CHAPTER 5 OPERATORS' LIENS UNDER 1989 AAPL FORM 610 OPERATING AGREEMENT

• Jurisdiction: United States

Oil and Gas Joint Operating Agreement
(May 1990)
CHAPTER 5
OPERATORS' LIENS UNDER 1989 AAPL FORM 610 OPERATING AGREEMENT
Lance Stockwell
Sandra Lefler Cole Boesche, McDermott & Eskridge
Tulsa, Oklahoma

I. INTRODUCTION

Article VII has been the subject of many legal disputes, due in large part to the economic problems plaguing the oil and gas industry for most of the last decade. In an apparent effort to resolve existing issues and narrow future disputes, the A.A.P.L. revision committee modified Article VII, concentrating on the following areas:

1. Narrowing the participating interest owners' liability in order to avoid joint and several liability.

2. Expanding the collateral pledged under the agreement as security for payment of all obligations arising under the agreement, both to the operator and to non-operators paying a defaulting interest owner's share of costs.

3. Providing greater ease for perfection of liens on the collateral.

4. Providing expedited enforcement measures in the event of default.

This article addresses operator's liens generally, the revisions to Article VII in the areas listed above, the recording supplement introduced in the 1989 AAPL Form 610 Operating Agreement ("1989 Form"), drafting and enforcement considerations, and additional remedies now available under the 1989 Form. It will also address alternate liens

[Page 5-2]

available if the 1989 Form fails to suffice.¹

II. LIENS, GENERALLY

A. Types of Liens

Operators' liens² may arise in any one of four (4) manners: (1) in equity; (2) by statute; (3) under a contract between the parties; or (4) under common law.

Equitable liens are commonly recognized in oil and gas development activities. They are created by the courts, and arise either out of a contract stating an intention to create a lien, or out of the general relationship of the parties.³

Equitable liens are important in the context of oil and gas operations, since the relationships of the parties are not always reduced to writing, or at least not timely so. When an operating agreement remains unsigned by one or more of the parties, courts may impose an equitable lien to protect the Operator.

Statutory liens may arise under a state's general lien statutes (such as statutes covering mechanic's and materialmen's liens), under specific lien statutes covering oil and gas development and mining, or under both. Mechanic's and materialman's liens usually apply to mineral operations, although the scope of the lien statute may be so narrow as to exclude work performed by operators.

Contractual liens arise out of the language of an agreement and are the emphasis of this article, especially

[Page 5-3]

the 1989 Form lien created in the provisions of Article VII of the 1989 Form.

We shall also discuss statutory liens as they relate to lien perfection and enforcement issues under the 1989 Form, and common law and equitable liens as alternate remedies available to operators.

B. Statutory Liens

Although the drafters intended the 1989 Form to serve as a recordable lien document qualified to serve as a security agreement and financing statement, it is not a panacea. Things happen. Drafting changes, recording failures, nonsingning parties, all can affect the enforceability of a 1989 Form lien. And, even when all is in order, state statutes may modify the 1989 Form's security and remedies provisions. Thus, operators should maintain familiarity with statutory lien provisions. Appendix A of this article presents a summary of certain states' lien statutes as they relate to operators' liens.

Although a few courts require an enhancement of the value of the mineral property before an operator may claim a statutory lien,⁴ enhancement of value generally is not necessary.⁵ The reason is obvious. Most mineral operations either deplete value or prove a property unproductive. To deny a lien in those circumstances could limit development to only those few properties which could qualify under an enhancement in value test.

Oil and gas lien statutes, on the other hand, usually are sufficiently broad to provide relief, even where the value of the property is not enhanced.⁶ For example, some

[Page 5-4]

courts interpret mineral lien statutes broadly enough to include supervising operations, paying bills, and handling paper, which otherwise may not be covered under general lien statutes.⁷ Similarly, statutory language exists in some states to include as lienable the performance of work or services in operating an oil or gas well,⁸ while other state statutes provide the more traditional right to claim a lien only if labor is performed or materials are furnished for the construction, alteration, or repair of the property.⁹ As problems with a particular statute are addressed through judicial interpretation, changes are often made in the statute to clarify legislative intent or to accommodate the court's particular concern.

