Property Subject to an Oil and Gas Mechanics and Materialmen's Lien

    The last blog post discussed the initial considerations in determining whether an oil and gas service or material provider is entitled to a Texas statutory lien (an “M&M Lien”) to secure amounts owed to the provider. The key is whether the provider performed labor or provided materials in a mineral activity either directly or indirectly to a mineral property owner.    If the initial hurdles are satisfied, then the question is what property will be subject to the lien. Not surprisingly, the M&M Lien attaches to all materials, machinery and supplies that a provider furnished or handled. The M&M Lien also attaches to each of the following for which the lien claimant provided services or materials:land;leasehold;oil or gas well or water well;oil or gas pipeline and its right-of-way.    An M&M Lien that attaches to a leasehold estate covers not only the well on which the claimant provided services or materials but also all other wells located on the leasehold in which the mineral property owner owns an interest. For example, if there are six producing wells on a lease, the mineral property owner drills a seventh well on the lease and fails to pay the drilling contractor, all seven wells will be subject to the contractor’s M&M Lien.    An M&M Lien does not attach to property for which a service provider did not provide services or materials. As an example, Mr. Jones, who is a mineral property owner contracts with Mr. White, a drilling contractor, to drill three wells located on three separate tracts of land that are not operated as a unit. Mr. Jones pays Mr. White for services performed for two of the wells but not the third. Mr. White will be able to secure an M&M Lien only on the well for which he has not been paid and the tract of land on which such well is located. Even though Mr. White’s contract with Mr. Pink covered all three tracts of land, because they are separate tracts not operated as a unit, Mr. White cannot claim an M&M Lien on the two tracts for which he has received payment.    An M&M Lien attaches only to the interests of mineral property owners who are parties to the contract. So, if Mr. Pink is an operator who holds only a one percent working interest in the well drilled by Mr. White, Mr. White can secure an M&M Lien only on Mr. Pink’s one percent interest.    A service provider’s claim for payment for services or materials provided before a mineral property owner assigns all or a portion of its interests to a third party may burden the assignee’s interest. For example, assume that Mr. Pink owns 100% of a leasehold at the time Mr. Pink and Mr. White enter into a contract for drilling on the lease. After Mr. White performs the services, Mr. Pink assigns twenty-five percent of his interest in the lease to Mr. Green. Mr. White then files to secure an M&M Lien on the well and the lease. Mr. White would not be obligated to give notice of the lien to Mr. Green because he had contracted with Mr. Pink before the assignment, and Mr. Green’s interest would be subject to the lien.    The Texas statutory lien does not attach to proceeds of oil and gas production. Courts have generally been unwilling to expand the coverage of the lien to property not listed or described in the statute. Nevertheless, in 1997, an appellate court upheld an appointment of a receiver to take possession of the proceeds from production prior to the foreclosure of the M&M Lien. The court held the action necessary to protect the lienholder because production was diminishing the lienholder’s collateral. The court did not address the previous line of cases holding that M&M lien claimants were not entitled to proceeds of production.    To be able to take advantage of the protection afforded by the Texas statutory M&M Lien, a service provider must properly secure the lien. The next blog post will set forth the necessary steps.