550 B.R. 59
Bankr. S.D.N.Y.2016Background
- Sabine Oil & Gas (Debtors) entered into gas/condensate gathering agreements with Nordheim and gathering/handling agreements with HPIP that included covenants described as "running with the land."
- Agreements dedicated produced hydrocarbons (and in HPIP’s case certain leases) to performance of the contracts and required delivery to the gatherers; Nordheim was also to receive a gathering fee.
- Debtors filed a section 365 rejection motion in their Chapter 11 case seeking to reject the Nordheim and HPIP agreements; the Court authorized rejection but reserved a final, binding determination on whether the covenants ran with the land.
- Debtors then brought adversary declaratory-judgment actions seeking rulings that the covenants do not run with the land; Nordheim and HPIP counterclaimed that the covenants are real covenants or equitable servitudes.
- The parties moved for judgment on the pleadings (Nordheim, HPIP) and the Debtors moved for summary judgment; the Court treated the disputed elements as legal questions on undisputed facts.
Issues
| Issue | Plaintiff's Argument (Debtors) | Defendant's Argument (Nordheim / HPIP) | Held |
|---|---|---|---|
| Do the covenants "touch and concern" the land (real covenant element)? | Covenants concern only produced hydrocarbons (personal property) and therefore do not affect land use or owner’s real-property sticks. | Covenants dedicate products (and HPIP argues leases) and thus affect mineral interests and value, so they touch and concern the land. | Held: Covenants do not touch and concern the land; they affect produced products (personal property), not real-property interests. |
| Is horizontal privity of estate present (requirement for real covenants under Texas law)? | Even if required, horizontal privity is not shown: no conveyance of the burdened estate to the covenanting party in the traditional paradigm. | Pointed to conveyances/easements and contractual dedication language as creating privity. | Held: Horizontal privity is not satisfied between Sabine and Nordheim or Sabine and HPIP. |
| Were the parties’ intentions to create covenants running with the land (intent element)? | Agreement language and context show service contract structure, not a conveyance of a real property interest. | Contracts contain language calling the covenant a "covenant running with the land," and recordings were made. | Held: Court need not reach intent after finding failure of touch-and-concern and privity; agreements read as service contracts, not conveyances of real property. |
| Can the covenants be enforced as equitable servitudes? | Even equitable servitudes must concern the land/use; these covenants do not, so they cannot be equitable servitudes. | Argued that even if not real covenants, they are equitable servitudes enforceable against successors. | Held: Covenants are not equitable servitudes because they do not limit use of or burden the land. |
Key Cases Cited
- Orion Pictures Corp. v. Showtime Networks, 4 F.3d 1095 (2d Cir. 1993) (bankruptcy rejection proceedings are summary in nature; substantive property rulings may require separate adversary proceeding)
- Newco Energy v. Energytec, 739 F.3d 215 (5th Cir. 2013) (illustrative paradigm where a covenant and related conveyance imposed a burden running with the land)
- Westland Oil Dev. Corp. v. Gulf Oil Corp., 637 S.W.2d 903 (Tex. 1982) (Texas test for covenants touching and concerning land)
- Inwood N. Homeowners’ Ass’n v. Harris, 736 S.W.2d 632 (Tex. 1987) (Texas discussion of elements for covenants running with the land)
- El Paso Refinery, LP v. TRMI Holdings, Inc., 302 F.3d 343 (5th Cir. 2002) (analysis of touch-and-concern and distinctions among covenants affecting produced products versus land use)