A recent case from the Texas Supreme Court emphasizes the importance of doing due diligence before purchasing assets from a debtor in bankruptcy. The case, Noble Energy, Inc. v. ConocoPhillips Company, held that Noble, through its predecessor and without realizing it, purchased a $63 million liability when, in addition to purchasing the bankrupt entity’s assets, it agreed to assume liability for all “Assumed Liabilities and Assumed Obligations,” even ones not expressly disclosed in the bankruptcy.

The dispute centered around an indemnity claim for environmental damage and contamination claims filed by the State of Louisiana and the Cameron Parish School Board against ConocoPhillips and others related to activities on the Johnson Bayou oil field in Cameron Parish, Louisiana. In 1994, ConocoPhillips’ predecessor entered into a lease exchange agreement with Alma Energy Corp. where each assignee agreed to indemnify the other party for all claims arising out of waste materials or hazardous substances on the exchanged leases assigned to such assignee, whether or not attributable to the assignor’s actions, prior to, during, or after the period of the assignor’s ownership of those leases.

Five years later, in 1999, Alma declared bankruptcy. As part of the bankruptcy, Noble’s predecessor in interest purchased through an asset purchase agreement all of Alma’s assets, including all executory contracts and leases that Alma had not expressly rejected in its bankruptcy case.  The bankruptcy plan, which was confirmed in August of 2000, contained language providing that “any Executory Contract or lease not referenced above shall be assumed and assigned” to Noble’s predecessor.  In addition to a list of expressly rejected contracts and leases, Noble’s predecessor was also able to provide its own list of contracts and leases it wanted to reject.  The Johnson Bayou lease and the related indemnity obligation from the 1994 exchange agreement were not listed on the list of rejected contracts and leases, nor was it listed by Noble’s predecessor as a rejected contract and lease.  In fact, it was not mentioned at all in the plan or at any point in the bankruptcy.

In May of 2010, Louisiana and the Cameron Parish School Board filed their suit against ConocoPhillips and others. ConocoPhillips settled the claims for $63 million and then sought indemnity from Noble pursuant to the 1994 exchange agreement, which ConocoPhillips claimed was assumed by Noble’s predecessor in the Alma bankruptcy.  Noble argued that because the Johnson Bayou lease and related exchange agreement were not specifically mentioned anywhere in the plan or disclosure statement, it was not provided with adequate notice of their existence, let alone that they were being assumed.  Noble further argued that the language in the plan was mere boilerplate language and did not reflect a specific intent to assume the exchange agreement.

Finding that the indemnity agreement under the 1994 exchange was an executory contract, the Court then concluded the language in the plan was sufficient to provide Noble’s predecessor with notice of the contracts being assumed. Specifically, the Court stated:

The Order confirmed the [asset purchase agreement] and the Plan that used both exclusive and non-exclusive language throughout, and we must assume the choices were intentional. As Conoco observes, the Plan could have stated, as reorganization plans often do, that all executory contracts not formally assumed and assigned by a certain date would be rejected.  Either way, the language is adjudicatory, not boilerplate.

Thus, the Court found Noble had at least constructive notice of the exchange agreement.

While acknowledging Noble’s concern that the ruling would discourage future purchases in bankruptcy proceedings by rewarding Alma for its failure to fully disclose all of its assets and liabilities in its bankruptcy case, the Court found it more important that bankruptcy plans and court orders be interpreted and enforced according to their plain terms.

The case provides a cautionary tale to companies looking to acquire a troubled competitor’s assets from a bankruptcy case. Under this ruling, it is not enough to rely on a debtor’s disclosure in bankruptcy.  There still exists a need for due diligence and a complete investigation into the debtor’s assets and liabilities.