Quicksilver Drops Motion to Reject Midstream Agreements in Connection with Closing of Sale to BlueStone Natural Resources

Quicksilver Drops Motion to Reject Midstream Agreements in Connection with Closing of Sale to BlueStone Natural Resources

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the Barnett Shale, replacing the three agreements that had been subject to rejection, and the rejection motion has been withdrawn with the consent of both BlueStone and Crestwood.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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  Jeffrey A. Schlegel


Omar Samji

Paul M. Green, Alexandra L. Wilde, and Katie A. Oldham, associates in the Houston Office, assisted in the preparation of this Alert. 

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