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Court upholds decisions allowing Sabine Oil & Gas to drop gathering contracts

A federal appeals court upheld lower court rulings that had allowed oil and gas driller Sabine Oil & Gas LLC to reject its gathering and processing agreements with a Cheniere Energy Inc.-affiliated gathering pipeline operator.

On May 25, a three-judge panel for the U.S. Court of Appeals for the 2nd Circuit upheld a March 2017 decision by the U.S. District Court for the Southern District of New York, which had affirmed orders of the U.S. Bankruptcy Court for the Southern District of New York. The lower courts' decisions had let Sabine Oil & Gas opt out of its contracts with Nordheim Eagle Ford Gathering after the independent producer sought Chapter 11 bankruptcy protection in 2015 and reorganized the following year as a private company.

Sabine filed a motion to reject its contracts with Nordheim and HPIP Gonzales Holdings LLC in the fall of 2015, but the two midstream companies argued those agreements cannot be voided because they carry covenants running with the land, which they said meant the bankruptcy court did not have the authority to approve their rejection in a 2016 ruling.

Sabine and Norheim disagreed over whether the necessary legal test for land covenants includes "horizontal privity," which requires that the original parties to the covenant have a mutual interest in the land at the time the covenant was executed. The federal court of appeals rejected Nordheim's argument, which said the separate agreements conveying pipeline easement and a parcel of land created an "equitable servitude," or a contract that limits the parties' use of the property, that cannot be rejected under Chapter 11, even if the agreements do not constitute horizontal privity.

"There is simply no colorable argument that these agreements created an equitable servitude because there is no benefit to real property of Nordheim," the 2nd Circuit stated. "It is Nordheim as an entity not its real property — that is benefited by the agreement." (U.S. Appeals Court for the 2nd Circuit docket 17-1026)