Lexpert US Guides

28 | LEXPERT • December 2016 | www.lexpert.ca work, and there is historical precedent for the use of public funds, which occurred when the provincial government decided to help out the industry in 2008 and 2009. Proponents of Wittmann's reasoning say that the outcry has been provoked in part by the public's misunderstanding of how insolvency works. "The idea that the debtor will have unsatisfied obligations is the whole point of insolvency," says one lawyer close to the case. "But the regulator is exercised that the trustee can pick and choose good assets and transact with them." As it turns out, the AER is appealing Wittmann's decision. "The AER continues to assert that companies must not be al- lowed to walk away from their responsibility, even when facing economic uncertainty," said AER spokesperson Ryan Bartlett in an email. "While we are disappointed in the court's decision, the AER will continue to protect public safety and the environment in the regulation of oil and gas development in this province." MIDSTREAM GATHERERS AT RISK? Re Sabine Oil & Gas, a US bankruptcy judge's ruling that mid- stream gatherer contracts can be rejected in insolvency cases, has raised fears among owners of pipelines and other midstream as- sets that Canadian courts will follow the precedent. "We're al- ready seeing a chilling effect because this decision, if followed in Canada, represents a new threat to midstream stakeholders that didn't exist before," says Randal Van de Mosselaer of Norton Rose Fulbright Canada LLP in Calgary. Torys LLP is advising midstream gatherers and producers to review their contracts. "Midstream companies should review pipeline contracts to evaluate the risk of rejection in the event of a bankruptcy by the upstream producers," says Alison Bauer in the firm's New York office. "Conversely, oil and gas produc- ers should consider negotiating reductions in price and volume commitment in unfavorable contracts that originated when oil and gas prices were higher — or threaten bankruptcy rejection." The issue arose when Sabine Oil & Gas Corp., an independent energy company engaged in developing onshore oil and natural gas properties, found itself in Chapter 11 proceedings. Chapter 11 of the United States Bankruptcy Code allows debtors to ap- ply for court approval to terminate existing agreements in certain circumstances. Similar provisions are found in Canada's Companies' Creditors Arrangement Act and the Bank- ruptcy and Insolvency Act. Sabine applied to terminate gas gathering and handling agreements it had with Nord- heim Eagle Ford Gathering LLC and High Point Infrastructure Partners LLC. Sabine maintained it could not restructure opera- tions without rejecting these contracts, which it claimed were too expensive. The pipeline owners countered with the argument that the dedication of production under the agree- ments created an interest that ran with the land and therefore the contract could not be rejected under the applicable Texas law. But Judge Shelley Chapman of the United States Bankruptcy Court for the Southern District of New York ruled that the agreements could be rejected as a reasonable exer- cise of business judgment by Sabine's management. While she did not — for procedural reasons — make a final ruling on the issue, Judge Chapman did indicate that she was disinclined to find that the agreements ran with the land. Among other things, she rea- soned that the agreements only affected Sabine's personal prop- erty interests in products that had already been extracted. "Meanwhile, the important legal question of whether gath- ering contracts run with the land remains to be determined in both the US and Canada," Van de Mosselaer says. "It's also un- clear whether a finding that an interest in land was created would mean that the contracts could be rejected but the particular cov- enants running with the land would survive." In another case, in Delaware, the issue is whether individual transaction confirmations can be severed and rejected as distinct from the umbrella gathering agreement. "But regardless of how midstream companies are defending these applications, they are the ones who stand to lose when these types of agreements are rejected, missing out on the benefit of their bargain in the agree- ments as well as failing to recover the costs for their own often substantial infrastructure development," Bauer says. A decision from US courts would not, of course, be binding in Canada. But that doesn't mean Canadian courts won't take notice. "Given the importance that is placed on the decisions of the United States Bankruptcy Court for the Southern District of New York in both the US and Canada, any ruling Judge Chap- man makes on this issue may well be influential here," Van de Mosselaer says. Still, the CCCA does require courts that are deciding whether to reject contracts to consider whether the disclaimer would cre- ate serious financial hardship to the debtor's counterparty. "That doesn't appear to have been a consideration in Sabine, but it would be the primary argument in Canada," Van de Mosselaer says. That being said, it is also true that the land titles and real estate legal regimes vary greatly from state to state and province to prov- ince. "No doubt the real estate law of each jurisdiction will bear heavily on these questions," Van de Mosselaer adds. INSOLVENCY Sandra Abitan Osler, Hoskin & Harcourt LLP "Because monitors are court-appointed officers who are the eyes and ears of the court, they have a special standing and engender a great deal of respect and are in an excellent position to broker settlements."

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