Case Document 17 Filed in TXSB on 03/30/17 Page 1 of 16

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1 Case Document 17 Filed in TXSB on 03/30/17 Page 1 of 16 IN THE UNITED STATES BANKRUPTCY COURT FOR THE SOUTHERN DISTRICT OF TEXAS HOUSTON DIVISION In re: VANGUARD NATURAL RESOURCES, LLC, et al., 1 Debtors. ENCANA OIL & GAS (USA) INC., v. Plaintiff, VANGUARD OPERATING, LLC, Defendant. Chapter 11 Case No (MI) (Jointly Administered) Adversary No ENCANA OIL & GAS (USA) INC. S RESPONSE TO VANGUARD OPERATING, LLC S MOTION PURSUANT TO BANKRUPTCY RULE 7012(b)(6) TO DISMISS THE FOURTH THROUGH SEVENTH CLAIMS FOR RELIEF IN ENCANA S COMPLAINT Encana Oil & Gas (USA) Inc. ( Encana ), for its Response to Vanguard Operating, LLC s ( Vanguard Operating or Defendant ) Motion Pursuant to Bankruptcy Rule 7012(b)(6) to Dismiss the Fourth through Seventh Claims for Relief in Encana s Complaint [Docket No. 9] (the Motion ), respectfully represents: 2 1 The debtors in these chapter 11 cases (collectively, the Debtors ), along with the last four digits of each Debtor s federal tax identification number, are: Vanguard Natural Resources, LLC (1161); Eagle Rock Acquisition Partnership, L.P. (6706); Eagle Rock Acquisition Partnership II, L.P. (0903); Eagle Rock Energy Acquisition Co., Inc. (4564); Eagle Rock Energy Acquisition Co. II, Inc. (3364); Eagle Rock Upstream Development Company, Inc. (0113); Eagle Rock Upstream Development Company II, Inc. (7453); Encore Clear Fork Pipeline LLC (2032); Escambia Asset Co. LLC (3869); Escambia Operating Co. LLC (2000); Vanguard Natural Gas, LLC (1004); Vanguard Operating, LLC (9331); VNR Finance Corp. (1494); and VNR Holdings, LLC (6371). The location of the Debtors service address is: 5847 San Felipe, Suite 3000, Houston, Texas Capitalized terms used but not expressly defined herein have the meaning ascribed to them in the Amended Complaint (as defined below)

2 Case Document 17 Filed in TXSB on 03/30/17 Page 2 of 16 I. PRELIMINARY STATEMENT 1. On February 23, 2017, Encana filed its original complaint [Docket No. 1] (the Original Complaint ) seeking (i) a declaratory judgment as to the nature and extent of its and Vanguard Operating s property interests under the Development Agreement and the Leases; (ii) to quiet title to the Earned Leasehold Interests; and (iii) an order requiring Vanguard Operating to forthwith execute and deliver to Encana appropriate assignments for the Earned Leasehold Interests. 2. On March 9, 2017, Vanguard filed the Motion, challenging the sufficiency of the fourth through seventh claims for relief in the Original Complaint. See Docket No. 9. Specifically, Defendant asserts that Encana failed to state a cognizable claim for relief that (i) Encana is entitled to declaratory judgment that the Remaining Leasehold Interests are excluded from Defendant s bankruptcy estate pursuant to Section 541(b)(4)(A) of the Bankruptcy Code (Fourth Claim for Relief); (ii) Encana is entitled to declaratory judgment that the Drilling Right and the Assignment Obligation are covenants that run with the land (Fifth Claim for Relief); (iii) Encana is entitled to declaratory judgment that the Drilling Right and the Assignment Obligation are equitable servitudes (Sixth Claim for Relief); and (iv) Encana is entitled to recovery reasonable attorneys fees in connection with the Complaint (Seventh Claim for Relief). 3. On March 30, 2017, Encana filed its First Amended Complaint (the Amended Complaint ). See Docket No. 16. In the Amended Complaint, Encana clarifies the nature of the relief sought in the Fourth Claim for Relief, and sets forth additional background facts supporting its Fourth through Seventh Claims for Relief. The Amended Complaint is Encana s live pleading in this adversary proceeding and is the complaint against which the Motion should be adjudicated. W. Run Student Hous. Assocs., LLC v. Huntington Nat. Bank, 712 F.3d 165,

