The Importance of Timely Perfecting Statutory Oil and Gas Liens

The COVID pandemic, price volatility, and recent regulatory changes have created financial stress on many E&P Companies as evidenced by an increasing number of bankruptcy filings.   Those providing goods and labor in aid of oil and gas development should be aware of Colorado’s Oil and Gas Lien statute and their right to perfect such a lien despite the debtor’s bankruptcy filing and the automatic stay.  Otherwise they may forfeit the opportunity to be treated as holding a secured claim in bankruptcy and be relegated to holding an unsecured claim upon which they may receive only pennies on the dollar, or worse, nothing at all.

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 mechanics lien. C.R.S. § 38-24-101, et seq.[1]  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 on all other wells, buildings and appurtenances on, and the interest of the owner, part-owner, or lessee in the lot of land on which the improvements are located.[2]  Any person who removes or causes to be removed any property covered by the lien, without the written consent of the lien claimant, is guilty of theft of such property.[3]

In order to preserve and perfect the lien, the lienholder must file with the county clerk and recorder of the county in which the property is located, within six months after the machinery, material, fuels, explosives, owner, supplies or labor is furnished, a statement setting forth an account of the amount due after all credits are given, a description of the property charged with the lien, and a verification.[4]  After recording the lien statement, the lienholder must commence an action in the district court for the county in which the lien statement was filed not more than six months after the filing, and the lien will remain effective until final determination of the suit.[5]

Perfecting Statutory Liens in Bankruptcy

When a debtor files bankruptcy, generally all proceedings against the debtor and its property are automatically stayed.[6]   The automatic stay also generally enjoins “any act to create, perfect, or enforce any lien against property of the estate.”[7]  Penalties for violating the automatic stay can be significant.  But the Bankruptcy Code provides important exceptions.[8] Section 362(b)(3) of the Code states that the commencement of bankruptcy case does not operate as a stay of any act to perfect, or to maintain or continue perfection of, an interest in property to the extent that the trustee’s rights and powers are subject to such perfection under section 546(b).   Section 546(b), in turn, states that that avoidance powers of the trustee are subject to any generally applicable law that permits perfection of an interest in property to be effective against an entity that acquires rights in such property before the date of perfection.  Together, these sections permit one to perfect statutory liens, such as Colorado oil and gas mechanic’s liens, notwithstanding the automatic stay.

To deal with the requirements in mechanic’s liens statutes that require a party to commence an action in the district court in the county where the property is located within a certain period of time to preserve the lien, the Bankruptcy Code permits the lienholder to instead provide the trustee with a notice of perfection within the time fixed under applicable non-bankruptcy law for the commencement of any required action to accomplish such perfection.[9]  Thus perfected, the lien claimant takes its place in the bankruptcy case as the holder of a prepetition secured claim, subject to the value of the encumbered collateral and any other competing secured claimants.

Bankruptcy Code § 546(b) thus elevates the right of a lien claimant under state law to perfect a statutory lien on property of the debtor’s estate despite the commencement by that debtor of an intervening bankruptcy case, with the caveat that the claimant must perfect the lien in accordance with applicable law and that the perfected lien must relate back to a date before the filing of the debtor’s bankruptcy petition.  Thus, those who perform labor on or furnish machinery, materials, supplies and goods for the drilling and operation of oil and gas wells, pipelines, plants and refineries should not assume the automatic stay bars taking any action to perfect an oil and gas lien once the debtor files a bankruptcy petition.  Rather, they should promptly determine if they have statutory lien rights, and if so, timely comply with the necessary steps under applicable state law and the Bankruptcy Code to perfect the lien.  Otherwise they may be relegated to the rights of a holder of an unsecured prepetition claim and receive nothing at all.

 

[1] Management and consulting services provided by engineers, geologists and draftsmen, however, are excluded from the lien, even if their services generally benefitted the property, where such persons did not actually perform labor or deliver supplies on location. AEC Industries, LLC v. Survivor Oil, Inc., 7 P.3d 1052 (Colo. App. 1999).

[2] The lien does not attach to the interest of the owner of a severed surface estate or the mineral owner lessor who has not contracted with the lien claimant or who has not participated in the development other than by virtue of executing an oil and gas lease. C.R.S. § 38-24-111; Terminal Drilling Co. v. Jones, 269 P. 894 (Colo. 1928). But the lien will attach to the owners of carried interests if they have consented, expressly or implicitly, to the improvements or development of the leasehold and committed their interest to the program. See AEC Industries, LLC v. Survivor Oil, Inc., 7 P.3d  1052 (Colo. App. 1999) (former lessee who reserved an interest that would arise upon assignee’s recovery of completion costs impliedly consented to the development and to incurring the costs associated therewith, such that the reserved interest could be subject to the lien). While the lien attaches to oil and gas in place, it does not extend to the proceeds from the sale of oil and gas. Chambers v. Nation, 497 P.2d 5, 8 (Colo. 1972).

[3] C.R.S. § 38-24-108.

[4] C.R.S. § 38-24-104.

[5] C.R.S. § 38-24-105.

[6] 11 U.S.C. § 362(a).

[7] Id.,  § 362(a)(4)

[8]  The Bankruptcy Code also preserves, subject to certain limitations and requirements, reclamation rights existing under state law.  11 U.S.C. § 546 (c).  In addition, where a person has sold goods in the ordinary course of business to the debtor and those goods are received by the debtor within 20 days preceding the bankruptcy filing, the seller is entitled to an administrative expense priority claim for the value of such goods that have not been reclaimed. 11 U.S.C. 503(b)(9). The administrative expenses allowed under Bankruptcy Code § 503(b)(9), like other administrative expenses, are entitled to the senior-most priority in bankruptcy cases under § 507(a)(2) ahead of nearly all other priority claims.

[9] It is common for the claimant to file in the bankruptcy case a Notice of Perfection of Lien to notify the other creditors as well.

 

Tags:  Bankruptcy; oil and gas lien; 38-24-101; perfection; E&P Companies; automatic stay