Sabine Court Gives “Non-Binding” Ruling That Gathering Agreements Are Not Covenants Running with the Land Under Texas Law

March 8, 2016 | Insights



After extensive briefing and hearing oral arguments related to Sabine’s motion to reject two gathering agreements with Nordheim Eagle Ford Gathering as well as two gathering and handling agreements with HPIP Gonzales Holdings, U.S. Bankruptcy Judge Shelley Chapman ruled that the four agreements may be rejected by Sabine.

At a subsequent hearing on March 8, 2016, Judge Chapman definitively ruled4 that Sabine had satisfied its “business judgment” requirement, and allowed the rejection of all four agreements.  Since there had been no evidence presented that Sabine was acting in “bad faith, whim or caprice,” it had met the requisite showing that the contracts should be rejected as burdensome. Judge Chapman also ruled that, in her view, since the covenants at issue were not covenants running with the land, the covenants could not be enforceable as equitable servitudes. The portion of her ruling related to whether the covenants at issue are covenants running with the land or equitable servitudes is “non-binding” due to Bankruptcy Rule 7001 and 2nd Circuit jurisprudence.5

Similar briefing is taking place in the Quicksilver bankruptcy case, with oral arguments haven taken place on Friday, March 4, 2016, and rulings to follow in the future. Amicus briefs have been filed by several midstream players, emphasizing the importance of this issue on the industry.  In each case, local real estate law will apply.6 This will be an ongoing question in oil and gas bankruptcies that will turn on specific facts, the language of each contract, applicable state law regarding property rights and covenants running with the land, and how the particular presiding court construes applicable law.

If you have questions on this topic or need more information, please contact one of the following Jackson Walker attorneys:

Bruce Ruzinsky, 713.752.4204, bruzinsky@jw.com
Matt Cavenaugh, 713.752.4284, mcavenaugh@jw.com
Mike Pearson, 713.752.4311, mpearson@jw.com
Amy Baird, 713.752.4525, abaird@jw.com
Stephanie Chandler, 210.978.7704, schandler@jw.com