3 Case Document 17 Filed in TXSB on 03/30/17 Page 3 of 16 (3d Cir. 2013) (recognizing that amended complaints supersede original complaints for the purposes of considering motions under Rule 12(b)(6)); Stark v. TRT Holdings Dev. Inc., No. CIV A C-08-88, 2009 WL , at *1 (S.D. Tex. Apr. 3, 2009) (noting that second amended complaint was to be treated as the live pleading thereby mooting the defendant s motion for a more definite statement). 4. Under the governing Rule 12(b)(6) standard espoused by the Supreme Court in Ashcroft v. Iqbal, 556 U.S. 662, (2009) and Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007), the Amended Complaint sets forth more than mere conclusory allegations or formulaic recitations of causes of action. Instead, the Amended Complaint clearly states plausible claims for relief. The Motion must be denied. A. Legal Standard II. RESPONSE 5. To succeed on its Motion, Defendant has the burden to show that no claim has been stated by Encana. 2 MOORE S FEDERAL PRACTICE, 12.34[1][a] (Matthew Bender 3d Ed.). Under governing Supreme Court jurisprudence, a complaint is only required to contain sufficient factual matter to state a claim for relief that is plausible on its face. Twombly, 550 U.S. at 570; Iqbal, 556 U.S. at ; see also Club Retro, L.L.C. v. Hilton, 568 F.3d 181, 194 (5th Cir. 2009) ( To resist dismissal, plaintiffs must plead enough facts to state a claim for relief that is plausible on its face ) (quoting Twombly, 550 U.S. at 570); Bixler v. Foster, 596 F.3d 751, 756 (10th Cir. 2010) ( [W]e assume the factual allegations are true and ask whether it is plausible that the plaintiff is entitled to relief ) (quoting Gallagher v. Shelton, 587 F.3d 1063, 1068 (10th Cir. 2009))

4 Case Document 17 Filed in TXSB on 03/30/17 Page 4 of When reviewing and ruling upon the Motion, the Court must accept Encana s factual allegations as true, liberally construe the allegations in the Amended Complaint, and draw all reasonable inferences in Encana s favor. Erickson v. Pardus, 551 U.S. 89, 94 (2007); see also Club Retro, 568 F.3d at 194 ( We must accept all well-pleaded facts as true, draw all inferences in favor of the nonmoving party, and view all facts and inferences in the light most favorable to the nonmoving party ); United States v. Uvalde Consol. Indep. Sch. Dist., 625 F.2d 547, 549 (5th Cir. 1980) (initial pleading is to be construed liberally so as to do substantial justice). 7. To survive the Motion, Encana s Amended Complaint must simply contain sufficient factual matter which, when taken as true, suggests the existence of the elements of Encana s claims for relief. See Phillips v. County of Allegheny, 515 F.3d 224, 234 (3d Cir. 2008) (citing Twombly, 550 U.S. at 556). This burden does not impose a probability requirement at the pleading stage, but instead simply calls for enough facts to raise a reasonable expectation that discovery will reveal evidence of the necessary element. Id. (emphasis added; internal citations omitted). B. Encana s Fourth Claim for Relief is sufficiently pleaded: Encana s Drilling Right and the Assignment Obligation with respect to the Remaining Leasehold Interests are excluded from Vanguard Operating s bankruptcy estate pursuant to section 541(b)(4)(A) 8. Defendant asserts that Encana fails to state a claim for relief as to its fourth claim because as a matter of law, section 541(b)(4)(A) of the Bankruptcy Code does not exclude the Remaining Leasehold Interests from Defendant s estate. 9. Encana s Amended Complaint revises and clarifies the substance of Encana s argument with respect to the fourth count. Specifically, the Amended Complaint asserts that once the Commitment Wells were completed, the Drilling Right and the accompanying

