Hilltop SPV, LLC
IT IS HEREBY ADJUDGED and DECREED that the below described is SO ORDERED.
Dated: January 06, 2025
UNITED STATES BANKRUPTCY JUDGE
ORDER AND OPINION GRANTING MOTION TO REJECT GAS GATHERING AGREEMENT
I. INTRODUCTION
The Court heard Debtor‘s Motion to (I) Reject Gas Gathering Agreement on a Nunc Pro Tunc Basis and (II) Establish a Bar Date for Filing Related Rejection Claims (ECF No. 84, ”Rejection Motion“) and the Response to Hilltop SPV, LLC‘s Motion to Reject Executory Contract (ECF No. 98, ”Response“) filed by Monarch Midstream, LLC (”Monarch“). After considering the evidence admitted and arguments of counsel, the Court has determined the Rejection Motion should be granted. Accordingly, Hilltop SPV, LLC (”Hilltop“) may reject the Gas Gathering Agreement (”GGA“) but the covenants running with the land contained in and created by the GGA will remain post-rejection. The Court will use the parties’ related adversary proceeding, Adv. Proc. No. 24-6015, to determine (i) the scope of the GGA‘s covenants running with the land and what performance duties may remain by the parties’ post rejection, and (ii) Monarch‘s damages related to the rejection.
II. JURISDICTION AND VENUE
The Court has jurisdiction over this matter under
III. BACKGROUND
a. PROCEDURAL BACKGROUND
The day after Hilltop filed for bankruptcy relief, it filed a complaint against Monarch seeking a declaratory judgment that the GGA is an executory contract which can be rejected. Adv. Proc. No. 24-06015, ECF No. 1. Hilltop timely amended its complaint, Adv. Proc. No. 24-06015, ECF No. 21, and simultaneously filed its Rejection Motion in this case. ECF No. 84. In both the Amended Complaint and Rejection Motion, Hilltop asserted that it could reject the GGA in whole, but any real property covenants would remain post-rejection. Adv. Proc. No. 24-06015, ECF No. 21; Case No. 24-60308, ECF No. 84. With Hilltop proceeding on two parallel tracks with similar goals, Monarch filed its Answer and Counterclaim in the adversary, Adv. Proc. No. 24-06015, ECF No. 22, and its Response to the Rejection Motion in this case. ECF No. 98. The parties jointly sought expedited consideration of Hilltop‘s Rejection Motion. ECF Nos. 107, 108. Monarch asked the Court to not only decide whether the GGA was executory, but also what portions of the GGA created covenants running with the land.3 Hilltop, on the other hand, wanted the Rejection Motion to only decide whether the GGA could be rejected, procedurally reserving for the adversary proceeding the determination of what portions of the GGA survive rejection because they create covenants running with the land. Without Hilltop‘s consent otherwise, the Court believes it procedurally appropriate to only address whether the GGA is executory and can be rejected in the Rejection Motion, and reserve for the adversary proceeding the question of what covenants run with the land post-rejection.
b. FACTUAL BACKGROUND
Hilltop owns oil, gas, and mineral leases in the Hilltop Lakes in Leon and Robertson Counties, Texas. ECF No. 84 ¶¶ 14–15; ECF No. 98 ¶ 7. Once formed, Hilltop acquired certain oil and gas assets from Hilltop Asset, LLC and in so doing inherited the GGA it now seeks to reject. ECF No. 84 ¶¶ 13, 16. The GGA was first entered into between Hilltop Resort GS, LLC—Monarch‘s predecessor-in-interest—and Gastar Exploration Texas, LP—Hilltop‘s predecessor-in-interest. ECF No. 84 ¶ 16; ECF No. 84 Ex. A, at 1;4 ECF No. 98 ¶ 6.
Under the GGA, Hilltop is tasked with tendering natural gas to Monarch at
- Related to Monarch‘s gathering system: Hilltop must produce the total equivalent of 50,000 Mcf per day every quarter or pay, subject to offset for prior amounts exceeding the quarterly minimum requirement, “liquidated and agreed damages for the Quarterly Minimum Volume not being delivered” to Monarch based on a formulaic payment structure. GGA ¶¶ 1.1, 5.2(i)–(iii).
- Related to Monarch‘s compression services: Hilltop must provide 10,000 Mcf per day. GGA 1A.7
The GGA states the sole remedy for any party‘s liability are actual damages.8 GGA ¶ 7.3.
