Endeavor Energy Resources, L.P, et al v. Heritage Consolidated, L.L.C., et al

Filing

PUBLISHED OPINION FILED. [13-10969 Affirmed in Part, Reversed in Part and Remanded] Judge: CES , Judge: PEH , Judge: JWE. Mandate pull date is 09/17/2014 [13-10969]

Case: 13-10969

Document: 00512748732

Page: 1

Date Filed: 08/27/2014

IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
United States Court of Appeals
Fifth Circuit

No. 13-10969
In the Matter of: HERITAGE CONSOLIDATED, L.L.C.,

FILED
August 27, 2014
Lyle W. Cayce
Clerk

Debtor,
ENDEAVOR ENERGY RESOURCES, L.P.; ACME ENERGY SERVICES,
INCORPORATED, D/B/A RIG MOVERS EXPRESS, D/B/A BIG DOG
DRILLING,
Appellants,

v.

HERITAGE CONSOLIDATED, L.L.C.; HERITAGE STANDARD
CORPORATION,
Appellees.

Appeal from the United States District Court
for the Northern District of Texas
Before STEWART, Chief Judge, and HIGGINBOTHAM and ELROD, Circuit
Judges.
JENNIFER WALKER ELROD, Circuit Judge:
Appellants Endeavor Energy Resources, L.P. and Acme Energy Services,
Inc. (collectively, Drillers) performed work on Debtors’ well, but were never
paid. Drillers subsequently filed a mineral lien on the well, and then a claim
in Debtors’ bankruptcy. The bankruptcy court dismissed Drillers’ constructive
trust and equitable lien claims and granted summary judgment to Debtors on

Case: 13-10969

Document: 00512748732

Page: 2

Date Filed: 08/27/2014

No. 13-10969
Drillers’ mineral contractor’s and subcontractor’s lien claims. The district
court affirmed.

We AFFIRM the district court’s dismissal of Drillers’

constructive trust and equitable lien claims. We REVERSE and REMAND the
district court’s grant of summary judgment on Drillers’ mineral subcontractors’
lien claims because Drillers submitted sufficient evidence to survive summary
judgment.
I.
Heritage Standard Corporation (HSC) owned mineral property leases for
a nonfunctioning oil well in Winkler County, Texas. This well was governed
by a series of contractual arrangements. Because these contracts bear on
Drillers’ ability to recover on their claims, we will briefly outline them here.
In January 2008, HSC entered into a farmout agreement (Staley Agreement)
with George Staley to develop the well. 1

Staley then entered into an

assignment contract (Lakehills Agreement) with Lake Hills Productions, Inc.
(Lakehills) to perform the work. Staley, HSC, and Lakehills, along with well
operator Stratco Operating Co., Inc. (Stratco) subsequently signed a Joint
Operating Agreement (JOA) to develop the well. The JOA was made effective
as of January 2008, and the parties all signed it between April and June of
2008.
Lakehills then sold and assigned its interests in the well to Trius Energy,
LLC (Trius) in February 2008, and Trius was added to the JOA in September
2008. As a result, HSC was responsible for 12.5% of the well expenditures, and
Trius was responsible for the remaining 87.5% of the expenditures. In July
2008, Lakehills replaced Stratco as the official well operator. Under this new
A farmout is a contract “whereby a lease owner not desirous of drilling at the time
agrees to assign the lease, or some portion of it . . . to another operator who is desirous of
drilling the tract.” 8-F Williams & Meyers, Oil Gas Law Scope. “The primary characteristic
of the farmout is the obligation of the assignee to drill one or more wells on the assigned
acreage as a prerequisite to completion of the transfer to him.” Id.
1

2

Case: 13-10969

Document: 00512748732

Page: 3

Date Filed: 08/27/2014

No. 13-10969
arrangement, Lakehills was responsible for ensuring that necessary work was
done on the well, and Trius and HSC were to make payments for this work to
Lakehills. In May, June, and July of 2008, Lakehills contracted with Drillers,
who then performed work on the well during that same time period.
This arrangement apparently took a downward turn in the late summer
of 2008.

Both Trius and HSC stopped making payments to Lakehills.

