Newco Energy v. EnergyTec, Incorporated , 739 F.3d 215 ( 2013 )

Case: 12-41162 Document: 00512485151 Page: 1 Date Filed: 12/31/2013
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
December 31, 2013
No. 12-41162 Lyle W. Cayce
Clerk
In the Matter of: ENERGYTEC, INCORPORATED,
Debtor
------------------------------------------------------------------------
NEWCO ENERGY,
Appellant
v.
ENERGYTEC, INCORPORATED; RED WATER RESOURCES,
INCORPORATED,
Appellees
Appeal from the United States District Court
for the Eastern District of Texas
Before DENNIS, CLEMENT, and SOUTHWICK, Circuit Judges.
LESLIE H. SOUTHWICK, Circuit Judge:
Energytec, Inc. owns and operates gas pipelines. In 2009, the company
filed a voluntary petition for bankruptcy relief under Chapter 11. The
bankruptcy court authorized a sale of a pipeline system to Red Water Resources,
Inc., but reserved for later determination whether the sale was free and clear of
Newco Energy’s right to certain fees and other interests in the pipeline. Over a
year after the sale, the bankruptcy court ruled that Newco’s rights were not
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covenants running with the land and that the sale of the pipeline system was
free and clear of Newco’s interests. The district court affirmed, and Newco
appealed. We VACATE and REMAND.
FACTS AND PROCEDURAL HISTORY
Newco’s interest in a transportation fee from Energytec’s pipeline arises
out of agreements made with Energytec’s predecessor, Mescalaro Oil & Gas, Inc.
In 1999, Mescalaro as seller and Rockwell Marketing Corporation and Producers
Pipeline Corporation as buyers entered into a letter agreement. Mescalaro
conveyed all its interest in a gas pipeline, its rights-of-way, and a processing
plant to Producers. Other assets were conveyed to Rockwell. Newco was also
a party to the agreement. In its brief to this court, Newco calls itself an
“affiliate” of Mescalaro. We are pointed to no record evidence further explaining
the relationship.
In language relevant to our later discussion of arguments about privity,
the agreement says this about Newco:
Mescalaro has reached agreement to convey certain interests in the
properties which are the subject of this Agreement to Newco
Energy, Inc. (“Newco”). Newco, as successor in interest to Mescalaro
therefore joins in the execution of this Agreement and Mescalaro
shall reserve for the benefit of Newco the acquired interests.
As partial consideration for the conveyance of the pipeline system,
Producers was required to pay Newco a “transportation fee” based on the
amount of gas flowing through the pipeline. The agreement gave Newco a
security interest and lien on the entire pipeline system to secure payment of the
transportation fee. Producers was required to obtain Newco’s consent prior to
any assignment of its interest in the pipeline. The agreement specified that
Newco’s interest in transportation fees was to “run with the land.” A separate
Assignment and Bill of Sale of the same date conveyed the pipeline system and
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other property. There, Mescalaro conveyed the interests “subject to the
Transportation Fee and other terms and provisions” of the letter agreement.
A dispute soon arose regarding the payment of transportation fees,
resulting in Newco’s suing Producers in 2002. The suit was settled in 2005 when
Energytec agreed to purchase the pipeline system from Producers. As part of the
purchase agreement, Energytec expressly agreed to assume the obligation to pay
transportation fees to Newco. In May 2009, Energytec filed for bankruptcy. It
paid the transportation fees until December 2009.
An auction of a substantial portion of the debtor’s assets, including the
pipeline system, was held in January 2010. Red Water (then known as Red
River Resources, Inc.) was the highest and best bidder. Energytec moved for the
bankruptcy court’s approval of the sale to Red Water. The motion requested that
the sale be free and clear of any liens, claims, or encumbrances, with exceptions
not relevant here. Newco objected, arguing that its interest in transportation
fees and its right to consent to any assignment ran with the land and, therefore,
the pipeline could not be sold free and clear of those interests. On February 23,
2010, the court approved the sale of the pipeline to Red Water, reserving Newco’s
objection to the sale for later determination by the court. The sale actually
occurred on April 14, 2010.
