With the increasing financial instability in the oil and gas industry, it has become essential for parties in interest to understand how their rights may be affected by a counter-party’s bankruptcy.
One of a debtor’s most powerful tools is its ability to reject burdensome executory contracts under Section 365 of the Bankruptcy Code. Generally speaking, a contract is executory when reciprocal duties are owed by both parties. Where a debtor grants a covenant running with the land, such covenant will likely be considered a property interest of the grantee rather than an executory agreement subject to rejection. However, where such a covenant is incorporated as part of a larger executory contract, issues arise with respect to the treatment of the covenant upon rejection of the contract.
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