### I N THE UNI TED STATES COURT OF APPEALS FOR THE FI F TH CI RCUI T

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 c ompany filed a voluntary p etition for bankruptcy relief under Chapter 11. The bankruptcy court authorized a sale of a p i peline system to Red Water Resources, Inc., but reserved for later determination whether the sale was free and clear of
Newco Energy’s r ight to certain fees and other interests i n the pipeline. Over a
year after the s ale, the bankruptcy court ruled t hat Newco’s rights were not U n i t e d S t a te s C o u r t o f A p p e al s

F i f t h C i rc u i t 

### F I L E D Decem ber 31, 2013
Ly l e W . Cay ce Clerk Case: 12-41162 Document: 00512485151 Page: 1 Date Filed: 12/31/2013No. 12-41162

covenants running with the land an d t h at the s ale of the pipeline system was f r e e and clear of Newco’s i nterests. The district court affirmed, a nd Newc o appealed. We VACATE and REMAND.

FACTS AND PROCEDURAL HISTORY Newco’s interest in a transportation fee from Energytec’s pipeline arises
out o f a greements m a de with Energytec’s predecessor, Mescalaro Oil & Gas, Inc.
In 1999, Mescalaro as s e l l e r a n d R ockwell Marketing Corporation and Producers Pipeline Corpora t ion as buyers entered i n to a l etter agreement. Mescalaro

c o n v eyed all its interest in a gas pipeline, its rights-of-way, and a proc e s s i n g plant to Producers. Other a ssets were conveyed to Rockwell. Newco was also

a p a rty to the agreement. In its brief to t his court, Newco c alls i t s e l f a n “affiliate” of Mescalaro. We are pointed to no record e vidence further explaining the relationship.
In language relevant to o u r later d iscussion of arguments about privity, the agreement says this about Newco: Mescalaro has reached agreement to convey c e rtain interests i n t h e properties which are the subject o f this Agreement to N e w c o Energy, Inc. (“Newco”). N e w c o , as successor in interest to Mescalaro therefore joins in t he e xecution of this Agreement a n d M e scalaro shall reserve for the benefit of Newco the acquired interests. As p artial consideration for the conveyance o f t h e pipeline system, Producers was r equi r e d t o pay Newco a “transportation fee” based on the

a m o u n t of g as flowing through t he pipeline. The agreement g ave Newco a security interest and lien on the entire pipeline system t o secure payment of the transportation fee

. Producers was r e quired to obtain Newco’s consent prior to

any a ssignment of its interest in the pipeline. The a g r e e ment s pecified that Newco’s interest in transportation f ees w as to “run with the land.” A separate Assignment and Bill of Sale of the same date conveyed the pipeline system and

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other property. There, Mescal a r o c onveyed the interests “subject to the Transportation Fee and other terms and provisions” of the letter agreement.
A dispute soon arose regarding the p ayment o f transportation fe es, resulting in Newco’s suing Producers in 2002. The suit w as settled in 2005 when Energytec agreed to purchase the pipeline system from Producers. A s part of the purchase agreement, Energytec e x p r e s s l y a g r eed to a ssume the obligation to pay transportation fees to N ewco. In May 2009, Energytec filed for b ankruptcy. It paid the transportation fees until December 2009.
An auction of a substantial p o r t ion of the debtor’s assets, including the pipeline system, was held i n January 2 010. R e d W a t er (then known as Red
River Resources, Inc.) was the highest a nd best bidder. Energytec moved for the bankruptcy court’s a pproval of the sale t o Red Water. The m otion requested that
the sale be free and clear of any liens, claims, or encumbrances, w ith exceptions
not relevant here. Newco objected, arguing that i t s i n t e r est in transportation fees and its right to c onsent to any assignment ran with t he land and, t h erefore,
the pipeline could n ot be sold free and clear of those interests. On February 23, 2010, the court approved the sale of the pipeline to R ed Water, reserving Newco’s objection to t h e s a le for later determination by the court. The sale actually occurred on April 14, 2010.
In May 2011, Newco moved to resolv e t h e i s s ue of whether the sale was free and clear of i ts claims. After a July hearing o n the motion, t h e bankruptcy
court ruled at a hearing in August that the t r ansportation fe e w a s n ot a
covenant running with the land. Consequently, t he 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
t o a s s i g n m ent o f the pipeline. T he district court affirmed. It mentioned the right to consent to assignment only in passing and h eld that t he right was not a property interest analogous to a royalty payment.

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Newco timely appealed to this c ourt. It a rgues that the sale should not have been free and clear of its transportation fee and other rights, which Newco

argues w ere c o v e n a n t s r unning with the land. The debtor Energytec and Red Water have filed a joint brief as appellees. 1
DISCUSSION

“ The Court of A ppeals reviews the decision of a district court, sitting as an appellate cou r t , by applying the same s tandards of review t o the bankruptcy court’s findings of fact and conclusions o f law as applied b y t h e d i s trict court.” Carrieri v. Jobs.com Inc., 3 93 F.3d 508, 517 (5th Cir. 2004). Because this appeal
is based o n t he 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 a rgues that Newco’s failure to stay the order authorizing the
sale of t he pipeline to Red Water moots its appeal and deprives this court of jurisdiction. Energytec relies on this statute:
The reversal or mo d i f i cation on appeal of an a uthorization under subsection (b) or (c) of this section of a sale or lease of p roperty d o es not affect t he v alidity of a sale or lease under such authorization to
an entity that pur c hased or leased such property in good faith, whether o r not such entity knew of the pen d e n c y o f the appeal, unless such authorization and s uch sale o r l ease were stayed pending appeal.

