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In re ATP Oil & Gas Corp.

United States Court of Appeals, Fifth Circuit

April 17, 2018

In the Matter of: ATP OIL & GAS CORPORATION Debtor
v.
SCHLUMBERGER TECHNOLOGY CORPORATION; WIRELINE CONTROL SERVICES, L.L.C.; SMITH INTERNATIONAL, INCORPORATED; M-I, L.L.C.; CANRIG DRILLING TECHNOLOGY, LIMITED; HARVEY GULF INTERNATIONAL MARINE, L.L.C.; HORNBECK OFFSHORE SERVICES, L.L.C.; SUPERIOR ENERGY SERVICES, L.L.C., doing business as Superior Completion Services; WORKSTRINGS INTERNATIONAL, L.L.C.; STABIL DRILL SPECIALTIES, L.L.C.; FASTORQ, L.L.C.; WARRIOR ENERGY SERVICES CORPORATION; OFFSHORE ENERGY SERVICES, INCORPORATED; CHAMPION TECHNOLOGIES, INCORPORATED, Appellants Cross - Appellees OHA INVESTMENT CORPORATION, formerly known as NGP Capital Resources Company, Appellee Cross - Appellant

          Appeals from the United States District Court for the Southern District of Texas

          Before REAVLEY, SMITH, and OWEN, Circuit Judges.

          REAVLEY, Circuit Judge:

         Various vendors, contractors, and subcontractors provided materials and services in connection with an offshore mineral lease. By way of the Louisiana Oil Well Lien Act, the service providers then secured liens on the lessee's operating interest. And, in the lessee's subsequent bankruptcy proceeding, the service providers intervened, seeking to enforce their statutory liens on overriding royalty interests conveyed by the lessee to a third party. The district court dismissed the service providers' complaints, concluding that the very statute that created the liens extinguished them via a safe-harbor provision. We affirm.

         I. BACKGROUND

         ATP Oil and Gas Corporation leased from the United States an operating interest-the right to explore and drill for minerals-on federal lands located on the Outer Continental Shelf off the coast of Louisiana. Thereafter, various service providers (collectively, "the M&M Intervenors") furnished labor and materials to ATP in connection with its oil-and-gas operation. Under the Louisiana Oil Well Lien Act ("LOWLA"), the M&M Intervenors thereby secured liens (also called "privileges") on ATP's operating interest, each lien attaching upon the commencement of labor. See La. Rev. Stat. §§ 9:4863(A)(1), 9:4864(A)(1). The M&M Intervenors timely recorded their liens.

         ATP later sold "term overriding royalty interests" to OHA Investment Corporation in three installments. ATP conveyed overriding royalties in exchange for $25 million in June 2011, $15 million in December 2011, and $25 million in July 2012. These overriding royalties entitled OHA to a cost-free percentage "of all Hydrocarbons produced, saved, and sold from or attributable" to the mineral lease and, relatedly, to satisfaction "out of the Subject Hydrocarbons and the proceeds thereof" until OHA realized a certain sum.[1]

         In August 2012, ATP filed a voluntary Chapter 11 petition for bankruptcy relief (later converted to a Chapter 7 proceeding). OHA then commenced an adversary proceeding, seeking a declaratory judgment that (1) OHA, not the bankruptcy estate, owned the overriding royalties and (2) the royalty conveyance was not an executory contract subject to rejection. The M&M Intervenors, still unpaid, intervened and sought to enforce their statutory liens against OHA's overriding royalties.

         The bankruptcy court bifurcated the proceeding into two phases: the first would decide whether OHA owned the overriding royalties and whether the conveyances were executory contracts, and the second would decide the lien-related questions. The parties resolved the first phase by agreed judgment, and OHA moved to dismiss the M&M Intervenors' complaints under Federal Rule of Civil Procedure 12(b)(6). In short, OHA argued that LOWLA liens could not attach to overriding royalties and alternatively, even if the liens could attach, they were extinguished by LOWLA's safe harbor for third-party purchasers of hydrocarbons.

         The bankruptcy judge acknowledged first that LOWLA liens can attach to four types of property interests:

1) "The operating interest under which the operations giving rise to the claimant's privilege are conducted";
2) "Drilling or other rig located at the well site of the operating interest";
3) "The interest of the operator and participating lessee in hydrocarbons produced from the operating interest and the interest of a non-participating lessee in hydrocarbons produced from that part of his operating interest subject to the privilege"; and
4) "The proceeds received by, and the obligations owed to, a lessee from the disposition of hydrocarbons subject to ...

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