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58 th Annual Meeting - San Francisco June 13-16, 2012 Liens, Foreclosures, and Bankruptcy - Impact on Oil & Gas Leasehold Title AAPL - Copyright © All Rights Reserved.

Liens, Foreclosures, and Bankruptcy Liens AAPL - Copyright © All Rights Reserved.

Liens, Foreclosures, and Bankruptcy Two Categories of Liens –Voluntary or Consensual Entered into by Agreement –Involuntary Someone or something has created a lien on your property AAPL - Copyright © All Rights Reserved.

Liens, Foreclosures, and Bankruptcy Voluntary Liens –Mortgages 2-Party Agreement between Mortgagor (Owner) and Mortgagee (Lender) –Deeds of Trust 3-Party Agreement between Mortgagor (Owner), Mortgagee (Lender), and Trustee Property conveyed to Trustee for benefit of Lender AAPL - Copyright © All Rights Reserved.

Liens, Foreclosures, and Bankruptcy Voluntary Liens –Issues Due on Sale Clause –Right to call note in the event of a sale or transfer of all or part of Property. Alienation Clause –Clause prohibiting Mortgagor from transferring or selling Property. AAPL - Copyright © All Rights Reserved.

Liens, Foreclosures, and Bankruptcy Voluntary Liens –Drilling Title Opinions Listing of Encumbrances. Title Requirements as what is required. AAPL - Copyright © All Rights Reserved.

Liens, Foreclosures, and Bankruptcy Voluntary Liens –Title Requirements: 1. Release of Record 2. Subordination Agreement AAPL - Copyright © All Rights Reserved.

Liens, Foreclosures, and Bankruptcy Voluntary Liens –Subordination Agreements Easy to Require but may be logistical problem AAPL - Copyright © All Rights Reserved.

Liens, Foreclosures, and Bankruptcy Voluntary Liens AAPL - Copyright © All Rights Reserved.

Liens, Foreclosures, and Bankruptcy Voluntary Liens Rush to Drill for Natural Gas Creates Conflicts With Mortgages –The New York Times (Oct. 19, 2011)

Liens, Foreclosures, and Bankruptcy Involuntary Liens Tax Liens Federal: Income; Estate; Gift State: Ad Valorem Judgment Liens Lis Pendens AAPL - Copyright © All Rights Reserved.

Liens, Foreclosures, and Bankruptcy Involuntary Liens Mechanic’s-- Oil & Gas Mineral Liens –A Trap for the Unwary AAPL - Copyright © All Rights Reserved.

Liens, Foreclosures, and Bankruptcy Involuntary Liens –Problem Many of them can exist and attach without being placed of record What does your recently acquired Title Opinion have to say??? AAPL - Copyright © All Rights Reserved.

Liens, Foreclosures, and Bankruptcy Involuntary Liens Of necessity, this Opinion is subject to any applicable bankruptcy or insolvency laws, liens for taxes not yet due, statutory and constitutional mechanic's and materialmen's liens not of record, operator's liens not of record, statutory liens securing payment of proceeds of production from the subject land, enforcement of regulations or orders by any governmental authority having jurisdiction over the subject land, capacity or competency of parties, fraud, delivery and alteration after delivery. AAPL - Copyright © All Rights Reserved.

Liens, Foreclosures, and Bankruptcy Involuntary Liens Tax Liens Federal Tax Liens-for income taxes, 941 withholding taxes and the like liens are filed of record. AAPL - Copyright © All Rights Reserved.

Liens, Foreclosures, and Bankruptcy Involuntary Liens Tax Liens Federal Estate Tax Liens: Attach as of date of death and are not filed of record. Will become a real issue if no action by Congress this year which results in reduction of exemption equivalent to $1,000, from current level of $5,000, AAPL - Copyright © All Rights Reserved.

Liens, Foreclosures, and Bankruptcy Involuntary Liens Ad Valorem Taxes Patchwork of provisions but all states provide for taxes and nearly all are self executing liens that are not extinguished by sale or transfer of the property taking priority of all other liens AAPL - Copyright © All Rights Reserved.

Liens, Foreclosures, and Bankruptcy Involuntary Liens Judgment Liens Particulars vary from state to state but all provide for liens upon property against whom a judgment has been entered. AAPL - Copyright © All Rights Reserved.

