ha investment corporation versus schlumberger technology corp let's wait just a minute let everyone get settled course caton may please the court benjamin cadden i'm here today on behalf of a group of companies that provided critical good services in materials to a t p oil and gas corporation prior to its filing bankruptcy these goods were provided in connection with the expiration of properties off the coast of louisiana and therefore the law of the state of louisiana will control any decision in this court the lower court's decision misapplied and contain internal inconsistency with respect to the treatment of a term overriding royalty interest and how the sale of such a term overriding royalty following the inception of a statutory conference would have an impact upon their interests this strain reading not only disregarded louisiana property and mineral law but it created a framework a construct in which my clients as service providers are unable to protect their statutorily afford a lien rights with respect to a that these claimants did not provide direct notice to the term overriding royalty holders via a letter or otherwise because there is an impossibilities for our clients to ever comply with that notice requirement if you take a look at the safe harbor provision which is the basis by which the purchaser of the over i got is to get out of jail free card that provision is aimed at purchasers of discrete quantities of hydrocarbons as this court is well aware  ground there extracted and typically on a rolling or monthly basis are sold at market based upon a marketing and sale contract in that context my clients to the extent we wish to him seek to enforce our lien rights with respect to a purchaser would provide notice to that purchaser we would look up in the records who's who's buying this oil and gas we would send them a notice but with respect to a term overriding world holder who pays one hundred percent of its purchase price at the time of the acquisition of the of the of the override i'm sorry it's impossible for us to know the transaction is going to occur and to send them notice because this is a private transaction between the operator on the one hand a term overriding royalty purchaser on the other hand so when there is what what case law do you point to that excuses notice under the circumstances your eyes frankly there is no case law directly on point this is  a new and novel issue is the first time that we are aware of any instance in which the holder of an overriding royalty has seek to avail itself of the third party boon to feed a purchaser exception  again the purpose of that notice provision is to protect a third party purchaser who is buying production each month they need the safety and this surance that if they buy production this month and they tender the purchase price that they're they're protected however if i provide notice to them from that point forward they're required to suspend payment that does not work for somebody who pays one hundred percent of the purchase price upfront for a purchase of future production how would we how would we write this assume that we agree with us to the result or we decide that we want to reach a result because it seems fair so how would we write that in a published opinion would we just say that louisiana law doesn't apply here as to the notice requirement what would we say what we would say your honor is that what you would say your honour's is that this safe harbor provision and that the scope of that provision when it speaks to the provide them notice they are not a purchaser as contemplated by the safe harbor provision and so that is the focus of what we believe the opinion should say that look at  either right i would answer that for two reasons draw or first hydrocarbons cannot be sold until their severed because louisiana law is explicit that ownership does not arise until severance a t p doesn't own and therefore cannot sell what it doesn't own until severance the second point though is equally important which is receive is a right to participate in future production and the related proceeds there is a likelihood that no production ever happens at the time they buy their over well in the other part i do want to make your honor is in the statute that you just read a believe the most important part of that provision says that it was bought and sold by a lessee who severed or own them at severa to this entire provision is written in the past tense because of what i just explained which is that hydrocarbons can't be sold until sever which is why this is written as something that happens on a rolling in contemporaneous basis hydrocarbons and that's a real right as opposed to a personal right and this provision would be rendered pointless we would have no ability to ever comply with the nose requirements to judge miss point we didn't provide oh ha notice because a t p n o h eight negotiated this transaction without notice to the service providers who are the ones out in the field actually making sure that something came out of the ground the the best and only way i can fathom for my clients protect our interests is for us to go out and file face a cli anticipatory liens from the first date that we start providing service and it says guess what the law of louisiana is that arlene and steps from the first day of service and if you buy an interest in this property you take it subject to that encumber it's i think you're ours if you think about this this interest similar to a mortgage oh ha specifically worked  obtain a subordination of the previous issing mortgage incumbrances when they bought their override days they didn't do that with us they could