In Re: Sabine Oil & Gas Corporation

17-1026
In re: Sabine Oil & Gas Corporation
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
SUMMARY ORDER
RULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT. CITATION TO A
SUMMARY ORDER FILED ON OR AFTER JANUARY 1, 2007, IS PERMITTED AND IS GOVERNED
BY FEDERAL RULE OF APPELLATE PROCEDURE 32.1 AND THIS COURT’S LOCAL RULE 32.1.1.
WHEN CITING A SUMMARY ORDER IN A DOCUMENT FILED WITH THIS COURT, A PARTY
MUST CITE EITHER THE FEDERAL APPENDIX OR AN ELECTRONIC DATABASE (WITH THE
NOTATION “SUMMARY ORDER”). A PARTY CITING A SUMMARY ORDER MUST SERVE A COPY
OF IT ON ANY PARTY NOT REPRESENTED BY COUNSEL.
At a stated Term of the United States Court of Appeals for the Second Circuit, held at the
Thurgood Marshall United States Courthouse, 40 Foley Square, in the City of New York on the
25th day of May, two thousand eighteen.
Present: ROSEMARY S. POOLER,
REENA RAGGI,
CHRISTOPHER F. DRONEY,
Circuit Judges.
IN RE: SABINE OIL & GAS CORPORATION,
Debtor.
___________________________________________________
SABINE OIL & GAS CORPORATION,
Plaintiff-Appellee,
v. 17-1026
NORDHEIM EAGLE FORD GATHERING, LLC,
Defendant-Appellant.1
_____________________________________________________
Appearing for Appellant: Yvonne Y. Ho, Bracewell LLP (Robert G. Burns, on the brief)
Houston, TX
1
The Clerk of Court is respectfully directed to amend the caption as above.
Thomas R. Phillips, Madelein R. Dwertman, Macey Reasoner
Stokes, Baker Botts LLP, Houston, TX (on the brief)
Appearing for Appellee: Erin E. Murphy, Kirkland & Ellis, LLP (Christopher Landau, Anna
G. Rotman, Kenneth A. Young, James H.M. Sprayregen, Ryan
Blaine Bennett, Jeremy M. Feigenbaum, on the brief), Washington,
D.C.
Amicus Curiae: James J. Proszek, Hall, Estill, Hardwick, Gable, Golden & Nelson,
P.C., Tulsa, OK and Craig Rainey, Tulsa, OK, amicus curiae GPA
Midstream Association in support of Defendant-Appellant
Nordheim Eagle Ford Gathering, LLC
James E. Mann, Duggins Wren Mann & Romero, LLP, Austin,
TX, amicus curiae Texas Pipeline Association in support of
Defendant-Appellant Nordheim Eagle Ford Gathering, LLC
Appeal from the United States District Court for the Southern District of New York (Rakoff, J.).
ON CONSIDERATION WHEREOF, IT IS HEREBY ORDERED, ADJUDGED,
AND DECREED that the judgment of said District Court be and it hereby is AFFIRMED.
Appellant Nordheim Eagle Ford Gathering, LLC appeals from the March 13, 2017
judgment of the United States District Court for the Southern District of New York (Rakoff, J.),
affirming the orders of the United States Bankruptcy Court for the Southern District of New
York (Chapman, Bankr. J.) authorizing the rejection of agreements between appellee Sabine Oil
& Gas Corporation and Nordheim under 11 U.S.C. § 365(a). We assume the parties’ familiarity
with the underlying facts, procedural history, and specification of issues for review.
Bankruptcy court decisions are subject to appellate review in the first instance by the
district court, pursuant to the statutory scheme articulated in 28 U.S.C. § 158. The same section
of the code grants jurisdiction to the circuit courts to hear appeals from the orders of the district
court. 28 U.S.C. § 158(d). Because this scheme requires district courts to operate as appellate
courts, we engage in plenary, or de novo, review of the district court decision. In re Manville
Forest Prods. Corp., 896 F.2d 1384, 1388 (2d Cir. 1990). We then apply the same standard of
review employed by the district court to the decision of the bankruptcy court. Accordingly, “[w]e
review the bankruptcy court’s factual determinations for clear error and its legal conclusions de
novo.” MBNA Am. Bank, N.A. v. Hill, 436 F.3d 104, 107 (2d Cir. 2006).
