Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca5-12-41162/USCOURTS-ca5-12-41162-0/pdf.json

Parties Involved:
EnergyTec, Incorporated

Newco Energy
Appellant
Red Water Resources, Incorporated
Appellee

Document Text:

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

No. 12-41162

In the Matter of: ENERGYTEC, INCORPORATED,

Debtor

------------------------------------------------------------------------

NEWCO ENERGY,

Appellant

v.

ENERGYTEC, INCORPORATED; RED WATER RESOURCES,

INCORPORATED,

Appellees

Appeal from the United States District Court 

for the Eastern District of Texas

Before DENNIS, CLEMENT, and SOUTHWICK, Circuit Judges.

LESLIE H. SOUTHWICK, Circuit Judge:

Energytec, Inc. owns and operates gas pipelines. In 2009, the company

filed a voluntary petition for bankruptcy relief under Chapter 11. The

bankruptcy court authorized a sale of a pipeline system to Red Water Resources,

Inc., but reserved for later determination whether the sale was free and clear of

Newco Energy’s right to certain fees and other interests in the pipeline. Over a

year after the sale, the bankruptcy court ruled that Newco’s rights were not

United States Court of Appeals

Fifth Circuit

F I L E D

December 31, 2013

Lyle W. Cayce

Clerk

 Case: 12-41162 Document: 00512485151 Page: 1 Date Filed: 12/31/2013
No. 12-41162

covenants running with the land and that the sale of the pipeline system was

free and clear of Newco’s interests. The district court affirmed, and Newco

appealed. We VACATE and REMAND.

FACTS AND PROCEDURAL HISTORY

Newco’s interest in a transportation fee from Energytec’s pipeline arises

out of agreements made with Energytec’s predecessor, Mescalaro Oil & Gas, Inc. 

In 1999, Mescalaro as seller and Rockwell Marketing Corporation and Producers

Pipeline Corporation as buyers entered into a letter agreement. Mescalaro

conveyed all its interest in a gas pipeline, its rights-of-way, and a processing

plant to Producers. Other assets were conveyed to Rockwell. Newco was also

a party to the agreement. In its brief to this court, Newco calls itself an

“affiliate” of Mescalaro. We are pointed to no record evidence further explaining

the relationship. 

In language relevant to our later discussion of arguments about privity,

the agreement says this about Newco:

Mescalaro has reached agreement to convey certain interests in the

properties which are the subject of this Agreement to Newco

Energy, Inc. (“Newco”). Newco, as successor in interest to Mescalaro

therefore joins in the execution of this Agreement and Mescalaro

shall reserve for the benefit of Newco the acquired interests.

As partial consideration for the conveyance of the pipeline system,

Producers was required to pay Newco a “transportation fee” based on the

amount of gas flowing through the pipeline. The agreement gave Newco a

security interest and lien on the entire pipeline system to secure payment of the

transportation fee. Producers was required to obtain Newco’s consent prior to

any assignment of its interest in the pipeline. The agreement specified that

Newco’s interest in transportation fees was to “run with the land.” A separate

Assignment and Bill of Sale of the same date conveyed the pipeline system and

2

 Case: 12-41162 Document: 00512485151 Page: 2 Date Filed: 12/31/2013
No. 12-41162

other property. There, Mescalaro conveyed the interests “subject to the

Transportation Fee and other terms and provisions” of the letter agreement. 

A dispute soon arose regarding the payment of transportation fees,

resulting in Newco’s suing Producers in 2002. The suit was settled in 2005 when

Energytec agreed to purchase the pipeline system from Producers. As part of the

purchase agreement, Energytec expressly agreed to assume the obligation to pay

transportation fees to Newco. In May 2009, Energytec filed for bankruptcy. It

paid the transportation fees until December 2009. 

