On December 20, 2019, Judge Marvin Isgur in the U.S. Bankruptcy Court for the Southern District of Texas (Houston Division) entered a memorandum opinion which held that debtors' midstream gathering agreements formed real property covenants "running with the land" under Oklahoma law - and such agreements could not be subject to rejection under section 365 of the Bankruptcy Code. See 11 U.S.C. section 365(a) (allowing a debtor-in-possession, "subject to the court's approval," to "assume or reject any executory contract.").
This decision appears to contravene directly the seminal holding in 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) (Sabine), which held that the gathering agreements in question did not create covenants running with the land and thus could be rejected under Texas law. The Alta Mesa Bankruptcy Court noted that the "requirements to form a real property covenant in Texas mirror those in Oklahoma," but "[t]he Court assumes that unique facts in Sabine led to that court's conclusions [to the contrary]." Alta Mesa Holdings LP v. Kingfisher Midstream LLC (In re Alta Mesa Res., Inc.), No. 19-03609, 2019 Bankr. LEXIS 3859, at *21 (Bankr. S.D. Tex. Dec. 20, 2019). Judge Isgur went on to state, however, that 2[t]o the extent that the pronouncements in Sabine were intended to be generalized, this Court must reject them." Id.
On September 12, 2019, Debtors Alta Mesa Resources, Inc. and Oklahoma Energy Acquisitions, LP (the Debtors or Alta Mesa) initiated an adversary proceeding against Defendants Kingfisher Midstream, LLC and Oklahoma Produced Water Solutions, LLC (together, Kingfisher), seeking, in part, a declaratory judgment that the gathering agreements may be rejected as executory contracts under section 365 of the Bankruptcy Code.
Judge Isgur found that all three elements required to form a real property covenant under Oklahoma law were satisfied: "First, the covenant must touch and concern real property. Second, there must be privity of estate. Third, the original parties to the covenant must have intended to bind successors." Id. at *14.
(1) The midstream agreements "touched and concerned" the Debtors' oil and gas leases.
As to the first element, Judge Isgur found that gathering agreements "touch and concern" the oil and gas leases because "both the benefits and burdens of the covenants affect the value of Alta Mesa’s real property." Id. at *22. Judge Isgur writes that: "Unlike in Sabine, where the court focused its inquiry on a fee mineral estate, the relevant starting point here is Alta Mesa’s leasehold interests." Id. at *25 (emphasis added).1 According to Judge Isgur, "[a]n oil and gas lease is distinguishable from a fee simple mineral estate. Although overlapping in many respects, a fee mineral estate contains a separate collection of rights." Id. at *24.2 Unlike a fee mineral estate, "[a]ll of the property interests associated with an oil and gas lease are necessary for the lessee to successfully explore and produce his reserves." Id. (emphasis added).