Noble Energy, Inc. v. Conocophillips Company ( 2017 )

IN THE SUPREME COURT OF TEXAS
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NO . 15-0502
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NOBLE ENERGY, INC., PETITIONER,
v.
CONOCOPHILLIPS COMPANY, RESPONDENT
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ON PETITION FOR REVIEW FROM THE
COURT OF APPEALS FOR THE FOURTEENTH DISTRICT OF TEXAS
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JUSTICE JOHNSON , joined by JUSTICE GREEN and JUSTICE GUZMAN , dissenting.
I disagree with the Court for essentially two reasons. First, the Court says that “the issue
before us is not whether the bankruptcy proceedings were conducted as they should have been.”
Ante at ___. But that is precisely the issue. Alma was not authorized to assign the Exchange
Agreement, which I agree was an executory contract, unless it was done pursuant to and in
conformance with Bankruptcy Code section 365. 11 U.S.C. § 365.1 Even Conoco agrees:
1
Otto Preminger Films, Ltd. v. Qintex Entm’t, Inc. (In re Qintex Entm’t), 950 F.2d 1492, 1495 (9th Cir. 1991)
(holding that the sale of the debtor’s assets did not include any executory contract unless the debtor first assumed that
contract under section 365); Chira v. Saal (In re Chira), 367 B.R. 888, 900 (S.D. Fla. 2007) (recognizing that section
365 is the exclusive remedy for the sale of executory contracts); Tech Pharmacy Servs., Inc. v. RPD Holdings, LLC (In
re Provider Meds, LLC), No. 13-30678, 2017 WL 213814, at *16 (Bankr. N.D. Tex. Jan. 18, 2017) (noting that section
365 is the exclusive means of effectuating assumption and assignment of executory contracts in bankruptcy); Compton
v. Mustang Eng’g Ltd. (In re MPF Holding U.S., LLC), 495 B.R. 303, 321 (Bankr. S.D. Tex. 2013) (recognizing that
in the context of executory contracts, section 365 is the exclusive remedy available to parties wishing to sell property);
In re Taylor, 198 B.R.142, 167 (Bankr. D.S.C. 1996) (providing that section 365 is either an exclusive remedy or a
necessary intermediate step before a sale of assets under section 363 is available); In re Robinson Truck Line, Inc., 47
B.R. 631, 638 (Bankr. N.D. Miss. 1985) (holding that within the context of executory contracts under a Chapter 11 plan,
Alma could not have assigned any executory contract—the Exchange Agreement or
anything else—in its bankruptcy to [Noble] under Texas law; it could only
accomplish such assignment under [Bankruptcy Code] Section 365. “[S]ection 365
is the exclusive means of effectuating assumption and assignment of executory
contracts in bankruptcy.” Compton v. Mustang Eng’g Ltd. (In re MPF Holding U.S.
LLC), 495 B.R. 303, 319 (Bankr. S.D. Tex. 2013); see In re Qintex Entm’t, Inc., 950
F.2d 1492, 1495–96 (9th Cir. 1991); In re Taylor, 198 B.R. 142, 167 (Bankr. D. S.C.
1996); In re Robinson Truck Line, Inc., 47 B.R. 631, 638 (Bankr. N.D. Miss. 1985);
In re LHD Realty Corp., 20 B.R. 717, 719 (Bankr. S.D. Ind. 1982) (all holding that,
within the Bankruptcy Code, Section 365 exclusively governs the assumption and
assignment of executory contracts in bankruptcy proceedings).
Conoco Resp. Brief at 13 (citing 11 U.S.C. § 365). The Court says Alma did so, but it did not.
Second, the Exchange Agreement was not disclosed in the bankruptcy proceeding by Alma,
either in its schedules or otherwise. The Court avoids that difficulty by saying Noble had
constructive knowledge of the Agreement and Alma assumed it because of general language in the
Asset Purchase Agreement (APA), the Bankruptcy Plan, and the bankruptcy court’s Order:
Section 10.8 of the Plan provides that executory contracts not specifically referenced
were to be “assumed and assigned to [Noble]” unless rejected at closing. . . . “All . . .
executory contracts . . . not . . . rejected . . . pursuant to this section,” Section 10.9
states, shall be assumed by [Alma] and assigned to [Noble]. The Exchange
Agreement was not specifically referenced in the Plan and was never rejected in any
way permitted by the Plan and thus was assumed by Alma and assigned to Noble.
