Newco Energy v Energytec Inc
Filing
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MEMORANDUM OPINION AND ORDER AFFIRMING BANKRUPTCY COURT AND RESOLVING APPEAL FROM THE UNITED STATES BANKRUPTCY COURT FOR THE EASTERN DISTRICT OF TEXAS SHERMAN DIVISION (CASE NO. 09-41477). Signed by Judge Richard A. Schell on 9/30/2012. (pad, )
IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF TEXAS
SHERMAN DIVISION
NEWCO ENERGY, INC., et al.,
Appellant,
v.
ENERGYTEC, INC., et al.
Appellees.
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Case No. 4:11-cv-737
MEMORANDUM OPINION AND ORDER AFFIRMING BANKRUPTCY COURT AND
RESOLVING APPEAL FROM THE UNITED STATES BANKRUPTCY COURT FOR
THE EASTERN DISTRICT OF TEXAS – SHERMAN DIVISION (CASE NO. 09-41477)
This is an appeal from a final order of the United States Bankruptcy Court for the Eastern
District of Texas Sherman Division. Appellant, Newco Energy, Inc. seeks reversal of the
bankruptcy court’s September 2, 2011 order holding that the property sold to Red River
Resources, Inc. (the Redwater Pipeline System) by Energytec, Inc. pursuant to the bankruptcy
court’s February 23, 2010 order authorizing the sale was transferred free and clear of Newco’s
interest in receiving transportation fees based on the volume of gas flowing through the
Redwater Pipeline. Having reviewed the bankruptcy court’s decision and the parties’ briefs, this
court finds that the bankruptcy court’s decision should be AFFIRMED.
I. JURISDICTION
This court has jurisdiction under 28 U.S.C. § 158(a)(1) to hear an appeal from a final
order of the bankruptcy court. A timely notice of appeal was filed. See FED. R. BANKR. P.
8002(a). Appellees assert that this appeal is moot because Appellant failed to move for a stay of
the sale in anticipation of this appeal. See 11 U.S.C. § 363(m). This argument is misplaced.
Section 363(m) provides that a bankruptcy court’s authorization of a sale of property under 11
U.S.C. § 363(b) to a good faith purchaser cannot be reversed or modified unless the sale was
stayed pending appeal. In re Ginther Trusts, 238 F.3d 686, 688-89 (5th Cir. 2001). In this
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instance, the bankruptcy court’s authorization was contingent upon a later determination of
Newco’s interest in the property; therefore a stay of the sale was unnecessary. Further, Appellant
is not now seeking to reverse or modify the sale but is only seeking review of the bankruptcy
court’s determination of its right to be paid transportation fees by future owners of the Redwater
Pipeline System. For that reason, section 363(m) is inapposite, and the appeal is not moot.
II. STANDARD OF REVIEW
In general, a district court reviews a bankruptcy court’s conclusions of facts for clear
error and conclusions of law de novo. In re Texas Pig Stands, Inc., 610 F.3d 937, 941 (5th Cir.
2010). The clear error standard is not used when the court from which the appeal is taken applied
legal principles to essentially undisputed facts. Moore v. M/V Angela, 353 F.3d 376, 388 (5th
Cir. 2003). Because the parties do not dispute that Energytec originally assumed an obligation to
pay transportation fees to Newco, the court will review the determination of the nature of
Newco’s interest as a covenant running with land de novo.
III. BACKGROUND
Newco Energy, Inc. is a creditor in Energytec, Inc.’s bankruptcy action and a successorin-interest to Mescalaro Oil & Gas, Inc. Appellant’s Br. 9. In 1999, Mescalaro conveyed
ownership of all its right, title and interest in a gas processing plant, pipeline system, and real
property on which it is situated (together the “Redwater Pipeline System”) to Producers Pipeline
Corporation. Id. Simultaneously, Mescalaro’s interests in two oil and gas leases connected to the
system were conveyed to Rockwall Marketing Corporation. Id. Both assignments were subject to
a separate, contemporaneous agreement in which Producers, in consideration for the conveyance
from Mescalaro, would pay Newco a “transportation fee” based on the volume of gas flowing
through the Redwater Pipeline and required Producers to obtain Newco’s consent before
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assigning its interest in the Pipeline. Id. at 10. Newco was given a security interest and lien on
the entire Redwater Pipeline System in the event that the transportation fees were not paid. Id. A
dispute arose between Newco and Producers over the payment of the transportation fees in 2002.
