Periods of downturn in the oil and gas industry often bring with them a host of legal complexities. From questions surrounding ownership rights—such as shut-in lease provisions, production in paying quantities, and operational clauses—to the renegotiation of midstream contracts and the enforcement of creditor rights, stakeholders must remain vigilant in protecting their interests. Understanding the legal mechanisms within commonly used agreements like the Joint Operating Agreement (“JOA”) is critical to minimizing risk and ensuring enforceability, particularly when financial distress or bankruptcy becomes a factor.

At the heart of creditor protection under a typical JOA are provisions granting each party a lien against the other parties’ real property rights (such as oil and gas leases) and a security interest—often a purchase money security interest—in personal property including equipment, fixtures, production, and proceeds. To ensure these rights are enforceable, the lien must be perfected by recording a JOA memorandum or supplement in the relevant county or parish. The security interest, on the other hand, requires the filing of a financing statement (UCC1 form) with the Secretary of State.

Default remedies available to operators and non-operators under the JOA are extensive. These include suspending a party’s rights to receive operational information or to participate in future operations, withholding production or proceeds, filing suit for damages, declaring a party non-consent, requiring advance payments, and recovering collection costs and attorneys’ fees. A particularly powerful remedy is the operator’s common law right of setoff, which allows debts to be offset even if they arise under different JOAs, provided certain conditions are met.

When bankruptcy occurs, the stakes rise significantly. A bankruptcy trustee may reject a JOA before the confirmation of a plan; however, not all provisions are extinguishable. Secured creditors retain their right to enforce perfected liens and security interests, and they may even maintain rights by virtue of possession of the collateral (e.g., oil in tanks). The right to setoff generally survives bankruptcy, though it is limited to matching prepetition and post-petition debts and credits respectively.

If the operator itself declares bankruptcy, it is typically deemed to have resigned, triggering the JOA’s operator replacement provisions. If the trustee elects to assume the JOA, all prepetition defaults must be cured. Conversely, if the JOA is rejected, the debtor’s interest may fall outside the agreement, and parties must then rely on co-tenancy law—a scenario that introduces significant risk regarding production entitlements and the continued validity of leasehold interests.