Lakehills then failed to pay Drillers for their work, and Drillers filed mineral
liens against HSC to recover the money they were owed. Drillers’ liens were
filed within the six month period required by the Texas statute, and HSC
received notice as required under the statute for a subcontractor’s lien. See
Tex. Prop. Code Ann. § 56.001–3, 0.21. After Drillers filed their liens, HSC
assigned its interest in the well to Heritage Consolidated. Several of the other
parties to these agreements subsequently defaulted on their contract
obligations.

As a result, HSC, Heritage Consolidated, Trius, Stratco,

Lakehills, and Staley negotiated a settlement agreement (Settlement
Agreement) in May 2009.
Under the Settlement Agreement, Lakehills received a 1% interest in the
well as consideration for releasing its operator liens against HSC and Heritage
Consolidated (collectively, Debtors).

The Settlement Agreement also

stipulated that Trius was obligated to satisfy Drillers’ liens and to indemnify
all other signees against claims arising from those liens. In consideration for
Trius’s agreement to discharge the liens, Debtors forgave Trius’s 87.5% share
of the working expenses incurred by Debtors after Debtors took over well
operations in November 2008. Even after this settlement, no one paid Drillers
for their services.
Debtors filed for Chapter 11 bankruptcy. Drillers filed proofs of claim in
their bankruptcies asserting secured lien claims and, alternatively, unsecured
nonpriority claims.

Drillers also filed an amended complaint seeking a
3

Case: 13-10969

Document: 00512748732

Page: 4

Date Filed: 08/27/2014

No. 13-10969
determination of the validity, extent, and priority of their mineral liens. The
bankruptcy court entered judgment against the Drillers on all claims. The
bankruptcy court granted summary judgment to Debtors on Drillers’ mineral
contractors’ and subcontractors’ lien claims, and granted Debtors’ motion to
dismiss Drillers’ additional claims for a constructive trust and equitable lien
asserted in their amended complaint. The district court affirmed, and Drillers
appealed.
II.
We review “the decision of a district court sitting as an appellate court
in a bankruptcy case ‘by applying the same standards of review to the
bankruptcy court’s findings of fact and conclusions of law as applied by the
district court.’” Clinton Growers v. Pilgrim’s Pride Corp. (In re Pilgrim’s Pride
Corp.), 706 F.3d 636, 640 (5th Cir. 2013) (quoting Wooley v. Faulkner (In re SI
Restructuring, Inc.), 542 F.3d 131, 134–35 (5th Cir. 2008)). “‘Generally, a
bankruptcy court’s findings of fact are reviewed for clear error, and its
conclusions of law are reviewed de novo.’”

Id. at 640 (quoting In re SI

Restructuring, Inc., 542 F.3d at 135).
We review a bankruptcy court’s grant of summary judgment de novo. See
Id. (citing SeaQuest Diving, LP v. S & J Diving, Inc. (In re SeaQuest Diving,
LP), 579 F.3d 411, 417 (5th Cir. 2009)). When seeking summary judgment, the
moving party—here, Debtors—bears the initial burden to demonstrate that
there is no genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S.
317, 322–23 (1986). Once this initial burden is satisfied, the burden shifts and
the non-moving party “must come forward with ‘specific facts showing that
there is a genuine issue for trial.’” Matsushita Elec. Indus. Co. v. Zenith Radio
Corp., 475 U.S. 574, 587 (1986) (quoting Fed. R. Civ. P. 56(e)). We must draw
inferences in the light most favorable to the party opposing the motion.
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986). However, the non4

