Forced Subordinations of Liens to Leases: Is Texas Property Code Chapter 66 an Unconstitutionally Retroactive Law?

Abstract

In 2015, the Texas Legislature enacted a law which benefits oil and gas producers, but retroactively affects (and potentially harms) lenders. Chapter 66 of the Texas Property Code alters traditional expectations regarding the effects of foreclosures on oil and gas leases. Due to its impact on previously executed mortgages, the law could be deemed unconstitutional.Lenders that issue security interests often rely on foreclosure sales or future transactions to recover the balance of an unpaid obligation. Historically, a foreclosure terminated subsequently executed, or “junior,” encumbrances (such as mineral leases) that covered mortgaged property. Purchasers, who would then acquire a greater interest in the property, would ideally offer a higher price for it. In turn, lenders had a greater possibility of recovering their initial loan. However, as of January 1, 2016, Chapter 66 protects junior leases from termination by foreclosure, and retroactively applies to mortgages that were issued years earlier. Unfortunately, due to the recently volatile energy market, some junior leases may significantly decrease property values. Therefore, lenders that issued mortgages with the expectation that foreclosures would remove junior leases may be less likely to recoup their outstanding debt. This Article describes the nature of Chapter 66, and explores Texas jurisprudence surrounding retroactive laws. It then analyzes the statute under the Supreme Court of Texas’s 2010 Robinson v. Crown Cork & Seal decision, and explains how a Texas court may find that Chapter 66 is unconstitutionally retroactive.