Case LSS Doc 1216 Filed 03/02/16 Page 1 of 53 IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE

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1 Case LSS Doc 1216 Filed 03/02/16 Page 1 of 53 IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE ) In re: ) Chapter 11 ) Quicksilver Resources Inc., et al., 1 ) Case No (LSS) ) Debtors. ) Jointly Administered ) Re: D.I & 1188 DEBTORS REPLY IN SUPPORT OF THE MOTION FOR AN ORDER AUTHORIZING AND APPROVING REJECTION OF CERTAIN EXECUTORY CONTRACTS WITH AFFILIATES OF CMLP MIDSTREAM PARTNERS LP 1 The Debtors in these chapter 11 cases, along with the last four digits of each Debtor s federal tax identification number, are: Quicksilver Resources Inc. [6163] ( QRI ); Barnett Shale Operating LLC [0257]; Cowtown Drilling, Inc. [8899]; Cowtown Gas Processing L.P. [1404]; Cowtown Pipeline Funding, Inc. [9774]; Cowtown Pipeline L.P. [9769]; Cowtown Pipeline Management, Inc. [9771]; Makarios Resources International Holdings LLC [1765]; Makarios Resources International Inc. [7612]; QPP Holdings LLC [0057]; QPP Parent LLC [8748]; Quicksilver Production Partners GP LLC [2701]; Quicksilver Production Partners LP [9129]; and Silver Stream Pipeline Company LLC [9384]. The Debtors address is 801 Cherry Street, Suite 3700, Unit 19, Fort Worth, Texas

2 Case LSS Doc 1216 Filed 03/02/16 Page 2 of 53 TABLE OF CONTENTS PRELIMINARY STATEMENT... 1 BACKGROUND... 4 REPLY... 5 I. BANKRUPTCY RULE 7001 IS NOT APPLICABLE TO THE MOTION AND CMLP S ARGUMENTS TO THE CONTRARY ARE NOTHING MORE THAN AN ATTEMPT TO DELAY AND MANUFACTURE LEVERAGE... 5 A. Bankruptcy Rule 7001 is Inapplicable to the Motion and Other Courts Have Rejected CMLP s Arguments to the Contrary B. CMLP Should Be Deemed to Have Consented to Proceeding by Motion Despite Its Transparent Attempt to Delay and Manufacture Leverage II. THE GATHERING AGREEMENTS ARE COMMERCIAL SERVICE AGREEMENTS THAT DO NOT CREATE OR CONVEY ANY REAL PROPERTY INTERESTS A. The Gathering Agreements Concern Gas That Has Been Severed from the Mineral Estate, Which is Personal Property Under Texas Law B. The Gathering Agreements Lack Sufficient Conveyance Language to Create a Real Property Interest Under Texas Law C. The Gathering Agreements Do Not Contain Land Descriptions Sufficient to Satisfy the Statute of Frauds D. The Gathering Agreements Contain Terms That Are the Hallmarks of a Commercial Services Agreement Rather Than a Conveyance of a Real Property Interest III. THE GATHERING AGREEMENTS DO NOT CONSTITUTE OR CONTAIN COVENANTS RUNNING WITH THE LAND A. The Dedication Language in the Gathering Agreements Does Not Constitute a Covenant Running With the Land (i) There is No Privity of Estate Because the Gathering Agreements Are Not Contained in a Grant of Any Real Property Interest (ii) The Gathering Agreements Do Not Touch and Concern the Land RLF v.1 i

3 Case LSS Doc 1216 Filed 03/02/16 Page 3 of 53 (iii)cmlp Cannot Show that the Original Parties Intended for the Gathering Agreements to Constitute Covenants Running With the Land (iv) Another Bankruptcy Court is Inclined to Find that Similar Gathering Agreements Are Not Covenants Running With the Land (v) CMLP s Main Authority Energytec Is Distinguishable and Not Supportive of CMLP s Arguments B. Even if the Gathering Agreements Contain Covenants Running With the Land, They Can Still Be Rejected Under Bankruptcy Code Section IV. THE DEDICATIONS IN THE GATHERING AGREEMENTS ARE NOT EQUITABLE SERVITUDES A. The Gathering Agreements Do Not Burden the Use of Land B. The Gathering Agreements Do Not Benefit Any Land Owned by CMLP V. EVEN IF THE COURT CONCLUDES THAT CMLP HAS REAL PROPERTY INTERESTS PURSUANT TO GATHERING AGREEMENTS, THE DEBTORS SALE TO BLUESTONE WAS APPROVED FREE AND CLEAR OF SUCH INTERESTS A. The Sale Order is Final and CMLP Never Objected to, Appealed, or Sought a Stay Pending Appeal of the Sale Order B. Even if CMLP Had Objected, the Debtors Sale to BlueStone Could Proceed Free and Clear of CMLP s Alleged Interests Pursuant to Bankruptcy Code Section 363(f)(5) CONCLUSION ii

4 Case LSS Doc 1216 Filed 03/02/16 Page 4 of 53 TABLE OF AUTHORITIES Page(s) Cases In re Aftandilian, BAP No. CC , 2014 WL (B.A.P. 9th Cir. Mar. 26, 2014)...8 In re Alabama Marble Co., Inc., No (JJR), 2014 WL (Bankr. N.D. Ala. Aug. 8, 2014)...6 In re Arden and Howe Assocs., Ltd., 152 B.R. 971 (Bankr. E.D. Cal. 1993)...33 In re Banning Lewis Ranch Co., 532 B.R. 335 (Bankr. D. Colo. 2015)...34 In re Beeter, 173 B.R. 108 (Bankr. W.D. Tex. 1994)...34 BP Energy Co. v. Bethlehem Steel Corp., No. 02 CIV (NRB), 2002 WL (S.D.N.Y. Nov. 15, 2002)...6 In re Braniff Int l Airlines, Inc., 164 B.R. 820 (Bankr. E.D.N.Y. 1994)...9, 10 In re CB Holding Corp., 448 B.R. 684 (Bankr. D. Del. 2011)...6 In re Chateaugay Corp., 944 F.2d 997 (2d Cir. 1991)...43, 44 Circle Ridge Prod., Inc. v. Kittrell Family Minerals, LLC, 2013 WL (Tex. App. Texarkana July 17, 2013, no pet.)...42 Clear Lake Apts., Inc. v. Clear Lake Utils. Co., 537 S.W.2d 48 (Tex. Civ. App. Houston [14th Dist.] 1976), aff d as modified, 549 S.W.2d 385 (Tex. 1977)... passim Clear Lake City Water Auth. v. Clear Lake Utils. Co., 549 S.W.2d 385 (Tex. 1977)...36, 37 Colorado Interstate Gas Co. v. Hunt Energy Corp., 47 S.W.3d 1 (Tex. App. Amarillo Ct. App. 2000, pet. denied)...11 In re Columbia Gas Sys., Inc., 50 F.3d 233 (3d Cir. 1995)...10 iii

5 Case LSS Doc 1216 Filed 03/02/16 Page 5 of 53 In re DBSI, Inc., 432 B.R. 126 (Bankr. D. Del. 2010)...8 In re El Paso Refinery, LP, 302 F.3d 343 (5th Cir. 2002)... passim In re Energytec, Inc., 739 F.3d 215 (5th Cir. 2013)...31, 32 Excel Willowbrook, L.L.C. v. JP Morgan Chase Bank, N.A., 758 F.3d 592 (5th Cir. 2014)...35 In re Fisher Island Invs., Inc., 778 F.3d 1172 (11th Cir. 2015)...7, 9 French v. Chevron USA, Inc., 871 S.W.2d 276 (Tex. App. El Paso 1994), aff d 896 S.W.2d 795 (Tex. 1995)...14 Gouveia v. Tazbir, 37 F.3d 295 (7th Cir. 1994)...34 Harmon v. U.S. Through Farmers Home Admin., 101 F.3d 574 (8th Cir. 1996)...7 Inwood N. Homeowner s Ass n, Inc. v. Harris, 736 S.W.2d 632 (Tex. 1987)... passim In re Kellstrom Indus., Case No (MFW) [D.I. 538, Ex. A ]...33 In re Kellstrom Indus., Inc., 286 B.R. 833 (Bankr. D. Del. 2002)...33, 34 Lesley v. Veterans Land Bd., 352 S.W.3d 479 (Tex. 2011)...13 Lyle v. Jane Guinn Revocable Trust, 365 S.W.3d 341 (Tex. App. 2010)...14 In re Mansaray-Ruffin, 530 F.3d 230 (3d Cir. 2008)...8 In re Marks IV Indus., 438 B.R 460 (Bankr. S.D.N.Y. 2010)...44 Martindale v. Gulf Oil Corp., 345 S.W.2d 810 (Tex. Civ. App. Beaumont 1961, writ ref d n.r.e.)...21, 25 iv

6 Case LSS Doc 1216 Filed 03/02/16 Page 6 of 53 Masgas v. Anderson, 310 S.W.3d 567 (Tex. App. Eastland 2010, pet. denied)...13 Montfort v. Trek Res., Inc., 198 S.W.3d 344 (Tex. App. Eastland 2006, no pet.)...28 Montgomery v. Creager, 22 S.W.2d 463 (Tex. Civ. App. Eastland 1929, no writ)...25 Ohio v. Kovacs, 469 U.S. 274 (1985)...43 Panhandle & S.F.R. Co. v. Wiggins, 161 S.W.2d 501 (Tex. Civ. App. Amarillo 1942, writ ref d)...23 Perry Homes v. Cull, 258 S.W.3d 580 (Tex. 2008)...28 Parten v. Cannon, 829 S.W.2d 327 (Tex. App. Waco 1992, writ denied)...42 In re Quicksilver Res. Inc., No (LSS), 2016 WL (Bankr. D. Del. Jan. 8, 2016)...17 Raman Chandler Props., L.C. v. Caldwell s Creek Homeowners Ass n, 178 S.W.3d 384 (Tex. App. Fort Worth 2005, pet. denied)...21 Reagan Nat l Adver. of Austin, Inc. v. Capital Outdoors, Inc., 96 S.W.3d 490 (Tex. App.-Austin 2002, pet. denied)...21, 35 Riley v. Riley, 972 S.W.2d 149 (Tex. App. Texarkana 1998, no writ)...11, 36 In re Sabine Oil and Gas Corp., No (SCC) (Bankr. S.D.N.Y. Feb. 2, 2016)... passim Sabine Production Co. v. Frost Nat l Bank, 596 S.W.2d 271 (Tex. Civ. App. Corpus Christi 1980, writ dism d)...11 Sava Gumarska in Kemijska Industria D.D. v. Adv. Polymer Sci., Inc., 128 S.W.3d 304 (Tex. App. Dallas 2004, no pet.)...43 Sharifi v. Steen Auto., LLC, 370 S.W.3d 126 (Tex. App. Dallas 2012, no pet)...43 Sharon Steel Corp. v. Nat l Fuel Gas Distrib. Corp., 872 F.2d 36 (3d Cir. 1989)...10, 19 v

7 Case LSS Doc 1216 Filed 03/02/16 Page 7 of 53 Shelton v. Poynor, 326 S.W.2d 583 (Tex. Civ. App. El Paso 1959, writ dism d)...42 Superior Phones, Ltd. v. Cherokee Commc ns., Inc., 964 S.W.2d 325 (Tex. App. Corpus Christi 1998, pet. denied)...37 Swinehart v. Stubbeman, McRae, Sealy, Laughlin & Browder, Inc., 48 S.W.3d 865 (Tex. App. Houston [14th Dist.] 2001, pet. denied)...41 Talley v. Howsley, 170 S.W.2d 240 (Tex. Civ. App. Eastland 1943, no writ)...24, 25 In re Tempnology, LLC, 541 B.R. 1 (Bankr. D.N.H. 2015)...7 In re Torwico Elec., Inc., 8 F.3d 146 (3d Cir. 1993)...43 In re Trans World Airlines, Inc., 322 F.3d 283 (3d Cir. 2003)...41 In re Trans World Airlines, Inc., No (PJW), 2001 WL (Bankr. D. Del. Mar. 27, 2001)...7, 43 United States v. Apex Oil Co., 579 F.3d 734 (7th Cir. 2009)...44 Wasson Interests, Ltd. v. Adams, 405 S.W.3d 971 (Tex. App. Tyler 2013, no pet.)...22, 23, 24 Watkins v. Slaughter, 189 S.W.2d 699 (Tex. 1945)...14 Wayne Harwell Props. v. Pan Am Logistics Ctr., 945 S.W.2d 216 (Tex. App. San Antonio 1997, writ denied)... passim Webb v. Voga, 316 S.W.3d 809 (Tex. App. Dallas 2010, no pet.)...21 Westland Oil Dev. Corp. v. Gulf Oil Corp., 637 S.W.2d 903 (Tex. 1982)...15, 16, 24, 25 Wimberley v. Lone Star Gas Co., 818 S.W.2d 868 (Tex. App. Fort Worth 1991, writ denied)...26, 27 vi

