As we have discussed before, whether or not work relates back can have an enormous impact on lien rights. The priority of a lien stems from the first date of furnishing labor or materials. While a payment dispute may not arise until late in a project, generally, the claim will relate back to the first date when labor or materials were provided. However, when the work is not continuous, determining lien priority can become a little trickier.
For most projects, there will be no gap in work substantial enough to alter lien rights. However, when a party must relate back to the first date of furnishing, and an interruption or cessation in work has occurred, statute may affect the ability to relate back. We know that relating back under the Miller Act probably won’t work, but rules on relating back can vary from state to state. Harvey Gulf International Marine v. Bennu Oil & Gas explains that the Louisiana Oil Well Lien Act will allow a claim to relate back so long as the interruption or cessation in work is 90 days or less. It also shows us that Louisiana lien law cannot be modified by private contract.
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Harvey Gulf International Marine (Harvey) provided marine towing on a project for ATP Oil & Gas (ATP). Harvey began working on the project in May of 2009, working continuously through April 2010. However, from end of April 2010 to April 2011, Harvey did not perform work on the project for nearly a full year. In April 2011, Harvey began towing operations for ATP again, working for about a year until April 2012. Before Harvey was fully paid for its services, ATP went bankrupt. When ATP went into bankruptcy, the court called for all claims of lien. Harvey originally filed its claim stating the earliest the claim could relate back was March of 2011, when it agreed to resume work for ATP. Harvey amended this filing to show that the earliest date was actually May 31, 2009, which is when Harvey originally began work on the project. Bennu Oil & Gas (Bennu) eventually purchased ATP’s assets in bankruptcy.
During bankruptcy proceedings, Bennu filed for summary judgment, claiming Harvey’s work could not relate back due to the nearly year-long gap between Harvey’s stints working on the project. Naturally, Harvey disagreed. A provision in the contract between Harvey and ATP stated that any gap in Harvey’s work on the project shall not constitute a cessation or interruption for lien purposes. However, as Bennu noted, this claim puts the agreement at direct odds with the Louisiana Oil Well and Lien Act (LOWLA). Under LOWLA, “If more than ninety consecutive days elapse between such activities or events, the privileges established before and those established after such time are separate.” The bankruptcy court found in favor of Bennu, leading to a Harvey appeal.
The big question here is whether or not a Louisiana lien law provision may be altered in private contract. Harvey asserted that the alteration does not derogate from public policy and therefore should be enforced. Unfortunately for Harvey, the court was not moved by this argument. The court found that in Louisiana, liens act only as statutory creation. Liens may not be created through contract and may only arise out of those situations contemplated by statute. While the provision to Harvey’s agreement with ATP contemplated an extended break in Harvey’s work on the project, because the agreement purported to extend relation back beyond the 90 days provided by LOWLA, the provision was invalid.
A mechanics lien may be a powerful remedy, but in bankruptcy situations, priority is king. When an owner goes bankrupt, there is typically not enough money to make all creditors whole. Mechanics liens create a secured credit interest, but even with this advantage, lien holders can be left on the outside looking in. One way many states have helped contractors, subs, and suppliers in this area is to allow their claims to relate back to the first date when labor or materials was furnished on a project. However, relating back has its limits. Under Louisiana lien law, these limits may not be modified through private contract.
For more on bankruptcy or priority, click whichever one of those blue words piques your interest! For more on Louisiana lien law, check out the Louisiana tag on the blog or head over to our Louisiana Lien Law FAQs.