Oilfield Collections: How to Ensure Your Energy Service Company Gets Paid
Introduction
Are you an energy service company struggling to get paid for your materials and services? Unpaid invoices can seriously impact your business. This guide will help you navigate the complexities of oilfield collections, focusing on Texas law unless otherwise noted. Learn how to leverage legal tools, like liens and fund trapping, to improve your collection rates and maintain your company’s financial health.
What is the Statute of Limitations?
A statute of limitations is a legal deadline. It tells you how long you have to file a claim. If you miss this deadline, you lose your chance to make that claim forever. So, it is crucial to know these deadlines for your specific claims.
Common Claims for Energy Service Companies
If you are an energy service company trying to collect a debt, you might use these types of claims:
Breach of Contract: When someone does not follow the terms of a contract.
Suit on Sworn Account: A formal claim for unpaid accounts.
Breach of Individual Guaranty: When a person guarantees payment but fails to pay.
Quantum Meruit: Claiming payment for services or materials provided when there is no formal contract.
Foreclosure of Lien and Fund Trapping: Using a lien to secure payment from property owners or trapping funds owed to the debtor.
In Texas, the first four claims have a four-year deadline. This means you have four years from the date of the issue to file these claims.
Special Rules for Liens and Fund Trapping
Claims related to foreclosure of lien and fund trapping are different. They have a one-year deadline, starting from 180 days after the lien is filed. See Tex. Prop. Code §§ 53.158, 56.021, 56.041 (stating claimant must enforce lien within the same time and manner as a lien under Chapter 53 of the Texas Property Code). This shorter timeline is critical because these claims are often the best way for energy service companies to get paid.
The statute of limitations can be different in other states. In Wyoming, for example, you have 180 days from the lien filing to bring your lawsuit. WY Stat § 29-3-109 (2024). In Oklahoma, you have one year from the date the lien is filed to bring a foreclosure lawsuit. See Okla. Stat. Ann. tit. 42, §§ 146, 172 (West 2025).
Act Quickly on Your Accounts Receivable
No matter the deadline, the sooner you act on unpaid debts, the better your chances of getting paid. Quick action improves your odds significantly. That is why we advise our clients to stay on top of their accounts receivable.
Best Practices for Debt Collection
Set Up a Notification System: Have a system that alerts you when a debt is overdue by 30 days.
Aggressively Pursue Debts: Start chasing unpaid debts as soon as they hit 90 days overdue.
Be Proactive: Do not wait until the last minute to start the lien filing process.
In Texas, you have six months to file your lien against a mineral property. If you wait too long, you might not have enough time to complete all the necessary steps, like running title searches and mailing out notices.
Chapter 56 of the Texas Property Code: Liens Against Mineral Property
Chapter 56 of the Texas Property Code can be daunting for energy service companies and even their lawyers. It is complex, and very few understand its intricacies. Over the past decade, we have specialized in helping energy service companies navigate this statute to ensure they get paid. Here is a simplified guide to help you understand and benefit from Chapter 56.
Key Benefits of Chapter 56
Chapter 56 offers two main advantages to energy service companies:
Lien Filing Mechanism:
It allows you to file a lien on certain properties to secure payment for your labor or services. This is crucial because operators and working interest owners do not like liens on their property. This leverage can help you get paid faster. See Tex. Prop. Code §56.002 (stating mineral contractor or subcontractor has a lien to secure payment for labor or services related to mineral activities).
Cause of Action Against Working Interest Owners:
If a working interest owner has not paid its Joint Interest Billings (JIBs) by the time they receive a fund trapping notice letter from you, Chapter 56 allows you to pursue them directly for payment. This expands your options for recovering debts.
How Chapter 56 Works
Definitions (Texas Property Code §56.001)
Understanding the definitions in Chapter 56 is the first step:
Mineral Activity: This includes digging, drilling, operating, completing, maintaining, or repairing wells, pipelines, or mines. See Tex. Prop. Code §56.001(1).
Mineral Contractor: A person or company performing labor or providing materials for mineral activities under a contract. See Tex. Prop. Code §56.001(2).
Mineral Property Owner: An owner of land, mineral leasehold, pipelines, or related rights-of-way. Texas Property Code See Tex. Prop. Code §56.001(3).
Mineral Subcontractor: A company that furnishes materials or performs labor for mineral activities under a contract with a mineral contractor or another subcontractor. Texas Property Code See Tex. Prop. Code §56.001(4).
Most energy service companies fall under the category of mineral subcontractors, meaning they provide services or materials under a contract with a mineral contractor (like an operator).
Filing a Lien
To leverage Chapter 56 effectively, you need to understand how to file a lien:
Property Subject to the Lien:
This includes materials, machinery, and supplies you furnished or hauled, as well as the land, leasehold interests, pipelines, and related buildings where you performed the work. See Tex. Prop. Code §56.003(a)(1–2).
Other material, machinery, and supplies used for mineral activities and owned by the owner of the property listed in Subdivision (2); See Tex. Prop. Code §56.003(a)(3).