In May 2011, Newco moved to resolve the issue of whether the sale was
free and clear of its claims. After a July hearing on the motion, the bankruptcy
court ruled at a hearing in August that the transportation fee was not a
covenant running with the land. Consequently, the sale to Red Water was free
and clear of Newco’s claims. The court entered a brief written order to the same
effect on September 2, 2011. The court did not address Newco’s right to consent
to assignment of the pipeline. The district court affirmed. It mentioned the
right to consent to assignment only in passing and held that the right was not
a property interest analogous to a royalty payment.
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Newco timely appealed to this court. It argues that the sale should not
have been free and clear of its transportation fee and other rights, which Newco
argues were covenants running with the land. The debtor Energytec and Red
Water have filed a joint brief as appellees.1
DISCUSSION
“The Court of Appeals reviews the decision of a district court, sitting as an
appellate court, by applying the same standards of review to the bankruptcy
court’s findings of fact and conclusions of law as applied by the district court.”
Carrieri v. Jobs.com Inc., 393 F.3d 508, 517 (5th Cir. 2004). Because this appeal
is based on the bankruptcy court’s application of law to undisputed facts, the de
novo standard of review applies. See id.
I. Is the Appeal Moot for Failure to Obtain a Stay?
Energytec argues that Newco’s failure to stay the order authorizing the
sale of the pipeline to Red Water moots its appeal and deprives this court of
jurisdiction. Energytec relies on this statute:
The reversal or modification on appeal of an authorization under
subsection (b) or (c) of this section of a sale or lease of property does
not affect the validity of a sale or lease under such authorization to
an entity that purchased or leased such property in good faith,
whether or not such entity knew of the pendency of the appeal,
unless such authorization and such sale or lease were stayed
pending appeal.
11 U.S.C. § 363(m). It “patently protects, from later modification on appeal, an
authorized sale where the purchaser acted in good faith and the sale was not
stayed pending appeal.” Gilchrist v. Westscott (In re Gilchrist), 891 F.2d 559, 560
(5th Cir. 1990). The section “codifies Congress’s strong preference for finality
1
For purposes of this opinion we will refer, except where otherwise noted, to the
appellees collectively as “Energytec.”
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and efficiency in the bankruptcy context, particularly where third parties are
involved.” Hazelbaker v. Hope Gas, Inc. (In re Rare Earth Minerals), 445 F.3d
359, 363 (4th Cir. 2006); see also Hardage v. Herring Nat’l Bank (In re Hardage),
837 F.2d 1319, 1323 n.3 (5th Cir. 1988) (recognizing the policy of finality
expressed by Section 363(m)). By providing good faith purchasers with a final
order and removing the risks of endless litigation over ownership, Section
363(m) “allows bidders to offer fair value for estate property[,]” which “greatly
benefits both the debtor and its creditors.” In re Rare Earth Minerals, 445 F.3d
at 363.
Newco argues that it is not trying to set aside the sale to Red Water. Its
challenge is not to the sale but to the bankruptcy court’s declaration, more than
a year after the sale, that Newco’s transportation fee could be terminated
because it was not a covenant running with the land.
Energytec responds that this circuit is one of the most “unequivocal” and
“steadfast” in requiring that a stay be entered, citing In re Gilchrist and a few
other cases. Regardless of how much zeal we have displayed, what we are
protecting is the “later modification on appeal” of authorized sales. In re
Gilchrist, 891 F.2d at 560. The April 2010 sale was subject to the contingency
of Newco’s unresolved claims. Newco is not trying to modify the contingency of
that sale; it is relying on it. In August 2001, 16 months after the sale, Red
Water learned that the bankruptcy court believed the assets should be free and
clear of Newco’s claims. The sale, though, had occurred without that protection.
It is true that Red Water’s bid contained a statement that the purchase
should be free and clear of encumbrances. Yet after Newco’s objection, the sale
was approved in February 2010 still subject to the encumbrance.2 No part of the
2
The bankruptcy court’s February 23, 2010 order provided:
[T]he sale shall be free and clear of all liens, claims, interests and
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lengthy bankruptcy court record designated for appeal reveals an objection by
Red Water to closing on the sale. In its bid, Red Water reserved the right to
terminate its offer or re-bid if the debtor decided not to sell all described assets.
There is no evidence after the bankruptcy court approved the sale without
providing that it would be free and clear of Newco’s claim, that Red Water tried
to alter the sales price, withdraw, or otherwise react to the fact that the sale
would be subject to the Newco claim. Red Water decided to proceed in the face
of whatever legal and financial risks it perceived.3
This circuit has yet to address issues similar to what are raised here.
