567 B.R. 869
S.D.N.Y.2017Background
- Sabine Oil & Gas entered contracts (HPIP Agreements; Nordheim Agreements) assigning exclusive gathering/processing services for hydrocarbons produced from defined "Dedicated Areas"; Sabine retained title to the minerals and agreed to pay fees and deficiency payments if minimum deliveries were not met.
- Nordheim received a small surface conveyance and easements; HPIP had a recorded memorandum and a clause that purchasers of Sabine’s leases must assume the agreement.
- Sabine filed Chapter 11 and moved to reject the Agreements under 11 U.S.C. § 365(a); appellants contested, arguing the covenants run with the land and thus cannot be rejected.
- Bankruptcy court held the Agreements did not run with the land (neither real covenants nor equitable servitudes) and authorized rejection; district court affirmed.
- Dispute turns on Texas property-law doctrine of covenants running with the land and whether the Agreements altered real-property interests or merely created contractual service rights.
Issues
| Issue | Plaintiff's Argument (Sabine) | Defendant's Argument (HPIP / Nordheim) | Held |
|---|---|---|---|
| Whether Agreements are real covenants that run with the land | Agreements are contractual and do not create property interests; they may be rejected under §365 | Covenants "touch and concern" land because they dedicate production from the Dedicated Areas and bind successors | Held: Not real covenants — do not touch and concern the land; no conveyance of mineral/lease interests |
| Whether Agreements are equitable servitudes | Agreements do not limit Sabine’s use of the land and thus do not create an equitable servitude | Agreements impose use restrictions and benefit appellants’ land/facilities, binding successors with notice | Held: Not equitable servitudes — do not limit use of the burdened land and primarily benefit appellants contractually, not their land |
| Whether Energytec compels a different result | Sabine: Energytec is distinguishable; here obligations arise only after production and do not restrain alienation | Appellants: Energytec shows covenants that relate to pipeline/use of land do touch and concern land | Held: Energytec distinguishable — no comparable conveyance of pipeline rights, assignment restraints, or ongoing property interest here |
| Whether Agreements could be rejected under § 365(a) | Rejection permitted because Agreements are executory contracts, not property interests that survive bankruptcy | Appellants: If covenants run with the land, they are property interests and not rejectable | Held: Rejection authorized — Agreements do not run with the land, so §365(a) rejection was proper |
Key Cases Cited
- Inwood N. Homeowners’ Ass’n v. Harris, 736 S.W.2d 632 (Tex. 1987) (elements for covenant to run with the land under Texas law)
- Westland Oil Dev. Corp. v. Gulf Oil Corp., 637 S.W.2d 903 (Tex. 1982) (tests for whether covenant "touches and concerns" land)
- In re Orion Pictures Corp., 4 F.3d 1095 (2d Cir. 1993) (standards for debtor’s rejection of executory contracts under §365)
- In re Energytec, Inc., 739 F.3d 215 (5th Cir. 2013) (pipeline/transportation arrangement held to touch and concern land)
- American Ref. Co. v. Tidal W. Oil Corp., 264 S.W. 335 (Tex. Civ. App. 1924) (recognizing mineral/royalty interests as real property)
- Altman v. Blake, 712 S.W.2d 117 (Tex. 1986) (listing recognized mineral rights/interests)
- Colorado Interstate Gas Co. v. Hunt Energy Corp., 47 S.W.3d 1 (Tex. Ct. App. 2000) (severed oil and gas become personal property)
- Reagan Nat’l Advert. of Austin, Inc. v. Capital Outdoors, Inc., 96 S.W.3d 490 (Tex. Ct. App. 2002) (elements for equitable servitude under Texas law)
- Ball v. A.O. Smith Corp., 451 F.3d 66 (2d Cir. 2006) (standard of review for bankruptcy appeals)