622 B.R. 274
Bankr. S.D. Tex.2020Background
- Debtors (Chesapeake entities) filed chapter 11 on June 28, 2020 and moved to reject several executory contracts, including a gas purchase agreement with ETC Texas Pipeline, Ltd. under 11 U.S.C. § 365.
- The ETC Purchase Agreement consists of a Base Contract, a Transaction Confirmation, and a recorded Memorandum; it dedicates Seller’s produced gas from listed "Dedicated Leases" to Buyer up to specified quantities and requires filing a memorandum.
- The Agreement designates itself a forward contract under the Bankruptcy Code and limits remedies for breach to a formulaic monetary payment (exclusive remedy clause), excluding specific performance or injunctive relief.
- ETC objected, arguing the contract contains a covenant running with the land (or an equitable servitude) and thus cannot be rejected; Debtors argued Texas law requirements for a covenant running with the land are not met and rejection remains permissible.
- The court found the contract required future performance on both sides (i.e., is executory) but concluded the Agreement does not create a covenant running with the land (no requisite intent, does not touch and concern the land, and lacks privity) and therefore granted the Debtors’ motion to reject.
Issues
| Issue | Debtors' Argument | ETC's Argument | Held |
|---|---|---|---|
| Whether the presence of a covenant running with the land bars executory-contract rejection | Rejection is permitted; executory status and covenant can coexist; if covenant exists damages remain as claim | A covenant that runs with the land prevents rejection | Court: No categorical bar; executory contracts may contain real‑property covenants — analysis depends on contract content |
| Whether the ETC Purchase Agreement contains a covenant running with the land (intent) | Exclusive monetary remedy and forward‑contract characterization show parties did not intend a land‑running covenant | Express language in the Agreement states the dedication is "a covenant running with the land" | Court: Intent lacking — exclusive monetary remedy and contractual framing indicate personal, not real‑property, obligation |
| Whether the obligation "touches and concerns" Chesapeake’s land | Produced gas is personal property; obligations arise only after severance, so no burden on the land | Dedication of all gas produced from Dedicated Leases affects the leases and thus touches and concerns the land | Court: Does not touch and concern the land — obligation concerns severed gas (personalty) and does not affect use/enjoyment of real property |
| Whether vertical (and horizontal) privity exists to support a covenant running with the land | Language dedicating "property rights necessary" and recorded memorandum suffice to create privity | Privity exists via dedication and recording | Court: No vertical privity — agreement governs sale of a commodity (forward contract) and does not convey an identifiable estate or property interest in the leases; horizontal privity also absent if required |
Key Cases Cited
- Mission Prod. Holdings, Inc. v. Tempnology, LLC, 139 S. Ct. 1652 (2019) (defines executory contract consequences of rejection and that rejection converts unperformed obligations into a prepetition damages claim)
- In re National Gypsum Co., 208 F.3d 498 (5th Cir. 2000) (treatment of executory contracts under § 365)
- In re El Paso Refinery, LP, 302 F.3d 343 (5th Cir. 2002) (Texas test for covenants running with the land; intent and touch/concern analysis)
- In re Energytec, Inc., 739 F.3d 215 (5th Cir. 2013) (discussion of privity requirements and skepticism about horizontal privity)
- Westland Oil Dev. Corp. v. Gulf Oil Corp., 637 S.W.2d 903 (Tex. 1982) (burden‑on‑the‑promisor’s‑land test for touch and concern)
- Phillips Petroleum Co. v. Adams, 513 F.2d 355 (5th Cir. 1975) (produced gas is personal property under Texas law)
- In re Alta Mesa Res., Inc., 613 B.R. 90 (Bankr. S.D. Tex. 2019) (recent chapter 11 decisions addressing rejection of gathering/purchase agreements alleged to create covenants running with the land)