5 Case Document 17 Filed in TXSB on 03/30/17 Page 5 of 16 Assignment Obligation were validly, fully and irrevocably transferred to Encana. See Docket No. 16, 19-20, 59, By virtue of Encana drilling and completing the Commitment Wells, the interests that comprise the Drilling Right and the Assignment Obligation the right to enter upon the land, drill, earn and have the accompanying working interests assigned remain property of Encana for so long as Encana complies with the 120-day continuous development requirement in section 6 of the Development Agreement. See Docket No. 16, 21. The Amended Complaint asserts that section 541(b)(4)(A) of the Bankruptcy Code prohibits Defendant from clawing back such validly conveyed property interests through rejection under Bankruptcy Code section 365. See Docket No. 16, Defendant contends that Encana s fourth count, as stated in the Original Complaint, fails to state a claim for relief because (i) Defendant, as a matter of law, has not transferred or agreed to transfer its interest in the Remaining Leasehold Interests and (ii) the Remaining Leasehold Interests are part of Defendant s bankruptcy estate regardless of whether Defendant rejects the Development Agreement. See Docket No. 9-1 at 6-7. These arguments must fail because Defendant has clearly agreed to transfer, and has in fact transferred, a valid property interest in the Remaining Leasehold Interests to Encana, and because Encana s property interest in the Remaining Leasehold Interests can only be pulled back into the bankruptcy estate by virtue of section 365 of the Bankruptcy Code. 11. Under Texas law, ownership of mineral rights constitutes the ownership of a bundle of interests in the underlying minerals. French v. Chevron U.S.A. Inc., 896 S.W.2d 795, 797 (Tex. 1995) (identifying five property interests included in a mineral lease). Those interests are: (i) the right to develop (i.e., the right to drill), (ii) the right to lease, (iii) the right to receive bonus payments, (iv) the right to receive delay rentals, and (v) the right to receive royalty

6 Case Document 17 Filed in TXSB on 03/30/17 Page 6 of 16 payments. See id. Each of the interests in the mineral estate included in a property owner s bundle, including the right to drill, exists as a separate interest in real property and may be independently conveyed or assigned to another. See id.; Ely v. Briley, 959 S.W.2d 723, 727 (Tex. App. Austin 1998, no pet.); Amoco Prod. Co. v. Alexander, 622 S.W.2d 563, 572 (Tex. 1981) ( [a] royalty or royalty interest [i.e., one of the interests in the bundle], whether created by grant or reservation or by lease, is an interest in real property and is a fee simple interest in land ). A farmout agreement, immediately upon its execution, serves as an assignment to the farmee of the right to enter onto land and drill for minerals, together with certain other contingent interests associated with such drilling right. See Clayton Williams Energy, Inc. v. BMT O & G TX, L.P., 473 S.W.3d 341, 353 (Tex. App. El Paso 2015, pet. denied) (finding that upon execution of a farmout agreement, the [farmee] received valid, fully operative drilling rights, which can be separately held from [farmor s] ownership rights ). 12. By virtue of the Leases, Vanguard, as lessee, received a fee simple determinable in the right to develop the Leasehold Estate. See Mitchell Energy Corp. v. Samson Res. Co., 80 F.3d 976, 982 (5th Cir. 1996) ( [i]n Texas, an oil and gas lease conveys an estate in real property to the lessee, namely, a fee simple determinable in the mineral estate ); McMillan v. Dooley, 144 S.W.3d 159, 183 (Tex. App. Eastland 2004, pet. denied) (noting that in Texas, a mineral lease assigns to the lessee a fee simple determinable in certain of the interests contained in the bundle including the right to drill while the lessor retains certain of the rights, including the right to receive royalty payments and the right to receive delay rentals). Then, as discussed in the Amended Complaint, upon execution of the Development Agreement and further, upon drilling and completion of the Commitment Wells, Vanguard transferred to Encana the right to enter onto the property and drill, together with several of the inextricably intertwined rights, including

