The owner and contractors on a construction project usually anticipate that all parties will be properly paid for work performed. In reality, however, it is not uncommon for issues to arise related to the payment of a contractor and its subcontractors or suppliers. In addition to bringing a breach of contract action, Pennsylvania’s Mechanics Lien Law (the “Lien Law”)1 provides an unpaid contractor or subcontractor with a powerful additional legal remedy to obtain payment because a mechanics lien is imposed against the property interest to which qualifying “improvements” were made, creating a “cloud” on the legal title to that property interest.2 With the recent boom in Marcellus shale in Pennsylvania, the question has arisen as to whether or not gas wells or pipelines qualify as “improvements” for purposes of the Lien Law, and therefore can be made the proper subject of a mechanics lien claim filing.
A valid mechanics lien claim must satisfy numerous statutory requirements. One such primary requirement is that work performed by the contractor or subcontractor must constitute an “improvement” in the property, as defined under the Lien Law. The underlying theory is that, if the contractor has provided services which permanently improve the value of the property, then it ought to be paid for the value of such services. Thus, the work done must create a new improvement upon the estate, or make a substantial addition to an existing improvement.3 The statutory language under the Lien Law defines an “improvement” to include “any building, structure or other improvement of whatsoever kind or character erected or constructed on land, together with the fixtures and other personal property used in fitting up and equipping the same for the purpose for which it is intended.”4 Pennsylvania courts have further defined an “improvement” as “a permanent addition to real property that enhances its capital value…and is designed to make the property more useful or valuable.”5
Does the construction of a gas well or the installation of a gas pipeline fall within this definition? This issue has not been specifically decided by the Pennsylvania courts in any reported decision, but prior decisional law, the legislative history preceding the current version of the Lien Law, and the broader body of out-of-state case law all suggest that that an oil and gas well or pipeline project can be susceptible to mechanics lien filings.
The only reported decision touching upon the subject is Yellow Run Coal Co. v. Yellow Run Energy Co., 420 A. 2d 690 (Pa. Super. Ct. 1979). In that case, the Pennsylvania Superior Court analyzed whether or not mining is an improvement to real property under the Lien Law. The court drew a distinction between strip mining (which involved only activities associated with the excavation of top soil and coal) compared to underground mining (which also includes the erection and construction of permanent improvements). The court in Yellow Run also compared the definition of improvement under the current version of the Lien Law, amended in 1963, with the definition from the 1901 Lien Law.6
The extended legislative history to the current Lien Law is also informative. Before the current Lien Law was enacted, the prior version, Pennsylvania’s Mechanics Lien Law of 1901 (the “1901 Lien Law”) included a list of structures there were considered improvements.7 Mines, pipelines and wells for the production of gas, oil or other volatile or mineral substances were all specifically listed as “improvements” under the 1901 Lien Law.8 When the Lien Law was amended in 1963, this itemized list of improvements was replaced with the current, more generic definition. However, the comments to the 1963 version of the Lien Law clarify that the legislature’s removal of the non-exhaustive list did not intend to modify a party’s right to file a lien.9 To the contrary, the legislature removed the itemized list because they thought it was unnecessary.10
A review of recent Pennsylvania filings reveals that at least one contractor has attempted to lien a gas pipeline project, but the matter was resolved without any decision being rendered on the issue. See, e.g., Otis Eastern Services, Inc. v. Chesapeake Midstream Services, L.L.C, Bradford Cty. C.P. Civ.No. 13ML000073. Outside of Pennsylvania, other states’ lien laws have generally been interpreted to include gas wells and pipelines as lienable improvements. For example, Indiana’s mechanics lien law does not specifically identify construction of a gas pipeline as an item that is considered an improvement, but cases in Indiana have held that mechanics liens can be placed on gas pipelines by contractors who performed construction work on the pipeline.11 Similarly, West Virginia’s mechanics lien law does not specifically identify improvements on an oil/gas pipeline as lienable, but the West Virginia courts have permitted mechanics liens for work performed in drilling a well.12
To eliminate any uncertainty in relying on decisional law, some states that previously interpreted general mechanics lien law statutes to be applicable to oil and gas well or pipeline construction projects have now enacted specific lien laws addressing oil and gas projects. For example, New Mexico, Oregon and California’s lien laws all now contain specific language regarding oil and gas wells and pipelines, eliminating the need to rely on prior decisional law that had extended the state’s general mechanics lien statute to such projects.13 Finally, many of the remaining states have specific statutes in place, separate from their general mechanics lien law, regarding lien rights on oil and gas projects.14 Although some states limit the class of people and interests for filing a lien on a pipeline project, no state has explicitly rejected the applicability of mechanics liens to an oil or gas well or pipeline project altogether.15
In conclusion, while there is currently no case law in Pennsylvania that specifically resolves the question of whether or not an oil or gas well or pipeline constitutes a lienable improvement for purposes of the Lien Law, the broader body of decisional law and legislative history indicates that oil and gas projects may be vulnerable to such claims by unpaid contractors, subcontractors and suppliers—provided the other statutory lien requirements have all been satisfied.16 For owners, developers and project lenders on such projects, this risk underscores the need to investigate and utilize precautions in the Lien Law designed to mitigate the risk of a possible mechanics’ lien claim filing, such as: (i) utilizing provisions unique to Pennsylvania’s Lien Law that permit the filing of no-lien agreements designed to preclude the ability of subcontractors and suppliers to pursue lien claims; (ii) obtaining partial lien waivers as the work is ongoing to further reduce the risk of a lien filing; (iii) requesting contractual indemnities against liens in the development and construction contracts; and (iv) for lenders, taking advantage of certain lender “super-priority” provisions in the Lien Law designed to protect project lenders if a lien were to be filed.17
1. 49 PURDON’S. STAT. (“P.S.”) §§ 1101, et seq. (2010).
