Navigating Marcellus Shale

by Kirk B. Burkley, Esq.

With the Marcellus Shale boom in full swing in Pennsylvania there are plenty of opportunities for trade vendors to participate and increase sales. Of course, with any opportunity there is risk and with any boom there is bound to be some level of bust. Navigating the supply chain in the Marcellus Shale industry may be a little trickier than first blush. Just because your company might be selling goods or services in the industry, does not necessarily mean you are selling to Shell Oil Company or Chevron. Downstream from the original gas lease there may be literally dozens of suppliers and subcontractors. Thus, it is important to know some of the remedies your company may have if you don’t get paid.

First and foremost, there is nothing more valuable than trough research into the creditworthiness of the actual customer to whom you are selling. Proper use of the credit application process is the first step in protection against loss. Nevertheless, if your company is generating sufficient sales you will incur some level of default. In the event you do sell goods to a gas rig operation and discover that the customer is unable to pay, you may be able to exercise your right of reclamation. Reclamation enables the seller of goods to send notice that you will “reclaim” your goods if the notice is delivered within 10 days of delivery of the goods and the goods are still there. However, if there is a prior perfected and under secured creditor in the same type of collateral, you may lose this right to the bank. If the customer files bankruptcy, and your goods were delivered within 20 days of the bankruptcy filing, you will be entitled to a top priority administrative claim for the value of those goods. Administrative claims get paid before all unsecured claims and the debtor is unable to confirm a plan of reorganization unless administrative claims are paid. This can be a a very powerful tool for trade creditors.

Another remedy may be to file a mechanics’ lien. While the case law is relatively untested with regard to gas operations in Pennsylvania, the filing of a mechanics’ lien is potentially an extremely effective weapon in your arsenal. If the gas lease contains language permitting the gas company to erect improvements such as drilling rigs and pipelines on the property, you may have the right to file a mechanics’ lien against the fee owner’s interest in the property. The mechanics’ lien law typically requires that when it comes to a leasehold interest the owner must consent in writing that improvements to real property are for the owner’s immediate use and benefit. Case law in Pennsylvania suggests that this is a factual determination. Since the entire purpose of most gas leases is to permit the gas company to drill and produces gas for the owner’s benefit, there is a strong argument that a lien against the owner’s property would be permissible. In addition, you may have the right to file a mechanics’ lien against the gas company’s leasehold interest in and of itself. The leasehold interest likely has substantial value so this remedy should not be ignored. Since mechanics’ liens are only allowed down to the level of second tier subcontracts, the decision whether to lien the leasehold interest of the fee interest may be critical. For example, if your company is a second tier supplier down from the lessee, you probably do not have a right to file a lien against the fee owner. Make sure to always know who you are doing business with and where the customer falls in the line of contracts.

Finally, you always have the traditional right to use your customer and obtain a money judgment. Once you have obtained judgment, you have the right to execute on that judgment and attach the debtor’s assets. Since there a lots of ways to get paid in the Marcellus Shale industry (and lots of ways to lose your right to get paid), due diligence and good advice are worth their weight in wet gas!

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