Id. at 11. As part of the settlement of that dispute, Energytec acquired the interests of both
Rockwall and Producers and assumed the obligation to pay transportation fees to Newco. Id.
Energytec filed for bankruptcy on May 13, 2009. Newco submitted a claim as a creditor
for the transportation fees it was owed. Id. at 9. Energytec filed a Motion for Approval of Sale
Pursuant to 11 U.S.C. § 363 Free and Clear of Liens, Claims and Encumbrances on January 28,
2010, requesting authorization from the bankruptcy court to convey the Redwater Pipeline
System to Red River Resources, Inc. Id. at 11. Newco filed an objection to the motion on
February 5, 2010. Id. at 11-12. On February 8, 2010, the bankruptcy court held a hearing on the
Debtor’s motion. See Hr’g Tr., Feb. 8, 2010. Newco indicated that it did not object to the sale of
the Pipeline System to Red River. Hr’g Tr. 8-11, Feb. 8, 2010. Instead, the parties indicated to
the bankruptcy court that they were working to resolve Newco’s claim and agreed to delay
submitting the issue for determination to the court. Id. Energytec does not dispute that earlier it
had assumed an obligation to pay the transportation fee to Newco. Appellees’ Br. 9. Indeed,
Energytec indicated to the bankruptcy court that $15,000 had been set aside to satisfy Newco’s
claim. Hr’g Tr. 27, June 20, 2011.
The bankruptcy court subsequently entered an order on February 23, 2010 granting the
Debtor’s motion contingent upon a later determination of Newco’s rights. Appellant’s Br. 12.
Newco filed a Motion to Determine Objection to Debtor’s Motion for Approval of Sale Pursuant
to 11 U.S.C. § 363 Free and Clear of Liens, Claims and Encumbrances to the bankruptcy court
on May 3, 2011 after the parties reached an impasse. Id. at 13. The issue before the court was
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whether Newco’s interest in receiving transportation fees based on the volume of gas pumped
through the pipeline was an interest in real property that created a covenant running with the land
and burdened future owners of the Redwater Pipeline System. Hr’g Tr., June 20, 2011. The
bankruptcy court denied Newco’s motion in an oral order on August 22, 2011 (Hr’g Tr., Aug.
22, 2011) and in a subsequent written order on September 2, 2011.
IV. ANALYSIS
The parties raise three issues on appeal: (1) whether the bankruptcy court’s determination
regarding the nature of Newco’s interests under state-based common law constituted an
impermissible judicial action by a non-Article III court under Stern v. Marshall, 131 S. Ct. 2594
(2011); (2) whether the bankruptcy court erred in determining that Newco’s interests are not
covenants running with the land that bind subsequent purchasers; and (3) whether the bankruptcy
court erred in determining that Red River’s purchase of the Redwater Pipeline System was free
and clear of Newco’s interest under 11 U.S.C. § 363(f).
A. The bankruptcy court did not err in determining the nature of Newco’s interest
under Texas law.
Appellees highlight that Newco failed to raise the first issue in the Bankruptcy court. “[I]t
is well established that [the district court does] not consider arguments or claims not presented to
the bankruptcy court.” In the Matter of Gilchrist, 891 F.2d 559, 561 (5th Cir. 1990). Although
Newco’s argument aims at the bankruptcy court’s subject-matter jurisdiction, “valid procedural
rules cannot be ignored just because the jurisdictional decision is being challenged rather than
the decision on the merits.” Id. Stern was decided on June 23, 2011—three days after the
bankruptcy court heard oral arguments on Newco’s objection and approximately two months
before the bankruptcy court entered its oral order. Appellees’ point, that Newco could have filed
supplemental briefing with the bankruptcy court if it believed Stern to be relevant to the issues in
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this case, is well-taken. Appellees’ Br. 5. Still Stern does not operate to strip the bankruptcy
court of its jurisdiction to determine Newco’s interest. Newco is a creditor in Energytec’s
bankruptcy action and a resolution of its claim as such necessarily requires a determination of its
interest. The bankruptcy court is empowered to allow or disallow Newco’s claim to the
transportation fee it asserts it is owed pursuant to its covenant with Energytec under 11 U.S.C. §
502 and to determine whether that interest binds Red River as a purchaser of the Redwater
Pipeline System under 11 U.S.C. § 363(f). Thus, the crux of the appeal is whether the bankruptcy
court erred in determining that Newco’s interests are not covenants running with the land that
bind future Pipeline owners.
