Issue link: https://digital.shearman.com/i/1300408
While consent to assignment provisions in oil and gas contracts are typically enforceable outside of bankruptcy, it is possible for them to be rendered unenforceable under Section 365(f)(1) of the Bankruptcy Code. Section 365(f)(1) provides that a trustee may assign an executory contract or unexpired lease "notwithstanding a provision in an executory contract or unexpired lease of the debtor…that prohibits, restricts or conditions the assignment of such contract or lease." Note that this safe harbor provision is only applicable to contracts and unexpired leases that qualify as executory contracts and not available with respect to consent to assignment provisions in oil and gas leases in Texas and other jurisdictions where oil and gas leases are not considered executory contracts. POST-CLOSING INDEMNIFICATION AND P&A LIABILITIES Following a sale of assets pursuant to the bankruptcy process, a seller is likely to distribute the sale proceeds soon thereafter and remain insolvent or, if possible, wind down. As a result, the seller's representations and warranties in the purchase agreement typically do not survive closing and the seller's post-closing indemnification obligations are often very limited. The Bankruptcy Code requires that all administrative claims must be paid in full. Accordingly, the question as to whether plugging and abandonment claims are entitled to administrative priority and the party responsible for plugging and abandonment obligations is a key consideration when buying assets pursuant to the bankruptcy process. The answer largely requires a state- by-state analysis and, therefore, it is important that the parties address the allocation of plugging and abandonment and other environmental obligations in the purchase agreement. Understanding a debtor's ability or inability to abandon assets with P&A liabilities in excess of market value may also provide a buyer with additional leverage. OUT-OF-COURT TRANSACTIONS Buying assets from a distressed seller outside of bankruptcy presents other opportunities and risks. On the one hand, out-of-court transactions are generally subject to less competition and public disclosure. However, where a seller is potentially insolvent and yet willing to transact, a buyer must consider the risk of subsequent challenges by creditors (or a bankruptcy trustee) to unwind the sale transaction and otherwise claw back value from the buyer. In the current climate of volatility and distress, this risk should not be overlooked. In some instances, pursuing the transaction through a structured Chapter 11 case is the best way to mitigate claw-back risks, execute with greater certainty and maximize the extent to which the sale is free and clear of the seller's liabilities. In other instances, particularly where there are few creditors and they are tactfully engaged in the sale process, an out-of-court approach can be an effective strategy to minimize competition and transaction costs. 9 Impact on Deal Terms FOR MORE INFORMATION PLEASE CONTACT: Nathan Meredith Partner Dallas T +1 214 271 5372 nathan.meredith@ shearman.com Ian Roberts Partner Dallas T +1 214 271 5610 ian.roberts@ shearman.com