Section 363(m) has been held to apply when the challenged provision is
“integral to the sale” of the debtor’s assets, which occurs “if the provision is so
closely linked to the agreement governing the sale that modifying or reversing
the provision would adversely alter the parties’ bargained-for exchange.” In re
Trism, Inc., 328 F.3d 1003, 1007 (8th Cir. 2003).
The Second Circuit discussed Section 363(m) in an appeal by a losing
bidder at the auction of the debtor’s assets, who had not obtained a stay.
encumbrances, with any valid liens, claims, interests or encumbrances to attach
to the proceeds of [the] sale to the extent set forth below, except for those liens
granted to Red [Water] pursuant to that certain Final Order Authorizing
Debtors to Enter into Post Petition Financing Agreement entered on June 25,
2009 and as further set forth herein below, and including without limitation the
rights, interests and lien rights claimed by Newco in certain obligations to pay
transportation charges or fees asserted in connection with the Redwater Pipeline
System, including but not limited to the right to consent to the assignment of all
or any part of the Redwater Pipeline System, pending later determination as set
forth below.
(emphasis added). The appellees do not dispute that the lengthy reference to the Newco claim
is an exception to the free and clear provision.
3
Red Water’s January 2010 bid on all the relevant assets was for over $3 million. At
a June 2011 hearing, an attorney for Red Water estimated that from commencement of the
bankruptcy in May 2009 until the sale occurred in April 2010, about $9,000 in transportation
fees would have been earned. Newco did not indicate whether it agreed. If true, then about
$10,000 in transportation fees were being earned annually at that time.
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WestPoint Stevens, Inc. v. Aretex LLC (In re WestPoint Stevens, Inc.), 600 F.3d
231, 247-54 (2d Cir. 2010). The losing bidder argued that a stay was
unnecessary because it did not seek to reverse the sale order and was only
challenging the provisions related to the release of certain liens and claims and
the distribution of securities. Id. at 247. The court rejected this argument,
finding that the purchaser would not have consummated the sale without
assurance that it was acquiring control of the debtor’s business, and the
provisions for lien release, claims satisfaction, and distribution were essential
to acquisition of control. Id. at 250-51. Where a challenged provision is integral
to the sale, the court held it had no jurisdiction to review an unstayed order
once the sale occurs, except on the limited issue of whether the sale was made
to a good faith purchaser. Id. at 250-51. Here, though, Red Water did agree to
consummate the sale despite that the validity of Newco’s claims remained to be
decided, suggesting that “free and clear” was not integral to the sale.
Much closer to the facts presented here is a case in which the Tenth
Circuit held that Section 363(m) did not apply. Paige v. Jubber (In re Paige),
685 F.3d 1160, 1191 (10th Cir. 2012). There, the trustee instituted an
adversary proceeding to recover an internet domain name previously owned by
the debtor that had been purchased by Search Market Direct, Inc. (“SMDI”)
shortly after the debtor filed for bankruptcy. Id. at 1164-65. The bankruptcy
court later approved a sale order under which a third party, ConsumerInfo.com,
agreed to pay the estate’s creditors and litigate the adversary proceeding in
exchange for the estate’s promise that it would be given the domain name if
recovered. Id. at 1165. SMDI sought a stay of the sale order but did not receive
one. Id. at 1190. On appeal, ConsumerInfo argued that Section 363(m) applied
and SMDI’s appeal of the sale order was moot. Id. The court disagreed, noting
that although the sale order authorized the sale of the domain name free and
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clear of all interests, it expressly reserved SMDI’s defenses to the adversary
proceeding, pending a final ruling by the bankruptcy court. Id. ConsumerInfo
chose to move forward with the closing of the sale without a final order ruling
on SMDI’s defenses. Id. at 1191. By doing so, the court reasoned,
“ConsumerInfo accepted the risk that SMDI could still prevail on the defenses
it retained under the Sale Order” and Section 363(m) did not strip it of those
defenses. Id.
