Bankruptcy & Creditors' Rights Bulletin: February 2016

February 02, 2016

The Bankruptcy and Creditors' Rights Bulletin provides an analysis of legal issues, recent court decisions and significant changes in bankruptcy and creditors' rights law. This edition highlights two key bankruptcy topics that should be of interest to many business clients.

Striking Oil: Mineral Lien Laws that Provide Protection to Oil & Gas Creditors

With crude oil prices hovering near $30 per barrel, many large and small oil companies have seen earnings hit some of the lowest levels in more than a decade.  Low oil prices have also directly led to an upsurge in bankruptcy filings for companies involved in various aspects of the oil and gas industry.  

Given the state of the industry, it is more important than ever for providers of goods and services to oil and gas companies to be aware of the protections available to them under various state laws that, if followed correctly, allow for the creation of a lien against the well site to which goods or services have been provided.  For example, Louisiana’s Louisiana Oil Well Lien Act (La. R.S., 9:4860, et seq.) (“LOWLA”) provides the framework and deadlines for filing a lien – known as a “privilege” – against properties associated with the exploration, development, drilling and abandonment of oil and gas properties within Louisiana, including offshore properties. Similar relief is available under Texas’ “Liens Against Mineral Property” statute (Tex. Prop. Code §§ 56.001, et seq.).

In Louisiana, contractors, laborers and contractor employees, providers of transportation services, and sellers of movables and leased equipment may assert a LOWLA privilege.  Property located on an oil and gas lease is subject to the LOWLA privilege, which includes each well located on the lease and certain real estate on which the lease is located. Critically, in most cases, the proceeds from selling oil or gas generated from the lease are subject to the privilege, as well. But to properly perfect a LOWLA lien, strict compliance with the statute is necessary.

First, within 180 days of the last date of service, a claimant must file a statement of privilege in the parish where the well is located. This initial step often causes problems for vendors who cannot prove they serviced a specific well-site or lease. As a result, it is crucial to include specific information on invoices and work orders identifying the name of the well, lease number, field and parish.

Claimants are also required to notify the well operator within 180 days of the last date that goods and services were provided to the well site over which they are asserting a privilege. After the privilege has been filed and notice provided, a claimant must bring suit to enforce the privilege within one year from the date of recording the privilege. If a claimant does not bring suit, the privilege is no longer effective against third-parties, such as non-operating working interest owners or purchasers. Assuming suit has been filed, a claimant must also file a lis pendens in the clerk’s office in the parish where the privilege filed.  

These represent just a few of the issues presented when correctly perfecting an oil well lien. Other state statutory schemes have several variances in the requirements and deadlines. And even though an operator may have already filed a petition for bankruptcy protection, contractors may still be able to perfect their lien rights within the bankruptcy proceedings without violating the automatic stay.

Phelps Dunbar’s Bankruptcy & Creditor’s Rights Group has extensive experience representing oil and gas goods and service providers in all phases of collection, including initial privilege filings and perfection, and as creditors in complex Oil & Gas Chapter 11 proceedings.
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The Pros and Cons of the Broad Reach of Bankruptcy Court Jurisdiction

U.S. Bankruptcy Courts have increasingly become the forum in which an array of issues and disputes are decided. Under the U.S. Bankruptcy Code, a bankruptcy court has jurisdiction (the power to decide) over all matters that arise in, arise under and that are related to a pending bankruptcy case. Matters that arise in a bankruptcy case are the usual and typical activities involved in administering the bankruptcy case itself, such as filing and objecting to claims, selling property of the estate and confirming a Chapter 11 plan. Matters that arise under the Bankruptcy Code are actions that are available only under a substantive bankruptcy code provision, such as a preference action.

Matters that “relate to” a pending bankruptcy case provide the broadest jurisdictional reach for the bankruptcy court. A matter is “related to” a bankruptcy case if  the outcome of that proceeding could conceivably have any effect on the estate being administered in bankruptcy.

The broad reach of a bankruptcy court’s subject matter jurisdiction is augmented by the fact that the test for whether a bankruptcy court has personal jurisdiction over a particular party is whether that party has sufficient minimum contacts with the United States, not just the locale in which the court is located. This is different than other federal courts, which evaluate minimum contacts with the particular state in which the court is located. Moreover, bankruptcy courts have nationwide service of process, which means a party who has no contact whatsoever with the state, city or county in which the bankruptcy court is located may be subject to that court’s jurisdiction if that party has systematic contact with the United States of America.

The broad reach of a bankruptcy court’s jurisdiction is balanced partially by the ability of a party to request that the bankruptcy court abstain (decline) from asserting its jurisdiction over a particular matter if a series of elements are met. These elements are designed, generally speaking, to balance the expediency of the bankruptcy court adjudicating the matter against fairness to the party requesting that the Court abstain.

Additionally, if the bankruptcy court’s jurisdiction is founded upon so-called “related to” jurisdiction, then, without the consent of all parties, the bankruptcy court cannot enter a final judgment on its own. The bankruptcy court may only enter a recommended judgment, which is then subject to automatic review by the U.S. District Court.

While the prospect of being involved in a court proceeding in a strange and far-off place can certainly be daunting, there are certain advantages to a bankruptcy court being the arbiter of a dispute.

Bankruptcy courts are courts of equity that are designed to encourage efficient and cost-effective resolutions of disputes. In that regard, most bankruptcy courts are very mindful of the economics of litigation and assist in keeping litigation costs down:

  1. by allowing telephonic appearances by lawyers in non-evidentiary hearings;

  2. by being generally tolerant of lawyers appearing pro hac vice (which allows a lawyer who is not a member of the Bar of the state in which the bankruptcy court is located to appear and represent her client in the proceeding at hand);

  3. by using alternative dispute resolution processes such as mediation early in the litigation process; and

  4. by actively managing discovery to ensure that only reasonably necessary discovery is conducted to avoid unnecessary cost.

While the broad reach of a bankruptcy court’s jurisdiction is a matter of federal law and you may find yourself hauled into a court you never expected, with the assistance of qualified and experienced bankruptcy practitioners, you may be able to turn it into an advantage which appeared at first blush to be a disadvantage.
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