B. The bankruptcy court did not err in holding that Newco’s interest is not a covenant
running with the land.
In Texas, “for a party to enforce an agreement burdening land against a successor to the
party with whom he covenanted, the agreement must run with the land.” Wayne Harwell Props.
v. Pan Am. Logistics Ctr., Inc., 945 S.W.2d 216, 218 (Tex. App.—San Antonio 1997, writ
denied). There are two types of covenants that could bind subsequent purchasers under Texas
law: real covenants and equitable covenants. Id. An equitable covenant will run when “the
restriction is imposed for the benefit of adjacent land” and the subsequent purchaser has notice of
the restriction. Id. A real covenant, or covenant that runs with the land at law, exists if the
covenant (1) touches and concerns the land; (2) relates to a thing in existence or specifically
binds the parties and their assigns; (3) the original parties to the covenant intend it to run with the
land; (4) the successor to the burden has notice; and (5) there is privity of estate between the
parties to the agreement. Id. Privity of estate “means there must be a mutual or successive
relationship to the same rights of property.” Westland Oil Dev. Corp. v. Gulf Oil Corp., 637
S.W.2d 903, 910-11 (Tex. 1982).
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There is no evidence in the record that Newco owns any adjacent property that could be
benefitted by payment of the transportation fees in question. Therefore, the covenant cannot bind
Red River as an equitable covenant under Texas law. The parties do not dispute that the
agreement between Mescalaro and Producers expressly attempts to bind the parties and their
assigns, evidences intent to run with the land, and that Red River had notice of Newco’s interest.
However, the agreement fails to satisfy the requirements of a covenant running with the land at
law because it does not touch and concern the land. Therefore, it is unnecessary for this court to
reach the parties’ arguments on whether privity exists.
A covenant touches and concerns the land when it affects a subsequent owner’s use and
enjoyment of the land or provides some benefit that affects the land. See Westland, 637 S.W.2d
at 911; see also Inwood N. Homeowners’ Ass’n, Inc. v. Harris, 736 S.W.2d 632, 635 (Tex.
1987). More specifically, “a covenant will run if it affect[s] the nature, quality or value of the
thing demised, independently of collateral circumstances, or if it affect[s] the mode of enjoying
it.” Westland, 637 S.W.2d at 911 (internal quotation marks omitted). Some Texas cases have
relied on section 537 of the Restatement of Property, which states that “successors in title to land
respecting the use of which the owner has made a promise can be bound as promisors only if (a)
the performance of the promise will benefit the promisee or other beneficiary of the promise in
the physical use or enjoyment of the land possessed by him, or (b) the consummation of the
transaction of which the promise is a part will operate to benefit and is for the benefit of the
promisor in the physical use or enjoyment of land possessed by him, and the burden on the land
of the promisor bears a reasonable relation to the benefit received by the person benefited.” See
e.g., Inwood, 736 S.W.2d at 635. When the burden of a covenant touches and concerns the land,
the “promisor’s legal relations in respect to the land are lessened—his legal interest as owner
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rendered less valuable by the promise.” Westland, 637 S.W.2d at 911. However, the mere fact
that a covenant impacts the value of the land is not sufficient for it to be considered a covenant
running with the land—“it must still affect the owner’s interest in the property or its use in order
to be a real covenant.” In the matter of: El Paso Refinery, 302 F.3d 343, 357 (5th Cir. 2002);
compare Inwood, 736 S.W.2d at 635 (holding that a covenant to pay maintenance assessments
for the purpose of repairing and improving the common areas and recreational facilities of a
subdivision touches and concerns the land), with Wayne Harwell, 945S.W.2d at 217 (holding
that the “assignment of an interest in the cash flow from land is only a personal covenant and
cannot run with or burden that land”).
