2012 AAPL ANNUAL MEETING SPONSORS
PLATINUM
GOLD
SILVER
BRONZE
SAN FRANCISCO SEMINAR
A wholly owned subsidiary of ExxonMobil
GOLF
58th Annual Meeting - San Francisco
June 13-16, 2012
Liens,
Foreclosures,
and
Bankruptcy Impact on
Oil & Gas
Leasehold
Title
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Liens, Foreclosures, and Bankruptcy
Liens
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Liens, Foreclosures, and Bankruptcy
• Two Categories of Liens
– Voluntary or Consensual
• Entered into by Agreement
– Involuntary
• Someone or something has created a lien on your
property
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Liens, Foreclosures, and Bankruptcy
• Voluntary Liens
– Mortgages
• 2-Party Agreement between Mortgagor (Owner) and
Mortgagee (Lender)
– Deeds of Trust
• 3-Party Agreement between Mortgagor (Owner), Mortgagee
(Lender),
and Trustee
• Property conveyed to Trustee for benefit of Lender
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Liens, Foreclosures, and Bankruptcy
• Voluntary Liens
– Issues
• Due on Sale Clause
– Right to call note in the event of a sale or transfer of
all or part of Property.
• Alienation Clause
– Clause prohibiting Mortgagor from transferring or
selling Property.
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Liens, Foreclosures, and Bankruptcy
• Voluntary Liens
– Drilling Title Opinions
• Listing of Encumbrances.
• Title Requirements as what is required.
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Liens, Foreclosures, and Bankruptcy
• Voluntary Liens
– Title Requirements:
1. Release of Record
2. Subordination Agreement
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Liens, Foreclosures, and Bankruptcy
• Voluntary Liens
– Subordination Agreements
• Easy to Require but may be logistical problem
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Liens, Foreclosures, and Bankruptcy
• Voluntary Liens
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Liens, Foreclosures, and Bankruptcy
• Voluntary Liens
• Rush to Drill for Natural Gas Creates Conflicts With
Mortgages –The New York Times (Oct. 19, 2011)
Liens, Foreclosures, and Bankruptcy
• Involuntary Liens
Tax Liens
• Federal: Income; Estate; Gift
• State: Ad Valorem
Judgment Liens
Lis Pendens
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Liens, Foreclosures, and Bankruptcy
• Involuntary Liens
• Mechanic’s-- Oil & Gas Mineral Liens
– A Trap for the Unwary
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Liens, Foreclosures, and Bankruptcy
• Involuntary Liens
– Problem
• Many of them can exist and attach without being
placed of record
What does your recently acquired Title Opinion
have to say???
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Liens, Foreclosures, and Bankruptcy
• Involuntary Liens
Of necessity, this Opinion is subject to any applicable
bankruptcy or insolvency laws, liens for taxes not yet
due, statutory and constitutional mechanic's and
materialmen's liens not of record, operator's liens not
of record, statutory liens securing payment of proceeds
of production from the subject land, enforcement of
regulations or orders by any governmental authority
having jurisdiction over the subject land, capacity or
competency of parties, fraud, delivery and alteration
after delivery.
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Liens, Foreclosures, and Bankruptcy
• Involuntary Liens
Tax Liens
• Federal Tax Liens-for income taxes, 941
withholding taxes and the like liens are filed
of record.
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Liens, Foreclosures, and Bankruptcy
• Involuntary Liens
Tax Liens
Federal Estate Tax Liens:
Attach as of date of death and are not filed
of record. Will become a real issue if no
action by Congress this year which results
in reduction of exemption equivalent to
$1,000,000.00 from current level of
$5,000,000.00
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Liens, Foreclosures, and Bankruptcy
• Involuntary Liens
Ad Valorem Taxes
• Patchwork of provisions but all states
provide for taxes and nearly all are self
executing liens that are not extinguished by
sale or transfer of the property taking
priority of all other liens
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Liens, Foreclosures, and Bankruptcy
• Involuntary Liens
Judgment Liens
• Particulars vary from state to state but all
provide for liens upon property against
whom a judgment has been entered.
