Reading Between the Lines

READING BETWEEN THE LINES: IS NOTICE REQUIRED PRIOR TO RECORDING AN OIL AND GAS LIEN?^[1]

As the oil and gas industry continues to experience some financial volatility caused by the COVID-19 pandemic, it is as important as ever that parties providing supplies or labor stay apprised of their rights to ensure they receive payment.   Part of this equation is being familiar with the Colorado Oil and Gas Lien Statute and its requirements. Review of the statute leaves one area unaddressed: is a lien claimant required to provide notice to the operator prior to filing the lien in order to protect its rights under the statute?

Colorado Oil and Gas Lien Statute

Persons providing labor, machinery, equipment, fuel, power and supplies for oil and gas wells, pipelines, pumping stations, plants and refineries may be entitled to an oil and gas lien.^[2]  The oil and gas lien extends to properties belonging to the real estate owner contracting with the lienholder, to the machinery, materials and supplies furnished, to the well upon and in which they were placed and used, and to all other wells, buildings, and appurtenances, and the interest of the owner, part owner, or lessee in the lot or land on which the improvements are located.^[3]

Once determined that a right to claim a lien exists, the statute directs the lien claimant to record a lien statement that contains: (1) a just and true account of the amount due (after allowing all credits); (2) a description of the property to be charged with such lien sufficient for its proper identification; and (3) a verification by affidavit.^[4]  Proper identification of the amount owed and the property liened upon is crucial, as a lien claimant potentially risks invalidation of its rights if the information is inaccurate.^[5]  A lien claimant has 6 months after the recordation of the lien statement to file a foreclosure action.^[6]

Notice: Required or Not?

Despite the wordiness of portions of the statute, it fails to address one critical component of lien law:  is notice to the debtor required prior to recordation? On one hand, it could be argued that notice is not a prerequisite to recording the lien statement.  This argument stems from the absence of an explicit requirement.  After all, the Colorado legislature wrote and passed this law and chose not to include a notice requirement and, therefore, implicitly rejected notice as a prerequisite to properly attach a lien.  In fact, the Colorado Supreme Court has already used this rationale when analyzing a different portion of the statute.  In Chambers v. Nation, it was determined that an oil and gas lien did not attach to proceeds from the sale of oil and gas because if the legislature had intended to allow such attachment, it would have explicitly written this into the statute.^[7]

However, the argument that notice is required before recording is not without some support. The statute states that it is “cumulative and in addition to all lien rights and remedies already provided by the laws of this state.”^[8]  Under the general mechanics’ lien statute, a lien claimant must serve upon the owner (or owner’s agent) a notice of intent to file a lien statement (with the lien statement itself) at least 10 days prior to recording the lien.^[9]  Once 10 days have elapsed from the personal service of the notice or the certified mailing to the owner, and the same is represented in an affidavit, the lien statement may be recorded.^[10]  Without proper notice of the intent to file general mechanics’ lien, the lien is invalid and could result in loss of all protections provided by the statute.

This leaves the question, should an oil and gas lien claimant provide notice or not?  It seems probable that a court facing a “failure to provide notice” challenge to an otherwise properly recorded and perfected oil and gas lien statement would err on the side of the lien claimant based on the lack of explicit notice requirements in the statute.  Why should a lien claimant, already faced with nonpayment, be required to look beyond the plain language of the statute to determine what must be done to properly claim its lien?  However, the only way to foreclose this potential challenge is by providing notice in accordance with the general mechanics’ lien requirements prior to recordation of a lien statement.  There also is little downside with regards to priority of one’s lien, as the oil and gas lien statute grants equal priority to all oil and gas liens (except liens for labor which are preferred), making the date of recordation less consequential as compared to other types of liens.^[11]  Furthermore, notice may entice the debtor to take the lien claimant’s demand for proper payment more seriously, improving the chance of payment without the need for the lien or litigation.

In the end, the decision lies with the lien claimant on whether or not to provide notice before recording an oil and gas lien on wells and equipment.  Considering the decision to provide the 10-day notice required for general mechanics’ liens comes with minimal downside, providing the debtor notice prior to recordation may save both parties time and expense.

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^[1] For a discussion on the Oil and Gas Lien Statute and its applicability in the bankruptcy context, see also Brian Tooley, “The Importance of Timely Perfecting Statutory Oil and Gas Liens” (Feb. 3, 2021).
^[2] C.R.S. § 38-24-101.
^[3] Id.
^[4] C.R.S. § 38-24-104.
^[5] C.R.S. § 38-22-128.
^[6] C.R.S. § 38-24-105.
^[7] 497 P.2d 5, 8 (Colo. 1972) (“We do not believe that the omission of ‘proceeds’ . . . pertaining to oil and gas equipment was a matter of legislative oversight.”).
^[8] C.R.S. § 38-24-110.
^[9] C.R.S. § 38-22-109(3).
^[10] Id.
^[11] C.R.S. § 38-24-102 (“All liens created by virtue of this article in any particular case shall be of equal rank and validity, except liens for labor which shall be preferred”).