Sabine Oil & Gas Corp. v. HPIP Gonzales Holdings, LLC (In re Sabine Oil & Gas Corp.)
Sabine Oil & Gas Corp. v. HPIP Gonzales Holdings, LLC (In re Sabine Oil & Gas Corp.)
Opinion of the Court
MEMORANDUM DECISION ON (I) MOTIONS OF NORDHEIM EAGLE FORD GATHERING, LLC AND HPIP GONZALES HOLDINGS, LLC FOR JUDGMENT ON THE PLEADINGS AND (II) DEBTORS’ OMNIBUS MOTION FOR SUMMARY JUDGMENT
Before the Court are (i) the motions of Nordheim Eagle Ford Gathering, LLC (“Nordheim”) and HPIP Gonzales Holdings, LLC (“HPIP”), respectively, for judgment on the pleadings with respect to the claims for declaratory judgment brought by the Debtors in the above-captioned adversary proceedings and the declaratory judgment counterclaims asserted by Nordheim and HPIP
This dispute initially arose when the Debtors filed their Omnibus Motion for Entry of an Order Authorizing Rejection of Certain Executory Contracts pursuant to section 365 of the Bankruptcy Code in their chapter 11 cases seeking to reject the Nordheim Agreements and the HPIP Agreements (the “Rejection Motion”).
For the reasons stated in the Rejection Decision,
Background
The Debtors are an independent energy company engaged in the acquisition, production, exploration, and development of onshore oil and natural gas properties in the United States. On July 15, 2015, the Debtors filed petitions for relief under chapter 11 of the Bankruptcy Code with this Court, and are operating their businesses and managing their properties as debtors in possession pursuant to sections 1107(a) and 1108 of the Bankruptcy Code. Familiarity with the background of the Debtors’ businesses and chapter 11 cases
One of the Debtors, Sabine Oil & Gas Corporation (“Sabine”), is a party to two contracts with Nordheim, each dated January 23, 2014, relating to the gathering of gas and condensate produced by Sabine from a designated area (the “Nordheim Agreements”). Sabine is also party to two contracts with HPIP, one dated May 3, 2013 and the other dated as of May 2014, relating to the gathering, handling, and disposal of oil, gas, and water produced by Sabine from a designated area (the “HPIP Agreements”). In the Rejection Decision, the Court summarized many of the central provisions of the Nordheim Agreements and the HPIP Agreements and incorporates that summary by reference here.-
One of the Nordheim Agreements, the Gas Gathering Agreement, contemplates a separate and subsequent conveyance from Sabine to Nordheim of a mutually agreed tract of land in connection with Nor-dheim’s construction and operation of a gathering system. Pursuant to a Warranty Deed dated March 11, 2014, Sabine conveyed to Nordheim approximately 17 acres of a 38-acre surface tract that Sabine acquired in October 2013 (the “Nor-dheim Parcel”) so that Nordheim could construct a nearby gathering facility. Also on March 11, 2014, Sabine conveyed to Nordheim a Pipeline and Electrical Easement (the “Pipeline Easement”), which granted Nordheim a 90-foot pipeline and electrical easement over the remaining 21 acres of the Nordheim Parcel, so that Nor-dheim could install and operate two pipelines and one electrical utility line over that tract of land.
B. Procedural History
On September 30, 2015, the Debtors filed the Rejection Motion. By the Rejection Motion, the Debtors sought Court approval to reject the Nordheim Agreements and the HPIP Agreements pursuant to section 365(a) of the Bankruptcy Code, On October 8, 2015, Nordheim and HPIP each filed an objection to that motion.
The Court heard oral argument on the Rejection Motion on February 2, 2016.
On April 4, 2016, Nordheim filed its Answer and Counterclaims against the
On April 7, 2016, HPIP filed its Answer and Counterclaims against the Debtors, asserting four counterclaims against the Debtors. Like Nordheim, HPIP brought two counterclaims seeking declaratory judgments that the HPIP Agreements are real covenants that run with the land, or alternatively, that the HPIP Agreements are equitable servitudes.
On April 11, 2016, the Debtors filed their SJ Motion,
On April 15, 2016, Nordheim and HPIP each filed a reply in support of the Nor-dheim Motion and the HPIP Motion, respectively, and an opposition to the SJ Motion.
Legal Standard
Judgment on the pleadings is warranted when the “material facts are undisputed and where a judgment on the merits is possible merely by considering the contents of the pleadings.”
Discussion
Given the nature of the Defendant Motions and the SJ Motion, the parties appear to agree that the claims and counterclaims that are .the subject of the motions do not give rise to disputed questions of material fact and that they can be resolved on the basis of the pleadings.
A. The Covenants Do Not Run With the Land As Real Covenants
As explained in the Rejection Decision, under Texas law, a covenant runs with the land when (1) it touches and concerns the land; (2) it relates to a thing in existence or specifically binds the parties and their assigns; (3) it is intended by the original parties to run with the land; and (4) the successor to the burden has notice.
In the Defendant Motions, Nordheim and HPIP largely reassert the arguments raised in their objections to the Debtors’ Rejection Motion, but identify additional
1. The Covenants Do Not “Touch and Concern” the Debtors’ Real Property
In support of their argument that the covenants at issue touch and concern minerals in the ground and thus touch and concern real property, Nor-dheim and HPIP rely on a theory that they did not present in the context of the Rejection Motion, but which the Court nevertheless expressly rejected in the Rejection Decision.
Moreover, the Texas cases that Nor-dheim and HPIP cite in support of this argument are either distinguishable or largely inapposite here. For example, Nordheim suggests that the “precise issue” whether an interest in a “produced” mineral constitutes a real property interest in the minerals in the ground was addressed in American Refining Co. v. Tidal
Nordheim and HPIP next point to certain provisions of the Debtors’ Second Amended and Restated Credit Agreement (the “Credit Agreement”) to argue that Sabine could have granted Nordheim and HPIP interests in the Debtors’ real property without consent of the Debtors’ lien-holders. Nordheim and HPIP argue that, pursuant to § 9.03(b) and articles 1(d) and (f) of the Credit Agreement, the interests granted to them by the Debtors meet the definition of “Excepted Liens” and, therefore, the consent of the Debtors’ lienhold-ers to a conveyance of an interest in property to Nordheim and HPIP was not required to create a valid interest in the Debtors’ real property.
