Fifth Circuit Doubles Down on Right to Reject Filed-rate Contracts, but With an Exception
by | posted in: Bankruptcy, Chapter 11 | 0

By Ronald Silverman, John Beck and Katherine Lynn (Hogan Lovells)

Ronald Silverman
John Beck
Katherine Lynn

The Fifth Circuit recently issued an opinion, Federal Energy Regulatory Commission v. Ultra Resources, Inc., in which it relied on and affirmed its prior 2004 decision — In re Mirant — and held that bankruptcy courts have the authority — at least in many common contexts — to reject filed-rate contracts without the approval of the Federal Energy Regulatory Commission (FERC). The court reasoned that rejection of such contracts only has an indirect effect on the filed-rate and is not a collateral attack, and therefore can be done without FERC’s approval.

Further, the Fifth Circuit held that rejection of a filed-rate contract does not violate 11 U.S.C. § 1129(a)(6) of the Bankruptcy Code because rejection does not change the rate itself, it merely ceases payment of the rate.  Thus, the decision further empowers debtors to reject filed-rate contracts in bankruptcy cases, so long as rejection does not amount to a rate change. 

However, the court did identify an exception to the general rule.  The opinion states that if a debtor seeks to reject a filed-rate contract, but still needs the capacity and seeks to secure a lower rate through rejection, such rejection would be impermissible without FERC’s approval, although that was not the situation in Ultra.  Left for future cases will be the determination of what particular circumstances will require FERC’s permission to reject a filed-rate contract.

Read the full article here.

Arbitrate? You Can’t Make Me! Rejection Trumps Arbitration, Says Texas Bankruptcy Court
by | posted in: Bankruptcy, Chapter 11 | 0

By Ronit J. Berkovich (Weil Gotshal & Manges) and Eric Einhorn (Weil Gotshal & Manges)

Eric Einhorn
Ronit J. Berkovich

In a recent decision, In re Highland Cap. Mgmt., L.P.,1 the Bankruptcy Court of the Northern District of Texas held that a debtor’s rejection of an executory contract with an arbitration clause precludes the court from compelling the debtor to arbitrate—notwithstanding the strong federal policy supporting enforcement of arbitration clauses, even in bankruptcy.  Although rejection of a contract constitutes a breach and may give rise to a claim for monetary damages, the Court found that specific performance of an arbitration clause was not an appropriate remedy post-rejection.  Highland provides an example of how bankruptcy courts may disregard contractual provisions—including an agreement to specifically perform—where they may irreconcilably conflict with the policy of the Bankruptcy Code.

The full article is available here.

Delaware Bankruptcy Court Rules That Midstream Gathering Agreements Failed to Create Covenants Running with the Land
by | posted in: Bankruptcy Administration and Jurisdiction, Bankruptcy Roundtable Updates | 0

By Duston K. McFaul & Juliana Hoffman (Sidley)

Duston K. McFaul
Juliana Hoffman

On October 14, 2020, the honorable Christopher Sontchi, Chief Judge of the Delaware Bankruptcy Court, issued an opinion in the Extraction Oil and Gas bankruptcy case finding that certain oil, gas and water gathering agreements (the “Agreements”) did not create covenants running with the land under Colorado law and are thus subject to rejection in Extraction’s chapter 11 proceedings. The Bankruptcy Court applied Colorado law, which requires that the following three elements be satisfied: (1) the parties must intend to create a covenant running with the land; (2) the covenant must touch and concern the land with which it runs; and (3) there must be privity of estate between the covenanting parties. The Bankruptcy Court analyzed these elements relative to the debtor’s leasehold interest.

The Extraction decision is the Delaware Bankruptcy Court’s first published foray into a recent thicket of gathering agreement litigation that was reignited in 2016 with the Bankruptcy Court for the Southern District of New York authorizing the rejection of certain gathering agreements in the Sabine Oil & Gas bankruptcy case. Following Sabine, various oil and gas producers in chapter 11 attempted to use Sabine as a basis for invalidating dedications and shedding minimum volume and other commitments in their own gathering agreements. Such efforts were rebuffed in 2019 by the Colorado Bankruptcy Court in Badlands and by the Bankruptcy Court for the Southern District of Texas in Alta Mesa, each of which analyzed the elements of the asserted covenants running with the land relative to the debtor’s leasehold interest.  The courts in Badlands and Alta Mesa each found that the agreements at issue created valid real property covenants under applicable state law and were thus not executory contracts that could be rejected in bankruptcy.

The Extraction case diverged from Badlands and Alta Mesa in its narrow holding, which analyzed the purported covenants in the context of only the debtor’s mineral estate, and ultimately concluded the midstream agreements did not contain an enforceable covenant running with the land.  The Extraction rulings are currently on appeal before the Delaware District Court.

The full article is available here.

First Circuit Holds That Trademark Licensee Loses Right to Use Trademarks When Debtor-Licensor Rejects License
by | posted in: Trademarks | 0

By Brian S. Hermann, Alan W. Kornberg, and Erica G. Weinberger (Paul, Weiss, Rifkind, Wharton & Garrison LLP).

Last month, the United States Court of Appeals for the First Circuit addressed two questions critically important to trademark licensees:  (1) can a trademark licensee use section 365(n) of the Bankruptcy Code to retain licensed trademarks (and exclusive distribution rights) following a debtor-licensor’s rejection of its license and (2) if not, can a licensee otherwise continue to use the licensed trademarks post-rejection?  In re Tempnology, LLC, 879 F.3d 389 (1st Cir. 2018).  The Court held that section 365(n) does not apply to trademarks (or distribution rights) and, in a split (two-to-one) decision, ruled that a licensee’s right to use licensed trademarks terminates upon rejection of its license.  In so ruling, the Court expressly rejected a contrary decision by the United States Court of Appeals for the Seventh Circuit in Sunbeam Products, Inc. v. Chicago American Manufacturing, LLC, 686 F.3d 372 (7th Cir. 2012), establishing a clear circuit split regarding the consequences of trademark license rejection for licensees.  This Memorandum discusses the First Circuit’s decision in Tempnology, as well as the scope of section 365(n) of the Bankruptcy Code and the consequences of rejection more generally.

The First Circuit’s decision in Tempnology may not be the last word on these important trademark license issues.  Given the split in Court of Appeals rulings, the Supreme Court could weigh in, if asked.  If not, it remains to be seen whether other courts will adopt Tempnology or Sunbeam or craft an entirely different rule.

The full article is available here.