An auction of a substantial portion of the debtor’s assets, including the

pipeline system, was held in January 2010. Red Water (then known as Red

River Resources, Inc.) was the highest and best bidder. Energytec moved for the

bankruptcy court’s approval of the sale to Red Water. The motion requested that

the sale be free and clear of any liens, claims, or encumbrances, with exceptions

not relevant here. Newco objected, arguing that its interest in transportation

fees and its right to consent to any assignment ran with the land and, therefore,

the pipeline could not be sold free and clear of those interests. On February 23,

2010, the court approved the sale of the pipeline to Red Water, reserving Newco’s

objection to the sale for later determination by the court. The sale actually

occurred on April 14, 2010. 

In May 2011, Newco moved to resolve the issue of whether the sale was

free and clear of its claims. After a July hearing on the motion, the bankruptcy

court ruled at a hearing in August that the transportation fee was not a

covenant running with the land. Consequently, the sale to Red Water was free

and clear of Newco’s claims. The court entered a brief written order to the same

effect on September 2, 2011. The court did not address Newco’s right to consent

to assignment of the pipeline. The district court affirmed. It mentioned the

right to consent to assignment only in passing and held that the right was not

a property interest analogous to a royalty payment.

3

 Case: 12-41162 Document: 00512485151 Page: 3 Date Filed: 12/31/2013
No. 12-41162

Newco timely appealed to this court. It argues that the sale should not

have been free and clear of its transportation fee and other rights, which Newco

argues were covenants running with the land. The debtor Energytec and Red

Water have filed a joint brief as appellees.1

DISCUSSION

“The Court of Appeals reviews the decision of a district court, sitting as an

appellate court, by applying the same standards of review to the bankruptcy

court’s findings of fact and conclusions of law as applied by the district court.”

Carrieri v. Jobs.com Inc., 393 F.3d 508, 517 (5th Cir. 2004). Because this appeal

is based on the bankruptcy court’s application of law to undisputed facts, the de

novo standard of review applies. See id.

I. Is the Appeal Moot for Failure to Obtain a Stay?

Energytec argues that Newco’s failure to stay the order authorizing the

sale of the pipeline to Red Water moots its appeal and deprives this court of

jurisdiction. Energytec relies on this statute:

The reversal or modification on appeal of an authorization under

subsection (b) or (c) of this section of a sale or lease of property does

not affect the validity of a sale or lease under such authorization to

an entity that purchased or leased such property in good faith,

whether or not such entity knew of the pendency of the appeal,

unless such authorization and such sale or lease were stayed

pending appeal.

11 U.S.C. § 363(m). It “patently protects, from later modification on appeal, an

authorized sale where the purchaser acted in good faith and the sale was not

stayed pending appeal.” Gilchrist v. Westscott (In re Gilchrist), 891 F.2d 559, 560

(5th Cir. 1990). The section “codifies Congress’s strong preference for finality

1 For purposes of this opinion we will refer, except where otherwise noted, to the

appellees collectively as “Energytec.”

4

 Case: 12-41162 Document: 00512485151 Page: 4 Date Filed: 12/31/2013
No. 12-41162

and efficiency in the bankruptcy context, particularly where third parties are

involved.” Hazelbaker v. Hope Gas, Inc. (In re Rare Earth Minerals), 445 F.3d

359, 363 (4th Cir. 2006); see also Hardage v. Herring Nat’l Bank (In re Hardage),

837 F.2d 1319, 1323 n.3 (5th Cir. 1988) (recognizing the policy of finality

expressed by Section 363(m)). By providing good faith purchasers with a final

order and removing the risks of endless litigation over ownership, Section

363(m) “allows bidders to offer fair value for estate property[,]” which “greatly

benefits both the debtor and its creditors.” In re Rare Earth Minerals, 445 F.3d

at 363.

Newco argues that it is not trying to set aside the sale to Red Water. Its

challenge is not to the sale but to the bankruptcy court’s declaration, more than

a year after the sale, that Newco’s transportation fee could be terminated

because it was not a covenant running with the land. 