This argument, however, ignores the carveout from the definition of “Excepted Liens” in articles 1(d) and (f) of any property interest that “materially impair[s] the use of the Property ... or materially impair[s] the value of such Property subject thereto.”
2. If Horizontal Privity of Estate Is a Requirement Under Texas Law, It Is Not Satisfied Here
In the Defendant Motions, Nordheim and HPIP cite to a selection of Texas cases
Although the Court acknowledges that there is some ambiguity under Texas law as to whether horizontal privity of estate remains a requirement for a covenant to run with the land, it does not, and cannot, conclude that Texas courts have definitively rejected horizontal privity of estate as a requirement for a covenant to run with the land. Moreover, while the Court does not offer its opinion as to whether horizontal privity of estate existed in the cases Nor-dheim and HPIP cite, it is far from clear that horizontal privity of estate was lacking in each .of those cases.
Moreover, in disputing Nordheim and HPIP’s assertion that horizontal privity of estate is no longer a requirement under Texas law, the Debtors cite to a number of recent Texas cases in which the courts expressly considered horizontal privity of estate in their analyses.
The Court agrees with the Debtors that neither Nordheim nor HPIP has demonstrated that horizontal privity of estate exists between the original covenanting parties with respect to the covenants at issue. In the Nordheim Motion, Nor-dheim argues that horizontal privity of estate is satisfied by virtue of the creation of the Pipeline Easement and the conveyance of the Nordheim Parcel. As the Court found in the context of the Rejection Decision, these facts do not fit within the traditional paradigm for horizontal privity of estate between covenanting parties, as was the case in the ’Fifth Circuit’s decision in Newco Energy v. Energytec, Inc.
Moreover, neither Nordheim nor HPIP has identified any authority for the proposition that the horizontal privity of estate prong is satisfied if the covenanting parties have horizontal privity of estate only with respect to property separate from the property burdened by the covenant at issue.
In addition, Nordheim’s argument that the Pipeline Easement constitutes an interest in the leasehold, and therefore its creation satisfies horizontal privity of estate, is unavailing. First, Nordheim suggests that horizontal privity of estate can be satisfied by a contractual provision that contemplates but does not effectuate a future assignment by Sabine of real property intérests to Nordheim. This argument defies common sense — the possibility of horizontal privity of estate does not constitute actual horizontal privity of estate. Second, Nordheim argues that horizontal privity of estate is satisfied because Nordheim has a real property interest in the form of the right to take minerals out of Sabine’s mineral estate. This argument is premised on a mischaracterization of the Nordheim Agreements (and, as applicable, the HPIP Agreements). As Nordheim acknowledges, under those agreements, Sabine is responsible for connecting its wells to Receipt Points (as defined in the Nordheim Agreements).
In addition to joining Nordheim’s arguments, HPIP advances additional arguments in the HPIP Reply that Sabine did in fact convey to HPIP an interest in the allegedly burdened real property. These arguments also fail. First, HPIP argues that any “dedication” of real property is by definition a conveyance of that real property. This circular argument ignores the fact that, under Texas law, a conveyance of real property requires a grant of an interest in such real property, which requires certain operative language, including an identification of a grantee.
Undaunted, HPIP disputes the Debtors’ characterization of the express terms of the HPIP Agreements as disclaiming any conveyance of an interest in Sabine’s real property. HPIP argues instead that the language in the HPIP Agreements that Sabine does not “sell, transfer or assign”
Accordingly, without concluding whether or not horizontal privity of estate is indeed a requirement under Texas law, the Court finds that horizontal privity does not exist between Sabine and Nordheim or between Sabine and HPIP.
B. The Covenants Do Not Run With the Land As Equitable Servitudes
An equitable servitude is enforceable when the contracting parties are in privity of estate at the time of the conveyance and a subsequent party purchases the land with notice of the restriction.
As it held in the Rejection Decision, and based on its additional “touch and concern” analysis above, the Court holds that the covenants at issue do not limit the use of or burden Sabine’s mineral estate such that they could run with that real property as equitable servitudes. The Nordheim Agreements and the HPIP Agreements are fundamentally service contracts relating to personal property of Sabine. The covenants at issue, therefore, do not constitute equitable servitudes that run with Sabine’s real property.
Conclusion
For all of the foregoing reasons and for the reasons stated in the Rejection Decision, the Court finds that the covenants at issue in the Nordheim Agreements and the HPIP Agreements do not run with the land either as real covenants or as equitable servitudes. Accordingly, (i) the Debtors’ motion for summary judgment on their declaratory judgment claims against Nordheim and HPIP is GRANTED; (ii) the Debtors’ motion for summary judgment on Nordheim’s declaratory judgment counterclaims and ■ HPIP’s declaratory judgment counterclaims is GRANTED; and (iii) Nordheim’s motion for judgment on the pleadings and HPIP’s motion for judgment on the pleadings are DENIED. The parties are directed to submit an order reflecting the Court’s rulings in the Rejection Decision and herein.
APPENDIX A
FOB PUBLICATION
UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
In re: SABINE OIL & GAS CORPORATION, et al.,
Chapter 11
Case No. 15-11835 (SCC)
(Jointly Administered)
BENCH DECISION ON DEBTORS’ OMNIBUS MOTION TO AUTHORIZE REJECTION OF CERTAIN EXECUTORY CONTRACTS
APPEARANCES:
KIRKLAND & ELLIS LLP
KIRKLAND & ELLIS INTERNATIONAL LLP
601 Lexington Avenue
New York, N.Y. 10022
By: Paul M. Basta, P.C.
Jonathan S. Henes, P.C.
Christopher Marcus, P.C.
Chicago, IL 60654
By: James H.M. Sprayregen, P.C.
