LIEN ON ME: THE IMPORTANCE OF MINERAL LIENS IN TEXAS
The unprecedented drop in the demand for oil due to the Coronavirus pandemic has placed immense economic pressure on oil and gas operators, many of whom are facing challenges paying their vendors while teetering on the brink of insolvency. If your company provided services, labor, materials, or equipment, to an oil well, gas pipeline, or midstream processing plant in Texas and have not been paid, then you should strongly consider filing a “mineral lien” under Chapter 56 of the Texas Property Code to secure payment of your unpaid invoices.
THE MINERAL LIEN
Mineral liens were designed specifically for companies like oilfield service and supply companies, giving them an easier route to collecting their debts. A mineral lien exists “to secure payment for labor or services related to the mineral activities” on which the contractor or subcontractor has been working.1 Under Chapter 56 of the Texas Property Code, a “mineral contractor” or a “mineral subcontractor” may place the lien on “the land, leasehold, oil or gas well…, and lease for oil and gas purposes for which the…material, machinery, or supplies were furnished or hauled, and the buildings and appurtenances on this property.”2 A “mineral contractor” is “a person who performs labor or furnishes or hauls material, machinery, or supplies used in mineral activities under an express or implied contract with a mineral property owner” or agent of that property owner.3 A “mineral subcontractor” is a person who furnishes or hauls materials and/or performs labor under a contract with a mineral contractor, including day laborers.4
PROPERTY SUBJECT TO A MINERAL LIEN
A mineral lien can attach to material, machinery, and supplies furnished or hauled by the claimant (i.e., the mineral contractor or subcontractor who has not been paid); the land, well(s), pipeline(s); or the lease for which the labor was performed or material, machinery, or supplies were furnished or hauled; the building(s) or appurtenances on the property covered by the lease; and other property used for mineral activities that the owner of the lease or land owns.5 However, the lien does not attach to the fee title of the mineral interest owner.6
SECURING A MINERAL LIEN
The benefits gained from a mineral lien comes at a cost: exacting and precise procedural requirements, including relatively narrow timing and notice requirements and somewhat burdensome property description requirements. The first step (actually, a “pre-step”) in securing a mineral lien should occur early on in the process, before any goods are delivered or services are rendered. It is this “pre-step” that is frequently ignored by service companies. Service companies must first identify the specific well in which the goods or services are provided. This information will be needed in order to perfect the lien and should be gathered at the earliest time possible. Service companies 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. Any employees actually sent out to the field should be able to note the API number in the relevant sales form used in the field during operations. For material suppliers, it is important to gather this information before shipping any materials.
If your company is a “mineral subcontractor”, then then next step is to first serve the property owner/leasehold interest owner with a Notice of Intent to File Lien. The notice must be served 10 days before recording the mineral lien affidavit7 and should include the following information: (1) the amount of the lien; (2) the name and address of the company or individual who retained your services; (3) a description of the property, leasehold interest, or pipeline; and (4) a description of the unpaid labor, material, services, or equipment.8 In response to the lien notice, a property/leasehold interest owner may withhold the amount claimed owed from the mineral contractor until the debt is resolved. Lien claimants should make it a practice to routinely serve the lien notice as soon as a payment dispute is anticipated.
In order to perfect an Oil & Gas Mineral Lien, you must prepare and record a lien affidavit in the county where the property is located and timely serve the lien affidavit on the leasehold interest owner and the mineral contractor.9 The affidavit must be filed within six months after the date “indebtedness accrues.”10 The lien affidavit must include the following information: (1) the identity of the mineral property owner; (2) the claimant’s name and mailing address; (3) the dates the labor, materials, equipment, and/or services were provided to the project; (4) a description of the land, leasehold interest, pipeline, or pipeline right-of-way; and (5) an itemized list of the amounts claimed owed to include the nature of the labor, materials, or equipment.11
A sufficient description of property subject to the lien is often the most difficult item to complete. Merely referring to certain wells in the lien affidavit does not qualify as a legally sufficient description. The Fifth Circuit Court of Appeals in In re Reichmann Petroleum Corp.12 provides some guidance on this issue, holding that a mineral lien affidavit contains a sufficient property description to establish a lien on the entire leasehold at issue where the affidavit attached either a plat or a plat and a Texas Railroad Commission Form W-1. The affidavit for mineral subcontractors must also include: (1) the identity of the individual or company who retained your services; and (2) a statement that the party timely served the Notice of Intent to Lien discussed above.13 The affidavit must be notarized and sworn to as being true and correct.
If filing the lien does not result in payment, you must file a lawsuit to foreclose the lien within no later than 2 years from filing the lien affidavit. If you prevail on the lien foreclosure, the court is required to award all reasonable and necessary attorneys’ fees and costs.
DON'T WAIVE YOUR MINERAL LIEN GOODBYE
Lastly, it is important to note that oilfield service and supply companies must also ensure that their contracts do not contain a waiver of that company’s right to file mineral liens. This is because a Texas court recently held that a pre-work contractual mineral lien waiver is enforceable.14 Master service contracts typically contain such blanket waiver of lien rights and must be reviewed and revised to omit such onerous provisions.
With the drastic decline in crude prices as a result of the Coronavirus pandemic, there will likely be an increase in unpaid amounts owed to providers of services and materials related to the production of oil and gas. Contractors waiting on payment for past due amounts should contact an attorney for assistance in utilizing a mineral lien claim to recover unpaid balances. Similarly, energy lenders and producers should consider consulting with an attorney to determine how best to protect their collateral and property.
Farnsworth & vonBerg, LLP is continuing to monitor issues affecting clients and businesses in response to the coronavirus pandemic. If you have any questions, for more information on the topics mentioned above, or for assistance with addressing insurance issues, supply chain problems, development of best practices and protocols, or other matters affecting your business, please contact any of us here at F&V: firstname.lastname@example.org; email@example.com; firstname.lastname@example.org; email@example.com.
This publication should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own lawyer on any specific legal questions you may have concerning your situation.
1 Tex. Prop. Code § 56.002.
2 Tex. Prop. Code § 56.003(a)(2).
3 Tex. Prop. Code § 56.001(2).
4 Tex. Prop. Code § 56.001(4)
5 Tex. Prop. Code § 56.003
6 Tex. Prop. Code § 56.003(b).
7 Tex. Prop. Code § 56.021(b)
8 Tex. Prop. Code § 56.023
9 Tex. Prop. Code § 56.021.
10 Tex. Prop. Code § 56.005. For labor performed by the day or week, indebtedness begins to accrue at the end of the day or week during which the labor was performed. For all other material or services, indebtedness accrues on the last date the services or materials were provided. Services and materials provided for the same land or leasehold are considered to be part of a single contract unless more than six months pass between the dates when services or materials are provided.
11 Tex. Prop. Code § 56.022(a).
12 373 Fed. Appx. 497 (5th Cir. 2010).
13 Tex. Prop. Code § 56.022(b).
14 Mesa S. CWS Acquisition, LP v. Deep Energy Expl. Partners, LLC, 14-18-00708-CV, 2019 WL 6210213 (Tex. App.—Houston [14th Dist.] Nov. 21, 2019, no pet. h.)( relying on a MSA's Payment of Claims clause, in which Mesa “acknowledges that in entering into this Agreement, [Mesa] is relying on the creditworthiness of [Deep Operating] and shall look solely and exclusively to [Deep Operating] for payment.”)