PRESENTED AT

The University of Texas School of Law 2016 Jay L. Westbrook Bankruptcy Conference

 November 17-18, 2016

Austin, Texas 

Drilling Deeper into the Significance of Louisiana Oil Well Liens in Energy-Related Bankruptcies

 Presented by:

The Honorable Marvin Isgur, U.S. Bankruptcy Judge for the Southern District of Texasand

Benjamin Kadden, Shareholder, Lugenbuhl Wheaton Peck Rankin & Hubbard

The University of Texas School of Law Continuing Legal Education  ▪  512.475.6700  ▪  utcle.org 

Materials  prepared by:Benjamin W. Kadden and Erin R. Rosenberg Lugenbuhl, Wheaton, Peck, Rankin & Hubbard

New Orleans, Louisiana

Pop Quiz!

Facts: You represent a vendor who is owed money for goods and services provided to an operator at a well site located on the Outer Continental Shelf off of the coast of Louisiana, but the operator just filed for bankruptcy.

Pop QuizQUESTION: What should Vendor do to best increase its chance of recovery in the bankruptcy?

MULTIPLE CHOICE :(A) File a proof of claim for the amount owed.(B) File a notice of lien in order to perfect statutory lien

rights under the Louisiana Oil Well Lien Act (“LOWLA”)(C) File a notice of perfection of interests under section 546

of Title 11 of the United States Code (the “Bankruptcy Code”)

(D) All of the above

Answer: (D) All of the Above

• As will be discussed in greater detail, the LOWLA provides significant tools for vendors that provide services, materials or equipment in connection with the drilling, development, operation and abandonment of oil and gas properties located in the State of Louisiana and in federal waters adjacent to the State of Louisiana. These rights (and the associated requirements to perfect such rights) are not lost simply because the company files for bankruptcy.

• Note: Section 362(b)(3) specifically provides that the automatic stay imposed by section 362 of the bankruptcy code does stay any act necessary to perfect, or to maintain or continue the perfection of, an interest in property of the estate.

OverviewPart One: What is LOWLA?

Part Two: How Does it Work?

Part Three: Intersection of LOWLA and Bankruptcy

Part Four: Test Time

Part Five: Appendix

01THING #2

What is LOWLA?

• Louisiana Oil Well Lien Act, La. R.S. § 9:4861 et seq.

• Grants those who provide goods and services to a well site a lien and privilege securing the costs of their work

• Analogous to the Texas mineral lien law, Tex. Prop. Code Ann. § 56.001 et seq.

What is LOWLA?

02THING #2

How does it work?

How does it work?Timeline for Perfecting and Enforcing LOWLA Lien• Statement of Privilege: 180 days from last date

services/goods provided to file Statement of Privilege in Parish where well site is located

• Operator Notice: 180 days from last date of services/goods provided to give notice of privilege to the operator of the subject well site

• Filing suit: 1 year from filing Statement of Privilege to file suit to recognize and enforce LOWLA lien

• Notice of Lis Pendens: 30 days after filing suit to file Notice of Lis Pendens

• May give notice to any purchasers of the hydrocarbons from the subject well site, demanding that the purchaser withhold payment of proceeds to the operator of the subject well site. All other deadlines are mandatory.

How does it work?What amounts does a LOWLA lien secure?• Costs of contract or goods/services provided;

• Interest due on underlying obligation;• Cost of preparing and filing necessary documents; and

NOTE: Necessary documents include the statement of privilege, operator letter, notice of lis pendens, etc.

• Reasonable attorneys’ fees not to exceed 10% of principal NOTE: In a bankruptcy case, claimant may be limited

in its ability to recover attorneys’ fees incurred post-petition.

La. R.S. § 9:4862(B)

La. R.S. § 9:4863(A)

How does it work?What is subject to the LOWLA Lien?