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Liens, Foreclosures, and Bankruptcy
• Involuntary Liens
Lis Pendens (the wannabe claim):
– Notice of lawsuit where a party is claiming
an interest in the Land. Can be a problem due
to unadjudicated claims.
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Liens, Foreclosures, and Bankruptcy
• Involuntary Liens
• Mechanic’s-- Oil & Gas Mineral Liens
A Story
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Liens, Foreclosures, and Bankruptcy
• Involuntary Liens
Background Facts:
1. You work for GBOC (Great Big Oil Company)
2. Recently completed due diligence on GBOC’s
acquisition in Wyoming and Texas.
3. Purchased 1000 acres and what is now the
GBOC No. 1
4. Acquisition was part of a 3000 acre lease.
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Liens, Foreclosures, and Bankruptcy
• Involuntary Liens
GBOC (Great Big Oil Co.) Wyoming Lease
Recently Acquired No. 1 from LOC (Little Oil Co.)
No. 1
No. 2
No. 3
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Liens, Foreclosures, and Bankruptcy
• Involuntary Liens
Problem:
1. Letter from attorneys for service company
claiming lien on your leasehold, well, and
production from the GBOC’s No. 1s in both
Texas and Wyoming for recent work done
on LOC’s No. 3s in Texas and Wyoming
before GBOC’s purchase.
2. Oil purchaser has suspended payments
pending resolution.
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Liens, Foreclosures, and Bankruptcy
• Involuntary Liens
Can they do that?
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Liens, Foreclosures, and Bankruptcy
• Involuntary Liens
Problem:
Nearly all liens for work on wells have their
inception at the time work is initially performed
but there may be nothing of record for a period of
3-6 months.
Simply checking public records is insufficient.
Need to review records for all work done on the
wells and confirm payment.
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Liens, Foreclosures, and Bankruptcy
• Involuntary Liens
Wyoming:
Liens available for work performed on oil and gas wells
is found W.S. § 29-3-101 through 29-3-111.
Bad News:
Lien extends to production and purchaser can
withhold payments if notice has been received (W.S. §
29-3-105)
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Liens, Foreclosures, and Bankruptcy
• Involuntary Liens
Wyoming:
Good News:
You find W.S. § 29-3-103(b)ii which provides
in part:
If work is performed for or materials furnished
to the owner, part owner or lessee of the
working interest in only a portion of the
acreage covered by a lease, the lien granted by
this chapter shall be restricted to that portion
of the acreage
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Liens, Foreclosures, and Bankruptcy
• Involuntary Liens
Texas:
Good News:
You find that the lien provided for in Chapter 56
of the Texas Property Code does not extend to
production or proceeds of production but only to
the underlying leasehold.
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Liens, Foreclosures, and Bankruptcy
• Involuntary Liens
Texas:
Bad News:
You find that the lien provided for in Chapter 56
of the Texas Property Code is not limited to just
the well or the acreage related to the wells on
which work was performed but the lien attaches
to the entire leasehold interest including other
wells on the leasehold.
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Liens, Foreclosures, and Bankruptcy
• Involuntary Liens
Results:
Wyoming:
Lien released since it related only to work performed on
LOC No. 3.
Texas:
Lien not released as it attaches to entire leasehold. Does
not extend to production so purchaser cannot withhold
payment.
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Liens, Foreclosures, and Bankruptcy
Foreclosure
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Liens, Foreclosures, and Bankruptcy
• Foreclosure
Purpose:
Acquire ownership of property for payment of a debt.
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Liens, Foreclosures, and Bankruptcy
• Foreclosure
Basic Rule:
Foreclosure of a Lien that predates Oil & Gas
Lease can effectively terminate lease.