Energytec responds that this circuit is one of the most “unequivocal” and

“steadfast” in requiring that a stay be entered, citing In re Gilchrist and a few

other cases. Regardless of how much zeal we have displayed, what we are

protecting is the “later modification on appeal” of authorized sales. In re

Gilchrist, 891 F.2d at 560. The April 2010 sale was subject to the contingency

of Newco’s unresolved claims. Newco is not trying to modify the contingency of

that sale; it is relying on it. In August 2001, 16 months after the sale, Red

Water learned that the bankruptcy court believed the assets should be free and

clear of Newco’s claims. The sale, though, had occurred without that protection.

It is true that Red Water’s bid contained a statement that the purchase

should be free and clear of encumbrances. Yet after Newco’s objection, the sale

was approved in February 2010 still subject to the encumbrance.2 No part of the

2 The bankruptcy court’s February 23, 2010 order provided:

[T]he sale shall be free and clear of all liens, claims, interests and

5

 Case: 12-41162 Document: 00512485151 Page: 5 Date Filed: 12/31/2013
No. 12-41162

lengthy bankruptcy court record designated for appeal reveals an objection by

Red Water to closing on the sale. In its bid, Red Water reserved the right to

terminate its offer or re-bid if the debtor decided not to sell all described assets. 

There is no evidence after the bankruptcy court approved the sale without

providing that it would be free and clear of Newco’s claim, that Red Water tried

to alter the sales price, withdraw, or otherwise react to the fact that the sale

would be subject to the Newco claim. Red Water decided to proceed in the face

of whatever legal and financial risks it perceived.3

This circuit has yet to address issues similar to what are raised here.

Section 363(m) has been held to apply when the challenged provision is

“integral to the sale” of the debtor’s assets, which occurs “if the provision is so

closely linked to the agreement governing the sale that modifying or reversing

the provision would adversely alter the parties’ bargained-for exchange.” In re

Trism, Inc., 328 F.3d 1003, 1007 (8th Cir. 2003).

The Second Circuit discussed Section 363(m) in an appeal by a losing

bidder at the auction of the debtor’s assets, who had not obtained a stay. 

encumbrances, with any valid liens, claims, interests or encumbrances to attach

to the proceeds of [the] sale to the extent set forth below, except for those liens

granted to Red [Water] pursuant to that certain Final Order Authorizing

Debtors to Enter into Post Petition Financing Agreement entered on June 25,

2009 and as further set forth herein below, and including without limitation the

rights, interests and lien rights claimed by Newco in certain obligations to pay

transportation charges or fees asserted in connection with the Redwater Pipeline

System, including but not limited to the right to consent to the assignment of all

or any part of the Redwater Pipeline System, pending later determination as set

forth below.

(emphasis added). The appellees do not dispute that the lengthy reference to the Newco claim

is an exception to the free and clear provision.

3 Red Water’s January 2010 bid on all the relevant assets was for over $3 million. At

a June 2011 hearing, an attorney for Red Water estimated that from commencement of the

bankruptcy in May 2009 until the sale occurred in April 2010, about $9,000 in transportation

fees would have been earned. Newco did not indicate whether it agreed. If true, then about

$10,000 in transportation fees were being earned annually at that time.

6

 Case: 12-41162 Document: 00512485151 Page: 6 Date Filed: 12/31/2013
No. 12-41162

WestPoint Stevens, Inc. v. Aretex LLC (In re WestPoint Stevens, Inc.), 600 F.3d

231, 247-54 (2d Cir. 2010). The losing bidder argued that a stay was

unnecessary because it did not seek to reverse the sale order and was only

challenging the provisions related to the release of certain liens and claims and

the distribution of securities. Id. at 247. The court rejected this argument,

finding that the purchaser would not have consummated the sale without

assurance that it was acquiring control of the debtor’s business, and the

provisions for lien release, claims satisfaction, and distribution were essential

to acquisition of control. Id. at 250-51. Where a challenged provision is integral

to the sale, the court held it had no jurisdiction to review an unstayed order

once the sale occurs, except on the limited issue of whether the sale was made

to a good faith purchaser. Id. at 250-51. Here, though, Red Water did agree to

consummate the sale despite that the validity of Newco’s claims remained to be

decided, suggesting that “free and clear” was not integral to the sale.

