Subcontractors Score a Victory in Federal Court

On August 27, in In re Heritage Consolidated, L.L.C., the Fifth Circuit Court of Appeals granted subcontractor’s lien rights to two oil and gas drilling contractors. The Court reversed a district court ruling which upheld a summary judgment issued by a bankruptcy court denying liens to the two drilling contractors. The case was briefed and argued by Gray Reed’s own Michael Bishop and Martin Averill.

The Court held that a service provider may be both a mineral contractor and a mineral subcontractor on the same project. The provider is a mineral contractor as to any ownership interest of the party with whom it contracted, and a mineral subcontractor as to the ownership interests of non-contracting working interest owners. Previously this issue had never been expressly decided by any court applying Texas law. However, “twin” bankruptcy cases in In re Mid-Am. Petroleum, Inc., 83 B.R. 933, 935 (Bankr. N.D. Texas 1988) had held to that effect by granting contractor status in one case and subcontractor status in the second case against the working interest owners. The Fifth Circuit adopted the same approach in this case.

The Court also rejected an argument that an operator may only be a mineral contractor if the operator itself performs physical labor on the project in question. For this proposition, the bankrupt owner relied on a 1928 case concerning passive “lease watching” from a neighboring property, which the court held was not “labor” within the meaning of the statute. The Heritage opinion does not address this point expressly, but it was a primary argument by the bankrupt owner in its briefing to the Court.

The Court also reiterated settled Texas law that contracts entered into after completion of the work, to which the drillers were not parties, had no effect on the drillers’ legal rights. The Court rejected application of the “relation-back” doctrine to limit the drillers’ rights because their contracting party—the operator—later acquired a 1% ownership interest in the underlying lease. According to the Court, this doctrine applies only if the later-acquired title expands the interest to which the lien attaches. It cannot diminish it.

*photo text: Les Miles encouraging the Tigers to read Energy and the Law

Topics:  Appeals, Commercial Bankruptcy, Construction Industry, Liens, Mechanics Lien, Oil & Gas, Subcontractors, Well Drilling

Published In: Bankruptcy Updates, Civil Procedure Updates, General Business Updates, Energy & Utilities Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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