Case: 13-10969

Document: 00512748732

Page: 5

Date Filed: 08/27/2014

No. 13-10969
moving party’s burden may not be satisfied by relying upon mere
“conclusionary denials, improbable inferences, and legalistic argumentation.”
S.E.C. v. Recile, 10 F.3d 1093, 1097 (5th Cir. 1993).
We also review the dismissal of claims pursuant to Rule 12(b)(6) de novo.
Gonzalez v. Kay, 577 F.3d 600, 603 (5th Cir. 2009). We accept all well-pleaded
facts as true and view those facts in the light most favorable to the plaintiffs.
Id. at 603 (quoting Dorsey v. Portfolio Equities, Inc., 540 F.3d 333, 338 (5th Cir.
2008)). However, “plaintiffs must allege facts that support the elements of the
cause of action in order to make out a valid claim.” City of Clinton, Ark. v.
Pilgrim’s Pride Corp., 632 F.3d 148, 152–53 (5th Cir. 2010) (citing Bell Atlantic
Corp. v. Twombly, 550 U.S. 544 (2007)). “[T]o survive a motion to dismiss, a
complaint must contain sufficient factual matter, accepted as true, to state a
claim to relief that is plausible on its face.” Gonzalez, 577 F.3d at 603 (internal
quotation marks and citations omitted).
“In this diversity action, we must apply Texas law as interpreted by
Texas state courts.” Gilbane Bldg. Co. v. Admiral Ins. Co., 664 F.3d 589, 593
(5th Cir. 2011) (quoting Mid–Continent Cas. Co. v. Swift Energy Co., 206 F.3d
487, 491 (5th Cir. 2000)). “We consider Texas Supreme Court cases that, while
not deciding the issue, provide guidance as to how the Texas Supreme Court
would decide the question before us.” Id. at 594 (internal quotation marks and
citation omitted). We also “consider decisions of the intermediate appellate
courts in determining how the Texas Supreme Court would decide this issue.
We are bound by our own precedent interpreting Texas law unless there has
been an intervening change in authority.” Id. (citations omitted).
III.
Drillers first argue that the bankruptcy and district courts should not
have granted summary judgment to Debtors on their contractors’ and
subcontractors’ mineral lien claims.

We agree that it was error to grant
5

Case: 13-10969

Document: 00512748732

Page: 6

Date Filed: 08/27/2014

No. 13-10969
summary judgment on Drillers’ subcontractors’ lien claims, and therefore do
not reach the issue of whether Drillers were also entitled to contractors’ liens.
A.
In Texas, material liens are creatures of statute, granted to “both
mineral contractors and mineral subcontractors to secure payment for labor or
services related to mineral activities, as therein defined.” 56 Tex. Jur. 3d Oil
& Gas § 678 (2014); see also Trevor Rees–Jones, Tr. for Atkins Petroleum Corp.
v. Trevor Rees-Jones, Tr. for Apache Services, Inc., 799 S.W.2d 463, 465 (Tex.
App.—El Paso 1990, writ denied). Texas courts have repeatedly noted that the
mineral lien statute is “designed to protect laborers and materialmen” 2 and
should therefore be liberally construed. Bandera Drilling Co., Inc. v. Lavino,
824 S.W.2d 782, 784 (Tex. App.—Eastland 1992, no writ); see also Youngstown
Sheet & Tube Co. v. Lucey Prods. Co., 403 F.2d 135, 143 (5th Cir. 1968).
A mineral contractor is a person who “furnishes or hauls material” or
“performs labor” under an express or implied contract with a mineral property
owner or with a trustee, agent, or receiver of a mineral property owner. Tex.
Prop. Code Ann. § 56.001(2).

A mineral subcontractor is a person who

“furnishes or hauls material” or “performs labor” under a contract with a
mineral contractor.

Tex. Prop. Code Ann. § 56.001(4).

Contractors and

subcontractors are treated interchangeably under the mineral lien statute,
with two notable exceptions: First, subcontractors must give notice to the
mineral owner when filing material liens, whereas contractors have no notice

While the Texas statute calls these liens “mineral” contractor or subcontractor liens,
the case law frequently refers to them as “material and mechanics” or “M&M” liens. Laborers
are sometimes referred to as “materialmen” in the case law. These terms appear to be
interchangeable.
2

6

Case: 13-10969

Document: 00512748732

Page: 7

Date Filed: 08/27/2014

No. 13-10969
requirement. 3 Second, contractors must have a contractual relationship with
a mineral owner, whereas subcontractors only need to have a contractual
relationship with a contractor.
When determining whether a laborer is a subcontractor or a contractor,
the important question is whether there is a contractual relationship between
the owner and the laborer performing the work: If there is a direct contractual
relationship between an owner and the laborer, then the laborer is a contractor
with regard to that owner. If there is a contract between the laborer and
another party who has a contract with an owner, then the laborer is a
subcontractor. See Rhett G. Campbell, A Survey of Oil and Gas Bankruptcy
Issues, 5 Tex. J. Oil Gas & Energy L. 265, 311–12 (2010).
If a well has multiple owners, it is possible for a single laborer to be both
a subcontractor and a contractor for the work they perform on that well. For
example, the owners may collectively enter into an agreement that makes one
owner the well operator, and gives that owner-operator the power to contract
with laborers. The laborers would then be contractors with respect to the
contracting owner-operator, but subcontractors with respect to the other
owners. See id. at 311 (“In the typical transaction, the operator contracts
directly with vendors but the non-operators do not.

