Sabine Saga: Second Circuit Upholds Rejection but Cites Approach that Could Broadly Undercut Texas Gathering Agreements

When the bankruptcy decision was issued, it was unclear whether horizontal privity remained a requirement under Texas law given that recent Texas cases rarely discuss the archaic doctrine, which has been abandoned or fallen into disuse in various jurisdictions nationwide.

The legal issues in Sabine were so Texas-centric that the defendants sought to directly appeal the bankruptcy decision to the Second Circuit, where the property law issues could be certified to the Supreme Court of Texas, the final arbiter on matters of Texas law. The bankruptcy court denied this request, however, forcing the defendants to pursue their appeal first in the District Court for the Southern District of New York, which ultimately affirmed the bankruptcy court’s decision.

In the subsequent appeal to the Second Circuit, the midstream companies (one of which later withdrew from the appeal) asserted in their consolidated opening brief that if the Second Circuit “has any doubts regarding these issues of Texas law, it should certify them to the Texas Supreme Court.”ⁱⁱ Given the importance of the case, the GPA Midstream Association and the Texas Pipeline Association both filed briefs in the case as amicus curiae similarly urging the Second Circuit to certify the issues to the Supreme Court of Texas.

The Texas Pipeline Association (TPA) noted that the “contractual provisions at issue in this case are functionally the same provisions as found in contracts covering thousands of wells in the state of Texas”ⁱⁱⁱ and “it should be expected that the same issues will arise in courts in other circuits.”^iv The TPA warned that “[d]iffering opinions as to the fundamental nature of such contracts would be extremely disrupting to the energy industry.”^v The GPA Midstream Association argued that the case satisfied all the elements required for certification to the Supreme Court of Texas as the issues in the case would have “far-reaching impact . . . on producers and gatherers” in Texas; there currently is not authoritative Texas law on the matter; and certification would resolve the litigation.^vi

Despite these efforts by the midstream industry, the Second Circuit declined to certify the Texas property law issues for presentment to the Supreme Court of Texas. Instead, it issued a summary order affirming the district court decision based on its view that horizontal privity remained a requirement under Texas law. It acknowledged that the trend throughout the country is toward abolition of this requirement but determined that it could not read the requirement out of Texas state law when there is no Texas authority instructing it to do so.

The Second Circuit then applied the horizontal privity requirement to the facts at issue and found that because there was no conveyance relating to the land that was burdened by the applicable dedications, there was no horizontal privity and no real covenant was created.^vii The Second Circuit noted that based on this result, it did not need to determine whether the “touch and concern” requirement had been met.

The basis on which the Second Circuit reached its decision has profound implications for gathering firms in Texas. The lower court decisions avoided the horizontal privity issue as much as possible and instead focused primarily on the touch and concern requirement, the determination of which is based on certain fact-specific issues that would be met in some cases and not met in others. The Second Circuit decision, however, emphatically declares that horizontal privity continues to apply under Texas law. Under the Second Circuit’s rationale, gathering contract dedications in Texas may need to be accompanied by a sale of the underlying fee estate, a highly unusual deal structure. Accordingly, virtually all gathering dedications in Texas could fail under the Second Circuit’s reasoning.

Although the Second Circuit’s decision was rendered by summary order, which does not have precedential effect, producers seeking to reject or challenge gathering arrangements or dedications governed by Texas law could gravitate toward courts in the Second Circuit, which likely will give deference to the Second Circuit’s decision even though it does not serve as formal precedent. However, the Second Circuit’s status as a venue of choice for producers seeking to reject gathering arrangements could change if the Supreme Court of Texas has an opportunity to examine the horizontal privity issue, an opportunity that industry participants must continue to await.

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iIn re Sabine Oil and Gas Corp. (Sabine Oil and Gas Corp. v. Nordheim Eagle Ford Gathering, LLC, Case No. 17-1026, Summary Order (2d Cir. May 25, 2018).
ⁱⁱIn re Sabine Oil and Gas Corp., Case No. 17-1032, Consolidated Brief of Appellants (2d Cir. July 25, 2017), p. 67.
ⁱⁱⁱIn re Sabine Oil and Gas Corp., Case No. 17-1032, Amicus Curiae Brief of Texas Pipeline Association (2d Cir. Aug. 1, 2018), p. 6.
^ivId. at p. 8.
^vId. at p. 9.
^viIn re Sabine Oil and Gas Corp., Case No. 17-1032, Amicus Curiae Brief of GPA Midstream Association in Support of the Consolidated Brief of Appellants (2d Cir. Aug. 1, 2018), pp. 13-15.
^viiThe Second Circuit also rejected the remaining appellant’s alternative argument that the dedication constituted an equitable servitude, another form of property that cannot be rejected in bankruptcy.