11 U .S.C. § 363(m). It “patently protects, from later modification on appeal, an authorized sale where the p urchaser a cted in good faith a nd the sale was not stayed p e nding appeal.” Gilchrist v. Westscott (In re Gilchrist) , 891 F.2d 559, 560 (5th Cir. 1990). The section “codifies Congress’s str o n g p r e f erence for finality

1 For p urp os es of this op inion w e w ill ref er, excep t w here otherw is e noted , to the ap p ellees collectively as “Energytec. ”

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and e fficiency in the b ankruptcy c ontext, particularly where third p arties are involved.” Hazelbaker v. Hope Gas, I n c. (In re R are 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, 1 323 n .3 (5th C ir. 1 9 8 8 ) ( r e cognizing the policy of finality expressed by Section 363(m)). B y providing good faith purchasers with a final

or d e r and removing the risks of endless litigation o ver ownership, Section 363(m) “ allows bidders to offer fair value for estate proper t y [,]” which “greatly benefits both t he debtor a nd its creditors.” In re Rare Earth Minerals , 445 F.3d
at 363. Newco a rgues that it is not trying to s e t 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 t he sale, that Newco’s transportation f ee could be terminated because it was not a covenant running with the land. Energytec r esponds that this circuit is one of the most “unequivocal” and “steadfast” i n requiring t hat a stay be entered, citing In r e G ilchrist a n d a few
other cases. Regardless of h ow much z e al we have displaye d , w h a t we are prot e cting is the “later modification on appeal” o f authorized sales. In re Gilchrist , 891 F.2d at 560. The A pril 2010 sale was subject to t h e contingency of Newco’s unresolved claims. Newco is n o t t rying to modify the c ontingency of
that s ale; it is re l y i n g o n it. In August 2001, 16 m onths after the sale, Red
Water learned that the bankruptcy court believed t he a ssets should be free and clear of Newco’s claims. T he sale, though, h a d occurred without that protection.
It is true that Red Water’s bid c ontained a statement t h a t the purchase should be free and clear o f encumbrances. Yet after Newco’s objection, the sale

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

2 The bank rup tcy court’s February 23, 2010 ord er p rovid ed : [ T] he s ale s hall be free and clear of all liens , claim s , interes ts and

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lengthy bankruptc y c o u r t record designated for appeal reveals an objection by Red Water to closing on the sale. I n i t s b i d , 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 c ourt approved the sale without providing that it would be free and clear of Newco’s claim, that R ed Water tried
to alter the sales price, withdraw, or otherwise r eac t t o t h e f a ct that the sale
would be subject to the Newco claim. Red W ater decided to proceed in the face of whatever legal and financial risks it perceived. 3
This c ircuit has yet t o address issues similar to what are raised here. S e ctio n 3 6 3 (m ) h a s b e e n h e ld to a p p ly w h e n th e ch a lle n g e d p r o v i s i o n is
“in te g ra l to th e sa l e ” o f th e d e b to r ’s a sse ts, w h ich o ccu rs “if th e p ro v isio n is so
clo se ly lin k e d to t h e a g re e m e n t g o v e rn in g th e sa le t h a t m o d ify in g o r re v e rsin g th e p ro v i sio n w o u ld a d v e rse ly a lte r th e p a rtie s’ b a rg a in e d

- fo r e x ch a n g e .” In re T rism
, In c., 3 2 8 F .3 d 1 0 0 3 , 1 0 0 7 (8 th C ir. 2 0 0 3 ).
T h e S e c o n d C ircu i t d iscu sse d S e ctio n 3 6 3 (m ) i n a n a p p e a l b y a lo sin g b id d e r a t th e a u ctio n o f th e d e b t o r ’ s a sse t s, w h o h a d n o t o b ta in e d a sta y

.

encum brances , w ith any v a lid liens , claim s, interes ts or encum brances to attach to the p roceed s of [ the] s ale to the extent s et f orth below , excep t for thos e liens granted to Red [ Water] p urs uant t o t hat certain Final O rd er Authorizing D ebtors to Enter into Pos t Petition Financing Agreem ent entered on June 25, 2009 and as f

urther s et forth herein below , a nd i ncl udi ng w i thout li mi ta ti on the ri g hts, i nterests a nd l i en ri ghts cl a i m ed by N ew co i n certa in obl i

ga ti ons to p a

y tra nsp orta ti on cha rges or f ees a sserted i n connecti on wi t h the Redw a ter P ip el i ne System
, i ncl udi ng but not l im i ted to the ri ght to consent to the a ssi gnm ent of a l l

or any p a rt of the Redw ater Pi pel i ne System
, pendi ng l ater determ i na ti on as s et f orth below

. ( em p has is ad d ed )

. The ap p ellees d o not d is p ute that the lengthy ref erence to the N ew co claim is an excep tion to the f ree and clear p rovis ion.

3 Red Water’s January 2010 bid on all the relevant as s ets w as f or over $3 m illion. At

a J u n e 2 0 1 1 h e a ring, an attorney f or R ed Water es tim ated that f rom com m encem ent of the bank rup tcy in M ay 2009 until the s ale occurred in Ap ril 2010, about $9, 000 in trans p ortation f ees w ould have been earned

. N ew co d id not ind icate w hether it agreed

. I f true, then about $10, 000 in trans p ortation f ees w ere being earned annually at that tim e.

