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FERC, CFTC, and State Energy Law Developments

US Bankruptcy Judge Mary F. Walrath of the District of Delaware entered an order on April 21 in In re Nine Point Energy Holdings, Inc., Case No. 21-10570 (MFW) (Bankr. D. Del. Apr. 21, 2021), finding that Caliber Measurement Services LLC, Caliber Midstream Fresh Water Partners LLC, and Caliber North Dakota LLC (together, Caliber) violated the automatic stay by sending “reservation of rights” letters to third parties that were providing services allegedly in violation of agreements between Caliber and Nine Point Energy Holdings, Inc. and certain of its affiliates (collectively, NPE).

Background

NPE and Caliber were parties to a variety of midstream services agreements, with services concentrated in McKenzie County, North Dakota. NPE believed that it could obtain services then provided by Caliber on more favorable terms and, according to NPE, on March 15, 2021, exercised its contractual rights to terminate its agreements with Caliber. Caliber believes NPE’s termination was unlawful and ineffective. Later the same day, NPE and its affiliates commenced voluntary chapter 11 bankruptcy cases.

After commencing the cases, NPE secured midstream services arrangements with alternative providers to replace the services performed by Caliber. Caliber contended that these arrangements violated its nonterminated contracts with NPE, because those agreements expressly precluded NPE from obtaining services from other providers.

Without seeking relief from the bankruptcy court, on March 25, 2021, Caliber sent “reservation of rights” letters to the alternative providers. The letters stated that it had “come to [Caliber’s] attention” that the alternative providers “ha[d] been providing midstream services relating to certain NPE sites at which Caliber, as a gatherer, has a midstream services agreement with NPE.” Caliber informed the alternative providers that its agreements with NPE, including the exclusivity provisions, remained in full force and effect and that “no court had held otherwise.” Caliber asserted that the alternative providers appeared to be “tortuously interfering with Caliber’s midstream services agreements with [NPE]” and warned that it may “seek all appropriate remedies for [the alternative providers’] actions.” According to NPE, Caliber’s letters had real world consequences: based on the letter it received, one alternative provider canceled its contract with NPE and needed to “sit this battle out.”

Guiding Legal Principles and the Parties’ Arguments

 “When a debtor files for bankruptcy, section 362(a) of the Bankruptcy Code imposes a broad automatic stay.” In re Nortel Networks, Inc., 669 F.3d 128, 137 (3d Cir. 2011). The automatic stay is an “existing, statutorily-created injunction” that debtors can enforce by motion when violated. In re Extraction Oil & Gas, Inc., No. 20-11548 (CSS), 2020 WL 7074142, at *4 (Bankr. D. Del. Dec. 3, 2020). At issue here, the automatic stay prohibits “any act to obtain possession of . . . or to exercise control over property of the estate . . . .” 11 U.S.C. § 362(a)(3).

NPE and Caliber disputed the extent to which these principles apply to actions taken by non-debtors against non-debtors.

NPE contended that by sending the reservation of rights letters Caliber violated the automatic stay because it sought “to exercise control over [NPE’s] relationships and business arrangements, over [NPE’s] oil, gas, water and transportation system, and over [NPE’s] economic opportunities.” NPE filed a motion to enforce the automatic stay against Caliber based on these alleged violations.

Caliber objected. It argued that a non-debtor (Caliber) can send reservation of rights letters to other non-debtors (the alternative service providers) without violating the automatic stay because there would be no exercise control over estate property if conduct is purely between non-debtors. Caliber contended that this is true even where there is an incidental impact on a debtor’s bankruptcy estate. Caliber emphasized that the letters merely reserved rights and were not in the nature of “cease and desist” letters or formal legal action against the suppliers.

The Bankruptcy Court’s Ruling

Against this backdrop, Judge Walrath issued a bench ruling, holding that, by sending the reservation of rights letters to the alternative providers, Caliber violated the automatic stay.

The Bankruptcy Court found that NPE’s contractual relationships with the alternative providers constituted property of the bankruptcy estates. While Caliber disputed NPE’s ability to enter into the alternative midstream arrangements in light of the present exclusivity provisions, Judge Walrath noted that, even if the alternative agreements were entered in violation of exclusivity, they would not be void, and that any exclusivity provisions bound only NPE and Caliber, and not the third-party alternative providers. Judge Walrath found that Caliber’s remedy “is not to approach the third parties, but to seek action for relief against [NPE].” If Caliber has rights, according to the court, such rights must be exercised in the Bankruptcy Court. Caliber “does not have the right to take matters into its own hands.”

The Bankruptcy Court found that the “reservations of rights” letters did more than just reserve rights: they interfered with NPE’s business relationships with the alternative providers. Judge Walrath noted that there was no legal need for Caliber to send reservation of rights letters. There would be no waiver without such letters. And the court found it important that one alternative service provider expressly ceased doing business with NPE on the basis that it received a “reservation of rights” letter from Caliber.

On these facts, the court found that Caliber violated the automatic stay. It directed Caliber to rescind the letters it sent and to provide a list of recipients of such letters to NPE. The court reserved for a later date on issues of attorney fees and costs and any additional relief.

Impact

This decision serves as an important reminder of the breadth of the automatic stay. A party sending a reservation of rights letter to a non-debtor third party may violate the automatic stay if such letters negatively impact the debtor’s relationship with that party. When a company is in bankruptcy, caution must be exercised when dealing not only with the debtor but also its contractual counterparties.

Where at all possible, relief (even confirmatory relief) should first be sought in the bankruptcy court before taking actions that may impact a debtor’s bankruptcy estate. A party found to be in violation of the automatic stay can be subject to damages, including costs, attorney fees and punitive damages “in appropriate circumstances.” See 11 U.S.C. § 363(k).