Extraction Oil & Gas, Inc. v. Elevation Midstream, LLC (In re Extraction Oil & Gas, Inc.), Case No.: 20-11548 (CSS) (Jointly Administered)

Citation627 B.R. 199
Decision Date14 October 2020
Docket NumberCase No.: 20-11548 (CSS) (Jointly Administered),Adv. Proc. No.: 20-50839 (CSS)
Parties IN RE EXTRACTION OIL & GAS, INC., et al., Debtor. Extraction Oil & Gas, Inc., et al., Plaintiff, v. Elevation Midstream, LLC, Defendants.
CourtU.S. Bankruptcy Court — District of Delaware

Marc Abrams, Stephen Brett Gerald, Richard W. Riley, Whiteford, Taylor & Preston LLC, Wilmington, DE, William E. Arnault, Stephanie Cohen, Kirkland & Ellis LLP, Chicago, IL, Ben Barnes, Kirkland & Ellis LLP, Dallas, TX, Ross Fiedler, Ciara Foster, Kevin Liang, Christopher Marcus PC, Kirkland & Ellis LLP, New York, NY, Kevin G. Hroblak, Whiteford, Taylor & Preston, LLP, Baltimore, MD, Evan Swager, Kenneth A. Young, Anna Rotman, Rebekah Sills, Orla P. O'Callaghan, Grant Jones, Jamie Aycock, Kirkland & Ellis LLP, Houston, TX, for Debtor.

FINDINGS OF FACT AND CONCLUSIONS OF LAW ON PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT AGAINST ELEVATION MIDSTREAM, LLC1

Christopher S. Sontchi, Chief United States Bankruptcy Judge

INTRODUCTION

This adversary proceeding is one of several arising from the Chapter 11 case of Extraction and its affiliates.2 The Debtors are in the "upstream" business of extracting hydrocarbons from land in the State of Colorado. In the Chapter 11 case, the Debtors have sought to reject several of what are commonly known as Transportation Services Agreements or TSA's. Broadly speaking, the counterparties to these TSA's are "midstream" pipelines, which transport the Debtors' hydrocarbons to larger "downstream" pipelines or directly to the depot in Cushing, Oklahoma.

In response to the motion to reject, many of the counterparties, including this defendant, have argued that the TSA's cannot be rejected because they include covenants that run with the land. Moreover, they argue that a determination of whether there are covenants that run with the land requires an adversary proceeding. Hence, the Debtors have filed several adversary proceedings in which they have sought a declaratory judgment that the TSA's do not create covenants that run with the land. Currently, before the Court is the Debtor's motion for summary judgment to that effect (and Elevation's cross motion for summary judgment).3

As set forth in detail below, the Court will grant the Debtors' motion for summary judgment and deny Elevation's cross motion for summary judgment. Under Colorado law, 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. In addition, there must also be privity of estate between the original covenanting parties at the time of the covenant's creation. Under the unambiguous terms of the Commercial Agreements, the parties intended the covenants specified in section 2.4 of the Commercial Agreements to be a covenant that runs with the land (the parties did not intend that any other provision of the contracts to create a covenant that runs with the land); the Commercial Agreements do not touch and concern the land except for the Drilling Commitment; and there was no privity among the parties. Thus, as not all the required elements are present in connection with any of the contracts, no covenant runs with the land.

Finally, while there are several issues discussed below, the central issue before the Court is whether the dedicated and committed interests in the Commercial Agreements touch and concern the land. Other than the Drilling Commitment, they do not. The dedications and commitments concern only personal property and do not affect the physical use of real property or closely relate to real property. Throughout the Commercial Agreements, the dedicated and committed interests are used to identify the particular minerals that are subject to, set apart for, pledged or committed to the parties' contractual obligations. They do not convey any interests in real property. Thus, they cannot serve to satisfy the touch and concern the land element of the test to establish a covenant that runs with the land.

THE GAS AGREEMENT, OIL AGREEMENT, AND WATER AGREEMENT.

On July 3, 2018, Extraction Oil & Gas, Inc. ("Extraction") and Elevation Midstream, LLC ("Elevation") entered the Gas Gathering and Compression Agreement (the "Gas Agreement"). Brief in Support of Plaintiff's Motion for Summary Judgment (A. D.I. 4-1)("Extraction MSJ "), Ex. A.

On July 3, 2018, Extraction and Elevation entered the Crude Oil Gathering and Stabilization Agreement (the "Oil Agreement"). Extraction MSJ (A. D.I. 4-2), Ex. B.

On July 3, 2018, Extraction and Elevation entered the Produced Water Commercial Agreement (the "Water Agreement"). Extraction MSJ (A. D.I. 4-3), Ex. C.

The parties dispute whether the Gas Agreement, Oil Agreement, and Water Agreement (collectively, the "Commercial Agreements") create any covenants running with the land. Complaint for Declaratory Judgment (A. D.I. 2) ("Extraction Complaint ") at p. 11–14.

