Sabine Oil & Gas Corp. v. HPIP Gonzales Holdings, LLC (In re Sabine Oil & Gas Corp.)

• Decision Date: 03 May 2016
• Docket Number: Adversary Proceeding Case No. 16-01043 SCC,Adversary Proceeding Case No. 16-01042 SCC,Case No. 15-11835 SCC
• Citation: 550 B.R. 59
• Parties: In re: Sabine Oil & Gas Corporation, et al., Debtors. Sabine Oil & Gas Corporation, et al., Plaintiffs, v. HPIP Gonzales Holdings, LLC, Defendant. Sabine Oil & Gas Corporation, et al., Plaintiffs, v. Nordheim Eagle Ford Gathering, LLC, Defendant.
• Court: U.S. Bankruptcy Court — Southern District of New York

550 B.R. 59

In re: Sabine Oil & Gas Corporation, et al.¹ Debtors.

Sabine Oil & Gas Corporation, et al., Plaintiffs

v.HPIP Gonzales Holdings, LLC, Defendant.

Sabine Oil & Gas Corporation, et al., Plaintiffs

v.Nordheim Eagle Ford Gathering, LLC, Defendant.

Case No. 15-11835 SCC

Adversary Proceeding Case No. 16-01042 SCC

Adversary Proceeding Case No. 16-01043 SCC

United States Bankruptcy Court, S.D. New York.

Signed May 3, 2016

KIRKLAND & ELLIS LLP, KIRKLAND & ELLIS INTERNATIONAL LLP, 601 Lexington Avenue, New York, N.Y. 10022, By: James H.M. Sprayregen, P.C., Paul M. Basta, P.C., Jonathan S. Henes, P.C., Christopher Marcus, P.C., 300 North LaSalle, Chicago, IL 60654, By: Gabor Balassa, P.C., Ryan Blaine Bennett, Esq., A. Katrine Jakola, Esq., Devon M. Largio, Esq., Counsel to the Debtors

BRACEWELL & GIULIANI LLP, 1251 Avenue of the Americas, 49^th Floor, New York, N.Y. 10020, By: Robert G. Burns, Esq., 711 Louisiana St., Suite 2300, Houston, TX 77002, By: William A. (Trey) Wood III, Esq., Jason G. Cohen, Esq., Counsel to Nordheim Eagle Ford Gathering, LLC

LATHAM & WATKINS LLP, 885 Third Avenue, New York, N.Y. 10022, By: Keith A. Simon, Esq., Paul A. Serritella, Esq., Annemarie V. Reilly, Esq., Counsel to HPIP Gonzales Holdings, LLC

MEMORANDUM DECISION ON (I) MOTIONS OF NORDHEIM EAGLE FORD GATHERING, LLC AND HPIP GONZALES HOLDINGS, LLC FOR JUDGMENT ON THE PLEADINGS AND (II) DEBTORS' OMNIBUS MOTION FOR SUMMARY JUDGMENT

HONORABLE SHELLEY C. CHAPMAN

, UNITED STATES BANKRUPTCY JUDGE:

Before the Court are (i) the motions of Nordheim Eagle Ford Gathering, LLC (“Nordheim”) and HPIP Gonzales Holdings, LLC (“HPIP”), respectively, for judgment on the pleadings with respect to the claims for declaratory judgment brought by the Debtors in the above-captioned adversary proceedings and the declaratory judgment counterclaims asserted by Nordheim and HPIP² against the Debtors (respectively, the “Nordheim Motion” and the “HPIP Motion,” and together, the “Defendant Motions”) and (ii) the Debtors' omnibus motion for summary judgment with respect to their claims for declaratory judgment and Nordheim and HPIP's declaratory judgment counterclaims (the “SJ Motion”). The Defendant Motions and the SJ Motion seek resolution of the parties' dispute as to whether certain covenants in the Nordheim Agreements (as defined below) and the HPIP Agreements (as defined below) “run with the land” under Texas law as real covenants or as equitable servitudes.

This dispute initially arose when the Debtors filed their Omnibus Motion for Entry of an Order Authorizing Rejection of Certain Executory Contracts pursuant to section 365 of the Bankruptcy Code

in their chapter 11 cases seeking to reject the Nordheim Agreements and the HPIP Agreements (the “Rejection Motion”).³ The Court granted the Rejection Motion,⁴ but concluded that, in the procedural context of a motion to reject an executory contract, it could not make a final determination as to whether the covenants at issue were covenants “running with the land,” consistent with the Second Circuit's decision in Orion Pictures Corp. v. Showtime Networks.⁵ In authorizing the rejection of the Nordheim Agreements and the HPIP Agreements, the Court provided its non-binding analysis on the “running with the land” issue, but noted that further proceedings would be necessary in order to enable the Court to render a binding ruling on the issue. The Debtors then commenced these adversary proceedings against Nordheim and HPIP seeking a declaratory judgment that the covenants contained in the Nordheim Agreements and the HPIP Agreements do not run with the land.

For the reasons stated in the Rejection Decision,⁶ and for the additional reasons stated herein, the Court finds that the covenants at issue do not run with the land either as real covenants or as equitable servitudes, and therefore it denies the Defendant Motions and grants the SJ Motion.

