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5th Circuit Summary: Newco Energy v. Energytec, Inc. (In re Energytec, Inc..), No. 12-41162

Energytec owned a pipeline system.  Newco Energy had an agreement with Energytec whereby Newco was paid a “transportation fee” based on the amount of gas that flowed through the pipeline.  Energytec filed Chapter 11 bankruptcy and sold the pipeline system to Red Water Resources in via a 363 sale.  The proposed sale order initially said that the sale was free and clear of all interests.  Newco objected, arguing that the sale could not be free of its interests because they ran with the land.  Thereafter the court entered an order stating that the sale was free and clear of all interests, but reserving for the contingency of Newco’s unresolved interest.  Red Water did not object to this language.

A year later, the bankruptcy court ruled that Newco’s rights did not run with the land and that therefore the sale was free and clear of its interests.  The district court affirmed.  Newco appealed to the Fifth Circuit.  The court first determined that the appeal was not mooted by 363(m), even though Newco failed to request or obtain a stay of the sale order.  This was because the sale order was subject to the contingency of the court later determining Newco’s rights.  The Fifth Circuit made a point of the fact that Red Water did not object to this arrangement – thereby accepting the risk that the contingency (Newco’s interest) would later arise.

The Fifth Circuit then analyzed whether the interest ran with the land and determined that, under Texas law, it did.  Finally, the court noted Energytec’s arguments that the sale could still have been free of the interest because section 363(f)(5) could force Newco to accept a monetary satisfaction of its interest.  Newco argued against this on the grounds that it was impossible to know the amount of gas that would pass through the pipeline in the future and therefore impossible to determine the monetary value of its interest.   This issue was not determined at the lower courts, so the Fifth Circuit remanded on that point.

Lesson from this case

If you represent the buyer and you allow a contingency carve out in the sale order, you need to realize the risk you are taking.  That is, you may not be able to use 363(m) to moot the matter if the contingency later arises.