Other wells and pipelines used in operations related to oil, gas, and minerals and located on property listed in Subdivision (2). See Tex. Prop. Code §56.003(a)(4).
However, a lien created by performing labor or furnishing or hauling material, machinery, or supplies for a leaseholder does not attach to the fee title to the property. See Tex. Prop. Code §56.003(b).
Deadline to File a Lien:
You have six months from the day the indebtedness accrues to file a lien. This accrual date is when you last provided materials or services. See Tex. Prop. Code §56.021(a).
Accrual of Indebtedness:
The indebtedness accrues at the end of each week for labor or on the date materials/services were last furnished. See Tex. Prop. Code §56.005.
Contents of the Lien Affidavit:
Pursuant to Tex. Prop. Code §56.022, a lien claimant’s affidavit must include: name of the mineral property owner, your name and address, the dates of work, a description of the property, and an itemized list of amounts claimed.
If you are a mineral subcontractor, you also need to include the name of the person you worked for and a statement that you served notice to the property owner. See Tex. Prop. Code §56.022(b).
Serving Notice
For mineral subcontractors, it is crucial to serve written notice to the property owner at least 10 days before filing the lien. This notice must include the amount of the lien, the name of the indebted party, and a property description. See Tex. Prop. Code §§56.021(b), 56.023.
Liability and Fund Trapping
By serving notice to the property owner, you can "trap funds" that the property owner might owe to the operator. This makes the property owner liable to you for the amount of the lien. This is powerful because often the property owner has funds available, even if the operator does not.
Practical Tips
Be Proactive: Set up a system to monitor your accounts receivable. Act quickly when debts are overdue.
Understand Your Timeline: Ensure you file your lien within the six-month period.
Leverage Your Lien: Use the lien and fund trapping provisions to apply pressure and secure payment.
The Power of the Credit Agreement
A Credit Agreement is a vital tool for energy service companies because it allows you to control the terms of your engagement. Unlike Master Service Agreements (MSAs), where negotiating power may be limited, a Credit Agreement lets you define important conditions, making it essential to include key clauses.
Key Clauses to Include
Applicant Information: Collect comprehensive details including social security numbers, tax ID numbers, banking information, addresses, and references.
Jurisdictional Language: Ensure the agreement allows you to bring legal action in Texas.
Venue Provision: Specify that any legal disputes will be handled in a Texas county of your choice.
Interest on Debt: Set an interest rate on unpaid debts, such as 1.5% per month (18% per year) or the maximum allowed by Texas law.
Defenses and Damage Limitations: Outline defenses against potential claims and specify that certain damages (e.g., punitive damages, loss of use, lost profits) cannot be claimed.
Complaint Handling: Detail how complaints about materials or services must be submitted in writing within a set timeframe, or the debt will be considered admitted and owed.
Work Ticket Signatures: Clarify the procedure for obtaining signatures on work tickets and the implications if signatures are not obtained.
Attorney Fees and Interest: Include a clause stating that you are entitled to recover all reasonable attorneys’ fees and interest incurred due to nonpayment and collection efforts.
It is important to have a lawyer experienced in oilfield collections draft and review your Credit Agreement to maximize your chances of obtaining payment.
The Role of Individual Guaranties
An Individual Guaranty can be a powerful tool to create leverage and ensure payment. Unlike lengthy legal documents, a guaranty should be concise and straightforward. This increases the likelihood that the debtor will sign it.
Crafting an Effective Individual Guaranty
Keep it Simple: Clearly state that the person signing the guaranty is personally liable for the entire debt, along with any attorneys’ fees and interest.
Placement: Position the guaranty immediately below the applicant’s signature on the Credit Agreement, making it easy for the applicant's officer to sign both at the same time.
An Individual Guaranty can also serve as a litmus test for the applicant’s reliability. If no officer or owner is willing to sign the guaranty, it may signal potential issues with the applicant’s creditworthiness.
Handling Cash-Only Customers
Some energy service companies prefer to work with cash-only customers to avoid credit risks. While this can be effective, it is still important to have a written agreement in place.
Benefits of a Written Agreement
Protect Your Interests: Even with cash-only customers, a written agreement can protect against claims and outline the terms of service.
Prevent Overextension: Cash-only customers sometimes exceed their payment limits. Having a written agreement helps manage this risk.
Using Credit Agreements and Individual Guaranties effectively can significantly enhance your leverage and ensure timely payments. Always have a comprehensive, legally sound Credit Agreement in place, and consider using Individual Guaranties to create additional security. Even for cash-only customers, a written agreement is essential to protect your interests. By implementing these practices, energy service companies can navigate the complexities of debt collection more effectively and safeguard their financial interests.
The Importance of Invoices and Work Tickets for Energy Service Companies
Invoices and work tickets are more than just routine paperwork for energy service companies—they are essential tools for ensuring timely payment and protecting your business interests. Here is why you should prioritize systematic and prompt handling of these documents.
