Mitigate Risk when Furnishing to Oil & Gas Industry
This week, we shared two interesting articles via social media. The first article discussed risk mitigation for those furnishing to the oil and gas industry and the second provided an example of calculating a mechanic’s lien deadline based on project completion.
First Up: Oil & Gas Bankruptcies Impact Construction Companies Too
I’m sure you are aware that times are tough for the oil & gas industry. According to BankruptcyData, over 500 companies in the oil & gas industry have filed for bankruptcy protection in the last 12 months. 204 of those entities had liabilities over $1 billion. (That’s $1,000,000,000 for those, like me, who struggle to comprehend money in billions.)
The article from Pepper Hamilton LLP, Coming Down the Pipeline: Mitigating the Payment Risk in Oil and Gas Construction Through Lien Claims, focuses on how contractors, subcontractors and suppliers can utilize the mechanic’s lien process to reduce their risk.
“Mechanics’ lien laws offer contractors, subcontractors and suppliers another avenue of recovery. With payment bonds often not secured, and the prospect of diminished returns in bankruptcy court, contractors, subcontractors and suppliers commonly turn to mechanics’ liens to secure their right to payment.”
While mechanic’s liens can be a great recovery option, we are reminded that in the gas/oil industry, these claims can be challenging.
“The nature of pipeline, however, poses a unique challenge for parties making mechanics’ lien claims. Mechanics’ lien laws in many jurisdictions are drafted to address traditional vertical construction on a single plot of land. Because pipelines snake through miles of public and private property on rights-of-way secured for the pipeline, mechanics’ lien laws in many jurisdictions are not equipped to address pipeline construction.”
Knowing that these projects often cover multiple parcels (sometimes across multiple states), how do you know whether you have rights and what does your security attach to?
“Mechanics’ lien laws are jurisdiction-specific and vary widely from state to state. What projects are covered, who is entitled to file a lien, the property interest the lien attaches to, and the process and requirements to perfect a lien depend on the jurisdiction in which the project is located. This is particularly true for pipeline projects. One of the fundamental distinctions between oil and gas development and vertical construction is the nature of the improvement and property interest to which the lien attaches. On most construction projects, the lien attaches to the project owner’s real estate. In oil and gas development, however, the project “owner” (i.e., the company constructing the well or pipeline) often has obtained a right-of-way on the property and is not the fee owner. The question of whether a pipeline constitutes a lienable improvement for purposes of the state’s mechanics’ lien law is unsettled in many jurisdictions.”
In other words, take the extra time to obtain as much project information as possible and seek guidance from an attorney local to the project.
Quick Glance: When is Project Completion?
Sometimes mechanic’s lien deadlines are calculated based on your last date of furnishing, but there are some states where the deadline is calculated based on the entire project’s completion. Completion has notoriously been a bit difficult to understand, despite the simple root word of “complete.”
In Construction Law: Picerne Construction Corp. v. Castellino Villas (Feb. 18, 2016, C071197), Sheppard Mullin Richter & Hampton LLP address a recent appeals case that addressed completion.
“[C]ompletion under the mechanics lien statute requires actual completion of the work of improvement, meaning completion of the entire structure or scheme of improvement as a whole, in Picerne Construction Corp. v. Castellino Villas (Feb. 18, 2016, C071197). * In doing so, the Court resolved an ambiguity developed through case law by acknowledging the abrogation of authority that permitted completion to be found where only “trivial imperfections” to the work of improvement remained.”
While the California case referenced above disallowed prior case law that interpreted the definition of completion to be “substantially complete,” it would remain wise to use the earliest date that may be construed as the completion date when calculating your lien deadline, and to confirm how each state in which you are working defines completion.
If your debtor has filed for bankruptcy protection, it is imperative for you to promptly and accurately file your proof of claim form. Take 3 minutes to review this week’s 3-in-3 on Bankruptcy Proof of Claim to learn more.
Upcoming Educational Opportunities
- 4/4/17 @ 1:00 pm: UCC Remedies Upon Debtor’s Default
- 4/18/17 @ 1:00 pm: Understanding Lien Waivers
- 5/2/17 @ 1:00 pm: UCCs Offer Security for Many Business Transactions
- 5/16/17 @ 1:00 pm: The Importance of Gathering Job Information
Conferences, Events & Tradeshows
- 4/11/17: FCFP Credit & Accounts Receivable Professional Retreat Day in Lafayette Hill, PA
- 4/12/17: CreditScape Spring Summit in Garden Grove, CA
- 6/11/17: NACM’s 121st Annual Credit Congress & Exposition in Grapevine, TX
NCS Spring Seminars
NCS Spring Seminars are set — make sure you join us!
Bookmark our Calendar of Events page for up to date listing of all educational opportunities.