Ryan Blaine Bennett, Esq. (argued)
Brad Weiland, Esq.
Counsel to the Debtors
BRACEWELL & GIULIANI LLP
1251 Avenue of the Americas, 49th Floor
New York, N.Y. 10020
By: Robert G. Burns, Esq. (argued)
711 Louisiana St., Suite
2300 Houston, TX 77002
By: William A. (Trey) Wood III, Esq.
Jason G. Cohen, Esq.
Counsel to Nordheim Eagle Ford Gathering, LLC
LATHAM & WATKINS LLP
885 Third Avenue
New York, New York 10022
By: Keith Simon, Esq. (argued)
Annemarie V. Reilly, Esq.
Counsel to HPIP Gonzales Holdings, LLC
ROPES & GRAY LLP
1211 Avenue of the Americas
New York, New York 10036
By: Mark R. Somerstein, Esq. (argued)
Keith H.. Wofford, Esq.
D. Ross Martin, Esq.
C. Thomas Brown, Esq.
Counsel to the Official Committee of Unsecured Creditors
LINKLATERS LLP
1345 Avenue of the Americas
New York, New York 10105
By: Margot B. Schonholtz, Esq. (argued)
Robert H. Trust, Esq.
Counsel to Wells Fargo, National Associate, as Administrative Agent under First Lien Credit Agreement
HONORABLE SHELLEY C. CHAPMAN UNITED STATES BANKRUPTCY JUDGE:
Before the Court is the Debtors’ Motion (the “Motion”) for an Order Authorizing Rejection of Certain Executory Contracts [ECF No. 371]. By the Motion, the Debtors seek to reject certain contracts between Sabine Oil & Gas Corporation (“Sabine”) and Nordheim Eagle Ford Gathering, LLC (“Nordheim”), and between Sabine and HPIP Gonzales Holdings, LLC (“HPIP”) pursuant to section 365(a) of the Bankruptcy Code.
On October 8, 2015, Nordheim and HPIP
The Debtors — an independent energy-company engaged in the acquisition, production, exploration, and development of onshore oil and natural gas properties in the United States — filed petitions for relief under chapter 11 of the Bankruptcy Code with this Court on July 15, 2015. The Debtors are operating their businesses and managing their properties as debtors in possession pursuant to sections 1107(a) and 1108 of the Bankruptcy Code. The Court entered an order authorizing the joint administration and procedural consolidation of the Debtors’ chapter 11 cases pursuant to Bankruptcy Rule 1015(b) on July 16, 2015. There has not been a request for the appointment of a trustee or examiner in these chapter 11 cases. On July 28, 2015, the Office of the U.S. Trustee for the Southern District of New York formed the official committee of unsecured creditors pursuant to section 1102 of the Bankruptcy Code. Familiarity with the background of the Debtors’ businesses and chapter 11 cases, and with the December 16, 2014 combination of Sabine Oil & Gas LLC and Forest Oil Corporation (the “Combination”), is assumed.
A. The Nordheim Agreements
As a result of the Combination, Sabine became party to two contracts -with Nor-dheim, each dated January 23, 2014: the first, a Gas Gathering Agreement, and the second, a Condensate Gathering Agreement (together, the “Nordheim Agreements”). By the Gas Gathering Agreement, Sabine agreed to “dedicate” to the “performance” of that agreement all of the gas produced by Sabine from a designated area and deliver such gas to Nordheim, and Nordheim agreed to gather, treat, dehydrate, and re-deliver that gas to Sabine. Nordheim further agreed to construct, at its sole cost and expense, a gathering system of pipelines and treatment facilities to provide certain agreed-upon services. The Gas Gathering Agreement contemplates a separate and subsequent conveyance from Sabine to Nordheim of a mutually agreed tract of land in connection with Nor-dheim’s construction and operation of the gathering system. Sabine also agreed to deliver a certain minimum amount of gas to Nordheim on an annual basis. To the extent it does not deliver such minimum amounts, Sabine is required to make a deficiency payment to Nordheim; Sabine also is obligated to pay monthly gathering fees to Nordheim. The Gas Gathering Agreement has a 10-year term, with automatic yearly renewal subject to termination, and is governed by Texas law.
The Condensate Gathering Agreement between Sabine and Nordheim contains substantially the same terms as the Gas Gathering Agreement, but it relates to liquid hydrocarbons and other liquids rather than gas. The Court will refer to the liquid hydrocarbons, gas, and other products that are the subject of the dedications in the Nordheim Agreements as the “Nor-dheim Products.”
Each Nordheim Agreement specifically provides that the agreement itself is a “covenant running with the [land]” within the designated area, and is enforceable by Nordheim against Sabine, its affiliates, and their successors and assigns.
Sabine also became party to two contracts with HPIP as a result of the Combination: one, a Production Gathéring, Treating and Processing Agreement, dated May 3, 2013, and the other a Water and Acid Gas Handling Agreement, dated May 2014, with no specific date (together, the “HPIP Agreements”). The former, the HPIP Gathering Agreement, obligates Sabine to “dedicate” to the “performance” of the agreement certain leases owned by Sabine and the oil, gas, and water produced from the wells located on the land subject to those leases, and to deliver that oil, gas, and water to HPIP. Pursuant to the agreement, HPIP agreed to construct, operate, and maintain gathering facilities to provide certain services with respect to the products delivered by Sabine. The HPIP Gathering Agreement is also governed by Texas law.
The latter, the HPIP Handling Agreement, contains substantially similar terms to those set forth in the HPIP Gathering Agreement, but provides for HPIP to construct, operate, and maintain disposal facilities for and perform disposal services with respect to all of the water and acid gas produced by Sabine from the same land subject to the leases. The Court will refer to the oil, gas, acid, and water that are the subject of the dedications in the HPIP Agreements as the “HPIP Products.”