• Operating interests in the well site; and• Interest of lessee(s) in the following:

Well, building, tank, leasehold pipeline, other construction or facility on the well site;

Movables delivered to a well site that are used in operations; Leased properties/servitudes; Drilling or other rig located on well site, if owned by operator or

contractor; Interest of the operator and participating lessees in hydrocarbons

produced from the well site and the interest of non-participating lessee in hydrocarbons produced from that part of his operating interest subject to the privilege; and

Proceeds received by or owed to operating interest holders from purchaser.

La. R.S. § 9:4864(A)

How does it work?When is it established?

La. R.S. § 9:4864(B)

How does it work?When is it extinguished?

• Upon extinction of the obligation it secures;

• By written consent of the claimant; or

• Failure to comply with notice requirements or act within certain prescriptive/limitations periods.

How does it work?

La. R.S. § 9:4870

Ranking of LOWLA Liens • All LOWLA liens are of equal rank

o except that a contractor’s LOWLA lien is subordinate to any party with whom the contractor is contractually bound (i.e., subcontractor)

• Established (perfected) LOWLA privileges outrank all other privileges, security interests or mortgages, except:Tax liens;Pre-existing mortgages or vendors’ privileges;Pre-existing perfected security interests; and Lien by LA Dep’t of Natural Resources.

How does it work?

See Appendix for additional information on how LOWLA works …

03THING #3

Intersection of LOWLA and Bankruptcy

Effect of Operator’s Bankruptcy on LOWLA LienIf claimant filed its Statement of Privilege prior to bankruptcy:

• A claimant may file a Notice of Perfection in the bankruptcy case pursuant to section 546(b) of the Bankruptcy Code;

• A claimant may act as a secured creditor of the bankrupt to the extent of the value of encumbered property, less any pre-existing security interests;

• A claimant may act as an unsecured creditor for the remaining portion of its claim;

• A claimant may not institute any litigation to enforce the LOWLA privilege without first seeking to modify the automatic stay with the bankruptcy court.

Intersection of LOWLA and Bank-ruptcy

Intersection of LOWLA and Bank-ruptcy

If claimant has not filed its Statement of Privilege prior to bankruptcy:

• May still file Statement of Privilege within the pertinent time period and may send notice of the lien to the Operator (see 11 U.S.C. § 362(b)(3));

• May file a Notice of Perfection in the bankruptcy case pursuant to 11 U.S.C. § 546(b);

• May act as a secured creditor of the bankrupt to the extent of the value of encumbered property, less any pre-existing security interests.

• May act as an unsecured creditor for the remaining portion of claim;

• May not institute any litigation to enforce the LOWLA lien without first seeking to modify the automatic stay with the bankruptcy court.

Effect of Operator’s Bankruptcy on LOWLA Lien (con-tinued)

Intersection of LOWLA and Bank-ruptcy

• Post-Petition Attorneys’ Fees + Interest (are you over-secured?)

• Cash Collateral; Entitlement to Adequate Protection/ Replacement Lien and Preservation of Lien Priority and Validity

• Plan Confirmation• Suit Against Non-Bankrupt Working Interest Owners• Lien Priority + the Importance of “Relation Back”

Other Oil Well Lien and Bankruptcy Issues for Dis-cussion

04THING #4

Test Time!I hope you were paying attention . . .

Question #1FACTS: An E&P company (the “Debtor”) with a long-standing operational history files for bankruptcy in November 2016. Your client (“Vendor”) has been working continuously for the Debtor on the same oil and gas property beginning in January 2011. In August 2012, the Debtor incurred secured debt from a lender (the “Secured Lender”) in the principal amount of $100 mm. As of the filing of the bankruptcy case, the oil and gas property to which Vendor provided services and materials is valued at $70 mm. Vendor is currently owed $17k on account of services and materials provided to the Debtor’s property prior to the bankruptcy filing.

Question #1QUESTION: How will Vendor’s claim be treated in the bankruptcy?

MULTIPLE CHOICE :(A) Unsecured(B) Secured (C)Who cares?

