigned to Noble unless rejected by Noble. Noble did not reject the EA.

Why did Nobel not reject the EA? Probably because it wasn’t known to Noble. The EA:

  • wasn’t mentioned in the several provisions of the Plan regarding executory contracts,
  • wasn’t listed in the APA with other specifically identified liabilities Noble agreed to assume,
  • wasn’t identified in Alma’s bankruptcy disclosures,
  • didn’t fall within the general description of “material contracts”,
  • wasn’t mentioned in the Plan, and in fact,
  • wasn’t mentioned in any way in the bankruptcy proceeding.

However, under the broad language of the APA Noble agreed to assume all duties and obligations associated with the assets. This included executory contracts, not only the ones specifically identified and not only the ones Noble actually knew about.

The court was also influenced by Noble’s constructive knowledge of the EA because it was referenced in Conoco’s pre-bankruptcy assignments of Alma assets, which were recorded in the public records.

The dissent sees it another way

The dissent deemed the result “manifestly inequitable”. The majority relied on the language of the APA and the Plan and declined to opine on whether the bankruptcy was run as it should have been. To the dissent the essential question centered around Bankruptcy Code Section 365 and the assumption or rejection of a debtor’s executory contracts.

The risk of Alma’s failure to disclose the EA should have fallen on Alma, not Noble. The confidence parties to a bankruptcy proceeding must have in the process was undermined.

Let’s be silly today and celebrate the familiar, the iconic, the Farfisa organ: One from ? and … and one from the band with the perfect ’60’s name.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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