The Pennsylvania Mechanics’ Lien statute has undergone several substantive revisions since its first iteration in 1803. Generally, the statute was broadened to reflect a common law that had consistently grown more amenable to the idea of real property encumbrances. Under the current version of the statute, 49 Pa. C.S. § 1101, et seq. (2011), it appears to be an open question as to whether oil and gas wells are proper subjects of liens for the payments of debts due to contractors or subcontractors for labor and materials furnished in the erection, construction, alteration or repair of the wells.

This uncertainty arises because Pennsylvania, a relative newcomer to the gas industry’s big stage, does not have a distinct statute devoted to liens against wells like many traditional oil- and gas-rich states.

As Marcellus Shale drilling continues to increase in the state, questions as to whether oil and gas wells, their fixtures, and the associated mineral and royalty rights may be properly subjected to liens will become more urgent.

WELL FIXTURES

In a 1893 decision, Orth v. West View Oil Co., the Pennsylvania Supreme Court held that because casing, tubing, sand lines and other like fixtures on a well’s structure were temporary in nature, they could not be subjected to a lien. However, the court relied on the language of an old statute, which was replaced in 1901 and again in 1963. Both the 1901 and the current 1963 statute defined “structure” and “fixture” more broadly to include “personal property used in fitting up” the improvement or structure.

The 1963 statute substituted a general definition of “improvements” for the detailed list of such structures in the 1901 act it replaced. Notably, the report of the Joint State Government Commission, which sponsored the 1963 act, stated that the more general definition was not intended either to abridge or enlarge the list of structures enumerated in the 1901 act, which included “mine[s] … derrick[s] … pipeline[s] … works for supplying water, heat, light, power … [and] well[s] for the production of gas, oil or other volatile or mineral substance.”

The current statute, 49 Pa. Cons. Stat. § 1301, originally codified in 1963, permits liens on “improvement[s]” and the “ estate or title of the owner in the property.” An “improvement” is defined broadly in the statute to include “any building, structure or other improvement of whatever kind or character erected or constructed on land, together with the fixtures and other personal property used in fitting up and equipping the same for purpose for which it is intended.” “Property” is defined as “the improvement, the land covered thereby and the lot or curtilage appurtenant thereto … reasonably needed for the general purposes thereof.”

While the Orth decision held that certain oil and gas well structures are not subject to the Mechanics’ Lien statute, lien claimants will likely rely on the broad definition of “improvements” in the contemporary statute to argue that well structures are lienable.

MINERAL RIGHTS

More uncertain, though, is whether an owner’s mineral rights (i.e., rights in the severed oil or gas) may be the target of a mechanics’ lien. The case law on this issue is sparse, and there is no direct statutory authority to reference.

In 1940, the Common Pleas Court of Fayette County held in Bickerton v. Vaughn that an interest in gas is an interest in real estate and is, therefore, subject to a lien. The court further held that extraction of the gas was the “general purpose” for which the well was constructed and it was, therefore, “curtilage” for purposes of determining the lienable “property” of the debtor. The court explained that without gas, the well itself would have had no value or practical use, and since the gas was key to the erection of the well it must be considered curtilage and lienable. Although the Bickerton case predates adoption of the current 1963 Pennsylvania’s Mechanics’ Lien statute, the court relied on nearly identical language from the 1901 statute.

In 1910, the Pennsylvania Supreme Court held similarly with respect to water in Wirsing v. Pennsylvania Hotel & Sanitarium Co. In that case, a mechanics’ lien was maintained against a sanitarium property and a lot on which there was a spring purportedly containing medicinal properties. Although operated as a single entity, the sanitarium and the spring were separated by railroad tracks and private land. Underground pipes stretched from the spring under the private land and the railway to the sanitarium. The court held that despite the distance and intervening private land, the lot with the spring was curtilage of the sanitarium because it had been built to take advantage of the medicinal powers of the spring. Without the spring, there would have been no reason to have built the sanitarium, nor would it have been profitable.