A service company

contracting with the operator is a contractor as to the operator (if the operator
owns an interest in the lease) but a subcontractor as to non-operators.”). It is
thus not only possible, but common within the industry for an owner to also be
a contractor as defined by the statute. See In re Mid-Am. Petroleum, Inc., 83
B.R. 933, 935 (Bankr. N.D. Tex. 1988) (concluding that MAP was both a
working interest owner and a mineral contractor); Energy Fund of Am., Inc. v.
Drillers averred in their lien affidavit that they gave such notice to the owner (HSC),
and Debtors do not contest this point.
3

7

Case: 13-10969

Document: 00512748732

Page: 8

Date Filed: 08/27/2014

No. 13-10969
G.E.T. Serv. Co., 610 S.W.2d 833, 835–36 (Tex. Civ. App.—Eastland 1980),
aff’d in part and rev’d in part on other grounds sub nom., Ayco Dev. Corp. v.
G.E.T. Serv. Co., 616 S.W.2d 184 (Tex. 1981). Under these circumstances, “the
service company would need to perfect its lien both ways, first as a
subcontractor and second as a contractor” to secure a claim against all owners.
Campell, supra at 312; see also Mitchell E. Ayer, 34 Energy & Min. L. Found.
§7.08 (2013).
In

order

to

determine

whether

Drillers

were

contractors

or

subcontractors with regard to Debtors, we therefore look to the various
contractual relationships governing the well at the time that Drillers
performed their work. Viewed in the light most favorable to non-movant
Drillers, Drillers have raised a fact issue as to whether they were mineral
subcontractors with regard to Debtors: Drillers presented evidence that Debtor
HSC was an owner at the relevant time because HSC owned part of the
working interest in the lease when Drillers performed their work and perfected
their liens. Drillers also presented evidence that HSC was the record owner of
100% of the lease, and retained 12.5% of the working interest even after the
various farmout agreements and assignments. Drillers presented evidence
demonstrating that Lakehills was in a contractual relationship with HSC
because Lakehills was the assignee of the Staley Agreement. Viewed in the
light most favorable to Drillers, this evidence demonstrates that Lakehills was
a contractor at the time that Drillers performed their work on the well. Drillers
also put forth evidence showing that Lakehills contracted with Drillers to have
Drillers perform work on the well. Taken together, these facts at the very least
raise a genuine issue as to whether Drillers were mineral subcontractors with
regard to Debtors at the time Drillers performed their work. Tex. Prop. Code
Ann. § 56.001(2), (4).
8

Case: 13-10969

Document: 00512748732

Page: 9

Date Filed: 08/27/2014

No. 13-10969
B.
Debtors argue, and the bankruptcy and district courts agreed, that
Drillers could not be subcontractors because Lakehills subsequently acquired
a 1% ownership interest in the lease, and was thus a co-owner, rather than a
contractor.

According to Debtors and the bankruptcy and district courts,

Lakehills’s ownership interest “relates back” to the time prior to the inception
of Drillers’ work. The bankruptcy and district courts therefore reasoned that
Drillers’ liens could only attach to Lakehills’s—and not Debtors’—interest in
the lease. We disagree. As we explained above, it is possible under Texas law
for an owner to also be a contractor, and for a laborer to secure liens against
both the contracting and non-contracting owners.

See In re Mid-Am.

Petroleum, Inc., 83 B.R. at 935; Campbell, supra at 311–12.
In reaching a contrary conclusion, the district court relied on the Texas
Supreme Court’s decision in Diversified Mortgage Investors v. Lloyd D.
Blaylock General Contractor, Inc., 576 S.W.2d 794 (Tex. 1978). Specifically,
Debtors and the district court point to language in Diversified Mortgage to
argue that Drillers’ liens could only attach to Lakehills’s interest—and not
Debtors’ interest—if Lakehills was an owner at the relevant time. The district
court relied on the Texas Supreme Court’s statement that “[o]ur courts have
long held that a mechanic’s and materialman’s lien attaches to the interest of
the person contracting for construction.