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

W e stP o in t S tev en s, I

n c. v

. A retex L L C

(In re W

estP o in t S tev e n s, In c .) , 6 0 0 F .3 d
2 3 1 , 2 4 7 -5 4 ( 2 d C ir. 2 0 1 0 ). T h e lo sin g b id d e r a rg u e d th a t a s ta y w a s

u n n e ce ssa ry b e ca u se i t d id n o t se e k t o re v e rse th e sa le o rd e r a n d w a s o n ly
ch a l le n g in g th e p ro v isio n s re l a te d to t h e re le a se o f ce r ta in lie n s a n d c la im s a n d
th e d istrib u t io n o f se cu ritie s. Id

. a t 2 4 7

. T h e co u rt re je c t e d t h i s a r g u m e n t, fi n d i n g t h a t th e p u rch a se r w o u ld n o t h a v e co n su m m a te d th e sa le w ith o u t

a ssu ra n ce th a t it w a s a cq u i r i n g co n tro l o f th e d e b to r’s b u sin e s s, a n d t h e
p ro v isio n s fo r lie n re le a se , cla im s sa tisfa ctio n , a n d d istrib u t io n w e re e sse n tia l

to a cq u isitio n o f co n t ro l. Id

. a t 2 5 0 -5 1

. W h e re a ch a lle n g e d p ro v isio n is in te g ra l

to th e sa le , th e co u r t h e ld it h a d n o ju risd ictio n to re v i e w a n u n sta y e d o r d e r

o n ce th e sa le o ccu rs, e x ce p t o n th e lim ite d i ssu e o f w h e th e r th e sa le w a s m a d e
to a g o o d fa ith p u rch a se r

. Id

. a t 2 5 0 -5 1

. H e re , th o u g h , R e d W a te r d id a g re e to

co n s u m m a te th e sa le d e sp ite th a t th e v a l i d ity o f N e w co ’s cla im s re m a in e d to b e d e cid e d , su g g e stin g th a t “fre e a n d cle a r” w a s n o t in te g ra l to th e sa le

. M u ch c lo se r to t h e f

a cts p re se n te d h e re is a ca se in w h ich th e T e n th
C i r cu it h e ld th a t S e c t io n 3 6 3 (m ) d id n o t a p p ly

. P a ig e v

. J u b b er (In re P a ig e ),
6 8 5 F

. 3 d 1 1 6 0 , 1 1 9 1 ( 1 0 th C ir. 2 0 1 2 ). T h e re , th e tru s te e in stitu te d a n

a d v e rsa ry p ro ce e d in g to re co v e r a n i n te r n e t d o m a in n a m e p re v io u s ly o w n e d b y th e d e b to r th a t h a d b e e n p u rch a se d b y S e a rch M a rk e t D ire ct, In c. (“S M D I”)
sh o rtly a fte r th e d e b to r file d fo r b a n k r u p tcy

. Id

. a t 1 1 6 4 -6 5

. T h e b a n k ru p tcy

co u r t la t e r a p p ro v e d a sa le o rd e r u n d e r w h ich a t h ird p a rty , C o n su m e rIn fo .co m ,

a g r e e d to p a y t h e e sta te ’s cre d ito rs a n d litig a t e th e a d v e rsa ry p ro ce e d i n g i n

e x c h a n g e fo r th e e sta t e ’s p r o m ise t h a t it w o u ld b e g iv e n th e d o m a i n n a m e if

re co v e r e d

. Id

. a t 1 1 6 5

. S M D I so u g h t a sta y o f th e sa le o rd e r b u t d i d n o t re ce iv e

o n e

. Id

. a t 1 1 9 0

. O n a p p e a l, C o n su m e rIn fo a rg u e d th a t S e ctio n 3 6 3 (m ) a p p lie d

a n d S M D I’s a p p e a l o f th e s a le o rd e r w a s m o o t. I d

. T h e co u rt d isa g re e d , n o tin g th a t a l t h o u g h th e sa l e o rd e r a u t h o rize d t h e sa le o f th e d o m a in n a m e fre e a n d

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

c l e a r o f a ll in te re sts, i t e x p re ssly re s e rv e d S M D I’s d e fe n se s to th e a d v e rsa ry
p ro ce e d in g , p e n d in g a f in a l ru lin g b y th e b a n k ru p tcy co u rt. Id

. C o n s u m e rIn fo
ch o s e t o m o v e fo rw a rd w ith t h e clo sin g o f th e s a le w ith o u t a fin a l o rd e r ru lin g

o n S M D I’s d e fe n se s. I d

. a t 1 1 9 1

. B y d o in g s o , th e co u rt re a so n e d , “C o n su m e rIn f

o a cce p te d th e risk th a t S M D I co u ld still p re v a il o n t h e d e fe n se s it re ta in e d u n d e r th e S a le O rd e r” a n d S e ctio n 3 6 3 ( m ) d id n o t s trip it o f th o se d e fe n se s. Id

. S im ila r to th e sa le o rd e r in P a ig e , th e b a n k ru p t c y co u rt’s o rd e r h e re th a t

a p p ro v e d th e sa le i n F e b r u a ry 2 0 1 0 , re se r v e d N e w co ’s in t e re sts p e n d in g a fin a l

o rd e r. R e d W a t e r w e n t f o rw a rd w ith th e sa le , a cce p tin g th e risk th a t N e w co ’s
in t e re sts w o u ld su rv iv e

. O f course, the February 2 010 “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 posse s s i o n o f t h e pipeline long before the bankruptcy c ourt’s 2011 order. Red W ater c o uld be arguing that N ewco should
have sought a stay earlier

