conduct and its attempts to assume the duties as successor Operator, notwithstanding Stone’s transfer of all of its interests to EQT. The bankruptcy court expressed its “grave concerns” that Triad had not recognized the terms of its sale and that its (Triad’s) rejection of EQT as the successor Operator and self-appointment implied that it did not recognize the validity of the sale and suggested its actions “may cause huge problems [for Triad].” Within days of the hearing, Triad and Stone reached a settlement so that when the JOA was assumed by EQT, Triad would be paid $180,000 to settle its claims (including the damages it asserted would be suffered upon assumption of the JOA). Triad agreed to abandon its efforts to name itself successor Operator, and the parties executed mutual releases. The stipulation approved by the bankruptcy court stated that “the assumption of the Operating Agreement pursuant to the Sale Order remains in full force and effect and such assumption and assignment shall not be altered by this Stipulation.” Thus, EQT became the designated successor Operator of the West Virginia Acreage. Once the Debtor assumed the JOA, it became binding on all parties including Triad and EQT. When Stone sold its interest to EQT, Stone no longer owned an interest in the Contract Area and was deemed to have resigned. A successor Operator required a vote of two or more owners holding a majority interest but neither EQT nor Triad could muster two votes and neither owned a majority (each held 50%). There was no basis upon which the bankruptcy court could have forced Triad to accept EQT as Operator once the JOA had been assumed and it seems unlikely that including a designation of EQT as Operator in the order of sale could have prevailed over Triad’s rights. Since neither owned a majority and neither had a second party to vote with it, the parties were in a contractual standoff and the bankruptcy court used its authority to encourage a settlement in keeping with the sale concept the court had approved. Had the 2015 JOA been in place, it would have solved one of the problems but not both. First the 2015 JOA no long requires two parties holding a majority to vote for a successor Operator. Second, it still requires a majority vote, but in this case neither Triad nor Stone/EQT held a majority. Likewise, the explicit prohibition on the assignment of the right to operate (“Operatorship is neither assignable nor forfeited except in accordance with
the provisions of this Article V”) in the 2015 JOA would not have been determinative. While the prohibition on assignment did not exist in the 1989 form, interpretations of Article V provisions generally made the prohibition on assignment implicit and it might have made it more difficult to include a designation of a successor Operator in the sale documents. You may want to analyze the operator replacement provisions of your JOA, especially if you are trying to purchase working interests from a debtor or your Operator or a Non-Operator is on shaky financial footing. Locke Lord Publications June 19, 2017. Reprinted by permission.
About the Authors:
Martin Gibson | 512-305-4743 | mgibson@lockelord.com
Martin Gibson is Of Counsel in Locke Lord’s Austin office where his practice concentrates on energy law, with a particular focus on the
exploration and production activities of independent oil and gas companies and individuals, both domestically and internationally. He is Board Certified in Oil, Gas and Mineral Law by the Texas Board of Legal Specialization and has deep experience in equity and debt financing of oil and gas related entities.
Berry Spears | 512-305-4724 | bspears@lockelord.com Berry D. Spears is a partner in the Bankruptcy, Restructuring and Insolvency section of Locke Lord LLP, and operates out of its Austin,
Texas office. Berry was elected a Fellow of the American College of Bankruptcy in 2007, has served in various leadership roles and is currently the Fifth Circuit Regent. He is a Sustaining Member of the American Bankruptcy Institute. For more than a decade he has been recognized by both Chambers USA and Best Lawyers in America in Bankruptcy and Creditor-Debtor Rights law. Berry has extensive experience in and has represented clients in all aspects of oil and gas, energy and related bankruptcy and bankruptcy planning matters.
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