Timely Invoicing:
First, sending out invoices systematically and promptly is crucial for maintaining good business practices and cash flow. Delayed invoicing can have several negative consequences. Most importantly, it can jeopardize your ability to file a lien, a legal claim against the debtor's property to secure payment. In Texas, you have six months from the date the debt accrues to file a lien. This might seem like ample time, but if you delay sending out invoices and do not start collection actions until ninety days or more have passed, that window can close quickly. Prompt invoicing ensures you have enough time to take all necessary steps to secure your payment, including filing a lien if needed.
Accurate and Detailed Invoicing:
Accurate and detailed invoicing is equally important. Each invoice should clearly itemize the services provided and the costs incurred. This not only helps in keeping transparent records but also minimizes disputes with customers. A detailed invoice leaves little room for the debtor to question or dispute the charges, thus facilitating smoother payment processes.
Signed Work Tickets:
Work tickets play a critical role as well. These documents serve as immediate proof that the services were performed and accepted by the customer. It is a best practice to get each work ticket signed on the day the work is completed or shortly thereafter. This immediate acknowledgment can prevent disputes later on. Unscrupulous debtors might attempt to avoid payment by claiming dissatisfaction with the services or materials provided. However, a signed work ticket can quickly invalidate these claims, showing that the debtor accepted the work at the time it was performed. While a signed work ticket is not the only evidence of work done, it certainly strengthens your case against any frivolous complaints.
Incorporating Terms and Conditions:
Moreover, work tickets can serve an additional legal purpose. Including key terms and conditions on the work tickets can offer further protection. If these terms are printed on the back of the ticket, make sure to clearly note on the front that signing the ticket means agreeing to those terms. This practice ensures that all parties are aware of and have agreed to the conditions from the outset. Such terms might include clauses about payment deadlines, interest on overdue payments, and limitations on claims against the service company. Having these terms agreed to in writing can be invaluable if disputes arise later on.
Legal Preparedness:
Lastly, it is important to have a lawyer who specializes in oilfield collections review your invoices, work tickets, and credit agreements. Legal advice can ensure that all documents are correctly worded and include all necessary clauses to protect your interests. Proper documentation not only aids in the collection process but also enhances your legal standing should you need to escalate the matter to court.
In conclusion, managing invoices and work tickets effectively is crucial for energy service companies. Timely, accurate, and detailed invoicing, along with promptly signed work tickets that include clear terms and conditions, can significantly reduce payment delays and disputes. By prioritizing these practices, you ensure a smoother operation and better financial health for your company.
Understanding Legal Actions for Energy Service Companies: Common Causes of Action
When an energy service company faces non-payment from a debtor, there are several legal actions they can take. Here are the typical causes of action that might be brought in a lawsuit:
Breach of Contract
Suit on Sworn Account
Breach of Individual Guaranty
Quantum Meruit
Foreclosure of Lien
Fund Trapping
Breach of Contract
A breach of contract claim is the most straightforward. This can be based on a written agreement like a credit agreement or master services agreement, an oral agreement, or a combination of both. Essentially, the energy service company is claiming that the debtor did not fulfill their obligations under the contract.
Suit on Sworn Account
This type of claim is similar to a breach of contract but with a crucial difference. In a suit on sworn account, the energy service company provides a sworn statement of the debt when the lawsuit is filed. This requires the debtor to respond with a sworn answer that explains why the debt is not owed. If the debtor fails to provide this answer, the service company can move for a summary judgment, which can expedite the process of obtaining a legal decision in their favor.
Breach of Individual Guaranty
In cases where an individual has signed a guaranty, they become personally liable if the debtor fails to pay. This claim is usually included in the same lawsuit as the suit against the debtor. These claims are often straightforward and provide significant leverage for the energy service company, as they can pursue the guarantor directly for payment.
Quantum Meruit
Quantum meruit is a legal principle that means "as much as he has deserved." This claim is used when the energy service company has provided materials and services that the debtor accepted and knew would require payment. Even if there is no formal contract, this claim seeks to prevent the debtor from unjustly benefiting from the service company's work without compensating them.
Foreclosure of Lien and Fund Trapping
These claims against mineral properties are brought under Chapter 56 of the Texas Property Code. The energy service company seeks to foreclose on a lien placed on the debtor's property. Additionally, fund trapping involves claiming funds held by the working interest owners. If executed correctly, these claims form the core of the lawsuit and can significantly enhance the service company's chances of securing payment.
Key Takeaways
Understanding these causes of action is crucial for energy service companies dealing with non-payment issues. By effectively leveraging these legal tools, companies can protect their interests and improve their chances of recovering debts. Each type of claim serves a specific purpose and, when used strategically, can provide the necessary leverage to secure payment from debtors.
Grabbing Assets
Finding assets
Abstracting judgment to create judicial lien
Foreclosing on property
Garnishments
Turnovers and Liquidation Receivers
Fraudulent Transfers
Exemptions – personal (list); nothing if company.
Conclusion
An energy service company must obtain payment for material and services provided if the company is to exist and thrive. An energy service company is better positioned to obtain payment for the material and services if it is educated on the system available to it. All energy service companies, regardless of size, should have a plan in place to obtain payment from a debtor. A good oil and gas lawyer experienced in oilfield collections is a valuable relationship to have. We invite you to call us.
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