TBJ January 2022
2021: The Year in Review
Bankruptcy Law
Written by Duston McFaul, Michael Fishel, and Maegan Quejada
Though bankruptcy filings did not witness the blockbuster activity that many predicted due to the pandemic, Texas courts nonetheless issued a host of significant opinions on a variety of matters in 2021. Several examples follow.
Bad Faith Filings Despite asserting it was in great financial shape, the National Rifle Association filed for bankruptcy in the U.S. District Court for the Northern District of Texas in January 2021 and immediately faced motions to dismiss alleging a bad faith filing. After a three-week trial featuring 23 witnesses, the bankruptcy court dismissed the case, holding that the NRA filed its petition primarily to gain an unfair litigation advantage.1
Covenants Running With the Land In 2020, a balance of power appeared to shift to oil and gas producers when multiple bankruptcy courts held that upstream debtors could reject midstream agreements because such agreements did not constitute covenants running with the land.2 While these holdings significantly relied upon the governing jurisdiction and contractual language within the agreements, the trend further continued in 2021 in In re Sanchez Energy Corp.,3 albeit with an added wrinkle to the jurisprudence. In Sanchez, the court held that while the agreements could be rejected, the real property covenants would survive and remain enforceable, thereby making clear that rejection of a contract and the extinguishment of a real property covenant can be separate and distinct issues.
5th Circuit Opinions The U.S. Court of Appeals for the 5th Circuit also issued notable bankruptcy opinions. First, after determining that a bankruptcy trustee does not require any pecuniary interest to have standing in a bankruptcy case, the 5th Circuit held that hindsight is irrelevant to an allowance of fees.4 In another case, the 5th Circuit held that cross-collateralized loans result in one claim covering both loans, therefore limiting a Chapter 13 debtor’s options under Section 1325(a)(5) of the Bankruptcy Code.5 Finally, the 5th Circuit considered the priority of an oil and gas producer’s lien where the outcome depended on whether such lien was perfected. The 5th Circuit held that, without filing a financing statement, Texas oil and gas producers’ statutory liens can be unperfected when a debtor-purchaser is a Delaware entity.6
Supreme Court Declines to Address Equitable Mootness Another significant decision involved a case the U.S. Supreme Court refused to hear. In October 2021, the Supreme Court denied, without comment, a petition for a writ of certiorari in a case seeking to test the viability of the equitable mootness doctrine.7 Bankruptcy debtors often invoke the doctrine to prevent parties from successfully appealing bankruptcy plans that are already being implemented. Reviewing courts generally side with debtors who rely upon the doctrine, arguing, among other things, that unwinding a plan would be unfair because the debtors had already issued and distributed funds and or securities pursuant to their confirmed plans.
Winter Storm Uri The effects of Winter Storm Uri were particularly evident in Texas electricity provider bankruptcies. While some of these cases have already reached resolution, the outcomes of others could have long-lasting effects throughout the state, with various forms of active litigation currently proceeding in cases such as Brazos Electric in the U.S. Bankruptcy Court for the Southern District of Texas. 8
DUSTON MCFAUL is a restructuring partner in Sidley Austin, based in its Texas offices.
MICHAEL FISHEL is counsel to Sidley Austin, where his practice focuses on both debtor and creditor representations. Additionally, he has extensive experience in representing energy clients in out-of-court transactions, including refinancings, 363 sales, and avoidance actions. Fishel was a history major at Columbia University and obtained his law degree from the University of Texas School of Law.
MAEGAN QUEJADA is an associate of Sidley Austin, where her practice focuses on both debtor and creditor representations. She serves as chair of the Young Lawyers’ Committee for the State Bar of Texas Bankruptcy Law Section. Quejada is a double Longhorn who clerked for Judge Tony M. Davis in the Bankruptcy Court for the Western District of Texas.
