Alert: "Fifth Circuit Holding: A Non-Debtor's Easement Rights Can Be Eliminated in Bankruptcy"

This week, the Fifth Circuit Court of Appeals expressly recognized that a bankruptcy sale can extinguish an easement.  In Port of Corpus Christi Authority v. Sherwin Alumina Company, LLC, the Fifth Circuit acknowledged that the Port of Corpus Christi Authority’s easement was a non-possessory property interest in the debtor’s land.  Nonetheless, the debtor’s land could be (and was) sold free and clear of that easement.

As alleged by the Port of Corpus Christi Authority (the “Port”), the Port obtained a road easement from Sherwin Alumina Company, LLC (“Sherwin Alumina”) on its real property.  The easement was filed of record.   Sherwin Alumina later filed for Chapter 11 bankruptcy, and as a debtor in bankruptcy, Sherwin Alumina sought to sell its real property free and clear of all liens, claims, and other encumbrances, except as otherwise provided.  Sherwin Alumina then sold the property pursuant to a confirmed bankruptcy plan of reorganization.  The Port later learned that the confirmed bankruptcy plan had stripped the Port of its easement.  The Port then filed a complaint, seeking revocation of the confirmation of that plan.

On subsequent appeal to the district court, the district court held that the bankruptcy court could eliminate the Port’s easement as part of the bankruptcy sale.  The Fifth Circuit affirmed. 

Of pertinent note, the Port did not object to the plan of reorganization and the proposed sale therein of the debtor’s property free and clear of encumbrances.  Takeaway: if an individual or company that owns property subject to your easement files for bankruptcy, you should consult with counsel to ensure your easement rights are adequately protected.