Nordheim argues on appeal that the district court and the bankruptcy court each erred by
misconstruing the relevant agreements as “personal obligations” as opposed to “real covenants
that run with the land.” Appellant’s Br. at 25. This distinction is significant, because if the
agreements constitute real covenants that run with the land they are not “executory contracts”
and the Bankruptcy Court does not have authority to approve their rejection under 11 U.S.C. §
365(a). See Gouvela v. Tazbir, 37 F.3d 295, 299 (7th Cir. 1994) (observing that “[w]hile
distinguishing between contracts and property rights might seem elusive,” it is possible for a
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court to determine that the terms of the agreement create a personal obligation, as opposed to “an
interest in real property” and when the agreement is determined to be a personal obligation as
opposed to an interest in real property, “§ 365 of the bankruptcy code is inapplicable”).
The bankruptcy court and the district court each reviewed the relevant agreements under
Texas state law, which was selected in the choice of law provision in each agreement. In addition
to the forum selection clause, bankruptcy courts must apply state law when reviewing questions
of property law. Butner v. United States, 440 U.S. 48, 55 (1979) (“Property interests are created
and defined by state law. Unless some federal interest requires a different result, there is no
reason why such interests should be analyzed differently simply because an interested party is
involved in a bankruptcy proceeding.”).
The parties agree that for a real covenant to run with the land under Texas law, it must: 1)
touch and concern the land, 2) relate to a thing in existence or specifically bind the parties and
their assigns, 3) be intended by the original parties to run with the land; and 4) the successor to
the burden must have notice. Inwood N. Homeowners’ Ass’n, Inc. v. Harris, 736 S.W.2d 632,
635 (Tex. 1987) (citing Westland Oil Devel. Corp. v. Gulf Oil Corp., 637 S.W.2d 903, 910–11
(Tex.1982)). The parties do not dispute that the agreement satisfies prongs 2-4, but disagree on
whether the agreement “touches and concerns” the land and whether the legal test includes a
requirement of horizontal privity.
We need not determine whether the agreement “touches and concerns” the land, because
we find that Texas still requires horizontal privity and that it was not satisfied in this case. The
bankruptcy court declined to decide whether horizontal privity remains a requirement under
Texas law, but concluded that even if it were, the requirement was not met by Nordheim. In re
Sabine, 550 B.R. 59, 68-70 (Bankr. S.D.N.Y. 2016).
In order for the parties to the original agreement to have been in horizontal privity with
one another, there must have been some common interest in the land other than the purported
covenant itself at the time it was executed. “‘Horizontal privity’ typically exists when the
original covenanting parties make their covenant in connection with the conveyance of an estate
in fee from one of the parties to the other. The covenant and the conveyance must be made at the
same time, although no continuing mutual relationship to the affected land is needed.” 9 Powell
on Real Property § 60.04(3)(c)(iii). The trend across the country is towards abolition of the
horizontal privity requirement, as reflected in the Restatement (Third) of Property, which has
eliminated the requirement. See Restatement (Third) of Property (Servitudes) § 2.4. The parties
dispute whether Texas has followed this trend.
The bankruptcy court found that horizontal privity remains a requirement under Texas
law and that the agreement between Sabine and Nordheim failed to satisfy that requirement.2 In
re Sabine, 550 B.R. at 68-70. On the first point, the bankruptcy court observed that
2
The district court did not reach the issue of horizontal privity because it determined that the
agreement failed to “touch and concern” the land. In re Sabine, 567 B.R. 869, 877 n. 5 (S.D.N.Y.
2017).
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[N]either [party] has identified any authority affirmatively indicating that horizontal
privity of estate between the covenanting parties is no longer a requirement for a
covenant to run with the land. Therefore, absent any actual authority to the contrary, the
Court considers horizontal privity of estate in its analysis under Texas law.
Id. at 68. When applying state law, we are tasked with applying the law of the state as it exists. It
would be improper for us to read a traditional requirement of real covenants out of Texas state
law when there is no Texas law instructing courts to do so. See SimplexGrinnell LP v. Integrated
Sys. & Power, Inc., 642 F. Supp. 2d 206, 213 (S.D.N.Y. 2009) (“Binding precedent is not
established by silence.”). Accordingly, we agree with the bankruptcy court and find that
horizontal privity remains a requirement of Texas real covenants. See Davis v. Vidal, 151 S.W.