have approached the debtors as part of due diligence on a sixty five million dollar is out there we know because of the relation back doctrine we may be primed if you ever stop paying people who are working before we bought our override we need to know who those vendors are because we can then approach those vendors and say we're buying this override will you agree to a subordination maybe you don't buy it maybe they won't agree but i would venture to guess that oh ha's of the world the operators the the holders of  two points your honor first i would respectfully disagree i think that the past tense is clear in that it only applies for hydrocarbons that were sold at severance and that ties into the fact again hydrocarbons aren't own by extract it extraction own the hydrocarbons and that is exactly why i believe it's written in the past tense and that provision it could just say lessees who are going to sever or will sever in the future but if they were very intentional and it actually interplays perfectly with the louisiana mineral the other issue your honor i would like to briefly touch on because i know it was a focus of briefs is the concept that this appeal is somehow precluded by a race judicata doctrine as this court may be well aware th adversary proceeding involved a great number of parties some of whom are in the courts a day and it was bifurcated in the two phases the first phase was a phase in which there was a dispute between ha an a t p as to whether this transaction was even a sale of a real right was really just a disguise financing that was coined in actually specifically defined as the financing issues the second part of the litigation was focused upon the issues of whether the overriding worldy interests were bought assuming that was a true sale subject to the rights of our clients phase one final judgment they like to use it as a sword but in fact i believe that final judgment actually supports the arguments of appellants because as i tried to explain to the court the the fact that hydrocarbons are distinguishable types of property under louisiana property law is recognized in this final judgment which says the term overrides a real interest in property and in the state of louisiana are in him are an immovable property interest and a real right that in of itself is a reflection of the understanding of the parties that what they acquired was immovable or real right where they did not acquire or hydrocarbons and so to afford them the protection of the third party person or statute essentially a vis arrays the ability of my clients to protect our  rights visa v in operating interest take for example a company like a t p who is extremely strain for liquidity they know that their property their property interest is in cumbered by statutory liens because they are not paying their vendors they know that if they produce oil and gas i is the link claimant can provide notice to the plains marking of the world and that person has to suspend payment so what they do is they monetize that in cumbered interest by selling the term override happened years later that's not what i understand writing royalty interest to be they're not paying one hundred percent for production they're paying for a right to proceed right that is correctly just different correct they're not purchasing hydrocarbons or purchasing a right to proceeds in the future ill enact permits sales of hydrocarbons including shares of hydrocarbons in arm's length bona fide transactions during lease operations await shay's production payment also known as a term overriding role  operating interest and thereby impose without notice their liens for the cost of operations on a cost free sheriff production and your honors that's not what the statute allows it's contrary to the language of the statute and it's contrary to the nature of the interest and the notice requirement your honor is asking about specifically notice and we agree that that's a fundamental issue in this case and from a big picture standpoint what the louisiana legislature is saying under this statute is that if you're going to buy a share of production that's cost free and not an operating interest whether it's  you're not going to be responsible for operating costs because those are costs borne by the less he says is owners of the operating interest unless you receive notice of the client of the of the existence of the when and that's really the fundamental distinction under the statute it's driven by the nature of the interest involved what mr mr cadden tells us is that it's impossible for them to comply with the notice requirement where you address that specifically absolutely your honor the lien claimants can enforce their liens they can file notices and in the public records giving notice that they are asserting a lien against the interest under the statute against the property now the statute says that when a purchaser of production payment pays the purchase price as long as that purchase price is paid before receiving note before being notified of the privilege by the claimant then the art than the share of hydrocarbon sold is extinguished but the requirement of the statute that it be a bona fide transaction also assumes that we proceeds so you know conceptually the statute absolutely protects the rights of the lien claimants because they are collateral package if you will under the terms of the statute which they are strictly subject to is not being diminished in any way and the statute contemplates that they are protected because of the safe harbor provision in the requirement for it to be a bona fide owners transaction and when they when it comes time to enforce their lane