8 Case LSS Doc 1216 Filed 03/02/16 Page 8 of 53 Statutes 11 U.S.C U.S.C passim 11 U.S.C passim TEX. BUS. & COM. CODE Rules Fed. R. Bankr. P Fed. R. Bankr. P Fed. R. Bankr. P Fed. R. Bankr. P Fed. R. Bankr. P passim Fed. R. Bankr. P vii

9 Case LSS Doc 1216 Filed 03/02/16 Page 9 of 53 The debtors and debtors in possession in the above-captioned chapter 11 cases (collectively, the Debtors ) hereby submit this reply (the Reply ) in support of the Debtors Motion for an Order Authorizing and Approving Rejection of Certain Executory Contracts with Affiliates of CMLP Midstream Partners LP [D.I. 1128] ( Motion ) 2 and in response to the Objection of Crestwood Midstream Partners, LP, Cowtown Pipeline Partners L.P., and Cowtown Gas Processing Partners L.P. to Debtors Motion for an Order Authorizing and Approving Rejection of Certain Executory Contracts with Affiliates of Crestwood Midstream Partners LP [D.I. 1188] (the Objection ) filed by Crestwood Midstream Partners LP on behalf of itself and certain affiliates (collectively, CMLP ). In support of this Reply, the Debtors respectfully state as follows: PRELIMINARY STATEMENT 3 1. By its Objection, CMLP simultaneously asks this Court to disregard clear Texas precedent on the nature of certain language in the Gathering Agreements and endorse a tortured reading of the Bankruptcy Rules that would produce a nonsensical result here and in countless other cases. Specifically, CMLP argues that (i) proceeding with a hearing on the Motion is procedurally improper because the request to reject the Gathering Agreements should have been made pursuant to a Bankruptcy Rule 7001 adversary proceeding, and (ii) the Gathering Agreements cannot be rejected because, under applicable Texas law, they contain covenants running with the land and/or equitable servitudes. These arguments, which are a transparent attempt by CMLP to delay the rejection of the Gathering Agreements in an attempt to either gain negotiating leverage over BlueStone or run the clock out on them, thus forcing the Debtors to 2 Capitalized terms used but not otherwise defined herein shall have the meaning ascribed in either the Motion or the Gathering Agreements (as defined below). 3 Capitalized terms used but not otherwise defined in this Preliminary Statement shall have the meanings ascribed herein. RLF v.1 1

10 Case LSS Doc 1216 Filed 03/02/16 Page 10 of 53 close with CMLP s preferred backup bidder, are wholly without merit, would pervert applicable law, and should not be entertained by this Court. 2. First, with respect to Bankruptcy Rule 7001, CMLP argues that the Court should deny the Motion because it amounts to a proceeding to determine the validity, priority, or extent of a lien or other interest in property... that requires an adversary proceeding. This proceeding is not, as CMLP asserts, a proceeding to determine the validity of an interest in property, such as a typical lien avoidance action. This proceeding is to effect the Debtors statutory right to reject certain executory contracts with CMLP. CMLP chose to object to the Motion and decided to allege a real property interest (that does not exist) as a defense to rejection. If that is all that is required to invoke the adversary proceeding requirement of Bankruptcy Rule 7001, as CMLP seems to argue, the logical conclusion is that nearly every rejection or assumption motion and every sale motion should be prosecuted via an adversary proceeding. Indeed, other courts that have considered similar issues have recognized the inherent absurdity of this potential outcome and rejected it outright. This Court should too. 3. Second, CMLP argues that the Gathering Agreements cannot be rejected because they contain non-severable covenants that run with the land under applicable Texas law or, in the alternative, equitable servitudes that are binding on successors to the Debtors interests. These arguments must fail. CMLP cannot meet its burden of establishing either a covenant running with the land or an equitable servitude. CMLP cannot establish the requisite privity of estate, that the Gathering Agreements touch and concern the land, or that the original parties to the Gathering Agreements intended to create a covenant running with the land. Similarly, CMLP cannot establish an equitable servitude because it cannot show that the dedication language in the 2

11 Case LSS Doc 1216 Filed 03/02/16 Page 11 of 53 Gathering Agreements limits the use of the Debtors real property or that it benefits CMLP s real property. 4. Even if CMLP could establish a covenant running with the land under Texas law, such a finding does not preclude the Court from authorizing the rejection of the Gathering Agreements. A number of courts have held that the issue of whether a covenant runs with the land has no impact on whether the contract is subject to rejection. In other words, despite CMLP s assertions, there is nothing particularly remarkable about a covenant running with the land that would exempt it from rejection under Bankruptcy Code section 365 and the cases CMLP cites to the contrary are inapposite. 5. Finally, even if the Court were to conclude that the dedication language in the Gathering Agreements is sufficient to convey a real property interest or establish a covenant running with the land or equitable servitude, the Debtors have already sold their assets free and clear of those supposed interests. The sale of substantially all of the Debtors assets to BlueStone was approved by this Court free and clear of all liens, claims, servitudes and encumbrances, including, if any, those contained in the Gathering Agreements, including dedications. CMLP did not object to the Sale Order, file an appeal of the Sale Order, or seek a stay pending appeal. Separately, even if CMLP had objected to the sale to BlueStone free and clear of its purported interests, pursuant to Bankruptcy Code section 363(f)(5), the Debtors could still sell their assets free and clear of those interests because CMLP could be compelled in a legal or equitable proceeding to accept a money satisfaction of such interest. 6. Accordingly, for all the foregoing reasons, the Debtors submit that CMLP s objections to the Motion are without merit and request that the Motion be granted in its entirety. 3

12 Case LSS Doc 1216 Filed 03/02/16 Page 12 of 53 BACKGROUND 7. CMLP is a midstream services provider that provides gathering, treating, processing, and compression services to the Debtors in their three primary areas of operation Alliance, Lake Arlington, and Cowtown in the Barnett Shale in the Fort Worth Basin in north Texas. The services provided by CMLP to the Debtors are specific to each area of operation and documented in separate agreements, which include gathering and processing agreements (each of which expires in 2020 and are governed by Texas law) as well as a joint operating agreement. The operative agreements primarily consist of the following: i. that certain Gas Gathering Agreement between QRI and Cowtown Pipeline Partners L.P. ( CPPLP ) (as assignee of Cowtown Pipeline L.P. ( CPLP )), effective as of December 1, 2009 and applicable to the Alliance operations area (as set forth therein) ( Alliance Gathering Agreement ); ii. iii. iv. that certain Amended and Restated Gas Gathering Agreement between QRI and CPPLP (as assignee of CPLP), effective as of September 1, 2008 and applicable to the Lake Arlington operations area (as set forth therein) ( Lake Arlington Gathering Agreement ); that certain Sixth Amended and Restated Gas Gathering and Processing Agreement between QRI, CPPLP, and Cowtown Gas Processing Partners L.P. ( CGPP ), effective as of September 1, 2008 and applicable to the Cowtown operations area (as set forth therein) ( Cowtown Gathering Agreement and, collectively with the Alliance Gathering Agreement and the Lake Arlington Gathering Agreement, as each has been amended, restated, amended and restated, supplemented or otherwise modified from time to time the Gathering Agreements ); and that certain Joint Operating Agreement between Quicksilver Resources Inc., Quicksilver Gas Services LP, and Quicksilver Gas Services GP LLC, effective as of July 1, 2010 ( Joint Operating Agreement ). 4 4 The complete list of agreements subject to rejection are set forth on Exhibit 1 to the Proposed Order and include certain amendments, restatements, supplements, other modifications or related agreements that may have been agreed upon or executed from time to time to those contracts identified above. Furthermore, for the avoidance of doubt, the Debtors request to reject includes any other such amendments, restatements, supplements, other modifications or related agreements that may have been agreed upon or executed from time to time. 4

13 Case LSS Doc 1216 Filed 03/02/16 Page 13 of With respect to the Gathering Agreements, and as indicated above, the parties thereto at the time of the sale to Crestwood Holding, LLC 5 were QRI, as Producer under all Gathering Agreements, CPLP, as Gatherer under the Alliance Gathering Agreement and the Lake Arlington Gathering Agreement, 6 and, in the case of the Cowtown Gathering Agreement, CPPLP, as Gatherer and CGPP ( Cowtown Processing ), as Processor. Importantly, at the time of execution, CPLP, CPPLP, and CGPP were wholly-owned affiliates of the Debtors. The Gathering Agreements have since been amended multiple times and now form the basis of the dispute before the Court. REPLY I. BANKRUPTCY RULE 7001 IS NOT APPLICABLE TO THE MOTION AND CMLP S ARGUMENTS TO THE CONTRARY ARE NOTHING MORE THAN AN ATTEMPT TO DELAY AND MANUFACTURE LEVERAGE. 9. As a threshold matter, CMLP argues that the Court should not even consider the relief requested in the Motion because it can only be properly heard as an adversary proceeding pursuant to Bankruptcy Rule 7001(2) and (9). This argument is a red herring that the Court should disregard. Instead, the Motion is properly before the Court because Bankruptcy Rule 7001 is inapplicable to the Motion. CMLP s argument in this regard is a transparent attempt to delay a ruling on the relief requested by the Motion for as long as possible in the hope that doing so will either give it more leverage over BlueStone in their ongoing negotiations or even force BlueStone out of the sale process altogether in favor of CMLP s preferred purchaser. This type of gamesmanship should not be allowed by the Court and certainly should not be allowed to derail the Debtors sale process. 5 QRI entered into a Purchase Agreement, dated as of July 22, 2010, as amended, with Crestwood Holdings LLC (f/k/a First Reserve Crestwood Holdings LLC), CGPLP, and CPLP through which QRI agreed to transfer its indirect ownership interests in CPPLP (as assignee of CPLP) and CGPP to Crestwood Holdings LLC. 6 CPLP subsequently assigned its interest in the Alliance Gathering Agreement and the Lake Arlington Gathering Agreement to CPPLP. 5

14 Case LSS Doc 1216 Filed 03/02/16 Page 14 of 53 A. Bankruptcy Rule 7001 is Inapplicable to the Motion and Other Courts Have Rejected CMLP s Arguments to the Contrary. 10. On its face, Bankruptcy Rule 7001(2) only requires that a proceeding to determine the validity, priority, or extent of a lien or other interest in property, other than a proceeding under Rule 4003(d) be filed as an adversary proceeding. Fed. R. Bankr. P. 7001(2). Similarly, Bankruptcy Rule 7001(9) only requires the use of an adversary proceeding to obtain a declaratory judgment relating to any of the foregoing. Fed. R. Bankr. P. 7001(9). 11. The relief the Debtors request in the Motion does not include a request for determination of the validity, priority, or extent of any lien or interest in property or any declaration of the parties rights. Nor does Debtors Proposed Order contain any such determinations. Rather, this proceeding was commenced to access the Debtors statutory right to reject certain executory contracts with CMLP. It is well settled that the appropriate procedural chapter 11 mechanism for rejecting executory contracts is the contested matter procedures set forth in Bankruptcy Rule See In re CB Holding Corp., 448 B.R. 684, 685 n.1 (Bankr. D. Del. 2011) (treating proceeding to determine whether rejected leases were executory as a contested matter under Rule 9014); In re Alabama Marble Co., Inc., No (JJR), 2014 WL , at *1 (Bankr. N.D. Ala. Aug. 8, 2014) (holding that the debtor s motion to assume its leasehold interest in a marble quarry was a contested matter under Rule 9014); BP Energy Co. v. Bethlehem Steel Corp., No. 02 CIV (NRB), 2002 WL , at *2 (S.D.N.Y. Nov. 15, 2002) (treating motion for rejection of gas purchase agreement as a contested matter under Rules 6006 and 9014); see also Fed. R. Bankr. P. 6006(a) ( [a] proceeding to... reject... an executory contract... is governed by Rule 9014 ). 12. CMLP chose to object to the Motion and elected to allege a real property interest as a defense to rejection. That alone is insufficient to implicate Bankruptcy Rule See, e.g., 6

15 Case LSS Doc 1216 Filed 03/02/16 Page 15 of 53 In re Fisher Island Invs., Inc., 778 F.3d 1172, 1194 (11th Cir. 2015) (holding that a bankruptcy court s determination of [an] ownership issue was not a proceeding to determine the validity... [of an] interest in property under Rule 7001(2), and thus an adversary proceeding was not required ); Harmon v. U.S. Through Farmers Home Admin., 101 F.3d 574, 585 (8th Cir. 1996) (holding that, because a creditor s Rule 3012 motion did not involve a challenge to the basis of the lien itself, where a creditor files a proof of claim and initiates the valuation process, the debtor is not required to bring an adversary proceeding to strip down the creditor s lien ). 13. Indeed, if that were all that was required to implicate the adversary proceeding requirement of Bankruptcy Rule 7001, the logical extension of CMLP s argument is that nearly every rejection or assumption motion and every sale motion should be prosecuted through an adversary proceeding. Other courts that have considered this issue have recognized the inherent absurdity of this potential outcome. See In re Trans World Airlines, Inc., No (PJW), 2001 WL , at *9 (Bankr. D. Del. Mar. 27, 2001) (holding that an adversary proceeding is required for those actions listed in Fed. R. Bankr. P But a free and clear sale under 363(f) is simply not such an action and observing that [i]f what the EEOC argues were true, all 363(f) sales would have to proceed via an adversary proceeding a procedure finding no support in the Bankruptcy Code or twenty plus years of reported decisions interpreting that Code ). 14. Importantly, the very argument advanced by CMLP has also been rejected in similar contexts including the rejection of gathering agreements by other courts. See In re Tempnology, LLC, 541 B.R. 1, 4 n.13 (Bankr. D.N.H. 2015) ( [Creditor] also argued that the [rejection] Motion was procedurally improper and the relief requested must be the subject of an adversary proceeding under Fed. R. Bankr. P. 7001(2) and (9). The Court rejected this argument, 7