– at the time t he sale was b eing consummated in April
2010. Such a stay w o u l d h a ve vitiated the purpose of the February order allowing the sale to go forward with N ewco’s claims remaining a contingent interest. Further, w hat would have been stayed in April 2010 was not a sale free
and clear of Newco’s claims, but a sale not free a nd clear o f those c laims. Instead of a stay by the claimant, Red Water c ould h ave d e clined to g o forward with the sale under such terms – or at least objected and had t h e b a n kruptcy court resolve whether the bid co u ld b e a lte r e d

. R e fu sin g to a p p l y S e ctio n 3 6 3 (m ) u n d e r th e se circu m sta n ce s is n o t

co n t ra ry to th e p o licy o f p ro v id in g in n o ce n t th i r d p a rtie s w ith a r e lia b le fin a l

o rd e r. R e q u irin g a sta y b e fo r e w e ca n re v ie w a d e cisio n e n te re d a y e a r a fte r a

sa le th a t w a s n o t o rig in a lly fre e a n d cle a r o f a p a rticu la r cla im d o e s n o t fo llo w fro m th e te x t o f S e ctio n 3 6 3 (m ) n o r sa tisfy its p u rp o s e s. W e h a v e ju risd ictio n
to co n s id e r th e b a n k ru p t cy co u rt’s A u g u st 2 0 1 1 d e cisio n on Newco’s claims.

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II. Are Newco’s Interests Covenants Running with the Land?
N e w co a r g u e s th a t its rig h t to tra n sp o rta tio n fe e s a n d its rig h t to co n s e n t
to th e a ssig n m e n t o f th e p i p e lin e co n stitu te co v e n a n ts ru n n in g w i th th e la n d

. T e x a s c a se la w c o n ta in s so m e v a ria t io n s o n th e re q u i re m e n ts f o r a
covenant t h at runs with the land. We accept the following a s a controlling explanation: “a covenant runs with the land when it [ 1] touches and concerns the land; [2] relates to a thing in e xistence or s pecifically 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 notic e

. ” I n w o o d N. Homeo w n ers’ A ss’n
, In c. v

. H a r ris , 7 3 6 S

. W .2 d 6 3 2 , 6 3 5 (T e x

. 1 9 8 7 ). T h e C o u rt a lso re fe rre d to a

re q u ire m e n t o f p riv ity b u t d id n o t d e ta il i t. Id

. A n in te rm e d ia te co u rt r e lie d o n In w o o d ’ s d iscu ssio n o f c o v e n a n ts a n d s a id th is a b o ut privity: “There must also
be p rivity of estate between the p arties when the covenant was made.” Ehler v. B.T. Suppenas Ltd , 74 S.W.3d 515, 521 (Tex. Ap p

. – Amarillo 2002) (citation omitted). N e w c o co n te n d s th a t th e e le m e n ts a r e m e t in th is ca se

. 4
T h re e fa cto rs a re u n co n te ste d

. T h e le tte r a g re e m e n t e x e cu te d b y N e w co

a n d P ro d u ce rs in 1 9 9 9 sta te d a n in te n t th a t N e w c o ’s in te re s ts in th e p i p e l i n e

ru n w ith th e la n d

. T h e a g re e m e n t a lso re f le cte d th e in te n t to b in d N e w co a n d
P r o d u ce rs, a s w e l l a s th e ir a ssig n s, a n d b u rd e n a th in g i n e x i s te n ce

– t h e
p ip e lin e

. W h e n E n e rg y te c a g re e d to p u rch a se th e p ip e lin e fro m P r o d u ce rs, it

4 Energytec argues that N ew co has failed to p res erve the is s ue of w hether its right to

cons ent to an as s ignm ent runs with the land

. Energytec p oints to the b a n k r u p t cy court’s bench ord er authorizing the s ale f ree and clear of N ew co’s interes ts , w hich d id not m ention the right to cons ent to as s ignm ent and ref ers o nly to N ew co’s right to trans p ortation f ees

. O ur review of the record reveals that N ew co rais ed its right to cons ent to as s ignm ents bef ore the bank rup tcy court in its objections to E nergytec’s m otion f or authorization to s ell the p ip eline and that right w as p res erved in the court’s initial ord er authorizing the s a l e. New co als o
as s erted it s r ight to cons ent to as s ignm ents in its brief ing bef ore the dis trict court, and the

c ourt ad d res s ed the right to cons ent, although only brief ly, in its ord er. The is s ue has been ad equately p res erved f or review by this court.

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a lso e x p re ssly a g re e d to h o n o r N e w co ’s in te re sts in th e p ip e lin e , so th e re is n o
q u e stio n th a t E n e rg y te c h a d n o tice

. W h a t a re le ft is t h e to u ch -a n d -co n ce rn fa cto r a n d w h e th e r th e re w a s p riv ity . W e a d d re ss p r iv ity first.
T h e tra n s p o rta t i o n fe e a n d N e w c o ’ s o th e r in te re sts w e re cre a te d in t h e 1 9 9 9 le tte r a g re e m e n t. M e sca la ro o w n e d th e e n t ire ty o f th e i n t e r e s t s in t h e
p ip e lin e p rio r to e n te rin g in to th e le tte r a g re e m e n t. The agreement describes
Newco as the “successor in interest to Mescalaro,” but there is n o elaboration about that. Newco “ therefore join s i n the execution of this Agreement and
Mescala r o s h a l l reserve for the benefit of Newco t h e acquired interests.” T h e le tte r a g re e m e n t co n ta i n s a n a ssig n m e n t o f th e rig h ts-o f -w a y a n d p ip e lin e
sy ste m to E n e rg y t e c’s p re d e ce sso r, P ro d u ce rs. It a lso co n t a in e d th is p ro v isio n ,