what they can do is actually enforce it fall notice and start proceeding to file a lawsuit and enforce the lien against the lessee identify any proceeds of production in the hands of the lessee what and where would the notice be where the proper use located that's because correct and you know was fundamental to the lower court's decisions here was the nature of this interest and in the louisiana and there is a an overlaying issue a five forty one  before b but we don't believe there's any conflict in this case with five forty one because louisiana allows for a pre severance sale of hydrocarbon production we have cited this lol oil versus landry as well as the rep williams and myers oil and gas treatise and all of those support the proposition that when you purchase a term overriding role t it's a share of the hydrocarbons produced now you can you can negotiate terms regarding how how the the deal is affected if you buy a share of hydrocarbons you can buy them in kind you can buy a volume metric production payment where you're actually taking in  receiving a certain amount of the hydrocarbon molecules or you can buy a share of hydrocarbons that obligates the lessee to transport those hydrocarbons and sell them on your behalf and then remit the proceeds but the fact that you agreed to allow the lessee to transport them doesn't mean you don't you still own the hydrocarbons that are being transferred and that's our fundamental point here is that as a matter of wall we owned our proportionate share of  where it where it discusses what liens are granted under section forty eight sixty three it speaks in terms of the operating interest and then production from the operating interest map production can be owned by it can be owned by other non lessee interest holders but all of that production can be sold under the safe harbor and that's the way the statute operates and when you look at the language of the safe harbor and i provided the handout to the court that it looked seems that you all have a copy of the safe harbor language and for you and four of you under section of forty eight sixty nine it's important to know that the lanes that are extinguished under the safe harbor are the lanes to production from the operating interest and proceeds for production in the operating interest and the lien under a one which is a gran production free and clear and you have to conclude logically that the lean under a one is not grand against hydrocarbons and hydrocarbon production because otherwise the safe harbor wouldn't would be meaningless you'd never be able to sail hydrocarbons free and clear because the a one lean isn't extinguished so it helps i think in terms of construing the statute to understand the breadth of it and that it addresses all hydrocarbons that are produced from the operating interest and the language of the statute the breadth of it i think continues to make that concept clear and the court notice the language sold or otherwise transfer we think that other law is transferred is important because it recognizes that hydrocarbons can be transferred in different ways it can be they can be transferred ina law predicts traction or they can be transferred post extraction post severance and the otherwise transfer it is important to capture that they can be transferred by the less ee with that which is a defined term a person that's a person who owns and operating interest and that's the person that can sell a pre extract ssion share of production or other person who severed or own the severance so when you when you look at the other transferred language and you think about it with under the construction of the statute with the following language we think it's very clear that this is intended to pot to apply broadly to all shares of hydrocarbon production and all that is required under the statute is that the transfer pay for those hydrocarbons before he's notified of the privilege by the claimant and again to that point the the importance of the notice provision is that again centers around the nature of these interest a purchaser of a non cost bearing share production isn't involved in operations they don't have any ability to identify lien claimants that are performing services that have been paid or not been paid  of the amazing you know kind of runoffs of the link claimants interpretation of the statute and the reason why that the concept of strict by strict liability is is is kind  it can continue in perpetuity as long as there's not a lapse in services of more than ninety days so under the lindt claimants interpretation of the statute a purchaser approaching payment can buy on in year one when they are performing services and can receive a share of hydrocarbons for years into the future and still they don't get paid any point in the future if they don't get paid and there hasn't been a lapse of ninety days their theory is that they're lean can relate back and can't capture or assert a claim against all those hydrocarbons that were received by the by the purchaser and your owners we wish strong very strongly believe that that is not the interpretation of the statute that's not how a situation i think i understand your question your honor so if if if there's a particular purchaser of sever hydrocarbons under a marketing agreement as one claims describe it and they receive notice of a pinch potential lan then they wouldn't pay those proceeds to the operator but that doesn't mean that the un claimant has a lien on all of those proceedings because what the what the production holder what the would departure the production payment would say is that those proceeds of production are not property of the lessee your lane does