[co-author: Stephanie Snyder-Zuasnabar]*

A subcontractor’s mineral lien in Texas is invalid when, at the time the mineral owner receives notice of the lien affidavit, the mineral owner is not yet obligated to pay the contract price to its contractor.  So says Pearl Resources Operating Co., LLC v. Transcon Capital, LLC,

The real takeaway that drilling contractors already know: A turnkey drilling contract gone wrong is the gateway to a financial apocalypse.

The wild well

Pearl Resources and PDS Drilling agreed in a Turnkey Drilling Contract for PDS to drill a well in Pecos County. Pearl was to pay 30% of the contract price after PDS positioned a rig at the wellsite. The remaining 70% would be paid after delivery of a successful well. PDS was liable for the cost of regaining control of a wild well, along with associated remediation and restoration efforts.

The 30% was paid and as PDS drilled the well, a wild well incident caused an eruption of freshwater out of the well and an adjacent water well. PDS contracted with Cannon to haul away the accumulated water. PDS abandoned the well, notifying Pearl that it did not have the funds to repair the well or drill a replacement.

Cannon sent PDS two invoices requesting payment for services performed before PDS abandoned the well. PDS failed to pay, and Cannon transferred its rights to Transcon. Transcon requested payment of $57,000 based on the two unpaid invoices. When Pearl refused to pay, Transcon sent the statutory notice of its intent to file a Mineral Lien Affidavit. Pearl again refused to pay. Transcon filed a lien affidavit in the Pecos County records.

Pearl sued for a judgment that Transcon’s lien was invalid under Chapter 56 of the Property Code. Transcon counterclaimed for a judgment that its lien was valid and sought to foreclose. The trial court found that Transcon’s lien was valid and awarded an Order of Sale for foreclosure on the lien.

Pearl’s winning argument

Pearl argued that Transcon’s lien was invalid because Chapter 56 only allows a subcontractor’s lien on a mineral owner’s property in the amount the property owner owes to its contractor, if any, at the time it receives notice of the lien affidavit, and Pearl did not owe money to PDS when the lien notice was delivered.  The court of appeals agreed. The mineral lien is “dependent upon the state of the account between the owner and its contractor, and not upon the condition of the account between the contractor and subcontractor when the owner receives notice of the claim.”

Transcon contended the early termination provisions in the Turnkey Contract were invoked when PDS abandoned the well, requiring Pearl to pay PDS for its services. The court determined that the sections referencing early termination and compensation only applied to a Pearl-directed shutdown. Because PDS walked off the job, the contract did not obligate Pearl to pay PDS for Cannon’s services.

In denying Transcon’s argument that Pearl still owed 70% of the total contract price, the court focused on the plain language of the contract which did not obligate Pearl to pay the remaining balance until completion of a successful well, which never occurred. The Court was not willing to rewrite the parties’ contract which expressly obligated PDS, not Pearl, to pay the remediation costs. The trial court erred in finding a valid mineral lien.

Transcon’s claim for quantum meruit was not addressed because actual damages were not awarded by the trial court.

Norma Waterson, RIP. Category, you ask? “Celebrated English folk singers I’ll bet you’ve never heard of”.

*Stephanie is a Universlity of Houston law student and Gray Reed law clerk.

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