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Liens, Foreclosures, and Bankruptcy
• Foreclosure
The Law in Ohio
Liens, Foreclosures, and Bankruptcy
• Foreclosure
Example of Power of Oil and Gas Industry:
Amended Chapter 1509 of the Ohio Revised Code,
effective June 30, 2010
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Liens, Foreclosures, and Bankruptcy
• Foreclosure
“If a mortgaged property that is being foreclosed is subject
to an oil or gas lease…and the lease… was recorded
subsequent to the mortgage, and if the lease… is not in
default, the oil or gas lease… has priority over all other
liens, claims, or encumbrances on the property so that the
oil or gas lease… is not terminated or extinguished upon
the foreclosure sale of the mortgaged property. If the
owner of the mortgaged property was entitled to oil and
gas royalties before the foreclosure sale, the oil or gas
royalties shall be paid to the purchaser of the foreclosed
property.”
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Liens, Foreclosures, and Bankruptcy
• Voluntary Liens
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Liens, Foreclosures, and Bankruptcy
• Foreclosure
Types of Foreclosures:
1. Non Judicial
Property sold without judicial intervention.
Not available in all states.
Only for consensual liens.
2. Judicial
Judicial process used to obtain court order for sale.
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Liens, Foreclosures, and Bankruptcy
• Foreclosure
Non Judicial Foreclosure
Advantages:
Speed
Cost
Problem from title standpoint:
No assurance of notice of foreclosure
action to Operator.
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Liens, Foreclosures, and Bankruptcy
• Foreclosure
Judicial Foreclosure—all involuntary liens
Advantages:
Greater certainty
Well established case law
Disadvantages:
Time
Expense
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Liens, Foreclosures, and Bankruptcy
• Foreclosure
Advantage to Operator in Judicial Foreclosure:
1. Notice
Notice required to holders of an interest in the
property.
2. Time
Judicial process is not swift.
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Liens, Foreclosures, and Bankruptcy
Bankruptcy
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Liens, Foreclosures, and Bankruptcy
• Bankruptcy
Automatic stay -11 USC § 362
Property of the Estate-11 USC § 541
Assume or reject executory contracts- 11 USC § 365
Cram down provisions – Court forcing acceptance of Plan
over objections
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Liens, Foreclosures, and Bankruptcy
• Bankruptcy
Can debtor reject a lease as an executory
contract?
Majority view- No
Louisiana- still a question
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Liens, Foreclosures, and Bankruptcy
• Bankruptcy
The Tale of “EARLY RETIREMENT”
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Liens, Foreclosures, and Bankruptcy
• Bankruptcy
Background Facts:
1. You work for LOC (Little Oil Company).
2. Recently completed farmout from XYZ.
3. Completed first well earning first 700 acres of
3,500 acre Prospect known as EARLY
RETIREMENT.
4. Assignment not yet received from XYZ and it files for
Chapter 11 Bankruptcy.
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Liens, Foreclosures, and Bankruptcy
• Bankruptcy
What is status of your title on the 700 acres
earned and what about the remaining
2800?
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Liens, Foreclosures, and Bankruptcy
• Bankruptcy
(b)Property of the estate does not include—
……
(4)any interest of the debtor in liquid or
gaseous hydrocarbons to the extent that—
(A)(i)the debtor has transferred or has agreed
to transfer such interest pursuant to a farmout
agreement or any written agreement directly
related to a farmout agreement;
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Liens, Foreclosures, and Bankruptcy
• Bankruptcy
Even though record title not yet in LOC at least
the 700 acres can be protected.
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Liens, Foreclosures, and Bankruptcy
• Bankruptcy
Remainder of Prospect- Since there remains
substantial performance to be completed the
remainder of farmout could be viewed as an
executory contract and rejected by XYZ which
would allow it to sell its remaining interest in
violation of farmout.
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Liens, Foreclosures, and Bankruptcy
• Bankruptcy
If XYZ retained an interest in the 700 acres as a
participant and was party to the a JOA,
consensus is that JOA is an executory contract
that can be rejected allowing XYZ to sell its
interest even LOC had retained preferential
rights to purchase in JOA.
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Liens, Foreclosures, and Bankruptcy
• Bankruptcy
Net Result-- EARLY RETIREMENT was
not completed
You will have to keep on working!!!!!!
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