Locke Lord QuickStudy: Louisiana State Mechanics’ Lien Law Trumps Parties’ Contract Terms

With U.S. oil and gas prices dipping low over the past year and a half, a large number of companies have declared bankruptcy. In the next year and a half, it is forecasted that more companies who are limping along, may seek protection from their creditors in bankruptcy. In this climate, creditors seek to understand the perils of competing liens and how to protect their security interests.

The focus of this Quick Study is a recent decision from the United States District Court for the Southern District of Texas that arose out of a Chapter 11 bankruptcy proceeding, Harvey Gulf International Marine, Inc. v. Bennu Oil & Gas, LLC, applying the Louisiana Oil Well Lien Act (“LOWLA”) to an oilfield service contract.

Background
In August 2012, ATP Oil & Gas Corporation (“ATP”) filed for bankruptcy. Harvey Gulf had contracted with ATP in 2009 to provide towing and transportation services in connection with certain federal oil and gas leases off the coast of Louisiana. There was an undisputed 352-day gap in Harvey Gulf’s services from April 2010 until April 2011. After April 2011, Harvey Gulf resumed work for ATP until just a few months before the bankruptcy.

Harvey Gulf claimed ATP failed to pay it approximately $2.9 million. To claim a priority lien, creditors like Harvey Gulf had to show that their prepetition work related back to a date that predated the “Senior Lien Deadline” of June 21, 2010. To reach that threshold Harvey Gulf relied on its contract with ATP.

Parties Cannot Contract Around the LOWLA
The central issue was whether parties can contract around the requirements of the LOWLA which governs whether parties have liens (or “privileges,” to use the parlance in Louisiana) that attach to oil and gas properties to secure contract obligations.

Harvey asserted that its lien claims all related back to the date of the contract in 2009, and not the court’s deadline for attachment and perfection of senior liens, June 21, 2010. Harvey relied upon language in the parties’ contract requiring all work provided by Harvey Gulf “shall not be deemed to be interrupted or ceased for lien purposes.”

Under LOWLA, a privilege is established when, inter alia, “[t]he claimant, who is a contractor, laborer, or employee begins rendering services at the well site.” La. Rev. Stat. § 9:4864(A)(1). However, a privilege may not relate back to an earlier date if there is an interruption or cessation in activity for “more than ninety consecutive days.” Id. at § 9:4864(C). The court concluded that Harvey Gulf’s one-year hiatus constituted a gap that exceeded LOWLA’s 90-day continuity requirement — cutting off Harvey Gulf’s lien claims for work occurring in the second phase of its work.

Applying a plain reading of the statute and Louisiana case law, the court rejected Harvey Gulf’s argument, holding that the parties “cannot modify LOWLA because these liens are ‘creatures of statute’ and Louisiana case law has held that lien statutes must be strictly construed.” The court concluded that “the benefits and limitations of a statutory lien must [] arise from the [Civil] Code and are not for the parties to modify.” The court declared the parties’ agreement unenforceable insofar as it seeks to modify LOWLA.

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