7 Case Document 17 Filed in TXSB on 03/30/17 Page 7 of 16 the right to earn a working interest in any drilled land. See Docket No. 16, 59-64; see also Clayton Williams, 473 S.W.3d at 353. It is undisputable that, for the purposes of Bankruptcy Code section 541(b)(4)(A), Defendant not only agreed to transfer the Drilling Right and the benefit of the Assignment Obligation to Encana, but did in fact effectuate such a transfer by executing the Development Agreement. 3 Thereafter, Encana s ownership of such rights was extended by Encana s drilling and completion of the Commitment Wells pursuant to the Development Agreement. See Docket No. 9-2, 8. These facts have been fully asserted by Encana in the Amended Complaint. See generally Docket No. 16. Accordingly, Encana has pleaded sufficient facts to show that Defendant has transferred or agreed to transfer the Drilling Right, and the Assignment Obligation that necessarily accompanies it, with respect to the Remaining Leasehold Interests, for the purposes of section 541(b)(4)(A)(i). 13. Much the same, Encana has pleaded sufficient facts to show that Encana s Drilling Right and the Assignment Obligation can only be brought back into the Vanguard bankruptcy estate through section 365 of the Bankruptcy Code. Indeed, the Amended Complaint specifically notes that, by virtue of completing the Commitment Wells, Encana fully earned the 3 Defendant has also agreed through the Assignment Obligation to transfer to Encana the allocable portion of the Remaining Leasehold Interests drilled by Encana. See Development Agreement 8. The Supreme Court has commanded that the words in a statute are to be given their plain meanings, unless doing so would have absurd results. See United States v. Ron Pair, 489 U.S. 235 (1989) ( [w]here... the statute s language is plain, the sole function of the courts is to enforce it according to its terms. ). The word agree or agreed is a transitive verb, defined as to consent to as a course of action. Merriam Webster s Online Dictionary, accessed March 20, 2017, available at: see also Black s Law Dictionary (6th ed. 1990) (defining agree as to give mutual assent; exchange promises; make an agreement. To grant or covenant, as when a grantor agrees that no building shall be erected on an adjoining lot; or a mortgagor agrees to cause all taxes to be paid ). Per Merriam Webster, a party agrees to do something even when the agreement to do a thing refers to future contingent activities. See id. (identifying the sentence [s]he agreed to sell him the house as an exemplary use of the term agreed ). Under that plain-reading definition, there can be little doubt that Defendant agreed to transfer certain interests to Encana within the scope of section 541(b)(4)(A). See, e.g., United States v. Radley, 632 F.3d 177, (5th Cir. 2011) (relying on Black s Law Dictionary for the definition of transaction ); United States v. Ferguson, 369 F.3d 847, 851 (5th Cir. 2004) (relying on Webster s Dictionary for the definition of alternative )

8 Case Document 17 Filed in TXSB on 03/30/17 Page 8 of 16 right to drill additional wells on the Remaining Leasehold Interests. See Docket No. 16, 19-21, 23; see also Development Agreement 8. Further, the Amended Complaint alleges that Encana has continued to perform in accordance with the Development Agreement and the accompanying Joint Operating Agreements, such that Encana remains in continued possession of the Drilling Right. See Docket No. 16, Defendant does not appear to seriously contest either of these facts, and indeed, by virtue of its filing of the Rejection Motion, Defendant seems to concede that Encana presently possesses the Drilling Right and the right to receive assignments by virtue of the Assignment Obligation. See Rejection Motion 14 (stating that the Development Agreement, and the Drilling Right assigned therein, precludes Vanguard from maximizing the value of the underlying oil and gas assets either by Vanguard developing the assets itself or in a joint venture or by monetizing the assets ). Accordingly, Encana has pleaded sufficient facts to support Encana s Fourth Claim for Relief. 4 C. Encana s Fifth Claim for Relief is sufficiently pleaded: The Drilling Right and the Assignment Obligation are covenants that run with the land 14. Defendant suggests that Encana has not adequately pleaded the intent and horizontal privity elements of a covenant running with the land. However, and as described in detail below, Encana s Amended Complaint asserts additional facts to support both the intent and horizontal privity elements of its fifth count (to the extent horizontal privity is even required under Texas law). 4 Since it is clear Encana has sufficiently pleaded its Fourth Claim for Relief, there is no need or reason to address Defendant s arguments relating to the U.S. Constitution [Docket No. 9-1, at 9-13] at this juncture. See In re Snyder, 472 U.S. 634, 642 (1985) ( We avoid constitutional issues when resolution of such issues is not necessary for disposition of a case ). Encana reserves all rights in this regard

