680 Noble Energy, Inc. v. ConocoPhillips Company, 532 S.W.3d 771 (Tex. 2017)

Tuesday, August 7th, 2018

Richard F. Brown

The following is not a legal opinion. You should consult your attorney if the case may be of significance to you.

Noble Energy, Inc. v. ConocoPhillips Company, 532 S.W.3d 771 (Tex. 2017) held that a mutual, reciprocal environmental indemnity was an executory contract assumable in bankruptcy. Under a 1994 Exchange Agreement, ConocoPhillips Company (“Conoco”) and Alma exchanged oil and gas interests, and each party accepted responsibility and indemnified the other party for any environmental claims related to the property, regardless of when the damage occurred. In 1999, Alma filed for bankruptcy and then sold its assets to Noble under an asset purchase agreement (“APA”). In 2010, environmental claims were made against Conoco, which Conoco settled for $63 million. Noble refused to indemnify Conoco. Conoco sued Noble for breach of the Exchange Agreement. The principal issue was whether, under the terms of the bankruptcy court order (“Order”) confirming the plan of reorganization (“Plan”) and the APA, Noble was assigned an undisclosed contractual indemnity obligation of Alma.

The Texas Supreme Court first determined whether the Exchange Agreement was an executory contract. “Executory contracts in bankruptcy are best recognized as a combination of assets and liabilities to the bankruptcy estate; the performance the nonbankrupt owes the debtor constitutes an asset, and the performance the debtor owes the nonbankrupt is a liability.” The Court noted that the Exchange Agreement provided for an exchange of assets between Conoco and Alma and it mutually obligated them to indemnify each other for all environmental claims regardless of when the claims arose. Thus, the Court concluded that the Exchange Agreement was an executory contract because the performance Alma owed to Conoco was a liability and the performance Conoco owed to Alma was an asset.

Next the Court examined the APA, the Plan, and the Order to determine whether Alma assumed the Exchange Agreement and assigned it to Noble. The Exchange Agreement was not specifically listed in the APA. However, under Section 8.03 of the APA, Noble agreed to “assume[] all duties and obligations as the owner of the Assets . . . including without limitation the obligation [to] . . . perform obligations under any executory contracts. . . .” Also, Section 10.8 of the Plan provided that “executory contracts not specifically referenced were to be ‘assumed and assigned to [Noble]’ unless rejected at closing” and Section 10.9 states that all executory contracts not rejected “shall be assumed by [Alma] and assigned to [Noble].” Moreover, paragraph 15 of the Order stated that “those Executory Contracts . . . proposed to be assumed and assigned to [Noble] pursuant to the Plan are ordered assumed and assigned to [Noble].” The Plan did not specifically reference the Exchange Agreement and Alma never rejected the Exchange Agreement. Thus, based upon the language of the APA, the Plan, and the Order, the Court concluded that the Exchange Agreement was assumed by Alma and assigned to Noble.

The significance of the case is the holding that a mutual, reciprocal environmental indemnity is an executory contract that can be assumed in bankruptcy.