Answer: (B) Secured• Because the inception date of Vendor’s statutory lien is prior to the date

on which granting of a lien in favor of Secured Lender and the value of the subject asset exceeds the amount of Vendor’s claim, such claim will be treated as a secured claim.

• Important Note: When considering the ranking of a lien under LOWLA vis-à-vis a lien or security interest granted in favor of a lender or other third party, it is critical to remember that the inception date of a LOWLA lien relates back to the first date of service (subject to the provision of continuing services/materials) regardless of whether the claimant was paid for a portion of the services. This can be important when a Debtor has been working with vendors consistently for a number of years and incurs secured debt during those same years, as such vendors may actually have a LOWLA lien that primes the secured debt notwithstanding that the claim relates to services and materials provided after the inception date of the secured debt.

Question #2FACTS: An E&P company (the “Debtor”) with a long-standing operational history files for bankruptcy in November 2016. Your client (“Vendor”) has been working continuously for the Debtor on the same oil and gas property beginning in October 2015. In August 2012, the Debtor incurred secured debt from a lender (the “Secured Lender”) in the principal amount of $100 mm. As of the filing of the bankruptcy case, the oil and gas property to which Vendor provided services and materials is valued at $70 mm. Vendor is currently owed $17k on account of services and materials provided to the Debtor’s property prior to the bankruptcy filing.

Question #2QUESTION: How will Vendor’s claim be treated in the bankruptcy?

MULTIPLE CHOICE :(A) Unsecured(B) Secured (C) I’m ready for happy hour.

Answer: (A) Unsecured

Because the inception date of Vendor’s statutory lien is subsequent to the date on which the Debtor granted a lien in favor of Secured Lender and the value of the subject asset is less than the amount of Secured Lender’s claim, such claim will be treated as a unsecured claim.

Question #3FACTS: An E&P company (the “Debtor”) with a long-standing operational history files for bankruptcy in November 2016. Your client (“Vendor”) has been working continuously for the Debtor on the same oil and gas property beginning in October 2015. In August 2012, the Debtor incurred secured debt from a lender (the “Secured Lender”) in the principal amount of $100 mm. As of the filing of the bankruptcy case, the oil and gas property to which Vendor provided services and materials is valued at $150 mm. Vendor is currently owed $17k on account of services and materials provided to the Debtor’s property prior to the bankruptcy filing.

Question #3QUESTION: How will Vendor’s claim be treated in the bankruptcy?

MULTIPLE CHOICE :(A) Unsecured(B) Secured (C)Please tell me this is the last question.

Answer: (B) Secured

Notwithstanding the fact that the inception date of Vendor’s statutory lien is subsequent to the date on which the Debtor granted a lien in favor of Secured Lender, the value of the subject asset exceeds the cumulative amount of the Secured Lender’s claim and Vendor’s claim. Therefore, Vendor’s claim will be treated as a secured claim.

Question #4After your client (“Vendor”) provides services to a well site located in Louisiana but prior to receiving payment, Vendor’s E&P customer files for bankruptcy. Given the filing of the bankruptcy, Vendor is precluded from perfecting its statutory lien by the automatic stay.

MULTIPLE CHOICE :(A) True(B) False

Answer: (B) False

The filing of a bankruptcy case and the imposition of the automatic stay does not preclude a non-debtor from taking an action necessary to perfect, or continue or maintain the perfection of, a statutory privilege, which would include the filing of a lien statement. 11 U.S.C. §§ 362(b)(3) and 546.

Question #5After your client (“Vendor”) provides services to a well site, the operator files for bankruptcy. Thereafter, you assist your client in perfect its LOWLA lien through the filing of a Statement of Privilege and Notice of Perfection under 11 U.S.C. § 546. Assuming Vendor has taken the steps required to perfect its LOWLA lien and timely files a proof of claim, no further action is required to protect the validity, rank and priority of Vendor’s lien and privilege.

