The Fifth Circuit recently dealt with the interplay of bankruptcy and oil and gas liens in the case of In Re: T.S.C. Seiber Services, L.C., decided November 3, 2014.

The facts of this case are as follows: EnCana hired Seiber as the general contractor to oversee the construction of a 12” natural gas pipeline in Robertson County, Texas.  Seiber hired Holt to provide heavy machinery, parts and services; and Transamerican Underground was hired to install over two thousand feet of pipe.  The agreement between EnCana and Seiber said that EnCana would withhold all sums remaining if a subcontractor notified EnCana that it had not been paid by Seiber.  After construction commenced, Holt received two partial payments, but then Seiber stopped paying.  Holt notified EnCana that it was not being paid in August of 2009.  Seiber filed bankruptcy in October 2009.  Transamerican notified EnCana that it was not being paid shortly after the filing.

In September 2009, EnCana filed an interpleader, deposited the remaining funds owed to Seiber into the registry of the court, and served Seiber, Holt, and Transamerican (along with other unpaid subcontractors).  In April 2012, the bankruptcy court found that EnCana had tendered all required funds into the registry of the court and subsequently discharged EnCana from the action.

Transamerica filed its lien affidavit against EnCana’s property in November 2009.  Holt filed its lien affidavit in March 2010.

Holt and Transamerica claimed liens under Chapter 56 of the Texas Property Code (the Oil & Gas Lien Statute) and under Chapter 162 of the Texas Property Code (the Construction Trust Funds Act).  The bankruptcy court held that neither lien statute applied and that the interpleader funds belonged to the bankruptcy estate, not the subcontractors.  On appeal, the federal district court agreed with the bankruptcy court.  The matter was then appealed to the Fifth Circuit in order to determine whether the bankruptcy and district courts erred in holding that the disputed (interpled) funds were the property of the bankruptcy estate.

Under section 541 of the Bankruptcy Code, the bankruptcy estate consists of all “legal or equitable interests of the debtor in property as of the time of the bankruptcy.”  Accordingly, the Chapter 7 Trustee argued, the Bankruptcy Code provision trumped the lien claims as to the interpled funds existing at the time of the bankruptcy filing.

Deferring to Texas law, the Fifth Circuit noted that both statutes reflect an admonition of liberal construction to protect laborers and materialmen.  The Chapter 7 Trustee argued when EnCana deposited the funds into the court registry, the statutory liens of Holt and Transamerican were extinguished and could not attach to the deposited funds or to EnCana’s property. Even if the liens could prevail, they could not do so until the lien affidavits were filed which occurred well after the commencemnet of the bankruptcy filing.  Furthermore, the Chapter 7 Trustee also argued that the liens do not attach to cash in an interpleader account.  He also argued the Construction Trust Funds Act did not apply because the interpleader deposit was not a payment “made to a contractor or subcontractor….”  

The Chapter 7 Trustee argued that the amount owed by EnCana was fixed by the amount owed on the date of the lien affidavit, and since EnCana no longer owed anything on that date, the lien did not and could not have attached.  The Fifth Circuit stated that the critical time period was when notice was provided to EnCana (not when the lien affidavits were filed), holding further that it was the amount owed by EnCana on the notice date that establishes the amount due.  

The Chapter 7 Trustee had argued that the filing of the interpleader automatically satisfied the debt to Seiber so, again, EnCana did not owe anything so the claims could attach to nothing.  Rejecting this argument, the Fifth Circuit ruled that one must distinguish between the act of depositing funds into the court registry and discharging the depositor of any further liability. In doing so, the Court reasoned a court must approve of the amount deposited before a party can be deemed to have satisfied its liability under the statutes.

Turning to the problem whether lien claims attach to property and not to interpled funds, the Fifth Circuit sidestepped the issue by noting that, in this case the underlying bankruptcy court order transferred the mineral liens to the interplead funds. The court noted that this order had become final and nonappealable.

Lessons learned: subcontractors should closely monitor their projects and receivables and comply with all state notice and lien statutes.  Which will likely prove most effective, when notice is provided to all interested parties at the earliest possible date.  A subcontractor should be on guard if a contractor becomes “slow-paying” which often signals insolvency. If an owner attempts to pay what he owes the contractor by utilizing the mechanism of interpleader, it is possible under certain circumstances, for a contractor to lose both its money and its lien rights.  Finally, a subcontractor should closely monitor the status of interplead funds to make sure that if the base lien is released, its liens attach to those funds.