Samantha Caraballo 

St. John's University School of Law 

American Bankruptcy Institute Law Review Staff 

Under section 365 of title 11 of the United States Code (the “Bankruptcy Code”), a debtor may reject an executory contract upon bankruptcy court approval. The consequence of rejection is a breach of contract under section 365(g) of the Bankruptcy Code.[1] In In re Chisholm Oil and Gas Nominee, Inc., the United States Bankruptcy Court for the District of Delaware held that a debtor's rejection of a Joint Operating Agreement (“JOA”) is a breach and, therefore, does not alter or vacate the claimant's prior exercise of its rights or past performance under the JOA.[2]

Chisholm Oil and Gas Operating, LLC (“Debtors”) owns and operates oil and gas wells in Oklahoma (“Chisholm Trail AMI”).[3] The Debtors entered into a JOA with Gold Star Energy, LLC, Texas Raw Oil and Gas, Inc., and Oljeinvest, LLC (collectively “Claimants”) governing the operations of drilling new oil and gas wells in Chisholm Trail AMI.[4] Pursuant to the JOA, when the owners of some oil wells propose drilling a new oil or gas well in Chisholm Trail AMI, the parties to the JOA must elect whether to participate in the drilling.[5] Under the JOA, a party that elects to drill will bear“the entire cost and risk of conducting such operations,” whereas the parties that elect not to drill will not be responsible for the costs of drilling the new well.[6] However, the non-electing party will relinquish their interest in that well to the electing party until the electing party recovers a portion of the proceeds from the well, “at which point the interest will automatically revert to the non-electing party.”[7] Facing financial difficulties, the Debtors voluntarily filed for relief under chapter 11 of the Bankruptcy Code with the United States Bankruptcy Court for the District of Delaware.[8] During the bankruptcy case, the bankruptcy court confirmed a chapter 11 plan, pursuant to which the Debtors rejected the JOA as of October 21, 2020.[9] Thereafter, Claimants filed a lawsuit in Oklahoma State Court to recover requisite payments that Debtors neglected to make in connection with the proceeds of the oil and gas wells in Chisholm Trail AMI pursuant to the JOA.[10] Claimants sought an order from the District Court of Tulsa County for the State of Oklahoma to determine their interests under the Debtors’ chapter 11 plan and confirmation order and the effect of the Debtors’ rejection of the JOA in the Debtors’ chapter 11 cases.[11] However, the Debtors filed a motion requesting that the bankruptcy court issue an order to interpret and enforce the chapter 11 plan and confirmation order.[12]

According to the bankruptcy court, rejection of a contract results in a breach of contract., not a termination of the contract.[13] A breach of contract relieves the parties from future obligations but does not undo their rights under the contract or alter past performance.[14] Accordingly, the Debtors breached the JOA when they rejected it because “a JOA is a contract to be construed like any other contract,” and legally setting aside an entire contract (“rescission”) results in a breach of contract in bankruptcy.[15] Claimants elected to not participate in the drilling of new oil and gas wells pursuant to the Non-Consent Provisions of the JOA.[16] Since the Debtors’ rejection of the JOA is a breach, the bankruptcy court held that “the Debtors’ rejection of the JOAs did not unwind the Claimants’ elections under the JOAs’ Non-Consent Provisions.”[17]

Rejection under section 365 of the Bankruptcy Code results in a breach.[18] According to the United States Bankruptcy Court for the District of Delaware, a breach or rejection in bankruptcy will not undo the parties’ exercise of rights under the contract, nor will it divest past performance under the contract.[19]