Paragraph 15 of the bankruptcy court’s Order clearly stated: “those Executory
Contracts . . . proposed to be assumed and assigned to [Noble] pursuant to the Plan
are ordered assumed and assigned to [Noble]. . . . The fact that Noble elected to
close indicates that in its view, at least, the assignment of executory contracts under
the Plan materially conformed to the APA.
Ante at ___ (alterations in original) (citations omitted). Again, the Court is mistaken.
section 365 is the exclusive remedy available to debtors).
2
The Court recognizes what is well established in bankruptcy law: section 365 does not
authorize a debtor to assign an executory contract unless it first assumes the agreement and the
assignee gives adequate assurance of performance. See 11 U.S.C. § 365 (f)(2). Under relevant
bankruptcy authority construing section 365, general plan language such as that the Court references
does not effect assumption of an undisclosed executory contract, approval of a putative assignee’s
adequate assurance of performance of it, and then its assignment.
The Court also points out that Noble acted as though it had assumed the Exchange
Agreement by indemnifying Conoco in connection with previous post-bankruptcy claims. But past
conduct “does not create a contract right that does not otherwise exist.” Sun Oil Co. (Del.) v.
Madeley, 626 S.W.2d 726, 734 (Tex. 1981). And regardless of the circumstances surrounding any
such actions by Noble and how it initially interpreted the bankruptcy documents, the actions do not
alter whether Alma complied with the requirements of section 365 by expressly assuming the
executory Exchange Agreement, Noble’s providing adequate assurance of its performance, Alma’s
expressly assigning it, and the bankruptcy court’s approval of all three.
Further, without citing authority except Conoco’s argument, the Court says that the Plan
language could have gone the other way and solved Noble’s problems. That is, the Plan could have
said “as reorganization plans often do, that all executory contracts not formally assumed and
assigned by a certain date would be rejected.” Ante at ___. It may be true that Alma’s Plan could
have contained such language, but that is not the question. The question is what actually happened
here and how it plays out under section 365.
3
Under section 365, a trustee or debtor-in-possession “may assume or reject any executory
contract.” 11 U.S.C. § 365(a); Gray v. W. Envtl. Servs. & Testing, Inc. (In re Dehon, Inc.), 352 B.R.
546, 558 (Bankr. D. Mass. 2006). “By permitting debtors to shed disadvantageous contracts but
keep beneficial ones, § 365 advances one of the core purposes of the Bankruptcy Code: ‘to give
worthy debtors a fresh start.’” Eagle Ins. Co. v. BankVest Capital Corp. (In re BankVest Capital
Corp.), 360 F.3d 291, 296 (1st Cir. 2004) (quoting Gannett v. Carp (In re Carp), 340 F.3d 15, 25
(1st Cir. 2003)). The decision to reject or assume an executory contract is “subject to the court’s
approval,” 11 U.S.C. § 365(a), thus protecting the integrity of the proceedings and the best interests
of all the concerned parties.
Only after a debtor has assumed an executory contract can the debtor assign it. 11 U.S.C.
§ 365(f)(2); Bonneville Power Admin. v. Mirant Corp. (In re Mirant Corp.), 440 F.3d 238, 253 (5th
Cir. 2006) (“According to § 365(f)(2)(A), assumption must precede assignment.”); In re Adelphia
Commc’ns Corp., 359 B.R. 65, 71 (Bankr. S.D.N.Y. 2007) (“In order to assign an executory contract,
a debtor in possession or trustee must assume it.”). Bankruptcy courts have recognized that the Code
does not preclude a debtor from neither assuming nor rejecting an executory contract. In re Mirant
Corp., 440 F.3d at 253 n.19. If an executory contract is neither assumed nor rejected, it remains in
effect and passes with other property, that is, it “rides through” to the reorganized debtor. Id.
Because such a contract is unaffected by the bankruptcy, the non-debtor party to the contract may
seek redress outside of the bankruptcy context for any default by the debtor. In re Dehon, 352 B.R.
at 561. Simply put, if the debtor wants to be relieved of the obligations of an executory contract, the
contract must be disclosed and dealt with according to bankruptcy law and rules.
4
Conoco asserts, and the Court agrees that, pursuant to section 365, Alma assumed the entire
Exchange Agreement and wholly assigned it to Noble. Noble advances two arguments in opposition.
First, Alma did not disclose the Exchange Agreement during the bankruptcy proceedings as it was
required to do by bankruptcy law. Second, an executory contract must be explicitly assumed in
bankruptcy, and Alma did not explicitly assume the Exchange Agreement.
