Texas Oilfield Collections: Texas Property Code Chapter 56 – Liens Against Mineral Property

oil field collections

Texas Property Code Chapter 56 is a useful tool to get energy service companies paid in the Texas oilfield.  This article generally explains how Chapter 56 liens work and how a service company can benefit from them.

Chapter 56 provides two main advantages to an energy service company.  First, it affords the mechanism for filing a lien on certain defined property.  See Tex. Prop. Code §56.041.    Second, Chapter 56 grants an energy service company the ability to obtain payment from not just the operator or other company it contracted with, but also any working interest owner that failed to pay its joint interest billing (JIBs) before being properly notified.  

  1. Definitions 

The first step is knowing how Chapter 56 defines certain terms.  Chapter 56 broadly defines “mineral activity.”  See Tex. Prop. Code §56.001(1).  If the service company’s work is included in this definition, the next step is to determine how the company is defined under Chapter 56.

Texas Property Code §56.001(2) defines a “mineral contractor.”  Typically, a mineral contractor is the operator.  If the operator is a contract operator, it is simply a mineral contractor.  If the operator owns a working interest in the property, then it is both a mineral contractor and a mineral property owner under Chapter 56.  

Texas Property Code §56.001(3) defines a “mineral property owner.”  Generally, working interest owners are mineral property owners as they own a percentage of the leasehold.  

Texas Property Code §56.001(4) defines a “mineral subcontractor.”  Mineral subcontractors are typically the energy service companies that provide materials and services on the well.  These mineral subcontractors qualify as mineral subcontractors by contracting with a mineral contractor (operator) or another mineral subcontractor.  

The “property” subject to the mineral lien is also broadly defined in §56.003 and includes the leasehold, oil or gas well, and lease for which the material and services were provided.  See Tex. Prop. Code §56.003(2).  

  1. Deadline to File Lien

To secure the mineral lien, Texas Property Code §56.021(a) provides that the lien claimant must file an affidavit with the county clerk of the county where the property is located within six months after the day the indebtedness accrues.

Texas Property Code §56.005 defines when the “indebtedness accrues” for lien filing purposes.  For each leasehold, the energy service company will look to the last date materials and services were provided.  This date will be when the indebtedness accrues for purposes of filing the lien or liens pursuant to Chapter 56.  It is important  to accurately determine the accrual date, because six months from the  accrual date is the deadline for filing the mineral lien or liens.  Also, the company should make sure that six months has not elapsed between the dates the materials and services were furnished.

Six months can go by very fast, especially when an energy service company does not begin collections until sixty or ninety days have passed.  An energy service company should be proactive and have a system in place that notifies it when an account is past ninety days so that liens may be properly filed within this six-month period. 

  1. Contents of Affidavit and Mineral Subcontractor’s Notice Letter

Having determined the deadline to file the lien, the energy service company next determines the contents to put in the lien affidavit to make it effective.  Pursuant to §56.022, a lien claimant’s affidavit must include:

  1. the name of the mineral property owner involved, if known;
  2. the name and mailing address of the claimant;
  3. the dates of performance or furnishing;
  4. a description of the land, leasehold interest, pipeline, or pipeline right-of-way involved; and 
  5. an itemized list of amounts claimed.

Additionally, if the service company is a “mineral subcontractor” as defined by §56.001, then pursuant to §56.022(b), the mineral subcontractor’s affidavit must also include:

  1. the name of the person for whom labor was performed or material was furnished or hauled; and
  2. a statement that the subcontractor timely served written notice that the lien is claimed on the property owner or the owner’s agent, representative, or receiver. 

A mineral subcontractor must comply with Texas Property Code §56.021(b) and §56.023 by serving written notice of the lien on the property owners no later than the tenth day prior to filing its lien.  The written notice must include the amount of the lien, the name of the person indebted to the mineral subcontractor, and a description of the land, leasehold interest, pipeline, or pipeline right-of-way.  

  1. Liability of Mineral Property Owner and Fund Trapping

We have seen that if the energy service company is a mineral subcontractor, it may timely serve written notice of the lien on the mineral property owner(s).  This allows an energy service company to “trap funds” in the hands of the property owners with proper notice, making such owners liable to the service company.  See Tex. Prop. Code §56.043 & 56.006.  Thus, if the energy service company properly notifies the mineral property owner before its payment on the JIBs is made to the operator, the funds are “trapped” in the hands of the property owner.  At that point, the property owner is liable to the service company whether or not it pays its JIBs.  

In conclusion, an energy service company is better positioned to obtain payment if it is educated on the lien process.  All energy service companies should have a plan in place to obtain payment from a delinquent customer.  An oil and gas lawyer experienced in oilfield collections can help and is a valuable relationship to have.  

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