Background

The Debtors are an independent energy company engaged in the acquisition, production, exploration, and development of onshore oil and natural gas properties in the United States. On July 15, 2015, the Debtors filed petitions for relief under chapter 11 of the Bankruptcy Code with this Court, and are operating their businesses and managing their properties as debtors in possession pursuant to sections 1107(a)

and 1108 of the Bankruptcy Code. Familiarity with the background of the Debtors' businesses and chapter 11 cases⁷ and with the Rejection Decision is assumed.

A. The Nordheim Agreements and the HPIP Agreements

One of the Debtors, Sabine Oil & Gas Corporation (“Sabine”), is a party to two contracts with Nordheim, each dated January 23, 2014, relating to the gathering of gas and condensate produced by Sabine from a designated area (the “Nordheim Agreements”). Sabine is also party to two contracts with HPIP, one dated May 3, 2013 and the other dated as of May 2014, relating to the gathering, handling, and disposal of oil, gas, and water produced by Sabine from a designated area (the “HPIP Agreements”). In the Rejection Decision, the Court summarized many of the central provisions of the Nordheim Agreements and the HPIP Agreements and incorporates that summary by reference here.⁸

One of the Nordheim Agreements, the Gas Gathering Agreement, contemplates a separate and subsequent conveyance from Sabine to Nordheim of a mutually agreed tract of land in connection with Nordheim's construction and operation of a gathering system. Pursuant to a Warranty Deed dated March 11, 2014, Sabine conveyed to Nordheim approximately 17 acres of a 38–acre surface tract that Sabine acquired in October 2013 (the “Nordheim Parcel”) so that Nordheim could construct a nearby gathering facility. Also on March 11, 2014, Sabine conveyed to Nordheim a Pipeline and Electrical Easement (the “Pipeline Easement”), which granted Nordheim a 90–foot pipeline and electrical easement over the remaining 21 acres of the Nordheim Parcel, so that Nordheim could install and operate two pipelines and one electrical utility line over that tract of land.

B. Procedural History

On September 30, 2015, the Debtors filed the Rejection Motion. By the Rejection Motion, the Debtors sought Court approval to reject the Nordheim Agreements and the HPIP Agreements pursuant to section 365(a) of the Bankruptcy Code

. On October 8, 2015, Nordheim and HPIP each filed an objection to that motion.⁹ On October 14, 2015, the Debtors filed an omnibus reply in support of the Rejection Motion.¹⁰ On January 8, 2016,¹¹ Nordheim filed a surreply,¹² and on January 22, 2016, the Debtors filed a response to Nordheim's surreply.¹³

The Court heard oral argument on the Rejection Motion on February 2, 2016.¹⁴ On March 8, 2016, the Court issued the Rejection Decision granting the Debtors' request for authority to reject the Nordheim Agreements and the HPIP Agreements. Promptly thereafter, and consistent with Orion,

the Debtors initiated two separate adversary proceedings—one against Nordheim and one against HPIP—by filing two one-count complaints, each seeking a declaratory judgment that the covenants at issue in the Nordheim Agreements and the HPIP Agreements, as applicable, do not run with the land.¹⁵

On April 4, 2016, Nordheim filed its Answer and Counterclaims against the Debtors.¹⁶ Nordheim asserted two counterclaims against the Debtors, seeking declaratory judgments that (1) the Nordheim Agreements contain real covenants that “run with the land;” or (2) in the alternative, the Nordheim Agreements contain covenants that are equitable servitudes that run with the land. Nordheim also filed the Nordheim Motion, requesting that the Court enter judgment on the pleadings in its favor on all claims.¹⁷

On April 7, 2016, HPIP filed its Answer and Counterclaims against the Debtors, asserting four counterclaims against the Debtors. Like Nordheim, HPIP brought two counterclaims seeking declaratory judgments that the HPIP Agreements are real covenants that run with the land, or alternatively, that the HPIP Agreements are equitable servitudes.¹⁸ HPIP also filed the HPIP Motion for judgment on the pleadings on its two declaratory judgment counterclaims against the Debtors.¹⁹

On April 11, 2016, the Debtors filed their SJ Motion,²⁰ asking the Court (1) to enter summary judgment for the Debtors on their declaratory judgment claims against Nordheim and HPIP; (2) to enter summary judgment for the Debtors on Nordheim's and HPIP's declaratory judgment counterclaims, and (3) to deny the Defendant Motions.

On April 15, 2016, Nordheim and HPIP each filed a reply in support of the Nordheim Motion and the HPIP Motion, respectively, and an opposition to the SJ Motion.²¹ On April 19, 2016, the Debtors filed their reply in support of the SJ Motion.²²

Legal Standard

Judgment on the pleadings is warranted when the “material facts are undisputed and where a judgment on the merits is possible merely by considering the contents of the pleadings.”²³ When deciding a motion for judgment on the pleadings, the court considers the pleadings as true and must draw all inferences as to facts in favor of the nonmoving party.²⁴ In addition, the court may consider any written documents attached to the pleadings and any matter of which the court can take judicial notice for the factual background of the case.²⁵ The court may also consider a document “on which the complaint heavily relies and which is integral to the complaint.”²⁶

Similarly, summary judgment “must be granted to the movant ‘if the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law.’ ”²⁷

Discussion

Given the nature of the Defendant Motions and the SJ Motion, the parties appear to agree that the claims and counterclaims that are the subject of the motions do not give rise to disputed questions of material fact and that they can be resolved on the basis of the pleadings.²⁸ The parties...