For example, in Kenan v. Hilliard Oil & Gas Inc. (in re: George Rodman, Inc.)¹⁰ an Oklahoma bankruptcy court held that an operator was not entitled to a statutory lien on the working interest of a non-operator. The Oklahoma statute in question contained the typical language allowing a lien to a person who "performs labor or services...in...operating...of any oil or gas well."¹¹ Because the operator was seeking a lien on the interest of a co-developer of the property, the court concluded the lien statute did not apply.¹²

[Page 5-5]

In some instances, coverage under a state's general lien statutes will overlap with its mineral lien statutes. While some courts treat the remedies afforded under each as cumulative,¹³ one court held that (1) the mineral lien statute controls; and, (2) if the lien claimant has not followed the provisions of the mineral lien statutes, but has followed the procedures under the mechanics' lien statutes, the court still will not allow recovery under the mechanics' lien statute.¹⁴

The development of the 1989 Form lien is important, especially in view of the disparities among various state lien statutes. Thus, an operator should ensure that the provisions of the 1989 Form accurately set forth the intentions of the parties as to the security interests it creates, and should take all necessary measures to properly perfect those interests, instead of relying solely upon statutory lien rights and the uncertain judicial interpretation of those statutes.

C. Application of UCC Provisions

The 1989 Form specifically provides that it or the recording supplement may be used for and filed as a security agreement and financing statement for purposes of perfecting a security interest in personalty covered by the 1989 Form lien. Where using the 1989 Form, the recording supplement, or a UCC-1 financing statement, the operator should first look to Article 9 of the Uniform Commercial Code^* to identify what items of collateral covered by the 1989 Form

[Page 5-6]

come within the various categories of personal property set forth in Article 9.¹⁵ This will determine the location for filing.¹⁶

D. Contractual Liens — The 1989 Form

Many court's have reviewed and enforced contractual operator's liens.¹⁷ Parties to the 1989 Form grant liens to one another on the collateral specified. The pertinent provision states:

Each party grants to the other parties hereto a lien upon any interest it now owns or hereafter acquired in Oil and Gas Leases and Oil and Gas Interests in the Contract Area, and a security interest and/or purchase money security interest in any interest it now owns or hereafter acquires in the personal property and fixtures on or used or obtained for use in connection therewith, to secure performance of all of its obligations under this agreement including but not limited to payment of expense, interest and fees, the proper disbursement of all monies paid hereunder, the assignment or relinquishment of interest

[Page 5-7]

in Oil and Gas Leases as required hereunder, and the proper performance of operations hereunder. Such lien and security interest granted by each party hereto shall include such party's leasehold interests, working interests, operating rights, and royalty and overriding royalty interests in the Contract Area now owned or hereafter acquired and in lands pooled or unitized therewith or otherwise becoming subject to this agreement, the Oil and Gas when extracted therefrom and equipment situated thereon or used or obtained for use in connection therewith (including, without limitation, all wells, tools, and tubular goods), and accounts (including, without limitation, accounts arising from gas imbalances or from the sale of Oil and/or Gas at the wellhead), contract rights, inventory and general intangibles relating thereto or arising therefrom, and all proceeds and products of the foregoing.¹⁸

This provision of the 1989 Form differs substantially from the previous 1982 version, under which "[e]ach Non-Operator grants to Operator a lien" on specified collateral, and the "operator grants a like lien and security interest to the Non-Operators to secure payment of Operator's proportionate share of expense." The collateral description under the 1989 Form is much more thorough than the earlier form operating agreements and should serve to eliminate ambiguities in the 1982 version.

1. Several Liability

The 1989 Form clarifies the intent to avoid joint liability.¹⁹ New Article VII.A reinforces the concept of several liability, and has been revised from the 1982 form as follows:

[Page 5-8]

The liability of the parties shall be several, not joint or collective....Accordingly, the liens granted among the parties in Article VII.B. are given to secure only the debts of each severally and no party shall have any liability to third parties hereunder to satisfy the default of any other party in the payment of any expense or obligation hereunder. It is not the intention of the parties to create, nor shall this agreement be...