Delaware Court Holds Rejection Eliminates Non-Debtor's Exclusive Right To Provide Services To The Debtor

• Published date: 01 February 2022
• Subject Matter: Corporate/Commercial Law, Insolvency/Bankruptcy/Re-structuring, Corporate and Company Law, Insolvency/Bankruptcy, Contracts and Commercial Law
• Law Firm: Jones Day
• Author: Mr Matthew C. Corcoran, Heather Lennox, T. Daniel Reynolds and Nick Buchta

Nine Point Energy Holdings, Inc. and its affiliates (collectively, "Nine Point" or "Nine Point debtors") constituted an oil and gas production and exploration company that sought to reorganize in chapter 11 through a going concern sale of substantially all of their assets. To maximize value, Nine Point sought to sell those assets free and clear of its midstream services contracts, which included provisions that prevented Nine Point from acquiring midstream services from anyone other than its counterparty, Caliber North Dakota, LLC ("Caliber"). The dispute over Nine Point's ability to do so was the driving factor in its bankruptcy case.

One of the issues involved in the dispute was whether the U.S. Supreme Court's decision in Mission Product Holdings, Inc. v. Tempnology, LLC, 139 S. Ct. 1652 (2019), prevented the contracts' rejection from eliminating Caliber's exclusive right to provide midstream services to Nine Point. The U.S. Bankruptcy Court for the District Delaware held that it did not. On appeal, the Delaware District Court agreed in Caliber North Dakota, LLC v. Nine Point Energy Holdings, Inc. (In re Nine Point Energy Holdings, Inc.), 2021 WL 3269210 (D. Del. July 30, 2021). The district court held that Mission Product's holding did not apply because the exclusivity provisions' only value was the leverage it created for Caliber to force Nine Point to perform Nine Point's rejected executory obligations, which would defeat the purposes of section 365 of the Bankruptcy Code. This case is an important clarification on the implications of Mission Product as it confirms that creative contracting cannot prevent a debtor from exercising, and receiving the benefits of, its rejection rights under the Bankruptcy Code.

Rejection and Mission Product

Section 365(a) provides debtors with a broad grant of authority to assume or reject executory contracts and unexpired leases. Section 365(g) further explains that rejection "constitutes a breach" of the underlying contract immediately before the bankruptcy filing, and counterparties to rejected contracts are generally treated as prepetition creditors with respect to the damages that flow from rejection.

A circuit split emerged, however, over the impact of rejection on individual provisions in rejected contracts-particularly provisions granting a counterparty a non-exclusive license to use the debtor's intellectual property, which may entitle the licensee to the protections set forth in section 365(n) of the...