w h ich is th e so u rce o f N e w co ’s p rim a ry cla i m : P r o d u ce rs sh a ll p a y N E W C O , o r its d e sig n e e , a s su cce sso r in in t e re s t to M e s ca l a r o , a T ra n sp o rta tio n F e e e q u a l to T e n C e n ts ($ 0 .1 0 ) p e r M C F fo r g a s v o lu m e s tra n sp o rte d th ro u g h th e S y ste m fro m th e se v e n n a t u r al gas wel l s [ t h e re a fte r d e scrib e d ], a n d T w e n ty C e n t s ( $ 0 .2 0 ) p e r M C F fo r g a s v o lu m e s tra n sp o rte d th o u g h th e p i p e lin e fro m a n y a n d a ll w e lls w h i ch m a y b e co n n e c te d t o t h e S y ste m h e re a fte r

. T h e cle a r la n g u a g e o f th e le tte r a g re e m e n t m e a n t th a t M e sca la ro w a s

re se rv in g fo r N e w c o ’s b e n e fit ce rt a i n i n te r e sts o u t o f t h e a ssig n m e n t to
P r o d u ce rs. E n e rg y t e c a rg u e s th a t th e re le v a n t p riv ity is a b se n t. W e sta rt b y id e n tify in g th e p riv i ty i ssu e s th a t a rise in d e fin in g co v e n a n t s th a t ru n w ith th e la n d

. T h e b u rd e n o f th e co v e n a n t is o n th e o w n e r o f t h e
p ip e lin e a n d a cco m p a n y in g rig h t-o f- w a y

. P riv i ty h a s b e e n m e t a s to t h e

su cce ssio n o f o w n e r s h i p o f th e b u rd e n e d p ro p e rty : M e sca la ro c o n v e y e d to
P r o d u ce rs, w h o co n v e y e d to E n e rg y te c, w h o th ro u g h b a n k r u p tcy c o n v e y e d to R e d W a te r. N e w co is e ith e r th e o rig in a l o w n e r o f th e b e n e f it o f th e co v e n a n t o r

su cce e d e d to it th ro u g h so m e a rra n g e m e n t w ith M e sca la r o , a p o in t l e f t u n cle a r

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

in th e 1 9 9 9 le tte r a g re e m e n t w h ich re fe rre d to N e w co a s M e sca la ro ’s “su cce sso r in i n te re st.” T h e se su cce ssiv e re la tio n sh i p s a re a t tim e s ca te g o rize d a s “v e rtica l

p riv ity

. ” 9 R I C H A R D R. P O W E L L , P O W E L L O N R E A L P R O P E R T Y § 6 0.04[3 ][c][iv] (2010). T h e p riv ity t h a t is a lle g e d ly m issin g h e re h a s b e e n c a lle d “ h o rizo n ta l

p riv ity , ” w h ich i s th e re la t io n sh ip b e tw e e n th e o rig in a l p a rtie s to th e covenant. Id. § 60.04[3][c][iii]. For t hose j urisdictions r equiring horizontal privity, there
must be “simultaneous existing interests” or “mutual privity” between the
ori g i n a l p a r t i es as either landlord and tenant or grantor and grantee. Id. § 60.04[3][c][ii]-[iii]. Energytec relies strongly on a Texas case addressing horizont a l p r i vity, though the opinion does not use that label. Wayne Harwell Props. v. Pan Am. Logistics C t r

. , Inc. , 945 S.W.2d 2 16, 2 18 (Tex. App. – San A ntonio 1997, writ denied)). A Restatement describes Wayne Harwell as one of a minority of

m odern cases requiring horizontal p r ivity. R E S T A T E M E N T (T H I R D ) O F P R O P

. : S E R V I T U D E S §2.4 (2000). It is a much-criticized doctrine that has been e xplicitly rejected by this latest Restatement. Id. T he principal r a tionale for t he doctrine

was so “that most covenants intended t o r u n w i t h the land will be created in conveyances.” Id. W e must a lso be w a r y b e cause the c i ted d e cisio n is n o t o n e fro m th e T e x a s S u p re m e C o u rt. W e a re g u i d e d b u t n o t co n tro l le d b y th a t d e cisio n w h e n in t e rp re tin g T e x a s la w

. T ra n sco n t’l G a s P ip e L in e C o rp

. v

. T ra n sp . In s. C o

. , 9 5 3 F .2 d 9 8 5 , 9 8 8 (5 th C ir. 1 9 9 2 ).
E n e rg y te c a sse rts t h a t th e fa cts o f W a y n e H a rw ell a re “re m a rk a b ly
sim ila r” to th o se h e re

. There are at least some similarities that w e will remark

upon. An owner of land entered into an agreement with a d e v e l o per. Wayne
Harwell , 945 S

. W

. 2 d at 217. The landowner, desiring to d evelop his p roperty,

gave the developer Harwell a “right of first refusal t o b e g e neral contractor on
any improvements t o the l and, a s w ell as a 2 0-year a ssignment of 15 percent of ‘net cash flow interest’ from the land to Harwell.” I d . The land was conveyed,

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

but the n ew owners argued they had no obligation to r ecognize H a r w e l l’s claimed rights. Id. The issue was w hether th e 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 b etween the o riginal parties, i t must be shown that the restriction is imposed for t he benefit of adjacent land; a bsent this s h owing, the covenant will be c onstrued as a personal covenant with the grantor.