Thus, if a lessee contracts for

construction, the mechanic’s lien attaches only to the leasehold interest, not to
the fee interest of the lessor.” Diversified Mortg., 576 S.W.2d at 805. After
reviewing the case law, we conclude that the district court incorrectly applied
this decision and the accompanying “relation back” doctrine.
In Diversified Mortgage, general contractor Blaylock held contractor’s
liens on certain properties based on a construction contract with Dollar Inns.
Id. at 796. The Texas Supreme Court explained that “[t]o further determine
9

Case: 13-10969

Document: 00512748732

Page: 10

Date Filed: 08/27/2014

No. 13-10969
the priority of the mechanic’s lien, this court must decide whether Dollar Inns,
the party contracting with Blaylock, held any legal or equitable interest in the
property at the time of inception of this mechanic’s [contractor] lien.” Id. at
806. The Texas Supreme Court determined that:
[A]t the time of inception of Blaylock’s mechanic’s lien, Dollar Inns
held an equitable right or interest in the land under a contract of
purchase to which such mechanic’s lien could attach. Under the
doctrine of after-acquired title, the security for such mechanic’s
lien was later expanded to include the legal title to the property
acquired by Dollar Inns when the sale was consummated on April
5, 1973.
Id.
The Texas Supreme Court thus expanded the interest to which the lien
attached based on the “relation back” doctrine. The Texas Supreme Court
explained the “relation back” doctrine as follows:
[T]he majority of the courts generally applies the doctrine of “afteracquired title” or the “relation back” doctrine. These doctrines hold
that the lien attaches to whatever legal or equitable interest the
contracting party had when the work was begun, and thereafter
attaches to any other or greater interest whenever acquired before
the lien is enforced: provided that the after-acquired title enlarges
an estate or interest to which the lien has already become
attached. Accordingly, the priority of a mechanic’s lien not only
depends upon the inception of the lien, but also upon whether the
party contracting with the mechanic or the materialman has a
legal or equitable interest in the property at the time of
contracting.
Id. at 805–06 (internal citations and quotation marks omitted). In other words,
the “relation back” doctrine is designed to expand the interest to which the lien
can attach, thus helping to effectuate the statute’s purpose in protecting
laborers and materialmen.

See Youngstown, 403 F.2d at 143; Bandera

Drilling, 824 S.W.2d at 784.
We have previously given the Texas Supreme Court’s decision in
Diversified Mortgage a similar reading in Matter of Waller Creek, Ltd., 867 F.2d
10

Case: 13-10969

Document: 00512748732

Page: 11

Date Filed: 08/27/2014

No. 13-10969
228, 234 (5th Cir. 1989). There, we addressed a contractor’s lien claim and
explained that the “relation back” doctrine:
[H]olds that the lien attaches to whatever legal or equitable
interest the contracting party had when the work was begun, and
thereafter attaches to any other or greater interest whenever
acquired before the lien is enforced: provided that the afteracquired title enlarges an estate or interest to which the lien has
already become attached.
Matter of Waller Creek, Ltd., 867 F.2d 228, 234 (5th Cir. 1989) (emphasis
added).

The “relation back” doctrine is therefore intended to expand the

interest to which a lien can attach.
In contrast, the district court’s construction of the “relation back” would
have just the opposite effect: because Lakehills later acquired a greater
interest than it had at the time of Drillers’ work, Drillers would no longer be
able to attach to HSC’s continued interest, despite the fact that HSC had a
12.5% interest in the lease, whereas Lakehills only acquired a 1% interest in
the lease. This application of the “relation back” doctrine thus shrank rather
than enlarged the interest to which Drillers’ liens could attach. If Lakehills
gained a 1% ownership interest in the lease at the time that Drillers performed
their work, then Drillers may have gained an additional claim for contractors’
liens against Lakehills. It would not, however, prevent Drillers from asserting
separate subcontractors’ liens against HSC. Such a result would be contrary
to the statutory scheme, which provides laborers with a method of recourse
against both contractors and owners with whom they do not have privity of
contract. See Campbell, supra at 311 (“The basic principle is that the service
company who contracts through the operator and perfects a subcontractor’s
lien is entitled to a lien on all amounts due from non-operator-[owner]s to the

11

Case: 13-10969

Document: 00512748732

Page: 12

Date Filed: 08/27/2014

No. 13-10969
operator.”). 4 The district court’s application of this doctrine conflicts with both
the language in Diversified Mortgage, and our own subsequent interpretation
of the “relation back” doctrine.