MULTIPLE CHOICE :(A) True(B) False

ANSWER: (B) False• May need to file objection to Cash Collateral/DIP

Order

• Entitled to adequate protection/replacement lien to account for diminution in value (see Sample Language on following slide)

• Request cash collateral weekly reporting and other notices provided to lenders and official committees

Sample Language“Preservation of Prepetition Priorities. Nothing in this Order is intended to change or otherwise modify the prepetition priorities among secured creditors of the Debtors, including (i) any operators’ or non-operators’ lien or recoupment rights to the extent their liens or rights are valid, enforceable, non-avoidable and perfected, and (ii) any claims of the lienholders or any other mechanic or materialmen or mineral state lien claimants to the extent their liens are valid, enforceable, non-avoidable and perfected, and nothing in this Order, including the granting of adequate protection liens, shall be deemed to have changed or modified such prepetition priorities, all of which are hereby expressly preserved.”

“Lienholders. Notwithstanding anything to the contrary in this Order, to the extent that any lienholder has a valid prepetition lien on any collateral, such interest shall be entitled to adequate protection, to secure payment of an amount equal to the diminution in value of such lienholder’s interest in such collateral, as follows: (i) postpetition replacement liens against such collateral (and the proceeds thereof) on which such lienholder holds a valid prepetition lien; (ii) super-priority adequate protection claims against the Debtor, including, without limitation, the proceeds of property recovered in respect of any avoidance actions; and (iii) reasonable professional fees, expenses, and disbursements to the extent allowed under § 506(b) of the Bankruptcy Code.”

See Final Cash Collateral Order in In re Energy XXI Ltd., Case No. 16-31928 (Bankr. S. D. Tex. May 19, 2016) [Doc. 319, ¶¶ 33-34]

Conclusion• Have clients stay on top of their claims and keep you informed of potential financial instability

• Need to act quickly on first-day motions and monitor developments throughout bankruptcy case to avoid prejudice to rights

• Monitor and comply with all statutory deadlines and filing requirements

Biographies

A Shareholder with Lugenbuhl, Wheaton, Peck, Rankin & Hubbard in New Orleans, Benjamin Kadden focuses on several practice areas including bankruptcy, restructuring, and creditors’ rights; corporate and commercial law, mergers and acquisitions; litigation; and asset-based finance. After graduating from Louisiana State University in 2002, Benjamin earned his law degree from Tulane University Law School in 2005. During law school, he served as a judicial clerk for the Honorable Magistrate Judge Alma Chasez, United States District Court for the Eastern District of Louisiana (2004-2005), and as a volunteer clerk for the Honorable Judge Sarah Vance, United States District Court for the Eastern District of Louisiana (2003).

Some of the Chapter 11 proceedings where Benjamin acted as debtor’s counsel include Gulf Fleet Holdings, Inc., East Cameron Partners, L.P., and Bender Shipbuilding & Repair Co. He has also served as counsel for various official committees of unsecured creditors, including acting as lead counsel in the Chapter 11 cases of Saratoga Resources, Inc., A&B Valve and Piping Systems, L.L.C., Graham Gulf, Inc., and Virgin Oil Company, Inc., and as special counsel to the Official Committee of Unsecured Creditors in the Trico Marine bankruptcy.

Benjamin has also actively participated in a number of merger and acquisition transactions pertaining to numerous businesses based in the Gulf Coast, with a focus upon representation of non-public buyers and sellers in equity and asset sales. Because of his experience in complex Chapter 11 bankruptcy cases, Benjamin has direct experience and knowledge regarding the purchase or sale of assets by distressed companies, including navigating the process while a buyer or seller is in bankruptcy.