9 Case Document 17 Filed in TXSB on 03/30/17 Page 9 of Encana has adequately pleaded that the original parties to the Development Agreement intended that the Drilling Right and the Assignment Obligation run with the land 15. The thrust of Defendant s argument with respect to the element of intent is that the original parties could not have possibly intended for the Drilling Right and the Assignment Obligation to run with the land because the parties did not include successors and assigns language in the Development Agreement. Defendant s reliance on a lack of successors and assigns language is misplaced because (1) the Joint Operating Agreements, which contain such language, must be read as part of the Development Agreement, and (2) under Texas law successors and assigns language (or the lack thereof) is not dispositive when related and referenced agreements evidence the requisite intent. Additionally, the parties course of conduct indicates an intent to run with the land. 16. When interpreting the meaning or intent of a contract, courts treat the contract, together with any external agreements or documents referenced therein, as one single agreement. See In re Bank One, N.A., 216 S.W.3d 825, 826 (Tex. 2007) (arbitration agreement referenced in executed contract was deemed to be part of the contract); Chicago Dist. Council of Carpenters Pension Fund v. K & I Constr., Inc., 270 F.3d 1060, 1069 (7th Cir. 2001) ( [t]he reasonableness of a proposed interpretation of contractual language requires consideration of the contract as a whole, including terms incorporated by reference ). Here, the Development Agreement specifically states the Leaseshold Estate shall be subject to the Joint Operating Agreements, and provides that the terms of the Joint Operating Agreements shall be binding as to the Leasehold Estate to the extent such terms do not conflict with the terms of the Development Agreement. See Development Agreement, 11. Each of the Joint Operating Agreements, in turn, provides that [t]his agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, devisees, legal representatives, successors and assigns, and the terms

10 Case Document 17 Filed in TXSB on 03/30/17 Page 10 of 16 hereof shall be deemed to run with the Leases or Interests included within the Contract Area. See Joint Operating Agreements, Art. XV.B. Accordingly, the Development Agreement, by virtue of its explicit reference to the Joint Operating Agreements, must be deemed to contain language evidencing an intent to bind successors and assigns. 17. Moreover, even to the extent the Court finds that the Joint Operating Agreements are not in fact part of the Development Agreement, reference thereto is nevertheless appropriate in determining intent. Where, as here, the agreement giving rise to a covenant does not expressly state that the covenant will run with the land, the Court may consider additional factors in evaluating intent, including whether contemporaneous or subsequent agreements entered into by one or more of the original parties suggests an original intent that the covenant bind successors and whether the covenant is the type that might ordinarily run with the land. See MPH Prod. Co. v. Smith, No CV, 2012 WL , at *5 (Tex. App. Texarkana May 18, 2012); see also Musgrave v. Brookhaven Lake Prop. Owners Ass n, 990 S.W.2d 386, 395 (Tex. App. Texarkana 1999, pet. denied) (noting that successors and assigns language is helpful in determining intent, [but] is not dispositive, and an obligation intended to run with the land can be created without such language ). 18. In MPH Production Co., for example, the court held that a deed transferring a surface estate together with a right of first refusal in the property s mineral estate was intended to run with the land notwithstanding the deed s silence on the issue. MPH Prod. Co., 2012 WL , at *6. There, the court based its decision on the terms of a later deed (the subsequent deed ) which transferred the grantee s interest in the property from the original grantee to a third party, finding that the subsequent deed evidenced the original grantee s belief that the right of first refusal would run with the land because the subsequent deed did not exclude from the

11 Case Document 17 Filed in TXSB on 03/30/17 Page 11 of 16 property being transferred the right of first refusal. Id. In other words, the court held that there was sufficient evidence to find that the original parties intended that their covenant run with the land based primarily on the fact that a deed executed by one of the original parties several years after the fact did not expressly exclude the restriction. See id. 19. Here, in the absence of any clear indication in the Development Agreement itself as to the parties intent concerning the nature of the Drilling Right and the Assignment Obligation, the Court may look to the Joint Operating Agreements executed by the parties in conjunction with the Development Agreement for evidence that the parties intended the covenants to run with the land. As discussed above, the Joint Operating Agreements, which were executed by the original parties to the Development Agreement, contain express successors and assigns language. The inclusion of such language in the Joint Operating Agreements, coupled with the fact that the Development Agreement provides that [e]ach of the areas (as opposed to each of the parties ) is bound by and subject to the Joint Operating Agreements, is sufficient evidence to show that the original parties to the Development Agreement intended that the covenants contained therein run with the land. 20. The facts outlined above concerning the relationship between the Development Agreement and the Joint Operating Agreements and the relevant language set forth in the Joint Operating Agreements, all of which were pleaded in in the Amended Complaint, see Docket No. 16, 75-76, more than satisfy Encana s obligations under Rule 12(b)(6) with regard to the issue of intent. 2. Encana has adequately pleaded that the original parties to the Development Agreement were in privity 21. At the outset, whether horizontal privity is a necessary element of a covenant running with the land under modern Texas law has been called into question by the Fifth Circuit