“We are bound by our own precedent

interpreting Texas law unless there has been an intervening change in
authority,” and thus reject the district court’s application of the doctrine here.
Gilbane Bldg. Co., 664 F.3d at 593 (citations omitted).
Moreover, the passage in Diversified Mortgage cited by the district court
and Debtors discussed a contractor’s rather than a subcontractor’s lien. As we
have explained, a contractor’s lien requires privity of contract with an owner,
whereas a subcontractor’s lien does not. Placed in context, the Diversified
Mortgage court was explaining that a contractor’s lien could only attach to the
interest of the party “contracting for construction.” Diversified Mortg., 576
S.W.2d at 805. It was not, as Debtors suggest, implying that a subcontractor’s
lien could not also be asserted against other owners. See Campbell, supra at
311. Instead, the Diversified Mortgage court was distinguishing between the
ability of a contractor’s lien to attach to a leasehold interest, and the lien’s
ability to attach to the real property on which the lease is located. It does not
mean that a subcontractor cannot reach the leasehold interests of owners who
have contracted with a contractor to have the labor performed.
Under Debtors’ reading, the entire category of “subcontractors” under
the statute would be superfluous, because a subcontractor by definition never
has a contract with the owner. We reject such a reading. See Nat’l Ass’n of
Home Builders v. Defenders of Wildlife, 551 U.S. 644, 668 (2007) (“But this
reading would render the regulation entirely superfluous.”); see also Antonin
Scalia & Bryan A. Garner, Reading Law: The Interpretation of Legal Texts 174
Non-operator is an industry short-hand for “non-operating working interest owner”
and refers to those owners who have not been designated as an operator of the lease. It is
also possible to be an operator without being an owner.
4

12

Case: 13-10969

Document: 00512748732

Page: 13

Date Filed: 08/27/2014

No. 13-10969
(2012) (“If possible, every word and every provision is to be given effect (verba
cum effectu sunt accipienda). None should be ignored. None should needlessly
be given an interpretation that causes it to duplicate another provision or to
have no consequence.” (footnote omitted)). In the case before us, the passage
from Diversified Mortgage means only that Drillers’ liens could not attach to
an interest held by the real property owner on which the mineral lease was
located.
Finally, the approach advocated by Debtors would allow HSC and
Lakehills to alter Drillers’ statutory rights to recover payment for the work
Drillers performed by entering into a subsequent contract after the completion
of the work that Drillers were not party to. It is undisputed that Lakehills was
not a legal owner of any interest in the well in mid-2008 when Drillers
performed their work. Lakehills later did receive a 1% working interest in the
lease after Drillers had completed their work and perfected their liens. Indeed,
Lakehills received this interest from a separate Settlement Agreement that
had not even been contemplated at the time that Drillers performed the work. 5

Even assuming arguendo that the “relation back” doctrine could prevent Drillers
from asserting subcontractors’ liens against Debtors, it is not clear that Lakehill’s interest
actually would relate back to the time that Drillers performed their work. The district court
noted that “[a]lthough it is a close question, the Court finds that under Diversified, Hoffman,
and related cases, Lakehills was a mineral owner.” Endeavor Energy Res., L.P. v. Heritage
Consol., LLC, No. 3:12-CV-03765-B, 2013 WL 4045250, at *8 (N.D. Tex. Aug. 9, 2013). This
case, however, is distinguishable from those cited by the district court. In Hoffman v.
Continental Supply Co., Lockhart and Humble Oil had already entered into a contract where
Lockhart agreed to purchase leases and to complete some drilling activities. 120 S.W.2d 851,
854 (Tex. Civ. App.—Eastland 1938), rev’d on other grounds, 144 S.W.2d 253 (Tex. 1940).
Similarly, in Diversified Mortgage, Dollar Inns had executed a contract to purchase the Irving
property from First Madison and paid First Madison $200,000 prior to the inception of the
mechanic’s lien. Diversified Mortg., 576 S.W.2d at 806. The court therefore concluded that
“Dollar Inns held an equitable right or interest in the land under a contract of purchase to
which such mechanic’s lien could attach.” Id. In contrast, there was no contract in place
pursuant to which Lakehills would receive an ownership interest at the time that Drillers
performed their work.
5

