What One Court Giveth, Another Court Taketh Away: Recent Decisions Relating To The Breadth Of Protections Afforded To Claimants Under The Louisiana Oil Well Lien Act, 2019

What is LOWLA?; How does LOWLA work?; and Recent Decisions, March 2019.

1. WHAT ONE COURT GIVETH, ANOTHER COURT TAKETH AWAY: RECENT DECISIONS RELATING TO THE BREADTH OF PROTECTIONS AFFORDED TO CLAIMANTS UNDER THE LOUISIANA OIL WELL LIEN ACT Presented by: Benjamin Kadden Lugenbuhl, Wheaton, Peck, Rankin & Hubbard 66 th Annual Mineral Law Institute Baton Rouge, Louisiana, March 14-15, 2019 Materials prepared by: Benjamin W. Kadden and Meredith S. Grabill Lugenbuhl, Wheaton, Peck, Rankin & Hubbard New Orleans, Louisiana

2. Overview Part One: What is LOWLA? Part Two: How Does LOWLA Work? Part Three: Recent Decision Expanding Protection Afforded to LOWLA Claimants Part Four: Recent Decision Expanding Protection Afforded to LOWLA Claimants

3. 01 THING #2 What is LOWLA?

4. Louisiana Oil Well Lien Act, La. R.S. § 9:4861 et seq. Grants a lien and privilege to certain parties to secure the cost of providing goods and services to a well site Analogous to the Texas mineral lien law, Tex. Prop. Code Ann. § 56.001 et seq. What is LOWLA?

5. 02 THING #2 How does LOWLA work?

6. How does LOWLA work? Who gets a LOWLA lien? La. R.S. § 9:4862(A)

7. How does LOWLA 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 .

8. How does LOWLA work? What amounts does a LOWLA lien secure? The price of a contract for operations at a well site (see discussion re: McMoRan Oil & Gas, LLC v. Coastal Drilling Company, LLC ) ; 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)

9. La. R.S. § 9:4863(A) How does LOWLA 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.

10. La. R.S. § 9:4863 How does LOWLA 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

11. La. R.S. § 9:4864(A) How does LOWLA work? When is it established?

12. La. R.S. § 9:4864(B) How does LOWLA work? When is it extinguished? Upon extinction of the obligation it secures; By written consent of the claimant; or As otherwise provided in the LOWLA, including, but not limited to, failure to comply with strict recordation and notice requirements or otherwise act within certain prescriptive and/or limitations periods.

13. La. R.S. § 9:4865 How does LOWLA work? When does it cease to have effect against third parties? Failure to Perfect by Recordation: LOWLA privilege ceases to have effect as to 3 rd 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 3 rd 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 3 rd 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.

14. La. R.S. § 9:4866 How does LOWLA work? Special Rule for Extinguishment of LOWLA Privilege on Certain Moveable Property 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.

15. La. R.S. § 9:4868(A), (B)(1), (E) How does LOWLA 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 designated operator; Description of subject operating interest or well site. 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 : 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).

16. La. R.S. § 9:4868(A), (B)(1), (E) How does LOWLA work? Example of Statement of Privilege The following is the actual Statement of Privilege filed by Coastal Drilling Company, LLC in St. Martin Parish, which was the subject of the matter discussed in greater detail hereinbelow:

17. La. R.S. § 9:4869(A) How does LOWLA work? Extinguishment of LOWLA Lien on Hydrocarbons and Proceeds 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.

18. La. R.S. § 9:4868(B)(2), (C)-(D) How does LOWLA 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.

19. La. R.S. § 9:4869(A)(1)(b), (B) How does LOWLA work? Effect of LOWLA on Third Party Purchasers of Hydrocarbons 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: Claimant directs purchaser in writing of extinguishment of lien; Operator instructs purchaser to pay amounts to claimant; Claimant AND Operator instruct purchaser to deliver the amounts to some agreed-upon third party; or Purchaser receives instructions by a court of competent jurisdiction.

20. How does LOWLA work? La. R.S. § 9:4870 Ranking of LOWLA Liens All LOWLA liens are of equal rank Exception: 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.