Each HPIP Agreement provides that Sabine’s undertaking to deliver the HPIP Products to HPIP is a covenant “running with the lands and leasehold interests” identified in the agreement,
Discussion
A. The Debtors Have Satisfied the Standard for Rejection of the Agreements
The Debtors seek to reject the Nor-dheim Agreements and the HPIP Agreements (referred to collectively as the “Agreements”) pursuant to section 365(a) of the Bankruptcy Code. Under that provision, a debtor in possession, “subject to the court’s approval, may assume or reject any executory contract ... of the debtor.”
As the Second Circuit held in Orion Pictures Corp. v. Showtime Networks, the “process of deciding a motion to assume [or reject] is one of the bankruptcy court placing itself in the position of ... the debtor in possession and determining whether assuming [or rejecting] the contract would be a good business decision or
The Debtors argue that rejection of the Nordheim Agreements and the HPIP Agreements is a reasonable exercise of their business judgment and is in the best interests of their estates because those Agreements' are unnecessarily burdensome. Specifically, the Debtors submit that it is not financially viable for them to deliver the minimum amounts of gas and condensate set forth in the Agreements, and, absent rejection, they would therefore be required to make the contractual deficiency payments, which would impose a considerable and unnecessary drain on the estates’ resources. If rejection is authorized, the Debtors state that they plan to enter into new gathering agreements with other gatherers on terms more favorable to the Debtors.
Both Nordheim and HPIP object to the Debtors’ proposed rejection, but for slightly different reasons. In its papers, Nor-dheim argues that the Debtors’ decision to reject the Nordheim Agreements does not satisfy the business judgment standard because Sabine’s covenants to dedicate the Nordheim Products and to pay a “transportation fee” are covenants that run with the land and therefore would survive rejection.
At oral argument, however, Nordheim put forward an additional and distinct ar
Like Nordheim, HPIP argues that Sabine’s dedication of certain of its leases and the HPIP Products are covenants that run with the land and are not subject to rejection.
Significantly, neither Nordheim nor HPIP has put forward any arguments or evidence that the Debtors’ decision to reject their Agreements is the product of “bad faith, whim or caprice.”
As discussed more fully below, after review of Nordheim’s Orion argument and Judge Drain’s recent decision in In re The Great Atlantic & Pacific Tea Company, Inc. interpreting Orion, the Court concludes that it cannot decide substantive legal issues, including whether the covenants at issue run with the land, in the context of a motion to reject, unless such motion is scheduled simultaneously with an adversary proceeding or contested matter to determine the merits of the substantive legal disputes related to the motion.
At oral argument, counsel for HPIP acknowledged that HPIP does not object to the Debtors’ rejection of the HPIP Agreements, stating that “there’s no question they should reject”
If it is ultimately determined that the covenants at issue in the Agreements do not run with the land, as the Debtors argue and the Court believes to be the case, the Debtors will be free to negotiate new gas gathering agreements with any party, likely obtaining better terms than the existing agreements provide. If, however, the covenants are ultimately determined to run with the land, the Debtors will likely need to pursue alternative arrangements with Nordheim and HPIP consistent with the covenants by which the Debtors would remain bound. In either scenario, the Debtors’ conclusion that they are better off rejecting the Nordheim and HPIP Agreements is a reasonable exercise of their business judgment. Therefore, even though, as explained below, the Court’s conclúsion that the covenants at issue do not run with the land is nonbinding, the Court finds the Debtors’ decision to rejéct each of the Nordheim Agreements and the HPIP Agreements to be a reasonable exercise of business judgment.
In the absence of any allegation challenging the Debtors’ decision-making process, the Court finds that the Debtors have properly and adequately considered the business and legal risks associated with rejection of the Nordheim Agreements and the HPIP Agreements. Taking into account HPIP’s consent to the rejection of the HPIP Agreements, and having identified no basis to find otherwise with respect to either the Nordheim Agreements or the HPIP Agreements, the Court defers to the business judgment of the Debtors to reject the Agreements. Rejection of the Agreements relieves the Debtors of those terms that are subject to rejection (whether that be all or some of the terms of the Agreements as will be decided in a subsequent proceeding or agreed to by the parties), and will likely allow for the more efficient use of the Debtors’ assets.
The Court’s non-binding analysis as to whether the covenants at issue “run with the land” under Texas law follows.
B. The Covenants At Issue Do Not “Run with the Land” under Texas Law
The covenants at issue are (i) the Debtors’ dedication to HPIP of the HPIP Products and certain leases to the performance of the HPIP Agreements; (ii) the Debtors’ dedication to Nordheim of the Nordheim Products to the performance of the Nor-dheim Agreements; and (iii) the Debtors’ covenant to pay Nordheim a gathering fee.
1. Historical Development of Covenants “Running with the Land”
As many practitioners have noted, “[i]n U.S. property law, no rules are more arcane and anachronistic than those governing real covenants,”
The original concept of covenants “running with the land” was introduced in early English law at a time when neither the rights nor the duties created by contract could be assigned. Beginning in the landlord and tenant context, the idea that the benefit and burden of a covenant could run with the ownership interest was applied in other situations, including covenants included in a conveyance of land. These covenants respecting the use of land that ran with the estate came to be known as “real covenants” and were enforceable in the English courts of law.
In the early cases, the courts tended to restrict the expansion of the use of real covenants by adding requirements to be met in order for a successor to recover for breach of a covenant in the original contract. For example, in one of the earliest cases dealing with the running of a burden, Spencer’s Case,
By 1834, the English courts of law had greatly narrowed the scope of legal relief available for breaches of covenants by holding that the running of the burdens on owners in fee violated public policy against encumbering land and restricting alienation. Thereafter, English courts of equity began developing rules for the enforcement of covenants against successive interestholders. Although over time English courts stopped finding that affirmative covenants run with the land, American jurisdictions have generally rejected that approach, instead adopting a policy that the requirements for running with the land should be more strictly applied to affirmative covenants than to negative ones. The covenants that meet the test established by the courts of equity have come to be known as “equitable servi-tudes.”
Over time, the use of covenants, both real and equitable, has become common. Yet, many characterize the law of covenants as an “unspeakable quagmire,”
It is in this historical context that the Court has considered the arguments as to the status under Texas property law of the covenants at issue in this case, and has preliminarily concluded that the covenants do not run with the land either as real covenants or as equitable servitudes.
