CHAPTER 7 STATE ROYALTY PAYMENT STATUTES GOVERNING STATE AND FEE LANDS
| Jurisdiction | United States |
(Apr 1993)
STATE ROYALTY PAYMENT STATUTES GOVERNING STATE AND FEE LANDS
Gable & Gotwals, Inc.
Tulsa, Oklahoma
I. Introduction
II. Timing — When Is Payment Due?
A. First Sales
B. After First Sales
C. Effect of Unmarketable Title
III. Remedies For Non-Payment
A. Lease Cancellation
B. Interest
C. Penalties
D. Attorney Fees and Court Costs
IV. Interest — When Payable and What Amount Is Due?
A. What Triggers Interest Obligation?
B. When Is Interest Due?
C. What Amount of Interest Is Due and How Is It Calculated?
D. Underpayments and Partial Payments — Does Interest Accrue on Unpaid Amounts?
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V. Escrow Provisions
VI. Enforcement
A. What Jurisdiction Has the Power to Enforce State Statute — District Court or Agency?
B. Notice Prior to Enforcement Action
VI. Reporting Provisions
VII. Conclusion
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I. Introduction
This paper primarily covers the statutes which impact the timing of royalty payments, liability for interest on such payments and enforcement of state payment statutes. Research was conducted on 29 states1 to collect the royalty payment statutes applicable to both state2 and fee3 lands. Some 16 states4 have specific statutes governing the above noted issues. The remaining 13 states5 have general oil and gas statutes but no single, specific provision which governs the issues covered herein. Therefore, those 16 states are not further addressed in this paper. Some states, either by virtue of their spacing statutes or other acts have enacted legislation which allows royalty owners to share in either the production or proceeds of the production in unitized areas. By such statutes, the questions of by whom (which lessee) and to whom (which royalty owner) payment must be made are raised. These issues are not discussed in this paper.6 The statutory
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issues of volume allocation of production among the tracts in a unitized area and valuation are beyond the scope of this paper.7 Questions raised in the numerous state royalty payment statutes are extensive and complex. The text of this paper is a general, summary overview of the specific statutory research done on the topic which is memorialized in the chart attached to the paper.
II. Timing — When Is Payment Due?
A. First Sales
Payment of royalties is typically required within six months after the date of the first sale of production.6 The shortest periods after first sales are found in Mississippi, Montana, and Texas, each of which set a 120 day period.7 There are some differences in computing the time period, with some statutes specifying that the time will run from the last day of the month of first sale, and others from the first day of the subsequent month.8 A few states expressly allow modification of this period by contract.9 It is uncertain if a contractual provision would override the statutory time period if the statute does not expressly allow variation.
B. After First Sales
Most states addressing the issue provide a particular frequency period for payments after the first sale, usually 60 days for both oil and gas10 , with some states allowing 90 days for
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payment of gas royalties11 . Several states, having created such specific frequency periods, then allow the parties to override those periods by contract;12 other states provide that the frequency period specified in the lease or other written agreement of the parties controls payment, but that if the lease or other agreement does not specify such periods, then the statutory period shall control13 . The effect of the two statutory approaches is the same; a written agreement takes precedence over the statutory provisions. It is uncertain if those states which provide a statutory period, but no provision addressing the possibility of alteration by contract, would recognize a contractual deviation from those statutory periods.
C. Effect of Unmarketable Title
Most states provide that a delay in determining whether a person is legally entitled to an interest in the oil or gas proceeds does not affect payments to other persons entitled to payment.14
III. Remedies For Non-Payment
A. Lease Cancellation
A few states provide cancellation or dissolution as a remedy for non-payment of royalties under a fee lease.15 In Louisiana, dissolution is expressly disfavored.16 Such an extreme measure usually requires some showing of willfulness or bad faith. Cancellation of the lease is also sometimes allowed for failure to pay royalties under a state lease.17
B. Interest
All states addressing the issue allow for recovery of interest on late-paid royalties. Most states provide fixed rates, varying from a low of 8% per annum18 to a high of 18% per annum.19 Several states use variable rates tied to the discount rate (or rate on loans to other
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institutions) at various federal reserve banks.20 Montana sets the rate as the maximum rate authorized under its legal interest statute.21 A few states add the caveat "unless a different rate is specified" in a written agreement between the payor and the payee.22 Again, it is uncertain if, in those states not expressly permitting such variation, a contractual rate would be valid.
