Face Challenges Confidently

091 Abella v. Knight Oil Tools

Thursday, September 3rd, 2015

Richard F. Brown

The following is not a legal opinion. You should consult your attorney if the case may be of significance to you.
Abella v. Knight Oil Tools, 945 S.W.2d 847 (Tex. App — Houston [1st Dist.] 1997, n.w.h.) considers whether the holders of mechanic’s liens can divert the proceeds of current production into the registry of the court prior to foreclosure of the lien. In this consolidated case, three holders of statutory mechanics and materialmen’s (M&M) liens provided labor and materials to the operator for drilling, completing, maintaining, operating and repairing three wells. The lien holders were not paid in full for their services and timely perfected their M&M liens. The operator assigned the leasehold to other working interest owners. The working interest owners argued that they were entitled to the current production proceeds until the liens were actually foreclosed, even if this meant the oil and gas reserves became totally depleted. The trial court appointed a receiver prior to the foreclosure to collect the net proceeds of production from the wells and to deposit those proceeds in the court.
The statute upon which M&M liens are based clearly extends to the equipment and material placed on the lease, and it also covers “the land, leasehold, oil or gas well . . . and lease for oil and gas purposes for which the labor was performed . . ..” The statute is silent as to whether the lien extends to oil and gas produced prior to foreclosure or the proceeds from its sale. The court held that the M&M liens attached not only to the materials supplied, but also to the leaseholds, and that the “leases grant the right to extract and produce the oil and gas from the land.” The majority of the court apparently concluded that this then demonstrated a probable right of recovery, and they declined to reverse the trial court’s appointment of a receiver. The dissent argued that lien statutes must be strictly construed, this statute does not expressly extend to proceeds, and that at most, it extends to the operator’s right to extract production. No injunction was sought, production should have continued, and the proceeds of production should be free from lien.
This case is significant in that statutory M&M liens now appear to extend not only to the well and leasehold, but also to the proceeds derived from the production of oil and gas. This creates significant additional risks for all downstream purchasers who assume that production prior to foreclosure is free from lien. Evaluation of this risk is made more difficult because M&M liens may be filed within a specified time after the services are performed, and the lien is valid.