Regarding Alma’s failure to disclose the Exchange Agreement during the bankruptcy
proceedings, the Court concludes that “[a]s critical as disclosure in bankruptcy proceedings may be,
we think it more critical that parties to bankruptcy proceedings and others have confidence that
reorganization plans and court orders will be interpreted and enforced according to their plain
terms.” Ante at ___. Of course the Court is correct that parties to bankruptcy proceedings must have
confidence in proceedings, plans, and court orders. But that confidence only comes if the
proceedings are transparent and bankruptcy law and requirements are strictly complied with.
Otherwise, the proceedings become a matter of gamesmanship—how opaque can a debtor’s filings
and disclosures be and how many omissions can be made without consequences to the debtor
seeking relief and other parties such as Conoco with knowledge of the opaqueness and who
ostensibly are benefitted? In any event, the Court’s statement is counter to the position of federal
courts regarding full and complete disclosure, as is discussed below. See, e.g., Zurich Am. Ins. v.
Tessler (In re J.A. Jones, Inc.), 492 F.3d 242, 249, 252 (4th Cir. 2007) (holding that even though a
Chapter 11 Plan of Liquidation had been confirmed, a creditor was not bound by the terms of the
settlement because the debtor had not included the creditor on the schedule of creditors as required
by 11 U.S.C. § 521).
5
Not only is the Court’s decision counter to bankruptcy authority, it is manifestly inequitable.
The Court’s decision prejudices Noble, who was not notified by Alma of the indemnity obligation
in the Exchange Agreement. And the Court’s decision benefits the direct parties to the Exchange
Agreement—Conoco and Alma—who negotiated, entered into, and accepted its risks in a
presumably arms-length, fully-vetted business transaction, then allowed it to ride through the
bankruptcy proceedings without notice to the trustee, the bankruptcy court, or the entities considering
purchasing Alma’s assets. Conoco benefits by having a claim against Noble instead of the
reorganized Alma, and the reorganized Alma benefits by escaping liability for bankrupt Alma’s
failure to comply with bankruptcy law by not disclosing an executory contract. The Court says that
“Noble knew from the plain terms of the APA, the Plan, and the Order that it could be assigned
executory contracts not specifically listed.” Ante at ___. But as discussed below, Noble explicitly
limited its assumption of Alma’s liabilities in the APA and Noble should have been able to rely on
Alma’s bankruptcy schedules without the need to conduct its own investigation into whether those
schedules were accurate. See Popgrip, LLC v. Brown’s Chicken & Pasta, Inc. (In re Brown’s
Chicken & Pasta, Inc.), 503 B.R. 86, 94 (Bankr. N.D. Ill. 2013); see also Cadle Co. v. Pratt (In re
Pratt), 411 F.3d 561, 566 (5th Cir. 2005).
As for Alma’s failure to disclose the Exchange Agreement, a debtor is required to disclose
assets, liabilities, and executory contracts on particularized schedules. 11 U.S.C. § 521(a)(1)(i); FED .
R. BANKR. P. 1007(b)(1)(C); see Official Bankruptcy Form 6, Schedule G (“Describe all executory
contracts of any nature and all unexpired leases of real or personal property [and] [s]tate nature of
debtor’s interest in contract, i.e., ‘Purchaser,’ ‘Agent,’ etc.” (emphasis added)). Alma did not
6
disclose the Exchange Agreement as an executory contract. And bankruptcy courts have firmly put
both the obligation of full disclosure and the risks of non-disclosure on the debtor. See Diamond Z
Trailer v. JZ L.L.C. (In re JZ L.L.C.), 371 B.R. 412, 417 (B.A.P. 9th Cir. 2007) (“It is settled that
the debtor has a duty to prepare these bankruptcy schedules and statements ‘carefully, completely,
and accurately’ and bears the risk of nondisclosure.” (quoting Cusano v. Klein, 264 F.3d 936, 946–49
(9th Cir. 2001))); Burnes v. Pemco Aeroplex, 291 F.3d 1282, 1286 (11th Cir. 2002) (“Bankruptcy
courts also rely on the accuracy of the disclosure statements when considering whether to approve
a no asset discharge. Accordingly, ‘the importance of full and honest disclosure cannot be
overstated.’” (quoting Ryan Operations G.P. v. Santiam-Midwest Lumber Co., 81 F.3d 355, 362 (3d
Cir. 1996))); In re Colvin, 288 B.R. 477, 481 (Bankr. E.D. Mich. 2003) (collecting cases and
concluding that disclosure obligations of debtors “are at the very core of the bankruptcy process and
meeting these obligations is part of the price debtors pay for receiving the bankruptcy discharge”).
