547 B.R. 66
Bankr. S.D.N.Y.2016Background
- Debtors (Sabine Oil & Gas and affiliated debtors) filed chapter 11 on July 15, 2015 and sought authority under 11 U.S.C. §365(a) to reject four midstream contracts: two with Nordheim (gas and condensate gathering) and two with HPIP (gathering/processing and water/acid gas handling).
- The agreements obligate Sabine to "dedicate" produced hydrocarbons (and, in HPIP’s case, certain leases) to the counterparty and to pay gathering/transportation fees; each agreement states it is a covenant running with the land and purports to bind successors and assigns.
- Debtors argued rejection was a valid exercise of business judgment because they cannot profitably meet minimum delivery obligations and would face costly deficiency payments; they intend to replace the agreements on better terms.
- Nordheim and HPIP objected; both asserted the dedications are covenants that run with the land and therefore survive rejection. Nordheim also argued the court cannot decide whether the covenants run with the land on a summary rejection motion (invoking Orion).
- HPIP consented to rejection of the agreements generally but reserved the right to contend the dedications run with the land; neither objector alleged bad faith or caprice in the Debtors’ business judgment.
- The court authorized rejection under §365(a) (as a reasonable exercise of business judgment) but, consistent with Orion, declined to make a binding adjudication on whether the challenged covenants run with the land; it provided a nonbinding legal analysis concluding the covenants likely do not run with the land under Texas law.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Debtors may reject the Nordheim and HPIP executory contracts under §365(a) | Rejection is a reasonable business judgment because agreements are burdensome and will cause deficiency payments; rejection allows replacing contracts on better terms | Nordheim argued rejection is not beneficial because dedications run with the land and would survive rejection; HPIP objected only as to enforceability of dedications | Court: Authorized rejection — Debtors satisfied business-judgment standard; no allegation of bad faith, and HPIP effectively consents to rejection |
| Whether the bankruptcy court may decide, in a rejection motion, the substantive property-law question whether certain covenants "run with the land" under Texas law | Debtors implicitly: court may make nonbinding analysis, but final determination not required to grant rejection | Nordheim: Orion prevents the court from deciding such substantive issues on a summary rejection motion; HPIP: court should decide the covenants do run with the land | Court: Under Orion, court will not make a binding determination on that substantive issue in the rejection proceeding; may provide nonbinding analysis but final adjudication requires separate adversary or contested proceeding |
| Whether the challenged dedications and fee covenants run with the land as real covenants under Texas law | Debtors: Dedications concern produced products (personal property) and service obligations, not real property; no horizontal privity; do not "touch and concern" the land | Nordheim/HPIP: Agreements expressly state covenants run with the land and bind successors; prior Fifth Circuit precedent (Energytec) supports finding such covenants run with the land | Court (nonbinding): Covenants likely do not run with the land — lack horizontal privity, do not affect the land or its use (they concern produced products and services), and do not convey a real-property stick |
| Whether the covenants are enforceable as equitable servitudes | Debtors: Even as equitable servitudes they must concern the land/use; these do not | Nordheim/HPIP: Alternatively, the covenants are equitable servitudes enforceable against successors with notice | Court (nonbinding): Not equitable servitudes because they do not concern the land or its use; therefore not enforceable as servitudes |
Key Cases Cited
- Orion Pictures Corp. v. Showtime Networks, 4 F.3d 1095 (2d Cir.) (bankruptcy rejection/assumption proceedings are summary and courts should not resolve complex substantive disputes in that context)
- In re Penn Traffic Co., 524 F.3d 373 (2d Cir.) (deference to debtor’s business judgment in assumption/rejection decisions)
- Newco Energy v. Energytec, Inc. (In re Energytec, Inc.), 739 F.3d 215 (5th Cir.) (analyzed when contractual burdens may constitute interests that run with the land)
- In re El Paso Refinery, LP, 302 F.3d 343 (5th Cir.) (test for whether covenant "touches and concerns" land; distinguishes covenants burdening land from covenants concerning produced products)
- Westland Oil Dev. Corp. v. Gulf Oil Corp., 637 S.W.2d 903 (Tex.) (Texas Supreme Court discussion of covenants running with the land)