The agreement to pay transportation fees to Newco “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; see also Veterans Land Bd. v. Lesley, 281 S.W.3d 602, 621 (Tex. App.—Eastland 2009,
pet. granted), aff’d in part, rev’d in part on other grounds, 352 S.W.3d 479 (Tex. 2011)
(“Covenants that run with the land generally burden or restrict the use of the land.”). The only
connection the transportation fees have to the property is that the amount of the fee is measured
by the volume of gas flowing through the pipeline. Newco’s interest is merely a personal
contractual arrangement to pay an encumbrance and “[u]nder Texas law, a covenant to pay an
encumbrance does not run with the land.” El Paso, 302 F.3d at 357 (citing Talley v. Howsley,
170 S.W.2d 240, 243 (Tex. Civ. App.—Eastland 1943) aff’d, 176 S.W.3d 158 (Tex. 1943). Of
course, owners of land “may contract with respect to their property as they see fit, provided the
contracts do not contravene public policy.” Inwood, 736 S.W.2d at 634. But in this instance, to
conclude that the obligation to pay the transportation fee is binding upon future owners would
create a burden on the land that would “hamper and impede real estate transactions to the
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detriment of owners, purchasers and agents” without a “compensating advantage which prevents
it from being on the whole a deterrent to land use and development.” Blasser v. Cass, 314
S.W.2d 807, 809 (Tex. 1958).
Newco makes clear in its brief that the sale did not include the oil and gas leases and
wells in which Newco claims overriding royalties, so royalties are not at issue in this appeal.
Appellant’s Br. 12-13. Newco seems to be asserting, however, that its interest in the
transportation fees is analogous to a royalty that would be paid pursuant to an oil and gas lease
and it is therefore a property interest. Id. at 17. “All land in Texas is comprised of separate
corporeal estates in the minerals and in the surface.” In re Estate of Slaughter, 305 S.W.3d 804,
808 (Tex. App.—Texarkana 2010, no pet.). The mineral estate encompasses five interests: “1)
the right to develop, 2) the right to lease, 3) the right to receive bonus payments, 4) the right to
receive delay rentals, and 5) the right to receive royalty payments.” Id. Royalties, bonus
payments, and delay rentals “have a well understood meaning in the oil and gas business.” Id.
Newco’s transportation fee interest is not a property interest simply because its value is
determined by the volume of gas in the Redwater Pipeline System. Similarly, Newco’s right to
consent to future conveyances of the Redwater Pipeline System is not a property interest.
C. The bankruptcy court did not err in holding that Red River’s purchase of the
Redwater Pipeline System was free and clear of Newco’s interest under 11 U.S.C. §
363(f).
Newco’s third argument is that the Redwater Pipeline System cannot be sold free and
clear of its interest under 11 U.S.C. § 363. Section 363(f)(5) permits the sale of property from a
bankruptcy estate free and clear of any interest in the property held by an entity other than the
estate if “such entity could be compelled, in a legal or equitable proceeding, to accept a money
satisfaction of such interest.” Newco asserts that Energytec and Red River offered no evidence
and cited no authority to show that Newco could be compelled to accept a money satisfaction of
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its interest. Appellant’s Br. 13. Yet Newco similarly fails to offer any support for its contention
that it could not be compelled to accept a money satisfaction of its interest. Newco’s main
argument in support of this assertion is that the value of its interest cannot be readily determined
because it may increase in value if additional wells are attached to the Redwater Pipeline System
in the future. Id. 14. The mere fact that an interest may increase in value in the future does not
mean that it cannot be given a present value. Newco’s interest could also decrease in the future if
the wells connected to the pipeline ceased production. Appellees do not contend that Newco’s
interest is without value. Indeed, “[t]here is nothing in the nature or operation of a restrictive
covenant that requires it to run with the land in order to be valid.” Tarrant Appraisal Dist. v.
Colonial Country Club, 767 S.W.2d 230, 235 (Tex. App.—Fort Worth 1989, writ denied).
Nevertheless, because Newco’s interest is not a covenant running with the land at law, the value
of its interest can be readily ascertained based on the amounts owed from the date of the last
payment it received until the date of the sale to Red River.
V. CONCLUSION
Based on the foregoing, the court hereby AFFIRMS the holdings of the bankruptcy
court.
IT IS SO ORDERED.
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SIGNED this the 30th day of September, 2012.
_______________________________
RICHARD A. SCHELL
UNITED STATES DISTRICT JUDGE
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