The Court seems to conclude that Alma’s failure to disclose the Exchange Agreement as
required by the Bankruptcy Code was excused because Noble had “constructive knowledge” of the
agreement. Ante at ___. But “constructive knowledge” is not applicable in the bankruptcy context.
Debtors are statutorily required to explicitly disclose assets, liabilities, and executory contracts so
all the parties involved, including the bankruptcy court, can rely on the disclosures. See Burnes, 291
F.3d at 1286 (noting that creditors and bankruptcy courts rely on the accuracy of disclosure
statements). “Schedules serve the important purpose of insuring that adequate information is
available for the Trustee and creditors without need for investigation to determine whether the
information provided is true.” In re Pratt, 411 F.3d at 566 (emphasis added) (internal quotations
7
omitted); see also Paradigm Air Carriers, Inc. v. Tex. Rangers Baseball Partners (In re Tex.
Rangers Baseball Partners), 498 B.R. 679, 704 (Bankr. N.D. Tex. 2013) (“Under the Bankruptcy
Rules, notice must be given in a bankruptcy case to counter-parties to the contract and to other
parties in interest of a debtor-in-possession’s contemplated decision to either reject or assume an
executory contract.” (emphasis added)). Further, “[p]arties who purchase assets from bankruptcy
estates should be able to rely on debtors’ Schedules and Statements of Financial Affairs. Otherwise,
competent, financially able purchasers will shun a bankruptcy process that requires them to speculate
about what they are asked to purchase.” In re Brown’s Chicken & Pasta, 503 B.R. at 94
(determining that information in a letter and monthly operating report was not sufficient to put an
asset purchaser on notice of the existence of a franchise agreement that was not included in the
bankruptcy schedules).
Further, in concluding that Noble had constructive knowledge of the Exchange Agreement,
the Court cites cases and statutes regarding notice based on recorded instruments. Ante at ___ n.10.
But none of these are applicable in a bankruptcy proceeding where the requirements for assigning
an executory contract are explicitly spelled out in the Bankruptcy Code. And finally, none of these
address whether the purchaser of an oil and gas lease was put on notice of a liability not addressed
in the purchase contract. See Cooksey v. Sinder, 682 S.W.2d 252, 253 (Tex. 1984) (“Because
Cooksey’s deed was properly recorded and within the chain of title of the Sinder parents and Tierra
Buena, they had legal notice of the lien and thus took the property subject to that lien. This defeats
their innocent purchaser defense.”); cf. Regency Advantage Ltd. P’ship v. Bingo Idea-Watauga, Inc.,
936 S.W.2d 275, 278 (Tex. 1996) (holding that the assignee of a lease was not liable on a
8
commission agreement in the lease because to be liable “it must have expressly assumed such
liability”).
Alma did not disclose the Exchange Agreement, and in the bankruptcy context, the risk of
a bankruptcy debtor’s failure to disclose falls on the debtor. See, e.g., Hamilton v. State Farm Fire
& Cas. Co., 270 F.3d 778, 785 (9th Cir. 2001) (holding that a debtor was judicially estopped from
asserting a claim that had not been disclosed in bankruptcy because “the integrity of the bankruptcy
system depends on full and honest disclosure by debtors of all of their assets. . . . The interests of
both the creditors, who plan their actions in the bankruptcy proceeding on the basis of information
supplied in the disclosure statements, and the bankruptcy court, which must decide whether to
approve the plan of reorganization on the same basis, are impaired when the disclosure provided by
the debtor is incomplete.” (quoting Browning Mfg. v. Mims (In re Coastal Plains, Inc.), 179 F.3d
197, 208 (5th Cir. 1999))); In re JZ L.L.C., 371 B.R. at 417 (“It is settled that the debtor . . . bears
the risk of nondisclosure.”); Sanderson v. Ptasinski (In re Ptasinski), 290 B.R. 16, 26 (Bankr.
W.D.N.Y. 2003) (denying debtors’ discharge based on their failure to disclose assets and noting that
“the benefits received by an honest debtor in a bankruptcy case, including a discharge of all
dischargeable debts, a ‘fresh start,’ are extraordinarily disproportionate to the few demands and
expectations [of full disclosure] placed upon a debtor by the Bankruptcy Code and Rules”).
Otherwise, a debtor would be incentivized to conceal information. Superior Crewboats Inc. v.
