The legal frameworks governing statutory lien rights of oil and gas trade creditors vary significantly between Texas and Louisiana (as well as among other hydrocarbon-producing states). Material distinctions exist between rights granted to providers of goods, labor and services for drilling activities in Texas under the Texas Mineral Lien Statute (Chapter 56 of the Texas Property Code) and the rights granted to such providers in Louisiana under the Louisiana Oil Well Lien Act (LOWLA, La. R.S. §§ 9:4861 et seq.).
Whether viewed through a non-bankruptcy creditors' rights lens or in the context of a Chapter 11 bankruptcy case, each statute can create significant headwinds for oil and gas operators in distressed situations. Operators and working interest owners should proactively consider tailored contractual provisions in their master service agreements and other contracts to address risks and stream-line issues that could arise with trade creditors in distressed situations.
Liens of Service Providers Against Operated and Non-Operated, Working Interest Owner Property
Texas Mineral Lien Statute
Chapter 56 of the Texas Property Code grants a statutory lien to secure payment for labor or services relating to mineral activities. It reaches the property interest of the mineral-owner party that is contracting with the service provider and the improvements used in drilling operations.1 The lien does not attach to hydrocarbons produced or production proceeds.2
The Texas statute distinguishes between mineral contractors (that is, parties contracting directly with a mineral owner to facilitate drilling operations – an original contractor) and subcontractors (parties in contractual privity with an original contractor or another subcontractor).3 Chapter 56 limits the rights of subcontractors based on the amount that was agreed to be paid by the mineral owner to the mineral contractor, and the outstanding amount that is owed by the mineral owner to the mineral contractor at the time notice of a subcontractor claim is provided to the mineral owner.4 Even if a mineral contractor owes obligations to its subcontractors in excess of the remaining amount owed under its contract with the mineral owner, the liability of the mineral owner will be limited to the amount outstanding under its contract with the mineral contractor as of the time it receives notice of a subcontractor's lien claim and, unless the mineral owner pays its contractor after receiving notice of an unpaid subcontractor's lien, it will not be liable to subcontractors.5 In that respect, a subcontractor's lien is subordinate to the terms of the contract between the mineral owner and the original contractor.6 Chapter 56 relies on an impounding or trapping mechanism to create a charge against amounts owed to a mineral contractor by a mineral owner at the time a mineral owner receives notice of a claim by an unpaid subcontractor.7 If a mineral owner remits funds to its contractor with notice of an unpaid subcontractor, the mineral owner may be subject to double liability if the subcontractor is not paid by the mineral contractor.
Separately, in situations in which an operating working interest owner is conducting drilling activities under an operating agreement with co-working interest owners, vendors who contract with the operator are generally treated as subcontractors vis-à-vis the non-operating working interest owners.8 Accordingly, non-operating working interest owners can be subjected to liability and liens if they remit payment to the operating working interest owner for operations on which they have received notice of an unpaid vendor. Although these situations can be complicated to varying degrees depending on the circumstances,9 operators and non-operating working interest owners can often navigate these potential liabilities by withholding funds to account for claims, negotiating financial accommodations to facilitate claim resolutions, filing interpleader actions or seeking other similar relief. Moreover, including specific provisions in applicable contracts in a manner consistent with the structure of the applicable lien statute, detailing the parties' respective rights and providing a framework to resolve claims can be beneficial.
In Chapter 11 exploration and production cases, because joint operating agreements are executory contracts under Section 365 of the Bankruptcy Code and typically require operators to keep the applicable contract area free and clear of lien claims, co-working interest owners can often protect themselves by asserting that any third-party claims or liabilities arising through the operator are defaults that must be cured in connection with any attempt by the operator to assume – or assume and assign – the applicable joint operating agreement. In the event that a joint operating agreement is rejected, the non-operating working interest owner may still hold a defense to payment (or a recoupment right) as it relates to amounts withheld on account of a pending subcontractor claim. In this context, the bankruptcy court's "first day" orders and the Chapter 11 plan's specific language and treatment of claims can be critical.