While these opinions suggest that mineral rights may be subject to mechanics’ liens, Bickerton is a 1940 common pleas decision with no precedential value, and the Wirsing case did not involve an oil or gas well, leaving doubt about whether mineral rights are lienable in Pennsylvania.

Other states are split in their approach. For example, in Louisiana and Montana, mineral rights and proceeds derived therefrom are lienable. Conversely, neither Texas nor Colorado permits oil or gas proceeds to be subject to liens. In the latter states, a lien claimant is at a disadvantage since a well’s oil or gas supply can be depleted, even while the well’s structure is encumbered by a lien.

ROYALTIES

Whether the lien claimant can attach the lien to royalties issuing forth from the well is another question left unanswered by the Pennsylvania lien statute.

The issue of whether royalties are lienable has not been analyzed by Pennsylvania courts. Under 49 Pa. Con. Stat. § 1301, a contractor may get a lien on “the estate or title of the owner in the property” as a result of debts owed by the owner to the contractor as a result of labor and materials furnished during construction. Under the plain language of the statute it seems that, if royalties are considered “estate or title” in the property, the Mechanics’ Lien statute could extend not only to the physical property that was the subject of the contractor’s work, but also to an interest in royalties.

Are royalties “property” under the terms of the statute? It is an open question, and the answer may depend on whether royalties can be considered “curtilage … reasonably needed for the general purposes” of the structure or improvement. As described above, some Pennsylvania courts have held that the oil, gas, and water underneath an improvement are part of the curtilage and, therefore, proper subjects of a lien.

In those cases, the presence of the oil, gas, or water was essential to the property’s purpose and its profit potential. As royalties are the profits made from the well paid back to the lessor, it is possible that the Pennsylvania courts may be willing to find that royalties are curtilage within the meaning of the Mechanics’ Lien statute and subject to a lien. However, Pennsylvania courts could follow the traditional definition of “curtilage,” which is commonly defined as the physical property surrounding an improvement. Under this definition, “curtilage” would seem to exclude royalties.

Some jurisdictions have treated royalty interests differently than other interests in wells that are subject to lien claims.

For example, Montana’s oil and gas lien statutes state expressly that liens “do not extend to any royalty interests, overriding royalty interests, or oil payments” created prior to the date the first material was furnished or labor as performed.

Moreover, courts in Kansas and Colorado have held that certain royalty interests were not subject to liens. In DaMac Drilling Inc. v. Shoemake the Court of Appeals of Kansas, citing previous case law holding that oil and gas cannot be subjected to mechanics’ liens, held that an overriding royalty interest could not be subject to the attachment of a lien because it is not an interest in the leasehold itself, but rather an interest in the minerals produced.

An overriding royalty interest is an interest in oil and gas produced at the surface, free of expenses of production. It is limited in duration to the life of the leasehold, and only when the oil and gas are reduced to possession does the interest attach. Similarly, the Court of Appeals of Colorado in AEC Industries LLC v. Survivor Oil Inc. has held that overriding royalty interests are not proper subjects of mechanics’ liens, while leaving open the question of whether the same was true of carried interests.

Uncertainty surrounds Issue

In sum, much uncertainty surrounds the question of how the Pennsylvania Mechanics’ Lien statute interacts with the holders of interests in oil and gas wells, their fixtures, the minerals themselves, and the royalties issuing from gas and oil production.

The continued boom in Marcellus Shale drilling makes understanding of these issues critical. A clear statutory statement from the General Assembly would be helpful, but, in the meantime, owners of oil and gas well interests should be prepared to challenge the validity of mechanics’ liens in this unsettled area of law. •

Jason Richey, a partner in the Pittsburgh office of K&L Gates, concentrates his practice in the areas of construction, real estate, and commercial law, and has worked on disputes and contracts involving multimillion-dollar construction projects, including
steel, oil and gas and Marcellus Shale disputes.

John Estep, an associate in the firm’s Pittsburgh office, maintains a general litigation practice, with particular emphasis in the areas of construction law and insurance coverage and advises on construction contract disputes and insurance coverage rights, among other matters.