Consider that in order to secure payment, a contractor may file a mechanic's lien on real property on which it performed work. The lien places an encumbrance against the owner's real property for the unpaid balance of the contractor's work. When Thomas Jefferson, then as secretary of State under George Washington, proposed this nation's first mechanic's lien law in 1791, he almost certainly did not contemplate a lien being filed against the types of structures commonly built today, particularly those arising out of shale play development. As many of the same companies operate in the multistate shale play, the following perspective summarizes Pennsylvania, West Virginia and Ohio mechanic's lien laws as they apply to shale play-related construction activities, and references a couple of actual cases that illustrate some of the novel construction and legal issues that may arise.
Mechanic's Lien Rights on Gas Wells and Pipelines
The Mechanics' Lien Law of 1963, as amended, currently governs mechanic's liens in Pennsylvania. In Pennsylvania, a contractor's work must constitute an "improvement" to be subject to a mechanic's lien. Prior to 1963, it was clear that natural gas wells and pipelines were lienable, as a prior version of the Mechanics' Lien Law provided a non-exhaustive list of improvements subject to mechanic's liens, including "pipeline[s]" and "well[s] for the production of gas, oil or other volatile or mineral substance[s]." This clarity was shattered when the non-exhaustive list was replaced with a broad definition of "improvement."
However, Note 12 to the current version of the law provides that the elimination of the non-exhaustive list of improvements "is not intended to abridge or enlarge the right to lien." Thus, because the previous iteration of the law expressly included pipelines and natural gas wells as improvements, Pennsylvania courts will likely recognize a mechanic's lien against a natural gas well or pipeline.
West Virginia's mechanic's lien statute allows a contractor to file a lien for the construction of "any building or other structure, or other improvement appurtenant to any such building or other structure." West Virginia's highest court has expressly held that a mechanic's lien may attach to an oil and gas well, as well as a leasehold interest in oil and gas, in Kanawha Oil & Gas v. Wenner, 76 S.E. 893 (W.Va. 1912), and Showalter v. Lowndes, 49 S.E. 448 (W.Va. 1904). The Showalter court defined "structure" broadly as "any structure that enters into, benefits and enhances the value of the particular property." Thus, a natural gas pipeline also likely falls within the definition of a structure subject to a mechanic's lien.
Looking to the East, Ohio has a specific statute that allows mechanic's liens against both gas wells and pipelines. Specifically, Ohio's statute provides mechanic's lien rights to secure payment for costs associated with "digging, drilling, boring, operating, completing or repairing any well drilled or constructed for the production of oil or gas or any injection well which furthers the production of oil and gas or which disposes of waste products generated by oil and gas operations, or for altering, repairing or constructing any oil derrick, oil tank or leasehold production pipeline."
Liening an Easement Interest
As noted above, Pennsylvania, West Virginia and Ohio courts recognize or will likely recognize that a mechanic's lien may be asserted against the fee simple interest in a natural gas well or pipeline. But what happens when a property owner grants an easement for the right to construct a pipeline on its land? Does the lien attach to the fee simple interest of the owner of the real property at issue, the interest of the easement holder or both?
In one recent case in which our firm was counsel, a midstream company contracted a pipeline contractor to construct nearly nine miles of pipeline on 25 separate land parcels on which the midstream company only had easement rights. After construction was complete, a payment dispute arose and the contractor filed a mechanic's lien claim against (1) the fee simple interest in each parcel of land on which the pipeline was located; (2) the midstream company's easement interest in each parcel; and (3) the pipeline itself.
This situation, while typical, raises several issues not addressed by the Mechanics' Lien Law. First, although a leasehold interest may be subject to a mechanic's lien, Pennsylvania law is silent as to whether a mechanic's lien may be asserted against an easement interest. Given the similarity between a leasehold interest and an easement interest, it is likely that a Pennsylvania court will recognize a mechanic's lien asserted against an easement interest.
Moreover, and perhaps more importantly, this case presented the novel issue of whether a mechanic's lien may be asserted against the servient estate owner's fee simple property interests. Section 1303(d) of the Mechanics' Lien Law contemplates improvements made to property subject to a lease or division of property interests, providing: "No lien shall be allowed against the estate of an owner in fee by reason of any consent given by such owner to a tenant to improve the leased premises unless it shall appear in writing signed by such owner that the erection, construction, alteration or repair was in fact for the immediate use and benefit of the owner." Thus, if a servient fee simple estate owner can establish that the pipeline was not for its immediate use and benefit, it could arguably defeat a mechanic's lien claim.
On the other hand, the purpose of Section 1303(d) is not furthered in the case of an easement because (1) the property owner at the outset has knowledge of and consents to the construction of the pipeline on his or her property and (2) the property owner does not relinquish possession of his or her property. Thus, the more persuasive argument seems to be that a property owner who grants an easement allowing construction of a pipeline over his or her land may not seek Section 1303(d) protection from a mechanic's lien, regardless of whether or not he or she has a written agreement confirming that the improvement is not for his or her immediate use and benefit.
Because West Virginia law recognizes that a mechanic's lien may attach to any structure that becomes a part of an interest in land, and an easement clearly creates an interest in land, an easement interest is probably subject to a mechanic's lien in West Virginia. However, no West Virginia court has addressed whether the property interests held by the owner of the servient estate may also be subject to a mechanic's lien. The resolution of this issue will likely turn on whether the pipeline "benefits and enhances the value" of the servient estate. This will invariably be a fact-based inquiry to be determined on a case-by-case basis.
Ohio law limits the interests that may be liened to the interests held by the person contracting for the construction from which the lien arises, as in Mahoning Park v. Warren Home Development, 142 N.E. 883, 886 (Ohio 1924). Thus, in Ohio, the right to lien the property likely only extends to the easement interest held by the owner with whom the contractor contracted.
Amount and Boundaries of a Lien Claim
In another recent case handled by our firm, a midstream company hired a contractor to construct approximately 45 miles of natural gas pipeline in Pennsylvania and West Virginia. When a payment dispute arose, the contractor asserted separate mechanic's lien claims in Pennsylvania and West Virginia, against two parcels of property, one in each state, for the entire amount of money claimed to be owed to it. The midstream company moved to significantly reduce the amount of the Pennsylvania lien claim on the grounds that the contractor only performed a limited amount of work on the liened parcel and to dismiss the West Virginia lien because the contractor incorrectly liened a parcel on which it did not work but instead was adjacent to the parcel on which the pipeline was located. The payment dispute was resolved before the courts could address the novel legal issues, so the issues remain unresolved, for now.
Many unique mechanic's lien issues have arisen as a result of the development of shale plays in the Appalachian region. As companies continue to construct the wells and infrastructure necessary to fully develop those shale plays, some of the issues discussed herein will be resolved by the courts or legislatures, and new issues will undoubtedly emerge. Operators and contractors alike involved in shale development need to be aware of the availability and application of mechanic's liens to payment disputes. I have no doubt Thomas Jefferson did not introduce the mechanic's lien with shale play development in mind, but it is something that certainly has to be accounted for in today's world.
David E. White is a shareholder in the construction, energy and natural resources and litigation services groups of Pittsburgh-based Babst Calland. He focuses his practice in the areas of construction and commercial litigation and has tried cases in state and federal trial courts and before government agencies.