2. Real Covenants
The parties agree that whether the covenants run with the land is a question of Texas law, which is the law governing the Agreements. Unfortunately, there appears to be no applicable binding decision of the Texas Supreme Court on all aspects of the question. What follows is the Court’s analysis of the issue based on existing caselaw.
Under Texas law, language in a contract containing a covenant is the primary evidence of the parties’ intent, but terminology is not dispositive.
In their omnibus reply to the objections, the Debtors dispute the existence of three of these elements: (1) that there is horizontal privity of estate between, respectively, Sabine and Nordheim, and Sabine and HPIP; (2) that the relevant covenants “touch and concern” the land; and (3) that the parties intended those covenants to run with the land.
Horizontal privity of estate generally means that there was “simultaneous existing interests or mutual privity” between the original covenanting parties as either landlord and tenant or grantor and grantee.
The facts here do not fit within that traditional model. In this case, the Debtors did not in the context of a relevant conveyance reserve any interest for Nor-dheim or HPIP; rather, they simply engaged Nordheim and HPIP to perform certain services related to the hydrocarbon products produced by Sabine from its property. The covenants at issue are properly viewed as identifying and delineating the contractual rights and obligations with respect to the services to be provided, and not as reserving an interest in the subject real property.
Moreover, the Agreements do not grant Nordheim or HPIP a real property interest in the Debtors’ mineral estate, which is comprised of five real property rights, or “sticks,” under Texas law: “(1) the right to develop (the right of ingress and egress), (2) the right to lease (the executive right), (3) the right to receive bonus payments, (4) the right to receive delay rentals, [and] (5) the right to receive royalty payments.”
The covenants at issue also do not appear to satisfy the “touch and concern” prong. Courts utilize two tests for determining whether that prong is satisfied under Texas law, although these tests are not “absolute.”
Under Texas law, once minerals are extracted from the ground, such minerals cease to be real property and instead become personal property.
Another consideration that the Fifth Circuit has examined in determining whether a covenant burdens the land is whether the action triggering the covenant is one that affects the land.
On this basis, once again, Energytec is distinguishable.
Energytec is also distinguishable by the fact that the obligation to pay the transport fee in that case was triggered simply by the flow of gas through the pipeline. Here, in contrast, the Nordheim gathering fee is triggered by Nordheim’s receipt of gas from Sabine into Nordheim’s own facilities. Nordheim’s gathering fee is thus not as directly tied to the promisor’s land as was the case in Energytec. The Nor-dheim gathering fee covenant therefore has no direct connection to or impact on the land or on Sabine’s property rights.
Having found preliminarily that the covenants at issue do not (i) readily fit into the traditional paradigm for horizontal privity of estate or (ii) “touch and concern” the Debtors’ land, the Court need not further extend its real covenant analysis at this time; accordingly, the Court has not considered the issue of the parties’ intent.
3. Equitable Servitudes
Nordheim, in its surreply, alternatively argues that even if the covenants at issue are personal covenants, they constitute equitable servitudes which cannot be rejected pursuant to the Bankruptcy Code. This argument lacks merit. An equitable servitude is enforceable when the contracting parties are in privity of estate at the time of the conveyance and a subsequent party purchases the land with notice of the restriction.
Conclusion
For all of the foregoing reasons, the Court finds that the decision to reject the Nordheim Agreements and HPIP Agreements is a reasonable exercise of the Debtors’ business judgment. Accordingly, the Court authorizes the rejection of those agreements as of the dates requested in the Motion.
As required by Oñon, in granting the Motion, the Court does not make any final determination as to whether the covenants at issue run with the land or as to any substantive legal issue other than granting authority to reject the contracts under section 365(a). The Court does not at this time grant the Debtors’ request to limit the nature of the claims that Nordheim or HPIP may file against the Debtors’ estates, nor does it grant Nordheim’s request for what is effectively relief fi’om the automatic stay to pursue remedies against Sabine and its property. Nordheim and HPIP may file claims (and, in HPIP’s case, amend its previously filed claim) against the Debtors’ estates consistent with what each of them believes its legal rights to be, and those claims may be resolved promptly through the Debtors’ claims administration process. The parties are directed to submit an order consistent with this decision.
. In addition to counterclaims for declaratory judgment, HPIP has asserted two additional
. Case No. 15-11835, ECF No. 371.
. See Bench Decision on Debtors’ Omnibus Motion to Authorize Rejection of Certain Exec-utory Contracts, dated March 8, 2016, Case No. 15-11835, ECF No. 872, In re Sabine Oil & Gas Corp., 547 B.R. 66 (Bankr.S.D.N.Y. 2016), attached hereto as Appendix A (the "Rejection Decision”).
. Orion Pictures Corp. v. Showtime Networks (In re Orion Pictures Corp.), 4 F.3d 1095, 1098 (2d Cir. 1993).
. See pp. 9-18 of the Rejection Decision. The entirety of the Rejection Decision is incorporated by reference herein.
. See, generally, Declaration of Michael Magil-ton (A) in Support of First Day Motions and (B) Pursuant to Local Bankruptcy Rule 1007-2, Case No. 15-11835, ECF No. 3. .
. See pp. 2-4 of the Rejection Decision.
. Case No. 15-11835, ECF Nos. 386, 387.
. Case No. 15-11835, ECF No. 410.
. The hearing on the Rejection Motion was adjourned several, times on consent of the parties.
.Case No. 15-11835, ECF No. 676.
. Case No. 15-11835, ECF No. 742.
. Case No. 15-11835, ECF No. 816 (Transcript of February 2, 2016 hearing).
. Adv. Pro. No. 16-01043, ECF No. 1; Adv. Pro. No. 16-01042, ECF No. 1.
. Adv. Pro. No. 16-01043, ECF No. 5.
. Adv. Pro. No. 16-01043, ECF No. 7.
