Oil and Gas Lawyer Blog
A reader alerted me to a Texas Supreme Court mandamus proceeding about unpaid royalties, In Re The Estate of Ebbie Edward Allen, Jr., No. 19-0027. Lawyers for the Relator asked the court to require the Texas Comptroller to audit Chesapeake and require it to deposit royalties not paid to Mr. Allen’s estate into the state’s unclaimed properties fund. The Supreme Court refused to take the case. The facts illustrate a little-known aspect of what can happen when royalties owed are not paid.
According to the petition, Ebbie Allen was an elderly man who lived alone on his 705-acre property in Brazos County and who signed an oil and gas lease in 1993, which was assigned to Chesapeake. In 1994, Chesapeake completed a horizontal well on the property and produced it until 2009, when it sold the lease to Envervest. Chesapeake produced 26,000 barrels and 2 Bcf of gas from the well. It sent a division order to Mr. Allen but he refused to sign it because he disagreed with the royalty decimal on the division order. Mr. Allen made attempts to resolve the royalty issue but never succeeded, and he subsequently passed away. Neither he nor his estate ever received any royalties on Chesapeake’s production. (After Enervest purchased the lease, the royalty issue was resolved and Mr. Allen’s estate received royalties from Enervest’s production, including some $15,000 in royalties that Enervest had deposited to the Comptroller’s unpaid properties fund.)
Chesapeake refused the Estate’s demands for payment, based on the four-year statute of limitations for royalty claims. Chesapeake also failed to deposit any of the royalties with the Comptroller. The Comptroller refused the Estate’s request that it audit Chesapeake’s records for unclaimed royalties that by law must be remitted to the Comptroller. In response to the Estate’s mandamus petition, the Comptroller responded that it had complete discretion whether and when to conduct audits and so could not be compelled to do so.
Under Texas’ division order statute a company may withhold royalties without interest if the royalty owner fails to sign a division order that complies with the statute. Tex.Nat.Res. Code Section 91.402 (e). The Unclaimed Property Act, Texas Property Code Chapter 74, provides that royalties not paid on production from lands in Texas must be reported and paid to the Comptroller after it has been “abandoned” for three years. Royalties are deemed “abandoned” when three years have elapsed without any “exercise of an act of ownership by the owner.” Royalties paid into the Comptroller’s unclaimed property fund may be claimed by the owner or the owner’s estate or heirs at any time, without ever being barred. So, in theory at least, the unclaimed property fund is supposed to allow royalty owners to collect royalties owed even though their claim against the producer is barred by limitations. But that assumes that the producer will tender the unclaimed royalties to the Comptroller. The Comptroller has the right to audit producers to determine if they are complying with their obligations to tender unclaimed funds and may sue for collection of unclaimed funds.
Royalties can remain unpaid for many reasons. In Mr. Allen’s case it was because of a title problem, which entitles the producer to withhold payment under the Division Order Statute. In other cases operators may be unable to locate the royalty owner, or the royalty owner may have died. Or the royalty owner may have simply lost and failed to return the division order.
Claims for unpaid royalties are barred four years after the royalties became due. The law provides no excuse if the royalty owner is not aware that she is owed royalties; a royalty owner is deemed to know whether a well has been drilled on lands in which she owns an interest. If the interest is a non-participating royalty interest, the royalty owner may not know that the property has been leased or that a well has been drilled.
In my experience most companies do make some effort to locate royalty owners and send them division orders when royalties become due. I don’t have any information on how much royalty that should have been escheated to the Comptroller never gets paid to the Comptroller; that might be a good topic for the legislature to investigate, since investment income from the unclaimed property fund goes to the general state budget. In Mr. Allen’s case Chesapeake gave no explanation for its apparent failure to pay Mr. Allen’s royalties to the Comptroller, and the Comptroller gave no explanation to the court why he refused to audit Chesapeake, except that it was in his discretion to do so or not.
The Comptroller does make it easy to search for unclaimed funds, at its website, https://claimittexas.org/.