Scope of Alaska’s Dump Lien Statute Substantially Reduced For Natural Gas Contractors

In All American Oilfield, LLC v. Cook Inlet Energy, LLC,[1] the Supreme Court of Alaska clarified and substantially reduced a natural gas contractor’s ability to secure a preferred lien for its contribution to a natural gas well.

Alaska’s dump lien statute (AS § 34.35.140) authorizes a laborer to claim a lien for the amount owed for their labor in the production of a “dump or mass” of “extracted, hoisted and raised” matter from a mine.  While Alaska’s dump lien statute is one of three Alaskan statutes allowing laborers to attach liens to mines, mining equipment or minerals,[2] the dump lien statute is unique because it is prior and preferred over other liens, increasing the laborer’s chance of being paid in a bankruptcy proceeding.

Attaching a lien to a “dump or mass” of hard-rock minerals piled outside a mine or oil stored in a tank is relatively straightforward.  However, natural gas is typically left in its natural reservoir until removed by a pipeline that carries the gas to a location far from the mine.  Natural gas is not extracted and stored in a “dump or mass” like other minerals, and until August 2019, controversy existed over how—or if—the dump lien statute could be used by natural gas contractors.

In 2014, Cook Inlet Energy (“CIE”) contracted with All American Oilfield (“All American”) to have All American “drill, complete, engineer and/or explore three wells” on Cook Inlet’s leaseholds.  After All American finished its works, CIE was unable to pay.  All American recorded two liens against CIE, including a dump lien.  But when CIE consented to Chapter 11 bankruptcy proceedings, the bankruptcy court denied All American’s high-priority dump lien asserted against unextracted gas remaining in natural reservoirs.  Because All American’s other lien was subordinate to other creditors, All American was left with nothing.

All American brought the case to the Supreme Court of Alaska on the following three certified questions regarding dump liens as they applied to natural gas:

(1)  Can a dump lien apply to gas stored in its natural reservoir?

(2)  Is a dump lien created every time gas is released from the natural reservoir and transported through a pipeline to the point of sale?

(3)  Must a claimant prove the produced gas was a product of their labor in order to have a dump lien?

All American argued that because the industry practice is to store gas in its natural reservoir, the dump lien statute’s requirements of “extraction” into a “dump or mass” would render the statute a nullity for over 90% of natural gas produced in Alaska.  In August 2019, however, the Alaska Supreme Court found the dump lien statute’s language unambiguous:  gas left in its natural reservoir is not “extracted, hoisted and raised” and therefore cannot constitute a “dump” under the dump lien statute.  In essence, the drilling of a natural gas well is not enough for a drilling contractor to attach a lien to the gas left inside its natural reservoir.

Next the Alaska Supreme Court held that natural gas extracted into a pipeline may constitute a “dump” under the dump lien statute so long as the gas in the pipeline is “at the mine or mining claim or adjacent to it.”  Because pipelines start at the mine or mining claim and can travel far from the mine or mining claim, determining how much of the pipeline is considered “adjacent” is vital for a claimant.  The Alaska Supreme Court held such a determination is a fact-specific inquiry for the courts and offered no guidance for what considerations or inquiries should be made in determining when a pipeline ceases to be adjacent to a mine or mining claim.

Finally, the supreme court held “lien claimants must prove that gas produced is the product of their labor.”

Without the ability to attach a dump lien to the vast amounts of gas stored in natural reservoirs, Alaska’s natural gas drilling contractors will likely find themselves less secure if a mine owner or leaseholder enters bankruptcy.  Unless the legislation is modified to better apply to the realities of natural gas, natural gas contractors are limited to less preferred liens and a lien on any gas in “adjacent” pipelines.

Ahlers Cressman & Sleight shall continue to monitor the impact of the Alaska Supreme Court decision and provide updates on any subsequent decisions or related legislation.

Comment:  Alaskan mining contractors should know their lien rights: so long as all conditions precedent are met, a dump lien may attach to “minerals” excavated from open-pit mines[3] including gravel[4] and water in geothermal wells.[5]  Natural gas contractors, in particular, should be aware of the limited scope of the dump lien statute, particularly where the natural gas will be left inside a natural reservoir, and should ensure their contract includes a mechanism for recovery under similar circumstances to those faced by All American. 

[1] 446 P.3d 767 (2019).

[2] See AS § 34.35.125 and AS § 34.35.130.

[3] D.H. Blattner & Sons, Inc. v. N.M. Rothschild & Sons, Ltd., 55 P.3d 37 (2002).

[4] Gravel is an “inorganic substance.”  See Watt v. Western Nuclear, Inc., 462 U.S. 36 (1983).

[5] In re Naknek Elec. Ass’n, Inc., 471 B.R. 225 (2012).

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