Liens, Foreclosures, and Bankruptcy Involuntary Liens Lis Pendens (the wannabe claim): – Notice of lawsuit where a party is claiming an interest in the Land. Can be a problem due to unadjudicated claims. AAPL - Copyright © All Rights Reserved.

Liens, Foreclosures, and Bankruptcy Involuntary Liens Mechanic’s-- Oil & Gas Mineral Liens A Story AAPL - Copyright © All Rights Reserved.

Liens, Foreclosures, and Bankruptcy Involuntary Liens Background Facts: 1. You work for GBOC (Great Big Oil Company) 2.Recently completed due diligence on GBOC’s acquisition in Wyoming and Texas. 3. Purchased 1000 acres and what is now the GBOC No Acquisition was part of a 3000 acre lease. AAPL - Copyright © All Rights Reserved.

Liens, Foreclosures, and Bankruptcy Involuntary Liens GBOC (Great Big Oil Co.) Wyoming Lease Recently Acquired No. 1 from LOC (Little Oil Co.) No. 1No. 2No. 3 AAPL - Copyright © All Rights Reserved.

Liens, Foreclosures, and Bankruptcy Involuntary Liens Problem: 1. Letter from attorneys for service company claiming lien on your leasehold, well, and production from the GBOC’s No. 1s in both Texas and Wyoming for recent work done on LOC’s No. 3s in Texas and Wyoming before GBOC’s purchase. 2. Oil purchaser has suspended payments pending resolution. AAPL - Copyright © All Rights Reserved.

Liens, Foreclosures, and Bankruptcy Involuntary Liens Can they do that? AAPL - Copyright © All Rights Reserved.

Liens, Foreclosures, and Bankruptcy Involuntary Liens Problem: Nearly all liens for work on wells have their inception at the time work is initially performed but there may be nothing of record for a period of 3-6 months. Simply checking public records is insufficient. Need to review records for all work done on the wells and confirm payment. AAPL - Copyright © All Rights Reserved.

Liens, Foreclosures, and Bankruptcy Involuntary Liens Wyoming: Liens available for work performed on oil and gas wells is found W.S. § through Bad News: Lien extends to production and purchaser can withhold payments if notice has been received (W.S. § ) AAPL - Copyright © All Rights Reserved.

Liens, Foreclosures, and Bankruptcy Involuntary Liens Wyoming: Good News: You find W.S. § (b)ii which provides in part: If work is performed for or materials furnished to the owner, part owner or lessee of the working interest in only a portion of the acreage covered by a lease, the lien granted by this chapter shall be restricted to that portion of the acreage AAPL - Copyright © All Rights Reserved.

Liens, Foreclosures, and Bankruptcy Involuntary Liens Texas: Good News: You find that the lien provided for in Chapter 56 of the Texas Property Code does not extend to production or proceeds of production but only to the underlying leasehold. AAPL - Copyright © All Rights Reserved.

Liens, Foreclosures, and Bankruptcy Involuntary Liens Texas: Bad News: You find that the lien provided for in Chapter 56 of the Texas Property Code is not limited to just the well or the acreage related to the wells on which work was performed but the lien attaches to the entire leasehold interest including other wells on the leasehold. AAPL - Copyright © All Rights Reserved.

Liens, Foreclosures, and Bankruptcy Involuntary Liens Results: Wyoming: Lien released since it related only to work performed on LOC No. 3. Texas: Lien not released as it attaches to entire leasehold. Does not extend to production so purchaser cannot withhold payment. AAPL - Copyright © All Rights Reserved.

Liens, Foreclosures, and Bankruptcy Foreclosure AAPL - Copyright © All Rights Reserved.

Liens, Foreclosures, and Bankruptcy Foreclosure Purpose: Acquire ownership of property for payment of a debt. AAPL - Copyright © All Rights Reserved.

Liens, Foreclosures, and Bankruptcy Foreclosure Basic Rule: Foreclosure of a Lien that predates Oil & Gas Lease can effectively terminate lease. AAPL - Copyright © All Rights Reserved.

Liens, Foreclosures, and Bankruptcy Foreclosure The Law in Ohio

Liens, Foreclosures, and Bankruptcy Foreclosure Example of Power of Oil and Gas Industry: Amended Chapter 1509 of the Ohio Revised Code, effective June 30, 2010 AAPL - Copyright © All Rights Reserved.

