Face Challenges Confidently

545 ConocoPhillips Company v. Noble Energy, Inc.

Tuesday, February 2nd, 2016

Richard F. Brown

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

ConocoPhillips Company v. Noble Energy, Inc. held that a mutual, reciprocal environmental indemnity was an executory contract assumable in bankruptcy. Under a 1994 Exchange Agreement, the parties exchanged leases subject to a mutual indemnification provision requiring each respective “Assignee” to indemnify each respective “Assignor” for environmental claims regardless of when the damage occurred. In 2010, environmental claims were made against the Assignor of the Johnson Bayou field, which Assignor settled for $63 million. Prior to the filing of the environmental claim, there were assignments, a corporate merger, and a bankruptcy in the chain of title. The parties to this litigation aligned as successor to Assignor and Assignee, and Assignor sought indemnity from Assignee. The principal issue in the case was whether the indemnity obligation was discharged in bankruptcy or assumed by the remote Assignee when the remote Assignee purchased the Johnson Bayou Field out of bankruptcy. That is, was the Exchange Agreement an executory contract assumed by the purchaser in the bankruptcy sale?

The court first noted that a purchaser of assets does not necessarily automatically assume obligations of the seller. Moreover, in the context of an assignment of a contract, the assignee must expressly or impliedly assume the predecessor’s obligation for the assignee to be liable. There was nothing in the Asset Purchase and Sale Agreement in the sale out of bankruptcy which clearly established that the purchaser was assuming the indemnity obligation.

Because this sale took place within the bankruptcy context, the court stated it must determine (1) whether the debtor assumed the Exchange Agreement, and (2) whether the Exchange Agreement was an executory contract conveyed by the Asset Purchase and Sale Agreement. The bankruptcy plan stated that the debtor expressly assumed all executory contracts not otherwise rejected as listed in a motion to reject, the disclosure statement, or on lists provided by the purchaser. Because the Exchange Agreement did not appear on any of these lists, the debtor assumed the Exchange Agreement. Under the Asset Purchase and Sale Agreement, all executory contracts were to be assumed by the debtor and assigned to the purchaser.

In analyzing whether the Exchange Agreement was an executory contract, the court stated that agreements are executory “if at the time of the bankruptcy filing, the failure of either party to complete performance would constitute a material breach of the contract, thereby excusing the performance of the other party.” A contingent obligation that is material can still render a contract executory. The court relied heavily upon In re Safety-Kleen Corp. and Philip Services Corp. v. Luntz (In re Philip Services (Del.), Inc.) in finding the Exchange Agreement executory. The indemnity provisions in the contract in Safety-Kleen provided benefits and burdens to both parties that continued at the time of bankruptcy filing. The court in Philip Services “concluded that the future mutual obligations, including the ‘promise to indemnify,’ were ‘substantial element[s] of the overall transaction.’” Because the Exchange Agreement contained indemnity and remedial action obligations that were reciprocal, “mutual, future, largely unperformed, material obligations, both monetary and nonmonetary in nature” that survived closing, the court concluded the contract was executory. Because, at the time of the filing of the bankruptcy petition, the failure of either party to the Exchange Agreement to complete performance of its obligation would have constituted a material breach of the Exchange Agreement, the Exchange Agreement was an executory contract assumed by the debtor and purchased and assumed by the purchaser.

The parties to the Exchange Agreement also entered into an Assignment and Bill of Sale made subject to the Exchange Agreement, which contained indemnity language virtually identical to the Exchange Agreement. Because the court relied upon the executory contract analysis in reaching its decision, the court did not address the parties’ arguments regarding whether the indemnification obligation was a covenant running with the land.

The significance of this case is the court’s willingness to find indemnity obligations can pass through a bankruptcy to successors-in-interest.