. Adv. Pro. No. 16-01042, ECF No. 8. HPIP’s two additional counterclaims against the Debtors, one for breach of contract and one for trespass, are not the subject of the HPIP Motion.
. Adv. Pro. No. 16-01042, ECF No. 9.
. Adv. Pro. No. 16-01042, ECF No. 13 and Adv. Pro. No. 16-01043, ECF No. 11.
. Adv. Pro. No. 16-01042, ECF No. 15 (the “HPIP Reply”); Adv. Pro. No. 16-01043, ECF No. 13 (the “Nordheim Reply”).
. Adv. Pro, No. 16-01042, ECF No. 18 and Adv, Pro. No, 16-01043, ECF No. 15 (the "Debtors’ Reply”).
. See Prentice v. Apfel, 11 F.Supp.2d 420, 424 (S.D.N.Y. 1998) (quoting Sellers v. M.C. Floor Crafters, Inc., 842 F.2d 639, 642 (2d Cir. 1988)).
. Viacom Int’l Inc. v. Time Inc., 785 F.Supp. 371, 375 (S.D.N.Y. 1992).
. In re Bakery & Confectionery Union & Indus. International Pension Fund Pension Plan, 865 F.Supp.2d 469, 472 (S.D.N.Y. 2012) (citing L-7 Designs, Inc. v. Old Navy, LLC, 647 F,3d 419, 422 (2d Cir. 2011), aff’d sub nom. Alcantara v. Bakery & Confectionery Union & Indus. Int’l Pension Fund Pension Plan, 751 F.3d 71 (2d Cir. 2014)).
. Id, (citing Chambers v. Time Warner, Inc., 282 F.3d 147, 153 (2d Cir. 2002)).
. SCR Joint Venture L.P. v. Warshawsky, 559 F.3d 133, 137 (2d Cir. 2009) (quoting Fed. R.Civ.P. 56(c)).
. In the Nordheim Reply, Nordheim suggests that discovery would be required if the Court were to find that Sabine has not conveyed any interest to Nordheim in the allegedly burdened real property. See Nordheim Reply, p. 10. The Court declines Nordheim’s invitation to delay, once again, a final determination of this matter. Indeed, Nordheim’s filing of the Nordheim Motion impliedly waives any argument as to the necessity of additional discovery on that issue. Moreover, Nordheim has not identified which facts alleged by the Debtors in the SJ Motion are in dispute and thus warrant denial of the SJ Motion.
. As identified in the Rejection Decision, the covenants at issue are (i) the Debtors’ dedication to HPIP of certain oil, gas and water products and certain leases to the performance of the HPIP Agreements; (ii) the Debtors’ dedication to Nordheim of certain gas and condensate products to the performance of the Nordheim Agreements; and (iii) the Debtors’ covenant to pay Nordheim a gathering fee. Rejection Decision, p. 9.
. Inwood North Homeowners’ Ass’n, Inc. v. Harris, 736 S.W.2d 632, 635 (Tex. 1987).
. See, e.g. Wasson Interests, Ltd. v. Adams, 405 S.W.3d 971, 973 (Tex.App. 2013); Wayne Harwell Props. v. Pan Am. Logistics Ctr., Inc., 945 S.W.2d 216, 218 (Tex.App. 1997); In re Energytec, Inc., 739 F.3d 215, 221 (5th Cir. 2013).
. See supra n. 6.
. As the Court explained in the Rejection Decision:
An argument might be made that the fact that only "produced” Products are dedicated to the performance of the Agreements does not limit such a dedication to Products extracted from the ground (z.e., personal property) but also includes Products that are still in the ground (z.e., real property) because, under Texas law, a conveyance of oil and gas "produced and saved” is classified as a royalty interest, which is characterized by Texas courts as a real property interest, Such an argument, however, depends on the separate and different conclusion that a conveyance of oil and gas "produced and saved” is a conveyance of oil and gas not extracted from the ground, i.e., the reserves. That conclusion does not logically follow, and therefore any such argument would fail. Moreover, as discussed infra, the Debtors’ reserves are subject to the liens of their reserve-based lenders.
Rejection Decision, p. 15 n. 44.
.Under Texas law, a royalty interest is per se a mineral interest. See, e.g., Altman v. Blake, 712 S.W.2d 117, 118 (Tex. 1986) (listing the five real property rights that comprise a mineral estate, including the right to receive royalty payments).
. 264 S.W. 335, 336 (Tex.Civ.App. 1924).
. See Nordheim Motion, pp. 11-12.
. See Nordheim Gas Gathering Agreement, § 1.4(i); Appendix to HPIP Production Gathering, Treating and Processing Agreement § 3.B.
. Nordheim Gas Gathering Agreement § 2.1; HPIP Production Gathering, Treating and Processing Agreement §§ 3.1.1 and 3.1.2.
. Nordheim and HPIP’s reliance on Wimberly v. Lone Star Gas Co., 818 S.W.2d 868 (Tex.App. 1991); Prochemco, Inc. v. Clajon Gas Co., 555 S.W.2d 189, 191 (Tex.Civ.App. 1977); and Montfort v. Trek Resources, Inc., 198 S.W.3d 344 (Tex.App. 2006) is also unavailing. In Wimberly, the court, after limited analysis, found that a water company’s right to access and extract water directly from a real property owner's wells touched and concerned that real property. Here, in contrast, Nordheim and HPIP do not have the right to extract minerals from Sabine's real property; rather, they have the right to transport the minerals extracted and delivered by Sabine, which minerals, as discussed above, constitute personal property. Moreover, neither the Prochemco nor Montfort decision provides any analysis as to the "touch and concern” prong. In particular, the court in Prochemco addressed only the "intent of the parties” prong.
.See Credit Agreement, arts. 1(d) and (f).
