On April 7, 2016, Quicksilver Resources Inc.
("Quicksilver") announced that it closed the sale of its
U.S. assets for $245 million to BlueStone Natural Resources II
("BlueStone") in connection with Quicksilver's
bankruptcy cases and pursuant to an Asset Purchase Agreement that
was approved by Judge Laurie Selber Silverstein of the U.S.
Bankruptcy Court for the District of Delaware in January 2016.
Under the original terms of the Asset Purchase Agreement,
BlueStone's obligation to close the transaction was conditioned
on the court issuing a final order rejecting three gas gathering
and processing agreements and a joint operating agreement between
Quicksilver and Crestwood Midstream Partners
("Crestwood"). Crestwood and BlueStone have announced
that they entered into new, long-term gathering and processing
agreements in the Barnett Shale, replacing the three agreements
that had been subject to rejection, and the rejection motion has
been withdrawn with the consent of both BlueStone and
Crestwood.
The Quicksilver transaction comes on the heels of the recent ruling
in the chapter 11 case of Sabine Oil & Gas Corporation, wherein
Judge Shelley C. Chapman of the U.S. Bankruptcy Court for the
Southern District of New York permitted Sabine to reject three gas
gathering and handling agreements. In its motion to reject the
agreements with Crestwood, Quicksilver advanced arguments similar
to those made in the Sabine case.
Quicksilver initially sought to reject the agreements with
Crestwood on the basis that rejection was necessary for BlueStone
to consummate the court-approved sale of Quicksilver's assets.
Crestwood countered that the agreements contained covenants running
with the land or, in the alternative, equitable servitudes, and
such covenants (or servitudes) could not be rejected in bankruptcy.
In amici curiae ("friend of the court") briefs, the Gas
Processors Association and the Texas Pipeline Association argued
that the issues before the court involve nuanced Texas property law
and that the decision of the court would have profound implications
on the oil and gas midstream industry. In its reply to
Crestwood's objection, Quicksilver contended, among other
things, that Crestwood could not meet its burden of establishing
either a covenant running with the land or an equitable servitude
under Texas law.
The settlement in Quicksilver highlights the
industry's reaction to the question of whether gas gathering
and processing agreements are protected from rejection in
bankruptcy if they include "covenant running with the
land" language of the type routinely used in the industry for
years (or whether, in fact, the covenants themselves can survive
the rejection of the underlying midstream agreements). As the
validity of these contract provisions continues to be challenged in
bankruptcy cases, parties are beginning to renegotiate the
underlying commercial arrangements both in and outside of
court.
For example, in addition to Quicksilver, Swift Energy Co.
("Swift Energy") (also a chapter 11 debtor in the
District of Delaware, but before Judge Mary F. Walrath) recently
settled a similar rejection dispute by renegotiating a gas services
agreement with Eagle Ford Gathering LLC (Jones Day represents Swift
Energy in its chapter 11 case). Another Delaware chapter 11 case
involving attempted midstream contract rejection is that of Magnum
Hunter Resources Corp. Bankruptcy Judge Kevin Gross is expected to
provide a ruling at a later date, which may provide further
guidance on how bankruptcy courts can be expected to rule on this
issue. In the meantime, the industry is likely to see continued
efforts to renegotiate contracts as the landscape remains
uncertain.
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