The Fifth Circuit Rules that Louisiana Statutory Mineral Liens Are Extinguished as to Production Payments Sold in Arms Length Transactions, Without Notice

            Most oil and gas producing states have oil and gas mineral lien statutes (similar to what many lawyers know as mechanics and materialman’s lien statutes) that grant automatically arising liens in favor of vendors that provide services in connection with oil and gas well operations.  Louisiana’s version of the statute is known as the Louisiana Oil Well Lien Act (or “LOWLA”).1   On June 14, 2018, in a case of first impression, the United States Court of Appeals for the Fifth Circuit entered a final judgment affirming for purposes of LOWLA’s “safe harbor” provision that the sale of a production payment qualifies as the sale or transfer of “hydrocarbons” (under the terms of the statute).  Accordingly, the Court held that LOWLA’s safe harbor operates to extinguish statutory liens as to production payments that are conveyed in “bona fide onerous transactions.”  The Fifth Circuit panel’s opinion was issued on April 17, 2018,2 and was subject to a motion for rehearing en banc until June 14, 2018.  Thompson & Knight represented the owner of the production payment, OHA Investment Corporation, before the bankruptcy court, district court and the Fifth Circuit Court of Appeals.3             Notably, the Fifth Circuit’s decision is the only case in American jurisprudence that has considered whether a vendor’s statutory lien can attach to (and follow) a subsequently conveyed non-cost bearing interest in an oil and gas lease.  The case is significant and may provide guidance to other courts to the extent similar claims are asserted under mineral lien statutes of other oil and gas producing states.             In OHA Inv. Corp. v. Schlumberger Tech. Corp. (In re ATP Oil & Gas Corp.),  OHA had purchased a production payment a/k/a a term overriding royalty interest (the “Term ORRI”) in outer continental shelf oil and gas properties owned and operated by ATP, an oil and gas exploration and production company.  When ATP filed bankruptcy and failed to pay its vendors, many of those vendors sued OHA in bankruptcy court claiming that their automatically arising liens against ATP’s oil and gas lease incepted prior to OHA’s purchase of its Term ORRI; therefore, they claimed that their liens attached to ATP’s property and followed the conveyance of the Term ORRI from ATP to OHA.  The lien claimants were asserting rights to disgorge over $35 million in royalties paid to OHA.   OHA moved to dismiss the claims arguing, among other things, that LOWLA’s safe harbor provision applied to its purchase of the Term ORRI and LOWLA extinguished any liens that would have attached.             OHA’s motion to dismiss was granted by the United States Bankruptcy Court for the Southern District of Texas, affirmed (on recommendation) by the District Court and unanimously affirmed by the Fifth Circuit panel.For more information on the Thompson & Knight Bankruptcy and Restructuring Practice, please click here. [1]  See La. R.S. § 9:4861, et. seq.[2]  OHA Inv. Corp. v. Schlumberger Tech. Corp. (In re ATP Oil & Gas Corp.), 888 F.3d 122 (5th Cir. 2018).[3]  The legal team principally included Tye C. Hancock (argued), Mitchell E. Ayer and Richard B. Phillips.