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Fifth Circuit Upholds Claims of Contractors Against a Bankrupt Texas Oil Field Services Company

The United States Fifth Circuit Court of Appeals recently published their decision in  Holt Texas, Limited and Transamerican Underground, Limited v. Stephen J. Zayler, a case which concerned a bankrupt oil and gas company. Holt Texas, Ltd. (“Holt”) and Transamerica Underground Limited (“TAUG”) who were subcontractors of the now bankrupt T.S.C. Seiber (“Seiber”) appealed the District Court’s judgment which in turn affirmed a Bankruptcy Court order. The District Court held that funds of an interpleader action filed by Encana Corporation (“EnCana”) were not property of Encana but property of the bankrupt company Seiber. On appeal, Holt and TAUG challenged the District and Bankruptcy Courts’ conclusions that first, the Texas Construction Trust Funds Act (“CTFA”) did not apply to these funds, and secondly, that Appellants did not have valid, perfected mineral liens on these funds under Chapter 56 of the Texas Property Code. The Fifth Circuit Court of Appeals vacated the District Court’s judgment and remand for further proceedings.

Background: In 2008 Encana engaged Seiber to build a natural gas pipeline in Robertson County, Texas. Holt and TAUG were the subcontractors; Holt provided heavy machinery and TAUG installed over two thousand feet of pipe. The agreement between Encana’s and Seiber specified that if a subcontractor was not paid by Seiber, Encana would be able to withhold all remaining sums and make no further payment to Seiber. In August 2009 TAUG notified Encana that it had not been paid recently, and would seek payment of the $96,3000 that TAUG claimed it was owed. In September 2009 Encana filed an interpleader in federal district court, paid $345,000.00 into that court’s registry and sought a declaration shielding it from any further liability for the unpaid amounts owed by Seiber. In October 2009 Seiber filed a voluntary petition for bankruptcy relief under Chapter 11 of the Bankruptcy Code, which was quickly converted to a Chapter 7 petition. TAUG then filed an Affidavit Claiming Mineral Lien against Encana’s property in November 2009. Holt filed its Affidavit Claiming Mineral Lien in March 2010. Encana was discharged from the interpleader in April 2012 and a discharge order was entered. The remaining parties filed competing motions for summary judgment: Holt and TAUG argued that two sets of Texas statutes (the Construction Trust Funds Act and the Texas mechanics lien statutes) that are intended to protect subcontractors require that the interpleader funds be awarded to them. The Bankruptcy Court held that neither law applied and that the interpleader funds were part of the bankruptcy estate of Seiber. Holt and TAUG appealed to the District Court, which affirmed the ruling of the Bankruptcy Court. Holt and TAUG then appealed to the Fifth Circuit.

Arguments: The Fifth Circuit discussed whether the interpled funds were property of the bankruptcy estate of Seiber or not. The opinion discussed that this question turns on who had legal possession of the funds after deposit into the registry of the court but before any action was taken by the court as to those funds. Chapter 56 of the Texas Property Code provides mineral subcontractors with a statutory lien “to secure payment for labor or services related to the mineral activities.” Tex. Prop. Code. §56.002. Chapter 162 of the Texas Property Code states that “Construction payments are trust funds under this chapter of the payments are made to a contractor or subcontractor … under a construction contract for the improvement of specific real property in this state.” Tex. Prop. Code §162.001(a). Section 162 protects subcontractors without requiring notice or other action by the subcontractor, such as sending a notice or filing an affidavit.

Zayler, the Appellee (presumably Seiber’s bankruptcy trustee), argued that: 1) Encana’s deposit into the federal district court’s registry automatically extinguished its liability to Seiber, and therefore the funds then belonged to Seiber and are part of its bankruptcy estate; and 2) by depositing the funds into the registry of the federal district court, the statutory liens of Holt and TAUG were extinguished and could no longer attach to either the funds or any other property of Encana. However, Holt and TAUG argued that the District and Bankruptcy Courts erred in finding the CTFA inapplicable to this situation. They asserted that they properly perfected their liens under Texas law against Encana’s property, and that those liens extended to the interpled funds.

Decision: The Fifth Circuit held that the District and Bankruptcy Courts correctly determined that under Texas law the liability of a mineral property owner is limited to the “total amount agreed to be paid in the contract” and cannot exceed “the amount that the owner owed the original contractor when the notice [of nonpayment to subcontractors] is received.” However, the Fifth Circuit held that TAUG held a valid mineral lien against Encana’s property at the time Encana was discharged from further liability to Seiber. As to Holt’s claim, the Fifth Circuit held that the District and Bankruptcy Courts erred in failing to draw a distinction between the act of depositing funds into the state court’s registry and the judicial act of discharging the depositor of any further liability. The act of Encana depositing funds does not mean the funds have been legally accepted or that ownership of the funds has been transferred. Therefore, the Fifth Circuit determined that the deposit of funds by Encana into the registry of the federal district court did not extinguish the liens held by Holt and TAUG on the interpled funds.

The depressed price of oil these days has created  tremendous pressure on oil companies large and small. There are many oil companies and oil field service companies that are going out of business. As a result, this decision will be important to oil field contractors who find themselves unpaid and are trying to recover what is owed them.


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