631 B.R. 847
Bankr. S.D. Tex.2021Background
- In 2017 Sanchez (through affiliate SN EF Maverick, LLC) bought working interests in the Comanche Field from Anadarko; Anadarko retained Springfield Pipeline and the multi-hundred-mile Springfield Gathering System.
- Sanchez (as "Shipper") executed Springfield oil and gas gathering agreements (Springfield OGA/GGA) dedicating leases, wells, and production to Springfield and granting easements; the agreements express intent that covenants run with the land.
- The purchasers also signed a Development Agreement requiring 60 wells/year for five years or payment of a $200,000 per-unfinished-well fee; Sanchez guaranteed Maverick’s obligations.
- Sanchez filed chapter 11 in 2019; its confirmed plan established a post-effective-date procedure for assumption/rejection of executory contracts and preserved counterparties’ defenses; Occidental acquiesced to that procedure at confirmation but later objected to rejection.
- Mesquite (the reorganized debtor) sought to reject the Springfield Agreements and the Development Agreement; Occidental sued, arguing the agreements create covenants running with the land that cannot be rejected.
- The Court allowed rejection of both types of agreements under § 365 but held the Springfield Agreements created real-property covenants and easements that survive rejection; the Development Agreement did not create enforceable covenants running with the land.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether post-confirmation (post-effective-date) rejection procedure is valid | Occidental: procedure invalid under § 365; reorganized debtor lacks authority; plan cannot confer this | Mesquite: Occidental expressly assented at confirmation; preserved defenses did not preserve collateral attack | Court: Occidental waived collateral attack by assenting and failing to appeal; res judicata binds it |
| Whether Springfield Agreements are executory and subject to rejection | Occidental: agreements create covenants running with the land and therefore not subject to rejection | Mesquite: agreements are executory (mutual ongoing obligations) and rejection is proper under business judgment | Court: Agreements are executory; rejection approved under business judgment rule |
| Whether Springfield Agreements created covenants running with the land that survive rejection | Occidental: dedications, easements, and express language show covenants run with land | Mesquite: rejection would eliminate obligations and rights | Court: Dedications and conveyed easements met Texas requirements for covenants running with the land; those property rights survive rejection |
| Whether Development Agreement formed real-property covenants that survive rejection | Occidental: parties intended covenants running with the land | Mesquite: promise was elective (monetary default remedy) and thus personal, not a land covenant | Court: Development Agreement did not create a covenant running with the land; exclusive monetary remedy shows personal nature; rejection approved |
Key Cases Cited
- Mission Product Holdings, Inc. v. Tempnology, LLC, 139 S. Ct. 1652 (2019) (rejection breaches but does not rescind contract; rights that survive a breach remain)
- United Student Aid Funds, Inc. v. Espinosa, 559 U.S. 260 (2010) (confirmed plan binding when creditor had notice and failed to object or appeal)
- NLRB v. Bildisco & Bildisco, 465 U.S. 513 (1984) (definition and treatment of executory contracts in bankruptcy)
- In re Energytec, Inc., 739 F.3d 215 (5th Cir. 2014) (discussion of privity and horizontal privity in covenants running with the land)
- In re Alta Mesa Resources, Inc., 613 B.R. 90 (Bankr. S.D. Tex. 2019) (analysis of midstream dedication agreements and survival of real-property covenants)
- In re Chesapeake Energy Corp., 622 B.R. 274 (Bankr. S.D. Tex. 2020) (distinguishing personal monetary remedies from enforceable land covenants)
- Celotex Corp. v. Catrett, 477 U.S. 317 (1986) (summary judgment burden-shifting principles)
- Anderson v. Liberty Lobby, 477 U.S. 242 (1986) (standard for genuine dispute of material fact)