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St. Mary's Law Journal

Abstract

The analysis of real covenants in wellhead contracts (e.g., gas purchasing, gathering, processing, etc.) by Texas courts has not been consistent. As a result, some bankruptcy courts are holding that a debtor in bankruptcy is not liable for a prior contractual obligation, unless the covenant is held to be a real covenant running with the land. For instance, the holding in In re Sabine Oil & Gas Corp. (Sabine I) contradicts the holdings in Westland Oil Development Corp. v. Gulf Oil Corp. and in Inwood North Homeowners' Association, Inc. v. Harris. The Sabine I court held that because the Acreage Commitments with Nordheim Eagle Ford Gathering, LLC (Nordheim Agreements) and HPIP Gonzales Holdings, LLC (HPIP Agreements) did not have a direct impact on the real property from which the minerals were produced, none of the covenants ran with the land. The rationale used by the court to arrive at this conclusion is incorrect. The oil and gas lease, an interest in real property, that Sabine owned should have been found to touch and concern the land. Although the Westland and Inwood courts held there was no ownership interest transferred, each of the covenants were found to touch and concern the land. To survive a summary judgment, a wellhead contract should include specific language that constitutes a servitude, a midstream lien, and an overriding royalty interest (ORRI). Wellhead contracts should also include the following phrase: “Dedicated Area, the Dedicated Leases, and all Gas on, in, and under the Dedicated Area and the Dedicated Leases and all such Gas that may be produced therefrom.” Additionally, to satisfy the requirements of the horizontal privity test, the order should contain a midstream lien. An ORRI can give a midstream company an interest in real property which would keep the debtor liable for the obligation.

Publisher

St. Mary's University School of Law

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