16 Case LSS Doc 1216 Filed 03/02/16 Page 16 of 53 viewing the Motion in the context of rejection under 365, which is a contested matter under Fed. R. Bankr. P ); see also Tr. of Hr g at 77:9-11, In re Sabine Oil and Gas Corp., No (SCC) (Bankr. S.D.N.Y. Feb. 2, 2016) ( This [hearing on debtor s rejection motion] was teed up for me to make a determination as to whether or not [the gathering agreements] are covenants that run with the land. And where you started was to tell me that if I do that, I ll be making some kind of an error. And I don t believe that that s the case. ) (attached hereto as Exhibit A). 15. By contrast, CMLP has cited no case that supports its reading of Bankruptcy Rule 7001, and the authorities it points to are easily distinguished because none of the cases cited concerned a motion to reject an executory contract that could have an incidental effect on a personal property interest at issue. For example In In re Mansaray-Ruffin, the Third Circuit held that an individual chapter 13 debtor s attempt to use the plan confirmation process to remove a mortgage lien on her home was an improper attack on the validity of the lien which pertained to the basis of the lien itself. In re Mansaray-Ruffin, 530 F.3d 230, 235, 242 (3d Cir. 2008). In In re DBSI, Inc., the bankruptcy court affirmed the unremarkable proposition that an explicit request via motion for declaratory relief was improper and should have been made in the context of an adversary proceeding. In re DBSI, Inc., 432 B.R. 126, (Bankr. D. Del. 2010). In re Aftandilian reached the same holding as the DBSI court. In re Aftandilian, BAP No. CC , 2014 WL , at *5 (B.A.P. 9th Cir. Mar. 26, 2014) ( The bankruptcy court correctly ruled that Aftandilian s failure to present his declaratory relief motion as an adversary proceeding was a sufficient ground, by itself, to justify denial of the motion. ) (emphasis added). 8

17 Case LSS Doc 1216 Filed 03/02/16 Page 17 of 53 B. CMLP Should Be Deemed to Have Consented to Proceeding by Motion Despite Its Transparent Attempt to Delay and Manufacture Leverage. 16. As noted above, the procedural infirmity alleged by CMLP smacks of an attempt to manufacture additional leverage over BlueStone or even manipulate the ultimate outcome of the Debtors sale process. CMLP is a sophisticated party, represented by sophisticated counsel, that has known about this motion for at least six weeks and likely expected that such a motion could be forthcoming for months. If CMLP were truly concerned about the procedural vehicle chosen by the Debtors to pursue rejection of the Gathering Agreements, CMLP could have raised those concerns when the Motion was announced at the Sale Hearing (when CMLP s attorneys were present in the courtroom and on the phone), when the Motion was filed, when it asked the Debtors to adjourn the hearing on the Motion (and the objection deadline) by one week, when it served the Debtors with extensive discovery requests, when it was preparing its thirty-six page objection and two accompanying declarations, or even when the Debtors agreed to further extend CMLP s objection deadline by three days. 17. Instead, CMLP remained silent and now complains about a perceived procedural defect and due process concerns when doing so will benefit its goals and give it maximum leverage over the Debtors sale process. Given these facts and CMLP s full participation in the process, CMLP has waived its right to insist that the hearing be halted or that it be granted further protections. See, e.g., In re Fisher Island Invs. 778 F.3d at 1194 (observing that [w]e are inclined to hold that [creditor] forfeited its belated adversary-proceeding... arguments by failing to raise them before the bankruptcy court in any sort of timely manner, and holding that where the bankruptcy court afforded the parties with essentially the same procedural protections applicable in adversary proceeding, the bankruptcy court did not err in allowing the ownership issue to proceed as a contested matter ); see also In re Braniff Int l Airlines, Inc., 164 B.R. 820, 9

18 Case LSS Doc 1216 Filed 03/02/16 Page 18 of (Bankr. E.D.N.Y. 1994) ( Where a party has proceeded by motion and the record has been adequately developed, however, courts have reached the merits of the dispute despite the procedural irregularity. ) (citing In re Jablonski, 70 B.R. 381, 385 (Bankr. E.D. Pa. 1987), aff d in part and remanded in part, 88 B.R. 652 (E.D. Pa. 1988)). 18. Accordingly, for all the foregoing reasons, the Debtors submit that Bankruptcy Rule 7001 is inapplicable to the Motion and CMLP s self-serving arguments to the contrary should be rejected. II. THE GATHERING AGREEMENTS ARE COMMERCIAL SERVICE AGREEMENTS THAT DO NOT CREATE OR CONVEY ANY REAL PROPERTY INTERESTS. 19. CMLP s attempts to characterize the dedication language in the Gathering Agreements as a conveyance of real property that cannot be unwound through the Motion are without merit. 7 The Gathering Agreements are executory, 8 commercial service agreements that can be rejected pursuant to Bankruptcy Code section 365. First, the Gathering Agreements relate to personal property produced gas that has already been severed from the mineral estate. Second, the plain language of the Gathering Agreements includes a dedication of lawfully produced gas, and not the language necessary to effectuate a real property conveyance. Third, even if a transfer of real property actually occurred, the descriptions of the applicable contract 7 See Objection While CMLP does not expressly challenge the executory nature of the Gathering Agreements, the Debtors nonetheless submit that such agreements are unequivocally executory contracts that include unperformed, reciprocal obligations remaining on the part of both CMLP and the Debtors i.e., the hallmark of all executory contracts. The Third Circuit defines executory contract as a contract under which the obligation of both the bankrupt and the other party to the contract are so far unperformed that the failure of either to complete performance would constitute a material breach excusing the performance of the other. Sharon Steel Corp. v. Nat l Fuel Gas Distrib. Corp., 872 F.2d 36, 39 (3d Cir. 1989) (citing Countryman, Executory Contracts in Bankruptcy: Part I, 57 Minn. L. R. 439, 460 (1973)). A contract is executory if each party has an unperformed obligation at the time of the bankruptcy filing that would constitute a material breach if not performed. See In re Columbia Gas Sys., Inc., 50 F.3d 233, (3d Cir. 1995). Here, there are four additional years of unperformed, reciprocal obligations remaining under the Gathering Agreements that render them executory, including, among others, the following: (i) the provision of gathering and processing services by CMLP, (ii) payment for services, (iii) production of monthly reports, and (iv) mutual indemnification. See Alliance Gathering Agreement 6.1, 11.1, 12.1, 15; Lake Arlington Gathering Agreement 6.1, 11.1, 12.1, 15; Cowtown Gathering Agreement 6.1, , 14.1,

19 Case LSS Doc 1216 Filed 03/02/16 Page 19 of 53 areas in the Gathering Agreements are woefully insufficient and cannot satisfy the Texas statute of frauds. Finally, the Gathering Agreements contain pricing, term, and quantity provisions that are characteristic of commercial services agreements, not conveyances of real property interests. A. The Gathering Agreements Concern Gas That Has Been Severed from the Mineral Estate, Which is Personal Property Under Texas Law. 20. The Gathering Agreements cannot convey real property interests because the purported real property at issue severed gas is personal property under black-letter Texas law. It is well established that minerals such as gas are personal property, not real property, once they are severed from the ground. See, e.g., Sabine Production Co. v. Frost Nat l Bank, 596 S.W.2d 271, 276 (Tex. Civ. App. Corpus Christi 1980, writ dism d) ( Once minerals have been severed from the reservoir or strata wherein they were originally contained, such minerals become personalty. ); Colorado Interstate Gas Co. v. Hunt Energy Corp., 47 S.W.3d 1, 10 (Tex. App. Amarillo Ct. App. 2000, pet. denied) ( Once oil or gas has been severed from the ground, it becomes personalty. ); Riley v. Riley, 972 S.W.2d 149, 155 (Tex. App. Texarkana 1998, no writ) (citing Phillips Petroleum Co. v. Adams, 513 F.2d 355, 363 (5th Cir. 1975) ( Texas law provides that oil and gas are realty when in place and personalty when severed from the land by production. )). 21. Here, each Gathering Agreement provides, in relevant part, as follows: 11

20 Case LSS Doc 1216 Filed 03/02/16 Page 20 of 53 Alliance Lake Arlington Cowtown Subject to the terms and provisions hereof, Producer dedicates and agrees to deliver or cause to be delivered to Gatherer at Gatherer s Receipt Point(s) the total volume of Gas owned or controlled by Producer lawfully produced from wells now or hereafter drilled on the lands within the Contract Area or lands pooled therewith excluding Gas reserved or utilized by Producer in accordance with the terms of Section Subject to the terms and provisions hereof, Producer dedicates and agrees to deliver or cause to be delivered to Gatherer at Gatherer s Receipt Point(s) the total volume of Gas owned or controlled by Producer lawfully produced from wells now or hereafter drilled on the lands within the Contract Area (or lands pooled therewith), in each case excluding Gas reserved or utilized by Producer in accordance with the terms of Section 3. 9 Subject to the terms and provisions hereof, Producer dedicates and agrees to deliver to Gatherer for gathering and to Processor for processing, at the Gathering System Delivery Point(s), the total volume of Gas owned or controlled by Producer or its successors and assigns, lawfully produced from wells now or hereafter drilled on the lands within the Contract Area or lands pooled therewith, excluding Gas reserved or utilized by Producer or its successors and assigns in accordance with the terms of Article III. 11 The term Gas is defined in the Gathering Agreements as natural gas which is owned or controlled by Producer and produced from lands within the Contract Area In other words, by the plain terms of the Gathering Agreements, the Debtors are only obligated to deliver, or cause to be delivered, for gathering and processing minerals that have been severed from the underlying mineral estate i.e., their personal property. Because severed minerals are personal property under clear Texas authority, there is simply no conceivable way that such an obligation could have created or conveyed an interest in real property. 22. Moreover, under Texas law, there are five real property rights, or sticks, that comprise a mineral estate (i.e., a real property interest in minerals): (1) the right to develop (the 9 Alliance Gathering Agreement 2.1 (emphasis added). 10 Lake Arlington Gathering Agreement 2.1 (emphasis added). 11 Cowtown Gathering Agreement 2.1 (emphasis added). 12 Alliance Gathering Agreement 1.1(o) (emphasis added); Lake Arlington Gathering Agreement 1.1(k) ( [N]atual gas which is owned or controlled by Producer and produced from wells drilled on lands within the Contract Area. ) (emphasis added). The Cowtown Gathering Agreement slightly modified the definition of Gas to include natural gas which is owned or controlled by Producer or its successors and assigns and produced from lands within the Contract Area. Cowtown Gathering Agreement 1.1(i) (emphasis added). 12

21 Case LSS Doc 1216 Filed 03/02/16 Page 21 of 53 right of ingress and egress), (2) the right to lease (the executive right), (3) the right to receive bonus payments, (4) the right to receive delay rentals, [and] (5) the right to receive royalty payments. Lesley v. Veterans Land Bd., 352 S.W.3d 479, 481 n.1 (Tex. 2011) (quoting Altman v. Blake, 712 S.W.2d 117, 118 (Tex. 1986)). Importantly, a contractual right to gather or process gas that has been severed from a mineral estate is not one of these sticks. See id. at 481. Thus, because the gas at issue is personal property, CMLP is essentially trying to create a new real property right, or stick, associated with the underlying mineral estate. Such an attempt to fundamentally change Texas real property law is unsupportable and should not be countenanced by this Court. B. The Gathering Agreements Lack Sufficient Conveyance Language to Create a Real Property Interest Under Texas Law. 23. In addition to the foregoing, entry into the Gathering Agreements could not have conveyed a real property right to CMLP because the language necessary to effectuate a conveyance is absent. Indeed, the Gathering Agreements are completely devoid of any traditional conveyance language whatsoever and the language relied upon by CMLP is not the language of a grant necessary to demonstrate any intent to convey title. 24. Texas precedent provides that [i]f, from the whole instrument, a grantor and grantee can be ascertained, if there are operative words or words of grant showing an intention of the grantor to convey title to a real property interest to the grantee, and if the instrument is signed and acknowledged by the grantor, it is a deed that is legally effective as a conveyance. Masgas v. Anderson, 310 S.W.3d 567, 571 (Tex. App. Eastland 2010, pet. denied); see also Clear Lake Apts., Inc. v. Clear Lake Utils. Co., 537 S.W.2d 48, 51 (Tex. Civ. App. Houston [14th Dist.] 1976), aff d as modified, 549 S.W.2d 385 (Tex. 1977) (noting that there must be a grant of some property interest in the land to create a covenant running with the land and finding that language 13