The GGA explicitly creates two property interests which the parties agree are covenants running with the land. ECF No. 84 ¶ 45; ECF No. 98 ¶¶ 46–49, 52–61. Hilltop granted Monarch a right-of-way and easement across Hilltop‘s leases to access Monarch‘s equipment (”Easement“).9 GGA, Ex. A ¶ 4. Hilltop also dedicated to Monarch all gas reserves in, under, and produced from Hilltop‘s leases in a specified area in the Hilltop Lakes (”Dedication“),10
IV. ANALYSIS
a. MOTION TO REJECT STANDARD
Section 365 of the Code allows trustees, subject to court approval, to assume or reject executory contracts and unexpired leases.
Although the Code does not lay out the legal standard a court must use to determine whether to approve a debtor‘s rejection or assumption under
b. THE PARTIES ARGUMENTS
Hilltop seeks to reject the GGA in its entirety as an executory contract subject to rejection under
c. THE GGA IS EXECUTORY
“A contract is executory if ‘performance remains due to some extent on both sides.‘” Tempnology, 587 U.S. at 373 (quoting Bildisco, 465 U.S. at 522 n. 6). Courts in the Fifth Circuit ask “whether, under the relevant state law governing the contract, each side has at least one material unperformed obligation as of the bankruptcy petition date.” Argonaut Ins. Co. v. Falcon V, L.L.C. (Matter of Falcon V, L.L.C.), 44 F.4th 348, 352 (5th Cir. 2022).
The Fifth Circuit does not allow slicing and dicing in the
Hilltop seeks to reject the entire GGA. Hilltop, however, concedes real property covenants in the GGA survive rejection not because of any choice Hilltop has made, but only because of bankruptcy law‘s limited ability to affect real property interests. Thus, Hilltop seeks to reject the entire GGA but will accept the consequences of such rejection, which will include remaining burdened by any real property covenants.
Monarch first argues the GGA is not executory because “performance only remains due on the Debtor‘s side.” ECF No. 98 ¶ 37. Monarch believes its obligations under the GGA “to construct, own, and operate” the compression station have already been completed and any non-operation would not be a material breach. ECF No. 98 ¶¶ 40–43; GGA 1A.
Hilltop must pay Monarch gas gathering and compression fees and meet its daily and quarterly minimum volume requirements. ECF No. 84 ¶¶ 17–21; ECF No. 98 ¶¶ 13–17, 19, 23, 44. Thus, Hilltop still has material obligations it must meet on its side.
Although Monarch constructed the new compression system and thereby met that portion of its obligation, it must continue to meet other obligations as they are ongoing. ECF No. 98 ¶ 13, 41. Since “own” and “operate” are not defined terms in the GGA, they must be given their ordinary meaning. Great Am. Ins. Co. v. Primo, 512 S.W.3d 890, 893 (Tex. 2017) (“A contract‘s plain language controls. ... And we assign terms their ordinary and generally accepted meaning unless the contract directs otherwise.“).13 “Own” and “operate” are written in the present tense,
Monarch argues “operate” merely means the compression system must be in Monarch‘s custody or control, ECF No. 98 ¶ 42, but such a connotation is too limiting. In this context,14 “operate” means Monarch must cause the compression system to continue to function, not just maintain “custody and control” of it. Id.; GGA 1A; Operate, BLACK‘S LAW DICTIONARY (online ed. 2024) (“1. To run some part of machinery or a business. 2. To function properly.“); Operate,
MERRIAM-WEBSTER DICTIONARY (online ed. 2024) (“1. Bring about, effect, 2a. to cause to function: work, 2b. to put or keep in operation.“). If Monarch were to fail to operate the compression system, it could have disastrous consequences.15
Because these material obligations cannot be completed until termination of the agreement, Monarch still has outstanding obligations. Thus, material performance is required on both sides and the GGA is executory.
d. COVENANTS RUNNING WITH THE LAND
Monarch next argues that because the GGA includes covenants running with the land it cannot be rejected. The parties agree that the GGA contains covenants running with the land. ECF No. 84 ¶¶ 39–42; ECF No. 98 ¶¶ 49, 52–53. But this begs the question: can the GGA, even though it has covenants running with the land, be rejected? And if so, what happens to those covenants after the GGA is rejected?
Because these are questions of first impression the Court begins at the beginning,16 with the Code. Section 365 allows a debtor-in-possession to reject any executory contract.
1. SECTION 365 AND THE POWER AND CONSEQUENCE OF REJECTING AN ENTIRE CONTRACT
Rejection of an executory contract under
There are few limitations on a chapter 11 debtor‘s power to reject an executory contract.
The Code tells us a chapter 11 debtor can reject any executory contract so long as the Court approves.
Rather than restricting a chapter 11 debtor‘s ability to reject a contract, Congress instead chose to outline the consequences such rejection would have.
