New Mexico Royalty Owners are Entitled to Interest on Suspended Oil and Gas Royalty Payments

New Mexico law requires that oil and gas companies pay interest on royalties held in suspense beyond six months.  NMSA 1978, §§ 70-10-1 to -6 (1985, as amended through 1991).  The New Mexico Supreme Court in First Baptist Church of Roswell v. Yates Petroleum Corp., No. 33,632, 2014 N.M. LEXIS 308 (N.M. September 15, 2014) addressed whether royalty owners and oil and gas companies may contract around or waive the statutory interest by executing division orders.  The dispute in Yates Petroleum Corp. arose from the failure of the Defendant, Yates Petroleum Company (“Yates”) to pay interest on royalty payments it held in suspense accounts beyond the six month statutory deadline set forth in § 70-10-4 of the Oil and Gas Proceeds Payments Act, NMSA 1978, §§ 70-10-1 to -6 (1985, as amended through 1991).  Yates Petroleum Corp., at *2.

The Plaintiffs (collectively “First Baptist Church”) owned the royalty interests in oil and gas production from the Runnin’ AZH Com. No. 1 Well in Eddy County, New Mexico.  Id., at *3.  Yates operated the well and leased the property.  Id.  Shortly after production began in August 2002, Yates sent form division orders to First Baptist Church, which required First Baptist Church to satisfy certain title requirements before they would be paid their royalty from the proceeds of the well.  Id.  The division order form also provided that “[Yates] is authorized to withhold payments without payment of interest until the claim is settled.”  Id.  First Baptist Church executed and delivered the division orders to Yates.  Id.  Approximately three years later, Yates sent the initial royalty payments to each Plaintiff without interest.  Id.  First Baptist Church brought suit seeking payment from Yates for the interest on the suspended payments.  Id.

§ 70-10-4 of the New Mexico Oil and Gas Proceeds Payments Act provides that “[a] person entitled to payment from the suspended funds shall be entitled to interest on the suspended funds from the date payment is due under Section 70-10-3 NMSA 1978.”  NMSA 1978, § 70-10-4However, the form division order Yates required First Baptist Church to sign waived away their statutory right to receive interest.  Id. at *9.  First Baptist Church argued that Legislative intent and public policy prohibited Yates from contracting around the statutory interest provision.  The New Mexico Supreme Court agreed.

Yates argued that because the statutory interest provision statute did not contain clear language preventing a party to contract around its terms, a party should be free to contract however it choses.  The Court rejected Yate’s argument and explained that the state has a strong public policy in favor of royalty interest owners.  Id. at *12.  The Court noted royalty interest owners lacked power in oil and gas transactions and were routinely required to sign form division orders prepared by oil and gas companies without any opportunity for negotiation.  The Court explained that the Legislature enacted the statutory interest provision to combat the disparity in bargaining power and establish basic terms for how oil and gas proceeds are to be paid.  Id.  The basic terms established by the Legislature include:  the establishment of a deadline by which proceeds are to be paid; the establishment of a penalty on the payor for failing to pay the proceeds promptly; and, most importantly in this case, the mandating that when proceeds payments are delayed pending the resolution of who is entitled to payment, then upon resolution that person shall be entitled to interest on the suspended funds.  See §§ 70-10-3 to -6.  All of those provisions were enacted to combat the disparity in bargaining power and protect the interests of the royalty owners.  Yates at 12-13.  Although some of the provisions, like § 70-10-3, contain provisions allowing parties to contract to their own terms, § 70-10-4 explicitly did not provide for such a provision.  Id. at 15.  Thus, the Court concluded that the Legislature’s decision to not include express language allowing the parties to modify the statutory obligations barred Yates’s unilateral attempt to waive the statutory interest provision.  Id. at *15-16.

Consequently, when Yates failed to pay First Baptist Church the royalty proceeds due after six months, it was obligated pursuant to § 70-10-4 to place the funds in a suspense account where it would accrue interest until it was paid.  In Yates, the New Mexico Supreme Court reaffirmed a strong public policy protecting the interest of royalty interest owners.

After Yates, it is important for any operator paying royalty interest owners to examine the language in form division orders and confirm that it does not amend the statutory interest requirement on suspended funds of the Oil and Gas Proceeds Payments Act, NMSA 1978, § 70-10-4 (1985, as amended through 1991) as such provisions will not be enforced.  Additionally, operators holding royalty payments in suspense must strictly comply with New Mexico statutory interest provisions.