6Jan

Mineral Liens: Collecting Unpaid Debt for Oilfield Service Companies

Purpose and Application of Mineral Liens

Everyone in the construction industry is intimately familiar with the “Mechanic’s Lien,” which gives a security interest in the title to real property (and sometimes personal property) to those who have supplied materials or labor to improve the property.  In some jurisdictions, the liens are broken down further into sub-groups, such as the the “Materialman’s Lien,” “Construction Lien,” “Supplier’s Lien,” or “Laborer’s Lien.”  But one lesser known type of lien can be crucial to oilfield service companies in collecting on debts owed to them: the Mineral Lien.

Liens are similar to a sort of mortgage or deed of trust on the property, acting like a cloud on title, and having the effect of hooking the owner into paying you for your services or labor before selling, financing, or refinancing the property.  Mineral Liens were designed specifically for companies like oilfield service companies, to give them an easier route to collecting their debts, and receiving money rightfully owed to them.

Special Rights Enjoyed Under Mineral Liens

Mineral Liens, covered by Chapter 56 of the Texas Property Code, give oilfield service companies special rights and status as a creditor in collecting their debt.  A company that supplies computers, or furniture, for example, typically would not qualify for a lien, and so they are required to go through a seemingly endless and arduous process of filing a suit, waiting for trial, obtaining a favorable judgment, then obtaining and enforcing a judgment lien.  And throughout this entire expensive path, these companies have no security for their debt!

An oilfield service company, on the other hand, can take advantage of the lien laws, giving them preference over other types of creditors, automatically giving them a “date of preference” as to the date the first services were rendered or materials were supplied. And as an added benefit, all mineral lien claimants are of equal status, no matter the date of services/supply of materials.  This is because all mineral lien claimants date of preference relates back to the first date of work of the earliest lien claimant!

This can be huge for oilfield service companies, because often this pushes their priority ahead of many other types of lienholders.  For example, say All-Continent Services, Inc. supplies materials or services on 2/1/2014, and two days later the Operator executes and files a Deed of Trust with Wells Fargo Bank. Two months later, in April, Benjy Oilfield Services Co. supplies additional services, and the Operator fails to pay the invoice to Benjy.  Who has priority between the Bank and Benjy?  Conventional creditors achieve their priority primarily through a simple “first in time, first in right,” and here the Bank is first in time compared to Benjy.  However, because Mineral Liens relate back to the first day of work of the earliest lien claimant, Benjy’s Mineral Lien would have priority over Wells Fargo, assuming All-Continent also files a lien.

Furthermore, a mineral lien against a well is effective against all wells on the lease, and the entire unit or pool with which the lease may be pooled or unitized.

But this powerful device comes with a pricetag: exacting and precise procedural requirements, including relatively narrow timing and notice requirements.  If you do not do it right, you will be thrown out of court. Even worse, costs and attorney’s fees can be assessed for failure to remove an invalid mineral lien.

Steps to Perfect a Mineral Lien (in Texas)

1. Identify the Well and Chain of Contract

The first step may be better called a “pre-step,” because it is best handled before a dispute arises. Contractors often prefer to identify wells by reference to the API number.  An API number is a “unique, permanent, numeric identifier” assigned to each well drilled for oil and gas in the United States.

The best and easiest time to gather this information is up-front, in a job information sheet or other job-intake form.  Additionally, any employees actually sent out to the field should be able to note the API number, and the “blank” for this number is often added to a relevant form used in the field during operations.  For suppliers, it is important to gather this information before shipping any materials.

2. Send the Requisite Notice

After a collection issue arises, first, we typically recommend that all clients provide notice of intention to file a lien.  After receiving this notice, we often see that operators really start to pay attention, because it often gives a strong incentive to cooperate and negotiate.  In this regard, this notice functions similarly to a “Demand Letter,” in giving the debtor push or incentive to finally come to the bargaining table.

However, technically speaking, only “mineral subcontractors” are required to send notice under Texas Law. Generally, a “mineral subcontractor” is a company that provides materials or services, and has no direct contact with the mineral owner (which under the Texas statute includes lessees).

As a side-note, one major road-block for mineral subcontractors are they they are often directly hired by the operator, but the operator typically is not a lessee!