22 Case LSS Doc 1216 Filed 03/02/16 Page 22 of 53 stating that one company agrees to construct and maintain reasonably adequate operative water and sewage trunklines and/or laterals to serve the Said Land... was not part of any transaction conveying the land involved); French v. Chevron USA, Inc., 871 S.W.2d 276 (Tex. App. El Paso 1994), aff d 896 S.W.2d 795 (Tex. 1995) (involving a deed stating that the grantor did grant, bargain, sell, convey, set over, assign and deliver its interest in and to the mineral estate); Watkins v. Slaughter, 189 S.W.2d 699, 700 (Tex. 1945) ( here the grantor was careful to express his intention and meaning [to grant] a 15/16 interest in and to the mineral estate). 25. The dedication language relied upon by CMLP does not include any operative conveyance language or the language of a grant sufficient to demonstrate an intent to convey title. Instead, the dedication language that CMLP points to merely states that the producer dedicates and agrees to deliver or cause to be delivered lawfully produced gas. 13 There is no language stating that a right or interest in real property is being granted or conveyed or that CMLP is taking title. The Debtors are sophisticated entities that regularly buy and sell real property interests in Texas and are clearly familiar with the language necessary to transfer a real property interest. If they had intended to convey real property interests by the Gathering Agreements, the Gathering Agreements would have contained some granting language evidencing the intent to convey or otherwise transfer a real property interest. Accordingly, 13 As discussed above, after gas is produced, i.e. severed from the ground, it is personal property rather than real property. When CMLP argues that the word produced in the Dedications is indicative of an interest in real property at paragraph 59 of the Objection, CMLP conflates the term produced when used in conveyances of royalty interests with the term produced in the dedication clauses of the Gathering Agreements (which do not convey any property interests). The dedication addressed in the Gathering Agreements is not a royalty interest. As described in the Lyle case cited by CMLP, [a] royalty is a share of the product or profit reserved by the owner for permitting another to use the property. In its broadest aspect royalty is a share of profit reserved by the owner for permitting another the use of the property. Lyle v. Jane Guinn Revocable Trust, 365 S.W.3d 341, 351 (Tex. App. 2010) (quoting Alamo Nat l Bank v. Hurd, 485 S.W.2d 335, 338 (Tex. Civ. App.--San Antonio 1972, writ ref d n.r.e.)). A royalty is commonly understood to be that part or share of production reserved or to be paid during the life of the lease; and generally speaking, the royalty created, excepted, or reserved under the terms of an oil and gas lease, is the right to receive, either in kind or its equivalent in money, a stipulated fraction of the oil or gas produced and saved from property covered by the lease, free of all costs of development and production. Id. (emphasis added). As noted herein, see section II(D) infra, the interests contracted for in the commercial services agreements in question do not have those characteristics. 14

23 Case LSS Doc 1216 Filed 03/02/16 Page 23 of 53 because the requisite granting language is absent from the Gathering Agreements, no interest in real property was created under applicable Texas law. C. The Gathering Agreements Do Not Contain Land Descriptions Sufficient to Satisfy the Statute of Frauds. 26. Even if the Court were to find that the Gathering Agreements convey a real property interest, that interest would be invalid because the relevant land descriptions in the Gathering Agreements cannot satisfy the Texas statute of frauds. Any agreement to assign an interest in an oil and gas leasehold estate in Texas is subject to the statute of frauds. TEX. BUS. & COM. CODE 26.01; Westland Oil Dev. Corp. v. Gulf Oil Corp., 637 S.W.2d 903, 908 (Tex. 1982). The description of the property at issue must be legally sufficient to satisfy the statute of frauds. See id. The writing must furnish within itself, or by reference to some other existing writing, the means or data by which the particular land to be conveyed may be identified with reasonable certainty. Id. at 909 (quoting Wilson v. Fisher, 188 S.W.2d 150 (Tex. 1945)). 27. For example, in Westland Oil, the Texas Supreme Court found that a description of land in an agreement that merely referred to lands in the area of the farmout acreage did not satisfy the statute of frauds. Id. The party asking the Westland Oil court to find that such a description was adequate to convey the real property interest in question urged the court to consider parol evidence that would give a clearer picture of the land at issue. Id. The Westland Oil court found that to consider the parol evidence to better identify the land in question would indulge in an impermissible inference. Id. The court noted that [t]he description necessary to meet the requirements of the statute of frauds cannot be arrived at from tenuous inferences and presumptions of doubtful validity. Id. at (citing Rowson v. Rowson, 275 S.W.2d 468 (Tex. 1955)). Extrinsic evidence is only proper when used for the purpose of identifying the 15

24 Case LSS Doc 1216 Filed 03/02/16 Page 24 of 53 land with reasonable certainty from the data in the memorandum, and not for the purpose of supplying its location or description. Id. at 910 (emphasis added) Here, Exhibit A to each of the Gathering Agreements describes the Contract Area in vague terms and does not identify the subject land with reasonable certainty. Attached hereto as Exhibits B-D are Exhibit A to each of the Gathering Agreements. For the Alliance Gathering Agreement and the Lake Arlington Gathering Agreement, the attached Exhibit A merely includes pictures of nondescript portions of maps of Tarrant and Denton with thick lines drawn around the Contract Area. Like the contract description of lands in the area of the farmout acreage that the Texas Supreme Court found inadequate in Westland Oil, the descriptions on Exhibit A to the Lake Arlington Gathering Agreement and the Alliance Gathering Agreement do not identify with reasonable certainty on the face of the document the location and description of the land in question. There is no property description and no information to interpret the lines drawn on the map. Does the Contract Area include only the inside of the line or the outside? Do the lines cross roads? What if one of the lines touches/crosses a third party s property? These answers are simply unknowable and, as a result, the property descriptions in the Alliance Gathering Agreement and the Lake Arlington Gathering Agreement cannot be said to provide sufficient certainty to identify the property in question 14 Conversely, the Westland Oil Court found that a reference in another agreement to any additional leasehold interests affecting any of the lands covered by said farmout agreement provided a sufficient description of the land when the caption of the said farmout agreement read as follows: PROPOSED FARMOUT OF MOBIL S LEASEHOLD INTEREST IN THE DRILLSITE SECTION AND AN UNDIVIDED ONE HALF OF OUR LEASEHOLD INTEREST IN SECTIONS 7, 18 and 19, BLOCK 48, TWP. 8, T. & P., AND SECTIONS 13, 23 and 24, BLOCK 49, TWP. 8, T. & P. LESS THE DRILLSITE SECTION FOR THE DRILLING OF A PROJECTED ELLENBURGER TEST TO BE LOCATED IN THE SE ¼ SECTION 13, BLOCK 49, TWP. 8, T. & P. RY. CO. SURVEY, PECOS COUNTY, TEXAS (MOC T 29063, T 29165, T C, T C, D, AND T D, E, G O). Id. 16

25 Case LSS Doc 1216 Filed 03/02/16 Page 25 of 53 under applicable Texas law. The property descriptions would not put a third party on notice of the land purportedly conveyed or encumbered. 29. The Cowtown Gathering Agreement, which lists eight counties in Texas as the Contract Area, similarly lacks sufficient certainty to satisfy the statute of frauds. While the Debtors acknowledge this Court s recent finding that a grant of the grantor s entire interests in a specific geographic area, like the State of Texas, satisfies the specificity required by the statute of frauds, In re Quicksilver Res. Inc., No (LSS), 2016 WL , at *10-11, n.48 (Bankr. D. Del. Jan. 8, 2016), there are a number of significant issues that render the descriptions in the Gathering Agreements insufficient to satisfy the statute of frauds. 30. Specifically, the list of counties contained in Exhibit A to the Cowtown Gathering Agreement includes Tarrant County. As noted above, both the Alliance Gathering Agreement and the Lake Arlington Gathering Agreement also include at least a portion of Tarrant County. Without a precise description of which portion of Tarrant County the Cowtown Gathering Agreement is meant to cover, it is impossible for a third-party to know which Gathering Agreement is applicable to a specific area. Moreover, the description in Exhibit A of the Cowtown Gathering Agreement does not specify that it is a grant of Debtors interests. Given the clear overlap of counties between the Gathering Agreements and the lack of certainty this creates, the description of the Contract Area in the Gathering Agreements may be invalid and distinguishes this issue from the Court s recent finding relating to a description like the State of Texas where there is no conflicting agreement. Accordingly, the Debtors submit that, similar to the Alliance Gathering Agreement and the Lake Arlington Gathering Agreement, even if a real property interest was transferred pursuant to the Cowtown Gathering Agreement, it may be invalid. 17

26 Case LSS Doc 1216 Filed 03/02/16 Page 26 of 53 D. The Gathering Agreements Contain Terms That Are the Hallmarks of a Commercial Services Agreement Rather Than a Conveyance of a Real Property Interest. 31. The Gathering Agreements are agreements to provide services specifically for the gathering and, in the case of the Cowtown Gathering Agreement, processing of gas legally produced from the applicable contract areas and delivered to CMLP. Numerous terms contained in the Gathering Agreements support this notion, including, without limitation, the following: Pricing. The Gathering Agreements provide that the Debtors shall pay CMLP a rate per unit of the Debtors gas received by CMLP. 15 CMLP produces a monthly report to the Debtors and the Debtors are to remit payment within thirty days of receipt. 16 Accounting Procedures. CMLP is required to furnish the Debtors a report disclosing the information necessary to enable the Debtors to make accurate statistical and accounting entries in its books, including the total volume of gas measured at the Receipt Points, the Debtors pro rata share of fuel and loss, and the cost billed to CMLP for electrical power. Taxes on Gas. The Debtors pay all taxes and related charges levied or assessed against the gas and the Debtors properties, facilities, or operations, whereas CMLP pays all taxes and charges levied or assessed against the Gathering System and its operations and in the Cowtown Agreement CMLP pays all taxes and charges levied against the Plant. 17 Importantly, if a real property interest had been conveyed by the Gathering Agreements, under applicable law, CMLP would be responsible for taxes on the gas as well. The Debtors Remain Responsible for Royalty Payments. Under the Gathering Agreements, the Debtors maintain sole responsibility for payment of all royalties due on the gas and indemnify and hold harmless CMLP for payment of the lessor s royalty or any other burden or encumbrance affecting the gas Alliance Gathering Agreement 11.1; Lake Arlington Gathering Agreement 11.1; Cowtown Gathering Agreement Alliance Gathering Agreement 12.1; Lake Arlington Gathering Agreement 12.1; Cowtown Gathering Agreement Alliance Gathering Agreement ; Lake Arlington Gathering Agreement ; Cowtown Gathering Agreement Alliance Gathering Agreement

27 Case LSS Doc 1216 Filed 03/02/16 Page 27 of 53 Term. All of the Gathering Agreements have set terms, with an automatic renewal provision for a one-year period unless either party provides notice to the other at least ninety days before the end of the year. 19 Rights of Termination. The Gathering Agreements include provisions relating to CMLP s right to choose not to gather and to cease gathering gas, as well as the Debtors right to terminate the Gathering Agreements upon the occurrence of certain conditions. Quality Requirements. The Gathering Agreements allow for CMLP to refuse to receive, gather, or redeliver gas delivered by or on behalf of the Debtors that fails to meet certain quality specifications. 20 Quantity Requirements. CMLP is required to gather the volume of gas legally allowed to be produced which is attributable to the interest owned or controlled by the Debtors in wells drilled on lands within the Contract Area. 32. Each of the foregoing provisions are indicative of a commercial services contract rather than a conveyance of a real property interest. See, e.g., Anne D. Weber, GAS GATHERING AND TRANSPORTATION AGREEMENTS, 2011 NO. 1 RMMLF-INST PAPER NO. 9, 9-2 (white paper outline noting that Key Elements of a Gathering/Field Services Agreement include dedication, quantity commitments, and term related to scope/degree of commitment); see also Sharon Steel, 872 F.2d at 37 (concerning a service agreement according to which a utility provider agreed to deliver gas to the debtor s steel plants under a rate schedule that provided for a minimum consumption of natural gas per month plus additional charges). When combined with the delivery of personal property in the form of severed gas, the lack of any conveyance language, and the invalidity under the statute of frauds, the only correct conclusion is that the Gathering Agreements are nothing more than commercial services contracts that do not effectuate any kind of conveyance. 19 Alliance Gathering Agreement 18; Lake Arlington Gathering Agreement 18; Cowtown Gathering Agreement, Art. XX. 20 Alliance Gathering Agreement 7; Lake Arlington Gathering Agreement 7; Cowtown Gathering Agreement, Art. VII. 19

