Fifth Circuit Limits Post-Confirmation Bankruptcy Jurisdiction Over Midstream Restructuring Disputes
The Fifth Circuit reversed lower courts, holding that a Chapter 11 debtor's post-confirmation settlement and restructuring agreements executed 18 months after plan confirmation were not "executory contracts" under the reorganization plan, stripping the bankruptcy court of "related-to" jurisdiction over a nondebtor midstream provider's state-law claims. The decision clarifies that executory contracts subject to assumption or rejection under 11 U.S.C. § 365 must have existed prepetition, limiting bankruptcy court jurisdiction over disputes involving agreements created after confirmation.
Background
Carnero G&P, L.L.C., a midstream services provider, was party to a prepetition "gas gathering processing and purchasing" contract with Sanchez Energy Corporation and other parties. When Sanchez filed for Chapter 11 bankruptcy, its reorganization plan assumed Carnero's contract, which survived the bankruptcy intact.
The Dispute
Eighteen months after plan confirmation, Sanchez entered into post-confirmation settlement and restructuring agreements with nondebtor counterparties that allegedly interfered with Carnero's contract rights. Carnero filed suit in state court against the then-former debtor and the nondebtor counterparties, asserting state-law claims for declaratory and monetary relief. After removal to bankruptcy court, the critical jurisdictional question emerged: did the bankruptcy court retain post-confirmation "related-to" jurisdiction under 28 U.S.C. § 1334(b) over disputes concerning these post-confirmation agreements? Both the bankruptcy court and district court answered yes, granting judgment on the pleadings against Carnero.
The Fifth Circuit's Analysis
The Fifth Circuit reversed, holding that the bankruptcy court lacked subject matter jurisdiction. The court held that the midstream restructuring agreements executed as part of the debtor's settlement with nondebtor counterparties did not embody contracts that were properly treated as "executory contracts" under the debtor's plan of reorganization. Consequently, the parties' dispute over the agreements' state-law ramifications did not pertain to the plan's implementation or execution for purposes of determining the bankruptcy court's post-confirmation "related-to" jurisdiction.
The critical issue was whether the midstream restructuring agreements constituted "executory contracts" under the plan. The court held they did not. Under the Bankruptcy Code, a debtor's assumption of a prepetition executory contract requires the contracting parties to fulfill the contract's prepetition terms, subject to conditions designed to protect the nondebtor party. Because the disputed agreements did not exist until 18 months after confirmation, they could not qualify as executory contracts subject to assumption or rejection under 11 U.S.C. § 365.
The court also held that Carnero was not barred by the plan from challenging the debtor's post-confirmation settlement and restructuring agreements, and that Carnero was not barred by its litigation strategy, in particular its failure to have objected, from challenging the debtor's settlement and restructuring agreements.