Justice Kagan put it plainly:
Section 365 provides a debtor like Tempnology with a powerful tool: Through rejection, the debtor can escape all of its future contract obligations, without having to pay much of anything in return. . . .
But in allowing rejection of those contractual duties, Section 365 does not grant the debtor an exemption from all the burdens that generally applicable law—whether involving contracts or trademarks—imposes on property owners.
Tempnology, 587 U.S. at 386–87. The contract is not considered rescinded; but “the debtor‘s contractual counterparty [] retain[s] the same rights under
Therefore, a chapter 11 debtor may reject any executory contract and the consequences of that rejection are the same as if that debtor had breached the contract in a non-bankruptcy context. E.g., Thornhill Bros. Fitness, 85 F.4th at 326; see also Eastover Bank for Savings v. Sowashee Venture (Matter of Austin Dev. Co.), 19 F.3d 1077, 1083 (5th Cir. 1994) (saying a lessee/sublessor‘s rejection of a lease with the original lessor did not terminate the lease or the sublessee‘s rights to the lease); Chandrahas Agarwal, M.D. v. Pomona Valley Med. Grp., Inc. (In re Pomona Valley Med. Grp., Inc.), 476 F.3d 665, 673 (9th Cir.2007) (“The rejection of an executory contract does not, however, otherwise affect the parties’ substantive rights under the contract or state law.“).
Judge Sontchi in Extraction Oil & Gas said: “Most courts that have held covenants running with the land cannot be rejected have found that the covenant was not an executory contract.” 622 B.R. 608, 620–21 (Bankr. D. Del. 2020). This is not the same, however, as saying an executory contract which contains a covenant running with the land cannot be rejected. Judge Sontchi merely recognizes that most covenants running with the land are not executory and therefore not rejectable.
The question here is does the inclusion of a non-rejectable covenant running with the land insulate the otherwise executory GGA from rejection? Courts who have considered this question, have said an executory contract, such as this GGA, may be rejected even though it contains real property covenants. Southland Royalty Co., 623 B.R. at 73–74, 90–92; In re Chesapeake Energy Corp., 622 B.R. 274, 281–82 (Bankr. S.D. Tex. 2020); Occidental Petroleum Corp. v. Sanchez Energy Corp. (In re Sanchez Energy Corp.), 631 B.R. 847, 851, 859–60 (Bankr. S.D. Tex. 2021).
Here,
Once an executory contract is rejected and therefore breached, those rights and interests conferred to Monarch within the GGA remain and Monarch may seek any relief or remedy for damages caused by such breach. See Mirant Corp., 378 F.3d at 520 (“When an executory contract is rejected in bankruptcy, the non-breaching party receives an unsecured claim against the bankruptcy estate for an amount equal to its damages from the breach.“). Thus, Monarch retains any covenants running
2. “CONFLICTING” CASES
Hilltop points to Chesapeake and Sanchez for its proposition that the GGA can be executory and rejectable even though it contains covenants running with the land. Chesapeake, 622 B.R. at 281–82; Sanchez, 631 B.R. at 859–60; ECF No. 84 ¶¶ 37–38. Monarch counters with Alta Mesa and Badlands for its proposition that the presence of a real property agreement within the GGA makes that contract rejection-proof. Alta Mesa Holdings, LP v. Kingfisher Midstream, LLC (In re Alta Mesa Resources, Inc.), 613 B.R. 90, 96 (Bankr. S.D. Tex. 2019); Monarch Midstream, LLC v. Badlands Prod. Co. (In re Badlands Energy, Inc.), 608 B.R. 854, 864–66 (Bankr. D. Colo. 2019); ECF No. 98 ¶¶ 62–75.
In Badlands, Judge Tyson considered a gas gathering agreement involving Monarch almost identical to the one in this case. Badlands, 608 B.R. at 864–66. Badlands presentation and procedural history, however, differs from this case. The debtor/producer in Badlands moved to sell its leases free and clear of any interest under
Next, Judge Isgur considered another gas gathering agreement with a dedication and easement from producer to gatherer. Alta Mesa, 613 B.R. at 96. Judge Isgur found the gas gathering agreement formed covenants running with the land. Id., at 99–100, 107. Citing Badlands, Judge Isgur concluded that “[c]ontracts forming real property covenants are not executory,” id., at 99, and thus cannot be rejected. Id., at 107. But as discussed earlier, Badlands did not say the agreements were not executory or could not be rejected. Badlands merely said the agreements contained covenants running with the land and those covenants remained with the land post-bankruptcy sale because the covenants are a real property interest that a bankruptcy sale cannot extinguish. Thus, Alta Mesa also holds only that covenants running with the land survive executory contract rejection.