PROCEDURAL BACKGROUND.

On June 14, 2020, Extraction and its affiliates filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code.

On August 10, 2020, Extraction filed a motion in the underlying chapter 11 case seeking the Court's authorization of its rejection of the Commercial Agreements. Notice of Rejection of Certain Executory Contracts and/or Unexpired Leases (D.I. 377) ("Motion to Reject ") at p. 1.

On September 4, 2020, Extraction filed the Complaint for Declaratory Judgment ("Extraction Complaint "), seeking a declaration that the Commercial Agreements do not create covenants that run with the land. Extraction Complaint (A. D.I. 2) at p. 11–14.

On September 4, 2020, Extraction filed Plaintiff's Motion for Summary Judgment (A. D.I. 3) and Brief in Support of Plaintiff's Motion for Summary Judgment (A. D.I. 4). On September 10, 2020, Elevation filed the Defendant's Motion for Summary Judgment (A. D.I. 11) and its Brief in Support of Defendant's Cross-Motion for Summary Judgment (A. D.I. 12) ("Elevation Cross-MSJ "). On September 23, 2020, Extraction filed Plaintiff's Response in Opposition to Defendant's Cross-Motion for Summary Judgment (A. D.I. 25) ("Extraction Response "). Also on September 23, 2020, Elevation filed Defendant's Response to Plaintiff's Motion for Summary Judgment (A. D.I. 26) ("Elevation Response "). On September 28, 2020, Elevation filed Defendant's Reply Brief in Support of its Cross-Motion for Summary Judgment (A. D.I. 29) ("Elevation Reply "), and Extraction filed Plaintiff's Reply in Support of Plaintiff's Motion for Summary Judgment (A. D.I. 30) ("Extraction's Reply "). The Court heard oral arguments on the summary judgment motions on September 30, 2020. The parties submitted proposed findings of fact and conclusions of law on October 8, 2020.

On September 10, 2020, Elevation filed its objection to the Motion to Reject . Objection of Elevation Midstream, LLC and GSO EM Holdings LP to the Notice of Rejection of Certain Executory Contracts and/or Unexpired Leases (D.I. 612) ("Elevation Objection ") at p. 1.

As relevant to this adversary proceeding, Elevation's Objection argued that the Commercial Agreements created covenants running with the land, and, therefore, the Court could not authorize Elevation's rejection of the Commercial Agreements. Id. at p. 3.

In the Extraction MSJ , Extraction seeks summary judgment on its claim for declaratory judgment that the Commercial Agreements do not contain covenants running with the land, in order to seek to reject them pursuant to 11 U.S.C. § 365(a). In the Elevation Cross-MSJ , Elevation seeks summary judgment that the Commercial Agreements contain covenants running with the land.

GAS AGREEMENT

Section 2.1 of the Gas Agreement states:

Subject to the terms of this Agreement, and except as provided in Section 2.2, Producer, on its behalf and on behalf of its Affiliates, hereby commits and dedicates the Dedicated Interests (whether now owned or hereafter acquired) and the exclusive right to receive from Producer and its Affiliates at the Delivery Points all Gas therein and thereunder and as may be produced therefrom to the performance of this Agreement (collectively, the "Dedication") and agrees to connect all of Producer's wells within the Dedicated Area to the Gathering and Compression System and deliver to Elevation at the Delivery Points one hundred percent (100%) of the Gas produced from the Dedicated Interests and from the Other Interests ("Producer's Gas") (collectively, the "Delivery Obligation").

Extraction MSJ (A. D.I. 4-1) at § 2.1.

Extraction's dedications and commitments were made "to the performance of th[e] [Gas] Agreement ...." Id.

The Delivery Obligation obligates Extraction to deliver "one hundred percent (100%) of the Gas produced from the Dedicated Interests and from the Other Interests ...." Id. at § 2.1.

Section 2.2 of the Gas Agreement states:

Producer reserves, excepts and excludes the following rights from Producer's and its Affiliates' commitment and dedication provided for in Section 2.1: (a) the right to pool, communitize or unitize all or part of the Dedicated Interests with other lands, leases and properties in the field in which the Dedicated Interests are located[.]

Id. at § 2.2(a).

Section 2.2(d) of the Gas Agreement states:

[S]ubject to the terms of the Drilling Commitment, the right to operate the Dedicated Interests as Producer and its Affiliates deem advisable in their sole discretion, including the right, but never the obligation, to drill new wells, to repair and rework wells, to temporarily shut in wells, to renew or extend, in whole or in part, any oil and gas lease covering any of the Dedicated Interests, and to cease production from or abandon any well or surrender any such oil and gas lease, in whole or in part[.]

Id. at § 2.2(d).

Section 2.3 of the Gas Agreement states, in relevant part:

Producer agrees that any sale, assignment or pledge of all or any portion of the Dedicated Interests will be made expressly subject to this
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