667 B.R. 110
Bankr. W.D. Tex.2025Background
- Hilltop SPV, LLC is a Chapter 11 debtor seeking to reject a Gas Gathering Agreement (GGA) it inherited relating to its oil and gas leases in Texas.
- The GGA, originally between predecessors of Hilltop and Monarch Midstream, LLC, requires Hilltop to meet minimum daily and quarterly gas production volumes and pay associated fees to Monarch.
- The GGA grants Monarch real property interests (a right-of-way/easement and a dedication of gas reserves), which both sides agree are covenants running with the land.
- Hilltop filed a motion to reject the GGA as an executory contract, asserting the covenants running with the land would survive rejection under bankruptcy law.
- Monarch opposed, arguing the GGA was not executory and/or could not be rejected due to the real property covenants it contained.
- The court consolidated procedural questions but left the determination of the scope of surviving covenants and damages for a related adversary proceeding.
Issues
| Issue | Hilltop's Argument | Monarch's Argument | Held |
|---|---|---|---|
| Is the GGA an executory contract subject to rejection? | Yes; material performance remains due on both sides. | No; only Hilltop's obligations remain material. | Yes; material, ongoing duties exist for both parties. |
| Does the presence of covenants running with the land bar rejection? | No; contracts with such covenants can still be rejected, though covenants survive. | Yes; real property covenants make the contract immune from rejection. | No; executory contracts may be rejected even if they contain real property covenants, which survive rejection. |
| Standard for contract rejection under § 365 | Business judgment: rejection is proper if not clearly erroneous. | Implied need for higher or different scrutiny due to property interests. | Business judgment standard applies; rejection here is appropriate. |
| Effect of rejection on covenants running with the land | Rejection does not terminate real property interests; they remain. | Implied that rejection would need to terminate property interests. | Covenants running with the land remain in effect post-rejection. |
Key Cases Cited
- Mission Prod. Holdings, Inc. v. Tempnology, LLC, 587 U.S. 370 (2019) (explains the effect of § 365 rejection—breach, not rescission; property rights survive)
- N.L.R.B. v. Bildisco & Bildisco, 465 U.S. 513 (1984) (defines executory contracts and standard for rejection)
- Richmond Leasing Co. v. Capital Bank, N.A., 762 F.2d 1303 (5th Cir. 1985) (adopts business judgment standard for § 365 motions)
- Matter of J. C. Penney Direct Mktg. Servs., L.L.C., 50 F.4th 532 (5th Cir. 2022) (restates business judgment standard under § 365)
- F.E.R.C. v. Ultra Res., Inc. (In re Ultra Petroleum Corp.), 28 F.4th 629 (5th Cir. 2022) (rejection releases the estate from burdensome contract obligations)
- Eastover Bank for Savings v. Sowashee Venture (Matter of Austin Dev. Co.), 19 F.3d 1077 (5th Cir. 1994) (rejection does not terminate underlying property interests)
- Phillips Petroleum Co. v. Adams, 513 F.2d 355 (5th Cir. 1975) (Texas law on real property interests)