Similar to the sale order in Paige, the bankruptcy court’s order here that
approved the sale in February 2010, reserved Newco’s interests pending a final
order. Red Water went forward with the sale, accepting the risk that Newco’s
interests would survive. Of course, the February 2010 “authorization” and the
April 2010 “sale or lease,” to use the terms of Section 363(m), could not be stayed
in August 2011. Red Water gained possession of the pipeline long before the
bankruptcy court’s 2011 order. Red Water could be arguing that Newco should
have sought a stay earlier – at the time the sale was being consummated in April
2010. Such a stay would have vitiated the purpose of the February order
allowing the sale to go forward with Newco’s claims remaining a contingent
interest. Further, what would have been stayed in April 2010 was not a sale free
and clear of Newco’s claims, but a sale not free and clear of those claims. Instead
of a stay by the claimant, Red Water could have declined to go forward with the
sale under such terms – or at least objected and had the bankruptcy court
resolve whether the bid could be altered.
Refusing to apply Section 363(m) under these circumstances is not
contrary to the policy of providing innocent third parties with a reliable final
order. Requiring a stay before we can review a decision entered a year after a
sale that was not originally free and clear of a particular claim does not follow
from the text of Section 363(m) nor satisfy its purposes. We have jurisdiction
to consider the bankruptcy court’s August 2011 decision on Newco’s claims.
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II. Are Newco’s Interests Covenants Running with the Land?
Newco argues that its right to transportation fees and its right to consent
to the assignment of the pipeline constitute covenants running with the land.
Texas caselaw contains some variations on the requirements for a
covenant that runs with the land. We accept the following as a controlling
explanation: “a covenant runs with the land when it [1] touches and concerns the
land; [2] relates to a thing in existence or specifically binds the parties and their
assigns; [3] is intended by the original parties to run with the land; and [4] when
the successor to the burden has notice.” Inwood N. Homeowners’ Ass’n, Inc. v.
Harris, 736 S.W.2d 632, 635 (Tex. 1987). The Court also referred to a
requirement of privity but did not detail it. Id. An intermediate court relied on
Inwood’s discussion of covenants and said this about privity: “There must also
be privity of estate between the parties when the covenant was made.” Ehler v.
B.T. Suppenas Ltd, 74 S.W.3d 515, 521 (Tex. App. – Amarillo 2002) (citation
omitted). Newco contends that the elements are met in this case.4
Three factors are uncontested. The letter agreement executed by Newco
and Producers in 1999 stated an intent that Newco’s interests in the pipeline
run with the land. The agreement also reflected the intent to bind Newco and
Producers, as well as their assigns, and burden a thing in existence – the
pipeline. When Energytec agreed to purchase the pipeline from Producers, it
4
Energytec argues that Newco has failed to preserve the issue of whether its right to
consent to an assignment runs with the land. Energytec points to the bankruptcy court’s
bench order authorizing the sale free and clear of Newco’s interests, which did not mention the
right to consent to assignment and refers only to Newco’s right to transportation fees. Our
review of the record reveals that Newco raised its right to consent to assignments before the
bankruptcy court in its objections to Energytec’s motion for authorization to sell the pipeline
and that right was preserved in the court’s initial order authorizing the sale. Newco also
asserted its right to consent to assignments in its briefing before the district court, and the
court addressed the right to consent, although only briefly, in its order. The issue has been
adequately preserved for review by this court.
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also expressly agreed to honor Newco’s interests in the pipeline, so there is no
question that Energytec had notice. What are left is the touch-and-concern
factor and whether there was privity. We address privity first.
The transportation fee and Newco’s other interests were created in the
1999 letter agreement. Mescalaro owned the entirety of the interests in the
pipeline prior to entering into the letter agreement. The agreement describes
Newco as the “successor in interest to Mescalaro,” but there is no elaboration
about that. Newco “therefore joins in the execution of this Agreement and
Mescalaro shall reserve for the benefit of Newco the acquired interests.” The
letter agreement contains an assignment of the rights-of-way and pipeline
system to Energytec’s predecessor, Producers. It also contained this provision,
which is the source of Newco’s primary claim:
Producers shall pay NEWCO, or its designee, as successor in
interest to Mescalaro, a Transportation Fee equal to Ten Cents
($0.10) per MCF for gas volumes transported through the System
from the seven natural gas wells [thereafter described], and Twenty
Cents ($0.20) per MCF for gas volumes transported though the
pipeline from any and all wells which may be connected to the
System hereafter.
