On May 25, 2018, the U.S. Court of Appeals for the Second Circuit affirmed a district court decision finding that producer Sabine Oil and Gas Corp. could reject certain midstream gathering contracts in its bankruptcy case.i
The initial bankruptcy decision from 2016 sent shockwaves through the midstream sector as it called into question the industry-wide practice of using dedication clauses in midstream gathering contracts, which are intended to provide gathering firms an exclusive right to transport and process all of the commodity produced in a particular area. The industry generally operated under the belief that dedications provide gathering firms property rights known as “real covenants” that run with the relevant land, meaning that the right was expected to persist even if the owner of the land files for bankruptcy protection or ownership of the land changes hands.
However, in Sabine, the Bankruptcy Court for the Southern District of New York found in 2016 that the dedications in Sabine’s midstream gathering contracts, which were governed by Texas law, were not sufficient to create real covenants because they did not “touch and concern” the relevant land and were not granted in connection with a conveyance of a fee estate in the land, as required under the principle of “horizontal privity.”
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