Primary P & I Underwriters (In re Superior Crewboats, Inc.), 374 F.3d 330, 336 (5th Cir. 2004)
(“The Hudspeaths had the requisite motivation to conceal the claim as they would certainly reap a
windfall had they been able to recover on the undisclosed claim without having disclosed it to the
9
creditors. Such a result would permit debtors to ‘[c]onceal their claims; get rid of [their] creditors
on the cheap, and start over with a bundle of rights.’” (alterations in original) (quoting Payless
Wholesale Distribs., Inc. v. Alberto Culver (P.R.) Inc., 989 F.2d 570, 571 (1st Cir. 1993))); Burnes,
291 F.3d at 1288 (“Allowing [the debtor] to back-up, re-open the bankruptcy case, and amend his
bankruptcy filings, only after his omission has been challenged by an adversary, suggests that a
debtor should consider disclosing potential assets only if he is caught concealing them.”).
Alma’s failure to disclose the Exchange Agreement factors into the ultimate question of
whether Alma assumed and assigned it in accordance with section 365’s requirements. Under
section 365, an executory contract may be assigned only after (1) it has been assumed by the debtor,
(2) the assignee has provided adequate assurance of future performance, and (3) the bankruptcy court
has approved. 11 U.S.C. § 365(a), (f)(2). Noble argues that Alma did not explicitly assume the
Exchange Agreement and an executory contract must be explicitly assumed in bankruptcy—it cannot
be assumed by implication. See Stumpf v. McGee (In re O’Connor), 258 F.3d 392, 401 (5th Cir.
2001) (stating that an executory contract may not be assumed by implication). This requirement of
explicit assumption is closely tied to the requirement of court approval.
Congress enacted section 365(a) as part of the Bankruptcy Code of 1978, making
court approval of [executory contract rejection or assumption] obligatory for the first
time. . . . The predecessor to section 365(a) . . . did not explicitly require judicial
approval [of assumption or rejection decisions] . . . . In adopting a requirement of
court approval, Congress overruled precedent that allowed trustees to show by
informal conduct that they had either assumed or rejected [executory contracts].
In re Dehon, 352 B.R. at 560 (alterations in original) (quoting Thinking Machs. Corp. v. Mellon Fin.
Servs. Corp. (In re Thinking Machs. Corp.), 67 F.3d 1021, 1026 (1st Cir. 1995)).
10
As noted above, the Court concludes that the Exchange Agreement was assumed in the
bankruptcy proceeding based on bankruptcy plan language providing that “executory contracts not
specifically referenced were to be ‘assumed and assigned to [Noble]’ unless rejected at closing.”
Ante at ___ (alteration in original) (citing Plan § 10.8). But the Court does not explain how the
bankruptcy court could have approved the assumption as required by section 365 when the contract’s
existence was known only to Alma and Conoco and undisclosed by either of them in the bankruptcy
to other parties, the trustee, or the court. Rather, the Court says that the bankruptcy court’s approval
of the plan was “perfectly understandable” even though it did not know the agreement existed
because “Section 365 does not impose an obligation on the court to conduct an independent
investigation.” Ante at ___ n.68. I completely agree that section 365 does not require a court to
conduct an independent investigation. But that point, again, goes back to Alma’s responsibility to
disclose the agreement because bankruptcy courts rely on disclosure statements. See Burnes, 291
F.3d at 1286 (“Bankruptcy courts also rely on the accuracy of the disclosure statements . . . .”).
Nor does the Court explain how the bankruptcy court could have intended its order specifying
that Noble has “provided adequate assurance of future performance of all Executory Contracts and
unexpired leases being assigned to it” to include the undisclosed Agreement when neither the court
nor Noble knew of the contract. Order § 15. That is because there is no reasonable, legally sound
explanation for it. Rather, as was noted by the court in In re Parkwood Realty Corp., a bankruptcy
court interpreting general language approving assumption of an undisclosed executory contract and
finding in its order that adequate assurance of future performance has been provided when the
11
contract was not disclosed and was unknown to the court, is pure fiction. 157 B.R. 687, 690–91
(Bankr. W.D. Wash. 1993).
Court approval of an executory contract’s assumption has been described as “an
indispensable step in the process” and an “explicit rule[] laid out by Congress.” In re A.H. Robins
Co., 68 B.R. 705, 710 (Bankr. E.D. Va. 1986) (“Judicial approval of a motion to assume is critical,
as issues of cure of default, adequate assurance of future performance and compensation for
pecuniary loss sustained as a result of default are matters of law left solely to the court’s resolve.”).
Assumption of an executory contract “elevates a prepetition liability to a postpetition liability, but
also entitles the nondebtor party to first priority status. Court approval thus provides protection to
the unsecured creditors whose claims could be prejudiced by potentially burdensome
contracts—ones that may have driven the business into bankruptcy in the first place.” Mason v.