The clear language of the letter agreement meant that Mescalaro was
reserving for Newco’s benefit certain interests out of the assignment to
Producers. Energytec argues that the relevant privity is absent.
We start by identifying the privity issues that arise in defining covenants
that run with the land. The burden of the covenant is on the owner of the
pipeline and accompanying right-of-way. Privity has been met as to the
succession of ownership of the burdened property: Mescalaro conveyed to
Producers, who conveyed to Energytec, who through bankruptcy conveyed to
Red Water. Newco is either the original owner of the benefit of the covenant or
succeeded to it through some arrangement with Mescalaro, a point left unclear
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in the 1999 letter agreement which referred to Newco as Mescalaro’s “successor
in interest.” These successive relationships are at times categorized as “vertical
privity.” 9 RICHARD R. POWELL, POWELL ON REAL PROPERTY § 60.04[3][c][iv]
(2010). The privity that is allegedly missing here has been called “horizontal
privity,” which is the relationship between the original parties to the covenant.
Id. § 60.04[3][c][iii]. For those jurisdictions requiring horizontal privity, there
must be “simultaneous existing interests” or “mutual privity” between the
original parties as either landlord and tenant or grantor and grantee. Id. §
60.04[3][c][ii]-[iii].
Energytec relies strongly on a Texas case addressing horizontal privity,
though the opinion does not use that label. Wayne Harwell Props. v. Pan Am.
Logistics Ctr., Inc., 945 S.W.2d 216, 218 (Tex. App. – San Antonio 1997, writ
denied)). A Restatement describes Wayne Harwell as one of a minority of
modern cases requiring horizontal privity. RESTATEMENT (THIRD) OF PROP.:
SERVITUDES §2.4 (2000). It is a much-criticized doctrine that has been explicitly
rejected by this latest Restatement. Id. The principal rationale for the doctrine
was so “that most covenants intended to run with the land will be created in
conveyances.” Id. We must also be wary because the cited decision is not one
from the Texas Supreme Court. We are guided but not controlled by that
decision when interpreting Texas law. Transcont’l Gas Pipe Line Corp. v.
Transp. Ins. Co., 953 F.2d 985, 988 (5th Cir. 1992).
Energytec asserts that the facts of Wayne Harwell are “remarkably
similar” to those here. There are at least some similarities that we will remark
upon. An owner of land entered into an agreement with a developer. Wayne
Harwell, 945 S.W.2d at 217. The landowner, desiring to develop his property,
gave the developer Harwell a “right of first refusal to be general contractor on
any improvements to the land, as well as a 20-year assignment of 15 percent of
‘net cash flow interest’ from the land to Harwell.” Id. The land was conveyed,
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but the new owners argued they had no obligation to recognize Harwell’s claimed
rights. Id. The issue was whether the developer’s rights were covenants that
either ran with the land or at least were binding on later owners. Id.
The court held there was no privity of estate between the developer
Harwell and the land owner, meaning no conveyance of a real property interest
created the rights. Id. at 218. Further, Harwell owned no land benefitted by his
rights, making the rights personal and not binding on successors:
If no privity of estate existed between the original parties, it must
be shown that the restriction is imposed for the benefit of adjacent
land; absent this showing, the covenant will be construed as a
personal covenant with the grantor.
It is undisputed that Harwell does not own land that would be
benefitted by the restrictions on the . . . property; therefore, absent
privity of estate between the parties, we cannot find this to be an
equitable servitude.
Id. (citations omitted). The beneficiary of these rights was simply a developer
who contracted to work with the landowner. Id. Consequently, the court held
that his interest did not run with the land. Id.
The alleged remarkable similarity of facts between the present case and
Wayne Harwell requires equating Mescalaro to the landowner and Newco to the
developer. In the facts of the Texas court decision, no property was conveyed at
the time of creating the developer’s rights. Quite differently, here the
transportation fee and other benefits for Newco were created at the time of a
conveyance of real property. Mescalaro in the letter agreement and in the
assignment and bill of sale conveyed the pipeline and rights-of-way and carved
out of that conveyance the rights at issue in this appeal. All these documents
were recorded in the land records of the relevant county. Had Mescalaro
retained the transportation fee for itself when it conveyed the pipeline and other
real property interests to Producers, there would be no question about privity.
