Delaware Bankruptcy Court denies Post-Petition Lien Perfection

The United States Bankruptcy Court for the District of Delaware recently gave a remarkable judgment on timely lien perfection. As per the facts In re Southland Royalty Co. LLC[1], Halliburton, the creditor had made two sets of newly constructed wells for Southland, who owns leasehold and mineral interests in southwestern Wyoming. On January 27, 2020, Southland filed a bankruptcy petition, in furtherance of which Halliburton asserted that under Wyoming law, it had mechanical and materialmen’s liens, including over the Wells. Halliburton had sent a letter to Wamsutter LP, who was a purchaser of Southland’s oil and gas, specifying to them that Halliburton had a claim of lien against the Southland’s property and proceeds. However, Halliburton did not obtain relief from the automatic stay triggered by Southland’s bankruptcy petition under Section 362 of the Bankruptcy Code[2].

The automatic stay triggered by Southland’s bankruptcy petition was not questioned by Halliburton, who did not apply to seek relief. Rather, on April 16, 2020, Halliburton filed a notice of perfection, continuation, or maintenance of lien with the bankruptcy court under Sections 362(b)(3)[3] and Section 546(b)(1)(A)[4]. Section 362 provides for “automatic stay” and puts a moratorium over any act to perfect or continue the perfection of an interest in the property, under subsection (b) (3). Further, as per Section 546(b)(1)(A), “the rights and powers of a trustee under Sections 544, 545 and 549, are subject to… applicable law that permits perfection of an interest in property to be effective against an entity that acquires rights in such property before the date of perfection…” If read together, the provisions allow, “the post-petition continuation, maintenance or perfection of an interest in a debtor’s property if applicable state law creates such interest prior to a bankruptcy filing and the interest’s post-petition perfection relates back to the date of its creation (the ‘Relation Back Exception’).”

Halliburton claimed that the Wyoming Lien Act grants lien rights to those who perform work to improve real property or mineral interests. Generally, such liens relate to the commencement of any construction work or repair of the premises or property. However, Wyoming law treats production and proceeds liens different from the liens on wells and land.

Based on the claims, Judge Owens discussed the provisions and production and proceeds of lien. She discussed that production and proceeds of lien is granted only when proper notice is given to the holder of the mineral interest or working interest and the purchaser. In the present case, Halliburton should have notified Southland and Wamsutter, before the date the petition was filed, in order to be entitled to assert a lien on the production. However, Halliburton failed to deliver notice before the petition filing date, and thereafter, the automatic stay was brought into action. Thus, Halliburton was not entitled to lien over the production as the lien on production did not relate back to a date prior to the filing date of the petition, therefore, Halliburton’s post-petition actions did not fall within the scope and protection provided by Relation Back Exception. Based upon this analysis, it was concluded that Halliburton’s post-petition attempts to obtain a lien on production were void ab initio.

The judgment has been considered as a teaching lesson for all the creditors with regards to the perfection of the lien before filing of the bankruptcy petition. Even though creditors have a last resort of Relation Back Exception, the exception demands several requirements. Failure to abide by the requirements can prevent the application of the Relation Back Exception, which has been showcased in the present case. Thus, in order to receive the entitled return at the end of the bankruptcy proceedings, the creditor must make sure to perfect the lien before the filing of the petition.

[1] 20-10158 (KBO) at 1 (Jan. 21, 2021, Bankr. D. Del.)

[2] 11 U.S.C. § 362

[3] 11 U.S.C. § 362(b)(3)

[4] 11 U.S.C. § 546(b)(1)(A)

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