Official Comm. of Unsecured Creditors (In re FBI Distribution Corp.), 330 F.3d 36, 45 (1st Cir.
2003).
As noted above, bankruptcy courts have consistently concluded that the assumption or
rejection of an executory contract under section 365 cannot be approved in bankruptcy if the contract
has not been disclosed. In In re Parkwood Realty Corp., a bankruptcy plan provided that “[a]ll other
executory contracts or unexpired leases of [the debtor] which have not been previously rejected shall
be deemed rejected on the Effective Date.” 157 B.R. at 689. The bankruptcy court concluded that
an undisclosed executory contract was not rejected based on this language because section 365
requires “actual consideration by the court,” and under section 365’s requirements, “to approve the
12
rejection of an unidentified contract results in purely fictitious compliance with the Code.” Id. at
689–91.
Similarly, in In re Golden Triangle Film Labs, Inc., a confirmed plan stated “all executory
contracts and unexpired leases of the Debtor shall be assumed by (and, to the extent necessary,
assigned to) reorganized Golden Triangle Film Labs, Inc. . . . except any executory contracts and
unexpired leases that are subject of separate motions to reject.” 176 B.R. 608, 609 (Bankr. M.D. Fla.
1994). The court determined that the unexpired lease at issue was not assumed under this language
because section 365 requires approval from the court and “[t]his Court is unwilling to accept the
proposition that the entry of an Order of Confirmation of a Plan which contains such unspecific
reference to unexpired leases and executory contracts would be sufficient to comply with the
requirements of § 365(a) of the Code.” Id. at 610.
The Fifth Circuit also recognized that interpreting the phrase “[a]ll . . . executory contracts,
other than contracts with or for the benefit of employees, agent[s] or brokers, not rejected prior to
time [sic] set forth herein will be assumed” as providing for the assumption of an undisclosed
contract “would be inconsistent with § 365(a), which requires court approval.” In re O’Connor, 258
F.3d at 401 (alterations in original). The Court discounts the Fifth Circuit’s labeling of the plan
language in that case as “boilerplate” as “no more than an aside,” and not the court’s actual holding.
Ante at ___. But regardless of whether the plan language is labeled “boilerplate,” the ultimate issue
is whether the proceedings complied with section 365’s requirements, specifically that a bankruptcy
court must approve both any assumptions and any rejections. And in bankruptcy proceedings, a
general statement such as is contained in the bankruptcy court order here simply does not approve
13
or disapprove of assumption of an undisclosed executory contract that the court has not expressly
considered.
The Court references two cases in which plan language similar to the language in this case
was upheld. Ante at ___ (quoting Dataprose, Inc. v. Amerivision Commc’ns (In re Amerivision
Commc’ns, Inc.), 349 B.R. 718 (B.A.P. 10th Cir. 2006); Tenucp Prop. LLC v. Riley (In re GCP CT
Sch. Acquisition, LLC), 429 B.R. 817 (1st Cir. 2010)). But in both of those cases, as the Court’s
quotes reflect, the focus was on whether the parties in interest had adequate notice of the assumption
or rejection of the executory contract. In re GCP CT Sch. Acquisition, 429 B.R. at 828–29 (“[T]he
question is not only whether the language contained within the plan or motion is sufficiently explicit,
but whether the notice (service of the relevant documents) under the circumstances was adequate.
Thus, the validity of any language depends upon notice and clarity and the overall information
provided to the parties in interest.” (emphasis added)); In re Amerivision Commc’ns, Inc., 349 B.R.
at 722 (“The Court does not invalidate boilerplate language per se. The validity of any language
depends upon notice and clarity and the overall information provided to the parties in interest.”
(emphasis added)). Here, as the asset purchaser, Noble was clearly a party in interest. But it was
provided no information with regard to the Exchange Agreement. The validity of the Plan language
as to the Executory Agreement depends upon the notice and information provided—or rather not
provided—to Noble in the bankruptcy proceedings. Based on explicit section 365 requirements, I
disagree that through the general Plan language Alma assumed the undisclosed Exchange
Agreement, Noble gave adequate assurance of performance of it, and Alma assigned it to Noble.
14
Generally, if a debtor does not assume or reject an executory contract in bankruptcy, the
contract “rides through” the bankruptcy and passes to the reorganized debtor, leaving the nondebtor’s
claim to survive the bankruptcy. In re Mirant Corp., 440 F.3d at 253 n.19. The validity of Noble’s
purchase of Alma’s interest in the Johnson Bayou Field during Alma’s bankruptcy is not being
challenged. To determine what that purchase means for the separate contractual indemnity
obligation, there are three applicable bankruptcy cases that have addressed a debtor’s failure to
follow the specific requirements of section 365 when attempting to dispose of an executory contract.
