• Record all recordable interests
  • Record assignments and memorandum of contracts that effect real property as quickly as possible.This not only includes leases and deeds, but it also includes contracts related to real property such as operating agreements, exploration and development agreements or any agreement containing an area of mutual interest or similar provision.The more recent model form JOAs (1989 & 2015) contain language specifically developed to protect Operators from non-Operator bankruptcies and vice versa.To be effective, memoranda of these contracts must be recorded. Interests and contracts that are not recorded might be set aside in bankruptcy under the broad powers granted to debtors and trustees under the Bankruptcy Code.
  • Use your best efforts to ensure that the operator is paying field expenses, joint interest billings and the like as those come due. An operator’s failure to fully or timely pay contractors will likely give rise to contractors filing liens against all of the working interest in the property, including interest in the property owned by non-operating working interest owners.
• M&M Liens
  • Most services provided to a well site, pipeline, or pipeline right-of-way fall under the protections granted to contractors under the applicable state protections granted to so-called “mechanics” (contractors and other service providers). Statutory mechanics have broad rights to file so-called “mechanics liens” in most states. In addition, many oil and gas producing states have a separate, parallel scheme of statutory protections for contractors and other services providers to the oil and gas industry – these liens are often referred to as “mineral” liens .It is possible a contractor might have rights under both a mechanic’s lien and a mineral lien law.
  • Although many of these statutes are procedurally complex, if they are properly adhered to by the contractor and/or other service providers, these “M&M Liens” give the protected contractors extensive lien rights.An innocent non-operator could see its interest in a well or other property wiped out by the foreclosure of an M&M Lien holder. Non-operators are particularly vulnerable in this area, thus they must use all reasonable efforts to ensure that cash calls, etc. are actually paid to the contractors providing the services and not utilized by the operator for other purposes. Escrowing funds would be ideal but might not be practical in all circumstances. In any case, a non-operator should at least demand proof of payment from the operator in situations where the operator appears to be financially distressed.
• Monitor activities
  • Non-operators need to monitor operators and operators need to monitors contractors.
  • If a pre-bankruptcy filing claim is unsecured, parties stand to lose a significant monetary portion of such claims through the bankruptcy process (perhaps even a total loss).
  • If the operator pays a contractor but the contractor doesn’t pay a subcontractor and the contractor files for bankruptcy, the operator (and the non-operators) may have to effectively double-pay because the subcontractors could be protected by M&M Liens.

¹ This document relies primarily on a paper prepared by, John Melko, a partner in Foley’s Houston office, entitled “An ounce of protection is worth a bbl of cure” printed in the April 2008 edition of OIL & GAS FINANCIAL JOURNAL.

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