28 Case LSS Doc 1216 Filed 03/02/16 Page 28 of Accordingly, for all the foregoing reasons, the Debtors submit that the Gathering Agreements do not operate to convey an interest in real property that cannot be unwound. III. THE GATHERING AGREEMENTS DO NOT CONSTITUTE OR CONTAIN COVENANTS RUNNING WITH THE LAND. 34. CMLP argues that the Gathering Agreements include covenants running with the land that are not subject to rejection under Bankruptcy Code section 365. Under Texas law, the Gathering Agreements do not. Even if the Court were to conclude that the Gathering Agreements contained covenants running with the land, the notion that a covenant running with the land is somehow special or different from any other contractual covenant that can be rejected as part of a larger contract through the bankruptcy process is a fiction created by CMLP and inconsistent with applicable law. 21 A. The Dedication Language in the Gathering Agreements Does Not Constitute a Covenant Running With the Land. 35. For a covenant to run with the land under Texas law, a party must establish the following five elements: i. Privity of estate between the parties to the agreement at the time the covenant was made; ii. iii. iv. The covenant touches and concerns the land; The covenant is intended by the original parties to run with the land; The covenant relates to something in existence or specifically binds the parties and their assigns; and v. The successor to property burdened by the covenant has notice of the covenant. 21 As a threshold matter, CMLP apparently believes that this Court needs an expert to assist in the judicial process of applying law to facts. However, using an expert to provide legal analysis and legal conclusions is improper and invades the duties of this Court. As a result, the Declaration of Owen L. Anderson in Support of Objection to Debtors Motion for an Order Authorizing and Approving Rejection of Certain Executory Contracts with Affiliates of Crestwood Midstream Partners LP (the Anderson Declaration ), a copy of which was attached to the Objection as Annex 1, should be stricken for the reasons explained in the Debtors Objection and Motion to Strike Expert Declaration of Owen L. Anderson in Support of Crestwood Parties Objection to Debtors Motion to Reject Executory Contracts filed by the Debtors contemporaneously herewith. 20

29 Case LSS Doc 1216 Filed 03/02/16 Page 29 of 53 Inwood N. Homeowner s Ass n, Inc. v. Harris, 736 S.W.2d 632, 635 (Tex. 1987); Wayne Harwell Props. v. Pan Am Logistics Ctr., 945 S.W.2d 216, 218 (Tex. App. San Antonio 1997, writ denied); Clear Lake Apts., 537 S.W.2d at While a restrictive covenant should be construed to give effect to its purpose and intent, doubts should be resolved in favor of the free and unrestricted use of the premises, and any ambiguity must be strictly construed against the party seeking to enforce the restrictive covenant. Raman Chandler Props., L.C. v. Caldwell s Creek Homeowners Ass n, 178 S.W.3d 384, 391 (Tex. App. Fort Worth 2005, pet. denied). As another Texas court summarized, [t]he cases show a reluctance to characterize interests as running with the land.... To burden lands with personal covenants would be to hamper and impede real estate transactions to the detriment of owners, purchasers and agents. Wayne Harwell, 945 S.W.2d at 218. Indeed, a personal contractual arrangement does not qualify as a covenant. In re El Paso Refinery, LP, 302 F.3d 343, 357 (5th Cir. 2002); see also Martindale v. Gulf Oil Corp., 345 S.W.2d 810, 813 (Tex. Civ. App. Beaumont 1961, writ ref d n.r.e.) (holding agreement between gas station owner and oil company, whereby owner agrees to purchase all petroleum requirements from company, was merely personal contract and not a covenant). 37. CMLP bears the burden of demonstrating each of the five elements. Webb v. Voga, 316 S.W.3d 809, 813 (Tex. App. Dallas 2010, no pet.) ( In every case where parties seek to enforce a restrictive covenant, the burden of proof is upon them to establish that the covenant was imposed on defendant s land for the benefit of land owned by them. ) (quoting Reagan Nat l Adver. of Austin, Inc. v. Capital Outdoors, Inc., 96 S.W.3d 490, 495 (Tex. App.- Austin 2002, pet. denied)). CMLP cannot demonstrate the first three elements. As a result, the Gathering Agreements do not create or contain any covenants running with the land. 21

30 Case LSS Doc 1216 Filed 03/02/16 Page 30 of 53 (i) There is No Privity of Estate Because the Gathering Agreements Are Not Contained in a Grant of Any Real Property Interest. 38. First, CMLP cannot satisfy the privity of estate requirement for a covenant running with the land. Under Texas law, a covenant running with the land must be made between parties who are in privity of estate at the time the covenant is made, and must be contained in a grant of land or in a grant of some property interest in land. Wasson Interests, Ltd. v. Adams, 405 S.W.3d 971, 973 (Tex. App. Tyler 2013, no pet.); Wayne Harwell, 945 S.W.2d at 218; Clear Lake Apts., 537 S.W.2d at 51. Privity of estate means a mutual or successive relationship exists to the same rights in property. Wasson, 405 S.W.3d at 973. In other words, there must be simultaneous or successive interests in the land. Wayne Harwell, 945 S.W.2d at 218. Here, as explained above, the Gathering Agreements do not convey or create any interest in real property. Because there was no real property interest conveyed, there is no privity of estate between the Debtors and CMLP. 39. The Wayne Harwell and Clear Lake cases are analogous to the situation here. In Wayne Harwell, the court examined whether a 20-year assignment of fifteen percent net cash flow interest from land contained within a development agreement constituted a covenant running with the land. Wayne Harwell, 945 S.W.2d at 217. The court summarized the relevant issue by stating, [s]ince privity of estate is a precondition for a covenant running with the land at law, whether the parties conveyed an interest in the land by their agreement will be dispositive. Id. at 218. The court held that the interest in cash flow from a piece of land did not constitute a covenant running with the land because there was no conveyance of a real property interest. Id. Specifically, the court explained, [w]e hold that an interest in the cash flow from a piece of land is not so closely linked to the land itself that it constitutes an interest in the land and so satisfies the privity of estate requirement. Id. 22

31 Case LSS Doc 1216 Filed 03/02/16 Page 31 of Similarly, in Clear Lake, a utilities company asserted that a contract whereby it was given the exclusive right to furnish water and sewer services to all owners and occupants on approximately eight acres of land constituted a covenant running with the land. Clear Lake, 537 S.W.2d at Indeed, despite the fact that the contract even said that it constituted a covenant running with the land, the court rejected this argument because there was no privity of estate. Id. at 51. Specifically, the court held that the contract was not part of any transaction conveying the land involved, or any easement in it, between the parties. Id. This fact distinguished the contract from other cases where, for example, an actual interest in the land was transferred or an easement was created, such as in irrigation contracts which create an easement in the real property. Id.; see also Panhandle & S.F.R. Co. v. Wiggins, 161 S.W.2d 501, 505 (Tex. Civ. App. Amarillo 1942, writ ref d) (finding no privity of estate because there was no contention that any of the land at issue was conveyed by the subject contract or otherwise). 41. Just like the cash flow interest in Wayne Harwell and the exclusive right to furnish water and sewer in Clear Lake, the Debtors dedication to deliver personal property in the form of gas that had been severed from the mineral estate does not convey any real property interest in the land itself. There is no simultaneous or successive interest in land because no real property is involved or conveyed. 42. Because CMLP cannot satisfy this requirement, it resorts to arguing that the requirement does not exist. (Objection 72). However, contrary to CMLP s argument, recent Texas courts unequivocally require horizontal privity by requiring that the covenant be contained in a grant of land or in a grant of some property interest in the land. Wasson Interests, Ltd. v. Adams, 405 S.W.3d 971, 973 (Tex. App. Tyler 2013, no pet.); Wayne Harwell Props. v. Pan Am Logistics Ctr., 945 S.W.2d 216, 218 (Tex. App. San Antonio 1997, writ denied). Both 23

32 Case LSS Doc 1216 Filed 03/02/16 Page 32 of 53 the Wasson and Wayne Harwell cases were decided after the Texas Supreme Court s decisions in Inwood and Westland Oil cited by CMLP. Moreover, neither Inwood nor Westland Oil affirmatively reject horizontal privity as a requirement for a covenant running with the land. Thus, horizontal privity continues to be required under Texas law. Because CMLP s rights under the Gathering Agreements were not included in a grant of land or a grant of some property interest in land, there is no privity of estate and CMLP cannot satisfy this requirement of a covenant running with the land. (ii) The Gathering Agreements Do Not Touch and Concern the Land. 43. Next, CMLP cannot demonstrate that the Gathering Agreements touch and concern the land. Inwood N. Homeowner s Ass n, 736 S.W.2d at 635. Although the determination is far from absolute, in order for a covenant to touch and concern the land, the covenant must affect the nature, quality, or value of the land burdened by the covenant or affect the enjoyment of the land. Westland Oil Dev. Corp. v. Gulf Oil Corp., 637 S.W.2d 903, 911 (Tex. 1982). The Westland Oil opinion goes on to explain, [i]f 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. Id. A personal covenant, in contrast, does not touch and concern the land because such a covenant affects the grantor personally and is unrelated to the use of the land. In re El Paso Refinery, 302 F.3d at For example, as a matter of law, a covenant to pay an encumbrance on land (such as a mortgage) is not a covenant that runs with the land. Talley v. Howsley, 170 S.W.2d 240, 243 (Tex. Civ. App. Eastland 1943, no writ). Such a covenant does not touch and concern the land because it does not affect the nature and quality of the land itself. Westland Oil, 637 S.W.2d at 911. Although the covenant to pay an encumbrance may increase a person s legal 24

33 Case LSS Doc 1216 Filed 03/02/16 Page 33 of 53 interest or value in the land, such a fact is not sufficient by itself to qualify as touching or concerning the land. See id.; Talley, 170 S.W.2d at Similarly, in El Paso Refinery, the Fifth Circuit held that a covenant in a deed precluding the grantee from seeking contribution or indemnity from the grantor for environmental clean-up costs was not a covenant running with the land. El Paso Refinery, 302 F.3d at The Fifth Circuit reasoned that the covenant had no direct impact upon the land itself. Id. at 356. The covenant does not compel nor preclude the promisor or any subsequent owner from doing anything on the land itself. Id. at Thus, the covenant was a continuing and non-contingent agreement under which the Debtor agrees to refrain from seeking environmental remediation or damages from [grantor]. Id. at 357; see also Martindale v. Gulf Oil Corp., 345 S.W.2d 810, 813 (Tex. Civ. App. Beaumont 1961, writ ref d n.r.e.) (holding agreement between gas station owner and oil company, whereby owner agrees to purchase all petroleum requirements from company, was merely a personal contract and not a covenant); Montgomery v. Creager, 22 S.W.2d 463, 466 (Tex. Civ. App. Eastland 1929, no writ) (agreement to purchase gasoline from a certain individual for sale at the filling station on the property was not a covenant running with the land). 46. As explained above, the Gathering Agreements concern personal property, not real property. Thus, any rights created under the Gathering Agreements more closely resemble the personal covenants described in El Paso Refinery, Talley, and Martindale. Stated differently, the Debtors legal relations with respect to the land and its mineral leases are not lessened or rendered less valuable by the Gathering Agreements. Subsequent to their execution of the Gathering Agreements, the Debtors owned the very same real property interests that they owned before execution. The only difference following execution of the Gathering Agreements was 25

34 Case LSS Doc 1216 Filed 03/02/16 Page 34 of 53 that the Debtors had now entered commercial services agreements under which CMLP agreed to perform certain services for certain fees and the Debtors had agreed to deliver their personal property in respect of the same. 47. CMLP skews the facts and the law in support of its argument on this element. CMLP argues that the Debtors own a fee simple determinable interest in the oil and gas in place beneath the lands burdened by the dedication language in the Gathering Agreements. (Objection 57). Only half of this statement is true. The Debtors do own a fee simple determinable interest in the oil and gas in place underground, but that interest is not burdened by the dedication language in the Gathering Agreements. The dedication applies to the gas that has been produced and is personal property under Texas law; it does not burden or impact the Debtors real property interests whatsoever. As explained above, Exhibit A to each of the Gathering Agreements does not even identify the subject land itself with enough certainty to satisfy the statute of frauds. Supra Moreover, contrary to CMLP s assertion (Objection 59), including the term produced actually makes the dedication less indicative of a real property interest since produced gas is personal property under Texas law for the reasons explained above. Supra CMLP relies principally on the Wimberley case to support its argument, but that case is distinguishable. In Wimberley, Lone Star contracted with a landowner to purchase water from her water well for Lone Star s use in connection with a compressor station plant. Wimberley v. Lone Star Gas Co., 818 S.W.2d 868, 870 (Tex. App. Fort Worth 1991, writ denied). While CMLP characterizes the Wimberley contract as one to deliver water (Objection 58), the case actually suggests that Lone Star was pulling the groundwater directly out of the ground itself, rather than having it delivered and processed through some intermediary. Indeed, 26