In American Flint Glass Workers Union v. Anchor Resolution Corp., the debtor, Anchor,
assumed and then “purported” to assign an executory contract under section 365 to an asset
purchaser. 197 F.3d 76, 78 (3d Cir. 1999). Under the language of the asset purchase agreement,
however, the buyer was to assume only some of the debtor’s obligations under that contract. Id. at
81. The court concluded that this was not a true executory contract assignment because the debtor
did not assign it cum onere—“[h]aving shifted fewer than all of the obligations (although it did
assign all of the rights) created by the [executory contract], Anchor remains liable on those
contractual obligations.” Id. at 78, 81. In coming to this conclusion, the court looked at the
underlying sales contract and noted that “here neither party to the sale transaction intended a true
assignment of all rights and obligations. . . . [The contract the] Purchaser was willing to (and did)
accept was simply not the same [contract] that Anchor had originally negotiated, and had then
assumed.” Id. at 81. The court concluded that because Anchor had not assigned the contract, the
claims against it for priority payments by the nondebtor party to the executory contract were fully
preserved. Id. at 83.
15
In another case, the Third Circuit Court of Appeals addressed an executory contract in which
Tenet Health System purchased collective bargaining agreements from the bankruptcy debtor,
Allegheny. Tenet Healthsystem Phila., Inc. v. Nat’l Union of Hosp. & Health Care Emps. (In re
Allegheny Health, Educ. & Research Found.), 383 F.3d 169, 172 (3d Cir. 2004). The agreements
were listed on the schedule of “Assumed Contracts” that were to be assumed by Allegheny and
assigned to Tenet. Id. However, the asset purchase agreement provided that Tenet only assumed
obligations arising after the closing of the sale. Id. The nondebtor party to the collective bargaining
agreement, the union, asserted that Tenet was refusing to abide by the terms of the collective
bargaining agreements by failing to pay employees for sick leave that accrued before the bankruptcy
sale. Id. at 173. The court concluded that under the asset purchase agreement Tenet was not liable
for any liabilities arising before the sale. Id. at 178. The court determined that while Allegheny
might be liable on the collective bargaining agreements, American Flint Glass “does not provide
authority for holding Tenet liable for the parts of the collective bargaining agreements that it declined
to assume.” Id. at 177. The court also pointed out that “[t]o the extent that Tenet has been able to
enjoy the benefits of the collective bargaining agreements without having to pay for the sick leave
that accrued under them, [the union] has itself to blame” because it failed to object to the asset
purchase agreement containing the “division of responsibility between Tenet and Allegheny.” Id.
The Court states that In re Allegheny is contrary to Noble’s position because the non-debtors
in that case had an existing right that was due at the time of bankruptcy, while in this case, indemnity
was not due until a covered liability was established. Ante at ___. But the Court fails to explain
away the discussion in In re Allegheny of the plan language which assigned the agreement to Tenet
16
and the contrary asset purchase agreement language in which Tenet did not assume all obligations
in the agreement.
Finally, in In re Dehon, the court addressed executory contracts that were listed as assets to
be transferred, but not as executory contracts to be assumed and assigned. 352 B.R. at 562. The
asset purchase agreement included all the debtor’s “right, title, and interest in and to all agreements.”
Id. at 552. The purchaser of the assets and the non-debtor parties to the executory contracts
continued to perform under the contracts after the bankruptcy. Id. at 553. When the bankruptcy plan
administrator sought to recover preferential payments made to the non-debtor parties, those parties
argued that the contracts had been assumed by the debtor under section 365. Id. at 555. The court
disagreed, noting that neither the debtor nor the plan administrator had requested assumption of the
contracts, no assumption was approved by the court, and nothing indicated the debtor intended to
assume the contracts. Id. at 564, 567. The court also concluded that because of the specific
requirements in section 365, the sale order of the contracts did not operate as an assumption. Id. at
562. The court declined to decide whether the contracts “rode through” the bankruptcy, concluding
that because the contracts had not been assumed, the non-debtor parties to them were subject to
preference avoidance provisions. Id. at 566.