Louisiana Oil Well Lien Act
Comparatively, LOWLA grants "privileges" (which are similar to common law liens) to those who perform services on well sites to secure the obligations incurred by their operation.10 Unlike the Texas lien statute, LOWLA provides that the privilege will attach to all of the working interests in the lease, hydrocarbons produced from and production proceeds inuring to the working interests, and the improvements.11 Moreover, subcontractors' claims are not made subordinate to the terms of the contract between the operator and original contractor, and the statute does not utilize an impounding or trapping mechanism for subcontractors.12
LOWLA does not distinguish between original contractors and subcontractors for purposes of determining whether and to what extent a privilege attaches, and no contractual relationship is required between the supplier of the labor, service or equipment and an owner of the lease in order for the privilege to attach.13 So, if a service provider contracts with an operating working interest owner to provide services relating to drilling activities, not only will that party obtain a privilege against that operator's interest in the lease, but it will obtain a privilege against all other working interest owners' interests in the lease.14 Subcontractors are generally entitled to the same rights as original contractors. Therefore, if an original contractor that is responsible for engaging and managing subcontractors goes over budget or otherwise mismanages a project such that the amount owed to its subcontractors exceeds the amount agreed to be paid by the operating working interest owner, there may be little protection to prevent the working interests of the owners from being subjected to lien claims in excess of the agreed cost of the project.
Accordingly, an operator's approach to managing these liabilities should take these issues into account, and it should carefully manage the nature and scope of all work performed by vendors. Contract terms governing the nature and scope of work and the engagement of third-party subcontractors should be clear.
In Chapter 11 cases involving LOWLA privileges, the broad attachment of privileges to third-party working interests can lead to greater challenges to distressed operators than those arising under Texas law. Privileges attaching to non-debtor working interest owner property will typically give rise to cure obligations against the debtor-operator under the parties' joint operating agreement. Accordingly, even if the privileges themselves are determined to be unsecured as to the debtor's property interest – due to perfection, priority and/or valuation issues – a non-debtor co-working interest owner will not receive the benefit of a debtor's bankruptcy discharge.15 Moreover, a pure bankruptcy discharge, without more, does not extinguish underlying debts as a technical matter; it merely terminates the personal liability of the debtor on the debt.16 Accordingly, a non-debtor working interest owner that is subject to a privilege arising from an obligation incurred by a debtor-operator would normally not be relieved of the effect of a privilege even if the debtor-operator is discharged from the underlying debt. Even so, a privilege arising under LOWLA is extinguished upon the "extinction of the obligation it secures."17
In the case of In re Fieldwood Energy LLC,18 the U.S. Bankruptcy Court for the Southern District of Texas determined that a debt underlying a LOWLA privilege was extinguished (both as to the operator-debtor and the applicable non-debtor working interests) by standard language contained in the debtor's Chapter 11 plan stating that the claim was "satisfied" and "settled."19 The bankruptcy court held that because the trade creditor had notice of the applicable language in the plan, but did not appeal the confirmation order, the claimant's privilege was deemed extinguished through the res judicata effect of the plan.20 Accordingly, operators, working interest owners and trade creditors must closely scrutinize language included in a Chapter 11 plan and be mindful of applicable res judicata principles.
Footnotes
1. See Youngstown Sheet & Tube Co. v. Penn, 355 S.W.2d 239, 245-46 (Tex. Civ. App.—Austin 1962) modified, 363 S.W.2d 230 (Tex. 1962); see also Platinum Energy Sols., Inc. v. Lazarus Operating LLC, No. 13-20-00279-CV, 2022 Tex. App. LEXIS 214 (Tex. App.—Corpus Christi Jan. 13, 2022, no pet.) (citing Bethlehem Supply and noting statute extends to interest of "person under whose auspices the labor or material is furnished").
