Mineral Liens (Pt. 2)
This part 2 of the mineral liens paper discusses, under a particular set of assumed facts, the law and an operator’s recourse when a subcontractor files an unenforceable mineral lien on the operator’s. Part 1 of this paper discussed the interests and property that are subject to mineral liens and can be found at the following link: https://www.steedbarkerlaw.com/blog/mineral-liens-pt-1 .
For the sake of this discussion, assume the following facts:
Operator (“Operator”), who owns a working interest, contracts with a drilling company (“Contractor”) to drill a well;
Contractor, without direction from Operator, subcontracts with another company (“Subcontractor”) to help with the project;
Operator receives Contractor’s final invoice for the project and pays same in full and on time;
At some point after paying the Contractor’s invoice in full, Operator receives notice of a lien claim from Subcontractor stating that Contractor never paid Subcontractor; and
Ten (10) days after Contractor receives notice of the mineral lien claim, Subcontractor files the mineral lien, burdening operator’s lien hold.
The question is, what is Operator to do to rid itself of the mineral lien? Given that it seems obvious that Operator should not have to pay the same bill twice, one would think that the Texas Property Code (the “Code”) is clear about how an operator may resolve this issue. The Code, and in fact most commentary we have reviewed on this subject, does not provide a clear path forward for Operator. The Code offers the following:
An owner of land or a leasehold may not be subjected to liability under this chapter greater than the amount agreed to be paid in the contract for furnishing material or performing labor. Tex. Prop. Code § 56.006.
In other words, the Code states that in our case Operator should not have to pay more than what is called for in the contract with the Contractor, but it does not expressly prohibit a Subcontractor from filing the lien. Moreover, Section 56 of the Code does not address Operator’s recourse. This issue has been litigated in Texas, so we look to case law for more answers.
In Energy-Agri Products, Inc., v. Eisenman Chem. C., Inc. the Amarillo Court of Appeals addressed a foreclosure case filed by a subcontractor against a leasehold owner. 717 S.W.2d 651 (Tex. App. – Amarillo 1986, no writ). As in our assumed fact pattern, the leasehold owner paid its contractor in full before receiving subcontractor’s notice of the lien. Id. at 653. The court held that the subcontractor’s lien was subordinate to the terms of the contract between the leasehold owner and the contractor and, therefore, the leasehold owner could not be liable to the subcontractor for more than the amount leasehold owner owed to his contractor at the time leasehold owner was served with notice of the subcontractor’s claim. Id.
Thus, with respect to our fact pattern, the rule is that Operator is liable to Subcontractor only to the extent that Operator is liable to the Contractor. Id. Because Operator paid Contractor in full before receiving notice of Subcontractor’s lien, Operator’s “property is not subject to the lien.” Id.
We have established that Operator’s interest is not “subject to” Subcontractor’s lien, but what should Operator do to force Subcontractor to release the lien and potential cloud on Operator’s title? Under our assumed facts, we would contact Contractor and request a statement and admission that Operator has paid its invoice in full—the statement should reference the particular invoice, the date Operator paid it, and a statement that there are no other outstanding invoices owed or coming due. An Affidavit stating same is preferable to an email admission, but most contractors will be reluctant to execute an Affidavit.
Next, we would draft a demand letter to Subcontractor demanding the release of the lien. The letter would contain as an attachment any admission or Affidavit we acquired from Contractor. If we could not secure the admission or Affidavit, we would ask Operator to provide the invoice at issue, proof of payment (e.g. copy of check or proof of wire transfer), and an All Bills Paid Affidavit executed by Operator. All would be attached to the demand letter.
Operator is afforded two points of leverage in dealing with Subcontractor. First, Section 53.156 of the Code states that “in any proceeding to declare that any lien or claim is invalid or unenforceable in whole or in part, the court shall award costs and reasonable attorney’s fees as are equitable and just.” In our case, where Subcontractor has filed a mineral lien against an interest that is not “subject to” the lien, a court would be more likely to reward Operator with costs and attorney fees. As such, the demand letter to Subcontractor should state that Operator will file a motion to remove the lien claim pursuant to Section 53.160 of the Code, which outlines the procedures for a “minitrial” on the lien claim. The letter should also state that Operator will seek recovery of all costs and reasonable attorney fees pursuant to Section 53.156 of the Code.
Second, in rare circumstances, Operator may be able to pursue or at least threaten a claim against Subcontractor for slander of title. To recover in an action for slander of title, the complainant must allege and prove the following: (1) the uttering and publishing of disparaging words; (2) falsity; (3) malice; (4) special damages; (5) possession of an estate or interest in the property disparaged; and (6) the loss of a specific sale. See Williams v. Jennings, 755 S.W.2d 874, 879 (Tex. App.—Houston [14th Dist.] 1988, writ denied). Slander of title is a complicated tort and will not be discussed herein in any detail, but the most challenging elements of the cause with respect to mineral lien would typically be malice, special damages, and loss of a particular sale.
In the context of a slander of title action, the type of malice required is “legal malice”, which means “merely the act must have been deliberate conduct without reasonable cause.” Id. at 882. For example, Operator would not be able to prove legal malice if Subcontractor filed its lien because Subcontractor reasonably believed that Operator had not paid its bills to Contractor.
The special damages and loss of a specific sale elements go hand in hand in slander of title claims. Special damages are those that proximately, naturally, and reasonably result from the alleged slander. Id. at 884. In order to recover special damages, the plaintiff must prove the loss of a specific, pending sale that was defeated by the slander. Duncan Land & Exploration, Inc. v. Littlepage, 984 S.W.2d 318, 333 (Tex. App. – Fort Worth 1998, pet. denied). In our fact pattern, if Subcontractor’s lien prevented Operator from selling its interest to a buyer, then Operator could recover the amount it would have realized from the sale less the amount for which it could have sold the lease at the time of the trial with the cloud (i.e. mineral lien) removed. See Id.
To summarize, in rare cases Operator may be able to use the threat of a slander of title claim to encourage Subcontractor to release its lien, but because slander of title claims require legal malice, a loss of a particular sale, and special damages that resulted from the lost sale, valid slander of title claims based on unenforceable mineral liens are rare.
In our practice, subcontractors typically respond to the demand letter quickly and file the release of lien as requested. If the subcontractors do not release the lien in time or do not respond, the leasehold owner’s best option is to file the Affidavit of All Bills Paid in the relevant property records and then pursue an action seeking a judgment to remove the lien under Section 53.160 of the Code. The leasehold owner should prepare evidence that payment was made in full to the contractor before leasehold owner received notice of the lien. The leasehold owner should also be prepared to testify at the mini trial. Last, leasehold owner’s attorney should seek recovery of fees and costs pursuant to Section 53.156 of the Code.
DISCLAIMER: This paper was drafted for educational purposes only and was not intended to be, and shall not be construed as, legal advice. Should you have specific questions about this issue or any other oil and gas or real estate issues, please email me at wmadden@steedbarkerlaw.com.