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Mescalaro and Producers were in horizontal privity, and a later assignment by
Mescalaro to Newco satisfies vertical privity. The slightly different manner in
which the 1999 letter agreement carved out the transportation fee and conveyed
interests in the pipeline property to two different grantees is not meaningfully
distinguishable. The letter agreement states that “Mescalaro has reached
agreement to convey certain interests in the properties” to Newco. The
conveyance to Newco was in the same instrument as the conveyances to other
parties, but we perceive no meaningful effect on the privity concerns. Moreover,
the fact that the documents creating the rights were recorded satisfies the
Restatement’s perception of the rationale for the privity requirement.
We conclude that if horizontal privity is a requirement of Texas law in
determining whether a covenant runs with the land, it was satisfied.
The remaining question is whether the interest touches and concerns real
property. Newco relies on Westland Oil Development Corp. v. Gulf Oil Corp.,
637 S.W.2d 903 (Tex. 1982). There, the Texas Supreme Court considered
whether an agreement to convey interests in oil and gas leases ran with the
land. Id. at 905. The court acknowledged that the tests for making this
determination were “far from absolute.” Id. at 911. One test considers whether
the covenant “affected the nature, quality or value of the thing demised,
independently of collateral circumstances, or if it affected the mode of enjoying
it.” Id. (quotations omitted). The other test mentioned by the court also takes
into account the covenant’s impact on the property’s value:
If the promisor’s legal relations in respect to the land in question
are lessened – his legal interest as owner rendered less valuable by
the promise – the burden of the covenant touches or concerns that
land; if the promisee’s legal relations in respect to that land are
increased – his legal interest as owner rendered more value by the
promise – the benefit of the covenant touches or concerns the land.
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Id. The court held that because the promise to convey interests in oil and gas
leases burdened the land, potentially rendering it less valuable, it constituted
a covenant running with the land. Id.
Newco argues that the obligation to pay transportation costs burdens the
land and makes it less valuable. Among the reasons is that it is secured by a
lien on the entire pipeline; failure to pay the fee would result in loss of
ownership and use of the pipeline through foreclosure. Newco contends that its
right to consent to assignment of the pipeline also affects the nature, quality,
and value of the pipeline system and rightly constitutes a covenant running
with the land.
Energytec relies on El Paso Refinery, LP v. TRMI Holdings, Inc. (In re El
Paso Refinery, LP), 302 F.3d 343 (5th Cir. 2002). This court considered whether
a covenant preventing subsequent owners of an oil refinery from seeking
contribution from the original owner for environmental contamination was a
covenant running with the land. Id. at 346. As in this case, the only disputed
factor concerned whether the covenant touched or concerned the land. Id. at
356. We held that a covenant allocating liability for environmental costs did not
touch or concern the land. Id. The court explained that any benefit created by
the provision affected only the original owner and had “no direct impact upon
the land itself.” Id. Further, the covenant did not compel or preclude
subsequent owners from doing anything on the land itself. Id. at 356-57. The
court characterized the environmental-liability provision as a “cost-shifting
mechanism” that was “more analogous to an obligation to assume an
encumbrance.” Id. at 357. “Under Texas law, a covenant to pay an
encumbrance does not run with the land.” Id.
We also rejected an argument that if a covenant affects the value of the
land it necessarily runs with the land. Id. The court explained that more was
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required under Texas law and that “even when a covenant impacts the value
of land, it must still affect the owner’s interest in the property or its use in order
to be a real covenant.” Id. Employing this language, Energytec maintains that
the obligation to pay transportation costs is unrelated to the use of the land
because it is based solely on the volume of gas moving through the pipeline and
has no direct impact on the land.
We disagree. The real property at issue here is a gas pipeline system and
the rights-of-way required for its placement. Newco’s interest in transportation
fees is for the use of real property, i.e., the traveling of natural gas from a
starting point along the length of the pipeline to an endpoint. The pipeline is
a subsurface road for natural gas, and a fee for the use of that road was
retained by Mescalaro and assigned to Newco. Another restriction on use is
that the pipeline cannot be assigned without Newco’s consent. These rights
impact the owner’s interest in the pipeline. Furthermore, as burdens on the
property, they also impact the pipeline’s value in the eyes of prospective buyers.
Indeed, the impact on the sale in bankruptcy has been clear, though the
financial impact has not been quantified.
