The current oil and gas environment: Navigating distressed operators and business partners

Hogan Lovells

Rick Wynne: The JOAs are very common; they allow co-owners of undivided fractional interests to use a single operator, but they also are particularly vulnerable in a bankruptcy because they’re normally executory contracts where there are obligations on both sides of the contract. That means until the debtor decides to assume or reject a contract, they’re not enforceable against the debtors, but they are enforceable against the other parties, the contract counterparties. The bankruptcy code gives the debtor the very powerful right to assume or reject an executory contract at any time before confirmation of a plan of reorganization unless the court shortens that time. In particular decisions to reject an executory contract are based on the business judgment rule, and are almost never overruled by the court. On the contrary, decisions to assume an executory contract and potentially assign it do carry with it the requirements that the debtor cure all defaults and prove that they have an adequate ability to perform or that an assignee can perform. There’s room for court intervention there, but rejection decisions are pretty much final if the debtor decides to reject the contract.

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