35 Case LSS Doc 1216 Filed 03/02/16 Page 35 of 53 the case explains that in 1955, Lone Star drilled another well on the property due to decreased production. Id. Therefore, Lone Star appears to have been given rights to extract groundwater while it was still in the ground, unlike the case here where CMLP only has an interest in gas once it has been produced. While the landowner s rights to its real property interests in the groundwater may have lessened due to the existence of Lone Star s ability to extract groundwater directly from the ground, the Debtors real property interests the right to extract gas are unaffected by the Gathering Agreements since the Gathering Agreements only relate to produced gas. 49. CMLP s remaining arguments on this element are conclusory and unsupported. CMLP argues that the use of the word farmout in the Gathering Agreements is unequivocal evidence that the dedications touch and concern the land. (Objection 60). However, CMLP cites no case law in support of this word being unequivocal evidence. Similarly, CMLP argues that because BlueStone wanted the Gathering Agreements rejected, the Gathering Agreements must touch and concern the land. That position that a right touches and concerns the land because it was an important point in negotiations between two companies is wholly unsupported and without merit. 50. Because the Gathering Agreements do not touch and concern the land, they cannot constitute covenants running with the land. (iii) CMLP Cannot Show that the Original Parties Intended for the Gathering Agreements to Constitute Covenants Running With the Land. 51. Finally, CMLP cannot demonstrate that the interests created by the Gathering Agreements were intended by the original parties to run with the land. Inwood N. Homeowner s Ass n, 736 S.W.2d at 635. CMLP argues that intent is shown from the Gathering Agreements and the Debtors public statements about, and the actual filing of, a Memorandum of Agreement 27

36 Case LSS Doc 1216 Filed 03/02/16 Page 36 of 53 relating to the Gathering Agreements. However, none of these documents or statements show an intent for a covenant to run with the land. 52. [W]hen construing [an unambiguous] deed, the intent of the parties is to be determined from the express language found within the four corners of the document. All parts of the deed are to be harmonized, construing the instrument to give effect to all provisions. Montfort v. Trek Res., Inc., 198 S.W.3d 344, 355 (Tex. App. Eastland 2006, no pet.). The Gathering Agreements do not state that the parties intended for the covenants to run with the land. While a covenant running with the land is not created simply by being named as such in a contract, the absence of such language in the Gathering Agreements is clear evidence that the parties never intended for the covenants to run with the land. See Perry Homes v. Cull, 258 S.W.3d 580, 606 (Tex. 2008) ( The language used in the agreement is the primary evidence of [the true intent of the parties to the agreement] ). 53. Contrary to CMLP s arguments, the lack of intent here is actually confirmed by a review of the four corners of the Gathering Agreements. The Gathering Agreements do not contain any language whatsoever evidencing an intent to create a covenant running with the land. The Debtors are sophisticated entities that regularly enter gathering and processing agreements, including amendments thereto, with midstream services providers in Texas and are clearly familiar with the requirements associated with creating a covenant running with the land. Had the parties actually intended for any covenants in the Gathering Agreements to run with the land, 22 such language could easily have been added by stating, the Parties agree and acknowledge that the Gas Gathering Agreement shall be a covenant running with the land or mineral interests owned by Producer. Moreover, the parties would have included adequate 22 See In re Sabine, D.I. 387 at 5; Id. at Ex. A 4. 28

37 Case LSS Doc 1216 Filed 03/02/16 Page 37 of 53 conveyance language and legally sufficient property descriptions to satisfy the statue of frauds had they really intended for any covenants in the Gathering Agreements to run with the land. Based on the four corners of the Gathering Agreements, CMLP cannot meet its burden of demonstrating that the Gathering Agreements were intended to include covenants running with the land. 54. Given the lack of specific language indicating intent, CMLP improperly relies on language in section 23 of the Gathering Agreements stating that the Gas Gathering Agreement binds successors and assigns to establish two elements of a covenant running with the land: (i) intent, and (ii) that the Gathering Agreements bind the parties and their assigns. The language in section 23 of the Gathering Agreements is nothing more than a red herring for the intent element. The Debtors do not dispute that it was the intent of the parties for the Gathering Agreements to bind successors. There are many types of contracts stating that they are binding on successors. However, merely stating that it is the parties intent for a contract to bind successors and assigns does not transform the agreement into a covenant running with the land, nor does such language constitute evidence of intent that the contract includes a covenant running with the land. Section 23 of the Gathering Agreements merely states that the agreements are binding on successors and assigns, and the Memorandum of Agreement supports this limited purpose; nothing more. 55. Lacking language within the four corners of the Gathering Agreements to establish intent, CMLP turns to parole evidence and attempts to rely on the Debtors public statements about the filing of a Memorandum of Agreement, and the actual filing of the Memorandum of Agreement. This is misplaced. Not only is it unnecessary to look beyond the documents to establish intent, neither the public statement made in the 8-K nor the Memorandum of Agreement state that the parties intended for the Gathering Agreements to constitute 29

38 Case LSS Doc 1216 Filed 03/02/16 Page 38 of 53 covenants running with the land. In fact, the absence of any express language in the Gathering Agreements, the public filings, and the Memorandum of Agreement demonstrates an intent that the dedications were not intended to run with the land. If the parties had intended for the Gathering Agreements to include covenants running with the land, CMLP would have undoubtedly pointed to at least one source expressly stating such language. Because no such evidence exists, CMLP cannot demonstrate that the parties intended for the Gathering Agreements to include covenants running with the land. 23 (iv) Another Bankruptcy Court is Inclined to Find that Similar Gathering Agreements Are Not Covenants Running With the Land. 56. The Debtors position here finds further support from the Sabine Oil and Gas Corporation bankruptcy proceeding where the debtors sought to reject certain gas gathering agreements and the gatherers objected, arguing that the agreements create covenants running with the land. In re Sabine Oil & Gas Corp., No (Bankr. S.D.N.Y. 2015). During the hearing on the debtors rejection motion, the court stated that it was inclined toward a ruling that the dedication language in the agreements were not covenants running with the land. The court reasoned, [s]o when you apply those tests [about whether something is a covenant running with the land], you run smack into this other language that says that [the gatherer is] going to perform services with respect to oil, gas, and water produced by Sabine. Those are not those are personal property items. They are not it s not real property. Tr. of Hr g at 127:3-15, In re Sabine Oil & Gas Corp., No (SCC) (Bankr. S.D.N.Y. Feb. 2, 2016) (attached hereto as Exhibit A). This Court should follow the Sabine Court s inclination and hold that the Gathering Agreements are not covenants running with the land. 23 The Debtors sale of an undivided 25% interest to TG Barnett establishes nothing with respect to intent. Rather, it merely establishes that that Debtors sold 25% interest in certain minerals to TG Barnett in a separate transaction that all parties agreed would be subject to the Gathering Agreements. 30

39 Case LSS Doc 1216 Filed 03/02/16 Page 39 of 53 (v) CMLP s Main Authority Energytec Is Distinguishable and Not Supportive of CMLP s Arguments. 57. CMLP s argument largely rests on a Fifth Circuit case that is entirely distinguishable from the facts here In re Energytec, Inc., 739 F.3d 215 (5th Cir. 2013). In Energytec, Mescalero Oil and Gas, Inc. ( Mescalero ) Energytec s predecessor entered in to a letter agreement with Producers Pipeline Corporation ( Producers ) through which Mescalero sold all its interest in a gas pipeline, its rights-of-way, and a processing plant to Producers. Id. at 217. Newco Energy, Inc. was also a party to the letter agreement. Id. Specifically, the agreement stated, Mescalero has reached agreement to convey certain interests in properties which are the subject of this Agreement to Newco Energy, Inc. Newco, as successor in interest to Mescalero therefore joins in the execution of this Agreement. Id. As partial consideration, Producers retained the right to receive a transportation fee from Newco based on the amount of gas flowing through the gas pipeline. Id. Producers was also required to obtain Newco s consent to any assignment of its interest in the pipeline. Id. The letter agreement gave Newco a security interest and lien on the entire pipeline system to secure payment of the transportation fee, and the agreement specified that Newco s interest in transportation fees run with the land. Id. A separate Assignment and Bill of Sale conveyed the pipeline system and other property. Id. 58. Later, Energytec agreed to purchase the pipeline system from Producers and expressly agreed to assume the obligation to pay transportation fees to Newco. Id. Energytec filed for bankruptcy and sought bankruptcy court approval for a free and clear sale. Id. at 219. Newco objected and argued that its interest in the transportation fees and its right to consent to any assignment were covenants running with the land. Id. The Fifth Circuit agreed and spent a considerable portion of its opinion discussing the privity and touch and concern requirements for a covenant running with the land. Id. at As to privity, the Fifth Circuit 31

40 Case LSS Doc 1216 Filed 03/02/16 Page 40 of 53 distinguished the Wayne Harwell opinion from Energytec s facts by explaining, here the transportation fee and other benefits for Newco were created at the time of a conveyance of real property. Id. at 223. As to the touch and concern requirement, the Fifth Circuit explained that there was real property at issue here in the form of a gas pipeline system, and that Newco s transportation fee was for the use of that real property the traveling of natural gas from a starting point along the pipeline. Id. at 224. Thus, Newco s rights impacted the owner s interest in the real property. 59. CMLP and the Gathering Agreements are nothing like Newco and the letter agreement that existed in Energytec. Unlike in Energytec, the Gathering Agreements were not created at the time of a conveyance of real property and there was no conveyance of real property whatsoever as between the Debtors and CMLP. Thus, the privity that existed in Energytec does not exist here. Similarly, CMLP s rights under the Gathering Agreements do not concern real property interests like Newco s right to a transportation fee was for real property pipeline interests, and CMLP was not granted a security interest or lien in any property like Newco received in Energytec. In other words, the Gathering Agreements do not impact the Debtors interest in its mineral estate, nor do the Gathering Agreements impact the value of the Debtors real property interests in the land. CMLP is attempting to equate the real property pipeline interests in Energytec to the Debtors mineral estates that were never part of any agreement with CMLP. There is simply no similarity between this case and Energytec and Energytec does not support CMLP s arguments here. B. Even if the Gathering Agreements Contain Covenants Running With the Land, They Can Still Be Rejected Under Bankruptcy Code Section If the Court concludes that the Gathering Agreements include covenants running with the land, that finding does not preclude rejection under Bankruptcy Code section

41 Case LSS Doc 1216 Filed 03/02/16 Page 41 of 53 CMLP s arguments to the contrary are nothing more than a fiction generated by a gas gathering company concerned that its increasingly lopsided agreements (especially in a very challenging commodities pricing market) may be rejected in bankruptcy. Indeed, several courts have held that the issue of whether or not a covenant runs with the land has no impact on whether the contract is subject to rejection. 61. In In re Arden and Howe Assocs., Ltd., 152 B.R. 971, 975 (Bankr. E.D. Cal. 1993), the court addressed the effect of lease rejection on a restrictive use covenant that ran with the land. The court held that once the bankrupt lessor rejects the unexpired lease, the executory covenants are also extinguished. Id. at ( The earlier holdings in this case, as amplified here, are that such covenants fall when the lease is rejected under section 365, regardless of whether they run with the land. ). 62. In In re Kellstrom Indus., Inc., 286 B.R. 833 (Bankr. D. Del. 2002), the debtor had a pre-petition agreement to notify Sawgrass [the other party to the agreement] of any offer to purchase the property and to permit Sawgrass to purchase that property if it matches the price. Id. at 834. Sawgrass asserted that the contract containing the right of first refusal was not an executory contract that could be rejected. Id. Although not ultimately addressed in the court s opinion, the agreement creating the right of first refusal was filed in the land records and provided that: All covenants, restrictions, conditions and agreements contained herein are made for the direct, mutual and reciprocal benefit of each and every Lot and other Property in favor of every other Lot and other Property; shall create reciprocal rights and obligations between all grantees of such Lot and other Property, their heirs, successors, personal representatives and assigns; and, shall, as to the Owner of each site, his heirs successors, personal representatives and assigns, operate as covenant running with the land for the benefit of all other sites. In re Kellstrom Indus., Case No (MFW) [D.I. 538, Ex. A at 11.4]. 33

42 Case LSS Doc 1216 Filed 03/02/16 Page 42 of The court held that the right of first refusal granted to Sawgrass was an executory contract subject to rejection. Kellstrom, 286 B.R. at 835. This Court noted that a majority of courts had found rights of first refusal to be executory contracts. Id. at 834 (citing In re Coordinated Fin. Planning Corp., 65 B.R. 711, 713 (9th Cir. BAP 1986) (even though right of first refusal was a covenant running with the land, court concluded that it was an executory contract that could be rejected under section )). 64. Here, as explained above, the Gathering Agreements are executory contracts subject to rejection under Bankruptcy Code section 365. The authority above demonstrates that even if the Court finds that the Gathering Agreements include covenants running with the land, such finding will not preclude rejection of the Gathering Agreements and the covenants contained therein. 25 Simply put, despite CMLP s assertions to the contrary, there is nothing special or unique about the alleged covenants running with the land in the Gathering Agreements that would preclude rejection. Instead, as part of an executory contract, the covenants are subject to rejection just like any other promise made through an executory contract. IV. THE DEDICATIONS IN THE GATHERING AGREEMENTS ARE NOT EQUITABLE SERVITUDES. 65. CMLP s final argument against rejection is that the dedications within the Gathering Agreements are equitable servitudes under Texas law that cannot be rejected. However, the Gathering Agreements do not contain equitable servitudes because the dedications 24 Although the Coordinated Financial case has a red flag on Westlaw (not Lexis), the case has not been overruled but has been distinguished as applied to option contracts by some courts. 25 The cases relied upon by CMLP for the proposition that the existence of a covenant running with the land precludes rejection are distinguishable as they concern deed restrictions created when the property was conveyed rather than contracts. See Gouveia v. Tazbir, 37 F.3d 295, (7th Cir. 1994) (reciprocal, restrictive land covenant recorded on all lots of a subdivision was not an executory contract subject to rejection); In re Beeter, 173 B.R. 108, (Bankr. W.D. Tex. 1994) (Declaration of Covenants, Conditions and Restrictions binding condominiums was a covenant running with the land and was imposed on the property when the estate in land was created pursuant to the documents that created the condominium regime, pursuant to state law ). Further, the final case relied upon by CMLP was characterized as a legislative act rather than a contract. See In re Banning Lewis Ranch Co., 532 B.R. 335, 343 (Bankr. D. Colo. 2015). 34

