Oilfield Bankruptcies - What to Expect
It is a big problem Approximately 300 E&P Company Bankruptcies since 2015. Some twice. Know who your Lessee is, Know who the Operator is. Keep tabs on them.
When a bankruptcy case is filed What will happen to my lease? Will my royalties be paid? Will I only get cents on the dollar?
Know what you own? Is your royalty interest merely a contract with the bankrupt debtor? It is called a lease. Is that all it is? This is confusing to a lot of bankruptcy courts If it is just a lease contract, then Bankruptcy Code 365 comes into play. In Texas, it is real property, and you own it to the exclusion of the debtor?
Lessor’s Royalty Is Real Property This is well-settled in Texas and recognized by the bankruptcy courts. In Kansas, an oil and gas lease conveys no interest in land.
The Lease Is Real Property In Texas, But What about after the minerals are produced? What about proceeds after the minerals have been sold? What about after the proceeds have been spent by the Operator? What about a dispute over the amount paid?
Bankruptcy Code Section 541 The “bankruptcy estate” and “property of the debtor” are broad concepts Essentially it is everything but An interest of the debtor in a lease of real property that terminated before the bankruptcy Not farm-outs or production payments Property in which the equitable title is in somebody other than the debtor.
Royalty Interests Are Not Debtor Property Royalty interest in the ground is not debtor property Royalty share at the surface is not debtor property Royalty proceeds in debtor possession are not debtor property Debtor might have “legal” title but not equitable title Funds held in a joint account for disbursement to royalty owners were not property of the estate. In re Reichmann Petroleum Corp.
Are Disputed Royalties Property of the Debtor Judge Jones comments in Chesapeake “There’s a huge difference between – and let me just draw an example for you [–] [a]n unpaid royalty versus a claim arising out of a failure to pay a royalty. One is a property interests, one is a legal claim” Even Judge Sontchi in Delaware (Extraction Oil & Gas) “actual royalty payments” are not property of the estate Disputed royalty payments are property of the estate until adjudicated in favor of the royalty owner
After The Roylaty Monies Have Been Spent Does the royalty owner have a lien claim against the debtor or the purchaser? In Oklahoma, no lien if the money was already spent In Texas, answer was yes, lien under Tex. Bus. & Com. Code 9.343, but not if the Lessee was an out-of-state company. Royalty owners lobbied Texas Legislature this year and were successful getting a new law passed.
The New Texas Statute I and others approached NARO but then learned Texas Land & Mineral Owners Association was already pushing a bill with Rep. Geren. I was asked to help edit the bill H.B. No. 3794 has been signed into law. Effective 9-1-2021. New Chapter 64 of the Texas Property Code Oil and gas lien for royalty owners in oil and gas, oil and gas after severance, oil and gas proceeds after sale. Not a UCC lien anymore. Automatically perfected. Priority over every other lien. 1-year SOL.
Watch Out For First Day Motions Often a royalty payments motion. Good. Cash Management System motion. Bad. Sandridge. DIP Loan Motion. Can be bad.
Watch Out For Claims Deadlines Proof of Claim Deadlines Administrative Claim Deadline And watch for Omnibus Claim Objections
Draft Any Claim Carefully Not just a debt owed by a bankrupt. Royalties must be paid because the debtor has no right to them. Make clear you are an owner of the royalty due, not just a claimant. If it be a claim, then a secured claim.
Watch Out for Rejected Contracts Such as Surface Use Agreements
Watch Out For 363 Sales Free and Clear of Liens Claims and Encumbrances But, Assumption of Contracts can be good. Consent rights implicated
Watch Out For Plan Provisions In re Linn Energy: “Here, the Plan submitted by Linn to claimants clearly stated that unclaimed mineral royalties would be treated as unsecured debt, that upon the Plan’s approval all remaining property would vest in Linn, and that no parties could bring further claims against Linn after the Plan became final.” Make sure audit, consent and other rights and obligations are preserved.
What Can You Do Before Bankruptcy? Make sure your interests are recorded in real property records (§ 544) Have your surface use agreements run with the land (touch and concern). Couple them with the real property conveyance of easement or royalty. Specific performance language. Keep good records and audit regularly Know other royalty owners of your Lessee. Make sure your lease retains a security interest Know if there are unplugged wells, non-compliant ponds, tanks, pipelines, etc. Stay on the operator Demand your royalty be segregated from debtor operating account if lease permits Keep an eye on press and chat rooms about your operator and their royalty payment disputes (google alert) Specify an interest rate for late royalties Monitor the market rate for royalties in your area.
There Is Strenth In Numbers A number of royalty owners with cumulative claims that are significant can achieve good results and share costs Surprising how many royalty owners do nothing and get nothing Also surprising that sometimes mass or class actions don’t achieve much.
Don’t Let Debtor Shed Decommissioning/P&A Obligations Texas judges have been strong on decommissioning obligations of the debtor. Treat them as an administrative expense in the bankruptcy case. Different answer in Delaware, California, etc.