3. Identify the Lease, Legal Description of the Land, and Working Interest Owners

Unlike most instruments affecting title to real property, such as a conveyancing instrument, assignment, deed, or stipulation of interest, a Mineral Lien is not subject to the stringent requirements under the Statute of Frauds. This is because, according to Texas Law, the mineral lien statute is to be liberally construed in favor of lien claimants. In this regard, the 5th Circuit has approved use of Railroad Commission plats of the well/lease referenced and attached to a lien as being sufficient for a property description.   Nevertheless, this is often the most time-consuming task.

If this information is not readily available, your attorney may suggest hiring a landman to search for, and copy, the relevant real property records. These records can then be used by the attorney to examine the chain of title and identify the record title working interest owner(s), lease and legal description.  This information is all crucial to the Lien Affidavit described in the next step.

4. File the Lien Affidavit.. correctly and on time!

When to File: In Texas, a Lien Affidavit must be filed within six months after labor or materials were last furnished. One word of caution is that you should not wait until the last few days, as county clerks sometimes fail to record lien affidavits on the same day they are received.  Note: due to a specific exception, Mineral Liens can be filed post-bankruptcy petition without being considered a violation of automatic stay!

What to File: In Texas, a Lien Affidavit must contain:

  • name of the mineral property owner
  • contractor’s name and mailing address
  • dates of performance or furnishing materials
  • description of the land, leasehold interest, pipeline, or pipeline right-of-way involved
  • itemized list of amounts claimed

Additional Requirements for “Mineral Subcontractors”:

  • name of person or entity for whom labor was performed or material was furnished/hauled;
  • a statement that the “mineral subcontractor” timely served written notice that the lien is claimed on the property owner, or his agent, representative, or receiver.

Where to File: in the county in which the lien property is situated.

5. Send Notice of the Lien Affidavit

Again, this isn’t required, but is a smart move.  Similar to a “Final Demand Letter,” this letter informs the parties that the lien has been filed.  We recommend sending this notice, because it can serve to give the debtor one final push to resolve the issue prior to suit being filed.  Once a suit is filed, all parties involved will incur additional costs, not to mention the time involved.  Many debtors will realize this and avoid it by resolving the debt before the suit is filed.

6. File Suit

The final step, if the debtor hasn’t already resolved the issue, is to file suit.  Suit must be filed in the county in which the lien is recorded, within two years of the deadline to file the lien affidavit.  If the Operator becomes subject to bankruptcy proceedings, the mineral lien claimant must file a notice of perfection in the bankruptcy court in lieu of filing a lawsuit.

Special thanks to Kevin Koel in preparing this article.

Austin Brister
Austin assists clients in all aspects of mergers, acquisitions and divestitures of energy properties, from the first letter of intent through negotiations, closing and post-closing matters. He has assisted clients in a variety of deals including farmouts, purchase and sale transactions, joint exploration and development agreements, participation agreements, and more routine operational transactions such as joint operating agreements and master services agreements.
Austin Brister
© Copyright 2014, Austin W. Brister. All Rights Reserved. DISCLAIMER: The information in this article is for general information purposes only. This article should not be substituted for legal advice and should not be taken as legal advice for any individual case or situation. This information is not intended to create, and receipt or reading this article does not constitute, an attorney-client relationship. You are encouraged to contact an attorney for legal advice concerning the information provided in this article.
OR
ARE YOU KEEPING UP TO DATE?
We keep clients and subscribers updated on case law alerts and insightful articles. Join more than 2,000+ in-house attorneys and landmen who receive our occasional alerts and summaries. All for free!
Note: When choosing facebook or google, alerts will be sent to the email listed in that account.
close
OR
ARE YOU KEEPING UP TO DATE?
We keep clients and subscribers updated on case law alerts and insightful articles. Join more than 2,000+ in-house attorneys and landmen who receive our occasional alerts and summaries. All for free!
OR
ARE YOU KEEPING UP TO DATE?
We keep clients and subscribers updated on case law alerts and insightful articles. Join more than 2,000+ in-house attorneys and landmen who receive our occasional alerts and summaries. All for free!
Note: When choosing facebook or google, alerts will be sent to the email listed in that account.
ARE YOU KEEPING UP TO DATE?
We keep clients and subscribers updated on case law alerts and insightful articles. Join more than 2,000+ in-house attorneys and landmen who receive our occasional alerts and summaries. All for free!