13

Case: 13-10969

Document: 00512748732

Page: 14

Date Filed: 08/27/2014

No. 13-10969
As one Texas appellate court reasoned:
Can the issue of whether those who provide services and materials
are contractors or subcontractors be dependent upon events that
occur after the contract for such services and materials is made?
We believe the answer should be “No”. Having dealt with Atkins
when that company owned all of the working interest and at a time
when there is no question about its right or authority to contract
for services and materials, the rights of those parties should not be
governed by subsequent events between the owner and third
parties who received assignments after the drilling cost had been
incurred.
...
The lien claimants’ status as contractors cannot be converted to
that of subcontractors by another contract to which they are not
privy.
Trevor Rees-Jones, 799 S.W.2d at 465–66. 6 As Drillers note, if subsequent
contracting by the owner of any portion of the mineral interest, no matter how
small and whether or not the interest is filed of record, precluded a
subcontractor’s lien, then laborers would have little remedy for nonpayment.
See Youngstown, 403 F.2d at 143 (“It is a rule of long standing that the
mechanic’s and materialman’s lien statutes of this state will be liberally
construed for the purpose of protecting laborers and materialmen.” (internal

Although not well briefed by the parties, there is another aspect of the Texas mineral
lien statute that suggests that it is meant to protect subcontractors from going without pay:
6

The mineral contractor chapter of the Texas Property Code also has a trapping
statute. If an unpaid mineral subcontractor or supplier who has led a lien
notice then also sends notice to working interest owners, the statute has a
similar effect, “trapping” monies otherwise due and owing to the operator, so
that they are to be paid directly to the mineral lien claimants instead. Like
the similar provision for building subcontractors, the trapping statute is only
available to those who have or are eligible to have a lien on the owner’s
property, but it does not expressly create a lien as such on the monies that are
intended to be trapped.
In re S. Tex. Oil Co., No. 09-54233-C, 2010 WL 1903750, at *1 (Bankr. W.D. Tex. May 10,
2010).

14

Case: 13-10969

Document: 00512748732

Page: 15

Date Filed: 08/27/2014

No. 13-10969
quotation marks and citation omitted)). Viewed in the light most favorable to
Drillers, these facts demonstrate that Drillers were subcontractors with regard
to Debtors. The district court therefore erred in granting summary judgment
to Debtors on Drillers’ subcontractors’ lien claims. 7
IV.
We next turn to Drillers’ argument that the bankruptcy court erred in
dismissing their claims for relief for a constructive trust or equitable liens. In
dismissing the claims, the bankruptcy court reasoned that Drillers had
insufficiently plead the existence of a fiduciary duty or fraud, which are
necessary components of a constructive trust claim, and the district court
affirmed. 8 We agree.
A constructive trust requires a breach of fiduciary duty or fraud,
accompanied by unjust enrichment of the wrongdoer and traceability to a res.
Haber Oil Co. v. Swinehart (In re Haber Oil), 12 F.3d 426, 437 (5th Cir. 1994).
In recognizing a constructive trust, the critical requirement for purposes of this
case is that the parties have a confidential or fiduciary relationship prior to
and apart from the transaction in question. Harris v. Sentry Title Co., 715 F.2d

The evidence also shows that Drillers complied with the subcontractors’ lien notice
requirements, and therefore have liens on Debtors’ interest in the well. As a practical matter,
these liens are the same in substance whether we classify them as contractors’ liens or
subcontractors’ liens. As a result, we need not reach the issue of whether Drillers might also
have contractors’ liens. We therefore do not reach the questions of whether Drillers had an
express or implied contract with Debtors, or whether Lakehills was the agent, joint-venturer,
or partner of Debtors.
7