2. See Abella v. Knight Oil Tools, 945 S.W.2d 847, 850-51 (Tex. App.—Houston [1st] 1997, no writ) (appointment of receiver not erroneous due to depletion of wells pending foreclosure); see also Wilkins v. Fecht, 356 S.W.2d 855, 855 (Tex. Civ. App.—San Antonio 1962, writ ref'd) ("The proceeds of the sales of oil produced from a well are not included in the statute and are therefore not reached.") (citing Crowley v. Adams Bros. & Prince, 262 S.W. 883, 885 (Tex. Civ. App.—Amarillo 1924, no writ) (stating that because the proceeds of an oil and gas well were not explicitly listed in the statute, they were not subject to a Mineral Lien); accord United States v. Tex. E. Transmission Corp., 254 F. Supp. 114 (W.D. La. 1965 (same).
3. Tex. Prop. Code §§ 56.001(2), (4).
4. Tex. Prop. Code § 56.006; see also Energy-Agri Products, Inc. v. Eisenman Chemical Co., 717 S.W.2d 651, 653 (Tex. App.—Dallas 1986, no writ).
5. See id.
6. Id.
7. Energy-Agri Products, Inc. v. Eisenman Chem. Co., Inc., 717 S.W.2d 651, 653 (Tex.App.—Dallas 1986, no writ).
8. See Energy Fund of Am., Inc. v. G.E.T. Serv. Co., 610 S.W.2d 833, 836 (Tex. Civ. App.-Eastland (1980), aff'd in part and rev'd in part on other grounds sub nom., Ayco Dev. Corp. v. G.E.T. Serv. Co., 616 S.W.2d 184 (Tex. 1981); see also Trevor Rees-Jones, Trustee for Atkins Petroleum Corp. v. Trevor Rees-Jones, Trustee for Apache Services, Inc., 799 S.W.2d 463 (Tex. App.—El Paso 1990, writ denied) (status of party as mineral contractor or subcontractor is determined at the time of contracting).
9. Notably, there are numerous procedural issues and other variables not discussed herein.
10. La. R.S. § 9:4862.
11. La. R.S. § 9:4863; the privilege attaches to the well itself, all drilling rigs, machinery, pipelines, flow lines, gathering lines, and other related equipment and structures. Guichard Drilling Co. v. Alpine Energy Servs., Inc., 657 So.2d 1307, 1311-12 (La. 1995).
12. See Guichard, 657 So.2d at 1312 ("[T]he privilege created by [LOWLA] attaches to all property listed in the statute, regardless of ownership, and requires no contractual relationship between the supplier of labor, service, or equipment and the owner of the lease or equipment.")
13. See Guichard, 657 So.2d at 1312.
14. Id; see also Bordelon Marine L.L.C. v. Devon Energy Production Co, 2015 U.S. Dist. LEXIS 42814, at *8-9 (E.D. La. March 31, 2015) (discussing owner of well who did not contract with vendor as third person against whose property liens could enforced, if valid, under terms of statute).
15. Nolan v. Audubon Ins. Grp., 59 So. 3d 487, 489 (La. Ct. App. 2011) (discussing discharge of debtor does not prohibit banks from going after third parties).
16. See Houston v. Edgeworth (In re Edgeworth), 993 F.2d 51, 53 (5th Cir. 1993) ("A discharge in bankruptcy does not extinguish the debt itself, but merely releases the debtor from personal liability for the debt").
17. La. R.S. § 9:4864(B)(1).
18. Case No. 20-33948, in the U.S. Bankruptcy Court for the Southern District of Texas
19. Quarternorth Energy LLC et al, v. Atlantic Maritime Services LLC (In re Fieldwood Energy LLC), Adv. No. 20-3476, *12-15 (Feb. 23, 2022) (memorandum opinion).
20. The trade creditor claimant's appeal of the bankruptcy court's ruling on these issue remains pending as of the date of this post. QuarterNorth Energy, LLC v. Atlantic Maritime Services, LLC, Case No. 23-20218 (5th Cir. May 11, 2023).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