2. On a project involving the construction of a building, the mechanics lien claim would typically be filed against the underlying property on which the building was constructed, usually the fee estate. However, on most gas well or gas pipeline projects, the production company does not own the land on which the well or pipeline is being installed, but typically only holds a leasehold or easement interest from the landowner. The Lien Law permits a lien to be asserted against a leasehold or easement interest, but places significant restrictions on the ability to assert a lien beyond the leasehold interest and against the underlying fee estate. See 49 P.S. 1303(d) (“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.”).
3. 49 P.S. §1201(10); Dollar Bank, FSB v. EM2 Dev. Corp., 716 A. 2d 671, 674 (Pa. Super. 1998).
4. 49 P.S. §1201(1).
5. Sampson–Miller Assoc., Cos., Inc. v. Landmark Realty Co., 303 A. 2d 43, 45 (Pa. Super. 1973).
6. Id. at 691.
7. Mechanics Lien Act of 1901, P.L. 431 § 1.
9. See 49 P.S. § 1201(1), (12), cmt. 1, providing that “the detailed enumeration of the types of structure or improvements such as wharves, docks, bulkheads, conduits, coalbreakers, etc., contained in the Act of 1901 is omitted and the phrase ‘structure or improvement of whatsoever kind and character’ which is taken verbatim from Section 1 of the Act of 1901 is adopted as a generic definition. This is not intended to abridge or to enlarge the right to lien.”
11. McCartin McAuliffe Mech. Constr. v. Midwest Gas Storage, 685 N.E. 2d 165 (Ind. Ct. App. 1997); see also, Mid America Homes, Inc. v. Horn, 396 N.E. 2d 879 (Ind. 1979) (citing Monpelier Light & Water Co. v. Stephenson, 53 N.E. 444 (Ind.1899)) (enforcing mechanics lien for erection of an oil well derrick under Indiana’s law).
12. See Kanawha Oil & Gas Co. v. Wenner, 76 S.E. 893 (Va. 1912) (oil and gas well found to be a qualifying structure under West Virginia’s mechanics’ lien law, W. VA. CODE §§ 38-2-1 et seq. (1985)).
13. See N.M. Albuquerque Foundry & Mach. Works v. Stone, 286 P. 157 (1930); Lakeview Drilling Co. v. Stark, 310 P. 2d 627 (1957); Yearout v. American Pipe & Steel Corp., 168 P. 2d 174 (4th Dist. 1946)(applying New Mexico, Oregon and California’s general mechanics lien statute to drilling of an oil well). New Mexico and California have both since passed specific statutes regarding lien rights in oil and gas projects. See N.M. STAT. ANN. §§ 70-4-1 et seq. (1987); CAL. CIV. PROC. CODE §§ 1203.50 et seq.(1981).
14. Alaska, Arizona, Arkansas, California, Colorado, Idaho, Illinois, Iowa, Kansas, Kentucky, Louisiana, Michigan, Montana, New Mexico, Oklahoma, Texas, Utah, Wyoming.
15. See e.g. New York law holding equipment rental relating to pipeline construction not lienable. Butts v. Randall, 260 N.Y.S. 713 (N.Y. Tr. Ct. 1932); Whereas a state court in Kentucky has held that the lienability of rental equipment depends on the type of equipment. Stagg Indus. Dev. Corp. v. General Oil Field Supply Co., Inc., 743 S.W.2d 41 (Ky. Int. App. Ct. 1988). See also Florida, Illinois, Louisiana, Michigan, Ohio, and Arkansas laws for another example of how state lien interests for pipelines differ. These states will expressly grant a lien on a pipeline’s production when a contractor has not been paid. 40. FLA. STAT. ANN. § 713.805(3); ILL. REV. STAT. CH. 82, ¶ 503(3); LA. REV. STAT. ANN. § 9:4861(A); MICH. COMP. LAWS ANN. § 26:423(1); OHIO REV. CODE ANN. § 1311.021(A); ARK. STAT. ANN. § 18-44-211.
16. Satisfaction of these other statutory requirements is no easy matter, and can quickly become a daunting task on a large oil and gas project. For example, whether each gas well would be considered to be a separate “improvement” and whether the project is considered a single “plant” or multiple projects, may create complex allocation and apportionment issues for the contractor seeking to assert a lien. See 49 P.S. §1306. Similarly, where a pipeline project extends over more than one parcel or one county, the logistics associated with filing of the claim (e.g., requirements concerning description of the property affected, allocation issues and filing in more than one county) can become very complicated and can furnish a possible basis for striking the lien. See 49 P.S. §§1502, 1503.
17. See, e.g., 49 P.S. §1402 (lien waivers); §1508 (lender priority provisions); see also 42 PA . CONSOL. STAT. §§ 8141(1), 8143(f) (provisions defining qualified purchase money mortgages and open end mortgages).
Client Alert 2014-095