Special Considerations for Protecting Interests under Water Agreements in Bankruptcy
by | posted in: Bankruptcy, Bankruptcy Administration and Jurisdiction, Bankruptcy Roundtable Updates | 0

By Rahul D. Vashi, Anna G. Rotman, Chris Heasley, Shubi Arora, Kenneth A. Young, Fraser F. Wayne, and John C. Elkins (Kirkland & Ellis)

Rahul D. Vashi
Anna G. Rotman
Chris Heasley
Shubi Arora
Kenneth A. Young
Fraser F. Wayne
John C. Elkins

Midstream service providers in the oil and gas space typically expend substantial upfront capital investment to build pipeline systems to gather and transport hydrocarbons and produced water for oil and gas producers, and rely on the fee structures in their service contracts to recoup their investments. One common method used by midstream companies to protect their investments is to create (or attempt to create) in their service contracts a dedication of production from the oil and gas producer structured as a covenant that runs with the land.

Beginning with Sabine Oil & Gas Corp. v. HPIP Gonzales Holdings, LLC (In re Sabine Oil & Gas Corp.), 567 B.R. 869 (S.D.N.Y. 2017), bankruptcy courts have delivered divided opinions on whether midstream gathering and transportation contracts can be rejected, resulting in substantial uncertainty about whether midstream service providers can rely on their contractual terms. The major decisions regarding the treatment of midstream contracts in bankruptcy have focused on contracts for the gathering and transportation of hydrocarbons, and whether the contracts should not be rejectable because the oil and gas producer properly granted to the midstream company a covenant running with the land in its oil and gas properties.

Providers of produced water gathering and transportation services have typically relied on the same contractual protections as those that provide hydrocarbon gathering and transportation services. However, to date, midstream water contracts purporting to contain covenants running with the land have not been tested, and there is reason to believe that such agreements may be treated differently than their oil and gas counterparts. This article discusses certain issues and considerations that are specific to midstream water agreements and may affect whether such agreements are determined to be rejectable under the Bankruptcy Code.

The full article is available here.

Reconciling “Additional Assistance” with “Appropriate Relief” in Ch. 15
by | posted in: Bankruptcy Administration and Jurisdiction | 0

By David L. Eaton (Kirkland & Ellis LLP) and Aaron J. David (Paul, Weiss, Rifkind, Wharton & Garrison LLP)*

When faced with a Chapter 15 foreign representative seeking discretionary post-recognition relief on behalf of a foreign debtor, courts have struggled to decide whether the requested relief falls under § 1507(a), referring to “additional assistance” and subject to the factors enumerated in § 1507(b), or under § 1521, affording “appropriate relief” under the balancing test in § 1522.  Because both provisions seem to enable courts to provide discretionary relief, but subject to different standards, courts and commentators have lamented the difficulty of assessing “where section 1521 ends and where section 1507 begins.”

In our view, the problem is illusory.  We revisit Chapter 15 in light of the “language and design of the statute as a whole” to argue that § 1507 has been misinterpreted.  On our reading, §1507 is not, itself, a source of discretionary relief, but rather sets out principles to guide courts in granting any discretionary relief, including under § 1521.  Specifically, § 1507(a) allows courts to employ applicable non-bankruptcy law in fashioning discretionary relief, and § 1507(b) imposes standards that preserve pre-Chapter 15 jurisprudence governing such relief.  Interpreting § 1507 this way clarifies that § 1521 is the true source of discretionary relief, but that it should be employed against the background principles of § 1507.

The full article was published in the ABI Journal and is available here.

*David Eaton is a recently retired partner of Kirkland & Ellis LLP.  Aaron David is an associate at Paul, Weiss, Rifkind, Wharton & Garrison LLP.  The article reflects the views of authors, and does not represent the views of Kirkland & Ellis or Paul, Weiss.

Testimony before House Judiciary Committee on Financial Institution Bankruptcy Act
by | posted in: Financial Firms and Safe Harbors | 0

By Stephen E. Hessler, Kirkland & Ellis LLP

hesslerCongress is again advancing legislation to amend the Bankruptcy Code to add specific provisions for administering the case of a major financial institution.  The belief that the Chapter 11 filing of Lehman Brothers was a key cause of the Great Recession led Congress to enact in 2010, as part of the Dodd-Frank Act, Title II, which provided “orderly liquidation authority” to the federal government to wind down insolvent financial companies whose failure would have “serious adverse effects on financial stability in the United States,” in proceedings administered by the FDIC.  Although there has never been a Title II proceeding, Dodd-Frank has been significantly criticized for creating a new resolution framework that imbues politically-sensitive regulators with broad and untested discretion to liquidate a major bank.

In further response, the House of Representatives last year passed the Financial Institution Bankruptcy Act of 2014, but the Congressional session expired without consideration of the bill by the Senate.  In July 2015, the House Judiciary Committee held another hearing on H.R. 2947, the reintroduced Financial Institution Bankruptcy Act of 2015.  This bill, which is substantively identical to last year’s iteration, proposes to amend the Bankruptcy Code by adding a new Subchapter V within current Chapter 11.  The central feature of Subchapter V is referred to as the “single point of entry” approach that allows a debtor to separate quickly upon filing “good” from “bad” assets through a near-immediate postpetition transfer of “good” assets to a nondebtor bridge company whose equity is held by a trust that is managed by a special trustee for the benefit of creditors of the chapter 11 estate.  The “bad” assets would then be liquidated within the chapter 11 case.  Critically, both the proposed transfer and liquidation transactions are subject to Bankruptcy Court approval.

For a further exploration of the legislation and these issues, my testimony before the House Judiciary Committee in 2015 is available here and my testimony before the House Judiciary Committee in 2014 is available here. Please note the views expressed in my testimony are solely my own, and are not offered on behalf my firm, any client, or other organization.

For a previous Roundtable post on the Financial Institution Bankruptcy Act see here.

Recent Lessons on Management Compensation at Various States of the Chapter 11
by | posted in: Bankruptcy Administration and Jurisdiction | 0

By James H. M. Sprayregen, Christopher T. Greco, and Neal Paul Donnelly, Kirkland & Ellis

Setting compensation for senior management can be among the most contentious issues facing companies reorganizing under Chapter 11 of the US Bankruptcy Code. Corporate debtors argue that such compensation—often in the form of base salary, bonuses, or stock of the reorganized company—helps retain and incentivize management, whose services are believed necessary to achieve a successful reorganization. Creditors, by contrast, may be loath to support compensation packages that they perceive as enriching the very managers who led the company into bankruptcy.

This tension over management compensation, though long present in corporate bankruptcy cases, has been more pronounced since 2005, when the US Congress added Section 503(c) to the Bankruptcy Code. Section 503(c) limits bankrupt companies’ freedom to give management retention bonuses, severance payments, or other ancillary compensation. For instance, under the current regime, a company cannot pay managers retention bonuses unless it proves to a bankruptcy court that the managers both provide essential services to the reorganizing business and that they have alternative job offers in hand. Even then, the Bankruptcy Code caps the amount of the retention bonuses. Severance payments to managers are similarly restricted by Section 503(c).…Read more here.

[This article first appeared in the March 2013 issue of Financier Worldwide magazine. Copyright Financier Worldwide 2014 all rights reserved. Reprinted with publishers permission. www.financierworldwide.com]