Codification of Oil and Gas Lien Claimants' Preference Defense?


Crude oil and natural gas prices began to decline in the third quarter of 2014.  From the beginning of the third quarter of 2014 to the beginning of the third quarter 2016, the price of crude oil declined approximately 60%.  Natural gas prices likewise suffered a significant decline during that time period.  Consequent to the decline in commodity prices, at the end of the second quarter of 2016, over 80 oil & gas companies had filed for bankruptcy protection in calendar years 2015 and 2016.

On July 20, 2016, C&J Energy Services, Ltd. and its affiliates (collectively, “C&J Energy”) filed for chapter 11 bankruptcy protection in the U.S. Bankruptcy Court for the Southern District of Texas.  C&J Energy provides, among other oilfield services, well construction, well completion and well support services to exploration and production (“E&P”) companies.

On the first day of the bankruptcy filing, C&J Energy filed an emergency motion requesting that the court allow C&J Energy to pay among other vendors, subcontractors that provided essential materials and services for C&J Energy’s operations and C&J Energy’s E&P customers’ oil & gas projects (the “Mineral Contractors”).  C&J Energy emphasized that upfront payment of the pre-petition amounts owed was critical because should C&J Energy default on any payment obligation, the Mineral Contractors would likely assert liens against C&J Energy’s E&P customers’ property, including leaseholds, oil or gas wells, and oil and gas leases.  Further, as a result of the assertion of statutory liens, the E&P companies might refuse to pay C&J Energy, or, even sever the business relationship with C&J Energy.  To buttress the justification for the requested relief (which was granted), C&J Energy underscored that in the recent wave of oil & gas bankruptcies, courts have increasingly authorized upfront payment of pre-petition amounts owed to Mineral Contractors.

As opposed to obtaining upfront post-petition payment for pre-petition services rendered, some Mineral Contractors instead receive payment from bankrupt companies within 90 days prior to the bankruptcy filing.  In those cases, the Mineral Contractors are at risk that the debtor will seek to avoid (“claw back”) the pre-petition payment.  In light of this risk, Mineral Contractors are proactively providing notice to debtors that a certain common law defense precludes such a claw back.  This article discusses preferential transfer avoidance under Bankruptcy Code section 547(b) in general, the fixing of a statutory lien defense under section 547(c)(6), contractors’ common law preference defense, and whether Congress should codify the common law defense. 


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 Camisha L.
Simmons