Much closer to the facts presented here is a case in which the Tenth

Circuit held that Section 363(m) did not apply. Paige v. Jubber (In re Paige),

685 F.3d 1160, 1191 (10th Cir. 2012). There, the trustee instituted an

adversary proceeding to recover an internet domain name previously owned by

the debtor that had been purchased by Search Market Direct, Inc. (“SMDI”)

shortly after the debtor filed for bankruptcy. Id. at 1164-65. The bankruptcy

court later approved a sale order under which a third party, ConsumerInfo.com,

agreed to pay the estate’s creditors and litigate the adversary proceeding in

exchange for the estate’s promise that it would be given the domain name if

recovered. Id. at 1165. SMDI sought a stay of the sale order but did not receive

one. Id. at 1190. On appeal, ConsumerInfo argued that Section 363(m) applied

and SMDI’s appeal of the sale order was moot. Id. The court disagreed, noting

that although the sale order authorized the sale of the domain name free and

7

 Case: 12-41162 Document: 00512485151 Page: 7 Date Filed: 12/31/2013
No. 12-41162

clear of all interests, it expressly reserved SMDI’s defenses to the adversary

proceeding, pending a final ruling by the bankruptcy court. Id. ConsumerInfo

chose to move forward with the closing of the sale without a final order ruling

on SMDI’s defenses. Id. at 1191. By doing so, the court reasoned,

“ConsumerInfo accepted the risk that SMDI could still prevail on the defenses

it retained under the Sale Order” and Section 363(m) did not strip it of those

defenses. Id. 

Similar to the sale order in Paige, the bankruptcy court’s order here that

approved the sale in February 2010, reserved Newco’s interests pending a final

order. Red Water went forward with the sale, accepting the risk that Newco’s

interests would survive. Of course, the February 2010 “authorization” and the

April 2010 “sale or lease,” to use the terms of Section 363(m), could not be stayed

in August 2011. Red Water gained possession of the pipeline long before the

bankruptcy court’s 2011 order. Red Water could be arguing that Newco should

have sought a stay earlier – at the time the sale was being consummated in April

2010. Such a stay would have vitiated the purpose of the February order

allowing the sale to go forward with Newco’s claims remaining a contingent

interest. Further, what would have been stayed in April 2010 was not a sale free

and clear of Newco’s claims, but a sale not free and clear of those claims. Instead

of a stay by the claimant, Red Water could have declined to go forward with the

sale under such terms – or at least objected and had the bankruptcy court

resolve whether the bid could be altered.

Refusing to apply Section 363(m) under these circumstances is not

contrary to the policy of providing innocent third parties with a reliable final

order. Requiring a stay before we can review a decision entered a year after a

sale that was not originally free and clear of a particular claim does not follow

from the text of Section 363(m) nor satisfy its purposes. We have jurisdiction

to consider the bankruptcy court’s August 2011 decision on Newco’s claims.

8

 Case: 12-41162 Document: 00512485151 Page: 8 Date Filed: 12/31/2013
No. 12-41162

II. Are Newco’s Interests Covenants Running with the Land?

Newco argues that its right to transportation fees and its right to consent

to the assignment of the pipeline constitute covenants running with the land. 

Texas caselaw contains some variations on the requirements for a

covenant that runs with the land. We accept the following as a controlling

explanation: “a covenant runs with the land when it [1] touches and concerns the

land; [2] relates to a thing in existence or specifically binds the parties and their

assigns; [3] is intended by the original parties to run with the land; and [4] when

the successor to the burden has notice.” Inwood N. Homeowners’ Ass’n, Inc. v.

Harris, 736 S.W.2d 632, 635 (Tex. 1987). The Court also referred to a

requirement of privity but did not detail it. Id. An intermediate court relied on

Inwood’s discussion of covenants and said this about privity: “There must also

be privity of estate between the parties when the covenant was made.” Ehler v.