Liens, Foreclosures, and Bankruptcy Foreclosure “If a mortgaged property that is being foreclosed is subject to an oil or gas lease…and the lease… was recorded subsequent to the mortgage, and if the lease… is not in default, the oil or gas lease… has priority over all other liens, claims, or encumbrances on the property so that the oil or gas lease… is not terminated or extinguished upon the foreclosure sale of the mortgaged property. If the owner of the mortgaged property was entitled to oil and gas royalties before the foreclosure sale, the oil or gas royalties shall be paid to the purchaser of the foreclosed property.” AAPL - Copyright © All Rights Reserved.

Liens, Foreclosures, and Bankruptcy Voluntary Liens AAPL - Copyright © All Rights Reserved.

Liens, Foreclosures, and Bankruptcy Foreclosure Types of Foreclosures: 1. Non Judicial Property sold without judicial intervention. Not available in all states. Only for consensual liens. 2. Judicial Judicial process used to obtain court order for sale. AAPL - Copyright © All Rights Reserved.

Liens, Foreclosures, and Bankruptcy Foreclosure Non Judicial Foreclosure Advantages: Speed Cost Problem from title standpoint: No assurance of notice of foreclosure action to Operator. AAPL - Copyright © All Rights Reserved.

Liens, Foreclosures, and Bankruptcy Foreclosure Judicial Foreclosure—all involuntary liens Advantages: Greater certainty Well established case law Disadvantages: Time Expense AAPL - Copyright © All Rights Reserved.

Liens, Foreclosures, and Bankruptcy Foreclosure Advantage to Operator in Judicial Foreclosure: 1. Notice Notice required to holders of an interest in the property. 2. Time Judicial process is not swift. AAPL - Copyright © All Rights Reserved.

Liens, Foreclosures, and Bankruptcy Bankruptcy AAPL - Copyright © All Rights Reserved.

Liens, Foreclosures, and Bankruptcy Bankruptcy Automatic stay -11 USC § 362 Property of the Estate-11 USC § 541 Assume or reject executory contracts- 11 USC § 365 Cram down provisions – Court forcing acceptance of Plan over objections AAPL - Copyright © All Rights Reserved.

Liens, Foreclosures, and Bankruptcy Bankruptcy Can debtor reject a lease as an executory contract? Majority view- No Louisiana- still a question AAPL - Copyright © All Rights Reserved.

Liens, Foreclosures, and Bankruptcy Bankruptcy The Tale of “EARLY RETIREMENT” AAPL - Copyright © All Rights Reserved.

Liens, Foreclosures, and Bankruptcy Bankruptcy Background Facts: 1. You work for LOC (Little Oil Company). 2.Recently completed farmout from XYZ. 3. Completed first well earning first 700 acres of 3,500 acre Prospect known as EARLY RETIREMENT. 4. Assignment not yet received from XYZ and it files for Chapter 11 Bankruptcy. AAPL - Copyright © All Rights Reserved.

Liens, Foreclosures, and Bankruptcy Bankruptcy What is status of your title on the 700 acres earned and what about the remaining 2800? AAPL - Copyright © All Rights Reserved.

Liens, Foreclosures, and Bankruptcy Bankruptcy (b)Property of the estate does not include— …… (4)any interest of the debtor in liquid or gaseous hydrocarbons to the extent that— (A)(i)the debtor has transferred or has agreed to transfer such interest pursuant to a farmout agreement or any written agreement directly related to a farmout agreement; AAPL - Copyright © All Rights Reserved.

Liens, Foreclosures, and Bankruptcy Bankruptcy Even though record title not yet in LOC at least the 700 acres can be protected. AAPL - Copyright © All Rights Reserved.

Liens, Foreclosures, and Bankruptcy Bankruptcy Remainder of Prospect- Since there remains substantial performance to be completed the remainder of farmout could be viewed as an executory contract and rejected by XYZ which would allow it to sell its remaining interest in violation of farmout. AAPL - Copyright © All Rights Reserved.

Liens, Foreclosures, and Bankruptcy Bankruptcy If XYZ retained an interest in the 700 acres as a participant and was party to the a JOA, consensus is that JOA is an executory contract that can be rejected allowing XYZ to sell its interest even LOC had retained preferential rights to purchase in JOA. AAPL - Copyright © All Rights Reserved.

Liens, Foreclosures, and Bankruptcy Bankruptcy Net Result-- EARLY RETIREMENT was not completed You will have to keep on working!!!!!! AAPL - Copyright © All Rights Reserved.