Co-authors Lydia Webb and Rusty Tucker

Until Monarch Midstream v. Badlands Energy, midstream companies facing rejection of their contracts in a producer’s bankruptcy were left with Abraham Lincoln’s least favorite negotiating option: If the both law and the facts are against you, pound on the table. Under Sabine (which we covered here, here, and here) gathering agreements are not covenants running with the land and can be rejected in the producer’s bankruptcy. Sabine was the only law on the books, but now a Colorado bankruptcy court has determined that a gathering agreement was a covenant running with the land.This opinion makes for a fair fight and gives midstream companies legal authority that agreements dedicating oil and gas reserves should survive bankruptcy unscathed. Still following Mr. Lincoln, they can now pound the law and not the table.

Different venue, different result

E&P debtor Badlands sought to sell its Utah assets in bankruptcy. Midstream company Monarch objected to the sale free and clear of its gathering agreement, arguing that it could not be rejected in bankruptcy because its dedication was a covenant running with the land. Badlands responded with Sabine, but the court was not persuaded. Sabine involved Texas law (albeit construed by a New York court); these assets were located in Utah, and although the two states’ law on covenants was similar, it was different enough to allow for a different conclusion. As with Sabine, the two elements at issue were “touch and concern” and “horizontal privity”.

Touch and concern

The dedication satisfied touch and concern because it burdened Badlands’ interest in the dedicated leases and reserves in place, which are real property interests under Utah law. In Sabine a similar dedication failed to touch and concern real property because the court concluded that it burdened gas “produced and saved,” which the court said was personal property. Although Utah has a slightly broader definition of touch and concern, the court implied that a dedication of reserves, leases, and related lands would satisfy the analysis under Sabine.

Horizontal privity

Horizontal privity was satisfied. Badlands granted Monarch an easement across its leases and adjoining land for the purposes of installing and operating a gathering system. The parties’ simultaneous ownership of property interests on the same land satisfied privity to the extent that it was required under Utah law. Contrast this with Sabine, which construed Texas law as requiring the covenant be created in a conveyance of real property. The Badlands court held the dedication itself—although not a fee estate—constituted a conveyance that burdens Badlands’ real property interest (the leases and reserves), thereby satisfying Sabine if it applied.

Shameless plug

Our Gray Reed attorneys have been at the forefront of this fight since the beginning. They can guide you through the uncertainties that remain in these situations. And here is a more detailed discussion of the case.

If you’ve ever been forced to litigate in a venue not to your liking, this musical interlude is for you.