B.T. Suppenas Ltd, 74 S.W.3d 515, 521 (Tex. App. – Amarillo 2002) (citation

omitted). Newco contends that the elements are met in this case.

4

Three factors are uncontested. The letter agreement executed by Newco

and Producers in 1999 stated an intent that Newco’s interests in the pipeline

run with the land. The agreement also reflected the intent to bind Newco and

Producers, as well as their assigns, and burden a thing in existence – the

pipeline. When Energytec agreed to purchase the pipeline from Producers, it

4 Energytec argues that Newco has failed to preserve the issue of whether its right to

consent to an assignment runs with the land. Energytec points to the bankruptcy court’s

bench order authorizing the sale free and clear of Newco’s interests, which did not mention the

right to consent to assignment and refers only to Newco’s right to transportation fees. Our

review of the record reveals that Newco raised its right to consent to assignments before the

bankruptcy court in its objections to Energytec’s motion for authorization to sell the pipeline

and that right was preserved in the court’s initial order authorizing the sale. Newco also

asserted its right to consent to assignments in its briefing before the district court, and the

court addressed the right to consent, although only briefly, in its order. The issue has been

adequately preserved for review by this court.

9

 Case: 12-41162 Document: 00512485151 Page: 9 Date Filed: 12/31/2013
No. 12-41162

also expressly agreed to honor Newco’s interests in the pipeline, so there is no

question that Energytec had notice. What are left is the touch-and-concern

factor and whether there was privity. We address privity first.

The transportation fee and Newco’s other interests were created in the

1999 letter agreement. Mescalaro owned the entirety of the interests in the

pipeline prior to entering into the letter agreement. The agreement describes

Newco as the “successor in interest to Mescalaro,” but there is no elaboration

about that. Newco “therefore joins in the execution of this Agreement and

Mescalaro shall reserve for the benefit of Newco the acquired interests.” The

letter agreement contains an assignment of the rights-of-way and pipeline

system to Energytec’s predecessor, Producers. It also contained this provision,

which is the source of Newco’s primary claim:

Producers shall pay NEWCO, or its designee, as successor in

interest to Mescalaro, a Transportation Fee equal to Ten Cents

($0.10) per MCF for gas volumes transported through the System

from the seven natural gas wells [thereafter described], and Twenty

Cents ($0.20) per MCF for gas volumes transported though the

pipeline from any and all wells which may be connected to the

System hereafter.

The clear language of the letter agreement meant that Mescalaro was

reserving for Newco’s benefit certain interests out of the assignment to

Producers. Energytec argues that the relevant privity is absent.

We start by identifying the privity issues that arise in defining covenants

that run with the land. The burden of the covenant is on the owner of the

pipeline and accompanying right-of-way. Privity has been met as to the

succession of ownership of the burdened property: Mescalaro conveyed to

Producers, who conveyed to Energytec, who through bankruptcy conveyed to

Red Water. Newco is either the original owner of the benefit of the covenant or

succeeded to it through some arrangement with Mescalaro, a point left unclear

10

 Case: 12-41162 Document: 00512485151 Page: 10 Date Filed: 12/31/2013
No. 12-41162

in the 1999 letter agreement which referred to Newco as Mescalaro’s “successor

in interest.” These successive relationships are at times categorized as “vertical

privity.” 9 RICHARD R. POWELL, POWELL ON REAL PROPERTY § 60.04[3][c][iv]

(2010). The privity that is allegedly missing here has been called “horizontal

privity,” which is the relationship between the original parties to the covenant. 

Id. § 60.04[3][c][iii]. For those jurisdictions requiring horizontal privity, there

must be “simultaneous existing interests” or “mutual privity” between the

original parties as either landlord and tenant or grantor and grantee. Id. §

60.04[3][c][ii]-[iii].

Energytec relies strongly on a Texas case addressing horizontal privity,

though the opinion does not use that label. Wayne Harwell Props. v. Pan Am.