While none of these cases precisely fit the factual situation here, they are instructive for
determining what happens in a situation such as this when the purchaser of an asset related to an
executory contract has realized the benefits of the asset it purchased, but the related executory
contract was not explicitly assumed and assigned by the debtor as required by section 365. In none
of the cases did the courts try to manipulate the transactions in order to force the debtor and the
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executory contract into compliance with section 365. Rather, the courts looked at what actually
occurred in the bankruptcy proceedings and what rights and liabilities the parties intended to transfer.
Looking at what the parties intended here, we begin with the APA. In Article I, Noble agreed
to purchase assets, including oil and gas leases, as described in Exhibit A. Section 1.04 is entitled
“Assumed Liabilities” and provides that “[i]n consideration for the sale of the Assets, Buyer shall
be responsible for the liabilities described in this Section.” Neither the Exchange Agreement
nor the indemnity obligation is included in that section as a liability. Section
1.06—“Liabilities”—provides that “[e]xcept for the Assumed Liabilities and Assumed Obligations
(as such term is defined in Section 8.03 below), . . . Buyer is not assuming any liability of, or related
to the Assets of any kind or description whatsoever.” (Emphasis added).
Article III is entitled “Representations and Warranties.” It states that Alma represented and
warranted to Noble: “Exhibit ‘D’ sets forth a list of the known contracts, agreements, plans, and
commitments to which [Alma is] a party or . . . bound,” which meet the following criteria: “[a]ny
guaranty, direct or indirect, by any affiliate of [Alma] of any contract, lease or agreement entered into
by [Alma],” and “[a]ny agreement of surety, guarantee or indemnification by [Alma] or any of [its]
affiliates outside of the ordinary course of business.” The exchange Agreement was not listed on
Exhibit D.
Article VIII contains obligations after closing. Section 8.03 sets out Noble’s post-closing
obligations including to assume “all duties and obligations as the owner of the Assets which accrue
or arise from and after the Closing Date, including . . . [to] perform obligations under any executory
contracts or unexpired oil and gas leases expressly assumed hereunder.” (emphasis added). Section
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8.04 sets out Alma’s post-closing obligations including “Except for those matters expressly assumed
by [Noble] . . . [Alma] shall be responsible for and discharge all claims, costs, expenses and
liabilities with respect to the Assets which accrue or relate to the times prior to” the effective date
of closing.
Nothing in the APA indicates that Noble expressly assumed the Exchange Agreement or the
indemnity obligation in it. Conoco points to the language in the confirmation order specifying that
Alma was assuming and assigning to Noble all executory contracts not previously assumed or
rejected. But as noted in the cases referenced above, when an executory contract is not assumed and
assigned according to the section 365 requirements, as the Exchange Agreement was not, courts have
looked to whether the parties intended for the debtor to assume the contract. And here, under the
clear language of the APA, Noble intended to limit its assumption of any liabilities to obligations
under executory contracts that were “expressly assumed” under the APA. Neither party argues that
the Exchange Agreement was expressly assumed under the APA by Noble. To respond to what the
Court says about the Plan language not rejecting all agreements not assumed when it could have
done so, Noble did not want to assume any liabilities it did not know of—and said so in the APA.
Further, because Alma did not disclose the Exchange Agreement as required by bankruptcy
law, as the debtor it bore the risk of nondisclosure. See In re JZ L.L.C., 371 B.R. at 417. The risk
of nondisclosure rightly should be that Alma, not the asset purchaser and its successors in interest,
would remain liable for the parts of the Exchange Agreement that Alma did not disclose and assign
within the framework of the bankruptcy proceeding. See In re Allegheny Health, 383 F.3d at 177.
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Conoco was a party to multiple other executory contracts with Alma that were listed as such
in Alma’s bankruptcy disclosure statement, along with a note about whether they were to be assumed
or rejected and the identities of the parties to the contracts. So, Conoco was in a position to object
to Alma’s failure to include the Exchange Agreement in its disclosures and request that the
bankruptcy court require Alma to either assume and assign the Agreement or reject it. Conoco did
not do so. See id. (noting that the nondebtor party to an executory contract had itself to blame for
not objecting to the asset purchase agreement). Under the circumstances, Conoco would not be
deprived of its contractual indemnity right if the Court were to follow applicable bankruptcy
precedent and hold that the Exchange Agreement rode through the bankruptcy and remained a
liability of reorganized Alma. The right simply would not attach to Noble; it would attach to the
reorganized party that succeeded to the interests of the party with whom Conoco made its deal in the
beginning—Alma.
I would reverse the judgment of the court of appeals. Because the Court does not, I
respectfully dissent.
________________________________________
Phil Johnson
Justice
OPINION DELIVERED: June 23, 2017
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