Judge Jones waded into the conversation with Chesapeake. See generally 622 B.R. 274. Judge Jones found the gas agreement at issue had no covenants running with the land and was an executory contract. Id., at 284. That agreement included a dedication for gas produced from a well (personal property under Texas
Finally, in Sanchez Judge Isgur revisited whether a gas gathering agreement which included covenants running with the land could be executory (and therefore rejectable) despite containing covenants running with the land. Sanchez, 631 B.R. at 851. The gas gathering agreements at issue in Sanchez included a dedication of produced and unproduced gas and an easement and right-of-way. Id., at 851–53. The court turned its attention to
- “Congress granted debtors the expansive right to reject any executory contract. The existence of a real property covenant does not limit the rejection power that Congress granted to debtors. If a contract is executory, a debtor may seek rejection.” Id., at 860 (citation omitted).
- “[P]ost-rejection, a counterparty retains those contract rights that would survive a breach under applicable non-bankruptcy law.” Id., at 859.
With these two powerful maxims, Judge Isgur concluded that because a party‘s breach of a contract that includes a covenant conveying a real property interest does not result in the property interest returning to the breaching party, a debtor‘s rejection of an executory contract does not reject any real property interests conveyed by covenants in the contract. Id., at 860. Instead, the real property interest conveyed by the covenant survives rejection. Id.
Because the Code grants broad authority to chapter 11 debtors to reject any executory contract and because of the Supreme Court‘s Tempnology opinion, this Court agrees with the Sanchez Court that an executory contract, even if it contains covenants which convey real property interests, may be rejected, but the real property interests conveyed by covenants in an otherwise executory contract survive rejection of such contract.
e. BUSINESS JUDGMENT
Having determined the GGA may be rejected with any covenants with the land remaining post-rejection, the Court next reviews Hilltop‘s request to reject the GGA under the business judgment standard. J. C. Penney, 50 F.4th at 534.
Hilltop‘s Chief Restructuring Officer, Erik White, testified that the GGA‘s current terms make Hilltop operate at a perpetual loss. Mr. White stated that Hilltop‘s inability to meet its minimum compression
V. SETTING A BAR DATE FOR REJECTION CLAIMS
Hilltop has asked this Court to establish a bar date for the filing of claims related to the rejection of executory contracts and unexpired leases. ECF No. 84 ¶¶ 48–50. Monarch‘s Response does not directly address this point.
Because calculation of Monarch‘s claim is dependent upon the outcome of Hilltop‘s declaratory judgment adversary proceeding, the Court will postpone determination of Monarch‘s deadline to file a rejection claim until after the Court has entered a judgment in Adversary Proceeding No. 24-06015.
VI. CONCLUSION
For the reasons stated above, the Court will grant the Debtor‘s Motion. It is, therefore,
ORDERED that the Debtor‘s Motion to Reject Gas Gathering Agreement (ECF No. 84) is GRANTED.
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Notes
GGA, Ex. A ¶ 4.(a) Access. To the extent that Producer may contractually or lawfully do so under its leasehold interests and other property rights in the subject Leases, Producer hereby grants, convey, assign, and transfer to Gatherer a right of way and easement across the Subject Leases, and across adjoining lands in which Producer may have an interest, for the purposes of installing, using, inspecting, repairing, operating, replacing, and removing Gatherer‘s facilities (including installation of new custody transfer meters and other equipment) used or useful in the performance of this Agreement.
GGA ¶ 3.1. “Dedicated Reserves” is defined within the GGA as:Dedicated Reserves. Subject only to Producer‘s Reservations, Producer (i) exclusively dedicates and commits to the performance of this Agreement the Dedicated Reserves. ... Producer agrees to cause any existing or future Affiliates of Producer to be bound by, and to execute and join as a party, this Agreement. The dedication and commitment made by Producer and their Affiliates under this Agreement is a covenant running with the land.
GGA ¶ 1.1.[T]he interests of Producer and its Affiliates in all Gas reserves in and under, and all Gas owned or controlled by Producer or its Affiliates and produced or delivered from, (i) the Subject Leases and (ii) any other lands located with the AMI, whether now owned or hereafter acquired by Producer or its Affiliates.
GGA ¶ 3.2.Producer‘s Reservations. Producer reserves the following rights (and reasonable quantities of Gas to satisfy same) (“Producer‘s Reservations“): (i) to operate wells producing from the Dedicated Reserves as a reasonably prudent operator, (ii) to separate or process Gas using only mechanical equipment located at surface production facilities on or near wells producing from the Dedicated Reserves, (iii) to use Gas produced from the Dedicated Reserves for lease operations, (iv) to pool, communitize, or unitize Producer‘s interests in the Dedicated Reserves, and (v) to pay lessors’ royalties in kind.