Logistics Ctr., Inc., 945 S.W.2d 216, 218 (Tex. App. – San Antonio 1997, writ

denied)). A Restatement describes Wayne Harwell as one of a minority of

modern cases requiring horizontal privity. RESTATEMENT (THIRD) OF PROP.:

SERVITUDES §2.4 (2000). It is a much-criticized doctrine that has been explicitly

rejected by this latest Restatement. Id. The principal rationale for the doctrine

was so “that most covenants intended to run with the land will be created in

conveyances.” Id. We must also be wary because the cited decision is not one

from the Texas Supreme Court. We are guided but not controlled by that

decision when interpreting Texas law. Transcont’l Gas Pipe Line Corp. v.

Transp. Ins. Co., 953 F.2d 985, 988 (5th Cir. 1992).

Energytec asserts that the facts of Wayne Harwell are “remarkably

similar” to those here. There are at least some similarities that we will remark

upon. An owner of land entered into an agreement with a developer. Wayne

Harwell, 945 S.W.2d at 217. The landowner, desiring to develop his property,

gave the developer Harwell a “right of first refusal to be general contractor on

any improvements to the land, as well as a 20-year assignment of 15 percent of

‘net cash flow interest’ from the land to Harwell.” Id. The land was conveyed,

11

 Case: 12-41162 Document: 00512485151 Page: 11 Date Filed: 12/31/2013
No. 12-41162

but the new owners argued they had no obligation to recognize Harwell’s claimed

rights. Id. The issue was whether the developer’s rights were covenants that

either ran with the land or at least were binding on later owners. Id.

The court held there was no privity of estate between the developer

Harwell and the land owner, meaning no conveyance of a real property interest

created the rights. Id. at 218. Further, Harwell owned no land benefitted by his

rights, making the rights personal and not binding on successors: 

If no privity of estate existed between the original parties, it must

be shown that the restriction is imposed for the benefit of adjacent

land; absent this showing, the covenant will be construed as a

personal covenant with the grantor.

It is undisputed that Harwell does not own land that would be

benefitted by the restrictions on the . . . property; therefore, absent

privity of estate between the parties, we cannot find this to be an

equitable servitude.

Id. (citations omitted). The beneficiary of these rights was simply a developer

who contracted to work with the landowner. Id. Consequently, the court held

that his interest did not run with the land. Id.

The alleged remarkable similarity of facts between the present case and

Wayne Harwell requires equating Mescalaro to the landowner and Newco to the

developer. In the facts of the Texas court decision, no property was conveyed at

the time of creating the developer’s rights. Quite differently, here the

transportation fee and other benefits for Newco were created at the time of a

conveyance of real property. Mescalaro in the letter agreement and in the

assignment and bill of sale conveyed the pipeline and rights-of-way and carved

out of that conveyance the rights at issue in this appeal. All these documents

were recorded in the land records of the relevant county. Had Mescalaro

retained the transportation fee for itself when it conveyed the pipeline and other

real property interests to Producers, there would be no question about privity. 

12

 Case: 12-41162 Document: 00512485151 Page: 12 Date Filed: 12/31/2013
No. 12-41162

Mescalaro and Producers were in horizontal privity, and a later assignment by

Mescalaro to Newco satisfies vertical privity. The slightly different manner in

which the 1999 letter agreement carved out the transportation fee and conveyed

interests in the pipeline property to two different grantees is not meaningfully

distinguishable. The letter agreement states that “Mescalaro has reached

agreement to convey certain interests in the properties” to Newco. The

conveyance to Newco was in the same instrument as the conveyances to other

parties, but we perceive no meaningful effect on the privity concerns. Moreover,

the fact that the documents creating the rights were recorded satisfies the

Restatement’s perception of the rationale for the privity requirement.

We conclude that if horizontal privity is a requirement of Texas law in

determining whether a covenant runs with the land, it was satisfied.

