Confess … Confess!

When  you prepare, review and/or sign settlement agreements you sometimes pay less attention than you should to the details of those “standard” releases! Acme Energy Services, d/b/a Big Dog Drilling v. Staley et al. says, Beware the “boilerplate”; before signing consider what you are actually trying to accomplish.

The facts

Lake Hills contracted to provide materials and services on oil and gas leases owned by Heritage. Big Dog and other subcontractors provided work and materials and invoiced Lake Hills. Heritage stopped paying Lake Hills and Lake Hills stopped paying the subs, who then recorded statutory mineral property liens against Heritage, its leases, and the well. Each subcontractor sued Heritage to foreclose and for personal liability.

In another suit Heritage and Staley settled a dispute over a separate agreement involving the leases. Staley received a 19.75% working interest in the Heritage leases. The liens had been filed before the assignment to Staley.

In the Heritage bankruptcy Heritage and the subcontractors settled adversary proceedings regarding the priority and valdity of the subcontractors’ debts and liens. The parties agreed to very broad release language: release from all claims, etc, known or unknown; arising or that could have arisen, etc.; full and final satisfaction; parties can’t enforce any liens or claims, etc.

The subcontractors hustled back to state court to foreclose on the leases, stipulating that Staley was not personally liable on the debts.

The question

Were the liens extinguished because the underlying debt had been extinguished by the settlement agreement?

The court considered several rules in arriving at its answer:

  1. Under Chapter 56 of the Texas Property Code, Staley took his interest subject to the liens.
  2. The liens ordinarily could be foreclosed against Staley’s interest even after the prior interest holders’ liens had been foreclosed in a separate action, provided a deficiency remained after the prior foreclosure.
  3. Satisfaction of a debt automatically extinguishes a lien securing that debt.
  4. An accord and satisfaction is a new contract in which parties agree to the discharge of an existing obligation in a manner other than originally agreed upon.
  5. Absent intent required for accord and satisfaction, taking of security for payment of an existing obligation does not discharge the debtor from an action to recover under the original contract and does not discharge the lien arising from it.

The answer

The settlement extinguished more than Heritage’s personal liability; it did not leave the underlying lien intact against the property because Big Dog’s debt was extinguished via the settlement.  Big Dog could not foreclose on its lien against Staley’s interest.

The settlement expressly released not only the underlying debt owed by Heritage but the lien as well. Heritage accepted liability for a portion of the debt and the subcontractors received priority treatment in the bankruptcy. Payment of a new amount would fully satisfy the existing claim. This demonstrated mutual intent to discharge the underlying debt by accord and satisfaction.

What about the Bankruptcy Code?

Liens pass through bankruptcy unaffected by discharge and remain in place when they are not paid in full under a confirmed plan or are not extinguished by Bankruptcy Code Section 506(d). Big Dog’s problem was that under the settlement, acceptance of liability by Heritage and granting the subcontractors priority status as to the stipulated amount would be full and final satisfaction of the claims and liens.

This was one of four related cased decided on the same day, with the same result.


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