A debtor had entered into a gas purchase agreement with a gas buyer, giving the gas buyer the rights to the gas on the property. The debtor later filed for bankruptcy under Chapter 11. After this filing, the court entered cash collateral orders that gave the creditor a senior security interest in the debtor’s assets. However, in doing this, the court failed to mention the gas buyer’s rights to gas on the debtor’s land in the cash collateral orders. Next, the debtor sold the land that the gas buyer’s rights were tied to, free of any encumbrance or lien (“Sale Order”). After the sale, the proceeds of the sale went to the creditor under the cash collateral order, and because the value of the sale was less than the total amount the debtor owed the creditor, the gas buyer received no distribution from the sale for its gas rights. The gas buyer filed suit, alleging that it had real property rights superior to any interest the court had given the creditor and that it should be paid for its rights in the sold land. The creditor moved for summary judgment, arguing that the gas buyer had no rights to the proceeds of the sale.
In Mustang Gas Products, LLC v. Wells Fargo National Ass’n (In re Alta Mesa Res., Inc.), No. 19-35133, 2023 WL 4139854, 2023 Bankr. LEXIS 1609 (Bankr. S.D. Tex. 2023) (unpublished opinion), the court denied the motion for summary judgment, finding that there was a disputed material fact concerning whether the gas buyer’s real property interest in the land had been extinguished. When viewing the facts in the light most favorable to the gas buyer, the court assumed that the gas buyer held a covenant that ran with the land for the gas rights. This, the court reasoned, would mean that the gas buyer’s interest would trump the creditor’s security interests the proceeds from the sale. However, after close examination of the facts, the court was unable to determine whether the Sale Order had properly terminated the gas buyer’s interest in the land, and thereby terminated the gas buyer’s superior interest over the creditor. The court reasoned that if the Sale Order did extinguish the gas buyer’s rights, the gas buyer would be entitled to claim proceeds of the sale. However, if the Sale Order did not extinguish the gas buyer’s rights, the gas buyer would have to pursue the new purchaser of the land for any compensation. Because of this uncertainty, the court denied the creditor’s motion for summary judgment.
By Maycee Redfearn, [email protected]
Edited By Hayden Mariott, [email protected]