It is undisputed that Harwell does n o t own l and that would be benefitted by t he r estrictions on the

. . . property; therefore, a bsent pr i v i t y o f e state between the parties, we c a nnot find this to be an equitable servitude.
Id. (citations omitted). The beneficiary of these rights was simply a d e v e l oper who contracted to work with the landowner. Id. Consequently, t he 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 f

acts of the Texas court decision, n o property was conveyed at the time of creating the d eveloper’s rig h t s

. Quite differently, here the transportation fee and o ther benefi t s f o r N e w co were created at the time of a
conveyance of real p roperty. Mescalaro in t he letter agreemen t a n d i n the assignment and bill of sale conveyed the pipeline and r ights-of-way and carved
out o f t hat conveyance the rights at issue in this appeal. All these documents

w ere recorded in the land records of the relevant c ounty. Had Mescal a r o retained the transportation fee for itself when it conveyed the pipeline a nd other
real property interests to Producers, there would be n o question about privity.

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

Mescalaro and Producers were in horizontal privity, and a later assignment by Mescalaro to N ewco satisfies vertical p rivity. The slightly different manner in
which the 1999 letter agreement carved out the transportation fee and conveyed interests in the pipeline property to t wo different grantees is not meaningfully distinguishable. The letter agreement states that “Mesc a l a r o has reached agreement to c onvey ce r t a i n i n terests in the properties” to Newco. The

conveyance to Newco was in the same instrument a s t h e c onveyances to other parties, but we perceive no meaningful effect on the privity concerns. Moreover, the fact that the documen t s creating the rights w ere recorded satisfies the Restatement’s perception of the rationale for the privity requirement.
W e c o n c lude that if horizontal privity is a requirement of Texas la w i n determining whether a covenant runs with the land, it was satisfied.
The remaining question is w hether the interest touches and concerns real property. Newco relies o n W estla n d O il D ev e l o

p m e n t C o rp

. v

. G u lf O il C o rp

. , 6 3 7 S .W .2 d 9 0 3 (T e x

. 1 9 8 2 ). T h e re , th e T e x a s S u p re m e C o u r t c o n sid e re d

w h e th e r a n a g r e e m e n t t o c o n v e y in te r e s t s i n o il a n d g a s le a se s ra n w ith t h e la n d

. Id

. a t 9 0 5

. T h e co u rt a ck n o w le d g e d th a t t h e te s t s f o r m a k in g th is
d e te rm in a tio n w e re “fa r fro m a b so lu te .” Id

. a t 9 1 1

. O n e t e st co n sid e rs w h e th e r th e co v e n a n t “ a f

f e c t e d th e n a tu r e , q u a lity o r v a lu e o f th e th in g d e m ise d , in d e p e n d e n tly o f co lla te ra l circu m sta n ce s, o r i f it a ffe cte d th e m o d e o f e n jo y in g it.” Id

. (q u o ta t io n s o m i tte d ). T h e o th e r te st m e n tio n e d b y th e co u rt a lso ta k e s in t o a cco u n t th e co v e n a n t ’s im p a ct o n th e p r o p e rty ’s v a lu e : If t h e p ro m iso r’s l e g a l re la tio n s in r e sp e c t to t h e l a n d in q u e stio n
a re le sse n e d

– h is le g a l in te re st a s o w n e r re n d e re d le ss v a lu a b le b y th e p ro m ise

– th e b u rd e n o f th e co v e n a n t to u ch e s o r co n ce rn s th a t la n d ; if th e p r o m ise e ’s le g a l re l a tio n s in re sp e ct to th a t la n d a re in c re a se d

– h is le g a l in te re st a s o w n e r re n d e re d m o re v a lu e b y th e p ro m ise

– th e b e n e f

i t o f th e c o v e n a n t to u ch e s o r co n ce rn s t h e la n d

.

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

Id

. T h e co u rt h e ld th a t b e ca u se th e p ro m ise to co n v e y in te r e sts in o il a n d g a s le a se s b u rd e n e d th e la n d , p o te n tia lly re n d e r in g it le ss v a lu a b le , i t co n stitu te d

a co v e n a n t ru n n in g w ith th e la n d

. Id

. N e w co a rg u e s th a t th e o b lig a tio n to p a y tra n sp o rta t io n co sts b u rd e n s t h e la n d a n d m a k e s i t le ss v a lu a b le

. A m o n g th e re a so n s is th a t it i s se cu re d b y a lie n o n th e e n tire p ip e lin e ; fa ilu re t o p a y th e fe e w o u ld re su l t i n l o s s o f

o w n e rsh ip a n d u se o f th e p ip e lin e th ro u g h fo re clo su re

. N e w co co n te n d s th a t its rig h t to co n se n t to a ssig n m e n t o f th e p ip e lin e a lso a ffe cts th e n a t u r e , q u a lity ,

a n d v a lu e o f t h e p ip e lin e sy s te m a n d rig h tly co n s tit u t e s a co v e n a n t ru n n in g

w ith th e la n d

. E n e rg y te c re lie s o n E l P a so R efin ery , L P v

. T

R M I H o ld in g s , In c. (In re E l
P a so R efin ery , L P

) , 3 0 2 F .3 d 3 4 3 (5 th C i r

. 2 0 0 2 ). T h is co u rt co n sid e re d w h e th e r

a c o v e n a n t p re v e n tin g su b se q u e n t o w n e rs o f a n o il re fin e ry fro m se e k in g

co n t rib u tio n fro m th e o r ig in a l o w n e r fo r e n v iro n m e n ta l co n ta m in a t io n w a s a

co v e n a n t ru n n in g w ith th e la n d

. Id

. a t 3 4 6

. A s i n th is ca se , th e o n ly d isp u te d
fa cto r co n ce rn e d w h e th e r th e co v e n a n t to u ch e d o r c o n ce rn e d t h e l a n d