The bankruptcy court also concluded that the equitable lien claims were not
adequately pled because Drillers and Debtors did not agree to create any security interest
between them, and there is a remedy at law for Drillers, violating two requirements of an
equitable lien. Drillers do not brief this point and thus waive it on appeal. See Kmart Corp.
v. Aronds, 123 F.3d 297, 299 n.4 (5th Cir. 1997) (citing Cinel v. Connick, 15 F.3d 1338, 1345
(5th Cir. 1994) (stating that a party who inadequately briefs an issue waives the claim)).
8

15

Case: 13-10969

Document: 00512748732

Page: 16

Date Filed: 08/27/2014

No. 13-10969
941, 946 (5th Cir. 1983) (citations omitted). A fiduciary duty must come from
a preexisting relationship beyond mere business interactions. Id. As we have
previously explained:
[I]n Rankin v. Naftalis, 557 S.W.2d 940 (Tex. 1977), the Supreme
Court of Texas refused to impose a constructive trust on oil and
gas lease transactions. The court noted that the parties had been
involved in a joint venture. It also recognized that confidential
relationships such as partnerships could impose a broader reach
for a constructive trust than simple business dealings. However,
the court found that the transactions in question were not based
upon the joint venture between the parties. It refused to extend a
fiduciary duty to cover the business dealings, saying: “[s]ubjective
business trust, cordiality and the trust which prevails between
businessmen which is the foundation of ordinary contract law”
could not be a basis for imposing a trust that would thwart the
statute of frauds. 557 S.W.2d at 944.
Id. at 947. Likewise, Drillers have not plead sufficient facts demonstrating a
special trust relationship here. Instead, the facts pleaded indicate that they
had an ordinary business relationship with Debtors. As Debtors point out,
Drillers rely solely on language in the Settlement Agreement and Option
Agreement to try to establish that a special trust relationship existed.
However, Drillers did not participated in the negotiation, execution, or
performance of these agreements.

In addition, the language of these

agreements does not support Drillers’ claims. 9
Drillers also assert that they are entitled to funds from Debtors under
the Texas Trust Fund Act. We disagree. While the Trust Fund Act might
provide Drillers with a claim against Lakehills, it does not give Drillers a claim
against Debtors, because Debtors were not contractors. As one Texas appellate

A trust can also be established if an owner behaves fraudulently. Haber Oil Co., 12
F.3d at 437. Drillers have neither briefed this issue, nor pleaded facts sufficient to show that
Debtors behaved fraudulently. Any such argument is therefore waived. See Kmart, 123 F.3d
at 299.
9

16

Case: 13-10969

Document: 00512748732

Page: 17

Date Filed: 08/27/2014

No. 13-10969
court has explained, “[t]he Trust Fund Act imposes fiduciary responsibilities
on contractors to ensure that Texas subcontractors, mechanics, and
materialmen are paid for work completed.” Kelly v. Gen. Interior Constr., Inc.,
262 S.W.3d 79, 84–85 (Tex. App.—Houston [14th Dist.] 2008), rev’d in part on
other grounds, 301 S.W.3d 653 (Tex. 2010) (emphasis added).
Under chapter 162, construction payments are trust funds if the
payments were made to a contractor or to an officer under a
construction contract for improvement of specific real estate in
Texas. Tex. Prop. Code Ann. § 162.001. The contractor or officer
who receives the trust funds is a trustee of the funds. Id. [at]
§ 162.002. The artisan, laborer, mechanic, contractor,
subcontractor, or materialman who labors or furnishes labor or
material for the construction or repair of an improvement on
specific real property located in Texas is the beneficiary of any
trust funds paid or received in connection with the improvement.
Id. [at] § 162.003. A trustee who intentionally or knowingly or with
the intent to defraud directly or indirectly retains, uses, disburses,
or otherwise diverts the funds has misapplied the trust funds.
Id. at 85 (emphasis added). The language in Chapter 162 does not support
Drillers’ argument that a fiduciary relationship also exists between Drillers
and Debtors. As a result, Drillers’ constructive trust claims were properly
dismissed.
V.
We AFFIRM the district court’s dismissal of Drillers’ constructive trust
and equitable lien claims, and REVERSE the district court’s grant of summary
judgment on Drillers’ subcontractors’ lien claims.
proceedings consistent with this opinion.

17

We REMAND for