Oklahoma Supreme Court Addresses Sources of Revenue to Fund Trust Fund for Payment of Lienable Claims and Relative Priority of Mechanic's and Materialman's Liens vs. Liens Created by Oil and Gas Owners' Lien Act
The Oklahoma Supreme Court in White Star Petroleum v. MUFG Union Bank, 2020 OK 89, answered in the negative two questions certified from the United States Bankruptcy Court for the Western District of Oklahoma. The first question was "[w]hether funds held in trust pursuant to 42 O.S. § 144.2 for payment of lienable claims are limited to joint-interest billing payments received by operators for services rendered by the lienholders." The second question was "does the Oil and Gas Owners' Lien Act grant operators and non-operating working interest owners a lien in proceeds from the sale of oil and gas which is prior and superior to any claim of the holder of a mechanic's and materialmen's lien?"
White Star argued that the statutory trust created by 42 O.S. § 144.2 applied only to joint interest billing monies received by it as operator from non-operating working interest owners and could therefore be used only to satisfy obligations that the operator incurred with third-party vendors in the course of drilling and operating the well. As such, White Star argued, the statutory trust created by 42 O.S. § 144.2 could not be funded with other forms of revenue, such as proceeds from sale of oil and gas or funds from sale of assets. Additionally, White Star argued that the Oil and Gas Owners' Lien Act granted operators and non-operating working interest owners a lien in proceeds from the sale of oil and gas that is superior to any claim of the holder of a mechanic's and materialman's lien. Contrarily, the lienholders argued that the funds to be held in the statutory trust created by 42 O.S. § 144.2 were not limited to joint interest billing funds received by the operator from non-operators but include proceeds from the sale of oil and gas and proceeds from divestment of assets and that their mechanic's and materialmen's liens were equal in status with any lien provided to operators and non-operators by the Oil and Gas Owners' Lien Act. In holding that nothing in the text or legislative history of 42 O.S. § 144.2 limits the type of revenue which should be held in trust for payment of lienable claims and that the Oil and Gas Owners' Lien Act does not grant an operator or non-operating working interest owners a lien in proceeds from the sale of oil and gas that is superior to any claim of the holder of a mechanic's and materialman's lien asserted under 42 O.S. § 144, the Oklahoma Supreme Court agreed with the lienholders.
On May 24, 2019, several vendors of White Star Petroleum, LLC and White Star Petroleum II, LLC ("White Star") filed an involuntary bankruptcy petition against White Star in the United States Bankruptcy Court for the Western District of Oklahoma. Four days later, White Star filed a petition in the United States Bankruptcy Court in the District of Delaware. The two cases were ultimately consolidated in the Western District of Oklahoma. During the bankruptcy proceedings, 78 unpaid vendors filed adversary proceedings seeking adjudication of statutory lien claims against White Star's interest in various wells and establishment of trust fund claims under 42 O.S. § 144.2, entitled Creation and Appropriation of Trust Funds for Payment of Lienable Claims. White Star subsequently initiated two adversary proceedings of its own. The first sought adjudication of the priority, validity, and value of the many mechanic's and materialman's liens asserted by the 78 unpaid vendors. The second sought an order of the Bankruptcy Court directing several first purchasers of oil and gas to deliver to White Star approximately $2 million that was being held in suspense after the purchasers received lien notices. The United States Bankruptcy Court for the Western District of Oklahoma certified two questions to the Oklahoma Supreme Court. The first was whether funds held in trust pursuant to 42 O.S. § 144.2 for payment of lienable claims created by 42 O.S. § 144 are limited to joint interest billing payments received by operators for services rendered to lienholders. The second question was whether the Oil and Gas Lien Owners' Act grants an operator and non-operating working interest owners a lien in proceeds from the sale of oil and gas which is prior and superior to any claim of the holder of a mechanic's and materialman's lien asserted under 42 O.S. § 144.
The White Star holding is clearly favorable to oil and gas vendors and service providers who have perfected liens to secure unpaid labor or materials expended in service of oil and gas well operators. Not only has the Oklahoma Supreme Court refused to limit the source of funds available to pay such liens, it has also refused to allow operators and non-operating working interest owners a prior and superior lien in the proceeds of sale of oil and gas. These results emphasize the importance to service providers of timely filing and perfecting their lienable claims.
Founded in 2007, Munson & McMillin, PC, is a mid-sized law firm with offices in Edmond and Tulsa, Oklahoma with a focus on business litigation, estate planning, oil and gas, and real estate law.
This publication is provided by Munson & McMillin as a service to participants in the Oklahoma oil and gas industry. The information contained in this publication is not legal advice and should not be construed as such. Questions regarding the matters discussed in this publication may be directed to Lucas J. Munson, or any other Munson & McMillin lawyer with whom you have consulted in the past on similar matters. Mr. Munson can be reached at 405-513-7707 or lmunson@munsonmcmillin.com.