.Such a violation would constitute an Event of Default under § 10.01 of the Credit Agreement, and the Debtors’ lenders would be entitled to (i) terminate their obligation to lend to and provide letters of credit on behalf of the Debtors, (ii) declare the Debtors’ outstanding debt obligations due and payable, and (iii) exercise all other rights and remedies available to such lenders at law or equity. Credit Agreement §§ 10.02(a) and (b),
. See, e.g., Westland Oil Dev. Corp. v. Gulf Oil Corp., 637 S.W.2d 903 (Tex. 1982); Inwood N. Homeowners’ Ass'n, Inc. v. Harris, 736 S.W.2d 632 (Tex. 1987); Wimberly v. Lone Star Gas Co., 818 S.W.2d 868 (Tex.App. 1991).
. See SJ Motion, p. 27, n. 21.
. 739 F.3d 215 (5th Cir. 2013).
. See SJ Motion, pp. 10, 17 (citing El Paso Nat. Gas Co. v. Amoco Prod. Co., Civ. A. No. 12083, 1992 WL 43925 (Del.Ch. Mar; 4, 1992)).
. Nordheim’s reliance on Clear Lake Apartments v. Clear Lake Util. Co., 537 S.W.2d 48 (Tex.App. 1976), aff'd as modified, 549 S.W.2d 385 (Tex. 1977), and its insistence that Ball v. Rio Grande Canal Co., 256 S.W. 678 (Tex.Civ.App. 1923), writ refused (Jan. 23, 1924), is “indistinguishable from this case” are largely mistaken. Both cases are consistent with the view that horizontal privity of estate is satisfied only when a property interest in the land burdened-by the covenant at issue has been conveyed.
. Case No. 15-11835, ECF No. 386, pp. 14-15.
. Under the HPIP Agreements, Sabine is responsible for connecting its wells to "Central Delivery Points.”
. See Guffey v. Utex Exploration Co., 376 S.W.2d 1, 5 (Tex.Civ.App. 1964), writ refused NRE (May 13, 1964); Southwest Pipe Line Co. v. Empire Natural Gas Co., 33 F.2d 248, 252 (8th Cir. 1929).
. Nordheim also argues in the Nordheim Reply that it holds a "profit & prendre”, which runs with the land. Nordheim Reply, pp. 11 — 12. The Court will not consider this new argument raised at the reply stage for the first time. In any event, the argument does not change the Court’s conclusion.
. See, e.g. Masgas v. Anderson, 310 S.W.3d 567, 571 (Tex.App. 2010).
. The Court also notes that Sabine's contractual dedications in the HPIP Agreements are to the "performance of the [agreements],” not to an identified grantee. HPIP Water and Acid Handling Agreement § 1.2; HPIP Production Gathering, Treating and Processing Agreement § 1.2.
. HPIP Water and Acid Handling Agreement § 8.3; HPIP Production Gathering, Treating and Processing Agreement § 9.3. Similarly, the Nordheim Agreements provide that title to Sabine’s oil and gas remain with Sabine. See, e.g. Nordheim Gathering Agreement § 3.7.
. HPIP Reply, p. 7.
. El Paso Refinery, LP v. TRMI Holdings, Inc. (In re El Paso Refinery, LP), 302 F.3d 343, 358 (5th Cir. 2002).
. Reagan Nat’l Advert. of Austin, Inc. v. Capital Outdoors, Inc., 96 S.W.3d 490, 495 (Tex.App. 2002).
. The Debtors in these chapter 11 cases, along with the last four digits of each Debtor’s federal tax identification number, include: Sabine Oil & Gas Corporation (4900); Giant Gas Gathering LLC (3438); Sabine Bear Paw Basin LLC (2656); Sabine East Texas Basin LLC (8931); Sabine Mid-Continent Gathering LLC (6085); Sabine Mid-Continent LLC (6939); Sabine Oil & Gas Finance Corp. (2567); Sabine South Texas Gathering LLC (1749); Sabine South Texas LLC (5616); and Sabine Williston Basin LLC (4440). The location of Debtor Sabine Oil ’& Gas Corporation’s corporate headquarters and thé Debtors' service address is: 1415 Louisiana St., Suite 1600, Houston, Texas 77002.
. This decision was dictated on the record of the hearing held on March 8, 2016. It has been modified to include full citations and defined terms, and reflects minor additional non-substantive modifications.
. Nordheim and HPIP are so-called "midstream gatherers.” Situated operationally between upstream companies such as Sabine and downstream refining companies, midstream gatherers gather, treat, transport, and/or process mineral products produced from a well before such products enter the commercial market. See, generally, Kurt L. Krieger, Gathering and Transporting Marcel-lus and Utica Shale Natural Gas to the Market and the Regulation of Midstream Pipeline Companies, 19 Tex. Wesleyan L.Rev. 49 (2012).
. See, generally, Declaration of Michael Magil-ton (A) in Support of First Day Motions and (B) Pursuant to Local Bankruptcy Rule 1007-2 [ECF No. 3],
. Nordheim Gas Gathering Agreement ¶ 1.6; Nordheim Condensate Gathering Agreement ¶ 1.6.
. HPIP Gathering Agreement ¶ 1.2; HPIP Handling Agreement ¶ 1.2,
. HPIP Gathering Agreement ¶ 9.2.1; HPIP Handling Agreement ¶ 8.2,1.
. 11 U.S.C. § 365(a).
. Orion Pictures Corp. v. Showtime Networks (In re Orion Pictures Corp.), 4 F.3d 1095, 1098 (2d Cir. 1993).
. Id.
. Id. at 1099; see also In re Penn Traffic Co., 524 F.3d 373, 383 (2d Cir. 2008); In re The Great Atlantic & Pacific Tea Co., 544 B.R. 43 (Bankr.S.D.N.Y. 2016) (RDD).
. In re The Great Atlantic & Pacific Tea Co., 544 B.R. at 48.
. In re Enron Corp., No. 01-16034(AJG), 2006 WL 898033, at *4 (Bankr.S.D.N.Y. Mar. 24, 2006).
. In re Balco Equities Ltd., Inc., 323 B.R. 85, 98 (Bankr.S.D.N.Y. 2005).
. Westbury Real Estate Ventures v. Bradlees, Inc. (In re Bradlees Stores, Inc.), 194 B.R. 555, 558 n. 1 (Bankr.S.D.N.Y. 1996).