12 Case Document 17 Filed in TXSB on 03/30/17 Page 12 of 16 See In re Energytec, Inc., 739 F.3d at (finding it unclear whether Texas law requires horizontal privity and noting that the doctrine is much criticized and has been explicitly rejected by th[e] latest Restatement ); see In re Sabine Oil & Gas Corp., 550 B.R. 59 (Bankr. S.D.N.Y. 2016) (impliedly recognizing the lack of clarity with respect to horizontal privity, but nevertheless electing to address the issue). Encana respectfully contends that horizontal privity is not a requirement for a covenant to run with the land under Texas law. See Westland Oil Dev. Corp. v. Gulf Oil Corp., 637 S.W.2d 903, (Tex. 1982) (promise to convey interests in oil and gas leases contained in letter agreement executed in connection with farmout agreement was covenant running with land; no mention of horizontal privity requirement); 718 Associates, Ltd. v. Sunwest N.O.P., Inc., 1 S.W.3d 355, 365 (Tex. App. Waco 1999) (option provision in commercial lease allowing for extension of lease meets the requirements of a covenant running with the land; no mention of horizontal privity requirement; dedication not made in conjunction with a conveyance of land); Wimberly v. Lone Star Gas Co., 818 S.W.2d 868, 871 (Tex. App. Fort Worth 1991, writ denied) (contract permitting gas company to purchase water from wells on owner s land for as long as gas company operated plant was contract running with the land binding upon all heirs, successors, and assigns; declaration of covenant made in water contract, not in conjunction with a conveyance of land; no mention of horizontal privity requirement); see also RESTATEMENT (THIRD) OF PROP.: SERVITUDES 2.4 (2000) ( In modern law, the Statute of Frauds and recording acts perform the function previously performed by the requirement of horizontal privity). 22. Despite that contention, however, Encana s Amended Petition nevertheless sets forth sufficient facts to show the existence of horizontal privity between the parties to the Development Agreement

13 Case Document 17 Filed in TXSB on 03/30/17 Page 13 of Under Texas law, horizontal privity exists as to a particular covenant when the covenanting parties possess a mutual or successive relationship to rights in real property and when the covenant is contained 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.); see also MPH Prod. Co., 2012 WL , at *5 (holding that the conveyance of a surface estate together with a right of first refusal as to the related mineral estate satisfied the horizontal privity requirement because the conveyance resulted in the grantor and the grantee each holding some interest in the same mineral estate). 24. As pleaded by Encana in the Amended Complaint, the Drilling Right (and the accompanying Assignment Obligation) is an interest in real property that was conveyed to Encana s predecessor by Defendant s predecessor in the Development Agreement. See French v. Chevron U.S.A. Inc., 896 S.W.2d 795, 797 (Tex. 1995) (noting that among the five interests included in a mineral lease is the right to develop the lease and that each of the interests can be individually conveyed); Altman v. Blake, 712 S.W.2d 117, 118 (Tex. 1986) (same); Clayton Williams, 473 S.W.3d at 353 (holding that under a farmout agreement, a farmor assigns his property interest in developing his mineral estate to the farmee). 25. As a result of the execution of the Development Agreement, the original parties thereto each possessed an interest in the same Leasehold Estate sufficient to satisfy the requirement for horizontal privity. See MPH Prod. Co., 2012 WL , at *6 (grantor s ownership of mineral estate and grantee s ownership of right of first refusal as to mineral estate satisfied horizontal privity test). Encana s Amended Complaint therefore sets forth appropriate and sufficient facts to support its claim that the Drilling Right and the Assignment Obligation constitute covenants running with the land