290, 291 (Tex. 1912) (requiring privity of estate “between the original lessor and the
undertenant”); Flanniken v. Neal, 4 S.W. 212, 214-15 (Tex. 1887) (concluding covenant ran with
land because it “entered into and formed a part or parcel of the contract by which, and of the
consideration for which, the grant of land was made.”); see also Westland, 637 S.W.2d at 910-11
(explaining that required privity between parties “must be a mutual or successive relationship to
the same rights of property”).
Nordheim argues that horizontal privity of estate is established through the separate
agreements conveying the pipeline easement and a separate parcel of land. The bankruptcy court
determined that this separate conveyance was insufficient to establish horizontal privity of estate.
In re Sabine, 550 B.R. at 68-69. The bankruptcy court explained that Nordheim failed to identify
any authority for the proposition that the horizontal privity of estate prong is satisfied if
the covenanting parties have horizontal privity of estate only with respect to property
separate from the property burdened by the covenant at issue. Instead, Nordheim . . .
argue[s], without support, that horizontal privity of estate exists through the conveyance
of any land ‘involved’ in the covenants at issue. Again, this overly broad conception of
the horizontal privity of estate requirement is inconsistent with the historical paradigm as
well as the very caselaw Nordheim . . . cite[s].
Id. at 69. We agree with the bankruptcy court that this separate conveyance cannot establish
horizontal privity of estate between the parties. Indeed, both cases cited by Nordheim are cases
in which Texas courts found there was no privity of estate. In Panhandle & S.F. Ry. Co. v.
Wiggins, the Texas Court of Appeals explicitly held that “[t]here is no contention that any
portion of the land involved . . . was conveyed by the contract or otherwise, and there was,
therefore, no privity of estate between the parties.” 161 S.W.2d 501, 505 (Tex. App. 1942); see
also Wayne Harwell Props. v. Pan Am. Logistics Ctr., Inc., 945 S.W.2d 216, 218 (Tex. App.
1997) (“For a covenant to run with the land at law, and so be enforceable at law so as to bind
successors in title, the covenant must be made between parties who are in privity of estate at the
time the covenant is made, and must be contained in a grant of the land or in a grant of some
property interest in the land.”). The Texas Appeals Court case Clear Lake Apartment, Inc. v.
Clear Lake Utils. Co., is on point. 537 S.W.2d 48 (Tex. App. 1976). In that case, the Texas court
held that the contract at issue “did not create any privity of estate: it was not part of any
transaction conveying the land involved, or any easement in it, between the parties.” Id. at 51.
The contract at issue in Clear Lake involved agreements to construct facilities “to serve Said
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Land in existing easements adjoining Said Land.” Id. Regarding the horizontal privity
requirement, there is no meaningful legal distinction between the contract in Clear Lake and the
one at issue here. Neither contract conveyed a property interest in subject land (in this case, the
mineral estate). Accordingly, both fail to establish horizontal privity of estate and therefore both
fail to create a real covenant.
Nordheim argues in the alternative that even if the agreements did not create real
covenants, they created equitable servitudes that nonetheless create a property interest that
cannot be rejected under 11 U.S.C. § 365. The parties rely on the same case for the definition of
equitable servitudes under Texas law:
[A] covenant that does not technically run with the land can still bind successors to the
burdened land as an equitable servitude if: (1) the successor to the burdened land took its
interest with notice of the restriction, (2) the covenant limits the use of the burdened land,
and (3) the covenant benefits the land of the party seeking to enforce it.
Reagan Nat. Advert. of Austin, Inc. v. Capital Outdoors, Inc., 96 S.W.3d 490, 495 (Tex. App.
2002) (internal citations omitted).
There is simply no colorable argument that these agreements created an equitable
servitude because there is no benefit to real property of Nordheim. It is Nordheim as an entity—
not its real property—that is benefited by the agreement. The district court offered the same
analysis when it held there was no equitable servitude created by the agreements. In re Sabine,
567 B.R. 869, 877 (S.D.N.Y. 2017) (“[T]he Agreements benefit only appellants, not their land.
Through the Agreements, appellants are entitled to receive fees for processing delivered gas and
condensate, regardless of where that process takes place, and thus the Agreements themselves do
not render more valuable the land on which appellants have located their processing facilities.”).
We have considered the remainder of Nordheim’s arguments and find them to be without
merit. Accordingly, the order of the district court hereby is AFFIRMED.
FOR THE COURT:
Catherine O’Hagan Wolfe, Clerk
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