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First Baptist Church of Roswell, et al, v. Yates Petroleum Corp., 345 P.3d 310 (S. Ct.) 2/20/15

Conclusion: Interest must be paid on royalties held in suspense as the strong public policy in favor of lessors expressed in NMSA 1978 §70-10-4 prevents parties from contracting around the statute.

 First Baptist Church of Roswell determines whether parties can contract around the unambiguous statutory language contained in NMSA 1978 §70-10-4 (the “Statute”) to waive interest on oil and gas royalties held in suspense for more than six months. The Supreme Court concluded, reversing the Court of Appeals decision in favor of defendants and reinstating the District Court’s decision in favor of the plaintiffs, that they cannot due to the Statute’s strong public policy in favor of the lessor and by distinguishing the circumstances of the case at bar versus those contained in the case relied upon by the Court of Appeals decision (Murdock v. Pure-Lively Energy 1981-A, Ltd., 1989-NMSC-048, 16-17, 108 N.M. 575, 775 P.2d 1292) (“Murdock”).

PUBLIC POLICY RATIONALE

The Statute:

A.     Any delay in determining any person legally entitled to an interest in the proceeds from production shall not affect payments to all other persons entitled to payments.  In instances where payments cannot be made within the time period provided in Section 70-10-3 NMSA 1978, the payor shall create a suspense account on his books for such interest or may interplead the suspended funds into court.

B.     The 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…

Contractual Provisions contained in the signed Division Order:

“If any claim is made which adversely affects title to any interest credited hereunder, or such title is unmarketable in the opinion of a licensed New Mexico attorney, the parties credited with such interest severally agree to furnish abstracts or other evidence of title acceptable to [Yates], and to cure any defects which render the title of the Interest Owners unmarketable, without expense to [Yates]. In the event of failure to furnish such evidence of marketable title, [Yates] is authorized to withhold payments without payments of interest until the claim is settled.”

The Supreme Court concludes that by providing a time frame to pay royalties, penalties for non-payment and rewarding attorneys’ fees to prevailing parties in an action brought under the Oil and Gas Proceeds Payments Act, NMSA 1978 §70-10-1 through -6, among other stipulations, the Legislature established a strong public policy in favor of interest owners to “equalize the bargaining power between parties in oil and gas transactions.” The Court points to Yates’ unilateral decision to include the above-quoted language in its division order (which directly contravenes the Statute) as evidence of this imbalance. Interest Owners, then, “have no real choice but to accept [the division order’s] terms in order to receive royalties,” as Yates refused to pay royalties when interest owners crossed out the language in the division order. The spirit of the Statute, then, resolves this imbalance.

The Supreme Court goes on to reject the contention that the provisions of NMSA 1978 §70-10-3 are applicable to the Statute. NMSA 1978 §70-10-3 requires royalties be paid within six months after the first day of the month following the date of first sale “unless other periods or arrangements are provided for in a valid contract with the person entitled to such proceeds.” Such language is not included in the Statute and the Supreme Court explicitly “refuses to read language into [the Statute] that does not exist.”

MURDOCK

The Court of Appeals cited Murdock for the contention that “contractual agreements to waive compensatory interest during a title dispute are valid and enforceable,” as the Court in Murdock determined that a division order provision appropriately waived statutory interest payments provided by NMSA 1978 §56-8-3(B) (1983). Distinguishing the case at bar, the Supreme Court pointed out that Murdock applied a statute generally applicable to commercial transactions and instruments, and that Murdock preceded the enactment of the Statute. The Court was called upon to “analyze an entirely separate legislative mandate” in the instant case. In that regard, the Court relied on the subject matter of the Statute and the language in the Statute that states that “interest on suspended funds ‘shall’ be paid” in rejecting the application of NMSA 1978 56-8-3(B).

The full text of the case can be found HERE.