14 Case Document 17 Filed in TXSB on 03/30/17 Page 14 of 16 D. Sixth Claim for Relief: The Drilling Right and the Assignment Obligation are equitable servitudes 26. Defendant challenges the sufficiency of Encana s claim that the Drilling Right and the Assignment Obligation are equitable servitudes on two grounds: first, that at the time the Drilling Right and the Assignment Obligation were created and conveyed, Athlon Holdings (Encana s predecessor in interest) owned no land that was benefitted by the covenants, and second, that Encana cannot assert a plausible theory as to how any land it possesses, or that Athlon Holdings possessed at the time the Development Agreement was executed, might be benefited by the Drilling Right and the Assignment Obligation. See Docket No. 9-1 at Defendant s arguments, however, represent an unreasonably narrow reading of the requirements for an equitable servitude. 27. The existence of an equitable servitude is not, in all cases, dependent upon the ownership of a parcel of benefitted land by the party seeking to enforce the servitude. In Ball v. Rio Grande Canal Co., 256 S.W. 678, 682 (Tex. Civ. App. San Antonio 1923), for example, the court found that a purchaser of real property was bound to his predecessor s obligation to pay for irrigation services on the basis that the obligation to pay was an equitable servitude that would bind successive owners of the property with notice of the obligation, notwithstanding the fact that the obligee possessed no land that directly benefitted from the obligation. Id. Accordingly, Defendant s contention that Encana did not possess an interest in benefitted land is misplaced, as the ownership of land is not necessarily dispositive. Here, as in Ball, Encana is the beneficiary of an obligation burdening land, which obligation was taken with notice by the successor to the party burdened by the obligation. See Ball, 256 S.W. at Moreover, even if the Court were to determine that ownership of a benefitted interest in land is in fact an element of an equitable servitude, Encana has nevertheless pleaded

15 Case Document 17 Filed in TXSB on 03/30/17 Page 15 of 16 sufficient facts to show that it possesses an interest in land that is benefitted by the covenants Encana s sixth claim seeks to enforce in equity. Specifically, Encana possesses an undivided interest in the Leasehold Estate. As Encana continues to drill additional wells and Defendant assigns to Encana the applicable working interests, Encana will gain access to additional acreage, well locations, and reserves, thereby increasing the overall value of Encana s interest in the Leasehold Estate. 29. Further, Encana s Drilling Right, which constitutes an interest in real property conveyed in the Development Agreement, see Clayton Williams, 473 S.W.3d at 353, is plainly benefitted by the Assignment Obligation because the Assignment Obligation is the primary mechanism by which the Drilling Right realizes value. Put simply, the Drilling Right and the Assignment Obligation are Siamese Twins: without the Assignment Obligation, the Drilling Right serves no real world purpose because drilling alone, without an accompanying economic interest, is worthless. Accordingly, the Assignment Obligation benefits Encana s interest in the real property, and Encana sufficiently pleaded facts to support its claim that the Assignment Obligation is an equitable servitude. E. Seventh Claim for Relief: Discussion of Encana s Seventh Claim for Relief is moot 30. The Amended Complaint omits Encana s requests for attorneys fees. The arguments in the Motion relating to Encana s Seventh Claim for Relief are therefore moot. III. PRAYER WHEREFORE, Encana respectfully prays that the Court deny Vanguard s Motion and grant such other and further relief as may be just and proper

16 Case Document 17 Filed in TXSB on 03/30/17 Page 16 of 16 Respectfully submitted this 30th day of March, GRAY REED & McGRAW LLP By: /s/ Jason S. Brookner Jason S. Brookner Texas Bar No James J. Ormiston Texas Bar No Post Oak Road, Suite 2000 Houston, Texas Telephone: (713) Facsimile: (713) And- Lydia R. Webb Texas Bar No Elm Street, Suite 4600 Dallas, Texas Telephone: (214) Facsimile: (214) COUNSEL TO ENCANA OIL & GAS (USA) INC. CERTIFICATE OF SERVICE The undersigned hereby certifies that on the 30th day of March, 2017, he caused a true and correct copy of the foregoing pleading to be served (i) via the Court s CM-ECF Electronic Notification System on all parties who have subscribed for electronic notice; and (ii) via electronic mail on counsel to the Debtors. /s/ Jason S. Brookner Jason S. Brookner