. In re Penn Traffic Co., 524 F.3d at 383; In re The Great Atlantic & Pacific Tea Co., 472 B.R. at 672-73; In re Old Carco LLC, 406 B.R. 180, 192-93 (Bankr.S.D.N.Y. 2009).
.. In re Helm, 335 B.R. 528, 538-39 (Bankr.S.D.N.Y. 2006).
. Nordheim Objection, ¶ 16 (citing In re Banning Lewis Ranch Co., LLC, 532 B.R. 335, 346 (Bankr.D.Colo. 2015) for proposition that debtor’s rejection of an agreement does not affect covenants to non-debtor parties that run with the land).
.HPIP Objection, ¶ 9 (citing Gouveia v. Tazbir, 37 F.3d 295, 298 (7th Cir. 1994) holding that covenants running with the land are property interests and cannot be extinguished through bankruptcy).
. HPIP Objection, p. 2.
. Orion, 4 F.3d at 1099.
. Tr. of 2/2/16 Hearing 94:16-17 [ECF No. 816].
. Tr. of 2/2/16 Hearing 97:20-23.
.It is clear that under Orion the Court may consider disputed legal issues in a non-binding way in the context of a motion to reject. In re The Great Atl & Pac. Tea Co., Inc., 544 B.R. at 52.
. See generally 9 Richard R. Powell, Powell on Real Property, § 60.01 (2015).
. 53 Rocky Mt. Min. L. Inst. § 19.01 (2007).
. 77 E.R. 72 (1583).
.See 9 Richard R. Powell, Powell on Real Property, § 60.01 (2015) (citing Edward Rabin,-Roberta Kwall, Jeffrey Kwall, and Craig Arnold, Fundamentals of Modem Real Property Law 489 (6th ed. 2011).
. Musgrave v. Brookhaven Lake Property Owners Ass’n, 990 S.W.2d 386, 395 (Tex.App. 1999).
. Inwood North Homeowners' Ass’n, Inc. v. Harris, 736 S.W.2d 632, 635 (Tex. 1987).
. Westland Oil Dev. Corp. v. Gulf Oil Corp., 637 S.W.2d 903, 910-11 (Tex. 1982).
. Newco Energy v. Energytec, Inc. (In re Energytec, Inc.), 739 F.3d 215, 222 (5th Cir. 2013).
. 53 Rocky Mt. Min. L. Inst. § 19.03 (2007).
. 739 F.3d at 221.
. Lesley v. Veterans Land Bd., 352 S.W.3d 479, 481 n. 1 (Tex. 2011) (quoting Altman v. Blake, 712 S.W.2d 117, 118 (Tex. 1986)).
. Id. at 481.
. Westland Oil, 637 S.W.2d at 911,
. El Paso Refinery, LP v. TRMI Holdings, Inc. (In re El Paso Refinery, LP), 302 F.3d 343, 356 (5th Cir. 2002).
. Westland Oil, 637 S.W.2d at 911,
. El Paso, 302 F.3d at 356. Not only is the caselaw "somewhat unclear,” but each of the two tests identified in the caselaw is somewhat analytically circular.
. Id. at 357.
. See, e.g., Sabine Prod. Co. v. Frost Nat. Bank of San Antonio, 596 S.W.2d 271, 276 (Tex.Civ.App. 1980); Colorado Interstate Gas Co. v. Hunt Energy Corp., 47 S.W.3d 1, 10 (Tex.App. 2000), pet. denied; Riley v. Riley, 972 S.W.2d 149, 155 (Tex.App. 1998); Phillips Petroleum Co. v. Adams, 513 F.2d 355, 363 (5th Cir. 1975).
. An argument might be made that the fact ■ that only "produced” Products are dedicated to the performance of the Agreements does not limit such a dedication to Products extracted from the ground (i.e., personal property) but also includes Products that are still in the ground (i.e., real property) because, under Texas law, a conveyance of oil and gas "produced and saved” is classified as a royalty interest, which is characterized by Texas courts as a real property interest. Such an argument, however, depends on the separate and different conclusion that a conveyance of oil and gas "produced and saved” is a conveyance of oil and gas not extracted from the ground, i.e., the reserves. That conclusion does not logically follow, and therefore any such argument would fail. Moreover, as discussed infra, the Debtors’ reserves are subject to the liens of their reserve-based lenders.
. El Paso, 302 F.3d at 356 (distinguishing Westland Oil ).
, Westland Oil, 302 F.3d at 357.
.A question as to the extent of the Debtors' rights under the Agreements or otherwise to transport Products by means other than the gathering systems of Nordheim and HPIP arose at oral argument — -to wit, the Debtors acknowledged that they are in fact using trucks instead of the HPIP gathering system to transport certain HPIP Products, a fact of which HPIP's counsel stated he was unaware. See Tr. of 2/2/16 Hearing 105:18-23. The transportation of the HPIP Products other than through HPIP's gathering system, if permissible under the HPIP Agreements, supports the conclusion that the dedication covenants in the HPIP Agreements do not "touch and concern” the land. As of the date hereof, HPIP has not, to the Court’s knowledge, sought injunctive relief against the Debtors relating to such activities.
. See El Paso, 302 F.3d at 356 (citing Mobil Oil Corp. v. Brennan, 385 F.2d 951, 953 (5th Cir. 1967) (describing covenant preventing mineral estate owner from interfering with surface grazing and from placing pipelines above certain depth)).
. 739 F.3d at 221.
. Tr. 'of 2/2/16 Hearing 114:6-9,
. Tr, of 2/2/16 Hearing 119:18-25.
. El Paso, 302 F.3d at 346.
. Id. at 346, 356-57.
. Id. at 358.
.id.
Reference
- Full Case Name
- IN RE: SABINE OIL & GAS CORPORATION,1 Debtors. Sabine Oil & Gas Corporation v. HPIP Gonzales Holdings, LLC, Defendant Sabine Oil & Gas Corporation v. Nordheim Eagle Ford Gathering, LLC
- Cited By
- 7 cases
- Status
- Published