Energytec argues that Newco’s transportation fee can easily (if not
cheaply) be circumvented by constructing another pipeline on different property
and abandoning the use of the original pipeline. Consequently, Energytec
argues the transportation fee “does not compel nor preclude the promisor or any
subsequent owner from doing anything on the land itself.” El Paso, 302 F.3d
at 356-57. That is not so. Whenever the owner of the “land,” i.e., the pipeline
and the rights-of-way, wants to transport natural gas along its length, the fee
to Newco is to be paid. If the “land” owner decides no longer to do so, then
Newco’s rights are dormant, subject to revival should the natural gas ever again
flow. The possibility that covenants will expire by the force of events is no
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definitional obstacle to calling them covenants running with the land.
Similarly, the overriding royalty interest on production from certain wells that
also was created in the letter agreement presumably ends when production
ceases and the oil and gas leases, on which the royalty depends, expire. But
that does not mean that so long as there is relevant production, that the royalty
is not binding on successors to the leases.
Newco’s right to transportation fees and its right to consent to assignment
are covenants running with the land. The district court erred.
III. May Newco be Compelled to Accept Money Satisfaction of its Interests?
Energytec maintains that even if we find that Newco’s interests in the
pipeline run with the land, the pipeline may still be sold free and clear of those
interests by virtue of this statute:
The trustee may sell property . . . free and clear of any interest in
such property of an entity other than the estate, only if . . . such
entity could be compelled, in a legal or equitable proceeding, to
accept a money satisfaction of such interest.
11 U.S.C. § 363(f)(5). The applicability of Section 363(f)(5) was raised in the
bankruptcy court but not resolved. Both that court and the district court
determined that Newco’s interests were not covenants running with the land,
mooting the relevance of Section 363(f)(5).
Newco contends that the monetary value of its right to future
transportation fees is impossible to estimate. Under the letter agreement,
Newco’s fees are tied to wells identified in the agreement and any future wells
that may be connected to the pipeline. According to Newco, because there is no
way to predict the number of additional wells that may eventually be connected
to the pipeline, monetization of its interest in transportation fees is impossible.
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Case: 12-41162 Document: 00512485151 Page: 17 Date Filed: 12/31/2013
No. 12-41162
The district court found, though, that an interest’s “increase in value in the
future does not mean that it cannot be given a present value.”
We do not address the valuation issue further because the failure of the
two lower courts to resolve the Section 363(f)(5) issue convinces us to remand for
further proceedings with respect to this subsection. By its express terms,
Section 363(f)(5) allows for the extinguishment of a nondebtor’s interest in the
debtor’s property only upon a showing that the nondebtor “could be compelled,
in a legal or equitable proceeding, to accept” money satisfaction of its interest.
This court has yet to consider what constitutes a qualifying legal or equitable
proceeding for purposes of Section 363(f)(5).5 The determination of what is a
qualifying legal or equitable proceeding under Section 363(f)(5) is a question to
which the bankruptcy court should give the initial answer.
We VACATE the judgment of the district court affirming the judgment of
the bankruptcy court that authorized the sale of the pipeline free and clear of
Newco’s interests. Newco’s interests, including a transportation fee, security
interest, and right to consent to assignments, are covenants running with the
land. We REMAND to the district court for further proceedings including
whether a qualifying proceeding would enable Energytec to sell the pipeline free
and clear of Newco’s interests under Section 363(f)(5).
5
The uncertainties under Section 363(f)(5) are shown by the fact some courts have held
that cram downs under 11 U.S.C. § 1129(b)(2) are qualifying proceedings. In re Grand Slam,
U.S.A., Inc., 178 B.R. 460, 462 (E.D. Mich. 1995); Terrace Chalet Apartments, Ltd. v. Fed. Nat’l
Mortg. Ass’n (In re Terrace Chalet Apartments, Ltd.), 159 B.R. 821, 829 (N.D. Ill. 1993).
Others have rejected that interpretation and have decided whether proceedings under
nonbankruptcy law could force monetization on an owner. Clear Channel Outdoor, Inc. v.
Knupfer (In re PW, LLC), 391 B.R. 25, 46-47 (B.A.P. 9th Cir. 2008); In re Jolan, Inc., 403 B.R.
866, 869-70 (Bankr. W.D. Wash. 2009).
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