C. Penalties
Some states add additional penalties outside the interest rate; those that do usually require a showing of culpability, such as bad faith, lack of reasonable justification or willfulness.23 Arkansas provides that if the nonpayment was willful or in bad faith, the court may award an additional penalty of 14 per cent simple interest on unpaid proceeds.24 The Arkansas Oil & Gas Commission, after hearing, can order an additional penalty equal to the sum of the payment due plus interest, not to exceed $100,000, but which need not be less than $25,000.25 Louisiana provides a penalty of double the amount of royalty due, plus interest on that double sum from the date due.26 Nevada provides a penalty of $1000 per act per day as long as the violation continues.27 Utah provides a penalty of 25% of the total proceeds, plus interest of 1.5% per month on the sum of the amount due plus interest.28
D. Attorney Fees and Court Costs
Most of the states examined specifically provide for the recovery of reasonable attorney's fees and court costs by the prevailing party in an action for nonpayment of royalties.29
IV. Interest — When Payable and What Amount Is Due?
A. What Triggers Interest Obligation?
The expiration of the statutory time period for payment generally triggers the interest obligation. However, where payment has been withheld because of unmarketable title, some
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states suspend or reduce the application of the interest provision.30 For instance, Alabama provides that the federal reserve discount rate in effect as of the first day of each month during which interest on proceeds is payable shall apply to an unmarketable title situation.31 In Texas, if (1) there is a dispute concerning the title that would affect distribution of payments, or (2) the payor has a reasonable doubt as to whether the payee sold or authorized sale to the purchaser, or as to the payee's clear title, or (3) a requirement in a title opinion places in doubt the title, identity or whereabouts of a payee, and that has not been satisfied by the payee after a reasonable request for curative information by the payor, the interest provisions will not apply.32 Several other states have statutes similar to those of Texas.33
B. When Is Interest Due?
There is no "due date" as such; interest is an additional obligation tacked on to the royalty, which is, of course, already due. None of the statutes expressly addresses this point.
C. What Amount of Interest Is Due and How Is It Calculated?
Presumedly, all accrued interest is due. Interest accrues, generally, per annum on the principal amount due, from the date the royalty became due (at the expiration of the statutory period). Most states do not specify how interest is calculated or whether it is to be compounded. Colorado provides for "simple" interest;34 Oklahoma provides that interest is compounded annually.35
D. Underpayments and Partial Payments — Does Interest Accrue on Unpaid Amounts?
Most statutes calculate interest on the principal balance due; therefore, interest would accrue, in the case of an underpayment or partial payment, on the remaining balance. Colorado, in particular, allows interest on the "amount of proceeds withheld."36 However, if
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the underpayment were the result of a good faith dispute over the amount actually due based on a question of title, many states' provisions as to unmarketable title would probably apply to exempt the withheld payment from interest.
V. Escrow Provisions
Nevada, Utah and Wyoming require the payor, if unable to make timely payments "for any reason" (including inability to locate a person entitled to receive proceeds), to suspend payments and establish an escrow account at a federally insured depository institution or savings and loan association.37 Interest accrues at the highest rate offered by that institution for similar demand accounts of that size and term. The escrow agreement is to be a standard escrow document form, and the escrow agent is required to pay all escrowed proceeds and accrued interest to the proper payee within 30 days of a final legal determination of title.38 New Mexico requires the payor to create a suspense account on his books or to interplead suspended funds into court if the payments cannot be made within the statutory time period.39 In Oklahoma, a person claiming a right to receive proceeds which have not been paid because of unmarketable title may require the holder of such proceeds to interplead them and all accrued interest into court for a determination of legal entitlement if marketability has remained uncured for 120 days...
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