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Louisiana Oil Well Lien Act Offers Creditors Significant Rights and Protections During Industry Downturn

Bankruptcy

10/01/2015

By: Benjamin Kadden and Christopher Caplinger

As the economic slump drags on for the nation’s oil and gas sector, a growing number of operators are facing a liquidity crisis, and some are filing for bankruptcy protection. In this tumultuous economic climate, it is crucial for oil service companies operating in and off the coast of Louisiana to understand the significant rights and privileges available under state law.

This is a brief discussion of important issues to consider when faced with increasing pressure to collect on accounts receivable by filing and enforcing liens on oil and gas properties and interests, as well as certain equipment and other property.

Known as “LOWLA,” the Louisiana Oil Well Lien Act (La. R.S., 9:4860, et seq.) specifies the rules and processes involved when filing a lien, or privilege as it’s referred to in the legislation, against properties associated with the exploration, development, drilling and abandonment of oil and gas properties within Louisiana or its coastal waters.

Under LOWLA, numerous parties are granted a privilege in connection with providing services and materials for oil and gas leases, including contractors, laborers and contractor employees, transportation services like trucking and barge companies, those who transport people to a well site, and those who either sell or rent materials and equipment to well owners.

Much of the property on an oil and gas lease is subject to a LOWLA privilege, including each well located on the lease and certain real estate, whether owned or leased, on which the lease is located. Any buildings on the lease are subject to the LOWLA privilege, as well as tanks and certain equipment. In addition, proceeds from selling oil or gas generated from the lease are subject to the privilege, along with certain oil and gas ownership interests.

Certain elements are not subject to a privilege claim, however, and caution should be exercised when considering what property is subject to seizure under LOWLA. This includes equipment used for repair, testing and “P&A,” or plug and abandon work. Casing, piping and other tubular goods recovered from the drill hole as a result of P&A work are also not subject. In specific cases, proceeds from oil and gas sales are not subject to a privilege, provided certain conditions are met.

All LOWLA privileges are of equal rank with the exception that a contractor’s privilege is ranked lower than those of its subcontractors. LOWLA privileges outrank all other privileges, security interests and mortgages with a few exceptions – tax liens, pre-existing mortgages or vendors’ privileges, pre-existing perfected security interests and liens filed by the Louisiana Department of Natural Resources.

So, how do you perfect and enforce a LOWLA privilege? First, the claimant must file a statement of privilege in the parish where the well is located within 180 days of the last time services or material were provided. For this reason, it is critical for oil service companies to include specific information on invoices and supporting documentation regarding the name of the subject well, lease, field and parish.

Vendors that would otherwise qualify as LOWLA claimants often lose the opportunity because they cannot adequately prove they serviced a specific lease. Also, to the extent that a party provides services or materials in connection with the construction, repair or operation of pipelines, LOWLA may not be applicable, but such party may consider whether they have alternative lien and privilege rights under the Louisiana Private Works Act (La. R.S. 9:4801, et seq.).

LOWLA claimants also must notify the well operator within 180 days of the last time services or materials were provided. Once the privilege is filed and notice is provided, you have one year from the date of recording the notice to file suit to enforce it. Otherwise, you risk losing the effectiveness of your privilege to third parties such as non-operating working interest owners or oil and gas purchasers.

If you sue to enforce the privilege, you have 30 days from filing suit to file what is known as a lis pendens, a written notice of pending suit, with the clerk’s office in the parish which the notice of privilege was filed. If the well owner tries to sell, mortgage or otherwise dispose of the property, the lis pendens alerts potential buyers that the property has a lien and any purchaser must either satisfy the lien claim or take the property subject to the lien.

As a claimant, you’re also allowed to notify everyone who buys oil or gas from that well and demand they withhold payment to the operator until the privilege is extinguished.

Once again, these are only a few issues involved when filing privilege claims through LOWLA. If you are involved in such a case, Lugenbuhl’s creditors’ rights team offers critical expertise to help protect your interests. In fact, Lugenbuhl founding shareholder Stewart Peck was on the advisory committee that drafted the LOWLA legislation and has nearly 40 years of experience handling litigation and transactional cases, including some of the leading LOWLA-related cases. 

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Shareholders Benjamin Kadden and Christopher Caplinger focus on commercial litigation, oil and gas liens, bankruptcy law and Chapter 11 reorganization. Both attorneys have given presentations on bankruptcy issues in the oil-and-gas sector during CLE events hosted by the Bankruptcy & Debtor/Creditor Rights Committee of the New Orleans Bar Association. Mr. Caplinger serves as vice chairman of NOBA’s Bankruptcy Committee. Joseph Briggett and Erin Rosenberg, associates in Lugenbuhl’s commercial litigation and bankruptcy practices, have both worked on a variety of LOWLA-related cases and represent oil-and-gas service providers in bankruptcy proceedings.

To learn more about these attorneys, click on their names below. More information about Lugenbuhl’s bankruptcy practice is available here

The content of this article is not intended to serve as an exhaustive review of the laws, statutes or issues related to the Louisiana Oil Well Lien Act and is not intended to provide legal advice. The opinions expressed through this article may not reflect the opinions of the firm, individual attorneys or clients.