The remaining question is whether the interest touches and concerns real

property. Newco relies on Westland Oil Development Corp. v. Gulf Oil Corp.,

637 S.W.2d 903 (Tex. 1982). There, the Texas Supreme Court considered

whether an agreement to convey interests in oil and gas leases ran with the

land. Id. at 905. The court acknowledged that the tests for making this

determination were “far from absolute.” Id. at 911. One test considers whether

the covenant “affected the nature, quality or value of the thing demised,

independently of collateral circumstances, or if it affected the mode of enjoying

it.” Id. (quotations omitted). The other test mentioned by the court also takes

into account the covenant’s impact on the property’s value:

If the promisor’s legal relations in respect to the land in question

are lessened – his legal interest as owner rendered less valuable by

the promise – the burden of the covenant touches or concerns that

land; if the promisee’s legal relations in respect to that land are

increased – his legal interest as owner rendered more value by the

promise – the benefit of the covenant touches or concerns the land.

13

 Case: 12-41162 Document: 00512485151 Page: 13 Date Filed: 12/31/2013
No. 12-41162

Id. The court held that because the promise to convey interests in oil and gas

leases burdened the land, potentially rendering it less valuable, it constituted

a covenant running with the land. Id. 

Newco argues thatthe obligation to pay transportation costs burdens the

land and makes it less valuable. Among the reasons is that it is secured by a

lien on the entire pipeline; failure to pay the fee would result in loss of

ownership and use of the pipeline through foreclosure. Newco contends that its

right to consent to assignment of the pipeline also affects the nature, quality,

and value of the pipeline system and rightly constitutes a covenant running

with the land.

Energytec relies on El Paso Refinery, LP v. TRMI Holdings, Inc. (In re El

Paso Refinery, LP), 302 F.3d 343 (5th Cir. 2002). This court considered whether

a covenant preventing subsequent owners of an oil refinery from seeking

contribution from the original owner for environmental contamination was a

covenant running with the land. Id. at 346. As in this case, the only disputed

factor concerned whether the covenant touched or concerned the land. Id. at

356. We held that a covenant allocating liability for environmental costs did not

touch or concern the land. Id. The court explained that any benefit created by

the provision affected only the original owner and had “no direct impact upon

the land itself.” Id. Further, the covenant did not compel or preclude

subsequent owners from doing anything on the land itself. Id. at 356-57. The

court characterized the environmental-liability provision as a “cost-shifting

mechanism” that was “more analogous to an obligation to assume an

encumbrance.” Id. at 357. “Under Texas law, a covenant to pay an

encumbrance does not run with the land.” Id. 

We also rejected an argument that if a covenant affects the value of the

land it necessarily runs with the land. Id. The court explained that more was

14

 Case: 12-41162 Document: 00512485151 Page: 14 Date Filed: 12/31/2013
No. 12-41162

required under Texas law and that “even when a covenant impacts the value

of land, it must still affect the owner’s interest in the property or its use in order

to be a real covenant.” Id. Employing this language, Energytec maintains that

the obligation to pay transportation costs is unrelated to the use of the land

because it is based solely on the volume of gas moving through the pipeline and

has no direct impact on the land.

We disagree. The real property at issue here is a gas pipeline system and

the rights-of-way required for its placement. Newco’s interest in transportation

fees is for the use of real property, i.e., the traveling of natural gas from a

starting point along the length of the pipeline to an endpoint. The pipeline is

a subsurface road for natural gas, and a fee for the use of that road was

retained by Mescalaro and assigned to Newco. Another restriction on use is

that the pipeline cannot be assigned without Newco’s consent. These rights

impact the owner’s interest in the pipeline. Furthermore, as burdens on the

property, they also impact the pipeline’s value in the eyes of prospective buyers. 

Indeed, the impact on the sale in bankruptcy has been clear, though the

financial impact has not been quantified. 

Energytec argues that Newco’s transportation fee can easily (if not

cheaply) be circumvented by constructing another pipeline on different property

and abandoning the use of the original pipeline. Consequently, Energytec

argues the transportation fee “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. That is not so. Whenever the owner of the “land,” i.e., the pipeline

and the rights-of-way, wants to transport natural gas along its length, the fee

to Newco is to be paid. If the “land” owner decides no longer to do so, then

Newco’s rights are dormant, subject to revival should the natural gas ever again

flow. The possibility that covenants will expire by the force of events is no

15

 Case: 12-41162 Document: 00512485151 Page: 15 Date Filed: 12/31/2013
No. 12-41162

definitional obstacle to calling them covenants running with the land. 