43 Case LSS Doc 1216 Filed 03/02/16 Page 43 of 53 neither burden the use of the Debtors land, nor does CMLP own any land that could be benefitted by the Gathering Agreements. 66. Under Texas law, a contractual restriction known as an equitable servitude exists when (1) the contracting parties are in privity of estate at the time of conveyance, (2) the subsequent party purchases the land with notice of the restriction, and (3) it concern[s] the land or its use or enjoyment. See In re El Paso Refinery, LP, 302 F.3d at & n.17; Excel Willowbrook, L.L.C. v. JP Morgan Chase Bank, N.A., 758 F.3d 592, 602 n.26 (5th Cir. 2014). As a threshold matter, CMLP s equitable servitude argument fails because there is no privity of estate for the reasons explained above. Supra Moreover, CMLP cannot establish that the dedications in the Gathering Agreements concern the land or its use or enjoyment. 67. An equitable servitude concerns the land or its use or enjoyment when it (a) limits the use of the burdened land and (b) benefits the land of the party seeking to enforce it. See In re El Paso Refinery, 302 F.3d at 358; Reagan Nat l Adver. of Austin, Inc. v. Capital Outdoors Inc, 96 S.W.3d 490, 495 (Tex. App. Austin 2002, pet granted, judgm t vacated w.r.m.) (quoting Davis v. Skipper, 125 Tex. 364, 83 S.W.2d 318, 321 (Tex. Comm n App. 1935)). 68. Where a restriction only benefits or burdens a person or entity, and does not impact the land itself, it does not constitute an equitable servitude. See In re El Paso Refinery, 302 F.3d at For example, in El Paso Refinery, the court held that restrictive language in a deed preventing future owners of land from seeking contribution from a grantor of a refinery or compelling that grantor to take remedial action regarding environmental liabilities did not concern the land or its use where the restriction solely benefited or burdened the grantor personally and has no direct impact upon the land itself. In re El Paso Refinery, 302 F.3d at 356, 358 (incorporating its touch and concern reasoning from its real covenant analysis into its 35

44 Case LSS Doc 1216 Filed 03/02/16 Page 44 of 53 equitable servitude and concern the land or its use analysis) (emphasis added). Thus, where a restriction only collaterally benefits or burdens land, a restriction does not concern the land or its use and is not an equitable servitude. See id.; see also Clear Lake City Water Auth. v. Clear Lake Utils. Co., 549 S.W.2d 385, 388 (Tex. 1977) ( [A] limitation [that] affects the use of land only collaterally [] will not create an equitable servitude upon the land. ). Here, nothing in the Gathering Agreements constitute equitable servitudes because they only burden personal property in the form of produced gas, and only benefit individuals. A. The Gathering Agreements Do Not Burden the Use of Land. 69. The Gathering Agreements are not equitable servitudes because they only burden personal property: produced gas. As explained above, under Texas law, produced gas is personal property it is not a real property interest. Riley v. Riley, 972 S.W.2d 149, 155 (Tex. App. Texarkana 1998, no pet.) (citing Phillips Petroleum, 513 F.2d 355, 363 (5th Cir. 1975) ( Texas law provides that oil and gas are realty when in place and personalty when severed from the land by production. )). Accordingly, here, the personal restriction that the Gathering Agreements place upon the Debtors does not burden the land, but rather personal property extracted and gathered from the land. 70. Furthermore, even if the Gathering Agreements burden land which they do not the Gathering Agreements could at most be said to collaterally burden land, rather than directly impact land. See In re El Paso Refinery, 302 F.3d at 356, 358. In an analogous case addressing an exclusive utilities services agreement, the Texas Supreme Court found that such an agreement did not concern the land or its use where Enforcement of the exclusive service provision would not have restricted [a landowner] in the use of its real property. At most, [the landowner s] promise limited [the landowner s] freedom to contract with other suppliers of water and sewer service. Such a limitation affects the use of land only collaterally and will not create an equitable servitude upon the land. 36

45 Case LSS Doc 1216 Filed 03/02/16 Page 45 of 53 Clear Lake City Water Auth., 549 S.W.2d at 388; see also Superior Phones, Ltd. v. Cherokee Commc ns., Inc., 964 S.W.2d 325 (Tex. App. Corpus Christi 1998, pet. denied) (holding that an agreement that granted one party exclusive rights to provide telephone services for a particular property was not an equitable servitude because, at most, the agreement limited the landowner s freedom to choose a pay telephone service provider for the premises and only collaterally limited the use of the real property). Similarly, here, the Gathering Agreements require the Debtors to deliver the gas to CMLP s Receipt Point, and thus at most only collaterally relate to land in the sense that the personal property that is subject to the Gathering Agreements was once in land and subsequently extracted from that land. See Clear Lake City Water Auth., 549 S.W.2d at 388; see also Superior Phones, 964 S.W.2d at 325. In other words, the Gathering Agreements do not directly burden the use of land itself, but rather are commercial contracts that restrict the Debtors dissemination of personal property once it is extracted from the land. Without a direct burden on land, an equitable servitude cannot exist. In re El Paso Refinery, 302 F.3d at (requiring a burden on land that directly impacts the land itself). B. The Gathering Agreements Do Not Benefit Any Land Owned by CMLP. 71. The Gathering Agreements also do not benefit land, but rather benefit CMLP personally. Tellingly, CMLP fails to cite any case where a commercial contract between two sophisticated parties constituted an equitable servitude. Indeed, CMLP fails to identify any land that it owns that is directly impacted and benefitted by the Gathering Agreements because there is none. Under the Gathering Agreements, CMLP merely has a contractual right to gather all of the produced gas from a specified area and to receive a fee for that service. Indeed, if CMLP moved its Receipt Point to a new tract of land, the Debtors would still be obligated to deliver gas to the Receipt Point rather than to a particular tract of land. There is no benefit to land itself, 37

46 Case LSS Doc 1216 Filed 03/02/16 Page 46 of 53 only to CMLP personally. Without a direct benefit to land, an equitable servitude cannot exist. In re El Paso Refinery, 302 F.3d at (requiring a benefit on land that directly impacts the land itself). Accordingly, the Debtors submit that CMLP cannot establish that the dedications included in the Gathering Agreements constitute equitable servitudes under Texas law. V. EVEN IF THE COURT CONCLUDES THAT CMLP HAS REAL PROPERTY INTERESTS PURSUANT TO GATHERING AGREEMENTS, THE DEBTORS SALE TO BLUESTONE WAS APPROVED FREE AND CLEAR OF SUCH INTERESTS. 72. Even if the Court finds that CMLP received real property interests or equitable servitudes by operation of the Gathering Agreements, Debtors have already sold their assets free and clear of CMLP s supposed interests. First, the Court s Order Approving the Sale of the Debtors Oil and Gas Assets [D.I. 1095] ( Sale Order ) approving the sale of substantially all of the Debtors assets to BlueStone did so free and clear of all liens, claims, servitudes, and encumbrances, including, if any, those contained in the Gathering Agreements, including dedications. Sale Order T, 7. CMLP never objected to the Sale Order, filed an appeal of the Sale Order, or sought a stay pending appeal. Second, even if CMLP had objected to the sale to BlueStone free and clear of its purported interests, pursuant to Bankruptcy Code section 363(f)(5), the Debtors could still sell their assets free and clear of those interests because CMLP could be compelled in a legal or equitable proceeding to accept a money satisfaction of such interest. 11 U.S.C. 363(f)(5). A. The Sale Order is Final and CMLP Never Objected to, Appealed, or Sought a Stay Pending Appeal of the Sale Order. 73. On January 27, 2016, this Court approved the sale of substantially all of the Debtors assets to BlueStone pursuant to the Sale Order and the Asset Purchase Agreement attached thereto as Exhibit A. The Sale Order became a final, non-appealable order fourteen days later on February 10, See Fed. R. Bankr. P. 6004(h). The Sale Order and the Asset 38

47 Case LSS Doc 1216 Filed 03/02/16 Page 47 of 53 Purchase Agreement, the forms of which were filed in advance of the hearing, 26 made clear that the sale was free and clear of all Interests. Sale Order T, 7. Interests is defined broadly to include any rights or covenants, including those included in the Gathering Agreements. For example, the definition of Interests includes servitudes, restrictive covenants, and any dedication under any gathering, transportation, treating, purchasing or similar agreement that relates solely to any Contract set forth on Schedule 7.4(d) to the Asset Purchase Agreement and any such other contract that is not assumed by or assigned to Purchaser. Id. T. Similarly, the Asset Purchase Agreement made clear that the sale was free and clear of all Encumbrances, and the term Encumbrances was defined to include servitudes, restrictive covenants, and, specifically as to the Gathering Agreements, any dedication under any gathering, transportation, treating, purchaser or similar agreements. Asset Purchase Agreement 1.1, Although it was clear through various filings and related documents that the sale to BlueStone would be free and clear of the dedications included at section 2.1 of the Gathering Agreements, CMLP never objected to the sale itself, including the free and clear nature of the same, nor did it appeal the Sale Order or seek a stay pending appeal. Instead, CMLP merely filed a Statement through which it purported to reserve all rights and objections in connection with entry of the proposed sale order and the Debtors anticipated motion to reject the Crestwood Designated Contracts. [D.I at 3]. Subsequent to filing its Statement, however, CMLP and the Debtors discussed and ultimately agreed to include the following at paragraph thirtyeight of the Sale Order: 26 The Asset Purchase Agreement (without exhibits and schedules) was filed on January 23, 2016 as an exhibit to the Notice of Successful Bidder and Backup Bidder with Respect to the Auction of the Debtors Assets [D.I. 1072] (the Successful Bidder Notice ). As indicated by the Successful Bidder Notice, the exhibits and schedules to the Asset Purchase Agreement were posted to the Debtors case website at The proposed form of Sale Order was filed on January 25, 2016 [D.I. 1082]. 39

48 Case LSS Doc 1216 Filed 03/02/16 Page 48 of 53 Nothing herein shall prejudice or, to any extent, waive the rights of Crestwood Midstream Partners LP, Cowtown Gas Processing Partners L.P., or Cowtown Pipeline Partners L.P. to object to, or otherwise contest, the proposed rejection of the contracts described in Schedule 7.4(d) to the Asset Purchase Agreement. Sale Order, 38. This language resolved any CMLP objections to the entry of the Sale Order. 75. The language agreed upon and included in the Sale Order only reserved CMLP s right to object to, or otherwise contest, the proposed rejection of its agreements with the Debtors that were listed on Schedule 7.4(d) to the Asset Purchase Agreement. There is nothing in the language reserving CMLP s rights to address the free and clear nature of the Debtors sale or any objection thereto. Even if CMLP asserts that its Statement regarding the sale was intended as an objection to the sale free and clear of its purported interests, the Sale Order specifically overruled any objections to the sale and, as discussed above, the reservation of rights language included in the Sale Order does not preserve those issues. See Sale Order, H, 38. Accordingly, without an objection to entry of the Sale Order or an appeal or request for stay pending appeal of the same, CMLP s opportunity to contest the free and clear nature of the Debtors sale to BlueStone has passed. B. Even if CMLP Had Objected, the Debtors Sale to BlueStone Could Proceed Free and Clear of CMLP s Alleged Interests Pursuant to Bankruptcy Code Section 363(f)(5). 76. Even if CMLP had timely objected to the sale to BlueStone free and clear of its purported property rights and this Court concludes that CMLP has an interest in real property, the Debtors sale to BlueStone can proceed free and clear of CMLP s interests pursuant to section 363(f)(5). 77. Generally, Bankruptcy Code section 363 provides that a debtor may sell property free and clear of an interest in that property of another entity only in certain circumstances. One such circumstance is where the debtor can show that the entity holding the interest in the 40