. Id

. a t
3 5 6

. W e h e ld th a t a co v e n a n t a llo ca tin g lia b ility f o r e n v i ro n m e n ta l co sts d id n o t
to u ch o r co n ce rn th e la n d

. Id

. T h e c o u rt e x p la in e d th a t a n y b e n e fit cre a te d b y th e p r o v isio n a f

fe cte d o n ly th e o rig in a l o w n e r a n d h a d “n o d i re ct im p a ct u p o n th e la n d i tse l f.” I

d

. F u r th e r, t h e c o v e n a n t d id n o t co m p e l o r p re clu d e

su b se q u e n t o w n e r s fro m d o in g a n y th in g o n th e l a n d i tse lf. I d

. a t 3 5 6 -5 7

. T h e

c o u rt ch a r a cte rize d th e e n v iro n m e n ta l-lia b ility p ro v isio n a s a “co st-sh iftin g

m e ch a n i s m ” t h a t w a s “m o re a n a lo g o u s to a n o b lig a tio n to a s su m e a n

e n cu m b r a n c e .” I

d

. a t 3 5 7

. “U n d e r T e x a s la w , a co v e n a n t to p a y a n

e n cu m b r a n c e d o e s n o t ru n w ith th e la n d .” Id

. W e a lso re je cte d a n a rg u m e n t th a t if a co v e n a n t a f fe cts th e v a lu e o f th e la n d it n e ce ssa rily ru n s w ith th e la n d

. Id

. T h e co u rt e x p la in e d th a t m o re w a s

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

re q u ire d u n d e r T e x a s la w a n d th a t “ e v e n w h e n a co v e n a n t im p a cts t h e v a lu e

o f l a n d , it m u st still a ffe ct t h e o w n e r’s in te r e s t i n t h e p ro p e rty o r i ts u s e in o r d e r
to b e a re a l co v e n a n t .” Id

. E m p lo y in g th is la n g u a g e , E n e rg y te c m a in ta in s th a t th e o b lig a tio n to p a y tra n sp o rta tio n co sts is u n r e la te d to th e u se o f th e la n d
b e ca u s e it is b a se d so le ly o n th e v o lu m e o f g a s m o v in g th ro u g h th e p ip e lin e a n d
h a s n o d ire ct im p a ct o n th e la n d

. W e d isa g r e e

. T h e re a l p ro p e rty a t issu e h e re is a g a s p ip e lin e sy s te m a n d
th e rig h ts-o f-w a y re q u ire d fo r its p la ce m e n t. N e w c o ’ s in te re st in tra n sp o rta tio n fe e s is f o r th e u se o f re a l p ro p e rty , i.e ., th e t ra v e lin g o f n a tu ra l g a s fro m a
sta rtin g p o in t a lo n g th e le n g th o f th e p ip e lin e to a n e n d p o in t. T h e p ip e lin e is

a su b su r fa ce ro a d fo r n a tu ra l g a s, a n d a fe e fo r th e u se o f th a t ro a d w a s

re ta in e d b y M e sca la ro a n d a ssig n e d to N e w c o

. A n o th e r re strictio n o n u se is
th a t th e p i p e l i n e ca n n o t b e a ssig n e d w ith o u t N e w co ’s co n se n t. T h e se rig h t s im p a ct t h e o w n e r’s in te re st in th e p ip e lin e

. F u rth e rm o re , a s b u rd e n s o n t h e
p ro p e rty , th e y a lso im p a ct th e p ip e lin e ’s v a lu e in t h e e y e s o f p r o s p e ctiv e b u y e rs. In d e e d , th e im p a c t o n t h e sa le i n b a n k ru p tcy h a s b e e n cle a r, th o u g h t h e fin a n cia l im p a c t h a s n o t b e e n q u a n tifie d

. E n e rg y te c a rg u e s t h a t N e w co ’s tra n sp o r ta tio n f e e c a n e a sily (if n o t ch e a p ly ) b e circu m v e n te d b y c o n stru ctin g a n o t her pi pel i ne on di f f er e nt p ro p e rty

a n d a b a n d o n in g th e u se o f t h e o rig in a l p ip e lin e

. C o n se q u e n tly , E n e rg y te c

a rg u e s th e tra n sp o rta tio n fe e “d o e s n o t co m p e l n o r p re clu d e th e p ro m iso r o r a n y

su b se q u e n t o w n e r fro m d o in g a n y th in g o n th e la n d itse lf.” E l P a so , 3 0 2 F .3 d

a t 3 5 6 -5 7 . T h a t is n o t so

. W h e n e v e r th e o w n e r o f th e “la n d ,” i.e ., th e p ip e lin e

a n d th e rig h ts-o f-w a y , w a n ts to t ra n sp o rt n a tu ra l g a s a lo n g its le n g th , th e fe e
to N e w co is to b e p a id

. If th e “la n d ” o w n e r d e cid e s n o lo n g e r to d o so , th e n N e w c o ’ s rig h ts a r e d o rm a n t, su b je ct to re v i v a l sh o u ld th e n a tu ra l g a s e v e r a g a in
flo w

. T h e p o s sib ility th a t co v e n a n ts w ill e x p i r e b y t h e fo rce o f e v e n ts is n o

