Texas Mineral Liens and Debt Collection: The Ins and Outs of Lien Enforcement and Debt Recovery
Oil prices have hit a 12-year low. As a result of this decline, industry cash flow is tight, and clients are seeking assistance in collecting unpaid invoices. Currently, the best remedy is to file a mineral lien.
A mineral lien is similar to a deed of trust on the property. It has the effect of pushing the owner into paying you for your labor or services before selling or refinancing the property.
Mineral liens are specifically for companies like oilfield service providers. It gives them an easier route to collect on their unpaid invoices and obtain a settlement for outstanding debts.
If you provide supplies or services in the oil field, you should at least have a basic understanding of Texas Mineral liens. It may help your company someday.
This article will guide you step-by-step on how to file a mineral lien in Texas.
Who is Eligible to File a Texas Mineral Lien?
A company that supplies furniture or sells computers, for example, would not qualify for a mineral lien. So who exactly qualifies to file a mineral lien in Texas? The answer is pretty simple.
Under the Texas Property Code, ‘’a mineral contractor or subcontractor can file a mineral lien to secure payment for labor or services related to the mineral activities.’’
To understand this more intimately, we need to break down each of these terms as defined by the statute and the courts.
A ‘’mineral contractor’’ is a person who performs labor or hauls material, supplies and machinery used in mineral activities. They are under a contract with the mineral property owner.
A ‘’mineral subcontractor’’ is a person who hauls materials, supplies and machinery used in mineral activities. They are under a contract with the mineral contractor.
‘’Mineral activities’’ refers to the digging, drilling, operating, torpedoing, repairing or maintaining gas, oil and water wells, gas or oil pipelines, or quarries and mines.
Parties that fall into any of the above categories can file a mineral lien in Texas.
What Property is Subject to a Mineral Lien?
This is where Texas mineral lien law can confuse folks
Don’t be intimidated, however. We have compiled a relatively straightforward breakdown of the properties subject to a mineral lien. The following is subject to a mineral lien:
- The material, supplies, and machinery hauled or furnished by the contractor
- The land, oil, gas or water well, oil or gas pipeline, and leasehold
- Any other material, supplies or machinery used for mineral activities and owned by the mineral property owner
- Other wells and pipelines used in tasks related to oil, gas, and minerals and located on the listed property
What Special Rights Do You Have Under a Mineral Lien?
Mineral liens give oilfield service companies special rights in collecting their debt. According to the law, they have a higher preference over other types of creditors. This is because the mineral lien date of preference dates back to the day work was first performed. As a result, the priority date pushes them ahead of other conventional creditors who achieve priority on a ‘’first come first serve basis.’’
For instance, if a company begins to provide services to an oil and gas operator, then later files a deed of trust with a specific bank, the service provider will have priority over the bank on the date when work first commenced.
Additionally, a mineral lien filed against a well is effective against every other well on the lease, as well as the entire unit with which the lease may be unitized. And as if that’s not enough, a mineral lien can also be filed post-bankruptcy without being seen as a violation of the automatic stay.
How Do You Acquire a Mineral Lien?
Acquiring a mineral lien is relatively stress-free; nonetheless, it is critical that you meticulously follow the laid-down procedures. Failure to do so will be damaging to the lien.
- Identify the Well and Chain of the Contract
Identifying the well is the first and most important step when filing a mineral lien. Perhaps, the best way to do this is to reference its API number. Without getting too technical, an API number is a unique, permanent numeric identifier assigned to each well in the United States. Accurately and sufficiently describing the property subject to the lien is of utmost importance.
The appropriate time to collect this information is before you begin a business. You can then record it in a job information sheet. Your client may give you nothing more than the well name and the state in which it is located. This requires you to probe for further information to determine a proper description of the lands and units subject to the lien. If you are a supplier, you should gather this information before shipping any material.
- Send the Requisite Notice
It is recommended that every client provides a notice of intention to file a lien as soon as a collection issue arises. Most operators usually start to pay attention after receiving this notice. This is because the notice acts as a strong incentive to cooperate and negotiate. In this case, it functions like a ‘’demand letter’’, pushing the debtor to the negotiating table.
The notice should identify the amount of debt, the name of the debtor and a description of the land and lease to which the materials or supplies were furnished.
However, under Texas Law, only mineral contractors are required to send a notice. If the potential lien holder is a mineral sub-contractor, then there is an additional need to notify the property owner before the lien is filed. This is because mineral sub-contractors are hired by the mineral contractor ad not the property owner.
- Identify the Lease, Legal Description of Land, and Working Interest Owners
It is important to remember that a Mineral Lien is not subject to the stringent requirements stipulated by the Statute of Frauds. For this reason, any information related to the lease/well and attached to the lien is sufficient for a property description. However, this information is not readily available.
Setting out to locate this information can be a time-consuming venture. Oftentimes, you may be forced to hire a landman to search for the necessary documents. These documents are important because they will then be used by the collection agency or attorney to examine the chain of title and identify the working interest owners. All this information is very crucial to the Lien Affidavit in your next step.
- File the Lien Affidavit
Now it’s time for the big show: filing your Texas mineral lien affidavit.
Filing a lien affidavit is a tricky task. It’s very common for companies to prepare their own lien affidavits and make mistakes. Overlooking seemingly minor technicalities can lead to your affidavit being rejected.
Under the Texas Property Code, a mineral lien affidavit must be filed with the county clerk of the area in which the property is found not later than 180 days after the day labor or materials were furnished.
If the potential lienholder is a mineral subcontractor, the affidavit of lien should be filed not later than the 10th day after the requisite notice is sent. Note: all mineral subcontractors are required to serve (by mail) a requisite notice at least ten days before they file an affidavit.
The Lien Affidavit Should Contain the Following:
- the name of the mineral property owner
- the name and the mailing address of the contractor
- dates of furnishing or supplying materials/services
- description of land, leasehold interest, pipeline and pipeline right of way involved
- a list of items and amounts claimed
For mineral sub-contractors, their affidavits should also have the following:
- The name of the person to whom labor or material was furnished or hauled
- A statement declaring that the sub-contractor timely served a written document to the property owner, his representative, agent or receiver
Word of Caution: Do not file an affidavit of lien in situations where deadlines have passed or in instances that prevent your client from qualifying for a lien. A lien affidavit is like a cloud on title-if you file one without merit- you expose yourself to a suit for slander of title. Seek competent legal advice from a qualified lawyer or professional debt collection services such as Melton and Norcross & Associates so that you don’t run the risk of losing your mineral lien due to petty errors.
- Send a Notice of the Affidavit of Lien
This is not mandatory under the Texas Property Law. However, it is advisable to always notify the involved parties after you file a lien. It gives them a final push to resolve the issue before a suit is filed. This is because once a suit is filed; all parties will incur extra costs. Many debtors realize this and avoid it by paying the debt before a suit is filed.
- File Suit
If you are otherwise unable to obtain a settlement, you should start enforcing your mineral lien. To do this, you will be required to file suit. The procedure for filing suit is generally the same as that provided for a mechanical lien or materialman’s lien.
When to File Suit: Suit to enforce lien must be filed within two years from the last day of filing the lien or within one year after completion, abandonment or termination of work, whichever comes after. If suit is not filed within this time, it is automatically disqualified.
Where to File Suit: The best place to file suit is in the county where the property is located.
Do you have a business client that is more than 90 days late paying you?
If YES, we can collect the money that is owed to you.
As a professional commercial debt collection agency located in Frisco, TX, Melton Norcross and Associates specializes in helping businesses collect past-due receivables.