49 Case LSS Doc 1216 Filed 03/02/16 Page 49 of 53 property, could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest. 11 U.S.C. 363(f)(5). 78. The Third Circuit has interpreted section 363(f)(5) to require showing that the interest in property is subject to monetary valuation such that the claims can otherwise be converted to a dollar amount and the claimants receive a distribution provided to other general unsecured credits in a liquidation. See In re Trans World Airlines, Inc., 322 F.3d 283, (3d Cir. 2003) (section 363(f)(5) was satisfied because a travel voucher and EEOC claims were both subject to monetary valuation; reasoning that the claims at issue would have been converted to a dollar amount and the claimants received the distribution provided to other general unsecured creditors had the debtor liquidated its assets in a Chapter 7 proceeding). Indeed, the Third Circuit in Trans World held that EEOC claims satisfied section 363(f)(5) s requirement because they were reducible to, and can be satisfied by, monetary awards even if the relief sought is injunctive in nature. Id. at 291 (emphasis added). 79. Moreover, while specific performance may be an option in certain real estate contracts under Texas law such as a contract for the sale of real property specific performance is merely one option and the aggrieved party may also sue for monetary damages. See Swinehart v. Stubbeman, McRae, Sealy, Laughlin & Browder, Inc., 48 S.W.3d 865, 885 (Tex. App. Houston [14th Dist.] 2001, pet. denied) ( Even if the third contract were enforceable and susceptible to specific performance, Texas law provides damages as an alternative remedy for breach of contract for the transfer of real property. ); Shelton v. Poynor, 326 S.W.2d 583, 585 (Tex. Civ. App. El Paso 1959, writ dism d) (in action arising from the breach of a written contract for the sale of a ranch, the court explained that, [u]pon breach of 41

50 Case LSS Doc 1216 Filed 03/02/16 Page 50 of 53 contract, the suit can be either for specific performance or for damages arising from said breach. ). 80. The plain language of the Gathering Agreements demonstrates that CMLP could be compelled to accept monetary damages for any breach of the purported covenant because the alleged damages are subject to monetary valuation. Specifically, any breach of the Gathering Agreements is subject to a calculation of damages based on the fees that the Debtors expect to owe CMLP under each agreement and the term of the agreement. Each of the Gathering Agreements provide for specific rates over a defined period of time. Thus, CMLP s potential damages for no longer having the benefit of the Gathering Agreements are quantifiable. For example, section 11 of the Alliance Gathering Agreement and Lake Arlington Gathering Agreement require the Debtors to pay CMLP a specific amount per Mcf or MMBtu of gas received by CMLP at the Receipt Points (subject to certain adjustments), and sections 18 of each agreement provides a specific term for the agreement. Similarly, section 12 of the Cowtown Gathering Agreement requires the Debtors to pay a Gathering Fee, a Processing Fee, and potentially a Treating Fee and Compression Fee, and article XX provides the term Based on these provisions, the benefit of CMLP s bargain is subject to monetary valuation and can be calculated through expert testimony or otherwise. For example, based on the fees owed to CMLP under the Gathering Agreements, the term of each Gathering Agreement, and the costs that CMLP did not incur by continuing its performance, a court can determine what amount of money will place CMLP in the economic position it would have occupied had the 27 Moreover, under Texas law, breach of a covenant, like a covenant running with the land, subjects the breaching party to monetary damages. See Circle Ridge Prod., Inc. v. Kittrell Family Minerals, LLC, 2013 WL , at *8 (Tex. App. Texarkana July 17, 2013, no pet.) ( Except in extraordinary circumstances, a covenant only subjects the breaching party to monetary damages. ); Parten v. Cannon, 829 S.W.2d 327, 330 (Tex. App. Waco 1992, writ denied) ( Breach of a covenant does not automatically terminate the estate, but instead subjects the breaching party to liability for monetary damages or, in extraordinary circumstances, the remedy of a conditional decree of cancellation. ) (citing Rogers v. Ricane Enters., Inc., 772 S.W.2d 76, 79 (Tex. 1989)). 42

51 Case LSS Doc 1216 Filed 03/02/16 Page 51 of 53 Gathering Agreements been performed. See Sava Gumarska in Kemijska Industria D.D. v. Adv. Polymer Sci., Inc., 128 S.W.3d 304, 317 n.6 (Tex. App. Dallas 2004, no pet.) ( The normal measure of damages in a breach of contract case is the benefit-of-the-bargain measure. This measure seeks to restore the injured party to the economic position it would have been in had the contract been performed. ) (citations omitted); see also Sharifi v. Steen Auto., LLC, 370 S.W.3d 126, (Tex. App. Dallas 2012, no pet) (summarizing Texas law on calculation of damages for breach of contract). Although such a calculation might involve expert testimony and other discovery, the calculation is one that can nonetheless be done with sufficient certainty to arrive at a quantifiable amount. Indeed, the Alliance Gathering Agreement even contemplates the clear possibility of damages by waiving a party s rights to punitive, exemplary, consequential, incidental, special, or indirect damages, and by also waiving any right to lost profits or other business interruption damages. Alliance Gathering Agreement This is analogous to how courts treat the dischargeability of environmental obligations. In general, a debtor s ability to discharge an equitable, environmental obligation such as an injunction to remediate a contaminated area hinges on whether the equitable duty constitutes a claim under Bankruptcy Code section 101(5) that can be discharged as a prepetition debt under section 1141(d)(1)(A). See, e.g., Ohio v. Kovacs, 469 U.S. 274, (1985); In re Torwico Elec., Inc., 8 F.3d 146, 148 (3d Cir. 1993); In re Chateaugay Corp., 944 F.2d 997, (2d Cir. 1991). Generally, courts hold that the breach of an equitable, environmental obligation gives rise to a dischargeable claim when the aggrieved party has the right or the option to receive damages as an alternative to an equitable remedy. See In re Marks IV Indus., 438 B.R 460, 467 (Bankr. S.D.N.Y. 2010); Chateaugay, 944 F.2d at 1008; United 43

52 Case LSS Doc 1216 Filed 03/02/16 Page 52 of 53 States v. Apex Oil Co., 579 F.3d 734, (7th Cir. 2009). Courts most often cite to the explanation within Chateaugay stating, Since there is no option to accept payment in lieu of continued pollution, any order that to any extent ends or ameliorates continued pollution is not an order for breach of an obligation that gives rise to a right of payment and is for that reason not a claim. But an order to clean up a site, to the extent that it imposes obligations distinct from any obligation to stop or ameliorate ongoing pollution is a claim if the creditor obtaining the order had the option, which CERCLA confers, to do the cleanup work itself and sue for response costs, thereby converting the injunction into a monetary obligation. Chateaugay, 944 F.2d at 1008 (emphasis added). 83. Just as equitable, environmental obligations are dischargeable if monetary damages are an option under the applicable statute, the Gathering Agreements are subject to section 363(f)(5) since there is the clear option for CMLP to receive monetary damages. CONCLUSION Accordingly, for all of the foregoing reasons, the Debtors respectfully request that the Court (a) enter the Proposed Order substantially in the form attached as Exhibit A to the Motion, granting the relief requested in the Motion, and (b) grant such other and further relief as may be just and proper. 44

53 Case LSS Doc 1216 Filed 03/02/16 Page 53 of 53 Dated: March 2, 2016 Wilmington, Delaware /s/ Amanda R. Steele RICHARDS, LAYTON & FINGER, P.A. Paul N. Heath (DE 3704) Amanda R. Steele (DE 5530) Rachel L. Biblo (DE 6012) One Rodney Square 920 North King Street Wilmington, Delaware Telephone: (302) Facsimile: (302) and AKIN GUMP STRAUSS HAUER & FELD LLP Charles R. Gibbs (admitted pro hac vice) Sarah Link Schultz (admitted pro hac vice) Marty L. Brimmage, Jr. (admitted pro hac vice) Travis A. McRoberts (DE 5274) 1700 Pacific Avenue, Suite 4100 Dallas, Texas Telephone: (214) Facsimile: (214) COUNSEL FOR DEBTORS AND DEBTORS IN POSSESSION 45

54 Case LSS Doc Filed 03/02/16 Page 1 of 6 Exhibit A

55 Case LSS Doc Filed 03/02/16 Page 2 of 6 Page 1 1 UNITED STATES BANKRUPTCY COURT 2 SOUTHERN DISTRICT OF NEW YORK 3 4 In re: : : Chapter 11 5 : SABINE OIL & GAS CORPORATION : Case No : Debtors. : 7 : 8 9 United States Bankruptcy Court 10 One Bowling Green 11 New York, NY February 2, :10 AM - 1:19 PM B E F O R E : 22 HON SHELLEY C. CHAPMAN 23 U.S. BANKRUPTCY JUDGE ECRO OPERATOR: MICHELLE BROWN Veritext Legal Solutions

56 Case LSS Doc Filed 03/02/16 Page 3 of 6 Page 2 1 HEARING re Pre-Trial Conference 2 3 HEARING re Doc #371 Debtors Omnibus Motion for Entry of an 4 Order Authorizing Rejection of Certain Executory Contracts 5 6 HEARING re Doc #659 Debtors Motion for Entry of an Order 7 (A) Authorizing Assumption of Certain Non-Residential Real 8 Property Leases Pursuant to Section 365 of the Bankruptcy 9 Code and Bankruptcy Rule 6006 and (B) Granting Related 10 Relief Transcribed by: Sonya Ledanski Hyde Veritext Legal Solutions

57 Case LSS Doc Filed 03/02/16 Page 4 of , you say, "The key rights under the gathering agreements 2 are covenants that run with that land. The key rights under 3 the gathering agreements touching concern the land. 4 The gathering agreements relate to a thing in 5 existence or specifically and expressly bind the parties and 6 their assigns. The gathering agreements were intended to 7 run with the land." This was teed up for me to make a 8 determination as to whether or not they are covenants that 9 run with the land. And where you started was to tell me 10 that if I do that, I'll be making some kind of an error. 11 And I don't believe that that's the case. We're going to 12 stick with it until we kind of get on the same page here. 13 MR. BURNS: I think the error that I'm referring 14 to, Your Honor, is if our claim is -- if we leave here today 15 and our claim is unsecured, we don't have the ability to 16 ever bring what we think is the proper claim. I mean THE COURT: I'm not in any way seeking to limit 18 the claim that you file, but if I agree with the Debtors 19 that this involves covenants running with the land and I 20 make that finding and render that decision, it doesn't get 21 revisited in the claims process. 22 MR. BURNS: But, again, where Orion speaks to Page that, Your Honor -- because it states -- and this is at 10, 24 excuse me, 4 F.3rd at "It is important to keep..." and I'm quoting the Court. "It is important to keep in mind Veritext Legal Solutions

58 Case LSS Doc Filed 03/02/16 Page 5 of 6 1 just because it says it doesn t mean that it is, right? And 2 then, you have to apply all of these other somewhat arcane 3 tests. So when you go to apply those tests, you run smack 4 into this other language that says that it s going to 5 perform services with respect to oil, gas, and water 6 produced by Sabine. Those are not -- those are personal 7 property items. They are not -- it s not real property. So 8 I m going to reflect on all of this. I think you can 9 probably hear that I m inclining toward a ruling that there 10 are covenants running with the land, but I MR. BENNETT: That they re not. 12 THE COURT: That they re not. I m sorry. 13 MR. BENNETT: Yes THE COURT: That they re not covenants running 15 with the land. But I need some additional time to think 16 about everything because there were a lot of interesting 17 points made here today. In the meantime, and being 18 practical is just what I do, to the extent that, you know, 19 against the backdrop of the uncertainty that the Debtors are 20 facing, it seems to me that it s in everybody s interests to 21 have some discussions and figure out what to do with the 22 Cadillac and the Chevy and the truck and the half built Page Buick or whatever it is. It just makes sense to try to make 24 the best of what s not an ideal situation for anybody. But 25 I m going to proceed ahead. And what I might do, depending Veritext Legal Solutions

59 Case LSS Doc Filed 03/02/16 Page 6 of 6 Page C E R T I F I C A T I O N 2 3 I, Sonya Ledanski Hyde, certified that the foregoing 4 transcript is a true and accurate record of the proceedings Sonya Ledanski Hyde Digitally signed by Sonya Ledanski Hyde DN: cn=sonya Ledanski Hyde, o=veritext, ou, =digital@veritext.com, c=us Date: :20:05-05'00' 8 Sonya Ledanski Hyde Veritext Legal Solutions Old Country Road 22 Suite Mineola, NY Date: February 3, 2016 Veritext Legal Solutions

60 Case LSS Doc Filed 03/02/16 Page 1 of 3 Exhibit B

61 Case LSS Doc Filed 03/02/16 Page 2 of 3 EXHIBIT A to the GAS GATHERING AGREEMENT This Exhibit A is attached to the Gas Gathering Agreement (the Agreement ) dated as of December 1, 2009, by and between Quicksilver Resources Inc., as Producer, and Cowtown Pipeline L.P., as Gatherer, and made a part thereof for all purposes. All defined terms used herein shall have the same meaning as set forth in the Agreement. Contract Area The leases and lands located in Denton and Tarrant Counties, Texas commonly referred to as the Alliance Area and designated the Contract Area as depicted on the plat attached hereto and made a part hereof. Exhibit A, Page 1 of 1

62 Case LSS Doc Filed 03/02/16 Page 3 of 3

63 Case LSS Doc Filed 03/02/16 Page 1 of 3 Exhibit C

64 Case LSS Doc Filed 03/02/16 Page 2 of 3

65 Case LSS Doc Filed 03/02/16 Page 3 of 3