623 B.R. 64
Bankr. D. Del.2020Background
- Southland Royalty Company LLC (debtor) owns mineral and leasehold interests in the Wamsutter Field (Wyoming). Wamsutter LLC (midstream, Williams affiliate) owns and operates a gathering system there.
- Two governing gas-gathering contracts: the L60 Agreement (2016) and the L63 Agreement (2018). L63 tied to specially constructed Hansen Lake/High Point infrastructure and includes a ten-year minimum volume commitment (L63 MVC) with quarterly deficiency fees and volumetric fees.
- Parties negotiated L63 at arm’s length; Wamsutter recorded a memorandum of the L63 Agreement in county real property records.
- After Southland filed Chapter 11 and ran a marketed sale process, it received no binding bids for the Wamsutter assets and blamed the L63 MVC; Southland sued seeking declarations on executory-contract status, severability/unenforceability of the MVC, right to flow L63-area gas under L60 after rejection, and ability to sell assets free-and-clear under §363(f).
- The court held an expedited trial; issues narrowed by stipulation; post-trial judgment: L63 is not a covenant running with the land (so is executory), MVC is not severable, Southland may reject/assume as applicable, Southland may sell assets free-and-clear under §363(f) (but may not unilaterally flow L63 gas to L60 without amendment).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Is the L63 an executory contract subject to rejection (or a real covenant)? | L63 is an executory services contract; not a real covenant; can be rejected under §365. | L63 (including the MVC) is a covenant running with the land or an equitable servitude and therefore not subject to rejection. | Court: L63 is not a covenant running with the land; it is an executory services contract and Southland may reject it (judgment for Southland on Count 4). |
| Is the L63 MVC severable from the agreement? | MVC can be severed so remaining contract can be assumed/assigned without MVC. | MVC is an essential, bargained-for component tied to fees and the dedication; cannot be severed. | Court: MVC is integral to the economic package (MVC + G&P fees + dedication) and is not severable (judgment for Wamsutter on Count 5). |
| Is the MVC unenforceable as an unlawful restraint on alienation / de facto anti-assignment under §365(f)(1)? | MVC functions as an anti-assignment or restraint and should be excised under §365(f)(1). | MVC does not expressly prohibit assignment and is a material economic term needed to compensate Wamsutter. | Court: Not convinced MVC constitutes an unlawful anti-assignment provision here; argument not sustained (related theories rejected/moot given other holdings). |
| If L63 is rejected and L60 assumed, may Southland flow all L63-area gas under L60? | Yes — L60 covers gas within its Area of Interest and therefore should govern flow after L63 rejection/termination. | No — receipt points are contract-specific; L63 Receipt Points are assigned to L63 and cannot be unilaterally re-designated to L60 without written amendment or agreement. | Court: Receipt points control which contract applies; Southland may not flow gas subject to L63 Receipt Points under L60 absent an amendment; judgment for Wamsutter on Count 8. |
| May Southland sell Wamsutter assets free-and-clear of Wamsutter interests under §363(f)? | Yes — either because L63 is not a land covenant or, even if it were, §363(f)(1) (foreclosure/priority) and §363(f)(5) (compel money satisfaction) permit extinguishment or money-compensation. | No — sale cannot let debtor stand in the lenders’ shoes to extinguish interests; interests should survive or require lender foreclosure. | Court: Judgment for Southland on Count 13. Court concludes §363(f)(1) (extinguishment via superior mortgage/foreclosure rights) and §363(f)(5) (money satisfaction is available) permit a sale free-and-clear; §363(f)(4) (bona fide dispute) left undecided. |
Key Cases Cited
- Sharon Steel Corp. v. Nat’l Fuel Gas Distrib. Corp., 872 F.2d 36 (3d Cir.) (definition of executory contract used in bankruptcy context)
- N.L.R.B. v. Bildisco & Bildisco, 465 U.S. 513 (U.S. 1984) (section 365(a) permits rejection of executory contracts)
- Mission Prod. Holdings, Inc. v. Tempnology, LLC, 139 S. Ct. 1652 (U.S. 2019) (effect of rejection—contract breach remedies and survival of rights already received)
- Sabine Oil & Gas Corp. v. HPIP Gonzales Holdings, LLC (In re Sabine Oil & Gas Corp.), 550 B.R. 59 (Bankr. S.D.N.Y. 2016) (examined whether gas-gathering covenants run with the land; influential for narrowing view)
- Monarch Midstream, LLC v. Badlands Prod. Co. (In re Badlands Prod. Co.), 608 B.R. 854 (Bankr. D. Colo. 2019) (court held gathering agreement created covenants running with land under Utah/other law)
- Alta Mesa Holdings, LP v. Kingfisher Midstream, LLC (In re Alta Mesa Res., Inc.), 613 B.R. 90 (Bankr. S.D. Tex. 2019) (bankruptcy court treating certain gathering agreement covenants as real covenants)
- Lingle Water Users’ Ass’n v. Occidental Bldg. & Loan Ass’n, 297 P. 385 (Wyo. 1931) (Wyoming law: covenants against free use of land are disfavored; elements for covenant running with land)
- Jacobs Ranch Coal Co. v. Thunder Basin Coal Co., 191 P.3d 125 (Wyo. 2008) (Wyoming Supreme Court discussion of intent/touch-and-concern in servitude/covenant analysis)
- Flying Diamond Oil Corp. v. Newton Sheep Co., 776 P.2d 618 (Utah 1989) (used in touch-and-concern analysis for mineral/surface covenants)