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

d e fin itio n a l o b sta cle to ca llin g th e m co v e n a n ts ru n n in g w ith th e la n d

. S im ila rly , th e o v e rrid in g r o y a lty in te re st o n p ro d u ctio n f ro m ce rta in w e lls th a t

a lso w a s cre a te d in th e le tte r a g re e m e n t p r e su m a b l y e n d s w h e n p r o d u c t io n

ce a se s a n d t h e o il a n d g a s le a se s, o n w h ich th e ro y a lty d e p e n d s, e x p i r e

. B u t th a t d o e s n o t m e a n th a t s o lo n g a s th e re is re le v a n t p r o d u ctio n , th a t th e ro y a lty
is n o t b in d in g o n su cce sso rs to th e le a se s. N e w co ’s rig h t t o tra n sp o rta tio n f ees and its rig h t to co n se n t t o a ssig n m e n t

a re co v e n a n ts ru n n in g w i th th e la n d . T h e d istrict co u rt e rre d

.

III. M ay Newco be Compelled to Accept Money Satisfaction of its Interests?
E n e r g y t e c m a in ta in s t h a t e v e n if w e fin d th a t N e w co ’s in te re sts in th e
p ip e lin e ru n w ith th e la n d , th e p ip e lin e m a y still b e so ld fre e a n d cle a r o f th o se in t e re sts b y v irtu e o f th is sta tu te : T h e tru ste e m a y se ll p ro p e rty

. . . fre e a n d cle a r o f a n y in te re s t in

su ch p ro p e rty o f a n e n tity o t h e r th a n t h e e sta te , o n ly if

. . . su ch

e n tity co u ld b e co m p e l l e d , in a l e g a l o r e q u ita b le p ro ce e d in g , to
a cce p t a m o n e y sa tisfa ctio n o f su ch in te re st.

1 1 U .S

. C

. § 3 6 3 (f)(5 ). T h e a p p lica b ility o f S e ctio n 3 6 3 ( f ) ( 5 ) w a s r a i se d in t h e b a n k ru p tcy co u rt b u t n o t re so lv e d

. B o th th a t c o u rt a n d th e d istrict c o u r t d e te rm in e d t h a t N e w co ’s in te re sts w e re n o t co v e n a n ts ru n n i n g w ith t h e la n d ,

m o o tin g th e re le v a n ce o f S e c tio n 3 6 3 (f)(5 )

. N e w co co n t e n d s t h a t th e m o n e t a ry v a lu e o f its rig h t to fu tu re
tra n sp o rta tio n fe e s is im p o ssib le to e stim a t e

. U n d e r th e le tte r a g re e m e n t,
N e w c o ’ s fe e s a r e tie d to w e lls id e n tifie d in th e a g re e m e n t a n d a n y fu tu re w e lls
th a t m a y b e c o n n e cte d to th e p ip e lin e

. A cco rd in g to N e w co , b e ca u se th e re is n o

w a y to p re d i ct t h e n u m b e r o f a d d itio n a l w e lls th a t m a y e v e n tu a lly b e co n n e cte d

to t h e p ip e lin e , m o n e t iza tio n o f its in te re s t in t ra n sp o rta tio n fe e s i s im p o ssib le

.

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

T h e district court found, though, that an interest’s “ increase in value in t he future does not mean that it cannot be given a present value.”
We do n ot address t he valuation i ssue f urther b ecause the f

a ilure of the
two lower c ourts to resolve t he Section 363(f)(5) i ssue convinces us to remand for
f u r t her proceedings with respect t o this subsection. By its e xpress terms, Section 363(f)(5) allows for the extinguishment of a nondebtor’s interest in the debtor’s property only u pon a showing that the nondebtor “could be compelled,
in a l egal or equitable p roceeding, to accept” money satisfaction of its i nterest. This court has yet to consider w h a t c o n stitutes a qualifying legal or equitable proceeding f

or purposes of Section 363(f)(5). 5 The determination of what is a qualifying legal or equitable proceeding under S ection 3 63(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 b ankruptcy c ourt that authorized the s ale of t h e p i peline free and clear of Newco’ s i n t e rests. Newco’s interests, including a transportation fee, security interest, and right to consent to assignments, are covenants running w ith the
land. We REMAND to t h e d i s t rict court for further proceedings including whether a qualifying proceeding would enable Energytec to sell the p ipeline free and clear of Newco’s interests under Section 363(f)(5).

5 The uncertainties und er Section 363( f ) ( 5) are s how n by the f

act s om e courts have held that cram d ow ns und er 11 U. S. C. § 1129( b) ( 2) are qualif ying proceed ings

. I

n re G ra nd Sl a m , U

. S

. A.
, Inc.
, 178 B. R. 460, 462 ( E. D

. M ich. 1995) ; Terra ce Cha l et A p a rtm ents, Ltd. v

. F

ed. N a t’l M ortg. Ass’n (

In re Terra ce C h a l e t A pa rtm ents, Ltd. ) , 159 B. R. 821, 829 ( N. D

. I ll. 1993)

. O thers have rejected that interp retation and have d eci d e d w hether p roceed ings und er nonbank rup tcy law could f orce m onetizati o n on an ow ner. Cl ea r Cha nnel Outdoor, Inc. v

. Knup f er ( In re PW, LLC) , 391 B. R. 25, 46- 47 ( B. A. P. 9th Cir. 2008) ; In re Jol a n, Inc. , 403 B. R

. 866, 869- 70 ( Bank r. W. D

. Was h. 2009)

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