In addition to his private practice, Benjamin regularly provides pro bono services for the Propeller Network, which efforts were recognized by the Louisiana State Bar Association in 2015 by his receipt of the Pro Bono Publico Award.  He has also been a member of the Intersession Faculty for Tulane Law School’s annual Civil Litigation Boot Camp since the program’s inception in 2012. Other awards include an AV Preeminent Rating by Martindale-Hubbell, and was recognized as a Super Lawyers Rising Star (2014-2016) and Top Lawyer by New Orleans Magazine in Insolvency and Reorganization Law (2014-2016).

Benjamin W. Kadden Lugenbuhl. Wheaton, Peck, Rankin & Hubbard

601 Poydras Street, Suite 2775New Orleans, LA 70130 Phone: (504) 568-1990bkadden@lawla.com

Biographies

Erin Rosenberg is an Associate in Lugenbuhl’s New Orleans Office. Her practice focuses on commercial litigation, appeals, and bankruptcy.

Prior to joining the firm, she served as a Staff Counsel for the United States Court of Appeals for the Fourth Circuit and as Law Clerk to the Honorable Martin L.C. Feldman of the United States District Court for the Eastern District of Louisiana.  She earned her B.A. from the University of Miami, where she graduated summa cum laude and was a member of Phi Beta Kappa. She earned her J.D. from Tulane University Law School, where she served as a member of the Tulane Law Review, graduated magna cum laude, and was elected to the Order of the Coif. Since joining the firm, she has worked on a variety of matters including various Chapter 11 cases representing debtors, creditors, and unsecured creditors committees, including Saratoga Resources, Inc., A&B Valve and Piping Systems, L.L.C., and Whistler Energy II, L.L.C. She also routinely represents creditors in enforcing their rights under LOWLA.

In addition to her private practice, she also serves on the Orleans Public Defenders’ Conflicts Panel, providing representation to indigent criminal defendants in New Orleans. She is admitted to practice before the Supreme Court of Louisiana, the U.S. Fifth Circuit, U.S. Fourth Circuit, U.S. District Court for the Eastern District of Louisiana, and the U.S. District Court for the Western District of Louisiana.

Erin R. RosenbergLugenbuhl. Wheaton, Peck, Rankin & Hubbard

601 Poydras Street, Suite 2775New Orleans, LA 70130 Phone: (504) 568-1990erosenberg@lawla.com

05THING #4

AppendixAdditional information on how LOWLA

works

How does it work?Who gets a LOWLA lien?

La. R.S. § 9:4862(A)

La. R.S. § 9:4863

How does it work?What is NOT subject to the LOWLA Lien?

• Movables temporarily on well site for repair, testing, etc.• “The privilege that results from operations on a voluntary or compulsory unit

affects only that part of a non-participating lessee's interest in the operating interest located within the boundaries of the unit and only insofar as the unit covers and affects the unitized zone or formation. The privilege affects only the interest of the non-participating lessee in the other property described in Subsection (A)(1) and (2) of this Section that is used in the operations of the unit well.” La. R.S. § 9:4863(B).

• Hydrocarbons produced from operating interest owned by lessor, sublessor, ORRI owner, or other non-lessee, as well as any proceeds derived therefrom

• Rigs, machinery, appliances, equipment, etc. used for P&A work on wells or closing associated pits

• Casing, tubing, pipe and other tubular goods recovered from the drill hole as a result of P&A work

La. R.S. § 9:4865

How does it work?When does it cease to have effect against third

parties?• Failure to Perfect by Recordation: LOWLA privilege ceases to have effect as to 3rd persons 180 days after the last date of service unless:

All Property Subject to Privilege Except a Rig: Claimant files a Statement of Privilege in the mortgage records of the Parish where the well site is located.

If the Property is a Rig: Claimant files a UCC financing statement.• Failure to Timely Enforce: LOWLA privilege also ceases to have

effect as to 3rd persons if claimant doesn’t file suit to enforce privilege within 1 year of filing privilege.

