Prime Contract Dictates Extent of Subcontractor Mineral Lien in Pearl Resources Case
Prime Contract Dictates Extent of Subcontractor Mineral Lien in Pearl Resources Case

On February 17, 2022, the Court of Appeals in El Paso, Texas reversed a summary judgment in favor of a mineral lien subcontractor claimant because, at the time the lien was filed, nothing further was owed under the prime agreement (Pearl Res. Operating Co. LLC v. Transcon Capital, LLC, No. 08-19-00288-CV, 2022 WL 484546, at *1 (Tex. App.—El Paso Feb. 17, 2022, no pet. h.)).


The contract at issue obligated Pearl Operating, as owner, to make an initial upfront payment to PDS Drilling LLC (PDS), the drilling contractor, of 30 percent of that total amount after PDS positioned a rig at the well site ready to spud. Thereafter, Pearl Operating was required to pay PDS the remaining 70 percent within five business days after PDS had delivered a successful well and had invoiced Pearl Operating for its services. The contract expressly stated that PDS needed to satisfy both conditions before Pearl Operating would have to pay the remaining amounts due.

While undertaking the work, the well suffered a wild well incident. The lien claimant was engaged by PDS to provide emergency services to contain the water flow at the well site. Thereafter, PDS abandoned the work. Before PDS’s abandonment, the lien subcontractor claimant sent two invoices to PDS requesting payment.  After PDS failed to pay, the lien claimant attempted to perfect a mineral lien.

The lien claimant argued for a mineral lien because Pearl Operating had not paid all amounts owed under the prime agreement. Pearl Operating argued there was no lien because PDS was not entitled to further payment under the prime agreement. The appellate court sided with Pearl Operating because “a mineral lien under Chapter 56 is dependent upon the state of the account between the owner and its contractor, and not upon the condition of the account between the contractor and subcontractor, when the owner receives notice of the claim.” Id. at *5. Here, because the owner had already paid its contractor all that is owed under the contract when the lien claimant served notice of its claim, the subcontractor was not entitled to the lien.

Lessons Learned

For owners, paying final amounts due to contractors on mineral lien projects does not carry the same risk as projects subject to mechanic’s liens. Specifically, if no subcontractors have served notices when the final amount is paid, the owner is not subject to subcontractor lien liability. On the other hand, mineral lien claimants should not wait for extended periods to claim mineral liens because there may be no lien right despite having met the lengthy deadlines available under Chapter 56.

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