For far too long, Bankruptcy Code Section 365 has caused confusion among parties to oil and gas leases when one party files for bankruptcy. This section of the Bankruptcy Code is intended to provide relief to debtors who are party to an unexpired lease or an executory contract, allowing a debtor-in-possession or trustee to make the decision to either assume or reject the agreement. While this concept is straightforward for standard lease agreements and contracts, courts have struggled to determine whether oil and gas leases actually fall into the category of a “lease” per se, an executory contract, or neither.
Many courts have held that oil and gas agreements are not actually leases, despite their title, because they convey an interest in real property that exceeds that of a leasehold interest. Some courts, however, have chosen to categorize such agreements as unexpired leases, or even executory contracts. This variation in court decisions is problematic because determining what category to place an oil and gas agreement is of paramount importance in determining whether the debtor has the right to reject the agreement in a bankruptcy proceeding. Additionally, such variation has had the effect of producing shocking results during bankruptcy proceedings, leaving parties to current oil and gas agreements unsure of their contractual and property rights in the event that a counterparty experiences financial distress.
To alleviate the uncertainty caused by the current caselaw, this Comment proposes an amendment to Bankruptcy Code Section 365 that provides a framework for consistency in evaluating oil and gas leases moving forward and protections for the property rights of the contracting parties.
One Size Does Not Fit All Leases—It's Time to Amend Bankruptcy Code Section 365,
Emory Bankr. Devs. J.
Available at: https://scholarlycommons.law.emory.edu/ebdj/vol38/iss2/4