• Failure to Timely File Notice of Lis Pendens: LOWLA privilege also ceases to have effect as to 3rd persons if claimant fails to file a Notice of Lis Pendens in the mortgage records of the Parish in which the Statement of Privilege was filed within 30 days of claimant instituting litigation to enforce the privilege.

La. R.S. § 9:4866

How does it work?Special Rule for Certain Moveable Property

Additionally, a LOWLA lien over movable property (other than hydrocarbons, related proceeds and rigs) is extinguished when the moveable is transferred by onerous transaction to a good faith third party and removed from the well site.

La. R.S. § 9:4868(B)(2), (C)-(D)

How does it work?Delivery of Notice to Operator

• Notice is properly delivered if it is delivered to the operator designated on the Statement of Privilege.

• “Delivery” takes place: Upon mailing, but only if mailed by certified or registered mail, return

receipt requested; Upon receipt by addressee or at office of addressee if not mailed by

certified or registered mail.• Return receipt indicating delivery or proof of mailing by USPS will be prima

facie proof of mailing the requisite notice.

La. R.S. § 9:4868(A), (B)(1), E

How does it work?Form and Substance of Statement of Privilege • Form

In writing; and Signed by or on behalf of the claimant.

• Substance Claimant’s name and address; Amount and nature of underlying obligation; Name and address of obligated person; Name and address of operator as designated by Louisiana Department of Natural

Resources (Louisiana State Lease) or Bureau of Ocean Energy Management (Outer Continental Shelf Lease);

Description of operating interest over which privilege is claimed or the pertinent well site.o A well site description is adequate if it includes:

The name and serial or other identification number; The name of the field where it is located.

• Exception to Substance Requirements: A statement of privilege is not invalid, in spite of missing certain of the information set forth above, so long as it “fairly apprises the recipient or person against whom the privilege is asserted of the privilege claimed and of the operating interest, hydrocarbons, or other property upon which the privilege is claimed.” La. R.S. § 9:4868(E).

How does it work?Importance of Proper Invoicing Procedures

• Invoices should include a specific designation of the well site (well, lease, field, parish) to which the vendor provided services and/or materials

• By including this information directly on the invoice, a vendor can more easily establish the precise well site over which its LOWLA lien applies both for purposes of preparing and filing its Statement of Privilege and also for enforcing the privilege in subsequent litigation

La. R.S. § 9:4869(A)(1)(b), (B)

How does it work?Effect of LOWLA Lien on Third Party Purchasers of Hydro-

carbons• Once a claimant delivers notice to a purchaser of a LOWLA lien, the claimant may enforce the lien against either the hydrocarbons in the purchaser’s possession or any amounts owed for their price.

• A purchaser that has received notice of a lien may retain any proceeds without liability to the claimant or the operator until:o Claimant directs purchaser in writing of extinguishment of

lien;o Operator instructs purchaser to pay amounts to claimant;o Claimant AND Operator instruct purchaser to deliver the

amounts to some agreed-upon third party; oro Purchaser receives instructions by a court of competent

jurisdiction.

La. R.S. § 9:4869(A)

How does it work?When LOWLA Lien on Hydrocarbons and Proceeds is Extin-

guished• If hydrocarbons are sold or transferred in a bona fide

onerous transaction to a third party before such party is notified of the asserted privilege;

• Hydrocarbons are commingled with, processed with, or transformed into other hydrocarbons or substances that are not subject to the asserted privilege; or

• Proceeds are commingled with other funds that are not subject to the asserted privilege.

How does it work?

La. R.S. § 9:4871

Enforcement by Writ of SequestrationA claimant may enforce a LOWLA privilege by seeking the issuance of a writ of sequestration during the pendency of any enforcement action, without the necessity of furnishing security.

La. R.S. § 9:4872

How does it work?Cancellation of Statement of Privilege or Notice of Lis Pen-

dens

Any interested person may seek the cancellation of a statement of privilege or a notice of lis pendens by filing a bond with the recorder of mortgages in an amount representing at least 125% of the face amount of the lien.