Delaware Bankruptcy Court Teaches Important Lesson on Timely Lien Perfection

Perfect your liens on time or you may lose them. That's the painful lesson U.S. Bankruptcy Judge Karen B. Owens taught Halliburton Energy Services, Inc., in her recent decision.

Ruling on plaintiff-debtor Southland Royalty Company LLC's motion for partial summary judgment, Judge Owens found that Halliburton did not obtain a lien on Southland's production of oil, natural gas, or their proceeds. In re Southland Royalty Co., LLC, 20-10158 (KBO) at 1 (Jan. 21, 2021, Bankr. D. Del.) (the "Opinion").

Southland focuses on the acquisition, development, and exploitation of oil and gas reserves. It owns leasehold and mineral interests in southwestern Wyoming. Halliburton is one of the world's largest oil field service providers. Among other services, Halliburton opened two sets of newly constructed wells (the "Wells") for Southland. Halliburton began and completed its work in August 2019, and the Wells started producing later that month. Opinion at 2.

Southland filed for chapter 11 bankruptcy on January 27, 2020 (the "Petition Date"). On February 11, Halliburton asserted several mechanic's and materialmen's liens under Wyoming law, including over the Wells (the "M&M Lien"), which Halliburton caused to be recorded. The next day, Halliburton sent a letter to Wamsutter LP, a purchaser of Southland's oil and gas. The letter notified Wamsutter that Halliburton held a lien claim against Southland's property and proceeds. Importantly, Halliburton did not obtain relief from the automatic stay triggered by Southland's bankruptcy petition, see 11 U.S.C. § 362, before filing its M&M Lien or delivering the notice. Opinion at 2.

On April 16, 2020, Halliburton filed a notice of perfection, continuation, or maintenance of lien with the bankruptcy court, purporting to perfect the liens under Bankruptcy Code sections 362(b)(3) and 546(b)(1)(A). Together, those provisions permit "the postpetition continuation, maintenance, or perfection of an interest in a debtor's property if applicable state law creates such interest prior to a bankruptcy filing and the interest's postpetition perfection relates back to the date of its creation (the 'Relation Back Exception')." Opinion at 2-3.

The Wyoming Lien Act grants lien rights to those who perform work to improve real property or mineral interests. The liens cover: "(i) [a]ll the production of oil, gas and ore and minerals in solid form attributable to the interest subject to the lien; (ii) [t]he proceeds of production attaching to the working interest as the working interest existed on the date labor was first performed; (iii) any well... and (ix)... the land or leasehold... where work was performed." Wyo. Stat. § 29-3-105(a). Generally, such liens relate back to "the commencement of any construction work or repair of the premises or property." However, Wyoming law treats production and proceeds liens differently than liens on wells and land. Opinion at 5. Pursuant to the Wyoming Lien Act, a lien "covering oil, gas... or the proceeds of their sale is not effective against any purchaser of the oil [or] gas... until written notice of the claim is delivered." Wyo. Stat. § 29-3-105(b). Further, "[t]he production of any mineral interest or working interest otherwise subject to a lien... is not to be encumbered until notice of the lien is delivered." Id. § 29-3-105(c).

Judge Owens ruled that "based on the plain and unambiguous language of the statute, [production and proceeds liens] arise if and only when proper notice is given to the holder of the mineral interest or working interest and the purchaser." Thus, while "Halliburton may have been entitled to assert a lien on Production... , the Production is not encumbered until notice is provided to Southland and Wamsutter." Halliburton failed to deliver notice until after the Petition Date and the automatic stay took effect. Thus, "[b]ecause a lien on Production does not relate back to a time prior to the Petition Date, Halliburton's postpetition actions do not fall within the scope and safeguards of the Relation Back Exception... Accordingly, any postpetition attempts of Halliburton to obtain a lien on Production are void ab initio." Opinion at 5-6 (discussing Wyo. Stat. § 29-3-105(b)-(c)).

Potential lienholders, especially over the production and proceeds of mineral assets, should learn an important lesson from Judge Owens's opinion. In the face of a potential bankruptcy, ensure that you perfect your liens pre-petition. As Halliburton learned, relying on the Relation Back Exception can be risky. Even where state laws like Wyoming's create lien rights that can trigger the exception, there may be additional requirements to effectuate such liens (e.g., notice). Failure to satisfy them can prevent the operation of the Relation Back Exception. Opinion at 6 (finding liens on production "void ab initio"). And depending on which state's law applies, the Relation Back Exception may not apply at all. See In re Linear Elec. Co., Inc., 852 F.3d 313, 322 (3d Cir. 2017) ("Pennsylvania [mechanic's] liens relate back, and New Jersey liens do not."). 

Daniel A. Lowenthal and Maxwell K. Weiss, Patterson Belknap Webb & Tyler LLP

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Tuesday, 13 April 2021

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