Similarly, the overriding royalty interest on production from certain wells that

also was created in the letter agreement presumably ends when production

ceases and the oil and gas leases, on which the royalty depends, expire. But

that does not mean that so long as there is relevant production, that the royalty

is not binding on successors to the leases. 

Newco’s right to transportation fees and its right to consent to assignment

are covenants running with the land. The district court erred.

III. May Newco be Compelled to Accept Money Satisfaction of its Interests?

Energytec maintains that even if we find that Newco’s interests in the

pipeline run with the land, the pipeline may still be sold free and clear of those

interests by virtue of this statute:

The trustee may sell property . . . free and clear of any interest in

such property of an entity other than the estate, only if . . . such

entity could be compelled, in a legal or equitable proceeding, to

accept a money satisfaction of such interest.

11 U.S.C. § 363(f)(5). The applicability of Section 363(f)(5) was raised in the

bankruptcy court but not resolved. Both that court and the district court

determined that Newco’s interests were not covenants running with the land,

mooting the relevance of Section 363(f)(5).

Newco contends that the monetary value of its right to future

transportation fees is impossible to estimate. Under the letter agreement,

Newco’s fees are tied to wells identified in the agreement and any future wells

that may be connected to the pipeline. According to Newco, because there is no

way to predict the number of additional wells that may eventually be connected

to the pipeline, monetization of its interest in transportation fees is impossible. 

16

 Case: 12-41162 Document: 00512485151 Page: 16 Date Filed: 12/31/2013
No. 12-41162

The district court found, though, that an interest’s “increase in value in the

future does not mean that it cannot be given a present value.” 

We do not address the valuation issue further because the failure of the

two lower courts to resolve the Section 363(f)(5) issue convinces us to remand for

further proceedings with respect to this subsection. By its express terms,

Section 363(f)(5) allows for the extinguishment of a nondebtor’s interest in the

debtor’s property only upon a showing that the nondebtor “could be compelled,

in a legal or equitable proceeding, to accept” money satisfaction of its interest. 

This court has yet to consider what constitutes a qualifying legal or equitable

proceeding for purposes of Section 363(f)(5).5 The determination of what is a

qualifying legal or equitable proceeding under Section 363(f)(5) is a question to

which the bankruptcy court should give the initial answer.

We VACATE the judgment of the district court affirming the judgment of

the bankruptcy court that authorized the sale of the pipeline free and clear of

Newco’s interests. Newco’s interests, including a transportation fee, security

interest, and right to consent to assignments, are covenants running with the

land. We REMAND to the district court for further proceedings including

whether a qualifying proceeding would enable Energytec to sell the pipeline free

and clear of Newco’s interests under Section 363(f)(5).

5 The uncertainties under Section 363(f)(5) are shown by the fact some courts have held

that cram downs under 11 U.S.C. § 1129(b)(2) are qualifying proceedings. In re Grand Slam,

U.S.A., Inc., 178 B.R. 460, 462 (E.D. Mich. 1995); Terrace Chalet Apartments, Ltd. v. Fed. Nat’l

Mortg. Ass’n (In re Terrace Chalet Apartments, Ltd.), 159 B.R. 821, 829 (N.D. Ill. 1993).

Others have rejected that interpretation and have decided whether proceedings under

nonbankruptcy law could force monetization on an owner. Clear Channel Outdoor, Inc. v.

Knupfer (In re PW, LLC), 391 B.R. 25, 46-47 (B.A.P. 9th Cir. 2008); In re Jolan, Inc., 403 B.R.

866, 869-70 (Bankr. W.D. Wash. 2009).

17

 Case: 12-41162 Document: 00512485151 Page: 17 Date Filed: 12/31/2013