Reed Smith Client Alerts

In the latest saga concerning “covenants running with the land” and the rejection of midstream gathering agreements under section 365 of the Bankruptcy Code (the Code), the Honorable Christopher Sontchi, Chief Judge of the Delaware Bankruptcy Court (the Court), issued three1 decisions holding that certain of Extraction Oil & Gas, Inc.’s (Extraction) gathering agreements with its midstream service providers did not create real property interests and, thus, that Extraction could reject such gathering agreements in its chapter 11 bankruptcy proceedings.

The Extraction opinions stand in contrast to the opinions issued by the Bankruptcy Court for the Southern District of Texas and the Bankruptcy Court for the District of Colorado in Alta Mesa Holdings LP v. Kingfisher Midstream LLC (In re Alta Mesa Resources)2 and Monarch Midstream, LLC v. Badlands Prod. Co. (In re Badlands Energy, Inc.),3 respectively, in which those courts found that the midstream agreements created “covenants running with the land,” and therefore that they were real property interests that could not be rejected as executory contracts under section 365 of the Code.

Factual Background

On June 14, 2020, Extraction and its affiliates filed chapter 11 in Delaware. On August 10, 2020, Extraction sought the Court’s authorization to reject certain of its midstream gathering agreements (the Commercial Agreements)4 with Elevation Midstream, LLC (Elevation). On September 4, 2020, Extraction initiated an adversary proceeding against Elevation, seeking a declaratory judgment that the Commercial Agreements do not create covenants running with the land such that they may be rejected as executory contracts under section 365 of the Code.

Court’s Analysis

Judge Sontchi found that not all three elements required to form a real property covenant under Colorado law were satisfied. “To create a covenant running with the land, the parties must intend to create a covenant running with the land and the covenant must touch and concern the land with which it runs.” Extraction Oil & Gas, Inc. v. Elevation Midstream, LLC, 2020 Bankr. LEXIS 2855 *43 (Bankr. D. Del. Oct. 14, 2020). “In addition … there must also be privity of estate between the original covenanting parties at the time of the covenant’s creation.” Id.

The Court conducted a covenant-by-covenant analysis regarding whether each covenant runs with the land. “In order to run with the land, each covenant must meet the elements required of real covenants. That one covenant meets these elements and runs with the land does not mean that all covenants contained in the contract run with the land, even if they do not themselves meet each of the elements.”5 Id. at *44. Thus, “[i]f only one covenant runs with the land, that covenant is enforceable against the contracting party through privity of contract, and it is also enforceable against successors-to-title in land with which the covenant is intended to run through privity of estate; the remaining covenants that do not run with the land are enforceable only against parties bound by privity of contract.” Id. at *46 (internal citations omitted).

(1) Intent to Create a Covenant Running with the Land

As to the first element, the Court found that “the only covenants in the Commercial Agreements that the parties clearly intended to run with the land” were those pertaining to dedication and delivery. Id. “To create covenants running with the land, the contracting parties must express an intent to create covenants running with the land in clear and unambiguous terms.” Id.

Because the Commercial Agreements expressly provided that “[t]he Dedication and Delivery Obligation ... are not merely contract rights but are covenants running with (and touching and concerning) all of the Dedicated Interests and, in addition, are binding upon the successors and assigns of Dedicated Interests,” the Court found that the parties intended the covenants to run with Extraction’s mineral estates. Id. at. *47. Conversely, because the parties did not expressly identify other covenants to run with the land, the Court found that the intent element was not satisfied with respect to the other covenants in the Commercial Agreements. Id.