Reed Smith Client Alerts

On February 13, 2018, the Hon. Marvin Isgur (United States Bankruptcy Judge for the Southern District of Texas) considered whether preferential rights – such as a party’s “Right of First Refusal” – were enforceable in a sale of a debtor’s oil and gas assets. Judge Isgur found that section 365(f) of the Bankruptcy Code is unambiguous, and ultimately held that preferential rights are unenforceable in the context of a debtor’s proposed sale of all or substantially all of the debtor’s assets.

Authors: Eric A. Schaffer Lloyd A. Lim Kerri A. Cox Rachel I. Thompson

This Client Alert relates to Cobalt International Energy, Inc., et al.’s (collectively, the Debtors or Cobalt) Chapter 11 bankruptcy case, which is currently pending in the United States Bankruptcy Court for the Southern District of Texas, Houston Division (Case No. 17-36709).

The Debtors are a publicly held offshore oil exploration and production company with assets in the Gulf of Mexico and a non-operated interest in West Africa. Certain of the Debtors’ Gulf of Mexico assets are subject to executory contracts containing preferential rights in favor of working interest co-owners. These contracts are joint operating agreements that provide the co-owners the right to acquire the Debtors’ working interest on the same terms and conditions offered to a third party.

On February 1, 2018, the Debtors requested that Judge Isgur enter an order deeming these rights of first refusal unenforceable in connection with the Debtors’ proposed sale of all or substantially all of their oil and gas assets (Case No. 17-36709, at Doc. No. 346). The Debtors argued that section 365(f)(1) of the Bankruptcy Code plainly provides that a debtor-in-possession may assign an executory contract notwithstanding a provision in the contract “that prohibits, restricts, or conditions the assignment of such contract” (11 U.S.C. § 365(f)(1)). In support of their argument, the Debtors also contended that enforcing these preferential rights would diminish the value of the assets and have a “chilling effect” on bidding.

Although several objections were filed, the working interest owners ultimately agreed to waive (vis-à-vis a one-time waiver) their respective preferential rights.