21. How does LOWLA work? La. R.S. § 9:4871 Enforcement by Writ of Sequestration A 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 .

22. La. R.S. § 9:4872 How does LOWLA work? Cancellation of Statement of Privilege or Notice of Lis Pendens 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.

23. How does LOWLA 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.

24. Effect of Operator’s Bankruptcy on LOWLA Lien If 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 Bankruptcy

25. Intersection of LOWLA and Bankruptcy 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 (continued)

26. Intersection of LOWLA and Bankruptcy 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 Discussion

27. 3 Recent Decision Expanding the Protection Afforded to LOWLA Claimants

28. LOWLA Privilege Secures the Entire Price of a Contract for Operations McMoRan Oil and Gas, LLC v. Patin : The 16 th Judicial District Court takes an Expansive View of “Operations” under LOWLA Drilling Contract with McMoRan Oil and Gas, LLC required services using Coastal Drilling Co., LLC - Rig 22 for completion of two wells. Per instructions from McMoRan, Coastal moved Rig 22 off the well site until the second well was ready to be drilled, but McMoRan cancelled contract. Coastal files a Statement of Privilege, claiming an amount to include “Early Termination” fee. McMoRan Files Petition for Writ of Mandamus to force removal of privilege. Court interprets “operations” under Act broadly to include (i) placing rig on stand-by and (ii) the Early Termination Fee as it was part of drilling contract.

29. 4 Recent Decision Limiting the Protections Afforded to LOWLA Claimants

30. Subsequent ORRI Purchaser Granted Third Party Purchaser Protections OHA Investment Corp. v. Schlumberger Tech. Corp. (In re ATP Oil & Gas Corp.) : The Fifth Circuit Applies Third-Party Safe-Harbor Protections to Purchasers of Overriding Royalty Interests Sold After Inception of a LOWLA Privilege The events leading up to litigation. Decisions from Bankruptcy and District Court. The Bankruptcy Court’s first report and recommendations. The Bankruptcy Court’s second report and recommendations. The District Court’s findings The Trade Creditors’ appeal and the Fifth Circuit’s Opinion. Potential for “Involuntary Trade Creditor Financing”: The Fifth Circuit’s Holding Has Frightening Real-World Implications For Trade Creditors.

31. Ben Kadden’s practice focuses upon Bankruptcy, Restructuring, & Creditors’ Rights, Corporate & Commercial Law, Mergers & Acquisitions, Commercial Litigation, and Asset-Based Finance.  Some of the Chapter 11 proceedings where he 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 Committee of Unsecured Creditors, including acting as lead counsel in the Chapter 11 case of Whistler Energy II, LLC, Midway Oilfield Constructors, Inc., Harvest Oil & Gas, LLC, 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. Ben is currently representing the Official Committee of Unsecured Creditors in another Chapter 11 case pending before Judge Isgur, In re Midway Oilfield Constructors, Inc. Ben has also represented numerous liquidating trusts arising out of confirmed plans of reorganization, including trusts formed in connection with confirmed plans in the bankruptcy cases of Whistler Energy II, LLC, Graham Gulf, Inc., Harvest Oil & Gas, LLC, Torch Offshore, Inc., Gulf Fleet Holdings, Inc ., and Virgin Oil Company, Inc. Ben has also actively participated in a number of merger & 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, Ben 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. Ben is a leader in New Orleans in the fields of corporate bankruptcy and commercial law, which is demonstrated by his Best Lawyers (2019) recognition, his Chambers USA ranking as an Up and Coming practitioner (2017-2019), a Super Lawyers' Rising Star (2014-2018), a Top Lawyer in New Orleans (2014-2018), and a recipient of an AV Preeminent rating by Martindale-Hubbell. He is admitted to practice and regularly practices in the following jurisdictions: Louisiana, Texas, U.S. Fifth Circuit, and all U.S. District Courts in Louisiana and Texas. Benjamin W. Kadden [email protected] Lugenbuhl. Wheaton, Peck, Rankin & Hubbard 601 Poydras Street, Suite 2775 New Orleans, LA 70130  Phone: [phone]