not attach to production proceeds that the lessee doesn't have an interest in so there are issues there that would need to be resolved but conceptually just because they serve notice of a lien on a purchaser of sever hydrocarbons certainly does not mean under the statute that there lane attaches to all those does that answer your question i guess need to think through it i suppose but if the interest is truly only a right to be paid out of proceeds it seems to me that there's a lynn on the gas and hydrocarbons as they're sold to intrastate pipeline  and that's that's our fundamental point is that when you sell a share of production what you're doing is you're selling a share of the hydrocarbons and that concept i think under louisiana law is it what the bankruptcy code says if you buy a production payment and if it's a qualifying production payment under five hundred one before b then the hydrocarbons in issue are sold they are owned by the purchaser they are not owned by the seller and that is to clarify property rights in the event of a bankruptcy there are again we don't think there's a conflict here between wheezy and a law because of the cases we've cited and because of the language of the statute if there was a conflict we do have a final judgment that says we purchased a qualifying production payment and we own those hydrocarbons so from our perspective the ownership issue which is really touches on the proceeds question ne other part of the state of the notice language that is important i think that is supported by cases that are even cited by the when claimants like be charged is that the notification provision keeps the risk on the the parties that operate the properties the parties that hire and fire contractors if you require notification to be served on the and the purchaser of hydrocarbons in order for the lane not to be extinguished what you're saying is the lessee is going to bear the risk of these operations and we're not going to transfer that risk to a purchaser of a share of hydrocarbons under the statu and i think that is why we agree with certainly that that proposition as set forth in the beach charter and i think that's how the statute ought to be interpreted i guess i would make disagrees with the decisions of the lower courts that production payments are subject to the safe harbor protections then then we in the alternative believe that just looking at the other language of the statute and the what these privileges can affect that non cost bearing interests are protected under the terms of the statute and the the lead back to my point regarding the safe harbor is that the  ran under five forty eight sixty three a one does not include hydrocarbons for hydrocarbon production and we believe logically that has to be the case in order for the safe harbor to make sense and so when a hydrocarbons in louisiana can't be sold preach traction and that's wrong it's fundamentally wrong and i'd like to explain that a little bit you know it in texas there it's an ownership and in place state but it's subject to the rule of capture and in texas you can sell a share of hydrocarbon production just like you can in louisiana louisiana ownership theory is a rule of capture in application it's very similar to the law of texas that relates to the sale of hydrocarbons the fact that you can't absolutely own hydrocarbon in the ground does not prevent l s e who has the exclusive right to explore and produce from your honour's o e cheese entire theory on this case is premised upon their ability to acquire and purchase hard to carbons pre severance i thought it would be instructive to bring in unfortunately read to your daughters the mineral code which is what actually defines a property interest in the easy and lola louisiana alene act doesn't define what's property interest five forty one b which relates to property the state doesn't define property interests thirty one co six louisiana mineral code says specifically ownership of land does not include ownership of oil gas and other minerals occurring naturally in liquid and gaseous form and then continues the land owner has the exclusive right to explore and develop his property for the production of such minerals and to reduce them to possession and ownership ownership does not only mister hancock then made the statement as i wrote x traction what can be sold predicts traction is the operating interests can sell a derivative portion of its right to explore and own up on severance in the future they cannot sell hydrocarbons to them pre x traction because they do not own them and again i also want to make sure that we talked about the ability to file a notice what mr hancock is referred to earlier about we could go in we could file a notice of our lien in all the various p vendor when you're when you're talking about this much money i mean that's such a burden it would be a few parishes when well your honor would your but you're talking about though in a given oil and gas operation could be tens or dozens or hundreds of vendors who may only be earning a thousand ten thousand twenty thousand so if for them to each at the inception of providing services go out and follow a lean that says in case one day i may not be paid i have a lien that starts as of this date would absolutely drown the mortgage records offices particularly in oil producing parishes with unnecessary documents that really do nothing more than recites the  law the fact of the matter is that that notice provision is intended for people who are buying discrete quantities from the wellhead on a rolling basis and it captures production from that point forward but the court has no further questions i thank